“2. Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus if the Dow Jones index is, say, at 10,000, one can “buy” or “sell” the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10010. If one buys, one is betting that the market will rise above 10010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain£1 for every point that the index exceeds 10010. If one sells and the market falls, one stands to gain£1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose£1 for every point that the index exceeds the spread point in the wrong direction. Thus if one sells at 10,000 with a sell spread point at 9990, one will make£1 for every point the market falls below 9990 and lose£1 for every point the market rises above 9990. Until the bet or “trade” is closed, the gains and losses are merely “running” gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sale spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose£10 for every£1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory winnings based on rising markets are infinite (in practice of course they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero. 3. Normally, of course, to gain by£1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than£1 . In effect, one’s£1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be£100 to£200 richer or poorer per£1 stake within a matter of hours of his trade. On a trade of£100 , those figures become£10,000 to£20,000 . 4. The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator’s customer: nor, in the present case, have the applicable terms been disclosed. The credit risk, margin and security 5. If the customer’s trade is efficiently laid off, the spread betting operator does not retain a market risk, but, since its customer is open to volatile swings and losses which are potentially out of all proportion to his initial stake, it does retain a credit risk, which it has to be able to monitor closely. Typically, it seeks to limit that risk by controlling the level of its customers’ trading and by taking security for its customers’ exposure. 6. Such security, or margin arrangements, may take two forms, responding to two kinds of risk. Even at the outset of a trade, indeed at the outset of a relationship, the operator may require funds to be deposited with it as security for the customer’s potential losses. The size of such a deposit may reflect, of course, the level of the customer’s trading and also the volatility of a market in which that trading takes place. The more volatile the market, the greater can be the potential losses. Secondly, security for running losses already incurred in open trades may be required.”
“Nothing in this Agreement will exclude or restrict any duty or liability owed by us to you under theFinancial Services and Markets Act 2000 [‘the 2000 Act’] or the FSA Rules and if there is any conflict between this Agreement and the FSA Rules, the FSA Rules will prevail.”
“You will open a Bet by ‘buying’ (wagering that a specified Index will go up within a specified period) or ‘selling’ (wagering that a specified Index will go down within a specified period). In this Agreement, a Bet that is opened by ‘buying’ is referred to as an ‘Up Bet’ and a Bet which is opened by ‘selling’ is referred to as a ‘Down Bet’…”
“All payments to be made under this Agreement (other than payments under Terms 14(6) and 14(8) that are due and payable in accordance with those Terms respectively) are due immediately on our Communicating a demand. All payments must be paid by you, and must be received in full by us for value, by (a) where the demand is Communicated before 12 noon on any day, not later than 12 midday on the business day following the day on which our demand (including our deemed demand in accordance with Terms 14(6) and 14(8)) is Communicated; or (b) where the demand is Communicated after 12 midday on any day, not later than 4pm on the business day following the day on which our demand (including our deemed demand in accordance with Terms 14(6) and 14(8)) is Communicated. These timeframes are subject to the rules of any Underlying Market that have been advised to you by us in the event that the Underlying Market requires payment of margin to be made sooner.”
“(1) Each of the following constitutes an ‘Event of Default’: (a) your failure to make any payment (including any deposit or margin payment) to us or to an Associated Company of ours in accordance with Term 15; (b) your failure to perform any obligation due to us; … (2) If an Event of Default occurs in relation to your account(s) with us or in relation to any account(s) held by you with any Associated Company of ours, we may at our absolute discretion at any time and without prior notice: (a) close all or any of your Bets at a Closing Level based on the then prevailing quotations or prices in the relevant Underlying Markets or, if none, at such levels as we consider fair and reasonable; (e) close any or all of your accounts held with us of whatever nature and refuse to accept further Bets from you. … (4) You acknowledge that: (a) where you have failed to pay a deposit or margin call in respect of one or more Bets five business days after such payment becomes due, we are (except as provided in Term 16(5) below) obliged to close out such Bets; … (5) Subject to the FSA Rules, in the event of your failing to meet a demand for deposit or margin or your being in excess of any credit limit placed on your account, we may exercise our reasonable discretion to allow you to continue to place Bets with us, or allow your open Bets to remain open, but this will depend on our assessment of your financial circumstances. (6) You acknowledge that, if we agree to allow you to continue to place Bets or to allow your open Bets to remain open under Term 16(5), this may result in your incurring further losses.”
