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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Barings Plc & Anor v Coopers & Lybrand (a firm)& Ors [2003] EWHC 1319 (Ch) (11 June 2003)
Cite as: [2003] Lloyd's Rep IR 566, [2003] EWHC 1319 (Ch), [2003] PNLR 34

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Case No: CH 1996 B No. 477 &

    CH 1998 B No. 5286

Neutral Citation Number: [2003] EWHC 1319 (Ch)




Royal Courts of Justice

Strand, London, WC2A 2LL


Date: 11th June 2003





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BARINGS Plc (in liquidation) and anr

- and -

COOPERS & LYBRAND (a firm) and ors










MATTAR and 36 ors






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Rhodri Davies QC/Richard Gillis (instructed by Slaughter & May for PLC)

Michael Brindle QC/Craig Orr (instructed by Ashurst Morris Crisp for BFS)

Mark Hapgood QC/David Garland (instructed by Lovell White Durrant for BSJ)


            Jonathan Gaisman QC/Christopher Butcher QC/Edward Bannister QC/David Bailey/James Brocklebank (instructed by Clifford Chance for D&T)

John Lockey (instructed by Barlow Lyde & Gilbert for C&LL)

John Nicholls (instructed by Herbert Smith for C&LS)


Hearing dates between: 7th May 2002 – 24th March 2003

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Approved Judgment


I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.




The Hon. Mr. Justice Evans-Lombe


SECTION                                                                                  paragraph number








Baring Securities (Singapore) Limited (“BSS”)



Matrix management

Consolidation of BB&Co and BSL

The management structure within the Barings Group


BB&Co and BSL Management Committees

BIB Management Committee (“MANCO”)

The Treasury and Risk Committees

Asset and Liability Committee (“ALCO”)

Group Treasury and Risk (“GTR”)

Financial Products Group (“FPG”)

Internal audit


Barings London management

Barings London settlements

Barings London Treasury and Finance





Futures and options

Margin and settlement variation

Futures contracts

Margin deposited by members of SIMEX with SIMEX

Margin deposited by customers with members of SIMEX

Settlement variation

Accounting treatment of margin and settlement variation


Accounts with SIMEX and customer accounts



Treatment of futures and options trades by CONTAC



Significance of the treatment of options to Leeson’s fraud

Margin funding for customer trades

Margin funding for proprietary trades

The need to reconcile margin

London Settlements

Reports to London

(i) The Trade Feed

(ii) The Margin Feed

(iii) The Price Feed

(iv) The London Gross report

(v) The Funding Spreadsheet

Reconciliations by the BSL Settlements Department

Reports to Japan

Error accounts, unallocated trades accounts and give-up trades


The start of Barings’ F&O business

SIMEX and Mr Killian

Mr Gueler

The activation of BFS

The set-up of BFS

The appointment of Leeson to BFS

The start of BFS’ operations

Leeson’s move to become a floor trader

The 88888 account

BFS’ customers

Leeson’s rolls

1993: Leeson is given discretion

Leeson’s switching business

BSL management in 1993

Reporting of Leeson’s profits

Mr Baker

Mr Baker’s vision

Mr Killian’s complaints to Mr Norris

November-December 1993: Leeson’s profits increase

Leeson’s 1993 Bonus

The “turf war” over Leeson

The development of Leeson’s trading in 1994

The imposition of risk limits and the start of JGB and Euroyen switching

Mr Gueler’s concerns about Leeson’s profits

January and February 1995





Corruption of the BFS back office

The Trade Feed and London Gross Report

The BFS back office

Concealment of the balance on the 88888 account at month- and year-ends

September 1992 audit

December 1992

False accounting entries

Option premiums


The reasons why Leeson was able to practise his fraud



Margining in US dollars

The Dollar Funding requests

The "K2/P4 line"

Investigation of the Dollar Funding by BSL

Initial investigation into the K2/P4 line

Initial investigation into the Dollar Funding

Investigation into the split between house and customer business

Investigation by Mr Hawes and the internal audit

Meetings in October 1994

Later investigations

The Margin Feed

Totals of Dollar Funding




1992 AUDIT


1993 AUDIT


1994 AUDIT



The pleaded case

1992 audit

1993 audit




The parties’ cases

Audit guidelines

Audit risk

D&T’s analysis of audit risk

The risk of unauthorised trading

Non-segregation of duties

Increased risk of unauthorised trading

Mitigating factors

Leeson was a reviewer, not a doer

Supervision of Leeson

BFS had no funds of its own

Execution-only broker

Small number of related company customers

Conclusion on audit risk

Effect of audit risk on audit procedures

D&T’s planning process

Lack of segregation of duties

Size of risk

What tests should D&T have conducted?

Confirmation procedure

The need to test open positions

The effect of the audit guidelines

How should D&T have tested for completeness?

The assurance to be gained from tests of the financial balances

Risk of manipulation of balances

Confirmation of the 88888 account



Leeson’s concealment

D&T’s investigation

The parties’ arguments

Factual witness evidence

Cut-off and window dressing

The conventions as to recording payments and receipts

The Bank Reconciliation and BFS’ explanation

The daily activity statement for the 88888 account

Client confirmations

The order of events




SIMEX rules on margins

The 1993 balance sheet

The parties’ cases

Accounting guidelines

The need to investigate

Would D&T have been entitled to accept Leeson’s explanation?

Others saw the imbalance and did not react



D&T’s case

Vicarious liability

Course of employment

Scope of authority

Special rule of attribution


Causation in deceit claims

D&T’s negligence in not detecting the misrepresentations

Causation for representations (i) and (iii)

“Informed common sense”

The purpose and scope of the rule: Empress Car and Reeves

Causation for representation (ii)

Applicability of Reeves


Contributory negligence




Are BFS’ damages limited by the scope of D&T’s duty to BFS?

The Dollar Funding

The authorities on scope of duty as a control mechanism

Application to the present case

Was the “chain of causation”, from D&T's negligence to the loss sued for, broken by management fault and if so when?

The appropriate test

Application of the test

The situation in April 1994

The level of the Dollar Funding

The K2/P4 balance

The connection between the two

The debtors’ report

Knowledge that BSJ was paying its margins

Conclusion on Dollar Funding

Knowledge of BFS’ overdraft

Imbalance of margins

Lack of segregation and supervision at BFS

Leeson’s profits


The Reeves principle

Alternative cut-off dates

Fluctuations in loss after the cut-off date


The applicable law

For whose actions was BFS responsible?

The ambit of BFS’ business

Monitoring of trading profits

London settlements and Treasury

Risk control

Group compliance and financial control

Internal audit


“Double-dipping” and the need to consider the details of management failings

The deduction for contributory negligence in audit cases

Vicarious liability for Leeson


The establishment of BFS

Settlement and finance supervision within BFS

Mr Bax

Mr Jones’ supervision of BFS settlements and back office

BFS’ finance function

Representation letters

Failure to implement the internal audit report


Other BFS staff

BSL’s failure to supervise the BFS back office

Failures by the BSL Settlements Department and Treasury attributable to BFS

The Ą670m payment

Lack of reconciliations by BSL

BSL’s failure to recalculate margin called by BFS

BSL’s failure to reconcile margin called by BFS against the margin BSL called from customers

Treatment by First Futures of data on the margin feed

The investigation of the Dollar Funding

The failure to recognise that BFS was not giving credit for the genuine US dollar client collateral sent by BSL in January and February 1994

The payment of US$32 million on 9 February 1994

The payments from 1 March onwards

Mr Hawes and his senior managers

Later dates

Supervision of Leeson’s trading

Individual responsibilities

The need to supervise Leeson’s trading

The failure to supervise Leeson’s trading


November 1992 to mid-August 1993

Mid-August to end-December 1993

End-December 1993 to end-April 1994

End-April to end-December 1994





Commission and profits

Would BFS have continued in existence?

Is the connection with the negligence too indirect?

Profits apparently earned from Leeson’s trading

BFS’ recovery under the Coopers settlement

Can BFS appropriate the settlement monies to non-overlapping claims?

Relevance of recoveries by Plc and BSL



The interpretation of section 727

Does section 727 apply to D&T?

Ought D&T fairly to be excused?

Profits received by other Barings companies

The reduction in BFS’ losses after the cut-off date



































































































































































































































































































Mr Justice Evans-Lombe:



1.                  The Barings group collapsed in February 1995. The immediate cause was unauthorised trading conducted on the Singapore International Monetary Exchange by Mr Nicholas Leeson (“Leeson”), the General Manager of Baring Futures (Singapore) Ltd (“BFS”). Leeson’s trading on his 88888 account incurred losses amounting to Ł791 million. These losses had been funded by other members of the Barings group, in ignorance of the real use to which the funds were being put. It was BFS’ inability to repay its debts to the other group companies that brought down the group.

2.                  In these proceedings BFS and two of its parent companies sued their auditors, Deloitte & Touche (Singapore) (“D&T”), Coopers & Lybrand (London) and Coopers & Lybrand (Singapore). The claims against the two Coopers firms were settled soon after the trial began and in an earlier judgment I struck out the claims by the Barings parent companies against D&T.

3.                  Accordingly this judgment relates to the claim brought by BFS against D&T, who were the auditors of BFS in 1992 and 1993. I have concluded that their audits were negligent in two respects:

i)                    Leeson concealed the loss in BFS’ accounts in September 1992 by “window-dressing”: he credited a payment from Baring Securities Ltd (“BSL”) in London as received on 30 September (the last day of the old financial year), when it was in fact received on 1 October (the first day of the next financial year). D&T should have detected that the payment had been credited to the wrong day and that the credit was concealing a significant loss in BFS’ accounts; and

ii)                   the December 1993 balance sheet showed BFS as having deposited more margin with SIMEX than it had received from customers, whereas the balance should have been the other way round. This was an indication of unauthorised trading. D&T should have investigated the imbalance and revealed Leeson’s unauthorised trading.

4.                  A number of other allegations against D&T were either dropped in the course of the trial or I have found them not to have been proved.

5.                  My findings mean that D&T are liable to BFS for the losses suffered as a result of Leeson’s unauthorised trading from November 1992 onwards.

6.                  However I have also had to take into account a very high level of fault by BFS and those to whom the board of BFS delegated their functions. Significant elements of this fault were the failure of BFS’ local management to supervise Leeson’s running of the BFS back office, the failure of management in London and Japan to understand his “switching” trading or question the high profits he reported and the lack of adequate risk monitoring.  Perhaps the most notable element of fault was BSL’s provision to Leeson from March 1994 onwards of funding which was not reconciled to trades or customers or supported by credible explanations, without any serious attempt to investigate the reasons why it was needed. In fact this funding was margining Leeson’s unauthorised trading.

7.                  In the light of this fault I have concluded that the damages to which BFS is entitled from November 1992 to April 1994 should be reduced by a proportion which rises over time from 50% to 80%. From the end of April 1994 onwards (that is, for the period during which by far the largest part of BFS’ loss was suffered), BFS’ fault was so great as to be the only cause of the losses suffered, and D&T have no further liability from that date.

8.                  The detailed calculation of BFS’ damages is to be agreed between the parties (or, if necessary, decided at a further hearing) in the light of the conclusions I have set out above and two further points of principle upon which I have ruled.


9.                  These proceedings arise out of the collapse of the Barings Group of companies in February 1995.  Administration orders were made in respect of the principal companies in the Group in this court on 26 February 1995, and they have subsequently been placed in compulsory insolvent liquidation. The claimants are three of the Barings Group companies acting by their liquidators. The first is Barings plc (“Plc”), the holding company of the Barings Group. The second is Bishopscourt (BS) Ltd, at all material times called BSL, a company incorporated in the Cayman Islands but based in London and registered as an overseas company in England & Wales. BSL was the securities trading arm of the Barings Group, and was the indirect subsidiary of Plc through Baring Brothers & Co Ltd (“BB&Co”), the banking subsidiary of the Group. The third claimant is BFS. BFS was incorporated in Singapore and was the indirect subsidiary of BSL. It was the futures trading company of the Group on the Singapore International Monetary Exchange (“SIMEX”). It was by means of an account in the name of BFS that Leeson entered into a number of transactions in financial derivatives, the losses sustained from which caused the Barings Group to collapse.

10.              The court has been concerned with two main actions. The first is that in which Plc and BSL are claimants, “the Plc action”, commenced by two writs issued and served in 1996 and 1998 which have been consolidated. In the Plc action the claimants claimed against the partners in the accountancy firm known as D&T, carrying on business in Singapore, part of a world-wide group of partnerships known as Deloitte & Touche. The claim against them is in negligence arising out of their audit of the Barings Group consolidation balances of BFS and BFS statutory accounts for the year to 30 September 1992 (“the 1992 audit”) and for the 15 month period to 31 December 1993 (“the 1993 audit”).  In summary it is alleged in the claim that in breach of duty the two audits were so conducted as to fail to uncover the unauthorised trading of Leeson. The claim is for the consequential damage suffered. 

11.              In the Plc action the claimants also claimed on the same grounds similar relief against Coopers & Lybrand (London), the London-based accountants’ partnership (“C&LL”) and Coopers & Lybrand (Singapore) (“C&LS”) (together “the Coopers firms”). The breach of duty alleged against C&LS arose from their audit of consolidation schedules and statutory accounts of BFS for the year to 31 December 1994 (“the 1994 audit”). The breach of duty alleged against C&LL arose from their audit of Plc’s and BSL’s statutory accounts for 1992, 1993 and 1994 and of the Group accounts for those years. Included in BSL’s claim by assignment was a claim by Baring Securities (London) Limited (“BSLL”), which took over BSL’s proprietary securities trading operations during 1993, in respect of C&LL’s audit of its accounts for 1993 and 1994.

12.              In the Plc action D&T counterclaim against Plc and BSL for deceit and breach of duty, seeking damages for any amount that they are adjudged liable to pay to Plc or BSL or to BFS. D&T have also issued third party proceedings against ING Baring Securities (Japan) Ltd (at all material times called Baring Securities (Japan) Ltd (“BSJ”)) and BFS, claiming contribution to any liability to Plc and BSL in respect of BSJ’s and BFS’ breach of duties owed to Plc and BSL. BSJ was the Japanese securities trading arm of the Barings Group which dealt in securities and, in particular, futures and options on the Tokyo and Osaka markets. C&LL issued third party proceedings against nine individual Barings officers, all of which proceedings have been settled or discontinued. C&LS issued third party proceedings against BFS.

13.              The claimant in the second set of proceedings (“the BFS action”)is BFS. In those proceedings BFS claims similar relief to that claimed in the Plc action on similar grounds against D&T in respect of the 1992 and 1993 audits of its statutory accounts and against C&LS in respect of the 1994 audit of those accounts, though the damage is differently quantified. In those proceedings D&T brought third party claims or Part 20 claims against BSJ, Plc and BSL for contribution arising from breaches of duties owed by those parties to BFS.  C&LS brought third party claims on similar grounds against Plc and BSL.

14.              The trial of the combined action began on 2 October 2001. During its second week, it was announced that the claimants in both actions had agreed terms to settle their claims against the Coopers firms. As a result I adjourned the proceedings on 9 October 2001, pending approval of the settlement by creditors and the Companies Court. Both approvals were in due course given.

15.              The settlement of the claims against the Coopers firms had a number of important consequences for the claims brought against D&T:

i)                    the claimants discontinued their claims against the Coopers firms,

ii)                   BFS continued with its action against D&T,

iii)                 Plc and BSL proposed that their claim against D&T should be stayed. The stay should be lifted only if BFS were held at trial unable to recover from D&T on a ground which did not prevent Plc and BSL recovering. The example given at the time was the issue as to the representation letter which I tried as a preliminary issue, as described below,

iv)                 all claimants indicated that they would not claim against D&T in respect of any loss incurred after 31 December 1994,

v)                  a further important provision of the settlement was intended to protect D&T against the danger of being unable to recover any judgment in its favour against Plc or BSL in its contribution claims against them, by reason of those companies’ insolvency. This provision was that BFS agreed to reduce any judgment which it might obtain against D&T in these proceedings by the amount of any judgment which D&T might obtain against Plc or BSL, and also BSJ, in its contribution claims[1].

16.              D&T’s response to the settlement involving the other parties was threefold. First, D&T brought Part 20 proceedings against the Coopers firms, which is the reason for their continued participation in this trial. Secondly, D&T applied in the Plc/BSL action to strike out Plc’s and BSL’s claims against them.

17.              I heard the strike-out application between 23 October and 2 November 2001 and handed down my judgment on 23 November 2001. In it, I struck out Plc’s and BSL’s claims against D&T on the grounds that (i) neither claimant had pleaded that D&T had in contemplation, when giving their audit opinions, the transactions as a result of which that claimant suffered loss; (ii) BSL’s claims in relation to the Dollar Funding were also barred by the rule in Johnson v Gore Wood [2001] 2 WLR 72; and (iii) Plc’s claims for bonuses paid out failed because Plc did not meet their cost. Accordingly I dismissed Plc’s and BSL’s claims against D&T.

18.              Plc and BSL have obtained leave to appeal against that decision but have not pursued their appeal pending the outcome of this trial.

19.              The third limb of D&T’s response to the settlement was to apply, successfully, for the hearing of a preliminary issue. D&T contended that they had a complete defence to BFS’ claim, based on circuity of action and/or set-off. They said that this arose as a result of two representation letters, written to them by Mr Jones in the course of the 1992 and 1993 audits, which D&T alleged were recklessly fraudulent.

20.              I heard the preliminary issue between 28 January and 8 March 2002, hearing evidence from Mr Mah, Mr Jones and Mr Mason (Mr Bax’s evidence on the issue was not challenged and so he was not called for cross-examination). References to the oral evidence of Mr Jones in this judgment are to his evidence given in the course of that hearing. He has not been called as a witness in the main trial.

21.              I handed down my judgment on the preliminary issue on 20 March 2002. I concluded on the evidence adduced on the application that Mr Jones had not been recklessly fraudulent in signing the representation letters and therefore D&T did not have the complete defence for which they contended. 

22.              The trial recommenced on 7 May 2002. Opening submissions occupied a further 30 hearing days, ending on 27 June 2002. I heard 55 days of factual and expert evidence, ending on 12 December 2002. Closing submissions lasted from 17 February to 24 March 2003.

23.              The time taken during the trial for witness evidence and closing submissions was reduced by an agreed order I made on 23 September 2002, hiving off to a later date D&T’s contribution claims against C&LL and C&LS. This order was made after opening submissions but before any witnesses for the Coopers firms had been called. The effect of the order was that in this judgment, which concludes Phase 1, I determine the liability of D&T to BFS, the extent of BFS’ contributory negligence, and whether in principle Plc, BSL and BSJ are liable to contribute to D&T’s liability. Whether the Coopers firms should contribute to that liability and the actual apportionment between all contributing parties is to be decided, if necessary, in Phase 2. The thinking was that Phase 2 would not be necessary if I were to decide Phase 1 entirely in favour of D&T, in which event the hive-off would have saved several weeks of court time.

24.              This means that in the trial so far I have not heard the witnesses called by C&LL or C&LS, nor any evidence from D&T witnesses relating to D&T’s claims against them. Counsel for the Coopers firms did cross-examine those witnesses called in Phase 1 whom they felt had given evidence which was relevant to D&T’s contribution claims against them. They also addressed me in closing submissions on issues of fact or law that had arisen in Phase 1 and might impact on the claims against them. However I do not deal in this judgment with those issues or otherwise with the allegations made against the Coopers firms, save tangentially in relation to one of the issues relating to damages.

25.              The facts surrounding the collapse of the Barings Group of companies have been exhaustively investigated already. The primary investigations were those of the report of the Board of Banking Supervision to the House of Commons which reported on the 13 July 1995  (“The BoBS Report”) and the report of inspectors to the Minister of Finance in Singapore into the collapse of BFS (“the SIR report”), also published in 1995. In addition the facts have been investigated by the Securities and Futures Authority, a committee of the House of Commons, the Accountants’ Joint Disciplinary Tribunal, the Public Accountants Board of Singapore and in the course of interviews of a number of Barings directors and employees by the Administrators of the claimants.  Company Directors’ Disqualification Act (“CDDA”) proceedings were taken against various Barings directors, some of which were compromised and some defended. In respect of defended cases, Jonathan Parker J (as he then was) gave judgment on 1December 1998 in a judgment reported as Re Barings plc (No. 5) [1999] 1 BCLC 433. His judgment was  upheld in the Court of Appeal on 25 February 2000. Extensive materials from all these reports, investigations and hearings were before this court.



26.              This factual description is broadly chronological but, in order to assist the reader, I attach as Schedule A to this judgment a brief chronology of the most important events described below. At Schedule B is a list of the abbreviations used, and descriptions of the persons mentioned, in this judgment. At Schedule J is a list of the exchange rates used in the proceedings.


27.              A structure chart of the Barings group is attached to this judgment as Schedule C. I describe below the relevant companies.


28.              Plc was the holding company of the Barings group. It was based in London and did not trade on its own account. Its operating subsidiaries (held via Baring Group Holdings Limited) were BB&Co, a merchant bank specialising in corporate finance and debt trading, and Baring Asset Management Limited (“BAM”), which provided fund and asset management services.


29.              In 1984 BB&Co acquired the Far Eastern stockbroking business of Henderson Crosthwaite, headed by Christopher Heath. This became BSL. It was Barings’ first significant involvement in the securities broking business.

30.              BSL was until the second half of 1992 run by Christopher Heath (chairman and chief executive officer) and Andrew Baylis (deputy chairman), quite separately from BB&Co’s banking business. BSL conducted securities and futures trading, both on behalf of customers and on its own account. It had strong positions in the Asian equity markets, particularly in Japan. In the late 1980s it made significant profits dealing in Japanese equity warrants, and it opened new offices and expanded into new markets. However its management structure did not keep up with its expansion and remained very limited.

31.              As explained below (see paragraph 39 and following), BSL underwent radical changes from 1992 onwards under the leadership of Peter Norris. These culminated in BSL’s consolidation with BB&Co (described below) into a new, non-statutory entity. By so doing, these companies obtained certain regulatory advantages which saved costs. The resulting combined “company” was known as Baring Investment Bank (“BIB”).

32.              From 1 November 1993, as a consequence of this consolidation of BB&Co and BSL, BSL used a subsidiary, BSLL, as the vehicle for its proprietary trading. Proprietary, or house, trading is trading on behalf of a Group company as principal. Customer, or agency, trading is trading on behalf of third party customers.


33.              BSJ was BSL’s securities trading subsidiary in Japan. Its activities included:

i)                    proprietary trading in derivatives, traded by a group of traders who were from April 1993 onwards headed by Fernando Gueler[2]. During the relevant period Mr Gueler himself was managing an index arbitrage book in Tokyo (arbitraging between a futures index and its underlying stocks). Also relevant to what followed was Nikkei option trading carried out on the Osaka exchange by Adrian Brindle, a trader in BSJ’s Osaka office and, from August 1994, in Tokyo. He traded on what was called a volatility book (also known as a “vega” book), seeking to anticipate market movements in the Nikkei market index. Leeson’s Nikkei 225 futures switching trading was booked to this book until September 1994. Some of BSJ’s proprietary trading was booked to BSJ and some to BSLL in London, and

ii)                   agency business for third party customers. The head of agency sales was Mr Killian, who in June 1993 became head of Barings’ Pacific Rim agency group[3]. Most agency trading was on behalf of customers whose accounts were maintained by BSL in London, even where the customer relationship and trading was centred in Japan[4].

34.              BSJ transacted business in Japan on the Tokyo and Osaka exchanges. 

Baring Securities (Singapore) Limited (“BSS”)

35.              BSS was BSL’s stockbroking (indirect) subsidiary in Singapore, trading securities listed on the Singapore and Malaysian stock exchanges. It was set up in 1987 by James Bax, who later became managing director of BFS and Regional Managing Director, Asia Pacific, for BSL and then BIB. Initially it used a local broker to carry out the trading but carried out its own settlements. Mr Bax recruited Simon Jones from Associated Merchandising Company in 1989 to take control of the settlement and funding process. BSS obtained membership of the Singapore Stock Exchange in October 1992, allowing it to trade directly on that Exchange[5].

36.              At the time of the crash BSS employed 115 staff[6].


37.              BFS was BSL’s (indirect) subsidiary and broker in Singapore for the transaction of futures and options business in Singapore on SIMEX. It was active from 1 June 1992 until the collapse in February 1995. Its history and activities are described at paragraph 163 and following below.

38.              At the time of the crash BFS employed 23 staff[7]. Its apparent turnover for the year ended December 1994 was approximately S$26.5m.


39.              In 1992 BSL’s business suffered a severe downturn. BB&Co management asked Peter Norris to carry out a review of BSL’s operations. Implementation of this review resulted in the replacement of the existing management and the introduction of new management control systems.

40.              In pursuance of the former step, Mr Norris took over as chief operating officer of BSL in September 1992, with Mr Heath stepping down as chief executive officer and becoming chairman only. In March 1993, Mr Heath and a number of other senior executives (including the entire management of the derivatives business[9]) were asked to leave the Barings Group altogether, and Mr Norris became chief executive officer of BSL.

Matrix management

41.              As part of Mr Norris’ improvement of BSL’s reporting and control systems, he introduced from the end of 1992[10] the concept of matrix management. This was a management structure under which each type of trading business activity had a global head, responsible for the conduct of that activity throughout the world, and across the various companies in the Group. A trader reported to the head of his particular trading activity (“his product head”), via a product reporting line. However (in theory at least) he also reported to local office management, which was responsible for local office infrastructure, including computer systems, controls and settlements[11]. This latter group of functions was referred to from time to time as “operations”.

42.              Of the operations functions, settlements seems, at least from January 1994, to have had a separate reporting line. After that date, the head of settlements in a subsidiary reported up a reporting line to Mr Gamby, the head of settlements at BSL and later BIB, who in turn reported to Mr Barnett (Chief Operating Officer at BIB). I should express two qualifications to this. Firstly, Mr Gamby denied, before the Singapore inspectors and in the CDDA proceedings, any responsibility for settlements at BFS. This denial was rejected by Jonathan Parker J in Re Barings plc (No. 5). Secondly, Mr Bowser denied before me that, while he was BSL Derivatives Controller and so head of Settlements at BSL between March 1992 and November 1993, he had any responsibility for settlements outside BSL. I consider this further at paragraph 1004 below.

43.              The matrix management system was designed to transcend corporate boundaries to unify the management of each type of business worldwide. Thus an aspect of the business of trading subsidiary A might be managed by an employee or director of subsidiary B reporting to an employee or director of subsidiary C, and ultimately to the appropriate product or operational head.

Consolidation of BB&Co and BSL

44.              In late 1992 Barings management decided that the investment banking businesses of BB&Co and BSL should be combined into a single entity. As a first step towards such consolidation, BB&Co and BSL were solo-consolidated” from November 1993. This meant that BSL was treated for regulatory purposes as a branch of BB&Co, and had to be wholly funded by BB&Co. Thereafter, funds advanced to BSL by BB&Co would not fall within the large exposure reporting requirements and maximum exposure limits of the Bank of England, so removing constraints on BB&Co’s ability to fund BSL.

45.              In December 1993 Barings management took the next step towards consolidation, by establishing a new umbrella organisation comprising the merchant banking and securities businesses of BB&Co and BSL, which came to be known as BIB. BIB’s structure was put in place over the period May to November 1994. It was not an incorporated body, although from October 1994 it had titular directors.

46.              BIB was divided into four main groups: Equity Broking and Trading (including the agency derivatives business), Banking (including the Financial Products Group, described below, and therefore the proprietary derivatives business), Corporate Finance, and Emerging Markets Corporate Finance. Mr Norris became Chief Executive of BIB. The Head of the Banking Group was George Maclean. The Deputy Head of the Banking Group was Ian Hopkins.

47.              The consolidation was not complete by the time of the collapse, at which time BB&Co and BSL still remained separate companies operating in different offices, but there was a common BIB management structure and treasury.  

The management structure within the Barings Group

48.              The management structure within the Barings Group consisted primarily of various managerial committees, with the statutory boards of directors of companies within the Group performing only a limited function. Thus the board of Plc (under the chairmanship of Mr Peter Baring) met only infrequently. The committee structure within Barings is of limited relevance to this judgment, but in outline it was as follows[12]:


49.              Management decisions in Plc were taken by an executive committee of the board known as EXCO.  EXCO met weekly, and was the senior committee of the Group.  

BB&Co and BSL Management Committees

50.              Below EXCO in the Group management structure were the respective management committees of BB&Co and BSL. The BB&Co Management Committee played an active role in dealing with strategic and operational matters; the BSL Management Committee fulfilled a much more limited role.

BIB Management Committee (“MANCO”)

51.              From May 1994, the BB&Co Management Committee ceased to function and was merged into MANCO. The BSL Management Committee continued to exist until the time of the collapse, but its activities were confined to Equity Broking and Trading.

