Barings Plc ((in Liquidation)) v Coopers & Lybrand (No. 7)
| Jurisdiction | England & Wales |
| Judge | The Hon. Mr. Justice Evans-Lombe,Mr Justice Evans-Lombe,The parties' cases |
| Judgment Date | 11 June 2003 |
| Neutral Citation | [2003] EWHC 1319 (Ch) |
| Docket Number | Case No: CH 1996 B No. 477 &CH 1998 B No. 5286 |
| Court | Chancery Division |
| Date | 11 June 2003 |
[2003] EWHC 1319 (Ch)
The Honourable Mr. Justice Evans —lombe
Case No: CH 1996 B No. 477 &CH 1998 B No. 5286
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Rhodri Davies QC/Richard Gillis (instructed by Slaughter & May for PLC)
Michael Brindle QC/Craig Orr (instructed by Ashurst Morris Crisp for BFS)
Mark Hapgood QC/David Garland (instructed by Lovell White Durrant for BSJ)
Jonathan Gaisman QC/Christopher Butcher QC/Edward Bannister QC/David Bailey/James Brocklebank (instructed by Clifford Chance for D&T)
John Lockey (instructed by Barlow Lyde & Gilbert for C&LL)
John Nicholls (instructed by Herbert Smith for C&LS)
Hearing dates between: 7 th May 2002 – 24 th March 2003
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
| SECTION | paragraph number |
| SUMMARY | 1 |
| INTRODUCTION AND PROCEEDINGS TO DATE | 9 |
| FACTUAL OUTLINE | 26 |
| GROUP STRUCTURE | 27 |
| Plc | 28 |
| BB&Co, BSL and BSLL | 29 |
| BSJ | 33 |
| Baring Securities (Singapore) Limited ("BSS") | 35 |
| BFS | 37 |
| REORGANISATION AND MANAGEMENT OF BARINGS LONDON | 39 |
| Matrix management | 41 |
| Consolidation of BB&Co and BSL | 44 |
| The management structure within the Barings Group | 48 |
| EXCO | 49 |
| BB&Co and BSL Management Committees | 50 |
| BIB Management Committee ("MANCO") | 51 |
| The Treasury and Risk Committees | 53 |
| Asset and Liability Committee ("ALCO") | 55 |
| Group Treasury and Risk ("GTR") | 56 |
| Financial Products Group ("FPG") | 57 |
| Internal audit | 62 |
| PEOPLE | 63 |
| Barings London management | 66 |
| Barings London settlements | 69 |
| Barings London Treasury and Finance | 72 |
| BSJ | 74 |
| BFS/BSS | 76 |
| REMUNERATION OF BARINGS STAFF | 80 |
| SIMEX | 82 |
| Futures and options | 85 |
| Margin and settlement variation | 93 |
| Futures contracts | 94 |
| Margin deposited by members of SIMEX with SIMEX | 94 |
| Margin deposited by customers with members of SIMEX | 96 |
| Settlement variation | 99 |
| Accounting treatment of margin and settlement variation | 100 |
| Options | 102 |
| Accounts with SIMEX and customer accounts | 107 |
| SYSTEMS | 109 |
| CONTAC | 109 |
| Treatment of futures and options trades by CONTAC | 113 |
| Futures | 113 |
| Options | 116 |
| Significance of the treatment of options to Leeson's fraud | 122 |
| Margin funding for customer trades | 124 |
| Margin funding for proprietary trades | 126 |
| The need to reconcile margin | 127 |
| London Settlements | 131 |
| Reports to London | 134 |
| (i) The Trade Feed | 136 |
| (ii) The Margin Feed | 137 |
| (iii) The Price Feed | 140 |
| (iv) The London Gross report | 141 |
| (v) The Funding Spreadsheet | 145 |
| Reconciliations by the BSL Settlements Department | 147 |
| Reports to Japan | 156 |
| Error accounts, unallocated trades accounts and give-up trades | 160 |
| BFS' HISTORY AND TRADING | 163 |
| The start of Barings' F&O business | 163 |
| SIMEX and Mr Killian | 165 |
| Mr Gueler | 168 |
