City Index Ltd (Trading as Finspreads) v Romeo Balducci

JurisdictionEngland & Wales
JudgeMrs Justice Proudman
Judgment Date07 October 2011
Neutral Citation[2011] EWHC 2562 (Ch)
CourtChancery Division
Docket NumberCase No: HC08C02401
Date07 October 2011

[2011] EWHC 2562 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Mrs Justice Proudman

Case No: HC08C02401

Between:
City Index Limited (Trading as Finspreads)
Claimant
and
Romeo Balducci
Defendant

Alexander Pelling (instructed by Streathers Solicitors LLP) for the Claimant

Mark Watson-Gandy (instructed under the Public Access scheme) for the Defendant in person

Hearing dates: 13, 14, 15, 18, 19, 20, 21 and 22 July 2011

Mrs Justice Proudman
1

This is the trial of a claim for payment of the sum of £313,067.02 plus interest. The debt is said to have been incurred by the defendant, Mr Balducci, in spread betting on the price of heating oil over a period of two and a half years. That sum represents the negative balance outstanding since 14 th May 2008 on an account with the claimant numbered BL64606.

2

Mr Balducci counterclaims the sum of $1.625m (as well as damages for breach of confidence and psychiatric injury) on the basis that his spread betting losses were wrongfully incurred owing to the claimant's fault. In short, his case is that the claimant unlawfully gave him advice relating to spread bets.

Background

3

The claimant offers its customers spread bets in financial derivative products. All the claimant's financial products are margined, that is to say that the customer is only required to deposit a percentage of the full value of the position that is opened. Trading is, or is supposed to be, conducted on an execution-only basis, which means that the claimant is not authorised to give advice, as opposed to information, about the products or the market. The customer is supposed to make his own trading decisions and trade at his own risk. The claimant's role is limited to opening and closing spread positions on instructions and providing him with market information on request. The distinction is set out in the risk warning notice described below, in the following terms:

"Your bookmaker is prohibited under FSA requirements from providing you with investment advice relating to investments or possible transactions in investments or from making investment recommendations of any kind. This prohibition is subject to an exception where advice given amounts to the giving of factual market information or information, in relation to a transaction about which you have enquired, as to transaction procedures, potential risks involved and how those risks may be minimised."

4

Spread betting is regulated by the Financial Services Authority and I observed that throughout the trial the description of Mr Balducci's activities was the language of 'trading', 'investing', 'buying' and 'selling'. However what the customer is doing is betting on whether that underlying market will rise or fall and this is emphasised by the use of the word 'bookmaker' in the risk warning notice I have quoted. The claimant offers two prices on every market, and the spread is the difference between the two. If the customer thinks the market will rise he will 'buy' the market at the higher price. If he thinks it will fall he will 'sell' the market at the lower price. Either position can subsequently be closed by placing an equal transaction in the opposite direction. Whether he wins or loses depends on the movement, and the size of the movement, of the underlying market. There is also a rollover procedure whereby a bet in one betting period is closed and the same bet is opened for the next period, prolonging the exposure to the market. If the market moves adversely to the customer the claimant makes a margin call, that is to say a call for an amount to cover the losses.

5

The classic description of spread betting is contained in the judgment of Rix LJ in Spreadex v. Battu [2005] EWCA Civ 855 at [2]-[4] as follows,

"[2] Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus, if the Dow Jones index is, say, at 10,000, one can 'buy' or ' sell ' the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10,010. If one buys, one is betting that the market will rise above 10,010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain £1 for every point that the index exceeds 10,010. If one sells and the market falls, one stands to gain £1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose £1 for every point the market rises above 9990. Until the bet or 'trade' is closed, the gains and losses are merely 'running' gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sales spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose £10 for every £1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory, winnings based on rising markets are infinite (in practice, of course, they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero.

[3] Normally, of course, to gain by £1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than £1. In effect, one's £1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be £100-£200 richer or poorer, per £1 stake within a matter of hours of his trade. On a trade of £100, those figures become £10,000 to £20,000.

[4] The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere, seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator's customer: nor, in the present case, have the applicable terms been disclosed."

6

Mr Balducci's account as at 14 th May 2008 relates to June contracts in heating oil opened on 23 rd and 24 th April 2008. The claimant's evidence was not challenged that in order to limit its exposure to these contracts it hedged most of them by opening derivative positions and had to pay its broking counterparty on the hedge. If it does not succeed in the claim it will therefore make a substantial overall loss.

7

Mr Balducci started spread betting in September 2005 with the claimant's predecessor, IFX Markets Limited ("IFX") trading as "Finspreads". He says that he was introduced to Finspreads by his bank manager at HSBC, Mrs Shah, who is married to Mr Shah, an employee of IFX and subsequently of the claimant.

8

Mr Balducci presented himself as an innocent in business matters, a humble coffee shop proprietor who was caught in Finspread's toils and who trustingly and unquestioningly did everything that Mr Shah told him to do. That simply does not hold water. Mr Balducci is indeed a coffee shop proprietor, but that does not automatically import the lack of understanding and lowly intellectual status for which he contends. He is a successful businessman. For a time he had more than one coffee shop in the Mayfair area. He also had access to very large sums of family money. Indeed his brother lent him some £3m, apparently knowing, at least in general terms, how he would use it. Mr Balducci owned properties in Kensington and at one stage ran the family leather business in Venezuela. Furthermore he himself admitted in a telephone conversation on 14 th March 2008 that to engage in spread betting on the price of heating oil,

"You have to know a little bit about oil and I know a little bit…"

By contrast his apparent astonishment at finding that the claimant was not an expert in the oil market sits uneasily with his admitted conversation with Mr Singh of the claimant in which Mr Singh told him (without any query from Mr Balducci) that he Mr Singh did not know anything about RBOB heating oil.

9

Mr Balducci's story is that Mrs Shah effectively told him that Mr Shah would look after Mr Balducci and that he would secure for Mr Balducci, as he had done for her, returns of some 10% per month. In the course of his evidence Mr Balducci changed his version about what he says was the promised return, at first saying it was 10% per annum but eventually reverting to his original figure of 120% per annum. He came across as an intelligent man and it is simply incredible that he nevertheless implicitly believed, as he says he did, that spread betting was a low risk activity. Even at the start of his relationship with IFX he made some heavy losses and he neither stopped spread betting nor did he complain at any stage prior to the time when these proceedings were in contemplation that he had been misled by Mr or Mrs Shah.

10

On 31 st March 2007 the claimant took over the Finspreads business from IFX. The transition was seamless in that Mr Balducci retained the same account with the same account number and details and continued to deal with the same people under the same trading name...

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