Stone & Rolls Ltd v Moore Stephens (a firm) [2007] EWHC 1826 (Comm)

“SUMMARY 1. This summary is included for the convenience of the Court. It does not form part of the Claimant’s case, which is set out more fully below. THE CLAIMANT 2. The Claimant (“S&R”) is a company incorporated under the laws of England and Wales. At all material times: (1) … (2) the manager of S&R was a Croatian national, Zvonko Stojevic, who: (a) was a shadow director of S&R; and (b) held a power of attorney on behalf of S&R THE DEFENDANTS 3. … 4. Moore Stephens were extensively involved in the affairs of S&R and other entities controlled by Mr Stojevic in the period leading up to S&R’s liquidation in 2002. In particular, Moore Stephens acted as auditors to S&R between 1997 and 2001, signing unqualified audit reports for the financial periods ending 31 December 1996 to 1999. THE LIQUIDATION OF S&R 9. S&R went into provisional liquidation on 15th November 2002 as a result of the judgment of Mr Justice Toulson… 10. The judge awarded Komercni Banka $94,470,382.28 damages for deceit against both defendants. He found that Mr Stojevic, who was the controlling mind of S&R, had dishonestly colluded with an Austrian company, BCL Trading GmbH (“BCL”), to create artificial commodity sales to enable S&R to obtain funds under letters of credit issued by Komercni Banka, with such funds then being recycled to BCL. 11. On 15th January 2003 the provisional liquidators of S&R, Ian Williams and Laurence Pagden of Benedict Mackenzie LLP, were appointed liquidators of S&R by the Secretary of State. S&R’S CASE IN OUTLINE 12. In this action S&R alleges that: (1) Moore Stephens were negligent in their conduct of the audits for 1996 to 1998; (2) Mr Chasty and Mr Anstis were dishonest in certain aspects of their conduct of the audit for 1998; (3) As a result of the above, Moore Stephens failed to detect and/or (through Mr Chasty and Mr Anstis for the 1998 audit) turned a blind eye to: (a) Mr Stojevic’s dishonesty; and (b) a pattern of fraud involving numerous fraudulent and/or irregular payments out by S&R to entities controlled by Stojevic and his associates; (4) any reasonably competent auditor who had detected such matters, and/or not turned a blind eye to them, would have resigned and/or reported them to the relevant authorities. S&R’s primary case is that this would have occurred by the end of October 1997 at the latest; (5) thereafter Mr Stojevic would have been unable to procure that fraudulent and/or irregular payments were made out of S&R. 13. The losses to S&R resulting from the continuance of the fraudulent and/or irregular payments out are set out in Schedule 1.”

“14. At all material times until its provisional liquidation in November 2002, S&R was controlled by Mr Stojevic and owned by Law Investments Limited (“Law Investments”), an Isle of Man company which was in turn owned by Mr Stojevic’s family trust. Mr Stojevic is, and was, a highly intelligent and secretive Croatian businessman who controlled numerous companies in various jurisdictions and used trustees and nominee directors in order to conceal his association with them. 16. Mr Stojevic’s intention throughout was to use S&R as a vehicle of fraud, i.e. it was intended to be, and became, a vehicle through which funds were extracted from banks which believed that they were financing bona fide commodity trades and then paid away to third parties who were under the influence or control of Mr Stojevic. The fraudulent transactions which he planned and executed through S&R became both larger and more obviously fraudulent as he realised that Moore Stephens had failed to detect his earlier frauds and would probably not detect his frauds in the future.”

