B e f o r e :
MR JUSTICE ANDREW SMITH
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Between:
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CAMERATA PROPERTY INC.
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Claimant
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- and -
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CREDIT SUISSE SECURITIES (EUROPE) LTD.
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Defendant
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FRANCIS TREGEAR QC AND ANDREW THOMAS
(instructed by Thomas Cooper) for the Claimant
ADRIAN BELTRAMI QC and CATHERINE GIBAUD
(instructed by Allen & Overy LLP) for the Defendant
Hearing dates: 18, 19, 20, 21 and 25 January 2011
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
Mr Justice Andrew Smith :
Introduction
- On 25 July 2007 the claimant, Camerata Property Inc ("Camerata"), bought through Credit Suisse (Guernsey) Limited ("CSG") for US$12 million a "5-year Autoredemption Note in USD Bearish on Eur/USD" (the "Note") issued by Lehman Brothers Treasury Co BV (the "Issuer"). On 15 September 2008 Lehman Brothers Holdings Inc ("Lehman") and various subsidiaries of Lehman filed in the United States for chapter 11 bankruptcy protection, and on 8 October 2008 the Amsterdam District Court declared the Issuer to be bankrupt. Camerata have lost all or a significant part of the investment.
- In or about June 2007 Camerata entered into an agreement with the defendant, Credit Suisse Securities (Europe) Ltd ("CSSE"), whereby they were to receive an investment "Advisory Service". Their advisor or "relationship manager" was Mr Petros Siakotos-Konstantinidis. Camerata do not complain in these proceedings about their dealings with CSSE whereby they came to buy the Note. Nor do they allege that after they had bought the Note CSSE were under a continuing duty to volunteer advice about the Note otherwise than by way of responding to their inquiries or requests for advice. Their complaint is that, after J P Morgan Chase on 16 March 2008 had bought Bear Stearns & Co Inc ("Bear Stearns") so as to rescue the bank, they, through Mr Charalambos Ventouris, sought advice from Mr Siakotos-Konstantinidis about their investments, including the Note, and received from him advice that was negligent and in breach of the contractual obligations of CSSE, but for which they would have sold the Note before Lehman failed.
- Although there is no complaint in these proceedings about the circumstances in which Camerata acquired the Note, by a letter of 31 December 2010 Messrs Thomas Cooper, Camerata's solicitors, sent Messrs Allen & Overy, CSSE's solicitors, a draft pleading with a view to bringing new claims in which, as I understand it, Camerata allege that the Note and other investments made through CSSE were unsuitable for them. Mr Adrian Beltrami QC, who represented CSSE, invited me to refrain from exploring in this judgment matters which might be in issue in such proceedings, and I have sought to avoid doing so unnecessarily. However, it is necessary to set the background to the present claim, and to examine, in particular, Camerata's financial knowledge and experience and their attitude, and expressed attitude, towards adventurous investments: indeed, CSSE themselves rely upon these matters.
The parties
- Camerata are a company incorporated in Belize in 2005. They are an investment vehicle owned by a Panamanian trust, the Frosio Foundation, whose sole beneficiary is Mr Ventouris. Their sole director is Dr Urs Lustenberger, a commercial lawyer practising in Zurich. Dr Lustenberger has acted for Mr Ventouris since the early 2000's, and he took his instructions in relation to Camerata from Mr Ventouris. He had no part in deciding what investments Camerata should make: that was done by Mr Ventouris alone.
- Mr Ventouris, who is Greek, is a wealthy man. He is in his thirties and has shipping experience: he holds a Captain's B certificate and he is qualified as a Chief Officer of an ocean-going vessel. He studied for the degree of Master of Business Administration in Maritime Studies from Leicester University through a distance learning programme, which included some accountancy and economics.
- Mr Ventouris' father founded a shipping business some fifty years ago and built it up from small beginnings. The business has now been divided between Mr Ventouris and other members of the family. Mr Ventouris manages bulk carriers: he once had a fleet of seven vessels, but has made sales and now owns only two. At the time of his dealings with Credit Suisse, he had funds of some $50 million for investment. They came from operating his ships and the sales from the fleet.
- CSSE are in the Credit Suisse group of companies, and are a listed money market institution under the Financial Services and Markets Act, 2000. Their business includes arranging finance for clients in the international capital markets, providing financial advisory services and dealing in securities, derivatives and foreign exchange both as a principal and on behalf of others.
- Mr Siakotos-Konstantinidis is employed by CSSE in the Private Banking division in London as a relationship manager. He has been employed in financial services since 1992, having worked first for Barclays Bank in Greece. He joined Credit Suisse's Private Banking division in 2003, and in 2007 he was promoted to director's level (the title of director indicating a rank of employee and not membership of the company board). Mr Siakotos-Konstantinidis was originally engaged by CSSE to "cover the Greek market" and most of his clients were Greek. During the period with which I am concerned, his assistant at CSSE was Mr Christopher Kelly.
- Mr Siakotos-Konstantinidis has a particular involvement with investments by way of structured notes, that is to say notes whose value and return depend upon the performance of an underlying asset or underlying assets (such as shares in other companies, currencies or commodities). He described his role as "client-facing", by which he meant that he dealt with CSSE's clients and was not involved in Credit Suisse's own investments or in deciding what financial products or notes should be sold through Credit Suisse or which banks or other institutions should issue investments that Credit Suisse sold.
- Mr Siakotos-Konstantinidis did not receive commission directly related to the amount of investments sold to CSSE's customers through him. However, when CSSE sold an investment issued by another institution, they received a commission from the issuer, and the performance of a unit within CSSE was measured in part by reference to how much commission was so earned.
- I have referred to CSSE selling structured products. Credit Suisse adopted what they described as an "open architecture" approach when they constructed financial products: they meant by this that they structured the terms upon which a product should be offered to investors and, if it attracted interest, they invited tenders from suitable institutions and arranged for it to be issued by one that offered competitive terms. As a result, it would sometimes not be known who would issue a product until after the client had agreed to invest.
Mr Ventouris' first dealings with Credit Suisse
- Although Camerata's complaint relates only to Mr. Ventouris' dealings with Mr. Siakotos-Konstantinidis after 16 March 2008, I must describe their earlier relationship: CSSE argue that it supports their contentions that they were not in breach of duty and that in any case Mr. Ventouris would not have sold the Note if given other advice by Mr Siakotos-Konstantinidis.
- In 2005 Mr Ventouris was introduced to Mr Achilles Fokiades, who worked for Credit Suisse in Switzerland. In 2006 Mr Fokiades, who was then Mr Ventouris' relationship manager with Credit Suisse, told him that he could earn a better return than that paid on bank deposits without risking his capital. This conversation led to Mr Fokiades introducing Mr Ventouris to Mr Siakotos-Konstantinidis because of his knowledge of structured products.
- Mr Ventouris first spoke with Mr Siakotos-Konstantinidis on 3 April 2006 in a conference telephone call arranged by Mr Fokiades. They had what Mr Ventouris described as (and I accept was) a brief discussion about a structured product which has been referred to as the "Index Based Note" issued by Credit Suisse. It was based upon the performance of three indices, the S&P (Standard & Poor's) 500 index, the Dow Jones Eurostoxx 50 index and the Nikkei 225 index. It paid quarterly floating coupons of 3 months LIBOR plus 3% pa during the life of the note. It was a three years note, but could be "called" at the end of any quarter by Credit Suisse paying the capital invested and the last quarter's coupon. The investment was not capital protected: less than the sum invested might be repaid if, during the lifetime of the note, any one or more of the three indices traded at or below its "barrier", which for each index was set at 60% of that index's "strike" level. In those circumstances, if upon maturity at least one of the indices was trading below its strike level, the amount for which the note was redeemed was reduced by the percentage by which upon maturity the worst performing index was below the strike level. Thus, the Index Based Note was designed for investors who considered that the three indices would not experience a severe bear market during the life of the note. I accept Mr Siakotos-Konstantinidis' evidence that he explained to Mr. Ventouris how the investment was structured.
- On about 11 May 2006 Mr Ventouris invested $3 million in an Index Based Note. The commission on the sale was divided equally between Mr Fokiades' unit in Credit Suisse, Switzerland and Mr Siakotos-Konstantinidis' unit in CSSE, London.
- In the course of the discussions leading to the purchase of the Index Based Note, Mr Ventouris was provided with a term sheet, which warned under the heading "Investment Considerations":
"The Notes involve complex risks which include equity market risks and may include interest rate, foreign exchange and/or political risks. Before buying Notes, investors should consider carefully, among other things, (i) the trading price of the Notes, (ii) the value and volatility of the shares comprised in the index, (iii) the probable range of Annual Coupons, (iv) any change(s) in interim interest rates and dividend yields, (v) any change(s) in currency exchange rates, (vi) the depth of the market or liquidity of the shares comprised in the Index and (vii) any related transaction costs. ….
…Fluctuations in the value of the Index will affect the value of the Notes."
I accept Mr Ventouris' evidence that he had nevertheless been assured that the investment was not a risky one. I cannot tell whether he was so reassured by Mr Siakotos-Konstantinidis or by Mr Fokiades or by both of them.
- In July 2006 Mr Fokiades and Mr Ventouris corresponded by e-mail about the possibility of Mr Ventouris making an investment in another structured product, an Equity Range Note based upon the performance of the S&P 500 index, or in a private equity placement, but Mr Ventouris did not make either of these investments.
- Mr Siakotos-Konstantinidis first met Mr Ventouris in person in September 2006. Mr Fokiades had suggested that he invest in a further structured product, which was referred to as the "Interest Rate Note" or, more usually, the "Swap Note". Mr Fokiades had a limited understanding of it, and so it was arranged that Mr Ventouris meet Mr Siakotos-Konstantinidis to explain it better. They met at Mr Ventouris' office in Piraeus. Mr Fokiades was at their first meeting on 28 September 2006, and they had another meeting without Mr Fokiades on 29 September 2006. Mr Siakotos-Konstantinidis discussed the Swap Note, and responded to Mr Ventouris' questions, for example about the frequency of observation dates, and about whether it could be leveraged.
- Over the next two years, Mr Ventouris was an important client of Mr Siakotos-Konstantinidis. Mr Siakotos-Konstantinidis roughly estimated that his annual sales of structured products were about $100 million: in 2006 Mr Ventouris invested $18 million through him. Mr Ventouris and Mr Siakotos-Konstantinidis worked together closely, and from it a social relationship developed. Their written communications were by e-mail, which they typically used for sending documents as attachments, and otherwise they generally communicated by telephone. Most of their meetings were in Greece, but some were in London, and they met in hotels rather than either Mr Ventouris' or CSSE's offices. It was the policy of CSSE that relationship managers should keep file notes of their meetings with clients, but Mr. Siakotos-Konstantinidis often did not make a note of his conversations with Mr. Ventouris: he described CSSE's policy as "impractical".
- Mr Siakotos-Konstantinidis and Mr Ventouris had very frequent telephone conversations. CSSE generally recorded telephone conversations conducted on their office landlines, but no transcripts of conversations before September 2008 were in evidence. In any case, Mr. Siakotos-Konstantinidis sometimes used mobile telephones, and these conversations were not recorded.
- At their first meetings in September 2006, Mr Ventouris and Mr Siakotos-Konstantinidis discussed the "Swap Note". It was a five years note, based upon the relationship between the 10 years US dollar swap rate and the 2 years US dollar swap rate. The Swap Note did not pay a premium, but in some circumstances it might be repaid for more than the principal investment: if on any of the "observation dates", the five anniversaries of the note, the difference between the 10 years US$ swap rate and the 2 years US$ swap rate was more than 65%, 10% was added to the amount repaid for each year since the note was issued. If during the life of the note the difference between rates was never more than 65% on an observation date, the investor was repaid his capital but without any uplift. Thus, the investment was capital protected.
- Mr Ventouris was impressed by Mr Siakotos-Konstantinidis and his apparent expertise in structured products. His understanding, as Mr Ventouris told me and I accept, was that Mr Siakotos-Konstantinidis had a part in constructing these products. Despite Mr Siakotos-Konstantinidis' evidence to the contrary, I also accept Mr Ventouris' evidence that at this stage that he told Mr Siakotos-Konstantinidis that he was interested in investments that carried a low risk to the capital invested while providing a better return than bank deposits, and that Mr Siakotos-Konstantinidis advised him that the Swap Note was so safe that Credit Suisse would lend, against its security, as much as 80% of its value, which was as much as they would advance against an AAA bond. In the following weeks, Mr Ventouris and Mr Siakotos-Konstantinidis had further discussions about the Swap Note by telephone.
- On about 23 October 2006 Mr Ventouris invested $15 million in the Swap Note. The investment was leveraged as to $10 million. The arrangements about the commission were the same as for the Index Note: it was divided equally between Mr Fokiades' unit and Mr Siakotos-Konstantinidis' unit.
- The Index-based Note and the Swap Note were bought through Credit Suisse in Switzerland and not through CSSE or CSG, and they were bought by Mr Ventouris personally and not by Camerata or any other vehicle of his.
- Mr. Ventouris' interest in structured products is reflected in further correspondence towards the end of 2006. On 17 October 2006 Mr Malcolm Husband of Credit Suisse in Switzerland sent an e-mail to Mr Ventouris about commission to be paid on fiduciary deposits and said that, while Credit Suisse understood that it should be paid at 0.375% pa, "As you are moving your assets with us into structured products, this fee will be eliminated since products are not being charged".
- In November and December 2006 Mr Fokiades and Mr Ventouris had further exchanges about other structured products, including a 1 year USD "gated accrual" note, based upon the exchange rate between the US dollar and the Euro, and the 3 years Callable Yield Note based upon the three underlying indices. The term sheet for the "gated accrual" note included a warning that the investor might receive substantially less than 100% of the principal amount if he sold it before maturity, and that for the Callable Yield Note had a comparable warning about the risk of losing capital.
- At about this time Mr Ventouris asked Mr Fokiades whether he would object to him discussing directly with Mr Siakotos-Konstantinidis possible investments in structured products, and Mr Fokiades was content that he should do so. Mr Ventouris preferred to rely upon Mr Siakotos-Konstantinidis' knowledge of structured products. After this, while maintaining a good relationship with Mr Fokiades, Mr. Ventouris looked to Mr Siakotos-Konstantinidis for advice.
- In early 2007 Mr Ventouris contacted Mr Siakotos-Konstantinidis, and they met at the Apollo hotel in Athens in February 2007. Mr Ventouris told Mr Siakotos-Konstantinidis that he wished to open a separate account from those with Credit Suisse in Switzerland, through which he intended to buy structured products. Mr Siakotos-Konstantinidis agreed to this proposal, and he made a file note of the meeting dated 20 February 2007. He described Mr Ventouris as a "UHNW", or ultra-high net worth, individual, and as being "very keen on structured derivatives". (Curiously the file note records that he had been introduced through a broker called Mr Trivizas, but, whatever the explanation, this was clearly mistaken.) Mr Ventouris was interested in investing in further structured products, but at this stage only if they were low risk. (Mr Ventouris' evidence was that he was also wanted to use Mr Siakotos-Konstantinidis' services because he understood that he would pay lower fees. This was not, in my judgment, his main reason for having Mr Siakotos-Konstantinidis as his adviser at Credit Suisse.)
- Mr. Siakotos-Konstantinidis' note named Camerata as CSSE's client: I infer that at the meeting, if not before it, Mr Ventouris decided to invest through Camerata because Mr Siakotos-Konstantinidis suggested that he use an off-shore company. He was concerned that the investments should be confidential, and asked whether e-mail communications might be encrypted. Accordingly, an encrypted e-mail system for communications between Mr Ventouris and Mr Siakotos-Konstantinidis was established.
- The new arrangement was more advantageous for Mr Siakotos-Konstaninidis' unit in CSSE in that, whereas for Credit Suisse's internal accounting purposes his unit had shared credit for the revenue commission equally with Mr Fokiades' in Geneva, it now took 70% of the commission and CSG took a 30% share. There was, however, as Mr Siakotos-Konstantinidis explained and I accept, no significantly greater advantage to him personally.
- Mr. Fokiades was not made aware that Mr. Ventouris was opening another account with Credit Suisse. In an e-mail dated 9 May 2007, Mr. Kelly referred to Camerata's account with CSG as "the account that Achilles must not know of". Mr. Siakotos-Konstantinidis explained in his evidence that he asked Mr. Ventouris not to mention the new account to Mr. Fokiades because of his embarrassment that it would be regarded as a breach of professional etiquette if he was seen to be involved in opening an account for Mr. Fokiades' client (although Mr Fokiades had had no objection to him advising Mr Ventouris and dealing directly with him). In any case, Mr. Ventouris was, as I have said, concerned about the secrecy of his affairs.
- Mr Ventouris and Mr Siakotos-Konstantinidis had a number of further meetings in March and April 2007. Following one such meeting Mr Siakotos-Konstantinidis sent himself an e-mail to remind himself of their discussion (or possibly of matters to which he was to attend after the meeting). It referred to various possible investments that had been discussed, including adventurous investments such as a convertible arbitrage product based upon the Vietnamese market, an Indian fund and shipping shares. The note also referred to an interest rate of LIBOR minus 6 or 10 pbs, which was the rate of interest that Mr Ventouris sought upon cash held by Credit Suisse, and to a "Guernsey account for Panamanian company". According to Mr Siakotos-Konstantinidis, this reflected Mr Ventouris' wish to open the account in Guernsey because of concern about the disclosure requirements for an account in the United Kingdom, but the reason that Camerata came to deal with CSG is not relevant for present purposes and I make no findings about that.
The CSG account
- CSG began to make arrangements for Camerata to open an account towards the end of March 2007. Mr Ventouris instructed Dr Lustenberger accordingly. On 29 March 2007 Camerata were sent a brochure of the Swiss Bankers' Association entitled "Special Risks in Securities Trading", and the covering letter explained that the brochure was "designed to inform you of the characteristics and risks involved in certain investment transactions which you may enter into from time to time". Under the heading "Structured Products", there was posed the question, "What special risks need to be borne in mind?", and the brochure stated:
"With structured products, buyers can only assert their rights against the issuer. Hence, alongside the market risk, particular attention needs to be paid to issuer risk. You need therefore be aware that, as well as any potential loss you may incur due to a fall in the market value of the underlying, a total loss of your investment is possible if the issuer should default."
- These documents were sent to Dr Lustenberger. He did not read them: the brochure ran to some 100 pages. He said that, in the course of his work he had "seen many of these. It is basically for the banks to cover their back vis-à-vis the regulator".
- On 7 May 2007 Dr Lustenberger signed the application brochure to open a corporate account for Camerata. Mr Lustenberger also signed an "Agreement relating to Orders Placed by an Intermediary" dated 7 May 2007, whereby Camerata authorised CSG to act upon the instructions of CSSE with regard to the purchase and sale of investments for their account. Mr Siakotos-Konstantinidis did not recall seeing the documents, and I conclude that he did not see them. The procedures for CSG were handled by a relationship manager in Guernsey, Mr Leon Wood, and the administrative procedures at CSSE were handled by Mr Kelly.
- The application form included a statement introducing the "Account Agreement" that:
"The Client's attention is particularly drawn to the Brochure entitled 'Special Risks in Securities Trading' (a copy of which the Client acknowledges having received) in respect of the risks of Investing in certain products."
The brochure was also referred to in a schedule to the Account Agreement under the heading Advisory Services, in which it was stated:
"Prior to entering into any transaction based on advice received from the Bank, the Client should fully understand the nature of the Investment risks associated therewith as specified in the brochure entitled 'Special Risks in Securities Trading'."
(CSSE also point out that it is stated under the heading Advisory Services that, "The Bank shall have no duty whatsoever to provide ongoing monitoring in respect of advice or recommendations given or in respect of any of the securities or exposures in the Client's portfolio". The "Bank" is CSG and it is not suggested that CSG were under any such duty.)
- The brochure included a section about structured products. It explained in general terms what they were and that some structured products provided for capital protection as to some or all of the investment. There was then a section against the side-note "What special risks need to be borne in mind?": it stated that all structured products had their own risk profile from the interaction of the component risks, and continued:
"With structured products, buyers can only assert their rights against the issuer. Hence, alongside the market risk, particular attention needs to be paid to issuer risk. You need therefore be aware that, as well as any potential loss you may incur due to a fall in the market value of the underlying, a total loss of your investment is possible if the issuer should default. Market makers, who in most cases are the issuers themselves, normally guarantee that structured products are tradable. Nonetheless, liquidity risks cannot be excluded."
