Bull & Ors v Gain Capital Holdings Inc & Ors [2014] EWHC 539 (Comm)

[2014] EWHC 539 (Comm)

Case No 2013 Folio 503; 2013 Folio 505

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

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

Date 28/02/2014

Before

MR JUSTICE WALKER

Between

(1) Gain Capital Holdings IncDefendants

(2) Gain Capital Group IncDefendant

(3) Gain Capital Group LLC (formerly known as Gain Capital Inc)Defendant

(4) Her Majesty’s TreasuryDefendant

(1) Paul Duncan BowkerClaimants

(2) Leonard DeveyClaimant

(3) Alan StrangeClaimant

(4) Sheila Anne TippingClaimant

(1) Gain Capital Holdings IncDefendants

(2) Gain Capital Group IncDefendant

(3) Gain Capital Group LLC (formerly known as Gain Capital Inc)Defendant

(4) Her Majesty’s TreasuryDefendant

Hugh Mercer QC and Gerard McMeel (instructed by Clarke Wilmott LLP) for Claimants

Richard Handyside QC and Tetyana Nesterchuk (instructed by Slaughter and May) for First to Third Defendants

Hearing Hearing dates: 17 and 18 September 2013.

Written submissions were lodged during the period 11 October to 18 November 2013.

Judgment

A1. The applications and my conclusion

[1]Actions have been brought by a number of those who lost money on investments with Cameron Farley Limited (“Cameron Farley”). I am concerned with applications by certain of the defendants in two such actions. The first is 2013 Folio 503, in which the claimants are Mr Stephen James Bull (“Stephen Bull”), his father Mr Carl James Bull (“Carl Bull”), and CSJ Forex Limited (“CSJ Forex”), a company whose sole shareholder is Stephen Bull’s mother. The second is 2013 Folio 505, in which the claimants are Mr Paul Duncan Bowker (“Mr Bowker”), Mr Leonard Devey (“Mr Devey”), Mr Alan Strange (“Mr Strange”) and Mrs Sheila Anne Tipping (“Mrs Tipping”).

[2]I am told that proceedings have been issued on behalf of more than four hundred other investor claimants. However I am not concerned with anything other than the two actions comprising 2013 Folio 503 and 2013 Folio 505. References below to “the claimants” are, unless the context indicates otherwise, to the claimants in those two actions. There are five sets of particulars of claim (“the particulars”): a single set in 2013 Folio 503 (“the Bull particulars”), and a set for each of the claimants in 2013 Folio 505 (respectively referred to below as “the Bowker particulars”, “the Devey particulars”, “the Strange particulars” and “the Tipping particulars”).

[3]The proceedings have not been brought against Cameron Farley. Nor have they been brought against Mr Stephen Farley (“Mr Farley”), the sole director and shareholder of Cameron Farley. Instead, each of these two actions is brought against four defendants. The fourth defendant is the United Kingdom government, in the form of Her Majesty’s Treasury. It is not affected by the present applications, which are brought by the first three defendants. Those defendants seek summary judgment in their favour, or alternatively they ask that the claims against them be struck out. In the remainder of this judgment references to “the claims” are, unless the context indicates otherwise, to the claims against the first three defendants in 2013 Folio 503 and 2013 Folio 505.

[4]I refuse the applications because, for the reasons given below, I cannot rule out the possibility that the claimants may succeed at trial.

A2. The Gain defendants

[5]The first three defendants are Gain Capital Holdings Inc (“Gain Holdings”), Gain Capital Group Inc (“Gain Operations 2003”), and Gain Capital Group LLC (“Gain Operations 2006”). I shall refer to them together as “the Gain defendants.” Gain Holdings is the ultimate parent company of Gain Operations 2003 and Gain Operations 2006. I shall refer to the combination of Gain Holdings and its direct and indirect subsidiaries as “Gain Capital group”. Gain Operations 2003 was Gain Capital group’s main operating subsidiary between 2003 and 2006. In May 2006 Gain Operations 2003 merged with Gain Operations 2006. Gain Operations 2006 is now the main operating subsidiary of Gain Capital group in the United States. Rather than seek to distinguish between the two, I refer below to “Gain” to mean Gain Operations 2003 as regards the period to May 2006, or Gain Operations 2006 as regards the period May 2006 onwards.

[6]Gain Capital group is an online provider of foreign exchange trading services. It acts as counterparty to foreign exchange trades entered into by its customers. It also provides execution, clearing, custody and technology services.

[7]Each of the Gain defendants is incorporated in the state of Delaware and is based in New Jersey. In the United States the ultimate independent regulator of Gain’s activities is the Commodity Futures Trading Commission (“CFTC”). In order to comply with CFTC requirements, Gain was registered with the National Futures Association (“NFA”), a self-regulatory organisation for the United States futures industry. It was registered as a retail foreign exchange dealer and as a futures commission merchant. It also held the status of an approved NFA member, an approved Forex firm, and an approved Forex dealer member. Accordingly Gain was entitled in the United States to conduct business in accordance with those registrations and approvals. It is asserted by the Gain defendants that, at least from 17 May 2007 onwards, Gain conducted business with Cameron Farley in accordance with those registrations and approvals.

A3. The claims against the Gain defendants

[8]Cameron Farley was incorporated in the United Kingdom. It was based in Edinburgh. At all material times the United Kingdom regulator for the financial services industry was the Financial Services Authority (“the FSA”), exercising powers under the Financial Services and Markets Act 2000 (“FSMA”). FSMA specifies activities which may only be conducted by authorised persons or exempt persons. At no material time was the status of authorised person or exempt person held by either Cameron Farley or Gain. In 2008 Gain Holdings acquired a United Kingdom company now known as “Forex.com UK.” This company is authorised by the FSA to carry on business as an investment intermediary firm. However it played no part in the events giving rise to the present claims.

[9]The facts giving rise to the claims against the Gain defendants are complex. A broad account of the claimants’ factual assertions is given at paragraph 3 of the Bull particulars: This Claim relates to the activities of … Mr Farley… , who carried on business as a financial adviser and/or intermediary. Mr Farley was the managing director and sole shareholder of Cameron Farley… . Mr Farley and Cameron Farley were not authorised to carry out regulated activities in the UK, but nevertheless did so. From in or about 2004 to in or about October 2008 they purported to provide investment services to some 815 investors, including the Claimants. Mr Farley and Cameron Farley purported to carry on business arranging deals in foreign exchange transactions ("forex"). To a large extent Cameron Farley operated as a Ponzi scheme, but significant forex trading using the investors' moneys was undertaken with the [Gain] Defendants… . Over the period of 2004 to 2008 some £13.3 million of investors' moneys was transferred from Cameron Farley in the UK to [the Gain defendants] in the USA, and large sums were lost by Mr Farley in speculative forex trading. [The Gain defendants] retain the benefit of those trades. From in or about 2004, [the Gain defendants] had a relationship with Mr Farley and Cameron Farley such that they became the principal introducers of investors and capital from UK-based investors to [the Gain defendants]. In the circumstances from in or about 2004 [the Gain defendants] and Cameron Farley were engaged in a joint venture to promote and arrange forex trading to UK investors in breach of both section 19 and section 21 of FSMA; alternatively Cameron Farley was [the Gain defendants’] agent for promoting and arranging its forex trading services to UK investors.

[10]The relevant facts are said to give rise to one or more of three statutory entitlements under FSMA. In relation to each such entitlement, the claimants say in their particulars of claim that they are entitled to recover from the Gain defendants sums paid to Cameron Farley, along with compensation for having parted with those sums, in reliance upon one or other or both of two heads of claim. In sections A4 to A6 below I describe the three statutory entitlements. In section A7 below I describe the two heads of claim which are advanced in relation to each such entitlement.

A4. Entitlement where the general prohibition is breached

[11]The first entitlement relied upon derives from the “general prohibition” found in section 19 of FSMA. It prohibits anyone from carrying on a regulated activity in the UK, or purporting to do so, unless that person is authorised or exempt. Under section 23 contravention of the general prohibition is a criminal offence. Under section 26(1) an agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party. For convenience I shall refer to that “other party” as “OP”. Under section 26(2) OP is entitled to recover(a) any money or other property paid or transferred by OP under the agreement, and

(b) compensation for any loss sustained by OP as a result of having parted with it. The claimants seek remedies under both paragraph (a) and paragraph (b) of section 26(2).

A5. Entitlement where deposits breach the general prohibition

[12]The second entitlement relied upon is also founded on the general prohibition. The entitlement arising under section 26(1) does not apply if the regulated activity is accepting deposits: see section 26(1). Instead, section 29 applies to an agreement between a depositor and a deposit taker made in the course of the carrying on by the deposit taker of accepting deposits in contravention of the general prohibition. The agreement must be one whose making or performance constitutes, or is part of, accepting deposits: see section 29(5). The statutory entitlement is set out in section 29(2): if the depositor is not entitled under the agreement to recover without delay any money deposited, the depositor may apply to the court for an order directing the deposit taker to return that money. However in certain circumstances the court need not make such an

[13]As regards this particular entitlement, I note that the particulars describe it as an alternative claim. The primary claim of the claimants is that any agreement on their part to make deposits was a sham, or if not, is an agreement which is unenforceable against them.

A6. Entitlement resulting from unlawful financial promotion

[14]The third entitlement relied upon arises where there has been an “unlawful communication”. That term has a special meaning: by section 30(1) it means a communication in relation to which there has been a contravention of the restriction on financial promotion found in section 21(1). The restriction in section 21(1) is that a person (“A”) must not, in the course of business, communicate an invitation or inducement to engage in investment activity. The restriction does not apply if A is an authorised person, or if the content of the communication is approved for the purposes of section 21 by an authorised person. Under section 25 contravention of the restriction on financial promotion is a criminal offence. Under section 30 various entitlements arise in relation to things done in consequence of an unlawful communication. For present purposes I need refer only to those which are set out in section 30(2). That sub-section provides that if in consequence of an unlawful communication a person enters as a customer into a controlled agreement, it is unenforceable against that person. For convenience, I shall refer to that person as “the customer”. In addition, also under section 30(2), the customer is entitled to recover(a) any money or other property paid or transferred by the customer under the agreement, and

(b) compensation for any loss sustained by the customer as a result of having parted with it. The claimants seek remedies under both paragraph (a) and (b) of section 30(2).

A7. Heads of claim: joint enterprise and agency

[15]As mentioned earlier, the claimants say that they are entitled to recover from the Gain defendants money that they paid to Cameron Farley and compensation for loss sustained as a result of having parted with that money. It is important to note that the claim is not directly concerned with money which Cameron Farley may have passed on to Gain. Rather, the claim is that the Gain defendants were so intimately connected with Cameron Farley’s activities that statutory entitlements arising against Cameron Farley arise against the Gain defendants as well.

[16]The first head of claim focuses upon there being a joint enterprise between Cameron Farley and one or more of the Gain defendants. It is described in this way in paragraph 177 of the Bull particulars: … the [Gain Defendants] and Cameron Farley and/or Mr Farley and each of them engaged in a joint venture to promote by way of unlawful communications speculative forex trading to investors in the UK and to arrange investments in speculative forex trading for investors in the UK. Accordingly the [Gain Defendants] and Cameron Farley and/or Mr Farley and each of them were joint wrongdoers in breach of both the general prohibition under section 19 of FSMA and the financial promotion restriction under section 21 of FSMA. …

[17]Additionally, or alternatively, the second head of claim focuses upon agency. It is put in this way in paragraph 178 of the Bull particulars: … the [Gain Defendants] and each of them acted as principal and Cameron Farley and/or Mr Farley acted as agent for the [Gain Defendants] to promote by way of unlawful communications speculative forex trading to investors in the UK and to arrange investments in speculative forex trading for investors in the UK, and … Cameron Farley and/or Mr Farley acted on behalf of the [Gain Defendants] and each of them with their actual authority (express or implied) and/or their apparent or ostensible authority. In the circumstances the [Gain Defendants] and each of them were carrying on regulated activities from an establishment maintained by them in the UK and/or issuing unlawful communications capable of having an effect in the UK through the agency of Cameron Farley and/or Mr Farley.

A8. The Gain defendants’ stance for present purposes

[18]As regards the joint enterprise head of claim, for the purposes of the present applications the Gain defendants do not dispute that there is an arguable case that Gain Operations 2006 assisted Cameron Farley in relevant dealings with investors. I make it clear that the Gain defendants do not accept that there was any wrongdoing on their part. Their stance for the purposes of the present applications is that I do not need to decide that question. There is, they say, a simple reason why as regards the joint enterprise claim their applications should succeed. It is this: they contend that each of the statutory entitlements is available to each claimant only against the person with whom an agreement was made. The Gain defendants say that as regards the present claims each claimant made relevant agreements with Cameron Farley, and that as a matter of law participation in any joint enterprise gives rise to no entitlement to claim against the Gain defendants. I shall refer to the question whether the statutory entitlements lie against those involved in a joint enterprise as “the joint enterprise question”.

[19]As regards the agency claim, the stance of the Gain defendants is very different. It is accepted by the Gain defendants that if Cameron Farley entered into agreements with the claimants as agent for Gain, then the statutory entitlements would be, as regards any such agreements, available against Gain. As regards the agency claim, the Gain defendants say that there is no sufficient legal or factual basis for the allegations of agency, and it is for that reason that the applications should, as regards the agency claim, succeed. Whether there is a sufficient basis turns on whether it is arguable that Cameron Farley had actual or ostensible authority. As regards actual authority, it might not matter whether a particular claimant was aware of the role of the relevant Gain defendant. As regards ostensible authority, however, the relevant claimant would have to show an arguable case that the relevant Gain defendant represented, or allowed it to be represented, that Cameron Farley had authority to act on its behalf. I shall refer to the questions which arise as the “actual authority arguability question” and the “ostensible authority arguability question”, and to these two questions together as the “authority arguability questions”.

