Al Sulaiman v Credit Suisse Securities (Europe) Ltd & Anor [2013] EWHC 400 (Comm)

Case No 2011 FOLIO 939

[2013] EWHC 400 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 01/03/2013

Before

THE HON. MR JUSTICE COOKE

Between

Basma Al SulaimanClaimant

Credit Suisse Securities (Europe) Limited1 st Defendant

Plurimi Capital LLP2 nd Defendant

Guy Philipps QC and Natasha Bennett (instructed by Fladgate LLP) for Claimant

Adrian Beltrami QC and David Simpson (instructed by Herbert Smith Freehills LLP) for 1 st Defendant

Patricia Robertson QC and Chloe Carpenter (instructed by Addleshaw Goddard LLP) for 2 nd Defendant

Hearing Hearing dates: 30 th, 31 st January, 4 th, 5 th, 6 th, 7 th, 11 th. 12 th, 13 th, 14 th, 18 th, 19 th, 20 th February

Judgment

Introduction

[1]At the beginning of the trial in this action the Claimant (BAS) alleged that the two Defendants (CSS and Plurimi) in breach of statutory duty under section 150 of the Financial Services and Markets Act 2000 recommended that she enter into a series of leveraged transactions without taking reasonable steps to ensure that she understood the risks associated with that leverage and without taking reasonable steps to ensure that the recommended investments were suitable for her. There were two elements to the claim, one based on the unsuitability of the investments in themselves for her and her investment philosophy and the other based on a failure properly to explain the risks of the transactions, it being said that had proper explanation been given, BAS would not have purchased the investments in question.

[2]The allegation that the leveraged investments were unsuitable in themselves was abandoned in closing submissions, leaving the advisers’ alleged failure to explain the risks and to satisfy themselves as to the suitability of the investments as the basis of the claim. Put shortly, CSS and Plurimi are alleged to have failed to explain to BAS that the structured notes that she purchased with money lent by Credit Suisse AG (CSAG) would be pledged to that bank as collateral for the loans, that the bank was entitled to call upon her to provide additional collateral in the shape of margin calls if the value of the Notes dropped, and that if she did not provide such margin calls within the time scale stipulated by the bank, her Notes could or would be sold with the consequent loss of some or all of her capital. She says that she was an inexperienced investor who was in the hands of her advisers, relied on them to tell her orally what the risks were and was led into taking risks she would never have taken, had they been explained properly to her.

[3]Following the collapse of Lehman Brothers and of two Icelandic banks in September and October 2008 and the consequent collapse in both the Equities and Fixed Interest Markets, the value of the Notes that she had purchased (both those linked to equities and those linked to interest rates) did drop significantly, with the result that CSAG made margin calls which she did not meet. CSAG sold the Notes at the then current low prices at the nadir of the market, in order to recoup the amount of the loans, but the proceeds were insufficient to do even that. BAS claims the losses which she says she incurred by investing in Notes she would not have purchased at all, had she been properly advised.

[4]As appears below, the claims pursued by BAS have altered since the first letters of claim were sent on her behalf by her solicitors. The Defendants submit that this is significant in itself and casts doubt on the validity of the claim currently maintained as well as those which were abandoned for good reason. They say that BAS has been casting about for a way to make a claim in circumstances where she knew the risks she was running in investing for high yields and was essentially the author of her own losses by failing to put up margin when she could have done, as well as failing to heed earlier advice to sell Notes which would have protected her against margin calls being made. A number of allegations of professional negligence were made by her which have been abandoned, but during the course of the trial various additional unpleaded accusations and criticisms were made of CSS and Plurimi which, it is said, lacked any evidential foundation or proper basis. All of this, they say, smacks of a specious claim.

[5]BAS is a Saudi national, born in 1959. In 1980, when she was 21, she married Walid Al Juffali (WAJ), a member of one of Saudi Arabia’s richest families. For the next 21 years, all of her day-to-day requirements were taken care of by her husband’s family office.

[6]In about 2000 BAS, who was then living in London because two of her children were in education in the UK, separated from her husband WAJ. On advice she established “habitual residence” and presented a petition in London for divorce in June 2002, which led to a divorce settlement which received wide publicity, because of the substantial amount of money and assets she received. The financial terms of BAS’ divorce from WAJ were finalised in an agreement dated 26 April 2003. In summary: i) WAJ caused to be transferred to an existing trust of which BAS was the principal beneficiary (the BSAS Trust)his share of three properties which had previously been jointly owned, comprising BAS’ home at 16 Wilton Crescent, London SW1, four flats at Wellington Court, Knightsbridge, London SW1, and an apartment at 24 Avenue Gabriel, Paris; ii) WAJ undertook to pay to BAS a capital sum of US$56 million, to be paid by instalments as follows: a) $10 million on execution of the agreement (paid on 12 May 2003) b) $9.2 million on 2 January 2004, on 3 January 2005, on 2 January 2006, on 2 January 2007 and on 2 January 2008. iii) In addition, WAJ undertook to pay $250,000 per annum towards the expenses of 16 Wilton Crescent for so long as it was the main base for any of the couple’s children.

[7]BAS had, in addition, by the time of the divorce, other assets of her own, in the shape of the BSAS Trust which was a bare trust set up for her by her husband during the course of the marriage. By 2002 there were assets in it to the tune of about $7m and presumably more in 2003. In 2003 that Trust was managed by JP Morgan Chase in the USA. She had other assets mostly inherited from her father of the order of about $1-2m, some of which she had used to purchase shares in Saudi Arabia over a limited period and 2 structured notes through a friend, Abir Hammad who had become a Relationship Manager at Banque Audi. Although the exact terms of the divorce settlement were confidential, the press publicity was not altogether wrong when speaking of the sums involved as being in excess of $40m. As she put it in her evidence, she was beset by banks and others like vultures, all of whom wanted to aid her in investing her settlement monies.

[8]Although she had met Ramzy Rasamny (RR) before her separation from WAJ, BAS (largely through his mother-in-law) came to know him and his wife well thereafter. RR was a Managing Director at CSS Private Client Services and co-head of the Middle East region for Credit Suisse’s Private Banking Division, London. RR’s wife and mother-in-law became personal friends of BAS. BAS, at the suggestion of RR’s mother in law, approached RR about investment and at a meeting on 30 May 2003 and in a telephone conversation on 11 December 2003, RR offered to help her and made suggestions, which she did not take up. Following a meeting with RR on 11 December 2004, on his recommendation, she invested through CSS in a structured note in January 2005, with money from the third instalment of her divorce settlement.

[9]Between 2005 and October 2008, she invested in 23 structured notes, 18 through CSS and 5 through Plurimi, virtually all leveraged by loans from CSAG secured by a Pledge Deed on the Notes themselves. The Notes stood as collateral (together with any deposits of cash) for the loans on those Notes and also for another loan for other investment purposes unconnected with the Notes and not recommended by RR. This was a loan of the equivalent of £2.2m taken in Yen from CSAG for the purchase of shares in a new start-up Islamic Bank, the Bank of London and the Middle East (BLME). The terms of the Pledge Deed allowed for margin calls to be made by CSAG in order to maintain sufficient collateral, as assessed by it and for the realisation of the pledged assets if such calls were not met. This collateral requirement was put into effect by requiring the loans to be no more than a specified proportion of the current value of the assets at any time, with the proportion varying according to the type of asset. The interrelationship between the aggregate of the loans and the security provided was referred to as the LTV ratio. The LTVP was what was permitted and the LTVA represented the actual LTV of the portfolio in question.

[10]RR left CSS and started his own Limited Partnership, Plurimi, with others from CSS, including Francis Menassa (FM) with effect from 1 January 2008. BAS transferred her business with him and during the year purchased 5 Notes on RR’s recommendations, two of which were referred to as “switches” (a term explained hereafter) (and which are not the subject of complaint) from Notes purchased through CSS.

[11]On 8 October 2008, CSAG informed Plurimi that it would be making margin calls on a number of Plurimi’s clients, including BAS. On Wednesday 15 October 2008 CSAG made a margin call on BAS in the sum of $7,572,000, to be provided by Friday 17 October 2008. She set about procuring bank guarantees and also, on October 22, sold, at a loss, a Note issued by Goldman Sachs (Note 19) that Plurimi advised her to sell.

[12]On Thursday 23 October 2008 CSAG changed its permitted LTV ratio, requiring greater collateral in respect of existing loans, which resulted on Friday 24 October 2008 in an increased margin call in the sum of $10,210,000, to be provided by Monday 27 October 2008. BAS failed to meet the call and CSAG proceeded to liquidate the Notes in her portfolio. The sum realised was less than the amount of her indebtedness, and CSAG appropriated BAS’ deposits with them as well as calling the guarantees. BAS is said to have suffered an overall loss of approximately $31.7 million. The amount invested by BAS from her own funds in such Notes was of the order of $28m, whilst the amount borrowed at the time of the October 2008 crash was about $69m. She thus lost all her equity in her investments and remained liable to CSAG on the balance of the outstanding loans, following the sale of the Notes.

[13]Although BAS’ relationship with CSS and Plurimi was governed by CSS’ and Plurimi’s standard terms and conditions (initially the 2003 Terms and subsequently the 2006 Terms for CSS), the claim is primarily framed as a breach of statutory duty and nothing turns on the applicable conditions. CSS and Plurimi were authorised by the FSA to advise on and conduct investment business, subject to FSA regulation. It was therefore subject to the applicable FSA conduct of business rules which were contained in the Conduct of Business handbook (COB) for the period up to October 31 2007 and thereafter in the Conduct of Business Sourcebook (COBS) (so that the latter alone applied to the period of BAS’ relationship with Plurimi). Under section 150 of the FSMA, breach of the COB or COBS, as applicable, is actionable at the suit of a private person who suffers loss caused by such breach. BAS was at all times a private person within the meaning of FSMA.

[14]The relevant provisions of COB are as follows: COB 5.4.3: A firm must not: (1) make a personal recommendation of a transaction ... with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved. COB 5.3.5R: (1) A firm must take reasonable steps to ensure that, if in the course of designated investment business, it makes any personal recommendation to a private customer to buy or sell a designated investment, the advice on investments or transaction is suitable for the customer. COB 5.3.5(3): In making the recommendation or effecting the transaction, in (1), the firm must have regard to the facts disclosed by the client and other relevant facts about the client of which the firm is, or reasonably should be, aware.

[15]The Rules are supplemented by Guidance, which includes the following: COB 5.4.2 – Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading. Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to ensure that a firm takes reasonable steps to ensure that a private customer understands the nature of the risks inherent in certain transactions.

[16]The evidentiary section includes the following, which can be relied on as evidence of compliance: COB 5.4.4 – The reasonable steps in COB 5.4.3 should include the steps set out in COB 5.4.6 E to COB 5.4.12 E as appropriate, in relation to transactions in the following types of investment or activity: (7) Structured capital-at-risk products (see COB 5.4.12 E). COB 5.4.12(1) Unless

(2) applies, in relation to a transaction in a structured capital-at-risk product, the firm should provide the private customer with a notice containing a clear, fair and adequate description of the structured capital-at-risk product which is to be the subject of the transaction, in a manner calculated to bring to the attention of the private customer the risks involved, in particular and if applicable):

[17]The relevant provisions of COBS are: COBS 9.2.1:(1) A firm must take reasonable steps to ensure that a personal recommendation, or decision to trade, is suitable for its client.

(2) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client’s (a) knowledge and experience in the investment field relevant to the specific type of designated investment or service; (b) financial situation; and (c) investment objectives; so as to enable the firm to make the recommendation, or take the decision, which is suitable for him. i) COBS 9.2.2: (1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing: (a) meets his investment objectives; (b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and (c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio. (2) The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.

(3) The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments. (1) A firm must take reasonable steps to ensure that a personal recommendation, or decision to trade, is suitable for its client. (2) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client’s (1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing: (a) meets his investment objectives; (b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and (c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio. (2) The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment. (3) The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments. Common Law Duties

[18]Although a duty of care was pleaded in contract and tort, it is common ground that it adds little or nothing to the claim for breach of statutory duty, since it was alleged that there was a duty of care in advising BAS with regard to the purchase of Notes, to explain the risks associated with such purchases including the risk of leverage and to ensure that BAS understood those risks, and to ensure that the investments were suitable for her. The reasonable steps required under COB and COBS correlate with the exercise of reasonable care required in contract and tort to achieve the same ends.

[19]It is common ground that, so far as relevant, taking reasonable steps to ensure that an investment is suitable for a client involves taking reasonable steps to ensure that the client understands the risks involved in the transaction and that the rules are concerned with substance and not form. If an investment is in fact suitable for the client, then it does not ultimately matter if there have been failings in the process: Zaki v Credit Suisse (UK) Ltd

[2011] EWHC 2422 (Comm)

at [102] and in the Court of Appeal at

[2013] EWCA Civ 14

at paragraphs [79]-[82]. The need for an explanation of the risks has therefore to be seen in the overall context of suitability, bearing in mind the client’s investment objectives, risk tolerance, knowledge, experience and financial standing.

[20]CSS and Plurimi acted in an advisory and not a discretionary capacity in conducting business for BAS. Under the 2003 Terms and the 2006 Terms, the terms on which CSS provided general investment advisory and dealing services, CSS was to “have regard to your investment objectives and restrictions as stated on your customer profile”. In the case of Plurimi, it was to give advice “on the merits of purchasing securities…. and financial instruments of any sort and rights therein, on margin or otherwise, “subject to the investment objectives, policy and restrictions of the Client”.

[21]BAS’ primary case in these proceedings was, at the commencement of the trial, that loss was caused by breach of duty on the part of CSS and Plurimi, in that they recommended that she enter into a series of leveraged transactions without taking reasonable steps to ensure that she understood the risks associated with that leverage, and without taking reasonable steps to ensure that the recommendations were suitable for her. In particular, CSS and Plurimi failed to explain to BAS that: i) Notes that she purchased with money lent by CSAG would be pledged to CSAG as collateral for the loans; ii) CSAG was entitled to call upon her to provide additional collateral, in the event that the value of the Notes dropped; iii) If she did not provide such additional collateral within the timescale stipulated by CSAG, her Notes could be sold, whereupon she could lose all or most of her capital.

[22]It was also said that RR, whilst considering that there was a possibility of BAS facing a margin call of $4-5 million, took no proper steps to ensure that she understood the risk that she might face a margin call at all or to satisfy himself that she had available to her liquid assets with which she could meet a margin call of any particular amount.

[23]By the end of the trial however, it was conceded that the structured notes recommended by RR were suitable investments for BAS in fact, in the sense that she had assets which could meet such a margin call. It was maintained that RR had never adequately explained the risks inherent in leverage to her nor asked the necessary questions to ensure that she understood what those risks were. Whilst therefore she did have sufficient assets to meet a potential margin call of any foreseeable size, it was alleged that RR was not in a position to know that. Although it was not submitted that there was any separate breach of duty in failing to specify what a margin call might involve or asking whether BAS had assets which could be used to satisfy such a call, it was said that, had this been done, BAS’ lack of understanding of margin calls and their significance would have become apparent.

[24]There is a conflict of evidence between BAS on the one hand and RR on the other as to what was and was not said in many meetings and telephone calls between them. There are less important conflicts of evidence between BAS and FM, who was RR’s right hand man at CSS and his business partner at Plurimi. The acuteness of conflict on these issues is exacerbated by BAS’ evidence to the court that, in essence, she did not read the documents sent to her by RR in the shape of Indicative Term Sheets for the purchases of the structured notes, nor the Effect of Leverage documents (cash flow analyses) which accompanied many of them, nor the Final Confirmations of Terms of Purchase, nor the Structured Capital at Risk Product warning notices (SCARP warnings), the Trade Summary Risk Warnings nor the Term Sheet Risk Disclosure. Her evidence was that she did not read any of the banking documents which she signed, whether provided by CSAG or other banks with whom she dealt, including their Terms and Conditions, Facility Agreements for loans, Pledge Deeds or other standard form documents signed on opening an account with a bank, so that references to collateral, margin, margin call and the consequences of non-compliance with the latter, passed her by. She said she was in the habit of signing blind. She testified that she did not read various emails from RR which warned her of potential capital losses if the barriers set out in some of the Notes were breached, nor understood emails which advised her of the risk of leverage on other investments on which she sought his view. She did not understand that leverage was optional and accepted RR’s recommendations for leveraged investment in structured notes as a package. She originally maintained that she did not even know that the value of the Notes fluctuated, but later accepted that she did. She testified that she did not understand the meaning of the words “pledge”, “margin” or “margin call”, if she was aware of them at all, as the subject was never mentioned. Her case is that RR should have explained the matters of which she was ignorant to her orally, since she would not have understood anything complex which was in writing. She did not say that she had ever told him (or any adviser, banker, Trustee or Trust manager) that she required all explanations to be oral, rather than in writing. The Expert Evidence

[25]There was no dispute between the parties, as might be expected, in the light of the COB and COBS regulations that CSS and Plurimi were only bound to take reasonable steps to ensure that BAS understood the risks of the investments recommended (and, as earlier claimed) to ensure their suitability for her in the light of her investment objectives, her appetite for risk and her financial situation. There were some differences between the parties’ experts’ reports as to what this involved in practice in assessing the suitability of the investments, but, once the ground was cleared by the putting aside of much inadmissible material from the expert reports, their evidence did not show much divergence of view on anything which mattered, which was doubtless, along with the evidence of BAS’ assets, a reason for the abandonment of the “suitability” claim in the form in which it had been put. They gave evidence of the market background against which any breach of duty fell to be considered.

[26]Their Joint Memorandum revealed their agreement that: i) The structured notes proposed to BAS by RR were suitable investments for someone of her wealth and expectations of return in and of themselves. ii) There was no regulatory requirement on an adviser to seek to estimate or advise the customer on the probability of, or the likely size of, any potential margin call. iii) Leverage did not change the nature of the risks of any of the transactions – it merely magnified the potential profit or loss that could be generated by the investments. iv) The timing and extent of the market crash which occurred in September and October 2008 was not foreseeable before August 2007. v) Historic performance of the equity indices prior to 2005, whilst a factor to be considered in advising on investment, was not a reliable guide to the future.

