CONTENTS
SECTION
paragraph number
SUMMARY
INTRODUCTION
AND PROCEEDINGS TO DATE
FACTUAL
OUTLINE
GROUP
STRUCTURE
Plc
BB&Co,
BSL and BSLL
BSJ
Baring
Securities (Singapore) Limited (“BSS”)
BFS
REORGANISATION
AND MANAGEMENT OF BARINGS LONDON
Matrix
management
Consolidation
of BB&Co and BSL
The
management structure within the Barings Group
EXCO
BB&Co and BSL Management Committees
BIB Management Committee (“MANCO”)
The Treasury and Risk Committees
Asset and Liability Committee (“ALCO”)
Group Treasury and Risk (“GTR”)
Financial Products Group (“FPG”)
Internal audit
PEOPLE
Barings
London management
Barings
London settlements
Barings
London Treasury and Finance
BSJ
BFS/BSS
REMUNERATION
OF BARINGS STAFF
SIMEX
Futures and
options
Margin and
settlement variation
Futures contracts
Margin deposited by members of
SIMEX with SIMEX
Margin deposited by customers with
members of SIMEX
Settlement variation
Accounting treatment of margin and
settlement variation
Options
Accounts
with SIMEX and customer accounts
SYSTEMS
CONTAC
Treatment
of futures and options trades by CONTAC
Futures
Options
Significance of the treatment of
options to Leeson’s fraud
Margin
funding for customer trades
Margin
funding for proprietary trades
The need to
reconcile margin
London Settlements
Reports to
London
(i) The Trade Feed
(ii) The Margin Feed
(iii) The Price Feed
(iv) The London Gross report
(v) The Funding Spreadsheet
Reconciliations
by the BSL Settlements Department
Reports to
Japan
Error
accounts, unallocated trades accounts and give-up trades
BFS’
HISTORY AND TRADING
The start
of Barings’ F&O business
SIMEX and
Mr Killian
Mr Gueler
The
activation of BFS
The set-up
of BFS
The
appointment of Leeson to BFS
The start
of BFS’ operations
Leeson’s
move to become a floor trader
The 88888
account
BFS’
customers
Leeson’s
rolls
1993:
Leeson is given discretion
Leeson’s
switching business
BSL
management in 1993
Reporting
of Leeson’s profits
Mr Baker
Mr Baker’s
vision
Mr
Killian’s complaints to Mr Norris
November-December
1993: Leeson’s profits increase
Leeson’s
1993 Bonus
The “turf
war” over Leeson
The
development of Leeson’s trading in 1994
The
imposition of risk limits and the start of JGB and Euroyen switching
Mr Gueler’s
concerns about Leeson’s profits
January and
February 1995
LEESON'S
UNAUTHORISED TRADING
Options
BFS’ LOSSES
CAUSED BY LEESON’S TRADING
CONCEALMENT
OF THE UNAUTHORISED TRADING
Corruption
of the BFS back office
The Trade Feed and London Gross Report
The BFS back office
Concealment
of the balance on the 88888 account at month- and year-ends
September 1992 audit
December 1992
False accounting entries
Option premiums
SLK
The reasons
why Leeson was able to practise his fraud
FUNDING OF
LEESON’S UNAUTHORISED TRADING
THE DOLLAR
FUNDING
Margining
in US dollars
The Dollar
Funding requests
The
"K2/P4 line"
Investigation
of the Dollar Funding by BSL
Initial investigation into the K2/P4 line
Initial investigation into the Dollar Funding
Investigation into the split between house and customer
business
Investigation by Mr Hawes and the internal audit
Meetings in October 1994
Later investigations
The Margin Feed
Totals of
Dollar Funding
RESPONSIBILITY
FOR BFS’ TRADING AND OPERATIONS
INVESTIGATION
OF LEESON’S PROFITABILITY
THE
AUDITORS
1992 AUDIT
SIMEX
AUDITS
1993 AUDIT
THE
INTERNAL AUDIT REPORT
1994 AUDIT
THE
COLLAPSE
THE
NEGLIGENCE ALLEGED AGAINST D&T
The pleaded
case
1992 audit
1993 audit
EXPERT
WITNESSES
THE FORM OF
D&T’S AUDIT
THE FAILURE
TO TEST FOR OPEN POSITIONS
The
parties’ cases
Audit
guidelines
Audit risk
D&T’s analysis of audit risk
The risk of unauthorised trading
Non-segregation of duties
Increased risk of unauthorised trading
Mitigating factors
Leeson was a reviewer, not a doer
Supervision of Leeson
BFS had no funds of its own
Execution-only broker
Small number of related company
customers
Conclusion on audit risk
Effect of
audit risk on audit procedures
D&T’s planning process
Lack of segregation of duties
Size of risk
What tests
should D&T have conducted?
Confirmation procedure
The need to test open positions
The effect of the audit guidelines
How should D&T have tested for
completeness?
The assurance to be gained from
tests of the financial balances
Risk of manipulation of balances
Confirmation of the 88888 account
Conclusion
THE Ą670
MILLION IN SEPTEMBER 1992
Leeson’s
concealment
D&T’s
investigation
The
parties’ arguments
Factual
witness evidence
Cut-off and
window dressing
The conventions
as to recording payments and receipts
The Bank
Reconciliation and BFS’ explanation
The daily
activity statement for the 88888 account
Client
confirmations
The order
of events
Conclusion
Causation
THE 1993
IMBALANCE OF MARGINS
SIMEX rules
on margins
The 1993
balance sheet
The
parties’ cases
Accounting
guidelines
The need to investigate
Would
D&T have been entitled to accept Leeson’s explanation?
Others saw
the imbalance and did not react
Conclusion
THE
COUNTERCLAIM BASED ON LEESON’S REPRESENTATIONS
D&T’s
case
Vicarious
liability
Course of employment
Scope of authority
Special rule of attribution
Causation
Causation in deceit claims
D&T’s negligence in not detecting the
misrepresentations
Causation for representations (i) and (iii)
“Informed common sense”
The purpose and scope of the rule:
Empress Car and Reeves
Causation for representation (ii)
Applicability of Reeves
Inducement
Contributory
negligence
Conclusion
THE
COUNTERCLAIM BASED ON MR JONES’ REPRESENTATIONS
CAUSATION
OF LOSS
Are BFS’
damages limited by the scope of D&T’s duty to BFS?
The Dollar Funding
The authorities on scope of duty as a control mechanism
Application to the present case
Was the
“chain of causation”, from D&T's negligence to the loss sued for, broken
by management fault and if so when?
The appropriate test
Application of the test
The situation in April 1994
The level of the Dollar Funding
The K2/P4 balance
The connection between the two
The debtors’ report
Knowledge that BSJ was paying its
margins
Conclusion on Dollar Funding
Knowledge of BFS’ overdraft
Imbalance of margins
Lack of segregation and
supervision at BFS
Leeson’s profits
Conclusion
The Reeves principle
Alternative cut-off dates
Fluctuations
in loss after the cut-off date
CONTRIBUTORY
NEGLIGENCE BY BFS: PRINCIPLES
The
applicable law
For whose
actions was BFS responsible?
The ambit
of BFS’ business
Monitoring of trading profits
London settlements and Treasury
Risk control
Group compliance and financial control
Internal audit
Conclusion
“Double-dipping”
and the need to consider the details of management failings
The
deduction for contributory negligence in audit cases
Vicarious
liability for Leeson
CONTRIBUTORY
NEGLIGENCE: ANALYSIS OF FAILINGS
The
establishment of BFS
Settlement
and finance supervision within BFS
Mr Bax
Mr Jones’ supervision of BFS settlements and back office
BFS’ finance function
Representation letters
Failure to
implement the internal audit report
Leeson
Other BFS
staff
BSL’s failure
to supervise the BFS back office
Failures by
the BSL Settlements Department and Treasury attributable to BFS
The Ą670m payment
Lack of reconciliations by BSL
BSL’s failure to recalculate
margin called by BFS
BSL’s failure to reconcile margin
called by BFS against the margin BSL called from customers
Treatment by First Futures of data
on the margin feed
The investigation of the Dollar Funding
The failure to recognise that BFS
was not giving credit for the genuine US dollar client collateral sent by BSL
in January and February 1994
The payment of US$32 million on 9
February 1994
The payments from 1 March onwards
Mr Hawes and his senior managers
Later dates
Supervision
of Leeson’s trading
Individual responsibilities
The need to supervise Leeson’s trading
The failure to supervise Leeson’s trading
CONTRIBUTORY
NEGLIGENCE: THE EXTENT OF THE REDUCTION
November
1992 to mid-August 1993
Mid-August
to end-December 1993
End-December
1993 to end-April 1994
End-April
to end-December 1994
Conclusion
THE
CONTRIBUTION CLAIMS AGAINST PLC, BSL AND BSJ
Conclusion
DAMAGES
Commission
and profits
Would BFS have continued in existence?
Is the connection with the negligence too indirect?
Profits
apparently earned from Leeson’s trading
BFS’
recovery under the Coopers settlement
Can BFS appropriate the settlement monies to
non-overlapping claims?
Relevance of recoveries by Plc and BSL
Conclusion
SECTION 727
COMPANIES ACT 1985
The
interpretation of section 727
Does
section 727 apply to D&T?
Ought
D&T fairly to be excused?
Profits received by other Barings companies
The reduction in BFS’ losses after the cut-off date
SCHEDULES
TO JUDGMENT
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Schedules
|
Mr Justice
Evans-Lombe:
SUMMARY
i)
Leeson concealed the loss in BFS’ accounts in September 1992
by “window-dressing”: he credited a payment from Baring Securities Ltd (“BSL”)
in London as received on 30 September (the last day of the old financial year),
when it was in fact received on 1 October (the first day of the next financial
year). D&T should have detected that the payment had been credited to the
wrong day and that the credit was concealing a significant loss in BFS’
accounts; and
ii)
the December 1993 balance sheet showed BFS as having deposited
more margin with SIMEX than it had received from customers, whereas the balance
should have been the other way round. This was an indication of unauthorised
trading. D&T should have investigated the imbalance and revealed Leeson’s
unauthorised trading.
8.
The detailed calculation of BFS’ damages is to be agreed
between the parties (or, if necessary, decided at a further hearing) in the
light of the conclusions I have set out above and two further points of
principle upon which I have ruled.
INTRODUCTION
AND PROCEEDINGS TO DATE
i)
the claimants discontinued their claims against the Coopers
firms,
ii)
BFS continued with its action against D&T,
iii)
Plc and BSL proposed that their claim against D&T should
be stayed. The stay should be lifted only if BFS were held at trial unable to
recover from D&T on a ground which did not prevent Plc and BSL recovering.
The example given at the time was the issue as to the representation letter
which I tried as a preliminary issue, as described below,
iv)
all claimants indicated that they would not claim against
D&T in respect of any loss incurred after 31 December 1994,
v)
a further important provision of the settlement was intended
to protect D&T against the danger of being unable to recover any judgment
in its favour against Plc or BSL in its contribution claims against them, by
reason of those companies’ insolvency. This provision was that BFS agreed to
reduce any judgment which it might obtain against D&T in these proceedings
by the amount of any judgment which D&T might obtain against Plc or BSL,
and also BSJ, in its contribution claims[1].
FACTUAL OUTLINE
GROUP
STRUCTURE
Plc
BB&Co,
BSL and BSLL
BSJ
i)
proprietary trading in derivatives, traded by a group of
traders who were from April 1993 onwards headed by Fernando Gueler[2]. During the relevant period Mr Gueler
himself was managing an index arbitrage book in Tokyo (arbitraging between a
futures index and its underlying stocks). Also relevant to what followed was
Nikkei option trading carried out on the Osaka exchange by Adrian Brindle, a
trader in BSJ’s Osaka office and, from August 1994, in Tokyo. He traded on what
was called a volatility book (also known as a “vega” book), seeking to
anticipate market movements in the Nikkei market index. Leeson’s Nikkei 225
futures switching trading was booked to this book until September 1994. Some of
BSJ’s proprietary trading was booked to BSJ and some to BSLL in London, and
ii)
agency business for third party customers. The head of agency
sales was Mr Killian, who in June 1993 became head of Barings’ Pacific Rim
agency group[3]. Most agency trading was on behalf of customers whose accounts were
maintained by BSL in London, even where the customer relationship and trading
was centred in Japan[4].
Baring
Securities (Singapore) Limited (“BSS”)
BFS
REORGANISATION
AND MANAGEMENT OF BARINGS LONDON[8]
Matrix
management
41.
As part of Mr Norris’ improvement of BSL’s reporting and
control systems, he introduced from the end of 1992[10] the concept of matrix management. This was a
management structure under which each type of trading business activity had a
global head, responsible for the conduct of that activity throughout the world,
and across the various companies in the Group. A trader reported to the head of
his particular trading activity (“his product head”), via a product reporting
line. However (in theory at least) he also reported to local office management,
which was responsible for local office infrastructure, including computer
systems, controls and settlements[11]. This latter group of functions was referred
to from time to time as “operations”.
Consolidation of BB&Co and BSL
The
management structure within the Barings Group
EXCO
BB&Co and BSL
Management Committees
BIB Management
Committee (“MANCO”)
The Treasury and
Risk Committees
Asset and Liability
Committee (“ALCO”)
Group Treasury and Risk
(“GTR”)
Financial Products Group
(“FPG”)
59.
Thus FPG[15] was
established as of 1 January 1994, headed by Mr Baker. It covered his old
BB&Co debt operation but also all BSL’s proprietary derivatives businesses,
including those carried on in Japan and Singapore. These latter were included
within a sub-group, the Structured Products Group (“SPG”), headed by Ms
Walz, who reported to Mr Baker. Leeson was at all material times General
Manager of BFS, part of Barings’ derivatives trading business. So from 1
January 1994, under the matrix management system described above, Mr Baker was
Leeson’s product manager in relation to Leeson’s proprietary trading
activities.
Internal
audit
PEOPLE
Barings
London management
Barings
London settlements
Barings
London Treasury and Finance
BSJ
74.
Mike Killian*: became General Manager, BSJ F&O
Sales, in September 1988 (having joined from Chase Manhattan), with director
status, but not a director of BSJ[18]. Director BSL May 1992-January 1993.
Director Baring Securities (Far East) Ltd April 1991-March 1994[19]. Director, BFS, December 1992-1995. Head of
Pacific Rim agency group, in June 1993, reporting to Mr Norris. Head of Global
Equity F&O Sales, BIB, in 1994. From January 1995 he reported to Mr Baker.
Based in San Francisco from 1 April 1994.
BFS/BSS
REMUNERATION OF BARINGS STAFF
SIMEX
Futures
and options
i)
the 3-month Nikkei 225: a contract based on the market value
of a basket of 225 stocks traded on the Tokyo Stock Exchange,
ii)
the 10 year JGB contract: a contract based on the market value
of Japanese Government Bonds with 10 years to maturity and with a standardised
coupon (or interest rate), and
iii)
the 3-month Euroyen contract: a contract based on the three
month interest rate for yen-denominated instruments traded outside the formal
control of the Japanese monetary authorities.
Margin
and settlement variation[22]
Futures
contracts
Margin
deposited by members of SIMEX with SIMEX
i)
maintenance margin (also referred to as initial margin,
but set at a lower level than the initial margin required from customers,
discussed below) in respect of all its trades effected on that day which were
open overnight. Maintenance margin protected SIMEX against the risk of a member
being unable to pay losses incurred on a position as a result of market
movements over the next 24 hours.
The
broker acting for a buyer or a seller of futures contracts had to deposit
margin with SIMEX. SIMEX calculated maintenance margin dailyin respect
of all a member’s positions outstanding at the end of the day. It calculated
margin on the member’s house and customer accounts separately, on the basis of
the member’s gross long (bought) and short (sold) open positions in each
account. The member was not able to net off within its customer account its
margin requirements on behalf of different customers[23]; and
ii)
advance margin: SIMEX occasionally called on members
for advance margin, in very volatile markets or over holiday periods, to
provide SIMEX with extra protection[24].
Margin
deposited by customers with members of SIMEX
Settlement variation
Accounting
treatment of margin and settlement variation
Options[31]
Accounts
with SIMEX and customer accounts
SYSTEMS
CONTAC[38]
i)
computer files listing all trades conducted by BFS that day,
which were fed into CONTAC. CONTAC allowed this information to be adjusted at
that point, and
ii)
a SPAN file which
allowed CONTAC to calculate the margin required from BFS’ customers.
Treatment of futures and options trades by CONTAC[42]
Futures
i)
Customer’s account balance brought forward
ii)
Cash paid to/received from BFS’ customer (not SIMEX) on that
date
iii)
Realised profit and loss on futures contracts closed out on
that date, and premiums on the sale of options on that date
iv)
Commission / brokerage on trades done on that date
_________________________________________________
v)
Account balance carried forward – the sum of (i) to (iv)
vi)
Total unrealised profit/loss – the total cumulative profit or
loss on open futures contracts
_________________________________________________
vii)
Equity balance – the sum of (v) and (vi)
viii)
Collateral or security held
ix)
Initial margin required on the customer’s positions (initial
margin on futures trades, but also all margin required on open short option
positions)
x)
Margin excess/deficiency – (vii) plus (viii), less (ix)
xi)
Margin call – the amount of any deficiency in (x)
115.
SIMEX marked any futures position to market, giving rise to an
unrealised profit or loss, on the trade date and thereafter until the position
was closed out or matured[43]. As
such, this was entered into (vi). It thus increased or decreased the equity
balance in (vii). If a loss decreased the equity balance, since the margin
requirement in (ix) stayed constant, the result would be a margin deficiency in
(x) and a margin call. By contrast, if a gain increased the equity balance, the
result would be a margin excess to be repaid to the client. A margin call or
repayment, when paid by or to the customer, resulted in a credit or debit to
(ii) (cash paid/received). This balanced out the unrealised profit or loss
resulting from the marking-to-market, returning the margin excess/deficiency in
(x) to zero.
Options
Significance of the treatment of options to
Leeson’s fraud
i)
was not debited with the margin which BFS paid to SIMEX (which
in fact exceeded the credited premium);
ii)
was not credited with margin received by BFS, as was the case
when a customer sold options and had to pay margin to BFS. This was because
CONTAC did not treat the funds which Leeson used to pay margin on sales of
options on the 88888 account as being margin paid to BFS by a customer.
Therefore it did not show those funds as cash received on the account[45]. So
Leeson could achieve a nil equity balance by selling options, without any risk
that margin on those options would turn the nil balance into a positive
balance; and
iii)
did not reflect the potential liability for future losses on
the position[46].
Margin funding for customer trades
i)
BFS would fulfil the customer order on SIMEX, on the
instructions either of the customer directly or of BSL or BSJ on the customer’s
behalf;
ii)
BFS would request the required margin in respect of that trade
from BSL;
iii)
BSL would remit the margin to BFS; and
iv)
BSL would demand the margin from its third party customer.
Margin
funding for proprietary trades
The
need to reconcile margin
i)
the need for BSL to ensure that it complied with large
exposure reporting requirements[48]; and
ii)
the need for BIB to
calculate and report accurately to the Securities and Futures Association (“the
SFA”) pursuant to its Counterparty Risk Requirement (a requirement to the
effect that a bank must have sufficient capital to cover exposure caused by its
counterparty defaulting in margin payments).
London Settlements
Reports
to London[51]
(i) The Trade Feed
(ii)
The Margin Feed
137.
Thiswas an electronic feed containing BFS’ calculation
of the initial and maintenance margin required from each of BSL’s customers
(and from BSLL) in respect of the customer’s open positions at the close of the
previous trading day[54]. As discussed at paragraphs 150 to 152
below, BSL could not check the accuracy of this, at least for portfolios
including options, since it did not have the appropriate SPAN software.
However, apart from the omission of details of transactions on the 88888
account from the trade feed, there is no evidence that during the period in
question the information passed by the trade feed or the margin feed was
incorrect or miscalculated. In particular there was no evidence of any BSL
client complaining that margin calls were incorrect.
139.
The margin feed included the margin required on the 88888
account[55], but First Futures did not recognise 88888
as a valid account and so ignored the data. Nevertheless the daily feed, if
printed out, was a short one-page document and clearly showed the large sums
payable for margin to SIMEX in relation to the 88888 account[56]. Furthermore First Futures allowed the user
to view two separate screens, one showing the margin balances received from
CONTAC and one showing the accounts recognised by First Futures. However the
BSL settlements clerks did not need to look at either screen when carrying out
the daily download, and no one at BSL seems to have compared the two[57].
(iii)
The Price Feed[58]
(iv)
The London Gross report
141.
This was also an electronic feed[59]. It was effectively a daily activity
statement for all accounts in the names of BSL and BSLL. Leeson arranged for
the 88888 account to be omitted from this report[60].
(v)
The Funding Spreadsheet[62]
Reconciliations by the BSL Settlements
Department[64]
i)
was correctly
calculated, since they did not use SPAN,
ii)
reconciled to individual trades, since the reports they
received did not break down margin between individual customers or trades[70], or
iii)
reconciled to the margin BSL requested from individual
customers, for the same reason[71].
Reports
to Japan[73]
Error
accounts, unallocated trades accounts and give-up trades
BFS’ HISTORY AND TRADING
The
start of Barings’ F&O business
SIMEX
and Mr Killian
Mr Gueler
The activation of
BFS
174.
Mr Killian envisaged BFS as a “lean operation”[78], so
structured and staffed as to keep both start-up and running costs as low as
possible. 1991 and 1992 were difficult years in financial terms for BSL and Mr
Killian recognised that it was important to keep these costs low in order for
his proposal to be approved. The total staff requirement was six plus a
secretary and the use of the BSS accountant, Ms Yong. Mr Killian did not make
any suggestion as to what the role of the existing local management of BSS should
be.
The set-up of BFS
179.
Mr Killian recommended that the CONTAC system be used by the
BFS back office[80]. Mr
Killian had no recollection of being involved in the establishment of the
settlements procedures in London in relation to the SIMEX business. However, he
did understand, from an e-mail he received from BSL’ systems specialist, Mr
Dixon, on 10 March 1992, that BSL in London would be having the SPAN margining
capability installed to enable it to calculate or re-calculate the SIMEX margin
calls from trade data.
The appointment of
Leeson to BFS
185.
Following “extensive”[82] discussions involving Messrs Dickel,
Killian, Martin (BSL’s then finance director) and Jones, Leeson was appointed
to run the SIMEX operation on 19 March 1992 for a trial period of 6 months. He
was given the title Derivatives Operations Manager and posted to Singapore to
(in the words of Mr Martin’s fax of 24 March 1992) “...head up our SIMEX
operation and also act as floor manager”[83].
The start of BFS’ operations
192.
BFS commenced its SIMEX operations in June 1992. Leeson had
arrived in Singapore, following his honeymoon, in early April 1992. Mr Killian
played an “active role”[89]
during the period leading up to the start of BFS’ operations. He was in regular
contact with Leeson by telephone and visited Singapore in May 1992. According
to Leeson in his interview by the SFO, Mr Killian was “relied on heavily”[90] in
the process of establishing the operations of BFS, not least because of his
previous experience as a director of SIMEX.
Leeson’s move to
become a floor trader
198.
As Mr Killian accepted, Leeson required permission from a
higher authority to execute trades on the floor of SIMEX, because it involved
an expansion of his role[92].