A9: Evidence, the hearing, and written submissions

[20]When issued, the applications were supported by a witness statement of Mr Kevin Warburton dated 15 March 2013. In opposition to the applications the claimants filed a second witness statement of Ms Philippa Hann dated 31 May 2013, an affidavit of Mr Louis F Burke dated 30 May 2013, a witness statement of Mr Louis Georgiou (a customer of Cameron Farley who is referred to below as “Louis Georgiou” in order to distinguish him from others in his family who were also customers) dated 30 May 2013, and a witness statement of Mr Devey dated 3 June 2013. The claimants also rely on an affidavit of Mr Constantinos Pittas, sworn by him in his capacity as investigator appointed by the FSA in relation to Cameron Farley, in November 2008.

[21]In reply the Gain defendants have filed a witness statement of Mr Eric S Goldstein dated 15 July 2013 and a witness statement of Mr Alexander Bobinski, Chief Compliance Officer of Gain Holdings and its subsidiaries, dated 15 July 2013.

[22]The hearing before me took place on 16 and 17 September 2013. Mr Richard Handyside QC and Ms Tetyana Nesterchuk appeared for the Gain defendants. Mr Hugh Mercer QC and Mr Gerard McMeel appeared for the claimants.

[23]Opening oral submissions by Mr Handyside were completed late in the afternoon of 17 September. During the course of Mr Mercer’s answering submissions on 18 September 2013 additional points, requiring further research, emerged. At 4pm on that day I proposed that the claimants’ legal team deal with the additional points in writing, that the Gain defendants’ legal team should then reply in writing, with an ability for the claimants’ legal team to lodge a rejoinder on any new points. Both sides were content that, subject to Mr Handyside making short points in reply that afternoon, the course I proposed should be followed.

[24]Mr Handyside then duly made his short points that afternoon. The claimants on 11 October 2013 lodged a response on the new points which had arisen. On 11 November 2013 the Gain defendants lodged their written reply. On 15 November 2013 the claimants lodged what they described as a “riposte”. On 18 November 2013 the Gain defendants lodged a reply to the riposte. B. Factual background to the applications

B1. Assumptions for the purposes of the applications

[25]In this section I set out facts which can, for the purposes of the present applications, be assumed to be correct. I stress that I am not making findings of fact: I merely make assumptions that certain matters are correct. Nothing in those assumptions prevents the parties from contesting them in contexts other than the present applications.

[26]Certain of the assumed facts concern what was said by Mr Farley. In that regard the only assumption that I make is that Mr Farley did indeed say what he is reported to have said. I make no assumption that what he said was correct.

B2. Hallmarks of a Ponzi scheme

[27]Mr Carlo Ponzi was a swindler who in the 1920s lured investors to part with their money by the promise of extraordinarily high returns. Those returns, however, involved a fraudulent pretence. Some of the promised returns were provided to some of the investors. This reassured those investors and others that extraordinarily high returns could be and were being achieved. Importantly, it also led investors not to call for the return of capital or supposed profits, but rather to leave them with Mr Ponzi in the belief that they would continue to achieve the extraordinarily high returns promised by Mr Ponzi. The returns provided to investors, however, had come from money “invested” by others. Eventually a point was reached where the money coming from new investors was insufficient to meet requests for return of capital and profits. In the absence of providential good fortune the scheme was bound to fail and it duly did.

[28]There are many variants of Ponzi schemes. Some, like the Cameron Farley scheme, involve increasingly desperate attempts by the fraudster to achieve substantial returns. A hallmark, however, is that some of the investors will receive, not merely on paper but by way of transfer of funds, an extraordinarily high return, and that the funds in question will derive, not from profitable investment of the investors’ capital, but from money put in by other investors. What is essential to a Ponzi scheme is that enough funds keep coming in to enable the fraud to be maintained. At some point this will cease to be the case and the fraudster will be in a position where, unless a massive speculative gain can be achieved, the scheme is bound to collapse. Mr Ponzi was not the first to induce people to part with their money in this way. Like many of his predecessors and successors, he used the money to live luxuriously. The scale of his fraud led to the collapse of six American banks and to the use of his name to describe subsequent schemes of a similar kind.

[29]Investigations by the FSA into Cameron Farley have identified at least two investors who were paid extraordinarily high returns. For one, an investment of £10,000 led to payments by Cameron Farley of £60,000. For another, Mr David Tate, an investment of £25,000 led to payments by Cameron Farley of £90,000. Investigations into the trading activities of Cameron Farley have identified none which could possibly produce these extraordinarily high returns.

[30]The FSA investigations eventually led to Cameron Farley being placed in provisional liquidation. The provisional liquidators’ report dated 19 December 2008 shows that on the basis of funds received from investor creditors, the deficiency to creditors is estimated at £15,521,116. Thus the funds available to be paid out to investors are more than £15 million less than investors have paid in. If, however, one takes into consideration the contractual interest promised by Cameron Farley and bonuses allocated to investors by Cameron Farley, then the deficiency is more than £113 million. The deficiency as to funds received from investor creditors is largely explained by losses on trading through Gain, estimated at £11,503,927, money and benefits to Mr Farley and his wife estimated at £1,328,267 and business expenditure of £1,399,497. The provisional liquidators could not identify any trading by the company which could reasonably be expected to produce the rate of returns promised and notionally allocated to investors. No materially profitable trading was undertaken. Those investors who received payments from the company were paid from the capital deposited by new investors.

[31]Thus the Cameron Farley collapse shows the hallmarks of a Ponzi scheme. It is not, however, asserted that the Gain defendants were aware of this at the time. The relevant claims are founded solely on statute. Fraud may be part of the background, but it is not an essential part of the claim.

B3. Mr Devey’s experience

[32]A witness statement dated 3 June 2013 has been filed by Mr Devey in 2013 Folio 503. His statement explains that in 2004, aged 57, he retired as a teacher. He was able to take early retirement because his father died and he inherited £110,000. This enabled Mr Devey and his wife to pay off their mortgage. In addition they had savings of about £35,000.

[33]Mr Devey was a friend of Mr David Tate, the investor who had received a £90,000 return on a £25,000 investment (see section B2 above). This led Mr Devey to contact Cameron Farley. Initially he spoke to Mr Stuart Thomson at the Cameron Farley office.

[34]Mr Devey’s statement explained that he then received an unexpected telephone call from Mr Farley. They had what Mr Devey described as “quite a long conversation”. What Mr Farley said was summarised by Mr Devey in this way: During that conversation he [Mr Farley] explained that he would use his expertise to trade on the Forex markets. He also explained that Gain Capital was working with him and they had an input into the trade. He said he was using not only his own expertise, but theirs as well.

[35]Mr Devey added: I understood that there was in practice, over the time that my relationship with Mr Farley existed, no risk of losing any of my capital. I understood there was an underpin with a given rate of interest. I am sure that he said that to me when I spoke to him in 2006, although I did not have any documentation to support that when I made my first investment. I do not recall specifically what documents I had when I made my first investment, although I did not receive any paperwork directly from Gain Capital. Everything came from Cameron Farley, but I knew that Gain Capital was involved.

[36]Mr Devey recalled that his initial payment of £5,000 was transmitted by his bank to Gain via JP Morgan Chase bank in New York in late October 2006. He then received statements from Cameron Farley showing that he was making money. He was given login details so that he could see how his money was doing on the Cameron Farley website. He logged in a couple of times a month. Because it was doing so well he invested an additional £20,000 on 4 April 2007.

[37]Mr Devey described receiving contractual documentation in about May or June 2007. He said he had not taken much notice of it. He believed that Mr Farley said the FSA required the new documentation in order to keep up with regulatory requirements. He noticed that the new contract included what he described as “an interest rate guarantee of 9.25%.” Mr Devey commented: Although I received many documents during the period of my investments, I believe this was the only written contract I ever signed with Cameron Farley. The existence of that interest rate underpin in that contract did not surprise me, because I had the impression from my earlier discussion with Mr Farley that there was some kind of underpin.

[38]On 25 January 2008 Mr Devey invested a further £40,000. He then invested another £50,000 in “a Euro option proposal that Cameron Farley had.” Additional investments of £1,000 for himself and £30,000 for his wife and children were made with Cameron Farley through Garstang Investments (a company in which Mr Tate was involved).

[39]The Devey particulars assert that his loss on investments with Cameron Farley, in terms of principal sums, is in the region of £103,956. In his statement Mr Devey adds that after the collapse of Cameron Farley he received a sum of £6,411.77 from Gain. As to this Mr Devey commented: I did not realise that they had any of my money separate from Cameron Farley. My original £5,000 was sent to Gain directly and the rest of the payments to Cameron Farley or through Garstang. I now understand the £6,411.77 was from that first £5,000 investment, but I didn’t know that was any different. I always understood that Cameron Farley and Gain were working together so it was a surprise to me when Grant Thornton told me that Gain still had some money held separately.

B4. Overview of Cameron Farley’s accounts with Gain

[40]A letter dated 7 November 2008 sent by Gain to the CFTC described four accounts held by Cameron Farley with Gain. They were as follows: 1. Cameron Farley Ltd. – Control Account – Account No. 2Y09GAIN – Account created on December 20, 2004 2. Cameron Farley Ltd. – EMAC Master Account – Account No. 4Z25GAIN - Account created on October 18, 2005 3. Cameron Farley Ltd. – Corporate EMAC Sub-Account – Account No. BFPBGAIN – Account created on May 11, 2006 4. Cameron Farley Ltd. – Corporate Account – Account No. 10132511 – Account created on May 17, 2007

[41]In paragraph A of the letter dated 7 November 2008 Gain explained certain features of these four accounts. For reference purposes I have added in square brackets the number of each sentence, and I have split the final sentence so that it comprises two clauses, [A6.1] and [A6.2]: [A1] … the first of these accounts is a Control Account due to Cameron Farley entering into an Introducing Broker Agreement with GAIN Capital on or around December 20, 2004 whereby the company earned compensation for introducing customers to us. [A2] As such, the Control Account holds those fee compensations which Cameron Farley earned from introducing customers. [A3] The second account is an EMAC Master Account which, following Cameron Farley entering into a Service Agreement for Managed Accounts Services with our firm on or around October 18, 2005, the account allowed Cameron Farley to conduct trading on behalf of those introduced customers who executed a Limited Power of Attorney (“LPOA”) giving trading authority to Cameron Farley. [A4] It is therefore important to note the funds in the Master Account belonged to individual customers who conferred trading authority to Cameron Farley to trade on their behalf. [A5] Finally, the remaining two accounts are corporate trading accounts comprised of Cameron Farley’s proprietary funds. [A6.1] One of them is an EMAC sub-account traded in the Cameron Farley EMAC Master Account along with other customer accounts, [A6.2] while the latter is a self-directed corporate trading account.

[42]In the remainder of this section I give a chronological account of the written agreements which Gain have produced between it and Cameron Farley, of certain of the trades which occurred, and of other relevant events.

B5. The first Introducing Broker Agreement

[43]An Introducing Broker Agreement (“IBA 1”) dated 28 July 2004 was entered into between Cameron Farley, described in the agreement as “CFL”, and Gain, described in the agreement as “GAIN Capital”. It was signed on 28 July 2004 by Mr Farley on behalf of Cameron Farley and on 4 August 2004 by Mr Glenn Stevens, managing director, on behalf of Gain. It provided that Gain would pay CFL certain sums “per lot round trip base currency unit transaction executed by CFL Originated Customers through GAIN Capital”, along with other payments for Managed Account Customer (“MAC” or “EMAC”) referrals.

[44]IBA 1 made provision for a control account as follows: Control Account Upon receipt of a completed and executed GAIN Capital Customer Application in the name of CFL, GAIN Capital will establish a Control Account in CFL’s name to hold payments made to CFL by GAIN Capital according to the payment for order flow instructions …

Control Account

[45]Clause 8 of IBA 1 was in these terms: 8. RIGHTS AND RESPONSIBILITIES. This Agreement is a non-exclusive arrangement with respect to GAIN Services. CFL is not authorized to make any representations concerning GAIN Capital or the services to be provided by GAIN Capital hereunder. CFL agrees to comply with all commodity Futures Trading Commission (CFTC) regulations and National Futures Association (NFA) compliance rules including, but not limited to, solicitation and sales practices, trading performance statements, risk disclosure, communications with the public, and the use of promotional materials. If and where applicable, GAIN Capital has the right to conduct an audit of CFL’s website, sales practices and promotional materials to ensure compliance with NFA and CFTC regulations, and CFL agrees to fulfil all requests from GAIN Capital regarding such compliance matters.

[46]IBA 1 included an entire agreement clause (clause 13) and a clause stating that there was to be no modification of the agreement except by an instrument in writing signed by all of the parties (clause 14). Clause 15 provided that the agreement was to be construed, and that legal relations between the parties were to be determined, in accordance with the laws of the state of New York, applicable to agreements signed and to be wholly performed within that state.

[47]In section B4 I have quoted from paragraph A of the letter dated 7 November 2008. Sentence [A1] refers to an “Introducing Broker Agreement” entered into on or around 20 December 2004. There is, however, no Introducing Broker Agreement of that date. As will be seen below, a Corporate Customer Agreement was made in December 2004, and a control account was opened thereafter. It seems that those preparing the letter of 7 November 2008 wrongly assumed that the Introducing Broker Agreement was made at around the same time.

B6. White label agreement

[48]Mr Farley on behalf of Cameron Farley on 28 July 2004 and Mr Stevens on behalf of Gain on 4 August 2004 also signed an agreement headed: AGREEMENT FOR WHITE LABEL/CO BRAND SERVICES

AGREEMENT FOR WHITE LABEL/CO BRAND SERVICES

[49]I will refer to this agreement as the “White Label Agreement”. In clause 2 it identified services to be provided by Gain to Cameron Farley, including three which I have numbered [2.1], [2.2] and [2.3]: [2.1] LIVE Trading Platform – A copy of GAIN’s proprietary Java-based production applet (“Trading Platform”) for live (funded) accounts branded with CFL’s logo. [2.2] DEMO Trading Platform – A copy of GAIN’s proprietary Java-based demo applet for demo accounts branded with CFL’s logo. [2.3] Trade Execution and Processing Services: online trade execution and processing services for Customers that have duly executed a customer agreement with CFL.

