Molton Street Capital LLP v Shooters Hill Capital Partners LLP and Another
| Jurisdiction | England & Wales |
| Judge | The Hon. Mr Justice Popplewell,Mr Justice Popplewell |
| Judgment Date | 26 November 2015 |
| Neutral Citation | [2015] EWHC 3419 (Comm) |
| Docket Number | Case No: CL-2014-000617 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 26 November 2015 |
2015 EWHC 3419 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
The Hon. Mr Justice Popplewell
Case No: CL-2014-000617
Mr Simon Atrill (instructed by Olswang LLP) for the Claimant
Mr Conall Patton (instructed by Nabarro LLP) for the Second Defendant
Hearing dates: 26 -30 October, 3 November 2015
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.
Introduction
The Claimant ("Molton Street") brings a claim as buyer from the Second Defendant ("Odeon") for wrongfully cancelling a contract of sale of junk bonds concluded on 16 June 2014 at a price of 22% of face value. Molton Street had sold the bonds on to Morgan Stanley & Co ("Morgan Stanley") at 35.5%, and claims damages together with an indemnity against liability to Morgan Stanley. Odeon disputes that a contract was concluded, and challenges the claim on the further alternative grounds that the transaction involved breaches of regulatory laws, or that the loss claimed is irrecoverable as being too remote or tainted with illegality.
The trade was initially negotiated by Molton Street with the First Defendant ("Shooters Hill"), which was negotiating the buy side of the transaction with City & Continental Securities LLP ("City & Continental"). Shooters Hill was replaced by Odeon following the conclusion of the negotiations, both as buyer from City & Continental and as seller to Molton Street. Molton Street initially brought a claim also against Shooters Hill, but that claim has been compromised and Shooters Hill has played no part in the trial before me.
Molton Street is a small broker dealer operating in London, which has been authorised and regulated by the Financial Conduct Authority ("the FCA") from the time it was formed in early 2013. One of its members was Mr Rajat Rohailla, through a wholly owned vehicle, Inverness Consulting Ltd. Mr Rohailla worked full time for the firm pursuant to a consultancy agreement, again through Inverness. When acting as a dealer rather than a broker, Molton Street traded on a "matched principal" basis, that is to say buying and selling securities on back to back terms save as to price.
At the relevant time Shooters Hill was also a small broker dealer in London, regulated and authorised by the FCA, whose dealings in relation to the current dispute were conducted by Mr Zeshan Ashiq. It was not sufficiently capitalised to trade as principal on the deals it negotiated. Accordingly it had an arrangement with Odeon whereby if it had negotiated a buy and sell transaction, Odeon would step into its shoes as the contracting party with the buyer and seller, in return for Shooters Hill being paid a part of the turn which Odeon made. Mr Rohailla was aware of the existence of this arrangement at the time of the negotiations for the disputed transaction.
Odeon operates as a broker dealer in the United States, conducting its business primarily from its office in New York, with some sales and trading being conducted from other offices. It has at all material times been regulated by the Securities and Exchange Commission ("the SEC") via the Financial Industry Regulation Authority ("FINRA"), of which it is a member. Its majority owner, co-founder and head trader in fixed income securities is Mr Evan Schwartzberg. Its co-founder, minority shareholder and compliance officer is Mr Van Alstyne. Mr Schwartzberg and Mr Van Alstyne are Odeon's two Principals, identified as such on its website. Mr Miron Nissim worked at the time in Odeon's back office in New York. When Odeon acted as a dealer for its own account, it usually traded, like Molton Street, as what it termed a "riskless principal", i.e. buying and selling on back to back terms save as to price.
City & Continental was another small broker dealer authorised and regulated by the FCA in London. Mr Agresta conducted negotiations on its behalf in relation to the disputed transaction.
The disputed trade was the first transaction concluded between Molton Street and Shooters Hill. There had been some prior trading directly between Molton Street and Odeon, comprising ten sales by Molton Street and one sale by Odeon. Mr Rohailla had on those occasions dealt with a trader at Odeon called Mr Ron Tesmond, who played no significant part in the disputed transaction.
