Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Gloster DBE |
| Judgment Date | 15 March 2012 |
| Neutral Citation | [2012] EWHC 584 (Comm) |
| Docket Number | Case No: 2010 Folio 221 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 15 March 2012 |
[2012] EWHC 584 (Comm)
Mrs Justice Gloster, DBE
Case No: 2010 Folio 221
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, 7 Rolls Buildings, London EC4A 1NL
Sharif Shivji Esq (instructed by Stewarts Law LLP) for the Claimant
Daniel Toledano Esq, QC & Sam O'Leary Esq (instructed by Clifford Chance LLP) for the Defendant
Hearing dates: 18 th-22 nd July 2011; and 25 th, 26 th and 29 th July 2011
Further written submissions received on 2 nd August 2011
Introduction
The claimant, Euroption Strategic Fund Limited ("Euroption"), is an investment fund incorporated in the British Virgin Islands. Its principal trading activity at the material time was options trading on European exchanges, including the London International Financial Futures Exchange ("LIFFE"). In particular, at the material time, Euroption traded European equity options.
At all material times, Option Strategist Limited ("OSL"), a company also incorporated in the British Virgin Islands, acted as its investment manager. This role was in fact performed by Stefano Scattolon ("Mr. Scattolon"), a trading advisor employed by Alternative Strategies Trading SA, a company incorporated in Switzerland and which acted as trading advisor to OSL. Effectively, Mr. Scattolon was Euroption's principal trader.
The Defendant, Skandinaviska Enskilda Banken AB ("SEB"), is a Swedish investment bank, which has a branch in London and significant operations in the United Kingdom. SEB acted as Euroption's clearing broker between May and October 2008 pursuant to an Exchange Traded Futures & Options Mandate entered into on 12 May 2008 ("the Mandate"). Settlement of exchange-traded derivatives takes place through a clearing house associated with a particular exchange. Only clearing members of an exchange (such as SEB) can enter into contracts with the clearing house. Therefore, non-members, such as Euroption, had to contract with a clearing member, such as SEB, which in turn held an equivalent contract with the clearing house.
Clause 11 of the Mandate obliged Euroption to pay margin when asked to do so by SEB to support the exposure on Euroption's portfolio. Pursuant to clause 11, where Euroption at any time failed to provide sufficient margin or other payment due in respect of any transaction as required, SEB was entitled "to close out [Euroption's] open contracts at any time without reference to [Euroption]". SEB was also entitled, at its discretion, to close out Euroption's positions having made reasonable efforts to contact Euroption, inter alia, "at any time SEB deem[ed] it necessary for its own protection".
Euroption employed an execution broker called Tavira Securities Limited ("TSL"). When Euroption had identified a trade that it wished to enter into, such trades were executed by TSL and given up to SEB for clearing. The result was a contract between Euroption and SEB as principals and a back-to-back contract between SEB and the relevant clearing house.
In the action Euroption sues SEB in respect of what Euroption alleges was SEB's negligent conduct of a forced liquidation or close out of Euroption's portfolio of equity index options in October 2008, following several missed margin calls by Euroption. Originally Euroption claimed damages for breach of contract, negligence and/or breach of fiduciary duty, but by the end of the trial the breach of fiduciary duty claim had been withdrawn. Euroption complains that the person SEB appointed to conduct the close out appeared to have no real understanding of options trading or the risks faced by the portfolio in volatile markets and that, in the circumstances, the close out was slow, disorganised and often misdirected.
The period in question was a time of great turbulence in the financial markets. The crisis caused a massive increase in volatility in the markets in which Euroption had positions. It also caused markets to fall heavily. It was common ground that, at the start of the week of 6 October 2008, Euroption had enormous open positions which, taken as a whole, were weighted heavily towards what amounted to a bet that markets would rise. It was also common ground that, as a result, Euroption's margin commitments on its open positions had dramatically increased over a short period of time and that Euroption could not meet those commitments. After the close of the European markets on 9 October 2008, markets around the world plummeted.
