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||Neutral Citation Number:  EWHC 2422 (Comm)
||Case No: 2009 FOLIO 1393
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
MR. JUSTICE TEARE
|| (1) SOHEIR AHMED ZAKI
(2) SHAHIRA MAGDY ZEID
(3) BAHIRA MAGDY ZEID
(suing on their own behalf and on behalf of
MOHAMMED MAGDY ZEID as his successors in title)
||- and -
||CREDIT SUISSE (UK) LIMITED
Robert Anderson QC and Shaheed Fatima (instructed by Howard Kennedy) for the Claimants
Adrian Beltrami QC and William Edwards (instructed by Freshfield Bruckhaus Deringer LLP) for the Defendant
Hearing dates: 15-16, 20-23, 27-29 June and 4-5 July 2011
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr. Justice Teare:
- Mr. Mohamed Magdy Zeid was a successful and wealthy businessman. Prior to the turbulent conditions which afflicted the financial markets in September 2008 he held a number of structured financial products which he had bought from Credit Suisse (UK) Limited ("CSUK"), the Defendant. In October 2008 CSUK issued a margin call which was not met by Mr. Zeid. As a result CSUK liquidated certain of the products causing Mr. Zeid to suffer a loss of US$ 69.4m. Mr. Zeid claimed that this loss was the responsibility of CSUK and, along with his wife and two daughters who were joint account holders with him, commenced proceedings against CSUK. Mr. Zeid died in May 2010 at the age of 77. The claim has been carried on by his widow and daughters. CSUK has denied liability.
- At trial the claim was ultimately advanced on the basis that CSUK had breached its statutory duty to comply with rules made by the Financial Services Authority ("FSA") pursuant to the Financial and Services Markets Act 2000. The rules in question were known as the Conduct of Business Rules ("COB"). They applied until 1 November 2007. Thereafter they were known as the Conduct of Business Sourcebook Rules ("COBS"). Section 150 of the Act provides that a contravention of a rule is actionable at the suit of a person "who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty".
- Considerable forensic effort was expended by the Claimants in showing that certain aspects of CSUK's record keeping and the manner in which CSUK had classified Mr. Zeid and the Claimants pursuant to COB 4 and COBS 3 were unsatisfactory. Aspects of CSUK's record keeping and classification of the Claimants did not inspire confidence that CSUK gave proper attention to its statutory duties but they are not in truth the foundation of the claim. The foundation of the claim lay in CSUK's duty under COB 5 and COBS 9 to ensure, where it makes a personal recommendation concerning an investment, that its advice is suitable for the client. Reliance was also placed on a duty of CSUK under COB 7.9 not to arrange for the loan of money in connection with a proposed investment unless certain conditions were satisfied, in particular that the arrangements for the loan and the amount concerned were suitable for the type of investment proposed. There is no such duty under COBS but instead there is guidance (not a rule) that when considering the suitability of an investment which is linked to a loan the suitability of the overall transaction should be taken into account.
- There was a factual dispute between the parties as to whether CSUK made a personal recommendation to Mr. Zeid to buy the structured products in question. If CSUK made such a recommendation then CSUK had a duty to ensure that its advice was suitable for Mr. Zeid pursuant to COB 5 and COBS 9. If no such recommendation had been made then no such duty arose. There was also a factual dispute as to whether CSUK (as opposed to another Credit Suisse entity) arranged for a loan. If it did, then it had a duty only to do so under COB 7.9 in certain circumstances. If it did not, then no such duty arose.
- The claim in this action was advanced in respect of 10 structured products sold between February 2007 and June 2008.
- Of those products, 7 were known as Callable Bullish Notes (and, for reasons never explained referred to as "CDIs"). Such notes are a type of yield enhancement product. Their terms can vary (to suit an investor's needs) but generally they provide the investor with the opportunity of receiving a periodic coupon payment, at a rate rather higher than interest on a deposit account. The notes may be linked to one or more stock market indices (or one or more stocks). They may be "called", that is, bought back by the issuer at 100% of the principal amount on a coupon payment date. If at the expiration of the note (which may last for a number of years) each index trades above the strike price (the level of the index at the date of purchase) and the note has not previously been called by the issuer, 100% of the principal amount will be returned to the investor. Similarly, if one or more of the indices trades below the strike price at expiration but none has ever touched the "barrier level" (say 55% of the strike price) the note will redeem at 100%. But if one or more of the indices touches the barrier during the lifetime of the note the note will be redeemed at the final level of the worst performing index. Thus if the barrier is touched and the worst performing index on closing is 85% of the strike level redemption will be at 85% of the principal. For this reason CDIs did not protect the capital invested in the note. The coupon was payable so long as none of the indices touched the barrier. If an index touches the barrier then no coupon will be paid during the period in which the index has touched the barrier. CDIs are known to experts in this field as "worst-of barrier reverse convertible securities." "Worst-of" refers to the feature that the note is related to more than one index and that the return can be based upon the worst performing index. "Reverse" refers to the feature that the return cannot exceed 100%. Thus there is no "upside" benefit to the investor. "Convertible" refers to the feature that once the barrier is touched the investment is converted into an equity risk.
- Of the remaining 3 products, 2 were "trigger" notes and 1 was a reverse convertible note. Since no submissions were made referable only to these notes it is unnecessary to set out how they worked save to note that they also did not protect the investor's capital.
- All of the 10 notes were purchased with the assistance of loans. Thus all of the loans were "leveraged".
- There was no evidence from Mr. Zeid. When he died on 16 May 2010 no draft statement or proof of evidence had been prepared. Witness statements were not due to be exchanged until December 2010. His widow, Soheir Ahmed Zaki, and his daughters, Shahira Magdy Zeid and Bahira Magdy Zeid, gave evidence at the trial. CSUK called Mahmoud Zaki (who is not a relation of Soheir Ahmed Zaki) to give evidence. He had been a relationship manager employed by CSUK and had had responsibility for the Claimants' account. One of Mr. Zaki's assistants, Mr. Rabih Khodari, also gave evidence. In addition both parties adduced expert evidence.
- Mr. Zeid had begun to purchase structured products in 2003 from Credit Suisse First Boston ("CSFB") through Mr. Zaki. The pattern of his purchases from 2003 was referred to in evidence and relied on by CSUK. Thus the evidence covered a five year period from 2003 to 2008. Inevitably the court's findings as to what happened during that period must be based primarily on such documents as exist. Mr. Zaki (or his assistants under his instruction) made records of his dealings with Mr. Zeid. They were entered up on the Private Client Relationship Management system ("PCRM") shortly after the meeting in question but sometimes three or four days later if, for example, Mr. Zaki had been travelling. It appears that Mr. Zaki dictated his notes and his assistants typed up the entries. Mr. Zaki did not type and did not use email (though his assistants did). These PCRM notes are a contemporaneous, or near contemporaneous, source of evidence concerning the dealings between Mr. Zeid and Mr. Zaki.
- It is necessary to record my assessment of the witnesses. Shahira Zeid, one of Mr. Zeid's daughters and a prominent businesswoman in Egypt, gave evidence in a manner which suggested that she was being very careful to say things which assisted the Claimants' case. Thus she insisted that her father was advised by and trusted Mr. Zaki with regard to his purchase of structured products. This was not something which she had said in terms in her statement and was not something of which she could have direct knowledge because the structured products were discussed between Mr. Zeid and Mr. Zaki alone. She insisted that her father could not understand structured products but she could not identify the features of them which he did not understand. She was also very careful not to say anything which might be thought to assist CSUK's case. Thus she was reluctant to answer questions about her father's involvement in business enterprises other than in Maridive, a successful company he himself had established. Indeed, she sought to downplay his involvement in other business enterprises when the documents suggested that he had had a significant role. In consequence I concluded that I had to treat her evidence with caution and only accept it when it was unchallenged or supported by other reliable evidence. Her sister Bahira Zeid, who does not work and lives with her family in Saudia Arabia, was also reluctant to answer questions which she thought might assist CSUK. Thus she was reluctant to say whether she expected Mr. Zaki to talk to her about the account in her name. As with her sister, I concluded that I should treat her evidence with caution. Mr. Zeid's widow, Soheir Zaki, who was never involved in her husband's business (and had never been in a bank in her life), gave evidence in a manner which appeared to me honest and straightforward. However, she had very little relevant evidence to give.
- Mr. Zaki gave evidence over three days. He left Credit Suisse at the end of 2008 and so did not appear to have a direct interest in the result of this litigation. At first he was keen to know where the questions were going and therefore appeared to be guarded in his answers. Some of his answers were also long and at times difficult to follow. From time to time he disagreed with what had been said in the contemporaneous documents. However, as time went on he engaged with the cross-examiner in a manner which appeared to be that of an honest witness, keen to give his evidence of what actually happened between himself and Mr. Zeid. Obviously, where the events in question took place between 2003 and 2008, his evidence must be tested against the contemporaneous (or almost contemporaneous) documents which are likely to be a better guide to what happened than his recollection in 2011. But where there are no documents to test his recollection I considered that his evidence, where it was clear, was worthy of belief unless there were some particular reason for regarding it as improbable. His assistant Rabih Khodari, who also gave evidence, appeared to me to be a witness who was seeking to tell the truth. He also had the merit of speaking with great clarity.
- The Claimants' expert witness, Mr. Tsvetan Beloreshki, was not a reliable witness. He said in his report that structured products should only be sold to "market participants/investors who are able, on the basis of their own knowledge, skills, sophistication and expertise, to understand, analyse, value and manage the risks associated with complex structured products." This was an extreme position to adopt which he wholly failed to support when cross-examined. In his report he had said that the "disconnect" between the Claimants' investment purpose (capital growth with moderate risk) and the nature of structured notes that offer income/yield at the expense of the possibility of substantial loss of principal/capital "alone should have sufficed to preclude Credit Suisse from selling the Structured Notes to the Claimants." Yet in cross-examination he said this did not apply where the client had his eyes open and a full understanding of the risk. I was very troubled that he had not thought it appropriate to add that caveat in his report. For these and other reasons I concluded that I could not rely on his evidence.
- The expert called by CSUK was David Croft. I regarded him as a fair and careful witness. That does not mean that all his evidence was reliable. For example he accepted that he had overlooked the rules and guidance in COB and COBS with regard to lending. But unless there was some particular reason to doubt his opinion, I regarded his evidence as reliable.
- Before recounting the dealings between Mr. Zeid and CSUK (and its predecessor CSFB) I must summarise Mr. Zeid's business career. He graduated from Cairo University with a degree in chemistry and worked in the oil industry. In 1978 he established Maridive, a company which provides offshore marine and oil support services in the Middle East and North Africa. In 2008 shares in Maridive were offered for sale in an IPO. The offering circular reported, for the year to 31 December 2007, operating revenue of over US$ 264m. and an operating profit of US$ 96.75m. Shahira Zeid, who is now the chairman of the family investment holding company, accepted that Maridive is currently worth US$ 1.5 billion. The family retains a holding of 17.64%, worth about US$ 300m.
- Mr. Zeid's wealth and that of his family was diversified into other businesses in Egypt (including insurance, oil exploration and hotels), in China (including automobiles and construction) and in Europe (real estate and hotels). Shahira Zeid accepted that the family wealth in 2007 would not have been less than US$ 600-700m.
- In addition to his role in Maridive, which was plainly his major activity, Mr. Zeid had other roles. He was chairman in an executive role of an Egyptian insurance company, Pharaonic American Life Insurance Company. He was on the board of a financial services company, ADI Al Ahly. He also represented the family investment company on the board of Sigma Capital which had an investment banking role. He had been deputy chairman of OAPEC.
- Mr. Zeid was therefore a very successful businessman whose interests and responsibilities extended beyond offshore marine and oil services into insurance, financial services and banking. His role as deputy chairman of OAPEC suggests that he was highly regarded by others.
Contractual arrangements between the Claimants and Credit Suisse
- There were, it seems, several accounts and agreements between Credit Suisse and the Claimants. The following are those most relevant and which were relied upon by counsel during the trial.
- In September 2003 Mr. Zeid opened a joint account with Credit Suisse, Geneva ("CSAG"). The account was in the name not only of Mr. Zeid but also of the Claimants. Mrs. Zaki accepts that this was done at least in part for succession purposes. Her daughters were reluctant to accept this but in circumstances where the family had no involvement in the operation of the account it seems likely that the family were named as account holders for succession purposes. When the account was opened the Claimants completed Customer Profile forms but only in part. Information was later added to these by others which information, it was common ground, was untrue in some respects. For example, both Soheir Zaki and Bahira Zeid were said to have had "over 10 years experience in the investment markets and as such a complete understanding of the risks involved." The forms recorded that an execution only service was required, that the Claimants' investment objectives were income and they were prepared to accept moderate risk. Whether this information concerning the type of service, investment objectives and risk was provided by the Claimants is not clear.