[27]When the Claimant’s expert was cross examined, the areas of agreement expanded yet further. He had not been responsible for the original report but had adopted it and, on later reflection, revised his views. The following emerged:- i) Implied volatility was more important than historic volatility of indices, when assessing future performance. ii) Structured notes did not behave in the same way as the indices of market movements for stocks or interest rates. iii) In general and in normal market conditions, the value of structured notes is relatively stable. They are considered safe if they are held until maturity but if they have to be sold before time, all the financial engineering that goes into them is unpicked. iv) The majority of the notes purchased by BAS were not principal protected. The Trigger notes and CDIs showed an aggressive approach to investment. Even with the CRANS, her portfolio was fairly aggressive. v) The spread of BAS’ structured notes portfolio at any time, split between Equity Linked Notes and Fixed Interest Linked Notes was such that, in normal market conditions, a drop in the Equities market would be offset by a rise in the fixed interest market and vice-versa. vi) The spread of indices in the Equity Linked Notes to different parts of the world (eg S&P, Nikkei and Eurostoxx) gave rise to a measure of protection against national or local market falls. vii) The existence of the “buffers” or “cushions” employed by RR when recommending leveraged notes, as against the LTV, reduced the likelihood of a margin call. viii) It was a benign market in 2006 and 2007 and the risk of a margin call between March 2003 and July 2007 was not one which an adviser would have concerned himself about. Despite the Northern Rock collapse, the markets remained relatively benign in August and September 2007. There was nothing in the market conditions, which militated against purchase of any of the Notes which are the subject of the dispute. ix) The portfolio as a whole never suffered a margin call until the extreme events of October 2008. x) The extreme events of October 2008 were unforeseeable until the brink of their occurrence. xi) No events of a similar kind had been encountered before although there were shared features with the stock market collapse of 1929. The scale of the collapse was such that it might take decades for full recovery. The absence of liquidity in the market engendered real panic. This was a global crisis which was not confined to local markets. The equity indices and the interest rate indices correlated so both fell at the same time. Prices were slashed and the banks became reluctant to lend money or give guarantees on the basis of any collateral because any such collateral was severely diminished and hard to quantify. At that point all advisers and investors were in uncharted territory and the game had changed. xii) Not only was the October 2008 crash unforeseeable but so also was the change in LTV criteria by CSAG. xiii) In normal market conditions the value of structured notes is relatively stable so that it is very unlikely that the value of the note would decline so far that the value became less than the value of the loan. An investor would not expect to lose more than the equity put in. xiv) The reasonable expectation is that if a bank is entitled to make a margin call, there will be some flexibility on the part of the bank in putting it into effect. A lender may often give more time on a call if a customer makes a clear commitment to provide collateral. There is no limit on the kind of assets that can be pledged as collateral to banks, subject to agreement.

[28]Despite having agreed that there was no regulatory requirement on an adviser to seek to estimate or advise the customer on the probability of or likely size of any margin call, nor any obligation to satisfy himself that a customer had sufficient assets to meet a margin call (which was recognised to be a practical impossibility for an adviser to do) at some points in his evidence the Claimant’s expert expressed the view that an adviser, as a matter of good practice, should consider if his client could meet the minimum margin call which could arise on the margin call criteria of a bank and satisfy himself that the client knew of the need to have liquid accessible assets to meet such a call at short notice or to pledge sufficient assets in the time required. If a call was made as soon as the LTV was breached (where the secured assets lost value and the outstanding loan exceeded the requisite proportion of their value) the minimum call, could, of course, be just $1. The suggestion made no sense in that context. In 2006 however, there was a change in the CSAG system which allowed additional loss of value of the security, once the prescribed LTV had been breached (the LTVP), before requiring communication to the client (the LTVC point) and yet further loss before actually making a call (the LTVM point). Thus, it was mathematically possible, at any stage after 2006, when a further buffer existed between the LTVP and the LTVM, to calculate the difference between the LTVP and the LTVM, which would represent the minimum call which might be made by CSAG, if one was made. It was not suggested to the Defendants’ experts that any obligation arose to do so, nor would it have been possible to make that allegation.

[29]Nonetheless, the claimant’s expert thought it would be good practice to calculate and alert the customer to this minimum level of call. This was a new unpleaded point, not raised in his expert report (the difference between LTVP and LTVM being unknown to him until evidence of it was produced, following the exchange of expert reports. It did not feature in the experts’ Joint Memorandum). He stated that if the customer assured the adviser of his ability to meet such a call, the adviser was under no duty to investigate the client’s financial circumstances further. The adviser had to be satisfied that the client understood the margin call requirements and the consequences of not meeting the call and accepted that risk. That was enough but if he had no assurance on that point, the adviser could not make any assumptions and should ask questions until he had satisfied himself on the point. As it was, by the end of the trial, recognised that BAS had assets sufficient to meet any foreseeable call, none of this mattered, the only significance being, apparently, that if RR had explored such matters with BAS, her ignorance of margin and margin calls would have emerged. Her case was that she knew nothing of this, as no explanation had been given, whereas, on RR’s evidence, he had not only explained how leverage worked, that the Notes were collateral for the borrowing, that margin calls could be made and their consequences, but had also told her, when she had asked on occasion, as to the likely sums which might be required in a margin call, that, although it was impossible to say, it could be of the order of $4-5m.

[30]At the end of the day, therefore, there is in reality only one central issue which arises in relation to the question of breach of statutory or common law duty (as opposed to causation of loss), which I have to determine: did RR, CSS and Plurimi take reasonable steps to ensure that BAS understood the nature of the risks involved in purchasing structured notes with leverage and in particular the risk inherent in potential margin calls and the consequences of a failure to meet them. The original claim and its development in the pleadings

[31]There were three letters of claim before the action begun. In the first two, the claim was made that BAS had been told by RR that her capital would not be lost in the investments made. In the third, a full solicitor’s letter before action, the allegation was made that BAS had told RR that her capital had to be safe or that any risk to capital had to be minimal and applicable to no more than a very small proportion. It was alleged that RR had encouraged BAS to invest in an unsuitable type of product when she required a safe and reliable portfolio of investments that would ensure that her capital was safe. He had misrepresented the terms of the Notes, by saying that there was not significant risk to capital and advising that leveraging was a necessary or appropriate part of the investment. There was a reference in this third letter to margin call risk but only in the following terms: BAS had never been advised about the margins operated by CSAG and the potential risk and effect of changes in margin and margin calls and the subsequent events came as a shock to her”. It can be seen that the complaint on this aspect was directed to the actual levels at which CSAG made calls and the change that was made on 23 October which upped the collateral requirement. As appears hereafter, those complaints, as against CSS and Plurimi, were unsustainable.

[32]The original particulars of claim alleged in paragraph 28.4 that all of the Notes were unsuitable and that RR made representations that they carried “very little risk” and that borrowing was “desirable and suitable”. These allegations followed the pattern of the letter before action. It was alleged that BAS believed that the notes were relatively low risk and that, had she been properly advised, she would not have bought any of them. As confirmed in the Further Information given pursuant to a request, it was said that, with proper advice, she would have invested in low risk products such as blue chip equities and government bonds. Whilst there were additional claims arising from the leveraged nature of the Notes, it was not alleged that RR did not advise BAS as to the risk of a margin call, nor that she did not understand the risk of a margin call, nor that she could not meet such a margin call.

[33]All the above elements of the claim disappeared before trial. It was no longer alleged that the Notes were unsuitable in themselves and none of the misrepresentation claims were pursued. Instead, by an amendment made in December 2012 (of which notice was given a couple of months earlier) the complaint was made about the recommendations for purchase, not of the Notes themselves, but of their purchase on a leveraged basis. It was said that had she been properly advised, she would have purchased the Notes without leverage, or invested elsewhere through the BAS 2003 Trust (the Trust in which she put some of the money from her divorce settlement- split into two portfolios, one managed by JP Morgan (Suisse) and the other managed by Banque Mirabaud). It was alleged that RR failed to give an explanation to BAS that a comparatively small fall in the value of the portfolio would entitle CSAG to make a margin call and that if she did not have sufficient immediately available liquid assets, there was a very significant risk that she might lose her capital and become indebted to CSAG. It was alleged that she did not understand that the value of her portfolio of Notes fluctuated from time to time or might be less than the price she had paid to purchase them. It was also alleged that she did not understand the risk of a margin call by CSAG or the consequences of failing to meet it because this had not been explained to her.

[34]In the written and oral opening of BAS’ case at trial, the focus changed once again to allege a failure to explain that the Notes would be pledged as collateral at all, that CSAG was entitled to call for additional collateral and that if she did not provide the collateral, the Notes would be sold and she would lose all or most of her capital. Secondly it was said that RR failed to satisfy himself that BAS had available to her liquid assets with which she could meet a margin call of $4-5 million. The first allegation was therefore the “failure to explain” case. The second was the “unsuitability of the investment” case. This constituted a development of the case put in the amended statement of case, which is, as the Defendants point out, unsatisfactory where professional negligence or breach of regulatory or statutory duty is alleged, where the precise nature of the allegation being made and the basis for it should be spelt out.

[35]Thirdly, prior to the trial, BAS was pursuing a claim against CSS and Plurimi for failure to monitor the Notes and advise deleverage from August 2007 onwards or in the case of Plurimi, by May 2008 at the latest, this case being based on passages in the Expert Report served on her behalf. In her written opening, that claim was not advanced, but a further unpleaded claim was put forward, that Plurimi had failed to monitor the Notes and advise deleveraging in September and early October 2008. On the second day of the trial the claim that deleverage should have been advised prior to 15 September 2008 was abandoned but it w3as said that a case was still being made in respect of the failure to advise on deleverage from that point onwards. I ordered that this case be pleaded, which it was by a draft amendment served the next day. No application to amend in those terms was in the event made and on the seventh day of the trial the allegation was abandoned.

[36]BAS’ written closing submissions were noteworthy in failing to make any mention of the “unsuitability” claim and in virtually his opening sentence, in his closing speech, counsel for BAS stated that it was no longer pursued, in the sense that it was no longer being said that BAS did not have sufficiently available liquid assets to meet the margin call. What remained was the allegation that the Notes were unsuitable for BAS because of the failure to explain the matters to which I have referred.

[37]The development of BAS’ case is significant, not only because of the changes in themselves, but in relation to the credibility of BAS herself, whose statements of truth supported the pleaded case as it changed from time to time. The Defendants relied on a number of facts pleaded by her, supported by such statements of truth, which were contradicted in later pleadings or in evidence: i) In the pleadings, she complained of the statement in CSS’ Customer Profile that her total assets amounted to $100m. She said that the true figure was $15m. This was plainly not true and she must have known that at the time she made that response. In her statement she stated that it was $70m whilst, in the amended Particulars of Claim it was stated to be approximately $85m. Her explanations, under cross examination, for this inaccuracy were not credible (saying, for example, that it referred to cash), since the issue was clear and there could be no room for misunderstanding. This is a clear example of dishonesty on her part, where correction was forced on her as disclosure of documents was ordered against her. ii) The original plea that her investment objective was capital preservation and that, properly advised she would not have invested in structured notes but would have invested in government bonds, blue chip investments and the like was again revealed by disclosure to be unsustainable, because what was revealed was a series of personal investments through other banks in high risk products, including Hedge Funds, Currency Options and other structured notes. The only investment she ever made in a Treasury Bond was effected with a view to obtaining a residential visa (and was done with leverage). Her trust, the BAS 2003 Trust in its two separately managed portfolios, which she closely supervised, with Mr Boujon, from February 2006 onwards, invested in a variety of assets, including Structured notes and Hedge Funds. Many of the very Notes recommended by RR carried a risk of capital loss, as the Indicative Term sheets showed and as she was well aware (see below). The change of case to plead that the Notes were acceptable in themselves, without leverage and that, if leverage had been explained, she would have invested in 23 Notes on an unleveraged basis, contradicted her original plea. There is no other conclusion possible save that she knew that this plea was also false. iii) The plea that BAS did not understand that the value of her portfolio of Notes fluctuated from time to time or might be less than the price she had paid to purchase the Notes in that portfolio did not survive long under cross-examination, as appears below. There was any amount of evidence to show that she must have appreciated this including an early letter of 12th December 2003 from RR in which it was expressly pointed out that the Note recommended, “if not held until maturity, could be sold at the prevailing market price at the time, which might be below the issuing price of 100%”. As some Notes were Protected and others were not, and BAS accepted that the terms of the Notes were the subject of discussion between her and RR, the point was unsustainable. Moreover, in the BAS 2003 Trust portfolio, there were a number of structured notes and, from mid 2005 onwards, she received monthly reports from Mr Boujon who monitored her investments, showing the fluctuating values of those Notes. Since, during the course of her investment through RR, some Notes were actually sold at a loss and fresh Notes purchased with a view to recouping that loss, with her express authority, the point was unarguable, even on the basis that she did not read various documents sent to her. iv) BAS pleaded in the Amended Reply that, apart from the purchase of two structured notes from Banque Audi issued in May and June 2003 respectively, and a structured note from Citibank issued in June 2008, none of which investments were leveraged, she did not invest in products similar to her investments in Notes which were recommended by RR. In particular it was denied that she made any other investments on a leveraged basis. Documents disclosed at a late stage in the history of proceedings revealed that these allegations were demonstrably wrong. The structured note through Citibank was 100% leveraged; she entered into investments through UBS which involved options in currency speculation on a 100% leveraged basis in 2007; she invested in structured notes through the BAS 2003 Trust in circumstances where she pressed the trustees to invest in such Notes to achieve the same returns as those invested through RR and where, from February 2006 onwards, she and Mr Boujon were vetting any new purchase before it was made. Once again it is impossible to see how this plea could have been included without appreciating its falsity. v) Elsewhere in the Amended Reply, BAS pleaded that she consulted no other adviser apart from RR about the purchase of structured notes (whether on a leveraged basis or at all) apart from the Citibank Note, but the documents showed her sending on some of RR’s proposals to Mr Boujon for his advice and in cross-examination, both he and BAS accepted that he had, from time to time, given such advice in relation to individual structured notes recommended by RR. In further information given by her she stated that from March 2005 onwards she relied on the advice of Mr Boujon in relation to recommendations from various banks but in relation to the Notes, the Claimant relied exclusively on the advice of RR. It is hard to see how these pleas could have been made without knowing they were wrong. The Witnesses

[38]I did not find any of the witnesses entirely satisfactory. Of course, actual recollection of meetings and conversations which took place between 4 and 9 years ago is bound to be limited and witnesses will inevitably reconstruct and come up with evidence of what they think must have happened on particular occasions, after looking at diaries, telephone logs, correspondence and email traffic. Allowing for all of this, the tenor of conversations over the years and the topics which would be covered by advice are matters which the main witnesses ought to be able to recollect, without necessarily being able to identify the specific occasion or occasions when this happened. At bottom, there is no room for doubt that one or other of the main protagonists is not simply suffering from a failure of recollection. Given the volume and size of the Notes purchased through RR and recommended by him after advice, the fact that RR and BAS were in regular and very frequent contact over three years about her investments and discussed not only Notes proposed by RR, but suggestions for investment made by BAS and recommendations made to her by others, both of Notes and other investments, it is not possible for one of them to be mistaken or to have forgotten whether or not they discussed the basic concepts of leverage and collateral, the interrelationship between loans and security, what might happen if the value of Notes dropped, margin, margin calls and what might happen if a margin call was not met. In the context of their discussions about investments in such Notes, whether or not BAS did or did not have an understanding of these concepts would have been apparent to both.

[39]The process of reconstruction on which the witnesses obviously embarked for the purpose of their statements is valuable because some identification of conversations can be made when an email or file note refers to it, and the contemporaneous documents provide a framework of events upon which the Court can work in deciding on the reliability of the witnesses’ evidence. Whilst there is unlikely to be much actual recollection of detailed discussion at any specific meeting which took place many years ago, there will be recollection of the sort of things that were discussed from time to time, particularly if there are any explanations which are given as a matter of standard practice when investments are suggested and the contemporary documents may identify occasions when this might have or must have occurred. So here, as in many cases, I found the documents and the inherent commercial probabilities the surest guide to assessing the reliability of the evidence given, but the demeanour and reaction of witnesses in the witness box when faced with questioning and documents strongly contributed to the conclusions I have reached.

[40]I did not find BAS a satisfactory witness and I was unable to accept her evidence in many respects. There was no doubt an element of self-persuasion in casting the blame for all her investment losses on RR and reconstruction of what she thought she must have known and understood and what she did not, but some of her evidence was, I am satisfied, not only inaccurate and unreliable, but dishonest. There were internal inconsistencies in her oral evidence as well as inconsistencies with her statement and various iterations of her Statement of Case and Further Information, each supported by a signed statement of truth, as set out above. It is plain from the history of the proceedings that she misrepresented her wealth in the pleadings, the transactions she had undertaken elsewhere, the leverage involved in some of those transactions and her understanding of them. When faced with documents which contradicted her case, she resorted to saying that she had not read those sent to her, that File Notes written by RR were fabrications or, where reference was made to numerous other documents, that she had no recollection of the events to which they referred. The extent of her lack of memory was greater than could be credited and was almost always prayed in aid in relation to points detrimental to her case, whereas she purported to have good recall of the matters which supported her case and contradicted the evidence of RR.

[41]On the critical issues in the case, therefore, I looked to see if there were other matters which supported her evidence, because of the difficulty in accepting what she said without such corroboration.

[42]I did not find Mr Boujon a wholly satisfactory witness either. Much of what he said gave the lie to BAS’ portrayal of herself as a naïve investor, wholly dependent on advisers to make decisions for her. It is clear that he (as did UBS, Citibank, Barings and others) treated her as a woman who knew her own mind, was able to make decisions, sometimes insisted on her own decisions contrary to advice and understood the basic concepts of loans, security, pledges, margin and margin call. She asked questions when she did not understand and was able to understand the concepts when they were explained to her. She made exacting demands of her advisers and trustees/managers and looked for high returns, with an awareness of the ordinary principle that the greater the return, the greater the risk. In particular, over the relevant period of the Notes in issue here, she was seeking double-digit returns from her investments.