52.              MANCO met weekly, on Mondays, and was the principal forum for management discussion and executive decision-making within BIB.  

The Treasury and Risk Committees

53.              Prior to the formation of ALCO in November 1994 (as to which, see below), the control of market risk in BB&Co was the responsibility of its Treasury and Trading Committee (“the Treasury Committee”). Membership of the Treasury Committee as at 31 December 1993 included Mr Maclean (Chairman), Mr Hopkins, Mr Baker and Mr Hawes. The Treasury Committee met daily.

54.              Within BSL, a similar function to that of the Treasury Committee was performed by BSL’s Risk Committee (“the Risk Committee”). Its role was setting limits for, and monitoring the results of, trading and sales activities which resulted in market and credit risk. The members of the Risk Committee included Mr Norris, Mr Hawes (Head of Treasury), and Mr Broadhurst (Finance Director). The Risk Committee met daily. Once a week it discussed credit issues, and on those occasions Mr Maclean and Mr Hopkins attended. As from 1 January 1994 either Mr Baker or Ms Walz attended meetings.

Asset and Liability Committee (“ALCO”)

55.              In November 1994, as part of the process of forming BIB, the Treasury Committee (of BB&Co) and the Risk Committee (of BSL) ceased to exist and were replaced by ALCO. ALCO met daily. Its members included Mr Norris, Mr Baker, Mr Hopkins and Mr Hawes.

Group Treasury and Risk (“GTR”)

56.              In August 1994 GTR was formed, headed by Mr Hopkins. GTR combined the Treasury, Risk and Credit units of BIB.

Financial Products Group (“FPG”)

57.              In 1992 BB&Co established the Debt Financial Products group, to set up a debt trading operation. It was headed by Mr Ron Baker, who joined Barings in April 1992, from Bankers Trust International. Ms Mary Walz, who had been one of his colleagues at Bankers Trust, joined Barings at about the same time to work with Mr Baker. Mr Baker was very successful in establishing that operation and acquired a high reputation in BB&Co.

58.              BSL had conducted agency and proprietary trading in derivatives since before 1990. Following the departure of Mr Heath and his colleagues, Mr Norris took charge of the derivatives business, with Mr Oades in a co-ordinating role[13]. However this was only a short-term solution, and in mid-1993 Mr Norris asked Mr Baker to take charge of the derivatives business. According to Mr Norris, Mr Baker was unwilling to take on the agency side but agreed to take on the proprietary trading activities. He carried out an information-gatheringvisit to his new empire, including Tokyo, in November and December 1993[14].

59.              Thus FPG[15] was established as of 1 January 1994, headed by Mr Baker. It covered his old BB&Co debt operation but also all BSL’s proprietary derivatives businesses, including those carried on in Japan and Singapore. These latter were included within a sub-group, the Structured Products Group (“SPG”), headed by Ms Walz, who reported to Mr Baker. Leeson was at all material times General Manager of BFS, part of Barings’ derivatives trading business. So from 1 January 1994, under the matrix management system described above, Mr Baker was Leeson’s product manager in relation to Leeson’s proprietary trading activities.

60.              Whilst the proprietary derivatives businesses of BSJ and BFS fell within FPG, until 1 January 1995 their agency businesses remained within a different group, Futures and Options Sales (“F&O Sales”), the head of which (as product manager) was Mr Killian. However, according to Mr Norris, Mr Baker realised during early 1994 the advantages to be gained from running the agency and proprietary businesses together. Despite some resistance from Mr Killian, on 1 January 1995 the agency business was also included in FPG, under Mr Baker.

61.              Hence prior to 1 January 1995 the product manager in relation to Leeson’s agency trading activities was Mr Killian; thereafter until the collapse it was Mr Baker[16].

Internal audit

62.              BB&Co had a long-established internal audit function, which by 1994 was headed by Ash Lewis.  BSL’s Internal Audit Department was not formed until late 1992. By 1994 it consisted of three auditors, headed by Ian Manson. One of them was James Baker, who gave evidence before me. The last internal audit which the Department conducted was of the South Asian Region (including BFS in Singapore). That took place in mid-1994 and is described below (see paragraph 441). Immediately afterwards, it was amalgamated into a single BIB Internal Audit Department, which was formed under Ms Lewis.  


63.              Attached as Schedule B is a list of Dramatis Personae of the people and companies mentioned in this judgment, together where appropriate with the abbreviations used to describe them. However it may be helpful to describe here the individuals who feature most importantly, with their career details and relevant reporting lines. A chart of the reporting lines is attached as Schedule D.

64.              An asterisk in the list below denotes that the individual gave evidence before me. The convention adopted during the trial was that witness statements of witnesses who were not called to give evidence could not be relied upon by the party which put in the statement, but could be used by other parties[17].

65.              Leeson himself was not called as a witness, though BFS and D&T had both put in brief witness statements from him. I also had available transcripts of the interviews he gave to the Serious Fraud Office (“SFO”) while awaiting extradition from Germany to Singapore in August and September 1995, the transcript of a BBC interview and his book “Rogue Trader”.

Barings London management

66.              Peter Norris*: Director BB&Co, running Asian corporate finance from Hong Kong 1987-1992. Chief Operating Officer, BSL, September 1992-March 1993. Chief Executive Officer, BSL, March 1993-November 1994. Chief Executive Officer, BIB, November 1994-February 1995, reporting to Andrew Tuckey, who became the Chairman of BIB. He was disqualified in the Company Directors’ Disqualification Act (“CDDA”) proceedings consequent upon the collapse of the Barings Group from being concerned in the management of a company for four years.

67.              Ron Baker: Director, BB&Co, April 1992, running Debt Financial Products group (having joined from Bankers Trust). Head of FPG (BB&Co, then BIB), 1 January 1994-1995. Responsible for Japanese/Singapore proprietary business from January 1994, and for agency business from January 1995. Until August 1994, he reported to Ian Hopkins, Head of Treasury and Trading at BB&Co, and thereafter direct to George Maclean. He was disqualified in the CDDA proceedings for six years.

68.              Mary Walz: Director, BB&Co, July 1992-December 1993, under Mr Baker in the Debt Financial Products Group. She headed SPG, later renamed Equity Financial Products, which included equity products, within FPG, January 1994-1995, reporting to Mr Baker. She was disqualified in the CDDA proceedings for 2 years.

Barings London settlements

69.              Tony Gamby: joined BB&Co October 1979. Head of Settlements, BB&Co, not responsible for BSL, until January 1994, when he became Settlements Director, BIB, and director of BB&Co. He then had the Heads of Futures and Options Settlements, Equities Settlements and Derivatives Settlements reporting to him. He was disqualified in the CDDA proceedings for five years.

70.              Gordon Bowser*: Derivatives Controller, BSL, responsible for managing the futures and options settlements department, March 1992-November 1993, reporting to Mr Norris, having joined from the Merrill Lynch swaps derivatives department. Manager of costs and budget issues, FPG, November 1993-August 1994. Risk Manager North Asia in Hong Kong, August 1994-February 1995.

71.              Brenda Granger: Manager London Futures and Options Settlements, BSL, July 1992-4, reporting to Mr Bowser. Manager Futures and Options Settlements, BIB, January 1994-1995, reporting to Mr Gamby.

Barings London Treasury and Finance

72.              Tony Hawes*: Director, BB&Co, 1987-end 1993. Deputy Head of Treasury, BB&Co, 1987-1993, reporting to Mr Hopkins. Seconded to BSL in October 1992 to work on solo consolidation. Treasurer, BSL, reporting to Mr Broadhurst, May 1993-August 1994. Group Treasurer, BIB, August 1994-February 1995, reporting to Mr Hopkins. He was disqualified in the CDDA proceedings for five years.

73.              Geoffrey Broadhurst: accountant, Deloitte Haskins & Sells, 1983-1986. Financial Controller, BB&Co, 1987-February 1992. Finance Director, BSL, February 1992-March 1993. Group Finance Director, BSL, March 1993-August 1994, reporting to Mr Norris. Group Finance Director, BIB, August 1994-February 1995, reporting to Mr Barnett. He was disqualified in the CDDA proceedings for three years.


74.              Mike Killian*: became General Manager, BSJ F&O Sales, in September 1988 (having joined from Chase Manhattan), with director status, but not a director of BSJ[18]. Director BSL May 1992-January 1993. Director Baring Securities (Far East) Ltd April 1991-March 1994[19]. Director, BFS, December 1992-1995. Head of Pacific Rim agency group, in June 1993, reporting to Mr Norris. Head of Global Equity F&O Sales, BIB, in 1994. From January 1995 he reported to Mr Baker. Based in San Francisco from 1 April 1994.

75.              Fernando Gueler*: joined BSJ in April 1988 (initially part-time) as a research analyst. Assistant to Mr Killian, summer 1989-early 1990. Arbitrage trader in warrants with Richard Johnston in Tokyo, early 1990-1991. Index arbitrage trader, 1991-1995. Head of derivatives traders, BSJ, April 1993. Head of FPG in Tokyo, 1 January 1995. Not a director of BSJ.


76.              James Bax*: Managing Director of BSS, August 1987-October 1994 (having joined from Hoare Govett), reporting to Andrew Fraser (Deputy Chairman, Asia, of BSL). Managing Director of BFS, June 1988-February 1995. Director, BSL, 1989-1995. Regional Managing Director, Asia Pacific, for BSL and then BIB, early 1994-February 1995, reporting (in his operations capacity at least) to Mr Barnett. He was disqualified in the CDDA proceedings for four years.

77.              Simon Jones*: accountant Deloitte Haskins & Sells, 1980-1982. Regional Finance Director, and then Divisional Vice-President, Associated Merchandising Company, 1982-1989. Finance Director of BSS, February 1990-February 1995, reporting to Mr Bax and then Mr Marais. Director, BFS, May 1990-February 1995. Director of Operations, South Asia Region, BSL and then BIB, early 1994-February 1995, reporting to Mr Bax.

78.              Rachel Yong: Financial Manager at BSS and BFS, January 1993-February 1995, reporting to Mr Jones.

79.              Nick Leeson: joined BB&Co from Morgan Stanley in July 1989 to work in Futures and Options Settlements. Member of the BSL Business Development Group, May 1991. Manager BFS, March 1992. General Manager BFS, June 1993-February 1995.


80.              The method by which Barings staff were remunerated had an important impact upon the events which led to the collapse of the Barings group. In each year of account, half of the group profit (for 1993, as I held in the strike-out application, the Plc and BSL groups were treated separately) was set aside for the payment of bonuses to staff over and above their nominal salaries. From this fund there would be allotted to each business group, by senior management, a part of the fund, the size of which depended upon the relative success of that group in generating revenue in that year. This in turn would then be shared out among the members of that group in accordance with an assessment of the contribution of each to the success of the group.

81.              Typically the remuneration of a member of a successful group would primarily consist of this bonus, which might be several times the size of his nominal salary. It will be seen that this system of remuneration had a corrosive effect on Barings management generally. It gave rise to competition between groups to include among their number particular “star” earners; obstruction of the free flow of information about trading between groups, and between groups and senior management; and the pampering and protection of “stars”, in particular Leeson, for fear that they might take their services elsewhere.


82.              It is necessary to give some basic explanation of the futures and options trading conducted by BFS on SIMEX[20], and of the products traded. A graphical walkthrough of BFS’ trading on SIMEX and its reporting procedures is attached at Schedule E.

83.              SIMEX was an open outcry market, with a separate pit for each commodity traded. Only brokers who were members of the exchange could trade on SIMEX, using authorised staff who had passed a (not very difficult)[21] aptitude examination set by the exchange.

84.              Trading was conducted by traders on the floor of the pit calling out and signalling to each other. A clearing member therefore had a team of front office staff, who worked on the floor of the exchange. They consisted of order fillers (who conducted the trading), linespersons (who took orders from customers and relayed them to the order fillers) and booth clerks (who handled administrative matters).  At the member’s office was a separate team of back office staff, who handled settlement of trades with SIMEX and with customers.

Futures and options

85.              Derivatives: a derivative is a contract or instrument which changes in value depending on price movements in another instrument or in an index. Futures contracts and options are derivatives.

86.              Futures contracts: a financial futures contract is an agreement to buy or sell a standard quantity of a specific financial instrument at a predetermined future date and an agreed price. The main contracts traded on SIMEX were:

i)                    the 3-month Nikkei 225: a contract based on the market value of a basket of 225 stocks traded on the Tokyo Stock Exchange,

ii)                   the 10 year JGB contract: a contract based on the market value of Japanese Government Bonds with 10 years to maturity and with a standardised coupon (or interest rate), and

iii)                 the 3-month Euroyen contract: a contract based on the three month interest rate for yen-denominated instruments traded outside the formal control of the Japanese monetary authorities.

87.              Options: an exchange-traded option gives the purchaser the right, but not the obligation, to buy (a “call option”) or sell (a “put option”) an underlying financial futures contract at a predetermined “strike price” on or before a specified future date. In return, the purchaser pays a premium to the seller (or writer) of the option.

88.              Equivalents of all these contracts could also be traded on (and of course they originated from) the Japanese exchanges at Tokyo and Osaka. There were differences in the terms of the contracts between Singapore and Japan: for example, a Nikkei 225 tradeable futures unit on Osaka was defined as 1000 times the Nikkei 225 price, whereas a unit on SIMEX was only 500 times that price, so SIMEX units were half the size of Osaka units. A “tick”, which was the basic amount of the movement up or down in the price of a futures contract, was worth four times as much on the Osaka market as on SIMEX (Ą2,500 on SIMEX and Ą10,000 on Osaka). Also the margining requirements of the Japanese exchanges were more onerous than those of SIMEX. This was a major reason for the move of business from the Japanese exchanges to SIMEX which was under way from 1992 onwards.

89.              When a futures or options contract was traded on SIMEX, the exchange interposed itself between the parties. Thus a broker such as BFS, which was a clearing member of SIMEX, when entering into such a contract on behalf of a customer, contracted as a principal with SIMEX. In turn, SIMEX as principal contracted with the counterparty’s broker. Therefore, subject to any right to be indemnified by its customer, the broker was individually liable for due performance of that contract. Such was, of course, also the position where the broker contracted on its own behalf or on behalf of a related company, i.e. when trading “in-house”.

90.              Without some form of protection, SIMEX would be exposed to loss were a party to a contract made on the exchange to fail to honour its bargain, since SIMEX would be liable to the counterparty. SIMEX (like all such exchanges) protected itself against such loss by requiring clearing members to pay to it “margin”, when entering into a futures contract, and “settlement variation”, to reflect movements in the market which increased the member’s exposure to loss in relation to that contract. As discussed below, SIMEX protected itself against market movements affecting exposure on options slightly differently.

91.              SIMEX required every member to enter into a direct debit arrangement with its bank. This allowed SIMEX to withdraw from the member’s bank account sufficient funds to meet the member’s margin and settlement variation without action from the member. SIMEX did this early each morning, in respect of the margin and settlement variation requirement generated by the previous day’s trading. Pursuant to this rule, BFS instructed Citibank to allow SIMEX to withdraw funds as necessary from BFS’ accounts with Citibank.

92.              SIMEX held margin pending the maturity or closing-out of the contract. Settlement variation might be increased in amount or repaid to the member, depending on movements in the market from day to day.

Margin and settlement variation[22]

93.              SIMEX rules required both that (a) a member of the exchange should post margin with SIMEX in relation to all positions held overnight and (b), where the member held a position on behalf of a customer, that customer should deposit margin with the member. Futures contracts and options were treated somewhat differently.

Futures contracts

Margin deposited by members of SIMEX with SIMEX

94.              SIMEX required a member of SIMEX to deposit with SIMEX:

i)                    maintenance margin (also referred to as initial margin, but set at a lower level than the initial margin required from customers, discussed below) in respect of all its trades effected on that day which were open overnight. Maintenance margin protected SIMEX against the risk of a member being unable to pay losses incurred on a position as a result of market movements over the next 24 hours.

The broker acting for a buyer or a seller of futures contracts had to deposit margin with SIMEX. SIMEX calculated maintenance margin dailyin respect of all a member’s positions outstanding at the end of the day. It calculated margin on the member’s house and customer accounts separately, on the basis of the member’s gross long (bought) and short (sold) open positions in each account. The member was not able to net off within its customer account its margin requirements on behalf of different customers[23]; and

ii)                   advance margin: SIMEX occasionally called on members for advance margin, in very volatile markets or over holiday periods, to provide SIMEX with extra protection[24].

95.              Initial and maintenance margins for futures were fixed by SIMEX at a set level per contract, and did not vary with the market[25]. Margin to be deposited with SIMEX had to be deposited with SIMEX by the start of the next trading day.

Margin deposited by customers with members of SIMEX

96.              SIMEX rules required that each member’s customers should deposit with the member initial margin in respect of each trade entered into by the member on the customer’s behalf[26]. Thishad to be deposited within three business days of the trade date[27]. Initial margin was 25 per cent higher than the maintenance margin which members had to deposit with SIMEX.

97.              If the initial margin deposited with the member fell below the level of maintenance margin referred to above, the member had to ensure that the customer topped up his margin to the initial margin level, again within three business days. However BFS adopted a more conservative practice, requiring customers to maintain margin at the initial level throughout[28].

98.              Thus the initial margin which a member obtained from customers was higher than the maintenance margin deposited with SIMEX. It follows that the margin paid or owed to a member by its customers should have exceeded the margin which the member had to deposit with the exchange in relation to its customers’ trades by about 25%. Therefore, once the customer had paid his margin in full, the member would hold a surplus.

Settlement variation

99.              SIMEX revalued, or “marked-to-market”, each futures contract open at the end of a trading day and calculated the member’s potential profit or loss on it as a result of market movements. The profits and losses on all open contracts were aggregated. If the market had moved adversely to the member’s positions overall, the member was required to pay the net loss as “settlement variation” (sometimes referred to as variation margin). This protected SIMEX against the member’s increased exposure to loss. If the market had moved in favour of the member’s positions overall, its settlement variation requirement would reduce, reflecting the member’s reduced exposure to loss. In that event SIMEX was required (on demand by the member) to repay the excess settlement variation to the member.

Accounting treatment of margin and settlement variation

100.          While a member’s contract with its customer no doubt required him to put up margin when required, unpaid margin was not treated in a member’s accounts as a debt owed by the customer. Rather, margin was security for the customer’s trading. Once paid, it was treated as a debt owed by the member to the customer, until consumed by realised losses or a call for settlement variation. Settlement variation, which amounted to notional realised profits or losses on the customer’s positions, did create a debt from customer to member, which the member could meet by using the customer’s surplus margin (if any)[29].

101.          Similarly margin deposited by a member with SIMEX was treated as security for the member’s trading on SIMEX, and therefore as a debt owed by SIMEX to the member. Indeed SIMEX paid interest on the member’s balances, for which in the normal way a member accounted to its customers (it is relevant in this case that BFS accounted to BSJ and BNP for interest on their margins which it received from SIMEX. By contrast, as a result of some internal understanding of which I have seen no direct evidence, it did not account to BSL for such interest until October 1994[30]). Again, realised losses or settlement variation created a debt from the member to SIMEX, which SIMEX could use the member’s margin surplus to meet.


102.          Only the seller of an option had to deposit margin. The buyer had to pay the premium but thereafter incurred no further risk.

103.          Unlike its rules as to futures, SIMEX did not fix in advance the margin on options. Instead, it calculated the margin on options using a software package, the Standard Portfolio Analysis of Risk margining system (“SPAN”). A member could buy the SPAN software and download from Compuserve or the internet risk arrays published by SIMEX. The member could then feed into its computer details of its positions and the software would calculate the margin due on them.

104.          SPAN’s calculation took into account two elements. Firstly, it effectively marked the option to market, calculating the loss or profit if the option were closed out immediately. Secondly, it added a risk element, to cover the largest loss the position was reasonably likely to incur as a result of market movements over the next 24 hours. As a result, the initial margin on the sale of an option was usually equal to or more than the premium received[32]. The member selling the option had to pay the margin to SIMEX on the day after the option was sold, whereas the member did not receive the premium until the day after that[33].

105.          Margin was calculated daily on the member’s whole option portfolio and the margin required on each option varied with movements in the market. SIMEX demanded further margin, or repaid that held, as the market moved against or in favour of the member’s position. Therefore margin fulfilled the function of settlement variation for futures, and SIMEX did not levy settlement variation on options[34].

106.          SIMEX required its members to use SPAN in calculating the margin they demanded from customers for option trades. I explain at paragraph 116below how BFS’ accounting system treated options in its customer accounts.

Accounts with SIMEX and customer accounts

107.          Each member had two accounts with SIMEX, a house account (for trading on its own account or that of related companies) and a customer account (for trading on behalf of unrelated third parties). BFS’ proprietary trading for BSL or BSJ should therefore have been recorded in BFS’ house account[35]. In fact some of Leeson’s arbitrage activity conducted on behalf of BSJ, known as “switching” (see paragraph 212below), was recorded in BFS’ customer account[36]. On the other hand, agency trades for BSL’s customers should have been recorded in the customer account (as they were, but so, wrongly, were trades on the 88888 account, to which Leeson booked his unauthorised trades).

108.          A member maintained accounts in its own accounting system on behalf of customers. BFS only had four customers, BSL, BSLL, BSJ and (from October 1992) Banque Nationale de Paris in Tokyo (“BNP”)[37], but it maintained a large number of sub-accounts, one for each of BSL’s and BSJ’s own customers.



109.          As part of the task of establishing BFS’ office in early 1992, Leeson and Mr Dickel selected a computer system to maintain BFS’ day-to-day trading and accounting records. On the recommendation of Mr Killian[39], and with the concurrence of Mr Jones and Mr Bowser (who visited Singapore in April 1992), they chose a system known as CONTAC. This was a popular system among Singapore derivatives traders and Mr Killian had used it at Chase Manhattan. CONTAC was used only to service BFS’ activities and was maintained wholly by BFS’ settlements staff.

110.          At the close of each trading day, BFS received from SIMEX:

i)                    computer files listing all trades conducted by BFS that day, which were fed into CONTAC. CONTAC allowed this information to be adjusted at that point, and

ii)                    a SPAN file which allowed CONTAC to calculate the margin required from BFS’ customers.

111.          CONTAC generated a number of reports, including a daily activity statement for each account. This showed the trades done that day for the account, the cumulative futures and options positions on the account and the realised and unrealised profits and losses. The daily activity statement ended with a summary which calculated the equity balance on the account and the margin due from or to the customer, as explained below. The last page of a sample daily activity statement is attached as Schedule I to this judgment[40]. A “walkthrough” of BFS’ systems, from customer order to reporting to the customer is attached at Schedule E[41].

112.          BFS’ financial and statutory accounting records were maintained on the separate SUN system, in common with the other Barings Singapore companies. At the end of each month, BFS staff updated the SUN system by manually transferring relevant trading balances from CONTAC to SUN.

Treatment of futures and options trades by CONTAC[42]


113.          The Daily Activity Statement produced by CONTAC for each account ended in a calculation of an equity balance and the margin due from or to the customer. A sample of such a calculation is at Schedule I. The elements of the calculation were as follows:

i)                    Customer’s account balance brought forward

ii)                   Cash paid to/received from BFS’ customer (not SIMEX) on that date

iii)                 Realised profit and loss on futures contracts closed out on that date, and premiums on the sale of options on that date

iv)                 Commission / brokerage on trades done on that date


v)                  Account balance carried forward – the sum of (i) to (iv)

vi)                 Total unrealised profit/loss – the total cumulative profit or loss on open futures contracts


vii)               Equity balance – the sum of (v) and (vi)

viii)              Collateral or security held

ix)                 Initial margin required on the customer’s positions (initial margin on futures trades, but also all margin required on open short option positions)

x)                  Margin excess/deficiency – (vii) plus (viii), less (ix)

xi)                 Margin call – the amount of any deficiency in (x)

114.          When BFS entered into a futures contract for a customer, the initial margin required went into (ix) on the trade date as margin required. When the customer paid that margin, it was entered into (ii) as cash received from the customer. That increased the equity balance in (vii). So, other things being equal, it balanced out the margin requirement in (ix), resulting in a zero margin call.

115.          SIMEX marked any futures position to market, giving rise to an unrealised profit or loss, on the trade date and thereafter until the position was closed out or matured[43]. As such, this was entered into (vi). It thus increased or decreased the equity balance in (vii). If a loss decreased the equity balance, since the margin requirement in (ix) stayed constant, the result would be a margin deficiency in (x) and a margin call. By contrast, if a gain increased the equity balance, the result would be a margin excess to be repaid to the client. A margin call or repayment, when paid by or to the customer, resulted in a credit or debit to (ii) (cash paid/received). This balanced out the unrealised profit or loss resulting from the marking-to-market, returning the margin excess/deficiency in (x) to zero.


116.          Where a customer bought or sold an option, the daily activity statement for the trade date showed the premium on the sale of an option in line (iii) as a realised profit (for the seller of the option) or loss (for the buyer).

117.          If a buyer of an option exercised it at a profit, at that point his profit was reflected as a realised profit in line (iii). This increased his equity balance and, other things being equal, triggered a repayment to him of an equivalent sum from the gross accumulated cash held by the broker on the buyer’s behalf. Until that point, changes in the value of the option caused by market movements were not reflected as unrealised profit or loss in line (vi), as happened with futures positions.

118.          However, as described at paragraphs 102 to 105 above, the seller of an option had to put up margin. This effectively marked the option to market and covered SIMEX against potential further losses over the next 24 hours. It was usually slightly more than the amount of the premium received by the seller.

119.          As mentioned above, BFS entered the option premium at line (iii) (realised profit/loss) on the trade date, thus increasing the equity balance at line (vii). It entered the margin requirement at line (ix) (initial margin required). The result was a margin call for the amount by which the margin requirement exceeded the premium. When the customer paid the margin call, this was entered at line (ii) (cash paid or received). It therefore increased the customer’s equity balance at line (vii) and reduced the margin excess/deficiency to zero[44].

120.          As on the purchase of an option, subsequent changes in the value of the option were not reflected directly as unrealised profit or loss in the daily activity statement. Until exercise, the only effect of such changes on the financial balance was on the margin which the customer had to deposit with BFS. A fall in the value of the option increased the margin required at line (ix) and triggered a margin call. Once paid, the margin was entered into line (ii) as cash received and increased the equity balance in line (vii) (though of course it only balanced out the increased margin requirement in line (ix)).

121.          If the option was exercised against the customer, the resulting payment to the buyer was at that stage reflected in the daily activity statement in line (iii) as a realised loss (and therefore was paid from the margin which was included in the equity balance against such an eventuality).

Significance of the treatment of options to Leeson’s fraud

122.          This treatment of options was significant in Leeson’s concealment of his fraud. Leeson conducted his unauthorised trading through a BFS account numbered 88888. In order to conceal his unauthorised trading on the 88888 account, which was consistently loss-making, Leeson needed to bring the balance on the account to nil over any relevant reporting date (balances had to be reported at month-ends, for the purpose of preparing monthly management accounts for BFS; and at accounting reference dates, auditors required confirmations by clients of any positive or negative balance shown on any account). As explained below, one means by which Leeson did this was to sell options on the 88888 account, funding the margins required out of excess margins held, BFS’ overdraft and, from February 1994, out of the Dollar Funding. On the sale of an option, the 88888 account was credited by CONTAC with the premium. But until it was exercised, that was the only effect of the sale of the option on the 88888 account equity balance. The equity balance:

i)                    was not debited with the margin which BFS paid to SIMEX (which in fact exceeded the credited premium);

ii)                   was not credited with margin received by BFS, as was the case when a customer sold options and had to pay margin to BFS. This was because CONTAC did not treat the funds which Leeson used to pay margin on sales of options on the 88888 account as being margin paid to BFS by a customer. Therefore it did not show those funds as cash received on the account[45]. So Leeson could achieve a nil equity balance by selling options, without any risk that margin on those options would turn the nil balance into a positive balance; and

iii)                 did not reflect the potential liability for future losses on the position[46].

123.          Thus in the short term, Leeson could use the sale of options to reduce or cancel out the debit balance on the 88888 account. Had anyone looked at the daily or monthly activity statement for the account, he would have seen a huge and growing margin requirement at lines (ix), (x) and (xi) of the calculation described at paragraph 113 above. But the equity balance, which was the figure reflected in overall CONTAC balances, was, when it mattered, nil (enabling Leeson to avoid having the auditors require the balance on the 88888 account to be confirmed by a customer). Only if an option was exercised against Leeson did CONTAC at that point debit the loss to the account, as a realised loss.