There is no evidence that anyone senior to Leeson gave such permission. Mr Bax
identified Mr Killian as one of the individuals with authority to do so, but
both Mr Killian and Mr Gueler denied that they had done so. Mr Killian had not
anticipated Leeson becoming an active floor trader, at least for some time. In
re-examination, he confirmed that Leeson was not at that point a “suitable
floor trader. He was not experienced yet”[93]. At
the time, he would have seen Leeson as developing that experience, little by
little, under Eric Chang’s tutelage.
The 88888 account
202.
Mr Bowser did not recall any such conversation and thought it
unlikely that he would have made such a request, given that the errors did not
cause any extra work in London[98]. However there was some later documentary
evidence that Mr Bowser was aware of Leeson having an error account which was not
reported to London[99]. It is perhaps more likely that Leeson
opened an account at Mr Bowser’s request which was not to be reported to
London, and later realised that it could be used for unauthorised trading, than
that he opened such an illicit account within eight days of BFS starting floor
trading. It also seems unlikely that, if Leeson’s intentions had been
fraudulent from the outset, he should have removed the 88888 account from the
trade feed but not from the margin feed.
BFS’ customers
Leeson’s rolls
1993: Leeson is
given discretion
208.
During the course of 1993, Leeson metamorphosed from an
execution-only broker to a trader. A broker executes an order at the
instigation of another, at a stated price, “at best” or “at market”, exercising
discretion only in his judgement as to how precisely to execute the order. A
trader has a discretion as to what trades to execute and at what price. Unlike
a broker, a trader initiates trades and effectively puts the bank’s money at
risk. As a result, as Mr Killian and Mr Norris accepted[105],
trading of a proprietary nature gives rise to more complex risk management
concerns than pure execution activity. It requires transparency and usually
involves the individual trader being given limits to control his activity.
Leeson’s switching
business
212.
The trading activity at which Leeson was apparently so
successful was arbitraging between SIMEX and the Osaka exchange. This was known
as “switching”. Arbitrage of this nature (sometimes called “price
anomaly arbitrage”[114])
aims to capture price differences (price anomalies) in the same product on two
different markets. The trader sells the product on the market on which the
price is higher and buys an equal quantity of the same product on the other
market where the price is lower. As long as he effects the two transactions
(the two “legs” of the arbitrage) as nearly as possible simultaneously, the
strategy is one of low market risk. The price differential is “captured”
once the two markets converge and the price of the product is the same on both
markets, whichever way the markets may have moved in the meantime.
215.
The origins of Leeson’s switching business lay in the hedging
strategy pursued by BSJ’s proprietary traders in Japan. As already mentioned,
Adrian Brindle was trading Nikkei options on a volatility book. As a hedging
strategy, to offset the risks involved in options trading, BSJ dealt in
futures, both on the Japanese markets and (through BFS) on SIMEX. In the course
of executing these hedging trades for BSJ, Leeson purported to show that he
could arbitrage profitably between Osaka and SIMEX[115].
218.
When it started, Leeson’s switching was accounted for as part
of BSJ’s volatility book. Initially it was restricted to dealing in Nikkei 225
futures contracts. It seems from a fax from Mr Oades to Mr Norris dated 17 June
1993[120] that
the Nikkei switching business was already established by that date, and that
the possibility of expanding into JGBs was under consideration (as happened in
1994), though apparently no one in London told Mr Baker about it before he went
out on his due diligence at the end of 1993[121]. Mr
Killian told me that he knew as early as late 1992 that Leeson was involved in
switching, but understood him only to be carrying out the directions of BSJ
traders. Mr Killian only became aware in mid to late 1993 that Leeson was
taking the initiative in the trading[122].
“if BFS received a large order on SIMEX and the liquidity[124] was
not available to execute it immediately, BFS would offer to execute the
customer’s order by taking on the other side itself
and laying off the risk with the equivalent number of contracts on the more
liquid Japanese exchange. BFS would charge the customer an extra price tick[125] for
doing this..... and would seek to unwind it later on when both markets had
liquidity.”
222.
As Mr Norris accepted, this transition amounted to a change in
roles, importance and status for Leeson[128]. For
BSJ to confer authority on Leeson to conduct discretionary arbitrage was, as
both Mr Norris and Mr Killian agreed, to give him “a book in all but name”[129]. Mr
Gueler agreed too but then had second thoughts later in his evidence,
suggesting that, throughout 1993 and until late spring/early summer of 1994,
Leeson’s ability to initiate trades was limited by parameters set by BSJ on the
morning of each day[130].
However this is contrary to both Leeson’s account to the SFO quoted above and
Mr Killian’s evidence. It is also inconsistent with Mr Gueler’s evidence thatthere was no difference between what Leeson was doing before and after he
got his own trading book[131]. I
find Mr Gueler’s first thoughts to have been correct.
BSL management in 1993
Reporting of
Leeson’s profits
Mr Baker
236.
Mr Baker did not visit Japan until late 1993 and early 1994.
It was only then, from his discussions with the traders in Japan, that Mr Baker
“discovered” the switching business and the importance of Leeson to the
apparent profitability of BSJ’s Japan trading books[150]. Mr
Killian said that Mr Baker “spied” the opportunity to take control of
this business which, since it was concealed within the BSJ books, had not been
claimed by anyone else in London[151]. It
would not have been apparent from the spreadsheets Mr Baker had received from
Mr Norris in September because Leeson’s trading was still buried in the Osaka
volatility book. Until Mr Baker discovered Leeson’s trading, only BSJ was aware
of the level of Leeson’s apparent contribution to the results of the Japanese
house books. It was, as Mr Killian described it “... a bit of a home grown
build up of business opportunity”[152].
Mr Baker’s vision
237.
Mr Baker’s first meeting with Mr Killian was over lunch in
Tokyo in November 1993. According to Mr Killian “My conflict began with Ron
Baker on the first day I met him”[153]. Mr
Baker told Mr Killian that he intended to expand the proprietary business and,
as part of his vision, it would be important for proprietary traders to “take
advantage of the client information curve”[154]. Mr
Killian asked Mr Baker whether he was talking about front-running, which Mr
Baker denied. But after the collapse, Mr Killian told Mr Baker “When you
told me when we first met that you were going to trade the client information
curve, I knew you were going to build a front running scam as part of your
vision and I was not going to be part of that”[155].
Mr Killian’s
complaints to Mr Norris
November-December
1993: Leeson’s profits increase
247.
By the end of 1993 Leeson had already become the single most
profitable trader in Mr Gueler’s group. On occasions when Leeson was absent for
any reason, in Mr Hawes’ words BFS’ “profitability dropped to virtually
nothing”[173]. Mr
Gueler accepted that Leeson’s results should have been investigated at this
stage though, he said, not by him[174]. Yet
no one at BSJ or BSL understood or sought to investigate Leeson’s trading
activities or the reason for the dramatic increase in his profits. For his
part, Mr Gueler admitted that he found Leeson’s profits “puzzling” from
the end of 1993 onwards but that he had no idea how Leeson was making them[175]. Mr
Gueler took no steps to try to discover, either from Leeson or elsewhere how
these profits were being made.
Leeson’s 1993 Bonus
The “turf war”
over Leeson
255.
Mr Killian was not prepared to recognise the lack of
communication as a failure[185], but
Mr Gueler was: “... [Mr Killian] and I did not communicate with each other,
okay. That was a fault okay, maybe... That is what really the problem is, you
know it, everybody knows it, that is where the fault lies”[186]. Mr
Baker too was willing to accept that
“... if I had seen both sides of that puzzle, it would have helped me
to be able to pick up what was going on”[187].
The development of
Leeson’s trading in 1994
263.
According to D&T’s Income Tables[198], Leeson’s apparent revenues from Nikkei 225
switching for 1994 amounted to Ł12.546 million (firm figures are available only
from 23 September 1994, when Leeson was given his own book. D&T’s estimate
is if anything conservative, given that the Internal Audit Report quotes a
figure for the first seven months of 1994 of Ł11 million (US$17 million)). Revenue
from JGB and Euroyen switching (which began in April and May 1994) amounted to
a further Ł23.931 million, giving an overall total for the switching business
in 1994 of Ł36.478 million. This is to be compared with the total revenue for
the whole of FPG in 1994 of Ł62 million, of the entire Bank Group of Ł84.4
million, and the whole of BIB of Ł406.6 million. Thus Leeson’s reported
switching revenues amounted to 59% of FPG’s revenue, 43% of the entire Bank
Group’s and 9% of BIB’s during 1994.
·
Leeson’s results from Nikkei switching in January and
February 1994 continued the trend recorded at the end of 1993, with income
estimated at Ł3.1m in January and Ł1.9m in February;
·
When Leeson started switching JGBs in April 1994, he
reported income of Ł1.87m in his first week, at an average of 6.5 SIMEX ticks
profit per contract. His income for the month of April was over Ł3.4m;
·
In the months May to September 1994, Leeson’s monthly
switching income was Ł1.8m, Ł2.3m, Ł3.75m, Ł3.7m and Ł2.7m respectively, with
regular Ł1m plus weeks. For example:
Month (Week)
|
Income (Łm)
|
April (2)
|
Ł1.907
|
July (2)
|
Ł1.135
|
July (4)
|
Ł1.674
|
August (1)
|
Ł1.123
|
August (4)
|
Ł1.306
|
·
In the week commencing 17 October 1994, Leeson’s
reported income from JGBs was Ł3.6m, at an average profit of 4.9 ticks per
contract. In the same week his Nikkei trading produced profits of between 3 and
4 ticks per contract[201]. Overall income for the month was Ł5.7m;
·
In November and December 1994, Leeson’s monthly
switching income was Ł4.6m and Ł2.8m respectively.
The imposition of risk limits and the start of JGB and
Euroyen switching
266.
Mr Norris’ evidence[202] was
that until early 1994 he had seen Leeson as one of a team, performing a
valuable role in enhancing, by his skill at executions, profits on trading run
from Japan. However it became clear in early 1994 that Leeson was initiating
trades and managing risk himself (including an element of intra-day directional
trading). Therefore Mr Norris obtained agreement that Leeson should be subject
to his own risk limits and that his revenue should be split out from Mr
Brindle’s volatility book.
269.
In the first week of January 1994, the BSL risk committee was
told that Mr Gueler and Ms Walz were to make a presentation of proposed trading
limits to the committee and that the “Osaka business may be expanded to
include JGB arbitrage”[206]. On
4 February Mr Baker asked Mr Gueler and Ms Walz to report to him on how the
SIMEX switching business could be expanded to include JGBs and Euroyen and the
intra-day and overnight trading limits that were required. They replied by a
fax of 27 February 1994[207], in
which they described Leeson’s business as “intra-day trading... that
exploits and relieves price and liquidity anomalies that occur between the
Osaka and Simex exchanges.” They attributed BFS’ success to “our pole
position in the information flow: we see huge client orders (ours and theirs),
we know well the locals and their trading habits, and have an intelligent line
into Osaka. We know all the bids and offers. It is difficult to be specific
about how we put money at risk when there are so many safety nets at our
fingertips”. Mr Gueler was recorded as suggesting a “Max Loss limit
applying to Singapore’s activities as a discipline”. No specific limits
were recommended although the report did identify the need to “define the
terms” on which the switching business was to progress.
277.
Mr Gueler admitted that Ms Walz’s and Mr Baker’s concerns as
to his management skills were justified[216].
Nevertheless, the minutes of the BSL Risk Committee meeting of 16 June 1994
recorded that “It was agreed Fernando Gueler would be responsible for
controlling the use of these limits...”[217]. Ms
Walz’s fax to the individual traders on 23 June 1994 stated “All risk
continues to report into Fernando in Tokyo, who in turn reports to me in London”[218].
“The Equity Derivatives
Group in the Tokyo office, managed by Fernando Mr Gueler, is part of the
Structured Products Group, headed by Mary Ms Walz... Nick Leeson, who trades
futures and options on Simex, also reports to Fernando...
The Tokyo Risk department is responsible for the daily collation
and reporting of trading positions for business executed by both Equity
Derivatives and Nick Leeson in Singapore. Tokyo Risk department are primarily
responsible for monitoring all trades against the risk limits as approved by
the Risk Committee, independently verifying revaluation prices which are supplied
by the front office, and reporting risk positions and MOF [Ministry of Finance]
capital utilised in a summary report for the daily London Risk Committee
meeting. The department was headed by Kevin Clarke until 1 November when he
transferred to the Equity Derivatives trading team. Kevin has been replaced by
his assistant, Vincent Sue...
.... detailed risk monitoring of the Simex business is undertaken
by Tokyo Risk department and in addition Fernando is kept informed of all
positions and p&l on a daily basis.”
Mr Gueler’s
concerns about Leeson’s profits
285.
Other than the risk control role performed by Mr Clarke and Mr
Sue from Japan, there was no independent middle office or risk controller
dedicated to Leeson’s switching business. Mr Gueler accepted that the absence
of any form of local monitoring in Singapore meant that the system was “defective”
and that an “important control” over Leeson’s switching business was
missing[229].
289.
Through the summer of 1994 Mr Gueler had been concerned at the
fact that Leeson was making 2 ticks on every Nikkei trade. By October Leeson
was taking 3-4 ticks from his Nikkei trades which Mr Gueler said “seemed too
big”[234]. Mr
Gueler said that he had not appreciated that Leeson was taking 7 ticks per JGB
trade by October 1994 but agreed that, if he had noticed this as he should have
done, he would have been even more concerned[235].
Leeson’s October results were so exceptional that Mr Gueler telephoned Ms Walz
and, in his own words, told her that he was “concerned about how [Leeson] is
making this money” and that he could not “easily sleep at night”
through worry about how the money was being made. He said that he believed
Leeson’s trading should be carefully looked at “before it all ends up in tears”[236].
Such was the level of Mr Gueler’s concern that, as he communicated to Mr Baker
and Ms Walz, he “wanted nothing more to do with [Leeson]”[237].
January and February
1995
LEESON'S UNAUTHORISED TRADING
i)
to book unauthorised trades, which he carried out as a
speculation and/or (in the case of his sales of options) in order to help
conceal his losses,
ii)
to conceal the fact that he had not matched all positions at
the end of each trading day, by transferring unmatched positions into the 88888
account. Such transfers were frequently carried out at a price which benefited
the account to which the position had originally been booked, at the cost of
the 88888 account, and
iii)
to adjust the prices of legitimate trades, conducted on behalf
of BFS’ customers, so as to make those trades appear more profitable than they
in fact were, at the cost of the 88888 account.
Options
BFS’ LOSSES CAUSED BY LEESON’S TRADING
i)
at 30 September 1992, S$9.2 million (Ł3.6 million),
ii)
at 31 December 1993, S$39.03 million (Ł16.18 million),
iii)
at 31 December 1994, S$376.78 million (Ł163.98 million), and
iv)
at 27 February 1995 (the date of the collapse), S$1,821
million (Ł791 million)[243].
CONCEALMENT OF THE UNAUTHORISED TRADING
Corruption
of the BFS back office
The
Trade Feed and London Gross Report
The
BFS back office
i)
As part of the process of concealment of his unauthorised
activities, Leeson would instruct staff in the back office to enter additional
trades into the CONTAC system which were not recorded in the listing from SIMEX
or in the trade blotters faxed from the front office. This involved the
creation in BFS’ books of records of cross-trades between the 88888 account and
other Barings accounts which had never occurred on SIMEX. Miss Sng accepted
that she had made such entries on the instruction of Leeson. Her evidence was
that she simply keyed in the entries without understanding them or realising
that they were fictitious. The booking of fictitious trades to the 88888
account seems to have begun in July 1992 and continued and increased in
parallel with Leeson’s unauthorised trading.
ii)
As described below, from some time in 1993 Leeson instructed
Miss Hassan, Miss Kader and the other settlement staff to perform journal
entries which brought the equity balance on the 88888 account to nil at the end
of each month.
iii)
The back-office staff were involved in the process of checking
the record of trades executed by BFS on SIMEX contained in the trade blotters
against SIMEX’s record in its computerised listing. This reconciliation was
intended to check that BFS’ record corresponded with SIMEX’s. During this
process, Leeson frequently caused adjustments to be made to the prices and
quantities of trades, either by annotating the trade blotters or by giving instructions
direct to the back-office staff. The effect of these adjustments was to corrupt
BFS’ records, and consequently the information sent to other Barings parties,
so as to produce a false picture of exceptionally profitable trading. Although
these adjustments started to be made in very significant numbers from August
1993, occasional adjustments were made earlier in 1993.
iv)
Miss Hassan was also involved in a procedure whereby Leeson
instructed the back-office staff to book fictitious trades to the 88888 account
at the end of each day. These were entered into the CONTAC system and had the
effect of reducing the total long positions reported to SIMEX. Doing this
reduced the margin called from BFS by SIMEX. In her witness statement, Miss
Hassan suggested that she began booking these fictitious trades in account
88888 in 1994, but CONTAC records indicate that the practice dates back to the
start of Leeson’s unauthorised trading on the 88888 account.
v)
At least from 1993 onwards, Miss Hassan and the other back-office
staff were instructed by Leeson not to file the daily activity statements for
the 88888 account with those for other accounts, but to give them to Leeson
himself, who destroyed them. In 1992 the position is slightly less clear, in
that in the course of that audit Miss Koo traced the receipt of the Ą670m
through to an 88888 account daily activity statement (see paragraph 596 below).
Therefore it may be that Leeson only began destroying the daily activity
statements after that audit. The monthly activity statements were only printed
out on Leeson’s request and were given to him.
Concealment of the balance on the 88888
account at month- and year-ends
September 1992 audit
December 1992
False
accounting entries
307.
In most months from February 1993 onwards, Leeson caused false
accounting entries to be made in BFS’ books to cancel out any balance on the
88888 account. This was vividly described by Miss Hassan in her evidence[246].
Initially Leeson put through the entries himself, but from 1994 he gave Miss
Hassan a standing instruction to make an internal journal entry after doing the
closing for the last day of the month (and therefore after calculating the
balance on the 88888 account). The entry credited to the 88888 account an
amount equal to the balance on that account (thereby reducing the balance to
zero) and debited the same amount to the “bank funds receivable” account in
CONTAC. Leeson directed the BFS staff to print out the report of end-of-month
balances from CONTAC for entry into the SUN system after these fictitious
entries had been made, and then to reverse them the following day.
Option premiums
SLK
The
reasons why Leeson was able to practise his fraud
FUNDING OF LEESON’S UNAUTHORISED TRADING
i)
working capital provided by BSL and intermediate holding
companies. This comprised S$2 million in share capital and subordinated loans
made over the period 1991 to January 1994, totalling S$40,250,000 (c. US$26
million);
ii)
BFS’ commission and interest income, which during the 15
months from October 1992 to December 1993 came to S$20 million (some of which
was paid in dividends to BSL);
iii)
letters of credit issued by Citibank, guaranteed by BSL. BFS
obtained letters of credit specifically used to meet SIMEX’s requirements as to
BFS’ adjusted net capital and for a security deposit. In addition to these, BFS
used further letters of credit to meet its margin requirements. Their value was
increased from US$4.77 million in June 1992 to US$47 million as of 31 December
1994. SIMEX treated the letters of credit (and also the treasury bills
described below) as available to meet any margin owed by BFS: they were not
allocated to particular accounts;
iv)
treasury bills. From February 1993, BFS deposited with SIMEX
treasury bills provided by BSL to meet margin requirements. Their value was
increased from US$10.8 million in February 1993 to US$19.45 million by 31
December 1994. Such bills were shown on the statement of the customer which had
deposited them and reduced the margin called from it. But if they were not
needed for that customer’s trading, they were not withdrawn from SIMEX and were
then applied against BFS’ other margin requirements;
v)
profits on his unauthorised trading. Leeson’s futures trading
was predominantly loss-making, but his options trading was for some periods
profitable. According to the Singapore Inspectors’ report[248], his
cumulative profit on options trading was Ą478 million as of December 1993
(though by January 1994 it had fallen to a loss of over Ą1 billion) and Ą17.8
billion as of December 1994. Even where option sales made losses eventually, in
the short term they were almost self-financing, as Leeson could use the premium
received to pay most of the margin due (see paragraphs 102 to 105 and 118 to
121 above)[249]; and
vi)
most importantly, as explained at paragraphs 93 to 106 above,
BFS margined all its customers (including other Barings companies) at the
initial margin level. For futures, this was 25% higher than the maintenance
level at which BFS had to deposit margins with SIMEX (for options the
difference depended upon a SPAN calculation). The difference between the two
was available to fund Leeson’s unauthorised trading. This difference grew as
the volume of BFS authorised trading increased: as of 30 September 1992, it was
US$16.76 million; as of 31 December 1993, it was US$24 million; and as of 31
December 1994, it was US$90.33 million[250].
i)
BSL: S$770 million (US$530 million/Ł334 million)
ii)
BSLL: S$270 million (US$186 million/Ł117 million), and
iii)
BSJ: S$ 690 million (US$475 million/Ł299 million)[257].
THE DOLLAR FUNDING
Margining in US dollars
The Dollar Funding requests
330.
In early 1994, Leeson began to request from BSL additional
funding, in US dollars, which was not linked to individual customers (“the
Dollar Funding”)[262]. When the trial started, the date of the
first such request was agreed to be 12 January 1994. However the issue was the
subject of further analysis as the trial proceeded. That suggested that until 9
February all payments of US dollars from BSL to BFS were attributable to BSL
passing on to BFS collateral received in US dollars from BSL’s customers.
334.
Mr Jones was involved again, on 1 March 1994, when he and
Leeson sent a fax to Mr Hawes[264]. They posited an option transaction for a
client between SIMEX and Osaka which would generate an overdraft at Citibank in
Singapore of US$50 million for one day, and asked to discuss it as soon as
possible. Whether as a result of that or not, on 2 March BSL paid BFS US$50
million, which was repaid the following day.
“Brenda, Due to the
holiday in Singapore on Monday, SIMEX have asked for additional margin. Kindly
send us USD 16,000,000 to our a/c with Citibank for good value 11 March 1994.
Kindly confirm.
Can you check also
whether you paid us USD 14,000,000 for value 9 March 1994 since there was no
such funds received on that date.
Regards, Linda.”
337.
This pattern became standard and continued on a regular, later
daily, basis, until the collapse[266]. The reasons given for individual requests
were brief – “margin call” or “Advance margin call – House” – but
frequently no reason at all was given. On the other hand, on many days BFS’
e-mail was a notification that BFS would be returning funds to BSL. The later
e-mails, at least, were addressed to eight members of staff in the BSL
settlements department (including Ms Granger and Mr Railton), and to one member
of staff in Group Treasury. They arranged for the monies requested to be
transferred to BFS’ account with Citibank in Singapore.
339.
The house element was remitted to BFS through BSLL (although
the funds were ultimately provided by BB&Co) and recorded in BSLL’s books
in a BSSHSECOLL account. At the end of December 1994, the BSSHSECOLL account
stood at US$ 5 million[270]. By the time of the collapse, the figure was
US$141 million[271].
The
"K2/P4 line"
348.
BSL’s credit committee did not review the item at all.
According to Mr Hawes, this was because the customers who were allegedly
receiving the benefit of the sums being lent had not yet been identified – as
of course they never were, which was precisely the problem[278].
Investigation of the Dollar Funding by BSL
Initial
investigation into the K2/P4 line
Initial
investigation into the Dollar Funding
359.