[50]Clause 2 made provision for a control account in similar terms to the provision in IBA 1. In relation to the White Label Agreement, clause 2 stated that the control account would be established to hold, among other things, margin funds transferred from CFL to Gain. In addition, clause 2 stated that Gain would provide Cameron Farley with other services numbered for convenience as shown below: [2.8] DEMO Registration Form – GAIN-hosted web page containing demo account registration form, branded with CFL’s log and/or web site look and feel. [2.9] DEMO Confirmation Web Page – GAIN-hosted web page or content, branded with CFL’s logo and/or web site look and feel. Confirms demo registration form has been successfully submitted and informs the registrant that an email will be sent containing their ID/PWD. (co-branded, GAIN-hosted page on partner web site) … [2.13] HTML User Guide – a link to a white label version of an HTML (web based) user guide that is hosted and maintained by GAIN. [2.14] Optional Website Content: - Approved website content for GAIN partners, including: About the Forex Market; Why Trade FX; Why Deal with CFL, Dealing Handbook; Installation and Support Instructions, HTML user guide, Risk Warning; Glossary of Forex terms; System requirements; etc. …

[51]Clause 5 of the White Label Agreement included the following: 5. RIGHTS AND RESPONSIBILITIES This Agreement is a non-exclusive arrangement with respect to GAIN Services. CFL is not authorized to make any representations concerning GAIN Capital or the services to be provided by GAIN Capital hereunder. CFL agrees to comply with all Commodity Futures Trading Commission (CFTC) regulations and National Futures Association (NFA) compliance rules including, but not limited to, solicitation and sales practices, trading performance statements, risk disclosure, communications with the public, and the use of promotional materials. GAIN Capital has the right to conduct an audit of CFL’s website, sales practices and promotional materials to ensure compliance with NFA and CFTC regulation, and CFL agrees to fulfil all requests from GAIN Capital regarding such compliance matters. CFL agrees to display risk and other required disclosures on your website, and agrees to only use verbiage approved by GAIN Capital in any and all descriptions of your relationship and agreements with GAIN Capital.

[52]Clauses 9, 10 and 11 dealt with entire agreement, no oral modification, and choice of law, in terms identical to those found in IBA 1 at clauses 13, 14 and 15.

B7. The Cameron Farley website in 2004

[53]Internet archives show that on 24 August 2004 the Cameron Farley website included a page entitled “benefits of dealing with Cameron Farley”. Among other benefits were “secure and robust Java-enabled dealing software.” On the left hand side of the page were a series of links under headings which included “open an account” and “open a demo”. A section of the web page entitled “investor confidence” urged the reader to “open a demo account to experience the software and services first hand before trading with actual funds”.

[54]Also present on 24 August 2004 was a web page which included the following: OUR PARTNERS – AN OVERVIEW Historically, people have tended to collect various policies and to make investments without considering their long-term objective in the context of an overall life-plan. Cameron Farley will introduce a full ‘health check’ of all investments, then work out a detailed portfolio plan for the future. Cameron Farley has established brokering relationships with a range of fully established and compliance-credited partners so as to be able to give clients access to an entire range of services at a highly competitive cost; a true ‘one-stop-shop’ that will meet all investment needs across a full range of clients. Our mission is to provide financial service products that offer quality benefits with value pricing. We wish to establish a successful partnership with each of our clients, with our own staff and with our service providers, always respecting the interests and goals of each party. Partner review … GAIN Capital Group is the premier independent provider of foreign exchange services OUR PARTNERS – AN OVERVIEW Partner review

GAIN Capital Group is the premier independent provider of foreign exchange services

[55]The internet archive shows that on 17 September 2004 the Cameron Farley website included a page headed “standard demo trading account”. On 15 November the Cameron Farley website had a page headed “account funding & forms.” This indicated that options to “fund your trading account with US$” included wire transfer. The wire transfer was to be sent to Citibank in New York, identifying the beneficiary as “GAIN Capital”. Different arrangements applied according to whether the account was under or over $25,000. Funds for accounts under $25,000 were to be sent to Citibank account number 26500310. By contrast, funds for accounts over $25,000 were to be sent to account number 00618695. In that regard, the web page stated that if an account was opened with $25,000 or more, funds could be held fully segregated from other client funds in a separate bank account.

[56]Also on 15 November 2004 the internet archive includes a Cameron Farley web page entitled “test drive a Forex account” and explaining that “a demo account gives you access to the Cameron Farley trading platform for thirty days.”

[57]Similar versions of many of these web pages appear in the internet archive for November 2004.

B8. Dec 2004: Corporate Customer agreement, Control account

[58]On 15 December 2004 Mr Farley on behalf of Cameron Farley signed a fourteen page document on an application form which was stated to be “last updated 12/03/04”. This is, I think, a reference to 3 December 2004, not 12 March 2004 as suggested in the particulars. The form was headed: GAIN CAPITAL Customer Account Application – Corporate pages GAIN CAPITAL

Customer Account Application – Corporate pages

[59]Pages two and three of this document stated that Cameron Farley had been in business for a year in Edinburgh, Scotland, had a projected turnover of £1 million sterling per month from January 2005, and had a net worth of $450,000.

[60]Pages six to ten comprised a “Customer Agreement” in which Cameron Farley was referred to as “Customer” or “You”. Under clause 3 Cameron Farley represented and warranted to Gain that: … 3.3 execution and delivery by Customer of this Agreement and all Contracts and other transactions contemplated hereunder, and performance of all of Customer’s obligations contemplated under this Agreement and any Contract and other transaction contemplated hereunder, will not violate any statute, rule, regulation, ordinance, charter, by-law or policy applicable to Customer.

[61]Clause 4 dealt with trading. Under clause 4.2, concerned with Order Execution, the agreement recorded that: … All Contracts made and entered into by GAIN Capital hereunder will be entered into by GAIN Capital as principal. Customer acknowledges, understands and agrees that GAIN Capital is not acting as a broker, intermediary, agent, and advisor or in any fiduciary capacity. …

[62]Clause 23 was an entire agreement clause. Clause 26 made provision to the effect that the agreement was governed by, and was to be construed in accordance with, the laws of the state of New York, without giving effect to any conflict of laws doctrine that would interfere with or prevent the application of that provision.

[63]On pages ten and eleven a Risk Disclosure Statement included the following: 6. Market Recommendations Are Informational, Customer Makes Independent Decisions, And GAIN Capital is Not An Advisor Or A Fiduciary To Customer. The market recommendations provided by GAIN Capital do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell, any Foreign Exchange Contracts or Cross Currency Contracts. Each decision by Customer to enter into a Contract or other transaction with GAIN Capital and each decision whether a Contract or other transaction is appropriate or proper for Customer is an Independent decision by Customer. GAIN Capital is not acting as an advisor or serving as a fiduciary to Customer. Customer agrees that GAIN Capital has no fiduciary duty to Customer and no liability in connection with and is not responsible for any liabilities, claims, damages, costs and expenses, including attorneys’ fees, incurred in connection with Customer following GAIN Capital’s trading recommendations or taking or not taking any action based upon any recommendation or information provided by GAIN Capital. … 8. … Foreign exchange trading with GAIN Capital is not conducted on a regulated market or exchange. Each Contract is a contract directly between GAIN Capital and the Customer. … … 12. Third Party Agents. In the event that Customer grants trading authority or control over Customer’s Account to a third party (the “Trading Agent”), whether on a discretionary or non-discretionary basis, GAIN Capital shall in no way be responsible for reviewing Customer’s choice of such Trading Agent or for making any recommendations with respect thereto. GAIN Capital makes no representations or warranties concerning any Trading Agent; GAIN Capital shall not be responsible for any loss to Customer occasioned by the actions of the Trading Agent; and GAIN Capital does not, by implication or otherwise, endorse or approve of the operating methods of the Trading Agent. If Customer gives the Trading Agent authority to exercise any of its rights over its Account, Customer does so at Customer’s risk. Even though the undersigned grants authority to Trading Agent, client should be diligent and closely scrutinize all account activity. GAIN Capital provides online Account access at www.gaincapital.com/reports, whereby Client may view their Account Value and Account Activity.

[64]At pages eleven and twelve under the heading “Trading Policies And Procedures” the document included the following: 3.4 Capacity. GAIN Capital acts as a principal and is the counter party in each Contract or transaction with its Customers.

[65]I shall refer to the agreement resulting from the submission of the application form signed on 15 December 2004 as the “Corporate Customer agreement”. It will be recalled that both IBA 1 and the White Label Agreement contemplated that Cameron Farley would complete and execute a customer application in its name, after which Gain would establish a Control Account in Cameron Farley’s name to hold various payments. Following submission by Cameron Farley of the application form signed on 15 December 2004 a Control Account in Cameron Farley’s name was duly opened by Gain on 20 December 2004.

[66]The Control Account which was thus created on 20 December 2004 was described as “Account No. 2Y09GAIN.”

B9. Early 2005: Cameron Farley website and cold calls

[67]The internet archive includes examples of pages on the Cameron Farley website on 29 January 2005 and 7 February 2005. That for 29 January 2005 is an example of the “our partners – an overview” page noted in section B7 above. That for 7 February 2005 is an example of the web page headed “standard demo trading account” also noted at section B7 above.

[68]On 25 April 2005 Mr Bowker received an unsolicited telephone call from Mr Farley. Mr Farley stated that he was engaged in foreign exchange trading, and described opportunities for returns on such trading. On the same day Mr Stuart Thomson of Cameron Farley wrote to Mr Bowker enclosing a Cameron Farley brochure. Paragraph 164 of the Bowker particulars states that Mr Bowker read the brochure carefully, and continues: 164. … Mr Bowker noted various references suggesting that Cameron Farley and its business partners were FSA registered or approved: including the reference (at page 6) to “mandatory changes to the UK Financial Services industry, being driven by the regulatory framework of the Financial Services Authority”; the statement (at page 9) that “All of our financial services providers are authorised to conduct investment business in the UK”; the statement (at page 11) that “We have purposely entered into partnership with a number of unrelated compliance credited firms that specialise in different areas of the Financial Services Industry”; the statement (at page 12) that “Clients are afforded all the regulatory safeguards set out by the Financial Services Authority in the Financial Services and Markets Act 2000”; and (at page 13) the representation that all Cameron Farley’s activities are “Authorised – All activities corresponds to compliance standards” and “Accurate – Compliance officers notified us immediately of regulatory changes ensuring that our guidelines are modified accordingly.” Mr Bowker was particularly reassured by the further statement (on page 13) that “All client funds are held by our partners, which entitle investors to benefit from a compensation scheme.” Mr Bowker noted that Gain Capital was identified as one of Cameron Farley’s partners. Furthermore Mr Bowker noted in the Q & A section (on page 18) the answer:

“All of our partners are fully regulated compliance credited financial institutions. What that means, is that our clients are protected under the safeguards set out in the Financial Services and Markets Act 2000”; and (at page 19) the answer “All client funds are held in designated bank accounts of fully regulated, compliance credited partners. What this means is that clients are afforded all the regulatory safeguards set out by the FSA.”

B10. The first Service Agreement

[69]On 16 May 2005 Mr Farley on behalf of Cameron Farley signed an agreement headed: SERVICE AGREEMENT for Managed Account Services between CAMERON FARLEY and GAIN Capital Inc.

[70]I shall refer to this agreement as “the first Service Agreement”. It will be seen from section B4 that in sentence [A3] the letter dated 7 November 2008 referred to a Service Agreement for Managed Accounts Services which preceded an EMAC Master Account and which was entered into by Cameron Farley “on or around October 18, 2005”. No such agreement of that date has been put in evidence. There was indeed an “EMAC Master Account” created in October 2005, and it may be that those drafting the letter of 7 November 2008 wrongly assumed that the first Service Agreement was made at that time.

[71]Returning to the first Service Agreement, it comprised a series of provisions, each with its own heading. Below I set out certain of these provisions and headings, with numbers in square brackets which I have added for ease of reference: … [4] AGREEMENT OBJECTIVE GAIN Capital (“Gain”) will provide CAMERON FARLEY a Master Account (“Master Account”) through which CAMERON FARLEY will execute foreign exchange trades on behalf of its managed client accounts (“Individual Accounts”). [5] DOCUMENTATION CAMERON FARLEY will ensure that each Individual Account duly executes GAIN account documents, including GAIN’s Power of Attorney. … … [8] MASTER ACCOUNT GAIN will provide CAMERON FARLEY a live Master Account through which CAMERON Farley will execute online trades and through which GAIN will enter telephone trades according to Account Manager’s Instructions. This account will reflect the net asset value and position of all Individual Account assets under management. GAIN Capital reserves the right to exclude individual clients’ funds from being traded in the master account. [9] CONTROL ACCOUNT Upon receipt of a completed and executed GAIN Capital Customer Application in the name of CAMERON FARLEY GAIN will establish a Control Account in Cameron Farley name to hold funds, if any, resulting from a Master Account P&L Sweep, commissions, fees or other applicable credits. Funds are held in Cameron Farley’s Control Account until GAIN Capital received a withdrawal request. All withdrawal requests must be in writing and submitted to GAIN Capital. Withdrawal requests are normally processed within two (2) business days of receipt. [10] INDIVIDUAL ACCOUNTS GAIN will establish an Individual Account for each of your Clients. GAIN will provide Clients with online access to their account whereby Client may monitor unrealized and realized profits & system or computer facility, whether belonging to GAIN Customer, any market, or any settlement or clearing system …

[72]The first Service Agreement included an entire agreement clause, a no oral modification clause, and a choice of law clause (at [12], [13], and [14]) in the same terms as appeared in IBA 1.