- When completing the application to open the account, Dr Lustenberger answered questions in a part of the form entitled "Investment Objectives (Risk Tolerance Indicator)". His response to five questions produced a conclusion that Camerata had "Low Risk Tolerance", the lowest of the five tolerances contemplated by the form. It was explained as follows:
"The investment objective is to generate a level of return, mainly in the form of income, whilst preserving capital. The typical investor in this category would be considered a conservative Investor. By way of example, although not intended as an exhaustive list, investments in government and investment grade corporate debt, money market funds and deposit accounts would be typical. Investments may be made in capital protected structured products."
The answers given by Dr Lustenberger to the five specific questions were as follows:
Experience: How many years experience does the investor have with high risk investments like stocks, derivatives and alternative investments? 1-2 years.
Interest: Does the investor regularly follow the development in financial markets? Never.
Expectations: Long term, does the investor believe that equities are the most attractive asset category? Definite No.
Awareness: As an example, the average annual result of an investment (such as the S&P 500 index) is expected (but not guaranteed) to be 7% yet the expected bandwidth of returns is +27% and -20%. How much of the assets would the client consider investing in this type of product? No investment of assets.
Ease: How does the investor react to big fluctuations like a drop of 30% in an investment? Can no longer sleep at night.
Under the questions it was stated:
"This document reflects my/our current investment objectives and risk tolerance. In the event that I/we wish to make any changes to my/our investment objectives/risk tolerance from time to time, I/we shall inform my/our relationship manager accordingly in order that such changes may be recorded on my/our Client Profile maintained by the Bank."
It is common ground that Camerata's "relationship manager" was Mr Siakotos-Konstantinidis. It is not suggested that Camerata ever specifically informed Mr. Siakotos-Konstantinidis (or anyone else in CSSE), that they would change their objectives or risk tolerance, but CSSE argued that the implication of the exchanges that Mr. Ventouris had with Mr. Siakotos-Konstantinidis and the investments that Camerata made was that Camerata were interested in more adventurous investments than indicated in these answers.
- Dr Lustenberger completed the Risk Tolerance Indicator after discussing the answers with Mr Ventouris. Dr Lustenberger did not remember these discussions, but I accept Mr Ventouris' evidence about this.
- On 16 May 2007 Mr Siakotos-Konstantinidis signed a "Client Profile" document. Before he did so, parts of the pro-forma had been completed, including that the "Risk Tolerance" of the client was "low". Mr. Siakotos-Konstantinidis wrote that the "use of the account" was "placement in fiduciary deposits, structured notes, mutual & hedge funds, interest rates and fx [foreign exchange] derivatives, bonds, equity etc". He wrote that the "Reasons for Opening Account" were "use of CS's open architecture". There is no evidence that any formal change was ever made to the Client Profile, either with regard to risk tolerance assessment or otherwise.
- Mr Siakotos-Konstantinidis agreed in cross-examination that the "use of the account" that he described on the client profile document referred to products that would involve medium to high risk. He said that, when he completed this part of the form, he did not pay any attention to what was said about risk tolerance, and did not look carefully at the forms about the opening of the account. Had he done so, he said, he would not have signed the form. He also said that he thought that he might well not have seen the Risk Tolerance Indicator on the account opening document because he was away travelling. On any view he should have taken notice of it and he did not properly do so. He explained that he considered that he had "complete knowledge of what [Mr Ventouris] was trying to achieve", but he accepted that he was at fault in ignoring the documents.
- Mr Siakotos-Konstantinidis, however, must have been aware that Camerata had stated in Credit Suisse's formal documentation that they did not wish to take risks with their investments. He could not have overlooked this when he completed the form. I can only conclude that he thought that he had a better understanding of his client's real wishes and objectives than they had formally stated, and so disregarded the formal statement of their position. He showed a similar attitude towards Credit Suisse's procedures in failing to read, or at least failing to read with any care, the forms that Camerata were required to complete. As I have said, he did not observe Credit Suisse's procedures for completing file notes of discussions with clients and so there is no record of his conversations with Mr Ventouris upon which Mr Siakotos-Konstantinidis relied to justify his indifference to Camerata's formal statements of their wishes. Indeed, as I shall explain, his assistant, Mr Kelly, asked Camerata to sign the client agreement in blank and to allow CSSE to complete it as they saw fit.
The client agreement
- The agreement by which CSSE provided services to Camerata was set out in a document called the "Acceptance Booklet" and CSSE's "Terms and Conditions". The Introduction to the Acceptance Booklet stated:
"The contents of this Acceptance Booklet together with the Terms and Conditions (a copy of which has been provided to you with this Acceptance Booklet) and where applicable, the Security Agreement, form the agreement ("Client Agreement") between you and Credit Suisse (UK) Limited, Credit Suisse Securities (Europe) Limited and Credit Suisse International (together "We" and "Us") ".
Although Camerata pleaded that CSSE did not provide them with a copy of the Terms and Conditions, they now accept that they received them by e-mail on 31 May 2007.
- Dr Lustenberger said that he did not discuss the Terms and Conditions with Mr Ventouris: "I do not think that in the reality when you open a bank account for a client you do discuss the acceptance booklet with the client because you would end up discussing for a week on nonsense". He did not object to any of the terms, and his evidence was that he believed that an account could have been opened with Credit Suisse in Zurich, for example, on less onerous terms than those of CSSE.
- The Acceptance Booklet was in four parts: a Client Profile, a Risk Profile, a Portfolio Mandate and Signature Pages, each of which was to be completed by the client. On 31 May 2007 Mr Kelly sent to Mr Peter Justel, who was Mr Lustenberger's assistant, a copy of the Acceptance Booklet, and asked Mr Justel to sign "the signature page", leaving it to CSSE subsequently to complete the booklet "according to the Guernsey documents that you have already submitted". He explained that, "This document is simply your acceptance of the Terms of Business [of CSSE] by whom, through [Mr Siakotos-Konstantinidis], you are being advised". Mr Justel, understandably, declined to sign the booklet in blank, and asked Mr Kelly to complete the booklet before returning it for signature.
- On 4 June 2007 Mr Kelly sent Mr Justel a copy of the booklet in which he had completed the Client Profile, the Risk Profile and the Portfolio Mandate. Dr Lustenberger signed it on 4 June 2007. The "Signature Pages" stated above the client's signature that, by signing, the client confirmed that the information in the Client Profile, the Risk Profile and the Portfolio Mandate was correct, and that the client had received, read and understood risk warnings in Section C of the Terms and Conditions and accepted the terms thereof.
- The Risk Profile was introduced as follows:
"The Risk Profile is designed to help you determine your investment objectives in a manner consistent with your tolerance to risk and to communicate the same to Us. This will help Us to manage the assets entrusted to Us in the best possible way. You acknowledge that this Risk Profile reflects your current risk tolerance and in the event you wish to make any changes to this, you will inform your Advisor so that the changes can be recorded by Us. Your answers below will not be considered by Us as any instructions in respect of your Portfolio."
- The Risk Profile required information in two categories: "Attitude to Risk" and "Investment Purpose, Timetable for Investments and Product Experience". The information that Mr Kelly included with regard to Attitude to Risk was such that overall it indicated "Low Risk Tolerance", which was explained as follows:
"The typical investor in this category is a conservative investor who generally looks to preserve capital whilst accepting a relatively low level of return."
The individual answers that led to this indication included these: that the "Primary Investment Objective" was "To preserve the value of our investments", that Camerata would "change [their] investment strategy if [their] portfolio of investments fell by … Up to 5%" and that they were "not willing to accept any volatility and wish[ed] to preserve and protect [their] capital". The question about Camerata's "Attitude Towards Investing" was not completed by Mr Kelly or by Dr Lustenberger: the evidence did not explain this, but I would suppose it to be an oversight.
- With regard to "Investment Purpose, Timetable for Investments and Product Experience", the completed form stated that Camerata had no experience of any of the list of 16 products identified, including "Other OTC [over the counter] Derivatives/Structured Products".
- The Risk Profile section of the Acceptance Booklet concluded with this statement:
"The Risk Profile is intended to provide information only and is not intended to be construed as any solicitation for the sale of any investment. It does not represent any investment advice to any person. Past performance is not indicative of comparable future performance and no representation or warranty is made regarding future performance of any investments. The value of investments and their income may go down as well as up and can do so dramatically. If you have any doubt about the suitability of any investment you must contact your Advisor. Your attention is also drawn to the Notices and Warnings in Section C of the Terms and Conditions."
I shall refer to Section C later in my judgment when I consider the Terms and Conditions.
- In the Portfolio Mandate section of the Acceptance Booklet, the "Investment Service" that Camerata required was the "Advisory Service", rather than, in particular, the "Discretionary Service" whereby CSSE would manage a portfolio of investments for the client. The Advisory Service was described in the Terms and Conditions (to which the Booklet referred) as follows:
"Where you specify "Advisory Service" in the Portfolio Mandate:
(A) you appoint us to give you investment advice;
(B) you authorise us to enter into Transactions and arrangements on your behalf and for your Account;
(C) we may also effect Execution–only Transactions. Where you ask us to effect such Transactions, we will not be responsible for advising you as to their investment merits;
(D) advice may be given either orally or in writing;
(E) we may in our discretion and without giving reasons decline to accept particular Instructions or to advise you on a particular Investment; and
(F) where you are a Private Customer and we offer advice on packaged products, the advice is offered based on a selection of packaged products from the whole of the market. Where we offer such advice, the "Key Facts About Our Services" document will apply (which will be supplied separately)."
(Camerata was a "Private Customer" within the meaning of clause F but the products with which I am concerned, including the Note, were not "packaged products", an expression defined by the Financial Services Authority in their handbook.)
- The Terms and Conditions were included in a substantial brochure, running to some 80 pages. I shall consider them later.
The Note
- Mr Ventouris and Mr Siakotos-Konstantinidis met in London in June 2007, and at that meeting and in telephone conversations they discussed possible investments. Mr Ventouris asked Mr Siakotos-Konstantinidis for his opinion about various products that Mr Siakotos-Konstantinidis considered to be medium or high risk investments. They included investments linked to the performance of a basket of shares, an investment in an initial public offering of the Blackstone Group (an investment and advisory business) and investment in hedge funds.
- Mr Siakotos-Konstantinidis suggested to Mr Ventouris that he might consider investing in the Note, which had come to his attention in the middle of May 2006. He thought that it might interest Mr Ventouris because he was familiar with the movement of the US dollar against the Euro through his shipping business, which operated in dollars but the overheads of which were calculated in Euros. Mr. Siakotos-Konstantinidis' evidence was that he also considered it suitable for Mr Ventouris because it had "an appropriate risk/reward profile", with a likely coupon, if the investment was leveraged, of some 12%-16%.
- The Note paid no regular coupon. It was for five years, but might automatically be redeemed if on certain dates ("observation dates") the exchange rate between the Euro and the US dollar was at the "strike rate" or lower. The observation dates were at six-monthly intervals, and, if the Note was so automatically redeemed, the investor received a premium upon his investment, the amount of the premium depending upon the period since the Note was issued. If the exchange rate was not at the strike rate or lower upon any of the observation dates, then after five years the investor was paid no coupon. He might recover all or some of his capital depending upon whether, during the life of the Note, the Euro appreciated against the US dollar so as to go above the "knock-in rate". If the rate of exchange did appreciate above the knock-in rate and did not return to the strike rate or below the strike date on any subsequent observation date, then the investor would lose a proportion of his capital investment when the Note expired after five years. The proportion that he lost depended upon the amount by which upon maturity the exchange rate exceeded the strike rate, and was calculated by dividing the strike rate by the exchange rate. Thus, the Note did not provide for capital protection for all or any of the sum invested, but a substantial amount of capital would be lost only if there was a sharp increase in the value of the Euro against the US dollar over the five years period. For example, if the Euro appreciated to a rate of €1.8/$1, the investor would (on the basis of the strike rate of 1.375 at which the Note was in due course issued) recover 76% of his capital.
- Mr Siakotos-Konstantinidis explained, and Mr Ventouris understood, the structure of the investment and that it depended in this way upon the exchange rate between the US dollar and the Euro. Mr Siakotos-Konstantinidis was optimistic, as he told Mr. Ventouris that, the US dollar would strengthen significantly against the Euro and would reach the strike price within a year. (In fact the dollar achieved the strike price on January 2009, after Lehman had filed for chapter 11 bankruptcy.)
- After the meeting on 18 June 2007, Mr Ventouris e-mailed Mr Siakotos-Konstantinidis and asked him to send documents relating to the possible investments that "we have talked about". On 19 June 2007, Mr Siakotos-Konstantinidis sent to Mr Ventouris an e-mail in which he sent him "documentation for the various products that we discussed". These included the Note, together with investments based on a basket of emerging brands, a 20% USD Equity Yield note based on the Dow Jones Industrial Average Index and hedge fund investments. In reply, Mr Ventouris sent e-mails asking questions about the proposed investments and requesting graphs showing the past performance of the related companies and indices. He also asked whether products could be re-organised so that, instead of recovering capital upon the maturity of the investment, he would receive shares in the company concerned.
- By an e-mail dated 3 July 2007 Mr Siakotos-Konstantinidis advised Mr Ventouris about what investments he should make. He recommended that half of the funds for investment should be placed in the Note, and he suggested leverage of 50%/50% or 60%/40% debt to equity. He also recommended investments of 20% of the funds in an Enhanced Return Note based on four indices, advising that it was the "most conservative" of the equity linked notes under discussion and that capital risk would be "limited to a catastrophic scenario"; of 20% of the funds in hedge funds; and of 10% in a US equity yield note. He concluded, "This allocation matches my perception of your medium term investment approach and your desire to put on varying degrees of risk for an average return in the 12-16% range". The coupon on the Note was 9.5%: it therefore earned a lower return than other investments that Mr Siakotos-Konstantinidis had suggested, and, I would infer, was a relatively conservative investment, but the return was markedly higher than Mr Ventouris was receiving on fiduciary deposits.
- Mr Siakotos-Konstantinidis acknowledged that Mr Ventouris had not told him that he was looking for a return of 12-16%. He said that he stated his own perception of what Mr. Ventouris wished, so that Mr Ventouris could comment upon it. Mr Ventouris did not do so, and did not correct or question this "perception" of Mr Siakotos-Konstantinidis. However, he did not invest in the range of products that Mr Siakotos-Konstantinidis suggested but only in the Note. He said in evidence that this was recommended to him both by Mr Fokiades and by Mr Siakotos-Konstantinidis as an ultra-safe investment. He also said that Mr Siakotos-Konstantinidis advised that it was more conservative than the Enhanced Return Note (which had a higher coupon than the Note), and Mr Ventouris thought that, since the Enhanced Return Note was described as presenting capital risk only in a "catastrophic scenario", the Note would be extremely safe. Whatever precisely was said, I accept that Mr Ventouris was led to think that the investment was a safe one. I do not need to make further findings about this, and, because this might be the subject of a separate claim, I do not do so.
- In an e-mail also dated 3 July 2007, Mr. Ventouris asked Mr. Siakotos-Konstantinidis to explain his suggestions about leverage, and enquired "If for example a product can be leveraged 80%, what does it mean? Just to ensure that I get it right". In reply Mr. Siakotos-Konstantinidis wrote that "If a product can be leveraged at 80%, then you can buy 100 dollars of the product with 20 pct equity and 80 pct debt. As an alternative, you can buy 100 of the product with your own cash and then borrow up to 80 which you can withdraw or use as you please." He pointed out that, if the value of a product that is fully leveraged falls, Credit Suisse might ask that funds be lodged to cover the exposure. Mr. Ventouris responded that he was asking about leverage because he would need funds for his "core business", that is to say his shipping interests. He confirmed this in evidence: although he had funds available to invest as he would, it was more convenient for him to take some leverage and keep uncommitted funds in case they were required for his shipping business.
- On 17 July 2007 Mr. Ventouris suggested waiting "a little longer" before investing, in the hope that the dollar might fall further against the Euro. Mr. Siakotos-Konstantinidis replied that "Given the current dollar weakness", investment in the note "looks very compelling now". He reiterated the basic terms of the Note, and added an explanation about "the possibility of putting the capital at risk". Mr Ventouris also asked whether structure of the Note could be revised to pay a coupon on a quarterly basis. Mr Siakotos-Konstantinidis explained that capital would be at risk if the Euro/US$ exchange rate went above 1.5686.
- On 18 July 2007 Mr Siakotos-Konstantinidis sent to Mr Ventouris by e-mail a loan facility letter for leverage for investment in the Note, a term sheet for the Note dated 6 July 2007 and a notice (called the "SCARP" – Structured Corporate at Risk Products - warning) headed "Private Customer Risk Warning Notice for Structured Capital at Risk Products". CSSE rely upon the various warnings and explanations in the term sheet and upon the SCARP warning.
- The SCARP document notice sent by Mr. Siakotos-Konstantinidis on 18 July 2007 stated that it was important that the Investor read the notice before investing in the structured product described in the term sheet. It continued with these warnings:
"…
2. the product described in the Term Sheet contained either no capital protection or was less than 100% capital protected;
3. the notice could not disclose all of the risks associated with this type of product, therefore, before entering into any transaction the Investor should ensure (consulting with such advisers as deemed necessary) that it fully understood the potential risks and rewards and independently determined that it was suitable for it, given its objectives, experience, financial resources and any other relevant circumstances;
4. the Investor should remember that the value of an investment and the income from it could go down as well as up;
5. the Term Sheet specified limits within which the investor's capital would be repaid. It should consider these limits and only enter into a transaction in the product described if it was prepared to lose some or all of the money initially invested."
- The term sheet, described the Note as a "structured derivative that is designed for investors who have a neutral to bullish view on the USD versus the EUR". It indicated a "strike price of US$1.3510/€1 and a "knock-in price" of US$1.5492/€1. It included a table under the words, "Example: Redemption at maturity if not early redeemed and the barrier of 1.5492 has at least once been breached". The table showed calculations of how much capital would be repaid, based on various final Euro/US$ exchange rates, the worst example being of redemption at 84.44% of capital if the exchange rate was at 1.6 after five years. Under "Risks" the term sheet stated "If none of the observation fixings were below strike and the "knock-in" level has been breached, the investor will suffer a loss", and referred to the table.
- Under the heading "Important legal notice/disclaimer" it was stated:
"The investor should be aware that the value of the investment is not solely dependent on the performance of the investment but also of the creditworthiness of the issuer. "
It also stated:
"The investment product is a structured derivative and may therefore be complex and involve a high degree of risk. It is intended only for investors who understand and are capable of assuming all risks involved. Before entering into any transaction, an investor should determine if this product suits its particular circumstances and should independently assess (with its professional advisers) the specific risks (maximum loss, currency risks, etc.) and the legal regulatory, credit, tax and accounting consequences. Credit Suisse makes no representation as to the suitability of this investment product for any particular investor nor as to the future performance of this investment product."
- The term sheet included a link to market disclaimers issued by Credit Suisse. They stated:
"In the event of defaulting by the issuer of the investment, and/or any third party the investment and income derived from such contracts is not guaranteed and you may get back none of, or less than, what was originally invested".
- According to Mr Ventouris in a subsequent telephone conversation Mr Siakotos-Konstantinidis described the documents sent on 18 July 2007 as standard form documents used by Credit Suisse, and said that the "real risk for the [Note] was negligible".
- On 23 July 2007 Mr Ventouris asked whether there could be a guaranteed coupon on the Note: he was under the impression that Mr Siakotos-Konstantinidis could tailor the structured products sold by CSSE to meet his requirements. Mr Siakotos-Konstantinidis replied that, if there were a guaranteed coupon, there could not be the "high potential return of the product", and continued "In other words, you should only invest in this if you think that there is a high degree of certainty that the product will redeem early".