“(1) You represent and warrant to us, and agree that each such representation and warranty is deemed repeated each time you open or close a Bet by reference to the circumstances prevailing at such time, that: (a) the information provided to us in your application form and at any time thereafter is true and accurate in all respects…”
“(1) If any Financial Index becomes subject to possible adjustment as the result of any of the events set out in Term 28(2) below (a ‘Corporate Event’) affecting a related financial instrument, we will determine the appropriate adjustment, if any, to be made to the size and/or value and/or number of the related Bet(s) (and/or to the level of any Order) to account for the diluting or concentrating effect necessary to preserve the economic equivalent of the rights and obligations of the parties in relation to that Bet immediately prior to that Corporate Event, to be effective from the date determined by us. (2) The events to which Term 28(1) refers are the declaration by the issuer of a financial instrument (or, if the financial instrument is itself a derivative, the issuer of the security underlying that instrument) of the terms of any of the following: (a) a sub-division, consolidation or reclassification of shares, a share buy-back or cancellation, or a free distribution of shares to existing shareholders by way of a bonus, capitalization or similar issue; …”
“‘Business day’ means any day other than a Saturday, Sunday and a UK public holiday. ‘Closing Level’ means the level at which a Bet is closed.”
“A firm must act honestly, fairly and professionally in accordance with the best interests of its client. (The client best interests rule)”
“(1) The protection of consumers objective is: securing the appropriate degree of protection for consumers. (2) In considering what degree of protection may be appropriate, the Authority must have regard to— (a) the differing degrees of risk involved in different kinds of investment or other transaction; (b) the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity; (c) the needs that consumers may have for advice and accurate information; and (d) the general principle that consumers should take responsibility for their decisions.” (a) the differing degrees of risk involved in different kinds of investment or other transaction; (b) the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity; (c) the needs that consumers may have for advice and accurate information; and (d) the general principle that consumers should take responsibility for their decisions.”
“A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.”
“This is to confirm that we act for the above (Mr A Ehrentreu and group of companies) and the total gross assets of the above exceed£10 million with a net value of around£3.5 million .”
“Please note that I have arrange a transfer to your account on Friday Please confirm.”
“Thanks for your phone call Please note that I have transfer last Friday 2 transfer of£100,000k each Please advise, it should come from oversee bank…”
“… Did you get the money?”
“Yeah, according to my confirmation it came from called [Gurney] in Turkey, HSBC … I don’t know what the date: 22, 24, 26 was sent at—what date was that, or what day, I don’t know, I am just trying to remember, got no calendar?”
“…I’ll send you now, from my account,£100,000 by transfer [OK] and if you don’t get it on Monday I’ll send you the rest from here. I just don’t understand why it didn’t happen.”
“Yeah, the problem I’ve got, that happened to me last time as well is that the fact because it is international I sometimes had to tell them send it to me and I’ll send it to you, because it’s international [yeah] sometimes its gets locked up in the system [yeah] sometimes it goes in one date, shows up on the system and they’ll tell me, what they normally do they send it from HSBC Turkey to London and then London due to the BACS system, they BACS it to you, so what I’ll do I’ll send an e-mail to my bank manager and I’ll copy you so that you see the correspondence and hopefully come back to you within 24 hours, but come back to me and I’ll send you£100,000 cash at least and if not I’ll send you£100,000 every day next week.”