“EXPRESS TERMS 48. The express terms of Moore Stephens’ retainer were set out in a letter of engagement from Moore Stephens to the directors of S&R, dated 19th December 1996. This was signed by Mr Stojevic on behalf of S&R, to confirm agreement with its terms, on 14th January 1997. 49. The letter of engagement provided, in part, as follows: …(2) We have a statutory responsibility to report to members whether in our opinion the financial statements give a true and fair view and whether they have been properly prepared in accordance with the Companies Act 1985. In arriving at our opinion, we are required to consider the following matters, and to report on any in respect of which we are not satisfied: (a) whether proper accounting records have been kept by the company… (b) whether the company’s balance sheet and profit and loss account are in agreement with the accounting records and returns; (c) whether we have obtained all the information and explanations which we consider necessary for the purpose of our audit; and (d) whether the information in the directors’ report is consistent with that in the financial statements… (4) We have a professional responsibility to report if the financial statements do not comply in any material respect with applicable accounting standards, unless in our opinion the non-compliance is justified in the circumstances. In determining whether or not the departure is justified we consider: (a) whether the departure is required in order for the financial statements to give a true and fair view; and (b) whether adequate disclosure has been made concerning the departure… Scope of audit (7) Our audit will be conducted in accordance with the Auditing Standards issued by the Auditing Practices Board, and will include such tests of transactions and of the existence, ownership and valuation of assets and liabilities as we consider necessary… (11) The responsibility for safeguarding the assets of the company and for the prevention and detection of fraud, error and non-compliance with law or regulations rests with yourselves. However, we shall endeavour to plan our audit so that we have a reasonable expectation of detecting material misstatements in the financial statements or accounting records (including those resulting from fraud, error or non-compliance with law or regulations), but our examination should not be relied upon to disclose all such material misstatements or frauds, errors or instances of non-compliance as may exist… IMPLIED TERM (a) whether proper accounting records have been kept by the company… (b) whether the company’s balance sheet and profit and loss account are in agreement with the accounting records and returns; (c) whether we have obtained all the information and explanations which we consider necessary for the purpose of our audit; and (d) whether the information in the directors’ report is consistent with that in the financial statements… (4) We have a professional responsibility to report if the financial statements do not comply in any material respect with applicable accounting standards, unless in our opinion the non-compliance is justified in the circumstances. In determining whether or not the departure is justified we consider: (a) whether the departure is required in order for the financial statements to give a true and fair view; and (b) whether adequate disclosure has been made concerning the departure… Scope of audit (7) Our audit will be conducted in accordance with the Auditing Standards issued by the Auditing Practices Board, and will include such tests of transactions and of the existence, ownership and valuation of assets and liabilities as we consider necessary… (11) The responsibility for safeguarding the assets of the company and for the prevention and detection of fraud, error and non-compliance with law or regulations rests with yourselves. However, we shall endeavour to plan our audit so that we have a reasonable expectation of detecting material misstatements in the financial statements or accounting records (including those resulting from fraud, error or non-compliance with law or regulations), but our examination should not be relied upon to disclose all such material misstatements or frauds, errors or instances of non-compliance as may exist… IMPLIED TERM 52. The exercise of reasonable skill and care required, amongst other things: (3) that if they became aware of information which indicated that fraud or error might exist they should obtain an understanding of the nature of the event and the circumstances in which it had occurred, and sufficient other information to evaluate the possible effect on the financial statements; (4) that if they believed that the indicated fraud or error could have a material effect in the financial statements, they should perform appropriate modified or additional procedures. TORT 53. Moore Stephens owed the Claimants tortious duties co-extensive with the contractual duties set out above.”

“plan and perform their audit procedures and evaluate and report the results thereof, recognising that fraud or error may materially affect the financial statements.”

“LOSS 396. As a result of the matters set out above, S&R has suffered loss and damage, as set out in Schedules 1 and 2 below. The sums set out in Schedule 1 all constitute irregular and/or fraudulent payments out to third parties for no value and/or not made in the ordinary course of business and were the continuation of a type of irregular and/or fraudulent transaction which Moore Stephens negligently failed to discover during the course of their audits. Against those sums S&R gives credit for the sums set out in Schedule 2 on the basis that those sums were paid back to S&R by the recipients of the sums set out at Schedule 1. 397. The total sum, net of interest, claimed by S&R is thus $141,721,864.85 less $47,007,249.11 = $94,714,615.74. INTEREST 398. At all material times Moore Stephens was aware of the extent of S&R’s indebtedness, whether to banks or to other parties, and of the fact that (1) trading and other receipts would be used to reduce this indebtedness and/or that (2) payments out to third parties would increase that indebtedness. On this basis S&R claims compound interest as special damages at the US Prime Rate plus 1% totalling $78,890,064.12. Particulars of the calculation of this sum are contained in Schedule 3.”