[73]The Gain defendants’ skeleton argument stated that this agreement governed “an individual account manager relationship” under which Cameron Farley acted as an appointed trading agent entering into foreign exchange trades on behalf of individual managed account clients introduced by Cameron Farley to Gain.

[74]A standard form was prepared to enable Cameron Farley’s managed account customers to open their individual managed accounts with Gain. Each page of the standard form was headed: GAIN CAPITAL As Introduced by: Cameron Farley GAIN CAPITAL As Introduced by:

Cameron Farley

[75]Under a heading “New Account – Individual”, page one of the form explained to the new customer that “to open your account” four steps were to be followed. The first was to complete the Customer Account Application on pages 2 to 3 of the form, to read the Customer Agreement on pages 4 to 11 of the form, and to sign the form on page 13. Non US residents were also to complete the “W-8 BEN Certificate” – a form confirming foreign status of the beneficial owner for the purposes of US tax withholding. Step two was to provide appropriate identification. Step three was to send all this material to Gain in the United States. Step four was to fund the account by depositing a minimum of $5,000.

[76]The “Customer Account Application – Individual” on pages 2 to 3 included a section entitled “Account Information”. That section included a question, “Were you referred to us?”. In the standard form this question was answered “Yes”, and a further question, “If yes, by whom?” was answered in typescript “Cameron Farley”.

[77]Thus the standard form itself made it clear that the new customer had been introduced to Gain by Cameron Farley. In that regard the top of page 4 of the standard form contained a section entitled, “Disclosure for Accounts Introduced By Third Parties.” This stated as follows: This disclosure statement relates specifically to Customer account(s) which has/have been introduced to GAIN Capital by a third party (“Referring Party”). Referring Party operates independently from GAIN Capital and is neither employed by nor an agent of GAIN Capital. Referring Party is not authorized to make any representation or agreement on behalf of or in the name of GAIN Capital without its prior consent, nor is Referring Party authorized to amend or alter the customer agreement Client executes with GAIN Capital. GAIN Capital does not control, and cannot endorse or vouch for the accuracy of completeness of any information or advice Client may have received or may receive in the future from Referring Party or any other person not employed by GAIN Capital. GAIN Capital is the clearing firm for all foreign exchange transactions in Client’s account. GAIN Capital will open an account in Client’s name and will hold all of the funds Client deposits for trading. Referring Party does not hold any of Client’s funds. GAIN Capital provides risk disclosure documents to all new clients when they open accounts. Client should read that information carefully and should not rely on any information to the contrary from any other source, as currency trading is very risky. GAIN Capital makes no claims regarding future profits and losses in Client’s account. If any third party provides Client with information or advice regarding forex trading, including but not limited to, verbal and written recommendations, research, trading systems, programs, or courses, GAIN Capital shall in no way be responsible for any monetary loss resulting from Client’s use of such information or advice. Referring Party may receive remuneration in return for the routing of Client’s orders to GAIN Capital. Referring Party may also elect to charge Client commissions and/or fees on a per trade basis or other basis. Client has the right to ask Referring Party about the precise nature of such remuneration. Referring Party shall have the right to access Client’s account, but does not have the right to enter any trades on Client’s behalf unless authorized to do so under the terms of an executed power of attorney between Client and Referring party.

[78]The Customer Agreement on pages 4 to 11 included the following: … 2. SERVICES PROVIDED. Subject to the terms and conditions of this Agreement and acceptance of Customer’s application to open an Account with GAIN Capital, GAIN Capital will maintain one or more Accounts in Customer’s name and will effect cash settled and physically settled transactions with and for Customer in the international Over-the-Counter Foreign Currency (foreign exchange) markets on a spot basis, and provide such other services and products as GAIN Capital may, in its sole discretion, determine from time to time in the future. Unless expressly stated otherwise in writing, all Contracts and other transactions entered into between GAIN Capital and Customer shall be governed by the terms of this customer Agreement, as amended from time to time (including, without limitation, GAIN Capital’s Trading Policies and Procedures). … 10. FUTURES COMMISSION MERCHANT. GAIN Capital is an affiliate of GAIN Capital Group which is a member of the National Futures Association (NFA) and is regulated by the Commodity Futures Trading Commission (CFTC). As a Futures Commission Merchant (FCM), GAIN must uphold the highest standards and business practices and is subject to strict financial requirements and reporting. NFA ID# 0339826. For more information on the NFA and its policies visit http://www.nfa.futures.org. 11. CHARGES. At this time GAIN Capital charges no brokerage fees or commissions. GAIN Capital may charge for incidental banking-related fees such as wire charges for deposits/withdrawals and returned check fees. GAIN Capital reserves the right to change its fee structure at any time without notice. Fees do not now but may in the future include such things as statement charges, order cancellation charges, account transfer charges, telephone order charges or fees imposed by any interbank agency, bank, contract, market or other regulatory or self-regulatory organization arising out of GAIN Capital’s provision of services hereunder. Customer may incur additional fees for the purchase of optional, value added services offered by GAIN Capital. 12. INTRODUCING BROKERS. If Customer’s account has been introduced to GAIN by an introducing Broker (“IB”), Customer understands and acknowledges that GAIN may compensate Introducing Broker for introducing Customer to FA Advantage and that such compensation may be on a per trade or other basis. The following is an allocation of responsibilities for each entity. It is intended to be a general disclosure and not a definitive enumeration of each and every responsibility. The Introducing Broker shall have the following responsibilities with respect to Customer’s account:• Contacting, soliciting and/or communicating with Customer regarding Investment opportunities and objectives.

• Complying with all laws, rules and regulations applicable to any arrangement or understanding that IB and Customer may have.

• Determining commissions and fees, whether on a per trade basis or other basis, to be charged for Customer’s transactions.

• Contacting, soliciting and/or communicating with Customer regarding Investment opportunities and objectives.

• Complying with all laws, rules and regulations applicable to any arrangement or understanding that IB and Customer may have.

• Determining commissions and fees, whether on a per trade basis or other basis, to be charged for Customer’s transactions.

[79]The other standard form contemplated was entitled, “Managed Account Authorisation – Limited Power of Attorney.” This form began, “The Undersigned Client(s) (“Client”) authorizes”, after which there was a space in which Cameron Farley’s name was to be inserted. In this way the Client would authorise Cameron Farley: … and its successors or assigns as agent and attorney-in-fact (“Trading Agent”) to purchase and sell (including short sales) foreign currencies, on margin or otherwise, and/or foreign currency option contracts for the undersigned’s account and risk. …

[80]I shall refer to this limited power of attorney as “LPOA”. It went on to provide that the Client agreed to indemnify and hold Gain harmless from all liabilities, claims, losses, damages, costs and expenses arising directly or indirectly from Cameron Farley’s authorisation. It added: … [2] GAIN Capital is authorized to follow the instructions of Trading Agent in every respect concerning the Client’s foreign currency account with GAIN Capital, except that said Trading Agent is not authorized to withdraw any money, securities or other property either in the name of the Client or otherwise. [3] GAIN does not endorse or vouch for the background or track record of Trading Agent. Client understands that GAIN Capital and its officers, employees and agents will not control trading agent’s actions, are in no way responsible for any loss to Client caused by the actions of trading agent and that GAIN Capital does not, by implication or otherwise, endorse the operating methods of trading agent. … [5] Client represents that such Trading Agent has all required government approvals, licenses, and permits, including, but not limited to, if applicable, registration with the National Futures Association (NFA) as a Commodity Trader Advisor (CTA). … [7] Even though the undersigned grants authority to Trading Agent, client should be diligent and closely scrutinize all account activity. GAIN Capital provides online access to account activity, whereby Client may monitor unrealized and realized profits & losses and account balances, and generate monthly account statements.

[81]As noted above, the first Service Agreement envisaged that Gain would provide Cameron Farley with a Master Account through which Cameron Farley would execute foreign exchange trades on behalf of its managed client accounts. While the first Service Agreement was signed by Mr Farley on behalf of Cameron Farley on 16 May 2005, the Gain defendants say that it was not until 18 October 2005 that the Master Account was created. As will be seen from the next section, however, it is clear that by early June 2005 the account documents to be executed in order to set up managed client accounts were on the Cameron Farley website.

B11. First FSA enquiry, June 2005 to October 2006

[82]On 7 June 2005 Mr Peter Wright of the FSA’s “Perimeter Enquiries Enforcement Division” wrote to Mr Farley. He noted that, albeit under the guise of being an “introducing agent”, Cameron Farley appeared to be offering to the UK public foreign exchange trading services among other things. Those services were “regulated activities” as defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). Accordingly Cameron Farley appeared to be in breach of sections 19 and 21 of FSMA.

[83]The letter continued that the FSA had downloaded a copy of the individual account form marked “Gain Capital as introduced by Cameron Farley”. It noted the responsibilities allocated to Cameron Farley in that regard and stated that Cameron Farley appeared to be arranging deals and investments and might also be providing investment advice for which authorisation or exemption under FSMA was required. Moreover, while the website described Cameron Farley as an introducer for providers authorised and regulated by the FSA, the “partners” listed on the website were out of the United Kingdom jurisdiction and were not regulated by the FSA. Mr Farley was asked to respond by 21 June 2005.

[84]This was the first of three enquiries which the FSA conducted into Cameron Farley. It does not appear to have gone beyond correspondence and telephone conversations. It was closed on 16 October 2006 on the basis of assurances that Cameron Farley was acting purely as an introducer to UK authorised persons. Those assurances, along with many other assertions made by Mr Farley to the FSA, appear to have been lies designed to enable Cameron Farley to continue to entice UK customers to invest with it.

B12. Investment activity, June to December 2005

[85]One such customer was Mr Bowker. After consideration of the material noted in section B9 above, on 14 June 2005 he made his first investment with Cameron Farley, a sum of £2,000. Paragraph 166 of the Bowker particulars adds that on 6 September 2005 he signed the US tax form W-8 BEN.

[86]Gain’s letter dated 7 November 2008 to the CFTC states that the Master Account was created on 18 October 2005, and that it was described as “Account No. 4Z25GAIN”.

[87]The Bull particulars record that a friend of Stephen Bull named Peter Georgiou introduced him to Mr Farley, and that Stephen Bull understood that Cameron Farley was engaged in foreign exchange trading. Paragraph 160 of the Bull particulars records that a letter dated 19 December 2005 from Mr Farley, describing himself as “Investment Director” of Cameron Farley, included the following: Further to our telephone conversation of today, please find written details about the stop loss policy that is used by Cameron farley [sic] Ltd. 1. The stop loss is non slippable, which means your positions are liquidated at an agreed price, even if the price falls lower than the agreed price. e.g. £20,000 invested with a stop loss of 10% means a client technically has £2000 risk capital. 2. Because the leverage is non-recourse, your losses are limited to your initial capital invested. This only applies if do not use [sic] a stop loss strategy. 3. In the event of a stop loss being triggered, we would never trade your funds again before contacting you. I hope this information answers the questions that you had.

[88]Paragraph 161 of the Bull particulars states that Stephen Bull was sent some Gain documentation in or about 2005, but has not retained copies.

[89]It was on 20 December 2005 that Stephen Bull made his first investment with Cameron Farley, a sum of £2,500.

B13. January to April 2006

[90]On 20 January 2006 Stephen Bull invested an additional £5,000 with Cameron Farley. This brought his cumulative cash investment (that is, the total amount paid to Cameron Farley after deducting payments received from Cameron Farley) to £7,500.

[91]In February 2006 Mr Bowker withdrew £1,000 of the funds he had invested with Cameron Farley. This resulted in his cumulative cash investment being reduced to £1,000.

B14. Cameron Farley accounts with Gain: May and June 2006

[92]Gain’s letter dated 7 November 2008 to the CFTC recorded that on 10 May 2006 $555,052 was deposited to Cameron Farley’s control account, and that the funds were received from the National Westminster Bank plc from an originating bank account in the name of Cameron Farley. Mr Mercer in his oral submissions, working by reference to the sums involved in subsequent transactions, said that by this time the control account had a credit balance of at least $122,000. Mr Handyside did not contest this computation.

[93]It also appears from the letter of 7 November 2008 that on the following day, 11 May 2006, Gain created a new account, described as “Account No. BFPBGAIN” in the name of Cameron Farley. The letter describes the new account as a “Corporate EMAC Sub-Account.” This expression is used by Gain to describe a managed client account of the kind contemplated by the Service Agreement. The evidence before the court does not appear to include any customer agreement between Gain and Cameron Farley in relation to this managed sub-account. There is, however, a copy of a completed LPOA form signed by Mr Farley and dated 11 May 2006. The signature is not stated to be on behalf of Cameron Farley, and thus the form would appear to have been signed by Mr Farley, using his own name “Stephen Farley” for himself as “Client”. The blank space at the start of the form has been filled in so as to say that the Client authorises “Stephen Farley/Cameron Farley” as Trading Agent. A part of the form dealing with the commission to be paid to the Trading Agent by the Client has a manuscript entry as follows:

“Will speak to Jay/Ken for preferential rate”

[94]Gain’s records show that at 1:44pm on 11 May 2006 a sum of $500,000 was transferred from the Control account to managed sub-account BFPB. On the same day that sum was transferred from the BFPB sub-account to Cameron Farley’s Master Account. Mr Bobinski produced a copy of a screen shot described as “transfer of funds into emac Sub-Account - $500,000, May 11, 2006”. When Mr Mercer turned to this document in his oral submissions on 18 September 2013, I asked Mr Handyside if he could assist on various aspects of the screen shot. It referred to an account “10072141/Cameron Farley Limited”. Mr Handyside was not able to identify that account. In a comment section, the screen shot stated “Moving money from control into his own new emac account 2Y09 to BFPB”. Mr Handyside submitted that this appeared to record an instruction from Mr Farley to move money from the Cameron Farley control account into its new managed sub-account. It is not clear to me that this is indeed a record of an instruction, although it does appear to be a record of the transfer that in fact took place.

