“SEB carries on investment business, including that relating to exchange traded futures and options”; iii) Recital (b) provided: “SEB is willing to settle and/or execute exchange traded futures and options, and settle OTC futures and options that are cleared via an exchange on behalf of the Client subject to the terms and conditions set out herein”; iv) Under clause 2, “margined transaction” was defined as: “… a contract under the terms of which a customer will be, or may be, liable to make deposits in cash or collateral to secure performance of obligations under the contact”. v) Clause 3 provided so far as material: “SEB is a Swedish bank and authorised to conduct securities business under Swedish law. Finansinspektionen in Sweden is the home-country supervisor of SEB. However, in relation to its exchange traded futures and options at the London branch, SEB is also regulated by the FSA.” vi) Clause 4 provided: “4. APPOINTMENT OF A FUND MANAGER (a) The client has appointed the Fund Manager as its agent to enter into transactions with SEB under this Agreement on its behalf. (b) The Client authorises and requests that SEB accepts and acts upon any instructions or communications from, enters into transactions with, and makes and receives payments to and from the Fund Manager (including any person who SEB believes in good faith to be the Fund Manager’s authorised representative) in each case on the Client’s behalf. The Client also authorises SEB to communicate all details concerning its account with SEB and any transactions under this Agreement to the Fund Manager. (c) SEB shall be entitled to presume the continuing authority of the Fund Manager and its representatives until it receives written notification to the contrary.” vii) Clause 6 provided that: “[Euroption] will make all trade decisions. The services SEB will provide are, subject to the restrictions contained in Clause 7 below [best execution], advisory services regarding dealing in exchange traded futures and options (and securities where the securities transaction in question is ancillary to a transaction in the foregoing) or such other services as may be agreed from time to time between SEB and [Euroption] in writing. SEB will contract only as a principal in respect of contracts in the terms of an Exchange Contract. In respect of every contract made between SEB and the Client, SEB shall have made an equivalent contract on the relevant market either by open outcry or in the electronically traded market. These services may include preparing and executing margined transactions in the investments referred to above. SEB may at any time impose or alter limits applicable to the Clients activities under this Agreement.” viii) Clause 11 provided: “11. MARGIN PAYMENT Where SEB effects transactions for the Client pursuant to Clause 6 above, the Client must, immediately upon SEB’s request, transfer to SEB a margin payment of an amount specified by SEB and representing at least the amount stipulated for the transaction by the relevant exchange on which the transaction is to be carried out. The Client will be required to supplement that payment at any time when the Client’s account with SEB shows a debit balance or an increase in the Client’s margin requirement. Time shall be of the essence with respect to margin payments from the Client to SEB. Margin transfer must be made in cash unless otherwise agreed between the Client and SEB. The parties agree that all right, title and interest in and to any margin (whether cash or other property) will, at the time of transfer, vest in SEB free and clear of any liens, claims, charges or encumbrances or any other interest. Each transfer of margin will be made so as to constitute or result in a valid and legally effective transfer of all legal and beneficial title to SEB. The parties do not intend to create in favour of SEB any mortgage, charge, lien, pledge, encumbrance or other security interest in any cash or other property transferred as margin. The Client is warned that, if at any time it has failed to provide sufficient margin or other payment or delivery due in respect of any transaction as required, SEB shall be entitled to close out the Client’s open contracts at any time without reference to the Client. Furthermore, it is an FSA requirement that where clients’ margin calls are not met within five business days, all positions must be closed out. Any sum due to SEB as a result of closing out those contracts will be payable by the Client to SEB immediately. SEB also reserves the right, at its discretion, to close out the Client’s position having made reasonable efforts to contact the Client in the event of the Client’s insolvency, or in the event of the Client having a winding-up, bankruptcy, administration or similar order made against it, or in the event of any failure by the Client to meet any obligations, whether in this Agreement or otherwise, or in the event that the Client makes any misrepresentation to SEB, or at any time SEB deems it necessary for its own protection. In addition, the Client authorises SEB to transfer any funds which SEB may be holding on the Client’s behalf as may be necessary to meet any of the Client’s obligations, including the obligation to make margin payments, in respect of the Client’s dealings with SEB. In some instances the original securities or the original type of securities may not be returned to the Client and where the securities have matured, the Client will be credited with the equivalent value of the collateral.” ix) Clause 12 (c) provided: “SEB may at its absolute discretion refuse any instruction given in accordance with this Clause”
“can we meet face-to-face to discuss? Early next week please. If we are unable to trust clients to meet calls we really don’t want them as clients”
“… they’d reduced their margin call by€33 million , so I was in a far more comfortable position”
“A. I wanted cash and I wanted positions cut, and, you know, at this stage I didn’t know I was getting cash, but I don’t think I’d ever said to anybody that I was going to liquidate the portfolio at this stage.”