- On 24 July 2007 Mr Ventouris decided, as Mr Siakotos-Konstantinidis recorded in a file note, that Camerata should invest $12 million in the Note, with $4 million by way of equity and $8 million leverage. He did so on the basis of a term sheet which contained income terms and conditions that were subject to confirmation or adjustment at the initial fixing date, and which stated that the issuer was "tbd", that is to say, to be decided. CSSE required him to sign a term sheet to confirm his commitment, and then went about acquiring the investment.
- CSSE sent to Dr Lustenberger in Zurich a confirmation of the purchase of the Note dated 7 August 2007, which described the Note as "Lehman Broth 5 Year Autoredemption Note in USD Bearish on EUR/USD". The strike price was fixed at UD$1.375. After the investment was made, Credit Suisse sent to Camerata in Switzerland monthly portfolio valuation statements which described the Note similarly, stating that it was issued by a Lehman company. Dr Lustenberger did not read the valuation statements himself and he did not send them on to Mr Ventouris.
- On 29 August 2007 Mr Ventouris asked Mr Siakotos-Konstantinidis to send him a copy of the term sheet for the Note: he had noticed some discrepancy in the precise terms that had at different times been provided to him. In response Mr Siakotos-Konstantinidis sent to Mr Ventouris by e-mail what he described as the "final termsheet with all dates/terms". The enclosed document, which was dated 24 July 2007, stated a strike price of US$1.3750/€1 and a "knock-in" price of US$1.5766/€1. It also stated, like the indicative term sheet of 6 July 2007, that the Note was issued by "tbd".
- On receiving this information, Mr Ventouris spoke to Mr Siakotos-Konstantinidis by telephone, and asked about who had issued the Note. Mr Siakotos-Konstantinidis did not in this conversation or at any time explain to Mr Ventouris Credit Suisse's "Open Architecture" approach to arranging structured products, and did not tell him that the Issuer was in the Lehman group. He left Mr Ventouris with the impression that it might be issued by Credit Suisse, and said that the issuer, if not Credit Suisse, would be an institution of comparable standing. Mr Ventouris did not press Mr Siakotos-Konstantinidis to identify the issuer, but remarked that he hoped that it was not an Arab bank or a Greek bank.
- This conversation is confirmed by the evidence of Mr Aristeides Triantafyllidis, Mr Ventouris' assistant, who was in the office at the time. He recalled that, when the term sheet was received, he and Mr Ventouris had discussed what "tbd" might connote, and that Mr Ventouris had been concerned that the Note should be issued by a reputable bank. He also recalled that, in a subsequent telephone conversation with Mr Siakotos-Konstantinidis, Mr Ventouris had joked that he hoped that the Note had not been issued by a Greek or Arab bank. At a meeting on 3 December 2008, to which I shall refer, Mr Siakotos-Konstantinidis also recalled this telephone conversation.
- I accept Mr Ventouris' evidence that he was not aware who had issued the Note, and that he supposed that it was likely to be Credit Suisse. (I so find, although Mr Siakotos-Konstantinidis, while acknowledging that he had no clear recollection, thought that by then he would have known that the Note was not to be issued by Credit Suisse: either he is wrong about that or he did not convey it to Mr Ventouris.) Mr Ventouris did not see the confirmation sent to Dr Lustenberger on 7 August 2007 nor did he see the portfolio valuations sent to Camerata from time to time which referred to Lehman. He also was not aware that in fact CSSE acquired a note for a total of US$15.25 million for Camerata and other clients, and Camerata's investment was by way of an interest in that note.
Camerata's later investments
- From time to time over this period, Mr Ventouris would ask Mr Siakotos-Konstantinidis for his views about financial products or potential investments that he had been sent by other banks or about which he had heard from other sources. I have already referred to some to them. By way of further example, in June 2007 he enquired about two investments, information about which had been sent to him by Clariden Leu, a bank that was wholly owned by Credit Suisse: one was a note with a potential return of 14.5% that was based on the performance of five underlying Dutch shares, and the other, a note with a potential return of 20%, was linked to the performance of four pharmaceutical companies. After discussing them with Mr Ventouris, Mr Siakotos-Konstantinidis responded on 18 June 2007, "as we agreed, I will send you notes with enhanced yield based on baskets of shares instead of indices, just like these that Clariden sent you". I infer that Mr. Ventouris had expressed interest in this kind of investment.
- In September 2007 Camerata, through Mr Ventouris, bought a second structured product through CSSE. They invested $8 million in what was referred to as a "Multi-Index Note" issued by Merrill Lynch using leverage of 50%. Mr Siakotos-Konstantinidis had recommended the investment in July 2007, before Camerata bought the Note. The Multi-Index Note was a three years note based on the performance of four indices, the S&P 500 index, the Dow Jones Eurostoxx 50 index, the Nikkei 225, and the Swiss Market Index ("SMI"). The note paid a coupon of 13.25% pa, provided that during its life none of the four indices touched its "barrier", that is to say, fell to 50% of its "start level". If on any annual observation date all four indices closed at 85% of the start level or higher, the note redeemed at 100% of its principal amount. If the note was not redeemed before maturity, then it was redeemed at 100% of the principal amount provided that none of the indices had dipped below its barrier in the three years: if any one of them had done so and at least one index was below 85% of its strike level on maturity, then the amount received by the investor was reduced by the percentage by which the worst performing index was below its strike level upon maturity.
- On 20 November 2007 Mr Ventouris observed to Mr Siakotos-Konstantinidis in an e-mail that the bank shares had fallen significantly, and asked what return might be achieved upon an investment designed to exploit this.
- In December 2007 through CSSE Camerata invested a further $4 million in another structured product, the so-called "Bank Note", which was linked to the share prices of three banks, Merrill Lynch, UBS and Citigroup. It too was bought with 50% leverage and had no capital protection. It was to mature on its first anniversary. The investor paid 80.2% of its principal value and was repaid the entire principal value upon maturity unless a fall in the share price of one or more of the banks prevented that. If any of the share prices fell below the barrier, which was set at 50% of the strike level for the share, then the Bank Note was redeemed by way of a transfer of shares of the bank whose shares had performed worst. The value of the shares received by the investor was calculated by reducing his investment by the percentage fall of the price of that worst performing share. (In the event the instrument that Camerata entered into to make this investment was a 20.6% Equity Yield Note. It was not explained in the evidence why the investment was taken in this form, and it makes no difference to the risk that it entailed or any other relevant matter.)
- The term sheet, which was signed by Dr Lustenberger, stated that the potential yield on the Bank Note was over 20% ("up to 24.68%"), but there was a risk of unlimited loss if a barrier was breached. Mr Ventouris accepted that Mr Siakotos-Konstantinidis told him that this was less safe than other investments that he had made, but said that Mr Siakotos-Konstantinidis assured him that it would be safe "at the end of the day". I accept that Mr Siakotos-Konstantinidis recommended the investment, but, whatever precisely was said, I do not accept that he presented it as a conservative investment that presented little risk: Mr Ventouris knew that some appreciable risk was involved in a structured product that held out the prospect of this level of return.
- In about March 2008, the price of UBS's shares had fallen so as to breach their barrier under the Bank Note, and to expose Camerata to the risk of capital loss. This caused Mr Ventouris some concern: on 6 March 2008 he wrote in an e-mail to Mr Siakotos-Konstantinidis, "What is going on with UBS, scared to death". Mr Siakotos-Konstantinidis responded "We are cool, don't worry". At about the same time, the Euro appreciated above the "knock-in" price stipulated in the Note. Camerata did not sell either the Bank Note or the Note. As Mr Siakotos-Konstantinidis recorded in a file note dated 17 March 2008, with regard to the Note "with 4 years ahead [Mr. Ventouris] is not worried about the USD not coming back" The file note also referred to a suggestion of Mr Ventouris that he might sell the Bank Note and invest in UBS shares because they were at a low price. Mr Ventouris' evidence was that the suggestion was made by Mr Siakotos-Konstantinidis, and he was not worried about the fall in the US dollar because of Mr Siakotos-Konstantinidis' advice. Mr Siakotos-Konstantinidis might have expressed optimism about the US dollar, but I otherwise reject this evidence: Mr Siakotos-Konstantinidis would have had no reason to write an inaccurate note about this.
- In May 2008, Mr Ventouris wrote that he was thinking of investment in banks and that "since there is no bankruptcy, I believe we are not risking anything in 1-3 years time. What do you think?" He sought Mr Siakotos-Konstantinidis' opinion about investments based on bank shares again in June and July 2008.
- On 6 May 2008 Mr. Ventouris asked Mr. Siakotos-Konstantinidis to send him "the fact sheets for the Cheyne special situation" (as well as an arbitrage fund). On 3 June 2008 he wrote that he had "the impression that many of these hedge funds or funds have been stricken during these months" and suggested that it would be worthwhile verifying "the good ones" and "enter[ing] at a discount". When Mr. Siakotos-Konstantinidis replied that the Cheyne fund fitted that description, Mr. Ventouris asked for fact sheet so that he could "check it out".
Bear Stearns
- In 2008 the banking market entered a period of turbulence. On 16 March 2008 Bear Stearns, the New York global investment bank and securities trading and brokerage house, merged with J P Morgan Chase in a "fire sale" of the shares, after an emergency loan from the Federal Bank of New York failed to prevent a collapse of the bank. Camerata's pleaded allegation is that: "As a result, Mr. Ventouris became concerned about the risk of counterparty default in relation to the Note and thereafter in course of 2008 on behalf of [Camerata] repeatedly asked Mr. [Siakotos-Konstantinidis] whether the note was still a safe investment". Camerata's claim depends upon the exchanges between Mr Ventouris and Mr Siakotos-Konstantinidis between March and September 2008. I shall examine the evidence about them later in my judgment.
- Over the same period, Mr Ventouris and Mr Siakotos-Konstantinidis continued to discuss other financial products that were available, including investments that carried a higher rate of return and a corresponding risk. Thus, for example, on 19 March 2008, shortly after Bear Stearns had been rescued from collapse, Mr Ventouris sent Mr Siakotos-Konstantinidis details, apparently provided by another institution, of notes based on the performance of UBS and Citigroup, which offered potential returns of 45% and 37%, and asked Mr Siakotos-Konstantinidis what he thought of them. They also discussed an investment based upon luxury goods which interested Mr Ventouris because he believed that the very rich are not deterred from extravagant purchases by volatility and falls in the market.
The failure of Lehman Bros
- Mr Siakotos-Konstantinidis learned of the collapse of Lehman Brothers in the evening of Sunday 14 September 2008. His evidence was that he spoke to Mr Ventouris by telephone that same evening, and they agreed that they should speak further the next day. No recording was made of the conversation, but none would be expected if Mr Siakotos-Konstantinidis was speaking from a mobile telephone. He made no file note or attendance note about it. Mr Ventouris denies the conversation.
- Mr Ventouris and Mr Siakotos-Konstantinidis spoke on the telephone on 15 September 2008. Their conversation was recorded because Mr Siakotos-Konstantinidis was speaking from his office on a landline. According to the transcript of the conversation, there was no reference to the Note, and no reference was made to the possibility that Camerata had suffered a loss because the Note had been issued by Lehman. On the contrary, the conversation included this exchange: Mr. Ventouris, referring to recent market events, said "I see that we were on fire this weekend, right?", and Mr. Siakotos-Konstantinidis replied, "It was crazy, crazy. Look, at least there's a pleasant outcome for us", because the difficulties of other banks, such as Merrill Lynch which was rescued by Bank of America, had been alleviated.
- There is no other recorded telephone conversation between Mr Ventouris and Mr Siakotos-Konstantinidis on 15 September 2008, and there is no file note made by Mr Siakotos-Konstantinidis in which he records discussions with Mr. Ventouris about the Note or the implications of the collapse of Lehman. He had three other clients who had invested in the Note: one had made an investment of a comparable size and the other two had made much smaller investments. Mr. Siakotos-Konstantinidis made file notes about telephone conversations on 15 and 16 September 2008 in which he spoke about their investments with Lehman.
- Mr Ventouris had further conversations with Mr Siakotos-Konstantinidis by telephone on 17 September 2008 in which they discussed the volatility of the markets. Mr Siakotos-Konstantinidis' file note of a conversation on 17 September 2008 was made under the heading "Market chat": it records that he "Spoke with the clients several times to discuss Lehman", but nothing suggests that these discussions referred to the Note. On 18 September 2008 they spoke again by telephone several times, including in a conference call in which Mr Fokiades also participated. Mr Ventouris was concerned whether he should sell the Swap Note because of the volatility in the market, but in light of Mr Siakotos-Konstantinidis' advice he decided not to do so. There was no reference to who had issued the Note and no mention that the investment in it was affected by the failure of Lehman.
- According to Mr Ventouris' evidence, he was still unaware at the time of these conversations that the Note was issued by a subsidiary of Lehman, and Mr Siakotos-Konstantinidis first told him this at a meeting on 22 September 2008. Mr. Siakotos-Konstantinidis made a file note of the meeting in which he referred to "an extensive conversation… with an update on his Lehman Brothers note" and recorded that he told Mr. Ventouris that "it may be some time before resolution". Mr Ventouris said that Mr Siakotos-Konstantinidis told him that he himself had only recently realised who the Issuer was, but said that Mr Ventouris should not be unduly concerned because about 80% of the investment would be recovered eventually. (In his witness statement Mr. Ventouris referred to the meeting as being on 22 September 2008: Mr Beltrami pointed out that in his oral evidence Mr Ventouris said that Mr Siakotos-Konstantinidis told him that the Issuer was in the Lehman group ten days after the failure of Lehman, which would have been on 25 September 2008. I cannot regard this as a significant discrepancy in his evidence or an indication that his evidence is generally unreliable.)
- CSSE submitted that I should accept Mr Siakotos-Konstantinidis' account about when he and Mr Ventouris spoke about the Note being issued by Lehman group and about how the failure of Lehman might affect the investment. It was said that there would have been no reason for him to avoid discussing this with Mr. Ventouris, who was bound to learn about it soon. I am not persuaded by this argument: it is possible that Mr Siakotos-Konstantinidis, like Mr Ventouris, did not have it in mind who had issued the Note. Alternatively, and to my mind more probably, he might have been unable to face up to giving such unwelcome news to a client with whom he had developed a close relationship. I recognise that he did discuss the position with other clients promptly, but there is no evidence whether those discussions were initiated by Mr Siakotos-Konstantinidis or the clients, who might well have known who the Issuer was. (Mr. Siakotos-Konstantinidis' file notes record outgoing calls, but there is no evidence whether Mr. Siakotos-Konstantinidis initiated contact with these clients about their investments or whether they had already contacted CSSE.)
- Whatever the reason that he did not speak to Mr Ventouris about the Note for some time after the collapse of Lehman, I reject Mr Siakotos-Konstantinidis' evidence about his conversations with Mr Ventouris on 14 and 15 September 2008, and I do not accept that they had any discussions about the Issuer of the Note or the risk to the investment because of Lehman's collapse until some days later. Indeed, I do not accept that they spoke on 14 September 2008 at all. If they had had the conversation described by Mr. Siakotos-Konstantinidis, this would have been reflected in the recorded conversations on 15, 17 and 18 September 2008. In particular, Mr Siakotos-Konstantinidis and Mr Ventouris would not have spoken of a "pleasant outcome" from the collapse of Lehman over the weekend. I do not consider that the references in Mr. Siakotos-Konstantinidis' file note of 22 September 2008 to an "update" suggests that they had previously discussed the impact on the Note of the failure of Lehman. Mr. Siakotos-Konstantinidis was quite capable of choosing wording that would not reflect that he had not previously apprised Mr. Ventouris of the position.
- After the failure of Lehman, Mr Ventouris continued to consult Mr Siakotos-Konstantinidis about his and Camerata's investments. Camerata's case is that Mr. Siakotos-Konstantinidis encouraged Mr. Ventouris to be optimistic that Camerata would recover the investment in the Note and that Mr. Ventouris still trusted his advice. Thus, for example, on 2 October 2008, when Mr. Ventouris asked whether there was news about Lehman, Mr. Siakotos-Konstantinidis said that the situation was improving. Mr. Ventouris still showed interest in adventurous investments. For example, by an e-mail dated 21 October 2008 he asked Mr. Siakotos-Konstantinidis to "check out" a high-risk fund that was managed by Schroders.
- In October 2008 Camerata acquired through Mr Siakotos-Konstantinidis a Deep Discount Note (the "Restructured Bank Note"), which was by way of a replacement of the Bank Note. It was based on the performance of stocks in UBS, Citigroup and the Bank of America (which had acquired Merrill Lynch at about the time that Lehman failed). The Restructured Bank Note was a three years note issued at 42% of the principal amount. It did not pay regular coupons. However, if on any "observation date", that is to say on any one of the three anniversaries of the issue of the note, the stocks in all three banks were trading at or above 132% of their starting price, then the note was to redeem at 100% of its value. Otherwise the price paid on maturity was to be determined by the price of the worst performing of the three stocks: the investor was to receive a percentage of the value of the note, which was determined by calculating the price of that stock as a percentage of a 132% of its starting price. Thus, the note was designed to appeal to an investor who thought that, over a three year period, the bank stocks would recover to the strike levels in the Bank Note.
- Mr Ventouris' evidence was that the matter was not presented to him by Mr Siakotos-Konstantinidis on the basis that Camerata were selling the Bank Note and acquiring another investment, but on the basis that the Bank Note was being restructured. In any case, he decided not to realise the investment in the Bank Note: he explained that Mr Siakotos-Konstantinidis convinced him that he should retain (what he understood to be) the "restructured" investment.
- At about this time, Mr Ventouris had an opportunity to sell the Swap Note before the date of its possible redemption upon its second observation date on 21 October 2008. Mr Ventouris did not sell it and, although it was a time of market volatility, held it with the hope of achieving a higher return when (and if) it did redeem.
- Mr Ventouris first complained to Mr. Siakotos-Konstantinidis about the advice that he had been given about the Note on 30 October 2008. In an e-mail he expressed himself to be distressed and indignant, and wrote: "This product was supposed to be the surest, and you were always telling me how confident you were and how secure, and that I should not worry. How do I find myself in this position? …. I never realized that Lehmans was the issuer, the term sheet was saying tbd, I always had the impression that it was Credit Suisse…".
The conversation on 3 December 2008
- After the e-mail of 30 October 2008 was sent, Mr Ventouris spoke to Mr Siakotos-Konstantinidis on several occasions about the Note, and in the course of those conversations Mr Siakotos-Konstantinidis was critical of Credit Suisse. As Mr Ventouris told me and I accept, he indicated that he would give evidence to support a claim if Mr Ventouris decided to bring proceedings, and agreed to make a statement for this purpose.
- On 3 December 2008 Mr Ventouris met Mr Siakotos-Konstantinidis at the Apollo Hotel. He recorded their conversation on his mobile telephone without Mr Siakotos-Konstantinidis' knowledge. Mr Ventouris said that he did so because he wanted to be sure that Mr Siakotos-Konstantinidis would not renege on his agreement to provide evidence against Credit Suisse. CSSE complained about the propriety of this, but that is not relevant to whether Mr Ventouris gave honest evidence or about anything else that I have to decide. Although the conversation was initially denied in CSSE's defence, there is now no dispute that it took place or about what was said.
- A translated transcript of the conversation, or of much of it, is in evidence. Mr Siakotos-Konstantinidis was, as he told me, under great pressure himself at this time. All of his clients who had invested in structured products had suffered heavy losses, and he had lost a very significant amount himself. He said that he felt frustrated and "sidelined" by Credit Suisse and perhaps even felt "antagonistic" towards CSSE. The conversation took place in an informal setting and was between two men who had become friends. Mr. Siakotos-Konstantinidis' evidence was in these circumstances he spoke unguardedly and some of his criticisms of Credit Suisse were untrue. I accept that: for example, he said that Credit Suisse chose to sell Lehman's products although it was not in their clients' best interests to do so because they received better terms from Lehman; and he said that Credit Suisse exploited their monopsony position when it was not "legal to do so".
- However, the conversation supports parts of Camerata's case. I have already mentioned that it supports Mr Ventouris' and Mr Triantafyllidis' evidence about Mr Ventouris' telephone conversation on 29 August 2007, and so it supports Mr Ventouris' evidence that he did not know who the Issuer of the Note was before Lehman defaulted. The relevant exchange was this:
"CV: In August. I asked for the term sheet. You sent it to me, you sent it to me, it came again with the "tbd". In fact, I was not sure what it was. Do you remember the phone call? You will remember, since I called you and said "I hope it's not Arab Bank"? And you said "No, it's Credit Suisse or better", right?