Mr Hawes’ evidence was that he knew that BSJ was meeting its
funding obligations[285] (and from October 1994 at least BSL had
reports from BSJ of the funds they placed with BFS). Therefore, throughout
1994, he saw the Dollar Funding as 80-90% an agency problem and correctly
treated as customer funds. But he suspected that, at the edges, the Dollar
Funding was partly providing short-term funding for BSJ positions, due to the
delay in transmitting yen from BSJ to BFS, and that that was misreported due to
sloppy management and book-keeping by BFS[286]. He agreed in evidence that such factors
would not result in the BSJ element amounting to a figure as large as US$50m,
though that is the figure for BSJ funding shown in the first funding breakdown
supplied by Leeson to BSL, as of 14 June 1994[287].
“Q. What reconciliation did you understand the
settlements department was doing, at that stage [before June 1994]?
A. I do not think that is a question I ever
asked myself, what reconciliations they were doing. I trusted them to be doing
their job and to be – and to know for what purpose the dollars were required.
Q. So that is what you mean when you say that
you did not have any idea about how little they really knew?
A. Yes.”[289]
Investigation
into the split between house and customer business
362.
For the first ten months Dollar Funding requests were framed
as requests to pay margin to BFS’ segregated (i.e. customer) account in
Singapore. The funds to meet these requests were transferred out of a BSL
segregated (i.e. customer) account in London and paid to BFS. Thus the requests
were treated as if they related to agency business.
365.
According to Mr Railton’s evidence, Treasury asked Settlements
in June 1994 to try to break down the Dollar Funding[293]. Mr Railton had a further concern, which was
whether BSL was receiving credit from BFS for genuine customer dollar
collateral which, as described above, BSL had paid to BFS. At least some of the
dollar funding was attributed by Leeson to initial margin, and so should have
been deducted from the yen margin required[294]. Hence on 15 June 1994 Mr Railton e-mailed BFS,
asking for a breakdown of the US$ collateral held by BFS and quoting the amount
of that collateral which represented US$ paid to BSL as collateral by customers[295].
Investigation
by Mr Hawes and the internal audit
372.
Mr James Baker’s evidence, which was supported by his
contemporaneous meeting note[304], contradicts this account. Mr James Baker
said that Mr Hawes raised with him only the difficulties caused by requests for
funding received at short notice, which were not reconciled at the time of the
call. Mr Hawes did not tell him of the size of the balance[305].
Meetings
in October 1994
i)
credit facilities granted to certain customers: this could
have explained some of the need for funding, but could clearly have been tied
to individual customers,
ii)
delay in receiving margin from customers: again, this could be
tied to customers and anyway would give rise to a need for funding in London,
not Singapore,
iii)
delays in receiving yen from BSJ: Mr Hawes said that he
thought that before January 1994 BFS must have been funding this from excess
margins held for other customers. He accepted that it did not explain the
balance unless BFS was slow to withdraw funds from SIMEX and its volumes were
continually rising. Again it could have been tied to customers,
iv)
customers doing mutual offset business (trades on SIMEX being
offset against trades on one of the Chicago exchanges) did not post margin,
which BFS had to fund: this applied only to eurodollar trading, volumes of
which were insignificant,
v)
advance margin called by SIMEX: these calls were short-term
and in fact very rare, a fact which could have been checked by a single call to
SIMEX, which was not made. Furthermore advance margin was credited against any
margin call in respect of that or the subsequent day’s trading. Mr Hawes
accepted before me that it could not be the explanation for a continual funding
need,
vi)
premiums on option trades were payable immediately but were
not received from the customers for some days: this would explain a significant
part of the balance only if BFS were transacting very large option trades
continually, which was unlikely. In any event it could have been confirmed from
the reports received by BSL.
380.
However Mr Hawes did not probe any of Leeson’s explanations,
then or later in 1994[314]. He said that this was because he hoped to
obtain approval of his proposal for a regional treasurer in the Far East, who
would be able to investigate the funding question on the ground. Unfortunately
this did not come about, though accounts differed as to whether the reason was
a veto by Mr Norris on cost grounds or the resignation of the candidate, Mr
Ashley.
381.
Mr Hawes admitted in cross-examination that the focus of his
meeting with Leeson was in fact not the reasons for the Dollar Funding. Rather,
it was the need for the requests to be split between house and customer, so as
to allow for accurate large exposure reporting[315]. The result of the meeting was that from November
1994 BFS did break down the Dollar Funding requests between customer and house
business. However the breakdown was often 50:50, and the figures were often
round numbers. Moreover, it frequently happened that Leeson would give one
figure in the morning for the funds he required, but when the Dollar Funding
request arrived later in the day the figure would be different[316]. Mr Hawes said that he looked at the
requests only occasionally, regarding them as no more than an approximation to
the truth, and so did not notice that they tended to be split 50:50. He
distrusted the information coming from BFS, but felt only investigation in
Singapore could resolve the issue[317]. It followed from this that Mr Hawes should
have realised that the large exposure reports continued to be inaccurate. But
he took no further steps to improve the quality of information coming from
Singapore for inclusion in them until 27 January 1995.
Later
investigations
The
Margin Feed
Totals
of Dollar Funding
RESPONSIBILITY FOR BFS’ TRADING AND
OPERATIONS
INVESTIGATION
OF LEESON’S PROFITABILITY
397.
I can deal briefly with BFS’ local management in Singapore.
Both Mr Bax and Mr Jones gave evidence that they did not regard themselves as
having any responsibility for supervising Leeson’s trading activities[327]. They did not question (or, to be fair,
profit directly from) his activities or the profits he made. Mr Jones was
intended to be in overall charge of compliance at BFS[328] and of the settlement of trades between BFS
and SIMEX, but in practice did nothing[329]. It is one of the extraordinary aspects of
this story that, at all times relevant to D&T’s audits, Mr Jones’ desk was
on the same floor, a few yards away from the BFS settlements staff, and Mr
Jones had responsibility for BFS’ settlements with SIMEX. Yet the settlements
staff appear (whether knowingly or not it is not clear. It was not pleaded, nor
was it put to them, that they were complicit in Leeson’s fraud) to have
systematically falsified BFS’ records of its trades on SIMEX over a period of
two and a half years without Mr Jones knowing anything about it.
i)
in February 1994 Ms Walz included a four-paragraph description
of the SIMEX/Osaka trading as part of a review of risk and funding issues in
the FPG businesses[331];
ii)
in March 1994 Ms Walz provided to Mr Norris approximate
numbers for the profit on the switching business, based on Mr Brindle’s
unofficial calculation[332],
iii)
in April/May 1994 Mr Baker and Ms Lewis visited Tokyo and
Singapore. Mr Baker stated in his witness statement that he carried out
analyses of the potential for price differentials (and therefore arbitrage
opportunities) between SIMEX and the Japanese exchanges, and concluded that
differentials of one or two ticks per contract sometimes existed. He calculated
the possible revenues based on such differentials and current trading volumes
and concluded that the revenue figures could be substantially explained on this
basis. Mr Baker met Leeson, who gave him an explanation of the switching
business which seems to have been in terms of liquidity arbitrage (see
paragraph 219 above)[333],
iv)
in July 1994 Mr Sacranie, who was then responsible for risk
management in BSL, mentioned a potential profit of one tick per contract from
switching in a memo to Mr Norris which discussed BFS’ arrangements with an
agency customer. There is no indication that this was based on anything other
than Leeson’s statement to that effect[334],
v)
until late October 1994, Mr Gueler did not express any doubts
as to Leeson’s profits. Mr Gueler saw all the trades apparently done by Leeson
in his switching business, and, at least between June and October 1994, was
responsible for monitoring his intra-day trading limits. His qualifications
rendered him very well able to assess whether the profits reported were
realistic. His evidence was that he believed there to be good reasons why the
profits were realistic: Leeson enjoyed technical advantages in operating from
the SIMEX pit with an open line and dedicated assistant in Osaka. He believed
that Leeson’s profits came mostly from liquidity arbitrage and other trading
between the house book and customer orders, which was made possible by BFS’
high level of such orders[335]. Indeed Mr Gueler believed that Leeson had
one major customer, “Philippe”, who was engaged in large scale trading and
contributed to Leeson achieving the results he did, and
vi)
the internal audit report, which I deal with below, described
in detail Leeson’s trading. On its face, it both accepted that his profits were
genuine and found that there was no improper activity (for example,
disadvantaging customers by, for instance, “front-running”) involved in
producing them. In fact, as Mr James Baker who drafted it admitted in evidence,
both conclusions were based on Leeson’s unsupported word[336].
“I imagine I heard
somebody say ‘Oh, Nick Leeson had a $3 million day’. I would say that to a
friend of mine… and this person would say ‘No way, no way you can do that. Do
not even listen to that type of story because it is not even possible’.”[338]
404.
The BSL Risk Committee does not seem to have carried out any
review. Likewise the profits were discussed, but apparently not questioned, at
MANCO and EXCO[342]. Eventually, in 1995, ALCO and MANCO became
concerned, but only about the size of Leeson’s positions and whether the bank
could fund them, not about the genuineness of the profits[343].
THE AUDITORS
1992 AUDIT
408.
BFS commenced active trading on SIMEX on 1 June 1992,
though for the first month it used Chase Manhattan to execute trades for it[345]. Its revenues, consisting of commission and
interest, for the period of four months up to 30 September 1992 (the reporting
date for the September 1992 audit) were S$3.83 million (Ł1.35 million) and its
profit before tax was S$3.05 million (Ł1.08 million). Since all BFS’ trades
were booked to clients, these results bore little relation to the results of
BFS’ trading.
“To enable us to express
our opinion [on the statutory accounts], we shall make such tests and enquiries
as we consider necessary. The nature and extent of our tests will vary
according to our assessment of the company’s
systems of internal accounting control. We shall report to the directors or to
the appropriate level of management any material weaknesses in the company’s
systems of internal accounting control which come to our notice and which we
believe should be brought to their attention.
Our audit is designed, in
accordance with normal practice, to enable us to express an opinion on the
accounts. It should not be relied upon to disclose defalcations or other
irregularities, although their disclosures, if they exist, may well result from
the audit tests we undertake.
The foregoing does not
cover maintaining the accounting records and the preparation of accounts, these
being the responsibility of the company’s
directors.”[346]
“2. Subject to the matters noted in paragraph 4
below, in our opinion all the consolidated schedules, as attached, were
prepared in accordance with the [BSL] group accounting policies and
consolidation instructions. The information in them is presented fairly in
conformity with accounting practices generally accepted in the United Kingdom”.
3. We intend to give an unqualified audit opinion on the local
statutory accounts which will be based on the consolidation schedules, adjusted
as necessary to comply with local legal or fiscal requirements or accounting
practices generally accepted locally; and to include any adjustments considered
necessary when the matters in paragraph 4 are resolved.
4. Material unresolved matters
(a) The bank confirmation for this year ended
September 30 1992 is outstanding.
(b)The confirmations for the intercompany balances
are outstanding as at September 30 1992.
(c) Local statutory accounts.”
420.
The Auditing Procedures Questionnaire[353] did not distinguish between the various
Singapore companies. It confirmed that D&T had carried out the audit
properly. It included a positive answer to the question “Have you evaluated
the adequacy of controls within the accounting system and identified whether
reliance on their operation may be possible?” and a negative answer to the
question “Are there any weaknesses in the company’s systems which are
so significant that in your opinion they should be brought to our attention?”
SIMEX AUDITS
426.
SIMEX carried out a regulatory audit in the spring of 1993 and
wrote to BFS with their conclusions on 7 September 1993[356]. One
of the points raised was that on two days in February 1993 BFS had called
insufficient margin from BSL, through ignoring certain subsidiary accounts and
illegitimately taking into account inter-market offsets. It had also taken no
action when BSL failed to respond in due time to a margin call. SIMEX fined BFS
S$23,000[357].
1993 AUDIT
“…management’s
attitude towards control is good. Mr James Bax (Managing Director) and Mr Simon
Jones (Finance Director) are actively involved in the day to day operations of
the companies.
Pressure to ensure that
proper controls are in place also comes from the regulatory bodies, SES [the Stock
Exchange of Singapore] and SIMEX…
The head office in London
oversees the local operations and monthly management reports are sent to the
head office.”[363]
439.
On 28 February 1994 D&T issued their opinion on the
statutory accounts of BFS[367]. This stated that they had audited the
financial statements in accordance with the relevant auditing standards and
that, in their opinion, the financial statements of BFS were properly drawn up
in accordance with statutory requirements and gave a true and fair view of the
state of affairs of BFS. D&T also submitted their regulatory reports to MAS
and SIMEX.
THE INTERNAL AUDIT REPORT
441.
In July 1994 the Internal Audit Department of BSL conducted an
internal audit of BFS, as part of its review of the South Asia region. Prior to
his departure for Singapore, James Baker, the internal auditor, spoke to, among
others, Mr Hawes on 22 June 1994. Mr Hawes raised with him concerns as to the
lack of segregation of Leeson’s functions, as James Baker recorded in his
meeting note:
“Nick Leeson has too
dominant a role looking after both trading (agency and proprietary) and settlements
aspects of the business; there is no deputy to challenge him… TH believes that
SJ basically leaves NL to his own devices. While he has no evidence to suggest
that NL has indeed abused his position, the potential for his doing so needs
examining.”[369]
442.
Mr Sacranie was also concerned about separation of
responsibilities[370]. As discussed at paragraphs 371 to 373
above, Mr Hawes also raised BFS’ need for funding at short notice, though not
the inability to reconcile or explain the Dollar Funding.
(1)
"BF(S)’s
back office should be reorganised so that the General Manager [i.e. Leeson] is
no longer directly responsible for the back office"[372];
(2)
"BF(S)’s
trading activities should be independently reviewed to ensure that regulations
are followed and risk limits observed. A suitably experienced manager should be
appointed to review the records, perform some tests of detail and discuss
activity with BF(S)’s traders"[373]; and
(3)
"London Group Treasury should perform a
comprehensive review of BF(S)’s
funding requirements"[374].
"there is significant
general risk that the controls could be overridden by the General Manager. He
is the key manager in the front and back office."
“Given the lack of
experienced and senior staff in the back office, we recognise that the General
Manager must continue to take an active role in the detailed operations of both
the front and the back office”, including
double-checking the back office’s output and “roles which do not involve
the settlement and recording of transactions, such as liaison with the SIMEX
authorities and the arrangement of funding in conjunction with Group Treasury”.
“Specifically, the
General Manager should not: retain sole responsibility for the supervision of
BF(S)’s back office team; retain cheque-signing or journal-passing powers;
review and sign off [reconciliations].”
“Other responsibilities
relinquished by the General Manager should be taken on by the BS(S)’s Director
of Finance and Operations. The main requirement is to ensure that the
settlement and recording processes are adequately supervised including, for
example:
Daily contact with the
futures settlement supervisor who should be refer [sic]
all significant matters arising in the office for discussion;
Daily review and sign off
of SIMEX reconciliations;
Occasional review of
daily checks of trades recorded on the system to SIMEX reports and trade
tickets; and
Occasional review of
standards maintained over standard procedures…
Management Response:
Nick Leeson, Simon Jones
As agreed with Internal
Audit these are not normal circumstances for BF(S) considering the current
absence of third party customers. Should these emerge, the role of General
Manager will obviously change. However, with immediate effect the General
Manager will cease to perform the functions itemised… The Director of Finance
(BS(S)/BS(F)) will ensure the adequate supervision of all settlement and
recording processes.”
451.
As to recommendation (2) above, no such detailed review of
trading activities was ever carried out. After an initial suggestion from Mr
Jones that Mr Bowser should perform the role of risk manager for BFS, Miss Yong
was appointed to the position, but had not started work by the time of the
collapse.
1994 AUDIT
455.
C&LS were appointed as auditors of BFS by an exchange of
letters dated 11 July and 1 August 1994[377]. C&LS’ formal letter of engagement was
not signed before the crash. The details of the 1994 audit were covered in
opening, but not in evidence (being left for Phase 2) so what follows is
subject to the hearing of oral evidence in due course.
458.
C&LL sent group audit instructions to C&LS on 2
November 1994[380]. C&LS returned their Audit Strategy
Memorandum[381] to C&LL on 23 November 1994. This stated
that “as this is our first year of audit and given the tight reporting
deadline, full early work based on October management accounts would be done,
except for trade and bank confirmations which would be done for year end
balances”. C&LS noted that the control environment was satisfactory and
stated that, in view of this and the high volume of trades, they would do a
system-based audit. They stated, incorrectly, that “BFS does not engage in
any House trading or discretionary trading for its clients.”[382] The section in the Audit Strategy Memorandum
headed “Balance Sheet Review” compared the December 1993 balance sheet
audited by D&T with that as at 30 September 1994[383]. The section showed that as at 30 September
1994 the figure for “Margin deposits with SIMEX and bank balance”
exceeded that for “Margin deposits placed by customers” by S$55 million.
But there is no indication that C&LS attached any significance to this.
i)
on or before 14 January 1995 C&LS noted the discrepancy
between the settlement variation balance shown on BFS’ Broker Reconciliation
sheet and that in BFS’ books, referred to at paragraphs 311 and 312 above.
Leeson attempted to explain this by inventing a fictitious over-the-counter
transaction, brokered by BFS, between either BNP or BSL (there were several
versions of the story) and SLK (Spear Leeds & Kellogg). He said that a
premium of Ą7.7 billion was due from SLK. On 2 February 1995 Leeson produced
forged confirmations from SLK and BSL and a forged bank statement from
Citibank, which appeared to show that SLK had repaid the Ą7.7 billion. These
caused C&LS to sign their report on the consolidation schedules on 3
February 1995 (though noting the details of the alleged transaction in their
covering fax);
ii)
on 27 January 1995 C&LS sent to C&LL a status report[387], which included their understanding of the
SLK transaction;
iii)
on 3 February 1995 C&LS sent to C&LL the consolidation
schedules, their report on the schedules, and a covering fax (with their latest
understanding of the SLK transaction)[388];
iv)
on 23 February 1995 C&LS confirmed to C&LL that their
first subsequent events review had thrown up no events affecting signature of
the group accounts[389];
v)
C&LS were due to sign the statutory accounts by 8 March
1995[390].
THE COLLAPSE
465.
On 24 February 1995 Leeson faxed his resignation to BFS. Over
the weekend of 25/26 February a team from Barings London and an official from
the Bank of England arrived in Singapore. In London, negotiations to sell the
Barings Group as a going concern continued through the weekend but failed,
following which Plc, BB&Co and BSL were placed in administration. On 27
February SIMEX instructed BFS to stop trading and then, when it failed to pay
its margin call that morning, suspended it. BFS was put into interim judicial
management on the same day.
466.
SIMEX appointed OCBC Bullion & Futures Ltd to close out
BFS’ positions. This involved:
i)
identification of positions held for true third party
customers, and transfer of the positions to the customers concerned,
ii)
matching off all remaining long and short futures positions
and closing out on the market the resulting net positions, at a cost of
US$252,353,074 and
iii)
negotiating a “sale” of BFS’ portfolio of loss-making open
option positions (including a small number of options booked to BSL accounts
which had a positive value) to a third party purchaser at a cost of US$500
million[391].
467.
After taking into account the security and margin held by
SIMEX and SIMEX’s costs of liquidating BFS’ positions, this process resulted in
a payment by SIMEX to BFS of US$57 million[392]. However BFS owed BSL, BSLL and BSJ a total
of US$1,191 million (see paragraph 324 above), and its inability to repay them
brought down the Group.
THE NEGLIGENCE ALLEGED AGAINST D&T
The pleaded case
1992 audit
i)
D&T failed adequately to take into account in their audit
that Leeson controlled front and back offices;
ii)
D&T failed to confirm and reconcile all balances and open positions;
iii)
D&T allowed the Ą670m to be treated as received on 30
September 1992 and failed to discover the various associated irregular
accounting entries;
iv)
D&T failed to consider whether the confirmations of
inter-company balances, in particular that for the BSL segregated account, were
correct;
v)
D&T failed to seek from BSL confirmation of the correct
balance on the 88888 account;
vi)
D&T failed to review the 88888 account, when they ought to
have done so because it was understood to be an error account, the Ą670m had
been credited to it and SIMEX statements showed numerous credits to it; they
failed to realise the account was not being operated as an error account or
that it showed substantial deficits; and failed to establish how the deficits
on the account had been discharged;
vii)
D&T accepted the apparent confirmation of the 88888
account despite it being purportedly sent and received by Leeson;
viii)
D&T failed to carry out the enquiries necessary to
complete Form 20;
ix)
D&T reported that BFS’ internal controls were adequate,
when they were not;
x)
D&T reported to MAS that BFS’ accounting records complied
with section 25 of the Singapore Futures Trading Act and that the segregated
account had been properly maintained, when they had not been;
xi)
D&T gave unqualified reports on BFS’ financial statements
and the group consolidation package even though they did not show a true and
fair view of BFS’ affairs;
xii)
D&T failed to report to MAS the matters of which they
ought to have been aware.
1993 audit
i)
D&T failed to recognise that files for the 88888 account
had not been produced to them for their audit;
ii)
D&T failed to discover the open option positions on the
88888 account; and
iii)
D&T failed to investigate the excess of margins deposited
with SIMEX over amounts owed to customers.
i)
in 1992 properly to enquire into the booking on 30 September
of the Ą670 million received from BSL on 1 October;
ii)
in both years to check that all open positions in CONTAC were
included in the confirmation requests sent to customers,
iii)
in both years to check that the total of open positions shown
in the customer confirmations agreed with the total of open positions as stated
in SIMEX’s records. The lack of segregation of Leeson’s duties was a factor
rendering such a test necessary.
Both
(ii) and (iii) were capable of causing loss only in 1993, as there were no
unauthorised open positions in 1992;
iv)
in 1993 to obtain a customer confirmation for the 88888
account; and
v)
in 1993 to enquire into the fact that BFS’ margin deposited
with SIMEX exceeded the margin deposited with it by its customers.
EXPERT WITNESSES
THE
FORM OF D&T’S AUDIT
THE FAILURE TO TEST
FOR OPEN POSITIONS
The parties’ cases
Audit guidelines
“Substantive procedures are designed to obtain evidence as to the
completeness, accuracy and validity of the data produced by the accounting
system.
“They are of two types:
·
tests of details of transactions and balances;
·
analysis of significant ratios and trends…”
“The auditor… needs reasonable assurance that transactions are
properly recorded in the accounting records and that transactions have not been
omitted. Internal controls… may contribute to the reasonable assurance the
auditor seeks.”
“3. The audit evidence should, in total, enable the auditor to
form an opinion on the financial information…
“4. The auditor’s judgement as to what is sufficient appropriate
audit evidence is influenced by such factors as:
(a) the degree of risk of misstatement. This
risk may be affected by:
(i)
the nature of the item,
(ii)
the adequacy of internal control,
(iii) the nature of the business carried on
by the entity…”
“5. …the auditor seeks reasonable assurance that fraud or error
which may be material to the [financial] information has not occurred… The
auditor therefore should plan his audit so that he has a reasonable expectation
of detecting material misstatements in the financial information resulting from
fraud or error…
“6. Due to the inherent limitations of an audit there is a
possibility that material misstatements of the financial information resulting
from fraud and, to a lesser extent, error may not be detected. The subsequent
discovery of [such material misstatements] does not, in itself, indicate that
the auditor has failed to adhere to the basic principles governing an audit…
“8. The risk of not detecting material misstatement resulting from
fraud is greater than the risk of not detecting a material misstatement
resulting from error, because fraud usually involves acts designed to conceal
it… Unless the auditor’s examination reveals evidence to the contrary, he is
entitled to accept representations as truthful and records and documents as
genuine. However the auditor should plan and perform his audit with an attitude
of professional scepticism, recognising that he may encounter conditions or
events during his examination that would lead him to question whether fraud or
error exist…
“11. In planning and performing his examination, the auditor
should take into consideration the risk of material misstatement of the
financial information caused by fraud or error.
