CMC Spreadbet Plc v Robert Tchenguiz
| Jurisdiction | England & Wales |
| Judge | David Elvin |
| Judgment Date | 01 July 2022 |
| Neutral Citation | [2022] EWHC 1640 (Comm) |
| Docket Number | Claim No: LM-2020-000107 |
| Court | Queen's Bench Division (Commercial Court) |
[2022] EWHC 1640 (Comm)
David Elvin QC
(Sitting as a Deputy High Court Judge)
Claim No: LM-2020-000107
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
LONDON CIRCUIT COMMERCIAL COURT
Rolls Building
Fetter Lane
London, EC4A 1NL
Daniel Saoul QC and Ben Smiley (instructed by DAC Beachcroft LLP) appeared on behalf of the Claimant.
Zoë Barton QC and Daniel Lewis (instructed by Withers LLP) appeared on behalf of the Defendant.
Hearing dates: 18–21 October 2021
This judgment was handed down by circulation to the parties' representatives by email and release to Bailii. The date and time for hand-down will be deemed to be 2 pm on 01/07/2022. A copy of the judgment in final form as handed down can be made available after that time, on request by email to TranscriptRequest.Rolls@justice.gov.uk.
David Elvin QC (Sitting as a Deputy Judge of the High Court)
Introduction
In these proceedings the Claimant (“ CMC”), which is a spread betting firm (“ SBF”), seeks to recover £1.31m as a debt, alternatively as a sum due under contract, from the Defendant, Mr Robert Tchenguiz, incurred as a result of losses made under a spread betting account opened with CMC in December 2019 in respect of which positions were taken out equivalent to 3 million shares in First Group and which were closed out on 17 March 2020 during the period of market volatility triggered by the Covid Pandemic and lockdown.
Spread betting was helpfully described by Rix LJ in Spreadex Limited v Dr Vijay Ram Battu [2005] EWCA Civ 855:
“1. 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 10010. If one buys, one is betting that the market will rise above 10010. 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 10010. 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 that the index exceeds the spread point in the wrong direction. Thus if one sells at 10,000 with a sell spread point at 9990, one will make £1 for every point the market falls below 9990 and 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 sale 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.
2. 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 to £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.
3. 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.”
See also HH Judge Pelling QC in Quinn v IG Index Ltd [2018] EWHC 2478 (Ch) at [3]–[10].
Mr Tchenguiz is an experienced spread better and, at the time relevant to these proceedings when it is claimed a debt to the Claimant became repayable, he had positions with a number of SBFs in total equivalent to about 81m shares in First Group including the position taken with CMC which is the subject matter of these proceedings.
It is common ground between the parties that:
(1) A spread betting agreement was entered into by Mr Tchenguiz in December 2019 following a request made on his behalf by Mr William Thompson, a solicitor with R20 Advisory Ltd (“ R20”), for an initial position of 2.7 million share equivalents which was subsequently increased at his request to 3 million.
(2) The position with CMC was taken out at least initially because R J O'Brien (“ RJO”), a SBF with which Mr Tchenguiz had a position of 18 million share equivalents in December 2019, considered its exposure to risk was too great and asked Mr Tchenguiz either to reduce his position with them or to accept a higher margin. At any rate, his position with RJO was reduced which led to his request to open an account with CMC (and probably other SBFs) which appeared to be willing to offer a more competitive margin.
(3) At the time Mr Tchenguiz also had spread bet positions with a number of SBFs, in each case the relevant SBF sought to classify him as an elective professional client meaning he would have enjoyed fewer protections than if it had been a retail client, including significantly the lack of “negative balance protection” (“ NBP”) which protects retail clients from losing more than their stake with the SBF. In cross-examination Mr Tchenguiz was asked about the other accounts with SBFs held in early December 2019 and to confirm that “in relation to all of those accounts, you were classified as an elective professional client” which he agreed. He was then asked
“[Q] In relation to all of those accounts, you had signed forms confirming that you wished to be classified as an elective professional client?
A. Yes.
Q. And each of those spread betting companies had warned you before you became a professional client about the protections that you would lose by becoming a professional client?
A. It wasn't high on my — yes, I presume yes.”
(4) That agreement was on CMC's Terms of Business (“ TOB”) (January 2018) which was provided to Mr Tchenguiz on-line on 16 December 2019, together with CMC's Risk Warning Notice and Order Execution Policy.
(5) A “Risk Warning Notice for Financial Betting (January 2018)” (“ RWN”), which is expressly referred to in the TOB at cl. 1.1.3 as forming part of the agreement, was provided on-line to Mr Tchenguiz on 16 December 2019 as was the Order Execution Policy (“ OEP”).
(6) An account was opened by CMC for Mr Tchenguiz initially on retail terms but was the subject of a “request to become an elective professional client” (“ the Request Form”) dated 17 December 2019 and what has been described as an “opt-up agreement”, more precisely the “Professional Client Categorisation and Title Transfer Collateral Agreements Agreement” dated 19 December 2019 (“ the Opt-Up Agreement”), both agreed and signed by Mr Tchenguiz.
(7) Mr Tchenguiz was notified that his account was “active” on 19 December 2019 following receipt of the signed Opt-Up Agreement.
Defence to the claim
Mr Tchenguiz' defence to the money claim brought by CMC is put in two principal ways.
First, he contends that due to a failure to comply with the Financial Conduct Authority's (“ FCA”) Conduct of Business Sourcebook (“ COBS”) Rules he should not have been categorised as an elective professional client (as opposed to being treated as a retail client) due to a failure to give due warnings in accordance with the COBS about the loss of protections concomitant with that reclassification. The effect of this, it is submitted, is that the debt did not arise since he should have still enjoyed, in particular, NBP which would have meant that, whilst his investment might be lost, he could not be liable for additional losses such as those claimed.
While legal issues remain, Mr Tchenguiz candidly accepted in cross-examination that this first issue was of lesser concern to him than the issue of close-out of his account:
“Q. You understood perfectly well how the account was going to work.
A. Fair enough.
Q. Well, do you agree or not?
A. How the account … My issue is not with the account opening, my issue is with the closeout, okay? So I've accepted every point you've made on the account opening, okay. I've said that if I've signed it, I have to stand by it.
Q. … Are you saying now that you don't wish to pursue any of the defences that you're taking about the account opening and classification process?
A. No, I'm not saying that. I mean, if the account opening was not dealt with correctly, it's not dealt with correctly, and it has to be appointed by this court. The point I'm trying to make here, my bigger issue with this is the closeout. If I've signed a document I stand by the...
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