“No court will lend its aid to a man who founds his cause of action on an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa…there the court says that he has no right to be assisted. It is on this ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.”

“Held, dismissing the appeal (Lord Keith of Kinkel and Lord Goff of Chieveley dissenting), that a claimant to an interest in property, whether based on a legal or equitable title, was entitled to recover if he was not forced to plead or rely on an illegality, even although it transpired that the title on which he relied was acquired in the course of carrying through an illegal transaction; that, in the circumstances, by showing that she had contributed to the purchase price of the property and that there was a common understanding between the parties that they owned the property equally the defendant had established a resulting trust; that there was no necessity to prove the reason for the conveyance into the sole name of the plaintiff, which was irrelevant to the defendant’s claim, and that since there was no evidence to rebut the presumption of a resulting trust the defendant was entitled to succeed on her counterclaim.”

“It is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.”

“He brought an action against the defendant claiming that he had suffered injury, loss and damage and that the defendant was in breach of a common law duty to treat him with reasonable professional care and skill, that on the known information the responsible medical officer should have realised that he was in urgent need of treatment and was dangerous, and that, had he been given treatment, he would not have committed manslaughter and would not have been subject to the prolonged detention which he faced. The judge refused to strike out the action, holding that the plaintiff was not precluded from recovering damages consequent on his own criminal act. On appeal by the defendant:- Held, allowing the appeal, (1) that the rule of public policy that a plaintiff should not be able to rely on his own criminal or immoral act was not confined to particular causes of action; and that public policy only required a court to deny its aid to a plaintiff seeking to enforce a cause of action if he was implicated in the illegality and sought to rely on the illegal act in putting forward his case, and the operation of the policy was restricted to those who were presumed to have known that what they had been doing was unlawful; that acceptance of a plea of diminished responsibility did not remove the plaintiff’s responsibility for his criminal act; and that, accordingly, since his claim arose out of his commission of a criminal offence, and since he had to be taken to have known what he was doing and, despite the reduction of his culpability by reason of his mental disorder, that it was wrong, the court was precluded from entertaining his claim.”

“We do not consider that the public policy that the court will not lend its aid to a litigant who relies on his own criminal or immoral act is confined to particular causes of action. Although Mr. Irwin asserted that in the present case the plaintiff’s cause of action did not depend upon proof that he had been guilty of manslaughter, the claim against the defendant is founded on the assertion that the manslaughter of Mr. Zito was the kind of act which Dr. Sergeant ought reasonably to have foreseen and that breaches of duty by the defendant caused the plaintiff to kill Mr. Zito. Further the foundation of the injury, loss and damage alleged is that, having been convicted of manslaughter, the plaintiff will in consequence be detained under the Mental Health Act 1983 for longer that he otherwise would have been. In our view the plaintiff’s claim does arise out of and depend upon proof of his commission of a criminal offence. But whether a claim brought is founded in contract or in tort, public policy only requires the court to deny its assistance to a plaintiff seeking to enforce a cause of action if he was implicated in the illegality and in putting forward his case he seeks to rely upon the illegal acts.”