| The activation of BFS | 172 |
| The set-up of BFS | 176 |
| The appointment of Leeson to BFS | 180 |
| The start of BFS' operations | 192 |
| Leeson's move to become a floor trader | 195 |
| The 88888 account | 200 |
| BFS' customers | 203 |
| Leeson's rolls | 204 |
| 1993: Leeson is given discretion | 206 |
| Leeson's switching business | 212 |
| BSL management in 1993 | 227 |
| Reporting of Leeson's profits | 229 |
| Mr Baker | 233 |
| Mr Baker's vision | 237 |
| Mr Killian's complaints to Mr Norris | 240 |
| November-December 1993: Leeson's profits increase | 245 |
| Leeson's 1993 Bonus | 249 |
| The "turf war" over Leeson | 251 |
| The development of Leeson's trading in 1994 | 256 |
| The imposition of risk limits and the start of JGB and Euroyen switching | 266 |
| Mr Gueler's concerns about Leeson's profits | 284 |
| January and February 1995 | 292 |
| LEESON'S UNAUTHORISED TRADING | 293 |
| Options | 295 |
| BFS' LOSSES CAUSED BY LEESON'S TRADING | 298 |
| CONCEALMENT OF THE UNAUTHORISED TRADING | 299 |
| Corruption of the BFS back office | 300 |
| The Trade Feed and London Gross Report | 300 |
| The BFS back office | 301 |
| Concealment of the balance on the 88888 account at month—and year-ends | 302 |
| September 1992 audit | 305 |
| December 1992 | 306 |
| False accounting entries | 307 |
| Option premiums | 309 |
| SLK | 311 |
| The reasons why Leeson was able to practise his fraud | 313 |
| FUNDING OF LEESON'S UNAUTHORISED TRADING | 317 |
| THE DOLLAR FUNDING | 325 |
| Margining in US dollars | 325 |
| The Dollar Funding requests | 330 |
| The "K2/P4 line" | 340 |
| Investigation of the Dollar Funding by BSL | 349 |
| Initial investigation into the K2/P4 line | 350 |
| Initial investigation into the Dollar Funding | 352 |
| Investigation into the split between house and customer business | 362 |
| Investigation by Mr Hawes and the internal audit | 368 |
| Meetings in October 1994 | 378 |
| Later investigations | 382 |
| The Margin Feed | 386 |
| Totals of Dollar Funding | 389 |
| RESPONSIBILITY FOR BFS' TRADING AND OPERATIONS | 391 |
| INVESTIGATION OF LEESON'S PROFITABILITY | 395 |
| THE AUDITORS | 405 |
| 1992 AUDIT | 408 |
| SIMEX AUDITS | 426 |
| 1993 AUDIT | 428 |
| THE INTERNAL AUDIT REPORT | 441 |
| 1994 AUDIT | 454 |
| THE COLLAPSE | 463 |
| THE NEGLIGENCE ALLEGED AGAINST D&T | 469 |
| The pleaded case | 469 |
| 1992 audit | 469 |
| 1993 audit | 470 |
| EXPERT WITNESSES | 472 |
| THE FORM OF D&T'S AUDIT | 474 |
| THE FAILURE TO TEST FOR OPEN POSITIONS | 487 |
| The parties' cases | 491 |
| Audit guidelines | 495 |
| Audit risk | 502 |
| D&T's analysis of audit risk | 505 |
| The risk of unauthorised trading | 509 |
| Non-segregation of duties | 512 |
| Increased risk of unauthorised trading | 514 |
| Mitigating factors | 516 |
| Leeson was a reviewer, not a doer | 517 |
| Supervision of Leeson | 519 |
| BFS had no funds of its own | 530 |
| Execution-only broker | 540 |
| Small number of related company customers | 542 |
| Conclusion on audit risk | 543 |
| Effect of audit risk on audit procedures | 546 |
| D&T's planning process | 546 |
| Lack of segregation of duties | 550 |
| Size of risk | 551 |
| What tests should D&T have conducted? | 553 |
| Confirmation procedure | 555 |
| The need to test open positions | 558 |