- On 2 December 2003 Mr. Zeid and the Claimants signed a Private Banking Agreement with the private banking division of CSFB in London. Its terms, together with those of an appendix, stated that CSFB was to provide an Advisory service, that is, one pursuant to which CSFB was to "give investment advice to the Client and effect transactions on an advisory or execution-only basis". The appendix described the family's investment objectives as "Growth/Maximise capital growth" and that the non-standard investments contemplated included derivatives and special products. The agreement defined "Growth/Maximise capital growth" as follows: "The investment objective is to maximise capital growth using a range of products including some with higher volatility and therefore a higher degree of risk for the investor. This category allows for investment in derivatives, specialist products including structured products……" Specialist products were described as having "high risk profiles" and the client was advised "not to enter into a transaction in any of these products unless the risks involved are understood."
- On 15 December 2003 the Claimants obtained a credit facility from CSFB (or CSAG, it was not clear which) in the sum of US$ 21m. It was to be governed by English law.
- On 18 March 2004 the Claimants obtained a further credit facility from CSFB (or CSAG) in the sum of £8m.
- On 2 July 2004 the US$ facility was increased to US$ 40m. On 22 September 2004 that facility was increased to US$ 60m.
- On 14 January 2005 the Claimants were informed by CSFB that their relationship with CSFB was to be transferred to CSUK on 14 February 2005 by means of an order of court.
- On 26 January 2005 the USD credit facility from CSFB (or CSAG) was increased to US$ 100m. Thus in the first 16 months of Mr. Zeid's relationship with CSFB his borrowing facility had been increased from US$21m. to US$ 100m.
- On 25 July 2005 the Claimants executed a Deed of Pledge in favour of "Credit Suisse". It was to cover "any and all claims of [Credit Suisse] against [the Claimants] as a result of any contract or agreement entered into or to be entered into within the framework of business relationships". Clause 5 entitled Credit Suisse to call upon the debtor to provide additional collateral "if the ratio of its value to the claims is no longer satisfactory in the Bank's opinion. Should the debtor not comply with this demand within the period stipulated by the Bank, or fail to duly effect payment for a debt secured under the pledge, all of the Bank's claims against the debtor automatically become due, entitling the Bank to dispose of the collateral at its discretion….." I was informed that it was pursuant to this power that the structured products which are the subject of these proceedings were liquidated in October 2008. The legitimacy of that action was not an issue in these proceedings.
- On 15 September 2006 two assistants of Mr. Zaki, Francis Menassa and Christian Robinson, applied for a Framework Credit Limit from "Credit Suisse" apparently on behalf of the Claimants. The actual extent of the credit limit was to be based "on the collateral value of the pledged assets." It was to be used as a current account overdraft, for fixed advances, to cover margin requirements on certain transactions and to cover outstanding credit card balances. It was specifically requested that "this agreement also to be applied to all existing loans in the forms referred to above." By clause 5 the Bank was to "grant an advance on the pledged assets in accordance with its customary lending guidelines. The limit may be used up to the collateral value of the assets pledged, subject to para. 5 of the General Deed of Pledge". The Framework Credit Limit was to be governed by Swiss law. On 29 September 2006 the Framework Credit Limit was accepted by Credit Suisse in Geneva. There was a dispute between the parties as to whether this Framework Credit Limit took the place of the earlier US$ and sterling credit facilities. The Claimants said that it did. CSUK said that it did not.
- These agreements were, as I have said, not only with Mr. Zeid but also with his wife and daughters but it is clear that Mr. Zaki dealt only with Mr. Zeid. At no stage did his wife and daughters assert a right to be consulted. They must have been aware that Mr. Zaki dealt only with Mr. Zeid. They must thereby have let Mr. Zaki understand that they consented to him dealing only with Mr. Zeid. Nevertheless, they remained clients of CSUK to whom regulatory duties were owed. If and in so far as CSUK had a duty to ensure that its recommendations to the Claimants were suitable that duty was owed to each of the Claimants. However, because Mr. Zeid's wife and daughters allowed Mr. Zeid to deal with Mr. Zaki on their behalf in every respect, I do not consider that they can assert that what was suitable for him was not suitable for them. The Claimants accepted that Mr. Zeid had authority to deal with the day to day conduct of the account. That must include the imparting of such information as was necessary to enable Mr. Zaki, and hence CSUK, to advise whether an investment was suitable or not, for example the investment objectives of the Claimants.
The sale of structured products prior to those which are the subject of this claim.
- 29 structured products were sold by CSUK (or its predecessor CSFB) to the Claimants prior to the 10 which are the subject of this claim. Of those 29, 14 were capital protected and 15 were not capital protected.
- The capital protected notes, or most of them, were known as Callable Range Accrual Notes ("CRANs"). They are notes which provide variable returns depending upon movements in US$ Libor. There was a risk that no coupons might be earned but it was not possible to lose the initial investment so long as the note was held until maturity. The first CRAN was sold to the Claimants on 29 October 2003. It cost £5m., of which £3.75m. was borrowed from CSFB. Not all, but almost all, of the notes sold to the Claimants were "leveraged" in this way.
- Most of the non-capital protected notes which were sold before the 10 notes which are the subject of this claim were known as Trigger notes. The first such note was sold on 10 December 2004. It cost £10m. of which £7.5m. was borrowed from CSFB.
- 2 CDIs were sold before the 10 which have given rise to this claim. One was sold on 3 November 2005. It cost £6m. of which £4.8m. was borrowed. The other was sold on 28 September 2006. It cost US$ 10m. of which US$ 7m. was borrowed.
- During the period 2003-2006, when Mr. Zeid was buying structured products from CSUK (or CSFB), Mr. Zeid was also buying such products from other banks, including Barclays and Citibank, sometimes on a leveraged basis.
The manner in which Mr. Zeid dealt with Mr. Zaki.
- Mr. Zaki was a relationship manager employed by Credit Suisse on the Middle East desk. He had a number of clients of which Mr. Zeid was one. Mr. Zaki began to specialise in structured products from 2001-2002. He was salaried but also received a proportion of the commission earned by Credit Suisse when selling a product.
- Mr. Zaki and Mr. Zeid often discussed investments in structured products at Mr. Zeid's home in London in the evening over a glass of whisky. Afterwards they and their wives would often go out for dinner. Investment business was not discussed over dinner. Sometimes they would discuss investments over the telephone. Mr. Zaki said that he and Mr. Zeid were good friends and he accepted that Mr. Zeid trusted him. Some of the notes were discussed at other places including Cairo and Nice. Mr. Zaki gave evidence that he would provide Mr. Zeid with "indicative terms" of a note they were to discuss. During the discussion Mr. Zeid would ask questions about the note. Mr. Zaki said he would explain the note in detail, including the risks associated with it and the effect of leverage on such risks. When the investment being discussed was of a type which the Claimants had previously bought, Mr. Zeid would often interrupt to say he already understood the note. In his oral evidence Mr. Zaki said that Mr. Zeid would often discuss the terms of the notes and consider whether, for example, the return could be improved or the barrier changed. He described the conversation as "two-way". Mr. Zeid would decide what trade to execute.
- It is necessary to test this evidence against the PCRM notes. The following are three examples of the PCRM notes:
i) A PCRM note for 7 September 2005 records that Mr. Zeid requested a firm price on a 10 year Momentum CRAN referenced to 3 month US$ Libor. "After several tweaks to the Note the client has given us an order to buy the Note with a 10% fixed first year coupon."
ii) A PCRM note for 16 April 2007 records that Mr. Zaki showed Mr. Zeid a Trigger note but that Mr. Zeid preferred a CDI. This was because he thought the equity market might drop. He wanted the CDI to pay a fixed coupon because he thought that US interest rates might drop. Mr. Zaki agreed to comply with Mr. Zeid's instructions.
iii) A PCRM note for 13 February 2008 records that Mr. Zeid wanted Mr. Zaki "to give him a structured note idea that was capital protected but with a possibility of an enhanced return." Mr. Zaki offered him a CRAN and Mr. Zeid said he would think about it. Mr. Zaki "explained that this note will have an additional advantage as it would diversify the account more, as all notes currently are equity linked."
- These notes paint a picture of Mr. Zeid having his own ideas as to what he wanted, examining critically the notes offered to him by Mr. Zaki and suggesting changes to the notes offered to reflect his wishes. They also show Mr. Zaki explaining the advantage of diversity. They certainly support Mr. Zaki's oral evidence that the discussions about structured products were "two-way". The notes do not suggest that Mr. Zaki's description of his discussions with Mr. Zeid is unreliable. I therefore accept his description of those discussions.
- Once Mr. Zeid gave instructions for the purchase of a structured product one of Mr. Zaki's assistants, under his instructions, filled out an internal Credit Suisse form. At the time of the early sales executed by CSFB the form was entitled "Transaction Approval Form for Structured Products" though its exact title and format altered over time. At the time when the 10 notes to which this action relates were sold by CSUK, the form was entitled "Transaction Suitability Form." Such forms were signed by Mr. Zaki or on his behalf. Their purpose, as appears expressly from the CSUK forms, was to present information for review and approval by management. In the forms Mr. Zaki is described as the Advisor and is expressly stated to be "responsible for assessing client suitability".
- The forms recorded information about the customer including his investment objectives and risk tolerance. They can be illustrated by three examples:
i) The form for the first CRAN in October 2003 recorded that Mr. Zeid's investment objective was "long term income" and that his risk tolerance was "moderate". It stated that he "is very knowledgeable in the investment markets and has sufficient understanding of the products."
ii) The first non-capital protected note (a Trigger) was sold in December 2004. No suitability form for this note was in evidence. Prior to that sale it is apparent from an email dated 23 November 2004 that Mr. Zaki's assistants were seeking to attract Mr. Zeid to "equity ideas" but that Mr. Zeid had shown no interest in anything but "rates based products." Mr. Zeid must have been attracted to a Trigger note shortly afterwards. A second Trigger note was sold in March 2005. The suitability form for that note recorded Mr. Zeid's investment objective as income and his risk tolerance as moderate (though those two entries were misplaced). It was stated that the purchase of this note would "add to the diversification." The form noted "increase risk profile" in answer to the question "will this investment increase or decrease the risk profile of the entire portfolio". It was further stated that "the client currently holds a Trigger Note in GBP", that "he fully understands the product and risks involved" and that he "has funds available to meet any margin call". The form further records that the sale had been promoted by CSUK by means of a personal visit, sending documentation and telephone. The product was described as a SCARP ("structured product at risk product") but it was recorded that no SCARP warning had been sent. Such a warning was said to be not appropriate because the client was an "Expert".
iii) The first CDI was sold in November 2005. The suitability form described Mr. Zeid's risk tolerance as medium but his investment objective as capital growth. With regard to diversification the form stated: "New CDI, only one in the account…. Trigger Note (GBP) has just been called and this replicates that risk on same reference indices: S&P, Eurostoxx and Nikkei 225." With regard to Mr. Zeid's ability to evaluate the merits and risks of the product it states: "Client extremely experienced in structured products. Currently has a diverse portfolio of 9 products and fully understand merits and risks involved. Has held similar notes previously and frequently takes a view on S&P, Nikkei and Eurostoxx." With regard to the client's ability to bear the risks involved it states: "Client is extremely liquid through significant banking relationships. Has transferred out £950,000 in September which we expect back into account soon. For coupons he will receive over $1,250,000 before the end of the year. Client understands margin call scenario." Again, no SCARP warning was sent. This was said to be not applicable although the product was a SCARP.