[95]Gain’s letter dated 7 November 2008 to the CFTC records that on 12 May 2006 $2,455,012 was deposited to the Cameron Farley control account. These funds were received from National Westminster Bank plc from an originating bank account in the name of Cameron Farley. Gain’s records show that at 12:09pm on 12 May this sum was transferred from the Control account to managed sub-account BFPB. Also on that day the same sum was transferred from sub-account BFPB to Cameron Farley’s Master account. As with the transfer on 11 May 2006, a screen shot was produced by Mr Bobinski and I asked Mr Handyside if he could offer assistance. Mr Handyside noted that the screen shot included a message which appeared to be sent by Ken Agostino at 12:08pm on Friday 12 May 2006. It was addressed to others at Gain, and stated “can we move to the BFPB sub… then to the 4Z25 master”. That screen shot, too, seems to me not necessarily to record an instruction. The message sent by Mr Agostino on this occasion seems to me to be in the form of a question.

[96]Gain’s letter dated 7 November 2008 to the CFTC records that on 22 May 2006 a sum of $55,550.45 was withdrawn from Cameron Farley’s Control account, and that in accordance with the customer’s instructions on the withdrawal request form, Gain sent the funds to National Westminster Bank plc with Cameron Farley’s bank account as the beneficiary.

[97]Gain’s records show that on 24 May 2006 Cameron Farley’s Master account was credited with profits on currency trades of $167,875. Also on that day, a sum of $3,122,887 was transferred from the Master account to the BFPB sub-account. Gain’s letter of 7 November 2008 to the CFTC records that on 24 May 2006 $3,122,847.00 was withdrawn from sub-account BFPBGAIN, and that in accordance with the customer’s instructions on the withdrawal request form, the funds were sent to National Westminster Bank plc with Cameron Farley’s bank account as the beneficiary.

[98]One of Cameron Farley’s managed account customers was DBB Investments Limited. On 5 June 2006 $3,498,441.10 was deposited into its individual managed sub-account with Gain. On the same day that sum was transferred to the Master account. On 9 June 2006 losses on currency trades of $3,154,825 were debited to the Master account, along with Gain fees of $63,050. Following these losses, the transfer back from the Master account to the DBB Investments Limited sub-account was for a sum of $270,445.

[99]The claimants draw no particular inference from events concerning the DBB Investments Limited sub-account, other than to note the very substantial losses. Their focus is on the total of $3,000,064 transferred to the Control account from Cameron Farley’s Natwest account ($555,052 on 10 May and $2,455,012 on 12 May 2006). Of this a total of $2,955,012 was transferred to the BFPB sub-account and onwards to the Master account, where it was used to generate profits of $167,875. On 24 May 2006 $3,122,887 is transferred from the Master account to the BFPB sub-account, and on to Cameron Farley’s Natwest account in Edinburgh. Two days earlier, on 22 May 2006, the balance of the total $3million transfer to the Control account, being an amount of $55,550, is transferred back to Cameron Farley’s Natwest account. The inference to be drawn, the claimants suggest, is that the $3 million transferred to the Control account comprised funds of Cameron Farley’s clients which had been pooled, and that $55,550 remained in the Control account because it represented commission taken by Cameron Farley on the trades in the Master account. The claimants also suggest that the inference may be drawn that Gain knew all this, that the money used for the trades in the Master account, along with the resultant profits, continued to represent a pooled amount of client money which is returned to the Natwest account, and that Gain knew this too.

B15. Other matters arising in May and June 2006

[100]On 16 May 2006 Cameron Farley signed a second Introducing Broker Agreement with Gain (“IBA 2”). It does not appear to be materially different from IBA 1.

[101]On 24 May 2006 Stephen Bull invested an additional £5,000 with Cameron Farley. This brought his cumulative cash investment to £12,500.

[102]The internet archive of web pages from the Cameron Farley website for 31 May 2006 includes the pages headed “account funding and forms”, “test drive a Forex account”, and “benefits of dealing with Cameron Farley” noted at section B7 above.

[103]On 6 June 2006 Mr Farley on behalf of Cameron Farley signed a further “service agreement for managed account services” (“the second Service Agreement”). It does not appear to differ in any material respect from the first Service Agreement.

B16. The remainder of 2006

[104]In his witness statement on behalf of the Gain defendants Mr Bobinski said that forty six individual managed accounts were introduced by Cameron Farley, but only fourteen of them were both funded and traded. Those fourteen included sub-account BFPB opened by Cameron Farley itself, and the sub-account for DBB Investments Limited. Mr Bobinski said that the remaining twelve individual managed accounts made contributions to the funds traded through the Master account, ranging from $1,846 to $69,980. None of the account holders had, so far as Gain was aware, issued proceedings against Gain. Mr Bobinski asserted that no third party funds were deposited into the Master account. He said that each of the relevant customers transferred funds to the relevant sub-account, and when funded Cameron Farley’s powers under the relevant LPOA were utilised to make a corresponding deposit entry in the Master account, with trades and resultant profit and loss in the Master account being allocated proportionately to the relevant individual managed accounts.

[105]Mr Strange, like Mr Devey, was introduced to Cameron Farley by his friend Mr David Tate. Paragraph 163 of the Strange particulars states that Mr Strange and Mr Farley spoke by telephone in or about July 2006, that Mr Strange understood that Cameron Farley was engaged in foreign exchange trading, and that Mr Farley explained to Mr Strange that he worked with a trading partner, Gain. Paragraph 165 of the Strange particulars adds: On 18 July 2006 Cameron Farley wrote to Mr Strange. The letter enclosed various documents relating to Gain Capital, including a “GAIN Capital Individual Account Application” form headed “GAIN CAPITAL [-] As Introduced by Cameron Farley”. Mr Strange was unsurprised, as Mr Farley had mentioned Gain Capital during the course of their telephone conversations. Prior to signing any documents Mr Strange investigated Gain Capital on the world wide web, noted that it was authorised by the Securities and Exchange Commission, and appeared to be sizeable and respectable business. Mr Strange noted that the documents gave authority to Cameron Farley to trade on his behalf. Mr Strange signed the documents and returned them.

[106]On 24 July 2006 Mr Strange signed the relevant form for an individual managed account with Gain, and also signed an LPOA appointing Cameron Farley as his Trading Agent. In the customer account form Mr Strange indicated that his initial margin deposit of £10,000 would be made by cheque. Mr Bobinski says in his statement that although Mr Strange opened an individual managed account, it was never funded. The Strange particulars say that Mr Strange made an initial investment of £10,000 in or about August 2006. It would seem that this amount, despite what was said in the account opening form, was not sent to Gain.

[107]Meanwhile Mrs Tipping, who had been introduced to Cameron Farley by her husband, and understood that Cameron Farley was engaged in foreign exchange trading, received a letter dated 19 July 2006 from Cameron Farley. According to paragraph 164 of the Tipping particulars, the letter stated that although Cameron Farley could not guarantee profits, “a Foreign Exchange Account is an ideal vehicle for generating short-term income or capital appreciation…”. On 25 July 2006 Mrs Tipping made an initial investment of £10,000 with Cameron Farley.

[108]On 6 August 2006 Stephen Bull invested an additional £20,000 with Cameron Farley. This brought his cumulative cash investment to £32,500.

[109]On 29 August 2006 Mr Thomson of Cameron Farley wrote a letter to another investor, Mr Clark, which appears to have been in similar terms to the letter sent to Mrs Tipping. It stated as follows: Please find information outlining the terms under which your Foreign Exchange Investment will be managed by Cameron Farley Ltd. We will use an Intra-Day style of trading that allows us to take advantage of price fluctuations in the Foreign Exchange Markets, plus capitalise on a zero cost option associated with using Non-Recourse Leverage within a 24 hour expiry period. We will also implement a Non-Slippable Stop Loss Strategy (at 20%) to limit your downside risk, lock in profits and also protect your capital from adverse market movements. What this means is that at no time can you be liable for more than your initial margin deposit. At Cameron Farley Ltd we pride ourselves on consistently delivering high levels of service. Therefore, should you be un-happy with any aspect(s) of your dealings with us, we guarantee the return of no less than the full outstanding balance of your Foreign Exchange Account, at any given time. Funds deposited in your Foreign Exchange Account are always liquid and can be returned to you within 5 working days of notice being received. Although we cannot guarantee profits, a Foreign Exchange Account is an ideal vehicle for generating short term income or capital appreciation. Any profits realised can be re-invested for capital growth or released on a monthly basis, paid by cheque or deposited into your bank account. ...

[110]Gain’s records indicate that on 28 September the Cameron Farley Master account received what Mr Burke described in paragraph 60 of his witness statement as an “unknown deposit” of $69,980, and a further “unknown deposit” of $18,860.

[111]On 2 October 2006 Mr Bowker invested an additional £10,000 with Cameron Farley. This increased his cumulative cash investment to £11,000.

[112]On 3 October 2006 Stephen Bull invested an additional £5,000 with Cameron Farley. This brought his cumulative cash investment to £37,500.

[113]As noted in section B11 above, it was on 16 October 2006 that the FSA closed its first investigation into Cameron Farley, on the basis that Cameron Farley was acting purely as an introducer to UK authorised persons.

[114]In October 2006 Mr Strange invested an additional £20,000 with Cameron Farley. This increased his cumulative cash investment to £30,000.

[115]It was around this time that Mr Devey received the unexpected telephone call from Mr Farley described in section B3 above. As noted there, Mr Devey describes Mr Farley explaining to Mr Devey that Gain Capital was working with him and had an input into the trade. Gain’s records show that Mr Devey’s initial investment of £5,000 took the form of a single deposit of $9,201 into an individual managed account with Gain. These funds were apparently not traded, and gave rise to an eventual payment by Gain to Mr Devey of £6,411 as described in section B3 above.

[116]Louis Georgiou records in his witness statement that in October 2006 he filled in Gain Capital forms, and on 20 October 2006 arranged for his initial investment of £5,000 to be transferred by his bank to Gain’s account in America.

[117]On 7 November 2006 Mrs Tipping invested an additional £5,000 with Cameron Farley. This increased her cumulative cash investment to £15,000.

[118]The claimants say that during this period Cameron Farley was “trading apace”. By way of example, they note that on 6 October 2006 Cameron Farley entered into twenty trades through the Master account on behalf of Rebecca Tate’s individual managed account.

[119]Gain’s letter dated 7 November 2008 to the CFTC records that on 26 October 2006 $121,960 was withdrawn from Cameron Farley’s Control account. The letter stated that in accordance with the customer’s instructions on the withdrawal request form, the funds were sent to National Westminster Bank Plc with Cameron Farley’s bank account as beneficiary.

[120]The last trade conducted by Cameron Farley on the Master account was on 24 November 2006. Gain’s records show that on that day losses on currency trades were debited to the Master account in an amount of $136,026.

[121]In November 2006 Mr Strange invested an additional £6,000, and in December 2006 an additional £14,000, with Cameron Farley. These payments brought his cumulative cash investment to £50,000.

[122]At around this time Louis Georgiou in his witness statement records that he logged on to look at his account with Gain (opened in October 2006, see above). He saw no trading taking place, and spoke about this more than once with Lisa Ruiz of Gain Capital by telephone. She said that he needed to speak to Cameron Farley. This led to a telephone conversation with Mr Farley in which he said that there had been a misunderstanding, and advised withdrawing the money from Gain and reopening an account with Cameron Farley. While there would be a loss because of adverse currency movements Cameron Farley would make up the shortfall. Louis Georgiou’s statement explains that he put that into effect. It adds that he was told by Mr Farley that the new method of trading was through “Cameron Farley’s Master account”. Paragraph 14 of the statement adds: Lisa Ruiz did not mention the Master Account to me but I explained to her the money was going to be sent back to Cameron and then back to Gain Capital as part of Cameron Farley’s aggregated funds. So she must have known that Cameron Farley was also managing pooled money on behalf of UK investors.

[123]Also in December 2006 the NFA made a formal complaint against Gain. This is described in section B17 below.

B17. The NFA complaint against Gain

[124]On 8 December 2006 the business conduct committee of the NFA issued a complaint against Gain. The complaint recorded that the business conduct committee had reviewed an investigative report submitted by the compliance department of the NFA, and had found reason to believe that NFA Requirements were being, had been, or were about to be violated.

[125]The reliance placed by the claimants upon the complaint was set out by Ms Hann in paragraphs 50 and 51 of her witness statement as follows:50. Gain has found itself the subject of criticism by the NFA in respect of its supervision of its so called sales "solicitors" – a term used in the American sense of those who solicit sales from the general public. In December 2006 the NFA issued a complaint against Gain Capital Group LLC… on the basis that "[The] NFA's examination found numerous and serious deficiencies with [Gain's] promotional material and that of its unregistered sales solicitors. In addition, NFA's examination found that [Gain] had failed to develop and implement an adequate money laundering programme”. At paragraph 18 of the complaint it confirms “at the time of NFA’s examination, [Gain] had approximately 170 domestic and foreign unregistered sales solicitors." Sales solicitors being, for this purpose, introducing brokers. At paragraph 20 of the complaint it states "[Gain's] supervisory procedures for its sales solicitors required [Gain] to review a solicitor’s website at the time [Gain] enters into a business relationship with the solicitor and thereafter on an annual basis”. The complaint alleges that Gain failed to conduct any review of the solicitors' websites and to take any action to correct the promotional material deficiencies. Gain was therefore charged with violations of the NFA compliance rules 2 – 36 B(1), (C) and (E): Rule 2 – 36 (B) (1) no Forex dealer member or associate of a Forex dealer member engaging in any Forex transaction shall (1) cheat, defraud or deceive, or attempt to cheat, defraud or deceive any other person. Rule 2 – 36 (C) Forex dealer members and their Associates should observe high standards of commercial honour and just and equitable principles of trade in the conduct of their Forex business. Rule 2—36 (E) each Forex dealer member shall diligently supervise its employees and agents in the conduct of their Forex activities for or on behalf of the Forex dealer member.