“Now I have to ask you that we receive at least half of that by tomorrow. Because the original margin call has been due for about three weeks now, so we have been fairly sort of lenient. I know you’ve had a holiday in the meantime but I can’t allow the exposure to remain without receiving any funds because it is quite a bit… I mean the majority of it is a deficit on the account, it’s not just a margin or a deposit funding needed, erm, so it needs to be getting its way to be cleared by Friday, but I would require half of it by tomorrow or you need to send a TT and sort of show that those funds are coming in…”
“OK. Leave it to me, I’ll sort it out for tomorrow morning. Come back to me and I’ll give you a call lunchtime.”
“He [the Defendant] said that he wanted me to ring to let you know he’d done the transfer.”
“He did it around lunchtime, it would have been about 1, 2 o’clock.”
“Around this time (i.e. 9-10 October 2008 ) I had ascertained that if I were to bring money in from abroad, the money would be subject to significant taxation at around 30%. Given the circumstances and what was happening in the economy I could ill afford to lose 30% of my money by transferring it into the UK, particularly when it was now such a huge sum. The whole situation was crazy, a mess and had spiralled completely out of control. Accordingly, I intended to refinance some property within the UK, where I had equity. I considered that I could find the£1.2 million needed and hoped that the RBS shares might recover.”
“I still haven’t heard from him [the Defendant], this is the problem. I can’t stress the urgency of this now. I mean when I spoke to you on Thursday wasn’t it, sorry Wednesday, you passed on some information that he had sent money, erm… we still haven’t received that…”
“Tell him that I need to speak to him before 4pm today and he should understand the reason for that so…”
“I’ve gone through my bank, I’ve got a lot of equity in property in the UK. … What I am doing now, I’m going to re-finance and that will leave me equity of about£1.2 million .”
“… I’m really sorry, please bear, don’t close my position… Please leave, you’ve got to understand one thing… if you close my position, … because it’s in my own name, it’s not my company, if I’ve not got the money I could go bankrupt so I will send you the money, please bear with me a couple of days.”
“[Mr Helal] This is the problem, I mean as you say, I mean of course given the circumstances I’ve kind of allowed a certain amount of time because I didn’t think you weren’t going to be paying, I mean I just assumed you had complications in transferring the money. [The Defendant] Yeah, now I realise, now I realise what the complication. Tell you what, let’s discuss again on Friday, right. And if I don’t get any, I’ll let you have a letter from my bank, the money’s coming. [Mr Helal] The problem I’m going to be having, Sir, is that I’m not going to be able to authorise that, I’m going to have to discuss this with my manager anyway, erm, I mean I’ve already been told that if we can’t establish that funds are on their way, we need to basically get on to closing the positions which I know you said is something you don’t want to do. Obviously the culprit of this has been the RBS position hasn’t it, continued to fall and now it’s kind of going up and down but we have to think of it as an exposure point-of-view, you’re not purely maintaining a margin here, you’re running a deficit on your account which is a, I mean, if you think of it in theory, it’s a hole in IG’s balance sheet, it’s not like we’re just letting you open a position without funding it which would be perhaps another scenario, we may have a different view on that, as it’s literally a running loss, you know, and if we did close the position at this point of time you would owe IG£1.26 million so I’m not going to be able to give you an answer this second, so I’ll speak to my credit director who obviously has already been kind of liaising with me about this, erm, and I need you to sort of say, if you can tell me perhaps, when we can sort of expect to receive this money, a realistic period of time would be what? [The Defendant] I’ll speak to my bank manager and come back to you. I can show you the letter from my bank manager and the e-mail about the re-finance. … [Mr Helal] Ok, well if you could check what you say you need to check and if you could ring me back within the next sort of half an hour to an hour, erm, because I struggle to get through to you, I’m sure you’re busy but obviously we need to talk… I’ll speak with David who is my credit director and if in the meantime you can find out the implications of what you’re saying and then we’ll speak shortly, yeah. [The Defendant] Yeah, I appreciate your patience.” [The Defendant] Yeah, I appreciate your patience.”