- In addition to providing "indicative terms", discussing them with Mr. Zeid and carrying out Mr. Zeid's instructions Mr. Zaki supplied Mr. Zeid with market information and the current pricing of the structured products he had bought. Market information was provided by documents entitled "market snapshot". They detailed the movements in world stock markets, volatility rates, currency movements and other matters. The pricing of the products was carried out by CSUK (and its predecessor CSFB). It was no doubt a complicated exercise but in broad terms it reflected movements in the referenced indices and volatility. The lower the referenced indices went, and so the nearer they approached the barrier, the lower the price would go. If the referenced indices rose above the strike level, the price would rise. The pricing would assist the issuer in deciding whether to "call" the note by redeeming it and would assist the buyer in determining whether he wished to sell the note back to the issuer. A typical pricing update showed the nominal value of the notes held by Mr. Zeid together with the current price of the notes expressed both in percentage and cash terms. The loan on each note was also recorded. Further information in "boxes" noted, in respect of CDIs, the level of each stock market index by reference to its strike level. A PCRM note for 28 February 2005 shows that Mr. Zeid kept a keen eye on the pricing of his notes. It is likely that these notes were much discussed by Mr. Zeid and Mr. Zaki. The pricing affected the loan to value ratio which in turn limited the amount of leverage which was available.
- Mr. Zaki also provided Mr. Zeid with documents showing the effect of leverage. They illustrated the (very attractive) return expected at maturity of a note purchased with leverage. In smaller type in a footnote Mr. Zeid was warned that the value of the note may fluctuate according to market conditions and that additional collateral may be required (a "margin call") to cover any shortfall if the loan value increased, say, to over 70% of the value of the note.
Mr. Zeid's understanding of the structured products and the risks associated with them
- Having regard to the term sheets, the pricing updates, the documents showing the effect of leverage and the content of the PCRM notes it is very likely that Mr. Zeid understood the essential characteristics of the notes, namely, the circumstances in which the coupon was payable and not payable, the circumstances in which the capital outlay was repayable and in which it was at risk, the effect in general terms that market movements had on the pricing of the notes and the circumstances in which changes in the loan to value ratio might lead to a margin call. It is likely that, by reason of his commercial and financial experience, Mr. Zeid was able to form a view as to how the markets were likely to behave and, in consequence, of the risks he ran in holding the notes. Indeed, before the dramatic events of October 2008 Mr. Zeid had had to face up to those risks.
- Thus on 14 December 2005 he was informed that a CRAN was no longer paying a coupon because the barrier had been broken. In consequence Mr. Zeid sold the CRAN and bought a Trigger. This was the fourth Trigger he had bought from CSUK (or its predecessor CSFB). The PCRM note recorded that "the client would like the opportunity to switch out of the Note and into a trigger which will give the opportunity to redeem at 100% (plus a return) so long as all three indices are above 100% on the observation dates. He is very familiar with the structure and has invested in several of these Trigger notes before."
- Also, on 8 June 2006 (at a meeting in Cairo, rather than in London) Mr. Zaki informed Mr. Zeid that there was a shortfall on his account and Mr. Zeid said that if two Trigger notes did not redeem on 13 and 15 June 2006 then he would sell a note to cover the shortfall. On 13 June 2006 two notes were sold with Mr. Zeid's consent to make up the shortfall. The PCRM note for 13 June 2006 is headed "margin call" and so I assume that there was either a margin call or the threat of one arising from the loan to value ratio exceeding the agreed figure. These sales gave rise to a loss of over £770,000. On 20 June 2006 Mr. Zaki and Mr. Zeid met again (Mr. Zaki says in London) and "discussed the recent margin call when two Notes were liquidated." Mr. Zeid was described as disappointed but understanding. At the meeting the sale of two further (Snowball) notes was discussed because a diminishing coupon was expected. They were later sold giving rise to further losses of over £4.3m.
- In January 2008 there was a risk of another shortfall. Mr. Zeid was obviously made aware of this because he signed a manuscript note dated 11 January 2008 on a term sheet to the effect that if the loan to value ratio exceeded 80% it would be covered by a cash injection. On or about 31 January 2008 Mr. Zaki and Mr. Zeid had dinner. The PCRM note records that Mr. Zaki informed Mr. Zeid that recent market movements had led to a shortfall of about $3m. and that funds were required to be transferred "asap". Mr. Zeid resisted transferring funds but agreed to provide a bank guarantee or "do a very high LTV deal – capital guaranteed." (The note also records that Mr. Zeid found a statement of all money transferred into his account "confusing" and so Mr. Zaki agreed to provide more details. Mr. Zeid also requested monthly statements on "all notes, called or triggered.") On 8 February 2008 Mr. Zeid telephoned and informed Mr. Khodari, one of Mr. Zaki's assistants, that he "will put the situation (ie the shortfall) in order." On 26 February 2008 Mr. Zeid transferred $3m. into the account but required it be used to purchase another CDI. The shortfall was eventually settled by a combination of CSAG (Credit Suisse in Zurich) agreeing on 2 April 2008 to increase the loan to value ration to 80% and by a rise in the market. A PCRM note dated 15 April 2008 records that Mr. Zaki was able to inform Mr. Zeid over dinner at the Lanesborough that his account was no longer in shortfall.
- During this period Mr. Zeid purchased two notes (on 1 February and 18 March 2008) without leverage. These notes are not amongst the 10 which form the subject matter of this claim but the fact that there was no leverage on them is indicative of the risk of shortfall which prevailed during this period.
- Mr. Anderson QC, counsel for the Claimants, submitted that, notwithstanding the documents provided to Mr. Zeid, the discussions with Mr. Zaki and the experience of barriers being breached and shortfalls arising leading to a need for additional collateral, Mr. Zeid "simply did not understand the basic structure of the notes – much less the risks associated with implied volatilities, correlations and so forth- and this must have been blatantly apparent to Mr. Zaki at the time." ("Implied" volatilities were estimates of future volatility and "correlations" referred to the risk that the several indices on which the CDIs were based might not move in the same direction or to the same extent.)
- Counsel relied upon five matters in support of this submission. I shall deal with each in turn.
- First, it was said that CSUK's paperwork did not contain any description of the content of advice allegedly provided to Mr. Zeid. Rather, it was said, it consisted of formulaic and repetitive assertions. It is true that the PCRM notes do not generally describe the content of advice given to Mr. Zeid. However, on occasion they do. An example is the PCRM note for 13 February 2008 when Mr. Zaki advised Mr. Zeid that a CRAN would improve the diversity of Mr. Zeid's portfolio. The complaint as to "formulaic or repetitive assertions" is probably a reference to the Transaction Suitability Forms. Whilst some entries are repeated I do not accept that they are devoid of evidential value. They are contemporaneous, or near contemporaneous documents. I do not consider that they should be ignored, notwithstanding that untrue statements had been added to the customer profile forms in 2003. I consider that the nature of the conversations between Mr. Zeid and Zaki, as recorded in the PCRM notes and from time to time reflected in the suitability forms, was such that Mr. Zeid must have had a clear understanding of the main features of the notes. Otherwise he would not have been able to form his own views as to what type or specification of structured product he required at any particular time based upon the current state of the markets.
- Second, it is said that Mr. Zeid was provided with limited documentation, the leverage analyses were misleading in that they did not identify the increased risks to which leverage gave rise and there were infrequent SCARP warnings, that is warnings that capital was at risk. It is perhaps a matter of impression but I do not regard the term sheets, the market snapshots, the pricing information and the leverage analyses as "limited" documentation. When Mr. Zeid wanted more documentation he asked for it, as he did on or about 31 January 2008 (see above). It is true that the leverage analyses did not set out the risks of leverage but it is, I think, unrealistic to suppose that Mr. Zeid did not appreciate the risks associated with leverage. He must have understood that if he borrowed in order to buy a note of, say, $10m. he risked more than if he had not borrowed and bought a note of, say, $2.5m. from his own resources. The loan to value ratio created a particular risk, namely, that if the loan to value ratio exceeded a predetermined figure, usually 70%, he would be asked to provide additional collateral. This risk was stated in the leverage analyses. True, it was in smaller print in a footnote but the document is one which he is likely to have studied. In any event this risk was brought home to him in June 2006 when a margin call was made or threatened and he had to sell notes to provide the additional collateral. There is no evidence that his attention was specifically drawn to the clause in the Deed of Pledge signed in July 2005 which permitted CSUK to liquidate notes if he failed to respond to a margin call. However, his daughter Shahira Zeid said that her father, as a businessman, would definitely read the documents or prospectus of a company in which he was considering investing. So it is more likely than not that he had read the Deed of Pledge. In any event, it is unlikely that he thought that CSUK was powerless in the event that he failed to provide additional collateral when asked to do so pursuant to a margin call. Banks rarely are powerless in such circumstances. It is true that SCARP warnings were not always issued but it is unrealistic to suppose that Mr. Zeid did not appreciate, when purchasing CDIs, that in the circumstances described in the indicative terms his capital was at risk.
- Third, it was said that the sale of the first CDI in October 2005 was an "illuminating illustration of the lack of sufficient explanation from Mr. Zaki as to the structure, nature and risks of the notes." It is true that the contemporaneous evidence suggests that Mr. Zaki misunderstood Mr. Zeid's instructions (both as to the value of the note and the amount of leverage requested). It is also true that Mr. Zaki did not consult the account and so did not realise that there was little room in the account to do this trade. However, none of this suggests that Mr. Zeid did not understand the structure, nature and risks of a CDI. The PCRM note relating to this trade records that Mr. Zeid had reviewed the term sheet and after discussing it by telephone placed an order. The note continues: "The client is extremely experienced and sophisticated in structured products. He is keen to shift his portfolio to a more equity weighted proportion given current market conditions." In cross-examination Mr. Zaki accepted that this was the first CDI purchased by Mr. Zeid and so Mr. Zeid was not experienced in CDIs. However, although Mr. Zaki could not be "100% sure" that the principal discussion about CDIs was over the telephone, he was "clear" that Mr. Zeid would not place an order for £5m. unless "he is fully satisfied, he has heard what I have to say, he is happy with that…It is a serious amount of money. He has – he is very inquisitive, he will ask questions, he will – you know, he will talk with other banks." This evidence suggests that Mr. Zeid understood the structure of a CDI and seems to me to be consistent both with the tenor of the discussions recorded in the PCRM notes and with the probabilities. It is difficult to accept that a self-made man such as Mr. Zeid would purchase a CDI for the first time without taking steps to understand it. That would not be consistent with his daughter's evidence. When he was confused and wanted more information he asked for it; see the PCRM note for 31 January 2008 referred to above. There is no suggestion in the PCRM note of 11 October 2005 that he did not understand a CDI. He sold it in June 2006 in the circumstances which I have already described and bought another CDI in September 2006 for $10m. with leverage of $7m.
- In this context Mr. Zaki was asked in cross-examination to describe or reconstruct the advice he would have given Mr. Zeid. His answers led counsel to submit that his evidence showed not only that extremely limited and flawed advice was given but that Mr. Zaki himself lacked an adequate knowledge and understanding of the notes. I was not persuaded that asking Mr. Zaki in 2011 to "reconstruct" the advice he would have given Mr. Zaki about CDIs in a number of meetings from 2005-2008 (the first CDI was sold in November 2005 and the last in 2008) was of much assistance when he did not appear to have a clear recollection of any particular meeting when such advice was given and he himself said that he may have missed one or two matters because he had not been giving such advice for two to three years. Such advice or explanation as was given must be culled from the contemporaneous (or near contemporaneous) documents and from Mr. Zaki's description of the character or tenor of his meetings with Mr. Zeid. I consider it more likely than not that when a new form of product was first discussed reference was made to the features as set out in the indicative term sheets. It is unlikely that any formal advice was given with regard to the features of the notes. It is more likely that advice was given in response to particular questions from Mr. Zeid as to how the note worked. It is unlikely that in responding to such questions Mr. Zaki used the language of "worst-of barrier reverse convertible securities." He did not appear to be familiar with such language and there is no echo of it in the PCRM notes. It is unlikely that Mr. Zaki analysed the risks involved in CDIs in any comprehensive manner. It does not follow however that an intelligent businessman like Mr. Zeid would not have understood the essential features of CDIs as set out in the indicative term sheets. It is likely that he did understand their essential features both from reading the indicative terms sheets and from discussing them with Mr. Zaki.