“13. If circumstances indicate the possible existence of fraud or
error, the auditor should consider the potential effect on the financial
information. If the suspected fraud or error could have a material effect on
the financial information, he should perform such modified or additional procedures
as he determines to be appropriate.”
Audit risk
D&T’s analysis of audit risk
The risk of unauthorised trading
510.
Mr Swinson contended, and Mr Mah, Mr Spence and Dr Fitzgerald
(D&T’s expert on banking management)[397]
accepted, that, where a company has authorised its employee to trade on a
market in the company’s name, there will always be an inherent risk that the
auditor will receive inaccurate trading records as a result of unauthorised
trading. A futures broker is an obvious example of such a company. Thus at
paragraph 6.66 of his report Mr Spence listed, as one of the three principal
audit risks affecting a futures broker, “operational risk, including the
risk of unrecorded or incorrectly recorded transactions, either caused by
concealment of unauthorised trading or accounting breakdown.” He agreed in
the course of cross-examination, as did Mr Mah, that unauthorised trading was
an inherent risk for a futures broker and would usually involve concealment.
Non-segregation of duties
Increased risk of unauthorised trading
Mitigating factors
Leeson was a reviewer, not a doer
Supervision of Leeson
“Nick Leeson has too dominant a role looking after both trading
(agency and proprietary) and settlements aspects of the business; there is no
deputy to challenge him… TH believes that SJ basically leaves NL to his own
devices. While he has no evidence to suggest that NL has indeed abused his
position, the potential for his doing so needs examining.”[403]
“It was quickly apparent from my work that Leeson had an
all-embracing role within BFS which put him in charge of the trading of the
company, for both house and clients, and in charge of the settlements department…
Leeson had sole responsibility for the supervision of BFS’ back office team, he
had cheque-signing and journal-passing powers, he was reviewing and signing off
SIMEX deposit, variation margin and collateral reconciliations and he was
reviewing and signing off bank reconciliations. It was also clear that Simon
Jones had little, if any, role in the running of the settlements department of
BFS. The indications that Leeson was in charge with little supervision by
Jones, which I had received during my audit planning… were confirmed. I also
found that, although Rachel Yong, the Financial Manager for BSS, prepared the
accounts for BFS, she had no proper involvement in the accounts for BFS, but
simply took whatever trading balances Leeson gave and produced BFS’ accounts
from the figures given to her by Leeson.[404]”
BFS had no funds of its own[407]
Execution-only broker
Small number of related company customers
Conclusion on audit
risk
Effect of audit risk on audit procedures
D&T’s planning
process
546.
Whether because of the simplicity of BFS’ balance sheet and
its limited number of customers (D&T’s reason[412])
or because SAG 7 required it where there was limited segregation of duties
(BFS’ reason), the parties agreed that D&T was correct to carry out a
substantive audit of BFS. This required D&T to obtain reasonable assurance
that the figures in the financial statements were correct and complete,
otherwise than from the operation of the company’s systems and controls.
“we had no reason to identify the possibility of BFS entering
unrecorded [which he explained as including
unauthorised] transactions as a risk, and did not do so. Accordingly
there was no reason for us to devise procedures to test for such transactions”[414],
he
was referring to the identification of specific risks in the planning process
required by D&T’s audit manual. When his comment is interpreted in that
sense, Mr Swinson’s evidence was to similar effect.
Lack of segregation
of duties
Size of risk
What tests should D&T have conducted?
i)
D&T should have controlled the procedure for sending out
requests for customer confirmations;
ii)
D&T should have conducted a test for open positions, of
the sort devised by Mr Swinson; and
iii)
D&T should have obtained a customer confirmation for the
88888 account.
Confirmation
procedure
The need to test open positions
The effect of the
audit guidelines
How should D&T
have tested for completeness?
The assurance to be
gained from tests of the financial balances
Risk of manipulation of
balances
i)
BFS was able to point to no audit literature or guidance which
suggested such a test, nor to produce an expert witness who had conducted such
a test when auditing a futures broker (though Mr Swinson himself had conducted
it once, on the audit of a commodity broker 27 years ago);
ii)
C&LS did not carry out such a test in their 1994 audit.
Nor did C&LL in their audits of BSL;
iii)
the Singapore Public Accountants Board, which brought
disciplinary proceedings against Mr Mah arising out of the BFS audits[419],
did not bring any charge based on his failure to perform such a test.
“[A professional man] must bring to any professional task he
undertakes no less expertise, skill and care than any other ordinarily
competent members of his profession would bring, but need bring no more. The
standard is that of the reasonable average. The law does not require of a
professional man that he be a paragon, combining the qualities of polymath and
prophet.”
Confirmation of the 88888 account
Conclusion
THE
Ą670 MILLION IN SEPTEMBER 1992
Leeson’s concealment
·on or
before 30 September, he requested BSL to remit to BFS’ customer account the sum
of Ą670 million for value 1 October. It seems likely that he made this request
to Mr Bowser, head of the BSL Settlements Department at the time. Before me Mr
Bowser had at least a vague recollection of Leeson telephoning him twice to ask
for advance margin, giving as explanations market volatility or a holiday. It
seems likely that one of these occasions was in September 1992, and the other
was when Leeson repeated the trick in December 1992;
· BSL
personnel completed and authorised a payment request form on 30 September 1992,
requesting payment for value on 1 October[423].
This was authorised by the signature of Mr Bowser. It was given effect to by a
telex (which is not in evidence) from the BSL payments office, apparently
direct to Barclays Bank in Tokyo, instructing it to make payment to BFS. In the
books of BSL (which were not available at BFS so that an auditor of BFS would
have been unaware of the fact) the payment was recorded as being made on 1
October 1992;
· the
sum was received by Citibank in Singapore into BFS’ customer account, via
Citibank in Tokyo, on 1 October. This is evidenced by a faxed advice from
Citibank Singapore to BFS, which is dated 1 October and states “Credit
advice: Yen 670,000,000 Value 10.01.92 [using American date notation].
We credit your account no. 0/888832/025 [BFS’ customer account]”[424];
· Miss
Hassan prepared a journal entry which would have correctly credited the receipt
on 1 October to the BSL Segregated Customer account in CONTAC. It is not known
whether the receipt was in fact so credited in CONTAC. However Leeson deleted
that journal entry, either on 1 October (in which case it is likely that the
entry was never made in CONTAC) or on 6 October (in which case the credit in
CONTAC must have been retrospectively reversed)[425],
· instead,
Riselle Sng made a journal entry crediting the sum to the 88888 account in
CONTAC on 30 September. There is no evidence whether she did this on her own
initiative or not, though the strong supposition is that it was on the
instructions of Leeson. Miss Sng gave evidence before me but was not questioned
on this point. There were in evidence both the journal entry prepared by Miss
Sng (debiting Bank and crediting the 88888 account) and an extract from the
daily activity statement for the 88888 account[426].
That carried the date of 30 September and showed the Ą670m as cash received
into that account and that the account holder was BFS itself;
· this
credit gave rise to a difference between BFS’ books (which showed the sum as
received on 30 September) and BFS’ bank account (which showed it as not
received on that date[427]).
The difference was shown in the BFS bank reconciliation for 30 September, prepared
by Miss Hassan on 1 October. In it she described the difference as “Funds
due from BSL – Seg A/C”[428];
· crediting
the Ą670 million to the 88888 account left a small credit on the account, of
Ą5.6m. Given D&T’s substantive approach to the 1992 audit, this balance
would need to be confirmed by the customer. Leeson prepared a confirmation
request to BSL, describing the account as “Baring Securities Limited London
(88888)”, in respect of this balance. It is agreed that he forged Mr
Bowser’s signature on it, dated 7 October[429],
· on
6 October Leeson created a journal entry, transferring the Ą670m from the 88888
account in CONTAC to the BSL Segregated Customer account[430],
· when
Leeson carried out a similar manoeuvre in December 1992, his fax asking Mr
Bowser for Ą395m said “As with the end of September, please arrange to pay
an additional margin call of JPY 395m for value 4.1.93. As before, we will
return this amount as soon as possible after this date.”[431] The
text of the December 1992 fax implies that the September funds were returned to
BSL. No individual repayment of the Ą670 million has been found but, once it
had been credited to BSL’s account with BFS, it would increase the equity
balance. Therefore it would automatically be taken into account in future
margin calls and repayments of margin to BSL[432].
D&T’s investigation
“Baring Futures took into their books the receipt of funds based
on customer advice that they will transfer funds value 30/9/92. However cash
was not received as at 30/9/92.
“Sighted Citibank fax advising the receipt of $670m [sic] value
1/10/92”
The parties’ arguments
Factual witness evidence
Cut-off and window dressing
“In identifying specific risks, we need to identify how material
mis-statements might occur. There are six types of possible mis-statements…:
…Cut-off: Transactions are recorded in accounts in the wrong
period.”[434]
and
again:
“The incidence of misstatements is greater for transactions
recorded (or improperly omitted from recording) at or near the end of an
accounting period (i.e. cutoff)”[435]
“the process by which transactions are recorded before the year
end but then reverse or mature soon after the balance sheet date. The purpose
and substance of such transactions is to alter the appearance of the balance
sheet.”
“1. Unusual transactions, especially near the year end, that have
a significant effect on earnings.
2. Transactions with
related parties.”
“The fact that we have not identified a specific risk relating to
an account does not mean that a misstatement in that account cannot exist. Our
audit plan is designed to ensure that, if a material misstatement exists, we are
reasonably likely to detect it. Therefore, in developing our audit plan, we
need to ensure that none of the six types of potential errors that may relate
to each significant account balance or to the financial statements as a whole [one of which is cut-off] is overlooked.”[437]
“Select material payments from bank statement and ensure that
these are recorded in the correct accounting period. Basis: amounts above
$5,000.”
617.
Whether that was so or not, Mr Mah accepted that in this audit
D&T looked at cut-off as being one of the areas of risk[439]. Mr
Spence accepted the importance of ensuring that transactions were recorded in
the right accounting period and that, when considering the Ą670m, D&T were
addressing cut-off[440].
Therefore it can be no explanation, for example for Miss Koo not looking at the
account details on the daily activity statement for the 88888 account, that she
was just auditing the cash figure and needed to do no more than check that the
cash had been received. She needed to check also that it had been recorded in
the right accounting period.
The conventions as to recording payments and
receipts
621.
Mr Mah and Mr Spence accepted Mr Swinson’s conventions as the
general rules to be applied[442].
However Mr Spence said that, since the conventions were not written down, Miss
Koo would not necessarily have thought in terms of them. He contended that the
Ą670m came within an exception to the conventions. He identified two possible
exceptions. The first was that the payment was equivalent to an unbanked
cheque, a suggestion which he put in his report but did not strenuously
maintain before me. The second was that D&T might have assumed that BSL had
intended the payment to be made on 30 September and the late receipt was due to
the time difference between London and Singapore.
The Bank Reconciliation and BFS’ explanation
The daily activity statement for the 88888
account
“I think even to get to that point she would have to be unhappy
about the consistency point we discussed this morning, about the agreement of
the balances. So to get to that point where she was looking for the double
entry, I think she would have to have some reason to be unhappy with the
overall position[447].
631.
When Mr Spence was asked why Miss Koo should have looked at
the daily activity statement at all if she were not looking for the double
entry, he was unable to suggest an alternative explanation[448]. In
fact, Mr Spence’s own conditions requiring Miss Koo to look for the double
entry seem to have been satisfied. The BSL segregated account confirmation was
not received until late on the evening of 7 October (see paragraph 599 above).
So it was not available to satisfy her that the Ą670m had been recorded on the
right date. On that basis, it followed from Mr Spence’s evidence that he agreed
with Mr Swinson that Miss Koo should have checked where in BFS’ books the Ą670m
appeared.
Client confirmations
634.
Mr Spence accepted that there is no evidence in the audit
files that Miss Koo relied upon the BSL confirmation in this context. Mr Mah
did not rely upon the argument in his February 2000 witness statement, though
he denied in evidence that this was because he did not rely on the point at the
time. We have no evidence from Miss Koo.
The order of events
Conclusion
i)
the Bank Reconciliation and BFS’ explanation of it should have
caused D&T to look for clear evidence that BSL had booked the Ą670m to the
same accounting period as had BFS;
ii)
in seeking such evidence, Miss Koo looked at the daily
activity statement which showed the money being credited to a client account.
She should have noticed that the account concerned was in the name of BFS, and
was not the BSL segregated account;
iii)
Miss Koo’s work on the confirmations, which she concluded
subsequently, did not provide clear evidence that BSL had booked the payment to
the same accounting period as had BFS, and was quite inconsistent with the
payment being credited to an account in BFS’ name.
Causation
649.
In my view BFS is correct as to the test to be applied: see BBL
v Eagle Star, [1997] AC 191, at page 221-2. However that issue is rendered
irrelevant, and D&T’s hypotheses are answered, by BFS’ further contention.
This was that, if D&T had not been negligent, they would have discovered
that the Ą670m had been credited, not to the BSL segregated account, but to the
88888 account in BFS’ name. In the light of that, neither a forged balance
confirmation from BSL nor a forged fax stating that BSL had treated the payment
as made on 30 September would have answered the questions D&T should have
asked.
THE 1993 IMBALANCE OF MARGINS
SIMEX rules on margins
The 1993 balance sheet
The parties’ cases
Accounting guidelines
“study of relationships among elements of financial information
that would be expected to conform to a predictable pattern…”
“Investigating unusual fluctuations and items
13. When analytical procedures identify unusual
fluctuations and items, that is, relationships that are unexpected or
inconsistent with evidence obtained from other sources, the auditor should
investigate them.
14. The investigation usually begins with inquiries
of management and the auditor should: corroborate management’s responses – for
example by comparing them with his knowledge of the business and other evidence
obtained during the course of the audit; [and] consider the need to apply other
audit procedures based upon the results of such inquiries.
15.Further investigation… would be required if
management is unable to provide an explanation or if the explanation is not
considered adequate.
Analytical procedures used in the overall review
16. In forming his overall conclusion that the
financial information as a whole is consistent with his knowledge of the
entity’s business…, the auditor should perform analytical procedures at or near
the end of the audit. The conclusions drawn from the results of such procedures
are intended to corroborate conclusions formed during the audit on individual
items of financial information and assist in arriving at the overall conclusion
as to the reasonableness of the financial information. However they may also
identify areas requiring further procedures.”
The need to investigate
Would D&T have been entitled to accept
Leeson’s explanation?
“seek corroborative audit evidence from sources inside or
outside the entity, evaluate whether the representations… appear reasonable and
consistent with other audit evidence obtained…, and consider whether the
individuals making the representations can be expected to be well-informed on
the matter.”
675.
D&T contended that this paragraph did not apply, as the
matter was not a material one, given the stage the audit had reached. But the
purpose of the analytical review, according to SAG 13, paragraph 16, was “to
corroborate conclusions formed during the audit on individual items of
financial information and assist in arriving at the overall conclusion as to
the reasonableness of the financial information”. If the result of the
review was contrary to those conclusions, then (quite apart from the rest of
SAG 13, which I deal with next) resolution of that contradiction must have been
a material matter.
677.
Mr Spence agreed that, if management responses were given to
D&T in relation to the imbalance, they would have to be corroborated[462].
It is true that he had been referred to paragraph 14 at that point, and was not
referred to paragraph 16. But he was dealing with the subject of what D&T
should have done after spotting the margin imbalance at the review stage. He
agreed with the proposition put to him, that management responses would have to
be corroborated. Insofar as Mr Spence’s evidence generally had any weight, it
was as evidence of good audit practice, rather than just evidence as to what
the SAGs say (especially since he had no experience of auditing in Singapore),
and I take his evidence on the topic in that light.
i)
margin calls in relation to heavy trading on 29 and 30
December[463], resulting
in BFS paying margin to SIMEX on T+1 (prior to the year-end) but the customers
not having to pay margin until T+3 (that is, within the three business days
allowed by SIMEX rules, but after the year-end); and/or
ii)
BFS’ customers paying margin later than T+3.
680.
But in fact the explanation would have been inconsistent with
the tests on margining which D&T had done. Their workpapers[464],
produced in the early work prior to the year end, show that BSL paid margin on
T+1 and BSJ paid on T+2 (this was true for every one of the 20 payments for
which test results are given, save for one payment of Ą230m, of which Ą214m was
paid on T+1 and Ą29m on T+3). So the explanation would have been implausible
but, if believed, should have led to further investigation.
Others saw the imbalance and did not
react
Conclusion
692.
In my judgement, this failure to investigate by D&T
constituted negligence.
THE COUNTERCLAIM
BASED ON LEESON’S REPRESENTATIONS
D&T’s case
i)
the representation given to Miss Koo on or about 7 October
1992 in the course of her audit of Cash to explain the reconciling item of
Ą670m in the bank reconciliation. This is fully described at paragraph 593
above. As recorded on the bank reconciliation[467],
the representation was that:
“[The Ą670m represented] Funds due from BSL – Seg A/C”. “Barings
Futures took into their books the receipt of funds based on customer advice
that they will transfer funds value 30/9/92. However cash was not received as
at 30/9/92.”
ii)
the representation as to the nature of the 88888 account,
given to Miss Koo on or about 20 October 1992 in the course of her testing of
BFS’ data processing system. As recorded on her worksheet[468],
the representation was that:
“The a/c 88888 represent trade errors done by Baring Futures,
thus no commission is charged. NB: The errors done by Baring Futures is fully
absorbed by Baring Securities (London)”
iii)
the representation that the true balance on the 88888 account
as at 30 September 1992 was Ą5,685,310. This was comprised in a fax
confirmation, apparently from Mr Bowser but actually created by or at the
instigation of Leeson. It was shown to Miss Koo on or about 7 October 1992 in
the course of her work on the amounts due to related companies (see paragraphs
590 and 597 above).
695.
D&T alleged the following:
i)
the representations were made by or at the instigation of
Leeson,
ii)
they were false,
iii)
they were made with the intention of deceiving D&T,
iv)
D&T relied upon the representations in signing their 1992
audit certificate and thus putting their name to BFS’ financial statements, and
their action in doing so was reasonable,
v)
as a consequence of the representations, D&T suffered loss
and damage in an amount equal to any liability that they may have to BFS, and
vi)
BFS was responsible for Leeson’s actions in making the
representations.
Vicarious liability
699.
Both parties relied on The Ocean Frost [1986] 1 AC 717,
in which Lord Keith considered the liability of an employer for the deceit of
its employee. He stated, at page 782, that in cases of fraudulent
misrepresentation, “the essence of the employer’s liability is reliance by
the injured party on actual or ostensible authority” and, later on that
page, that:
“At the end of the day the question is whether the circumstances
under which a servant has made the fraudulent misrepresentation which has
caused loss to an innocent party contracting with him are such as to make it
just for the employer to bear the loss. Such circumstances exist where the
employer by words or conduct has induced the injured party to believe that the
servant was acting in the lawful course of the employer’s business. They do not
exist where such belief, although it is present, has been brought about through
misguided reliance on the servant himself, when the servant is not authorised
to do what he is purporting to do, when what he is purporting to do is not
within the class of acts that an employee in his position is usually authorised
to do, and when the employer has done nothing to represent that he is
authorised to do it.”
“the wrong of the servant or agent for which the master or
principal is liable is one committed, in the case of a servant, in the course
of his employment, and, in the case of an agent, in the course of his
authority.”
Course
of employment
“Certainly an employer may be vicariously responsible for acts
which are intended or wilful, or which are dishonest or even fraudulent (see Lloyd v Grace Smith & Co), but the
employees’ action in this case in concealing, not only their own frauds, but
the frauds of each other, does not have about it the character of conduct which
can be said to be undertaken in the course of employment. It was dramatically
and deliberately hostile to the employer’s interest; it cannot be viewed as
merely an unauthorised mode of performing an authorised duty; it cannot be said
to be ‘acts to which the ostensible performance of his master’s work gives
occasion or which are committed under cover of the authority the servant is
held out as possessing or of the position in which he is placed as a
representative of his master’ (see Deatons v
Flew)…”
“To my mind, therefore, the interests of the fraudsters in
concealing the frauds and the interests of the company were antithetical in the
extreme. It would be inappropriate to hold the company responsible pursuant to
either the principle of corporate identification, the doctrine of imputed
negligence or the concept of vicarious liability. These doctrines are
notoriously elastic in their definition and application, but they are not so
elastic that they must be extended to behaviour which was essentially part of a
programme of fraudulently bilking the company.”
706.
BFS contended that the two recent House of Lords authorities
of Lister v Hesley Hall [2001] 2 WLR 1311 and Dubai Aluminium v
Salaam [2002] 3 WLR 1913 support its argument. In the former, owners of a
children’s home were found liable for the acts of sexual abuse committed by the
warden. BFS pointed to the emphasis which their Lordships placed on the need
for a close connection between the wrongful act and the employment. Thus Lord
Steyn stated at paragraph 20:
“If this approach to the nature of employment is adopted [that propounded by Salmon LJ in Rose v Plenty], it is not necessary to ask the simplistic
question whether in the cases under consideration the acts of sexual abuse were
modes of doing unauthorised acts. It becomes possible to consider the question
of vicarious liability on the basis that the employer undertook to care for the
boys through the services of the warden and his employment. After all, they
were committed in the time and on the premises of the employers while the
warden was also busy caring for the children.”
Scope of
authority
“Generally speaking, [the employee’s] act will be within his
ostensible authority when it is within that class of acts which a person in his
position usually has authority to perform; it will not be within his ostensible
authority, either when it does not fall within that class of acts, or where, in
the case of the particular servant, his authority is limited and the third
party has notice of the limitation on his authority.”
Special
rule of attribution
Causation
Causation
in deceit claims
721.
I concluded in my judgment on the preliminary issue that
causation is a requirement in a claim for deceit (paragraphs 126 to 131). I
also noted the two approaches to causation represented by Lord Steyn’s judgment
in Smith New Court v Scrimgeour Vickers (Asset Management) Ltd, [1997] AC 254, and Lord Hoffmann’s judgment in Environment Agency v Empress Car Co
(Abertilley) Ltd, [1999] 2 AC 22. In the former case, Lord Steyn equated
and approved the tests of whether the alleged deceit was “a substantial
factor in producing the result”, and whether “in common sense terms
there was a sufficient causal connection”. In the latter case, Lord
Hoffmann looked to the purpose and scope of the rule concerned (paragraphs 134
to 139). This dichotomy is reflected in the speech of Lord Nicholls in Kuwait
Airways v Iraqi Airways (No.s 4 and 5) [2002] 2 WLR 1353, from which I
quote more extensively later in this judgment. At paragraph 71, Lord Nicholls
explained that the court will first apply a simple “but for” test, and then go
on to make a value judgement:
“In most cases, how far the responsibility of the defendant ought fairly
to extend evokes an immediate intuitive response. This is informed common sense
by another name. Usually there is no difficulty in selecting, from the sequence
of events leading to the plaintiff’s loss, the happening which should be
regarded as the cause of the loss for the purpose of allocating responsibility.
In other cases, when the outcome of the second enquiry is not obvious, it is of
crucial importance to identify the purpose of the relevant cause of action and
the nature and scope of the defendant’s obligation in the particular
circumstances. What was the ambit of the defendant’s duty? In respect of what
risks or damage does the law seek to afford protection by means of the
particular tort? Recent decisions of the House have highlighted the point.”