[43]When however, there were more direct questions which might, in his view lead to answers which might unduly prejudice BAS’ case, I did not think he was doing his best to assist the court. I found myself unable to accept his evidence about his discussions with and advice to BAS on the Notes recommended by RR to her, upon which she consulted him. He could not have given advice about the relative merits and demerits of the recommendations, as compared with other investments which he discussed with her at the time, without referring in some detail to leverage, its effect and potential risks.

[44]Further, Mr Boujon contradicted his statement where he had said that a decision was made in late October 2008, on the sale of Note 19, not to repay the CSAG yen loan taken out for an investment by BAS in the Bank of London and the Middle East. BAS said that this was his view which prevailed whilst RR recorded her decision, against his recommendation, not to repay the loan, because of her view that the yen would weaken and it could be repaid at a better exchange rate later. I could not accept his evidence on this point.

[45]Finally, I found his evidence about BAS’ failure to meet the margin call and the meeting with CSAG on 27 October completely unsatisfactory for reasons which appear later in this judgement.

[46]Abir Hammad’s evidence was of limited assistance to the court. She was argumentative, had little actual recollection and did not answer some questions because she said she was not really an expert, which was true. She was a friend of BAS who had advised her to invest $750,000 in two structured notes in 2003, but without leverage, when she was a Relationship Manager at Banque Audi and before BAS ever consulted RR. She said that her own knowledge of the Products was limited and that she was learning at the time and reliant on those who had knowledge of such products at the bank. She relied on the assessment of the vetting committee of the products in which she advised BAS to invest. Her insistence on BAS’ investment objective as being solely the preservation of capital contradicted Banque Audi’s own documents and, it seemed to me, that she was very keen to preserve her friend’s case, rather than answer questions in a straightforward manner. Those documents set out what BAS was looking for, though Ms Hammad did not accept this as accurate – “regular cashflow, better returns than deposits and investments whose value did not fluctuate unduly”. That seems to me to be an accurate picture of where BAS was at the time, before receipt of her divorce settlement monies.

[47]She did say that she had explained to BAS what it was she was signing when she signed a Banque Audi Deed of Pledge in October 2002, as providing security over products or cash in the bank’s account in respect of any borrowings made by the customer, but avoided giving any further clarification of what she had said, telling Counsel “I can see where you are going”.

[48]Mr Ramzy Rasamny has had over 20 years of experience working in the wealth management sector. He continues to be an investment adviser specialising in structured products. His expertise in this area is undoubted. His integrity was the subject of attack in cross-examination inasmuch as it was suggested that he recommended leverage in order to increase the size of the investment upon which commission was based and his own remuneration. It was suggested to him that some of his file notes were fabrications and that on a number of occasions he had sold BAS’ Notes without her authority. It was also suggested that he had invented a point with regard to the LTV treatment of the Yen loan taken out by BAS in May 2007 to purchase her stake in BLME in order to cover up a mistake in his witness statement. I did not consider that there was any good basis for any of these attacks on his integrity. He was in my judgement, a witness who did his best to assist the court.

[49]Although his evidence was unsatisfactory in relation to the completion of the Transaction Suitability Forms (TSFs), this was largely because those forms were not completed with the care which they deserved. He admitted that there were mistakes in those forms, that they were not all signed by the appropriate adviser, that some of the questions raised in the forms were not properly answered though not admitting lack of care in the advice which underlay the completion of them.

[50]It is clear to me that RR recommended leverage to BAS as a means of increasing the yield on her investments, which he understood to be what she wanted (and, as appears later, was in fact what she wanted and told him she wanted). This was part of RR’s specialised approach to investment in structured notes. This magnification of returns was spelt out in the Effect of Leverage documents sent by RR to BAS, whether or not she read them. Mr Boujon, whose monitoring function of the Trusts included investigation of inflated fees and who particularly checked the fee structure on one particular Note recommended by RR, made no criticism of fees charged by him.

[51]With the exception of file notes that were compiled after the liquidation of BAS’ notes by CSAG, when he could have been seeking to justify his own position, it is hard to see what reason RR could have for fabricating file notes and I am clear that this did not happen. For the most part, it was clear that the underlying rationale of the file notes was to record recommendations made by RR which were taken up by the client, for compliance purposes. Where recommendations were made which were not taken up, there was no need for such a note for compliance purposes and usually none therefore existed. It might perhaps have been thought suspicious if, in those circumstances there had been a file note of rejected recommendations. There was no basis in BAS’ evidence for suggesting that RR had concluded any transactions without her authority. I did not therefore consider that there was any reason to approach RR’s evidence with regard to the critical questions in this trial with any prior doubts about his integrity in relation to other matters, although, of course, his evidence on these critical matters fell to be considered in the light of all the circumstances and the contemporaneous documents, as well as that of BAS.

[52]The evidence of Francis Menassa (FM) was limited. It was given with great confidence but I was not able to accept some parts of his evidence relating to the manner in which the Plurimi Acceptance Booklet had been completed, since a part of the document had plainly been “lifted” from an earlier memorandum of the 29th March 2005 sent by RR to CSAG, whether or not Mr Menassa himself had drafted that memo. That part could not have been the subject of discussion at a meeting with BAS at her house, as he said, because it repeated an inaccuracy in that note, which she could not have confirmed. Nonetheless, there were other parts of that Booklet which contained detailed information about her investment experience which could only have come from her, and I am satisfied that, in the material respects relating to her investment objectives and risk tolerance, the booklet accurately reflected answers that she must at some point have given to Plurimi. The same issue with regard to the Yen Note was held against him, as against RR, by Counsel for BAS but it was clear to me that both of them held the understanding of which they spoke, whether or not it was a correct understanding.

[53]The helpful part of his evidence in relation to the issues which I have to decide was that which related to the normal kind of explanation given to clients of structured notes and the standard procedure when sending documents to BAS. His evidence was that, whenever leverage was suggested to BAS as part of the recommendation, an Effect of Leverage document was sent with the Indicative Term Sheet (though only a certain number appear in the court documents). He also said that he had heard RR give explanations on many occasions and he talked of a standard routine when doing so and when going through “snapshots” also, which he said he also did with BAS, which she denied. It seemed to me to be inevitable that an adviser would develop some pattern when introducing concepts to a new customer and when reviewing investments or recommending notes with decisions to be made about leverage and LTV ratios and cushions or buffers (see below). He said that it was part of the standard approach to refer to LTV and margin, with the potential of a margin call, when reviewing the portfolio and when going through snapshots and leverage analyses.

[54]As I have already said, in the case of an acute conflict of evidence about oral conversations, the primary documents constitute a useful guide as to where the truth lies, particularly if they refer to conversations. The earliest meetings or conversations in 2003 and 2004 fall into this category. It is common ground between the parties therefore that there was a meeting between RR and BAS on the 30th May 2003, a telephone conversation on the 11th December 2003 and a meeting on the 11th December 2004 over lunch. Absent the correspondence, diary notes or telephone records, it is highly unlikely, in my judgement that either party would have known that meetings took place on those dates, nor would they be able to give details of what was discussed, save on the basis that certain topics were generally the subject of discussion and would therefore be expected to be discussed on the occasions in question. At the outset, prior to the first investment, some explanation of some kind, as is common ground must inevitably have been given.

The Impact of the Primary documents setting out the Recommendations and the Transactions

[55]RR sent an email on the 30th May 2003 referring to the meeting of that day attaching “details of a product similar to the one we discussed, along with a Cash Flow Analysis that shows how the numbers look once the investment is underway”. Attached to the email was a Term Sheet for a 10 year USD Callable LIBOR Range Accrual Note (a CRAN) together with a document headed “Effect of Leverage on the performance” of that CRAN. i) The email referred to the structure of the Note and the “barriers” below which US$ LIBOR would have to stay in order to achieve the coupon. The email also explained that the barriers and the maturity of the Note were the two most influential factors in determining the coupon and an attempt was made to find a “fine balance between achieving a decent coupon and not taking too much risk”. It was explained that the attached product was one that had been traded earlier that month and that the cash flow analysis (the Effect of Leverage document) provided a snapshot of how the end result would look. There was no recommendation to invest in this note which provided for a coupon rate of 6.9% per annum provided that, in the relevant years, LIBOR did not rise beyond the figures set out (being 2.00% in year 1 and 7.5% in year 10). ii) The Effect of Leverage document set out a cash flow projection for each of the 10 years showing the annual coupon payable if LIBOR stayed under the barrier, offsetting against that the cost of borrowing at the assumed LIBOR rates. The clear benefit to be achieved by borrowing at a much lower cost than the income to be received appears clearly from the document. The illustration shows $10m of equity provided by the investor with additional borrowing of $40m and the net figures receivable for the total investment of $50m. It refers to an LTV of 80%. In the box at the foot of the document it is stated that “prices of and income of investments can fluctuate. An investor may get back less than the amount invested.”

[56]From the terms of the email it is plain that a similar product had been discussed at the meeting. It is inconceivable that the manner in which Notes of this kind operated, with barriers, was not the subject of discussion. Equally, the enhanced returns available by leverage, as compared with the basic coupon, must have been discussed, since this was the structure which RR utilised when making recommendations to customers. In the Effect of Leverage document which he had attached to his email, a 6.9% p.a. coupon was enhanced to the level of 10.77% - 27.46% by use of 80% leverage.

[57]As to the product which was actually the subject of discussion at the meeting (similar to the attached CRAN), it could only be one of the two Notes in which BAS had invested in Banque Audi on 25th April or 8th May 2003 which had embedded leverage but potential coupons of 15.5% and 18%. These were 10 year and 7 year US$ Callable Reverse Floaterswith capital protected at maturity, each linked to a LIBOR rate and effectively betting on LIBOR rates remaining low.

[58]The email refers to the “product” attached to the email being mentioned at the meeting also and on the 19th June, RR gave BAS information as to the movement of US Interest Rates, asking whether she had had a chance to think about the product which he had suggested at the meeting, which must be a reference to the CSS Note, details of which he had thereafter attached to the email itself.

[59]Exchanges of emails between RR and BAS over the month of June show her pursuing RR for advice in relation to Real Estate Funds (with returns of 8-10%) and a Credit Libanais certificate of deposit which was paying about 4 times as much as the equivalent LIBOR rate.

[60]On the 12th December 2003 RR sent BAS a letter referring to a telephone conversation of the previous day and enclosing an indicative Term Sheet for an 8 year US Dollar CRAN with “an indicative cash flow analysis illustrating how we arrived to the stated returns”. The letter set out the reasons why the product was recommended, with a fixed coupon of 7% per annum provided that the LIBOR rate remained within the specified barriers. The letter made plain that the principal was 100% guaranteed, although the issuing bank could call the Note early. The letter also made it plain that “by borrowing on a short term basis, the investor was taking advantage of low US$ short term borrowing costs and investing in higher long term US$ fixed income products thus magnifying potential returns”. The effect of leverage in enhancing yield was therefore made clear.

[61]Under the heading “What are the risks” it was made plain that if the barriers were breached, no interest would be earned in respect of the days of breach but interest would remain due on the borrowing regardless of the lack of coupon. A warning was given that if the investor wanted access to the capital which was locked up until maturity, before the term date, the note could be sold at the prevailing price in the market at the time which might be below the issuing price of 100%. Anyone reading this letter would therefore realise that there was a risk of capital loss if the Note was sold before maturity. Critically however the letter continued with a third bullet point under the risks heading:- “Moreover, please note that Bank’s maximum allowed borrowing for these products is 85%. In this case we are proposing to borrow 75% as stated in the cash flow analysis in order to maintain a 10% cushion for price fluctuations”.

[62]Moreover, the Effect of Leverage document, though now not available, would presumably have taken the same form as that sent earlier or the form sent in December 2004, which is referred to below.

[63]Anyone reading this letter would therefore appreciate not only that the value could fluctuate during the term of the investment but that the bank had a limit on the amount the investor could borrow, which was 85% of the value of the Note. Since the proposal was to borrow 75% “in order to maintain a 10% cushion for price fluctuations” the obvious issue raised by the letter, if there had been no prior discussion, was what would happen if the value of the Note dropped below the maximum borrowing limit of 85%.

[64]Just over one year later, on Monday 13th December 2004, RR sent BAS an email referring to their meeting on Saturday and, pursuant to their discussions, enclosing details of a Fixed Income Note as an investment proposal. The email explained that the Note paid a coupon of three months US Dollar LIBOR (currently at 2.4%) plus 3% which was payable for every day that the LIBOR rate remained below the barriers specified. The email referred specifically to leverage charged at 3 month LIBOR plus 0.5%, thus providing a net surplus credited to the account on a quarterly basis in accordance with the attached cash flow analysis. That attached cash flow analysis (Effect of Leverage document) referred to an investor’s equity of $5 million with $15 million dollars borrowed (75% leverage) and an LTV of 75%. The assumed borrowing costs for each year was then set off against the annual coupon, assuming the barriers to remain unbreached, giving rise to a net return on equity of 13.26%-15.64% in each year of the 8 year period. In addition to the box which appeared at the foot of the previous Effect of Leverage document, to which I have already referred, the following wording also appeared:- “The value of the Note fluctuates according to market conditions. We may require additional collateral to cover any shortfall if the loan value increases to over 85% of the value of Note”.

[65]Anybody reading these documents, with the indicative term sheet would immediately see the effect of leverage in enhancing the return on the investment by virtue of the differential between borrowing cost and annual coupon (assuming the barriers were not breached). A reader would also appreciate that not only did the value of the note fluctuate during the 8 year term but that, once again, 75% borrowing was being suggested where the bank’s maximum was 85% and where the bank could require additional security if the loan value increased above that level. Although the term “margin call” was not used the document clearly set out the entitlement to make such a call. If the requirement for additional security was not met, anyone applying their mind would assume that the lender could require repayment of the loan, and it would be an obvious question to ask what would occur in that situation, if there was any doubt in the reader’s mind.

[66]On the same day RR sent around, by courier, CSAG’s standard account opening documents including a limited power of attorney in favour of CSS and a General Deed of Pledge, which set out at clause 5 the bank’s entitlement to call for additional security “if its value decreases or if the ratio of its value to the claims is no longer satisfactory in the banks opinion”. The bank’s power to liquidate should the margin call not be met was then spelt out. The CSS terms of business were sent for signature with a Warrants and Derivatives Risk Warning Statement accompanying the Indicative Term Sheet. BAS signed the documents required to open the account, including the terms of business and a blank Customer Profile form, that day.

[67]Although there was a dispute between RR and BAS as to the completion of this Customer Profile form, since RR maintained that he obtained information from BAS over the telephone which was used to complete the form, whilst she maintained that this had not occurred, this dispute has receded into the background. A complaint was made that her estimated total assets were given as $100 million plus and the box for her liquid net worth (excluding house) for over £1 million was ticked. Nothing in my judgment turns on this as it is now accepted by BAS in the pleadings that she was then worth $85 million and she did undoubtedly have liquid net worth of over £1 million, which was the highest box available on the form, which was not, therefore, a form well suited to completion for high net worth individuals. No complaint was made at the investment objectives stated in the form - of income with a readiness to accept a moderate level of risk which was defined as seeking long term returns but sustaining downward investment fluctuations, with a preference for investments with a limited downside price risk and the foregoing of higher returns as a consequence. In my judgment this form could only have been completed on the basis of information supplied by BAS, whether all in that telephone conversation or not, is of no consequence.

[68]Of more significance is the Transaction Suitability Form for this investment, which was the first purchase of a Note by BAS, through RR, although not the first such Note she had purchased (see the two Notes bought through Banque Audi in April and May 2003). It referred to the investment as the first trade for a new client and stated that an explanation had been given to the client of the product, which she fully understood. It referred to the term sheet provided to her but not the Effect of Leverage document. It posed the question, “how have you satisfied yourself that the client fully understands the product and associated risks (including margin calls for leveraged positions)? The answer was given – “yes we have satisfied ourselves that the client fully understands the product.” It will be noted that this is an insufficient answer to the question, as a statement that CSS had satisfied itself does not even begin to answer the question as to how it had done so. The form was completed by one of RR’s assistants but signed by him. It provided, above his signature that the form had to be signed by the adviser in question and that a copy of the document, together with all supporting documents including the Term Sheet, and, amongst other documents, file notes of conversations, should be placed on the adviser’s client file. There was no file note of this conversation, which RR explained as the result of BAS not being a client until the client documentation was signed. As this was a first investment, that was no satisfactory answer. This TSF was the first of many which were admittedly inadequate and showed, in my judgment a careless approach which has the result that the forms do not give the assurance that they ought to, that matters have been fully explained.

[69]The TSF for the second Note was not actually signed by RR and takes a different format to the form for the first Note. When the form asks why it was considered that the investment was suitable for the client and that BAS had sufficient knowledge to evaluate its merits and risks, it was simply stated that the investment was suitable because it was short in duration with fixed coupons linked to the equity market. It was stated that the client had sufficient funds to meet any margin call. No express reference was made in this TSF form to any risk involved in leverage or any basis for saying that the client understood margin and the risks of margin call, though a number of notes expressly said that she did so understand.

[70]The TSF for Note 3 in April 2005 followed much the same format, though this was a switch of the Banque Audi Note into a Trigger Note, without leverage. The TSF for the fourth Note was signed by one of RR’s assistants in May 2005 certifying that he had reasonable grounds to believe that the client was capable of understanding and did understand the investment and that he had reasonable grounds to believe and did believe that the proposed investment would not be inconsistent with the investment objectives and risk tolerance of the client. A term sheet and a SCARP warning were provided in respect of this CDI with leverage and whilst the form contained greater detail than some other TSFs, the basis for belief that the client understood the risk was stated to be the client’s sophistication and frequent investment in similar notes in the past. It was said that she understood equity linked notes and the margin call scenario. Other TSFs included similar information.

[71]TSFs were completed for the sale of Note 1 at a loss because barriers were being broken and the coupon eroded. There was no real answer given to the request for information as to why it was thought that the client had sufficient knowledge and experience to evaluate the merits and risk or the basis for belief that she understood the risk of significant loss of the principal amount of this CDI.

[72]The first file note in relation to any purchase of Notes by BAS appears in relation to this transaction. The note refers to conversation with BAS and sets out the reasons for selling Note 1 at 94.6% of its purchase price and purchasing Note 5 in its place, in an effort to maintain coupons and recoup the capital loss suffered. It records that this was explained to the client who agreed with the strategy. The TSF could have, but did not, refer to this file note which contained the usual certification of understanding by the client, on this occasion signed by RR.