- The fourth matter relied upon was a fax dated 12 July 2006 sent by Mr. Zaki addressed to Mr. Zeid as Chairman of Marriott European Holdings Ltd. in response to a letter dated 5 July 2006 which has not survived. It appears that Marriott also had an account with Credit Suisse which traded in structured products. Some of the comments made by the author of the letter dated 5 July 2006 are repeated in the letter dated 12 July 2006 and some of those comments suggest that the author did not correctly understand how CDIs worked. It was therefore submitted that Mr. Zeid, who, it was said, must have been the author of the letter dated 5 July 2006, did not understand CDIs. It is likely that the letter dated 5 July 2006 was signed by Mr. Zeid because the letter dated 12 July 2006 was addressed to him. Whether it was drafted by him is not known (notwithstanding that Mr. Zaki did not suggest in his evidence in chief that the draftsman was anyone other than Mr. Zeid) and so whether the mistaken comments reflect his personal misunderstanding of the note is not known. As a piece of evidence it must be placed in the context of the other evidence available from which to assess Mr. Zeid's understanding of the notes. When it is placed in that context I do not find it a compelling piece of evidence. The discussions between Mr. Zeid and Mr. Zaki concerning the purchase of structured products on Mr. Zeid's account (rather than that of Marriot) were generally oral, either in person or on the telephone. By July 2006 Mr. Zeid had bought a CDI in November 2005 and had sold it in June 2006 incurring a loss. In this context it is more likely than not that the letter dated 5 July 2006 was drafted by someone at Marriott European Holdings Ltd. other than Mr. Zeid and represents that person's misunderstanding of the CDI rather than Mr. Zeid's. In any event, if the letter was drafted by Mr. Zeid his misunderstanding was clearly corrected by the letter dated 12 July 2006.
- The fifth and final matter relied upon was Mr. Zaki's alleged failure to understand CDIs properly. I accept that Mr. Zaki probably lacked the understanding of a CDI that a technician (or "quant") would have had. He probably did not understand, save in general terms, how the pricing of a note was assessed and how it was affected by volatility, actual or implied, or by correlation effects. It is unlikely that he had studied the probability of a barrier breach. It is also probable that he needed the advice of his assistants to draft the reply to the letter dated 5 July 2006. However, I do not infer from this that he did not understand the essential features of CDIs or that Mr. Zeid did not understand the essential features of CDIs. That seems improbable.
- I must therefore reject the submission that Mr. Zeid "simply did not understand the basic structure of the notes". I find on the balance of probabilities that he did understand the basic structure of the notes. I also consider that he understood the essence of the risks run in holding CDIs though I doubt that either he or Mr. Zaki spoke in terms of "implied volatilities, correlations and so forth." It is also unlikely that he had made any detailed calculations as to the probability of a barrier breach. Mr. Croft said that it was sufficient for Mr. Zeid to have had a "loose sense" of the risk of a barrier breach and I consider that Mr. Zeid had such a sense based upon his view as to how the markets were likely to perform.
The 10 products which form the subject-matter of this claim
- Nos.1 and 2: Two CDIs were sold on 2 February 2007. In one the investment was US$5.2m. The funds used came from the sale of an earlier note which had been bought with the assistance of a loan of US$3.9m. That loan was continued so that there was leverage of 75%. In the other the investment was US$20m. with US$15m. borrowed so that again there was leverage of 75%.
- Mr. Zaki discussed these purchases with Mr. Zeid at Mr. Zeid's home in London on 11 January 2007. A PCRM note dated 12 January 2007 noted that the returns on an existing CMS note were "depleted so far this quarter" and recorded that "the client was receptive to [switching out of this and into a callable bullish note] as he is experienced in these Notes and likes their structure. We showed a structure which was 5 years with a floating 3M+3% coupon and a low 55% barrier. The coupon is at risk for the quarter only if the barrier is breached. The structure was explained to the client in detail and he liked the shorter maturity and view on the underlying indices (even though he realised capital protection is being given up)." A second PCRM note also dated 12 January said that Mr. Zeid was "keen to deploy [a cash balance] in a callable bullish note similar to the Note he already holds. He asked us to price a 3 yearly maturity Note, with coupon guaranteed or at risk, to deploy this cash in to and trade a notional of $20,000,000. We have priced this today and can offer……….." Both notes were referenced to the S&P 500, the Eurostoxx and Nikkei indices. The barrier of the second was set at 60%.
- The suitability form required Mr. Zaki, in the case of "non-execution only transactions", to explain the impact of the investment on the diversification and risk profile of the portfolio, to explain why the investment meets the demands and needs of the client and why it is thought that the client has sufficient knowledge and experience to evaluate the "merits and risks" of the investment. The form also required Mr. Zaki to state the basis of his belief that the client has sufficient liquidity to bear illiquidity risks or meet future capital obligations. Finally, if the investment is highly speculative and involves a risk of significant loss of the principal invested, Mr. Zaki was required to state the basis of his belief that the client understands the risk and has the resources to bear it.
- The form was probably filled in by one Mr. Zaki's assistants. It was certainly signed on his behalf by one of his assistants. But it is likely that the information came from Mr. Zaki for only he dealt with Mr. Zeid. Mr. Zaki stated, inter alia, that the first US$5m. note would increase the client's quarterly cash flow and provide more exposure to the Nikkei, Eurostoxx and S&P Indices. He said that the investor was very experienced in structured products, that this particular type of note has been traded before and that the "note mechanics including resurrecting coupon have been described to the client and have been fully understood by the client." He said that the client had "fully liquidity [sic] from CSI and was "very liquid in other bank accounts." He said that the note was not capital protected but that Mr. Zeid "understands this Note and the concept of a margin call. He is regularly updated on the performance of his account and monitors it closely." The suitability form for the second US$20m. was in almost identical terms.
- Although it is known that some of Credit Suisse' records were unreliable (in particular CSFB's initial client profile forms dating from 2003) and that estimates of Mr. Zeid's net worth in the suitability forms varied considerably and so were unreliable there is, it seems to me, no particular reason to doubt the reliability of the PCRM notes and suitability forms with regard to what they suggest was Mr. Zaki's perception of Mr. Zeid's understanding of the notes and what they suggest was discussed between Mr. Zeid and Mr. Zaki. The notes and the entries in the forms accord with the probabilities.
- These contemporaneous (or near contemporaneous) notes evidence a discussion between Mr. Zeid and Mr. Zaki as to the performance of his account. Although Mr. Zeid was happy with the performance there was a doubt about future coupons on an existing note. For this reason a CDI appears to have been suggested. It is likely that the structure of the note, its maturity and the underlying indices were mentioned. The notes also evidence recognition on the part of Mr. Zeid that in switching into a CDI he was losing capital protection. It is therefore likely that that also was mentioned. The internal suitability form recorded that a SCARP warning had been issued with each note. Mr. Zeid already held a CDI which he had purchased in September 2006 and that fact probably contributed to Mr. Zeid's understanding of the notes which he bought. The suitability form shows that Mr. Zaki considered the investment suitable for Mr. Zeid.
- No.3: This was another US$ 20m. CDI linked to the same three indices purchased on 30 March 2007 with the assistance of a loan of US$15m. The suitability form states that a "Trigger" note had just been called by Lehmans and so Mr. Zeid had funds to invest which he wished to invest in this note. It also recorded that Mr. Zaki visited Mr. Zeid in Cairo where he "promoted" the note. A PCRM note for 9 March 2007 records that in a telephone call Mr. Zeid expressed the wish to buy a CDI linked to the S&P 500, Eurostoxx and Nikkei indices. It further records that Mr. Zaki advised against this because it would leave the account close to shortfall. However the account increased in value and the trade became possible. The reference to a possible shortfall suggests that Mr. Zeid must have been aware of the risks associated with leverage but nevertheless went ahead with his purchase. The suitability form noted that the CDI would not change the diversification of the account and that Mr. Zeid held three such notes and, for that reason, fully understood the risks associated with the Note. No SCARP warning was sent. It was said to be not applicable.
- It is likely that there was very little discussion as to the mechanics of this CDI. None is mentioned in the PCRM note or suitability form and Mr. Zeid had bought two such notes very recently when such a discussion had taken place. It is however likely that there was some discussion about the risks of buying such a note with substantial leverage because the risk of a shortfall was mentioned in the PCRM note.
- No.4: This was another $10m. CDI linked to the same three indices supported by a loan of $7.5m. on 8 May 2007. It came about because Mr. Zeid had recently redeemed a US$24m. Trigger and wanted to invest the proceeds in a new note; see the PCRM note for 16 April 2007 and the suitability form. Mr. Zaki "showed" Mr. Zeid another Trigger note which Mr. Zeid liked but then later changed his mind because he thought the equity market might drop and wanted to invest in a CDI. He also thought that US rates might drop and so a note with a fixed coupon was priced which Mr. Zeid agreed to buy. The suitability form noted that Mr. Zeid liked the callable bullish note, of which he held four. It was said that it met his current investment needs because "it provides the client with downside protection and also pays quarterly coupons." Although it would appear that this CDI was requested by Mr. Zeid in place of the Trigger suggested by Mr. Zaki the suitability form noted that it had been "promoted" by CSUK.
- As with the third note it is unlikely that there was any particular discussion as to the mechanics of the note because Mr. Zeid now had four of them. It is likely that the discussion focussed on the merits of a CDI compared with a trigger, having regard to Mr. Zeid's perception of the equities market, and on the merits of a fixed as opposed to a variable coupon, having regard to Mr. Zeid's perception of the money market.
- No.5: This was another US$10m. CDI linked to the usual three indices purchased with the assistance of a US$7.5m. loan on 11 June 2007. A PCRM note for 21 May 2007 records that Mr. Zaki, on being told by Mr. Zeid that he had cash available, asked him if he wished to increase his position on the previous CDI. Mr. Zeid did. No SCARP warning was provided. The suitability form recorded that this was Mr. Zeid's fifth CDI.
- It is likely that there was minimal discussion as to the "merits and risks" of the note because he now held 5 CDIs.
- No.6: This was a US$10m. Trigger note linked to the same three indices purchased with the assistance of a loan of US$7m. on 29 June 2007. A PCRM note for 14 June 2007 recorded that Mr. Zeid had a similar note which was due to redeem on 29 June 2007 and wished to purchase another Trigger either using the proceeds or cash, if the similar note did not redeem. The note suggests that Mr. Zeid had firm ideas as to such matters as to the percentage at which the "buffer" and "barrier" were to be set. The suitability note recorded that the note had been promoted by CSUK at a visit to Mr. Zeid's office in Cairo. It is difficult to make out Mr. Zaki's comments on diversification and the other matters on which he was asked to comment but it appears that he considered the note suitable for Mr. Zeid.
- Since Mr. Zeid had bought Trigger notes before it is unlikely that there was much, if any discussion, as to the mechanics of the note. Although Mr. Zaki gave evidence that he met with Mr. Zeid in Cairo to discuss "the risks" associated with this note no particular discussion of such matters is suggested by the contemporaneous documents.
- No.7: This was another Trigger note, similar to no.6, bought on 22 October 2007 with the assistance of a loan of US$8m. A PCRM note for 31 July 2007 records that following a "recent dip in the market" Mr. Zaki showed Mr. Zeid two different CDIs and a Trigger note. Mr. Zeid preferred the Trigger note. He said that he had US$11m. in cash which was to be invested in the future depending upon the market. The suitability form recorded that the note was promoted by CSUK whilst speaking to Mr. Zeid in Nice. It also noted that Mr. Zeid was "bullish" about the indices.
- It is unlikely that there was any discussion about the mechanics of the note since, as the suitability form noted, "the client has traded theses structures many times with us". As with the other notes the structure of the note was described in the indicative term sheet.
- Before the next notes which form the subject-matter of this claim were purchased a shortfall incurred as noted above in paragraph 46. In about May 2008 the IPO of Maridive took place. This generated a large cash sum, about US$ 50m., of which, I was told, US$ 15m. was used to buy back shares in Maridive.
- No.8: This was a CDI bought for US$16m. on 19 May 2008 with the assistance of loan for US$5.5m. It was referenced to four indices. It appears to have been discussed by Mr. Zaki and Mr. Zeid on 28 April 2008. The suitability form states that the promotion of this note was by telephone. It noted that the client's risk profile was rated at 3 whilst the risk category of the note was noted at 4. His investment objective was stated to be capital growth but in answer to the question why the investment met his needs it was stated that "the client is looking for enhanced return on his money". The form noted that "the "client has 8 other structures on the account, all of which are scarps." A Mr. Wigney approved the transaction but noted that "the product and client risk files are not compatible. The product is potentially unsuitable." As with other notes it is unlikely that there was much discussion concerning the mechanics of the note.
