Valse Holdings S.A and Merrill Lynch International Bank Ltd
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Morison |
| Judgment Date | 04 November 2004 |
| Neutral Citation | [2004] EWHC 2471 (Comm) |
| Docket Number | Case No:2002/1333 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 04 November 2004 |
[2004] EWHC 2471 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Morison
Case No:2002/1333
Mr A Malek QC & Mr D Quest (instructed by AJF/APW Withers LLP) for the Claimant
Mr M Hapgood QC & Mr A Henshaw (instructed by Bennett/Warwick Linklaters) for the Defendant
Hearing dates: 9, 15, 16, 17, 21, 22, 23, 24, 28, June and 5 July 2004
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.
Morison J:
The Djafar Mohseni Family Trust ['the Trust'] was settled by the late Djafar Mohseni for the benefit of his descendants and for charitable purposes. Credit Suisse Trust [CST] is the trustee. The claimants, Valse Holdings SA [Valse], are a company registered in Panama on 16 April 1990, and were, from February 1997, wholly owned by the Trust. Valse is managed by CST, and its directors and officers are CST personnel. Valse owned a portfolio of investments worth, at the end of March 2000, about US$15 millions. Valse retained the defendants [MLIB or Merrill Lynch] as their bankers and financial advisers. Valse's accounts were kept in MLIB's Lugano branch from the inception (1990) through to 1996, when the accounts were transferred to London. Valse's dealings in securities were traded by MLIB's brokers, Merrill Lynch Pierce Fenner & Smith Inc [MLPFS], who nominally held some of Valse's trading accounts. However, all communications relating to Valse's various accounts were through MLIB. As a result of the events giving rise to the present dispute the account with MLIB was closed in February 2002 and was transferred elsewhere.
Valse's claim is for negligent mismanagement and financial advice during the period 1999 to 2002 and for a loss of about US$3.93 million, plus interest. There is also a claim for unauthorized dealings on the account, which includes making transactions without authority, and failing to comply with instructions. It is common ground that the account with MLIB was under advisory rather than discretionary management. This meant that MLIB advised on investments and were not authorized to trade without express instructions. In a nutshell, Valse say that between February 1999 and February 2002 the account was managed by a senior financial consultant at MLIB, Mr Jourabchi, and that under his management 'the Portfolio performed disastrously': the value of the portfolio reduced from US$13.9 million at the end of January 1999 by some US$4.4 million by the end of January 200The principal allegation is that MLIB pursued an extraordinarily risky investment policy: the portfolio was concentrated in volatile equities, especially in the technology sector and was highly leveraged, in the sense that it was investing not only its own capital but money loaned to it by MLIB. The loan facility agreement dated 4 August 1992 provided for a US$6.5 millions credit line, which replaced an earlier facility of US$5.6 millions. The 1992 level was further increased to US$10 millions in January 2000.
Throughout the relevant time, Mr Mohammed Mohseni, the settlor's son, was the person who had regular day to day contact with MLIB, although for formal matters such as the execution of [non-trading] contracts, or account opening forms, CST were responsible. Mr Mohseni had authority to give investment instructions to MLIB.
When the account was moved to London, Mr Jourabchi's predecessor, Mr Goodarzi, arranged for the opening of new trading and banking accounts under an umbrella service called the Merrill Lynch Private Client Group Cash Management Account [CMA]. At MLIB's suggestion, Valse also opened a futures trading account.
Valse's main investment activities were trading in equities, mutual funds, fixed income securities and foreign exchange. The procedure for effecting a trade on Valse's behalf would have been a telephone call between Mr Mohseni, who was based in Canada, but sometimes travelled in the course of his business to London, where he visited his daughter, and Mr Jourabchi, who was based in London. Mr Mohseni has been able to disclose his own telephone accounts which show land-line calls he made from Vancouver. The substance of the telephone calls was not recorded at either end, but a record of the outgoing calls made from London to Mr Mohseni, was made by MLIB. Regrettably, after the proceedings were started, and after MLIB had served a detailed request for further information about Valse's case in relation to the 'phone calls, MLIB's records were destroyed. The records had been held by an independent contractor; the contractor was changed; these records were not transferred to the new company and were destroyed by the old contractor in August 2003. As counsel for the Claimants puts it:
"Clearly this is very unfortunate since there is now no evidence of the times and dates of calls to Mr Mohseni."