“It is what I wanted them to believe – we had a good relationship.”
“During October we saw extreme volatility, the collapse in share price of many banking stocks and a severe market crash”
“It is not disputed that, had the Claimant been suing on the Customer Agreement, the Defendant would have been entitled to set off such damages as were awarded on his counterclaim (whether the breach of contract or breach of duty).”
“After some questioning from the court Mr Mayall again appeared to me to accept that the facts asserted by Mr Ehrentreu in the counterclaim could amount to a valid claim (in the sense that it was not demurrable). If, for example, Mr Ehrentreu had immediately paid what IG Index said he owed he could have brought his claim on the following day. What he appears to me to be saying was that a claim which can operate as a set-off cannot also exist as a free standing claim. I reject that submission. The starting point is the existence of a cross-claim. Whether a cross-claim can operate as a set-off is covered by well known principles. But the important point is that cross-claims that can be deployed by way of set-off are a sub-set of cross-claims. They do not cease to be members of the set of cross-claims merely because they are also part of the sub-set of cross-claims capable of being set-off…”
“Further and in the alternative it is averred that the breaches of duty alleged (but denied) do not give rise to a counterclaim. They amount to no more than a denial that the Claimant is entitled to recover the difference between the Opening Level of the Bet and the Closing Level pursuant to Clause 8 of the Agreement.”
“(iii) By the Settlement Agreement the Defendant irrevocably acknowledged and agreed that the Debt (i.e. the difference at the time the bets were actually closed) was properly due and owing to IG in its entirety and therefore acknowledged and agreed that the Claimant was entitled to recover the Debt under Clause 8. (v) The breaches alleged seek to claim that the Claimant was not properly entitled to close the bets out at the time it did and thus recover the Debt. In particular it is alleged that the bets should have been closed at an earlier time when the difference would have been less. (vi) In all the circumstances the allegations of breach and any claim for damages arising therefrom are wholly incompatible with the Settlement Agreement and the Judgment of the Court of Appeal.”
“A firm must close out a private customer’s open position if that customer fails to meet a margin call made for that position for five business days following the date on which the obligation to meet the call accrues, unless: (1)(a) the firm has received confirmation from a relevant third party that the private customer has given instructions to pay in full; and (b) the firm has taken reasonable care to establish that the delay in its receipt is owing to circumstances beyond the private customer’s control; or (2) the firm makes a loan or grants credit to the private customer to enable that customer to pay the full amount of the margin call in accordance with the requirements of COB 7.9.3R (Restrictions on lending to private customers).”
“16.1.28 COB requirements in respect of realisation of a private customer’s assets are more prescriptive than MiFID. They are more specific about the information that is to be disclosed and the timing and manner of provision. However we consider that the high level requirements in MiFID provide a similar level of consumer protection. Our proposal to rely on these high-level requirements is also consistent with our policies of reviewing COB and a move towards principles-based regulation. … 16.1.32 Firms will no longer have a regulatory requirement to obtain from a private customer any margin payable, nor to close out a position to which that margin relates where there is a failure on the part of the private customer to pay. These requirements were designed to prevent firms from allowing a position of a private customer from running up potentially unlimited losses at the customer’s risk. 16.1.33 It is not anticipated that this deletion will have any material impact on consumer protection because the requirements relate to execution-only and non-advised transactions. We understand the consumers in these markets to be relatively sophisticated. While it is conceivable that this provision would prevent losses to customers in certain situations, firms do not have commercial incentives to create or encourage such losses on the part of their customers. On the contrary, we understand market practice to be to close margin accounts in deficit in a shorter period than five days, usually one day. We further consider our proposals, in respect of the risk control function in SYSC also provide for adequate credit risk management on the part of the firm and therefore prevent a negative impact on market confidence.”
