IG Index Ltd v Aryeh Ehrentreu
| Jurisdiction | England & Wales |
| Judge | Mr Justice Supperstone |
| Judgment Date | 24 November 2015 |
| Neutral Citation | [2015] EWHC 3390 (QB) |
| Docket Number | Case No: HQ11X00001 |
| Court | Queen's Bench Division |
| Date | 24 November 2015 |
[2015] EWHC 3390 (QB)
The Honourable Mr Justice Supperstone
Case No: HQ11X00001
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr David Mayall (instructed by Martin Shepherd Solicitors LLP) for the Claimant
Mr Alan Gourgey QC (instructed by DAC Beachcroft LLP) for the Defendant
Hearing dates: 26–29 October 2015
Introduction
IG Index Ltd, the Claimant, is a spread-betting company authorised and regulated by the Financial Services Authority ("FSA"). Mr Ehrentreu, the Defendant, had been a customer of the Claimant since 2001. The written agreement that the Claimant had entered into with the Defendant that governed the relationship between the parties at all material times took effect on 15 December 2007 ("the Customer Agreement"). Over the years he had placed various spread bets upon the movement of the market. One of the bets, placed in the summer of 2008, on the movement of the share price of Royal Bank of Scotland ("RBS"), went, as Lewison LJ has observed, "disastrously wrong" ( [2013] EWCA Civ 95 at para 1). The result of this bet was that by 14 October 2008 the Claimant's account was over £1.2 million in debit.
On 30 April 2009 the parties entered into an agreement for the payment of the debt ("the Settlement Agreement"). The Defendant made some payment pursuant to its terms, but he did not maintain the payments, and on 4 January 2011 the Claimant issued proceedings for the sum of £1,070,350.75 under the Settlement Agreement. On 10 February 2011 a Defence and Counterclaim was filed and served by the Defendant. In summary the Defendant alleged that the Claimant was in breach of the Customer Agreement in failing to close out his position on the RBS bet sooner and hence causing his loss. In addition he claims damages for breach of statutory duty, relying on the FSA Conduct of Business Rules.
On 20 July 2011 Master Fontaine gave judgment for the Claimant on most of its claim and allowed the Defendant to defend the balance. On appeal from Master Fontaine on 29 June 2012 Macduff J gave summary judgment for the Claimant for the whole of its claim. On 22 February 2013 the Court of Appeal dismissed the appeal from the decision of Macduff J. However Lewison LJ (at para 48) noted that there is no order dismissing the Defendant's counterclaim. Accordingly the effect of dismissing the Defendant's appeal against Macduff J's order is that while the Claimant is entitled to the judgment sum, the Defendant is free to pursue his counterclaim. Lewison LJ added that if the Defendant does pursue it, "it will be open to [the Claimant] (after proper amendment of its statement of case) to advance the argument on the interpretation of the Customer Agreement that Mr Mayall sought to develop; and to argue that the counterclaim is incompatible with the judgment in favour of [the Claimant]".
This is the hearing of the Defendant's counterclaim.
Mr David Mayall appeared for the Claimant and Mr Alan Gourgey QC appeared for the Defendant.
Spread Betting
A very helpful account of the nature of spread betting is given by Rix LJ in his judgment in Spreadex Ltd v Battu [2005] EWCA Civ 855 at paragraphs 2–6:
"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 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.
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 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.
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.
The credit risk, margin and security
5. If the customer's trade is efficiently laid off, the spread betting operator does not retain a market risk, but, since its customer is open to volatile swings and losses which are potentially out of all proportion to his initial stake, it does retain a credit risk, which it has to be able to monitor closely. Typically, it seeks to limit that risk by controlling the level of its customers' trading and by taking security for its customers' exposure.
6. Such security, or margin arrangements, may take two forms, responding to two kinds of risk. Even at the outset of a trade, indeed at the outset of a relationship, the operator may require funds to be deposited with it as security for the customer's potential losses. The size of such a deposit may reflect, of course, the level of the customer's trading and also the volatility of a market in which that trading takes place. The more volatile the market, the greater can be the potential losses. Secondly, security for running losses already incurred in open trades may be required."
The Customer Agreement
Term 1(3) provides that:
"Nothing in this Agreement will exclude or restrict any duty or liability owed by us to you under the Financial Services and Markets Act 2000 ['the 2000 Act'] or the FSA Rules and if there is any conflict between this Agreement and the FSA Rules, the FSA Rules will prevail."
Term 2 of the Customer Agreement warns the customer that "Entering into Bets with us carries a high level of risk and can result in losses that exceed your initial deposit".
Term 6 explains how a customer can open a bet. Term 6(1) states:
"You will open a Bet by 'buying' (wagering that a specified Index will go up within a specified period) or 'selling' (wagering that a specified Index will go down within a specified period). In this Agreement, a Bet that is opened by 'buying' is referred to as an 'Up Bet' and a Bet which is opened by 'selling' is referred to as a 'Down Bet'…"
Term 8 explains how he can close a bet.
Term 8(1)
"Subject to this Agreement and any requirement we may specify in relation to Linked Bets, you may close an open Bet or any part of such open Bet at any time prior to the Determination Date for the Index in respect of which the Bet is made by entering into a further Bet in respect of the same Index and Determination Date, but in the opposite direction. For the purposes of this Agreement references to closing a Bet (other than in the case of Controlled Risk Bets) may be taken as meaning the crystallization of winnings or losses in the manner set out in Term 7".
Term 8(9)
"Upon closing a Bet:
(a) you will pay us the difference between the Opening Level of the Bet and the Closing Level of the Bet multiplied by the Stake if the Bet is:
(i) a Down Bet and the Closing Level of the Bet is higher than the Opening Level of the Bet; or
(ii) an Up Bet and the Closing Level of the Bet is lower than the Opening Level of the Bet; and
(b) we will pay you the difference between the Opening Level of the Bet and the Closing Level of the Bet multiplied by the Stake if the Bet is:
(i) a Down Bet and the Closing Level of the Bet is lower...
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