723.
In my earlier judgment I also quoted from the decision of the
Court of Appeal in Standard Chartered Bank v Pakistan National Shipping Corp
(No. 4) [2001] QB 167. In that case, the Court of Appeal decided that the
maker of a fraudulent statement is liable for all losses caused to a
representee who is induced by it to enter into a transaction. This is so even
if the representee was negligent in doing so. As long as the deceit was a cause
of the claimant’s loss, it is to be treated as the only cause. The decision of
the Court of Appeal has since been reversed in part by the House of Lords
([2002] 3 WLR 1547), but without affecting that element of the judgment.
D&T’s
negligence in not detecting the misrepresentations
·
representation (i) (explanation of the Ą670m
reconciling item): I have already concluded (see paragraphs 643 and 644 above)
that D&T were negligent in their investigation of the Ą670m reconciling
item and in accepting the explanation offered for it;
·
representation (ii) (as to the nature of the 88888
account): it was not pleaded that D&T were negligent in accepting this
representation. However BFS alleged that this representation was part of the
concealment of the 88888 account, which D&T should have detected. When
reviewing the credit of the Ą670m to the 88888 account, D&T should have
asked the purpose of the account. An explanation that it was an error account
should have seemed extraordinary and caused D&T to investigate the account;
·
representation (iii) (as to the balance on the 88888
account): if D&T had not been negligent in their investigation of the Ą670m
reconciling item, they would have found that that item had wrongly been
credited to the 88888 account as of 30 September 1992. Therefore they would
have detected that the representation as to the balance on the 88888 account
was false.
Causation
for representations (i) and (iii)
“Informed
common sense”
“However negligent the party may have been to whom the incorrect
statement has been made, yet that is a matter affording no ground of defence to
the other. No man can complain that another has too implicitly relied on the
truth of what he has himself stated” (per Lord
Cranworth LJ at p.710)
“Concentrating on the tort measure, the remoteness test
whether the loss was reasonably foreseeable had been authoritatively laid down
in The Wagon Mound in respect of the tort of negligence a few years
before… Doyle v Olby (Ironmongers) Ltd settled that a wider test applies
in an action for deceit. The dicta in all three judgments, as well as the
actual calculation of damages in Doyle v Olby, make clear that the
victim of the fraud is entitled to compensation for all the actual loss
directly flowing from the transaction induced by the wrongdoer. That includes
heads of consequential loss.”
The
purpose and scope of the rule: Empress Car and Reeves
“… one cannot give a common sense answer to a question of
causation for the purpose of attributing responsibility under some rule without
knowing the purpose and scope of the rule. Does the rule impose a duty which
requires one to guard against, or makes one responsible for, the deliberate
acts of third persons? If so, it will be correct to say, when loss is caused by
the act of such a third person, that it was caused by the breach of duty. In
Stansbie v. Troman, Tucker L.J. referred to a statement of Lord Sumner in
Weld-Blundell v. Stephens, in which he had said:
‘In general, even though A is in
fault, he is not responsible for injury to C which B, a stranger to him,
deliberately chooses to do. Though A may have given the occasion for B's
mischievous activity, B then becomes a new and independent cause.’
“Tucker L.J. went on to comment:
‘I do not think that Lord Sumner
would have intended that very general statement to apply to the facts of a case
such as the present where, as the judge points out, the act of negligence
itself consisted in the failure to take reasonable care to guard against the
very thing that in fact happened.’
“Before answering questions about causation, it is therefore first
necessary to identify the scope of the relevant rule. This is not a question of
common sense fact; it is a question of law. In Stansbie v. Troman the law
imposed a duty which included having to take precautions against burglars.
Therefore breach of that duty caused the loss of the property stolen.”
“‘the free, deliberate and informed act or omission of a human
being, intended to exploit the situation created by the defendant, negatives causal
connection.’ However, as Hart and Honoré also point out…, there is an exception
to this undoubted rule in the case in which the law imposes a duty to guard
against loss caused by the free, deliberate and informed act of a human being.
It would make nonsense of the existence of such a duty if the law were to hold
that the occurrence of the very act which ought to have been prevented
negatived causal connection between the breach of duty and the loss.”
Causation
for representation (ii)
Applicability
of Reeves
Inducement
Contributory
negligence
Conclusion
THE COUNTERCLAIM
BASED ON MR JONES’ REPRESENTATIONS
“it would need to be a very special case before carelessness by
… the representee would make it just and equitable to reduce the damages
payable to compensate [the representee] for loss suffered by it in consequence
of doing the very thing which, in making the representation, [the representor]
intended should happen.”
“It was said that during the whole of the negotiations Captain
Sprye not only left Sir Thomas Reynell at perfect liberty to consult his
friends and professional advisers, but even on several occasions recommended
him to do so. To a great extent this certainly was the case; and if the relief
sought in this suit had rested on mere mistake, if Captain Sprye had not by
misrepresentations of fact, which I cannot treat as unintentional, led Sir
Thomas Reynell to believe that his rights were different from what in truth
they were, it may be that the argument to which I am now adverting would have
prevailed. In such a case, perhaps, this court might have considered that it
was the folly of Sir Thomas Reynell to have acted without advice, and might
have refused to assist any person who was so singularly little alive to his own
rights. Qui vult decepi, it is said, decipiatur. But no such question can arise
in a case like the present, where one contracting party has intentionally
misled the other…”
778.
Finally Sir Donald Nicholls referred to Nocton v Lord
Ashburton [1914] AC 932. In that case a solicitor had failed to make full
disclosure of his interest in a transaction, and grossly misled his client, in
advising his client to enter into it. The Court of Appeal held him to have been
fraudulent. The House of Lords overturned that, but found him to have been in
breach of his fiduciary duty. It is therefore not surprising that the House
rejected the solicitor’s argument that the client’s claim should fail altogether
because, if the client had pieced together various facts of which he had known
18 months before, he might have realised the truth. Even now that the 1945 Act
is available, the courts in recent times have refused to apportion blame in
cases of breach of fiduciary duty: Alliance and Leicester v Edgestop [1993]
1 WLR 1462.
CAUSATION OF LOSS
“69How then, does one identify a plaintiff’s “true
loss” in cases of tort? This question
has generated a vast amount of legal literature. I take as my starting point the commonly accepted approach that
the extent of a defendant’s liability for the plaintiff’s loss calls for a
twofold enquiry: whether the wrongful conduct causally contributed to the loss
and, if it did, what is the extent of the loss for which the defendant ought to
be held liable. The first of these enquiries
widely undertaken as a simple “but for” test, is predominately a factual
enquiry. …
70The second enquiry, although this is not always
openly acknowledged by the courts, involves a value judgment (“ought to be held
liable”). Written large, the second
enquiry concerns the extent of the loss for which the defendant ought fairly or
reasonably or justly to be held liable (the epithets are interchangeable). To adopt the language of Jane Stapleton in
her article… the enquiry is whether the plaintiff’s harm or loss should be
within the scope of the defendant’s liability, given the reasons why the law
has recognised the cause of action in question. The law has to set a limit to the causally connected losses for
which a defendant is to be held responsible.
In the ordinary language of lawyers losses outside the limit may bear
one of several labels. They may be described as too remote because the wrongful
conduct was not a substantial or proximate cause, or because the loss was the
product of an intervening cause. The
defendant’s responsibility may be excluded because the plaintiff failed to
mitigate his loss. Familiar principles,
such as foreseeability, assist in promoting some consistency of general
approach. These are guidelines, some
are more helpful than others, but they are never more than this.
71In most cases how far the responsibility of the
defendant ought fairly to extend evokes an immediate intuitive response. This
is informed commonsense by another name. Usually there is no difficulty in
selecting, from the sequence of events leading to the plaintiff’s loss, the
happening which should be regarded as the cause of the loss for the purpose of
allocating responsibility. In other cases, when the outcome of the second
enquiry is not obvious, it is of crucial importance to identify the purpose of
the relevant cause of action and the nature and scope of the defendant’s
obligation in the particular circumstances.
What was the ambit of the defendant’s duty? In respect of what risks or damage does the law seek to afford
protection by means of the particular tort?
Recent decisions of this House have highlighted the point. When evaluating the extent of the losses for
which a negligent valuer should be responsible the scope of the valuer’s duty
might first be identified see Banque Bruxelles
Lambert SA v Eagle Star Insurance Company Ltd [1997] AC 191. In Reeves v Commissioner of Police of the Metropolis
[2001] AC 360 the free, deliberate and informed act of a human being, there
committing suicide, did not negative responsibility to his dependants when the
defendant’s duty was to guard against that very act.
72The need to have in mind the purpose of the
relevant cause of action is not confined to the second, evaluative stage of the
twofold enquiry. It may also arise at
the earlier stage of the “but for” test, to which I now return. This guideline principle is concerned to
identify and exclude losses lacking a causal connection with the wrongful
conduct. Expressed in its simplest
form, the principle poses the question whether the plaintiff would have
suffered the loss without (“but for”) the defendant’s wrongdoing. If he would not, the wrongful conduct was a
cause of the loss. If the loss would
have arisen even without the defendant’s wrongdoing, normally it does not give
rise to legal liability. … of course, even if the plaintiff’s loss passes this
exclusionary threshold test, it by no means follows that the defendant should
be legally responsible for the loss.”
“What is the purpose behind the legislative requirement for the
carrying out of an annual audit and the circulation of the accounts? For whose protection were these provisions
enacted and what object were they intended to achieve? My Lords, the primary purpose of this
statutory requirement that a company’s accounts shall be audited annually is
almost self evident….. it is the auditors function to ensure, so far as
possible, that the financial information as to the company’s affairs prepared
by the directors accurately reflects the company’s position in order, first, to
protect the company itself from the consequences of undetected errors or,
possibly, wrongdoing (by, for instance, declaring dividends out of capital)
and, second, to provide shareholders with reliable intelligence for the purpose
of enabling them to scrutinise the company’s affairs and to exercise their
collective powers to reward or control or remove those to whom that conduct has
been confided.”
Are BFS’ damages
limited by the scope of D&T’s duty to BFS?
The Dollar Funding
794.
This is evident from the recorded statements of Leeson, made
in the course of enquiries into the collapse of the Barings group, and the
evidence of BFS’ back office staff[472].
From those, it emerges that Leeson asked for Dollar Funding as a last resort.
He did so when all other sources of funding (the overdraft facility and the
margin surplus) had been exhausted and it was necessary to find money to fund
margin calls (both maintenance margin and settlement variation) in respect of
transactions which had already been undertaken. This is what one would expect,
given the risks involved in asking for the Dollar Funding. If it was needed to
meet margin calls on transactions which had already been undertaken, refusal of
the Funding would have led to BFS defaulting on its obligations to SIMEX and
immediate investigation.
“It is a fundamental principle of bank management that payments
should never be authorised without a clear and verifiable understanding of the
purpose for which the monies are required. …cash should only be paid out of [an
omnibus client account] if it is verifiably on behalf of one of the identified
individual clients and reflected in the information presented to that client.
“…I would have expected any competent back office settlements
manager to follow up on [the first Dollar Funding margin call] to get a precise
definition of what it was for and how it was to be allocated to clients… I do
not believe any competent settlement manager should have authorised the second
payment if he had not been able to reconcile fully the first payment. I would
have expected in these circumstances the settlements department to contact the
relevant senior manager to discuss the issue with him.”[479]
804.
I accept D&T’s submission. The transformation of BFS made
possible by the Dollar Funding is well illustrated by the amount of the losses
incurred as a result of Leeson’s trading during the relevant periods. The loss
incurred during the four month period of the accounts to 30 September 1992 was
Ł3.6 million; that for the 15 month period to 31 December 1993 was Ł12.6
million; that for the 12 month period to 31 December 1994 was Ł147.8 million;
and that for the last period of two months to the date of the collapse was Ł627
million. .
The authorities on
scope of duty as a control mechanism
808.
It is in the speech of Lord Hoffmann in South Australia
Asset Management Corporation v York Montague Ltd [1997] AC 191, widely
referred to as “the BBL case”, that these principles are to be found in
their fully-developed form. That case dealt with appeals in three separate
cases brought by mortgagee banks against valuers upon whom they had relied to
value properties as security for loans of money. The valuations were found to
have negligently overvalued the properties in question. The loans were made
but, when the borrowers defaulted, the security proved to be deficient and the
banks suffered loss. That loss was found to have been caused, in part, by the
negligent overvaluations of the security without which the loans would not have
been made and, in part, by a substantial fall in the value of property
generally during the period when the loans were extant.
“Your Lordships identified the duty as being in respect of any
loss which the lender might suffer by reason of the security which had been
valued being worth less than the sum which the valuer had advised. The
principle approved by the House was that the valuer owes no duty of care to the
lender in respect of his entering into the transaction as such and that it is
therefore insufficient, for the purpose of establishing liability on the part
of the valuer, to prove that the lender is worse off than he would have been
had he not lent the money at all. What he must show is that he is worse off as
a lender than he would have been if the security had been worth what the valuer
said. … it was accepted that the whole loss suffered by reason of the fall in
the property market was, as a matter of causation, properly attributable to the
lender having entered into the transaction and that, but for the negligent
valuation, he would not have done so. It was not suggested that the possibility
of a fall in the market was unforeseeable or that there was any other factor
which negatived the causal connection between the lending and losing the money.
…the essence of the decision was that this is not where one starts and that the
valuer is responsible only for the consequences of the lender having too little
security.”
“It is never sufficient to ask simply whether A owes B a duty of
care. It is always necessary to determine the scope of the duty by reference to
the kind of damage from which A must take care to save B harmless.”
“In the present case there is no dispute that the duty was owed
to the lenders. The real question in
this case is the kind of loss in respect of which the duty was owed…
The scope of the duty, in the sense of the consequences for
which the valuer is responsible, is that which the law regards as best giving
effect to the express obligations assumed by the valuer: neither cutting them
down so that the lender obtains less than he was reasonably likely to expect
nor extending them so as to impose on the valuer a liability greater than he
could reasonably have thought he was undertaking. What therefore should be the
extent of the valuers liability?”
“Normally the law limits liability to those consequences which
are attributable to that which made the act wrongful. In the case of liability
in negligence for providing inaccurate information, this would mean liability
for the consequences of the information being inaccurate”.”
“Your Lordships might, I would suggest, think that there was
something wrong with the principle which, in the example which I have given
produced the result that the doctor [who had
negligently advised a mountaineer that his knee was in a good enough condition
to undertake a climb, in the course of which the mountaineer fell as a result
of a different cause and injured himself] was liable…
“I think that one can to some extent generalise the principle
upon which this response depends. It is that a person under a duty to take
reasonable care to provide the information on which someone else will decide
upon a course of action is, if negligent, not generally regarded as responsible
for all the consequences of that course of action. He is responsible only for
the consequences of the information being wrong. A duty of care which imposes upon an informant responsibility for
losses which would have occurred even if the information which he gave had been
correct is not in my view fair and reasonable as between the parties. It is
therefore inappropriate either as an implied term of a contract or as a
tortious duty arising from the relationship between them….
“If his duty is only to supply information, he must take
reasonable care to ensure that the information is correct and, if he is
negligent, will be responsible for all the foreseeable consequences of the
information being wrong.”
“However for reasons spelled out by my noble and learned friend
Lord Hoffmann in the substantive judgments in this case, a defendant valuer is
not liable for all the consequences which flow from the lender entering into
the transaction. He is not even liable for all the foreseeable consequences. He
is not liable for consequences which would have arisen even if the advice had
been correct. He is not liable for
these because they are the consequences of risks the lender would have taken
upon himself if the valuation advice had been sound. As such they are not
within the scope of the duty owed to the lender by the valuer.”
Application to the
present case
“This makes it unnecessary to consider whether, if the requirement
of proximity was satisfied it would be just and reasonable to impose a duty of
care to the existing bank creditors.
But in case the matter goes further I ought to indicate my own views. In
my judgment, it would not. Caparo’s case [which
had only reached the Court of Appeal at this time] shows that even if
the duty of care is confined to the creditors whose existence was known to the
defendants, the potential liability is not restricted to the amount of existing
indebtedness. The defendants will be
liable to a bank which made an additional facility available to the company in
reliance on the audited accounts. Accordingly though there is no danger of
exposing the defendants to a liability to an indeterminate class, they will be
exposed to liability for an indeterminate amount. Moreover, this is potentially
a far greater exposure than in Caparo’s case where the company was solvent
though overvalued in the accounts. In the worst case the maximum liability
would be measured by the amount by which the value of the company was
overstated. Where the value of a company is negligently overstated or
understood in the accounts, the auditors liability to investors and
shareholders would be measured by or at least related to, the extent of their
own negligence. That is not so where creditors are concerned and the company is
alleged to have been insolvent. In the case of a subsequent and irrecoverable
advance, the auditors’ maximum liability would fall to be measured by the
amount of the advance, which would be unknown to the auditors and could not be
foreseen by them. It would bear no necessary relationship to, and could be many
times greater than, the value of the company as shown by its published
accounts. In the present case the
company had a paid share capital of Ł325,000. The 1982 accounts showed net
assets of just under Ł800,000 and bank borrowings of Ł6.4M. They could have been used to support further
borrowings of many millions of pounds. Even if the requirement of proximity was
satisfied, I would not for my own part, unless constrained by authority, extend
the duty of care to a prospective lender, unless the amount or at least the
scale of the proposed loan was known to the defendant.”
“Although the auditor’s role in the financial reporting process
is secondary and the subject of complex professional judgement, the liability
it faces in a negligence suit by a third party is primary and personal and can
be massive. The client, its promoters, and its managers have generally left the
scene, headed in most cases for government-supervised liquidation or the
bankruptcy court. The auditor has now assumed centre stage as the remaining
solvent defendant and is faced with a claim for all sums of money ever loaned
to or invested in the client. Yet the auditor may never have been aware of the
existence, let alone the nature or scope, of the third party transaction that
resulted in the claim.”
“In view of the factors discussed above, judicial endorsement of
third party negligence suits against auditors limited only by the concept of
foreseeability raise the spectre of multibillion dollar professional liability
that is distinctly out of proportion to:(1) the fault of the auditor (which is
necessarily secondary and may be based on complex differences of professional
opinion): and (2) the connection between the auditor’s conduct and the third
party’s injury (which will often be attenuated by unrelated business factors
that underlie investment and credit decisions).
As other courts and commentators have noted, such
disproportionate liability cannot be justified on moral, ethical or economic
grounds. As one commentator has summarised: ‘The most persuasive basis for
maintaining the limited duty [of auditors] is
a proportionality argument… it can be argued as a general proposition in these
cases that the wrongdoing of an accountant is slight compared with that of the
party who has deceived him (his client) as well as the plaintiff. This
rationale for non-liability is similar to the proximate cause grounds on which
wilful intervening misconduct insulates a “merely negligent” party from
liability.’ ”
“It is by no means certain that the demands of corrective
justice require auditors rather than these sophisticated creditors and
investors to absorb the losses that flow from lending to or investing in the
auditor’s client. Auditors can have only a vague idea as to the potential loss
that may flow from the failure to detect fraud or error in the affairs of the
client being audited…. creditors and investors on the other hand are likely to
be in a better position than auditors to know the likely extent of their
losses. The investor or creditor knows the maximum extent of any likely loss.
Unlike most plaintiffs in negligence cases, these investors and creditors can
take steps to protect themselves against loss…”.
Was the “chain of
causation”, from D&T's negligence to the loss sued for, broken by
management fault and if so when?
The appropriate
test
“It is common to refer to a chain of causation between the
wrongful act and the plaintiff’s loss and to an intervening act which may or
may not break the chain. If that is always the appropriate metaphor, of course
it must follow that an event occurring before the wrongful act cannot break the
chain. It is as simple as that. But I for my part do not accept that the chain
metaphor is an appropriate one for causation in contract. Instead one has to
ask whether in commonsense the wrongful act was a cause of the plaintiff’s
loss, or whether something else was.”
“It is D&T's primary case that the conduct of the bank and
of its servants or agents in the mismanagement of Leeson and of his activities
makes it impossible for BFS to establish a sufficient causal connection between
any breach of duty on the part of D&T and the losses that are being
claimed. This is because the evidence reveals that the antecedent, concurrent
and subsequent failings on the part of the Barings entities and their servants
and agents amounted to conduct which was so egregious and so grossly deficient
that it is to be regarded as the real cause, and the sole cause in law, of
BFS’s loss. If ever there was such a case, when gross failings should be held
to eclipse venial ones, this must be it.”
“2-36… the defendant’s
conduct may have satisfied the “but for” test, in the sense that without his
wrongful conduct damage would not have occurred. But this, in itself, is not
determinative of whether he should be held responsible where other causally
relevant events have played a role. Thus, in the majority of cases where a plea
of novus actus [breaking the chain]
succeeds, there will have been a prior finding that the original wrongdoing
does indeed satisfy the “but for” test of factual causation. It is a
cause of the damage. On grounds of equity and policy, the court then proceeds
to find that in the light of subsequent events, the defendant should not be
held answerable for consequences beyond his control. A novus actus may take
three forms:
(1) some natural event
independent of any human agency;
(2)an act (or omission) by
a third party;
(3)the conduct of the
claimant himself;
Whatever its form, the novus actus must constitute an event of
such impact that it obliterates the wrongdoing of the defendant.
“2-37Often the courts have
to resort to metaphor and, again, “common sense”. Did the intervening event
“isolate” or “insulate” or “eclipse” the defendant’s conduct so that it was
merely the occasion of the harm rather than the cause of it? Was the intervening act “no mere conduit pipe
through which consequences flow from defendant to claimant, no mere part of a
transmission gear set in motion by the defendant”? The proliferation of
expressions indicates that there is no simple test and, though common sense may
point the way, the language of causation tends to obscure the evaluative nature
of the decisions that the courts must inevitably make.”
“No precise or consistent test can be offered to define when the
intervening conduct of a third party will constitute a novus actus interveniens
sufficient to relieve the defendant of liability for his original wrongdoing.
The question of a novus actus “can only be answered on a consideration of all
the circumstances and, in particular, the quality of that later act or
event.” Four issues need to be
addressed. Was the intervening conduct of the third party such as to render the
original wrongdoing merely a part of the history of the events? Was the third
party’s conduct either deliberate or wholly unreasonable? Was the intervention foreseeable? Is the
conduct of the third party wholly independent of the defendant, i.e. does the
defendant owe the claimant any responsibility for the conduct of that
intervening third party? In practice in most cases of novus actus more than one
of the above issues will have to be considered together.
“2-51 When the conduct of the claimant exacerbates, or adds to,
the injuries of which he complains, that conduct will generally result in a
reduction of his damages on grounds of contributory negligence, or failure in
his duty to mitigate damage. However it may be that the conduct of the claimant
is so wholly unreasonable and/or of such overwhelming impact that that conduct
eclipses the defendant’s wrongdoing and constitutes a novus actus….
2-52 It is submitted that,
for the claimant’s subsequent conduct to be regarded as a novus actus
interveniens, it should be such as can be characterised as reckless.
Unreasonable conduct can be dealt with by a finding of contributory negligence.
Once the court has determined that the defendant was in breach of a duty to
exercise reasonable care for the claimant’s safety, the claimant’s negligent
conduct should not lead to a finding of novus actus.”