[73]From this point on, there is a file note in respect of the purchase of each Note, as well as a TSF, both in the CSS period and the Plurimi period. The file note in relation to Note 6, a three year Trigger Note refers to RR talking BAS through the Note and her instruction to purchase. The TSF, in answer to the request for basis of belief that the client understood the risk, simply records that “the client fully understands the risks associated with this type of Note”. The TSF for the investment in the Blackstone Real Estate Fund, in answer to the same question records that the client is experienced in these products with investments made in private equity with other banking relationships. BAS signed a suitability form for investment in that fund, in which she stated that she understood the risk of the investment although, in cross-examination she said she did not read this very short document before signature.

[74]With regard to the remainder of the investments, the TSFs are unsatisfactory inasmuch as little or no basis is given for any belief that the client understood the risk, save for previous trading. Many include a statement of BAS’ understanding of the risks of margin calls, without giving an express basis for that understanding, although in the case of all the Plurimi TSFs, there is reference to conversations with RR. Each of the TSFs for Notes 5-23, could however have made reference to file notes of conversations but did not do so. Some of those file notes are brief in recording RR’s conversations with BAS but some are longer and refer to a more extended process. None specifically refers to collateral or the risk of margin calls although they refer to explanations of the Notes and one to a three hour meeting and another to a full review, analysing the merits and risks of all Notes currently held in the portfolio. A number of the TSFs do, as I have said, make reference to the satisfaction of the adviser that BAS understood the risks of leverage and margin calls.

[75]Effect of Leverage documents (cash flow analyses) containing the form of words stating that the value of the Note fluctuated and that additional collateral might be required to cover any shortfall if the loan value increased to more than a given percentage of the value of the Note were found for eight occasions and SCARP warnings sent by CSS were found for five occasions. Trade summaries and interest summaries in respect of each coupon sent to her referred specifically to the fluctuation in prices and values of investments and some term sheets referred to loss of capital or (on capital protected notes) specifically to loss of capital in the event of premature sale.

[76]Plurimi’s terms and conditions were sent to BAS at the beginning of 2008 and they expressly refer to a risk of a loss of capital and the effect of leverage in magnifying relatively small movement in the price of a contract in giving rise to an enhanced profit or loss.

[77]There are a series of emails in which references are made by RR to leverage as a choice to be made by BAS and to the reduction or avoidance of leverage where a product is considered to be more high risk. Thus:- i) In an email of 9th December 2005, commenting on a crude oil Note which BAS sent to him for his opinion RR said:

“in general I don’t like one year Notes because they seldom work but if you do want to do it, better increase the cushion i.e. make it a drop of 55% which will result in a coupon of around 8% but safer, and maybe better not to put on too much leverage”

. It is clear that RR assumed that she would be able to understand the concept of the Note with a 65% barrier, where he suggested a reduction to 55% and that she would understand that leverage increased the risk. ii) In an email from RR to BAS dated 16th December 2005, he suggested an alternative to the crude oil Note, namely a Note linked to the performance of the Gulf stock markets. The Note had a 4 year maturity “but can be sold at any time – if for example the market continues to do very well we can get out of it at any time”. He pointed out that “to get the 95% capital protection (if needed) we need to stay in until maturity…it can also be leveraged in the usual way like the other Notes”. Not only is RR talking here about limited capital protection (and implicitly fluctuations in value) but also makes it plain that leverage is an option. iii) On the 13th January 2006 RR emailed BAS to give his comments about a Booster Note, proposed to her by the managers of the BAS 2003 Trust. “On the downside however, the Note is not capital protected – you only have a buffer of 10% so if the worst performing index is down by 10% over the life of the Note which is one year, then you will get back your capital at 100% but no profit. If the worst index is down by more than 10%, then the capital starts to get reduced…unless they are able to put a 25% downside buffer on it, it is not advisable to leverage it because if the market drops more than 10% than the capital starts to get reduced and there is no coupon payable in the interim in order to compensate for that.” The degree of sophistication assumed by RR in sending BAS this email is once again obvious, with clear references to loss of capital and the effect of leverage. iv) On 29th January 2008 RR emailed BAS to give his view about a structured note recommended to her by Citibank, linked to the stock prices of three banks. He suggested three different banks and then said “better not to leverage this Note, because singly stocks are much riskier than indices.” v) On 30th January 2008 he emailed her in relation to a revised version of this Note saying “it is better not to use leverage on this one and to go for no more than $1 million because there is no coupon paid unless all three stocks are above 100% of their strikes when the Note redeems. In a worst case scenario, if these stocks remain below their strikes, the Note could be there for 5 years with no coupon.” vi) On 12th May 2008 RR gave his view about a Note proposed to BAS by UBS. “This structure is linked to three financial stocks and although these stocks have come down a lot, there can still be a danger that they go down more, especially that they have recovered more over the past couple of months so it is better to stay away from them or if you want to do it, do so with no leverage. In any case, let them replace Lehman Brothers with another stock (like Credit Suisse) as it is the most dangerous in case of renewed market sell off.” Not only did this show wisdom in relation to Lehman but the email made it plain that leverage was optional and had the effect of increasing the risk. The critical conflict of evidence

[78]BAS’ evidence in her witness statement was that she did not read RR’s email of 30th May 2003 and did not read the details of what he sent her on 12th December 2003. She said she did not have funds available for investment in May 2003, but it is plain that she did as she had just received the first instalment of her divorce settlement. Under cross-examination she said she must have looked at the 30th May email briefly and did not read any of the letter of 12th December 2003 save perhaps the first paragraph.

[79]In her witness statement, she said she had various discussions with RR about his structured notes during 2003 and 2004 and it was difficult to be precise as to what was discussed, when and where, as they saw each other a lot. The evidence of both her and RR established that they were in contact several times a week, by telephone and sometimes several times in a day, at least in the later years.

[80]With regard to the meeting on 11th December 2004 at the George Restaurant, she accepted that leveraging might have been mentioned but said that there was no detail about the risks and rewards involved in it. She said that she had explained to RR that she had concerns that her trust was not producing a regular or satisfactory income, which was what she would need but that her income had to come from her capital which accrued from her divorce settlement, so that capital had to be protected. RR emphasised that she would receive a regularly quarterly income which was what mattered to her the most. She was not looking for a particularly high income however. She said that she gained an understanding of how the Notes worked, including those which were 100% capital protected, and the operation of the barriers. She understood that the indices or rates would have to fall a long way before a barrier was breached and so it was not something that was likely to happen much, if at all. If there was a problem with a barrier, RR told her that he could “adjust it” but she did not understand how that would happen and he did not explain it. She therefore understood that if there was to be any loss of income it would only be for a short period as the indices would rise again or RR would do an adjustment.

[81]She thought that he did explain that the interest charges on the loan would have to be paid even if no coupon was paid but this was the only risk of which she was made aware. There was no mention of any relationship between bank lending and the value of the Notes, or of security, and no discussion of margin or margin call, which were terms that meant nothing to her. When the borrowing of money from CSAG was explained as part of the arrangement, she understood that this would increase her income, as RR explained that the income from the Notes would exceed the level of interest on the loan. She thought it was all part of the structure. RR never suggested it would be possible to invest in one of his Notes without borrowing from CSAG.

[82]In cross examination, she said she had specific recollection of what RR did and did not say, but not of specific meetings in 2003 and 2004. She saw him on a regular basis and he talked about his kind of investments on many occasions. He always discussed the Notes and the consequences of a barrier breach and he might have mentioned leverage but did not discuss the risks involved. He never, at any stage, mentioned any relationship between bank lending and the Notes or security or margin or margin collateral. She would have remembered if leverage had been mentioned in the context of a margin call. The only thing that was ever mentioned about borrowing was the need to pay interest whether or not coupons were paid.

[83]She accepted that it was possible there had been a discussion of a CRAN on the 30th May 2003. She did not recall giving RR an Audi Note term sheet at their meeting and said she did not know that the Audi Notes represented the same kind of product. She did not specify the kind of return she wanted at that point and never said that she was after double-digit returns. He never told her that if she borrowed, she would get a larger investment and never explained that the Notes would be the collateral and that she could be called on to increase that collateral. She did understand that leverage meant borrowing and paying interest but never thought about security. She considered the loan separate from the Note and understood that she had to repay the loan regardless of the value of the Note. Where reference was made to the value of the Note dropping, she thought it only meant her personal investment outside the loan. She did not know how she was to repay the loan if it was separate from the Note because that was never explained to her.

[84]In cross-examination her evidence was that, at the meeting of the 11th December 2004, she had told RR that she wanted to invest with him but not in any particular product, telling him that she had $5 million to invest. He came up with a leveraged package without explaining the risks of leverage. She said she must have read the follow up email of the 13th December which enclosed an indicative Term Sheet and an Effect of Leverage document. Although she read the parts about borrowing, the cost of borrowing, about the coupon and the return, she did not read anything about collateral and nothing was explained to her. She then said that she did know that the value of the Note fluctuated according to market conditions but she only read what RR explained to her. She said it was not enough to explain things in writing to her and RR knew that she was like his mother in law who depended on him entirely. She said she did not ask him to send the forward LIBOR rates the next day so that she could understand the bet she was taking against a rise in LIBOR rates, although he did so. She did not know whether she had read what he had sent but if she did, she would not have understood it.

[85]So far as the account opening documents are concerned, she did not read the deed of pledge, the warrant and the derivatives warning, nor the customer profile form with its warning about the need for accuracy. So far as reading documents were concerned, she said she read those which were easy to read and not in small print but if it looked complicated she would not read it.

[86]Later in her witness statement, she said that, probably during 2005, RR explained about Notes that were not 100% capital protected. He explained that if a barrier was breached during the life of a Note and if it had not recovered, then she might not get back all her original investment and there could be some deduction of up to 20%. That was the only potential risk to the capital in her mind, but as she would have more than one Note and breaching the barrier would be unlikely and rare, she would not suffer such a loss on every type of Note so as a percentage of the total portfolio, the loss would be small. At no time until things went wrong at the end of 2008 was there any discussion about the value of the Notes or of her total portfolio. In her understanding she could see that at the end of the period she would either get 100% of capital back or something a bit less and what happened in between was irrelevant. She understood that the Notes were expected to be held for a fixed period but the consequences of withdrawing from the investment before the end of the period were not discussed.

[87]All she was ever given by CSS and Plurimi were “snapshot” reports about the Notes which made no reference to value. Never, prior to October 2008, was she ever advised about the value of the Notes. If she had known at any stage that, although she was receiving income, the Note had a value much less than the capital she had invested, she would have been alarmed and not bought any more Notes. She said that she now knew that reports were produced by CSAG as the lender which gave details of the value of the Notes but she had given CSAG instructions to “hold mail” (apparently for tax reasons), so she never saw any reports until the crisis in late 2008.

[88]Elsewhere in her statement she said that she did not recall receiving “Effect of Leverage” documents in respect of each Note but did remember seeing that sort of schedule and understood that it was to show how the income would be increased by borrowing further funds from the bank. She said she did not read it in detail. She proceeded on the basis that if something was important RR would discuss it with her. She did not remember seeing or reading any SCARP warning. If she had read such documents at the time she would not have understood them. The documents were not discussed with RR and she proceeded on the basis that he would have advised her orally about everything she needed to know.

[89]In cross-examination BAS accepted that RR had taken her through the terms of each of the Notes that he recommended and had referred to the various numbers in the Effect of Leverage documents. She did understand that the higher the return, the greater the risks. He would explain the maximum loss she could suffer if the value of the Notes moved below the strike price at the end of the term which, he said, was 10-15%. This was said every time she met with him early on in their relationship. He never discussed the paragraph about capital loss and margin calls in the Effect of Leverage document.

[90]RR’s evidence in his witness statement was that on the 30th May he attended BAS’ Belgravia home to discuss the services which he and Credit Suisse generally might be able to provide for her, including advice on a range of investments, whilst his specialisation was in structured products. She told him at this meeting that she had an existing portfolio of hedge fund investments managed by JP Morgan, which returned approximately 6-8% per annum. The returns were automatically reinvested in the portfolio and she wanted to make some investments which would generate a receivable income which could be used by her to fund her lifestyle. He understood her to be looking for a greater return than 6-8% and specifically wanted income for use for spending purposes.

[91]He described to her a CRAN and its characteristics. It appeared to him that she was familiar with some of the key features, including the reference to LIBOR and she produced a Term Sheet for a 10 year Note. He told her that a CRAN was safer as it only required LIBOR to remain within the lower or upper barriers for the investor to receive a coupon. She asked questions about how the barriers worked vis-à-vis LIBOR but when he informed her that it would provide a coupon of approximately 7% per annum “she visibly cringed” and told him that this was similar to the returns being generated by her Trust portfolio and she was looking for more than this. At that time she had a Trust fund, set up by her husband in 1996 (the BSAS Trust) which was managed by JP Morgan Chase and held investments worth about $7m.

[92]He explained that Credit Suisse offered clients the option of leveraging investments which would create the opportunity to obtain a higher return in a CRAN. He explained that the Note she had produced (which he identified through disclosure as the Audi 10 year note) had embedded leverage whereas the CRAN he described could be leveraged externally. His evidence was that he summarised the key risks and rewards associated with leveraged investment including the magnification of losses as well as gains. He explained that interest due on the borrowed funds would be payable irrespective of whether the CRAN paid a coupon and if the value of the Notes declined beyond a certain point it might be necessary to provide additional funds as collateral to support the account. He described this as a “margin call” and explained the potential consequences of failure to meet such a call, including the risk of liquidation of the accounts. Because this was a capital protected Note, the major risk was loss of coupon, whilst still paying loan interest, provided that the Note was held to maturity. He explained that structured products were designed to be held to maturity, which meant that the investor’s capital was locked up for several years, but if an investor required funds for other purposes, they could borrow against their holding of structured products with Credit Suisse.

[93]In his witness statement he described speaking with BAS on the telephone on the 11th December 2003 and then sending the letter the following day which referred to the risks of the CRAN which he was suggesting, which was similar to the product they had discussed in May. His witness statement did not descend into any detail about the telephone discussion before sending this letter, but pointed out the risks specified within the letter.

[94]His written evidence about the meeting on the 11th December 2004 at the George Restaurant in Mayfair was that she confirmed that she did want to invest in a leveraged CRAN similar to those previously discussed. He repeated his previous explanation of risks and rewards of investing in this type of product and explained that a CRAN was 100% capital protected so that there was no loss of capital if she held the Note to maturity. He explained however that if sold prior to maturity there was a risk of loss of capital because, at the point of sale, the Note would be valued by the issuer and that might be below the par value of the original investment. Once again he discussed the risks of investing in structured products on a leveraged basis, including the risk of the value of the Note going down, the risk of a margin call, the need to meet the call to avoid the account being liquidated and the possibility of meeting a call with either cash or security.

[95]There was discussion of the amount she wanted to invest and the amount she wanted to borrow to leverage the investment. Although, at the lunch he would not have had an Effect of Leverage document in hand, because this was a product he knew well from discussion with other clients, he could relate to her the approximate coupon she would receive depending upon the amount of leverage utilised. The maximum LTV for this type of product was 85% and she told him, in accordance with his previous recommendation a year before, she would want to leverage the investment by 75%. The amount she borrowed was the result of her decision in the light of the potential returns. He sent an email the following day attaching the indicative terms of the CRAN with an Effect of Leverage document which contained the information that the value of the Note fluctuated and that additional collateral might be required to cover any shortfall if the loan value increased over 85% of the Note.

[96]He was satisfied that she understood the investment and the risks and although the TSF which he signed did not properly answer the question as to how he had so satisfied himself, it did set out his satisfaction that she did understand the risks, including the risk of margin calls for leveraged positions.

[97]Although he had no clear recollection of the discussion which took place before the purchase of Note 2, because this was her first investment in a Note which did not have 100% capital protection, he was certain that he would have explained to her that, if at the point of sale or maturity, one or more of the indices of the CDI was below the barrier (30% of the strike level) there would be a loss of capital. He would have explained also that the receipt of the coupon was conditional on none of the equity indices dropping by 30% from the strike level. This Note was leveraged at 70.8%.

[98]His evidence was that, prior to each of BAS’ investments in a structured product he either telephoned her or met her to discuss the proposed investment and if it was a different product from anything she had previously invested in, he would explain the risks and rewards associated with it and the rationale for making the investment. As there were essentially three different types of product in which she invested through RR, as time went by she became familiar with each and their discussions became more focussed on the economics of the Note, namely the underlying assets, the coupon, the barriers and the term of the Note by reference to the prevailing market conditions. Many of the conversations were followed up by a short email summarising the points discussed and attached to the email, or sent separately, would be an indicative term sheet and Effect of Leverage document. Following the transaction the advisers would send a transaction confirmation, a final indicative term sheet, an overall account summary and in circumstances where there was a risk of capital loss on final redemption a SCARP Warning. All of this was standard procedure with the risks explained, including changes in the value of Notes and margin calls.

[99]He said that from the very first discussions with her, BAS expressed a desire to obtain higher returns which, he explained to her, could be achieved by using leverage. This was the basis upon which virtually all later transactions proceeded with differing degrees of leverage. On every occasion there had to be a discussion about the terms of the Note itself and the amount of leverage to be employed, which was all part of considering the risk and the reward. She could not fail to be aware of changes in value of the Notes. He referred to discussions about the sale of the Audi Note and of Note 1 (a $20 m investment, with 75% leverage) at a loss and the purchase of substitute Notes (Notes 3 and 5), bought in the hope of making recoupment, as in fact happened.

[100]In cross-examination he was asked why the 30th May 2003 conversation had not been referred to in CSS’ solicitors’ response to the letter of claim if he had a recollection of it. He maintained that he did have a clear memory of it nonetheless, although he could not recall whether he actually talked about the value of the Note vis-à-vis the barriers and the interest rate. He maintained there was discussion of the Audi Note and a comparison made between it and the Note he discussed with her, a copy of which he sent by email that day. He said he understood she was looking for double-digit returns, in the light of her dissatisfaction with 6-8% obtained by her JP Morgan Trust portfolio. He said that she mentioned double-digit returns at the meeting, though this did not appear in his witness statement. He said that he had no recollection of the details of the telephone call on the 11th December 2003, but leverage was part of the recommendation made in the letter of the following day, based upon their discussion on the telephone. He agreed that ideally the letter should have referred to a margin call expressly and what would happen if a call was not met but he had judged the 10% cushion to be enough to avoid a margin call, which they had discussed. He told her that a margin call could be met with cash or securities but did not tell her how long she would have to meet such a call nor that the collateral would be valued by the bank as it thought appropriate.

