E D & F Man Capital Markets Ltd v Come Harvest Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Calver |
| Judgment Date | 16 February 2022 |
| Neutral Citation | [2022] EWHC 229 (Comm) |
| Docket Number | Case No: CL-2017-000782 |
| Court | Queen's Bench Division (Commercial Court) |
and
[2022] EWHC 229 (Comm)
THE HONOURABLE Mr Justice Calver
Case No: CL-2017-000782
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Huw Davies QC, John Robb, Katherine Ratcliffe (instructed by Clyde & Co) for the Claimant
David Lewis QC, Andrew Dinsmore, Manuel Casas (instructed by Reed Smith) for the Tenth Defendant
Hearing dates: 11 October 2021 to 12 November 2021
| (A) INTRODUCTION | 4 |
| (B) FACTUAL BACKGROUND | 5 |
| (i) The nature and effect of a Repo Transaction | 5 |
| (ii) The parties to the claim | 7 |
| (iii) The relationship between Mr Kao, Mr Wong and Straits | 7 |
| (iv) Straits begins contracting with Mr Kao's companies | 8 |
| (v) MCM's purchase contracts with Come Harvest and Mega Wealth | 11 |
| (C) SUMMARY OF THE CLAIMS | 13 |
| (i) Tort of deceit | 13 |
| (ii) Tort of unlawful means conspiracy to injure | 13 |
| (iii) Knowing receipt | 13 |
| (iv) Equitable proprietary claims | 14 |
| (v) Unjust enrichment | 14 |
| (vi) Breach of contract | 14 |
| (vii) Tort of procuring breach of contract | 15 |
| (D) PRELIMINARY CONSIDERATIONS | 15 |
| (i) The burden of proof concerning allegations of fraud | 15 |
| (ii) The witness evidence | 16 |
| (iii) Expert evidence | 19 |
| (iv) Documentary evidence and the witnesses' “recollections” | 20 |
| (v) Deliberate destruction of documents | 27 |
| (E) BACKGROUND TO THE FRAUD | 30 |
| (i) The types of transactions between Straits and CH, MW and Genesis | 30 |
| (ii) Release Instruction from ING (7/8 January 2015) | 37 |
| (iii) PMA Letters | 40 |
| (iv) The involvement of VAM | 42 |
| (v) Natixis inspection (May 2015) | 47 |
| (vi) Carlyle/VAM inspection July 2015 | 50 |
| (vii) Carlyle/VAM audit February 2016 | |
| (viii) Carlyle claims ownership of further WHRs: the PMA Letters | 59 |
| (ix) Type 5 trades: Did the parties agree that Mr Kao's companies had an option to purchase the metal? | 63 |
| (x) Mr Kao supplies forged warehouse receipts to MCM; Straits' knowledge that MCM was being targeted | 67 |
| (xi) ANZ inspection request in July 2016 | 73 |
| (xii) Marex's questions | 75 |
| (xiii) ANZ's December 2016 enquiry about the validity of its WHR | 79 |
| (xiv) Straits response to the discovery of the fraud in January 2017 | 81 |
| (xv) Motive | 83 |
| (F) FINDINGS OF FACT CONCERNING KNOWLEDGE | 85 |
| (i) Straits had actual knowledge of the fraud | 85 |
| (ii) Mr Kao and Mr Wong's knowledge and central involvement in the fraud | 86 |
| (G) APPLICATION OF THE LAW TO THE FACTS | 88 |
| (i) Deceit claim against CH and MW based on Express Representations | 88 |
| (ii) Deceit claims against the first to fourth defendants based on Implied Representations | 91 |
| (iii) Breach of Contract Claim against CH/MW | 93 |
| (iv) Procuring Breach of Contract Claim against Mr Kao & Genesis | 94 |
| (v) Conspiracy to injure by unlawful means | 95 |
| (vi) Damages for deceit & unlawful means conspiracy: res inter alios acta? | 118 |
| (vii) The Knowing Receipt Claims | 134 |
| (viii) Equitable Proprietary Claims | 145 |
| (H) THE FINDINGS OF THE COURT & RELIEF GRANTED | 163 |
(A) INTRODUCTION
By this action, the Claimant ( MCM) alleges that it is the victim of a high value metals fraud. It maintains that the First Defendant ( Come Harvest or CH) and the Second Defendant ( Mega Wealth or MW) utilised 92 fraudulent documents (the Purported Receipts), in order to obtain finance from it under bogus sale and repurchase transactions (or “repo transactions”).