PS-K: Yes, exactly."
- Mr Ventouris' purpose was to record Mr Siakotos-Konstantinidis admitting matters that might later be disputed, and because Mr. Ventouris was leading the conversation to this end and dominated the exchanges, it would be unrealistic to take Mr Siakotos-Konstantinidis to have confirmed everything said by Mr Ventouris that he did not dispute. However, the conversation supports Mr Ventouris' evidence that he bought the Note because he was assured by Mr Siakotos-Konstantinidis and Mr Fokiades that the investment was a safe one. I refer in particular to this exchange:
"CV: I agreed to invest this money because I trusted what you told me and I believed that it was done in safety. You remember, that time at the [Mr. Fokiades' office] you told me it is a 100% sure, "I am sure it will work out, I can vouch with my signature for it". Of course, we were talking about the investment, right? We were not discussing, we did not even know who the issuer was at the time. Everything we said at the time concerned the investment.
PS-K: Of course
CV: But it was presented as an ultra safe product.
PS-K: And so.
CV: As we still believe it is.
PS-K: And we looked into it …
CV: That's right, 100%.
PS-K: If anyone else had issued it, we would not be …
CV: We would not be happy, we would be smiling.
PS-K: Yes, that's right."
Issues
- The issues between the parties can be formulated as follows:
i) What (if any) advice did Mr Ventouris seek from Mr Siakotos-Konstantinidis between March and September 2008 and how (if at all) did Mr. Siakotos-Konstantinidis respond?
ii) What duties were owed by CSSE to Camerata in relation to any such enquiries and advice?
iii) Were CSSE in breach of those duties?
iv) Did such breach of duty cause Camerata loss?
v) If so, what loss?
vi) Did Camerata contribute to any loss that they suffered through their own fault?
- Before I come to these issues, I shall consider the evidence about Mr Ventouris' financial experience, knowledge and understanding, and about his attitude to risk. I shall also say something about the witnesses who gave oral evidence at the trial.
Mr Ventouris' knowledge and experience
- It is convenient first to deal with Mr Ventouris' knowledge and experience of finance and investments. His evidence was that, before his dealings with Mr Siakotos-Konstantinidis, he had had no experience of high risk investments, and that he never had any real understanding of structured products. He said that, although he discussed a range of investments with Mr Siakotos-Konstantinidis and gained "some rudimentary understanding of the jargon relating to these investments" and although Mr Siakotos-Konstantinidis used graphs to explain them, he found structured products difficult to understand. Mr Ventouris acknowledged in cross-examination that he appreciated that they depended upon the movements of the market or the value of the assets on which they were based, whether they might be exchange rates, specified equities or other indices; and he also knew that some structured products had capital protection and others did not. He denied knowing much more than that.
- That evidence is consistent with the answers given by Dr Lustenberger in the documentation for opening the CSG account. It is also reflected in some of Mr. Ventouris' exchanges with Mr Siakotos-Konstantinidis. For example, in July 2007 he asked Mr Siakotos-Konstantinidis to explain to him how leverage might be used to invest in the Note. The question itself shows that Mr Ventouris had only a vague concept of the principles involved, and Mr Siakotos-Konstantinidis' response was an elementary explanation that indicates that he thought that Mr Ventouris had little understanding of it. Mr Ventouris also thought that the Note might be structured to meet his own requirements, which suggests that he had little experience of such investments.
- CSSE submitted that Mr Ventouris knew more about sophisticated investments than he acknowledged. As I shall explain, in agreeing to the Terms and Conditions Camerata stated that they were a "sophisticated investor" and had knowledge, experience and expertise in financial matters, but CSSE did not argue that this statement in itself evidences what sophistication, knowledge, experience and expertise Mr Ventouris and Camerata in fact had. They were right not to do so.
- CSSE advance other arguments that Mr Ventouris had a sophisticated understanding of the financial markets. I was not persuaded by them. First, they pointed out that Mr Ventouris had studied for his MBA, but there is no evidence that the study of accountancy and economics for the course would have provided any assistance in understanding the sort of investments with which this case is concerned.
- Secondly, it was Mr Siakotos-Konstantinidis' evidence that, when he met Mr Ventouris in his office in September 2006, he saw that Mr Ventouris had "his computer screens set up to follow the financial markets, as well as a large amount of literature on financial theory". I reject that evidence: Mr Ventouris denied it and produced photographs of his office to illustrate the equipment and books in it. When he was cross-examined, it became clear that Mr Siakotos-Konstantinidis should not have given this evidence in his witness statement: it was untrue.
- CSSE also referred to dealings that Mr Ventouris had with other banks, as well as Credit Suisse (including Clariden Leu). In a letter dated 4 November 2010, Messrs Thomas Cooper stated that Mr Ventouris had discussed structured products or other medium or high investment products with SG Hambros, Goldman Sachs, EFG bank, Maerki Baumann & Co AG, Bank of Hoffman and HSBC. They also stated that they meant by this not that these banks had simply attempted to sell him investments of this kind, but that there had been "an active two-way dialogue". In cross-examination Mr Ventouris denied any such discussions, and said that these banks had simply approached him with proposed investments.
- Mr Ventouris' evidence about this was supported to some extent by a witness statement made by Mr Panos Savides: CSSE did not ask that he attend for cross-examination, and his statement was put in evidence. Mr Savides was until April 2010 a Director and Chief Executive Officer for Private Banking for Southern Europe at Maerki Baumann & Co AG in Zurich, having previously worked with Rothschild Bank. Mr Ventouris became a client of his in 2002 when he was with Rothschild Bank, and remained one when he moved to Maerki Baumann. He said that it was clear from what Mr Ventouris told him that he was an "extremely conservative and risk averse investor who was only interested in investments where his capital was protected", and that all his investments should be "very low risk". He never showed any interest in more adventurous investments, and, as far as Mr. Savides knew, Mr Ventouris had no experience of structured derivatives or other sophisticated financial products.
- There is no evidence that Mr Ventouris, either himself or through some vehicle entity, bought any structured products or other relevant investments from any of these banks, and, whatever the explanation for what Messrs Thomas Cooper wrote, I accept his evidence that he did not have discussions with them which provided him with any significant information or understanding about such products.
- None of this persuades me that, when he dealt with CSSE, Mr Ventouris in fact had any relevant previous experience or that he had any technical understanding about how the market in structured products operated. However, the important question is what impression he gave Mr Siakotos-Konstantinidis and whether that impression was a reasonable one. As Mance J said in Bankers Trust International plc v PT Dharmala Sakti Sejahtera (No 2), [1996] CLC 518 at 531E-F: "A recipient holding himself out as able to understand and evaluate complicated proposals would be expected to be able to do so, whatever his actual abilities".
- I conclude that Mr. Ventouris had no experience of structured products before he met Mr Siakotos-Konstantinidis. Mr. Siakotos-Konstantinidis had no reason to think otherwise, and this should have been clear to him if he had read CSG's account opening document or the completed Acceptance Booklet. Mr. Ventouris showed that he had limited technical knowledge about investments of the kind in which he and Camerata were investing and about investments generally.
- That said, Mr Ventouris is clearly intelligent and financially astute, and Mr. Siakotos-Konstantinidis must have recognised this. He took a lively interest in investment, and showed himself willing and eager to ask about and to discuss products suggested to him by CSSE and others. He asked that CSSE provide him with graphs and other research information. He engaged in discussion with Mr Siakotos-Konstantinidis about market developments and the opportunities that they presented for investments. Mr. Siakotos-Konstantinidis could reasonably suppose that he understood the risks involved in the investments that he and Camerata made and other products that he discussed, including the risk that the investment would be lost if a counterparty defaulted, and that he would ask about any concerns that he had. He could also reasonably suppose that Mr. Ventouris understood that the enhanced returns that could be earned from structured products broadly reflected the risks associated with them.
Mr Ventouris' attitude to risky investments
- Camerata say that Mr Ventouris dealt with CSSE on the basis that he was a conservative investor who was interested only in investments in which the capital would be safe. Dr Lustenberger gave evidence that in his experience Mr Ventouris was not willing to make risky investments. He knew that Mr Ventouris' father, who had a strong influence over his son, had not been interested in the financial sector and put his money into time deposits and, to some small extent, into first class bonds. He described Mr Ventouris too as being "absolutely obsessed with trying to avoid risk". Camerata's case, therefore, is that, throughout the period in which they were dealing with CSSE, their, and Mr Ventouris', attitude to risk was as described in the Risk Profile completed by Mr Kelly and in the application brochure that Dr Lustenberger completed for CSG.
- In his witness statement, Mr Ventouris said that his "overriding concern … was that any investment made should be extremely low risk" and that Mr Siakotos-Konstantinidis knew this. He also said, that he would not have authorised an investment unless Mr Siakotos-Konstantinidis had advised him that there was very little risk, that any risk was only as to a small proportion of the capital, and that the return would almost certainly be higher than for funds on deposit. Mr. Ventouris was cross-examined about what he meant by "low risk" investments, and Mr Beltrami pressed him about Camerata's pleaded case that he told Mr Siakotos-Konstantinidis at their meetings in September 2006 that he was interested only in safe investments because he wanted his money to be "absolutely secure". Mr Ventouris expanded upon his aims: he said that he had been prepared to make investments which might not earn any return upon capital, and to accept some risk that he might face a small loss limited to interest previously earned upon his capital base, but not to run unnecessary risks beyond that. I say 'unnecessary risks" because Mr. Ventouris understood that any investment might be lost through some entirely improbable event - he referred to an illustration given by Mr Fokiades: "If an aeroplane falls, everyone dies, so it is a very risky way of transport, but it is very limited, that makes it very safe". He was determined to keep any risk of total loss of an investment to a minimum. Although Mr Beltrami made great play about Mr Ventouris' use of different expressions when describing his willingness to make adventurous investments and suggested that his evidence was too vague to be reliable, in my judgment the picture that Mr Ventouris presented of his attitude to risk was essentially consistent and entirely understandable; and it was reflected in the written information given by Camerata.
- Mr Siakotos-Konstantinidis' evidence was that the account opening documents "did not give an accurate indication of the risk appetite" of Camerata, and that Mr Ventouris invested in a number of products that carried "at least a medium risk". This is in accordance with CSSE's computer records. Mr Siakotos-Konstantinidis and his superior, Mr Francesco Lombardo, a Managing Director in Credit Suisse UK, signed on 8 December 2008 an Annual Client Review, in which, on a part of the form generated, as I understand it, by Credit Suisse's computer systems, the "Risk Profile" of Camerata's account and the "Risk Profile (Client Level)" were stated to be "medium". No documentary or other evidence explained who entered this information into the system or when or why the entry was made. Mr Siakotos-Konstantinidis said that he relied upon this rather than Camerata's own statements in the account opening documents.
- CSSE rightly do not rely upon this computer generated information to justify Mr Siakotos-Konstantinidis' view about Mr Ventouris' appetite for risk. (Indeed, at the start of the trial, they had, surprisingly, not disclosed the Annual Client Review.) They rely upon the dealings and exchanges that Mr Siakotos-Konstantinidis had with Mr Ventouris.
- First, CSSE argue that the investments that Mr. Ventouris and Camerata made themselves show that he was willing to take considerable risks. Of the investments that he made either himself or through Camerata, only the Swap Note had capital protection. All of them could have earned a significantly higher coupon than the return on deposits. He made the investments despite the warnings about them to which I have referred. Mr Siakotos-Konstantinidis' evidence in his witness statement was that each of the investments made by Camerata "carried at least a medium risk", and I accept that that was a reasonable assessment of them.
- Camerata's response to this argument is that Mr Ventouris invested in reliance upon the advice and reassurances of Mr Siakotos-Konstantinidis, and I accept that to some extent Mr Ventouris was encouraged to buy these investments because Mr Siakotos-Konstantinidis said that he considered them sound. However, I cannot accept that Mr Ventouris failed to recognise that they presented some risk that he would lose part of his capital. Mr Ventouris took an active interest in what he earned on the fiduciary deposits. On 19 June 2007 Mr Siakotos-Konstantinidis wrote that interest would be paid at 10bps below LIBOR, and that the rate should later be adjusted to LIBOR less 6 bps: by an e-mail of 12 May 2008 Mr Ventouris reminded him of this. During the relevant period, the rates that would have been paid on deposits were of the order of 3% to 5.5%, and Mr Ventouris knew this. He also appreciated, as he confirmed in cross-examination, that generally the higher the return on an investment, the greater the risk associated with it. Mr Siakotos-Konstantinidis accepted that Mr Ventouris told him that he "wanted to take low probability risk", but he also wanted returns that were "significantly more than what was available in the fixed deposit market". Mr Siakotos-Konstantinidis could not specifically recall whether he discussed with Mr Ventouris the tension between these two aims, but it would have been obvious to a businessman of Mr. Ventouris' intelligence. He sought a balance between the two objectives.
- I should add that Mr Ventouris used more leverage when buying the Note than Mr Siakotos-Konstantinidis suggested in his e-mail of 3 July 2007, and he also used leverage to finance the investments in the Swap Note, the Multi-Index Note, and the Bank Note. Mr Beltrami submitted that the investments were therefore the more risky. I am not persuaded by that submission: Mr Ventouris explained that he decided how much he wished to invest, and that he had funds which he could have used to finance the investments fully: as he put it, he "didn't use leverage to increase the yield, [he] used the leverage because [he] didn't want to use [his] other assets". The risk involved depended upon the amount of the investment rather than upon how it was financed.
- Mr Ventouris was not driven to sell investments in volatile market conditions. In March 2008, after Bear Stearns had been rescued and both the Bank Note and the Note had breached their respective barriers, he decided to hold them. Again, as I have explained, in October 2008 he did not realise the funds invested in the Bank Note, but reinvested in the Restructured Bank Note in the hope that bank shares would recover over the next three years.
- Mr Ventouris' interest in less conservative products is also reflected in the so-called "reverse inquiries", when he asked Mr Siakotos-Konstantinidis for his opinion about possible investments, many of which were medium or higher risk investments, such as shares in the pharmaceutical, luxury goods, shipping, insurance and construction sectors and investments linked to the performance of commodities. (He also made some inquiries about hedge funds, but it appears from the Annual Client Review for 2008 that CSSE recognised that Camerata had no wish to trade in hedge funds. This entry was not explained in the evidence, but I see no good reason to doubt its accuracy. In any case, Mr Siakotos-Konstantinidis said that "there is no reason for mutual and hedge funds to be medium, high risk".) When there was a drop in the market in 2007, Mr Ventouris saw the possibility of exploiting this to his advantage: thus on 6 August 2007 he wrote to Mr Siakotos-Konstantinidis, "Can you advise me regarding the product with the indexes we discussed as the market correcting maybe it is an opportunity. What do you think?"; and on 20 November 2007 he wrote, "After observing the banks, and particularly Citi and Bank of America, I come to the conclusion that they have lost at least 20-30% of their value from high price … a product with 50% barrier gives a good margin for a 70-75% drop from high. Can you update me on what coupon we can achieve".
- I recognise that in fact Mr Ventouris did not make any investments as a result of these "reverse inquiries". I also recognise that he made inquiries of Mr Siakotos-Konstantinidis about more conservative investments: for example, on 12 October 2007 he asked, "Do we have any capital guarantee product with gold?", because, as he explained, he thought a structured product based on gold would be very safe. On 5 October 2007 he responded to a proposal for an investment in emerging markets by expressing concern that it was too risky. However, Mr Ventouris would not have sought advice about so many relatively exotic products had he been committed only to making investments that could be described as "safe".
- My conclusions about Mr Ventouris' attitude to risk are these: when he started to deal with Mr Siakotos-Konstantinidis, he had no experience of risky investments, but, in the hope of higher returns, was willing to make investments which he knew might result in some limited loss to capital. To that extent he never limited himself to investments that were "absolutely secure". In the course of his dealings with Mr. Siakotos-Konstantinidis increasingly he became interested in, and attracted and excited by, more adventurous investments. This understandably and reasonably led Mr Siakotos-Konstantinidis to believe that he would contemplate running rather greater risks with his capital (and Camerata's funds) than the documentation completed by Camerata indicated. In fact, he never put any money into the most adventurous ideas that they discussed, and he would never seriously have contemplated any investment if he thought that there was any realistic chance that he would lose the whole or the greater part of his investment. He understood and accepted risks by way of market movements, but would not willingly have run the risk that any of the banks or institutions that he was dealing might default if he had thought this seriously possible.
The witnesses
- Camerata's main witness was Mr Ventouris. He is, as I have said, Greek and his first language is Greek, but he gave his evidence in English. He had an interpreter available to assist him to understand questions and to reply to them, and he made use of the interpreter from time to time, but I do not consider that this handicapped him in giving his evidence to any significant extent.
- I consider Mr Ventouris was an honest witness, and sought to give an accurate account of events. However, his recollection of them and in particular of the crucial discussions between March 2008 and September 2008 was vague and imprecise.
- It was submitted by Mr Beltrami that Mr Ventouris was concerned to argue Camerata's case when he was cross-examined, and that for this reason I should be the more cautious about accepting his evidence. Although Mr Ventouris was sometimes concerned to explain Camerata's case (particularly towards the end of his cross-examination when, I suspect, he was becoming a little tired), I do not criticise him for this. In any case, this is not, to my mind, a reason to reject his evidence.
- However, I have concluded that, with regard to his crucial exchanges between March and September 2008 with Mr. Siakotos-Konstantinidis, over time Mr. Ventouris has convinced himself that his requests for advice and the advice that he received went further than they did, and he has convinced himself that, if he had been given less reassuring advice, he would have responded more decisively that he would have done. This was manifested to some extent in his witness statement, but it was more pronounced in cross-examination.
- Camerata also adduced oral evidence from Dr Lustenberger and Mr Triantafyllidis. Both were honest witnesses, and I accept their evidence, but it was of limited importance.
- CSSE's only witness was Mr Siakotos-Konstantinidis. I do not accept that his evidence was always honest. I give three examples.
i) On his own account, he told Mr Ventouris untruths at their meeting on 3 December 2008. He initially denied that the conversation had taken place at all, and as a result it was denied in CSSE's original pleaded defence. I cannot accept his evidence that this was because he had forgotten about the conversation.
ii) I reject his account of his telephone conversations with Mr Ventouris on 14 and 15 September 2008, and he cannot have been mistaken about them. He was giving deliberately untruthful evidence.
iii) In his witness statement he had said that, when he went to Mr Ventouris' office in September 2006, he "noticed that Mr Ventouris had computer screens set up to follow the financial markets, as well as a large amount of literature on financial theory". It was clear in cross-examination that he had given false evidence deliberately in order to present Mr Ventouris as financially well-informed.
I have therefore been particularly cautious about accepting his evidence of controversial questions, but I do not totally reject his evidence.
The exchanges between Mr Ventouris and Mr Siakotos-Konstantinidis after Bear Stearns collapse.
- Camerata say that they were given negligent advice in oral exchanges between Mr Ventouris and Mr Siakotos-Konstantinidis. After the collapse of Bear Stearns, Mr Ventouris and Mr Siakotos-Konstantinidis continued their frequent telephone conversations and continued to meet from time to time. Camerata's pleaded case is that Mr Ventouris enquired about whether the Note was still a safe investment "at various meetings which took place in London including meetings on 20 to 23 March, 16 April and 1 to 3 May 2008 and also in Greece including a meeting on 11 September 2008" and that there were also about 24 telephone calls between March and 15 September 2008 made by Mr Ventouris. There was no evidence about what was said at specific meetings, or even that those particular meetings took place, and Mr Ventouris and Mr Siakotos-Konstantinidis had many more telephone conversations than the pleading suggests. However, since Mr Ventouris was not asked about this part of the pleading, I place no reliance upon the discrepancies between the pleading and the evidence.