“Mr. Martin: We need to do these in parallel. You get the positions out and I want to know if the client’s got any cash because if he hasn’t I’ll take some action. So I need to know. Mr. Caldon: Well, OK. What are you talking about “taking action”? Mr. Martin: I’ll take the whole lot out.”
“Sorry. I have not been explicit about this, but I guess you are working on this assumption anyway. No new positions on this account whatsoever until further notice. We are working to close only”
“no new positions, working to close positions only. Not close the entire portfolio, not shut it down, but the third line relates to the second line. So your interpretation of that e-mail I’m afraid is one hundred percent incorrect.”
“It doesn’t matter. Our only chance is to show SEB that we are closing positions from the open. We have to start with the CAC. If SEB decide we are not closing fast enough, they will take over.”
“SEB are really increasing the pressure on us Stefano. They have told us that we are not reducing exposure fast enough. I am worried that they will start covering some positions themselves.”
“Looking back at the transcript of that call now, I think that I did not feel it was necessary at the time to spell out that SEB would be giving the instructions in relation to the portfolio from this point onwards. Mr. Caldon and I are both professionals, and we had both seen the carnage on the markets from the opening of trading on10 October 2008 . My sense at the time was that it would have been absolutely clear that Euroption’s trading of its portfolio was over and that SEB would be calling the shots from then on.”
“Wednesday 8th October The client was called for Euro 3,822,856.15, and again there was no response to our call. Tavira were called again and advised us that the client could not meet the margin call. Tavira were instructed to immediately commence cutting the clients positions. The client cut [details of trades] Although these were cutting existing positions, the client had rolled a number of positions to position himself further down the market. New positions given up on the day were. [details of trades] Further increased volatility hurt the client on the overnight revaluation. As at COB Wednesday October 8th the client had negative free cash of Euro 57,002,822.39 and Equity balance of Euro 71,294,333.02 and a portfolio liquidation value of Euro 31,529,928. Thursday October 9th The client was called for Euro 57,002,882.39, the call was not responded to. Tavira were advised that SEB wanted naked positions cut aggressively. The market conditions were exceptionally volatile with liquidity hard to come by in any serious size. We believed that Tavira were best placed to execute the closing trades, as they knew the clients, and the market makers. Executing close out instructions in these indexes via a fixed income desk, was considered to be too risky. The client along with Tavira closed [details of trades] However, again a lot of these were closed by rolling positions further down the price curve and further out the time line. The combo trades tied to the closures resulted in the following new positions [details of various call and put options] It was clear to us that the client was managing the position as opposed to cutting the position. Although the client’s actions improved the cash position slightly as at COB Thursday 9th October the client had a negative cash balance of Euro 26,173,887.52 and Equity balance of Euro 67,715,510 and a portfolio liquidation value of Euro 35,684,966. Friday October 10th Friday October 10th opened with stock markets in full rout mode. Heavy overnight losses in Asia transferred to large opening losses on the European indices and another significant volatility spike. Mindful of the clients reluctance to close naked positions, and also aware of the rapidly reducing liquidation value of the client, Tavira were instructed to close only in accordance with SEB instructions. The client was taken out of the loop and we commenced cutting positions ourselves. Again given Tavira’s knowledge of the markets and the clients positions it was considered sensible to work the closing orders through their broking desk. Although our aim was to liquidate the entire portfolio as quickly as possible we were mindful of market conditions. We concentrated on liquidating