Margin funding for customer trades

124.          Most of BFS’ agency trading was for accounts maintained by BSL in London, although BSJ also had some domestic Japanese customers of its own. Reduced to its simplest terms, the funding flow from BSL to BFS in relation to customer trades ought to have been as follows: -

i)                    BFS would fulfil the customer order on SIMEX, on the instructions either of the customer directly or of BSL or BSJ on the customer’s behalf;

ii)                   BFS would request the required margin in respect of that trade from BSL;

iii)                 BSL would remit the margin to BFS; and

iv)                 BSL would demand the margin from its third party customer.

125.          BSL thus served as a conduit for margin between the third party customer and BFS. Where BSL had to pay margin to BFS before it received it from its customers, BSL obtained funding from the Baring Securities Group Treasury. The same was also true where a customer had deposited collateral (for example shares or gilts) with BSL which secured its trading, reducing the margin BSL called from the customer[47]. Subject to those cases, BSL ought to have stood in a net even position in relation to the inflow and outflow of margin between the third party customers and BFS.  

Margin funding for proprietary trades

126.          BFS’ “house” trades on trading books domiciled in London were booked through BSL until late 1993 and BSLL from late 1993 onwards. House trades on Japanese books were booked through BSJ. BSL/BSLL (which were funded by Group Treasury) and BSJ (which had its own sources of funding) paid the required margin to BFS.   

The need to reconcile margin

127.          As observed by Jonathan Parker J in Re Barings (No. 5), any investment house needs to reconcile funding of margin requirements to known trading positions. In relation to customer trades, such a reconciliation is necessary because the broker needs to know whose customer moneys it holds, and from whom it needs to call margin and in what amounts. Further, in cases where margin is to be paid to the exchange by the broker before the requisite funds have been collected from the customer, the broker needs to be able to satisfy itself that the credit risk (i.e. the risk of the customer defaulting) is acceptable.  

128.          Further particular factors made such a reconciliation necessary in the case of BSL’s customer trades, viz:

i)                    the need for BSL to ensure that it complied with large exposure reporting requirements[48]; and

ii)                    the need for BIB to calculate and report accurately to the Securities and Futures Association (“the SFA”) pursuant to its Counterparty Risk Requirement (a requirement to the effect that a bank must have sufficient capital to cover exposure caused by its counterparty defaulting in margin payments).

129.          In relation to house trades, BSL/BSLL needed to be able to calculate the cost of its house positions, and to apportion such costs accurately. Apart from the obvious requirement for this in order to manage the companies efficiently, failure to do this would risk a breach of section 221 of the Companies Act 1985 (duty to keep accounting records).

130.          In relation both to customer and to house trades, BSL needed to be satisfied that the margin calls made by SIMEX had been correctly calculated by reference to recorded trades. And in terms of internal control, it was necessary to ensure that funds called for margin were duly applied for that purpose.

London Settlements

131.          The BSL Futures and Options Settlements Department was responsible for allocating and reporting to BSL’s customers the trades conducted on their behalves by internal or external brokers, and acting as a conduit between the customers and the brokers for margins and trading proceeds in respect of those trades. Its computer system for the recording and settlement of trades was known as First Futures. When proprietary trading began to be booked to BSLL in 1993, that was also done on the First Futures system.

132.          It is clear that for a period up to and including 1991 the Settlements Department suffered from the inadequate attention paid to operational and control matters by the Heath management. There were in 1991 serious problems in reconciling customer margins, with many large outstanding unreconciled balances. BSL had bought the First Futures system in 1989, and it took some time to develop it to the point at which it met BSL’s needs in a satisfactory manner. Thus it could not calculate customer margins on business transacted on the Japanese exchanges until mid-1992. That function had to be performed on an unreliable add-on system known as the KP System, with all trade details having to be entered a second time.

133.          However following the recruitment of Mr Bowser and Miss Granger in spring 1992, and further development work on First Futures, these problems had been largely overcome by late 1992[49]. First Futures was by then able to calculate Japanese margins and customer reconciliations were up to date. However Mr Bowser agreed that the Settlements Department remained thinly-manned and under pressure: whereas it was out of control in 1991, by the end of 1992 it was “barely in control”[50].

Reports to London[51]

134.          Mr Bowser’s main requirement in being asked to approve BFS’ computer system was that it should have the capacity to send trade and margin details directly into BSL’s First Futures system by an electronic feed. This avoided BSL staff having to key in such details a second time and therefore avoided the errors which are inevitable with manual keying[52].

135.          Accordingly, at the end of each trading day BFS transmitted information as to the trades it had conducted and its margin requirements direct from CONTAC to First Futures. The main reports which BFS sent to London were:

 (i) The Trade Feed

136.          This was an electronic feed containing information as to all trades conducted for BSL and BSLL[53]. As will be described, Leeson arranged for trades booked to the 88888 account to be omitted from this.

(ii) The Margin Feed

137.          Thiswas an electronic feed containing BFS’ calculation of the initial and maintenance margin required from each of BSL’s customers (and from BSLL) in respect of the customer’s open positions at the close of the previous trading day[54]. As discussed at paragraphs 150 to 152 below, BSL could not check the accuracy of this, at least for portfolios including options, since it did not have the appropriate SPAN software. However, apart from the omission of details of transactions on the 88888 account from the trade feed, there is no evidence that during the period in question the information passed by the trade feed or the margin feed was incorrect or miscalculated. In particular there was no evidence of any BSL client complaining that margin calls were incorrect.

138.          The feed was downloaded each day into First Futures, which used the information to calculate margin calls from BSL’s customers. The feed was not used to calculate BSL’s margin payments to BFS. They were handled through the Funding Spreadsheet described below.

139.          The margin feed included the margin required on the 88888 account[55], but First Futures did not recognise 88888 as a valid account and so ignored the data. Nevertheless the daily feed, if printed out, was a short one-page document and clearly showed the large sums payable for margin to SIMEX in relation to the 88888 account[56]. Furthermore First Futures allowed the user to view two separate screens, one showing the margin balances received from CONTAC and one showing the accounts recognised by First Futures. However the BSL settlements clerks did not need to look at either screen when carrying out the daily download, and no one at BSL seems to have compared the two[57].

(iii) The Price Feed[58]

140.          Thiswas an electronic feed containing closing prices for all SIMEX contracts. It was downloaded into First Futures and used to mark-to-market open positions.

(iv) The London Gross report

141.          This was also an electronic feed[59]. It was effectively a daily activity statement for all accounts in the names of BSL and BSLL. Leeson arranged for the 88888 account to be omitted from this report[60].

142.          The London Gross Report listed, for each BSL and BSLL account (there were seven), all trades done and positions held. For agency trades, it identified the sub-account to which each trade was booked[61]. At the end of the listing of the trades on each account was an account summary equivalent to that on the daily activity statement (see paragraph 113 above), calculating the Equity Balance due to, and the margin to be paid by, or due to, BSL or BSLL.

143.          However the figure for margin required was shown as a gross figure for each BSL or BSLL “omnibus” account. It was not broken down between individual customer sub-accounts (for the BSL customer accounts) or trades. There was no obvious correlation between, on the one hand, the trades listed or the figures in the account summary giving rise to the equity balance and, on the other, the margin required.

144.          The Dollar Funding (see paragraph 325 and following below) was shown in two separate accounts, with no underlying trades listed.

(v) The Funding Spreadsheet[62]

145.          This was a document prepared by BFS showing the margin due from or to BSL and BSLL. It was sent daily from BFS to BSL. It was not broken down by reference to BSL’s individual customers. Again, the Dollar Funding was shown as two separate accounts, BSL Segregated Account (USD) Collateral Account, and BSLL House Account (USD) Collateral Account, though the Funding Spreadsheet was not used to call for funds on those accounts.

146.          The initial margin figures on the Funding Spreadsheet did not include the margin requirement on the 88888 account[63].

Reconciliations by the BSL Settlements Department[64]

147.          BSL Settlements Department processed the Trade Feed, updating the trade data in First Futures and also checking that First Futures recognised all the account information in the feed. They then reconciled the London Gross report to the trade information in First Futures (and thus checked that First Futures had correctly processed the Trade Feed).

148.          The Settlements Department also checked that the figures in the Funding Spreadsheet agreed with the figures for margin required in the London Gross Report. Based on these figures, they transferred margin if required from the Baring Group Treasury to Citibank, BFS’ bank, in time for the next trading day. Payments of margin to BFS were authorised by staff in the Settlements Department, usually Miss Granger and one other[65].

149.          First Futures updated BSL’s customers’ positions to reflect trades done on their behalf and market movements. It used the information in the margin feed (after combining it with margin calls from other exchanges on which the customer might have been trading through BSL) and the price feed to calculate the margin and settlement variation on each account. This enabled the Settlements Department to request any amounts due from BSL’s customers[66].

150.          The BSL Settlements Department did not themselves calculate the margin required for SIMEX transactions, but left this task wholly to BFS. This contrasts with the position for BSL’s trading on other exchanges: at least by March 1993 BSL was able to verify margin calls by BSJ and Baring Securities Hong Kong and by the external brokers it used for trades on LIFFE and LTOM[67]. To do this for the Hong Kong exchange, LIFFE and LTOM, BSL had installed a PC using the same SPAN software as was used by SIMEX and risk arrays downloaded from the relevant exchange over the internet. It had developed an interface between that PC and First Futures. BSL was thus able to download trade details from First Futures onto the PC, calculate the margin owed to the relevant exchange, and upload the margin calculation into the customer accounts on First Futures.

151.          BSL could have installed such a PC-SPAN system when BFS was activated, to calculate margins on SIMEX, but it did not. According to Mr Bowser’s evidence, this was because at that time the priority for BSL’s IT department was development of a system allowing First Futures to calculate margins on the Japanese exchanges: as I have mentioned, BSJ could not calculate margins at the customer level and BSL’s existing system for calculating the margin due from individual customers was highly unreliable. BFS could and did calculate margins at the customer level. Therefore installation of SPAN software in London to calculate SIMEX margins for what was at the time expected to be a low-volume office did not seem essential. The expedient solution was to rely on BFS’ margin data without checking it. It was no doubt also relevant that at the time SIMEX, which had introduced SPAN only in March 1992, was the only exchange in the Far East to use it and BSL did not use SPAN in London until September 1992[68]. Unfortunately this decision was not revisited the following year, by which time SPAN software had been installed in London and BFS’ trading volumes had grown significantly[69]

152.          As a result the Settlements Department could not check that the margin requested by the Funding Spreadsheet:

i)                     was correctly calculated, since they did not use SPAN,

ii)                   reconciled to individual trades, since the reports they received did not break down margin between individual customers or trades[70], or

iii)                 reconciled to the margin BSL requested from individual customers, for the same reason[71].

153.          It follows from the above that there was some limited scope for Leeson to have tampered with the Funding Spreadsheet and the London Gross report so as to ask for more margin than his trades justified, without the Settlements Department noticing. Indeed, he did abuse the Funding Spreadsheet in January and February 1994, by failing to give credit for dollar collateral sent to BFS on behalf of customers (see paragraph 325 below). However after that point, when Leeson needed extra margin from February 1994 onwards to finance his unauthorised trading, he requested it, and was sent it, outside the standard system (see paragraph 330 below).

154.          Therefore, whether or not it was reasonable for BSL to leave calculation of margin wholly to BFS, until January 1994 no loss was suffered as a result of this aspect of the standard system. If BSL had recalculated the margin on the trade data sent by BFS, it would have found BFS’ calculation to be correct. As far as is known, the allocation to individual customers was correct.

155.          D&T pointed out that the Settlements Department could have compared the margin requested (in the Funding Spreadsheet and the London Gross report) with the margin feed. As described above, the margin feed set out all the margin requested, by customer account and sub-account, including the 88888 account[72]. This comparison would have made little sense as a routine reconciliation, as both sets of data came from BFS and it would have amounted to checking that BFS was saying the same thing twice. However once the Dollar Funding started in 1994, such a comparison would immediately have brought to light the 88888 account as the explanation for the funding requirement which so puzzled Barings personnel for over a year.

Reports to Japan[73]

156.          A similar, though less automated, process applied to BSJ. At the end of each trading day, BFS confirmed to BSJ, by fax or telephone, all trades carried out on the instructions of BSJ traders, whether they were booked to BSL or BSJ accounts. Trades which were for BSJ accounts were also reported to BSJ by faxing the daily activity sheets for the BSJ accounts, with a covering page indicating the excess or deficit on the accounts.

157.          BSJ’s settlements department reconciled all trades done on BSJ’s behalf. In relation to futures, it also calculated the margin required, to verify BFS’ margin calculation. There is no clear evidence on the point, but it appears that BSJ may not have had SPAN. If so, it could not recalculate margin in relation to the options which Mr Brindle traded on SIMEX on behalf of BSJ until August 1994 (after that date, Mr Brindle’s book was moved to BSLL). BSJ then remitted the margin to BFS[74].

158.          BSJ sent to BSL a daily Risk Position Summary Report, which covered all proprietary trades carried out on SIMEX and the Japanese exchanges, and whether booked to BSL/BSLL or BSJ[75].

159.          It does not appear that Leeson, at any stage, attempted to fund his unauthorised trading by obtaining payments for margin from BSJ which exceeded those properly due. He did obtain funding from BSJ to the extent that BSJ did not require payment of balances due to BSJ and its customers. At the time of the collapse the surplus due from BFS to BSJ and not repaid was Ą20 billion (Ł133 million): see paragraphs 323 and 324 below.

Error accounts, unallocated trades accounts and give-up trades

160.          An error account was an account maintained by a broker to deal with trades which were executed in error. For example, the broker might have bought more futures than the client instructed it to, or might have bought when the client had instructed it to sell. Once the error had been identified, the broker booked such a trade into its error account. It then closed out the trade as quickly as possible, leaving a profit or loss in the error account. The balance on the account would usually appear in the broker’s profit and loss account. It did not in the case of BFS, as BSL met the cost of errors.

161.          This is to be contrasted with an unallocated trades account. That was an account to which were booked trades that had not been done in error, but which for some reason could not be booked, at least yet, to a client account: for example, the client account might be in the course of being opened.

162.          One particular use for an unallocated trades account was to book give-up trades. A customer might instruct BFS to execute a trade for it, but instruct BFS then to “give up” the trade to another broker for settlement and clearing. Such a customer might not have an account with BFS at all. Therefore if the trade had to be booked to an account pending being given up to the other broker, it would be booked to an unallocated trades account.


The start of Barings’ F&O business

163.          BSL was originally a niche broker in Far Eastern Securities. It achieved dramatic success in equities, Japanese warrants and convertible bonds on the back of a bull market in Japan which began in the early 1980s and continued until the crash of the Nikkei index at the end of 1989. 

164.          BFS was incorporated as an indirect subsidiary of BSL on 17 September 1986, and obtained a seat on SIMEX as a corporate non-clearing member. It was dormant until June 1992. Until then, when Barings companies needed trades executed on SIMEX, they used the Singapore branch of Chase Manhattan as an external broker.

SIMEX and Mr Killian

165.          Mr Killian joined Barings in the summer of 1988. He was the first F&O specialist hired by Barings and was employed to establish an F&O business for the Barings group at BSJ in Japan. Barings had an established client base dealing in Japanese equities and wanted the facility to offer their clients Japanese futures and options derivatives to hedge their positions in the event that the market fell.

166.          When Mr Killian joined Barings he already had some 7 years of experience in the F&O brokerage business, all of which he obtained on SIMEX. He had set up an F&O brokerage business for Continental Illinois in 1981 and had managed its SIMEX agency business in Singapore until 1986 when he joined Chase Manhattan as the General Manager of its SIMEX brokerage business. He had been in charge of both the front and back offices of these businesses, had passed the SIMEX trading exam and had traded on the SIMEX floor. He had also served as a director of SIMEX and had been a member of the SIMEX Rules Committee and the vice-chairman of the SIMEX Education and Marketing Committee.

167.          Mr Killian was hired by Barings because of his expertise in futures and options, to provide the managerial input and guidance necessary to establish and develop a F&O sales business for BSJ and the Barings group. Of all the employees within the Barings group, Mr Killian was the person most experienced in activities on futures trading floors.

Mr Gueler

168.          Mr Gueler had joined Barings as a part time analyst for BSJ in April 1988. By mid-1989, he had been co-opted by Mr Killian and was executing client orders for the futures and options agency group. In 1990, BSJ set up a warrant arbitrage and index arbitrage trading operation. Mr Gueler’s computer and mathematical skills meant that he was a suitable person to assist in setting up the systems necessary to conduct these relatively sophisticated trading strategies and Mr Gueler therefore joined this group. Once the head of the arbitrage group, Mr Johnston, returned to London in 1992, Mr Gueler was the most senior proprietary derivatives trader at BSJ.

169.          Mr Gueler assumed full management responsibility for BSJ’s index arbitrage activity in 1991 and 1992. At Mr Martin’s request, he also took responsibility for the Osaka options volatility book being run by Mr Brindle in April 1993. Thus, by early spring 1993, Mr Gueler was in charge of all proprietary Nikkei 225 trading in Japan. As Mr Gueler explained in his witness statement: “The futures, options and arbitrage derivative traders in Japan were put into one group and I was put in charge of them[76].

170.          Management responsibility for front office activities within the BSL group was organised pursuant to the matrix system, on a product rather than a geographical basis. Hence, although he was based in Tokyo, Mr Gueler was made responsible for the Osaka-based options volatility book because it formed part of the same product (proprietary trading in Japanese derivatives), though run out of a different location. In June 1993, Mr Gueler also assumed management responsibility for the proprietary derivatives business undertaken by Baring Futures (Hong Kong) Limited in Hong Kong.

171.          In 1993, Mr Killian and Mr Gueler both reported to Mr Norris. Because proprietary trading involved taking risk on behalf of the bank, Mr Gueler also reported to the Risk Committee in London.

The activation of BFS

172.          Mr Killian was the chief proponent of the activation of Barings’ derivatives business in Singapore and of BFS becoming a full clearing member of SIMEX. By the beginning of 1992, a substantial number of Mr Killian’s F&O agency customers were expressing a preference to have their business transacted on SIMEX rather than the Japanese exchanges. Futures and options on the Nikkei 225 contract could be traded on SIMEX as well as the Japanese exchanges and margin costs and commissions were lower on SIMEX. By 1992, a substantial proportion of Barings’ agency business was being executed by Chase Manhattan on SIMEX. Mr Killian’s perception was that this flow of business to SIMEX away from the Japanese exchanges would continue. All the big houses were active on SIMEX and Mr Killian recognised that it was important for Barings to keep up with the competition.

173.          Following discussions between Mr Killian and the then senior management in London (Mr Heath, Mr Baylis and Mr Martin), Mr Killian was asked to put forward a proposal for the activation of BFS. On 19 February 1992, Mr Killian made a written presentation to Barings management in London which recommended the activation of BFS. His proposal was that BFS would operate as an execution facility for the established agency business that Mr Killian had already built up in Japan. There was no intention that BFS would be engaged in proprietary trading. As Mr Killian explained in his evidence “My original concept was that we would activate our dormant membership at SIMEX and we would perform the clearing function so that we would save money by clearing the trades ourselves, as well as when margin monies were being placed by clients they were actually being placed by us so we were allowed to earn interest income. But I was not interested at the time in replacing... the execution staff of Chase Manhattan, because they were very good [77].

174.          Mr Killian envisaged BFS as a “lean operation[78], so structured and staffed as to keep both start-up and running costs as low as possible. 1991 and 1992 were difficult years in financial terms for BSL and Mr Killian recognised that it was important to keep these costs low in order for his proposal to be approved. The total staff requirement was six plus a secretary and the use of the BSS accountant, Ms Yong. Mr Killian did not make any suggestion as to what the role of the existing local management of BSS should be.

175.          Mr Killian asked senior management to approve his proposal, and to direct him to begin the application process and to begin looking for initial staff. The London management committee gave approval for the activation of BFS at its meeting on 26 February 1992. Mr Dickel was allocated the practical task of setting up BFS’ operations in Singapore and London.

The set-up of BFS

176.          Once the plan had been approved, Mr Killian was actively involved in the start-up of BFS, and he was appointed a director in December 1992. Mr Killian accepted that he knew BFS was relying on him to assist Mr Dickel and Leeson in the process of setting up the BFS business.

177.          Although experienced in the practical task of setting up overseas offices, Mr Dickel had no knowledge or experience of the futures and options business. Similarly, as Mr Killian knew, Mr Bax’s and Mr Jones’s experience at BSS was confined to the equities business conducted on the Singapore Stock Exchange. Mr Dickel was dependent upon Mr Killian to inform and guide him in relation to futures and options and the requirements of such a business. Mr Killian accepted that he was in constant contact with Mr Dickel and advised him on the best way to structure the BFS operation.

178.          Mr Killian’s priority was to establish a clearing and settlements capacity, to clear the Barings trades that would be executed in the SIMEX pits by Chase Manhattan and given up to BFS. This strategy was reflected in the application that was made to SIMEX to upgrade BFS’ status to that of a clearing member, which stated “we will initially operate by executing through other brokers. It is envisaged that we will have our own salaried brokers in the pit 6 to 9 months from now[79]

179.          Mr Killian recommended that the CONTAC system be used by the BFS back office[80]. Mr Killian had no recollection of being involved in the establishment of the settlements procedures in London in relation to the SIMEX business. However, he did understand, from an e-mail he received from BSL’ systems specialist, Mr Dixon, on 10 March 1992, that BSL in London would be having the SPAN margining capability installed to enable it to calculate or re-calculate the SIMEX margin calls from trade data.

The appointment of Leeson to BFS

180.          Consistent with the intention to establish BFS as a settlements function for the first 6 to 9 months of its operations, Mr Killian’s initial focus was to identify a suitable settlements specialist who could run the back office in Singapore.

181.          Leeson had joined BSL in London on 31 July 1989 as a clerk in Futures and Options Settlements. By 1992 he had developed a reputation in BSL as an expert in this field. As well as helping to sort out BSL’s own back office, he was used by BSL as a trouble-shooter to sort out the settlements systems of BSL’s company in Indonesia. In March 1992 Leeson was just 25[81].

182.          While still working for BSL, Leeson applied to the SFA for admission to its register of securities representatives. On the application he answered in the negative a question asking if there were any unsatisfied judgment debts against him. That answer was false, as he had had a judgment entered against him, for Ł639 in February 1991, by a bank.

183.          The SFA wrote to BSL in March 1992, informing them of the non-disclosure of the judgment. They wrote again in August 1992, by which time Leeson was in Singapore. Ms Thomas, the head of BSL’s Compliance Department, replied that BSL did not propose to continue with the application. BSL did not inform Mr Bax of these events, so that he did not disclose it to SIMEX when he applied for Leeson to become an associated person at SIMEX.

184.          Leeson had accompanied Mr Dickel on his visit to Singapore in March 1992 to assess the feasibility of the proposed activation of BFS. During that trip, Mr Dickel telephoned Mr Killian in Tokyo and explained that Leeson had asked whether he could be considered for the job of settlements manager at BFS.

185.          Following “extensive[82] discussions involving Messrs Dickel, Killian, Martin (BSL’s then finance director) and Jones, Leeson was appointed to run the SIMEX operation on 19 March 1992 for a trial period of 6 months. He was given the title Derivatives Operations Manager and posted to Singapore to (in the words of Mr Martin’s fax of 24 March 1992) “...head up our SIMEX operation and also act as floor manager[83].

186.          Mr Killian’s contribution to those discussions was informed by his familiarity with Leeson as a settlements “firefighter”. In 1991, Leeson had been sent to Japan to help resolve BSJ’s futures and options settlement problems. Mr Killian’s resultant appeal to Mr Martin that “we need 10 more Nicks...”[84] showed that Mr Killian was impressed by Leeson as a settlements operator. However, Leeson was not a trader. He was 25 years old and, at the time he was posted to BFS, the entirety of his experience and training had been derived from his role in settlements. Both Mr Killian and Mr Gueler knew that.

187.          Since BFS was initially intended to function as a SIMEX clearing operation for BSJ and its clients, Leeson’s lack of prior trading experience did not deter Mr Killian from recommending that he be appointed to head up the back office of the Singapore operation. However, as Mr Killian accepted in his evidence, Leeson was not qualified for the position of SIMEX floor manager. As Mr Killian put it: “... if there were people to manage, yes, [Leeson] would not have been a good floor manager[85].

188.          When Leeson was appointed floor manager in March 1992, the only activity that it was envisaged BFS would be undertaking during the first 6 to 9 months of its operations was the acceptance of give-up tradesfrom Chase Manhattan (trades executed by Chase Manhattan but handed over for clearing by the BFS back office). At that time it was not anticipated that Leeson would be managing any BFS floor staff, let alone that Leeson would be actually executing SIMEX trades himself. Accordingly Mr Martin’s fax did not identify a product reporting line for Leeson, as in charge of BFS’ market traders, because it was not relevant at that time.

189.          Instead, a few days before Leeson’s appointment, Mr Dickel had explained to Mr Jones “Nick will report to you but Gordon Bowser will also have an overall input as global derivatives operations head[86]. Leeson had been posted to BFS to run the back office, so reporting lines to Mr Jones and Mr Bowser made obvious sense. 

190.          Mr Bax and Mr Jones were unhappy about this joint reporting arrangement. Mr Bax wrote to Mr Fraser on 25 March to protest that Mr Jones should be solely responsible for BFS’ operations side. However Mr Bax told me that he discussed his concerns with Mr Martin and he was reassured by the proposed structure of the business: it was to be an execution-only service, with all trades settled in London or Japan. BSS had established a similar execution-only office in Thailand, which was effectively run from Singapore. On that basis, Mr Bax accepted the arrangement.

191.          According to Mr Bowser, Mr Bax and Mr Jones achieved their objectives by another route. When Mr Bowser visited Singapore shortly after he joined BSL in March 1992, they made it clear to him that Leeson would not report to him[87]. They pointed out that functions such as assessment could only be done locally. Mr Bowser said that Mr Martin impliedly accepted that and as a result Leeson never reported to Mr Bowser. Mr Bax disagreed with that account. He said he would not have contradicted Mr Martin’s decision. His understanding was that Mr Bowser was responsible for setting up and managing the BFS settlements function, and that Leeson reported to him[88].

The start of BFS’ operations

192.          BFS commenced its SIMEX operations in June 1992. Leeson had arrived in Singapore, following his honeymoon, in early April 1992. Mr Killian played an “active role[89] during the period leading up to the start of BFS’ operations. He was in regular contact with Leeson by telephone and visited Singapore in May 1992. According to Leeson in his interview by the SFO, Mr Killian was “relied on heavily[90] in the process of establishing the operations of BFS, not least because of his previous experience as a director of SIMEX.

193.          During June 1992, BFS cleared trades that had been executed on its behalf by Chase Manhattan, as originally envisaged. That arrangement had originally been expected to continue until the end of 1992 at least. But Leeson clearly had a vision for BFS which was different from that which Mr Killian had set out in his planning papers. Leeson started recruiting front-office staff to execute trades and on 24 June 1992 distributed a memorandum announcing that BFS’ own floor operation on SIMEX would start on 1 July 1992.  

194.          Mr Killian was presumably consulted as to this change of plan as, during his visit to Singapore in May, Mr Killian participated in an interview of Eric Chang, who was recruited as the first member of BFS’ floor team. Mr Chang had been an employee of Chase Manhattan and had worked with Mr Killian there. Connie Tan, another recruit from Chase Manhattan, was hired as a result of a referral from BSJ’s Tokyo office. Chang, Tan and the other traders employed by BFS seem to have been engaged in straightforward execution-only trading on the instructions of BSL, BSJ and their customers. Only Mr Leaning seems to have had any involvement in discretionary arbitrage trading, in a very junior capacity under Leeson. None of these traders was called to give evidence before me.

Leeson’s move to become a floor trader

195.          In his fax of 24 June 1992 Leeson did not identify himself as one of the BFS floor traders. Leeson sat the SIMEX Institute of Banking and Finance, Futures and Trading test two days later, on 26 June 1992[91]. This gave him access to the SIMEX floor. Mr Killian saw that as a useful marketing tool, allowing Leeson to speak to clients on the telephone from the booth and to show visitors around. When BFS began its floor operation, Leeson had not yet received his badge or participated in the SIMEX briefing and simulated pit trading session which he was scheduled to attend on 25 August 1992.

196.          In his fax of 24 June 1992, Leeson proposed that the BFS floor staff would service the agency team in Japan. For the time being, the proprietary traders should continue to place their orders with Chase Manhattan. This arrangement meant that Mr Gueler’s group of proprietary traders would still pay commission to an external broker, which was less satisfactory than using BFS as its in-house broker. When the house traders tried to direct their orders to the BFS floor staff (rather than to Chase), they found that customer orders were given a higher priority.

197.          This situation was unsatisfactory to the BSJ proprietary traders. At Mr Killian’s suggestion, Mr Gueler spoke to Leeson in an attempt to resolve the problem. Whether as a consequence of this or not, Leeson himself became engaged in the execution of the orders of proprietary traders on SIMEX. Once he was active on the floor of SIMEX, both the F&O sales team and the proprietary traders at BSJ began using Leeson to execute their orders on SIMEX.