- According to Mr Ventouris, as the markets became more volatile from about the beginning of 2008, he was increasingly anxious about Camerata's investments, especially after Bear Stearns had had to be rescued. He spoke of an "added level of anxiety" in his discussions with Mr Siakotos-Konstantinidis. Although they exchanged many e-mails during the relevant period, Mr Ventouris did not express concern in any of them about the Note or about the issuer of the Note or of any other investment. Mr Francis Tregear QC, who represented Camerata, submitted that this is not surprising since Mr Ventouris used e-mails to send documents as attachments and to convey information of that kind, but on occasions other e-mails were sent: for example, his e-mail of 6 March 2008 in which he expressed his concerns about the fall in the UBS's share price.
- Mr Ventouris' evidence was that he sought advice from Mr Siakotos-Konstantinidis whether he should sell the investments, and more specifically, that he asked "on more than one occasion" whether he should sell the Swap Note and the Note, and whether any banks other than Bear Stearns were likely to fail; and that during the summer of 2008 he had "numerous specific discussions with Mr Siakotos-Konstantinidis about whether UBS or CitiGroup were likely to collapse". He said that Mr Siakotos-Konstantinidis had advised that the investments should not be sold, and that "there were no problems with the banks with which these investments were concerned" and all these banks were "safe". Mr Siakotos-Konstantinidis expressed the view that there was no long-term risk to any of the investments made by Camerata. He had also advised that the investments were "absolutely safe", and that investment in the Note would benefit from the volatility because the markets would invest in the US dollar. This continued to be his advice until Lehman filed for bankruptcy protection.
- Mr Ventouris' evidence in cross-examination was that, while he was very concerned that his capital should be safe, particularly because his core shipping business was not doing well, and he questioned Mr Siakotos-Konstantinidis about his concerns "all the time", he did not ask "specific" or focused questions, or question him about any particular bank or institution: he did not understand what was happening in the market and he asked "general" questions. They included these: whether Mr Siakotos-Konstantinidis thought that another bank would fail as Bear Stearns had; whether there was any risk that the institutions with whom he had investments would fail; and whether there was anything about the investments that had changed since they were bought and of which he should be aware. Mr Ventouris asked these questions, he said, in the context of seeking advice whether he should sell investments.
- Mr Siakotos-Konstantinidis said in his witness statement that over this period he and Mr Ventouris discussed the state of the market and frequently discussed Camerata's investments, including the Note, but those discussions were about the "underlying assets", that is to say, in the case of the Note, the Euro/US dollar exchange rate. In this context and in relation to the Bank Note, Mr Ventouris expressed concerns about the share price of UBS. They did not discuss who had issued the Note or whether there was any risk that the issuer might default, and Mr Ventouris did not raise any concerns of this kind.
- Mr Siakotos-Konstantinidis did not recall Mr Ventouris asking him whether there were problems with the banks connected with his investments, or whether anything had changed with regard to them about which he should be aware. He said that he would have recalled it if such a question had been asked. He did recall Mr. Ventouris asking whether there was anything that he should know about the investments. Mr. Siakotos-Konstantinidis did not understand that enquiry to be directed to risk of counterparty default. He also described the risk of counterparty default as "a miniscule part of the risk of a product", and acknowledged that, if simply asked whether an investment was safe, he would not have focused on it.
- Camerata's pleaded case is that Mr Ventouris asked, repeatedly, "whether the Note was still a safe investment", and that Mr Ventouris "meant", and that Mr Siakotos-Konstantinidis "understood or ought to have understood, that Mr Ventouris wanted to know whether there was, as a result of any development since [Camerata] purchased the Note, any risk of losing part or all of the capital investment constituted by the Note as a result of any cause, including counterparty default by the Issuer". They did not plead that he had asked this expressly or that he had asked the other more specific questions about which he gave evidence.
- I accept that, after the sale of Bear Stearns and throughout the summer of 2008, Mr Ventouris frequently asked Mr Siakotos-Konstantinidis about his views about the markets and about the prospects for his investments. It would have been natural that in the course of such discussions Mr Ventouris asked whether he thought that another institution would face difficulties such as led to the sale of Bear Stearns, and I accept that he asked questions of this kind. There is no real dispute that Mr Ventouris and Mr Siakotos-Konstantinidis discussed how the exchange rate between the Euro and the US dollar might move as a result of the market turbulence and so how it would affect the Note: Mr Siakotos-Konstantinidis expressed the view that the flight to the reserve currency of the dollar would be to the advantage of the investment. I accept that they had discussions about whether Camerata should sell or keep the Note, and that Mr Ventouris asked in that context whether this and the other investments (in his and Camerata's name) were safe. I do not accept that he asked more focused questions in that:
i) I do not accept that he asked specifically whether the Note was safe from risk of counterparty default. Mr Ventouris did not give evidence that he did so.
ii) I reject Mr. Ventouris' evidence that he specifically asked whether the banks with which he had his investments were safe, and that he asked whether anything had changed about which he should know. I do not believe that Mr Ventouris was deliberately giving untruthful evidence about this, and I accept that he has come to believe that he expressed his concerns in this way in his conversations. But this evidence was inconsistent with the pleading, and the pleading seems to me to give a more probable account.
- The conversations upon which Camerata rely took place either in hotel and bars or in the frequent telephone conversations. As I have explained, Mr Ventouris and Mr Siakotos-Konstantinidis had become friends. Mr Ventouris asked what he described, as I have said, as "general" questions. He was interested to hear Mr Siakotos-Konstantinidis' opinion about the markets and what would result from the market turbulence, and in that context that he asked how Mr Siakotos-Konstantinidis thought that his investments (and Camerata's investments) would fare. I do not accept that he presented his questions as enquiries made with a view to planning or making decisions about buying or selling investments in light of the answers. Further, Mr. Ventouris was acute enough and sufficiently well informed to know that counterparty default could jeopardise an investment, and, if he had been concerned about that, he would, as I conclude, have asked about the position expressly and specifically.
- Camerata plead that, in reply to Mr Ventouris, Mr Siakotos-Konstantinidis said that the counterparty to the Note was "as creditworthy as Credit Suisse itself", that the investment in the Note was "completely safe" and that "there was nothing to worry about". There is no credible evidence that, after Bear Stearns had been sold, Mr Siakotos-Konstantinidis spoke of the issuer of the Note being as creditworthy as Credit Suisse, or that he thought that the investment was completely safe. I accept that Mr Siakotos-Konstantindis probably told Mr Ventouris, in some vague way, not to worry. He had, as Mr Ventouris said and I accept, spoken in the conversation on 29 August 2007 of the counterparty to the Note being as creditworthy as Credit Suisse, and Mr Tregear submitted that, given that previous assurance, Mr Siakotos-Konstantinidis' advice that there was nothing to worry about as far as the issuer was concerned was tantamount to him confirming his previous assurance. I do not accept that Mr Siakotos-Konstantinidis did exhort Mr Ventouris not to worry about the Note's counterparty, but in any case a vague remark of this kind does not bear this interpretation.
- I accept that in general terms Mr Siakotos-Konstantinidis expressed optimistic views during the summer of 2008 that other banks would not fail as Bear Stearns had done and that Mr Ventouris' investments remained sound. I accept that in the course of the discussions Mr. Siakotos-Konstantinidis gave his own view (or impression) that Mr. Ventouris' and Camerata's investments would be safe. I cannot accept that he gave Mr Ventouris any more specific or firmer advice or assurances. Mr Ventouris' continuing relationship with Mr Siakotos-Konstantinidis after the collapse of Lehman seems to me inconsistent with the contention that he had been let down by Mr Siakotos-Konstantinidis as badly as his evidence suggested. As I have said, he bought the Restructured Bank Note through Mr Siakotos-Konstantinidis. In a telephone conversation on 1 October 2008, which was recorded, he told Mr Siakotos-Konstantinidis, "I totally trust your opinion", and on 14 October 2008, he remarked that "The storm always has goodies to bring". In any case Mr. Ventouris' evidence was not of a quality that would justify a finding that Mr. Siakotos-Konstantinidis' advice went further than I have stated.
What duties did CSSE owe to Camerata?
- Camerata's case that CSSE owed a duty of care depends essentially upon the exchanges between Mr Ventouris and Mr Siakotos-Konstantinidis. Their primary case is that, whatever the exact terminology used, Mr Ventouris expressly asked for advice about the companies concerned with his and Camerata's investments, and Mr Siakotos-Konstantinidis implicitly gave advice about them when describing the investments as safe. I have rejected his evidence that he expressly or specifically sought advice of this kind. Their secondary case is that, even if Mr Ventouris did not expressly ask about the institutions that had issued the investments, or, more generally, about institutions concerned with them, his questions about whether the investments were safe inherently involved him asking for Mr Siakotos-Konstantinidis' opinion about the reliability and soundness of the counterparties, and Mr Siakotos-Konsantinidis' response was to be taken implicitly to include advice about that. Mr Tregear submitted that Mr Siakotos-Konsantinidis must in fact have realised that Mr Ventouris' questions were intended to refer to, among other things, the creditworthiness of the issuers, and that, at any rate objectively interpreted, their exchanges covered the risk of counterparty default.
- Camerata contend that CSSE owed them in contract and in tort a duty that any advice would be given with the skill and care with which a reasonable financial adviser would advise a client such as Camerata. They say that such a term would be implied into their contract for advisory services in order to give it business efficacy and because this was the obvious intention of the parties, and that in any case the Supply of Goods and Services Act 1982 (the "1982 Act") provides for such a contractual duty. Section 13 of the 1982 Act provides that "In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill". Section 16 contains provisions about how the implied term may be excluded:
"(1) Where a right, duty or liability would arise under a contract for the supply of a service by virtue of this Part of this Act, it may (subject to subsection (2) below and the 1977 Act) be negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both parties to the contract.
(2) An express term does not negative a term implied by this Part of this Act unless inconsistent with it…."
- In support of their contention that CSSE are liable for breach of a duty in tort, Camerata rely upon familiar principles deriving from the speech of Lord Bridge in Caparo Industries Ltd v Dickman, [1990] 2 AC 605 at p.617/8: they say (i) that it was always reasonably foreseeable to CSSE and Mr Siakotos-Konstantinidis that, if he did not advise with reasonable skill and care, Camerata would suffer financially because they would rely upon his advice and, without proper advice, might not be alerted to a risk associated with keeping, rather than selling, the Note; (ii) that they had a close relationship with CSSE; and (iii) that it is fair just and convenient that CSSE should be under a duty of care in relation to advice given to Camerata about the Note. They also submit in support of their contention that a duty was owed in tort that they were a client "with a high level of risk aversion". They do not plead that CSSE assumed a responsibility to give them advice through Mr. Siakotos-Konstantinidis in his exchanges with Mr. Ventouris.
- In their defence, CSSE admit that "subject to the governing terms, where Mr Siakotos-Konstantinidis did give advice to [Camerata] in relation to its investment in the Note, [CSSE] owed a duty of care in respect of such advice". However, in their closing submissions, CSSE argued that, leaving aside any provision of the Terms and Conditions that excluded or defined their duties, "even if a relevant question was asked and answered, the circumstances were not such as to impose a duty of care on" them. As I understand their argument, they submit that, because of the nature of the advice and the circumstances in which it was sought and given, Mr Siakotos-Konstantinidis, when responding to Mr Ventouris' questions, was not to be understood to be giving advice under the agreement for advisory services and the circumstances were not such as to give rise to a duty of care in tort. (If their argument went further than that, it would be inconsistent with the pleading and would amount to an argument that the term prima facie to be implied under the 1982 Act was excluded in some way not contemplated by section 16.)
- In support of this contention, CSSE argue that the advice is said to have been given in the course of informal conversations between friends, and observe that, in his evidence, Mr Ventouris spoke of discussing "every matter" with Mr Siakotos-Konstantinidis, including personal matters that were nothing to do with their professional relationship. They met, as I have said, not in CSSE's or Mr Ventouris' offices but hotels or other more social surroundings. They had "simple day to day exchanges", in which Mr Siakotos-Konstantinidis was asked in general terms for his personal opinion about uncertain future events: see the observations of Aikens LJ in Springwell Navigation Corp v JP Morgan Chase, [2010] EWCA Civ 221 at paras 116-121.
- I am unable to accept that for these reasons, when Mr Ventouris sought Mr Siakotos-Konstantinidis' views about whether the investments were safe, their discussions were not in the context of, and covered by, the agreement for advisory services. Indeed, this suggestion was not put to Mr Ventouris when he was cross-examined. I reject CSSE's argument that, quite apart from the Terms and Conditions and because of the circumstances of the discussions, CSSE were under no duty of care in relation to how Mr Siakotos-Konstantinidis responded to Mr Ventouris' questions about his investments. The points made by CSSE about the nature and circumstances of the discussions are certainly relevant to whether CSSE were in breach of a duty of care because they bear upon the standard of care required of Mr Siakotos-Konstantinidis, but do not displace the duty.
- In their pleaded case CSSE say that their duty (whether in contract or tort) was "constrained and defined" by (i) the "true level of experience, investment objectives and attitude to risk" of Camerata (which I have already considered), (ii) the contractual terms that governed their relationship with Camerata, and (iii) the "risk disclosures" which had been made to Camerata, of which Camerata were or should have been aware and of which CSSE were entitled to assume Camerata were aware.
- Before coming to the Terms and Conditions, I mention that CSSE argued that they were under a duty to exercise reasonable skill and care only if they in fact gave advice. I recognise that the description of the "Advisory Service" in the Terms and Conditions provides that CSSE might decline to give advice on a particular investment, but I am not persuaded that this or any other contractual provision limits CSSE's duties about when they were to give advice. In their submissions the parties did not refer to section 16 of the 1982 Act, and, if anything turned upon this point, I should have invited submissions as to whether the agreement for advisory services prima facie committed CSSE to provide continuing advice about investments that Camerata had made through them and whether, if so, CSSE contend that the term implied by section 13 was "negatived or varied" by some express agreement or in some other way permitted by section 16. However, since Camerata's only complaint is about advice which, as they contend, Mr Siakotos-Konstantinidis did in fact give, I say no more about this.
The Terms and Conditions
- I come to the Terms and Conditions. Section A included General Terms and Conditions. Section B contained Terms and Conditions Applicable to Special Services. Section C contained Notices and Warnings. Section D was about Standard Fees.
- The Introduction to the Terms and Conditions stated that:
"These Terms and Conditions together with the Acceptance Booklet contain the terms of independent (and several) contracts between you and each of, (1) Credit Suisse (UK) Limited ("CSUKL"), (2) Credit Suisse Securities (Europe) Limited (acting through its Private Client Services division ("PCS")) ("CSEL") and (3) Credit Suisse International ("CSI") (together "we" and "us")".
It went on to explain that the Terms and Conditions included representations and warranties given by the client, and limitations upon the liability of CSSE. The following words were printed in bold: "We recommend that you read these terms and conditions very carefully. If you are unsure about the meaning or effect of any of these terms and conditions, you should seek advice from an appropriate professional …".
- Section D set out standard fees in respect of advisory services relating to equities and other matters, but stated:
"In addition, your Advisor will be able to provide you with details of the fees for the other bespoke services including, but not limited to, managed funds, hedge fund advisory services, bond only portfolios, structured products and derivatives."
It is common ground that in fact Camerata were not charged for CSSE's advisory services.
- CSSE rely upon a number of provisions in parts 5 and 6 of section A of the Terms and Conditions. Part 5 was headed "Liability and Indemnity". It stated "This Part sets out the extent of our respective liabilities to each other", and paragraph 1 was headed "Our liability to You". In fact, it comprised limitations upon and exclusions of CSSE's liability, including the following:
"1.1 To the extent permitted by law and the FSA Rules and save as otherwise expressly provided in these Terms and Conditions, we shall not be liable for any losses, liabilities, costs, claims, damages, expenses, demands or Taxes (including, but not limited to, value-added taxes and stamp duties) ("Costs") incurred or suffered by you:
(A) as a result of any advice given or Transaction effected under these Terms and Conditions (including without limitation any loss or damage caused by a depreciation in value of any Portfolio Asset or any adverse Tax consequence); or
(B) otherwise arising directly or indirectly out of or in connection with these Terms and Conditions or any Transaction contemplated hereunder,
other than Costs arising directly as a consequence of the gross negligence, fraud or wilful default of us or any of our directors, officers, or employees.
1.2 Without limiting the foregoing or any other provision of these Terms and Conditions (or any other agreement between us) that excludes or restricts our liability to you, we shall not, save as otherwise expressly provided in these Terms and Conditions, be liable to you for any loss or damage suffered by you directly or indirectly as a result of:
…
(B) any decline in the value of any Investments purchased, held or sold by us on your behalf or which we have advised you to purchase hold or sell howsoever arising; …
(F) the solvency, acts or omissions of any Broker, Nominee Company, Custodian, settlement agent, Depositary or other third party by whom or in whose control any of your Investments (or documents of, or certificates evidencing, title thereto) may be held or through whom any Transaction may be effected, or any bank with whom we maintain any bank account, or any other third party with whom we deal or transact business or who is appointed by us in good faith on your behalf, but we will make available to you, when and to the extent reasonably requested, any rights that we may have against such person; …
unless the liability arises directly as a consequence of the gross negligence (or, in the case of liabilities arising from our custody activities, negligence), fraud or wilful default of us or any of our directors, officers, or employees …
1.6 We will not be liable to you for any delay in performance, or for the non-performance of any of our obligations hereunder by reason of any cause beyond our reasonable control, or for any losses caused by the occurrence of any contingency beyond our reasonable control. …"
- Part 6 was headed "Representations and Warranties" and was introduced with the words "In this Part we give the other various assurances about ourselves and the performance of our obligations hereunder". In fact the only representation made by CSSE was that they did not hold a significant interest in an insurance business, and they gave no warranties. As far as is significant, it contained representations and warranties by the client, including these:
"1.1 You [the client] acknowledge that we [CSSE] provide services to you in full reliance on the representations and warranties set out in these Terms and Conditions and undertake to notify us should any of these representations and warranties cease to be valid.
1.2 The representations and warranties set out in these Terms and Conditions are given by you on an ongoing basis and will be deemed, unless specified otherwise, to be repeated by you on each day following the commencement of these Terms and Conditions until it is terminated.
2.1 You make the following general representations, warranties and undertakings to us: …
(L) you have read, understood and accepted the risk warnings contained in Section C of these Terms and Conditions.
…"
- Section C, after stating that it did not "disclose all the risks and other significant aspects of the Investments and markets referred to", and that Camerata should satisfy themselves that they fully understood "the conditions which applied to such Investments and potential risk exposures", identified certain risks including these:
"1. The price or value of an investment will depend on fluctuations in the financial markets outside our control…
13. The liquidity of an instrument is directly affected by the supply and demand for that instrument. Under certain trading conditions, it may be difficult or impossible to liquidate a position…
21.2. Special Products [that is to say, products structured to fulfil a particular trading or market objective] are not traded on regular markets and you take the risk on the counterparty issuing the structure."
- Section A, Part 6 also provided, at paragraph 5.3, that:
"To enable us, our Associate or a Nominee Company to make such statements, representations and warranties and to subscribe on your behalf, you hereby give to us the statements, representations and warranties set out in … Part 8 of Section B in relation to Notes and agree that those statements, representations and warranties shall be repeated at the time of each such subscription in a … purchase of Notes and are given on a continuing and ongoing basis. You also agree to notify us immediately of any changes in the foregoing information which may occur prior to or following an investment in any Fund".
- Part 8 of Section B was headed "Representations and Warranties for Investments in Notes", and it was introduced as follows:
"The following are the representations and warranties referred to in Part 6 of Section A in relation to Notes. If you are unable to make the following disclosures you may still be able, in certain circumstances, to subscribe for Notes, but you should contact us for details first."