the closest to the money strikes, in either direction first. By close of the markets we had closed [details of various put options] The vast majority of these we had managed to close naked, however in some cases we had to pick up a little upside exposure to get the trades away. New positions taken on were S1300 November Eurostox 2650 Calls (traded against some of the 2350 puts that were closed) S2083 November FTSE 4600 Calls (traded against some of the 3600 puts that were closed) Friday 10th October closed with record falls in most major European Stock Indices, and volatility at records levels. Despite aggressive cutting of close to the money positions, the clients account with SEB Futures remained on call. As at COB Friday 10th October the client had negative free cash of Euro 58,580,816.39, a positive equity balance of Euro 38,562,715, but portfolio liquidation value that was Euro 7,636,594 negative.” (Emphasis supplied)
“… instructed to close only in accordance with SEB instructions. The client was taken out of the loop and we commenced cutting positions ourselves”
“In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill.” [Emphasis supplied.]
“66. It is plain from these authorities that a decision maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern was that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria; as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time. In the latter class of case, the concept of reasonableness is intended to be entirely mutual and thus guided by objective criteria. Gloster J was therefore, in my judgment, right to put to Mr Millett in the passage cited at para 57 above the question whether a distinction should be made between the duty to take reasonable care and the duty not to be unreasonable in a Wednesbury sense; and Mr Millett was in my judgment wrong to submit that it made no difference which test you deployed. Lord Justice Laws in the course of argument put the matter accurately, if I may respectfully agree, when he said that pursuant to the Wednesbury rationality test, the decision remains that of the decision-maker, whereas on entirely objective criteria of reasonableness the decision maker becomes the court itself. A similar distinction was highlighted by Potter LJ in para 51 of his judgment in Cantor Fitzgerald. For the sake of convenience and clarity I will therefore use the expression ‘rationality’ instead of Wednesbury-type reasonableness, and confine ‘reasonableness’ to the situation where the arbiter on entirely objective criteria is the court itself. … 112. Thus in the specific context of a default and a forced -retention of designated assets, Standard is compelled by its buyer’s default to retain what it never sought, save to the extent that it can immediately liquidate the assets on the termination date. The question whether it can sensibly in the interests of either party liquidate on the termination date is part of the complex uncertainties of this emergency situation. If it decides not to liquidate, it is forced to retain. If in that context it has to value the assets, why should it not be entitled to value them at a value which reflects the value of such assets to itself? It may dislike the risk they pose, in terms of the nature of the particular asset, its currency and/or nationality and so on. The decisions have to be taken very quickly, namely, ‘on the date of termination’ …. Once the asset is not immediately sold, the risk of retention is entirely transferred to Standard. In theory and sometimes in practice anything may happen the next day, or within the time in which a sale might become possible. The difficulty multiplies if the asset is relatively or entirely illiquid. Then there is no market price by which the value can be set on the relevant day. Who knows at what price the asset can be sold when a buyer appears? In such circumstances, Standard is entitled, it may be said, to consult its own interests, subject of course to the requirements of good faith and rationality. Those factors include both subjective and objective elements, but the essence of that construction is that the decision remains that of Standard, not of the market or the court, and that in coming to its assessment, subject to the limitations of good faith and rationality, it is entitled primarily to consult its own interests.”