“I do not believe that there is any general principle that the claimant must either plead, give evidence of or rely on his own illegality for the principle to apply. Such a technical approach is entirely absent form Lord Mansfield’s exposition of the principle. I would, however, accept that for the principle to operate the claim made by the claimant must arise out of criminal or illegal conduct on his part. In this context “arise out of” clearly denotes a causal connection with the conduct, a view which is implicit in such different cases as Lane v Holloway and the recent case to which we were referred in this court, Standard and Chartered Bank v Pakistan National Shipping Corporation & Ors, Court of Appeal transcript, Friday 3 December, 1999. In my view the principle applies when the claimant’s claim is so closely connected or inextricably bound up with his own criminal or illegal conduct that the court could not permit him to recover without appearing to condone that conduct.”

“In summary, therefore, if ex turpi causa is to apply in tort something more than wrongdoing, whether general or even on the occasion directly in question, is needed. Perhaps the most useful starting point for discovering this additional ingredient is found in the observations of Bingham LJ (as he then was) in Saunders v Edwards [1987] 2 All ER 651, [1987] 1 WLR 1116. Although the case was concerned with an illegality arising from a misrepresentation the discussion is of general application: Where issues of illegality are raised, the courts have to steer a middle course between two unacceptable positions. On the one hand it is unacceptable that any court of law should aid or lend its authority to a party seeking to pursue or enforce an object or agreement which the law prohibits. On the other hand it is unacceptable that the court should, on the first indication of unlawfulness affecting any aspect of a transaction, draw up its skirts and refuse all assistance to the claimant, no matter how serious his loss, nor how disproportionate his loss to the unlawfulness of his conduct. On the whole the courts have tended to adopt a pragmatic approach to this problems, seeking, where possible, to see that genuine wrongs are righted, so long as the court does not thereby promote or countenance a nefarious object or bargain which it is bound to condemn. Where the claimant’s action in truth arises directly ex turpi causa he is likely to fail. Where the claimant has suffered a genuine wrong to which the allegedly unlawful conduct is incidental, he is likely to succeed. … In my judgment, where the claimant is behaving unlawfully, or criminally, on the occasion when his cause of action in tort arises, his claim is not liable to be defeated ex turpi causa unless it is also established that the facts which give rise to it are inextricably linked with his criminal conduct. I have deliberately expressed myself in language which goes well beyond questions of causation in the general sense.”

“the authorities supported the proposition that where a claimant has to rely upon his own unlawful act in order to establish part or the whole of his claim, the claim will fail, in whole or in part. In order for the claimant to continue to work in his employment, he would have to deceive his employers by falsely representing that he did not suffer from epilepsy, and would thus have committed a criminal offence: that of obtaining a pecuniary advantage by deception. This deception would be neither collateral nor insignificant, not least because of the risks to others caused by the claimant continuing to work whilst suffering from such a condition. The claimant’s deliberate deception struck at the root of the contract under which he earned remuneration. It was inappropriate for the courts to approach the case by considering the question of whether or not the public conscience would be affronted.”

“The correct principle seems to me to be substantially the same as that identified by Beldam L.J. as being applicable to cases in which the maxim ex turpi causa non oritur actio applies. It is common ground that that maxim does not itself apply here because it is correctly agreed that there is no principle of public policy which prevents the appellant from pursuing his cause of action for damages for negligence or breach of duty against the respondents. The question is not whether he can recover at all but whether he is debarred from recovering part of his alleged loss. However, as I see it, the principle is closely related. It is common ground that there are cases in which public policy will prevent a claimant from recovering the whole of the damages which, but for the rule of public policy, he would otherwise have recovered. The principle can perhaps be stated as a variation of the maxim so that it reads ex turpi causa non oritur damnum, where the damnum is the loss which would have been recovered but for the relevant illegal or immoral act. A classic example is the principle that a person who makes his living from burglary cannot have damages assessed on the basis of what he would have earned from burglary but for the defendant’s negligence.”

“Illegality may affect a tort claim in many ways ranging from an essential part of the story giving rise to liability to some remote aspect of quantum. For this reason I favour a broad test of the kind proposed by Clarke L.J. namely: is the claim or the relevant part of it based substantially (and not therefore collaterally or insignificantly) on an unlawful act? Such a broad test has the merit of simplicity. It does not involve the judge having to make very specific and difficult value judgments about precisely how serious the misconduct is or whether it would result in imprisonment or whether the claimant’s loss is disproportionate to his misconduct.”