51. The complaint also alleged a failure on the part of Gain in respect of its anti-money laundering programme in that, in violation of NFA compliance rule 2 – 9 (C), it failed to establish and implement an adequate anti-money laundering programme, it failed in respect of the requirement for “customer identification”, suspicious activity reporting and the responsibilities of the firm’s anti-money laundering compliance officer. It alleged that Gain also failed to conduct an annual audit of its anti-money laundering programme and failed to maintain records showing that it had conducted anti-money laundering training. Rule 2 – 36 (B) (1) no Forex dealer member or associate of a Forex dealer member engaging in any Forex transaction shall (1) cheat, defraud or deceive, or attempt to cheat, defraud or deceive any other person. Rule 2 – 36 (C) Forex dealer members and their Associates should observe high standards of commercial honour and just and equitable principles of trade in the conduct of their Forex business. Rule 2—36 (E) each Forex dealer member shall diligently supervise its employees and agents in the conduct of their Forex activities for or on behalf of the Forex dealer member.

[126]Gain’s answer to the complaint was dated 29 January 2007. Paragraphs 1 to 28 of the answer contained formal admissions, non-admissions and denials in relation to the three counts charged. Paragraphs 29 to 32 set out Gain’s defence to the assertion that its corporate reorganisations were intended to avoid regulatory oversight, asserting that during the relevant time period “the customer experience remained completely unchanged” and that reporting to NFA and CFTC also remained unchanged.

[127]In relation to the complaint about Gain’s alleged use of misleading promotional material, paragraphs 33 to 37 acknowledged that the various statements relied upon in the complaint had indeed been made. To the extent that they were inaccurate, Gain gave explanations of how they had come about and/or described steps which had been taken to remedy the position.

[128]Paragraphs 38 and 39 dealt with the NFA’s allegations about review by Gain of its partners’ websites. Paragraph 38 acknowledged that “several domestic solicitors’ websites included non-compliant claims that inflated profit potential and downplayed risk of loss.”

[129]Paragraph 39 was in these terms: Gain Capital Group acknowledges while it did indeed conduct both initial and periodic reviews, it was not persistent enough in 2006 in conducting reviews of its solicitors' websites. However, the assertion ‘[Gain] failed to conduct any review of it's solicitors' websites and, therefore, failed to detect, let alone take any action to correct, the promotional material deficiencies in its solicitors' websites, including those cited above' is a significant overstatement. All introducing broker websites were reviewed by the Partner Services department at inception of the relationship. Further, as indicated above, [Gain] has enhanced its Compliance function website review program and website review cycle in an effort to identify and correct any such deficiencies.

[130]The remainder of the answer concerned NFA allegations about Gain’s anti-money laundering procedures, and alleged failure on the part of Gain to notify NFA of the carrying of customer accounts. As regards the former of these, paragraph 40 of the answer stated: [Gain] acknowledges that its written "AML Procedures" fail to include all of the requirements of NFA compliance rule 2 – 9 (c). In general the written procedures covered the 'Know-Your-Customer' guidelines, but failed to be updated in writing for the new 'Customer Identification Program' guidelines. That being said [Gain's] practices did incorporate all of the requirements of NFA Compliance Rule 2 – 9 (c) at all times. There were no deficiencies in practice in this area – which was noted during the NFA audit process. Although [Gain] views this as a documentation issue, [Gain] takes such matters seriously and worked diligently with NFA to update its written procedures.

[131]On 17 May 2007 a NFA Hearing Panel issued a decision in relation to the complaint. It noted that Gain had submitted an offer in which, without admitting or denying the allegations, it proposed to settle the case. The proposed settlement involved consent to findings that Gain committed the violations alleged in counts I and II of the complaint, and to payment of a fine of $100,000, contingent upon NFA dismissing count three of the complaint, which NFA agreed to do. Accordingly count three of the complaint, concerned with failure to notify NFA that Gain was carrying customer accounts, was dismissed. The Panel duly made findings under count I that Gain violated NFA compliance rules as a result of its use, and the use by its unregistered sales solicitors, of misleading promotional material. Under II the Panel found that Gain had violated NFA compliance rule 2-9(c), by failing to develop and implement an adequate anti money laundering programme. An order was made for Gain to pay a fine of $100,000.

B18. January to April 2007

[132]On 22 January 2007 Stephen Bull invested an additional £50,000 with Cameron Farley. This increased his cumulative cash investment to £87,500.

[133]On 6 February 2007 Mr Bowker invested an additional £8,000 with Cameron Farley. This increased his cumulative cash investment to £19,000.

[134]On 4 April 2007 Mr Devey invested an additional £20,000 with Cameron Farley. This increased his cumulative cash investment to £25,000.

[135]On 5 April 2007 Mr Bowker invested an additional £5,000 with Cameron Farley. This increased his cumulative cash investment to £24,000.

[136]On 5 March 2007 Stephen Bull invested an additional £10,000, and on 27 April 2007 an additional £40,000, with Cameron Farley. These payments increased his cumulative cash investment to £137,500.

B19. May 2007: the FSA second enquiry

[137]Information received earlier in 2007 led FSA investigators to make an unannounced visit to CFL’s office in Edinburgh on 4 May 2007. When asked about Cameron Farley’s business concerning foreign exchange investments, Mr Farley initially said, among other things, that Cameron Farley introduced clients to Gain, which did all the trading on behalf of the clients. Upon further questioning he admitted that what he had initially said was untrue, and while there were some clients who dealt directly with Gain, there were others on whose behalf Cameron Farley conducted business. Mr Farley said he was not able to produce bank statements, client lists and client files because they were located at Cameron Farley’s registered office in London.

[138]At paragraph 61 of his affidavit Mr Pittas gave reasons for thinking that Mr Farley’s assertion that documents were in London was deliberately misleading. In paragraph 62 of his affidavit, Mr Pittas described the next stage of the FSA second enquiry in this way: 62. On 10 May 2007, Farley attended a meeting at the FSA's offices (pages 91-95). During the meeting, Stephen Farley expressed a wish to come clean with the FSA and changed the story that he had given during the unannounced visit. He told the FSA the following information:(1) At its inception, CFL had attempted to become authorised in its own right but had been unable to because key employees did not meet the requisite standards.

(2) CFL had started a relationship with Gain Capital as an introducer. As this relationship progressed, Gain Capital had invited CFL to have more involvement in the relationship than a traditional introducer. At this point some UK customers requested to deal through CFL as they did not want to deal with a US firm. CFL commenced dealing in foreign exchange on behalf of those clients.

(3) At this time there were 150 foreign exchange clients dealing with both Gain Capital and CFL. This represented £2 million in client funds.

(4) CFL had recently sent correspondence through its online system to all clients who dealt with CFL offering them the opportunity to deal directly with Gain Capital.

(5) All UK consumers' monies who dealt in foreign exchange went to Gain Capital, although a "pot of money" was held on behalf of CFL. The profit made on these trades was distributed back to CFL and then CFL distributed these profits to its customers.

(6) CFL was not in a position to be able to offer the infrastructure to trade on behalf of clients.

(7) Any profits made by Gain Capital on the clients' funds were paid into the CFL bank account and were distributed to clients as soon as possible. Payments were made monthly.

(8) Gain Capital remunerated CFL directly. CFL did not take any profits from the client funds.

[139]At paragraphs 63 and 64 of his affidavit Mr Pittas records that the FSA investigators told Mr Farley that as Gain was not authorised in the UK, it could not accept introductions from a UK company. They advised Mr Farley to take legal advice, and asked him to provide various information and undertakings.

[140]Mr Pittas records at paragraph 65 of his affidavit that Mr Farley indicated on 16 May and again on 23 May 2007 that the FSA would receive the requested information shortly. On 29 May Mr Farley sent an email referring to a new company, Cameron Farley International Limited (“CFIL”). The email set out a draft proposal which Mr Pittas summarised in this way:(1) a new company had been set up (CFIL), which would employ FSA authorised individuals;

(2) in the meantime, all activities relating to foreign exchange had been suspended;

(3) Mr Farley was in the process of opening a bank account to hold client money;

(4) Mr Farley had spoken to all CFL clients and informed them that their funds could not be traded in the existing format.

(5) there were contracts and paperwork in place to support the conversion from a foreign exchange investment to a capital injection agreement; and

(6) Mr Farley would post all relevant paperwork to the FSA investigator.

[141]The various accounts given by Mr Farley to the FSA in May 2007 as to what had happened and what would happen are difficult to reconcile with other events in May 2007.

B20. May 2007: other events

[142]The Bowker and Tipping particulars describe letters dated 9 May 2007, the day before Mr Farley attended the FSA’s investigators at Canary Wharf, signed by Mr Farley as managing director of Cameron Farley, and addressed to each of them. In each case the letter stated: To maintain all required standards of compliance and to fully utilize the wealth of experience and resources available to Cameron Farley through out partnership with Gain Capital Inc, we are implementing a number of changes to the way we work. We will directly involve Gain Capital in the management of all Foreign Exchange accounts…. To enable us to implement these changes, please complete, sign and return the enclosed Gain Application form in the prepaid envelope provided.

[143]The Tipping particulars state at paragraph 166 that Mrs Tipping has not retained copies of any enclosed documents. However the Bowker particulars record at paragraph 169 that the letter of 9 May 2007 enclosed various documents relating to Gain, including a “GAIN Capital Individual Account Application” form headed “GAIN CAPITAL [-] As Introduced by Cameron Farley”; a Gain Capital Limited Power of Attorney in favour of Mr Farley; a Customer Agreement with Gain Capital; a Gain Capital Secondary Risk Disclosure Document; and a US tax form W-8BEN. The Bowker particulars added: Mr Bowker was unsurprised, as Gain Capital had been identified as one of Cameron Farley’s partners in the Cameron Farley brochure. Mr Bowker signed the documents on 12 May 2007 and returned them.

[144]As noted in section B17 above, it was on 17 May 2007 that the NFA hearing panel issued its decision giving effect to Gain’s offer of settlement accepting violations under counts I and II of the NFA complaint. It is asserted by Gain that on the same day it created a corporate account, number 10132511, for Cameron Farley. The customer agreement relied upon by Gain for the purposes of this corporate account is said by Gain to have been the Corporate Customer agreement resulting from the submission of the application form signed on 15 December 2004.

[145]Mr Warburton at paragraph 74 of his witness statement refers to paragraphs 68 and 69 of the Bull particulars, dealing with events in 2004, and gives the impression that the corporate customer account was opened “on or around 15 December 2004”. By contrast, Gain’s letter dated 7 November 2008 to the CFTC expressly states that Cameron Farley’s corporate account number 10132511 was “created on May 17, 2007”. The evidence before the court does not include any written record of an instruction at that time to create the corporate account. Nor do I have any information as to how the creation of the corporate account came about.

[146]Also on 17 May 2007 account number 10132511 received its first deposit. Paragraph E3 of Gain’s letter dated 7 November 2008 to the CFTC states: On May 17, 2007, $1,777,590.00 was deposited to the corporate account, Account No. 10132511. The funds were received from FX Operations New York NY from a bank account in the name of Cameron Farley Limited. …

[147]At paragraph 61 of his witness statement Mr Burke notes that during the period from 17 May to 30 July 2007 the corporate account showed losses on currency trades totalling $1,669,106.

B21. June 2007: the FSA assessment and the “revamp” letters

[148]Mr Pittas at paragraphs 66 and 67 of his affidavit explains that the draft proposal emailed by Mr Farley on 29 May 2007 was incomplete. Outstanding information was requested on 11 June 2007. In a telephone call on 26 June 2007 Mr Farley said that CFIL would be applying for direct authorisation with the FSA to undertake regulated activities, and promised to send new paperwork by which customers were converting their foreign exchange investments into direct capital injections. Mr Pittas adds that the FSA had never been provided with this documentation by Mr Farley, and that it was not until October 2007 that CFIL’s application to become authorised was received.

[149]An assessment by Mr Pittas of Cameron Farley’s activities prior to conversion of “foreign exchange investments into direct capital injections” appears at paragraph 68 of the affidavit: 68. The activities of CFL explained and admitted by Mr Farley during the second FSA enforcement enquiry may have been simply a continuation of the previous activity of CFL in arranging deals in investments, namely foreign exchange contracts for difference. However, the activities also appear to have been such that, at least in relation to those investors who dealt with CFL rather than with Gain Capital direct, CFL was establishing and operating a collective investment scheme: certainly, CFL had day to day control over the management of the monies and the contributions of the participants appear to have been pooled before being sent to Gain Capital, appear to have been dealt with by Gain Capital on a pooled basis, and any return payment of profit or income made by Gain Capital also appears to have been pooled.

[150]Turning to the suggestion that there was new paperwork by which foreign exchange investments were being converted into direct capital injections, the particulars record that each of Stephen Bull, Mr Bowker, Mr Devey, Mr Strange and Mrs Tipping received a letter dated 5 June and signed by Mr Farley. It stated: Following the recent operational changes to revamp our compliance framework, please find enclosed a contract between yourself and Cameron Farley Ltd, which enables us to continue trading Foreign Exchange in a compliant manner. As part of our compliance review with the FSA, Cameron Farley Ltd has put the framework in place to become a fully regulated UK company. This process which has already started will take between one to three months until completion. Until such time, the enclosed contract supersedes all previous contractual documents in your possession.

[151]Adopting the expression used in the first sentence quoted above, I shall refer to the letters of 5 June 2007 as “the revamp letters”.

