Lehman Brothers International (Europe) (an unlimited company incorporated under the law of England and Wales) ((in Administration)) v Exxonmobil Financial Services BV
| Jurisdiction | England & Wales |
| Judge | Mr Justice Blair |
| Judgment Date | 28 October 2016 |
| Neutral Citation | [2016] EWHC 2699 (Comm) |
| Docket Number | Case No: 2014 FOLIO 1006 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 28 October 2016 |
[2016] EWHC 2699 (Comm)
Mr Justice Blair
Case No: 2014 FOLIO 1006
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr Rhodri Davies Q.C. and Mr Richard Mott (instructed by Travers Smith LLP) for the Claimant
Mr Daniel Toledano Q.C. and Mr Conall Patton (instructed by Norton Rose Fulbright LLP) for the Defendant
Hearing dates: 18 th– 21 st and 28 th July 2016
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
This is a dispute between Lehman Brothers International (Europe) ("LBIE"), which was the principal European trading company in the Lehman Brothers group until its failure in September 2008, and ExxonMobil Financial Services BV ("EMFS") which is a financial services arm of the ExxonMobil oil industry group based in the Netherlands.
When LBIE went into administration on 15 September 2008, there was an outstanding sale and repurchase ("repo") transaction between the parties under which EMFS had, in effect, lent US$250m to LBIE, and LBIE had, in effect, provided EMFS with collateral in the form of a diversified portfolio of securities consisting of equities and bonds.
The repo was entered into under the standard form Global Master Repurchase Agreement ("GMRA") (2000 version). The GMRA is used internationally for such transactions, the current 2011 version being published by the Securities Industry and Financial Markets Association (SIFMA) and the International Capital Markets Association (ICMA).
Most of the securities were sold by EMFS on 17/18 September 2008, though some were not sold, and were valued a few days later. The dispute is as to the balance of the account. In cash terms, LBIE says that EMFS owes it US$13,938,198, whereas EMFS says that LBIE owes it US$8,605,108.
The dispute raises questions of some complexity as to the construction of the termination provisions in the GMRA 2000 and how these provisions are to be applied in practice, and has also raised issues as to how the securities are to be valued. The issues are agreed between the parties.
In summary, EMFS's case is that it validly exercised the Default Valuation Notice procedure in the GMRA. Under this procedure, it valued those securities which had been sold at the sale price, those for which a quotation was obtained (all bonds) at the quoted price, and ascribed a valuation to the remaining securities (also all bonds) for which it was not possible to obtain either a sale or a quotation.
In summary, LBIE's case is that EMFS did not validly exercise the Default Valuation Notice procedure in the GMRA. It says that the Default Valuation Notice came after business hours, went to the wrong fax number, and (in respect of the non-US securities) having regard to the "Appropriate Markets" provisions in the agreement, came after the "Default Valuation Time". In consequence the "fair market value" provisions in the GMRA apply.
The timing points depend on a prior issue as to when the Default Notice was served, LBIE saying that this happened on 15 September 2008, EMFS saying it happened on 16 September 2008.
Finally, there are disputes between the parties as to the valuation of the securities in the event that LBIE is correct in disputing the validity of EMFS's exercise of the Default Valuation Notice procedure in the GMRA. This was the subject of expert evidence.
The proceedings
There are few factual disputes between the parties, and the trial was short. Most of the parties' submissions were produced in writing, with some additional submissions provided after closings at the court's request.
Two factual witnesses gave evidence. LBIE called Ms Ruth MacLennan, who had been a lawyer with the company at the material time. She gave evidence via a video link from Perth, Australia. EMFS called Mr Kris Sanders, who in September 2008 was the company's Front Office Supervisor with oversight of the dealing room, market research and cash flow forecasting. There are some criticisms of each them made by the parties in their closing submissions, but in the court's estimation, both were good witnesses.