198.          As Mr Killian accepted, Leeson required permission from a higher authority to execute trades on the floor of SIMEX, because it involved an expansion of his role[92]. There is no evidence that anyone senior to Leeson gave such permission. Mr Bax identified Mr Killian as one of the individuals with authority to do so, but both Mr Killian and Mr Gueler denied that they had done so. Mr Killian had not anticipated Leeson becoming an active floor trader, at least for some time. In re-examination, he confirmed that Leeson was not at that point a “suitable floor trader. He was not experienced yet[93]. At the time, he would have seen Leeson as developing that experience, little by little, under Eric Chang’s tutelage.

199.          Nonetheless, by July 1992 Leeson was out of the back office and actively engaged in executing trades on the floor of SIMEX. Mr Killian accepted that he was aware of that[94]. As Mr Killian accepted he knew, Leeson was not subject to any direct supervision from anyone in relation to his activities on the trading floor of SIMEX.

The 88888 account

200.          On 3 July 1992, Leeson opened an account, 88888, in the CONTAC system, and booked his first SIMEX trade to the account on the same day. The 88888 account was described on the CONTAC new account form as a BFS error account (for a description of error accounts, see paragraph 160 above)[95]. When Leeson notified it to SIMEX on 26 August 1992, he described it initially as a BSL error account, but then changed the description to merely a BSL account[96]. As described at paragraph 300below, on 8 July 1992 he arranged for reports of trading activity using the 88888 account to be omitted from the trade feed to London and the London Gross Report.

201.          D&T put to Mr Bowser Leeson’s account (in his book, “Rogue Trader”) that he opened the 88888 account, and then had it removed from the trade feed, at Mr Bowser’s suggestion[97]. According to Leeson, this was to avoid London having to deal with a large number of small errors. He said that later on Mr Bowser asked Leeson to revert to reporting all errors to London, but Leeson did not then or subsequently arrange for data from the 88888 account to be included in the trade feed.

202.          Mr Bowser did not recall any such conversation and thought it unlikely that he would have made such a request, given that the errors did not cause any extra work in London[98]. However there was some later documentary evidence that Mr Bowser was aware of Leeson having an error account which was not reported to London[99]. It is perhaps more likely that Leeson opened an account at Mr Bowser’s request which was not to be reported to London, and later realised that it could be used for unauthorised trading, than that he opened such an illicit account within eight days of BFS starting floor trading. It also seems unlikely that, if Leeson’s intentions had been fraudulent from the outset, he should have removed the 88888 account from the trade feed but not from the margin feed.

BFS’ customers

203.          BFS’ agency customers were mostly customers of BSL in London, although BSJ also had some domestic Japanese customers. BFS had only one outside customer of its own, BNP, from October 1992. Proprietary trading was on behalf of both BSL (later BSLL) and BSJ[100]. For both agency and proprietary trading, the trading was mostly initiated by BSJ traders (or Leeson).

Leeson’s rolls

204.          Leeson’s rise to prominence began in late 1992 and early 1993 when he was involved in rolling over both client and house futures positions on SIMEX. Positions needed to be rolled over because a Nikkei futures contract only had a life of three months and matured at the quarter end in March, June, September or December. Consequently, if a client or house book wanted to maintain an existing futures position it had to be rolled over to the next contract period before expiry. As Mr Killian explained “a roll... involves effectively closing out the near contract and purchasing a far contract to replace it[101]. Market makers on SIMEX offered rolls as a single trade whereby they would buy (say) September futures at x and sell an equivalent number of December futures at y. The difference between x and y would be the spread and represent the cost to the customer in rolling over his position. There was, therefore, a prevailing price for rolls on SIMEX which could be bought as a single trade without the necessity for the order filler to take any directional risk (that is, risk that the market would move during the roll operation) or execution risk (that is, the risk of an error in implementing the order).

205.          When roll orders were given to Leeson, he was apparently able to achieve prices which were often more favourable than the prices being offered in the spread market. The evidence of Dr Fitzgerald was that the most cogent explanation (from BSJ’s perspective) for Leeson’s good prices would have been that he was “legging” into the roll[102]. In other words, Leeson would execute one leg of the roll order and then wait before executing the other leg in the hope that the market would move to improve the spread. Mr Killian’s evidence was that he understood Leeson to be beating the spread price by carrying out the two trades independently. He had done the same himself as a trader[103]. This was legging, but only in the sense it was not possible to carry out the two trades completely simultaneously.

1993: Leeson is given discretion

206.          When its floor operation commenced in July 1992, BFS’ authority was limited to the execution of orders on behalf of other companies within the Barings group and their clients. Nobody at BFS had authority to take directional risk, or to initiate house positions or to exercise discretion in the execution of customer orders without prior approval from a compliance officer. Mr Killian knew this, and was not aware of Ms Thomas or any other compliance officer having given permission for Leeson to accept discretionary orders from customers. Mr Killian had not budgeted for a specific compliance officer for BFS in his business plan or proposal and none had been appointed.

207.          The fact that BFS was intended to be an agency-only business meant that there was no segregation of duties problem arising out of Leeson’s position in charge of both front and back offices. As Mr Killian explained to the Singapore inspectors and confirmed in his evidence “’s typical to have General Managers who are responsible for the floor and back office... It was an ordinary thing” and “... when I was in Singapore I stood on the floor and I would take orders from clients and execute the orders and I still retained the title of general manager and I was responsible for the back office...”[104]

208.          During the course of 1993, Leeson metamorphosed from an execution-only broker to a trader. A broker executes an order at the instigation of another, at a stated price, “at best” or “at market”, exercising discretion only in his judgement as to how precisely to execute the order. A trader has a discretion as to what trades to execute and at what price. Unlike a broker, a trader initiates trades and effectively puts the bank’s money at risk. As a result, as Mr Killian and Mr Norris accepted[105], trading of a proprietary nature gives rise to more complex risk management concerns than pure execution activity. It requires transparency and usually involves the individual trader being given limits to control his activity.

209.          Leeson began trading in the above sense in early 1993, and slowly this activity grew. Leeson was given more and more discretion by the BSJ traders to move their futures hedges from Osaka to SIMEX. It was apparent (to Mr Killian at least) that by early 1993, Leeson was effectively trading; initiating house positions and exercising discretion[106]. Mr Gueler admitted that it was he and the members of his proprietary desk at BSJ who conferred discretion on Leeson[107]. However, as Mr Killian knew, Leeson had not been given any authority by higher management to engage in that activity and had not received approval from any compliance officer entitling him to exercise discretion in the execution of orders (as the BSL Compliance Manual required)[108].

210.          By spring 1993, Leeson was apparently beginning to make a sizeable contribution to the profitability of the house books run by the BSJ proprietary traders in Japan. Mr Gueler’s April memorandum to Mr Norris noted “Our SIMEX execution and trading ability is superb and extremely valuable to us. This is due to the great efforts made by Nick Leeson and his team.”[109], though in his evidence, Mr Gueler stated that the word “trading” did not mean proprietary trading[110]. Mr Killian recalled being told by Mr Gueler’s group that they had managed to add Ł100,000 to the value of the house books on a single day as a result of Leeson legging the execution of proprietary positions that were being moved from Osaka to SIMEX[111].

211.          Mr Killian appreciated that Leeson’s involvement in proprietary trading gave rise to a potential conflict of interest. He raised this concern with Mr Baylis and Mr Martin in London but was told to “relax” because the house was just a customer of BFS and Leeson was simply executing the house orders[112]. At that time, which must have been before the end of March 1993 when Mr Baylis and Mr Martin left, Mr Killian regarded this response as satisfactory “because [Leeson] was executing in an agency capacity only, not as a proprietary trader[113]. It is also true that Mr Killian’s group stood to benefit (by way of internal commission) from the increasing volume of trades due to Leeson servicing the house books.

Leeson’s switching business

212.          The trading activity at which Leeson was apparently so successful was arbitraging between SIMEX and the Osaka exchange. This was known as “switching”. Arbitrage of this nature (sometimes called price anomaly arbitrage”[114]) aims to capture price differences (price anomalies) in the same product on two different markets. The trader sells the product on the market on which the price is higher and buys an equal quantity of the same product on the other market where the price is lower. As long as he effects the two transactions (the two “legs” of the arbitrage) as nearly as possible simultaneously, the strategy is one of low market risk. The price differential is “captured” once the two markets converge and the price of the product is the same on both markets, whichever way the markets may have moved in the meantime.    

213.          In price anomaly arbitrage the positions held on the two exchanges must be equal and opposite. If they are not, the unmatched (or “open”) position will be directly vulnerable to market movements. So, during the period while only one of the two legs of the arbitrage is in place, there is an exposure to market movement, and therefore directional risk.

214.          Instead of effecting both the legs of the arbitrage as near as possible simultaneously, a trader can deliberately create an open position, either by delaying putting down one of the two legs (“legging in”), or by “lifting” one of the legs after it has been put in place. Both these variants involve straightforward directional trading, that is, gambling on the directional movement of the market. In both cases, a properly-run bank or broker would limit the extent of the positions which the trader was permitted to have open, either in the course of a day’s trading or overnight.  

215.          The origins of Leeson’s switching business lay in the hedging strategy pursued by BSJ’s proprietary traders in Japan. As already mentioned, Adrian Brindle was trading Nikkei options on a volatility book. As a hedging strategy, to offset the risks involved in options trading, BSJ dealt in futures, both on the Japanese markets and (through BFS) on SIMEX. In the course of executing these hedging trades for BSJ, Leeson purported to show that he could arbitrage profitably between Osaka and SIMEX[115].

216.          There was nothing new or unique about switching. In a fax sent by BSJ to Mr Baylis in September 1992, “Osaka SIMEX arbitrage” had been identified by Mr Brindle and Mr Fou as one of the strategies in which BSJ was engaged. Arbitrage trading between two exchanges was not sophisticated. Mr Gueler called it “downstairs trading requiring little or no technical knowledge[116]. According to Mr Gueler, Leeson was a “barrow boy” just buying cheap and selling dear[117]. Although Leeson’s perceived ability to make proprietary profits by reason of his access to customer orders may have meant that his proprietary trading was not as “pure” as that being conducted by the traders at BSJ, it was not beyond the competence of Mr Gueler to comprehend. Indeed, Mr Gueler said he had tried it himself but had got his “fingers burnt[118].

217.          Mr Gueler attributed Leeson’s success to his presence on the floor in SIMEX, with a dedicated phone line to Osaka. This allowed Leeson to spot price anomalies more quickly than Mr Gueler had been able to do trading from a screen in Tokyo[119]. As I will later describe, Leeson’s apparent success was actually largely the result of concealed alterations to trades using the 88888 account, to its disadvantage and thus that of BFS.

218.          When it started, Leeson’s switching was accounted for as part of BSJ’s volatility book. Initially it was restricted to dealing in Nikkei 225 futures contracts. It seems from a fax from Mr Oades to Mr Norris dated 17 June 1993[120] that the Nikkei switching business was already established by that date, and that the possibility of expanding into JGBs was under consideration (as happened in 1994), though apparently no one in London told Mr Baker about it before he went out on his due diligence at the end of 1993[121]. Mr Killian told me that he knew as early as late 1992 that Leeson was involved in switching, but understood him only to be carrying out the directions of BSJ traders. Mr Killian only became aware in mid to late 1993 that Leeson was taking the initiative in the trading[122].

219.          Adevelopment of the switching business, and what was perceived to be a significant element in the success of the business, was liquidity arbitrage. This is described by BOBS in the following terms[123]:

“if BFS received a large order on SIMEX and the liquidity[124] was not available to execute it immediately, BFS would offer to execute the customers order by taking on the other side itself and laying off the risk with the equivalent number of contracts on the more liquid Japanese exchange. BFS would charge the customer an extra price tick[125] for doing this..... and would seek to unwind it later on when both markets had liquidity.”

220.          Mr Gueler’s evidence was that he believed Leeson to be engaging in a combination of price-anomaly arbitrage, liquidity arbitrage and directional trading.

221.          By mid-1993, Leeson and the BSJ house traders in Japan had decided that Leeson should run the switching strategy from Singapore. This resulted from an informal group decision made by the BSJ proprietary traders and Leeson in the summer of 1993. From that point, as Leeson put it in his interviews by the Serious Fraud Office, “I was the trader. I was the decision-maker[126]. As Mr Gueler accepted, from August 1993 onwards “Nick [Leeson] would call the shot”; the “go/no go decision” would come from Singapore[127]. Rather than simply executing orders on SIMEX at BSJ’s request, Leeson initiated trades, exercised discretion and gave the orders to BSJ to execute trades in Japan. Leeson thus clearly crossed the line between an order-filler and a trader.

222.          As Mr Norris accepted, this transition amounted to a change in roles, importance and status for Leeson[128]. For BSJ to confer authority on Leeson to conduct discretionary arbitrage was, as both Mr Norris and Mr Killian agreed, to give him “a book in all but name[129]. Mr Gueler agreed too but then had second thoughts later in his evidence, suggesting that, throughout 1993 and until late spring/early summer of 1994, Leeson’s ability to initiate trades was limited by parameters set by BSJ on the morning of each day[130]. However this is contrary to both Leeson’s account to the SFO quoted above and Mr Killian’s evidence. It is also inconsistent with Mr Gueler’s evidence thatthere was no difference between what Leeson was doing before and after he got his own trading book[131]. I find Mr Gueler’s first thoughts to have been correct.

223.          Mr Gueler’s group of proprietary traders had not asked Mr Killian’s permission for Leeson effectively to run a proprietary switching book from Singapore; nor was Mr Killian aware of Leeson having been authorised to conduct the switching business by anyone in senior management[132]. Mr Norris said he would have expected such a change in Leeson’s role to be reported to him but he was not made aware of it[133].

224.          Mr Killian had learnt that Leeson was running his own book in all but name by the autumn of 1993. He discovered this from his conversations with the proprietary traders and his own execution sales staff in Japan[134]. By the autumn of 1993, Mr Gueler said that Leeson had become “principal” among the team running the Osaka volatility book and that Leeson’s switching was contributing the most profit[135]. Mr Killian recognised that, by the end of 1993, Leeson was “clearly now doing proprietary trading and he’s part of the proprietary traders...”[136].

225.          Mr Killian told me that he appreciated that the switching business (and Leeson’s role in it) represented a fundamental departure from the execution-only role that BFS had been set up to conduct and that it was “essential” that the questions of risk limits and risk management should be considered[137]. Moreover, Mr Killian knew that the change in Leeson’s role had serious implications for the agency business. Leeson now faced a potential conflict of interest and there was a risk of complaints of front-running and other similar abuses from customers. Mr Killian also accepted that he knew that Leeson’s unsegregated role, in running both the front and back offices of BFS, was no longer appropriate now that he was engaged in proprietary trading[138].

226.          Leeson’s switching activity in Nikkei 225s was established by June 1993, but no separate figures for its profitability are available until September 1994. However it seems that the switching began to make striking apparent profits in November and December 1993. On the basis of comments in contemporary documents and in evidence to the Singapore inspectors, D&T have provided figures which treat Leeson’s switching as representing 60% of the profitability of Mr Brindle’s volatility book in those two months. This gives a figure for Leeson’s income of Ł3.5 million for November and December[139]. This was included in Mr Brindle’s book and therefore reflected in BSJ’s financial results, not BFS’.

BSL management in 1993

227.          1993 was a year of substantial change within the BSL group. Throughout 1993 the BSJ proprietary traders were not subject to any clear or active management supervision. Mr Gueler was distracted by his responsibilities for Hong Kong and, as the result of an “undesirable interregnum” in senior management, the derivatives group had a succession of different bosses to report to in London[140]. As Ms Walz put it, before she and Mr Baker took over, the derivatives business was “tossed around a whole lot of people[141]. Mr Norris himself had no expertise or experience of proprietary trading and was ambivalent as to whether Barings should persevere with a derivatives business at all. Mr Oades, whom Mr Norris attempted to groom as a potential senior manager, was regarded by Mr Gueler as an unsuitable manager with no understanding of the derivatives business[142]. In the result, as Mr Killian explained “... the young guys like [Mr Gueler] and [Leeson] and Mr Fuchs really did not have a sponsor/mentor for them for the proprietary activities out of London[143]. Mr Gueler said that he and his group did not trust senior management and felt neglected and “thoroughly undervalued” in 1993[144].

228.          When Mr Baker visited Japan at the end of 1993 he described the proprietary trading group as being “very unmanaged and very unloved” and operating in a “climate of concealment[145], which was a perception Mr Killian confirmed was probably accurate[146]. This was the climate which prevailed in Japan throughout the period when Leeson’s switching business was born.

Reporting of Leeson’s profits

229.          Even though the switching was Leeson’s business, BSJ performed an essential role in it. BSJ appointed dedicated trading assistants to execute trades in Japan at Leeson’s behest and received details of the corresponding trades on SIMEX from Leeson each day. This was done by members of Mr Gueler’s group and under his supervision.

230.          Because in 1993 Leeson’s switching was booked to Mr Brindle’s volatility book, its profits were hidden within BSJ’s books and were not reported to either London or Singapore in a transparent manner. Mr Brindle kept an unofficial spreadsheet recording the contribution of Leeson’s switching, but this was not known to anyone outside BSJ until 1994.

231.          Once Leeson had been given his own books (see paragraphs 271 and 272 below), BSJ included Leeson’s positions and profit in the official traders’ spreadsheets. These were saved in a shared directory on a computer, and were used by BSJ risk control to produce the Daily Risk Report for the Risk Committee and Financial Control in London. All the FPG managers and traders, including Mr Gueler, Mr Baker and Ms Walz, received a copy of the Equity Financial Products Daily Income Report from early 1994 and a copy of the group weekly income report which set out details of Leeson’s profits.

232.          Therefore Mr Gueler received details of all Leeson’s switching trades (including prices and volumes) from 1993 through to the end of 1994. Mr Baker and Ms Walz received details of Leeson’s profits from early 1994, as Mr Brindle began adding manuscript remarks to his daily report, signifying the level of Leeson’s contribution to his book’s income, and Leeson received his own books for JGB and Euroyen trading.

Mr Baker

233.          Mr Norris’ tenure as the senior manager with overall responsibility for the derivatives business was a temporary one, assumed by default following the departure of Mr Martin, Mr Baylis and Ms Gibson in March 1993. During this managerial “vacuum[147], Mr Norris was looking for a replacement.

234.          In the second half of 1993, Mr Norris attempted to persuade Mr Baker (who had joined BB&Co from Bankers Trust in 1992) to take control of the derivatives business as part of his Debt Financial Products Group. Although Mr Baker had no experience of exchange traded derivatives, he agreed to look at the business. At that stage, Mr Baker was only interested in the proprietary trading and he did not want responsibility for the agency business run by Mr Killian.

235.          In September 1993 Mr Baker was sent copies of spreadsheets on the derivatives books recording the reported results from January to August 1993 which Mr Norris described as “most of the relevant information on the Derivatives Unit here[148]. On 26 October 1993, Mr Baker circulated a memorandum entitled “Organisation of a Financial Products Group”, which included the BSJ derivatives business within a sub-group named Equity Financial Products to be headed by Ms Walz. Two days later Mr Norris issued a memorandum to all staff in the BSL group announcing that Mr Baker would be assuming responsibility “for managing our existing derivative trading and stock borrowing businesses[149].

236.          Mr Baker did not visit Japan until late 1993 and early 1994. It was only then, from his discussions with the traders in Japan, that Mr Baker “discovered” the switching business and the importance of Leeson to the apparent profitability of BSJ’s Japan trading books[150]. Mr Killian said that Mr Baker “spied” the opportunity to take control of this business which, since it was concealed within the BSJ books, had not been claimed by anyone else in London[151]. It would not have been apparent from the spreadsheets Mr Baker had received from Mr Norris in September because Leeson’s trading was still buried in the Osaka volatility book. Until Mr Baker discovered Leeson’s trading, only BSJ was aware of the level of Leeson’s apparent contribution to the results of the Japanese house books. It was, as Mr Killian described it “... a bit of a home grown build up of business opportunity[152].

Mr Baker’s vision

237.          Mr Baker’s first meeting with Mr Killian was over lunch in Tokyo in November 1993. According to Mr Killian “My conflict began with Ron Baker on the first day I met him[153]. Mr Baker told Mr Killian that he intended to expand the proprietary business and, as part of his vision, it would be important for proprietary traders to “take advantage of the client information curve[154]. Mr Killian asked Mr Baker whether he was talking about front-running, which Mr Baker denied. But after the collapse, Mr Killian told Mr Baker “When you told me when we first met that you were going to trade the client information curve, I knew you were going to build a front running scam as part of your vision and I was not going to be part of that[155].

238.          Mr Killian understood the phrase “taking advantage of the client information curve” to mean that Mr Baker intended the proprietary traders to make trading decisions in the light of information available to them through Barings also executing customer orders[156]. Mr Killian was “stunned” by what he was told by Mr Baker because of the detrimental impact such a strategy would have upon the agency business that Mr Killian had sought to establish[157].

239.          The absence of any form of Chinese wall in Singapore and the strategy of taking advantage of the client information curve gave rise to a continuing compliance concern which, as far as Mr Killian was concerned, was never adequately addressed by either Mr Baker or Mr Norris[158]. Ms Thomas in the compliance department was never made aware of these matters by Mr Killian or by anybody else within Barings. She said later that, had she looked at the matter, she would have regarded the practice of taking advantage of the client information curve as being “completely out of order...[159]. Mr Killian accepted that “that is an issue that should have been raised with her[160] but it was not.

Mr Killian’s complaints to Mr Norris

240.          Shortly after his November 1993 meeting with Mr Baker, Mr Killian learned that Mr Baker had invited Leeson to attend an off-site meeting of the proprietary traders in Hong Kong. Mr Killian was angry and upset by this development. He felt that Leeson would now be openly treated as a proprietary trader and be encouraged by Mr Baker to front-run or abuse client orders by taking advantage of the client information curve[161].

241.          It was this invitation to Leeson which prompted Mr Killian to complain to Mr Norris about Leeson’s role as a proprietary trader. Mr Killian told me that he raised his concerns with senior management in London and suggested that Leeson be given a separate booth on SIMEX. Neither they nor Mr Killian took any steps to change Leeson’s role or responsibilities. Mr Killian accepted that he “should have called [Mr Jones] as well” but he did not[162]

242.          Mr Norris in his evidence analysed Mr Killian’s expressed concerns as being twofold. First, Mr Killian was concerned that his clients should continue to receive a good service. Secondly, Mr Killian was worried that the agency group would not get any financial benefit from Leeson’s activities if he was to be a fully-fledged member of Mr Baker’s FPG[163]. Mr Killian accepted that he raised his concerns in general terms and that this characterisation was essentially accurate[164].

243.          Mr Norris did not agree with Mr Killian’s view as to the need to separate the availability of customer and house information at the point at which trading and execution decisions are taken. Mr Norris considered it to be both unnecessary and impracticable to have any form of physical separation between Leeson and order-fillers on the SIMEX floor[165]. Mr Killian, who was by far the more experienced, disagreed and maintained that Leeson should have been given a separate booth. However, Mr Killian never ensured that this happened and said that, whenever he raised these issues with Mr Norris, the latter simply “glazed”; it was like “Oh Jeez, here we go again. It was old news[166].

244.          Mr Killian’s concerns were never dealt with by Mr Norris satisfactorily and Mr Killian’s continued complaints earned him the nickname of “the bad penny”. Although Mr Norris denied ever referring to Mr Killian in those terms[167], Mr Killian said that “...when the chairman says that to you, of your company, it is one of those things I tend to remember[168].

November-December 1993: Leeson’s profits increase

245.          In the last 2 months of 1993, Leeson’s reported switching profits increased markedly. Having contributed (according to Mr Gueler) an estimated US$200,000 to the income of the volatility book for the first 10 months of 1993, Leeson was apparently able to generate switching profits of about Ł3.5m in the last two months. By the turn of the year, Leeson’s switching was consistently generating some 60% of the income of the Osaka volatility book and Mr Gueler regarded Leeson as “exceptional[169].

246.          Mr Killian was aware, at least from conversations in the office, of the fact that approximately 75% of the proprietary profits for the last 2 months of 1993 were emanating from switching[170]. Mr Killian recalled one acquaintance telling him, in late 1993, that the only way Leeson could be making a lot of money from switching was by “doing one side of the trade and then perhaps waiting before completing the other side, taking the chance on a few more ticks and profits[171]. Mr Killian said he understood Leeson could only have generated profits of such magnitude by taking directional risk[172].

247.          By the end of 1993 Leeson had already become the single most profitable trader in Mr Gueler’s group. On occasions when Leeson was absent for any reason, in Mr Hawes’ words BFS’ “profitability dropped to virtually nothing[173]. Mr Gueler accepted that Leeson’s results should have been investigated at this stage though, he said, not by him[174]. Yet no one at BSJ or BSL understood or sought to investigate Leeson’s trading activities or the reason for the dramatic increase in his profits. For his part, Mr Gueler admitted that he found Leeson’s profits “puzzling” from the end of 1993 onwards but that he had no idea how Leeson was making them[175]. Mr Gueler took no steps to try to discover, either from Leeson or elsewhere how these profits were being made.

248.          When Mr Baker discovered the switching business at the beginning of 1994 he believed that Leeson’s profits were so substantial that he must be taking risk. According to Mr Gueler, Mr Baker was sceptical about Leeson’s profits and found them “incredible[176]. But nobody investigated whether the explanation was directional trading and what risks Leeson was taking. When called upon by Mr Baker (at an off-site in Bruges in December 1993) to explain how Leeson made his money, Mr Gueler said that “I had difficulty explaining it then[177].

Leeson’s 1993 Bonus

249.          Mr Killian recommended that Leeson’s bonus for 1993 should be S$600,000. This suggestion was based on a bonus pool for the Pacific Rim agency group (from which Leeson’s bonus was originally to be paid) that included Ł1.4 million of internal commission payable by the house traders to the agency group. Mr Killian had reached an agreement with Mr Gueler during 1993 that such a commission would be payable and rationalised it to senior management in London on the basis that “95% of Nick[’s] trading day is spent servicing the house traders[178].

250.          When this suggestion was vetoed by London, Mr Killian initially agreed a compromise with Mr Baker that half of Leeson’s bonus should be paid from the Pacific Rim Agency Group and the other half would be paid by Mr Baker’s FPG. In the event, however, all of Leeson’s bonus was paid by Mr Baker’s group because Mr Killian regarded it as unfair that the agency group should have to bear the overhead of Leeson’s proprietary trading (i.e. SIMEX clearing fees and BFS costs) without the benefit of any internal commission.

The “turf war” over Leeson

251.          The disagreement over Leeson’s 1993 bonus marked the beginning of a turf war between Mr Killian’s F&O sales group and Mr Baker’s FPG as to Leeson’s position and the extent to which each group was for bonus purposes entitled to credit from a share of his apparent income. Leeson was now perceived as a “star” and a “natural trader” whom Mr Baker felt should be brought within the fold of his newly formed group of derivative traders[179]. Mr Killian, on the other hand, was reluctant to deprive the F&O sales group of the reflected glory created by Leeson’s apparent success and a share of his revenue. Mr Killian considered that he was entitled to some benefit from Leeson’s proprietary profits and was still maintaining as late as June 1994 that the agency bonus pool should receive a credit from the proprietary profits being generated by Leeson[180].

252.          This quarrel between Mr Killian and Mr Baker reflected a critical ambiguity in relation to Leeson, namely whether he was within the sphere of Mr Baker’s or Mr Killian’s managerial responsibility. It dragged on until October 1994, when it was finally decided that the agency business would be merged with FPG as a single product under Mr Baker’s leadership with effect from 1 January 1995.

253.          Despite the fact that Mr Killian was and remained Leeson’s direct superior in relation to agency business until the end of 1994, his reaction to the fact that Leeson became increasingly aligned with the proprietary traders appears to have been the complete abdication of any responsibility for BFS and Leeson. At the end of March 1994, Mr Killian moved from Japan to the United States. Thereafter his only contribution to the management of Leeson’s business appears to have consisted of sarcastic observations on the levels of Leeson’s reported profits. According to Mr Baker, Mr Killian became cynical and lost interest in Barings[181]. Mr Gueler said that Mr Killian “just turned a blind eye to where [Leeson’s] commissions would have been coming from[182].

254.          The result of Mr Killian’s insouciance was the absence of any active or effective management supervision over Leeson’s agency business in 1994. Nor was there any effective communication between the managers of the agency team and FPG. This meant that no one in a managerial position developed an overall understanding of Leeson’s activities. This was a critical failure in the events leading up to the collapse of Barings, for which Mr Norris acknowledged he was ultimately at fault[183]. Mr Gueler agreed that this serious failure was “absolutely at the heart of what went wrong[184]. In particular, it enabled Leeson to indulge in myths of secret clients with fantastic strategies to explain to his proprietary managers the very large number of trades he was conducting (in reality for account 88888), while no one knew who these clients were or the volume of business they were conducting.

