The Financial Conduct Authority v MacRis
| Jurisdiction | England & Wales |
| Judge | Lady Justice Gloster,Lord Justice Patten,Lord Justice Longmore |
| Judgment Date | 19 May 2015 |
| Neutral Citation | [2015] EWCA Civ 490 |
| Docket Number | Case No: A3/2014/1378 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 May 2015 |
[2015] EWCA Civ 490
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
JUDGE TIMOTHY HERRINGTON
FS/2013/0010
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Longmore
Lord Justice Patten
and
Lady Justice Gloster
Case No: A3/2014/1378
Mr Paul Stanley QC (instructed by The Financial Conduct Authority) for the Appellant
Mr Javan Herberg QC (instructed by Clifford Chance Llp) for the Respondent
Hearing dates: Thursday 11 December 2014
Further written submissions received 5 May 2015
Introduction
This is an appeal by the appellant, the Financial Conduct Authority ("the Authority"), against a decision by the Upper Tribunal (Tax and Chancery Chamber) ("the Upper Tribunal") promulgated on 10 April 2014. By its judgment ("the judgment") the Upper Tribunal judge 1 ("the judge") decided, in the context of a preliminary issue determined in accordance with Rule 5(3)(e) of the Tribunal Procedure (Upper Tribunal) Rules 2008, that the respondent to this appeal, Achilles Macris ("Mr Macris") was identified in certain notices given by the Authority on 18 September 2013 to JPMorgan Chase Bank, N.A. ("the Firm").
The issue in the appeal is whether the notices identified Mr Macris for the purposes of section 393 of the Financial Services and Markets Act 2000 ("the Act") in which case the Authority ought to have given Mr Macris third party rights under section 393 of the Act.
Background
On 18 September 2013 the Authority gave a warning notice ("the Warning Notice"), a decision notice ("the Decision Notice"), and a final notice ("the Final Notice") to the Firm and on 19 September 2013 the Final Notice was published. These notices (collectively "the Notices") notified the Firm that the Authority had decided to impose on it a financial penalty of £137,610,000 as a result of large losses incurred in a trading portfolio managed by the Firm for J P Morgan Chase & Co ("the Group"). The losses were stated to have amounted to US $6.2 billion by the end of 2012 and were reported by the press as the "London Whale" trades.
The Firm is a wholly owned subsidiary of the Group. The Firm operated the Chief Investment Office, principally in both London and New York. The Synthetic Credit Portfolio ("SCP") was a trading portfolio within the CIO's London operations, whose trading related to credit instruments, especially credit default swap indices. The Notices related to trading conducted by SCP traders. They focused in particular on events in late 2011 and early 2012, and on decisions taken during that period which resulted in huge losses.
Mr Macris had a role in the management structure of the SCP. His job title was International Chief Investment Officer. He was approved by the Authority under Section 61 of the Act to hold the Controlled Function CF 29 (significant management) at the Firm from 1 November 2007 to 13 July 2012. He was based in London. He reported directly to CIO Senior Management in New York, namely Ina Drew, who was the Global Chief Investment Officer. She reported to Jamie Dimon, Chairman and Chief Executive of the Group. Mr Macris was also responsible himself (with one
other) for the Foreign Exchange Capital Hedging portfolio. Two other senior CIO managers based in London (namely the CIO International Chief Financial Officer and the CIO International Chief Operating Officer) reported directly to both CIO Senior Management in New York (namely the CIO Global CFO and CIO Global COO respectively) and to Mr Macris. Apart from Mr Dimon (who was mentioned by name in the Notice), none of these people was referred to by name in the Notice.Other managers reported to Mr Macris. Among them was Mr Javier Martin-Artajo, who was both responsible for the SCP and was regional head of the Europe, Middle- East and Africa region, and also held the title of global head of credit and equity.