The Purported Receipts professed to give CH and MW a right to title to parcels of nickel. However, MCM maintains that they were, in fact, worthless counterfeits produced by someone who had had sight of colour-scanned copies ( CSCs) of the original warehouse receipts ( OWRs) issued by the warehouse-keeper storing the nickel 1 to its true owner, the Tenth Defendant ( Straits). In reality, the OWRs remained with Straits or its financiers at all times and were never acquired by CH or MW.
Deceived by the Purported Receipts, MCM provided finance to CH and MW (obtained via its own sub-sale of the Purported Receipts to ANZ Commodity Trading Pty Ltd ( ANZ)), by entering into repo transactions with them between May to October 2016. MCM claims to have been left seriously out of pocket for the monies it advanced to them when it transpired that the Purported Receipts were forgeries which did not confer title to any nickel.
MCM maintains that each of the defendants is implicated to a lesser or greater extent in this fraudulent scheme, by either facilitating or arranging it.
As a result of this fraud, the claimant claims that it suffered losses amounting to USD 284,536,139.23. It brings its claims by way of a series of different and distinct causes of action against different defendants in an attempt to recoup its losses.
Given the complexity of the factual and legal issues arising for determination, this judgment is unavoidably extensive. The structure of the judgment is as follows:
i) Section B: Sets out the factual background to the claim;
ii) Section C: Provides a summary of the claims brought by MCM;
iii) Section D: Deals with a number of preliminary considerations on the evidence adduced before the Court and the burden of proof to be applied in a claim alleging fraud;
iv) Section E: Sets out the background to the fraud in greater detail;
v) Section F: Summarises my findings of fact concerning knowledge;
vi) Section G: Applies the law to the facts in light of my findings of fact and addresses each cause of action advanced by MCM in turn;
vii) Section H: Summarises, by way of conclusion, my legal findings and the relief granted by the Court.
(B) FACTUAL BACKGROUND
(I) The nature and effect of a Repo Transaction
Nickel repo transactions are financing transactions whereby a seller raises finance by selling metal to a buyer and agreeing to repurchase it at some point in the future at a slightly higher price. The difference between the two prices is akin to the interest that accrues on the lending of funds for the period between the purchase and sale.
The seller is effectively in the position of a borrower of funds and the buyer (commonly a bank) in the position of a lender of funds, with the metal acting as the collateral or security for the financing. Given that the commercial purpose of the transactions is to raise finance, and because they usually involve several hundred or thousands of tons of metal that cannot easily be transported, the purchase and sale often takes place by delivery of an original warehouse receipt issued by a metals warehouse certified by the London Metals Exchange. A warehouse receipt, although not a document of title, is similar to a bearer bond in that it represents and can be redeemed for a quantity of metal stored at a metals warehouse.
The repurchase leg of a repo transaction involving a warehouse receipt may be contingent; in which case the ‘borrower’ (i.e. the original seller) will be granted an option to purchase from the ‘lender’ (i.e. the original buyer) metal of the same specification, brand, weight, shape and location as was originally sold under the purchase leg.
If the call option in a contingent repo transaction is not exercised, then the financier's remedy is (i) to put the metal onto LME warrant and sell it on the LME exchange and (ii) close out hedging contracts which will typically have been put in place to protect the financier from exposure to market price movements in the interim.
It is fundamental to the operation of a repo that a sale takes place, and that the party advancing money in exchange for delivery of a warehouse receipt obtains a genuine original warehouse receipt. It is this that makes repos a form of secured financing (with commensurate interest rates).
In order to understand how the fraud was perpetrated in the present case, an understanding of how a repo transaction involving genuine warehouse receipts is effected as a matter of practicality is required, which is as follows.
The warehouse which holds the parcel of metal issues a hard copy original warehouse receipt to the order of the first order party who deposited the metal in the warehouse in the first place (i.e. the borrower/seller).
The purchaser of the metal (the lender of funds) purchases the metal from the seller (the borrower) by paying typically a fixed price based on current market value to the seller (or borrower of funds), who, upon payment, endorses and delivers the original warehouse receipt to the purchaser as collateral for the funds. Possession of the original warehouse receipt entitles the holder to go to the warehouse to verify its authenticity and/or to demand delivery of the metal represented by the original warehouse receipt. Because of this security, financial institutions are comfortable engaging in transactions involving original warehouse receipts.
At the expiry of an agreed time period in the repo contract, typically 3–6 months (which in some cases may be extended by “rolling-over” the transaction for an additional period of time), the purchaser sells the metal back to the seller, who pays the amount due. Upon...
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