255.          Mr Killian was not prepared to recognise the lack of communication as a failure[185], but Mr Gueler was: “... [Mr Killian] and I did not communicate with each other, okay. That was a fault okay, maybe... That is what really the problem is, you know it, everybody knows it, that is where the fault lies[186]. Mr Baker too was willing to accept that  “... if I had seen both sides of that puzzle, it would have helped me to be able to pick up what was going on[187].

The development of Leeson’s trading in 1994

256.          With effect from 1 January 1994, BSJ’s proprietary trading (which included Leeson’s switching) was brought within FPG under Mr Baker with Ms Walz, as head of Equity Financial Products, reporting to him. Mr Gueler became the Head of Equity Derivatives and, from January 1995, Regional Manager of FPG in Japan. Mr Norris explained that Mr Gueler (despite his denials) continued to be Leeson’s most immediate source of authority[188]. I find that the appointment of Mr Baker and Ms Walz did not alter Mr Gueler’s responsibilities but simply meant that, for the first time, he had clear senior management.

257.          During 1994, Leeson was to become fully integrated into Mr Gueler’s section of FPG. Leeson’s apparent success was such that he was invited to the FPG off-site meetings in December 1993 and January 1994. Leeson was regarded as a “miracle worker”. He was referred to as the “Michael Jordan of the floor” after the American basketball star[189]. Leeson’s “legend” in BSL continued to grow; stories as to how much money he was making became bigger and his reputation grew. He felt confident enough to adopt “superman” as his e-mail address[190].

258.          By the beginning of 1994, Mr Killian’s impression was that Leeson had become bored of agency execution and that he was doing only a limited amount of client business[191]. This is consistent with Mr Killian’s comment, in a letter quoted above in the context of Leeson’s bonus, that “95% of Nick[‘s] trading day is spent servicing the house traders[192].

259.          BSJ (and thus the BSL group) was a major beneficiary of Leeson’s trading. Leeson’s reported profits (generated at the expense of adjustments and loss making cross-trades with account 88888) were in large part attributed to BSJ. The reported revenue generated by Leeson in 1994 exceeded Ł36m. Of this, more than Ł12m was attributed to Nikkei 225 switching and was included in BSJ’s accounts. From late 1994, some of Leeson’s profits from JGB switching were also booked to BSJ.

260.          The members of the FPG (which included the proprietary traders at BSJ) also benefited personally from the apparent success of Leeson’s trading. The switching revenues generated by Leeson contributed to the pool from which their bonuses were paid. For example, for 1993, Mr Gueler’s bonus was Ł275,000, which was 4 times greater than the bonus he received for 1992. After the amazingly successful FPG results for 1994 (to which Leeson had personally contributed almost 60%), Mr Gueler’s bonus would have been Ł390,000 but for the collapse. Mr Baker would have received a bonus of Ł880,000 on top of his salary of Ł100,000. Mr Gueler was also invited by Mr Norris to become a director of BIB in recognition of “the significance of his managerial role and responsibilities”, in part in relation to the role he had in Leeson’s switching business[193].

261.          As the senior proprietary trader and head of the FPG in Japan, Mr Gueler retained managerial responsibility for all of the Japanese trading books including the volatility book of which, until September 1994, Leeson’s Nikkei switching formed part. Leeson continued to report his daily trades and positions to BSJ and Mr Baker and Ms Walz both relied upon Mr Gueler to keep them informed of the switching business between SIMEX and Osaka Stock Exchange. As Ms Walz told the Singapore inspectors, “a direct reporting relationship for trading risk” existed between Leeson and Mr Gueler and she relied upon Mr Gueler to monitor Leeson[194].

262.          Unlike the traders at BSJ, Ms Walz and Mr Baker had no experience of exchange traded derivatives of the sort that BSJ and Leeson were engaged in. As Mr Baker has said, it was “clear to me after one day [observing Leeson at SIMEX] that I was never going to understand, if I stayed there for a month, exactly what took place[195]. As Ms Walz said “[Mr Gueler] clearly had experience in the markets in Japan that I didn’t have...[196]. Hence, they were heavily dependent upon Mr Gueler to understand and monitor Leeson’s business. Mr Gueler accepted that senior management was dependent upon his specialist derivatives experience[197].

263.          According to D&T’s Income Tables[198], Leeson’s apparent revenues from Nikkei 225 switching for 1994 amounted to Ł12.546 million (firm figures are available only from 23 September 1994, when Leeson was given his own book. D&T’s estimate is if anything conservative, given that the Internal Audit Report quotes a figure for the first seven months of 1994 of Ł11 million (US$17 million)). Revenue from JGB and Euroyen switching (which began in April and May 1994) amounted to a further Ł23.931 million, giving an overall total for the switching business in 1994 of Ł36.478 million. This is to be compared with the total revenue for the whole of FPG in 1994 of Ł62 million, of the entire Bank Group of Ł84.4 million, and the whole of BIB of Ł406.6 million. Thus Leeson’s reported switching revenues amounted to 59% of FPG’s revenue, 43% of the entire Bank Group’s and 9% of BIB’s during 1994.

264.          As to profits, SPG reported profits for 1994 which exceeded the entire Bank Group’s operating profits for the year and amounted to some 17.8 per cent of the Baring Group operating profits for the year. The apparent contribution of Leeson’s switching business to overall Group profits for 1994 was at least 12.5 per cent of the Baring Group operating profits[199].

265.          Leeson’s reported income from his different activities was consistently high throughout 1994 and showed some striking peaks[200]:

·        Leeson’s results from Nikkei switching in January and February 1994 continued the trend recorded at the end of 1993, with income estimated at Ł3.1m in January and Ł1.9m in February;

·        When Leeson started switching JGBs in April 1994, he reported income of Ł1.87m in his first week, at an average of 6.5 SIMEX ticks profit per contract. His income for the month of April was over Ł3.4m;

·        In the months May to September 1994, Leeson’s monthly switching income was Ł1.8m, Ł2.3m, Ł3.75m, Ł3.7m and Ł2.7m respectively, with regular Ł1m plus weeks.  For example:

Month (Week)

Income (Łm)

April (2)


July (2)


July (4)


August (1)


August (4)


·                    In the week commencing 17 October 1994, Leeson’s reported income from JGBs was Ł3.6m, at an average profit of 4.9 ticks per contract. In the same week his Nikkei trading produced profits of between 3 and 4 ticks per contract[201]. Overall income for the month was Ł5.7m;

·                    In November and December 1994, Leeson’s monthly switching income was Ł4.6m and Ł2.8m respectively.

The imposition of risk limits and the start of JGB and Euroyen switching

266.          Mr Norris’ evidence[202] was that until early 1994 he had seen Leeson as one of a team, performing a valuable role in enhancing, by his skill at executions, profits on trading run from Japan. However it became clear in early 1994 that Leeson was initiating trades and managing risk himself (including an element of intra-day directional trading). Therefore Mr Norris obtained agreement that Leeson should be subject to his own risk limits and that his revenue should be split out from Mr Brindle’s volatility book.

267.          Implementation of this agreement was delayed by opposition from Mr Baker and Miss Walz, who, according to Mr Norris, feared that the latter change would impact on their group’s profits. According to Ms Walz at the time, the reason was fear that an audit of the book could “send the wrong signals” to the BSJ traders and demotivate Mr Brindle[203]. Whichever is correct, Leeson’s profits from Nikkei switching remained subsumed within BSJ’s volatility book until September 1994. However Mr Brindle did begin to add brief manuscript remarks to his daily report to London and Tokyo signifying the level of Leeson’s contribution to the book’s income.

268.          Mr Norris said that, while this debate was continuing, Leeson’s proprietary switching business was seen as falling within existing risk limits. Mr Brindle managed risk on the Nikkei switching within the limit on his volatility book. BB&Co managed risk on the JGB switching, when that started in April 1994, within its overall limit for JGB-linked trading (as was stated in the Risk Committee minute recording the start of JGB switching[204]). However it was clearly appropriate that the trader managing the risk should be subject to his own, appropriately-set limits: Mr Brindle’s limits, based on maximum loss, were difficult to apply to an arbitrage business, for which a limit based on a maximum number of open contracts was appropriate. Hence the imposition in June 1994 of formal risk limits on Leeson’s switching business[205].

269.          In the first week of January 1994, the BSL risk committee was told that Mr Gueler and Ms Walz were to make a presentation of proposed trading limits to the committee and that the “Osaka business may be expanded to include JGB arbitrage[206]. On 4 February Mr Baker asked Mr Gueler and Ms Walz to report to him on how the SIMEX switching business could be expanded to include JGBs and Euroyen and the intra-day and overnight trading limits that were required. They replied by a fax of 27 February 1994[207], in which they described Leeson’s business as “intra-day trading... that exploits and relieves price and liquidity anomalies that occur between the Osaka and Simex exchanges.” They attributed BFS’ success to “our pole position in the information flow: we see huge client orders (ours and theirs), we know well the locals and their trading habits, and have an intelligent line into Osaka. We know all the bids and offers. It is difficult to be specific about how we put money at risk when there are so many safety nets at our fingertips”. Mr Gueler was recorded as suggesting a “Max Loss limit applying to Singapore’s activities as a discipline”. No specific limits were recommended although the report did identify the need to “define the terms” on which the switching business was to progress.

270.          On 16 March 1994 Ms Walz and Mr Baker sent a memorandum to the BSL risk committee proposing an intra-day limit of 150 futures for the volatility book and stating that “Mr Gueler will manage the intra day risks up to a total maximum delta of 175 futures across all the books. He may, after consent from [Ms Walz or Mr Baker], go to a maximum of 300 futures across all the books[208]. The limits authorised by the risk committee were sent to BSJ on or shortly after 16 March 1994 and Mr Gueler faxed a copy on to Leeson on 28 March 1994. In evidence, Mr Gueler could not explain why he did so[209]. The likely explanation is that he did so as Leeson’s product manager.

271.          On 6 April 1994, Mr Baker reported to the BSL risk committee that “Fernando Gueler’s team has started arbitraging JGB contracts between Simex and Tokyo...”[210]. The relevant member of Mr Gueler’s team was Leeson, who was given a trading book for this purpose. It seems that this new activity was reported to the risk committee as a fait accompli which Mr Baker and Mr Gueler had allowed to start without any prior authority and without any specific limits in place.

272.          On 20 May 1994, Leeson commenced switching in Euroyen and was given a further book for this purpose. This new activity does not appear to have been minuted (let alone sanctioned) by the Risk Committee.

273.          As noted above, Leeson’s commencement of JGB switching in April 1994 was marked by a second startling explosion in the magnitude of his reported profits, with revenues in his first week of over Ł1.8m from JGB switching alone.

274.          Mr Gueler admitted that Leeson’s JGB profits were “really fantastic from the word go”. He described Leeson’s reported profits in April 1994 as “very amazing, something very spectacular” and agreed that they “beggar[ed] belief[211]. Mr Gueler accepted that Leeson’s JGB revenues were reported to him on a daily basis[212].

275.          On 16 June 1994, the BSL Risk Committee approved risk limits for the switching business proposed by Ms Walz and Mr Gueler. They were “intra-day” limits only, meaning that positions had to be “flat” overnight: in other words, Leeson was not authorised to carry an open position overnight.  The risk limits applied to open (exposed) positions as they occurred from time to time during the day on the two exchanges; no gross limits were imposed[213]. Thus, for example, Leeson was not authorised to hold an open position at any time during the day in excess of 200 Nikkei 225 futures contracts (expressed in Osaka terms), or 400 Nikkei 225s (expressed in SIMEX terms). He was not authorised to trade in options (other than for third party customers)[214]

276.          Despite his failure to detect unauthorised trading by the Hong Kong traders in 1993, Barings continued to rely upon Mr Gueler to monitor and control Leeson’s proprietary trading. Ash Lewis made a note of a discussion she had with Ms Walz in June 1994 which records “...[Ms Walz] does not really understand what it is that [Leeson] does. However, the daily contact for [Leeson] is [Mr Gueler] in Tokyo. He probably does understand what [Leeson] is doing. The problem here is [Ms Walz’s] assessment of [Mr Gueler’s] ability to control and manage[215].

277.          Mr Gueler admitted that Ms Walz’s and Mr Baker’s concerns as to his management skills were justified[216]. Nevertheless, the minutes of the BSL Risk Committee meeting of 16 June 1994 recorded that “It was agreed Fernando Gueler would be responsible for controlling the use of these limits...[217]. Ms Walz’s fax to the individual traders on 23 June 1994 stated “All risk continues to report into Fernando in Tokyo, who in turn reports to me in London[218].

278.          Mr Gueler regarded the absence of a risk controller in Singapore as a serious weakness in the system but said that Mr Baker’s attitude was that the business should be developed whether or not the controls were in place[219]. According to Mr Gueler, Mr Norris told him that any further pressure on the attempt to improve controls could cause the system to “fall apart[220]. Consequently, as Mr Gueler admitted, there was no one else better placed than him to assume this responsibility and he “dutifully” did so[221].

279.          Mr Baker told the Singapore inspectors: “Nick would talk every day to Fernando. People seem to forget Fernando’s role in this. He had been there for two or three years and his role was to talk to Nick every day about his intra-day risk. That was his managerial responsibility. He was in the same time zone as Nick, he was on the other end of the market phone and Nick in the pit, and Fernando’s job was to monitor the intra-day risk[222].

280.          Not only was Mr Gueler explicitly responsible for controlling Leeson’s use of his intra-day limits but BSJ also checked that Leeson’s overnight positions were flat, calculated his daily profit and loss and reported on these matters to London. According to Mr Norris the risk control function in Japan (Mr Clarke and Mr Sue) had a responsibility “to monitor end of day positions on the books managed by Mr Gueler and his team [which included the SIMEX activity], to verify prices and other aspects relevant to marking the positions to market, and to follow up on anomalies[223]. The fact that Leeson’s position was apparently flat at the end of the day was not the end of the matter.  As Mr Norris explained “... an exceptional result, either way, in relation to the size of the book or the nature of the commodity being transacted, would be something I would have expected people to follow up on[224].

281.          The responsibilities on the part of BSJ for Leeson’s business were described in the internal audit report of the Tokyo FPG[225], which was distributed to Mr Gueler and other members of senior management in November 1994. Mr Norris said that this report gave a good description of how he understood matters were organised[226]. The report said [emphasis supplied]:

The Equity Derivatives Group in the Tokyo office, managed by Fernando Mr Gueler, is part of the Structured Products Group, headed by Mary Ms Walz... Nick Leeson, who trades futures and options on Simex, also reports to Fernando...

The Tokyo Risk department is responsible for the daily collation and reporting of trading positions for business executed by both Equity Derivatives and Nick Leeson in Singapore. Tokyo Risk department are primarily responsible for monitoring all trades against the risk limits as approved by the Risk Committee, independently verifying revaluation prices which are supplied by the front office, and reporting risk positions and MOF [Ministry of Finance] capital utilised in a summary report for the daily London Risk Committee meeting. The department was headed by Kevin Clarke until 1 November when he transferred to the Equity Derivatives trading team. Kevin has been replaced by his assistant, Vincent Sue...

.... detailed risk monitoring of the Simex business is undertaken by Tokyo Risk department and in addition Fernando is kept informed of all positions and p&l on a daily basis.”

282.          That report was based, at least in part, on conversations between the internal auditors and Mr Gueler. Despite seeing a draft copy of the report in order to make management comments, there was no suggestion from Mr Gueler at the time that it was inaccurate. In evidence all Mr Gueler could say was that the report was wrong[227].

283.          Leeson was given his own trading book for his Nikkei switching as from 23 September 1994. From that date his Nikkei revenue was reported separately from that of Mr Brindle’s volatility book.

Mr Gueler’s concerns about Leeson’s profits

284.          As set out above, Leeson’s reported profitability during 1994 reached very high levels. Mr Gueler admitted that Leeson had “many exceptional results” and that someone within Barings should have investigated them[228] but no one did so.

285.          Other than the risk control role performed by Mr Clarke and Mr Sue from Japan, there was no independent middle office or risk controller dedicated to Leeson’s switching business. Mr Gueler accepted that the absence of any form of local monitoring in Singapore meant that the system was “defective” and that an “important control” over Leeson’s switching business was missing[229].  

286.          By October 1994, market volatility had become heavily depressed and, as Leeson described it in a conversation with Mr Gueler, the market on SIMEX was “very boring[230]. Nonetheless, when Leeson returned from holiday in the middle of October, he reported a record profit of over Ł4m for the week.

287.          For several months before October, Mr Gueler had become increasingly concerned about the size of Leeson’s profits. He told me that he had “many concerns” about Leeson’s business and, as the profits grew, these concerns intensified[231]. By October 1994, Mr Gueler was so uncomfortable with Leeson’s levels of profitability that he believed Leeson must have been abusing customer orders to generate such profits[232].

288.          Mr Gueler explained that Leeson’s position and combination of customer and proprietary business gave rise to a compliance-related concern. He said this had been “growing through [him] for several months” because it seemed to him that everyone else was “turning a blind eye to the fact that [Leeson] is taking a large spread from the client” and Barings might get sued as a result[233].

289.          Through the summer of 1994 Mr Gueler had been concerned at the fact that Leeson was making 2 ticks on every Nikkei trade. By October Leeson was taking 3-4 ticks from his Nikkei trades which Mr Gueler said “seemed too big[234]. Mr Gueler said that he had not appreciated that Leeson was taking 7 ticks per JGB trade by October 1994 but agreed that, if he had noticed this as he should have done, he would have been even more concerned[235]. Leeson’s October results were so exceptional that Mr Gueler telephoned Ms Walz and, in his own words, told her that he was “concerned about how [Leeson] is making this money” and that he could not “easily sleep at night” through worry about how the money was being made. He said that he believed Leeson’s trading should be carefully looked at “before it all ends up in tears[236]. Such was the level of Mr Gueler’s concern that, as he communicated to Mr Baker and Ms Walz, he “wanted nothing more to do with [Leeson][237].

290.          Although Mr Gueler said that his concerns were “very serious”, he produced no analysis to support them, did not instigate an investigation and did not mention them to either Mr Killian or Mr Norris[238]. In retrospect, Mr Gueler now says that he wished he had communicated his concerns to Mr Norris and he accepted that he should have produced some “concrete” evidence to make Mr Baker and Ms Walz take his concerns seriously[239]. In the event, Mr Baker and Ms Walz just brushed Mr Gueler’s concerns aside.

291.          Despite being put on notice that the senior derivatives trader in the group had serious concerns over the propriety of Leeson’s activities, neither Mr Baker nor Ms Walz did anything to investigate or analyse Leeson’s trading. Nor did Mr Baker take any steps to ensure that Leeson’s role was properly segregated, even though he admitted to the Singapore inspectors that he knew Leeson’s position was “fundamentally wrong in principle[240]

January and February 1995

292.          During January 1995 Leeson reported revenues amounting to Ł11.278 million, which represented 68 per cent of the Bank Group’s total revenue for that month of Ł16.5 million[241]. Again, there were some amazing apparent results, including Ł4.9m from two days’ trading on 24 and 25 January. His total reported income for the seven weeks in which he traded in 1995 was over Ł17m.


293.          I have described at paragraph 200 above Leeson’s opening of the 88888 account on 3 July 1992. Leeson used the 88888 account[242]:

i)                    to book unauthorised trades, which he carried out as a speculation and/or (in the case of his sales of options) in order to help conceal his losses,

ii)                   to conceal the fact that he had not matched all positions at the end of each trading day, by transferring unmatched positions into the 88888 account. Such transfers were frequently carried out at a price which benefited the account to which the position had originally been booked, at the cost of the 88888 account, and

iii)                 to adjust the prices of legitimate trades, conducted on behalf of BFS’ customers, so as to make those trades appear more profitable than they in fact were, at the cost of the 88888 account.

294.          By (ii) and (iii) above, Leeson caused his trading results to appear far better than they in fact were, by creating losses in the 88888 account. Since there is no evidence that Leeson himself benefited directly from his unauthorised trading, his motive for conducting it appears to have been largely the desire to appear a successful trader, with the rewards in prestige and bonuses that that position would bring.


295.          Leeson traded options legitimately on behalf of BSL and BSJ (including on Mr Brindle’s volatility book) and their customers. He was not authorised to trade options otherwise. However from October 1992 he was a consistent seller of options on the Nikkei 225 futures contract, booking them to the 88888 account.

296.          This may in part have been speculative trading which Leeson hoped would be profitable. Certainly in 1994 and 1995 his strategy was to sell straddles, by which he effectively gambled upon the markets moving less than was generally expected – which was why the Kobe earthquake (which caused a sharp fall in Nikkei futures and a rise in JGBs) caused him substantial losses.

297.          However it seems clear that in large part the reason for Leeson’s sale of options was to conceal his losses on the 88888 account. Leeson could not use the sale of options to fund his other trading: as explained at paragraph 102above, the seller of an option in fact had to pay out more in margin than he received in premium (at least until the market moved in favour of the option and the margin requirement dropped). But in the short term the premiums did allow him to clear the debit balance on the 88888 account at month-ends and other reporting dates. The method for achieving this is described at paragraph 122 above. 


298.          The cumulative losses resulting from trading booked to the 88888 account were:

i)                    at 30 September 1992, S$9.2 million (Ł3.6 million),

ii)                   at 31 December 1993, S$39.03 million (Ł16.18 million),

iii)                 at 31 December 1994, S$376.78 million (Ł163.98 million), and

iv)                 at 27 February 1995 (the date of the collapse), S$1,821 million (Ł791 million)[243].


299.          I consider below, first, the means which Leeson adopted to conceal his unauthorised trading and, secondly, the reasons why he was able to succeed in doing so.

Corruption of the BFS back office

The Trade Feed and London Gross Report

300.          Using his knowledge of the BSL back office, on 8 July 1992 Leeson persuaded Dr Wong, the responsible director of the company which provided the CONTAC system, to adjust the CONTAC computer system so as to omit information recorded on the 88888 account from the trade feed and the London Gross Report to BSL[244]. Possibly as a result of an oversight, it was not omitted from the margin feed but, because BSL’s First Futures system did not have an account under that number, the system ignored the information as to the 88888 account, which reached it by way of that feed.

The BFS back office

301.          The CONTAC system permitted changes to be made to the trading data received by it from SIMEX, without keeping any record of the changes. Accordingly Leeson was able on a regular basis to instruct his staff to make entries in CONTAC which facilitated and concealed the unauthorised transactions involving the 88888 account described above at paragraphs 293 and 294. The relevant entries for which the staff were responsible were as follows:

i)                    As part of the process of concealment of his unauthorised activities, Leeson would instruct staff in the back office to enter additional trades into the CONTAC system which were not recorded in the listing from SIMEX or in the trade blotters faxed from the front office. This involved the creation in BFS’ books of records of cross-trades between the 88888 account and other Barings accounts which had never occurred on SIMEX. Miss Sng accepted that she had made such entries on the instruction of Leeson. Her evidence was that she simply keyed in the entries without understanding them or realising that they were fictitious. The booking of fictitious trades to the 88888 account seems to have begun in July 1992 and continued and increased in parallel with Leeson’s unauthorised trading. 

ii)                   As described below, from some time in 1993 Leeson instructed Miss Hassan, Miss Kader and the other settlement staff to perform journal entries which brought the equity balance on the 88888 account to nil at the end of each month.

iii)                 The back-office staff were involved in the process of checking the record of trades executed by BFS on SIMEX contained in the trade blotters against SIMEX’s record in its computerised listing. This reconciliation was intended to check that BFS’ record corresponded with SIMEX’s. During this process, Leeson frequently caused adjustments to be made to the prices and quantities of trades, either by annotating the trade blotters or by giving instructions direct to the back-office staff. The effect of these adjustments was to corrupt BFS’ records, and consequently the information sent to other Barings parties, so as to produce a false picture of exceptionally profitable trading. Although these adjustments started to be made in very significant numbers from August 1993, occasional adjustments were made earlier in 1993.

iv)                 Miss Hassan was also involved in a procedure whereby Leeson instructed the back-office staff to book fictitious trades to the 88888 account at the end of each day. These were entered into the CONTAC system and had the effect of reducing the total long positions reported to SIMEX. Doing this reduced the margin called from BFS by SIMEX. In her witness statement, Miss Hassan suggested that she began booking these fictitious trades in account 88888 in 1994, but CONTAC records indicate that the practice dates back to the start of Leeson’s unauthorised trading on the 88888 account.

v)                  At least from 1993 onwards, Miss Hassan and the other back-office staff were instructed by Leeson not to file the daily activity statements for the 88888 account with those for other accounts, but to give them to Leeson himself, who destroyed them. In 1992 the position is slightly less clear, in that in the course of that audit Miss Koo traced the receipt of the Ą670m through to an 88888 account daily activity statement (see paragraph 596 below). Therefore it may be that Leeson only began destroying the daily activity statements after that audit. The monthly activity statements were only printed out on Leeson’s request and were given to him.

Concealment of the balance on the 88888 account at month- and year-ends

302.          As I have explained above (see paragraph 112), BFS’ financial and statutory accounting records were maintained on the separate SUN system. At the end of each month, BFS staff manually transferred the relevant trading balances from CONTAC to SUN.

303.          If the debit balance on the 88888 account had appeared on the SUN accounts, it would have been evident that Leeson was using the account for unauthorised trading. Therefore he had to reduce the balance to zero at month-ends. At financial year-ends the need was even greater, due to the presence of the external auditors.

304.          Leeson used a number of techniques to achieve this. The main ones are described below.

September 1992 audit

305.          At 30 September 1992 the deficit on account 88888 stood at Ą664 million (S$9.2 million). Leeson eliminated this from the month- and year-end balances by arranging for BSL to send to him Ą670m, which was received into BFS’ bank account on 1 October. BSL entered the payment in its books on that date, but Leeson caused it to be credited to the 88888 account in BFS’ books as received on 30 September. The result was that the deficit in the 88888 account was cancelled out, leaving a small credit balance of Ą5.6m for which Leeson forged a confirmation from BSL. This transaction was the subject of one of the allegations of negligence against D&T and will be examined in much more detail below.

December 1992

306.          Leeson used an exactly similar technique to eliminate the balance on the 88888 account at 31 December 1992, though the losses at that date were lower than they had been in September. Leeson arranged for BSL to remit Ą395 million to BFS for value 4 January 1993, which was credited to the 88888 account on 31 December[245].

False accounting entries

307.          In most months from February 1993 onwards, Leeson caused false accounting entries to be made in BFS’ books to cancel out any balance on the 88888 account. This was vividly described by Miss Hassan in her evidence[246]. Initially Leeson put through the entries himself, but from 1994 he gave Miss Hassan a standing instruction to make an internal journal entry after doing the closing for the last day of the month (and therefore after calculating the balance on the 88888 account). The entry credited to the 88888 account an amount equal to the balance on that account (thereby reducing the balance to zero) and debited the same amount to the “bank funds receivable” account in CONTAC. Leeson directed the BFS staff to print out the report of end-of-month balances from CONTAC for entry into the SUN system after these fictitious entries had been made, and then to reverse them the following day.

308.          The “funds to be reverse” entry which I describe below in connection with the 1994 audit reflected such a false accounting entry, which reduced the balance on the 88888 account to zero at the October 1994 month-end.

Option premiums

309.          Leeson used the sale of options to conceal losses at some month- and year-ends, including December 1993. As explained at paragraph 116above, the option premium received on the sale of an option was treated by CONTAC as an asset and could be credited to the 88888 account so as to reduce or cancel out the accumulated losses on that account. Only if the option was exercised by the buyer did it result in a debit to the equity balance.

310.          Premiums from the sale of options were credited to the 88888 account to eliminate deficits at the end of April, May, August and December 1993 (and therefore at the time of the 1993 audit), and March and June 1994.


311.          As at 31 December 1994 the deficit on the 88888 account, even after crediting option premiums to it, was over Ą7.778 billion (Ł49.9 million). Leeson concealed this by causing a false option trade to be booked to the 88888 account, crediting to it a premium of Ą7.778 billion. The small debit left on the account was cancelled as an “out trade resolution”.

312.          Leeson sought to deal with the distorting effect this fictitious trade had on BFS’ settlement variation balance with SIMEX by instructing Linda Hassan to ignore the false trade when preparing the reconciliation of that balance at 30 December 1994. However this meant that the settlement variation balance shown on the Broker Reconciliation sheet was different from that in BFS’ books. It was this discrepancy which was noticed by C&LS in conducting their year-end audit and which Leeson tried to explain by his story of the “SLK receivable”, described at paragraph 462 below.

