Barings Plc ((in Liquidation)) v Coopers & Lybrand (No. 7)

JurisdictionEngland & Wales
JudgeThe Hon. Mr. Justice Evans-Lombe,Mr Justice Evans-Lombe,The parties' cases
Judgment Date11 June 2003
Neutral Citation[2003] EWHC 1319 (Ch)
Docket NumberCase No: CH 1996 B No. 477 &CH 1998 B No. 5286
CourtChancery Division
Date11 June 2003
Between:
Barings Plc (in Liquidation) And Anr
Claimants
and
Coopers & Lybrand (a Firm) And Ors
Defendants
and
Barings Futures (singapore) Pte Ltd (in Liquidation)
Claimants
and
Mattar And 36 Ors
Defendants

[2003] EWHC 1319 (Ch)

Before:

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)

1

Hearing dates between: 7 th May 2002 – 24 th March 2003

2

Approved Judgment

3

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.

The Hon. Mr. Justice Evans-Lombe
4

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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