There were then set out under the heading "Representations and Warranties" a number of statements, of which I should refer to the following:
"1.1 You represent and warrant to, and agree with, us that as at the date hereof (and in the case of (E) below, for all periods in which you hold Notes):
(E) you have observed and will observe the restrictions on the offering of the Notes and distribution of documents relating to the Notes and you have not entered into any arrangement, contractual or otherwise, with respect to the distribution of the Notes;
(F) you have determined, based on your own independent review, that your acquisition of the Notes: (1) is fully consistent with your (or, if you are acquiring Notes in a fiduciary capacity or for the purpose of on-sale, each beneficiary's or each third party client's) financial needs, objectives and conditions; (2) complies and is fully consistent with all investment policies, guidelines and restrictions applicable to you, each of your beneficiaries or third party clients (whether acquiring Notes as principal, in a fiduciary capacity or for the purpose of on-sale); and (3) is a fit, proper and suitable investment for you (or, if you are acquiring Notes in a fiduciary capacity or for the purpose of on-sale, for each of your beneficiaries or third party clients) and for the purposes of any on-sale by you, notwithstanding the risks inherent in investing in or holding the Notes;
(G) you are a sophisticated investor and have such knowledge, experience and expertise in financial and business matters that you are capable of evaluating the merits of, the risks inherent in and the suitability of an investment in the Notes for you (or, if you are acquiring Notes in a fiduciary capacity or for the purpose of on-sale, for each of your beneficiaries or third party clients);
…
1.4 You acknowledge that you have received all financial and other information concerning the Notes and the issuer of the Notes and such other information which you require to evaluate fully the merits and risks of an investment in the Notes.
1.5 You represent that you have taken your own professional legal, tax and accounting advice in relation to the merits and risk of investment in the Notes and are not relying on our views in that regard.
1.6 The agreements, representations, warranties and other statements set forth in these Terms and Conditions shall remain in full force and effect, regardless of any investigation or statement as to the validity thereof made by or on behalf of you or us, and shall survive the sale, delivery and purchase of the Notes.
- As I have said, CSSE contend that the Terms and Conditions "constrain and define" what duties were owed to Camerata. They advance these arguments, which raise questions both about the meaning and effect of the relevant provisions in the Terms and Conditions, and whether the Unfair Contract Terms Act 1977 (the "1977 Act") prevents CSSE from relying on them:
i) Because of section A part 5 para 1.1 and para 1.2 they are not liable if Mr Siakotos-Konstantinidis was simply negligent in that he failed to exercise proper skill and care, and some graver fault on his part is required.
ii) The extent and nature of their duties relevant to Mr Ventouris' exchanges with Mr Siakotos-Konstantinidis are defined by the warranties and representations in section B part 8. (They say that they are also subject to the warnings in section C, which Mr Ventouris acknowledged in section A part 6 para 2.1(l) he had read and accepted. I shall refer briefly to these warnings and the other risk disclosures and warnings, including those in the term sheet and the SCARP warning, when I consider whether CSSE were in breach of duty.)
Gross negligence
- CSSE submit that the effect of section A part 5 para 1.1 of the Terms and Conditions is that they are liable only if Mr Siakotos-Konstantinidis was guilty of gross negligence in the advice that he gave: no claim is advanced on the basis of fraud or wilful default, and, it is submitted, paragraph 1.1 excludes liability simply for what might be called "mere" negligence in the sense of want of reasonable skill and care. Camerata do not accept that the intention or effect of paragraphs 1.1 and 1.2 is to exclude liability for mere negligence. They cite authorities in which the courts have commented upon the difficulty of distinguishing mere negligence and gross negligence, or, to put it another way, of identifying what, if any, meaning the adjective "gross" should be given, and have concluded that there was no distinction relevant to the cases before them: see, for example, Sucden Financial v Fluxo-Cane Overseas Ltd, [2010] EWHC 2133 (Comm) at para 54; and Marex Financial Ltd v Fluxo-Cane Overseas Ltd, [2010] EWHC 2690 (Comm) at para 93. In Tradigrain SA v Internek Testing Services, [2007] EWCA Civ 154 at para 23, Moore-Bick LJ observed that "The term "gross negligence", although often found in commercial documents, has never been accepted by English civil law as a concept distinct from civil negligence…".
- The relevant question, however, is not whether generally gross negligence is a familiar concept in English civil law, but the meaning of the expression in these paragraphs of the Terms and Conditions. I cannot accept that the parties intended it to connote mere negligence: in paragraph 1.2 and also in paragraph 1.3 both the expression "gross negligence" and the expression "negligence" were used, and some distinction between them was clearly intended. Equally clearly, to my mind, the expression "gross negligence" must be taken to have the same meaning in paragraphs 1.1, 1.2 and 1.3: I cannot accept Camerata's suggestion that, because paragraph 1.1 itself does not include any reference to mere "negligence", no distinction between "gross negligence" and "negligence" is intended in the context of paragraph 1.1. I accept that the distinction between gross negligence and mere negligence is one of degree and not of kind: see Armitage v Nurse, [1998] Ch 241 at p.254C/D per Millett LJ. As such, it is not easy to define or even to describe with any precision. However, as Mance J recognised in Red Sea Tankers Ltd v Papachristidis (The "Ardent"), [1997] 2 Lloyd's Rep 547, 586, "If the matter is viewed according to purely English principles of construction, … "Gross" negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence", and there is no reason to depart from conventional English law principles of construction when giving effect to paragraph 1.1. Mance J continued, "... as a matter of ordinary language and general impression, the concept of gross negligence seems to me capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious regard of or indifference to an obvious risk". That, as it seems to me, is what it connotes in the Terms and Conditions.
- I therefore accept that, as a matter of interpretation, paragraphs 1.1 and 1.2 provide that, in order to establish liability, Camerata have to show more than mere negligence on the part of CSSE. Camerata submit, however, that the paragraphs do not have this effect because of the 1977 Act.
- Section 2 of the 1977 Act provides:
"(1) …
(2) In the case of [loss other than death or personal injury], a person cannot [by reference to any contract terms or to a notice given to persons generally or to a particular person] exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk."
- Section 3 of the 1977 provides:
"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term –
(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
(b) claim to be entitled –
(i) to render a contractual performance substantially different from that which was reasonably expected of him, or
(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,
except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."
(It was not disputed that Camerata were dealing as a consumer and on CSSE's standard terms of business: the meaning of "consumer" is defined in section 12 of the 1977 Act, which provides (so far as is material) that a party so deals if he does not make the contract in the course of a business, nor holds himself out as doing so, and if the other party makes the contract in the course of a business.)
- Under section 11 of the 1977 Act, the party who asserts that a contract term satisfies the requirement of reasonableness must establish this: this burden is upon CSSE. They have to show that the term was "a fair and reasonable one to be included having regard to the circumstances which were, or ought to have been, known to or in the contemplation of the parties when the contract was made".
- Schedule 2 to the 1977 Act specifies five guidelines to which the court is to have regard when determining for some purposes whether a contract term satisfies the requirement of reasonableness. The guidelines are only made expressly applicable (in English law) for the purposes of section 6 (sale of goods and hire purchase) and section 7 (other contracts for the supply of goods) of the 1977 Act, but they are frequently treated as being of general application: Chitty on Contract (2008) 30th Ed Vol 1 at 14-085.
- The guidelines are as follows:
"(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other thing, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer."
- The 1977 Act applies to paragraphs 1.1 and 1.2: they purport to exclude CSSE's liability for mere negligence, or, if it be preferred, to restrict their liability for negligence to cases in which it was gross. They are similar to a provisions considered by the Court of Appeal in Springwell Navigation Corp v J P Morgan Chase Bank, [2010] EWCA Civ 1221 at para 181 (the provision described by Aikens LJ as the penultimate sentence of para 4 of the DDCS letter), which was held to be an exclusion clause covered by the 1977 Act.
- The question, therefore, is whether paragraphs 1.1 and 1.2 satisfy the statutory requirement of reasonableness. Here it seems to me that relevant considerations include these:
i) Mr Ventouris is a wealthy businessman who approached Mr Siakotos-Konstantinidis for CSSE's advisory services.
ii) Camerata entered into their agreement with CSSE through Dr Lustenberger, a commercial lawyer. Although he signed the contract without reading the terms, he was aware of the sort of terms that might be included in a contract with a bank for advisory services.
iii) Dr Lustenberger understood that, if Camerata did not wish to enter into a contract upon such onerous terms, they could use another bank. Indeed, he understood that they could obtain less onerous terms from Credit Suisse in Switzerland. Nevertheless, Camerata entered into the agreement on the terms presented by CSSE.
iv) Paragraphs 1.1 and 1.2 did not exclude all liability for fault falling short of dishonesty or wilful fault.
v) CSSE were providing services for clients to invest in relatively adventurous investments, which inherently involved a risk that the clients might suffer loss and seek to blame CSSE as their adviser whether or not CSSE were at fault. Inevitably there is, in a field such as investment advisory services, generous room for protracted disputes about what amounts to reasonable skill and care, and the prospect of them being time-consuming and expensive to resolve is obvious. It was, to my mind, reasonable that CSSE should protect themselves from such disputes by excluding liability for mere negligence when dealing with clients such as Camerata.
- CSSE also plead in support of their contention that the Terms and Conditions satisfy the statutory requirement of reasonableness that they "contain clear statements" and that they are "clearly expressed". I do not accept that broad contention: generally the Terms and Conditions, as well as being diffuse and prolix, were in some respects unclear, as is illustrated by the issues between the parties about their proper interpretation of the warranties and representations made in section B, part 8. However, I consider that, although paragraphs 1.1 and 1.2 are prolix, their general meaning is clear.
- I conclude that, in the context of the agreement with Camerata, paragraph 1.1 and 1.2 of the Terms and Conditions satisfy the requirement of reasonableness.
The warranties and representations made in section B, part 8
- I come to the provisions in section B part 8 of the Terms and Conditions. CSSE submit that the parties agreed that all their dealings should proceed on the basis there stated, and so it is not open to Camerata to dispute this: that they are, as Aikens LJ put it in Springwell Navigation Corp v J P Morgan Chase Bank, (loc cit) at para 186, "contractually estopped". Therefore, it is submitted, any question about what, if any, relevant duty was owed to Camerata is to be determined on these assumptions:
i) That Camerata had independently reviewed the suitability of the Note and decided on the basis of their independent review that it was consistent with their objectives and was a suitable investment.
ii) That they were a sophisticated investor and had the knowledge, experience and expertise to evaluate the suitability of the investment in the Note and the risks inherent in it.
iii) That they had received all the information that they required to evaluate the risks of the investment in the Note including risk of counterparty default.
CSSE argue that these contractually agreed assumptions leave no room for them to be under a duty of care to provide information or advice in relation to the merits, risks or suitability of the Note and for them to owe such a duty in relation to any advice that they in fact gave.
- Camerata submit that the provisions of section B part 8 are not relevant to their complaint about the advice that Mr Siakotos-Konstantinidis gave between March and September 2008 about the Note, and that CSSE cannot properly rely upon them. They argue that:
i) The statements are to be interpreted in the context of their contract with CSSE read as a whole, and, when so interpreted, they do not assist CSSE.
ii) The statements in section B part 8 are not relevant to their complaint because they are not directed to advice of the kind that Mr Siakotos-Konstantinidis gave between March and September 2008.
iii) In any case the regime of the 1977 Act applies to the statements and they do not satisfy the requirement of reasonableness.
- In support of their submission that the provisions do not assist CSSE, Camerata cite Homburg Houtimport BV v Agrosin Ltd, [2004] 1 AC 715 per Lord Bingham at para 11 as authority for the established principle that, if there is inconsistency, greater weight should be given to parts of a contract which the parties deliberately chose to include than to standard, pre-printed wording. Accordingly, they submit (i) that their choice of CSSE's investment service is inconsistent with, and overrides, the provision at section B, part 8 para 1.1(F) that their decisions were based on their own "independent review"; and (ii) that the information given in the Risk Profile was inconsistent with the provision at para 1.1(G) that they were a "sophisticated investor".
- I accept the premise of the argument that, although they were completed by Mr Kelly, apparently on the basis of answers given by Dr Lustenberger in the Risk Tolerance Indicator in the CSG account opening documentation, the answers in the Acceptance Booklet are to be regarded as chosen by the parties and not as standard wording. However, I do not consider that there was any contradiction or tension between the information in the Acceptance Booklet and these provisions of section B part 8.
- With regard to paragraph 1.1(F), there is no express or inherent inconsistency between its terms and other contractual provisions. The distribution of responsibility was that CSSE agreed to provide advice about investments, but Camerata were to satisfy themselves by their own review that the investment complied with their own needs and investment objectives and otherwise satisfied their requirements as described in the paragraph. This, to my mind, makes perfect sense: it was Camerata who could best judge how an investment suited them, in light, for example, of their portfolio of investments as a whole.
- Paragraph 1.1(G), and the statement that Camerata were a sophisticated investor and had the knowledge, experience and expertise to evaluate the risks, are said to be inconsistent with the answers in the Acceptance Booklet that they had no experience of any of the listed products, including structured products. Those answers were about what experience Camerata had of various kinds of investment: they were about their investment history and did not mean that they had no "sophistication" in terms of their understanding of finance and investment. After all, a new investment company might well recruit staff of the highest calibre and relevant "sophistication". (Indeed, it is not clear whether in this case the answers in the CSG account opening document, from which apparently the information in the Booklet derived, was given by reference to the experience and history of Camerata or of Mr Ventouris.)
- Mr Beltrami also submitted that there was no inconsistency between the answers and the Terms and Conditions because, in their answers in the Acceptance Booklet, Camerata were, as the booklet stated, giving answers designed to help them determine their own investment objectives. I do not accept that submission: the purpose of the answers was stated also to be in order to "communicate" the objectives to CSSE, and the implication was that CSSE would be aware of them when providing their services. There would otherwise have been no reason to require the client to inform their advisor if they wished to make changes to the information. This does not mean that the answers were instructions to CSSE: they provided them with information that they would be expected to consider when advising.
- Leaving aside the answers in the Acceptance Booklet, there are other issues about the proper interpretation of the provisions in section B part 8. CSSE plead that the statements were made "on the purchase of a Note and on a continuing basis": see section A, part 6 para 1.2. They submit that the advice given by Mr. Siakotos-Konstantinidis between March and September 2008 and its adequacy are to be assessed on the basis that, when it was given, Camerata repeated those statements, and so Camerata cannot dispute that at that time they considered as a result of an independent review that the Note was consistent with their objectives and a fit, proper and suitable investment for them, and that they had all the information that they needed, including information about the counterparty, that they required to evaluate fully the merits and risks of the investment.
- Camerata dispute that, upon the proper interpretation of these provisions, (i) they are to be taken to have made these statements at that time, and (ii) even if they are to be taken so to have reiterated the statements, nevertheless they referred only to the position when they acquired (or authorised) the investment in question. They say that the representations are, at most, directed to only two points in time, namely (i) when the contract was made between Camerata and CSSE and (ii) when investments were made.
- Mr Tregear relied upon the qualification in section A part 6 para 1.2 that the representations and warranties are taken to be repeated daily "unless specified otherwise", and pointed out that section B part 8 is introduced by an express statement that the representations are made and the warranties given "as at the date hereof", except in the case of the statement at (E), upon which CSSE do not rely. He argued that the implication is that the representations and warranties were not made and given at times other than when the contract was made. I do not accept that argument: I do not consider that the introductory words of section B part 8 "specif[y] otherwise" with regard to the statements in that part so as to displace the provision of section A part 6 para 1.2. This is because (i) paragraph 1.6 provides that they "shall survive the sale, delivery and purchase of the Notes" and (ii) the stated purpose of the statements by Camerata was that CSSE should be able to make corresponding statements and representations and to give corresponding warranties on their behalf when they bought Notes. CSSE could not have done so if the statements were made by reference only to the time that Camerata entered into the contract with them for their services. Further, some of the statements in paragraph 1.1 could not on their face be made at that time: for example, paragraph 1.1(F) is naturally to be understood to be directed to the time when a note was being acquired.
- However, I consider that Camerata have more powerful answers to this part of the case, based upon the wording of the relevant provisions and their stated purpose. First, the statement in section B, part 8 para 1.1(F) is directed to the time when any investment is acquired. Mr Beltrami submitted that nevertheless it is to be understood to be directed both to when an investment was acquired and to any time during which an investment was held by the client. This does not respect the specific reference in the paragraph to the acquisition of the Note and involves re-writing the paragraph. It is beside the point whether the statement is to be taken to have been made by Camerata "on a continuing and ongoing basis": whenever it was made, it concerned the position when investments were acquired, and does not assist CSSE in relation to a complaint about advice about keeping an investment.
- Mr Tregear submitted that the statement in section B, part 8 para 1.4 is similarly directed to Camerata having information about the Note (and other investments) and its issuer (and their issuers) at the time of investment. I do not agree with that submission: the words of the paragraph do not indicate this, and there is no reason so to restrict its application. Nevertheless, it does not seem to me that this provision assists CSSE in relation to a complaint of the kind made by Camerata. Their complaint is that, because Mr. Ventouris was misled by Mr. Siakotos-Konstantinidis' advice, he (and they) believed that they had received the information that they needed to assess the risk of counterparty default. CSSE cannot, in my judgment, rely upon Camerata's statement that they had sufficient information to answer their complaint that they were misled into believing that they did.
- These arguments seem to me to answer CSSE's submissions based upon paragraph 1.1(F) and paragraph 1.4. However, Camerata have another answer to them and also the submission based on paragraph 1.1(G). Section A part 6 paragraph 5.3 states the purpose for which the representations and warranties were made and given and for which it was contemplated that they might be used or relied upon by CSSE: that their purpose was to enable CSSE to make statements to such effect when subscribing for investments on Camerata's behalf. As I interpret paragraph 5.3, that was the only role of the statements in section B part 8. Parties to a contract can agree upon an assumed basis for their contractual relationship even if it is known not to represent the true position: see Springwell Navigation Corp v J P Morgan Chase Bank (loc cit) at paragraph 143. Equally, as it seems to me, they can agree that one contracting party makes representations and gives warranties which are to provide an assumed basis upon which the other can act for some specific purpose, but limit the application of that assumption and stipulate that the representations should be relied upon only for the specified purpose. That, as it seems to be, is the effect of section A part 6 para 5.3, and it prevents CSSE from relying upon the statements in section B part 8 for other purposes and so from relying upon them to answer the complaints made by Camerata about Mr Siakotos-Konstantinidis' advice.
- If I am right about this, Camerata do not need rely upon the 1977 Act in relation to these provisions. I shall therefore state only briefly my conclusions about whether the regime of the 1977 Act applies to them, and whether, if so, they satisfy the requirement of reasonableness?
- The first question turns upon whether the provisions are properly to be regarded as specifying the basis of the contractual relationship for the provision of advisory services or whether, whatever appearance they have been given by what has been called the "ingenuity of the draftsman", they amount in reality and in substance to terms which purport to permit CSSE to provide no performance in respect of contractual obligations or at least to provide performance substantially different from what was expected of them. The distinction was examined by Gloster J in JP Morgan Chase Bank v Springwell Navigation Corp, [2008] EWCA 1186 (Comm) (see para 601), and by the Court of Appeal (loc cit) at paras 179ff, where it was recognised that parties to an agreement of this kind can quite properly "define the terms upon which [they] are conducting their business" without bringing into play the regime of the 1977 Act or the Misrepresentation Act, 1967: see too Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc, [2011] 1 Ll L R 123 at paras 313-315. Although the distinction is clear in principle, it seems to me that in application the question whether, as a matter of substance rather than form, a particular provision should be regarded as defining the terms upon which business was conducted or as purporting to allow a party by his standard terms to render a performance substantially different from that which was reasonably to be expected of him can be a fine one, and ultimately, I think, can be a matter of impression rather than analysis. That said, I consider that the provisions of section B part 8 on which CSSE seek to rely are properly to be regarded (whether they bear the interpretation for which CSSE contended, or that for which Camerata contended, or that which I have found) as defining the parties' respective roles and ambit of responsibilities with regard to investments, and so are not governed by the 1977 Act.
- This conclusion makes the question about whether they would satisfy the requirement of reasonableness the more hypothetical. The considerations which I have identified as applying to the provisions of section A part 5 paras 1.1 and 1.2 point to these provisions also satisfying the requirement of reasonableness. So too does the fact that the client was informed in the introductory words of section B part 8 that he might be able to subscribe for notes even if unable to make the representations in that part. Despite this, however, given that the meaning and proper application of these terms are unclear and open to debate, as is to my mind demonstrated by the issues about them between the parties, if I had given them the interpretation for which CSSE contended, I should have concluded that they do not satisfy the requirement of reasonableness. I recognise that the clarity of a term is not listed in schedule 2 to the 1977 Act as a consideration as to whether the requirement is satisfied, but the list in the schedule does not purport to be exhaustive, and it seems to me a relevant consideration here.