“Causation cannot be examined independently of the
identification of the alleged cause of action; it involves the relationship
between the loss or damage suffered by the plaintiff and the fault of the
defendant. As regards the alleged liability of Dearden Farrow in tort to Union
Discount, the failure of the defendants to show reasonable foreseeability in
relation to the losses claimed is fatal to their claim as a matter of causation
as well. However since I have concluded that, if Union Discount did rely upon
the certification in relation to the relevant discounting transactions they
were acting recklessly, it would follow that in law the only relevant cause of
their loss was their own reckless conduct.”
“human conduct, which is not entirely reasonable, for example,
where it is itself careless, but is within the range of human conduct that is
foreseeable and normally contemplated as not unlikely, may add a further cause
of the relevant subsequent event but would not normally mean that an earlier
event ceases also to be a cause of that later event. Careless conduct may
ordinarily be regarded as being within the range of normal human conduct when
reckless conduct ordinarily would not.”
Application of the
test
“Audited accounts are in any event only one of the sources of
information which a prudent banker takes into account. Within a reasonable
period after the end of the year covered by the accounts, those accounts may
have a dominant role. With the passage of time thereafter, the role of the
audited accounts becomes progressively less important and other more up-to-date
information, including up-to-date references and up-to-date experience of
transactions and accounts of whatever kind, covering later periods, become
progressively more important. By August 1983 it was not reasonably foreseeable,
nor was it foreseen by Deardan Farrow, that any material reliance would be
placed by a banker or discount house upon the audited accounts of Berg for the
year ending March 1982, except possibly for the purpose of historical
comparison.
“At no material time was it reasonably foreseeable by Deardan
Farrow that any failure to qualify their auditors’ certificate would cause any
loss or damage to Berg or its members. It was not reasonably foreseeable that
any loss could be suffered by Berg or its members as a result of the terms of
the certificate to the 1982 accounts provided that all relevant facts were
known to Mr Golechha [Berg’s controlling
shareholder and director].
“The contemplation of the parties to the contract whereby Berg
instructed Deardan Farrow to carry out the 1982 audit and Deardan Farrow
accepted those instructions was similar. It would not have been within the
contemplation of those parties that, in any material respect, an unqualified
certificate would cause any serious loss or damage to Berg. Nor was it within
their contemplation at that time that, provided Mr Golechha knew all the
relevant facts and had all the relevant information, any loss could be caused
to Berg by any matter material to this action.”
“An annual audit report is out of date so far as the business of
the client is concerned when it is published.
The report gives merely a picture of the business on a particular date,
which may be from 6 to 10 weeks or more before the audit is published. By
publication date, the details of the business will have changed even if the
fundamentals of the business have not. The gap between financial reality and
the financial position represented by the audit increases as each week goes
by.”
The situation in
April 1994
i)
BSL was itself enabling Leeson to continue his fraud by
providing the Dollar Funding. Otherwise he would have been unable to continue
margining his positions and BFS would have defaulted in its payments to SIMEX;
ii)
the Dollar Funding had continued for a sufficient duration so
that, by any reckoning, BSL should have investigated it. Such an investigation
would have detected Leeson’s fraud;
iii)
quite apart from the Dollar Funding, BSL management knew of a
range of other warning flags which should have caused them to investigate
Leeson’s trading and to detect his fraud.
The level of the
Dollar Funding
The K2/P4 balance
The connection
between the two
“Q: There came a time – and I am still seeking to
summarise your evidence – which I think you would put as either January or
February 1994, when you associated at least part of the K2 funding with the
funding of Singapore?
A:I would say it was later than that. I think it
was March/April 1994.
Q:I do not want to go back over that, Mr Hawes;
but your evidence was you asked particular questions of Mr Leeson about this
when you went on your visit to Singapore in 1994. You told my Lord yesterday
that he gave you the same sort of answers as he gave Deirdre O’Donoghue in June
and you in October.
A: Yes, that was particularly in connection with
his requests for additional dollar funding.
Q: There came a point, whenever it was, in the
first quarter of 1994 you associated the K2 problem with funding of Singapore,
but before that you say you did not know what it was?
A:
That is correct, yes.”[483].
The debtors’ report
“if you add up the client debtors’ report on a daily basis, it
didn’t take a rocket scientist to see that the debtors did not equal the loan
account. I did that in the beginning, when the funds started going up. Look at
my debtors. Look at the amount of money that was in Singapore. It wasn’t a
proper record. That information was available to everybody.”[485]
Knowledge that BSJ
was paying its margins
Conclusion on
Dollar Funding
Knowledge of BFS’
overdraft
859.
Mr Hawes accepted in cross-examination that issues such as
overdrafts fell within his supervisory remit[488].
So he should have been aware by April 1994 that, not only was BFS requiring
more funds from BSL than were justified by the trades it was doing, but even so
BFS was consistently placing more funds with SIMEX than it received from BSL.
Imbalance of
margins
Lack of segregation
and supervision at BFS
“Nick Leeson has too dominant a role looking after both trading
(agency and proprietary) and settlements aspects of the business; there is no
deputy to challenge him… TH believes that SJ basically leaves NL to his own
devices. While he has no evidence to suggest that NL has indeed abused his
position, the potential for his doing so needs examining.”[489]
Leeson’s profits
“fundamentally there has been a sea change in the nature of this
book. Most of the volatility up and down has been removed; and its level of
profitability is extremely significantly higher than what we saw before. So my
view, if I was a derivatives risk manager of this book, there would be a
trigger then, you know, to say, ‘Given this sea change in the book, you know,
what is going on? What are the new strategies being followed? Is a whole new
approach to the business being taken?’ Or whatever. It would be a trigger to
ask questions, I think.
Now, if we go further, the next graph updates that through
February 1994… And I would say on that, I guess my view as a derivatives risk
manager is the evidence from the extra couple of months would certainly have
considerably reinforced my view on the different nature of the book and the
need for investigation would be bolstered, in my mind.”[492]
“as early as November 1993 Leeson’s profits amounted to 34.1% of
all the Financial Product Group’s profits, and to well over 50% in January and
February 1994… I would have expected the individuals with direct responsibility
for Leeson and Brindle, and members of senior management, to be aware of such
levels of profitability and to obtain cogent explanations for them….
The average monthly P/L in the Volatility Book in 1993 up to
October was Ł370,000 – then the figure reached Ł3,257,000 in November and
Ł2,617,000 in December… this should have triggered an investigation into what
was going on and what was new.”[493]
“I find it inconceivable that nobody in April and May 1994 felt
the need to question how an entirely new business could immediately start doing
weekly trading volumes constituting between 38% and 91% of all exchange traded
volumes, and generating an income of Ł3,840,000 in the first two months of
operation. This profit figure constituted over 37% of the entire FPG income in
the months of April and May 1994 for a totally new venture. I cannot conceive
of any other investment bank in the world simply taking such figures for
granted without verifying them by detailed further investigation.”
Conclusion
i)
large sums of United States dollars were being paid by BSL to
BFS at the request of Leeson, but the necessity for those payments and what
they related to had not been satisfactorily explained or determined;
ii)
the K2/P4 balance on the Barings solo consolidation balance
sheet was rising and falling, mirroring the payments and repayments of dollars.
That led Mr Hawes to conclude that there was a connection between the two. Thus
the explanation for the necessity for the Dollar Funding payments was to be
found in BFS’ trading and its requirement for funding for margin payments in
respect of its transactions on SIMEX;
iii)
Mr Hawes, if he was not, should have been aware of BFS’ 1993
balance sheet. From that and from his contacts with Citibank in Singapore, he
should have been aware that BFS was running a substantial overdraft and thus
abusing its overdraft facilities which were daytime facilities only. The nature
of BFS’ business should not have required substantial overdraft facilities and
certainly not a large “hard core” borrowing;
iv)
from the same balance sheet he should have noticed the
anomalous imbalance between amounts for margin held by SIMEX and amounts
held by BFS in respect of margin from
clients. It did not require an expertise in F&O markets to see that these
totals should at least have balanced. A reasonable expertise in the SIMEX
market should have led him to conclude that the balance was in fact
dramatically the wrong way round. That Mr Hawes was inexpert in the
technicalities of F&O markets can be no excuse to Barings. This should have
led him to conclude that either BFS was financing its clients in substantial
sums or it was itself conducting trades
on SIMEX which it was not authorised to do;
v)
he knew that BSL clients were in general not in the habit of
paying margin calls by BSL late;
vi)
he knew that BSJ was funding margin calls in respect of its
own transactions on SIMEX from its own sources;
vii)
he should have been aware of the recent substantial increase
in the apparent profits resulting from BFS’ trading, the reason for which was
largely unexplained;
viii)
he was aware that, while combining responsibility for both the
front office and the back office of BFS, Leeson was himself conducting
substantial proprietary trading; and
ix)
he was aware that Leeson was running BFS single-handedly with
virtually no supervision from senior management.
The Reeves principle
877.
By far the most important reasons why Mr Hawes should have
insisted on an immediate investigation of BFS’ trading to discover the reasons
for the Dollar Funding were the emergence of the Dollar Funding itself and his
realisation of the connection between it and the unexplained fluctuations in
the K2/P4 balance. I have found that the first request for dollar payments made
by Leeson which should have been refused was the payment of $40 million on 1
March 1994, two months after the close of the period of the 1993 audit and
after D&T had signed off the 1993 financial statements. Therefore it could
be no reason for Barings not to investigate the reasons for the Dollar Funding
that D&T had given a clean audit certificate for the year to December 1993.
The Dollar Funding was a problem that had arisen wholly since that date.
878.
In my judgement, excluding Mr Hawes’ and thus Barings’ failure
to appreciate the significance of the anomalous margin imbalance shown by BFS’
1993 accounts, there were ample other reasons which should have driven Mr Hawes
to insist upon a thorough investigation of BFS’ affairs. Given the state of
knowledge of Mr Hawes in late April 1994, or what it should have been, even if
he was not himself able to deduce that unauthorised trading was being
undertaken on SIMEX through BFS, he should have instituted an investigation.
That investigation would inevitably have led to the uncovering of Leeson’s
unauthorised trading. His failure, or that of his superiors, so to act had the
effect of subsuming D&T's negligence as a cause of the loss resulting from
Leeson’s unauthorised trading which took place after 30 April 1994.
Alternative cut-off
dates
Fluctuations in
loss after the cut-off date
“Actions taken after breach by the plaintiff himself are
directly within the principles laid down in British
Westinghouse…: it is here that is found the core of the problem. The matter is not well worked out in the
authorities and all that can be done is to sketch what the law probably is.”
889.
McGregor then goes on to a review of the authorities,
many of which appear to be in conflict but none of which deal with the sort of
facts and the problem which this case raises.
It seems to me that, on principles analogous with those governing
mitigation of damage, where the loss occasioned by the defendant is that
flowing from the continuation of a specific trading activity (such as that
carried out at Leeson’s instance on SIMEX, under cover of the 88888 account)
and the defendant’s negligence has ceased to be a cause of the continuation of
that trading, then, for the purpose of calculating the damage for which the
defendant is liable, the defendant should be entitled to take the point in time
thereafter which is most favourable to himself as the time at which the damages
fall to be calculated.
CONTRIBUTORY
NEGLIGENCE BY BFS: PRINCIPLES
The applicable law
“Where any person suffers damage as the result partly of his own
fault and partly of the fault of any other person or persons, a claim in
respect of that damage shall not be defeated by reason of the fault of the
person suffering the damage, but the damages recoverable in respect thereof
shall be reduced to such extent as the court thinks just and equitable having
regard to the claimant’s share in the responsibility for the damage.”
“‘fault’ means negligence, breach of statutory duty or other act
or omission which gives rise to a liability in tort or would, apart from this
Act, give rise to the defence of contributory negligence.”
For whose actions
was BFS responsible?
“Directors have, both collectively and individually, a
continuing duty to acquire and maintain a sufficient knowledge and
understanding of the company’s business to enable them properly to discharge
their duties as directors. Whilst directors are entitled (subject to the
articles of association of the company) to delegate particular functions to
those below them in the management chain, and to trust in their competence and
integrity to a reasonable extent, the exercise of the power of delegation does
not absolve a director from the duty to supervise the discharge of the
delegated functions.”
“…it is the fundamental task of the directors to manage the
business of the company. Theirs is the power and the responsibility of that
management. To manage the company effectively, of course, they must necessarily
delegate much of their power to executives of the company, especially in
respect of its day to day operations. Although constantly referred to as “the
management”, the executives’ powers are delegated powers, subject to the
scrutiny and supervision of the directors. Responsibility to manage the company
in this primary sense remains firmly with the directors.”…
“The directors may delegate powers and functions, using that
term in a broad sense, but they cannot delegate the management function
itself.” … “If a director negligently disregards the obligation to oversee the
conduct of the company’s business, he or she has manifestly failed to perform
that function with reasonable care.”
The ambit of BFS’
business
i)
BFS’ trading activities were managed and controlled by BSL and
BSJ management;
ii)
the London settlement department had overall responsibility
for and the control of the settlement of trades executed by BFS; and
iii)
risk monitoring and compliance supervision in relation to BFS’
activities were the responsibility of, and performed by, management in London
and Japan and, from about October 1994, Mr Bowser in Hong Kong. Monitoring the
risk of BFS’ proprietary trading was the responsibility of the BSL risk
monitoring function and the BSL risk committee was responsible for BFS’ risk
management. The BSL compliance function was responsible for overseeing
compliance issues for BFS.
Monitoring of
trading profits
London settlements
and Treasury
i)
the sending of margin by BSL,
ii)
supervision and control of the sending of margin,
iii)
the requesting and receiving of the margin by BFS, and
iv)
supervision and control of the process of requesting margin
and of its use once received.
Risk control
937.
The purpose of risk management in an investment bank, as
explained by Dr Fitzgerald[501],
is the development and monitoring of risk reports and risk limits, to ensure
that risk is taken only within “a framework which achieves an appropriate
trade-off between risk and reward”. BFS accepted that the monitoring of
Leeson’s trading limits was part of BFS’ business. It might therefore seem surprising
that it contended that other aspects of the risk control function were part of
BFS’ customers’ businesses, not BFS’. However BFS contended that risk control
is primarily concerned with the control of market risk. That is borne in most
circumstances by the customer, whose capital and trading profits are at risk,
and therefore it constitutes part of the customer’s business. Risk control
within BFS’ business was limited to operational risk (which includes trading
errors and unauthorised trading).
Group compliance
and financial control
Internal audit
Conclusion
“Double-dipping”
and the need to consider the details of management failings
“This is most easily illustrated by taking an extreme case from
a type of litigation which is tried daily in the courts. A dangerous machine is
unfenced and a workman gets his hand caught in it. So far as causation alone is
concerned it may be fair to say that at least half the cause of the accident is
the fact that the workman put his hand into the danger. But so far as "fault"
(and therefore liability) is concerned the answer may be very different.
Suppose that the workman was a normally careful person who, by a pardonable but
foolish reaction, wanted to save an obstruction from blocking the machine and
so put his hand within the danger area. Suppose further that the factory owner
had known that the machine was dangerous and ought to be fenced, that he had
been previously warned on several occasions but through dilatoriness or on the
grounds of economy failed to rectify the fault and preferred to take a chance.
In such a case the judge, weighing the fault of one party against the other,
the deliberate negligence against the foolish reaction, would not assess the
workman's fault at anything approaching the proportion which mere causation
alone would indicate.”
The deduction for
contributory negligence in audit cases
“In our opinion the reasoning of the Court of Appeal in Daniels is correct. There is no rule that
apportionment legislation does not operate in respect of the contributory
negligence of a plaintiff where the defendant, in breach of its duty, has
failed to protect the plaintiff from damage in respect of the very event which
gave rise to the defendant’s employment…
“The duties and responsibilities of the defendant are a variable
factor in determining whether contributory negligence exists and, if so, to
what degree. In some cases, the nature of the duty may exculpate the plaintiff
from a claim of contributory negligence; in other cases the nature of that duty
may reduce the plaintiff’s share of responsibility for the damage suffered; and
in yet other cases the nature of the duty may not prevent a finding that the
plaintiff failed to take reasonable care for the safety of his or her person or
property. Contributory negligence focuses on the conduct of the plaintiff. The
duty owed by the defendant, although relevant, is one only of the many factors
that must be weighed in determining whether the plaintiff has so conducted
itself that it failed to take reasonable care for the safety of its person or
property.”
957.
So BFS can only pray in aid this principle to the extent that
its failure to supervise its business and guard against fraud was excused by
its reliance on D&T’s audit. Beyond that, it cannot use the Commonwealth
cases to support any kind of reduction in the attribution of blame merely
because the defendants were auditors with a duty to report to shareholders on
the company’s management. Still less do those cases support any artificial
ceiling in audit negligence cases, of 50%, as BFS argue, or of any other
figure.
“… a 100% apportionment of responsibility to Mr Lynch gives no
weight at all to the policy of the law in imposing a duty of care upon the
police. It is another different way of saying that the police should not have
owed Mr Lynch a duty of care…. The apportionment must recognise that a purpose
of the duty accepted by the commissioner in this case is to demonstrate
publicly that the police do have a responsibility for taking reasonable care to
prevent prisoners from committing suicide.” (per
Lord Hoffmann at page 372)
Vicarious liability
for Leeson
CONTRIBUTORY NEGLIGENCE: ANALYSIS OF FAILINGS
The
establishment of BFS
967.
BFS admits that it was at fault in failing to ensure that
there was adequate segregation between its front and back offices[505]. This was a basic fault, but it had serious
consequences only because of the failure to supervise which I describe next. As
explained at paragraphs 207 and 512 to 515 above, the evidence from Mr Killian
and others was that it was not uncommon for small execution-only brokers to be
run by a manager who was in charge of both front and back offices. But such a
structure increased the risk of unauthorised trading which was present in any
broking business. It required the board to implement clear reporting lines and
controls on both the trading and settlements sides, including an independent
finance function.
Settlement
and finance supervision within BFS
Mr
Bax
971.
Mr Bax gave evidence that, when BFS was set up, he was left in
no doubt that he was not to be involved in BFS’ trading, or indeed to have any day-to-day involvement with BFS’ affairs[506]. However in my judgement this did not acquit him of all responsibility
for BFS so long as he remained a director of it, let alone its managing
director. He remained responsible for ensuring that BFS’ trading, both that
carried out by Leeson and also by others, was properly monitored and that
Leeson’s other functions, including in particular the control of BFS’
settlements and back office, were properly supervised by at least one
representative of senior management. The former responsibility required Mr Bax
to ensure that he had at least some grasp of the nature of Leeson’s trading for
this purpose. As to the latter responsibility, it was Mr Bax’s evidence, and
that of everyone else including Mr Norris (save Mr Jones himself), that
supervision of Leeson’s operations was or should have been undertaken by Mr
Jones. If Mr Bax was relying on Mr Jones to do supervise Leeson, he should have
checked from time to time that Mr Jones was actually doing so.
972.
Mr Bax did
not meet these minimum requirements. On the trading side, he did not even know,
at any time before the crash, that Leeson was running a proprietary book and
taking positions himself. Had he known that, Mr Bax told me that he would have
required the appointment of a compliance officer at BFS[507]. In relation to the back office and finance, Mr Bax relied upon
the controls which he understood to have been incorporated when the business
was set up – in particular BSL’s and BSJ’s control of funding – to ensure that
BFS was properly supervised and controlled. He took no steps to ensure that
those controls were working. Mr Bax accepted that he had no contact with BFS’
trading staff or with the back office staff. Indeed Mr Bax further accepted
that he had no involvement at all in BFS’ affairs between the initial
discussions about setting it up and the internal audit report in late 1994,
beyond reading the monthly accounts and the SIMEX audit letter[508].
Mr
Jones’ supervision of BFS settlements and back office
979.
Mr Jones’ answer to these criticisms in his evidence before me
was that he did not regard himself as being under any duty to exercise
day-to-day supervision of Leeson. He relied on the controls which were put in
place when BFS was set up to control Leeson: the feeds to BSL, the
reconciliation of margin by BSL and the bar on taking money out of the Citibank
account[512]. Like Mr Bax, however, this did not excuse
him from any responsibility for the supervision of Leeson and BFS. Mr Jones was
the only other executive director of BFS besides Mr Bax. He must have known of
Mr Bax’s role, or lack of it, and that no one else of any seniority was supervising
Leeson from day to day. Mr Jones’ excuses might have been persuasive if he had
taken any steps at all to satisfy himself that the controls upon which he
relied were working, or even existed. He did not. As the evidence showed, the
feeds were not working correctly and no effective reconciliation by BSL ever
took place. Nor could Mr Jones have expected the staff to act as a control,
firstly because of their inexperience but secondly because he never spoke to
them so as to be able to assess whether they would.
BFS’
finance function
Representation
letters
Failure
to implement the internal audit report
992.
Mr Jones’ explanation for his failure to take steps to
implement the report was that Mr Norris told him in November to devote all his
time to sorting out a crisis relating to the transfer of settlement functions
from New York to Singapore[517]. It seems that there were problems relating
to New York at that time. But Mr Norris denied giving any instruction such as
Mr Jones alleged, and Mr Bax had no recollection of it[518]. Nor did Mr Jones mention the instruction to
the Singapore inspectors when they interviewed him after the collapse. I
therefore find that, although Mr Jones did have to deal with New York problems
in November 1994, there was no instruction from Mr Norris which excused him
from complying with his undertaking to implement the internal audit report. Nor
was there any reason why he should not have taken the necessary steps prior to
November: he knew what the recommendations were from the end of August.
Leeson
Other
BFS staff
997.
Miss Hassan, Miss Sng and Miss Kader, the BFS staff who gave
evidence[521], all told me that they had no contact with
Mr Jones, and looked only to Leeson as their superior. When they were
cross-examined about their knowledge of Leeson’s activities, they all relied on
their inexperience and said that they just obeyed Leeson’s instructions. They
claimed that the instructions to adjust trades and to manipulate a nil balance
on the 88888 account at month-ends were just a few among the many routine
instructions which they had to process every day, and they assumed them to be
legitimate.
1000. Against
that I set that, in the case of Miss Hassan, she accepted that she knew that
the 88888 account was excluded from the trade feed to London and that reports
to customers did not reflect all the trades entered into on SIMEX[524]. As I have said, in previous evidence she
accepted that she found it odd that so many trades were entered on an error
account and that the fictitious trades which Leeson instructed her to book gave
rise to unreconciled differences between BFS’ and SIMEX’s records. She accepted
that she knew the month-end entries on the 88888 account which she executed had
the effect of giving the false impression that money was coming into the
account, and that she made those entries before the month-end reports were
printed out for Rachel Yong[525].
BSL’s
failure to supervise the BFS back office
Failures
by the BSL Settlements Department and Treasury attributable to BFS
The
Ą670m payment
1007. I
have found that D&T were negligent in certifying BFS’ 1992 accounts, in
that they permitted a payment by BSL to BFS of Ą670m received on 1 October 1992
to be treated as having been received on 30 September 1992, without further
enquiry of BSL or C&LL as to whether BSL was also treating the payment as
having been made on 30 September. It affords no defence to such a charge of
negligence that BSL actually made the payment, thereby giving substance to the
explanation apparently given to Miss Koo that this sum represented a balance
actually due from BSL to BFS. This is so even though the fact of the payment
was in all probability a factor which influenced her in not following up her
enquiries about the payment with sufficient vigour.