[101]He said that at the meeting in December 2004 he orally gave her cash flow figures for 60%, 70% and 75% leverage for the first couple of years which he would have been able to recall from his dealings with other customers. He explained that the more leverage there was the riskier it was. This was not in his witness statement.

[102]At the outset he classified her as a person who was prepared to accept “moderate risk” in the Customer Profile, which meant seeking long term returns whilst being able to sustain downward investment fluctuation, though preferring investments with limited downside price risk and foregoing higher returns in consequence. He said that although the TSF did not refer to the discussion of leverage, its risks and the possibility of a margin call, he had explained that and that explanation should have been referred to in the TSF, with a copy of the file note recording that discussion.

[103]RR confirmed that the terms of the file notes prepared by him or by FM on the basis of an email or conversations with him were accurate when recording the terms of conversations with BAS. Whilst the TSFs were inadequately completed, often by members of his team, this did not mean that there had not been discussion and explanation of the risks. The Evidence of BAS’ other investments and other advice

[104]Disclosure of BAS’ other investment was a tortuous process which continued right until the date of trial. The Defendants were not satisfied that, even then, full disclosure had been given. Neither am I. What emerged however was a series of other investments, made through other banks, as well as her Trust investments. She had purchased two structured LIBOR Notes from Banque Audi before she purchased any Notes through RR and at the time of their first meeting in May 2003, each of those had embedded leverage. By the time of the first disputed Note recommended by RR, on 5th April 2006, BAS was involved with Mr Boujon in vetting the individual purchases of investments by the managers of the two portfolios (JP Morgan and Banque Mirabaud) which constituted the BAS 2003 Trust. She had been pressing for higher returns from them by reference to the returns generated by her CSS portfolio of structured notes. Through the JP Morgan portfolio within that trust, ten other structured notes had been purchased, some of which involved embedded leverage. She was in the process of changing the investment parameters of the Trust which had initially achieved 6-7% returns, first to 10% in 2006 and then in 2007 to 15%. Hedge funds featured in some of the investments of the trust.

[105]She had signed account opening documents with UBS in 2003, including a collateral loan agreement with a pledge agreement which contained an explicit warning about the possibility of a margin call in the event of a fall in secured assets. Initially she invested $3.5m. By the end of 2007, she had invested in leveraged investments and what appeared to be speculative currency options through this bank.

[106]She had engaged Mr Boujon of DAPM in 2005 to monitor the performance of her BAS 2003 Trust and was receiving extremely detailed and sophisticated monthly reports on what the individual investments were doing. She had regular meetings with the trustees and the managers, initially lasting a day or two at a time on a monthly or quarterly basis, which diminished by virtue of the arrangement of prior vetting of each such investment by herself and Mr Boujon before purchase.

[107]She had opened an investment account with Baring Brothers in 2006 for the purpose of investing in “alternative investments” such as hedge funds and had invested some $3.5 million in such funds. The First disputed Note was Note 9, purchased on 5th April 2006.

[108]The purchase of the second disputed Note, Note 14 on the 20th February 2007. By the time of the third disputed Note, Note 15 on the 8th May 2007, BAS had given an instruction to invest $2.2 million in the start up Islamic Bank against the advice of the managers of one portfolio in her trust fund and the advice of Mr Boujon.

[109]By the time of the fifth disputed Note, Note 17 on the 24th August 2007, BAS had an investment account with Citibank through which she had invested some $2.5 million in alternative investments, hedge funds or similar funds. In June 2008 she invested $1m through Citibank in a structured note with 100% leverage.

[110]As it appears from the documents, although she denied it, BAS took the initiative for the purchase of Notes 7, 17 and 20. She was keen to invest to secure high yields, accepting late in her evidence that she was looking to Plurimi for double- digit returns.

[111]BAS’ desire for high returns and appetite for risk was clear from the documentary evidence showing her relationship with other banks apart from CSAG despite her best efforts to explain away the contents of these documents and despite the mediating influence of Mr Boujon. What emerged was that, in the years 2005-2008 she was looking for double-digit returns from all of her investments, whichever adviser or bank was involved. In cross-examination, she admitted, at one point, that there did come a point where she was looking for double-digit returns on the basis of what she described as “calculated risk”. She said she relied on the advisers’ judgment on risk/return but told her trustees and managers what her annual expenditure was, it being for them to work out how it could be achieved. In June 2007, a Citibank Suitability Letter, sent to her, c/o Mr Boujon, stated this:

“Your risk tolerance is aggressive; ie you emphasize return on investment over principal preservation and are willing to assume greater levels of risk in pursuit of greater returns. You are willing to engage in tactical or opportunistic trading which you understand may involve higher volatility and variability of returns. You are prepared to use leverage which you understand may involve higher volatility, variability of returns and loss of principal.”

[112]It also referred to her as having “extensive experience using leverage as part of an investment strategy”. Despite the fact that this letter was sent to Mr Boujon shortly after the meeting with her in order to set out the contents of the discussions with her and seeking confirmation or correction, BAS maintained that none of what appeared in the letter was discussed at the meeting and that she did not know where they got these notions from. There was no response to the letter correcting the position, nor to a similar letter a year later stating much the same thing.

[113]The Defendants were able to point to any number of high risk investments in which BAS was involved. I have already referred to the Barings hedge funds, the Citibank hedge funds and structured note, the UBS currency options and the BLME shares. Reference can also be made to the Madoff Fund (where Mr Boujon advised her in terms about the 50/50 leverage, as he termed it) and the China Pacific Alliance Fund, where the Trustees or managers of the BAS 2003 Fund placed the responsibility for the risk on her and Mr Boujon, just as they had also, when refusing to invest in the BLME shares, required her to sign a disclaimer of any responsibility on their part.

[114]The Plurimi Acceptance Booklet referred to her primary investment objective as “to earn high income” and the acknowledgement “that the greater the income I earn usually means the greater the risk to the value of my investments”. Her attitude towards investing was “to see my investments grow substantially over time and to do so, I am willing to accept a high degree of risk to the value of my investments”. Her attitude towards her investment strategy would change if her portfolio fell by 15%-25% and her attitude towards volatility was such that she wanted her investments to grow faster than inflation and she could accept greater losses to their value. The Portfolio mandate then set out her investment objective as “balanced (capital growth and income) – you seek to increase your principal and at the same time generate income from one portfolio of securities which together have historically demonstrated a moderate to high risk of loss of principal value”. No challenge was made as to this as a statement of BAS’ position as at the beginning of 2008 and the other investments made by BAS accord with this assessment of her appetite for risk and desire for high returns. Wherever she may have started out in 2003, within a few years, she was demanding high returns, which, as she knew, carried commensurate risk.

[115]I have also referred to the many documents that she signed, when entering into relationships with the various banks. Pledges or similar documents were signed with Banque Audi (28.11.02) UBS (9.5.03) JPM Suisse (9.12.03), Barings (17.5.06), Citibank, (11.6.07) and JPM (5/9/07), each of which provided for margin calls of one kind or another, quite apart from documents signed with CSAG. It is inherently unlikely that she could have signed all these Pledge Agreements without explanation from any bank as to the general nature of what she was signing and the evidence, limited as it was, indicated that, although banks descended into no detail when account opening documents were signed, the nature and purpose of each document was generally explained. It is in my judgment inconceivable that she did not know what a pledge was and what its effect was, particularly when she arranged for two pledge documents specifically to secure a loan of $2m on her personal and trust account at JP Morgan in respect of the purchase of Note17. She also signed documents for trading in hedge funds, options, futures, derivatives and in other alternative investments.

[116]In discussing other investments (where she identified Mr Boujon as the person from whom she sought independent advice) Mr Boujon told the court, in the context of the Barings pledge agreement that it would never have occurred to him that BAS did not understand what the deed of pledge was. In relation to a Barings bridging loan, he told the court that he did not discuss the question of security for the loan because he assumed she understood what she was doing. In relation to a pledge on the JP Morgan portfolio of the BAS 2003 Trust, he said that he would have discussed the question of the pledge with her in relation to the loan but he did not think he would have been teaching her anything. Further, in relation to leverage which he subsequently discovered in relation to the purchase of the Citibank structured note, he said that it did not occur to him that he needed to explain to her how margins and margin calls work. He assumed that she knew about borrowing, security and the like. Mr Boujon told the court that he would have to satisfy himself, as her adviser that she understood enough about investments to make decisions in relation to them and even where she made a decision without reference to him and he found out later, I was left in no doubt that he would have advised her about the risks of it. From his detailed regular conversations with her, he took it that she understood these aspects of collateral and margin that she says she did not.

[117]Mr Boujon’s evidence was that BAS’ understanding of basic investment concepts was good. He gave an example of pledging in currency where she had not understood at the beginning but following explanation she did. Where she did not understand she asked and he would explain with resulting comprehension.

[118]Mr Boujon was plainly a very able man, with considerable skill in the analysis of investments. He was used to advising high net worth individuals, (with wealth up to $2 billion) many of whom were professionals, but some of whom were not. He said that he spent more time with BAS than with others, because she was not a professional, but he paid tribute to her understanding of the matters he explained to her, in relation to complex investments, where he would talk through his monthly reports with her for an hour or so, once a month, and spend one or two days with her and the Trustees and Managers of the BAS 2003 Trust on a quarterly basis until early 2006, following which he and she vetted any proposed changes in investments by the Managers before they were put into effect. He would discuss risk and return with her. He had to be well aware of her investment objectives and desire for high returns, with commensurate risk, both in relation to the portfolio he monitored for her and in her investments through RR.

[119]He personally preferred, as a matter of investment philosophy, investments in Hedge Funds to investments in structured notes, but recognised that other colleagues thought differently. Whilst he was clear that he considered that BAS understood loans and security including pledges and that she understood that the higher returns sought, the greater the risk, he was somewhat evasive when it came to the point of being asked what advice he had given about leverage and her leveraged investments with CSS and Plurimi.

[120]On a number of occasions BAS passed on RR’s recommendations for investment in structured notes to Mr Boujon for his views (just as she passed investment recommendations by others to RR for his views). BAS self evidently took advice from different quarters and weighed up the views before making decisions. On some occasions however she took no advice or, on receiving it, rejected it. Some eight investments through UBS in 2007 do not appear to have been the subject of any consultation with either RR or Mr Boujon and I have already made reference to the Citibank structured note in 2008 which also falls into this category. Investments such as that in the BLME were effected contrary to their advice. There are eight or nine examples of investments suggested by RR to BAS where it is clear that she either forwarded that recommendation to Mr Boujon and then accepted his advice not to invest, or made the decision herself without reference to Mr Boujon. There was also a recommendation to her by RR to repay a loan in Japanese yen, which she declined to follow on the basis of either her, or Mr Boujon’s view as to the declining strength of the yen at that point.

[121]In September 2005, for the first time, as it appears on the documents, BAS sent RR’s proposal for a CRAN to Mr Boujon for his explanation and opinion and, she said, to facilitate his encouragement of her Trustees/managers to invest in similar structured products. Originally she had said that the only reason for sending RR’s recommendations to Mr Boujon was to encourage the Trustees/managers to make similar investments, but as they already had similar investments, this seemed unlikely (unless it was the leverage element of which she was trying to persuade them) and she admitted in cross-examination that she had been seeking Mr Boujon’s advice on such investments. She told the court that she discussed the underlying basis of the Note but not the leverage analysis with Mr Boujon. She said that Mr Boujon did not like the Note and she did not invest in it despite RR’s recommendation. Mr Boujon’s evidence was that he was not keen on the ten year Note and could see that, in order to achieve the return suggested, leverage was necessary. He considered that regard should be had to the intrinsic merits of the Note itself before considering leverage and he told BAS that the only point of this investment was leverage, in order to achieve the returns. The Note itself was unexciting. He said he did not discuss leverage in detail with her as he was not in favour of the investment. In this case RR was proposing that BAS put £1.5 million of her own money into the investment with a loan of £4.5 million (75% leverage).

[122]Documents reveal that Mr Boujon did tell BAS that the Note itself was unexciting and that the only advantage of the proposal lay in the leverage. Yet he denied that he had discussed this issue of leverage in any detail with her. This was not credible as he then approached TFS, who supplied an alternative proposed 10 year Note which he later sent on to BAS. TFS specifically asked Mr Boujon in writing whether the CS Note was considered suitable and whether the client wished to have leverage. TFS was asking one of the very questions which are at issue in this litigation. There was no reply which has been disclosed but it is impossible to conclude that this issue was not the subject of conversation between Mr Boujon and BAS in the context of the RR proposal and the alternative on offer from TFS. He must have advised her on the upside and downside of the one point of the investment that merited consideration and to which TFS was seeking an answer. It is to be inferred that an answer was given internally to TFS’ question- namely that leveraged investment in structured notes was suitable for BAS, even if none was given to TFS. At all events, in the context of conversations which must have taken place about suitability and the risks/rewards involved in leverage, she decided not to invest on this occasion, but continued to do so on numerous other occasions, with considerable leverage.

[123]In May 2006, RR advised BAS to invest the proceeds of Note 6 in Sapic II, a CS Fund of Funds, but she declined to do so and instead opened a personal account at Barings which she used to trade in hedge funds.

[124]On 17th January 2007 BAS forwarded RR’s recommendation of Note 13 to Mr Boujon, including the Effect of Leverage document, asking in the subject line of the email “what do you think?” Note 13 was a Credit Suisse Nikkei Note. Mr Boujon’s evidence was that he told her that if she wanted to invest in Japan, it was better to invest in a Japanese hedge fund with a manager whom he knew. He said that this was a matter of investment philosophy, since he preferred to bet on someone who could do better than the market. He was looking at the bottom line of the leveraged Nikkei Note proposal with a projected return of 25.73% as compared with the hedge fund, without leverage. He said that he probably discussed the risk associated with the Note with leverage, as compared with the hedge fund without it, comparing the relative exposure and return. He probably discussed leverage as having the effect of increasing the profit and loss. Once again, in the context of this Note, BAS told the court that she never discussed leverage with him. She said that she only ever spoke about the underlying structure of RR’s Notes with him and not about leverage. On this occasion BAS did invest in Note 13, following RR’s advice rather than that of Mr Boujon.

[125]The comparison here was between the Hedge Fund without leverage and the Note with it as BAS was being faced by Mr Boujon with a choice between the two. It is inevitable that leverage and its benefits and risks must have featured strongly in this discussion when comparing the two different types of investment.

[126]On 22nd January 2007 BAS forwarded RR’s recommendation in a six year Transatlantic Note, which was principal protected. This Note was based on the difference between US Dollar and Euro swap rates. Mr Boujon’s evidence was that swap rates were outside his area of expertise and he was not prepared to advise on it. He said he would not personally make such an investment and BAS did not then invest in the Note.

[127]On 22nd June 2007 BAS rejected RR’s proposal of a five year JPY Callable Bullish Note. On 13th June BAS sent another Note recommended by RR to Mr Noor at Citibank saying “have a look at this – let me know”. BAS did not purchase this Note despite obtaining an alternative from Citibank which she then referred to RR. It is clear that, despite her denial, she played off Citibank against RR to seek to secure the best terms on a comparable Note. The Citibank Note which was the subject of discussion in June 2007, in its eight pages included a number of paragraphs dealing with risk and one expressly dealing with leverage/ gearing risk which referred to “margin” and the requirement that the investor might receive notice to make additional margin deposits or liquidate their position at significant loss. In June 2007, rather than investing through Citibank or RR it seems that BAS invested in currency options through UBS.

[128]In July 2007 a 5 year US Dollars Callable Bullish Note was recommended by RR but she did not take this up. In January 2008 he advised her to invest in a Transpond Note (which was capital protected), but she declined to do so. In May 2008 she forwarded RR’s recommendation of a JP Morgan 6 year Protected Note to Mr Boujon. She did not conclude this investment but it seems that, shortly afterwards she purchased a structured note from Citibank.

[129]The significance of the above is not only that BAS was able to make up her own mind about investments, after taking advice, but that, when talking with Mr Boujon, there was inevitably talk about leverage, despite her denials of it. If Mr Boujon was being asked to advise about a Note proposed by RR, although no doubt he would focus initially on the terms of the Note itself, it was inevitable that there would be discussion of leverage and the effect it had. If regard was being had to the yield and the risk/return profile, Mr Boujon could not have failed to talk to her about the benefits and risks involved in leverage.

[130]Not only did the documents show that Mr Boujon was sent Notes recommended by RR with recommended leverage, but the evidence was that BAS was pressing her trust managers through Mr Boujon to achieve similar high returns. He denied that she had ever talked to him about leverage in this context, but he told the Court that the trustees would not have been prepared to use leverage to increase the yield. In the circumstances he must have explained to BAS that these high returns were achieved by leverage and could not otherwise have been obtained and to have explained the risks of doing so which influenced the Trustees against adopting such a course. Since the Trusts did invest in such Notes, without leverage, it is a fair inference, that what she was pressing them to do was to apply leverage to improve the returns to the level she sought.

[131]Mr Boujon’s answers about the letter sent to him by Citibank on 21 June 2007 were not credible. He had accompanied BAS to open accounts with Citibank for investment purposes. The letter was sent to confirm the contents of the discussion at the bank about BAS’ investment experience, her approach to investment, leverage and the risks she was prepared to take, asking for any errors to be pointed out. A successor letter of 30 May 2008 was sent also. To neither letter did he respond, pointing out any mistakes or misunderstanding. He told the court he would not have read these letters and may not even have seen them. I find that impossible to believe – it would have been negligent in the extreme for that to occur- the importance of the letters would have been obvious to any employee, let alone to himself. It must have reached him and he must have considered that it recorded her position and what had taken place sufficiently accurately not to warrant a reply.