- No.9: This was a note based, not upon stock market indices, but on three bank shares, JP Morgan, BNP Paribas and Barclays. There had been discussion between Mr. Zaki and Mr. Zeid prior to 10 June 2008 as to which banks the note should be linked. The note was purchased on 24 June 2008 for US$18.1m. with a loan of US$10.1m. The suitability form noted that "this will be the first trade for the client with financials stock exposure (with us)" and that the client is "looking for enhanced return and is willing to take some risk." His investment objective was again stated to be capital growth. The note was purchased at a discount at a time when all three bank stocks had fallen substantially in value. It is likely that that was one reason why the note was purchased by Mr. Zeid. An "effect of leverage" form suggested a return of over 45%.
- No.10: This was another CDI based upon four market indices taken out on 27 June 2008. It cost Euro20m. and was financed by a loan of Euro15m. A PCRM note recorded that it was "proposed" to Mr. Zeid by Mr. Zaki who had been tracking the Euro for Mr. Zeid. The PCRM note added that Mr. Zeid held "similar structured notes". The suitability form recorded that the client will be more exposed to the SMI index; "most notes on the account are only linked to the S&P, Nikkei and Eurostoxx". Mr. Zeid was described as "looking for high returns." The manager reviewing the form noted that "the investment to portfolio ratio is high." Mr. Zaki gave evidence that Mr. Zeid believed that that the market had reached its lowest level and would improve. This is not recorded in the contemporaneous documentation but the purchase of the note is consistent with Mr. Zeid having a bullish view of the market.
The events of October 2008
- However, as a result of the "credit crunch", the demise of Lehman Brothers and the collapse of certain banks the market indices fell, in particular the Nikkei index. These events resulted in some of the barriers on Mr. Zeid's notes being breached. In addition CSAG unilaterally changed the LTV ratio on the account to 60%. In consequence there was a shortfall on his account.
- Mr. Zaki met Mr. Zeid on or about 20 October 2008 to discuss the account and the shortfall. Mr. Zaki recorded on the PCRM note that Mr. Zeid did not seem to have the liquidity to cover the shortfall. (I assume that the US$35m. deposited with CSUK following the IPO of Maridive had, to the extent not used for the purchase of notes 8-10, already been taken into account. Mr. Zaki said that Mr. Zeid was unable to borrow against the US$ 15m. of Maridive shares which had been bought back.) On 24 October 2008, following a further drop in the Nikkei index, Mr. Zeid was informed by telephone that funds will be required "urgently". Mr. Zeid said that he did not wish to transfer funds because he thought CSUK had enough on deposit and he believed that the markets would rebound. He also said that since the notes had been issued by Credit Suisse in Geneva they should not doubt their value. On 28 October 2008 in a further telephone call Mr. Zaki advised Mr. Zeid that if the market continued to deteriorate CSUK would issue a margin call and that he should prepare for this. Mr. Zeid replied that he did not have any extra cash to support the account but that the market would go up. On the same day Mr. Zaki sent an email to Mr. Zeid advising that the shortfall stood at US$20m. and that when a margin call was issued there would be a limited time, typically 24 hours, in which to respond. On 29 October 2008 there was telephone call in which Mr. Zeid blamed CSUK "for proposing investments knowing that the market will collapse" and that CSUK "allowed him to highly leverage his investment". Mr. Zaki replied that this was untrue and that it had been Mr. Zeid who always asked for the maximum leverage. Mr. Zeid repeated his complaints in an email sent on 29 October 2008. Mr. Zaki noted in a PCRM note that he did not think that Mr. Zeid had cash available to transfer into the account.
- On 30 October 2008 a margin call for US$31m. was issued with a deadline of Friday 31 October 2008 at 12pm. Either because Mr. Zaki asked Mr. Khodari to speak to him or because at the time only Mr. Khodari was available, it was Mr. Khodari who had to convey the unwelcome news to Mr. Zeid by telephone. It was suggested to Mr. Khodari in cross-examination that the transcript of the conversation (which took place partly in English and partly in Arabic) illustrated Mr. Zeid's lack of understanding of the notes. Mr. Khodari did not accept that suggestion. Nor do I. The transcript showed Mr. Zeid, as might be expected, seeking to resist the idea that the notes must be sold at that time and seeking to persuade CSUK to permit him to continue to hold the notes until maturity. Unsurprisingly he was reluctant to accept that his investments were "gone". "Are you kidding?" he asked. Mr. Khodari summarised the points made by Mr. Zeid in his file note dated 30 October 2008. The news Mr. Zeid had been given that day must, even for a man of his means, have given rise to anxiety and I do not consider that it can be inferred from the points he was making to Mr. Khodari that he did not understand the essential features of the notes.
- Mr. Zeid did not transfer the required additional collateral to the account and so CSAG commenced to liquidate the notes shortly after 12 noon on 31 October 2008. At the time he held 11 notes and the 10 which form the subject matter of this action were liquidated. The liquidation resulted in the agreed loss of US$ 69.4m.
The claim for breach of COB 5.3.5 and COBS 9.2
- By the end of the trial there was no dispute that for the purposes of this case Mr. Zeid is to be regarded as a "private customer" under COB and a "retail client" under COBS. CSUK was therefore obliged, where it made a personal recommendation to Mr. Zeid concerning an investment, to take reasonable steps to ensure that its advice on investments was suitable for Mr. Zeid; see COB 5.3.1-5.3.5. This duty applied until 1 November 2007. It therefore applied to note nos. 1-7 of those notes which are the subject of this claim. Notes 8-10 were covered by COBS. CSUK was obliged by COBS 9.2.1 to take reasonable steps to ensure that a personal recommendation was suitable for its client.
- The first, and fundamental, question is whether CSUK, through Mr. Zaki, made a personal recommendation to buy the 10 notes. A recommendation is defined as advice on investments and advice is defined as "advice on the merits" of buying a particular investment. Thus the question is whether Mr. Zaki gave advice to Mr. Zeid on the merits of purchasing the notes.
- Advice on the merits of purchasing a structured product must, I think, refer to the advantages and disadvantages of purchasing the product. What may be regarded as an advantage for one client may not be regarded as an advantage for another client and so COB provides that the advice must be suitable for the client and COBS provides that the recommendation (that is, advice on the merits) must be suitable for the client. However, "advice on the merits" is to be distinguished from the mere giving of information. This is apparent from the FSA's Perimeter Guidance Manual ("PERG") at para. 2.7.15 and from the discussion of the meaning of advice by Flaux J. in Bank Leumi (UK) PLC v Wachner  EWHC 656 (Comm) at paragraphs 85 and 307. However, what amounts to advice will also depend upon the context.
"…..the context in which something is communicated may affect its character; for example, if a person gives information on share price against the background that, when he does, that will be a good time to sell, then this will constitute advising on investments" (see PERG 2.7.15).
- Advice requires an element of opinion on the part of the adviser; see PERG 5.8.8 (which refers to contracts of insurance rather than with investments but there seems no reason why the same principle should not apply).
- Mr. Anderson QC, counsel for the Claimants, submitted that Mr. Zaki made a personal recommendation to Mr. Zeid, that is, gave him advice on the merits of purchasing each of the notes which are the subject of this action. In the absence of evidence from Mr. Zeid to this effect he relied upon answers from Mr. Zaki in cross-examination and on the manner in which the suitability forms were filled in on Mr. Zaki's instructions. Mr. Beltrami QC, counsel for CSUK, submitted that no advice on the merits was given by Mr. Zaki. He relied upon the evidence of Mr. Zaki when cross-examined and on the terms of the PCRM records.
- It was noteworthy that the question whether there was a recommendation or advice on the merits was not addressed expressly in Mr. Zaki's evidence in chief. He said in paragraph 12 that the decision whether a product was suitable for a client was taken by him and that he would turn a product down if it were not suitable for a client. In paragraph 60 he referred to providing Mr. Zeid with information. However, he did not say in terms that he did not make recommendations or give advice to Mr. Zeid.
- Although Mr. Zaki had referred to each of the 10 notes in terms in his evidence in chief he was not asked in cross-examination about each note individually. Instead, more general questions were asked by Mr. Anderson. Mr. Zaki accepted that, the account being an advisory account, most of the products would have been bought on his advice. He accepted that all of the ten disputed notes were purchased as a result of advice he had given about them on the merits. However, the value of such answers depended on what the witness understood by "advice on the merits". Mr. Zaki was therefore asked whether each note resulted from "advice, a recommendation given by you to Mr. Zeid?" to which he replied "It's a recommendation, yes. A recommendation." Having regard to the importance of the issue this was a striking admission by Mr. Zaki. Mr. Beltrami did not re-examine on this topic but relied upon other answers of Mr. Zaki in cross-examination in which he stated that "we are not an independent firm where Mr. Zeid would come to us and say "What do you think of this?". We are not that type of adviser." He also drew attention to another answer in which Mr. Zaki said "The word "advise" is, I would say, misleading. I was not out to advise to invest or not to invest." On another occasion Mr. Zaki appeared to draw a distinction between advising and "promoting", which he says was stating "what was available".
- I do not doubt that Mr. Anderson had forensic reasons for asking only general questions on this topic or that Mr. Beltrami had forensic reasons for not exploring the matter further in re-examination. But the Court is left to reach a view on this important question by having regard to the few answers in cross-examination which bear upon it and such other evidence as is relevant.
- When Mr. Zaki discussed investments with Mr. Zeid his role was, at least in part, to provide information to Mr. Zeid concerning the products CSUK had on offer (the indicative terms sheets) and as to the state of the markets (the market snapshots). However, Mr. Zaki's role was also to sell products to Mr. Zeid. He said in cross-examination that "our business is to sell and to encourage to a certain extent." He received a share of CSUK's commission; on the 10 notes which form the subject-matter of this action he received £580,037. It is unrealistic to suppose that he did not, at least from time to time, cross from the territory of information into the territory of recommendation or advice, at least in the sense of either pointing out that a product was advantageous in the then current market conditions or in agreeing with such an observation by Mr. Zeid. Thus, a PCRM note dated 9 November 2006 recorded that Mr. Zaki "highlighted that for the extra 3% in one month it was probably worth holding this and taking 1 month view that markets will be sideways to positive. Client agreed". Further examples can be taken from the PCRM notes relating to the notes which form the subject matter of this action. The PCRM notes for the first two notes suggest that Mr. Zaki recommended that Mr. Zeid purchase a CDI as a means of gaining the coupons he desired (Mr. Zeid was "receptive" to purchasing a CDI). It is likely that his explanation of the structure of the note was, in context, part and parcel of that recommendation. The PCRM note for the third note records that Mr. Zaki advised against a purchase on the grounds that there was risk of shortfall. Although this was advice against rather than for a transaction it is, I think, unreal to suppose that Mr. Zaki scrupulously avoided giving advice as to the merits of a transaction and restricted himself to providing information, save when advising against a purchase.
- Moreover, the suitability forms for notes nos.1-7, as filled in by or on behalf of Mr. Zaki, indicated that he considered that he was giving advice on the merits. Thus he signed the part dealing with Non-Execution Only Transactions in which he stated that the proposed investment was suitable for the client. Had he in fact been careful in his meetings with Mr. Zeid to ensure that he made no recommendations, and gave no advice on the merits, to Mr. Zeid it is unlikely that he would have certified that the proposed investment was suitable for Mr. Zeid. Rather, it is likely that Mr. Zaki would have made use of that part of the form dealing with Execution Only Transactions in which he could have stated, as the standard form states, that "no advice has been given as to the merits of the transaction". Mr. Zaki's acceptance in cross-examination that each note resulted from a recommendation is consistent with the manner in which he, or his assistants on his instructions, filled out the suitability forms.
- Mr. Beltrami submitted that Mr. Zaki was required, as a matter of internal Credit Suisse policy, to satisfy himself as to suitability whether or not he made any personal recommendation. Whilst there was a Credit Suisse Compliance Manual which required suitability forms to be filled in I was not referred to any evidence that a relationship manager such as Mr. Zaki was required to satisfy himself of suitability whether or not a recommendation was made or advice on the merits was given. Rather, it appeared from the cross-examination of Mr. Zaki that the manual required him to obtain sufficient information to satisfy Credit Suisse's regulatory obligations. That would suggest that the relationship manager was only expected to satisfy himself of suitability if he had made a recommendation or given advice on the merits. Mr. Beltrami's submission appears to have been based on two matters. First, even where there was an advisory account advice need not be given and transactions might be effected on an execution only basis, as provided for in the December 2003 client agreement. Second, such a policy may be inferred from the fact that Credit Suisse required the suitability forms to be filled in so that the Business Control Analysts team could review and approve it. I was not persuaded that there was in fact a policy that, where no recommendation or advice on the merits was given, Mr. Zaki was nevertheless required to set out his reasons for believing that the product was suitable for the client. The submission was, it seems to me, an attempt at providing another explanation for the manner in which Mr. Zaki had filled out the suitability forms. I consider that the more likely explanation is that Mr. Zaki did in fact regard himself as having made recommendations to Mr. Zeid and as having given him advice on the merits. If he had regarded himself as effecting a transaction on an execution only basis without having given any advice on the merits he would, I think, have used the separate form for execution only transactions (as was initially provided, see for example the form signed on 1 February 2005) or signed that part of the (later) form which enabled him to certify that no advice had been given on the merits of the transaction (see for example that signed on 11 October 2005). The format of the suitability forms used for note nos.8-10 does not appear to have included a section for Execution Only Transactions but I do not consider that this detracts from the force of this point, at any rate for notes 1-7. In any event, the forms for notes 8-10 contain a section in which Mr. Zaki stated that the investments were suitable for the client.