“COBS 2.1.1 provides: ‘A firm must act honestly, fairly and professionally in accordance with the client’s best interest’ but COBS 2 is also excluded from counterparty business. Even if applicable, it is not suggested as such that MCA acted other then [sic] honestly, fairly and professionally. As regards the best interests of the client, this is a difficult concept in circumstances where the client is refusing to pay margin and expecting MCA to close out as best it can. MCA was in effect trading on its own account. Furthermore, the interests of MCA were in common with FCO namely to limit the loss that might be sustained as a result of the liquidation. Thus I reject the suggestion if it be made that MCA were obliged by COBS 2.1.1 to manage FCO’s position as if still acting as FCO’s broker but at its own risk and without the provision of margin.”
“53. However, I am equally satisfied that the COBS (and the annex to the letter of26 October 2007 so far as it creates an independent obligation) do not apply when the broker is liquidating the customer’s account pursuant to an Event of Default. That is because these rules apply when the broker is executing its customer’s orders, which is not the case in a liquidation. It is not correct either that in those circumstances the firm has to act in the best interest of its client. It cannot ignore the client’s interests, but as the present case shows, the firm has interests of its own to consider. Here, liquidation was required to eliminate Sucden’s own exposure with its counterparty. It was, in my judgment, entitled to put its own interest ahead of that of its client in that regard, although in practice both parties had a mutual interest in liquidation on the best terms possible. This conclusion is the same as that reached in ED & F Man at [75] and [76]. There David Steel J rejected the suggestion that the claimant was obliged to manage the defendant’s position as if it was still acting as the defendant’s broker, but (as he put it) at its own risk and without the provision of margin.”
“… by asking whether Fluxo-Cane can demonstrate negligence, because unless it can, it will clearly be unable to demonstrate gross negligence. It is not suggested that this is the case of wilful default or fraud.”
“65. I have discussed the evidence in this respect in some detail already. There are two principal reasons why in my judgment Fluxo-Cane's submissions cannot be accepted. The first, I have already referred to, and is that it was not negligent to wait until after the meeting of29 January 2008 in Sao Paulo before finally liquidating the account. On the contrary, this was (I am satisfied) a reasonable course to take. The other is that I am quite satisfied that Dr Fitzgerald is correct to express the view that it is only with the benefit of hindsight that it can be seen that liquidation during the period 22 to25 January 2008 would have been most advantageous. The market might have risen, as Mr Levy thought it would, or Mr Garcia might have been proved correct in his conviction that the market would fall. I am satisfied that following the action taken by the Exchange, the liquidation of Fluxo-Cane's positions was going to be extremely problematic, as indeed both Mr Garcia and Mr Overlander foresaw. I very much doubt in these circumstances whether there is a single template by reference to which it can be said that liquidation was, or was not, negligent. Be that as it may, I am satisfied in this case that the criticisms made of Sucden's conduct of the liquidation are unfounded. The highest Fluxo-Cane puts the required standard is that Sucden was under a duty of care to act reasonably and to conduct the liquidation to the highest possible professional standards required in the circumstances. Even if that is correct as a matter of law, which is not something which I need to decide in this case, I do not consider that the duty has been breached. Negligence has not been established, let alone gross negligence.”
“The House of Lords has warned against the danger of extending the ambit of negligence so as to supplant or supplement other torts, contractual obligations, statutory duties or equitable rules in relation to every kind of damage including economic loss: see C.B.S. Songs Ltd. v Amstrad Consumer Electronics Plc[1988] AC 1013 , 1059; Caparo Industries Plc v Dickman[1990] 2 AC 605 and Murphy v Brentwood District Council[1991] 1 AC 398 . … There will always be expert witnesses ready to testify with the benefit of hindsight that they would have acted differently and fared better.”
“We’re covering 37 Puts, we are trying to work a combo on the 36 Puts against 46 Calls, and covering the rest of the ESX. The market is so thin it is very very difficult.”
“… I’ve now got to get rid of those 46 … I’ve now got to get rid of 4600 calls as well. Look I don’t want any risk on this … account over the weekend.”
“I think these close-outs, actually, if I can just make a general point, are not done in this kind of scientific modelling way that you’re trying to imply. I think the main point is, as I’ve said, to get rid of positions quickly.”