As to expert valuation evidence, LBIE's equities expert was Mr Sam Ruiz, a former senior trader with extensive experience in trading equities at major banks. LBIE's bonds expert was Ms Thu-Uyen Nguyen with extensive past experience in trading fixed income securities. EMFS called Dr David Ellis as its expert on both equities and bonds. While he does not have recent trading experience, he has extensive academic and practical consultative experience.
Each side strongly criticises the other's valuation witnesses. Whilst they were fluent witnesses, and tried to do their best to assist the court, there is in my view some substance to the criticisms that have been made of them particularly on the following points.
It is common ground that there has been a significant change in LBIE's case on the valuation of the equities. LBIE had pleaded a methodology involving a number of days (a "hedging period") to sell down EMFS's holding in each security, so as to minimise the market impact of selling a large holding on a single day. When he came to write his report, Dr Ellis adopted the same approach in his alternative methodology, making adjustments to LBIE's inputs to reflect his own views on valuation.
Mr Ruiz however adopted a different approach, considering that the closing price on the primary exchange is all that is needed to value equities, subject to a market impact adjustment to reflect the fact that if the securities had actually been sold in the closing auction at the end of the day, then those sales would have impacted the closing prices.
In its written opening submissions, LBIE said in this regard that it "has seen the error of its ways, while EMFS persists in its errors". However, this was not a convincing stance to take—all that had happened was that LBIE had changed its valuation methodology. One of the issues in the case is the application of the "rationality" test to a party's exercise of a contractual discretion. It was put to Mr Ruiz in cross-examination that it could not be said that "no sane person" would have adopted an approach which had previously been adopted by LBIE itself, but he would not agree. Whether or not that is an accurate statement of the "rationality" test, I agree with EMFS that such an extreme position reflected adversely on his overall credibility.
Ms Nguyen was the author of an earlier report by her consulting firm produced around February 2014. This report identified a "lower bound" valuation for the bonds that was more favourable to EMFS, but Ms Nguyen did not mention it in her reports in these proceedings. As EMFS says, nothing had changed to alter the position in the meantime. She said that the lower bound figures identified in 2014 did "not produce a reasonable result", but the fact is that she had put them forward at that time. In cross-examination, she said that it was the "lower bound of the admissible valuations that I could have marked my book without being challenged". As EMFS says, it is therefore hard to see how they could be disregarded, and again, though she was generally a good witness, I consider that this reflected adversely on her overall credibility.
The witness who came in for the fiercest attack was Dr Ellis. As regards the alternative methodology he adopts in his reports, one of the adjustments he makes to that originally pleaded by LBIE is to assume that on each day of the "hedging period" a volume equal to 10% as opposed to 20% of the Average Daily Volume (ADV) in the security concerned would be sold. Shortly before trial, LBIE's solicitors asked for his calculations, and found that, in the case of any holding over 10% ADV, Dr Ellis had calculated the point to which the price would have fallen (on his assumptions) at the end of the hedging period and applied that price to the entire holding, including those parts of the holding that could have been sold within the 10% ADV limit on the first day and any other days before the end of the hedging period.
The effect is that the entire holding is valued as if it had been sold in one block at the level to which the price is projected to have fallen at the time at which the last share in the holding would have been sold had the holding been sold steadily at 10% ADV per day. To take the holding in a company called Assured Guaranty (which is admittedly the most extreme case), had Dr Ellis applied his approach in the manner which might have been expected, i.e. by assuming sales of up to 10% ADV on each day at the price projected to apply on that day, his discount would be reduced by US$786,816 (this is based on his "Method 2", which assumes no sales on 22 September 2008).
EMFS says that the request for Dr Ellis' underlying calculations should not have been left as late as it was, and that his evidence was corrected by his supplementary report of 20 July 2016 produced during the trial. But the fact is that (albeit I accept unintentionally) his report was misleading as to what he had actually done, as he readily accepted. Also, his figures had to be changed, all of which reflected adversely on his overall credibility.
I do not however accept LBIE's submission that Dr Ellis' evidence cannot carry any weight. It is not suggested that there is any universally accepted method of valuing stocks or bonds, and despite the shortcomings in his evidence (and there...
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