For a considerable period before the Notices were issued against the Firm, Mr Macris had been under investigation by the Authority relating to his management actions concerning the SCP. In that connection, he was first interviewed on 9 January 2013 but the recording of that interview was faulty, so it was necessary to interview Mr Macris again on 20/21 March 2013. However, at the time of both these interviews, he was not under investigation for having failed to deal with the Authority in an open and co-operative way, or for having failed to disclose to the Authority any matters of which it would reasonably have expected notice. He was not asked detailed questions about those matters in interview. 2 The Authority stated in the correspondence that "in the future we may interview Mr Macris again, at which time he will have an opportunity to answer any further questions that may be put to him in relation to our concerns in this area". 3
The need to ask questions in relation to "this area" arose because, subsequent to his March interviews, the Authority had widened the scope of its investigation into Mr Macris. On 23 July 2013, it served a Notice of Change of Scope of Investigation 4, which added a new ground of investigation, relating to a potential breach of Statement of Principle 4 of the Authority's Statements of Principle for Approved Persons (dealing with regulators in an open and cooperative way and disclosing appropriately any information of which the regulator would reasonably expect notice).
The prospective further interview, which might have given Mr Macris the opportunity to answer the Authority's concerns, did not take place. But as late as 7 August 2013, the Authority confirmed by letter that it "had not made any findings as to whether Mr Macris has breached Statement of Principle 4".
On 16 September 2013, Mr Macris decided to take the initiative himself. He voluntarily provided the Authority with a written explanation of the matters that the Authority had previously identified as prompting the expansion of its investigation into his conduct.
Two days later, the Authority promulgated the Notices relating to the Firm. The Authority did not suggest in evidence that it had considered the material supplied by Mr Macris before promulgating the Notices relating to the Firm. Other than by acknowledging its receipt, the Authority did not attempt to seek to engage with Mr Macris in relation to the material which he had provided.
All three Notices are, so far as relevant, in identical terms. For the purposes of the appeal reference was made to the wording of the Final Notice. Save where it is relevant to refer specifically to the Warning Notice, the Decision Notice or the Final Notice, I shall simply refer to "the Notice".
Paragraph 4.3 of the Notice described the management structure of the Firm in the following terms:
"CIO operates within the Firm in both New York and London. The traders on the SCP were managed by SCP management, which in turn were managed by CIO London management. CIO London management represented the most senior level of management for the SCP in London, reporting directly to CIO Senior Management in New York, which in turn reported to Firm Senior Management. CIO also had its own Risk, Finance and VCG functions, which were control functions relevant to the SCP and other portfolios within CIO. The wider control functions within the Group included Internal Audit, Compliance and the Group's Audit Committee. …"
As the judge said in paragraph 14 of the judgment:
"The Final Notice contains a definitions section in paragraph 3. "CIO" is defined as the Chief Investment Office of the Bank, "SCP" is defined as the Synthetic Credit Portfolio, the "Firm" is defined as JP Morgan Chase Bank NA and the "Group" is defined as JP Morgan Chase & Co, the parent company of the Bank. The terms "SCP management", "CIO London management", "CIO Senior Management" and "Firm Senior Management" are not defined. These terms do not in fact refer to any particular body that can be identified in the Bank's corporate structure chart. Mr Macris contends that the term "CIO London management" has been intentionally employed by the Authority to refer to him, specifically and uniquely and does so consistently throughout the Notice. The Authority has not denied that, although Mr Stanley 5 contends that as the question to be determined is whether Mr Macris has been identified in the Final Notice it is irrelevant to ask the question as to who the Authority had in mind when referring to this term, although Mr Stanley submits that each of the terms used in paragraph 4.3 are deliberately vague and could consist of one or more people." [My emphasis.]
As the judgment set out at paragraph 11, the Notice contained criticisms of the Firm's conduct as to the trading activities and management of the SCP under broadly six heads as follows:
i) the employment of a high risk trading strategy;
ii) a failure to properly vet and manage that trading strategy
iii) a failure properly to respond to information which should have alerted the Bank to the risk which was present in the SCP;
iv) a failure properly to value the Bank's positions within the SCP;
v) mismarking of the SCP; and
vi) a failure to be open and co-operative with the Authority about the extent of the losses generated by the SCP as well as other serious and significant issues regarding the risk situation in the SCP.
Mr Macris took the view that the Authority, in promulgating the Warning Notice, Decision Notice and Final Notice had included reasons which...
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