The reasons why Leeson was able to practise his fraud

313.          As General Manager of BFS, Leeson was at all material times in day to day practical control both of BFS’ trading activities - its “front office” - and of its administrative activities - its “back office”. He was BFS’ head trader and he was also in charge of the paperwork, including the recording and settling of trades. This allowed him to alter the records of his own trading and to create records of fictitious trades. In particular, it enabled him to arrange for there to be a nil balance on the 88888 account in CONTAC at month- and year-ends, when data was transferred to the SUN system for inclusion in management and statutory accounts.

314.          As well as Leeson combining responsibilities which ideally should have been segregated, he was, as will be discussed below, effectively unsupervised. The executive directors of BFS, Mr Bax and Mr Jones, did not supervise either his trading or settlement activities. At most, Mr Jones provided financial and administrative back-up. Mr Killian and Mr Gueler, whom Mr Jones believed to be supervising Leeson’s trading activities, were not doing so. Responsibility over control of margins and settlements, which both Mr Jones and the auditors believed to be exercised by BSL’s settlements department in London, was denied by Mr Bowser and wholly negated by the Dollar Funding which I describe shortly.

315.          The final ingredient was BFS’ inexperienced staff who did what Leeson told them to without question and, apparently, in all innocence. The evidence of all the BFS staff called as witnesses in these proceedings (the only experienced trader employed by BFS, Eric Chang, was not called as a witness) was to the same effect: they were new to futures trading, they believed that, if Leeson told them to record the entries as he did, it must be all right, and they never suspected that anything improper was occurring. I discuss the actions of the BFS staff at paragraphs 301 above and 996 to 1003 below.

316.          The combination of these three factors allowed Leeson to conceal his unauthorised trading for nearly three years.


317.          As explained at paragraph 93 and following above, BFS had to deposit margin with SIMEX in respect of all its trading on the exchange, authorised and unauthorised, so that all trading losses had to be paid as they arose.

318.          From the start of BFS’ operations, BFS had available six sources of funding[247]:

i)                    working capital provided by BSL and intermediate holding companies. This comprised S$2 million in share capital and subordinated loans made over the period 1991 to January 1994, totalling S$40,250,000 (c. US$26 million);

ii)                   BFS’ commission and interest income, which during the 15 months from October 1992 to December 1993 came to S$20 million (some of which was paid in dividends to BSL);

iii)                 letters of credit issued by Citibank, guaranteed by BSL. BFS obtained letters of credit specifically used to meet SIMEX’s requirements as to BFS’ adjusted net capital and for a security deposit. In addition to these, BFS used further letters of credit to meet its margin requirements. Their value was increased from US$4.77 million in June 1992 to US$47 million as of 31 December 1994. SIMEX treated the letters of credit (and also the treasury bills described below) as available to meet any margin owed by BFS: they were not allocated to particular accounts;

iv)                 treasury bills. From February 1993, BFS deposited with SIMEX treasury bills provided by BSL to meet margin requirements. Their value was increased from US$10.8 million in February 1993 to US$19.45 million by 31 December 1994. Such bills were shown on the statement of the customer which had deposited them and reduced the margin called from it. But if they were not needed for that customer’s trading, they were not withdrawn from SIMEX and were then applied against BFS’ other margin requirements;

v)                  profits on his unauthorised trading. Leeson’s futures trading was predominantly loss-making, but his options trading was for some periods profitable. According to the Singapore Inspectors’ report[248], his cumulative profit on options trading was Ą478 million as of December 1993 (though by January 1994 it had fallen to a loss of over Ą1 billion) and Ą17.8 billion as of December 1994. Even where option sales made losses eventually, in the short term they were almost self-financing, as Leeson could use the premium received to pay most of the margin due (see paragraphs 102 to 105 and 118 to 121 above)[249]; and

vi)                 most importantly, as explained at paragraphs 93 to 106 above, BFS margined all its customers (including other Barings companies) at the initial margin level. For futures, this was 25% higher than the maintenance level at which BFS had to deposit margins with SIMEX (for options the difference depended upon a SPAN calculation). The difference between the two was available to fund Leeson’s unauthorised trading. This difference grew as the volume of BFS authorised trading increased: as of 30 September 1992, it was US$16.76 million; as of 31 December 1993, it was US$24 million; and as of 31 December 1994, it was US$90.33 million[250].

319.          Of these, Leeson was able to use (ii), (iii), (v) and (vi), at least, to fund his unauthorised trading. Accordingly, as of December 1994 Leeson had available approximately US$150m to fund his unauthorised trading (the sum of (ii), (iii) and (vi) above), even if one ignores the possible use of treasury bills, any profits on options trading and the Dollar Funding described below.

320.          Until early September 1993, the difference between initial and maintenance margins on authorised trading was sufficient to fund the losses on Leeson’s unauthorised trading (save for a point in April 1993, when Leeson had to draw on the other sources indicated). However from September 1993, Leeson’s losses always exceeded this difference[251].

321.          For a few months Leeson was able to carry on by using the other sources of funds described above, supplemented by use of BFS’ overdraft with Citibank. This had been subject to a limit of S$1.65 million when established, but by February 1994 the limit had been increased to US$50 million. However that was a daylight facility, available only against pre-advices of incoming funds during the day. Leeson’s use of the overdraft to fund continuing negative balances on the 88888 account in late 1993 and early 1994 was a breach of its terms and led to a letter of complaint from the Citibank manager to Mr Jones on 18 February 1994[252].

322.          Accordingly in early 1994 Leeson had to find a further source of funds for the ever-growing losses on the 88888 account. His solution was to request from BSL, and later also from BSLL, the Dollar Funding which I discuss in detail below. Leeson continued to use the excess of margins and other sources of funds identified above, but requested Dollar Funding to meet the difference between those funds and the amount required for margin on BFS’ positions, including the 88888 account[253]. At the time of the collapse the Dollar Funding amounted to US$639 million (Ł403 million)[254].

323.          One final source of funding which I should mention for completeness, but which became important only after December 1994, came from balances held on behalf of BSJ. These consisted of margin on trades conducted by BFS on behalf of BSJ and profit on those trades which BFS did not repay to BSJ. In relation to the switching business, there was an equal and opposite loss-making trade on a Japanese exchange for every profitable trade on SIMEX. When BFS failed to pay over the profits on the SIMEX trades, which occurred especially in January and February 1995, BSJ ended up borrowing heavily from its banks in order to fund its own loss-making positions[255]. At the date of the collapse the unrepaid surplus owed by BFS to BSJ amounted to Ą20 billion (Ł133 million)[256].

324.          By comparison with these figures, the total amounts held by BFS on behalf of Barings companies, legitimately and illegitimately (i.e. margins on positions, Dollar Funding and withheld profits), at the time of the collapse were:

i)                    BSL: S$770 million (US$530 million/Ł334 million)

ii)                   BSLL: S$270 million (US$186 million/Ł117 million), and

iii)                 BSJ: S$ 690 million (US$475 million/Ł299 million)[257].


Margining in US dollars

325.          As discussed above, by early 1994 Leeson’s losses on the 88888 account meant that he needed a new source of funding. He obtained it by taking advantage of a recent innovation in BSL’s margining systems.

326.          Until late 1993 all customers had had to put up margin in yen for trades in yen-denominated instruments on SIMEX and the Japanese exchanges. In 1993 SIMEX began accepting margin in US dollars and some customers pressed BSL to allow them to put up margin in dollars. Accordingly in November 1993 BSL began to accept margin in dollars from customers for SIMEX trading and to forward that margin in dollars to BFS[258].

327.          To accommodate this process, BSL opened on 5 January 1994 a separate ledger account for SIMEX US dollar collateral, named BSINGCOLL (Barings Singapore Collateral). The opening balance on the account was US$160,843, which was the net amount of dollars held as of that date as a result of the US dollar margin transactions up to then.

328.          Until 1 March 1994, all except one of the US dollar payments made by BSL to BFS and entered on the BSINGCOLL account seem to have been initiated by BSL and to have related to customers who wished to put up margin in US dollars. However when requesting yen margin through the funding spreadsheet, BFS did not give credit for US dollars paid by BSL[259]. Thus Leeson obtained the margin twice over, at the cost (since BSL did give its customers credit for the dollars) of BSL. Leeson was able to use the excess to fund his unauthorised trading[260]. As of 28 February 1994, the net amount involved was at least US$25 million[261].

329.          BFS’ failure to give credit for the collateral went unnoticed by BSL until 23 June 1994, when, as described below, Mr Railton raised the point with Leeson but then appears to have let it lapse.

The Dollar Funding requests

330.          In early 1994, Leeson began to request from BSL additional funding, in US dollars, which was not linked to individual customers (“the Dollar Funding”)[262]. When the trial started, the date of the first such request was agreed to be 12 January 1994. However the issue was the subject of further analysis as the trial proceeded. That suggested that until 9 February all payments of US dollars from BSL to BFS were attributable to BSL passing on to BFS collateral received in US dollars from BSL’s customers.

331.          The first US dollar payment which was not of that type, that is, was paid from BSL funds, was a payment of US$32 million on 9 February. That seems to have been linked to a fax of the same date from Mr Jones to Mr Hawes, asking for an immediate credit line of US$50 million. This was required to cover late payments due to “teething problems with the settlement system, plus increased margin calls re Chinese New Year holidays imposed by SIMEX[263].

332.          Before me, Mr Hawes did not recall having done anything in response to this fax other than to discuss the daylight overdraft facility with Citibank and to reply to Mr Jones that there was a US$70m facility in place. However this payment was not put to Mr Hawes, and it seems unlikely that Mr Leeson would have made a separate and unrelated request for US$32 million on the same date as Mr Jones’ fax. The existing daylight facility would not have met the difficulty referred to in Mr Jones’ fax if Mr Jones told Mr Hawes that the funds were needed for more than one day. Furthermore, unlike the later Dollar Funding payments requested by Leeson, the US$32 million was deducted from BSL’s normal yen margin due on that day. The balance of probability is therefore that on the 9 February 1994 Leeson persuaded Mr Jones to make a request for US$32 million, in order to make good a shortfall of funds available to Leeson to finance his unauthorised trading. 

333.          The US$32 million was repaid by BFS eight days later as part of a somewhat larger sum.

334.          Mr Jones was involved again, on 1 March 1994, when he and Leeson sent a fax to Mr Hawes[264]. They posited an option transaction for a client between SIMEX and Osaka which would generate an overdraft at Citibank in Singapore of US$50 million for one day, and asked to discuss it as soon as possible. Whether as a result of that or not, on 2 March BSL paid BFS US$50 million, which was repaid the following day.

335.          Accordingly Mr Jones seems to have been involved in persuading Mr Hawes to make the dollar payments on 9 February and 2 March. However BSL also paid BFS US$40 million on 1 March, for which BFS was able to offer no explanation. It was not matched to any client receipt by BSL and it was not offset against the normal yen margin payment. This therefore seems to have been the first “classic” Dollar Funding payment, in the sense of a straightforward request for money by Leeson alone, without Mr Jones’ involvement and not linked to any client.

336.          There is no clear evidence, but it seems likely from the above circumstances that Leeson used Mr Jones to accustom BSL to paying out unreconciled cash, and then Leeson felt able to start making further calls for cash on his own. During the rest of March, Leeson made regular calls for round sums of dollars, on top of the margin in yen requested through the funding spreadsheet, and not-quite-so-regular repayments. The first such request which survives is an e-mail, dated 10 March 1994[265]. It reads in full as follows:

“Brenda, Due to the holiday in Singapore on Monday, SIMEX have asked for additional margin. Kindly send us USD 16,000,000 to our a/c with Citibank for good value 11 March 1994.

Kindly confirm.

Can you check also whether you paid us USD 14,000,000 for value 9 March 1994 since there was no such funds received on that date.

Regards, Linda.”

337.          This pattern became standard and continued on a regular, later daily, basis, until the collapse[266]. The reasons given for individual requests were brief – “margin call” or “Advance margin call – House” – but frequently no reason at all was given. On the other hand, on many days BFS’ e-mail was a notification that BFS would be returning funds to BSL. The later e-mails, at least, were addressed to eight members of staff in the BSL settlements department (including Ms Granger and Mr Railton), and to one member of staff in Group Treasury. They arranged for the monies requested to be transferred to BFS’ account with Citibank in Singapore.

338.          As described below, at first the Dollar Funding was treated as if it were funding customer margins, but in time came to be split between house and customer margins. None of the purported customer element of the Dollar Funding was reconciled by BSL to its own customers, so no attempt was made to recover it from customers. Instead, the customer element was simply booked by BSL in the BSINGCOLL account, as a convenient account[267]. At the end of December 1994, the BSINGCOLL account recorded net payments totalling US$ 201 million[268]. By the date of the collapse, the figure was US$ 486 million[269].

339.          The house element was remitted to BFS through BSLL (although the funds were ultimately provided by BB&Co) and recorded in BSLL’s books in a BSSHSECOLL account. At the end of December 1994, the BSSHSECOLL account stood at US$ 5 million[270]. By the time of the collapse, the figure was US$141 million[271].

The "K2/P4 line"

340.          The Dollar Funding appeared clearly in one accounting record produced by BSL. During the “solo consolidation” of BB&Co and BSL in early 1993 (described at paragraph 44 above), a working group chaired by Mr Hawes prepared a “solo balance sheet”. This covered BSL’s core business which would result from the intended amalgamation. When the solo balance sheet was prepared in early 1993, it identified a difference between the fiduciary assets held by BSL in connection with customer business and BSL’s corresponding liabilities: BSL had more fiduciary assets (cash deposited with exchanges and at the bank) than it had received from customers.

341.          In order to make the fiduciary assets and liabilities balance in BSL’s solo balance sheet, and as a temporary expedient, in April 1993 the working group inserted a liability identified as loan contra into the fiduciary liabilities section of the balance sheet (shown on line K2). A balancing asset described as “customer loans” (shown on line P4 of the balance sheet) was inserted in the banking assets section. Thus, the difference was described as the K2/P4 line[272]

342.          An initial study, described below, concluded that the K2/P4 line resulted from delays in the receipt of margin from customers. Therefore BSL was effectively making loans to customers by “topping up” their margin requirements. Hence the balance was known within BSL as the “top-up” balance. As at 31 December 1993 it was Ł21.7 million.

343.          Mr Hawes in his evidence before me suggested an explanation for the K2/P4 balance in 1993 which had not until that point occurred either to him or to the others who considered the question in 1993 to 1995. This was that the balance sheet reflected margin and cash collateral paid by customers to BSL, but not non-cash collateral such as shares or treasury notes[273]. Customers who had deposited non-cash collateral against some or all of their margin requirements would not be required to put up margin in cash to that extent, and would not be treated by Mrs Granger as debtors when they did not do so. Yet, to the extent that the non-cash collateral was not deposited with an exchange but was retained by BSL, there would be an imbalance between the cash received from customers and that paid to exchanges on customers’ behalf. It is true that in 1993 the non-cash collateral exceeded the K2/P4 line but that simply indicates that not all the collateral deposited by customers with BSL was being actively used as security against which to trade futures and options[274].

344.          It is indeed surprising that this did not occur to those considering the issue at the time or subsequently until Mr Hawes gave his evidence, and was not even mentioned in his witness statement. In any event, the “non-cash collateral” represented securities held by BSL from a number of different clients whose individual debit or credit position may well have varied widely. There was no evidence of any kind why the deposits were made and in particular whether they were actually made as security for margin payments made by BSL on behalf of clients.

345.          Whatever the explanation for the K2/P4 line in 1993, when the Dollar Funding began in March 1994 the element of it purporting to relate to customer margin was directly reflected in the K2/P4 line: as the Dollar Funding did not relate to genuine customer trades, equivalent funds were not received from customers. As the Dollar Funding increased, so did the shortfall shown on the K2/P4 line. On 30 June 1994 it was Ł120 million. As at 24 February 1995 it stood at Ł306 million[275]. Attached at Schedule H to this judgment is a graph showing the growth in the K2/P4 line over the course of 1994[276].

346.          In a sense Mr Hawes’ recent possible explanation of the K2/P4 line in 1993 is irrelevant to assessing his actions in 1994, as he was not then aware of it. But if his explanation is correct, and if BSL had investigated the K2/P4 line further at that time, they need only have compared the total margin required from customers (a total certainly available from First Futures) with the total margin paid by customers plus any debtors. The difference would represent the extent to which customers were trading against the security of non-cash collateral. Comparing that difference with the K2/P4 line would demonstrate that by March 1994 non-cash collateral explained only part, and a decreasing part, of the K2/P4 line. The remainder was the Dollar Funding.

347.          Unfortunately the solo balance sheet for BSL had a restricted circulation (Messrs Hawes and Sacranie and their assistants). Mr Hawes told me that there were other balance sheets produced in a different form for use by management, one for the solo consolidated group and one for BSL alone (and no doubt others). They had a wider circulation. They showed the item as part of “advances (up to 7 days)”. Only in the case of the balance sheet for BSL might that trigger the question why a securities company was lending so much money. Mr Hawes thought Mr Norris and Mr Maclean saw the BSL balance sheet but was not sure. ALCO saw only the consolidated group balance sheet, into which the BB&Co, BSL and Treasury pages were consolidated, and the K2/P4 figures were subsumed in an omnibus figure for loans. One can understand that it would raise few questions if a banking group were making loans[277].

348.          BSL’s credit committee did not review the item at all. According to Mr Hawes, this was because the customers who were allegedly receiving the benefit of the sums being lent had not yet been identified – as of course they never were, which was precisely the problem[278].

Investigation of the Dollar Funding by BSL

349.          The story of BSL’s investigation of the Dollar Funding is complicated by the three strands running through it. The first strand in time is the investigation in April and May 1993 into the K2/P4 line, thrown up by the solo consolidation exercise. The second is the enquiry as to the reasons for the Dollar Funding, which Leeson began requesting on 1 March 1994. The third is a series of attempts beginning in May 1994, to obtain a reasonably accurate division of how much had been, or was being, advanced for the purpose of financing house trading and how much to finance customer trading. The principal reason for these latter enquiries was concern that Barings’ large exposure reporting to the Bank of England did not reveal accurately the exposure of BSL to SIMEX as a result of margin deposited for house trading.

Initial investigation into the K2/P4 line

350.          As I have explained, the solo consolidation working group created the K2/P4 line in the BSL solo balance sheet as a temporary expedient in April 1993, to make the totals for fiduciary assets and liabilities balance. The working group commissioned Miss Henderson, BSL’s financial controller, and Miss Thomas, the compliance officer, to establish the reasons for the difference between those totals.

351.          Miss Henderson and Miss Thomas concluded in May 1993 that the difference was attributable to delays in receiving margin from customers, delays in transferring commission from customer to office account, and other minor factors. The working group asked Miss Henderson to carry out further work on the issue but she was made redundant not long afterwards. Although Mr Hawes believed that Miss Henderson’s successor was continuing the exercise, that proved not to be the case and no further investigation of the reason for the K2/P4 line took place for over a year.

Initial investigation into the Dollar Funding

352.          On 24/25 February 1994, Mr Hawes paid a one-day visit to Singapore and met Mr Jones and Leeson. His evidence in his witness statement, confirmed in cross-examination, was that he did then discuss the need for the Dollar Funding, and was given similar explanations to those which Leeson gave him later in 1994, and which I consider below[279]. Since Mr Hawes gave evidence, the parties have carried out the further analysis of the US dollar payments to BFS in January and February 1994 to which I have referred above. It now seems that the only request for Dollar Funding made prior to Mr Hawes’ visit was Mr Jones’ fax of 9 February. Therefore it seems likely that Mr Hawes during his visit discussed only the factors that had prompted that fax, but not the pattern of Dollar Funding which became established in March.

353.          Whether or not Mr Hawes discussed other reasons for the need for Dollar Funding in February 1994, he does seem to have discussed with Mr Jones and Leeson the time required to send yen from Tokyo to Singapore. Leeson said that this required BFS to put up margin itself against BSJ’s positions until the yen arrived. Mr Hawes formed the view that this was a potential reason for BFS requiring funds from BSL and for the K2/P4 line, though he did not put the latter point expressly to Mr Jones and Leeson[280].

354.          I have described above the start of the Dollar Funding on 1 March 1994 and have quoted the earliest surviving request on 10 March. It appears from Mrs Granger’s evidence to the Singapore inspectors that she discussed with Leeson the reasons for the Dollar Funding and he regularly gave her the explanation that it was needed to fund advance margin called by SIMEX because of a holiday. In any event, the Settlements Department and Treasury seem at first to have accepted whatever reasons Leeson gave without having asked any questions. Their reaction was similar to that of Mr Bowser to Leeson’s requests for Ą670m and Ą395m in September and December 1992, i.e. unquestioning payment.

355.          Mrs Granger was not called to give evidence. She told the Singapore inspectors that she began to discuss the Dollar Funding with Leeson, Mr Hawes and those working for Mr Hawes in the summer of 1994. The only specific conversation with Leeson of which she gave evidence was, she said, between the third and fourth quarters of 1994. In the course of that conversation, Leeson told her that the Dollar Funding was required to fund BSJ’s house trading: she said that she could not remember specifically “if he just said advance margin calls or just Tokyo was unable to move funds quickly enough”[281]. Leeson told her that BFS had no credit lines of its own, so it came to London for funds. He described London as “the cash cow”.

356.          At the time of this conversation or earlier, Mrs Granger was clear that the Dollar Funding was an inter-company loan to BFS. Her evidence to the inspectors was that she knew from the start, and told all those from Credit and Treasury who asked her, that she had no debtors among her agency customers. Therefore loans to them could not account for the K2/P4 balance. She believed that she had explained that to Mr Hawes and that he had approved the loans, as she had told him of Leeson’s explanations of why he needed the money and debated with Mr Hawes which account it should come from. Mrs Granger’s concern was, not that the funding was being called, but that it was being treated as customer funds: although BFS called BSJ a customer, actually it was house and so she felt that the money for their trading should come out of the house account[282].

357.          Mrs Granger told the inspectors that she did not know that BSJ was actually funding its own positions, but that Treasury must have known[283].

358.          Mr Railton’s evidence before me supported Mrs Granger’s account. He said that within the Settlements Department the Dollar Funding was regarded as inter-branch funding, meeting a number of costs of BFS’ doing business. Treasury and those above Mr Railton in Settlements had agreed the Funding should be paid. No one in Settlements checked whether BSJ was actually funding its own positions or SIMEX was making advance margin calls, until Mr Railton went out to Singapore in February 1995[284].

359.          Mr Hawes’ evidence was that he knew that BSJ was meeting its funding obligations[285] (and from October 1994 at least BSL had reports from BSJ of the funds they placed with BFS). Therefore, throughout 1994, he saw the Dollar Funding as 80-90% an agency problem and correctly treated as customer funds. But he suspected that, at the edges, the Dollar Funding was partly providing short-term funding for BSJ positions, due to the delay in transmitting yen from BSJ to BFS, and that that was misreported due to sloppy management and book-keeping by BFS[286]. He agreed in evidence that such factors would not result in the BSJ element amounting to a figure as large as US$50m, though that is the figure for BSJ funding shown in the first funding breakdown supplied by Leeson to BSL, as of 14 June 1994[287].

360.          One of the many extraordinary features of this story is that Mrs Granger and Mr Hawes worked very near to each other, and clearly discussed the existence of the Dollar Funding repeatedly over a period of a year, yet they seem to have held completely different and unreconcileable views as to the reasons for it. Mrs Granger believed it to be an inter-company loan to fund BSJ house business. Mr Hawes knew that not to be the case, other than to a minor extent, and told me that such a loan would have been structured quite differently, as funding direct from Treasury[288]. For his part, Mr Hawes believed the Dollar Funding to be mostly funding agency business. This was so even though Mrs Granger had told him that the Funding could not be in relation to BSL agency clients and BFS’ one significant non-BSL agency client, BNP, could not possibly have accounted for the volumes of Funding seen by mid-1994. Mr Hawes told me that, although “concerned”, he believed that Mrs Granger’s department did know the reasons for the Dollar Funding requests:

“Q.  What reconciliation did you understand the settlements department was doing, at that stage [before June 1994]?

A.  I do not think that is a question I ever asked myself, what reconciliations they were doing. I trusted them to be doing their job and to be – and to know for what purpose the dollars were required.

Q.  So that is what you mean when you say that you did not have any idea about how little they really knew?

A.  Yes.”[289]

361.          Yet surely even the briefest of conversations with Mrs Granger would have established that the settlements department did not know what the Funding was for, beyond an explanation which Mr Hawes knew to be incorrect.

Investigation into the split between house and customer business

362.          For the first ten months Dollar Funding requests were framed as requests to pay margin to BFS’ segregated (i.e. customer) account in Singapore. The funds to meet these requests were transferred out of a BSL segregated (i.e. customer) account in London and paid to BFS. Thus the requests were treated as if they related to agency business.

363.          In April 1994, when reviewing the large exposure report which was about to be submitted to the Bank of England, Mr Hawes realised that it understated the Group’s exposure to SIMEX on house business. This was because BFS placed the margin for such business in its customer account with SIMEX, and described it as customer margin in its “enclosure B” reports to BSL. Such margin was therefore ignored in preparing the Group’s large exposure report. This issue could not be resolved in time for the March 1994 report. Mr Barnett had to explain the problem to the Bank of England in a letter of 29 April 1994, and promise to establish a system which would assess accurately the exposure to SIMEX.

364.          The result was firm instructions from Mr Cooke in BSL’s regulatory department to Leeson on 5 May 1994, instructing him to distinguish clearly in BFS’ enclosure B reports between margins for outside customers and those for Barings companies[290]. Leeson’s response was from then on to split the money and other securities deposited with SIMEX in the customer account between house and customer, on the basis that the deposits of non-cash securities covered the house exposure[291]. This was at best an inaccurate indication of the extent to which the customer account included house exposure[292].

365.          According to Mr Railton’s evidence, Treasury asked Settlements in June 1994 to try to break down the Dollar Funding[293]. Mr Railton had a further concern, which was whether BSL was receiving credit from BFS for genuine customer dollar collateral which, as described above, BSL had paid to BFS. At least some of the dollar funding was attributed by Leeson to initial margin, and so should have been deducted from the yen margin required[294]. Hence on 15 June 1994 Mr Railton e-mailed BFS, asking for a breakdown of the US$ collateral held by BFS and quoting the amount of that collateral which represented US$ paid to BSL as collateral by customers[295].

366.          Possibly as a result of this query, BFS sent on 16 June 1994 its first purported breakdown of the dollar funding. This purported to allocate the total funding provided (including the amount requested) between advance margin, funding of particular customers, etc[296]. Such breakdowns continued to be sent intermittently after that, and from November 1994 they became regular. From November, BSL seem to have attempted to monitor them by comparing each daily funding breakdown with that for the preceding day[297]. However although one or two discrepancies were raised with Leeson, the fact that the funding in each category tended to stay the same from day to day and was for round figures which were unlikely to be accurate passed almost without comment until January 1995[298].

367.           On 20 and 23 June 1994, Mr Railton sent further messages to BFS, directed at the issue of why BSL was not receiving credit for the dollars deposited as collateral. Mr Railton could not recall receiving any satisfactory reply to these, but his enquiry seems to have lapsed at that point.

Investigation by Mr Hawes and the internal audit

368.          Meanwhile Mr Hawes began to make his own efforts to understand the K2/P4 balance and the Dollar Funding. His initial evidence was that in June 1994 he asked Miss O’Donoghue, Head of the Credit Department, to investigate the K2/P4 balance. She traced it to Singapore and the Dollar Funding, and she asked Leeson for the reasons for the funding.[299] Mr Hawes said that she passed these reasons on to him, but they differed little from the reasons Leeson had given to him in February.

369.          Miss O’Donoghue’s evidence to the Singapore inspectors was that Mr Hawes simply asked her to split Leeson’s first funding breakdown between house and customer business. In order to do this, she spoke to Leeson on either 17 or 29 June 1994 and obtained a split. She passed that, but not Leeson’s explanations for the funding, to Mr Hawes. She made no connection with the K2/P4 line, which she had not seen since moving to Credit in September 1993[300]. Miss O’Donoghue’s evidence was put to Mr Hawes in cross-examination and he adhered to his own recollection, but without great conviction[301].

370.          Mr Hawes told the Singapore inspectors that it was only in June 1994, when Miss O’Donoghue made her call to Leeson, that he made the connection between the increasing K2/P4 balance and the Dollar Funding. Before me, as I explain at paragraphs 850 to 852 below, he said that he made the connection in March or April 1994[302]. In the light of Miss O’Donoghue’s evidence, I think that must be correct. Nor does there seem any reason for Mr Hawes, who had full knowledge of both the K2/P4 line and the Dollar Funding payments as they were made, to take four or five months to make the connection. Accordingly I accept D&T’s submission that Mr Hawes knew of that connection in or before April 1994. His later request to Miss O’Donoghue was not a request to establish the reason for the K2/P4 line but was rather a request to split the Dollar Funding breakdown supplied by Leeson between client and house for regulatory purposes.