- Mr. Beltrami also submitted, on the basis of Mr. Khodari's evidence as to the meaning of the phrase "promoted by" in the forms (namely, that it referred to products tailor-made by Credit Suisse), that the manner in which the forms were filled out was no evidence of what actually passed between Mr. Zaki and Mr. Zeid. I was not persuaded that in this respect Mr. Khodari's evidence was necessarily accurate; he was only familiar with the later electronic forms. But even it were accurate I still consider that it more likely than not that had Mr. Zaki carefully avoided giving advice on the merits he would have required the forms to be filled in by stating that no such advice on the merits had been given.
- Mr. Beltrami in his written closing submissions went through the PCRM notes for each note in question and said that none of them evidenced a recommendation or advice on the merits. However, it is necessary also to consider the likely nature of the exchanges between Mr. Zaki and Mr. Zeid, the terms of the forms and the probabilities. In the case of notes nos.1 and 2 there was, it seems to me, as I have already said, a recommendation, or advice on the merits, by Mr. Zaki. With regard to no.3 there was, initially, advice not to purchase on the grounds of the risk of a shortfall. However, no other negative advice was given and I infer that Mr. Zaki must have recommended the purchase of note no.3, once the rise in the increase in the value of the account gave "enough room" for the purchase. This is consistent with the probabilities and with Mr. Zaki certifying that the product was suitable for Mr. Zeid rather than certifying that no advice on the merits had been given. Note no.4 was purchased notwithstanding that Mr. Zaki first suggested a Trigger note. However, with regard to the CDI which was purchased Mr. Zaki again certified that the product was suitable and did not certify that no advice on the merits had been given. I infer that, notwithstanding his initial advocacy of the Trigger, he recommended the CDI. The PCRM note in respect of note no.5 records that Mr. Zaki asked Mr. Zeid if he wanted to increase his position on an existing CDI and he said "yes to this idea". This, coupled with Mr. Zaki's certifying that the product was suitable and not certifying that there was no advice on the merits, suggests that he recommended note no.5. Note no.6 was a Trigger and it is clear that Mr. Zeid had a lot to say about the terms of the note. However, having regard once again to the probabilities and the terms in which the suitability form was signed, I infer that Mr. Zaki recommended the Trigger note. Note no.7 was also a Trigger. It was one of three notes which Mr. Zaki "showed" to Mr. Zeid. This, together with the probabilities and the manner in which the suitability form was signed, suggests that the Trigger was the subject of a recommendation by Mr. Zaki. The PCRM note for note no.8 records that Mr. Zaki rang Mr. Zeid to "propose" another trade with similar characteristics to one which was about to redeemed. This is likely to have been a recommendation to purchase. Note No.9 was the CDI linked to banking stocks. It appears that much information was given concerning the banks to which this note could be linked. But it is probable, since this was the first such note, that Mr. Zaki recommended the note in its final form. There is no evidence that he advised against it. On the contrary the suitability form records Mr. Zaki's belief that it was suitable. Note No.10 was a Euro note. The PCRM recorded that Mr. Zaki "called Magdy Zeid to propose a structured investment." It is most improbable that he did not give advice on the merits and recommend the investment. There is no evidence that he merely gave Mr. Zeid information about it and let him make up his own mind with no advice from Mr. Zaki.
- I have therefore concluded on the balance of probabilities that Mr. Zaki made recommendations to Mr. Zeid to purchase each of the notes which are the subject of this action.
- It follows that CSUK owed a duty, under COB 5.3.5 and COBS 9.2, to take reasonable steps to ensure that its advice on investments or recommendation was suitable for Mr. Zeid. Under COB 5.2.5 CSUK was obliged, before making a personal recommendation, to take reasonable steps to ensure that it was in possession of sufficient personal and financial information about Mr. Zeid relevant to the services which CSUK had agreed to provide. A similar duty was owed under COBS 9.2.1 and 9.2.2. Under COB 5.4.3 CSUK was obliged to take reasonable steps to ensure that Mr. Zeid understood the nature of the risks involved. A similar duty was owed under COBS 9.2.2.
- Mr. Anderson submitted that CSUK failed to take reasonable steps to ensure (i) that it possessed sufficient information about Mr. Zeid, (ii) that its personal recommendations were suitable for Mr. Zeid and (iii) that Mr. Zeid understood the nature of the risks involved. Mr. Beltrami submitted that the requirements of COB and COBS were satisfied. I have already found that Mr. Zeid understood the structure of the notes and the risks run in holding them.
- So far as Mr. Zaki's knowledge of Mr. Zeid is concerned certain matters concerning him were recorded in the suitability forms. The forms for the 10 disputed notes correctly recorded that Mr. Zeid's account was an advisory account. His investment objective was described as income for notes 1-2 and capital growth for notes 3-10. Mr. Zaki accepted in cross-examination that Mr. Zeid's investment objective was capital growth. His risk profile was described as medium or, with respect to notes 8-10, 3 (out of 5). His estimated net worth varied. For notes 1-7 it varied between US$250m. and US$200m. For notes 8-10 it was stated as being over US$100m. There is no evidence that Mr. Zaki ever interrogated Mr. Zeid as to his net worth. He said that was never done in the Middle East. Whether that is so or not it appears that Mr. Zaki's estimates were no more than that and must have been based upon what he gleaned from his conversations with Mr. Zeid. Mr. Zaki accepted that they were unreliable. But having regard to the evidence of Shahira Zeid the estimates all appear to have been of sums substantially less than Mr. Zeid's actual net worth. The types of investments purchased by Mr. Zeid were described in notes 1-7 as being leveraged structures, interest rate linked structures and equity linked structures. For note 8 they were described as being FOREX (foreign exchange), equities, SCARPS and leveraged structures, for note 9, FOREX and SCARPS and for note 10 as forex, equities and SCARPS.
- Thus the only consistent record was that the account was advisory and that Mr. Zeid had a medium risk profile. The extent to which records of other matters varied with no apparent explanation does not suggest that those records were completed with an appropriate degree of care and attention. This is also apparent from the "annual client review" dated July 2006 which recorded in one part that Mr. Zeid's investment objective was "income" whilst in another part his investment objective was recorded as "capital growth".
- CSUK's approach to obtaining and recording information about Mr. Zeid therefore appears to have lacked the rigour and care which COB and COBS required. But, although detailed submissions were made about that approach and, in particular, as to the manner in which CSUK and its predecessor had classified Mr. Zeid, those submissions did not, in my judgment, ultimately assist the Claimants' case on suitability. It was accepted by CSUK that Mr. Zeid and his family had to be regarded as private clients. Mr. Zaki regarded Mr. Zeid as an "expert" private client but I am not persuaded that he was wrong to do so. Mr. Zeid plainly had a high level of interest in the market, formed views about the market and had confidence in his own views. Mr. Zaki could and should have made more enquiries as to Mr. Zeid's net worth but no evidence was adduced to suggest that Mr. Zeid could not bear the financial risks to which he was exposed by trading in CDIs. The important point, it seems to me, is whether the recommendations made by Mr. Zaki were suitable for Mr. Zeid. If they were not suitable then it adds nothing to enquire whether Mr. Zaki's approach to obtaining and recording information and classifying the Claimants lacked the required rigour and care. If they were suitable, then again it cannot matter whether his approach to obtaining and recording information and classification was adequate or not. Of course, if the recommendations were not suitable for Mr. Zeid the extent to which Mr. Zaki failed to exercise the required degree of rigour and care in obtaining information about Mr. Zeid may, depending upon the reasons why the recommendations were unsuitable, be relevant when assessing whether Mr. Zaki, and hence CSUK, took reasonable steps to ensure that the recommendations were suitable. In that sense regulatory failures in the information gathering exercise may evidence a breach of the duty to take reasonable steps to ensure that the recommendations were suitable but they do not, it seems to me, assist in showing that the recommendations were not suitable.
- Mr. Anderson had several complaints under the head of suitability. Those maintained in his closing submissions were that the investments did not protect capital when that was what Mr. Zeid wanted, that they did not fit his medium risk profile, that they led to a lack of diversification and that notes 8-10 were sold at a time when the markets were especially volatile.
- Mr. Beltrami submitted that all the notes met Mr. Zeid's investment objectives which were for high yielding structured notes and he was able to decide for himself whether he wished in any particular case for capital protection. All the notes fitted comfortably within his investment objectives as reasonably understood by Mr. Zaki over the course of many years of dealings. Reliance was placed on, inter alia, Mr. Croft's opinion that the notes were suitable for Mr. Zeid. Properly analysed the notes fell squarely within the description of moderate risk. In return for very high coupons and foregoing the chance of upside gains the investor took the risk that a low probability event would not happen over a one to three year horizon. Diversification of the portfolio was not a matter for Mr. Zaki because he was not managing Mr. Zeid's portfolio of investments; see COB 5.3.5(4) and COBS 9.3.1. Finally, as to the market conditions in 2008 when notes 8-10 were sold, Mr. Zeid must have been well aware of the market volatility at the time through the account valuations and market snapshots. Some investors take the view that a period of market decline presents a favourable opportunity for investment. Mr. Zeid had a bullish view of the market.
- COB does not specify what factors must be taken into account when assessing suitability. COBS 9.2 does however identify three factors about which information should be gathered to enable a determination of suitability to be made, namely, the client's knowledge and experience in the investment field relevant to the investment, the client's financial situation and the client's investment objectives. There did not appear to be any dispute that these factors were relevant to an assessment of suitability under COB as well.
- I have already found that it is probable that Mr. Zeid understood the structure of the notes and the nature of the risks associated with them and that his knowledge of the markets was sufficient for him to form a view as whether he was prepared to take those risks. As to his financial situation his family wealth in 2007 was not less US$600-700m. No suggestion was made that he was unable to bear the risks associated with the notes. Obviously he and his family would prefer not to have lost almost US$ 70m. in October 2008 but there was no evidence led from the family that this was a loss which could not be borne. (Having regard to the family's wealth in 2007, such a loss would not have been more than about 10% of the family's wealth in 2007, though the proportion may have been somewhat higher in 2008 than in 2007.) There was, however, a dispute as Mr. Zeid's investment objectives.
- It seems clear that Mr. Zeid had no wish to risk his cash funds on equity investments. The greater part of his family wealth was invested in a number of different businesses and there is no indication that he wished to purchase equity interests in other businesses with the very large cash funds at his disposal. His purchase of CRANs suggests that he wished to obtain an enhanced return on his funds without risking his capital. Indeed, Mr. Zaki accepted that Mr. Zeid was "very keen on 100 per cent capital protection if he could get it."
- I have already noted that the suitability forms contained statements as to Mr. Zeid's investment objectives. However, these were expressed in terms such as "income" or "capital growth". The fact that the terms used varied does not inspire confidence in them as reliable evidence of Mr. Zeid's investment objectives. As I have already noted Mr. Zaki accepted that Mr. Zeid's objective was capital growth. But that says little about the detail (or "granularity", a word used by the experts) of his investment objectives. By 2007 Mr. Zaki had been selling structured products to Mr. Zeid for over 3 years. In the absence of evidence from Mr. Zeid his investment objectives in 2007 and 2008 must be ascertained not only from Mr. Zaki's evidence but also from a consideration of Mr. Zaki's experience of Mr. Zeid in the previous 3 years.
- Mr. Anderson submitted that Mr. Zeid's investment objectives in 2007 remained what they had been at the outset, namely, a desire for attractive returns whilst protecting his capital. He said that Mr. Zaki "enticed [Mr. Zeid] away into riskier products" because of apparent concerns that the account needed to be diversified and because the fees payable on SCARPS were higher than the fees chargeable on capital protected products.