“(1) Is the knowledge of Mr Lewis … to be attributed to the Claimants? (2) If so, does the illegality, of which the Claimants would then be treated as having been aware, mean that their claims in these proceedings are so tainted or…so inextricably linked with the corruption that the court should decline to entertain them?”

“I consider that the court should decline to entertain the deceit claim on the grounds that the alleged deceit is so closely involved with the illegal venture: ex turpi causa non oritur actio. The same applies to the conspiracy and breach of fiduciary duty claims.”

“The authorities show clearly that different persons may for different purposes satisfy the requirements of being the company’s directing mind and will. Therefore the question in my judgment is whether in relation to the Yulara transaction, Mr Ferdman as an individual exercised powers on behalf of the company which so identified him. It seems to me that Mr Ferdman was clearly regarded as being in a different position from the other directors. They were associates of his who came and went. SAFI charged for their services at a substantially lower rate. It was Mr Ferdman who claimed in the published accounts of DLH to be its ultimate beneficial owner. In my view, however, the most significant fact is that Mr Ferdman signed the agreement with Yulara on behalf of DLH. There was no board resolution authorising him to do so. Of course we know that in fact he signed at the request of Mr Stern, whom he knew to be clothed with authority from the Americans. But so far as the constitution of DLH was concerned, he committed the company to the transaction as an autonomous act which the company adopted by performing the agreement. I would therefore hold, respectfully differing from the judge, that this was sufficient to justify Mr Ferdman being treated, in relation to the Yulara transaction, as the company’s directing mind and will. Nor do I think it matters that by the time DLH acquired Yulara’s interest in the Nine Elms project on 16 March 1988, Mr Ferdman had ceased to be a director. Once his knowledge is treated as being the knowledge of the company in relation to a given transaction, I think that the company continues to be affected with that knowledge for any subsequent stages of the same transaction. So, for example, if (contrary to the judge’s finding) the £1,030,000 sent by Yulara on 29 May 1986 had been received beneficially by DLH as a loan, but Mr Ferdman had resigned or died a week earlier, I do not think that DLH could have said that it received the money without imputed knowledge of the fraud.”

“Held, (1) that where the deceased, whether of sound or unsound mind, had committed suicide when the defendant was found in breach of a duty of care to guard against his doing so, it would not represent covert connivance at or countenancing of suicide or constitute an affront to the ordinary citizen’s conscience to permit his estate to recover against the defendant; and that, accordingly, the defendant could not rely on a defence based on public policy or the maxim ex turpi causa… (2) Allowing the appeal (Morritt L.J dissenting), that, since the duty of care found owing to the deceased existed irrespective of his being of sound or unsound mind, and since his suicide was the very act against which the defendant had been required to guard, that act did not constitute a new or intervening act such as would break the chain of causation, nor was the defendant’s breach a failure to which he had knowingly and willingly consented; and that, accordingly, the defences of novus actus interveniens and volenti non fit injuria were inapt and could not be invoked to bar the plaintiff’s claim… (3) That (per Lord Bingham of Cornhill C.J), although the Act of 1945 was applicable, it was inappropriate in the circumstances to reduce the plaintiff’s award to reflect responsibility by the deceased for his loss; and that (per Buxton L.J.) since the deceased’s act was that which the defendant had been under a duty to take steps to prevent, the statutory defence was inapposite; and that, accordingly, the plaintiff’s claim succeeded in full…”

“Second, the present case does not fit at all well into the explanation of the defence given by Kerr L.J. in the Euro-Diam case [1990] 1 Q.B. 1: the defence applies where it would affront public conscience to grant relief “because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts.”

“the deceased did to himself the very thing that the commissioner was under a duty to take reasonable care to prevent while he remained in his custody.”