“16.1.34 We believe that the costs and benefits arising from the proposals for realisation of a private customer’s assets and lending to private customers described in this chapter will be of minimal significance. Therefore no cost-benefit analysis is required. 16.1.35 Although the proposals for margin requirements are deregulatory in nature and therefore do not give rise to increased costs to firms, we believe there will be fall in consumer protection. However we consider this will be of minimal significance because of the sophistication of the clients and current practices of firms and exchanges. Therefore no further cost-benefit analysis is required.”
“Are there any aspects of COB 7.10 that in your view should be retained in NEW COB? Would any of these provisions be more appropriately expressed in industry guidance?”
“Respondents generally agreed with our proposal to delete these provisions on the grounds that they are provided for by our implementation of the high-level MiFID requirements, as well as it not being in the commercial interests of firms to allow their customers to accumulate unlimited losses. However, some respondents indicated that industry guidance was not appropriate in this area, and that any necessary guidance should be provided by the FSA. Our response: we propose to delete COB 7.10 on the basis set out in CPO6/19. We do not intend to provide guidance in this area.”
“Where the time is to be computed from a certain date, or an act to be done on the happening of an event, the mode of calculating the time must depend on the circumstances of the particular contract. The general rule is now well established that where a particular time is given from a certain date, within which an act is to be done, the day of the date is to be excluded, but ‘there is no absolute rule with regard to the inclusion or exclusion of the day on which a particular event takes place’, and the court has to decide the meaning of the particular contract. The mode of calculation must therefore depend on the wording of the contract, and where the act done is one to which the party against whom time runs is privy the computation may be inclusive as he has had the benefit of some portion of the day included, but where this is not so and the event is foreign to the party against whom time runs, the general rule will be adopted. …”
“The passages which I have cited from the speeches in Monarch Steamship Co. Ltd v Karlshamns Oljefabriker A/B[1949] AC 196 make it clear that if a breach of contract by a defendant is to be held to entitle the plaintiff to claim damages, it must first be held to have been an ‘effective’ or ‘dominant’ cause of his loss. The test in Quinn v Burch Bros. (Builders) Ltd[1966] 2 QB 370 that it is necessary to distinguish between a breach of contract which causes a loss to the plaintiff and one which merely gives the opportunity for him to sustain the loss, is helpful but still leaves the question to be answered ‘How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?’ The answer in my judgment is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of duty imposed on a defendant whether by contract or in tort in a situation analogous to the breach of contract. The answer in the end is ‘By the application of the court’s common sense’.”
“If a breach of contract is assumed and the acts complained of were taken in isolation then it seems to me that Mr Mallin’s view of causation might be preferred. If one assumes the breach (and also the absence of ‘such bets’ issue) then a loss caused because bets were closed out some days later than they should have been would have been caused by the breach. However this involves making assumptions about the facts in circumstances where Mr Leung-Cheun was actively trading each day and would have been forcefully opposed to his positions being closed out five days after the ‘margin calls’. I find it difficult to see how he could have successfully recovered damages for a failure to close out which he would have strongly opposed and which he could have remedied by closing out himself.”
“One cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule”
“There are three rules often referred to under the comprehensive heading of ‘mitigation’: they will be considered in turn. First, the claimant cannot recover damages for any part of his loss consequent upon the defendant’s breach of contract that the claimant could have avoided by taking reasonable steps…”
“… imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.”
“It is not strictly a ‘duty’ to mitigate, but rather a restriction on the damages recoverable, which will be calculated as if the claimant had acted reasonably to minimise his loss. Only the claimant’s net gain from his mitigating effort will be deducted – he may set off against his substitute profits or earnings the reasonable expenses incurred in obtaining them. The onus of proof is on the defendant, who must show that the claimant ought, as a reasonable man, to have taken certain steps to mitigate his loss and that the claimant could thereby have avoided some part of his loss.”