Were CSSE in breach of duty?
- If my conclusions about the Terms and Conditions are correct, the important issue is whether CSSE were guilty of gross negligence because of how Mr Siakotos-Konstantinidis responded to Mr Ventouris' questions. However, I shall also consider whether they, through Mr Siakotos-Konstantinidis, were guilty of failing to exercise reasonable skill and care. If they were not, clearly they would, a fortiori, not have been grossly negligent.
- Before coming to Camerata's specific complaints, I refer to an important general point made by CSSE. No expert evidence was adduced about whether the views held or expressed by Mr Siakotos-Konstantinidis were views that a banker in his position might reasonably have held and expressed. The parties did not seek permission to adduce any such expert evidence until, shortly before the trial, Camerata applied to do so in relation to the significance of Lehman's credit default swap spreads, to which I shall refer later. The application was opposed by CSSE and refused by HH Judge Mackie QC on 7 January 2011 because it was made too late. CSSE argue that Mr Siakotos-Konstantinidis should not be held to be negligent in the absence of expert evidence. They rely upon the observation of Butler-Sloss LJ in Samson v Metcalfe Hambleton, [1998] PNLR 542, 549B in which she said that, "... a court should be slow to find a professionally qualified man guilty of a breach of his duty of skill and care towards a client (or a third party), without evidence from those within the same profession as to the standard expected on the facts of the case and the failure of the professionally qualified man to measure up to that standard. It is not an absolute rule … but, less than in an obvious case, in the absence of relevant evidence the claim will not be proved". I take and accept that as a general observation that, in the absence of expert evidence, the court will have the less material from which it can conclude that there was professional negligence (or gross negligence) and so will be the less likely to conclude that negligence is proved, but this neither excuses the court from examining the evidence that it has nor imposes a higher standard of proof upon the claimants in professional negligence cases where there is no expert evidence. That said, I have, as I shall explain, found it impossible to uphold some parts of Camerata's contentions without expert evidence to support them.
The complaint that Mr Siakotos-Konstantinidis did not know who had issued the Note
- Camerata argued that Mr Siakotos-Konstantinidis was negligent, and, as they would submit if necessary, grossly negligent, because he responded to Mr Ventouris' enquiries without having proper information available in that:
i) He did not know who had issued the Note, and
ii) He did not properly acquaint himself with the documents completed by Camerata when opening the account with CSG and accepting CSSE's advisory services, and so did not know what Camerata had stated about their willingness to take risks when investing.
I take these two criticisms first.
- Camerata plead that, before he answered the questions that Mr Ventouris asked about the investments, Mr Siakotos-Konstantinidis ought to have "ascertained the identity of the Issuer" of the Note, and that in fact he did not make "any checks on the identity of the issuer" before Lehman filed for chapter 11 bankruptcy.
- Mr Tregear submitted that Mr Siakotos-Konstantinidis' evidence was inconsistent about whether, when he was speaking with Mr Ventouris, he knew who had issued his investments generally and the Note in particular. I am not persuaded that there was any significant inconsistency. In his witness statement Mr Siakotos-Konstantinidis said that he did not recall whether he "specifically had in mind" that the Note was issued by a Lehman entity. When he was cross-examined, he explained that he had readily available to him information about who had issued investments which his clients had made through CSSE because it was entered on to a spreadsheet containing details of all his clients' investments, which he consulted when he needed to do so. Indeed, it was Mr Siakotos-Konstantinidis who entered this information into the computer system. Understandably, he did not always have it in mind: as he put it, "I can't say that I at all times had a specific link between Lehman Brothers and Mr Ventouris".
- I accept Mr Siakotos-Konstantinidis' evidence about this. Camerata, as I understand it, submitted that in the conversation on 3 December 2008 Mr Siakotos-Konstantinidis accepted that he never knew who had issued the Note until after Lehman had defaulted. I do not find the transcript of this part of the conversation at all clear, but, whatever was said at that meeting, in view of the spreadsheets I cannot accept that Mr Siakotos-Konstantinidis did not know who the Issuer was before September 2008.
- I do not consider that Mr Siaokotos-Konstantinidis can be criticised for not always having in mind who had issued the Note. Nor do I consider that it would necessarily be negligent for a banker in Mr Siakotos-Konstantinidis' position not to remind himself of the counterparty whenever asked anything about an investment or about what risks it presented. It depends upon what he is asked and the circumstances in which his views are sought. Of course, as Mr Tregear argued and prevailed upon Mr Siakotos-Konstantinidis under cross-examination to accept, counterparty risk is, on analysis, inherent in any assessment of whether an investment of this kind is "safe". However, while Mr Siakotos-Konstantinidis probably somewhat overstated the point when he described counterpart risk as "a miniscule part of the risk" involved in holding an investment such as the Note, nevertheless I consider that, generally and in the absence of a particular reason to suspect a risk of counterparty default, a relationship manager could not be criticised if he did not focus upon it when asked for a general view about the "safety" of an investment of this kind. Whether a client's questions called for consideration of it depends upon what exactly the adviser is asked and the circumstances in which his views are sought.
- Of course, if the client made it clear that he is asking about the risk of counterparty default, the relationship manager would usually be negligent if he gave advice without knowing who the counterparty was. As I have said, I do not accept that Mr Ventouris put any questions to Mr Siakotos-Konstantinidis during the relevant period (or at any time) that indicated that he had any particular concern of that kind, or sought Mr Siakotos-Konstantinidis' assessment of counterparty risk. I conclude that Mr Siakotos-Konstantinidis understood, and reasonably understood, that the thrust of Mr Ventouris' enquiries about the Note (and about his and Camerata's other investments) was about what determined the return on the investment, that is to say, about the movement of the Euro against the US dollar.
- Further, if a relationship manager had particular reason to think that the counterparty to the investment might be an institution that was liable to default, it might well be that he would be under a duty to investigate the position before giving advice although only his general advice was sought. Here the investment had been issued by an institution that had been assessed as an appropriate counterparty under Credit Suisse's "open architecture" policy. Further, the criticism of Mr Siakotos-Konstantinidis is to be assessed against his evidence that between March and September 2008, while he recognised that investors holding equity in institutions such as Lehman might have reason for concern, he did not think that any such institution would default or that those who held investments such as the Note were at risk of counterparty default. As I shall explain, I do not consider that Mr Siakotos-Konstantinidis has been shown to have been negligent, still less to have been grossly negligent, in taking that view about Lehman in particular or about institutions of their standing more generally. He fairly pointed out that Bear Stearns had not defaulted when they were sold to J P Morgan Chase. Again, the adviser might be at fault if he did not have in mind who issued the investment if the circumstances of the enquiry make it clear that the client is looking for an exhaustive assessment of all the risks involved in holding it. These were not the circumstances here. Mr Ventouris asked questions in the course of general conversation in relatively informal surroundings or by telephone. He asked for Mr Siakotos-Konstantinidis' general impression about whether he and Camerata should regard their investments as safe given the volatile market and the failure of Bear Stearns: he was not to be understood to require a detailed analysis of all the risks involved them.
- I therefore do not consider that Mr Siakotos-Konsantinidis to have been at fault in not reminding himself who had issued the Note before responding to Mr Ventouris' questions in view of their general nature and the context in which they were made. I therefore reject this criticism of Mr Siakotos-Konstantinidis.
The complaint about Mr Siakotos-Konstantinidis' knowledge of the account opening and contractual documents
- Mr Siakotos-Konstantinidis took no part in having Camerata complete the documents to open their account with CSG or in completing the Acceptance Booklet. It was his normal practice to go through such documents with his client and complete them in a meeting. He suggested that he might not have done so in Camerata's case because Mr Ventouris had already been operating an account with Credit Suisse, but whatever the reason, he left it to others to complete the documentation and he never properly read the information provided by Camerata. It is not disputed, and could not be disputed, that a relationship manager and adviser in Mr Siakotos-Konstantinidis' position should have been familiar with this information. In my judgment he was negligent, and indeed grossly negligent, in failing to do so. A client would naturally and properly assume that his adviser would be aware of such information, and a relationship manager should have read it and had it in mind when advising or otherwise dealing with his client.
- It is a different question whether this failing on the part of Mr Siakotos-Konstantinidis led to a breach of duty on CSSE's part in relation to advice that he gave to Camerata. I do not consider that it did. First, in my judgment this failure did not affect in any way any advice that Mr Siakotos-Konstantinidis gave and he would not have responded differently to Mr Ventouris' questions had he been familiar with this information. Further, the question whether he was negligent or in breach of duty, or caused CSSE to be negligent or in breach of duty, depends upon whether his advice was such as could have been given by a banker in his position consistently with the exercise of the skill and care required of him. If it was, he and CSSE would not be in breach of duty because of how he came to give the advice. Negligence in these circumstances depends essentially upon what advice was in fact given, not upon the processes whereby it came to be given: see Adams v Rhymney Valley DC, [2001] PNLR 4.
- I add that, had I reached a different conclusion about the criticism of Mr Siakotos-Konstantinidis for failing to have in mind who had issued the Note, I would have regarded that failure too as inconsequential for similar reasons.
Could Mr Siakotos-Konstantinidis' advice properly have been given?
- CSSE argue that Camerata's claim involves criticising Mr Siakotos-Konstantinidis for not predicting or foreseeing Lehman's collapse notwithstanding that it was an unprecedented banking failure and that it took by surprise the financial markets, including the many major banks and other institutions with investments in Lehman. They dispute that a relationship manager such as Mr Siakotos-Konstantinidis should have appreciated before 15 September 2008 that there was any significant risk that Lehman would default.
- CSSE point out that, when Lehman filed for bankruptcy, Credit Suisse themselves had substantial investments with them: they have made claims in Lehman's bankruptcy, net of collateral, of some $1.3 billion. Certainly from March 2008 the Credit Suisse group had exposure to the Lehman group of over $1 billion, but their exposure was gradually being reduced: in May 2008 it was about $1.8 billion; in June, $1.6 billion; in July 2008, $1.5 billion; and in August 2008, US$1.4 billion. The reason for this trend was not explained. CSSE also relied upon the fact that in February 2008 the Credit Suisse group increased the ceiling on their exposure to Lehman from $2 billion to $2.6 billion, the decision being taken, as it is recorded, "due to steadily increasing business, especially in derivatives, with particular growth in credit derivatives", and because "several new ISDA [International Swap and Derivatives Association] Agreements are presently under negotiation". However, this decision was taken before the sale of Bear Stearns. In my judgment CSSE have not produced evidence that provides any sufficient explanation of Credit Suisse's decisions about their exposure or the exposure ceiling for me to place any real reliance upon these matters.
- In any case, CSSE's protestation that Mr Siakotos-Konstantinidis should not be so criticised distorts Camerata's case, at least as it was presented in Camerata's closing submissions. It was emphasised that the complaint is not of a failure to predict the collapse of Lehman. It is that, in response to Mr Ventouris' enquiries (whether they were simply whether the investment in the Note was "safe" or whether they were more specific and focused), Mr Siakotos-Konstantinidis ought to have advised Mr Ventouris of matters relating to the counterparty risk presented by Lehman which he should consider. I have accepted Mr Siakotos-Konstantinidis' evidence that in the summer of 2008 he saw no reason to think that Lehman or any comparable financial institution would default. Camerata submitted that, nevertheless, because of the following considerations he ought to have advised Mr. Ventouris that some at least saw reason to be concerned about Lehman:
i) Credit Suisse ceased in March 2008 to use Lehman as a counterparty.
ii) In March 2008 the Credit Default Swap ("CDS") rate for Lehman had increased, and it remained higher than that of other banks.
iii) There were press reports of concern or speculation that Lehman would be the "next to go" after Bear Stearns was sold and again after Lehman announced large losses in the second quarter of 2008.
iv) Lehman's share price fell.
v) Credit Suisse's research reflected concerns about Lehman.
- Camerata plead that "Credit Suisse had stopped using the Issuer as a counterparty (for proprietary trading and/or for products sold to clients) in about February/March 2008 because of concerns on the part of Credit Suisse about the creditworthiness of the Issuer…". In support of this contention, Camerata relied upon two pieces of evidence. First, on 3 December 2008 Mr Siakotos-Konstantinidis told Mr Ventouris that, "[The bank] stopped doing … with Lehman, but did not tell anyone", and that "The bank certainly monitored the counter bank risk, since at some point twelve months ago it stopped using Lehman Brothers as counter bank. So it is not out of the blue. It rated this". Mr Siakotos-Konstantinidis also had these exchanges with Mr Ventouris:
P S-K: "But there is indeed .. maybe a third point in that this person here was telling his clients up to the last day of Lehman's existence "you know, Lehman is … not in bankruptcy", up to the last day. So the updates this person provided incessantly to this one, was, you know "don't worry, don't worry" but in the meantime he himself has not carried out any transactions with Lehman."
CV: "He has stopped all transactions with Lehman."
P S-K: "Yes."
And
P S-K: "It gets on my nerves, so we had this discussion with other people … you know we say every day that Lehman is not a risk. The bank knew, it knew Lehman had .. and it stopped using it as counter-bank."
CV: "Why did it not tell us? Do you believe that it simply did not bother?"
P S-K: "It's not that."
CV: "Or did it know, you know, that there was an obscure plan?"
P S-K: "It's ... I am not sure, but I imagine that it simply did not want to rock the boat".
- When he was asked about this, Mr Siakotos-Konstantinidis said that he was repeating what had been alleged by another client who had invested with Lehman and who was making representations to Credit Suisse about his loss, and also that he was speculating about what might have happened. This evidence was not given in his witness statement, and there is nothing in the transcript of the conversation that lends support to the explanation that he was repeating, and perhaps building upon, the complaints of another client. On the other hand, the transcript does not indicate that he had any specific basis for what he was saying, and did not state clearly why Credit Suisse stopped using Lehman as counterparty. Moreover, it seems improbable that, during the difficult months before and after Lehman's collapse, Credit Suisse would have entrusted sensitive information of this kind to an employee of Mr Siakotos-Konstantinidis' status. I do not consider that his rather emotional comments on 3 December 2008 provide satisfactory evidence to support this part of Camerata's case. For whatever reason, he told untruths against Credit Suisse, as he had about other matters in that conversation.
- Secondly, Camerata rely upon an interview with Mr Walter Berchtold, the Head of Private Banking at Credit Suisse, which was published under the headline, "Lehman was a Leading Player" in "Corporate Communications", which was, I infer, an internal publication of Credit Suisse. It was dated 25 January 2009. In the interview Mr Berchtold was asked and answered as follows:
"Wasn't Credit Suisse guilty of still selling Lehman products at a point where credit insurance premiums, i.e. credit spreads, were already indicating the very high risk of such products?
We operate an open product platform, and always ask three to four parties to provide us with an offer, including our own units. Lehman was one of the best providers, and offered a good service and very competitive prices right up until the point when the credit spread went haywire. From this point onward we concluded no new business with the bank.
When was that?
Broadly speaking, from March 2008 onward."
The implication of these answers, as I would interpret them, is that Mr Berchtold was saying that Credit Suisse ceased to conduct business (of the kind under discussion) with Lehman after March 2008 as a response to their "credit spread [going] haywire".
- It is not disputed that in March 2008 Credit Suisse ceased to include Lehman as an institution that might issue notes under their "open architecture" procedure. CSSE plead (subject to the qualification that CSSE were "doing the best it can and in so far as the defendant is able to determine") that this decision was taken in the "Structured Products team" in Credit Suisse AG and was "based on minimum service levels required from issuers on the open architecture platform and in particular concerns relating to Lehman's provision of a secondary market for investments that it issued". I understand that no documents have been disclosed about why the decision was taken because CSSE explained that the relevant documents were not in their control but in that of Credit Suisse AG. In submissions Mr Beltrami referred to a witness statement dated 25 October 2010 and made for interlocutory purposes by Mr T R Ludford, the Vice-President of CSSE's Legal and Compliance Department, who stated, on the basis of his understanding from "colleagues at Credit AG", that the decision was taken for the reason pleaded by CSSE. Mr Ludford was not called as a witness, his witness statement was not put in evidence at the trial and CSSE have adduced no evidence that supports their pleaded case on this issue. Mr Beltrami complained that Camerata "persisted" in this allegation despite being "informed" that it was wrong. I do not consider that they are to be criticised for doing so in view of what Mr Berchtold is reported to have said.
- I have no material upon which I can satisfactorily reach a decision about why Credit Suisse AG took the decision to which Mr Berchtold was referred. I need not do so, and I decline to do so. There is no sufficient reason, in my judgment, to doubt Mr Siakotos-Konstantinidis' evidence that he was unaware of the decision, and I accept it. Camerata did not argue that CSSE (or any other company in the group) were to be criticised for not disseminating such information to relationship managers in Mr Siakotos-Konstantinidis' position. Whatever the reason for the decision, it does not, to my mind, support the complaint that Mr Siakotos-Konstantinidis was negligent, or grossly negligent, in his dealings with Mr Ventouris.
- I come to the second matter that Camerata pleaded in support of their allegation that Mr Siakotos-Konstantinidis ought to have known that the investment in the Note was not "safe": that "credit spreads in relation to the Issuer became very high in March 2008". As I have explained, this refers to the rates charged for credit default swaps to cover counterparty risk to buyers of Lehman's investments. (A credit default swap is a contract whereby the buyer of an investment pays the seller a premium, or periodic fee, to protect itself against a contractually-defined event in a specific underlying risk, in this case counterparty default. The premium, or rate, is typically expressed in terms of basis points on the notional amount.) Credit Suisse themselves, in research documents sent to Mr Siakotos-Konstantinidis during the relevant period, said that "CDS spreads are a good leading indicator of future market quality". Mr Siakotos-Konstantinidis agreed in cross-examination that he knew that it is a "market appreciation" that, if a counterparty's "spread" increases, this reflects the view that the risk of default has aggravated.
- The only evidence about the movement in CDS spreads for Lehman and other banks was presented in the form of graphs produced by Bloomberg. They show that, around the time of the sale of Bear Stearns, the CDS rates for Lehman increased sharply, and, after a fall at around the beginning of May 2008, they climbed again during June and into July 2008. Although it would be possible to read off from the graphs (more or less accurately) what I take to be the rates in terms of basis points, there is no expert or other evidence that enables me to assess their significance. Camerata's case, as I understand it, rests upon the movement and pattern of rates, rather than the rates themselves.
- The graphs relied upon by Camerata also show the movement of CDS rates for counterparty risks for other banks: Santander, Barclays, Citibank, Lloyds, JP Morgan Chase and UBS. Their spreads were lower than those for Lehman throughout the periods shown, which included the whole of 2008 before the collapse of Lehman. In general terms, the movement in their spreads show a similar pattern to that for Lehman, but the increases were markedly less pronounced both at the time of the sale of Bear Stearns and later. CSSE were able to produce a graph that showed that the movement in the spread for Merrill Lynch tracked that of Lehman more closely.
- I am unable, in the absence of expert evidence, to infer from this that the movement in CDS spreads reflected concern in the markets about Lehman's standing of a counterparty that is significant for present purposes. Although I can see that, on the face of it, there was a greater increase in the spread for Lehman than for the other leading financial institutions shown on the graphs, I cannot infer that the market considered the risk to be of such significance that, even had he know of it, Mr Siakotos-Konstantinidis should have been concerned or that he should have mentioned it to Mr Ventouris when his views about the investments were sought. For example, I do not know whether the graphs reflect the creditworthiness of the institutions over a period longer than that relevant to the investment in the Note and the other investments.
- CSSE have another answer to this part of Camerata's case. Mr Siakotos-Konstantinidis' evidence was that, although he knew what CDS spreads were, he regarded them as a sophisticated piece of financial information which he, as a relationship manager, would not have used as an indicator of the quality as an investment. In my judgment there is no proper basis for this criticism. Again, it would need to be supported by expert evidence.