- From September 2003 to June 2004 Mr. Zeid purchased 6 CRANs. From November 2004 to June 2005 only 1 CRAN was purchased but other notes, including 2 Triggers, were purchased. Mr. Zaki gave evidence that when market conditions changed CSUK stopped issuing CRANs. This was challenged in cross-examination. Mr. Zaki accepted that in November 2006 a CRAN (based upon swap rates, not interest rates) was purchased. The suitability note recorded Mr. Zaki's opinion that this investment was "capital protected which is in line with the client's objectives for this investment." This note was sold three months later because "it didn't work". It was "not producing the right results." It does not appear that any CRAN was purchased thereafter. Whether or not capital protected CRANs could be purchased after November 2006 remained obscure on the evidence but perhaps does not matter because Mr. Zaki accepted that CDIs with 100 per cent capital protection could be purchased. However, he said that they produced a lower coupon rate which was of no interest to Mr. Zeid "who always wanted to get double digit return. So this was the underlying motive. But obviously he didn't want to lose his money. So we had this conversation all the time." This evidence, that Mr. Zeid wanted "double digit return", seems to me to be consistent with the probabilities and I accept it. It is likely that it was this desire for high returns that led to Mr. Zeid purchasing notes which were not 100 per cent capital protected. It is true that higher fees were chargeable on such products and that Mr. Zaki pointed out (correctly) that the introduction of non-capital protected products diversified his investments with CSFB and CSUK (because they introduced an equity link). But I do not accept the submission that Mr. Zaki "enticed [Mr. Zeid] away into riskier products". Mr. Zeid began buying CDIs because they gave him the desired return and he was prepared to take the risk of capital loss.
- What then were Mr. Zeid's investment objectives at the commencement of 2007? By this time 29 structured products had been purchased from CSFB and CSUK, of which 14 had been capital protected and 15 had been non-capital protected. The latter 15 had been purchased between December 2004 and December 2006. During that period 4 CRANs (capital protected notes) were also purchased from CSUK. The suitability notes for those CRANs tended to note that the CRANs were suitable for the client because his capital was protected.
- Thus in the two year period from December 2004 (when the first non-capital protected note was purchased) the majority of notes purchased were non-capital protected. In 2006 6 non-capital protected notes were purchased and 2 capital protected notes were purchased. In these circumstances it seems to me difficult to say that Mr. Zeid's investment objectives were to ensure that his capital was protected, notwithstanding that when a capital protected note was purchased such note was said to be suitable because of that very characteristic. Rather, his investment objectives appear to have been to receive an enhanced or high coupon payment and if that led to the purchase of a non-capital protected note then that was a risk he was prepared to take. Of course, had Mr. Zeid not appreciated that the majority of notes he purchased were non-capital protected it would not be possible to say that that was his investment objective. But in my judgment the Claimants cannot establish that Mr. Zeid did not appreciate that. Similarly, if it could be shown that Mr. Zeid wanted capital protected notes and was prepared to forego the higher returns available on non-capital protected notes in order to get capital protected notes a different conclusion would be warranted. But that cannot be shown. Indeed, when in February 2008 Mr. Zeid asked for a capital protected note and was offered a CRAN paying 4.5% he decided to purchase a CDI paying 11%. It is also notable that the suitability forms for note nos. 8-10 refer to Mr. Zeid as "looking for enhanced returns" and "looking for high returns".
- Having regard to the returns Mr. Zeid was hoping to make I do not regard my finding as to Mr. Zeid's investment objectives as inconsistent with Mr. Zaki's acceptance that Mr. Zeid's objective was capital growth.
- Thus, when one has regard to Mr. Zeid's knowledge and experience in the investment field relevant to the investment, his financial situation and his investment objectives there is nothing in those matters which would suggest that Mr. Zaki's recommendation or advice to buy the 10 notes which are the subject matter of this action was not suitable for Mr. Zeid. The notes gave him enhanced returns, which was his objective. He understood there was a risk that he might not recover his capital and if that materialised he was able to bear the resulting loss by reason of his considerable resources.
- There remain the degree of risk, the lack of diversification and the particular circumstances of 2008 which were relied upon by Mr. Anderson as showing that the notes were unsuitable for Mr. Zeid.
- Mr. Zaki always described Mr. Zeid's risk tolerance as moderate. It is said that the 10 notes involved a greater than moderate risk. In support of that submission reliance was placed on advice by the Swiss Bankers Association who described notes of the type in question as entailing "an especially high level of risk". Reference was also made to a book written by Andreas Blumke "How to invest in structured products" published in 2009. The author, whom Mr. Croft accepted "knew his stuff", advised investors to consider the level of coupon as a measure of the risk of the structure. He also advised investors never to invest in products based on too many underlying assets and in the case of barrier reverse convertible notes to invest where the conviction is pretty high that the barrier will hold. His section on yield enhancement products ended as follows:
"Yield enhancement products should never be used as bond replacements. The value of even a conservative structure based on low-risk single stocks or indices can fall considerably. Of every structure the author has ever back-tested, not a single one has never had its barrier breached.
As a final point, investors should bear in mind that, despite the likelihood that four times out of five the product will be redeemed with full coupon and capital, the fifth time is likely to destroy all the revenue generated by the previous coupons and much more. Caveat emptor."
- It was also noted that doubts were expressed by the Legal and Compliance Department of CSUK that a moderate risk profile was appropriate where Mr. Zeid was a frequent trader in structured products; see the internal review dated 7 October 2005 and the remarks on the suitability forms for notes 8-10 added by management to the effect that the product was "potentially unsuitable" because the client's risk profile and the product risk profile were not compatible.
- Mr. Croft was of the view that the notes should only have been sold to experienced and knowledgeable investors with the appropriate level of understanding. He also considered that there was an inconsistency between the desire of Mr. Zeid for high returns and the moderate risk category into which the Claimants had been placed.
- However, it does not follow that the 10 structured products which form the basis of this claim should be regarded as carrying a risk greater than that which Mr. Zeid had been prepared to accept and which Mr. Zaki described in the suitability forms as "moderate". Obviously, the notes were "risky" as accepted by Mr. Croft. But if one compares them with high grade bonds on the one hand and equities on the other had one could fairly conclude that they were of "moderate" risk.
- The nature of the investment proposed by the notes was neatly described by Mr. Croft as follows:
"….in return for very high Coupons and foregoing the chance of upside gains, the investor took the risk that a low probability event (ie very large market falls) would not happen over a one to three year horizon and accepted that that if it did there could be losses of principal (the amount of which would depend on market levels at maturity) and some Coupons."
- Mr. Croft assessed the probability of a 60% barrier being breached (where there were three or four indices) as around 10%. Mr. Beloreshki's calculations, which Mr. Croft accepted appeared to have made using the same methodology as Mr. Croft had used and had been scaled up using a conventional approximation, suggested that 10% was about right for notes 1-6 and 9. Note 7 was assessed at 30% but that was a Trigger note and it was not clear from Mr. Beloreshki's evidence how the 30% had been calculated. Notes 8 and 10 were assessed at 16% and 21% which may have reflected the increased volatility in the market at that time. In the result I was not persuaded that Mr. Beloreshki's calculations were a reason to doubt Mr. Croft's assessment of the probability of barrier breach. On the contrary they tended to support his assessment.
- Bearing in mind that assessment of the probability of a barrier breach I was not persuaded that in the spectrum from high grade bonds to equities the structured notes in question were, in the context of this case and having regard in particular to Mr. Zeid's investment objectives, properly to be regarded as carrying a greater than moderate risk, save possibly in the case of notes 8-10 which were bought in 2008 when market volatility was high.
- By January 2007 all or almost all of the structured products held in Mr. Zeid's account with Credit Suisse were equity related. The need for diversification is, I consider, a relevant matter to bear in mind when assessing suitability. Mr. Zaki bore it in mind in 2004 and 2005 when noting that equity linked products at that time increased the diversification of the account. He also bore it in mind in February 2008 when suggesting to Mr. Zeid, who had requested a capital protected note, that he purchase a CRAN which would "have an additional advantage as it would diversify the account more, as all notes currently held are equity linked." I do not consider that COB 5.3.5(4) or COBS 9.3.1 require consideration of such matters to be excluded when assessing suitability. The fact that all, or almost all, of the notes were equity linked by January 2007 therefore suggests that Mr. Zaki's recommendations were unsuitable. However, against that must be balanced Mr. Zeid's desire for "double digit" returns. In this regard it is significant that, notwithstanding Mr. Zaki's advice about diversification on 13 February 2008 and his recommendation to purchase a CRAN paying 4.5%, Mr. Zeid decided to purchase a CDI paying 11%. Bearing this in mind, together with Mr. Zeid's understanding of the notes and the risks associated with them and his ability to bear any resulting losses, I have concluded that the lack of diversity in January 2007 did not make the notes unsuitable for Mr. Zeid, save possibly in the case of notes 8-10 which were bought in 2008 when market volatility was high.
- Before turning to the events of 2008 it is necessary to consider the relevance of leverage. Mr. Anderson relied heavily on COB 7.9 and COBS 9.3.4. Pursuant to COB 7.9 a firm which lends money or arranges for another person to do so must not do so unless, inter alia, it has made and recorded an assessment of the customer's financial standing and has taken reasonable steps to ensure that the arrangements for the loan and the amount concerned are suitable for the type of investment which the customer is likely to enter into. Under COBS 9.3.4 guidance was given that, when considering the suitability of a recommendation, which is linked to a loan, the firm should take into account the overall suitability of the overall transaction.
- No explanation was given to me as to why the regulation of lending in COBS was so different from the regulation of lending in COB. However, I do not consider that, so far as this case is concerned, the difference is material. When a firm makes a recommendation to purchase a structured product for, say, US$20m. with the assistance of a loan of, say, US$15m., the firm must take reasonable steps to ensure that its recommendation is suitable for the client under both COB and COBS. Suitability will, in my judgment, usually require account to be taken of the substantial leverage. For such leverage greatly increases both the potential losses which may be suffered by the client and the risk of a margin call, requiring the payment of additional collateral in default of which pledged assets may be sold. That leverage must be considered when assessing suitability seems to me to be implicit in COB but is the subject of express guidance in COBS. Mr. Croft did not appear to agree with this. He suggested that suitability was focussed on the product and that financing was a separate matter. In this regard I am unable to accept his evidence.
- In circumstances where an existing credit facility is drawn down I do not consider that COB 7.9 imposes an additional duty to consider the suitability of drawing down the loan. COB 7.9 appears to me to be dealing with the suitability of a loan or credit facility at an earlier stage, namely, when it is granted, not when it is drawn down. Thus the customer is required to give his "prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees." The customer will surely do that when the loan or facility is granted, not when it is drawn down. Before granting the facility the firm must have taken reasonable steps to ensure that the arrangement for the loan or credit and the amount concerned are suitable "for the type of investment agreed proposed or which the private customer is likely to enter into." There was no suggestion in the present case that when the credit facility of US$100m. was arranged by CSFB in January 2005 or when CSUK arranged the Framework Credit Limit in September 2006 that such credit was unsuitable for Mr. Zeid. What was suggested was that when that credit was drawn down to purchase structured credit products, and in particular, the 10 which form the subject matter of this claim, those purchases, taking into account the substantial leverage, were unsuitable for him. In my judgment leverage was a relevant matter to take into account when assessing suitability, but that duty arose pursuant to COB 5.2.5 and COBS 9.2.1.
- The amount of leverage was substantial. It was 75% for notes 1-5, 70% for loan 6, 80% for note 7, 34% for note 8, 55% for note 9 and 75% for note 10. Mr. Croft described this level of leverage as "aggressive" or "bold". Mr. Zaki accepted that it was "excessive". Its particular relevance lay in the fact that it increased the quantum of any loss of capital and that it would lead to a demand for additional collateral when the loan to value ratio fell below the ratio regarded by CSUK as acceptable, usually 70%. It seems clear that the amount of leverage extended to Mr. Zeid was usually the maximum or nearly the maximum available to him at any particular time.
