investors face uphill battle to recover losses arising out of
the chaos of the financial crisis
Disappointed investors who have suffered losses in the recent
financial crisis have turned to the courts to try and recover their
losses from the banks who sold them poorly performing
investments.
Each claim will turn on its specific facts but
most cases where investors have sought to recover losses from a
bank have included a claim for breach of an advisory duty of care
and/or misrepresentation.
an advisory duty of care
Investors might try to recover their losses by
establishing that they were owed an advisory duty of care by their
bank. Establishing a duty of care will depend on the facts of
each case. Factors the courts will take into account
include:
- the contractual framework of the deals
- the sophistication of the investor, and
- the relationship between the investor and the bank as defined
by the parties.
If the bank is found to owe the investor an
advisory duty of care, it will be liable for the investor's
foreseeable losses if it breaches that duty.
In JP Morgan Chase v Springwell
[2008] EWHC 1186 Springwell was an investment fund created by
a wealthy ship owning family that suffered significant losses when
it invested $700 million in a Russian derivative product known as
GKO Linked Notes, the value of which collapsed after the Russian
debt default in 1998. JP Morgan had issued these notes, and
Springwell sought to recover its losses by claiming JP Morgan had
acted as an investment advisor and was liable for Springwell's
losses on account of breach of duty. Gloster J in the High
Court decided that there was no advisory duty of care because the
contract contained express disclaimers that excluded any liability
for investment advice; Springwell was a sophisticated investor; and
there was no written advisory agreement. It was found that JP
Morgan had given recommendations and advice, but that formed a
normal part of the role of a salesman in the City and did not lead
to an advisory relationship.
In Standard Chartered Bank v Ceylon
[2011] EWHC 1785 Ceylon entered into two derivative
transactions based on oil prices, which left it exposed to large
losses when oil prices tumbled in 2008. Hamblen J in the High
Court made it clear that the absence of a written advisory
agreement was a significant pointer against the existence of an
advisory relationship. The parties had categorised their
relationship as non-advisory, and therefore even though Standard
Chartered's salesman had given specific investment advice, and
Ceylon had relied on that advice, the court held that no advisory
duty of care had arisen. Even if the court had established
that the facts could have given rise to an advisory duty of care,
Hamblen J went on to say that Ceylon would not have been able to
make such a claim, as it was prohibited from doing so by the
existence of disclaimers and non-reliance wording in the
contract. However, he noted disclaimers would only
exclude liability insofar as the language closely reflects the
claim being brought.
In Adrian Rubenstein v HSBC [2011]
EWHC 2304 an investor was unable to recover anything but nominal
damages, despite establishing HSBC breached its duty of care,
because the turmoil in the financial markets following Lehman
Brother's collapse in September 2008 was not reasonably
foreseeable. Mr Rubenstein, who was seeking somewhere safe to
invest the proceeds of sale from his house, was advised in 2005 by
HSBC to invest in a fund run by AIG, which HSBC had stated was as
safe as a cash deposit. Following the collapse of Lehman
Brothers, and upon hearing rumours that AIG may become bankrupt in
the USA, investors rushed to withdraw their investment, resulting
in significant losses to the fund. The court found that HSBC
owed Mr Rubenstein an advisory duty of care that it had breached by
failing to consider other funds. However, HSBC was not liable
for Mr Rubenstein's losses, because the actual losses themselves
were not reasonably foreseeable. Judge Havelock-Allan QC
said: "The idea that one of the world’s largest insurance
companies might go bankrupt was unthinkable in September
2005."
Therefore, Mr Rubenstein's losses were not caused by HSBC's
negligence; the losses to the fund were caused by the turmoil in
the markets following Lehman Brother's collapse, which was wholly
outside the contemplation of the bank or any competent financial
adviser in September 2005 when the investment was taken out.
misrepresentation and negligent misstatement
As shown above, in certain circumstances, a
bank can give investment advice without taking on responsibility
for that advice. However, if the products on which the bank
had advised were not accurately described (deliberately or
negligently), the investor may still have a claim for
misrepresentation or negligent misstatement.
Springwell (see above) also brought a claim
against JP Morgan for misrepresentation and negligent misstatement,
and the High Court case was appealed on this point. A JP
Morgan employee had referred to the investment as 'conservative'
and 'liquid', when it turned out to be anything but. The
Court of Appeal said a word cannot be lifted 'like a fish out
of water' and
held that the courts would consider any statement in the context of
the market and the particular investor. Springwell was a
sophisticated investor, who knew the market well and understood
that the jargon being used was not implying that the investments
were the equivalent of investment grade assets. Therefore the
court concluded that no misrepresentations had been made. The
claim for misrepresentation therefore failed at the first
stage. However, even if it had succeeded at this stage, there
are other stumbling blocks facing an investor.
Not all misrepresentations are
'actionable'. To be an actionable misrepresentation, it must
be a representation of fact (ie not opinion) that is relied upon by
the other party. Statements made by a bank's employee about
the quality of derivative products would be a statement of opinion,
not fact, and therefore would not be actionable, unless it could be
shown that each time the employee made a statement of opinion, it
carried with it an implied statement of fact that the employee had
reasonable grounds for holding that opinion. In Springwell,
the nature of the relationship and the investor's understanding of
the statements, were fatal to the claim.
The Court of Appeal did accept that there
could nonetheless be a low level duty of care not to make negligent
misstatements. However, in Springwell the court found that in
fact there were no misstatements, let alone negligent
ones.
Market standard documentation is normally
covered in disclaimers and agreements contain non-reliance clauses,
which together seek to restrict representations occurring, or if
they do occur, to stop the investor from relying on them.
Non-reliance clauses will be classified as an exclusion of the
bank's liability under s.3 of the Misrepresentation Act, and
therefore to be valid the exclusion must be reasonable. Such
terms must be seen in context, and will usually be upheld as
reasonable when the investor is a sophisticated user.
conclusion
The courts have made a clear distinction
between a bank giving advice, and assuming legal responsibility for
that advice. Much weight will be given to the agreement
between the parties, and where there is a sophisticated investor,
the court is much less likely to find that there was a duty of
care, or that misrepresentations were made. Even if an
investor can prove liability, that liability will only extend to
damages that were reasonably foreseeable.
notes
- Paragraph 115 Adrian Rubenstein v
HSBC [2011] EWHC 2304
-