- I therefore come to the press reports about Lehman. (Camerata's pleading does not refer to them, but CSSE took no point on this.) Mr Siakotos-Konstantinidis' evidence was that he relied upon "credit ratings and any pro-active news given to me from people I work with". Between March and September 2008, there were reports that Lehman were vulnerable to the volatility in the market. In the days immediately after the sale of Bear Stearns, there was press speculation about Lehman's future, particularly because of a perceived similarity between Lehman's business and that of Bear Stearns. Two examples are sufficient:
i) MarketWatch, published by Dow Jones, reported on 17 March 2008 under the headline "Wall Street watches Lehman walk on thin ice" that "Analysts who cover broker Lehman Brothers Holdings Inc. watched closely from the sidelines Monday, loath to add to market speculation that the firm may be the next major brokerage to falter".
ii) On 18 March 2010 Bloomberg Business Week, under the headline "Is Lehman liquid enough?", referred to "market players asking: Who may be next?", and wrote "some figure Lehman brothers … may be vulnerable to a liquidity seize-up".
Of course, if Lehman had suffered the fate of Bear Stearns, although equity investors would have suffered, investors in the Note and other such investments would not have done.
- Camerata also referred to a report in the New York Times of 4 June 2008 under the headline, "Lehman Battles an Insurgent Investor", in which it was reported that a Mr David Einhorn, who was described as a "rabble rousing hedge funds manager", opined that "another big Wall street bank is heading for trouble". The report, however, observed that Mr Einhorn had for eight months "pilloried the venerable Lehman Brothers in an effort to drive down the bank's stock price, which he is betting against".
- On or about 8 June 2008 Lehman announced a loss of $2.8 billion in the second quarter of 2008, which at the time Credit Suisse described as being "far in excess of expectations". This prompted another round of press comment. For example:
i) New York's Dealbook reported on 9 June 2008 that "Few people had more reasonable claim to vindication … than David Einhorn"; and on 10 June 2008 an article under the headline, "Lehman Shares Sag Under Continued Investor Fears" stated: "This is not a picture of resounding investor confidence. Efforts by Lehman Brothers to assure the markets that it remains a fundamentally sound firm, despite pre-announcing a $2.8 billion quarterly loss and a $6 billion capital raise, appear to have worked little so far."
ii) On 11 June 2008, an article in Business Week under the headline "Lehman: Independent for How Long?" concluded, "Despite the difficulties inherent in an acquisition, Lehman's days as an independent firm may be numbered. Says analyst Chris Whalen of Institutional Risk Analytics: 'Lehman is next. When you have a pack of dinosaurs, the slowest gets picked off'."
- Mr Beltrami fairly observed that the press coverage also included many comments and opinions that were much more optimistic about Lehman's future, and that the thrust of the unfavourable coverage was that Lehman might cease to be independent. I was not shown speculation in the reports that they might file for bankruptcy.
- Mr Siakotos-Konstantinidis accepted that he would have read reports of the kind relied upon by Camerata when they were published. His evidence was that, as he saw it, while they might have worried Lehman's shareholders, nothing in them should have concerned those with Lehman investments such as the Note, and indeed they should not have deterred anyone from investing in such Lehman products in, say, June 2008. Again, without expert evidence, I am unable to conclude that this view could not reasonably have been taken by a relationship manager such as Mr Siakotos-Konstantinidis or that it shows want of proper skill or care on his part.
- I should add this: I have referred to the loss in the second quarter of 2008 that Lehman announced. Mr Siakotos-Konstantinidis accepted that he would have known of this announcement in June 2008. On about 10 September 2008 Lehman announced further losses in the third quarter of 2008 of $3.9 billion. Mr Siakotos-Konstantinidis said that the "only scenario that anyone really considered" was that losses of this kind might threaten Lehman's future "as an independent firm", but not that they might default on investments such as the Note. Again, I cannot properly conclude that this view could not properly have been held by a banker in Mr Siakotos-Konstantinidis' position.
- For similar reasons I do not consider that the evidence that during the relevant period various institutions made recommendations to buy, to hold or to sell shares in Lehman assists me. In so far as CSSE sought to rely upon recommendations to buy the shares, Mr Tregear rightly pointed out that the recommendations were based, at least in part, upon the view that they had fallen to a price that made them an attractive, if speculative, investment.
- There were three other areas of the evidence where Camerata sought support for their case, but which CSSE contend support their contrary contentions:
i) Views about Lehman published by credit rating agencies.
ii) Research issued by Credit Suisse.
iii) The views of the financial markets that, it is said, were reflected in the research of other major institutions.
- I accept Mr Siakotos-Konstantinidis' evidence that he took notice of the ratings published by credit agencies. Standard & Poor ("S&P"), Moody's and Fitch all published credit ratings for Lehman. S&P and Moody's published separate credit ratings for the Issuer, Lehman Brothers Treasury Co B.V. They all divided the businesses that they assessed into two main categories: those with investment grade debt, which historically have had a low rate of default, and those with speculative grade debt, which have a relatively high rate of default. Both investment grade debt and speculative grade debt are divided into sub-categories, and within the sub-categories the assessment is further refined by + or – gradings (in the case of S&P and Fitch) or numberings of 1, 2 or 3 (in the case of (Moody's)).
- At all times up to 15 September 2008 Lehman and, in the case of S&P and Moody's, the Issuer held an Investment Grade credit rating with all three agencies. S&P gave both Lehman and the Issuer ratings of A+ until 2 June 2008, when they reduced their ratings to A. On 10 September 2008 S&P placed both companies under "negative rating watch", that is to say, they let it be known that they were actively reviewing the credit ratings to consider reducing them. Fitch published an AA- rating for Lehman until 28 June 2008 and a rating of A+ thereafter, and they put Lehman under negative rating watch on 9 September 2008. Moody's gave both Lehman and the Issuer ratings of A1 until 17 July 2008, when they reduced them to A2. They had published negative rating watches on 13 June 2008.
- On 10 September 2008 a Note by Moody's stated, "Moody's believes that Lehman's liquidity pool and its access to the Primary Dealer Credit Facility provide the firm with time to address [the challenges that they faced]. The rating agency believes that Lehman's liquidity management and stand-alone liquidity position remains acceptable". On the same day, S&P wrote, "we continue to view Lehman's near-term liquidity as satisfactory. Overall, and despite nervous market sentiment in recent months, Lehman has maintained a very stable funding profile. We consider its excess liquidity position and contingent funding plan to be sound".
- CSSE relied upon a Global Corporate Finance Report dated February 2008 in which Moody's explained the "historic performance of [their] ratings as predictors of default and loss severity for corporate issuers". They set out statistics about rates of default associated with different ratings, default being defined widely to include missed or delayed disbursement of interest or principal, as well as bankruptcy, administration and the like. I need only refer to a statistic relating to the A2 grading, to which Moody's reduced the ratings of Lehman and the Issuer in July 2008: 0.024% of institutions so graded defaulted in the first year and 0.559% did so within five years. CSSE submitted that this supports their contention that an A rating from the credit agencies indicated a very low rate of default even in this wide sense.
- In my judgment, the evidence about the assessments of the credit ratings does not assist either Camerata or CSSE. Camerata have not shown that the changes in the assessments were such that Mr Siakotos-Konstantinidis should have drawn them to Mr Ventouris' attention, whether his enquiries were as Mr Ventouris described them in his evidence or as I have found them to be. On the other hand, CSSE have not shown (and I did not understand them to submit) that the reports by the credit agencies would have justified Mr Siakotos-Konstantinidis in not warning Mr Ventouris about Lehman if otherwise he ought to have done so.
- I add that with regard to the changes in the agencies' assessments in September 2008, Mr Siakotos-Konstantinidis' evidence was that he might well not have read them immediately or was aware of them before Lehman filed for chapter 11 bankruptcy. No evidence would support any suggestion that he would have been negligent or otherwise at fault if he did not do so. In so far as Camerata suggested that he would have been, I reject that suggestion.
- I come to the evidence from Credit Suisse's own research documents upon which Mr Tregear relied:
i) He referred to a research flash issued on 25 March 2008, which stated that, "In the aftermath of Bear Stearns, Lehman has been increasingly under the microscope given its allegedly closest comparison to Bear". However, this observation was under the heading "Difficult times, but still financially sound", and it went on to opine that the comparisons with Bear Stearns were "not particularly well-founded".
ii) Mr Tregear also referred to an internal review in June 2008 and submitted that it showed that Credit Suisse's ratings of Lehman and their subsidiaries were downgraded. The significance of this was not explored in the evidence, and I am unable to place any weight upon the document.
iii) On 10 June 2008 Credit Suisse's Equity Research publication wrote of Lehman's second quarter results that, "There's not much more to say to sum this up than disappointing and disconcerting", and said that the "retained exposure remains too large in so uncertain a macroeconomic environment". At the same time their Fixed Income and Credit Research considered Moody's decision to change their outlook assessment to negative and Fitch's decision to reduce their grading to A+ with a negative outlook (and S&P's affirmation of their A grading). Their report concluded that "the group remains vulnerable to market sentiment and operates under challenging conditions", but "view[ed] positively the group's actions to reduce exposure to risky assets and to strengthen its liquidity position".
iv) On 10 September 2008 Credit Suisse's Fixed Income and Credit Research changed their "fundamental credit review" to "negative", and said that, "despite Lehman taking positive steps to deal with their problems, the broker-dealer business model remains highly dependent on market sentiment and confidence and there are execution risks involved. In the current fragile market environment, Lehman credit spreads are likely to continue suffering from volatility". A Research Analyst report said that "Lehman "remains increasingly (and disproportionately) under the microscope" and "restoration of market confidence remains critical".
- Camerata have identified these particular observations, but the reports of Credit Suisse's research that are in evidence, when considered as a whole, would not lead the reader to conclude before the weekend of 13/14 September 2008 that there was any significant risk of default by Lehman. For example, on 10 June 2008, in the Equity Research to which I have referred, Credit Suisse rated shares in Lehman as "neutral", and their Fixed Income and Credit Research report 10 June 2008 reiterated their "hold" recommendation for selected short-dated Lehman bonds; and on 10 September 2008, the Fixed Income and Credit Research concluded, "At this time, we do not foresee default and maintain our HOLD recommendation on short-dated Lehman bonds".
- I need to mention views expressed by other institutions only briefly: Mr Beltrami drew my attention to recommendations of other respected institutions (including Bank of America, Goldman Sachs, J P Morgan and Deutsche Bank) that Lehman shares should be bought or held. Mr Tregear identified other (rather fewer) more pessimistic comments, including these:
i) On 17 March 2008, BMO, the affiliate of the Bank of Montreal, wrote in a research note about Lehman, "Similar to Bear Stearns, the greatest risk for Lehman Brothers is the risk that once speculation begins it becomes a self-fulfilling prophecy, and no level of liquidity will be sufficient".
ii) On 17 June 2008 Bank of America published Equity Research that opined that, "Lehman's Gross Exposures Remain Large Relative to Reported Common Equity".
I find it impossible on the evidence before me to reach any conclusion about whether, respected though the institutions that produced them are, the various reports of market research that were drawn to my attention are representative of the views of the markets as a whole. This is another area in which, without the assistance of expert evidence, I cannot rely upon this material either to support Camerata's criticisms of Mr Siakotos-Konstantinidis or CSSE's defence of him.
- The pleaded allegation of Camerata is that Mr Siakotos-Konstantinidis ought to have advised Mr Ventouris as follows:
i) That there were real grounds for doubting the creditworthiness of the Issuer.
ii) That, because there were real grounds for doubting the creditworthiness of the Issuer, Credit Suisse had themselves ceased to use the Issuer as a counterparty.
iii) That, having regard to the extreme risk aversion of Camerata and Mr Ventouris, they ought to consider liquidating the investment in the Note and putting the proceeds somewhere more secure, such as government bonds or in deposit with CSSE or with another bank whose creditworthiness was not in doubt.
- None of these complaints is established. I have considered separately the various strands of argument presented by the parties, but, of course, the position is to be assessed taking them all into account. When this is done, in my judgment, Camerata have not shown that there were real grounds for doubting the creditworthiness of Lehman, still less that Mr Siakotos-Konstantinidis should have appreciated that there were and advised Mr Ventouris that there were. Camerata have not shown that Credit Suisse had stopped using Lehman as a counterparty because of real doubts about their creditworthiness, still less that Mr Siakotos-Konstantinidis should have known this. Camerata have not established that there were grounds to think that they should liquidate their investment in the Note.
- The question, essentially, comes down to this: Mr Siakotos-Konstantinidis did not pass on to Mr Ventouris either reports that he had read suggesting that Lehman might follow the way of Bear Stearns or the other information upon which Camerata rely. If Mr Ventouris had asked specifically about counterparty risk in relation to the Note, Mr Siakotos-Konstantinidis would, I think, have been at fault, and negligent, unless he either told Mr Ventouris about press reports and other information that he had come across or told Mr Ventouris that he was not in a position to offer advice upon a more specialist question of that kind; but Mr Ventouris did not ask such questions. Even if he had done so, I would not have concluded that Mr Siakotos-Konstantinidis was grossly negligent.
- Nor am I able to accept that, when he sought Mr Siakotos-Konstantinidis' views in the general terms that he did, Mr Ventouris was to be understood to be enquiring about risk of counterparty default. After all, Mr Ventouris had shown himself to be alert and perceptive of financial matters and actively interested in his investments, and Mr Siakotos-Konstantinidis could properly have expected him to ask specific questions if he was concerned about this. The nature of the questions, especially given the circumstances and context in which they were given, were, in my judgment, to be understood as an invitation for Mr Siakotos-Konstantinidis to give his opinion, or really just to give his impression, about whether the investments were "safe", and, although of course upon analysis, the "safety" of an investment of this kind depends in part upon counter-party risk, the enquiry did not call for a response that involved analysis of this kind. I would have reached the same conclusion even if Mr Ventouris had asked questions of the kind that he described in his oral evidence. I do not consider that Mr Siakotos-Konstantinidis was negligent, still less grossly negligent, because he did not assess counterparty risk when responding to questions of the kind that Mr Ventouris was asking, or because he did not pass on to Mr Ventouris reports that he had read or other information or speculation about Lehman, or because these matters were not reflected in the views that he expressed.
- I therefore conclude that CSSE were not in breach of duty. Mr Siakotos-Konstantinidis' response to Mr Ventouris was one that a relationship manager in his position could properly give consistently with exercising the reasonable skill and care to be expected of him. I have reached this conclusion without bringing into account the various warnings that Mr Ventouris and Camerata were given and that were included in the Terms and Conditions. I accept that, in some circumstances, CSSE might be able to rely upon them to meet a complaint that they had failed to give advice that they should have given. I do not consider that, at least in the circumstances of this case, they assist CSSE to meet a case that Mr Siakotos-Konstantinidis was negligent in advice that he in fact gave. Had I otherwise concluded that Mr Siakotos-Konstantinidis' was grossly negligent, I would not have considered that the warnings provide CSSE with a defence.
Did breach of duty cause Camerata loss?
- Although I conclude that Camerata were not in breach of duty, I shall consider how Mr Ventouris would have responded to different advice, that is to say how he would have responded to "proper advice": Sykes v Midland Bank, [1971] 1 QB 113 at p.127D/E. It is probably unnecessary in this case to define more specifically the test as to what proper advice is: see Beary v Pall Mall Investments, [2005] EWCA (Civ) 415 para 30. However, it seems to me that, more specifically, the question is what advice Mr Siakotos-Konstantinidis would have given had he not been negligent and advised with the requisite skill and care: Bolitho v Hackney and City Health Authority, [1998] AC 232. This does not seem to me a case in which the test is what was the "correct" response to Mr Ventouris' questions. Although Lord Hoffmann spoke in such terms in South Australia Asset Management Corp v York Montague Ltd., [1997] AC 191, this test is apposite only when the adviser was under a duty to "provide specific information or advice on request" and not where there was a duty to advise generally when it is "left to the adviser to decide what matters he should consider": see Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd., [2001] UKHL 51, [2002] 1 Ll L R 157, 190 at para 62 per Lord Millett.
- It is Camerata's case that, had he been alerted to any problem about the institution that issued the Note, Mr Ventouris would have arranged its immediate sale, and so the investment would not have been lost. He said in cross-examination, "I was very stressed during this environment so I was looking if there is anything that it will make me to think to sell these products". His evidence was that, if he had been properly advised and in particular if he had been told that there was, or potentially might be, a risk to the capital invested in the Note, he would have sold it and would have placed the funds on deposit with Credit Suisse or another creditworthy bank.
- I accept that Mr Ventouris would have given instructions that the Note be sold (even for a price lower than the capital investment of $12 million), if Mr Siakotos-Konstantinidis had advised him that in his or in Credit Suisse's opinion there was a serious risk of counterparty default. I also accept his evidence that he would have done so if Mr Siakotos-Konstantinidis had told him that the Note was issued by a Lehman company and that Lehman's creditworthiness was causing Credit Suisse, as Mr Ventouris put it, "very significant concern". Further, I accept that he would have done so if he had been told that the Asset Management Division of Credit Suisse had stopped dealings with Lehman or reduced their exposure to them because of concerns about their creditworthiness; or that Credit Suisse regarded Lehman as "very high risk" and that they presented a "significant risk of counterparty default"; or that the CDS spreads indicated that there was "very high risk associated with Lehman" that they would default within the five years term of the Note. Although Mr Ventouris had by March 2008 shown that he was a more adventurous investor than indicated in the account opening documentation with CSG and the Risk Profile Indicator, I do not accept that he would have risked losing in its entirety an investment as large as the Note.
- However, I do not consider that, on any view and whatever he was asked, Mr Siakotos-Konstantinidis should properly have given such gloomy advice about Lehman's position. It would have been more pessimistic than would have been reasonable and proper, and it would have been more pessimistic than Camerata plead would have been proper advice. Whatever Mr Siakotos-Konstantinidis was asked by Mr Ventouris, Camerata have not shown that he should have said more than that (i) the credit rating agencies had reduced Lehman's ratings, but that they still gave Lehman "A" ratings and considered them to deserve Investment Grade ratings; (ii) that there had some increase in the CDS spreads of Lehman following the collapse of Bear Stearns; and (iii) that there was some speculation in the financial press, and that some analysts thought, that Lehman might lose their independence as Bear Stearns had done. There is no credible evidence, and I am not persuaded, that, had he been given such advice, Mr Ventouris would have arranged for the Note to be sold. Nor am I persuaded, if it be alleged, that, given advice or warnings of this kind, Mr Ventouris would have investigated the position further or sought further advice that would then have led to a sale of the Note. Specifically, I reject Mr Ventouris' evidence that he would have sold the investment in the Note had he been told that it "contained warnings about significant risks including … interest rate, price risk, liquidity risk, redemption risk and credit risk". That would, in my judgment, have come as no surprise to him. Nor, for example, do I accept his evidence that he would have done so if he had been told that "Credit Suisse received better terms from Lehman Brothers and placed investments with that bank even though it was not in its clients' best interests". In any case, there is no evidence to support the suggestion that such advice would have been well-founded.
- Even if Camerata had established that CSSE had been guilty of negligence (or gross negligence), I would not have concluded that their fault caused loss.
Loss
- I shall refer briefly the evidence about what loss Camerata suffered because they did not sell the Note before Lehman filed for chapter 11 bankruptcy. Until then, the Note could have been sold. Credit Suisse provided for Camerata valuations which stated a price for which the Note could have been sold, and I would accept those valuations as reliable evidence of the price that the Note could have realised. The amount of the loss would have depended upon when, through Mr Siakotos-Konstantinidis, CSSE failed, in breach of duty, to give advice which would have caused Mr Ventouris to have the Note sold, and the value that the Note commanded at that time. I cannot say from the evidence before me whether the Note has any residual value that should be brought into account, and if so what that value is. Had I upheld the claim, I would have invited further submissions about that.
Contributory negligence
- CSSE pleaded contributory negligence as a defence to the claim, but Mr Beltrami made no submissions in support of the plea and did not put any case of contributory negligence to Mr Ventouris in cross-examination. If I had otherwise upheld the claim, I would have rejected this defence.
Conclusion
- I therefore conclude that, in order to succeed in their claim, Camerata have to prove that Mr Siakotos-Konstantinidis had been grossly negligent and that they have not done so. Indeed, even if they have only to prove that he was negligent in the sense of failing to advise and act with reasonable skill and care, I reject their claim both because they have not established that Mr Siakotos-Konstantinidis was negligent in this sense, and because they have not shown that as a result of any fault on his part they did not sell the Note before Lehman and the Issuer defaulted.