[132]Mr Boujon took away from a meeting with RR at Plurimi’s office in February 2008 an envelope, which contained details of BAS’ account with Plurimi. This was handed to him because BAS asked RR to do so, but he said he was only given the envelope to pass on to BAS and never saw the contents, and so did not know what the portfolio looked like, though he had seen some of the individual Notes at purchase. I did not find this credible. He would not have been given the documents which were normally sent by email to BAS, simply as a courier. They were given to him for him to look at. He must have done so and found nothing untoward. Conclusions on the Conflict of Evidence

[133]RR’s evidence is to be preferred to that of BAS on this critical conflict. Although, as Counsel for BAS pointed out, there was no file note or TSF which expressly recorded a specific warning as to margin call and its effect, in the context of the recommendations made, with leverage and reference to LTV, I do not consider that the implications of maintaining a cushion against LTV and the consequences of not maintaining the required LTV could not have been explained. The documents which do exist are consistent with RR’s version of events.

[134]Whilst her background, as set out earlier in this judgment meant that BAS did not, in 2003 have any experience of investment or of financial affairs, it was clear from the evidence of her adviser, Mr Boujon, from the contemporary documents and from the evidence of RR and other witnesses, that she was (and is) an intelligent woman who, when things were explained to her, had no difficulty in grasping them. Mr Boujon told the court that he was astonished at how well she understood concepts once they were explained to her. He said she asked for further explanation when she did not understand, but once that was given, there was no problem in comprehension. It is plain from the evidence that she took advice from market professionals but was able to weigh it and come to her own conclusions, rejecting their advice, as she did both with the advice and recommendations of Mr Boujon and RR on a number of occasions. Mr Boujon said that she could be stubborn and difficult once she had an idea in her head about investing and it would be difficult to say no to her in such circumstances. Her attempt to portray herself in her evidence as a woman who understood little about her investments, was told little, left decisions to her advisers and was wholly in their hands when it came to selection of investments did not do her any credit. She learned quickly how to utilise advisers, compare their advice and even play them off against each other, with a view to securing better terms or results. By 2008 she had 5 years of experience of Trustees and Managers, of Banks and advisers and had invested through them in a significant number of structured notes and Hedge Funds, both in her personal portfolios and through her trust managers whose performance was monitored by Mr Boujon. She understood how the barriers in structured notes worked, how coupons could be lost on breach of those barriers and how capital value could be lost on unprotected capital Notes. She understood how capital could be lost on the sale before maturity of Notes which were specifically capital protected, and therefore of the fluctuation in value of those Notes during their term.

[135]I could understand and accept her evidence that she did not go through or read in any detail the documents presented by her by various banks, such as Banque Audi, Barings, UBS and Citibank when opening an account, and that she would not read the small print of documents sent to her, but I was unable to accept her evidence that she did not read the Indicative Term Sheets of investments recommended to her with values between $2.5m and $20m, or short emails giving advice or making recommendations. Likewise she must have read the Effect of Leverage documents which accompanied many Indicative Term Sheets, which showed her the coupons/returns she might expect to receive, which were the subject of most interest for her. It is inconceivable, given the size of the investments being made and the limited scope of the particular documents in question that she did not read them and absorb their contents, asking for an explanation if there was something she did not understand.

[136]At different times she gave inconsistent answers about her understanding that the market value of the notes fluctuated. It became clear on her own evidence that she knew that she might not, on a capital unprotected note, get back her capital at term, where barriers were breached and that, if she sold a note before maturity, the full value might again not be recoverable for any Note. She accepted that RR had warned her of this and said that he had told her that the maximum loss she could suffer, if the Notes moved below the strike price at the end of the term was 15-20%. She maintained towards the end of her evidence that in her mind, the maximum capital loss she could suffer was 20% of her own equity investment, without reference to the loan. It is clear that she knew of instances where, on RR’s recommendation, she had sold Notes before the end of the term, because barriers had been or were close to being breached, with a view to purchase of other Notes at a discounted price, with different barriers which might enable her to recoup her loss, as in fact happened. The fluctuations in market value of such Notes in her trust portfolio were the subject of discussion with Mr Boujon and she knew that one of the first Notes she had bought through Banque Audi in 2003 had sustained a loss, which was recouped by a substitute purchase through RR and that the first Note that she bought through RR was also sold at a loss on a switch to Note 5.

[137]In parts of her evidence it appeared that what she was saying was that it was not the fluctuations in value of which she was unaware but the size of the potential loss. Yet, that very first Note that she bought through CSS for $20m, with $15m of borrowed money, was sold early at 94.6% of its full value, because a barrier had been breached and a substitute Note was purchased, which again successfully resulted in recoupment. It is fanciful to think that, when this Note sold for 94.6% of its value, she did not appreciate that she had sustained a loss of over $1m, as compared with the equity she had put in of $5m. She told the court that had she been aware of the magnitude of this loss she would not have invested further in such Notes at all.

[138]I found her evidence about loans, security and leverage impossible to credit. i) She testified that no one ever explained that leverage had the effect of enlarging her investment and therefore magnifying the profit or loss suffered. She said that she did not understand that leverage was an option, and that she could invest in the products recommended by RR, without it or with differing levels of borrowing. Yet she borrowed elsewhere for investment purposes (UBS, JP Morgan and Citibank) at different levels and she borrowed to purchase a Government Bond (in order to assist in the process of obtaining a residence visa) and the one thing that she must have understood, whether or not she read the Effect of Leverage documents fully, was the benefit that was obtainable from paying a lower rate to borrow than the rate obtainable from the investment. It is self-evident that borrowing is optional and that the effect of borrowing is to allow a purchase of that which might otherwise not be purchased. She certainly understood, the basics, as her adviser, Mr Boujon said in evidence. ii) Her evidence was that she understood what a loan was and the need to pay interest on it and repay the capital. She said that she was told by RR that she would have to pay interest on the loan even if the Notes purchased with the loan did not produce a coupon. However she said that she did not think about how the capital of the loan itself would be repaid, though she did understand that she would have to repay the loan, regardless of the value of the note. iii) She said that she did not understand what the word “pledge” meant and that the idea of leverage and its effect was never explained to her. She also said that she thought that the only loss she could suffer would be a percentage loss of part of her equity in the leveraged Notes. She did not understand the Notes to be security for the Loans. In her mind the two were not connected. iv) She said that the words “margin” and “margin call” were never used in conversation with her and no-one ever explained the concepts, so that she was unaware that if the values of the Notes dropped she could be faced with a demand for further collateral, which, if unmet, could result in CSAG selling the pledged assets to recoup the loans. v) Mr Boujon told the Court that he was satisfied that BAS understood that collateral had to be provided for a loan, what security meant and that security was given to banks in the shape of a pledge on the assets held in the account there. It would have been impossible for him to advise her properly about investment in individual notes proposed by RR to her, on which she sought his (Mr Boujon’s) advice if he had not discussed leverage and the risks of it with her. When opening an account with Citibank, with his advice and in his presence, she signed documents, including loan and pledging documents similar to those signed by her with CSAG and other banks and he could not have let her do that unless she had understood the concept of security for a loan. He said that in September 2007, when he reviewed her purchase of a CSS Note where she had borrowed 100% of the price and entered into two pledges with JP Morgan for a loan from them, he would have discussed the loan and pledge with her, but he would not have been teaching her anything. The concept of a pledge is a familiar one to people of very different cultures, whether well-educated or not. Mr Boujon had no doubts that BAS understood what it meant and neither have I. vi) In one passage in her evidence she explained that when her pleaded case stated that she had never invested in similar notes to the CSS Notes on a leveraged basis (when she was being asked about borrowing money to invest in structured notes through, for example Citibank), this was because she regarded leverage as being different from borrowing to invest. Later she testified that she understood that leverage meant borrowing and paying interest on the loan but never thought about security for the loan and considered the loan separate from the Note bought with it. Elsewhere she accepted that she knew that her loan from JP Morgan was secured somehow with that bank, when she entered into two pledge documents with JP Morgan, one in respect of her personal account and the other on her trust account. “There was something in the account, to make sure they got paid”. vii) Despite saying in a number of places that she never sought a specified rate of return from her investments, the evidence establishes that there was a history from 2006 onwards of BAS pressing her Trust’s managers, with Mr Boujon’s assistance, to increase the yield from her Trust portfolio from returns of 6-7%, to 10% and then to 15%. In doing so, she prayed in aid the returns she was getting from the structured notes purchased through RR, where the average return was of the order of 13-14%, obtainable only through leverage when purchasing Notes. The comparison was made with the purchase of investments in Hedge Funds, generally considered to be high risk investments, without leverage. Ultimately, late in her evidence, BAS accepted that she was looking for double-digit returns, which involved an increase in risk and in such circumstances it is inevitable that, when she discussed the relative merits of different investments with Mr Boujon and her Trust, when she was pressing for more investments like RR’s recommendations in order to achieve higher returns, there would have been full discussion about the relative merits and demerits of leveraged Notes as against Hedge Funds and other investments, and the comparative risk/reward profiles of each.

[139]The documents show that the effect of leverage was explained to her in writing in transactions which she concluded with leverage and it is idle to consider that this was never the subject of discussion before the decision was taken to invest and to borrow. With Indicative Term Sheets, sent to her for her consideration, were enclosed Effect of Leverage documents, where leverage was suggested. In emails giving advice on investment proposed by others, on which BAS sought RR’s advice, he told her sometimes not to employ leverage because he considered the product itself to be high risk. Whilst she maintained that she did not study such documents and that she relied exclusively on what RR told her orally, no discussion could have taken place, nor recommendation or decision made, without exploring how much of her own money was to be invested and how much was to be borrowed, with an eye to the difference this made to the potential return. She could not have failed to understand that leverage was optional and that the amount she borrowed was a matter for her decision, whatever the recommendation made by RR or any other adviser. BAS was looking for high yielding investments, and the difference leverage made to the return was important to her. No one commenting on the possibilities could fail to say that the effect of leverage was to increase the amount of the investment and therefore, without changing the nature of the risk involved, to increase the profit or loss engendered on the investment.

[140]The Effect of Leverage document also made it plain that the market could move, that the value of the Notes might drop and that additional security might be required in the shape of a margin call. However unsophisticated an investor she may have been at the outset in 2003, I have no doubt at all that within a very short period of time indeed, with contact with many banks, Trustees, Managers and advisers, she must have appreciated that banks required security for her borrowing and that the assets that they held, including the investments purchased with the loans, constituted that security.

[141]Contrary to the advice of Mr Boujon and to RR’s cautious approach, BAS insisted on investing in a start-up Islamic Bank, the Bank of London and the Middle East, borrowing the equivalent of £2.2m in Yen from CSAG in order to do so. She professed ignorance of the security that CSAG had for this loan, which beggars belief. She had to know that CSAG were not lending without security and that the assets that CSAG held for her, whether cash deposits or Notes, represented the security for that loan. In one passage in her evidence she accepted that she did understand that what she had with her account at the Bank was something which they held against her loans.

[142]I have no doubt that in oral conversation with banks or others encouraging investment, including CSS, no stress was ever placed on the risk of loss of capital on the investments in question, on the security taken by the banks or the need for added security, should the market value of the investments drop to an extent that the banks considered inadequate collateral for their loans, but no investor, with independent advice, and particularly, after a few years’ experience could fail to understand that the investments bought with borrowed money stood as security for the loan and that the value of the security provided had to match the extent of the loan in the banks’ eyes. It follows that she must have known that a failure to provide such additional security, whether or not the terms “margin” or “margin call” were familiar to her, could result in realisation of the security to achieve repayment of the loan.

[143]When reference is made to the documents which were sent to her, any lack of understanding on her part is incomprehensible, unless she ignored them all, which is effectively what she said she did - at least to the extent necessary to avoid the inevitable conclusion that she had a clear grasp of the fact that her CSS Notes stood as security for the loans from CSAG.

[144]As RR knew, the documents sent to BAS referred to CSAG’s collateral requirements and the possibility of a margin call if the loan exceeded a given percentage of the value of the security provided, in the shape of loans and deposits. The form of the TSF which had to be completed where purchases were concluded, even if not adequately completed, was a reminder to him that the risks had to be spelt out for each purchase. The evidence of RR and FM was that routine explanations were given in relation to each Note, its structure and risks, as well as in reviews of the account and snapshots. RR was an experienced adviser, who was able to spell out, in language which was readily comprehensible, what the various risks were. There was, in truth, no reason for him not to explain collateral, margin, margin call and the consequences of not meeting a call, since, on the expert evidence, such a call was, throughout the period until August 2008, a remote possibility, given the market conditions, the carefully balanced structure of the portfolio between Equity linked Notes and Fixed Interest Notes and the buffers or cushions for which provision was made. In referring to a cushion (as in the letter of 12 December 2003), RR must have explained what the cushion was, the risk against which it was intended to operate and what it was intended to achieve- namely avoidance of a margin call.

[145]If margin call was the subject of discussion between them, as it had to be, when discussing the amount of leverage to be applied, then so too, RR must have explained the consequences of not meeting such a call. It would be impossible not to do so, and because the risk was seen as so remote and her assets were known to be so considerable that meeting a call would present no difficulty, there would be no reason on his part not to do so.

[146]When cross-examined on the subject, RR did not say that he spelt out exactly what time would be allowed to meet a call, exactly what type of assets would have to be produced to meet a call, save to say it could be cash or securities, nor how they might be valued by a lender. RR did not therefore say in evidence that he explained every last detail. He was credible when being clear that he did tell her how the procedure worked however and it would not, I find, have been possible for him not to have done so, in the face of what the documents show.

[147]I am satisfied that although there may have been some reconstruction and some amalgamation in RR’s evidence of discussions at the meetings prior to BAS first investment in Notes through CSS, he must have explained, before she made that first investment how leverage operated, how a loan was secured, the concepts of LTV and margin and the consequences of a margin call.

[148]Apart from the early correspondence/emails and enclosures in 2003 and 2004, the file notes and TSFs are good prima facie evidence that RR directed his mind to the issues which arose in respect of the purchase of each Note. With a Customer Profile completed, about which there is little material issue, the first TSF, albeit that it does not say how CSS satisfied itself that the client understood the risks associated with margin call, did say that CSS had satisfied itself that the client fully understood the product. Other TSFs completed before file notes became the norm, expressed the conclusion of suitability, the client’ understanding of risks and margin calls and/or the client’s ability to meet the margin call. Although these forms were not completed with the care that they deserved, they are prima facie evidence of some discussion of margin, margin calls and risk and cannot have been, and I find were not, total fabrication. An awareness of the risk and the need to explain is borne out by these forms, an awareness of which both RR and FM spoke and to which their routine form of explanation must have referred. The file notes for Note 5 and Note 6 indicate thorough discussion – the first with regard to the sale of Note 1 at a loss and the purchase of Note 5 in an attempt to recoup the loss, whilst the second refers to talking BAS through the note- i.e. in accordance with the usual pattern. Where Notes were called and instructions were given to roll over into new notes with the same structure, the file notes are less comprehensive, as are later file notes which refer more to the financial elements, but others refer to detailed account reviews of all Notes held, whilst the TSFs continue to refer to the client’s understanding gained through trading in these products over some time.

[149]I have referred to a number of emails which were sent by RR to BAS which assume understanding of the risks of leverage on her part. The basis for that assumption could only be that he knew that he had explained it all to her, as well as sending her documents which referred to it.

[150]When regard is had to the course of events in 2008, as appears below, the point is borne out because of BAS’ actions in response to RR’s recommendations. Her retention of cash in the CSAG account is only explicable by reference to her knowledge of LTV as is her sale of Note 15 and Note 19 and her attitude to meeting the margin call when it arose. At no point is there any recrimination against RR when the calls were made. There is no complaint that he had failed to explain to her what could happen and, when she first made complaint it was about the size of the call, rather than the call itself and about the changes made by CSAG to the LTV which had the effect of increasing the amount for which a call was made. Leaving aside her more recent protestations, there was no suggestion at the time that she did not fully understand what a margin call was nor what its consequences were.

[151]The reality is that BAS’ case is based on a fiction- a fiction that she was not told and did not understand the basics of loans, collateral, margin and margin call, despite leveraged trading in 23 of such Notes through RR, despite borrowing money elsewhere for investment, despite signing numerous loan facility documents and pledges with various banks, some or all of which contained warnings of varying degrees of clarity. The terms of the documents are such that, if she did not understand such features, she would have been bound to ask, as Mr Boujon said she did, when faced with something she did not understand. When money is borrowed, a borrower wants to know the terms of the loan and of the security provided. RR said he explained this at the outset, and in my judgment, it is impossible for him not to have done so, in the circumstances and by reference to the documents disclosed.

[152]BAS has put her case on a number of different bases over the course of these proceedings since the first letter before action on 28 May 2010. The current version emerged late in the day and runs counter to her earlier complaints, supported by statements of truth by her. I could not accept her evidence, when set against that background, the evidence of RR, the documents and the inherent probabilities. Did RR fulfil CSS/Plurimi’s statutory duties?

[153]The questions arise in relation to COB and COBS in this way: Did RR take reasonable steps to ensure that BAS understood the nature of the risks involved in the investments he recommended (within the meaning of COB 5.4.3) and take reasonable steps to ensure that his recommendation of Notes were suitable for her (within the meaning of COBS9.2.1 ) and have a reasonable basis for believing that she understood the risks involved (within the meaning of COBS

9.2.2 (1) (c)?

[154]It was clear from the evidence of BAS that she never told RR that she did not read documents that were sent to her. She was literate and educated. He was therefore entitled to assume, as he did, that she did read documents and understand them if expressed in straightforward terms. The Effect of Leverage document was clear in saying that the value of the Note in question fluctuated and that additional collateral might be required to cover any shortfall if the loan value increased to over 85% of the value of the Note. This document, together with the term sheets set out the basis of investments. The investments were of a significant size and any adviser could and would reasonably expect a customer to study those documents, even if the customer did not read anything else.

[155]Anyone reading the “Effect of Leverage” document would appreciate how leverage worked to increase the size of the investment and the returns, if the coupons received remained greater than the loan interest. Anyone with a basic understanding of loans and security, would understand from the document, that the Note purchased was collateral for the loan and that the loan could not exceed the specified percentage of the value of the Note, with the bank being able to require additional security if the Note’s value dropped below that. The document did not specify what would happen if no additional collateral was provided, but given the requirement for the loan to represent only a certain percentage of the Note’s value, even a moment’s thought would suggest that there were only two possibilities, if that happened- either some other security would have to be found or the loan would fall to be repaid. If this was not understood, I cannot imagine an investor failing to ask.