[152]Accompanying the revamp letters was documentation which appears to correspond to the new paperwork which Mr Farley promised to send, but did not in fact send, to the FSA. For present purposes the main feature of that documentation, as found by the FSA in 2008 on a review of client files, was that Cameron Farley’s existing customers, and any new customers, were required to sign what was called an “Interim Agreement”, incorporating what were called “Capital Injection General Terms and Conditions”. In paragraph 69 of his affidavit Mr Pittas explained that there appeared to have been at least three versions of the Interim Agreement. Mr Pittas described versions which, like those accompanying the revamp letters, were signed by Mr Farley on 1 June 2007 as “the First Interim Agreement”. In paragraph 69 of his affidavit he explained that he had seen a third version which stated it was last updated on 4 August 2008 but in fact appeared to have been signed several months earlier (“the Third Interim Agreement”), and that he had not seen the second version of the Interim Agreement.

[153]At paragraphs 70 to 72 of his affidavit, Mr Pittas explained that he had seen references to a “Capital Injection Agreement” and to a “Loan Agreement”. None of the client files sampled in 2008 had contained a document with that name, but each had contained an Interim Agreement. On the basis of information obtained from CFL’s customers it seemed that references to the “Capital Injection Agreement” and the “Loan Agreement” were in fact references to the Interim Agreement.

[154]In paragraph 73 of his affidavit Mr Pittas set out what he described as “key terms” of the Interim Agreement: 73.1. the consumer is described as the "Capital Injector" and the sum paid by the consumer to CFL as a "capital injection" (clause 1). In the Third Interim Agreement, the sum paid is also described as a "loan" or "loan capital" (for example, see clause 3 and clause 9); 73.2. the minimum capital injection in the First Interim Agreement is £1,000 and the maximum is £1,000,000. The minimum capital injection in the Third Interim Agreement increases to £5,000, although the maximum remains the same (clause 2); 73.3. either on the Repayment Date or "at a date of your choosing", CFL will transfer the value of "your account with CFL (including interest)" (the First Interim Agreement), or the "original capital (loan) plus any accrued interest or minus any previous repayments to the Capital Injector" (the Third Interim Agreement) (clause 3); 73.4. in the event that the consumer requests repayment of his "capital injection" or "loan" before the Repayment Date, CFL "reserves the right to apply/impose the terms set out in the Penalty Clause" (clause 3, the Third Interim Agreement); 73.5. the capital injection carries a fixed rate of interest of 9.25% per annum until repayment plus a variable element to be determined by CFL. The terms of the Interim Agreement make it clear that the "variable element" is entirely discretionary. In the First Interim Agreement, the variable element is a “profit share option" which entitles each Capital Injector to a “percentage share of net profits" which are paid monthly. The share profit is "determined by CFL at its absolute discretion". In the Third Interim Agreement, the variable element is described as a "variable interest option" which is determined by CFL "solely at its discretion". The variable element "remains with CFL" and only passes to the consumer when CFL "remits cleared funds to the designated bank account of the agreement holder solely at its discretion" (clause 8); 73.6. in the Third Interim Agreement only, the consumer is asked to agree that "CFL can use the loan capital arising from the agreement (as it sees fit) in its course of business " (clause 9); 73.7. the consumer is also offered a share of the proceeds whereby the consumer is entitled to a share in the profit on any capital gain if CFL is sold as a going concern. The calculation of the share of profit is to be determined by CFL with no clearly defined criteria; …

[155]At paragraph 75 of his affidavit Mr Pittas turned to the “Capital Injection General Terms and Conditions” (“the General Terms”). He noted five features of the General Terms: 75.1. Capital injections in CFL are "capital injections only and do not represent share capital or any right to exercise any control over CFL" (paragraph 3 of the General Terms); 75.2. the consumer may request repayment of their "capital injection" or "loan capital" at any time from the date of the Interim Agreement (paragraph 5.1 of the General Terms); 75.3. with regard to the Third Interim Agreement only, CFL reserves the right to repay "all or part of your capital injection at any time from the date hereof or any time thereafter on you giving 30 days notice to terminate [the Third Interim Agreement]" (paragraph 6.1). CFL also reserves the right to apply a penalty in the event that the Third Interim Agreement is terminated before the Repayment Date (paragraph 6.4 of the General Terms); 75.4. fixed interest is set at 9.25% per annum, while the variable element is determined on a monthly basis" (paragraph9.1 ). Interest is paid monthly, however in the First Interim Agreement, interest is paid gross without the deduction of income tax. In the Third Interim Agreement, interest is net of a tax deduction of 20% (paragraph

9.2 of the General Terms); 75.5. the Capital Injection Terms and Conditions are signed for and on behalf of CFL by Stephen Farley.

[156]What the Interim Agreement appears to have contemplated was set out by Mr Pittas in paragraph 76 of his affidavit: 76. It appears quite clear that the Interim Agreement is an agreement for the taking of deposits to the extent that customers, pursuant to the Interim Agreement, place capital sums with CFL for a period of time. The return of the capital sums are guaranteed, plus an annual interest rate of 9.25%. The capital sums are not paid in exchange for any property, and are apparently used by CFL to carry out its own foreign exchange transactions. Finally, the activities of CFL pursuant to the Interim Agreement are carried on by way of business, in that CFL which holds itself out as accepting such capital sums on a day to day basis and/or in fact does so on regular (rather than only particular) occasions.

[157]The conclusion thus reached by Mr Pittas is that, at least when taken at face value, the Interim Agreement was an agreement for deposit taking.

[158]The particulars record that each of Stephen Bull, Mr Bowker, Mr Devey, Mr Strange and Mrs Tipping signed and returned the Interim Agreements accompanying the revamp letters. At the head of the Interim Agreement the relevant customer was described as “the Capital Injector”. A sum in pounds sterling was then identified as the “Value of Capital Injection”. This appears to have been the balance of sums paid by the investor and returns allegedly allocated to the investor in statements of account with Cameron Farley. In the case of Stephen Bull it was £113,881.97. He received a certificate purportedly issued on Friday 1 June 2007 identifying this sum under the heading “Capital Injection Certificate”. After setting out the sum, the certificate described it as “convertible on or prior to 1st June 2008”. Mr Devey, Mr Strange and Mrs Tipping say that they received certificates for amounts of £30,447, £98,072.95 and £36,182.02 respectively.

B22. July to December 2007

[159]On 4 July 2007 Stephen Bull invested an additional £20,000 with Cameron Farley. This increased his cumulative cash investment to £157,500.

[160]As noted in section B20 above, during the period 17 May to 30 July 2007 the Cameron Farley corporate account, having been opened with a deposit of $1,777,590, suffered losses on currency trades amounting to $1,669,106.

[161]According to paragraph 60 of Mr Burke’s witness statement, on 15 August 2007 Cameron Farley’s Master Account with Gain was closed with a nil balance.

[162]On 1 October 2007 Mrs Tipping invested an additional £10,000 with Cameron Farley. This brought her cumulative cash investment to £25,000.

[163]The internet archive records that on 9 October 2007 the Cameron Farley website included the page headed “our partners – an overview” described in section B7 above.

[164]Also on 9 October 2007 Stephen Bull invested an additional £40,000 with Cameron Farley. This increased his cumulative cash investment to £197,500.

[165]On 12 November 2007 Mr Strange withdrew £18,000 from Cameron Farley, reducing his cumulative cash investment to £32,000. However in November 2007 he also invested an additional £1,000 with Cameron Farley via Garstang Investments, and thus the resulting balance of his cumulative cash investment was £33,000.

[166]On 19 November 2007 Stephen Bull invested an additional £5,000 with Cameron Farley. This was followed by further investments of £40,000 on 26 November 2007 and £5,000 on 6 December 2007. The result was that his cumulative cash investment increased to £247,500.

B23. January to June 2008

[167]Gain’s letter dated 7 November 2008 to CFTC records that funds transferred by Natwest were deposited into Cameron Farley’s corporate account as follows: 13 February 2008: $5,870,960 25 February 2008: $782,480 6 March 2008: $1million 27 June 2008: $5,897,960

[168]During this period Mr Bowker invested £40,000 on 16 April 2008. His cumulative cash investment thus increased to £64,000.

[169]On 11 January 2008 Mr Devey withdrew £10,000 from Cameron Farley, reducing his cumulative cash investment to £15,000. However he invested a further £40,000 on 25 January 2008, increasing his cumulative cash investment to £55,000.

[170]The Devey particulars state at paragraph 173 that in or about March 2008 Cameron Farley contacted Mr Devey and informed him of a new investment opportunity in respect of Euro and US Dollar exchange rates, and that further details in this regard were posted by Mr Farley on the Cameron Farley website on 7 April 2008.

[171]On 14 April 2008 Mr Devey withdrew £75,000 from Cameron Farley. The result of this withdrawal was that he had received from Cameron Farley sums totalling £20,000 more than the cash which he had invested. However the following day, 15 April 2008, Mr Devey invested a further sum of £130,000 with Cameron Farley, along with £1,000 through Garstang Investments. The result was that Mr Devey’s cumulative cash investment stood at £111,000. Mr Devey made a final withdrawal of £5,000 on 16 June 2008, with the result that his cumulative cash investment decreased to £106,000.

[172]Mr Strange made withdrawals from Cameron Farley of £1,000 on 13 February 2008 and £12,000 on 14 March 2008. These receipts reduced his cumulative cash investment to £20,000.

[173]The Strange particulars at paragraph 174 state that in or about March 2008 Mr Farley cold-called Mr Strange describing a new investment opportunity in respect of Euro and US Dollar exchange rates, with further details posted by Mr Farley on the Cameron Farley website on 7 April 2008.

[174]On 14 April 2008 Mr Strange withdrew £201,600 from Cameron Farley. At this stage he had been paid by Cameron Farley £181,600 more than he had invested. However, on 16 April 2008 he invested a further sum of £300,000 with Cameron Farley, bringing his cumulative cash investment to £118,400. After further withdrawals of £1,000 on 14 May 2008, £1,000 on 16 May 2008, and £1,000 on 16 June 2008, his cumulative cash investment was £115,400.

[175]Mrs Tipping made no further investments with Cameron Farley during this period, nor did she make any withdrawals.

[176]During this period Stephen Bull withdrew £145,000 from Cameron Farley on 12 May 2008, but reinvested the same sum on 12 June 2008. His cumulative cash investment thus remained at £247,500. On 23 and 30 June 2008 Stephen Bull invested further sums totalling £29,000, with the result that his cumulative cash investment stood at £276,500.

[177]On 12 June 2008 CSJ Forex made its initial and only investment with Cameron Farley. This was in the sum of £145,000.

B24. July and August 2008

[178]On 15 July 2008 Stephen Bull withdrew £193,000 from Cameron Farley. This reduced his cumulative cash investment to £83,500. On the same day the sum of £193,000 was invested by Carl Bull with Cameron Farley. The Bull particulars explain at paragraph 169 that this was a gift to him from Stephen Bull. They add at paragraph 170 that Carl Bull believes he signed a “Capital Injection Agreement” (that is, an Interim Agreement) with Cameron Farley, but has not retained a copy.

[179]Paragraph 61 of Mr Burke’s witness statement records that while on 8 August 2008 Cameron Farley’s corporate account with Gain showed a profit on currency trades of $200,830, over the period from 8 to 13 August 2008 that account showed losses on currency trades of $226,243.

[180]On 15 August 2008 Mr Strange withdrew £10,000 from Cameron Farley. This reduced his cumulative cash investment to £105,400.

[181]Gain’s letter dated 7 November 2008 to the CFTC records that on 20 August 2008 $3,718,400 was deposited to Cameron Farley’s corporate account. Mr Burke’s witness statement states at paragraph 61 that this transfer came from Cameron Farley’s Natwest account, and adds that following this transfer the credit balance on Cameron Farley’s corporate account with Gain was £17,170,969.

B25. September 2008: interdict and FSA third enquiry

[182]In his affidavit Mr Pittas explained that in addition to the application by CFIL in October 2007, an application for Mr Farley to become an Approved Person was also lodged. Concerns were raised by the FSA in January 2008, and after attempts to contact him in February and March 2008 a meeting with Mr Farley took place on 29 May 2008. Additional information was sought by the FSA, but on 24 June 2008 Mr Farley notified the withdrawal of CFIL’s application.

[183]Following the receipt of further information a formal investigation was begun by the FSA on 28 July 2008. In August documents and information were obtained from the Royal Bank of Scotland Group Plc (“RBS”). Mr Pittas himself was an appointed investigator. He took steps enabling FSA to obtain search warrants to be executed at the offices of Cameron Farley and at the residential address of Mr Farley, along with an order of the Court of Session freezing Cameron Farley’s principal account and its US Dollar account with Natwest, and restraining Cameron Farley and Mr Farley from carrying on the regulated activity of accepting deposits (“the Interdict and Arrestment Order”). The search warrants were executed on 2 September 2008. Mr Pittas recalls in his affidavit a number of things said to him by Mr Farley on that date. One of them was that he (Mr Farley) had understood from the meeting of 29 May 2008 that if he was taking funds via a loan agreement this would fall within the provisions of the Consumer Credit Act 2006, and therefore was not within the FSA’s remit. Mr Pittas explained that he had obtained confirmation that this had not been said to Mr Farley at that meeting or any other time, and that in any event Mr Farley’s understanding was wrong.

[184]In paragraphs 135 to 152 of his affidavit Mr Pittas described misleading information circulated by Mr Farley and others in relation to the FSA enquiry during the period to 30 September 2008.

[185]At paragraph 61 of his witness statement Mr Burke records that on 2 September 2008, the date of the Interdict and Arrestment Order, Cameron Farley’s corporate account with Gain held a balance of $17,220,899. Mr Burke’s paragraph 61 also records that the corporate account reached its highest balance on 17 September 2008, namely $17,523,151, but also on that day recorded losses on currency trades of $128,929.