However, their loss was at worst careless and at the end of the day the absence of these records has not impaired the court's ability to form a conclusion on the issues to which the records might have related.
The paperwork which was generated by MLIB when a transaction was undertaken was, in the first place, an internal order ticket; thereafter a printed trade confirmation document would be sent by post to CST in Geneva and (from 1997) a copy was also sent to Mr Mohseni's daughter, Noushin Daneshi, in London. Further, monthly account statements were sent, at the relevant time, to the same two addresses. MLIB also rely on the fact that spreadsheets or statements showing investments bought or sold in the portfolio were faxed frequently, generally weekly, to Mr Mohseni personally. They also say, and I accept, that during the telephone calls it was quite common for Mr Mohseni to be taken through Valse's portfolio, either in its entirety, or by reference to particular securities which had 'moved' in the market. There would also be half yearly meetings between Mr Mohseni and CST for which the latter would prepare reports showing Valse's assets and currency allocation. Copy account statements were couriered periodically to Mr Mohseni in Vancouver.
The procedure for the taking of an order for the sale or purchase of equities was as follows:
If the trade was in the US market, an 'at market' buy or sell order would either be entered into the order entry system which executed trades automatically, or a trade ticket would be completed and sent to the wire room where it would then be entered into the automatic system. In the case of a European equity, the process was generally as follows: an order to buy or sell would be received from the client by 'phone. The financial consultant receiving the call would complete a trade ticket, the terms of which would be read back to the client, time stamped and then sent to the wire room for processing. Some orders would be received after the relevant market had closed and would be processed the following day. This happened relatively frequently because of the time differences. Most conversations between Mr Jourabchi and Mr Mohseni [when the former was in London and the latter in Vancouver] occurred after the close of the European markets, at around 16.00 – 20.00 hours GMT. Mr Jourabchi used to make a written record of the client's order either on a trade ticket or in his own work diary and send the ticket down to the wire room as soon as he arrived at work the following morning. The delay between the time when the relevant market opened and the time when Mr Jourabchi arrived at work, has not been the subject of any pleaded allegation. It seems to me that, strictly speaking, in accordance with MLIB's own procedure manuals, when any order was given a ticket should have been completed then and there, read over to the client and time stamped and sent through to the wire room for processing. The time stamp recorded the time in New York, which is 5 hours behind GMT.
The Allegation of Unauthorised Dealing
I can deal with the allegation that there was unauthorized dealing on the Valse account very shortly. It is a most serious allegation to make that a trader has, with regard to a non-discretionary account, carried out trades on that account without instructions from the client. The burden of proof clearly rests on Mr Mohseni to prove his case. In my view he has not done so, and Mr Jourabchi should be completely exonerated from this unpleasant allegation, which appears to me to be baseless in fact.
In order to understand this part of the case it is necessary to say something of the background to the way in which Mr Jourabchi came to take over the running of this account. In late 1998, Mr Mohseni alleged that Mr Jourabchi's predecessor had failed to carry out an instruction to buy some S & P futures "because I felt that the markets were poised to rebound". When the markets rose the next day, Mr Mohseni was expecting to be told that he had made a profit of some $100,000. However, Mr Goodarzi had failed to make the trade because, so Mr Mohseni alleged, "he had changed his mind after speaking to me." The dispute was settled by MLIB crediting the account with $50,000 in full and final settlement. Mr Mohseni lost all confidence in Mr Goodarzi, principally because Mr Goodarzi had denied receiving the instructions and it seemed to Mr Mohseni that he was no longer to be trusted because of what he regarded as a false denial. Hence the need to change financial consultants. Mr Jourabchi was asked to attend what he regarded as a beauty parade for Valse to decide whether he was a suitable replacement for Mr Goodarzi. It seemed to him that the main...
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