[156]Once again, anyone who understood the basic nature of a loan and security would understand that, if the loan was not repaid or additional security provided in such circumstances, a lender could force the sale of the Note to recoup the loan.

[157]As appears in this judgment, and was plain from her own evidence to the court, the evidence of Mr Boujon and from the documents which showed that in her dealings with him, with RR, with her trust managers on both of the portfolios in the BAS 2003 Trust, with her bank advisers at Barings, UBS and Citibank, BAS did understand the basics of loans and security and the right of the lender to recoup monies due from the secured account with it. She understood what a pledge was and had signed security documents containing pledges or similar security documents with all of those banks and JP Morgan, quite apart from CSAG.

[158]By the time of the purchase of the Notes which are the subject of this action, BAS had received many copies of term sheets, Effect of Leverage documents and other documents which cross –referred to the underlying concepts which she understood. On the documents alone, it seems to me that sufficient explanation was given to her of the risks of leveraged investment in the Notes and that CSS and Plurimi took reasonable steps to ensure that BAS understood the nature of the risks involved in her investments and that they were suitable for her in the light of her investment objectives, her knowledge and experience and her financial status.

[159]As appears earlier in this judgment, I also accept RR’s evidence that he did explain orally to BAS all the matters of which she now complains. There was therefore no breach of statutory duty or any other duty in failing to explain the risks of the Notes in which she invested, nor therefore any breach of the requirement that the Notes be suitable, since it is only the failure to explain which is said to give rise to unsuitability. RR dealt with BAS throughout, both at CSS and at Plurimi. He knew what he had explained to her, her increasing desire for higher returns and growing appetite for risk and with great skill, put together a portfolio which brought her income of the order of $6.5 m in four years, with a rate of return of 13-14%. It was only the unforeseeable events of October 2008 which brought disaster and, as appears below, BAS’ reaction to them, notwithstanding RR’s best efforts to help her. BAS’ Reliance and Causation of Investment in the Notes.

[160]In her pleaded case BAS alleged that she relied exclusively on RR for advice in relation to the Notes purchased through him. In her written evidence, she alleged that she did not involve Mr Boujon in the decision to invest in any of the Notes. Whilst, in her oral evidence she sought to give the impression that she always followed RR’s advice as a matter of course, it became plain that she did send Mr Boujon RR’s proposals, not only to encourage him to press her Trust managers to invest in them, but also for his views. As set out earlier in this judgment, this appears plainly from Mr Boujon’s own evidence and partly from hers. Whilst she rightly regarded RR as the specialist in this type of investment, she took other advice before making any decision. That did not, of course, mean that she did not rely on RR.

[161]It is plain however that BAS was a strong minded individual who rejected a number of RR’s recommendations either on the advice of Mr Boujon, or of her own accord. She was also prepared to press ahead with investments against the advice of one or both. Again that does not detract from the fact of her reliance on his advice, when accepting his recommendations to invest in Notes suggested by him.

[162]I have already found that the risks involved in leveraged structured notes were adequately explained to BAS by RR. Even if this were not the case however I am satisfied that she was, by March 2007, the time at which she purchased Note 14, which is the first of those that were sold at a loss by CSAG in October/November 2008, fully aware, from her conversations with Mr Boujon in particular, of the risks of leverage and margin calls.

[163]I am also entirely satisfied that, even if there had been no explanation to her from any quarter of the risks involved, and she had only found out about the risks later, she would not have been in any way put off from investment in the Notes and would have continued to invest in them, right up to October 2008.

[164]As I have already held, at the time the Notes were purchased, no one would have foreseen the risk of a margin call as anything other than extremely remote. The events of October 2008 were unforeseeable and it was only in those circumstances that a margin call eventuated. One of the supporting reasons which leads me to conclude that RR would not have been in any way reluctant to mention the risk of a margin call and the consequences of failure to meet it is that the risk was seen as so remote as not to discourage any potential investor. For the same reason, on the hypothesis that the risk was never explained to BAS by RR, consideration has to be given to what the effect of such warnings would have been on her. I find that it would have had no impact on her desire to achieve returns which were higher than those originally obtained by her Trust, namely 6-8% or double-digit returns of the order of 13-14% which RR achieved, or returns higher than that, such as those that she came to demand of her Trust in 2007. On her own evidence she was prepared to take what she regarded as a “calculated risk”. She was content, in order to achieve high returns to invest in Hedge Funds, Chinese land deals and leveraged Madoff funds, as well as a start up Islamic Bank. She was looking for high returns and, certainly by 2007, was prepared to take what she saw as acceptable risks in investing in “alternative investments” in order to achieve them.

[165]When asked, in cross-examination, as to her approach if she had been informed of the risk of margin call, she did not say that she would have altered her investment strategy despite what was said in the latest version of her pleadings and in her witness statement:- “Q - a margin call of $5 million was never a matter of concern to you, because first of all it was always relatively unlikely, and secondly, if it came, you could always meet it? A –yes, but I mean, I would have liked to know about it and given the option if I want or not, you know but I would have liked to know if my investments were doing well or I was losing money and I was losing continuously money and my value was dropping and I wasn’t being told.”

[166]The essence of what she appeared to be saying was not that a margin call of $5 million would have been any concern to her at all but simply that she wanted to know how her investments were doing, by which she was referring to the capital value of the Notes. This information, was, of course available to her from CSAG, being recorded in her CSAG account statements which were not sent to her by CSAG because of her instructions to “hold mail”, apparently for tax reasons. That was BAS’ choice. RR, CSS and Plurimi monitored the situation and referred matters to BAS only when issues arose with the LTVC or earlier if it was considered that she ought to know because of the volatility of the position.

[167]The suggestion that BAS would not have invested in the Notes, had she been told of the risks of which she says she was not told, is not therefore to be accepted. Investment in these Notes represented exactly the kind of “calculated risk” that she wanted to take. Alternative Investment

[168]On BAS’ case, no adequate risk explanation was given and, had such explanation been given she would have decided not to invest in the Notes. I have rejected that contention but if, for whatever reason, BAS were to have decided not to leverage investment in structured notes, the question arises as to what alternative investments she would have made. I have drawn attention to her inconsistent answers in her statement of case on this point. Further inconsistent answers were given under cross-examination. Her desire for high returns, her preparedness to accept risk and her directions to her Trustees and managers, as well as her other investments through Barings, UBS and Citibank, all show that she would have been looking for “alternative investments” that did give high yields. She was not satisfied with the performance of her Trust managers and so looked first to RR, then to Barings, UBS and Citibank to achieve higher returns, whilst pressing her Trust managers to do better. Mr Boujon stated that the Citibank portfolio was aiming at 15%-20% returns. In the event that she had not decided to invest through RR, in my judgment it is clear beyond doubt that she would have invested through Barings, UBS and Citibank in the same type of investments that she actually purchased through them. Any idea that she would have purchased safe investments such as blue chip equities or Government Bonds disappeared with her amendment to her statement of case. Unleveraged structured notes (her current case as to her alternative investment) would not have given rise to double-digit returns, which is what she sought. The options, as explained to her by Mr Boujon, so it would appear, were leveraged structured notes or Hedge Funds or similar alternative investments. That is the road that she would have pursued, if not through RR, then through these other banks or other advisers. The events of September and October 2008

[169]Having, at one stage in her case, alleged that, from August 2007 onwards, RR should have recommended deleverage, BAS abandoned that argument and alleged that deleverage should have been recommended from 15 September 2008 onwards, but this too was abandoned during the course of trial. The underlying basis for these allegations, when they were being pursued, was that the state of the market, as perceived by a competent professional, would have required a recommendation of deleverage in the circumstances in which BAS found herself.

[170]In summarising the expert evidence earlier in this judgment, I have referred to the agreement of the experts, at the time of the trial if not before, that the market was such in 2006 and 2007 that no adviser would have concerned himself with the risk of a margin call, at least until the collapse of Northern Rock. Even after that, the market was seen as benign and no one would have thought it necessary to contemplate deleverage. By the end of the expert evidence, it was clear that no possible criticism could be levelled at the purchase of any individual Note based on the state of the market at the time, the last such Note (with the exception of the two “switched” Notes in October 2008) being purchased on 29th April 2008 (Note 21). At that stage the general view of the market was that it had reached its nadir and that it was likely to improve, thereby representing an opportunity for an investor to make a profit, an opportunity which BAS was keen to seize.

[171]The evidence establishes that in August 2007, in November 2007 and in March 2008 the LTVA exceeded the LTVP but not the LTVC or LTVM. For a short period, according to CSAG’s criteria, the aggregate of the money loaned to BAS surpassed the LTVA by a limited amount, not being enough to require any communication to the client nor to make a margin call. CSS and Plurimi had their own way of monitoring these figures on their Master Sheets which were internal to themselves, whilst the actual values as calculated by CSAG appeared only on the CSAG statements of account which would ordinarily have been sent to BAS but for her instructions to the bank to “hold mail”. RR’s evidence was that he would have understood her to have received all her account information from CSAG on a yearly basis, as a consequence of that instruction, but her evidence was that she never saw such statements at all.

[172]In August 2007 a file note shows that RR was in contact with BAS a number of times over the course of a few days in order to discuss what was happening in the market at the time. There was a drop in value in Notes 13 and 16 which resulted in a shortfall against LTVA. CSS applied for an increase in the specific LTV ratios on Note 16 and Note 9 to provide a further cushion and CSAG agreed. Whilst BAS was on holiday in the South of France, she took the initiative in asking for a EUR Callable Bullish Note. She was looking for a Euro denominated Note in order to furnish her with Euros for expenditure. The documents show CSS enquiring as to pricing and coming back with a Note for purchase with 60% leverage (Note 17). The file note reveals not only BAS’ enthusiasm to utilise the volatility of the market but also her awareness that if funds were not received by the settlement date “then we will have to liquidate this Note and possibly others to meet any shortfall in the account”. This further evidences BAS’ awareness of LTV and the potential consequences of the provision of inadequate security for money borrowed.

[173]Although there was over $2 million in her CSAG account at the time of the purchase of Note 17 in August 2007, BAS transferred Euro 2 million to the CSAG account for the purchase of the Note which she had borrowed from JP Morgan. The explanation for leaving $2 million in her CSAG account, rather than utilising it for the purchase of Note 17, can only be her awareness of the LTV issues and the volatility of the market.

[174]In November 2007, Note 13 and Note 15 had fallen in value which again caused the LTVA to exceed the LTVP. This price fluctuation was caused by general market volatility but was aggravated, according to RR, by BAS’ currency speculation in which she had borrowed Japanese Yen as compared with investments expressed in other currency. The situation was monitored by CSS who maintained constant contact with CSAG and various strategies were considered to remedy the shortfall such as selling Note 15, but this was not considered necessary at the time. BAS told RR that she was due to receive another tranche from her divorce settlement before too long.

[175]At the beginning of January 2008, when BAS’ account was transferred to Plurimi, she held six structured notes, 9, 14, 15, 16, 17 and 18, together with the proceeds of Note 12 which had been called on 19th December 2007. She had therefore $10 million from that CRAN which she reinvested in Note 19 on the 14th January 2008.

[176]On 3rd January 2008 she paid $9.2 million into her CSAG account, being the latest instalment from the divorce settlement. From this point on, there was always a substantial cash deposit in the account, although BAS purchased Note 20 on the 4th February 2008, calling RR on the 1st February to say that she wanted to take advantage of the low level of the indices and volatility in the market at the time. There was a 20% buffer below the Note LTVP at the time of purchase. In April 2008 Note 21 was purchased on RR’s recommendation, he being aware that she had money in her CSAG account which she wanted to invest. This followed a further blip in March 2008 where the LTVA of BAS’ portfolio had gone above the LTVP for a few days, without reaching the LTVC. BAS’ evidence was that, at the time of making these investments she wanted to keep some cash on account of the order of $6 million. Once again, given her appetite for investment, it appears that the only sensible reason for this was to maintain an appropriate LTV ratio at CSAG.

[177]On 15th September 2008 Lehman Brothers was declared to be insolvent. This, it is recognised, was unforeseeable. BAS was in Saudi Arabia at the time, following her mother’s death but RR made contact with her to discuss the impact of events. RR sent her six text messages that day, one of which was copied into an email in which he stated that all her Notes were fine for the moment, the closest being 25% away from a relevant barrier, but that they would be watched. They also held a further telephone conversation that day. There was plainly concern about solvency of banks in general following Shearson Lehman’s collapse. The next day, CSAG informed Plurimi that BAS’ account was in shortfall by $3.2 million but Plurimi disagreed and on the following day reverted to CSAG saying that it was $152,000 only (therefore nowhere near the LTVC). Nonetheless RR telephoned BAS on the 16th September and had a conversation with her which is referred to in an email of the following day which discusses distribution of cash amongst banks and the possibility of failure of such banks. No mention is there made of any possibility of a margin call or of the LTV ratio.

[178]There was however plainly discussion about the sale of Note 15. There is a file note dated the 19th September in which RR records his recommendation to BAS that this Note be sold “in order to protect the account and preserve it from having a margin call”. The note refers to two Fixed Income Notes issued by UBS and Goldman Sachs, both of those banks being under pressure in terms of their credit rating, with consequent loss of marked to market value. Note 15 was a Credit Suisse Note and was trading very close to par and the effect of selling it, as recorded in the file note, would be to increase the cash position by some $5 million. RR’s evidence was that he updated BAS on the situation and told her of the real risk of a margin call and the desirability of selling some of her Notes to deleverage her portfolio. RR’s evidence was that he recommended selling some of her Fixed Income Notes which were holding their value as compared with the Equity Linked Notes. BAS was hesitant to sell any Notes, not wanting to crystallise a loss by so doing. She was prepared to sell Note 15 at par, which was then done but she wished to hold onto the two other Fixed Income Notes which were trading below their nominal value. It was agreed that the position would be monitored.

[179]BAS’ evidence was that she agreed to sell Note 15 to produce cash (in fact $4.5 million) and left the proceeds in cash at RR’s suggestion. She said he did not explain the possibility of a shortfall or margin call at all. He did not tell her that CSAG was saying that there was an actual shortfall but that CSS’ calculation showed that they were wrong. She had no recollection of RR suggesting the sale of more than one Note and if he had, she said she would have agreed.

[180]To my mind there is only one possible explanation for the agreement to sell Note 15 and lose coupon on it. It was in order to protect the account from a margin call as RR’s note records. He must have explained this to her as the reason for the sale. Likewise, given the terms of his note which refers to the dubious status of UBS and Goldman Sachs at the time, I accept his evidence that he was recommending the sale of one or more of these Notes also, because of his doubts about these banks’ solvency and because of potential issues with the LTV ratios, even with the cash in hand. It appears that CSAG then did accept Plurimi’s calculation and, with the sale of Note 15, there was then no immediate LTV problem.

[181]Counsel for BAS suggested to RR in cross-examination that his file note was a fabrication and that he had sold the Note without authority. The reason for this allegation was because the file note referred to the sale “in order to protect the account and preserve it from having a margin call”. This suggestion was untenable and was not advanced by BAS in her evidence.

[182]There was also, according to RR, discussion about conversion of BAS’ Yen loan into US Dollars so that it became a “currency matched loan” which would have a beneficial effect on the LTV ratio as calculated by CSAG. Whilst there was much debate on whether there was any such benefit, it was clear to me that RR and FM thought that there was. Consistent with her view that she did not want to crystallise loses on fixed interest Notes, BAS was also not willing to convert the Yen loan and crystallise a loss there, since she thought the Yen would weaken again so that she could repay it with less US$ in due course.

[183]According to RR’s file note of 30th September 2008, he spoke with a number of clients the previous day including BAS. The note refers to a lengthy discussion of the market and the options, should there be a need to switch out of some of the Notes that might be approaching their barriers. The performance of the Nikkei index was critical since BAS had six Notes with Nikkei barriers. The market was to be monitored with a view to “switching” any Notes that were approaching their barriers to others with wider barriers, in the same manner as had been done with other Notes in earlier days (such as the sale of the Audi Note and Note 1 with substitute purchases). BAS, in her evidence, accepted that RR explained that he was getting prices for her to be able to switch Notes if necessary but said that there was no talk of downsizing the account or selling other Notes. He only told her that one Note was close to the barrier.

[184]RR’s evidence was that by the beginning of October the scale of the financial crisis was becoming more evident and that he was advising all of his clients to look to downsize their portfolios in order to protect themselves from margin calls. He was telling them that, although losses would be incurred now from such sales, those could be recouped later on once the market had settled down. His evidence was that around this time he had a telephone call with BAS, when he was at home in his kitchen with his wife, in which he told her to take this approach. She however appeared much less worried than he was. She asked him in Arabic why he was panicking and then said in English that he had the weight of the world on his shoulders and that he should not worry as everybody knew their risks. He thought that her view was that the market would not deteriorate and she could deal with a margin call if necessary. BAS denied that any such conversation had ever taken place.

[185]On the 2nd and 6th October, Note 16 and Note 9, both Equity Linked Notes, were switched to Notes 22 and 23 respectively at prices representing 64.6% and 66.89% of par. No criticism is made of these two switches, despite a reduction in coupon on both and the capital loss thus incurred. It is accepted that in the market position of the time, these were sensible recommendations.

[186]RR’s recollection is that he was speaking to BAS very frequently during this time and discussing how she might respond to the drop in value of her Notes and the risk of margin call. His evidence is that he advised her on numerous occasions to consider selling more Notes to deleverage further, but she was resistant to that. CSAG was asking Plurimi to review the shortfall on BAS’ account on 3rd October although RR did not think that CSAG’s calculations were correct at that time. It is inconceivable that RR was not talking to BAS about the risks of a margin call during this period, therefore.