1008. Nonetheless
the fact that Ą670m was paid on 1 October 1992, and Ą395m in December 1992, by
BSL to BFS without any enquiry as to the reasons why such payments had been
requested by Leeson must constitute fault attributable to BFS on the principles
which I have above set out. Without these payments Leeson would have been
unable to conceal the “hole” in BFS’ accounts caused by his unauthorised
trading at the 1992 accounts reporting date and, less importantly, at the
December 1992 month-end. This was fault by BFS in failing adequately to look
after its own interests. However it arose from circumstances which D&T
should have investigated and from the consequences of which D&T as BFS’
auditors were under a duty to protect BFS. I have found that they did not
discharge that duty with due care. It follows that the Reeves principle
applies to reduce the impact of this fault.
Lack of
reconciliations by BSL
i)
BSL should have recalculated the margin called by BFS;
ii)
BSL should have reconciled the margin called by BFS against
the margin it had itself called from its customers; and
iii)
BSL failed to ensure that all data on the margin feed was
accepted by First Futures.
BSL’s
failure to recalculate margin called by BFS
1012. D&T
assembled a formidable array of evidence in support of their criticism. Dr
Fitzgerald, albeit not an expert in settlements practice, said that any
competently-run bank should have done its own calculation of the margin due on
its broker’s reported positions. This was so even though BFS was an in-house
broker; he said that each link in the chain should do its own calculation[529]. Mr Railton agreed that it was a deficiency
that BSL was unable to recalculate the margin, even though BFS was an in-house
broker[530]. Mr Bowser, whose decision it was to set up
the system as it was, agreed in cross-examination that it was an important
control weakness, even though BFS was in-house[531]. Mr Hawes agreed that in principle it was
elementary that a broker (here BSL) should reconcile margin against trades
before paying it on behalf of customers[532]. In July 1992, Odette Farmer, then
Settlements Controller of BSL, in a report to its Board referred to BSL’s
inability to use SPAN to recalculate margin on LIFFE and LTOM (for which
exchanges it used external brokers) as a “major outstanding deficiency”[533]. Even BSL admitted in its trial opening
(though it withdrew the concession in its closing[534]) that it was a system weakness that BSL
could not recalculate margin, thus exposing it to the risks of overcharging, or
taking a credit risk on, its customers and breaching regulatory requirements.
BSL’s
failure to reconcile margin called by BFS against the margin BSL called from
customers
Treatment
by First Futures of data on the margin feed
The
investigation of the Dollar Funding
1024. BSL
admitted[538] that it was at fault in January and February
1994 in failing to realise that BFS was not giving credit for the US dollar
collateral, as described above, and in March 1994 in failing to take effective
steps to investigate why BFS needed the Dollar Funding. BSL also admitted that
the issue should have received specific attention during the internal audit in
July and August 1994. BFS adopted BSL’s submissions on this issue.
The failure to recognise that BFS was not giving credit for
the genuine US dollar client collateral sent by BSL in January and February
1994
1027. As
I have discussed above, it was clear from the Funding Spreadsheets that BFS was
effectively obtaining the same money twice. BSL and Mr Railton accepted that
the BSL Settlements Department should have picked that up[539]. It did not do so until June 1994, when Mr
Railton queried the position with Leeson, but even then he seems to have
accepted whatever explanations Leeson gave and the enquiry lapsed. The
Settlements Department’s failure to spot Leeson’s double-counting gave him at
least US$26 million (considerably more if, as must be likely, he did not repay
the extra yen when he repaid US dollar collateral) for use in his unauthorised
trading in January and February 1994.
The payment of US$32 million on 9 February 1994
1028. It
follows from Dr Fitzgerald’s and Mr Hawes’ evidence, quoted above, that Mr
Jones and Mr Hawes should have immediately enquired into the reasons why this
funding was needed and how it was to be allocated to clients. BFS has pointed
to the terms of Mr Jones’ fax as indicating the reasons given to Mr Jones by
Leeson. But clearly neither Mr Jones nor Mr Hawes conducted any effective
investigation into those reasons or attempted to allocate the funding to
clients. Therefore I conclude that BFS was at fault in failing to investigate
and reconcile this payment.
The payments from 1 March onwards
1029. BFS
and BSL have accepted that they should have made, and did not make, an effective
investigation into these payments. In the light of the evidence it is clear
that no payments should have been made after 9 February 1994 without a thorough
investigation which established the need for the payments and allocated them to
customers. The reasons given to Mr Hawes in February 1994 and/or later, which I
have summarised at paragraph 379, should not have stood up to even modest
scrutiny. Even Leeson’s notoriously persuasive advocacy left Mr Hawes “only
just about convinced”[540] as to those reasons. Yet BSL allowed
payment after payment to be made, for over a year, reaching extraordinary
levels, without making any attempt to check any of them – not even a telephone
call to SIMEX to check how many advance margin calls were made. As I have commented
before, Mr Hawes and Mrs Granger not only entertained fundamentally different
and irreconcilable beliefs as to the true reason for the Dollar Funding, but
each had information which should have disproved the other’s belief. Yet,
although they seem to have discussed the matter, they seem to have failed to
communicate their contrasting views. Neither looked at the margin feed to help
solve the mystery.
Mr Hawes and his senior managers
Later dates
1033. Were
it necessary, I should find that the level of fault increased over time, as the
level of the Dollar Funding increased without any effective investigation. I
have stated above (paragraph 873) the reasons why April 1994 seems to me a
critical date. However further relevant dates were mid-June and October 1994:
i)
in mid-June, the levels of Dollar Funding reached US$170
million[544]. There arrived from Leeson the first
purported breakdown, which was clearly not a satisfactory reconciliation of the
Funding (see paragraph 366). Mr Railton spotted the failure to give credit for
the US dollar collateral. Yet Mr Hawes says that he decided not to investigate
the Dollar Funding himself but to leave it to the internal auditors, who would
not report back for another two months – and then failed to communicate the
full problem to them (see paragraphs 371 to 373);
ii)
in October 1994 it became apparent that the internal auditors
had failed to investigate the problem at all, as I have described at paragraphs
376 and 377. Mr Hawes finally confronted Leeson in an attempt to resolve the
Dollar Funding problem, and Leeson came up with explanations which should not
have been accepted (see paragraphs 378 to 380). But no further investigation
was carried out;
iii)
the position deteriorated yet further in January and February
1995 but, as a result of BFS’ self-imposed cut-off, that is now not relevant to
this judgment.
Supervision
of Leeson’s trading
Individual
responsibilities
The
need to supervise Leeson’s trading
“The weaknesses of the
current arrangement are: While the trading activities of BFS are subject to
high level monitoring, there is no one to review day-to-day trading in detail;
and BFS’ dealers and traders are not subject to independent compliance
monitoring and review.”[548]
“In a medium-sized
investment bank like Barings, I believe it would have been normal practice for
one or more representatives of the middle office to be resident in all the
derivatives trading areas, reporting directly back to the middle office in
London. I would certainly have expected any competent management of derivatives
trading activities to insist on this being the case for a trading hub which was
generating in normal circumstances over 50 per cent of the profits of the
entire derivatives trading operation. Such a person based in Singapore would
have been able to monitor Leeson’s trading directly as it occurred...”[549]
“The fundamental
principles of risk management in any competently run investment bank required
that the precise structure of Leeson’s profits and the exact trading strategies
that were being used to generate them be understood, analysed and reviewed in
depth by Leeson’s superiors and senior management.”[550]
“Any reasonably
competent observer should have concluded that these profits on JGBs were not
being generated by almost riskless arbitrage… Leeson’s trading profits and
volumes were so extraordinary that any competent derivatives manager should
have realised that either Leeson’s reported profits and trades were wholly
unreliable, or Leeson must have been taking on intra-day risks in such enormous
volumes that he needed to be stopped immediately before he bankrupted the bank.
In other words, that Leeson was either a fraudster or a psychotic.”[551]
“I guess if I was a...
boss of Nick and Nick was making $2 million a day… I’d go down there and I’d
stay there for a long time and I’d figure out everything he’s doing…”[553]
“build up a detailed
understanding of the strategies being undertaken by BFS and the nature of the
risks being taken. …trading days producing unusual levels of profits or losses
should be examined and discussed with the traders.”[554]
The
failure to supervise Leeson’s trading
“I recall Ian Hopkins on
one occasion saying to me, in quite a surprised tone of voice, you know – he
said ‘I think I have just been warned off Leeson by Ron’.”[557]
1057. Although
Ms Walz at the time expressed the view that Leeson must be breaking his trading
limits[558], and Mr Hawes and Mr Bowser told me that
there was a general suspicion in late 1994 as to whether Leeson was observing
his limits[559], no one investigated whether he was. Rather,
the attitude was, as Mrs Granger told the Singapore inspectors:
“I remember when I was
complaining about Nick Leeson to Tony Hawes, he says ‘What do you do with
someone who has made’, I can’t remember, I think he said, ‘$10 million in a
week’”[560]
CONTRIBUTORY NEGLIGENCE: THE EXTENT OF THE REDUCTION
1059. I
accept Mr Gaisman’s submission that there is nothing special about auditors
which requires of them a special standard of skill and judgement in their
investigation of an audit client’s affairs over other professional men and, in
particular, over the directors and officers of the commercial companies they
audit. As I have remarked, it is upon such directors and officers that the
primary duty to protect the company from loss occasioned by fraud rests. I
would draw attention again to the passages quoted from the judgment of Lucas CJ
in the Bily case cited at paragraphs 822 and 823 above. The authorities
establish that the auditor’s duty is to report to the shareholders, in
particular, on the conduct of the company’s management. But the shareholders
cannot escape responsibility for the conduct of those directors and officers
whom they have been instrumental in appointing, directly or indirectly. The
comparison here is between the degree of blameworthiness of the auditors for
the negligence which I have found and that of the management of BFS for the
fault, some accepted and some contested, but which I have also found to be
established.
November 1992 to
mid-August 1993
Mid-August to
end-December 1993
End-December 1993
to end-April 1994
i)
Leeson’s profits from November 1993 onwards should have
prompted an investigation by those responsible for supervising his trading.
That investigation should have occurred by the end of December at the latest;
ii)
from early January 1994 onwards BFS called for yen margin from
BSL without giving credit for the US dollar collateral paid by BSL. The BSL
Settlements Department failed to realise that; and
iii)
on 9 February, and on a regular basis from early March, 1994,
Leeson started requesting the Dollar Funding. The BSL Settlements Department
paid it without carrying out any adequate investigation of why it was needed.
End-April to
end-December 1994
Conclusion
·
2 November 1992 to mid-August 1993: 50 per cent;
·
mid-August to end-December 1993: 60 per cent;
·
end-December 1993 to end-April 1994: 80 per cent.
THE CONTRIBUTION
CLAIMS AGAINST PLC, BSL AND BSJ
i)
properly and carefully to manage, monitor, supervise and
control BFS’ (and in particular Leeson’s) trading activities;
ii)
properly and carefully to understand and control the business
being effected by BFS on behalf of companies in the Barings group and/or its
clients;
iii)
properly and carefully to manage, monitor and control the
provision of funds to finance BFS’ trading activities; and
iv)
properly and carefully to monitor and understand their own and
BFS’ businesses, with a view to accurately recording the results of those
business and reporting them to the Bank of England and SIMEX..
Conclusion
i)
all of the duties which D&T alleged BSJ to have owed to
BFS and breached were part of BFS’ business. Breach of them was therefore fault
attributable to BFS, which I have already taken into account in assessing BFS’
contributory fault, and cannot also found a contribution claim against BSJ.
D&T’s claim against BSJ is therefore dismissed; and
ii)
the same is true of most of the duties which D&T alleged
that Plc and BSL owed to BFS and breached. I found three aspects of those
duties not to have been part of BFS’ business. They were purely part of Plc’s
and BSL’s businesses, and Plc and BSL did not owe to BFS a duty to perform
them. In the absence of such a duty, Plc and BSL cannot be liable to contribute
towards D&T’s liability. Thus D&T’s Part 20 claim against Plc and BSL
is also dismissed.
DAMAGES
i)
BFS received income from commission on trades executed for
customers and interest on margins deposited with it by customers. BFS accepted
that it had to give credit for commission and interest on Leeson’s switching
activities, which would not have been earned if those activities had been
stopped as a result of the discovery of Leeson’s unauthorised trading
consequent upon D&T’s audit. But D&T
contended that BFS should also, and BFS contended that it did not have
to, give credit for commission and interest on BFS’ authorised activities: that
is, for commission charged, and interest received on deposited margin,
resulting from the execution of bona fide agency transactions;
ii)
Leeson’s switching operations generated high apparent profits
which were booked to BSL and BSJ. D&T contended that BFS should give credit
for those profits; and
iii)
I have mentioned at paragraphs 14 and 15 the settlement
reached by BFS, Plc and BSL with the two Coopers firms. D&T contended that
BFS should give credit for some or all of the monies paid under that
settlement.
Commission
and profits
Would BFS have continued in existence?
i)
Mr Norris’ evidence that, if Leeson’s unauthorised trading had
been discovered in January 1995, he would have shut down the whole operation,
as he did with BSL’s Mexican operation when that was unable to settle
transactions. However what would have happened in 1995 is not necessarily a
guide to what would have happened in 1992, at least;
ii)
evidence from Mr Soo of SIMEX in response to a letter of
request issued by me. Mr Soo said that, if the fraud had been discovered in
1995, Leeson would have been removed from trading and BFS would have been
suspended or required to cease trading. In 1992 or 1993, Mr Soo’s evidence was
that SIMEX would have taken “immediate action designed to ensure that there
were no further irregularities. This would have been much on the lines of that
set out above and would have ensured the exclusion of Mr Leeson…”[564]. I do not read this as unequivocal evidence
that, at least in 1992, SIMEX would have insisted on measures beyond Leeson’s
removal and adequate segregation of duties in the future;
iii)
perhaps more persuasively, D&T pointed out that in
mid-1992 Mr Norris had proposed to close down BFS to save money (BSL was losing
money in 1992), but was persuaded not to do so by Mr Baylis[565]. Mr Norris told me that, when Mr Baylis and
others left in March 1993, he himself was “pretty ambivalent” about
keeping BSL’s derivatives business going at all[566]. And D&T pointed to figures which seemed
to show that in September 1992 BFS was not only insolvent (because of the
deficit of Ł3.6 million on the 88888 account), but was probably making an
operating loss on its authorised activities[567]. Therefore D&T contended that BSL, given
its financial position, was very unlikely to have been willing to spend the
money necessary to render BFS solvent and put in place controls and local
management such as would satisfy the Singapore regulators, so as to keep BFS
trading. The only advocate of such a course would have been Mr Killian, who
would have been in disgrace for his role in setting up and failing to supervise
BFS;
iv)
had the fraud been discovered in early 1994 as a result of the
1993 audit, the losses would have been far higher than on 2 November 1992
(about Ł48 million on 1 March 1994[568]); the discrediting of local management and
those in Leeson’s product lines far greater; the funding mechanisms of BSL’s
Settlements Department and supervision by BSL’s Treasury would have been in question;
and both the reputational damage and the cost of the controls needed to satisfy
the regulators would have been far greater.
Is the connection with the negligence too indirect?
Profits
apparently earned from Leeson’s trading
i)
the profits were received by BFS, and it is irrelevant that
BFS then paid them to other companies. First, the profits were not genuinely
owed to those companies because they were the product of unauthorised trading.
Secondly, if BFS is able to ignore the fact that its customers in fact paid its
losses (by the funding they provided), the court should also ignore the fact
that BFS paid the profits to its customers: that was res inter alios acta;
ii)
even if the profits were to be treated as accruing to other
companies than BFS, they should not be ignored. D&T relied on Linden
Gardens Trust Ltd v Lenesta Sludge [1994] 1 AC 85 and McAlpine v
Panatown [2001] 1 AC 518, as cases in which the claimant was able to
recover in full, even though another company in the group suffered the loss.
Similarly the fact that another company in the group received profits should
not prevent them being taken into account in assessing the claimant’s right to
recover; and
iii)
the profits could be taken into account by applying section
727. I deal with this at paragraphs 1146 to 1148 below.
“The problem that has
arisen in the present case is one which is most likely to arise in the context
of the domestic affairs of a family group or the commercial affairs of a group
of companies. How the members of such a group choose to arrange their own
affairs among themselves should not be a matter of necessary concern to a third
party who has undertaken to one of their number to perform services in which
they all have some interest. It should not be a ground of escaping liability
that the party who instructed the work should not be the one who sustained the
loss or all of the loss which in whole or in part has fallen on another member
or members of the group. But the resolution of the problem in any particular
case has to be reached in light of its own circumstances.”
i)
the narrow ground, favoured by two of their Lordships, was
that A could recover from B in respect of C’s loss, as long as (in Lord Clyde’s
view, quoted above) A was legally obliged to account to C for the damages it
recovered or (in Lord Jauncey’s view at page 574C) A “has made good, or
intends to make good, the effects of the breach”. So A could recover
damages only if it would use them to remedy C’s loss. In the present case, the
issue is whether A must give credit for profits received by C. The analogous
condition to that applied in Panatown is that A (that is, BFS) can only
be required to give credit for those profits if it received or will receive the
benefit of them;
ii)
the broad ground, favoured by three of their Lordships,
focussed on A alone. It allowed A to sue for its own loss in not receiving the
benefit for which it contracted (that is, performance of the contract), whoever
in the group suffered the financial loss. The analogous argument in our
situation would be that A (BFS) has to give credit for the profits if it
received the benefit of them. It is also worth noting that Lords Goff and
Millett required A’s intention to spend the damages in remedying the breach to
be taken into account when assessing its right to substantial damages. As Lord
Millett said, at page 593C:
“It is sufficient that
the necessary remedial work will obviously have to be carried out, and that it
will have to be carried out at the expense of the group. Whether it is carried
out directly or indirectly by or at the expense of Panatown itself or of
another member of the group is not material. What matters is that the work will
be done and that doing it will enable Panatown to obtain whatever benefit it
sought to obtain as a member of the Unex Group by entering into the building
contract. It will not, to use the language of Oliver J, obtain an uncovenanted
benefit.”
Again, therefore, the
actual use of the damages to provide the benefit to C which was contracted for
was necessary before A could recover substantial damages.
BFS’
recovery under the Coopers settlement
i)
BFS claimed against C&LS only, in respect of the 1994
audit of BFS. It claimed the amount of the losses suffered by BFS as a result
of Leeson’s unauthorised trading between 3 February 1995 and the collapse on 23
February 1995;
ii)
Plc claimed against C&LL, in respect of the December 1992,
1993 and 1994 audits of the Plc group. It claimed against C&LS in respect
of the 1994 audit of the consolidation schedules of BFS. Plc claimed the loss
of the value of the Plc group from both firms and claimed in respect of
overpaid bonuses in 1994 from C&LL only;
iii)
BSL claimed against C&LL only, in respect of all three
years. It claimed the loss of the Dollar Funding, the loss of the value of the
BSL group and overpaid bonuses in 1994.
Can
BFS appropriate the settlement monies to non-overlapping claims?
“Where the previous
recovery stems from the acceptance of a payment into court made and accepted,
not only in respect of the claim for damages under consideration, but also in
respect of other claims not relevant, the court must decide, and it is for the
plaintiff to establish, by how much that part of the payment attributable to
the instant claim falls short of the total value of the claim itself. For my
part I cannot see how this exercise can be done without an investigation of the
other claims… For these reasons the learned judge was perfectly correct to
investigate the value of the claims between the appellants and [D1], as well as
the claims between the appellants and [D2].”
“I am satisfied that
[D1] would have been held liable in full for the agreed costs if the matter had
proceeded to trial against [D1]. The principle appears to be that if a
plaintiff who receives payment from one tortfeasor establishes an additional
separate claim against that tortfeasor, the payment is allocated first to that
claim, and credit must be given in favour of the second tortfeasor only for the
excess necessarily referable to the overlapping claim. That seems to me the
approach indicated by the Court of Appeal judgments in Townsend v
Stone Toms… and by the actual decision in The Morgengry… It also
appears to me to be the approach which is required by an application of first principles.”
“In Townsend,
the Court of Appeal held that, once there is a prima facie case that the
plaintiff has received money from a second tortfeasor which reduces his loss,
it is for him to show that the payment relates to some separate claim against
the second tortfeasor. That involves showing that the separate claim was
sustainable on the facts and in law. In my judgement [the plaintiffs’] argument
that they would have recovered against [D1] the costs which were disallowed
against [D2] ought not to succeed. I do not regard it as a reasonably
foreseeable head of loss, and its recovery in an action against [D1] is not
demanded by the dictates of common sense or justice. It is too remote. In any
event, [the plaintiff has] failed to discharge the burden of proving that this
alleged separate claim would have been likely to succeed at a trial against
[D1].”
Relevance
of recoveries by Plc and BSL
Conclusion
i)
BFS is obliged to give credit for one half of its profits from
commission and interest on its non-switching activities from 1 November 1992 to
1 March 1994 and for all of such profits from 1 March 1994 to the cut-off date
of 30 April 1994 (or any later cut-off date that is applied);
ii)
BFS is not obliged to give credit for the apparent profits
from Leeson’s switching business received by BSL, BSLL and BSJ under the two
legal grounds considered above. I address below D&T’s third ground, the
operation of section 727 Companies Act 1985 or its Singapore equivalent; and
iii)
BFS, Plc and BSL were entitled to appropriate their recovery
under the Coopers settlement to their claims which did not overlap with BFS’
claim against D&T. Therefore BFS is not obliged to give credit in its claim
for any element of that recovery.
SECTION 727
COMPANIES ACT 1985
“If in any proceedings for negligence, default, breach of duty
or breach of trust against a person to whom this section applies [which
includes an auditor], it appears to the Court before which the proceedings are
taken that he is or may be liable in respect thereof but that he has acted
honestly and reasonably and that, having regard to all the circumstances of the
case including those connected with his appointment, he ought fairly to be
excused for the negligence, default or breach, the Court may relieve him either
wholly or partly from his liability on such terms as the Court thinks fit”[573]
i)
attribution of fault. D&T invoked the section to allow the
court to take into account the fault of employees of Barings companies other
than BFS, if such fault was not otherwise attributable to BFS. However in the
light of my finding as to attribution, this argument became unnecessary and
they did not pursue it[574];
ii)
profits from the switching business. D&T contended that
the Court should relieve them of liability to the extent that other Barings
companies received apparent profits from Leeson’s activities, an issue already
discussed in the preceding section on Damages; and
iii)
cut-off of damages. The level of losses on the 88888 account
fluctuated during 1994, depending on whether Leeson traded on that account
profitably or at a loss. I have already discussed this question at paragraphs
880 to 891 of this judgment. As a final line of defence, D&T contended that
the section could be used to relieve them from liability so as to take account
of periods of profitable trading by Leeson on the 88888 account occurring after
any cut-off date.
The interpretation
of section 727
“It may seem odd that a person found to have been guilty of
negligence, which involves failing to take reasonable care, can ever satisfy a
court that he acted reasonably. Nevertheless, the section clearly contemplates
that he may do so and it follows that conduct may be reasonable for the
purposes of section 727 despite amounting to lack of reasonable care at common
law.”