- The extent of leveraging meant that in the event of a fall in the markets there was a risk of a margin call. This had happened in June 2006. Despite this, in 2007 leveraging of over 75% was arranged for notes 1-5, 70% for note 6 and 80% for note 7. Did such leverage, and the risks it entailed, make those notes unsuitable for Mr. Zeid? For many people "aggressive" (per Mr. Croft) or "excessive" (per Mr. Zaki) leveraging at the levels accepted by Mr. Zeid would be unsuitable. Indeed, Mr. Zaki accepted that "excessive" meant "unsuitable". But whether or not the leveraging made available to Mr. Zeid, which was undoubtedly on a grand scale, was unsuitable for Mr. Zeid depends on his understanding of the risks involved and his ability to bear the consequences of those risks if they materialise. There can be no doubt, having regard in particular to the experience of June 2006 and the market and financial information provided to him by and discussed with Mr. Zaki, that Mr. Zeid understood the risks associated with leverage. No evidence was led which suggested that Mr. Zeid was unable to bear the risks involved. These matters, coupled with the fact that Mr. Zeid had accepted substantial leveraging since 2003, suggest that notes 1-7, notwithstanding the leveraging levels, were suitable for Mr. Zeid and I so find.
- That brings me to the question whether notes 8-10, which were bought in 2008, were unsuitable for Mr. Zeid. By May/June 2008 much had happened in the financial world: UBS, Citigroup and Merrill Lynch had announced substantial losses, central banks had attempted to forestall the resulting credit crunch, global stock markets had suffered substantial falls, Northern Rock had been nationalised and Bear Stearns had been acquired by a rival. To invest in any product linked to equities at such a time was a brave action. Mr. Croft accepted that at that time there was a perceived risk of a global recession. Mr. Zaki accepted that a prudent adviser would have recommended his clients to reduce their exposure to equities. Yet notes 8 and 10 were linked with four indices, which feature itself increased the risk, and note 9 was linked to 3 banking shares at a time when banks were under considerable pressure. All these matters strongly suggest that the purchase of notes 8-10 was unsuitable. The markets were volatile and hence the risk of a barrier breach was probably higher than it would otherwise have been. (I note that Mr. Beloreshki's calculations suggested that this was not so with note no.9 but I was not persuaded that this was a reliable calculation in this context.) Mr. Zeid's account with CSUK was already particularly exposed to the volatile equity market because of a lack of diversification.
- In addition, in April 2008 the loan to value ratio had been increased to 80% which served to increase the risk, in the event of a fall in the market, of a margin call.
- Against these matters must be put Mr. Zeid's understanding of the risks involved and his ability to bear them. In particular it must be borne in mind that the prospect of a shortfall and the need for additional collateral was expressly discussed with and accepted by Mr. Zeid between January and April 2008. Also, Mr. Zeid was, according to Mr. Zaki, bullish about the markets. There is no reason to doubt that evidence. Mr. Zeid would have to have been bullish to have purchased notes costing US$16m., US$18m. and Euro20m. in May/June 2008.
- Having weighed these matters I consider that, notwithstanding Mr. Zeid's appreciation of the risks and his ability to bear the consequences of them materialising, the line had been crossed in May/June 2008. Notes 8-10 were unsuitable. The markets were volatile and there was no diversity in Mr. Zeid's portfolio of investments with CSUK. They were all linked with equity markets or three banking stocks. The notes were heavily leveraged. Over US $15m. was borrowed to purchase notes 8 and 9 valued at US $34m. and Euro15m. was borrowed to purchase note 10 valued at Euro20m. There had already been considerable leveraging of the earlier notes and so this further substantial leveraging must, at a time of market volatility, have greatly increased the risk of substantial margin calls, especially where the loan to value had been increased to 80% with the aim of avoiding an earlier margin call. Although no evidence was led as to what Mr. Zeid's liquid resources were in the latter part of 2008 the fact that Mr. Zeid failed to meet the margin call in October 2008 suggests that he did not have sufficient liquid resources at that time to meet that margin call. That was the view formed by Mr. Zaki at the time. For these reasons I have concluded that notes 8-10 were not suitable for Mr. Zeid. I recognise that in making this finding I am not accepting the view of Mr. Croft who considered that all of the notes were suitable but I must reach my own view on the totality of the evidence.
Breach of statutory duty
- There is no evidence that Mr. Zaki exercised any particular care to ensure that his recommendation or advice with regard to notes 8-10 was suitable for Mr. Zeid. The suitability forms do not suggest that he paid appropriate attention to the volatile conditions or to the increase in risk caused by linking two of the notes to four indices or by linking one to banking shares. As I have already noted Mr. Zaki accepted that a prudent adviser would have recommended his clients to reduce their exposure to equities. In essence his thought process appears to have been that Mr. Zeid wanted an enhanced return, was familiar with the products and was willing to take some risk. In the turbulent conditions of mid-2008, when there was no diversity in the account, this did not, in my judgment, amount to taking reasonable steps to ensure the products were suitable for Mr. Zeid. Mr. Zaki ought to have had regard to the desirability of some diversity in the account, as he had done in February 2008, and to the risks from "excessive" leveraging at a time of market volatility. Mr. Zaki did not appear to be aware of the need for him to assess the suitability of leveraging when recommending the purchase of a note. He regarded such matters as a function of the credit department. Mr. Zeid had very deep pockets but the conditions in May/June 2008 required greater care than Mr. Zaki gave. Although Mr. Zaki had reduced his estimate of Mr. Zeid's net worth in 2008 (as recorded in the suitability forms for notes 8-10) there is no evidence that he took any steps to consider whether Mr. Zeid's liquid resources at that time would be sufficient to meet a margin call of a size significantly greater than that discussed in January-April 2008. A note in the suitability form for note no.10 suggests that it was thought that he had liquidity with other banks (and it may be that this thought is to be inferred from a similar note in the suitability forms for notes 8 and 9). However, there is no evidence that any checks were made as to Mr. Zeid's liquidity with other banks. It appears that Mr. Zaki only learnt that Mr. Zeid was unable to meet the margin call in October 2008 when Mr. Zeid failed to provide additional collateral.
- There was therefore a breach of COBS 9.2.1 in that CSUK, through Mr. Zaki, recommended the purchase of notes 8-10 and such recommendation was made without taking reasonable steps to ensure that it was suitable for Mr. Zeid. Mr. Anderson submitted that all the Claimants needed to establish in order to show that such breach caused loss was that Mr. Zeid would not have acted as he did (that is, by purchasing the notes) if such recommendation had not been made; see McMeel and Virgo on Financial Advice and Financial Products 2nd.ed. para. XI.4.322, Bristol & West Building Society v Mothew  EWCA Civ 593 per Millet LJ and White v Paul Davidson & Taylor  PNLR 15. Mr. Beltrami submitted that it was necessary for the Claimants to show what advice ought to have been given and that if such advice had been given Mr. Zeid would not have purchased the notes; see Howard Hagen and others v ICI Chemicals and Polymers Limited and others  EWHC 548 (QB).
- I am content to assume that Mr. Anderson's approach is that which I should follow. Mr. Anderson relied upon Mr. Zaki's statement in evidence that if he gave advice to Mr. Zeid he would consider it carefully and more often than not rely on it. He submitted that "the history of the relationship shows that [Mr. Zeid] invariably relied and acted upon the advice he was given." He referred to the first purchase of non-capital protected products instead of CRANs and to occasions in December 2005 and January 2008 when a smaller note than Mr. Zeid wanted was purchased.
- I do not consider that the Claimants have established their case. Mr. Zeid was a successful and wealthy business man. On the evidence of the PCRM notes he was a man with his own views on the markets and what was an appropriate investment. Mr. Zaki described Mr. Zeid as "very formidable, he would like to get his own way." It is likely that Mr. Zeid made his investment decisions on the basis of his own views and unlikely that he relied upon Mr. Zaki's recommendations, though on occasion he may have done so, such as when he was first introduced to non-capital protected notes in 2004 and 2005. There is no doubt that he and Mr. Zaki were friends and that he trusted Mr. Zaki. But it does not follow that, once he had become familiar with non-capital protected notes, he relied upon Mr. Zaki's recommendations when deciding what investments to make when Mr. Zaki brought investment suggestions and proposals to him. It seems to me more likely than not that Mr. Zeid decided what investments to make based upon his own view of the markets. As to the size of note purchased, that often depended upon what was possible having regard to the amount of collateral in the account rather than on "advice" from Mr. Zaki. The burden is on the Claimants to show that Mr. Zeid relied on Mr. Zaki's recommendations. In the absence of evidence from Mr. Zeid, they are, it seems to me, unable to discharge that burden. Mr. Zaki's agreement that Mr. Zeid relied upon his "advice" (unparticularised) is not sufficient for this purpose. I am left unpersuaded that Mr. Zeid relied upon Mr. Zaki's recommendations in deciding to purchase notes 8-10. In May/June 2008, at a time of great market volatility, Mr. Zeid made very large investments, involving substantial leveraging. He did so, notwithstanding that in January-April 2008 there had almost been a margin call and that he had promised to provide additional collateral. To invest in products linked to equity markets in May/June 2008 one had to have had a serious appetite for investing and to be bullish, brave and confident. Mr. Zeid was, it seems to me, all of those and was determined to get an enhanced return on his money. Mr. Zaki described Mr. Zeid as having an "appetite for continuing to purchase…….He was a pro, he was bullish about the market and he wanted to take advantage." In deciding to purchase notes 8-10 it is more likely than not that Mr. Zeid relied on his own judgment and not on advice from Mr. Zaki. If Mr. Zeid had not received advice on the merits from Mr. Zaki he would still have bought the notes and suffered loss when they were liquidated. Put another way, if Mr. Zaki had advised that notes 8-10 were unsuitable, it is more probable than not that Mr. Zeid would still have purchased them and suffered loss when they were liquidated.
- Mr. Anderson sought to characterise CSUK's argument on causation as a volenti argument and submitted that such an argument was not open to CSUK where CSUK had acted in breach of duty. However, I do not accept that CSUK's argument on causation was a volenti argument. Section 150 of the Financial and Services Markets Act 2000 requires a claimant to establish that loss has been suffered as a result of a breach of duty. CSUK argued that causation had not been established. I agree that it has not been established.
- CSUK did not act in breach of duty with regard to notes 1-7. Although CSUK acted in breach of its duty with regard to notes 8-10 the Claimants have not established that such breach caused them loss. It follows that the claim must be dismissed.
Note 1 Reference was made in the course of the trial to clause 3 of an account mandate signed by the Claimants and dated 2 December 2003 which referred to the giving of instructions but in the event this was not made the subject of submissions on behalf of the Defendant in closing. [Back]
Note 2 In the light of this conclusion it is unnecessary to determine other disputes concerning COB 7.9, in particular, whether CSUK arranged for loans to be made to Mr. Zeid. In case a finding is necessary I shall express my views on these disputes shortly. Until CSUK took over the account the financing was made available by or through CSFB. From September 2006 the financing was provided by CSAG (Credit Suisse in Geneva) pursuant to the Framework Credit Limit. There was a dispute as to whether this replaced the earlier facilities. The request for the Framework Credit Limit requested that it applied to all existing facilities. There is no evidence that that request was denied. This suggests that the existing facilities remained in existence but were governed by the Framework Credit Limit. No mention is made of any other credit facilities. On the balance of probabilities I consider that the existing facility of US$ 100m. remained in existence but that it was governed by the Framework Credit Limit. Although Mr. Zaki accepted that he was instrumental in arranging this facility and that it was used to leverage each note, it was submitted on behalf of CSUK that CSUK did not arrange the facility. It is true that CSUK did not arrange the facilities which had been granted before CSUK came onto the scene. But it seems to me that in circumstances where CSUK requested the Framework Credit Limit on terms that it applied to the existing facilities it would be an unduly narrow view of the facts to say that the credit facility represented by the Framework Credit Limit had not been arranged by CSUK. It was further submitted on behalf of CSUK that, because CSUK had no control over the grant of financing facilities, it could not be said that CSUK had arranged them. There was a difference between requesting them and arranging them. However, COB 7.9 applies both to firms that lend money and those that arrange for another person to do so. In that context the firm that lends money plainly has control over the grant of financing facilities. I do not therefore consider it appropriate to construe “arrange” in its context as requiring control over the grant of financing facilities. I consider that “arrange” should be given its usual meaning of taking to steps to organise or procure. By requesting financing facilities CSUK was, as between it and Mr. Zeid, arranging those facilities.
Note 3 Since preparing this judgment I have been referred to the decision in Rubenstein v HSBC Bank PLC  EWHC 2304 (QB) by counsel for the Claimants. However, no submissions were made as to the effect of that case and the paragraphs to which I was referred did not cause me to alter my conclusions. [Back]
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