[187]During 7th-9th October 2008 two Icelandic banks collapsed and the market continued to fall. Uncertainty and confusion abounded and nothing appeared solid. On the 8th October at 18.58 hrs Plurimi received an email from CSAG giving notice of an imminent margin call on a number of Plurimi’s clients. A margin call, expressed in CHF equivalent to about $6 million was indicated in respect of BAS. Figures were subsequently sent in support of this calculation which showed usage of the wrong LTV percentage for two equity linked Notes.

[188]It is common ground that on October 9th RR spoke to BAS about a margin call. His evidence was that he sent a text to her shortly after receipt of CSAG’s message on the 8th October referring to the notification and asking her to call him to discuss it. She was at a health farm in Germany but they did speak on the 9th October and it is common ground that he referred to a figure of the order of $8 million. She indicated to him that she would be in touch on Monday 13th October but there was a sequence of text messages on the Friday and they spoke twice on the Sunday.

[189]Her evidence was that when they spoke on the 9th October he mentioned the margin call but she did not know what he was talking about. She did not realise how serious the situation was and all he did over the course of the weekend was to keep telling her to produce $8 million in cash. Although she spoke to Banque Mirabeau and Citibank that day, this was not with a view to obtain guarantees but because she was trying to understand what a margin call was. She said, contrary to his evidence, that he did not explain to her the various ways in which the margin call might be met. His evidence was that he advised her to meet the margin call in full and they discussed how she might do it, including selling more Notes to deleverage, or by moving assets into her CSAG account, or moving some or all of her Notes out of CSAG and into another financial institution where she had more collateral to cover the margin requirements. She asked how long CSAG would need the money for, but all he could say in response to that was that it would be required for as long as the markets were in that state and did not improve. She appeared to him to be somewhat reluctant to meet the margin call although she said she would do it.

[190]RR’s file notes of the 10th October stated that he had been in regular contact with her throughout the last couple of weeks and kept her informed of the current market turmoil and the effect it had on her Notes. Because of BAS’ location in Saudi Arabia in September and Germany in October telephone logs do not assist in showing whether or not such contact did or did not take place, but given their usual frequency of contact, it is inevitable that they were in touch regularly, given what was happening in the market. A file note of the 12th October refers to the two telephone conversations that day in which reference is made to his warning to her that if no collateral, or clear indication of its provision was forthcoming, then CSAG might liquidate the whole account, in which case very little, if anything would be left.

[191]On the following day, 13th October, there is an email from RR in which he refers to BAS providing bank guarantees, which she accepted in evidence that she had indicated she would produce. She said that she involved Mr Boujon on 14th October for him to organise the guarantees and he made contact with RR. Discussions ensued with a view to obtaining the required guarantees, BAS and Mr Boujon telling RR that their intention was to meet the call in full by such guarantees. At that stage emails show that the expectation was that there would be two guarantees for $4 million each.

[192]Plurimi continued to monitor the pricing of all BAS’ Notes including the Goldman Sachs and UBS Notes (Notes 19 and 21). Mr Boujon was in close contact with BAS and aware of the state of the account, including all the current Notes, the Real Property Fund Investment, the cash deposit of $11 million and the Yen loan in respect of the BLME shares.

[193]In the early evening of the 15th October, CSAG notified Plurimi of an anticipated margin call for $7.572 million, with a payment deadline of Friday 17th October 2008, of which BAS was informed early the next morning. RR emphasised the urgency of the situation to her and the different options available and she informed him that she was considering the option of moving all her Notes to another bank. It appears that this might have been Citibank. At some point, though he did not recall the date, BAS told him that one of her banks was willing to take the portfolio but would want to sell one or two of her Notes which she did not want to do because it would crystallise losses. BAS denied that she ever said anything of this kind.

[194]BAS’ evidence was that she left it to Mr Boujon to arrange the guarantees. By 17th October Barings had issued a $2 million guarantee and on that day Banque Mirabeau said that they could provide a $1.8 million guarantee in respect of their part of the BAS 2003 Trust portfolio. No approach had been made in respect of the JP Morgan portfolio in that Trust. Despite some suggestion from BAS that there was a verbal request to the trustees to consider a guarantee on the JP Morgan portfolio, it is clear that there was no such request at any stage, the request to the Trustees being limited to the Banque Mirabaud portion.

[195]No request for the Banque Mirabeau guarantee was made until the 21st October and the guarantee was actually provided on the 22nd. Although it appears that Citibank had been approached and indicated that they were prepared to provide a $2 million guarantee, this was never forthcoming. BAS said that she spoke to the trustee of the Smile Trust, another of her trusts and left it to him to sort out a guarantee but there was no mention of this in her witness statement and no documents supporting that suggestion. I do not accept that any such request was made. She made no approach to any other bank nor sought to make use of any other asset to meet the call.

[196]It appears that BAS was hoping the market would improve or that limited guarantees would be acceptable to CSAG who, she hoped, would not wish to liquidate the account of someone like her. She said she was trying to meet the call but events were happening too quickly. She said she made no deliberate decision not to get guarantees. Thus, despite a great deal of toing-and-froing between Mr Boujon and RR, with cross reference to CSAG, by 22nd October BAS had only provided two bank guarantees for a total of $3.8 million (from Barings and Banque Mirabeau) and was still significantly short of the $7.572 million margin call, with the 17th October deadline already past. RR’s evidence was that he had been advising her to sell more of her Notes, in order to produce cash and reduce the amount of leverage, since mid-September. Since that time however the market had been declining drastically. He had been repeating his advice because he could see that every day she delayed selling, the position deteriorated. She remained resistant to selling any Notes because of crystallising losses and because, so he thought, she considered that the markets would recover soon and if necessary CSAG would give her more time. He was telling her that he did not share that view but he thought, from what she said, that Mr Boujon did.

[197]RR and BAS met on the 22nd October, as recorded in a file note the following day. The Note records that “in order to reduce leverage and exposure, we decided to sell the CS 6 year spread note [the Goldman Sachs Note – 19] and use the proceeds to repay some loans. We also decided to use the available cash, approximately $11 million to reduce leverage. The client is still in shortfall and we will keep following up with her to discuss what other action she is taking”.

[198]According to RR, the decision to sell Note 19 only came about after lengthy discussions both that day and in earlier telephone conversation. At the meeting they looked at each of the Notes in her portfolio and concluded that the loss would be less on the sale of Note 19 than for any other Note. He had been advising her to sell several Notes in response to the margin call but she told him at the meeting that she was just going to sell this one Note and that he should tell them to leave her alone. He advised her to use the funds generated from the sale to reduce her loans but contrary to his advice she decided not to repay the Yen loan, as recorded in another file note of the following day. He advised her to use the cash balances on the account to reduce the borrowing because the effect of doing so would be the full application of the cash deposit in reduction of the loans instead of its application at 95% as collateral.

[199]In particular it was plain from RR’s evidence and Plurimi’s internal documents that they were exploring the prices at which Note 21, the UBS Note could be sold as well. RR recommended its sale. The effect of selling both Note 19 and Note 21 at around 86% of par would have been significant. The loans on each were $7.5 million and $1.1 million net proceeds would have been realised on each after repayment of those loans. Mr Boujon’s evidence was that he was in touch with RR and BAS on a daily basis and that BAS accepted RR’s advice to sell these two Notes. He said that he and RR agreed on the sale of two Notes as the best solution on the 22nd October and he did not recall any discussion about not selling the Notes.

[200]BAS’ evidence was that RR did recommend the sale of both Notes and that she agreed. She said that she would have done whatever he suggested and was not reluctant to sell Notes because it would crystallise a loss. It was not true that she decided not to sell the UBS Note in the face of his recommendation. An email shows however that, following the apparent agreement to sell, “the client has decided to hold for now”. BAS’ evidence was that a decision had been taken to sell so it must have been RR’s opinion that the Note be retained and not sold. He, she said, controlled the portfolio. This evidence from BAS constituted, I regret to say, a bare-faced lie. At this stage, $3.8 million in guarantees had been provided and it was still anticipated that Citibank would produce a guarantee for another $2 million. The use of the $11 million deposit to repay loans would result in a further benefit of $550,000 approximately still leaving a shortfall. The sale of two Notes would have met the shortfall with something to spare in the event of further falls in the market. With the continuing doubts about the solvency of the two banks issuing the Notes as well as the declining market, the idea that RR would recommend the sale of two Notes, that BAS and Mr Boujon would agree to that and then RR would decide, of his own accord, not to sell one of them is so far fetched as to be risible. The only reason that Note 21 was not sold, was because, despite the pricing indications obtained, BAS was not prepared to sell it, in the hope that the market would recover or CSAG would be satisfied with the collateral that she was prepared to provide.

[201]I am satisfied that here, in relation to all the events of September/October 2008, as elsewhere, RR’s evidence is to be preferred to that of BAS. His evidence is consistent with the documentary record and accords with the advice he was giving to other clients and the logic of the market and his view of it. On 23rd October however in the late afternoon CSAG notified Plurimi of a change to the LTV ratios. This would result in an additional call on BAS which, when calculated resulted in a total revised call of $11,711,494. It was unheard of for a bank to alter its LTV ratios in this way and it was recognised by the experts as being unforeseeable. RR’s evidence was that he telephoned BAS a couple of hours later and received a fresh margin call at 15.43 hours on Friday 24th October with a revised figured of $10.21 million. This thus represented an increase on the first margin call of $2.638 million. The deadline for providing this margin was now Monday 27th October at 1600 hours Geneva time with an express statement in the margin call letter that, if the deadline was not met, CSAG would be entitled to liquidate BAS’ positions. The figure of $10.21 million did not include the $3.8 million in guarantees already provided, nor the deleveraging effects of the sale of Note 19 and use of the $11 million deposit to repay loans. No further guarantees were however produced by BAS or Mr Boujon.

[202]RR’s evidence was that BAS told him that Mr Boujon was going to meet with CSAG in Geneva on Monday 27th October to discuss her response to the second margin call. Plurimi sent an email to CSAG, stating its belief that Mr Boujon was coming to CSAG’s offices “to resolve the issue” and asking for feedback as soon as it was available. BAS did not tell RR what Mr Boujon’s approach would be at that meeting. At half past four that afternoon, CSAG emailed Plurimi to say that the meeting had taken place “to review the situation of the client’s account” The email concluded in this way:- “M. Boujon pointed out that according to the conversation that he has with our client, they are not going to take further measures as of transferring funds or assets from other accounts that she has under custody with other banks. Please be advised that we are claiming both guarantees of $2 million and $1.8 million.” Please be advised that we are claiming both guarantees of $2 million and $1.8 million.”

[203]The evidence from Mr Boujon and BAS about the purpose and content of this meeting was altogether unsatisfactory. Both gave evidence that he went without any clear instructions from her. That seems inherently unlikely in the circumstances. It is effectively now recognised that BAS had the assets available to pledge by way of guarantee for the extant margin call, had she wished to do so. A schedule of her available assets, as disclosed (and there is good ground for thinking that there were further assets which remained undisclosed) was produced by Plurimi’s counsel in the course of argument, showing some $14m- $15m of assets which could have been readily pledged, plus $10m of jewellery, without looking to her real property and contents valued in excess of $60m. There were both personal and trust assets which were apparently available for pledge. She made no approach to her personal bankers, nor to the JP Morgan managers of the BAS 2003 Trust nor to the trustees of the Smile Trust. She never produced the guarantee which was available from Citibank. With available guarantees of $5.8 million, the benefit of the use of the $11 million deposit to pay off loans, the effect on leverage of selling Note 19 and the use of the net proceeds to repay further loans, there should have been no difficulty in producing a further guarantee to meet the shortfall, with all the other assets at her disposal. Alternatively, she could have asked for time and indicated a willingness to come up with collateral which it is highly likely, would have been acceptable. This was not done.

[204]Mr Boujon’s evidence was that he was asked by CSAG to come to a meeting and did not know what the revised margin call figure was. That does not seem likely unless the figure did not matter to him because a decision had already been taken not to produce further margin. He said he did not expect to persuade CSAG that they should not make the additional margin call, based on their revised LTV figures. That was a matter of mathematics for them. He said he told CSAG that there was still an issue about getting the original margin call of $7.512m together and he did not see how they could get $10.215 million. He did not ask for more time at the meeting. He was simply asking what the situation was and what they could do. When they told him the figure of $10.2 million was what was required, he said that they would not be able to get it and told them that BAS would not take any future steps to meet any margin call. It seems that he was thus refusing to produce even the Citibank guarantee which was apparently available for the asking.

[205]Although it was suggested by BAS’ Counsel in closing that there was an issue of time in getting together the guarantees required, had this been the only issue, Mr Boujon would have asked for such time, which he admitted he did not do. By this stage, I am clear that BAS had no intention of producing further margin. As she herself said in her evidence, when she heard of the revised margin call she went “ballistic”. It is inconceivable that Mr Boujon attended this meeting without instructions. He and BAS must have decided what would be said at the meeting which was, so RR was told, to resolve the issue. There are only very limited possibilities. Either the intention was to seek to persuade CSAG not to enforce the margin call or to take a lower figure by way of guarantee or it was to take a tough line and state that no more collateral would be forthcoming. The latter approach might be adopted in the hope that CSAG would back down and not liquidate the assets of a well- to- do client in circumstances where it was hoped the market would improve. If there had been an intention to meet the call, Mr Boujon would have asked for more time to pay and, as everyone realised at the time, BAS would have been perfectly capable of providing the collateral sought.

[206]There was one point in his cross examination where Mr Boujon came close to saying that an express decision had been taken not to produce more margin. When asked whether, at the time of the meeting, he and BAS were not prepared to do anything more, he agreed “especially when you cannot meet already the first step and they ask you for more”. He then talked of the market going down and increasing margin calls being made. When it was suggested to him that BAS had assets of well over $100 million and they were talking about a maximum of $4.4 million in collateral in circumstances where the markets could improve, he referred to the hope that the market would get better “but if only we knew”, “if we could predict what was going to happen probably we would never have ended up in this situation. This is the way the market works. It fall, there is some money need, we didn’t manage to get it on time, end of the game”. He went on to say that there was no other cash and it would take at least two days to sell assets and then this:- “I see your point, but at the same time, the decision was made not to do anything and it’s not something we took lightly”.

[207]In my judgment it is plain that a decision was made not to meet the margin call. This was probably done in the hope that CSAG would not insist on the additional collateral. Such an approach is so irrational as to be almost incomprehensible, explicable only if it really was thought that CSAG would not liquidate the account. Even then, when it became apparent that her bluff was being called, she could possibly have retrieved the position, but no attempt was made to do so. Not meeting the margin call suggests blind irrational pique at CSAG’s movement of the goal posts on LTV.

[208]There is an email of the 16th October 2008 from Mr Boujon to a trustee of the BAS 2003 Trust, with a copy to the managers of the Mirabeau portion. It refers to the need for a letter of guarantee from Banque Mirabeau and then states “if the market would carry on going down we would get ride (sic) of the position at Credit Suisse rather than starting to lower Mirabeau’s portfolio.” That implies a willingness to sell the Plurimi Notes, rather than sell Trust assets to produce cash, but that was what BAS declined to do. It must have been her decision not to sell Notes and not to produce guarantees or further margin.

[209]Consequent on the expression of that intention at the meeting by Mr Boujon, CSAG, after asking Plurimi to sell the Notes, for which it had no instructions from BAS, proceeded to liquidate the account in accordance with its contractual rights. Causation of the Losses suffered on Liquidation of BAS’ Account.

[210]In these circumstances, it would not be possible to say that any failure on the part of CSS or Plurimi adequately to explain collateral, margin, margin calls and the consequences of failure to meet such a call was the cause of BAS’ losses. Not only did RR advise the sale of Notes, which BAS declined to do in September and October, which would have changed the LTV ratio beyond recognition, but he advised her to put up margin, in the shape of guarantees which she also failed to do. Even in a market in turmoil, as it was in October/November 2008, the decision on her part not to follow RR’s advice to sell Notes and not to provide additional margin, when she was plainly in a position to do so, provides a break in any chain of causation. Her view of the market was such that she did not want to sell and that may or may not have been a rational view. But, having taken the decision not to sell, the failure to produce margin is explicable only as an attempt to play “hard ball” with CSAG or as the result of a fit of pique. The losses occurred by reason of the fall in value in the Notes and BAS’ deliberate and irrational decision not to meet a margin call, not from any failure to explain that margin calls could occur when the Notes were purchased.

[211]BAS accepts that the investments were suitable for her in the sense that she was able to meet any margin call but her decision not to provide additional margin even in the market of October/November 2008 and thereby incur losses of the order of $30 million is so extraneous to the failure to advise and would in any event constitute a failure to mitigate, that the losses cannot be laid at CSS’ or Plurimi’s door. Whilst these matters should not be considered with hindsight, by looking at the improvement in the market which has taken place in the years since, it is clear that the provision of additional collateral would appear to any sensible person as the prudent course to adopt and a deliberate failure to produce additional margin and thereby precipitate the distressed sale of all the Notes, whether capital protected or not, completely nonsensical. Conclusion

[212]There are additional arguments which the Defendants have put forward in relation to the scope of the duty in relation to the loss actually suffered and why losses occurring as a result of an unforeseeable market collapse, an unforeseeable change in LTV ratios and a deliberate failure to meet margin call are not recoverable. I consider that there is much force to these arguments but do not need to decide them because of the views I have formed on the facts.

[213]In my judgment neither CSS nor Plurimi were in breach of statutory duty, contractual or tortious common law duty. BAS’ evidence on critical conflicts of evidence was not credible. RR, CSS and Plurimi did explain, both in documents and orally what the risks were in leveraged investment and structured notes and the cause of the loss was not only the unforeseeable collapse of the market and change in the LTV ratios required by CSAG, but more particularly BAS’ own extraordinary and unreasonable decision not to meet a margin call when she was well able to do so after ignoring RR’s advice to sell more Notes. The way in which the claim has been pursued, with varying and conflicting statements of case illustrates the lack of foundation for her complaints and the irrationality of her attempts to hold others liable for her own risk- taking, the market collapse of October 2008 and her own decision not to take the obvious course when presented with margin calls.

[214]In these circumstances the claim must be dismissed and costs must follow the event.

Al Sulaiman v Credit Suisse Securities (Europe) Ltd & Anor [2013] EWHC 400 (Comm)

Introduction

The Impact of the Primary documents setting out the Recommendations and the Transactions

Cited in 3 later judgments