| The effect of the audit guidelines | 558 |
| How should D&T have tested for completeness? | 561 |
| The assurance to be gained from tests of the financial balances | 563 |
| Risk of manipulation of balances | 574 |
| Confirmation of the 88888 account | 580 |
| Conclusion | 586 |
| THE ¥670 MILLION IN SEPTEMBER 1992 | 589 |
| Leeson's concealment | 590 |
| D&T's investigation | 591 |
| The parties' arguments | 601 |
| Factual witness evidence | 608 |
| Cut-off and window dressing | 609 |
| The conventions as to recording payments and receipts | 618 |
| The Bank Reconciliation and BFS' explanation | 623 |
| The daily activity statement for the 88888 account | 628 |
| Client confirmations | 633 |
| The order of events | 640 |
| Conclusion | 643 |
| Causation | 645 |
| THE 1993 IMBALANCE OF MARGINS | 653 |
| SIMEX rules on margins | 654 |
| The 1993 balance sheet | 660 |
| The parties' cases | 663 |
| Accounting guidelines | 665 |
| The need to investigate | 668 |
| Would D&T have been entitled to accept Leeson's explanation? | 673 |
| Others saw the imbalance and did not react | 686 |
| Conclusion | 690 |
| THE COUNTERCLAIM BASED ON LEESON'S REPRESENTATIONS | 693 |
| D&T's case | 693 |
| Vicarious liability | 698 |
| Course of employment | 704 |
| Scope of authority | 711 |
| Special rule of attribution | 718 |
| Causation | 721 |
| Causation in deceit claims | 721 |
| D&T's negligence in not detecting the misrepresentations | 725 |
| Causation for representations (i) and (iii) | 727 |
| "Informed common sense" | 729 |
| The purpose and scope of the rule: Empress Car and Reeves | 739 |
| Causation for representation (ii) | 750 |
| Applicability of Reeves | 753 |
| Inducement | 757 |
| Contributory negligence | 764 |
| Conclusion | 767 |
| THE COUNTERCLAIM BASED ON MR JONES' REPRESENTATIONS | 768 |
| CAUSATION OF LOSS | 781 |
| Are BFS' damages limited by the scope of D&T's duty to BFS? | 787 |
| The Dollar Funding | 791 |
| The authorities on scope of duty as a control mechanism | 807 |
| Application to the present case | 816 |
| Was the "chain of causation", from D&T's negligence to the loss sued for, broken by management fault and if so when? | 826 |
| The appropriate test | 826 |
| Application of the test | 839 |
| The situation in April 1994 | 843 |
| The level of the Dollar Funding | 847 |
| The K2/P4 balance | 849 |
| The connection between the two | 850 |
| The debtors' report | 853 |
| Knowledge that BSJ was paying its margins | 855 |
| Conclusion on Dollar Funding | 856 |
| Knowledge of BFS' overdraft | 857 |
| Imbalance of margins | 860 |
| Lack of segregation and supervision at BFS | 863 |
| Leeson's profits | 867 |
| Conclusion | 873 |
| The Reeves principle | 874 |
| Alternative cut-off dates | 879 |
| Fluctuations in loss after the cut-off date | 880 |
| CONTRIBUTORY NEGLIGENCE BY BFS: PRINCIPLES | 892 |
| The applicable law | 893 |
| For whose actions was BFS responsible? | 897 |
| The ambit of BFS' business | 911 |
| Monitoring of trading profits | 919 |
| London settlements and Treasury | 924 |
| Risk control | 937 |
| Group compliance and financial control | 940 |
| Internal audit | 943 |
| Conclusion | 945 |
| "Double-dipping" and the need to consider the details of... |
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