371.          Mr Hawes’ evidence was that, having received Miss O’Donoghue’s account (and on the assumption that his version of her task was correct), he realised that investigation in Singapore was needed. Treasury had only limited resources and so Mr Broadhurst suggested that Mr Hawes should ask the BSL internal audit team, who were about to audit BFS, to look at the issue. On 22 June 1994 Mr Hawes therefore told Mr James Baker, the auditor, of the high level of long-standing funding and asked him to investigate it[303]. At the time it seemed to him a rational decision to use this means of investigating the issue in a non-confrontational way, given his lack of resources, though he accepted that by the end of June 1994 the K2/P4 balance had increased sharply over the last three months (to Ł120m). 

372.          Mr James Baker’s evidence, which was supported by his contemporaneous meeting note[304], contradicts this account. Mr James Baker said that Mr Hawes raised with him only the difficulties caused by requests for funding received at short notice, which were not reconciled at the time of the call. Mr Hawes did not tell him of the size of the balance[305].

373.          I prefer Mr Baker’s account of this conversation. It is consistent with his contemporary note and with his subsequent failure to investigate the issue of funding when in Singapore. Such a failure would be quite inexplicable for an internal auditor who had been warned that the company he was about to audit held over Ł100 million of unreconciled funds.

374.          Meanwhile, the regulatory department told Mr Hawes in August 1994 that BFS had not properly implemented Mr Cooke’s request to separate out the customer margin into genuine customer margin and margin deposited on behalf of Barings companies, for large exposure purposes. Therefore on 8 September 1994 Mr Hawes repeated the request and queried why the house element was rising so sharply. Leeson’s response simply referred to the large positions taken, by BSL and BSJ. Before me, Mr Hawes could not recall how the September large exposures report[306] was prepared. He told the Singapore inspectors that Leeson explained in September 1994 that the margins for house trading had been covered by the deposited securities and so had not been mentioned in the margin reports. Now house exposure had exceeded the securities, but the BFS staff had become accustomed to not needing to report house margin[307].

375.          Independently of Mr Hawes, the Settlements Department was asking for breakdowns of the Dollar Funding on 21 September, and received the usual uninformative list of round numbers, on 22 and again on 29 September. They queried why the numbers did not agree with the figures in the London Gross report, but not why many of the figures did not change over the six days[308].

376.          The internal audit report was not published until October 1994, though Mr Hawes started seeing drafts in mid-September. A recommendation in an earlier draft of the report, that margin calls by BFS should be reconciled with those made by SIMEX on BFS, was omitted from the final version. Nor did the report deal with the explanation for the Dollar Funding. It limited itself to suggestions as to the use of letters of credit to decrease the proportion of margin deposited by BFS in cash and to recommending a comprehensive review of BFS’ funding by Group Treasury.

377.          Mr Hawes gave evidence that he discussed with James Baker the reasons for the report’s failure to deal with funding. James Baker told him that he had been dissuaded by Leeson, with support from Mr Broadhurst[309], from including the recommendation as to reconciling margin calls. Even in Mr Hawes’ account, there was no discussion of the reasons for the Dollar Funding. James Baker’s evidence was that he just told Mr Hawes he had not been able to make any progress on funding. Mr Hawes told me that he discussed with Mr Hopkins sending James Baker out to Singapore again, but decided not to as he was himself due to go there in two or three weeks[310].

Meetings in October 1994

378.          Mr Hawes visited Singapore at the beginning of October 1994, following a visit to Tokyo. He missed Leeson, who claimed to have been detained in London, and neither Miss Hassan nor Mr Jones was able to provide any help in understanding the funding issue[311]. Therefore Mr Hawes met Leeson in London on his return.

379.          They discussed the reasons for the Dollar Funding. The reasons for the Funding which Leeson gave were the same reasons as (according to Mr Hawes) he had given previously. Mr Hawes admitted that he was “only just about convinced” by these explanations[312]. They were general and unsupported. In summary they were[313]:

i)                    credit facilities granted to certain customers: this could have explained some of the need for funding, but could clearly have been tied to individual customers,

ii)                   delay in receiving margin from customers: again, this could be tied to customers and anyway would give rise to a need for funding in London, not Singapore,

iii)                 delays in receiving yen from BSJ: Mr Hawes said that he thought that before January 1994 BFS must have been funding this from excess margins held for other customers. He accepted that it did not explain the balance unless BFS was slow to withdraw funds from SIMEX and its volumes were continually rising. Again it could have been tied to customers,

iv)                 customers doing mutual offset business (trades on SIMEX being offset against trades on one of the Chicago exchanges) did not post margin, which BFS had to fund: this applied only to eurodollar trading, volumes of which were insignificant,

v)                  advance margin called by SIMEX: these calls were short-term and in fact very rare, a fact which could have been checked by a single call to SIMEX, which was not made. Furthermore advance margin was credited against any margin call in respect of that or the subsequent day’s trading. Mr Hawes accepted before me that it could not be the explanation for a continual funding need,

vi)                 premiums on option trades were payable immediately but were not received from the customers for some days: this would explain a significant part of the balance only if BFS were transacting very large option trades continually, which was unlikely. In any event it could have been confirmed from the reports received by BSL. 

380.          However Mr Hawes did not probe any of Leeson’s explanations, then or later in 1994[314]. He said that this was because he hoped to obtain approval of his proposal for a regional treasurer in the Far East, who would be able to investigate the funding question on the ground. Unfortunately this did not come about, though accounts differed as to whether the reason was a veto by Mr Norris on cost grounds or the resignation of the candidate, Mr Ashley.

381.          Mr Hawes admitted in cross-examination that the focus of his meeting with Leeson was in fact not the reasons for the Dollar Funding. Rather, it was the need for the requests to be split between house and customer, so as to allow for accurate large exposure reporting[315]. The result of the meeting was that from November 1994 BFS did break down the Dollar Funding requests between customer and house business. However the breakdown was often 50:50, and the figures were often round numbers. Moreover, it frequently happened that Leeson would give one figure in the morning for the funds he required, but when the Dollar Funding request arrived later in the day the figure would be different[316]. Mr Hawes said that he looked at the requests only occasionally, regarding them as no more than an approximation to the truth, and so did not notice that they tended to be split 50:50. He distrusted the information coming from BFS, but felt only investigation in Singapore could resolve the issue[317]. It followed from this that Mr Hawes should have realised that the large exposure reports continued to be inaccurate. But he took no further steps to improve the quality of information coming from Singapore for inclusion in them until 27 January 1995.

Later investigations

382.          Mr Hawes told me that his next attempt to investigate came in December 1994 when Jeremy Stunt, an accountant in the Finance Department, was carrying out an investigation into financing costs generally. Mr Hawes said that he asked Mr Stunt also to investigate the reasons for the Dollar Funding, but Mr Stunt did not carry on to do that. Mr Hawes’ evidence on this point conflicts with that of the others involved: Mr Railton, who assisted Mr Stunt in the project, said that it was always limited to the cost of funding[318], and Mr Stunt’s evidence to the Singapore inspectors and his SFA witness statement supports that. Even Mr Hawes admitted that the cost of funding was the main focus. He told me that even the limited exercise which Mr Stunt carried out did show that the money was there in Singapore deposited on SIMEX, which gave him some comfort[319]. That comfort ought to have been limited, since it did not follow that money deposited as SIMEX margin would return from SIMEX to BFS in due course.

383.          In January 1995, Mr Hawes sent to BFS the project specification for a “Singapore Project”, one object of which was “identification of the causes of the very large and consistent requirement for funding from London under the heading ‘Loans to Futures and Options Customers’”. He told me that he intended the project to be carried out by Mr Ashley, whom he and Mr Hopkins were hoping to take on in a project role after the idea of a Regional Treasurer had fallen through[320]. When Mr Ashley resigned the next day, Mr Hawes had no one to conduct the investigation. Mr Bax simply passed the project to Leeson, who produced an obfuscatory explanation which Mr Jones co-signed without carrying out any investigation himself[321].

384.          Mr Stunt’s exercise did have the effect that, in the course of assisting with it, Mr Railton started examining and comparing the funding requests from Singapore and asking BFS some pertinent questions. He realised that the numbers on the requests did not move and could not be accurate. His enquiries expanded during January 1995 to the point where the BSL Settlements Department realised that, at the least, the BFS Settlements Department was preparing the requests extremely badly[322]. The result was that Mr Railton was sent out to BFS at the start of February 1995 to help out in the BFS back office and to try to improve the quality of the information being sent, in particular the funding requests.

385.          Leeson did his best to keep Mr Railton occupied with other projects during his three weeks in Singapore. However despite this Mr Railton established that the Dollar Funding requests were meaningless and that there was a large shortfall between (i) the funds deposited by BFS at SIMEX and the banks and (ii) the figure shown by BFS’ accounts as owing to BSL, BSLL, BSJ and BNP. His questioning about this shortfall was a major factor causing Leeson to flee to Kuala Lumpur.

The Margin Feed

386.          It is striking that, while Mr Hawes and others were making these ineffectual efforts to understand the Dollar Funding, no one thought to look at a print-out of the Margin Feed. As explained above at paragraphs 137 to 139, this set out the margin required for each BFS account. Had anyone looked they would have found that this included margin required for 88888 account transactions which were not being reported on the trade feed or the London Gross Report.

387.          Mr Railton told me that he did not use the feed to answer queries about Dollar Funding because he did not see one as relating to the other. Even though the Dollar Funding was described in Leeson’s breakdowns as partly initial margin, if BSJ was paying some and BSL paying some it would not help to find out the total BFS margin from the feed. Furthermore advance margin would not have appeared on the margin feed at all. But he accepted that the feed should have been explored[323]

388.          Mr Bowser told me that he and others in the Settlements Department did not realise that the margin feed could be viewed. Nor did they realise that the feed set out all BFS’ margin requirements, including margin payable by BSJ and BNP, and therefore contained more information than was in the customer statements obtained from First Futures[324]. It is not clear whether this was also Mrs Granger’s perception: she admitted to the Singapore inspectors that she probably knew that the margin feed split the margin between accounts and she could not say why no one looked at it when trying to reconcile the dollar funding[325].

Totals of Dollar Funding

389.          The BOBS inquiry and the pleadings in this action assumed that the first Dollar Funding payment was one on 12 January 1994. As I have explained at paragraphs 325 to 329 above, it now appears that the position was more complicated than that. Most of the payments in January and February 1994 were genuine payments of customer funds but, because BSL paid twice over, still resulted in Leeson obtaining funds which he could use for unauthorised trading. The same applies to the two payments in which Mr Jones seems to have been involved. The first “classic” Leeson-initiated Dollar Funding request was on 1 March 1994, and there were no further BSL-initiated payments after that date.

390.          The duplication of customer payments in January and February and Mr Jones’ intervention on 9 February 1994 made available to Leeson for his unauthorised trading a balance of at least US$25 million at the end of February. The “classic” Leeson-initiated Dollar Funding then began on 1 March. Including both the January and February payments and the Leeson-initiated Dollar Funding from March onwards, the total available to Leeson was US$125 million on 15 March. The total then dipped, but recovered to around US$100 million in mid-April. It again dipped until mid-May, but from 20 May onwards was well in excess of US$100 million. From 8 September 1994 and for the remainder of the year the total remained over US$150 million. As at 30 December 1994 the figure was US$205 million. It then increased rapidly in January, and especially February, 1995 (it more than doubled between 15 and 24 February) and at the collapse was US$639 million (Ł403 million)[326].


391.          Leeson was in charge of both trading and settlements at BFS. It is a notable, though no doubt completely understandable, aspect of the Barings collapse that, according to their evidence since the collapse, none of those who might have been thought to have had immediate responsibility for Leeson in either capacity admit to having had any such responsibility and no one else has put themselves forward as responsible.

392.          It was never envisaged that anyone in Singapore would supervise Leeson on the trading side. D&T contended in these proceedings that Leeson had a direct reporting line to, and was supervised by, Mr Killian, in relation to his agency trading (from June 1992 until 1 January 1995) and by Mr Gueler (throughout). Mr Killian, Mr Gueler and BSJ denied this, save that Mr Gueler was expressly given responsibility for monitoring Leeson’s intra-day risk limits between June and October 1994. For the reasons I give at paragraphs 1034 to 1040 below, I conclude that D&T are correct, but that the issue of who precisely should have supervised Leeson’s trading does not affect the outcome of the case.

393.          It is accepted that Mr Baker took overall responsibility for Leeson’s proprietary trading from January 1994 onwards, and for Leeson’s agency trading from January 1995.

394.          As I describe at paragraph 975 and following below, virtually the whole of the rest of the Barings Group seems to have believed that Mr Jones was supervising BFS’ settlements and finance sides, save for Mr Jones himself and the BFS staff. Mr Jones played no part in supervising the settlements side. On the finance side he signed the year-end accounts and dealt with minor accounting and administrative matters, but did little more than that. Miss Yong’s role in BFS, when she was appointed in 1993, was similarly limited.


395.          I have described above the relevant reporting lines within Barings and the uncertainties involved. I have also mentioned that Mr Heath and the entire management of the derivatives business left Barings in around March 1993. This included Mr Baylis, the only member of senior management who it seems may have had some direct knowledge of derivatives trading. Therefore after that time there was no one in the senior management of Barings who understood derivatives trading or what Leeson was apparently doing.

396.          In this section I describe the steps taken by those to whom Leeson reported (or should have reported) and others to analyse his apparent trading profits. Any steps taken were of course ineffective until it was too late. I deal later in this judgment with the consequences of such failure by management.

397.          I can deal briefly with BFS’ local management in Singapore. Both Mr Bax and Mr Jones gave evidence that they did not regard themselves as having any responsibility for supervising Leeson’s trading activities[327]. They did not question (or, to be fair, profit directly from) his activities or the profits he made. Mr Jones was intended to be in overall charge of compliance at BFS[328] and of the settlement of trades between BFS and SIMEX, but in practice did nothing[329]. It is one of the extraordinary aspects of this story that, at all times relevant to D&T’s audits, Mr Jones’ desk was on the same floor, a few yards away from the BFS settlements staff, and Mr Jones had responsibility for BFS’ settlements with SIMEX. Yet the settlements staff appear (whether knowingly or not it is not clear. It was not pleaded, nor was it put to them, that they were complicit in Leeson’s fraud) to have systematically falsified BFS’ records of its trades on SIMEX over a period of two and a half years without Mr Jones knowing anything about it.

398.          The only occasions which Plc/BSL were able to put forward, even at the apogee of their case, as analyses undertaken by Leeson’s product managers as to how he was making his apparent substantial profits were the following[330]:

i)                    in February 1994 Ms Walz included a four-paragraph description of the SIMEX/Osaka trading as part of a review of risk and funding issues in the FPG businesses[331];

ii)                   in March 1994 Ms Walz provided to Mr Norris approximate numbers for the profit on the switching business, based on Mr Brindle’s unofficial calculation[332],

iii)                 in April/May 1994 Mr Baker and Ms Lewis visited Tokyo and Singapore. Mr Baker stated in his witness statement that he carried out analyses of the potential for price differentials (and therefore arbitrage opportunities) between SIMEX and the Japanese exchanges, and concluded that differentials of one or two ticks per contract sometimes existed. He calculated the possible revenues based on such differentials and current trading volumes and concluded that the revenue figures could be substantially explained on this basis. Mr Baker met Leeson, who gave him an explanation of the switching business which seems to have been in terms of liquidity arbitrage (see paragraph 219 above)[333],

iv)                 in July 1994 Mr Sacranie, who was then responsible for risk management in BSL, mentioned a potential profit of one tick per contract from switching in a memo to Mr Norris which discussed BFS’ arrangements with an agency customer. There is no indication that this was based on anything other than Leeson’s statement to that effect[334],

v)                  until late October 1994, Mr Gueler did not express any doubts as to Leeson’s profits. Mr Gueler saw all the trades apparently done by Leeson in his switching business, and, at least between June and October 1994, was responsible for monitoring his intra-day trading limits. His qualifications rendered him very well able to assess whether the profits reported were realistic. His evidence was that he believed there to be good reasons why the profits were realistic: Leeson enjoyed technical advantages in operating from the SIMEX pit with an open line and dedicated assistant in Osaka. He believed that Leeson’s profits came mostly from liquidity arbitrage and other trading between the house book and customer orders, which was made possible by BFS’ high level of such orders[335]. Indeed Mr Gueler believed that Leeson had one major customer, “Philippe”, who was engaged in large scale trading and contributed to Leeson achieving the results he did, and

vi)                 the internal audit report, which I deal with below, described in detail Leeson’s trading. On its face, it both accepted that his profits were genuine and found that there was no improper activity (for example, disadvantaging customers by, for instance, “front-running”) involved in producing them. In fact, as Mr James Baker who drafted it admitted in evidence, both conclusions were based on Leeson’s unsupported word[336].

399.          Mr Norris accepted before me that none of these could be regarded as detailed analyses of Leeson’s profitability, such as he accepted that Mr Baker and Miss Walz should have made and such as he believed at the time they had made[337]. He was not aware of any analysis actually done by Mr Gueler. In the case of Mr Baker’s alleged analysis at (iii), Mr Norris saw no document recording such an analysis. The only evidence for it is Mr Baker’s witness statement. Since BFS did not call him as a witness, that is of no evidential value.

400.          By contrast, Mr Killian’s evidence to me was that in 1994, when rumours were circulating in Tokyo about Leeson earning $3m in a day from arbitrage, arbitrage traders in other firms whom Mr Killian knew told him that was impossible:

“I imagine I heard somebody say ‘Oh, Nick Leeson had a $3 million day’. I would say that to a friend of mine… and this person would say ‘No way, no way you can do that. Do not even listen to that type of story because it is not even possible’.”[338]

401.          As a result Mr Killian attributed Leeson’s profits to high levels of directional trading, assisted by BFS’ level of customer orders. He presumed this was authorised by Mr Baker. But Mr Killian said that the Chinese wall between those involved on the agency and proprietary sides precluded him from asking. Therefore he did not know if this was the correct explanation, or what Leeson’s risk limits were. Mr Killian said that Leeson’s product managers should have gone to Singapore and, in his words, said “OK, now show me. Make $2m today. Let’s see how it’s done.” His proprietary product manager should have done that in order to understand such a high source of profits, and his agency product manager (and Mr Killian denied he had that responsibility) should have done so in order to ensure that the profits were not coming from unfair exploitation of customers[339].

402.          Mr Gueler also questioned how Leeson could be making his profits, though his concern was that Leeson was charging customers too much for his liquidity arbitrage. As I have described, he went to Ms Walz with his concerns “about how [Leeson] is making this money” and told her that he could not “easily sleep at night” through worry about how the money was being made (see paragraph 284 and following above). He felt that Mr Baker and Ms Walz should understand how Leeson was making his profits. But, differing from Mr Norris, Mr Gueler did not feel that that was his job[340].

403.          Finally there were the departments within Barings which might have been thought to have some responsibility for monitoring funding of, and risk from, the Group’s activities. BFS had no risk manager of its own (Rachel Yong was due to take over the role on 1 March 1995). The switching business fell within the purview of BSJ’s risk managers, Messrs Clarke and Sue, but Mr Norris’ evidence was that they fulfilled a statistical role, collecting and reporting trade data. For that purpose the risk manager relied on the data supplied by BFS and did not verify it independently or analyse the profits. Rather, Mr Norris said that it should have been Mr Gueler and the BSJ traders who understood Leeson’s trading and could have spotted anomalies. They failed to do so[341]

404.          The BSL Risk Committee does not seem to have carried out any review. Likewise the profits were discussed, but apparently not questioned, at MANCO and EXCO[342]. Eventually, in 1995, ALCO and MANCO became concerned, but only about the size of Leeson’s positions and whether the bank could fund them, not about the genuineness of the profits[343].


405.          Deloitte Haskins & Sells in London were for a number of years auditors to the Barings Group. As Barings established companies in Singapore, Deloitte Haskins & Sells, Singapore were appointed auditors to them[344].

406.          In 1989, most of the component firms of Deloitte Haskins & Sells merged with the component firms of Touche Ross. This included the Singapore firm, who became D&T. An exception was the UK, where the UK practice of Deloitte Haskins & Sells merged with Coopers & Lybrand to form C&LL.

407.          The result of this merger activity was that in 1990 C&LL audited the Barings companies in London and co-ordinated the group audits, while D&T audited the BSL subsidiaries in Singapore (including BFS). C&LS were appointed auditor of BB&Co’s Singapore branch in 1990. This situation continued until 1994, when C&LS succeeded in winning the poisoned chalice of appointment as auditors of the other Barings companies in Singapore.

1992 AUDIT

408.          BFS commenced active trading on SIMEX on 1 June 1992, though for the first month it used Chase Manhattan to execute trades for it[345]. Its revenues, consisting of commission and interest, for the period of four months up to 30 September 1992 (the reporting date for the September 1992 audit) were S$3.83 million (Ł1.35 million) and its profit before tax was S$3.05 million (Ł1.08 million). Since all BFS’ trades were booked to clients, these results bore little relation to the results of BFS’ trading.

409.          D&T had been appointed as BFS’ auditors by an exchange of letters dated 6 and 15 October 1986, when the company was first incorporated. D&T’s engagement letter set out their statutory functions as auditors and then stated:

“To enable us to express our opinion [on the statutory accounts], we shall make such tests and enquiries as we consider necessary. The nature and extent of our tests will vary according to our assessment of the companys systems of internal accounting control. We shall report to the directors or to the appropriate level of management any material weaknesses in the companys systems of internal accounting control which come to our notice and which we believe should be brought to their attention.

Our audit is designed, in accordance with normal practice, to enable us to express an opinion on the accounts. It should not be relied upon to disclose defalcations or other irregularities, although their disclosures, if they exist, may well result from the audit tests we undertake.

The foregoing does not cover maintaining the accounting records and the preparation of accounts, these being the responsibility of the companys directors.”[346]

410.          Neither the letter of appointment or D&T’s engagement letter mentioned D&T’s responsibilities under the Singapore Futures Trading Act or Futures Trading Regulations.

411.          Chaly Mah had been the D&T partner responsible for the audits of the BSL Singapore companies since 1988, and therefore was responsible for the 1992 audit of BFS. In 1992 the audit juniors were Koo Mei Yen (“Miss Koo”) and Chang Suland, and the audit manager was Teo Pin Ghee[347].

412.          In 1992 C&LL were the auditors to the BSL Group of which BFS formed part. C&LL sent to D&T on 21 July 1992 group audit instructions relating to the BSL subsidiaries in Singapore (BSS, BFS, Baring Management Services Pte Ltd and Barings Nominees Singapore Pte Ltd) and an audit procedures questionnaire. The audit was for the year ending 30 September 1992, although BFS had been active only for the last four months of that period.

413.          D&T replied on 17 August 1992, sending to C&LL a completed Audit Planning Memorandum (“APM”) and audit time and costs budgets. The APM was prepared by Jenny Rodgerson of D&T, apparently after a visit to BSS and BFS[348].

414.          While separate time and cost budgets were prepared for each company, and the APM described each company separately, issues such as risk assessment and systems and controls were dealt with jointly, and the comments on those issues were apparently directed wholly towards BSS. That was by far the larger company in terms of number of employees and turnover. In particular, the APM indicated that D&T would adopt a controls-based approach, which was actually the approach adopted for BSS, but not for BFS. The budgeted hours for the audit of BFS were 85, compared with 400 for that of BSS. The APM stated that D&T “have identified no specific risks in any audit areas”, and the covering fax reported that D&T “have not identified any significant audit/accounting issues that need to be brought to your [i.e. C&LLs] attention” at that interim stage[349].

415.          Despite the confusion in the APM, it is very clear when one looks at D&T’s working papers, and it was confirmed by the evidence of Mr Mah, that D&T adopted a substantive approach to the audit of BFS rather than a controls-based approach. A substantive approach involved obtaining assurance as to the correctness of the financial statements by direct verification of the balances in those statements and of the transactions and documents underlying them. If adopting a controls-based approach, an auditor obtains assurance by testing the extent and operation of the internal controls which should detect or prevent errors in the financial statements.

416.          The procedure followed by D&T in carrying out the 1992 audit is described in detail in Schedule F to this judgment. D&T adopted a substantive approach to their audit, not because of any perceived audit risk or control weakness in BFS, but because they considered that it was the most cost-effective approach in the light of the simplicity of the business being conducted by BFS. They understood BFS to be an execution-only broker whose only customers were to be four associated Barings companies placing orders for execution on SIMEX on behalf of themselves or their customers.

417.          In accordance with C&LL’s timetable, D&T sent to C&LL on 16 October 1992 the audited consolidation schedules for each company, an audit report for each company, an Audit Summary Memorandum and the completed Audit Procedures Questionnaire. The working papers, dated October 1992, for the Audit Summary Memorandum include the Risk Assessment: “No specific risk has been identified during the planning stage and the course of our audit.”[350]

418.          The consolidation schedules were audited financial statements, prepared in accordance with UK accounting standards but using the materiality level adopted for the statutory accounts[351]. They were to be consolidated into the BSL Group accounts, and they needed to be sent relatively early in the audit process in order to allow time for C&LL to use them in preparing those Group accounts.

419.          The audit report for BFS[352] was addressed to the directors of BSL. It stated:

“2. Subject to the matters noted in paragraph 4 below, in our opinion all the consolidated schedules, as attached, were prepared in accordance with the [BSL] group accounting policies and consolidation instructions. The information in them is presented fairly in conformity with accounting practices generally accepted in the United Kingdom”.

3. We intend to give an unqualified audit opinion on the local statutory accounts which will be based on the consolidation schedules, adjusted as necessary to comply with local legal or fiscal requirements or accounting practices generally accepted locally; and to include any adjustments considered necessary when the matters in paragraph 4 are resolved.

4. Material unresolved matters

(a) The bank confirmation for this year ended September 30 1992 is outstanding.

(b)The confirmations for the intercompany balances are outstanding as at September 30 1992.

(c) Local statutory accounts.”

420.          The Auditing Procedures Questionnaire[353] did not distinguish between the various Singapore companies. It confirmed that D&T had carried out the audit properly. It included a positive answer to the question “Have you evaluated the adequacy of controls within the accounting system and identified whether reliance on their operation may be possible?” and a negative answer to the question “Are there any weaknesses in the companys systems which are so significant that in your opinion they should be brought to our attention?”

421.          D&T then carried out the further work necessary to submit the required regulatory reports to the Singapore regulators, MAS and SIMEX. This included the further checks necessary in order to complete Forms 17, 21, 22 and 23 prescribed by the Singapore Futures Trading Act, reviewing BFS’ correspondence with MAS and SIMEX, and completion of certain further checklists and programmes[354].

422.          On 20 November 1992, D&T sent BFS’ statutory accounts in draft to Mr Jones, along with a draft representation letter addressed to D&T to cover the 1992 audit which they asked him to sign and return. They repeated the request on 10 December 1992.

423.          On or about 17 December 1992, Mr Jones returned the signed representation letter. Apparently he had had it retyped on BFS letterhead, but he did not change the text from D&T’s draft. This representation letter and one in similar terms signed by Mr Jones in the course of the 1993 audit were the subject-matter of the preliminary issue which I have described at paragraphs 19 to 21 above.

424.          On 31 December 1992, D&T issued their opinion on the statutory accounts of BFS. This stated that they had audited the financial statements in accordance with the relevant auditing standards and that, in their opinion, the financial statements of BFS were properly drawn up in accordance with statutory requirements and gave a true and fair view of the state of affairs of BFS. D&T also submitted their regulatory reports to MAS and SIMEX.

425.          D&T’s fee for the 1992 audit was S$8,300 (around Ł2,900), though they had in fact spent over 50% more hours than they had budgeted for[355].


426.          SIMEX carried out a regulatory audit in the spring of 1993 and wrote to BFS with their conclusions on 7 September 1993[356]. One of the points raised was that on two days in February 1993 BFS had called insufficient margin from BSL, through ignoring certain subsidiary accounts and illegitimately taking into account inter-market offsets. It had also taken no action when BSL failed to respond in due time to a margin call. SIMEX fined BFS S$23,000[357].

427.          In 1994 SIMEX conducted a more limited audit. It wrote to BFS on 16 January 1995, noting breach of the rules as to segregation and computation of customer funds. Further action was overtaken by the collapse of the Barings Group[358].

1993 AUDIT

428.          The 1993 audit covered the period 1 October 1992 to 31 December 1993 (BSL and BFS having changed their year-end to December). BFS’ revenues for the 15 months were S$27.9 million (Ł11.75 million) and its profit before tax S$22.6 million (Ł9.5 million)[359]. As in 1992, since all BFS trades were booked to clients, these results bore little relation to the results of Leeson’s trading.