“[The defendants] submit that, if an auditor formed an honest
judgement on a matter after due consideration of the question, or perhaps in
accordance with prevailing practice, but the court nevertheless considered the
judgement erroneous and negligent, the court could nevertheless find that the
auditor had acted reasonably. They submitted the court might do likewise if the
act of negligence found was casual or minor. It was conceded that the breach of
duty would have to have some such quality as in these examples to make it
reasonable. As on the defendants’ own interpretation of the section I think the
defendants fail on the facts, it is not in point to determine the questions
raised by the plaintiff, upon which I express no opinion…
“I should add also that the provision in section 365 is that the
person seeking the benefit of the section must have acted reasonably, there
being no limitation as to the field in which he must act reasonably. It is not,
for example, limited to acting reasonably in the actual discharge of his duty
of care. There seems no reason why, when he comes to be excused, his conduct
generally so far as it is relevant should not be looked at to see whether he
acted reasonably…”,
continued
(at page 294):
“In my opinion, it is in the foregoing dicta that the resolution
of the dilemma earlier adverted to is to be found. Whilst it may well be that,
in a particular situation, the very circumstances which give rise to a finding
of negligence may be so pervasive and compelling as also to demand a conclusion
that a person had acted unreasonably for the purposes of the exculpatory
section, nevertheless that section is to be taken to directing its attention to
a much wider area of concern – both in point of scope and time frame. The
examples relied upon by the defence as cited by Moffitt J seem to me apt
illustrations of the issues involved.
“I am therefore content to construe s. 365(1) in that manner.”
1131. Having
cited Re Allsop, Whittaker v Bamford [1914] 1 Ch 1 and stressing both
the “unfettered judicial discretion” involved in applying the section
and the caution to be exercised in doing so, Olssen J concluded:
“the court… ought not to shrink from giving effect to its sense
of fairness and justice. It should not hesitate, in a proper case, to relieve a
person from what, having regard to particular facts and circumstances –
particularly where the person concerned has acted honourably, fairly, in good
faith and in a commonsense manner as judged by the standards of others of a
similar professional background – from what might otherwise be seen to be a
harsh and oppressive consequence of the strict application of the law, if
applied in the absence of the considerations identified by the section.”
“The Courts in the Colony have found that the appellants acted
honestly and reasonably… Mr Terrell contended that, these two things being
established, the right to relief followed as a matter of course; but that is
clearly not the construction of the Act. Unless both are proved, the Court
cannot help the trustees; but, if both are made out, there is then a case for
the Court to consider whether the trustee ought fairly to be excused for the
breach, looking at all the circumstances.”
Does section 727
apply to D&T?
Ought D&T
fairly to be excused?
Profits received by
other Barings companies
“I now turn to the defendant’s submission that relief should be
given on the basis that the defendant, being an equal owner of the plaintiff,
has directly suffered half the loss arising as a result of trading with Promco.
If it was correct that, by being an equal shareholder with Ampol, Greenslade
suffered half the loss caused by Promco’s default, it would be reasonable, in
my view, to afford the defendant some relief. Not to do so would result in a
windfall to the other shareholder of the plaintiff. It would also cause the
defendant's loss as a shareholder to be magnified. However, the facts are such
that the extent, if at all, to which the defendant will be treated unjustly if
some relief is not given having regard to the corporate structure is by no
means clear... ”
The reduction in
BFS’ losses after the cut-off date
SCHEDULES TO JUDGMENT
Schedules
[The Schedules contain diagrams or pictures not reproduced in HTML version - see 1319_sch.rtf file to view]
A.
Chronology
B.
Dramatis
personae and glossary
C.
Organisation
chart[575]
D.
Reporting
lines chart
E.
Walkthrough
of order to trade feed[576]
F.
Audit
procedure
G.
Table
of losses from November 1992[577]
H.
K2/P4
graph[578]
I.
Example
of daily activity statement showing equity balance and margin call calculation[579]
J.
Exchange
rates[580]
[1] Heis, 3
witness statement; T22.5.02/91-5
[2] Gueler WS
B3/9 para 33
[3] Killian WS
B3/8 para 4.13
[4] Killian WS
B3/8 para 1.18, 5.3; 2nd WS B3/14 para 1.11
[7] BOBS para
1.33. Staff charts are at G11/24 (for 1992) and JF/1195 (for 1993)
[8] BOBS para
2.13 onwards
[9] Baylis,
Martin and Gibson
[12] BOBS para
2.29 onwards
[13] Norris WS
B1/220; G18/11
[16] SIR 4.22;
Norris day 103 page 60; Norris WS B1/227-9
[17] save for
Messrs Ito and Suga, whom D&T did not require to be called, and Mr Brindle,
who was overseas and refused to attend the trial
[18] Norris WS
B3/10 para 89. See day 69 page 73 and day 107 page 56-9
[20] See BFS
closing appendix 1
[22] BFS
opening, para 34 onwards; Swinson D1/54; Seet WS at C1(1)/4/36; D&T opening
at T16.5.02/73-83.
[23] SIR para
15.10; BOBS para 3.13, day 116 page 127
[25]SIMEX rule
820 (E1/129), circular 8.4.92 (E6(3), tab 115). BFS opening 7.5.02, p.61-4 and
8.5.02, p.56
[26] SIMEX rule
822 (E1/131), circular at G4/166
[29] BFS “Answer
to D&T’s Document ‘The effect of trades in the broker’s accounts’; day 120
page 54
[31] see
D&T’s opening at T16.5.02/74-7.
[32] Seet
evidence at C2(1)/58, 203. See debate during BFS’ opening at 8.5.02 at p.32
onwards and p.57-8. Also D&T opening at T16.5.02/74-7.
[33] day 125
page 145-160
[35] Seet WS
C1/4 para 10-13
[36] Hawes WS
B1/9 para 26-7
[37] and
occasionally Baring Securities (Hong Kong) Ltd
[38] BFS closing
appendix 1
[39] day 107
page 177; G5/69
[40] taken from
F1(1)/161
[41] taken from
F1(1) pages I-IV
[42] see D&T
memos in appendix 2 to closing and BFS Answer to them at opening, tab 11, and
D&T Response at supplementary opening, tab 19
[43] See D&T
response pp. 6-7
[44] Day 125
page 152. Of course the margin remained “below the line” as a margin
requirement as well. But once it had been paid, the difference between balance
and requirement would be nil, so no margin call. It is important to remember
that payment of margin to SIMEX has no effect on the equity balance
[46] D&T
closing appendix 2, T16.5.02/81-3 and F1(1) tab 9, especially p.161A. CONTAC
treated the valuation of options as memorandum information only. Even the
limited provision for future losses included in the daily SPAN margin
calculation (effectively restricted to potential losses over the next 24 hours)
did not show up, as margin paid was not reflected in the balance
[47] Hawes day
95 page 124, day 100 page 16, 53
[48] See Banking
Act 1987 section 38(1) (Large Exposure Reporting).
[49] Siegfried:
day 83 page 168
[51] D&T’s
“Analysis of the London Reconciliations” of 23.5.02. Also BFS closing appendix
1; Anthony Railton WS B1/16; London walkthrough F2
[53] the feed
was not direct from CONTAC: Hassan WS B2/2 page 85 and 92
[54] so it set
out the total initial margin, not new margin required that day. It did
not include, for futures, settlement variation: F2(1)/B.
[55] and BSJ
accounts: Plc/BSL revised opening, page 31
[56] examples
are at F2/12 and 14
[57] BFS opening
7.5.02 p.116.
[59] F2 tab E;
though it was not downloaded into First Futures, but was printed out by BSL and
used as a document: BFS opening 7.5.02 p.116
[61] According
to the C&LS ASM (Q5/283), BFS maintained in November 1994 227 customer
accounts, including a segregated account for each of the about 200 BSL agency
customers who traded through BFS.
[63] BSL closing
page 114
[64] see
D&T’s “Analysis of the London Reconciliations”, sections C and D of which
were verified by Railton on day 84 at 63-95
[66] S30 pages
27, 28, 172.
[67] Siegfried
day 83, page 93
[68] Day 120,
page 160, G4/166
[69] Bowser WS
B1/5/63-4, day 92 page 145-163, day 93 page 41-68, S19/24-5, 30-1 and 43; Dixon
e-mail at G5/27.001; Siegfried day 83 page 84-108, SIMEX memo at G4/200, Seet
at C2(1)/221-3, Dixon WS B1/8/103; Norris day 101 page 66-84; Granger
S30/173-4)
[70] Granger
S30/19 and 172
[71] Granger
S30/27, 28, 172; Railton summary B1/305: omitted from witness statement
[72] see D&T
“Analysis of London reconciliations” para 17. Almond reply report, D34/207.
[73] BFS closing
appendix 1, Riselle WS B2/4 para 31; Japan walkthrough F3, esp. tabs 2 and 11
[74] Ito’s
evidence (WS B3/183-4) relates to September 1994 and February 1995, when BSJ
did not have options on SIMEX. It was asserted by BFS and BSJ, but not proved,
that BSJ did not have SPAN in Tokyo or Osaka at any relevant time.
[75] F2(1)/154.
Day 69 page56-9
[77] day 107
pages 132-133
[80] S40/150;
day 107 page 177
[81] his
birthday was 25 February 1967: G1/98
[94] day 108
pages 14, 16
[96] forms BC4
at G9/37 and 39
[98] Day 92 page
89-91, 133-7
[99] G25/170: “Can
you take the trades that are give-ups to your own ‘error’ account in Singapore.
These bookings in and out of the London-booked clients and error accounts are a
bloody nightmare.” (7.12.93)
[100] Ito WS
B3/4/169-170; G23/237
[102]
D21A/31/paragraph 4.7
[104] S40/16 and
193; day 107 pages 15-19
[105] day 108
page 14 and day 103 page 166
[106] day 108
pages 151-152
[108] day 108
page 152; G6/1-10
[110] day 111
pages 17-20
[111] day 108
pages 152-153
[113] day 108
pages 154-155
[114] to be distinguished
from, for example, "cash/futures arbitrage", which aims at capturing
anomalies between the price of futures contracts and a basket of the underlying
securities.
[122]
Killian T6.11.02/168, T7.11.02/183-6, 210
[123] See BOBS
paragraph 3.37.
[124] the volume
of transactions on an exchange
[125] The
minimum unit of the price of a futures contract. For Nikkei 225s this was
approximately US$25 on SIMEX (US$50 on the Japanese markets, as futures
contracts traded on the Japanese markets were twice the size of those traded on
SIMEX). For JGBs a tick was approximately US$50 on SIMEX (US$100 on the
Japanese markets).
[127] day 110
pages 117-118; day 111 page 36; day 113 page 100
[129] day 103
pages 44-45 and 49; day 108 page 167
[130] day 110
pages 65-66; day 110 page 117
[131] day 110
pages 65-66
[133] day 103
pages 38-39
[140] Gueler:
day 110 page 203
[142]
B3/398/paragraph 38; day 113 page 96
[157] day 108
pages 196-199
[158] day 109
pages 17-19
[159] S63/91;
day 109 pages 20-23
[162] day 108
pages 177-178; day 109 pages 8-9
[165] day 104
pages 150-151
[166] day 109
pages 9 and 16
[169]
B3/395/paragraph 29
[170] day 109
page 27; S40/46 and 50
[171]
B3/501/paragraph 2.7
[173]
S34/197.012. See D&T paper “The dependence of the switching profits upon
Leeson” in their opening
[174] day 112
pages 156 and 160-161
[175] day 111
page 62; day 112 page 209
[179]
G28/115-116 and 118-119
[180] day 109
pages 106-107
[181]
S71/82-83/paragraphs 829-832
[182] day 112
pages 149-150
[183] day 103 pages
84-85
[184] day 111
pages 120-121
[185] day 109
pages 113-114
[188] S45(1)/34;
S46/229.158/paragraph 498
[189] day 111
page 148; S2/42; S40/67; day 108 page 183
[191] day 109
pages 47 and 102
[193] day 103
page 150; day 110 page 113
[194]
S68(1)/149, 181 and 186
[199] BOBS para
3.51 and 7.19
[202] Norris day
104 pages 4-36, 59
[209] day 112
pages 16-18
[211] day 112
page 208; day 113 page 68, 128
[213] BOBS para
3.43. Discussed with Bax day 81 page 53 onwards
[214] SIR para
3.2, BOBS para 3.49
[216] day 112
pages 63-64
[219] day 98
page 34; day 111 pages 176-177
[220] day 111
pages 174-175; S31/225-228
[223] day 103
pages 122-123 and 147
[225]
G50/111-133 at 114-115
[227] day 112
page 50, 60-1
[228] day 111
page 178-179, 197
[229] day 111
page 115, 118
[231] day 110
pages 191, 193 and 195; day 111 page 83, 171
[232] day 110
page 16; V7/24
[233] day 110
pages 190-191
[236] day 110
page 191; V1/14-15; S31/192 and 198
[237] day 111
pages 104-105
[238] day 112
pages 85-87
[239] S31/203;
day 112 page 86-7
[240] S2/73; day
107 page 19
[242] BFS
closing appendix 2, Hassan B2/61-70, and listing of the illicit trades in F6
[243] schedule 7
of the BFS statement of claim
[244] BFS
opening para 179; Wong WS B2/5 para 40-5
[246]
S31/395-402, and B2/70-2
[247] BFS
closing, appendix 3
[248] SIR
appendix 3K, page 215 of bundle
[249] Leeson
S73/2/69 and S73/4/87-8
[251] see
F9/9-11 and schedule 3
[253] Leeson
S73/3/7 and 17-8; Hassan WS B2/102: “we requested … the shortfall between the
funds available in the bank accounts and the amount which had to be paid to
SIMEX and the customers.”
[254] See
schedule at the back of A4 (Plc statement of claim) amended in accordance with
D&T closing K4 paragraph 128 and appendix 5.
[257] SIR para
3.46. BFS opening (para 15 of section 6B) gives figures in the actual
currencies, and current exchange rates, which produces higher sterling
equivalents: Ł368m BSL, Ł151m BSLL and Ł321m BSJ
[258] The
dollars were only called collateral because they were not the currency of the
traded contract: S49/49 and day 85 pages 79, 87.
[259] it did on
the day the dollars were paid, but not on subsequent days
[260] Railton
day 85 page 129
[261]
considerably more if he did not repay the extra yen when he repaid US dollar
collateral
[262] Railton WS
para 35-42; Hughes WS B1/10 para 8-14
[266] the
surviving requests are collected in U8
[267] Railton
day 85 page 93
[268] BSL
closing, appendix 2; D&T closing appendix 5 does not distinguish between
BSL and BSLL funding
[269] BOBS para
6.92 and schedule to Plc statement of claim
[270] BSL
closing, appendix 2
[271] BOBS para
6.64 and schedule to Plc statement of claim
[272] G16/64.
Hawes WS B1/9 para 15-22; S32/210-2
[273] Day 100
page 54. Details of collateral are in F11 and 12
[276] taken from
D&T supplemental opening submissions
[277] Hawes
S32/42, 61-2 and day 97 page 112-5: the balance sheets are at the back of
Hawes’ WS in B1.
[278] Hawes day
98, pages 82-94 and S32/221; O’Donoghue S48/34; Granger S30/193
[279] Hawes WS
B1/115; day 95 pages 150-4, 163-4; day 99 pages 64-5, 69-70
[280] Hawes day
95 pages 150-4
[282] S30/106-9,
193-4, 198-9; S32/116, 119
[284] Railton
day 85 page 155, day 86 pages 18-35
[286] G58/18 and
S32/128, 205-6, 228, 240-6, 256, 261, 271, 306
[287] Hawes day
99 pages 128-134
[288] Day 95
page 81, day 96 pages 23, 30, 76
[291] Hawes day
97 pages161-5; day 100 pages 69-70. Enclosure Bs are in U10
[292] Hawes day
97 page 163
[293] Railton
day 85 page 164
[294] day 85
pages 172-182
[295] G38/195.
The figure quoted is now apparently impossible to reconcile to the records
[298] Railton
cc-mail 3.1.95, G57/30
[299] day 96
page 153; S32/38-46, 219-224
[300] S48/15-22.
Her notes are at G39/10-12
[301] Day 96,
pages 154, 163
[305] Day 87
page 100; day 88 page 73
[307] S32/110,
277. See G35/51, G46/109, Hawes WS B1/9 para 25-9, S32/73, 272-6 and day 98
page 11
[308] G47/13,
71, 167 and 168
[311] Hawes day
98 pages 20-34
[312] Hawes day
99 page 87
[313] Hawes WS
B1/115-6; day 99 pages 90-134
[314] Hawes day
99 pages 84-90
[315] Hawes day
99 page 87
[317] Hawes day
98 pages 39-47
[318] Stunt
S53/10-11, 47; Railton day 86 page 91; Hawes day 99 page 160
[319] Hawes day
100 page 87
[320] Hawes WS
B1/123; day 99 page 164
[322] G55/95,
G56/42, G57/30, G57/142, G59/105, 108. Railton day 86 pages 92-129
[323] Railton
day 85 pages 31-5
[324] Day 93
pages 105-110.
[326] 1994
figures taken from D&T closing appendix 5. 1995 figures from the schedule
to the Plc statement of claim (A4), amended in accordance with D&T closing
K4 paragraph 128 and appendix 5. The payment on 23 February 1995 was US$123.5
million.
[327] Bax WS
B2/1 para 47 and day 80 page 78; Jones WS B2/14 para 93 and 13.2.02/91, 94
[328] Norris day
104 pages 70-87
[329] Jones
13.2.02/91, 94
[330] Gautier
report D23 pp 31-3.
[333] Baker WS
B2/10 paras 24-8.
[335] Gueler WS
B3/461, 463
[336] James
Baker day 88 pages 31, 54, 162
[337] Norris day
104 pages 114-129
[339] Killian
day 109 pages 36-45; S40/107
[340] day 111
page 204; day 113 page 109
[341] Norris day
103 pages 131, 146
[343] BOBS para
7.29 onwards
[344] For these
paragraphs, see Mah WS B4/1 para 2 and Khoo Kum Wing WS B4/3 para 11 - 13
[345] G7/122.002
and 178; Killian day 108 page 9
[347] Mah WS
B4/1 para 6.2
[348] Mah WS
B4/1 para 6.3
[354] Mah WS
B4/1 para 8 and B4/2 generally
[355] JG/1 and
JF/4 page 1163
[360] Mah WS
B4/1 para 15.1
[364] Mah WS
B4/1 para 16.2
[368] JG/2 and
JF page 1163 and 1298
[377] K2/3 pages
1044, 1045
[378] Seet WS
B4/4 para 29
[379] Seet WS
B4/4 para 35
[384] G54/25,
K4/1655, Khoo WS B4/3 para 34, Seet WS B4/4 para 14
[385] Seet WS
B4/4 para 145-150; Spence D33/29
[386] Seet WS
B4/4 para 39
[391] Dennis
Seet Choon Seng WS C1/4/40 and 258; Ho Tian Yee WS C1/3/2-4.
[392] C1(1)/258
and 8.5.02 at p.133. SIR para 15.48 says US$86 million
[397] Day 114
pages 57, 59
[400] Day 124
pages 34, 38
[406] Day 118
page 13; day 121 pages 14-7
[407] see
paragraphs 317-324 for details of BFS’ funding
[408] BFS closing
appendix 3, pages 25 and 31
[409] JB/390,
day 117 pages 134, 137
[415] Day 122
pages 133, 163; day 123 page 36
[416] Day 127
page 88; day 129 pages 60-3, 71-3
[417] Day 124
pages 146-156
[419] four
charges were initially lodged, of which two were dropped without a hearing and
one was struck out. Mr Mah was found not to have been at fault on the remaining
charge
[420] D1 para
617; day 125 pages 98-9
[422] see
discussion at day 80 page 159 onwards
[425] G11/3,
which shows Leeson having crossed out Hassan’s correct entries for 1 October
[432]
T16.5.02/17; BSL closing p.148
[433] see the
explanation of the audit procedure followed by D&T at Schedule F to this
judgment
[439] Day 117
page 26; day 118 page 50
[441] Day 123
page 127; day 126 page 4-5; day 128 page 54
[442] Day 118
page 45; day 127 pages 78-80
[446] Day 123
pages 174-185; day 126 page 90
[449] account
99905: day 119 pages 28-9
[451] Day 118
page 77; day 128 page 97
[453] Day 123
pages 127-8
[455] BFS’
closing, appendix 3 page 14
[456] The other
way of looking at it is that, if amounts owed to customers were S$89m, the
margin at SIMEX ought to have been S$71.4m. Instead it was S$103.9m.
[458]
D1/176-184; day 129 pages 109, 134
[463] Business
days in the last week of December 1993 were 29, 30 and 31 December. See U9/181.
[465] nor is it
likely that trades done earlier than 29 December, on 23 or 24 December, would
have resulted in the imbalance, because of BSL being delayed in making payment
by the Christmas holiday. A trade on 24 December would have required BSL to
cause payment to be made by 31 December, which should have caused no
difficulties
[472] S73/3
pages 7-17; B2/102 and 144
[474] Day 78
page 138-9, 142
[476] Day 101
pages 146-156
[481] D&T
appendix to closing, tab 5
[482] D&T
appendix to closing, tab 7
[490] Day 98
pages 133, 136
[491] Day 108
page 168-170
[492] Day 113
pages 178-9
[494] at the
exchange rate current when the schedule was compiled. Save where otherwise
indicated, when referring in this judgment to the losses on the 88888 account,
I have used the sterling figures as shown in this schedule
[495] reply,
paragraphs 13(3), 14C, 14D and 15B(2)
[497] Day 110
page 149-150
[499] B2/36; day
78 pages 66, 133, 182
[500] Day 92
page 72-3; Day 101 pages 168-172
[502] Day 78
pages 65-6, 76-7; day 82 pages 10-11
[507] Day 80
page 45-6, 167
[508] Day 79,
page 57-60, 147-8
[509] Day 79
pages 64, 71, 79-90
[510] B3/445;
day 79 page 63; day 82 pages 68-75
[511] BFS
closing page 278
[512] T14.2.02
page 108, 222
[513] day 79,
pages 101, 110, 114
[516] day 89
page 16-7, G47/72
[517] T11.2.02
pages 78-80
[518] day 81
page 66; day 102 page 114; day 106 page 104
[519] day 81
pages 23, 68
[522] S31/456;
day 75 pages 18-26
[523] Hassan WS
para 54; day 74 pages 88-92
[524] Day 74
pages 58, 78; day 75 page 55
[525] Day 75
pages 32, 37
[526] day 77
pages 24, 39, 49
[529] D21A/65
and 275; day 116 pages 62-9
[534] BSL
closing pages 124-130
[535] day 101
pages 66, 77-8, 84-5
[536] see F2(1)
page 135-6
[538] BSL
closing page 179
[542] BOBS
report paragraph 6.90
[543] BOBS
report paragraphs 13.23-24
[544] D&T
appendix 5, but ignoring the $26m of double-counted yen margins
[546] G15/80 and
G18/12-3
[552] day 110
page 149; day 113 page 48
[553] S40/107;
day 109 page 45
[555] BFS
closing page 297-8
[559] day 94
page 88; day 98 page 123-4
[561] D&T’s
statement of claim against Plc and BSL, paragraph 10
[562] D&T’s
statement of claim against BSJ, paragraph 18(4) and 20; section L, paragraph 74
of D&T closing
[564]
C1(2)/271-2. Mr Soo was not cross-examined about this evidence (see C2(1) and
(2)).
[567] day 149
pages 77-81
[568] combining
schedule 7 of the BFS statement of claim and appendix 3 of D&T closing
[569] G27/165,
G30/19, G32/97
[571] see
Plc/BSL original opening, pages 11-15 and 278-313
[575] appendix
to BFS opening
[576] Volume
F1(1), pp.I-IV
[578] from
D&T supplemental opening submissions