The bonds which are the subject matter of the dispute were a series of residential sub-prime mortgage backed securities issued in 2007 by a special purpose entity underwritten by Bear Sterns & Co Inc, the well known Bank headquartered in New York, which failed in the financial crisis of 2008 and was sold to JP Morgan Chase. When issued they had a face value of US$10,124,000, and a Moody's rating of "Aaa". By the time of the disputed transaction the face value was US$ 8,191,333 and the rating "C (sf)". The disputed transaction was in respect of the entire tranche of the class of securities issued ("the Bonds"). In 2014 the market in the Bonds was illiquid because they were not the subject of regular trading. By reason of their illiquidity and opacity, pricing of the Bonds was a matter of subjective judgment on which views might differ considerably, as the circumstances of this case illustrate. Prices in this market are expressed as a percentage of the face value of the Bonds. Fractions of a percentage are commonly expressed as "ticks", a tick being 1/32 of 1%. A price of 54–8, for example, is a price of 54.25% of the face value of the Bonds. It was common ground that settlement for trades in this market normally takes place on the third business day after the trade is concluded in the absence of contrary agreement.
The rival arguments in outline
Molton Street claims that the contract is governed by English law and that Odeon was in breach of contract in cancelling the trade and failing to deliver the Bonds. It claims damages comprising (a) its loss of profit on the sale to Morgan Stanley, amounting to a little over US$1.1 million; alternatively damages representing the difference between the price payable to Odeon and the value of the Bonds on 19 June 2014, the settlement date; and (b) an indemnity against liability to Morgan Stanley for failure to deliver the Bonds. Because the alternative damages claim, based on value rather than lost profit on the Morgan Stanley sale, was introduced by a relatively late amendment, it was ordered that quantification of damages on this basis, if relevant and recoverable in principle, should be addressed at a subsequent hearing.
Odeon contends that the putative proper law of the contract is New York law. Its defences can be briefly summarised as follows:
(1) There was no concluded contract by reason of Odeon's disclaimer ("the Disclaimer") which provided in relevant part:
". …. Indicative prices, bids, offers are not Firm unless so indicated and trades cannot be considered 'good trades' without express consent of the Principals of the firms."
The effect of the Disclaimer is that the express consent of Mr Schwartzberg and Mr Van Alstyne as Principals was required as a condition precedent to the existence of a binding contract, and no such consent was ever given.
(2) Alternatively the contract was voidable, and has been avoided, by reason of dishonest non disclosures by Mr Rohailla which contravened the United States Securities Exchange Act 1934 ("the 1934 Act"). The non disclosures relate to what Mr Rohailla knew about potential problems with City & Continental delivering the Bonds and what he said to persuade City & Continental to confirm the trade.
(3) Alternatively the contract was validly rescinded for unilateral mistake under New York law, Odeon's mistake being (primarily) that there was no issue with City & Continental's prospects of delivering the Bonds.
(4) Alternatively the contract contained an implied term, whether governed by New York law or English law, that Odeon would be excused from performance if City & Continental failed to perform.
(5) Alternatively if the contract is governed by English law, it was subject to an implied term that Molton Street had not breached or would not breach s. 89 of the Financial Services Act 2012. Molton Street was in breach of the implied term by reason of Mr Rohailla's dishonest statements to Mr Agresta (a) that he had sold the Bonds to Morgan Stanley at 22 and (b) that Morgan Stanley had sold the Bonds on.
(6) Alternatively Molton Street's damages claim fails (a) as being too remote or (b) under the principle ex turpi causa non oritur actio, the offending conduct relied on for this aspect of the defence being a series of lies told by Mr Rohailla to Morgan Stanley to the effect that City & Continental were offering the Bonds at mid 30s or 35 whereas they were being offered to Mr Rohailla at 21 or 22.
It was common ground that:
(1) if the putative proper law of the contract is New York law, defences to (4) and (6)(a) fall to be decided in accordance with New York law and defence (5) does not arise (although it was also agreed that in the absence of New York law evidence on some of the sub issues on defence (1), the Court should apply English law to those sub issues);
(2) if the putative proper law is English law, defences (1), (4), (5) and (6)(a) fall to be decided under English law; and defences and (3) do not arise;
(3) whatever the...
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