B26. October 2008: losses in excess of $17 million

[186]Mr Burke’s witness statement at paragraph 61 records losses on Cameron Farley’s corporate account with Gain during the period 1 to 8 October 2008. Those between 1 and 6 October totalled more than $17million. On 1 October losses on Euro/Dollar trades amounted to $10,551,375. On 2 and 3 October losses on Sterling/Dollar trades amounted to $1,619,375. On 6 October further losses on Sterling/Dollar trades amounted to $4,978,210. In relation to each of these losses the trading position was automatically liquidated by Gain as there was insufficient margin held by Cameron Farley to sustain another adverse market movement.

[187]Mr Burke’s witness statement at paragraph 61 also records that on 8 October 2008 there were losses on Dollar/Yen trades of $167,632, that it was on that day that the last trade was carried out in Cameron Farley’s corporate account with Gain, and that the closing balance on the corporate account on 8 October 2008 was $12,092. C. Legal principles: summary judgment/striking out

C1. Striking out

[188]Under CPR 3.4(2)(a) a claim may be struck out where there are no reasonable grounds for bringing it. The exercise of this power is governed by Practice Direction 3A. Paragraph 1.4 of that Practice Direction gives as an example of a case where the court “may conclude” that particulars of claim fall within rule 3.4(2)(a): … those which contain a coherent set of facts but those facts, even if true, do not disclose any legally recognisable claim against the defendant.

[189]The claimants add, and Gain does not in principle dispute, that in a case principally turning on issues of law, the court should be reluctant to dismiss summarily claims in novel or developing areas of the law. As stated at Civil Procedure 2013, para 3.4.2: … it is not appropriate to strike out a claim in an area of developing jurisprudence, since, in such areas, decisions as to novel points of law should be based on actual findings of fact (Farah v British Airways, The Times, January 26, 2000, CA referring to Barrett v Enfield BC

[1999] 3 WLR 83

(HL)

[1999] 3 All ER 193

C2. Summary judgment

[190]Summary judgment against the claimants is sought by the Gain defendants under CPR 24. They will be entitled to summary judgment under CPR 24.2 if the claimants have no real prospect of succeeding on the claim and there is no other compelling reason why the case should be disposed of at a trial.

[191]Both sides agree upon key points summarised by Lewison J in EasyAir Ltd v Opal Telecom Ltd

[2009] EWHC 339 (Ch)

at [15]:(i) The court must consider whether the claimant has a “realistic” as opposed to a “fanciful” prospect of success: Swain v Hillman

[2001] 2 All ER 91

;

(ii) A “realistic” claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel

[2003] EWCA Civ 472

at [8];

(iii) In reaching its conclusion the court must not conduct a “mini-trial”: Swain v Hillman;

(iv) This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10];

(v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5)

[2001] EWCA Civ 550

;

(vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd

[2007] FSR 63

;

(vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd

[2007] EWCA Civ 725

[192]As regards point (iv) of Lewison J’s summary, the Gain defendants relied strongly on what was said by Potter LJ in ED & F Man Liquid Products v Patel. While the court is not required to conduct a mini-trial: … that does not mean that the court has to accept without analysis everything said by a party in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporary documents. If so, issues which are dependent upon those factual assertions may be susceptible of disposal at an early stage so as to save the cost and delay of trying an issue the outcome of which is inevitable: see the note at 24.2.3 in Civil Procedure (Autumn 2002) Vol 1 p.467 and Three Rivers DC v Bank of England (No.3)

[2001] UKHL 16

[2001] 2 All ER 513

per Lord Hope of Craighead at paragraph [95].

[193]The claimants add, and Gain does not in principle dispute, that the court’s reluctance to dismiss summarily claims in novel or developing areas of the law applies equally whether approaching the matter by reference to summary judgment or striking out.

C3. The riposte

[194]Further observations were made by the claimants in their written riposte. The Gain defendants objected that they did not arise out of “new” matters. They do not materially add to the principles set out in sections C1 and C2 and I say no more about them.

C4. Failure to object to jurisdiction

[195]The claims were, by permission of the court, served on the Gain defendants out of the jurisdiction. Acknowledgements of service initially filed by those defendants indicated an intention to contest jurisdiction. In the event, however, jurisdiction was not contested.

[196]The claimants note that an element in the test for service out of the jurisdiction is that there must be a real, as opposed to a fanciful, prospect of success on the claim. Founding upon this, they advance a contention that there is an obvious inconsistency between the Gain defendants’ decision to submit to the jurisdiction of the court, and the application now made to strike out or grant summary judgment.

[197]I reject this contention. In my view it is misconceived. Once the court has permitted service out of the jurisdiction, it is a matter for the defendant to consider the question whether to contest jurisdiction or not. The answer to that question may be affected by factors which differ from those applicable to the question whether or not to make the present applications. A defendant may conclude that it is in its interests to have a decision of the court, made with jurisdiction, striking out the claim or granting reverse summary judgment. There is nothing in the present case which demonstrates an inconsistency between submitting to jurisdiction on the one hand, and advancing arguments in support of the present applications on the other. D. The Joint Enterprise Question

[198]At the hearing on 18 September 2013 I queried whether I had been provided with material relevant to questions of statutory interpretation arising on the joint enterprise question. Additional material was duly provided in conjunction with the written submissions lodged in October and November 2013.

[199]FSMA creates remedies in sections 26, 29 and 30. Each of these sections identifies who may seek the new remedy. But FSMA does not say against whom they may be sought. In that regard the draftsman has adopted an approach found in the predecessor statute to FSMA. This was the Financial Services Act 1986 (“the 1986 Act”). Section 5 of the 1986 Act provided remedies for individual investors who had entered into investment agreements with persons carrying on unauthorised investment business. Subsection (1) provided that any such agreement: shall be unenforceable against the other party [i.e. the investor]; and that party shall be entitled to recover any money or other property paid or transferred by him under the agreement, together with compensation for any loss sustained by him as a result of having parted with it.

[200]Questions as to the scope of the remedy, and in particular as to who the remedy may be sought from, are questions of statutory interpretation. A question of this kind was noted in relation to the 1986 Act by Scott LJ in his judgment in SIB v Pantell (No 2)

[1993] Ch 256

. Although it was not necessary for him to decide the point, he commented at p. 270: The restitutionary and compensatory provisions of section 5 do not in terms identify the person or persons against whom the remedies are available. But it is difficult to see how the section 5 restitutionary remedy could be available against anyone other than the other party to the transaction in question or the party to whom, under the transaction in question, the investor's money had been paid or transferred. Whether the compensatory remedy available ‘together with’ the restitutionary remedy, could be obtained against an accomplice who was neither a party to the transaction nor a person to whom money or property of the investor had been transferred is equally doubtful. These difficulties do not, however, have to be resolved on this appeal.

[201]I had hoped that counsel’s researches might reveal a reason why section 5 of the 1986 Act had failed to specify those against whom the remedy under that section would lie, or at least why FSMA had taken a similar approach to the 1986 Act without seeking to deal with the difficulties which Scott LJ had noted.

[202]The written submissions noted that the genesis of the relevant sections lay in Professor Gower’s report on Review of Investor Protection, Part I (1984) Cmnd 9125 at para 10.32 (the “Gower Report”). At paragraph 10.32 the Gower Report stated: A recent case suggests that a contract entered into by an unregistered person in the course of carrying on investment business would be treated as illegal. Whether this should be so, and with what effect, is a question which the Act should clearly answer. Experience of licensing under the Consumer Credit Act 1974 suggests that to make contracts unenforceable by an unregistered person would be an effective deterrent against failure to register and should therefore be provided.

[203]This explains the express provision made in the relevant sections as to unenforceability. It does not, however, address the scope of the additional remedies created.

[204]From an early stage the Gain defendants placed strong reliance on the decision of Hamblen J in Brown v Innovatorone

[2012] EWHC 1321

. They observe that in his judgment Hamblen J concluded at paragraph 1234 that when s.26(2) refers to the “other party's right to recover money or property or compensation” it is naturally to be read as referring to a right to recover it from the counterparty to the agreement referred to in s26(1).

[205]The question which arose in that case, however, was different from the joint enterprise question. As Hamblen J noted at paragraph 1236, the claimants in that case were asserting that recovery could be made against(1) a non-counterparty who never held the monies beneficially and had long since parted with the monies in accordance with lawful instructions given,

(2) a third party seller who acted in good faith and provided value for the monies received, and

(3) a third party purchaser for value of property transferred who acted in good faith. In their written submissions the claimants have questioned whether Hamblen J’s decision is right. I express no view on that question. My only conclusion is that Hamblen J’s decision in that case does not deal with the question arising in the present case.

[206]The Gain defendants rely upon the decision of the Court of Appeal in Green and Rowley v The Royal Bank of Scotland plc

[2013] EWCA Civ 1197

. There the Court of Appeal held that there was no common law duty of care co-extensive with the statutory duty under what was then s. 150 of FSMA. Again it seems to me that this is a different question from the joint enterprise question, which is concerned to identify those against whom a statutory remedy lies.

[207]Reliance is also placed by the Gain defendants on section 382 of FSMA, under which the Secretary of State and the FSA (now the Prudential Regulation Authority and the Financial Conduct Authority) have a power to apply to the court for a restitution order. Such an order would require a person who contravened sections 19 or 21 or a third party who was “knowingly concerned in the contravention” to pay the relevant regulator such sum as appeared to the court to be just. It does not seem to me, however, that the existence of this power in section 382 necessarily entails that FSMA gives the claimants themselves no rights against those involved in a joint enterprise.

[208]The Gain defendants note that an investor who received substantial benefits under the contract (for instance, made a significant claim under the insurance contract) may not wish to unwind it, given the statutory requirement to provide counter-restitution. Similarly, an investor may decide that performance of the contract is more valuable to him than the statutory right of restitution; and this may be so even where the counterparty has also profited from the transaction. It does not seem to me necessarily to follow that the clear purpose of the sections is, in the Gain defendant’s words, limited to “the reversal of unjust enrichment of the investor and the unauthorised counterparty”.

[209]By contrast, it seems to me that the claimants derive at least arguable assistance from the decision of the House of Lords in Majrowski v Guy’s and St Thomas’s NHS Trust

[2006] UKHL 34

[2007] 1AC 224

. As noted by the Gain defendants, the issue in Majrowski was whether an employer could be held vicariously liable in damages under section 3 of the Protection from Harassment Act 1997 for a course of conduct by one of its employees which amounted to harassment in breach of section 1 of that Act. The House of Lords answered that question in the affirmative. The Gain defendants draw attention to passages in the reasoning of the majority that by section 10(1) of the Act, Parliament had indicated that in Scotland an employer could be vicariously liable for the conduct of an employee, in the course of his employment, amounting to harassment within the meaning of the Act, and that Parliament could not have intended that the position would be any different in England and Wales. The point nevertheless remains that the Act was held to contemplate that a common law principle would apply in determining the scope of the remedy.

[210]In these circumstance I conclude that the joint enterprise question is novel and difficult, and that it is best decided at trial rather than on a summary basis. E. The authority arguability questions

[211]The first of these questions concerns the actual authority of Cameron Farley. The Gain defendants’ oral submissions and written reply stressed the terms of the agreements made between Gain and Cameron Farley.

[212]Plainly those agreements do not confer actual authority upon Cameron Farley. Indeed it may be thought that they are designed to limit to a minimum the extent to which Cameron Farley is entitled to do anything on behalf of Gain. However, a fundamental difficulty with reliance upon the terms of those agreements, as it seem to me, is that individuals on both sides may well act in a manner inconsistent with them, and for good reason. Among other things, if individuals at Gain wished to increase the volume of business then they may have considered it in their and Gain’s interest to encourage Cameron Farley to do things on behalf of Gain.

[213]I acknowledge that Mr Bobinski denies that anything of the kind took place. However he was not involved at the time. No evidence is provided from those who were. The claimants, as described in section B above, describe repeated reference by Cameron Farley to it being involved with Gain in relation to forex dealing. There is very little by way of documentation concerning the basis upon which funds went from the claimants to Cameron Farley for foreign exchange trading. The evidence from the claimants is at least arguably consistent with Cameron Farley receiving such money as agent for Gain to enable forex trading through Gain.

[214]I add that those claimants who entered into customer account agreements with Gain are arguably entitled to say that anything in those agreements purporting to limit Cameron Farley’s authority is unenforceable, such agreements having arguably been made in breach of the general restriction and the financial promotion restriction.

[215]Equally, as it seems to me, the claimants are arguably entitled to say for similar reasons that nothing in the Interim Agreements is enforceable against them. The same would apply to any side agreement under which the Interim Agreements took the place of whatever entitlements the relevant claimant would have had in the absence of those agreements.

[216]The Gain defendants say that the agreements made with Cameron Farley were governed by New York law, and rely upon Mr Goldstein’s evidence that there was no relationship of agency under New York law. I would hesitate before concluding that such evidence justified a summary determination of the matter against the claimants. I add that it seems to me at least arguable that the question is not governed by New York law, that even if it were Mr Goldstein is not in a position to take account of what may have transpired between individuals at Cameron Farley and those at Gain, and that in any event once relevant principles of New York law have been ascertained their application to the facts of the case is a task for this court which must not be usurped by an expert witness.

[217]The second question concerns ostensible authority. It seems to me that this question is intimately bound up with actual authority. The Gain defendants say that in order to succeed, the claimants must be able to establish that the relevant Gain defendant represented to them that Cameron Farley was authorised to enter into “a contract of a kind within the scope of the ‘apparent’ authority”. It seems to me that acquiescence by Gain in the general activities of Cameron Farley may arguably found a contention of ostensible authority even if that acquiescence was not such as to amount to the grant of authority specifically in relation to the point in question.

[218]In these circumstances I consider that the authority questions fall within paragraph (vi) of Lewison J’s summary in the EasyAir case. The relevant points should not be decided against the claimants on a summary basis, but should be the subject of examination at a trial. F. Conclusion

[219]For all these reasons I refuse the applications. I ask the parties to seek to agree on consequential orders.

order

see section 29(3) and (4).