From 7 October 2008, SEB made calls for Euroption to pay margin to cover this exposure which Euroption did not meet or respond to. At the same time, the clearing house was making margin calls on SEB in respect of the back-to-back contracts referred to above. SEB was obliged to meet, and did meet, those margin calls.
SEB gave Euroption the opportunity to meet its margin obligations and/or reduce its positions between 7 and 9 October but Euroption did not take that opportunity. While some positions were closed out, many new positions were opened.
It is common ground that, in the circumstances, SEB was contractually entitled to conduct a close out of Euroption's account and to choose the moment when it exercised that right (subject to its overriding regulatory obligations). It was also common ground that SEB exercised its right to close out Euroption's portfolio, although the date on which it exercised that right and began the close out was one of the principal issues in dispute in the litigation. The entire close out process took less than 3 or 4 days in total, depending on whether it started on Thursday, 9 October (Euroption's case) or Friday, 10 October (SEB's case). It continued on Monday, 13 October and part of Tuesday, 14 October by which time all the positions had been closed out. In the end, SEB was able to return to Euroption a final positive ledger balance of €2,049,437.29.
Euroption's case
By the time of its closing submissions, Euroption's case was articulated by Mr. Sharif Shivji, counsel appearing on behalf of Euroption, as follows:
SEB's duties
i) Having exercised its right to close out, at the time it chose to do so, SEB had a duty to conduct the close-out in a manner that was not arbitrary, capricious, perverse and/or irrational; see Socimer International Bank Ltd (in Liquidation) v Standard Bank London Ltd (No 2) [2008] 1 Lloyd's Rep 558; Paragon Finance Plc (formerly National Home Loans Corp) v Nash [2002] 1 WLR 685.
ii) In addition, or in the alternative, SEB had a contractual and/or tortious duty of care to conduct the close out exercise competently and with reasonable care.
iii) The contract conferred no discretion on SEB as to how to carry out the forced liquidation of the portfolio once it had decided to do so; clause 11 was a narrow clause requiring SEB to close out the entire portfolio with no delay; it had no contractual entitlement to put on new positions or to manage the portfolio over any period of time; in circumstances where SEB breached that obligation, and "stepped outside" what it was entitled to do under the contract, it assumed a tortious responsibility to Euroption.
SEB's breaches of duty
iv) SEB was in breach of all three duties in its conduct of the close out of the portfolio. Euroption's complaints about such breaches were articulated under three different heads of claim:
a) Claim 1: that SEB, having begun the close out at, or around, 12:44 on 9 October 2008, negligently, and in breach of its duty not to act in an arbitrary, capricious, perverse and/or irrational manner, delayed in the close out of the portfolio. All the positions could and should have been closed out by close of business on 9 October. However, Claim 1 was not contingent on Euroption showing that the entire close out could and should have been completed by the end of 9–10 October, since Euroption alleged that closure of some of the positions on 9–10 would still have yielded a better return for Euroption. (However if, as Euroption contended, the portfolio could and should have been closed out in its entirety by the close of business on 9 October 2008, then there would have been no need to put on any new trades on 10 October 2008, which was the subject matter of Claim 2.)
b) Claim 2: that SEB opened new "combination" positions without contractual or other authority on 10 October 2008 which caused loss to the portfolio. Claim 2 only arose for consideration if, contrary to Euroption's position under Claim 1, there would still have been positions left on the books on 10 October.
c) Claim 3: in the event that SEB had begun the forced liquidation on 10 October 2008 or that positions were left open on that date, that SEB negligently, and in breach of its duty not to act in an arbitrary, capricious, perverse and/or irrational manner, delayed the closure of five short call positions which should have been closed on 10 October (but were only closed on 13 or 14 October) and one short call position which should have been closed on the morning of 13 October 2008 (instead of in the afternoon), which caused Euroption loss. (This claim was an alternative claim to Claim 1).
Quantum
v) The quantum of Euroption's claim in respect of the direct losses (namely the difference between the value of the positions as closed out compared to their value if they had been closed out by close of business on 9 October 2008) allegedly suffered in respect of Claim 1, as a result of SEB's alleged delay in the close out of the portfolio, varied between approximately €31 and €6.2 million...
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