429.          D&T’s 1993 audit of BFS followed a similar pattern to their 1992 audit. C&LL sent their audit instructions to D&T on 27 October 1993 and an Audit Procedures Questionnaire two days later. Since 1992, BSL had been “solo-consolidated” into the Plc group. Therefore the instructions were those for the audit of the Plc group and D&T were required to produce consolidation schedules for incorporation into the financial statements of the Plc group.

430.          Mr Mah remained the partner in charge of the audit. Miss Koo was the audit senior and Philip Ng the audit junior. Teo Pin Ghee had left D&T and so Mr Mah acted as audit manager to the extent necessary[360].

431.          On 1 November 1993 D&T submitted their time and cost budget for the audit. They estimated 134 hours in total for the audit, almost exactly the same as they had spent in 1992[361].

432.          D&T sent their Audit Planning Memorandum[362] to C&LL on 1 December 1993. This again covered both BSS and BFS. It noted that:

“…managements attitude towards control is good. Mr James Bax (Managing Director) and Mr Simon Jones (Finance Director) are actively involved in the day to day operations of the companies.

Pressure to ensure that proper controls are in place also comes from the regulatory bodies, SES [the Stock Exchange of Singapore] and SIMEX…

The head office in London oversees the local operations and monthly management reports are sent to the head office.”[363]

433.          In the light of such factors D&T concluded that the engagement risk for the Baring Securities (Singapore) Group was “Normal”.

434.          Planning work and substantive field work began in November 1993 and were completed in January 1994, save for the regulatory reports[364]. As in 1992, D&T carried out a substantive audit. Again D&T relied upon the confirmation requests prepared by BFS to check customer balances, and verified that they received confirmations for all balances. 

435.          Mr Jones signed at D&T’s request a representation letter covering the 1993 audit on 27 January 1994. This was in identical form to that for 1992.

436.          On 28 January 1994, D&T sent to C&LL audit reports addressed to the directors of Plc, matters for the attention of partners, consolidation schedules and completed audit questionnaires[365].

437.          The audit report was in similar terms to that for 1992, save that the only outstanding matter was expressed to be bank confirmations. The Auditing Procedures Questionnaire was in 1993 specific to BFS, but gave the same reassuring answers as in 1992. As in 1992, the working papers, dated 15 January 1994, include a risk assessment: “No specific risk has been identified during the planning stage and the course of our audit[366].

438.          As in 1992, D&T conducted further tests necessary for the submission of regulatory reports. This included following up with BFS the points raised by SIMEX in its audit letter of 7 September 1993.

439.          On 28 February 1994 D&T issued their opinion on the statutory accounts of BFS[367]. This stated that they had audited the financial statements in accordance with the relevant auditing standards and that, in their opinion, the financial statements of BFS were properly drawn up in accordance with statutory requirements and gave a true and fair view of the state of affairs of BFS. D&T also submitted their regulatory reports to MAS and SIMEX.

440.          D&T’s fee for the 1993 audit was S$17,400 (around Ł7,400), as compared with their estimate in November 1993 of S$9,500[368].


441.          In July 1994 the Internal Audit Department of BSL conducted an internal audit of BFS, as part of its review of the South Asia region. Prior to his departure for Singapore, James Baker, the internal auditor, spoke to, among others, Mr Hawes on 22 June 1994. Mr Hawes raised with him concerns as to the lack of segregation of Leeson’s functions, as James Baker recorded in his meeting note:

“Nick Leeson has too dominant a role looking after both trading (agency and proprietary) and settlements aspects of the business; there is no deputy to challenge him… TH believes that SJ basically leaves NL to his own devices. While he has no evidence to suggest that NL has indeed abused his position, the potential for his doing so needs examining.”[369]

442.          Mr Sacranie was also concerned about separation of responsibilities[370]. As discussed at paragraphs 371 to 373 above, Mr Hawes also raised BFS’ need for funding at short notice, though not the inability to reconcile or explain the Dollar Funding.

443.          James Baker spent three weeks at BFS conducting the internal audit, from 19 July 1994 onwards.

444.          After some delay in producing it, the final version of the Internal Audit Report was completed in October 1994. The Internal Audit Report[371] made three key recommendations in relation to BFS, as follows:

(1)   "BF(S)s back office should be reorganised so that the General Manager [i.e. Leeson] is no longer directly responsible for the back office"[372];

(2)   "BF(S)s trading activities should be independently reviewed to ensure that regulations are followed and risk limits observed. A suitably experienced manager should be appointed to review the records, perform some tests of detail and discuss activity with BF(S)s traders"[373]; and

(3)   "London Group Treasury should perform a comprehensive review of BF(S)s funding requirements"[374].

445.          None of these recommendations made in the internal audit report was carried into effect.

446.          So far as recommendation (1) above is concerned, the Executive Summary of the Internal Audit Report[375] stated that:

"there is significant general risk that the controls could be overridden by the General Manager. He is the key manager in the front and back office." 

447.          The main body of the report noted the mitigating factors which reduced the concentration of power in Leeson’s role (including reconciliation controls between BFS and its customers). It stated that:

“Given the lack of experienced and senior staff in the back office, we recognise that the General Manager must continue to take an active role in the detailed operations of both the front and the back office”, including double-checking the back office’s output and “roles which do not involve the settlement and recording of transactions, such as liaison with the SIMEX authorities and the arrangement of funding in conjunction with Group Treasury”.

448.          But, after the recommendation noted above, it stated:

“Specifically, the General Manager should not: retain sole responsibility for the supervision of BF(S)’s back office team; retain cheque-signing or journal-passing powers; review and sign off [reconciliations].”

449.          Later the report recommended:

“Other responsibilities relinquished by the General Manager should be taken on by the BS(S)’s Director of Finance and Operations. The main requirement is to ensure that the settlement and recording processes are adequately supervised including, for example:

Daily contact with the futures settlement supervisor who should be refer [sic] all significant matters arising in the office for discussion;

Daily review and sign off of SIMEX reconciliations;

Occasional review of daily checks of trades recorded on the system to SIMEX reports and trade tickets; and

Occasional review of standards maintained over standard procedures…

Management Response: Nick Leeson, Simon Jones

As agreed with Internal Audit these are not normal circumstances for BF(S) considering the current absence of third party customers. Should these emerge, the role of General Manager will obviously change. However, with immediate effect the General Manager will cease to perform the functions itemised… The Director of Finance (BS(S)/BS(F)) will ensure the adequate supervision of all settlement and recording processes.”  

450.          Despite this management response, no action was taken and Leeson remained until the collapse in control of both the front and the back offices at BFS. 

451.          As to recommendation (2) above, no such detailed review of trading activities was ever carried out. After an initial suggestion from Mr Jones that Mr Bowser should perform the role of risk manager for BFS, Miss Yong was appointed to the position, but had not started work by the time of the collapse.

452.          As to recommendation (3) above, no investigation was made into Leeson’s funding requirements.

453.          I deal later in this judgment with the evidence given before me as to why these recommendations were not implemented.

1994 AUDIT

454.          The 1994 audit, conducted by C&LS, covered the 12 months to 31 December 1994. BFS’ gross revenues for the year were S$30.587 million (Ł13.385 million) and its profit before tax S$22.041 million (Ł9.645 million)[376].

455.          C&LS were appointed as auditors of BFS by an exchange of letters dated 11 July and 1 August 1994[377]. C&LS’ formal letter of engagement was not signed before the crash. The details of the 1994 audit were covered in opening, but not in evidence (being left for Phase 2) so what follows is subject to the hearing of oral evidence in due course.

456.          C&LS had a preliminary meeting with Mr Bax, Mr Jones and Miss Yong in June 1994. During September 1994 they reviewed D&T’s working papers relating to the 1993 audit, and Seet Wee Teong (“Mr Seet”) of C&LS then met Mr Mah to discuss the audits[378].

457.          In August 1994 Mr Seet and Khoo Kum Wing (“Mr Khoo”) of C&LS met the BSL internal auditors. Mr Seet’s evidence was that this was at the end of the internal auditors’ visit and they said that they had not noted any significant issues[379]. James Baker does not accept that this interview took place at the end of the internal auditors’ visit. However C&LS’ notes of the interview in their audit working papers appear only to be consistent with this being the case.

458.          C&LL sent group audit instructions to C&LS on 2 November 1994[380]. C&LS returned their Audit Strategy Memorandum[381] to C&LL on 23 November 1994. This stated that “as this is our first year of audit and given the tight reporting deadline, full early work based on October management accounts would be done, except for trade and bank confirmations which would be done for year end balances”. C&LS noted that the control environment was satisfactory and stated that, in view of this and the high volume of trades, they would do a system-based audit. They stated, incorrectly, that “BFS does not engage in any House trading or discretionary trading for its clients.”[382] The section in the Audit Strategy Memorandum headed “Balance Sheet Review” compared the December 1993 balance sheet audited by D&T with that as at 30 September 1994[383]. The section showed that as at 30 September 1994 the figure for “Margin deposits with SIMEX and bank balance” exceeded that for “Margin deposits placed by customers” by S$55 million. But there is no indication that C&LS attached any significance to this.

459.          C&LS carried out their audit testing in two stages, the first in October and November 1994 and the second in January and February 1995. They completed their fieldwork for the first stage by early December 1994[384].

460.          Part of C&LS’ early work was the topic of bank reconciliations. The 31 October 1994 bank reconciliation, prepared by BFS and reviewed by C&LS on 14 or 16 November 1994, included a significant reconciling item of Ą4.115 billion (S$62.5 million) which was described as “funds to be reverse”. This was in fact one of the false accounting entries routinely entered by BFS staff on Leeson’s instructions, to conceal the reduction of the balance on the 88888 account to zero at the month end. C&LS noted the item but did not investigate it further[385].

461.          C&LS asked Rachel Yong for a copy of the internal audit report in December 1994 or January 1995. She replied that she was not aware of one, and one may not have been produced, but she would check with Mr Jones. As C&LS heard no more they assumed that no report had been produced[386].

462.          Events after 31 December 1994, and therefore the work done by C&LS on the year-end accounts, are of marginal significance because of the cut-off on BFS’ claim described previously. I therefore just mention the most important dates:

i)                    on or before 14 January 1995 C&LS noted the discrepancy between the settlement variation balance shown on BFS’ Broker Reconciliation sheet and that in BFS’ books, referred to at paragraphs 311 and 312 above. Leeson attempted to explain this by inventing a fictitious over-the-counter transaction, brokered by BFS, between either BNP or BSL (there were several versions of the story) and SLK (Spear Leeds & Kellogg). He said that a premium of Ą7.7 billion was due from SLK. On 2 February 1995 Leeson produced forged confirmations from SLK and BSL and a forged bank statement from Citibank, which appeared to show that SLK had repaid the Ą7.7 billion. These caused C&LS to sign their report on the consolidation schedules on 3 February 1995 (though noting the details of the alleged transaction in their covering fax);

ii)                   on 27 January 1995 C&LS sent to C&LL a status report[387], which included their understanding of the SLK transaction;

iii)                 on 3 February 1995 C&LS sent to C&LL the consolidation schedules, their report on the schedules, and a covering fax (with their latest understanding of the SLK transaction)[388];

iv)                 on 23 February 1995 C&LS confirmed to C&LL that their first subsequent events review had thrown up no events affecting signature of the group accounts[389];

v)                  C&LS were due to sign the statutory accounts by 8 March 1995[390].


463.          Over the period 17 – 23 February 1995, Mr Railton, on secondment to BFS from BSL settlements, tried and failed to obtain an explanation from Leeson of a Ą14 billion discrepancy between the funds remitted to BFS by BSL, BSLL and BSJ and those held by BFS or deposited with SIMEX. On 23 February 1995 Mr Hughes of BSL sent to Mr Hawes (then in Tokyo), and Mr Hawes forwarded to Mr Jones, an e-mail expressing BSL’s inability to understand Leeson’s funding requests. Later that day, Leeson left a meeting with Mr Railton and Mr Jones which had been called to discuss the issue and fled with his wife to Malaysia.

464.          That night Mr Hawes arrived in Singapore. He, Mr Railton and Mr Bax discovered the existence of the 88888 account and the losses on it almost immediately.

465.          On 24 February 1995 Leeson faxed his resignation to BFS. Over the weekend of 25/26 February a team from Barings London and an official from the Bank of England arrived in Singapore. In London, negotiations to sell the Barings Group as a going concern continued through the weekend but failed, following which Plc, BB&Co and BSL were placed in administration. On 27 February SIMEX instructed BFS to stop trading and then, when it failed to pay its margin call that morning, suspended it. BFS was put into interim judicial management on the same day.

466.          SIMEX appointed OCBC Bullion & Futures Ltd to close out BFS’ positions. This involved:

i)                    identification of positions held for true third party customers, and transfer of the positions to the customers concerned,

ii)                  matching off all remaining long and short futures positions and closing out on the market the resulting net positions, at a cost of US$252,353,074 and

iii)                 negotiating a “sale” of BFS’ portfolio of loss-making open option positions (including a small number of options booked to BSL accounts which had a positive value) to a third party purchaser at a cost of US$500 million[391].

467.          After taking into account the security and margin held by SIMEX and SIMEX’s costs of liquidating BFS’ positions, this process resulted in a payment by SIMEX to BFS of US$57 million[392]. However BFS owed BSL, BSLL and BSJ a total of US$1,191 million (see paragraph 324 above), and its inability to repay them brought down the Group.

468.          Just over a week later the majority of the assets and liabilities of the Barings Group (including BSJ) were purchased for a nominal sum by Internationale Nederlanden Groep NV (“ING”).


The pleaded case

469.          BFS alleged that D&T were negligent in the following respects:

1992 audit

i)                    D&T failed adequately to take into account in their audit that Leeson controlled front and back offices;

ii)                   D&T failed to confirm and reconcile all balances and open positions;

iii)                 D&T allowed the Ą670m to be treated as received on 30 September 1992 and failed to discover the various associated irregular accounting entries;

iv)                 D&T failed to consider whether the confirmations of inter-company balances, in particular that for the BSL segregated account, were correct;

v)                  D&T failed to seek from BSL confirmation of the correct balance on the 88888 account;

vi)                 D&T failed to review the 88888 account, when they ought to have done so because it was understood to be an error account, the Ą670m had been credited to it and SIMEX statements showed numerous credits to it; they failed to realise the account was not being operated as an error account or that it showed substantial deficits; and failed to establish how the deficits on the account had been discharged;

vii)               D&T accepted the apparent confirmation of the 88888 account despite it being purportedly sent and received by Leeson;

viii)              D&T failed to carry out the enquiries necessary to complete Form 20;

ix)                 D&T reported that BFS’ internal controls were adequate, when they were not;

x)                  D&T reported to MAS that BFS’ accounting records complied with section 25 of the Singapore Futures Trading Act and that the segregated account had been properly maintained, when they had not been;

xi)                 D&T gave unqualified reports on BFS’ financial statements and the group consolidation package even though they did not show a true and fair view of BFS’ affairs;

xii)               D&T failed to report to MAS the matters of which they ought to have been aware.

1993 audit

470.          The particulars of negligence set out for 1992 at (i), (ii), (vi), (viii), (ix), (x), (xi) and (xii) were repeated for 1993. In addition BFS alleged that:

i)                    D&T failed to recognise that files for the 88888 account had not been produced to them for their audit;

ii)                   D&T failed to discover the open option positions on the 88888 account; and

iii)                 D&T failed to investigate the excess of margins deposited with SIMEX over amounts owed to customers.

471.          By the conclusion of the trial the ambit of the audit case had substantially contracted. By then, the criticisms made were D&T’s failure:

i)                    in 1992 properly to enquire into the booking on 30 September of the Ą670 million received from BSL on 1 October;

ii)                   in both years to check that all open positions in CONTAC were included in the confirmation requests sent to customers,

iii)                 in both years to check that the total of open positions shown in the customer confirmations agreed with the total of open positions as stated in SIMEX’s records. The lack of segregation of Leeson’s duties was a factor rendering such a test necessary.

Both (ii) and (iii) were capable of causing loss only in 1993, as there were no unauthorised open positions in 1992;

iv)                 in 1993 to obtain a customer confirmation for the 88888 account; and

v)                  in 1993 to enquire into the fact that BFS’ margin deposited with SIMEX exceeded the margin deposited with it by its customers.


472.          In relation to the audit case, BFS relied primarily upon the evidence of Mr Swinson, the senior partner of Stoy Hayward. Its second audit expert, Mr Mason, is a former partner of Price Waterhouse in Singapore. He gave evidence only as to specifically Singaporean audit practice.

473.          D&T relied on the evidence of Mr Spence, the London senior partner of Grant Thornton.


474.          I have already described the events of D&T’s 1992 and 1993 audits of BFS (see paragraphs 408 to 425 and 428 to 440 above) and that in each year of account D&T elected to undertake a substantive audit. BFS do not criticise that choice. Indeed they contend that, having regard to the audit risks, both inherent in BFS’ business as a derivatives broker and arising as a result of the way in which BFS was managed during the years, and provided the audits in those years were planned and carried out with sufficient completeness, this was a wholly appropriate audit approach.

475.          As explained at paragraph 415 above, a substantive audit involves direct verification of balances and of the transactions and documents underlying them, in order to be satisfied to the necessary standard that the client’s accounts present a true and fair view. By contrast, if following a compliance approach, an auditor tests the client’s internal controls which should detect or prevent errors in the financial statements, and thus gains the appropriate level of assurance which allows him to reduce the level of substantive testing required.

476.          It is common ground that a substantive audit must test the completeness, as well as the accuracy, of the client’s financial statements. “Completeness” means that there are no unrecorded assets, liabilities or transactions. The main issue in this part of the case is the nature and extent of the audit procedures which D&T took or should have taken to be satisfied that BFS’ accounts for 1992 and 1993 presented a true and fair view.

477.          As they were doing a substantive audit, D&T needed to confirm all the figures they were checking against external information. Their approach to this was to verify each item on BFS’ trial balance sheet. D&T therefore audited the account balances due to customers and the amounts due from SIMEX. Open positions resulting from transactions executed for clients on SIMEX as such did not feature on the balance sheet.

478.          The normal means of verifying customer balances was by requesting the customers to confirm the balances. For SIMEX and bank balances the figures in the trial balance could be confirmed against the relevant SIMEX and bank statements.

479.          In both 1992 and 1993 BFS prepared and sent out by fax confirmation requests to its five customers. There was one request for each omnibus account held by that customer: thus for BSL there was one request each for the segregated, the non-segregated and the house accounts. However in 1992 there was a separate (forged) request for confirmation of the 88888 account balance, and in 1993 a separate (genuine) request for the BSL hedge account. No satisfactory explanation was offered for why a separate confirmation of the balance on the 88888 account was thought necessary in the 1992 audit.

480.          Each request set out figures taken from CONTAC for the account balance, initial margin, variation margin, and commission paid and outstanding, and listed all open positions on the account, all as of the accounting date. The request asked the customer to sign and return the request to BFS, to confirm the accuracy of the information. The requests were prepared and sent out by BFS staff, to be returned to BFS. BFS staff then passed the confirmations when received to D&T for use in the audit.

481.          In 1993 BFS did not produce, and D&T did not require, an audit confirmation for the 88888 account, it is assumed because it had a nil account balance.

482.          D&T took the confirmations received from customers and checked that the figures for “account balance” and “variation margin” on each account confirmation, all added together, equalled exactly the total figure for “client payable” in BFS’ trial balance. That total was itself checked against the client general ledger in CONTAC.

483.          In relation to SIMEX, D&T confirmed the figures in the trial balance for amount payable to and receivable from SIMEX against CONTAC and against the SIMEX Combined Margins and Positions report (“the CMP report”). This was one of the reports produced by SIMEX daily for members, summarising their positions at the close of the day’s trading.

484.          In 1992, Miss Koo, who did the field work for the audits, checked the open futures positions listed in the customer confirmations against the broker’s report from CONTAC. She did not check the option positions. In 1993 she checked a few, but far from all, of the open futures positions, and none of the option positions. Mr Mah in his evidence was unable to explain why she had done even this limited amount of checking, since D&T’s audit approach did not require her to verify open positions. Indeed, he said that it must have been BFS’ decision to seek confirmations of the open positions from customers in the first place, since D&T did not need them. Nor could he explain why Miss Koo had done some work on open positions for futures but not on those for options.

485.          D&T did use the lists of open positions in 1993 for one purpose. C&LL required D&T, in their audit report to Plc and attached Matters for Attention of Partners, to provide details of any “commitments, contingent liabilities and off-balance sheet assets or liabilities” of BFS[393]. D&T replied on 28 January 1994 that they were not aware of any such, except for “Outstanding Futures and Options contracts as listed on Appendix 2”. Appendix 2 consisted of the customer confirmations, including the lists of open positions.

486.          In the course of their opening, counsel for D&T were able to demonstrate from D&T’s working papers that, following this course, D&T were able to confirm the figures in the balance sheets in the 1992 and 1993 accounts to the nearest yen. Counsel’s explanation is summarised at Schedule F to this judgment.


487.          As of 30 September 1992, Mr Leeson had no open positions on the 88888 account. He had closed all positions, leaving a deficit which he had to conceal by the Ą670m window-dressing operation discussed below.

488.          However as of 31 December 1993, Mr Leeson had sold considerable numbers of options, at least partly in order to bring the equity balance on the 88888 account down to zero (see paragraph 309 above). The result was that, as of that date, BFS had 22,109 short option positions, of which 8,560 were on account 88888 and not held on behalf of customers.

489.          D&T did not detect these short option positions in their 1993 audit. The issue I now address is whether they were negligent in not doing so.

490.          In analysing this issue, I set out first the parties’ cases and the relevant audit guidelines. I next consider D&T’s assessment of the audit risk posed by BFS, in the light of the risk of unauthorised trading, the lack of segregation of duties at BFS, and the various mitigating factors relied on by D&T. I then consider the effect of the audit risk on the audit procedures which D&T should have followed. Finally I deal with the question of whether those considerations required D&T to carry out the test on open positions for which BFS contended.

The parties’ cases

491.          Among the allegations of negligence pleaded by BFS are that, in both 1992 and 1993, D&T failed to recognise that BFS’ internal controls were flawed by virtue of Leeson’s control of front and back offices; they failed adequately to take that into account in their audit; and they reported that BFS’ internal controls were adequate. However as the trial proceeded, BFS reacted to the evidence from both factual and expert witnesses that it was usual in small broking firms for one person to be in charge of both front and back offices. BFS ceased to contend that the failure to report the lack of segregation of duties was a self-contained allegation of negligence. Instead, it became an element of BFS’ case on audit risk. 

492.          BFS contended that there was an appreciable risk of unauthorised trading, that it was likely that any unauthorised trading would be concealed and that manipulation of balances was a likely means of doing that. D&T’s audit procedures were essentially limited to checks of balances, and did not allow for those risks. In addition to checking balances, D&T should have checked that all open positions entered into by BFS were recorded in BFS’ books and authorised by customers. They should have done this by reconciling the open positions recorded by SIMEX against those confirmed by customers, as recommended by Mr Swinson. BFS also contended that D&T should have controlled the confirmation process and should have confirmed the 88888 account in 1993, despite it having a nil balance.

493.          D&T contended that, as the evidence turned out at trial, no criticism was made of D&T’s assessment of risk. Unauthorised trading was a risk, but a low risk, and D&T were not required to devise any special procedures to guard against it. The lack of segregation should have caused no concern as long as BFS was providing an execution-only service, rather than itself initiating trades, and D&T had no reason to know in either 1992 or 1993 that Leeson was initiating trades.  

494.          D&T contended that the verification of balances which they carried out would have been expected to reveal unrecorded or unauthorised trading, since any trading affects the financial balances. Such an approach would be defeated only in a case of deliberate fraud involving manipulation of balances. That sort of fraud had, reasonably, not been identified as a specific risk. Therefore D&T were not obliged to devise specific procedures, such as that devised by Mr Swinson, to test for it. No relevant audit guideline or other professional practice guidance required such a test in the absence of any indication to the auditors that BFS’ financial statements were incomplete as a result of fraud, of which there was no indication.

Audit guidelines

495.          The applicable audit guidelines are set out in the Statements of Auditing Guideline (“SAGs”) issued by the Singapore Society of Accountants[394]. The SAGs are based upon the International Auditing Guidelines issued by the International Federation of Accountants.

496.          SAG 4, “Basic principles governing an audit”, states at paragraph 17:

“Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity of the data produced by the accounting system.

“They are of two types:

·        tests of details of transactions and balances;

·        analysis of significant ratios and trends…”

497.          SAG 7 deals with the evaluation of internal controls. Paragraph 10 states that:

“The auditor… needs reasonable assurance that transactions are properly recorded in the accounting records and that transactions have not been omitted. Internal controls… may contribute to the reasonable assurance the auditor seeks.”

498.          SAG 7 makes clear that, where internal controls are unreliable, the auditor should perform substantive procedures instead. It makes this point particularly in the context of small businesses “where segregation of duties is limited and evidence of supervisory controls is lacking”. In such cases “the evidence necessary to support the auditor’s opinion on the financial information may have to be obtained largely through the performance of substantive procedures.” (paragraph 27).

499.          SAG 9 deals with audit evidence. Paragraphs 3 and 4 provide:

“3. The audit evidence should, in total, enable the auditor to form an opinion on the financial information…

“4. The auditor’s judgement as to what is sufficient appropriate audit evidence is influenced by such factors as:

(a) the degree of risk of misstatement. This risk may be affected by:

(i) the nature of the item,

(ii) the adequacy of internal control,

(iii) the nature of the business carried on by the entity…”

500.          Paragraph 6 of SAG 9 explains “completeness” in the context of audit evidence obtained from substantive procedures as meaning that “there are no unrecorded assets, liabilities or transactions”.

501.          SAG 12 deals with Fraud and Error. It states:

“5. …the auditor seeks reasonable assurance that fraud or error which may be material to the [financial] information has not occurred… The auditor therefore should plan his audit so that he has a reasonable expectation of detecting material misstatements in the financial information resulting from fraud or error…

“6. Due to the inherent limitations of an audit there is a possibility that material misstatements of the financial information resulting from fraud and, to a lesser extent, error may not be detected. The subsequent discovery of [such material misstatements] does not, in itself, indicate that the auditor has failed to adhere to the basic principles governing an audit…

“8. The risk of not detecting material misstatement resulting from fraud is greater than the risk of not detecting a material misstatement resulting from error, because fraud usually involves acts designed to conceal it… Unless the auditor’s examination reveals evidence to the contrary, he is entitled to accept representations as truthful and records and documents as genuine. However the auditor should plan and perform his audit with an attitude of professional scepticism, recognising that he may encounter conditions or events during his examination that would lead him to question whether fraud or error exist…

“11. In planning and performing his examination, the auditor should take into consideration the risk of material misstatement of the financial information caused by fraud or error.

“13. If circumstances indicate the possible existence of fraud or error, the auditor should consider the potential effect on the financial information. If the suspected fraud or error could have a material effect on the financial information, he should perform such modified or additional procedures as he determines to be appropriate.”

Audit risk

502.          Audit risk is the risk that auditors may not detect a material misstatement in the audit client’s accounts and so may incorrectly give those accounts an unqualified audit certificate. According to SAG 27, this comprises three elements: inherent risk (the risk that the accounts may be misstated, which is the product of the client’s type of business, its environment and the nature of the accounts), control risk (the risk that misstatements may not be prevented or detected by the system of internal control) and detection risk (the risk that the auditor will not detect the misstatement).

503.          An important part of the process of planning an audit is to identify the inherent risks affecting the client and to devise procedures which will afford the auditor a reasonable expectation of detecting material misstatements arising from those risks (see SAGs 4 and 12, quoted above, among others). BFS, as a futures broker, was subject to a number of inherent risks. Many, such as the risk of errors in implementing clients’ instructions, are not relevant to this judgment. In this section I deal with two inherent risks which were alleged to have been relevant to D&T’s audits of BFS: the risk of unauthorised trading, and the lack of segregation of duties (though the latter could also be categorised as a control risk which increased other risks).

504.          An auditor’s assessment of audit risk is relevant to the audit evidence he will require in order to obtain reasonable assurance that the financial statements are not misstated: see SAG 9, paragraphs 3 and 4, quoted above.

D&T’s analysis of audit risk

505.          In their 1992 Audit Planning Memorandum, in relation to both BFS and BSS, D&T noted that “generally, management’s attitude towards control is good.... Mr Simon Jones, a director, and Mr James Bax, the managing director, are actively involved in the management of the company and exercise direct management controls”. Mr Mah’s evidence was that this referred to BFS as well as BSS. D&T concluded that “Based on our review of the various accounts, we have identified no specific audit risks in any audit areas and as such we will be performing standard audit procedures to test the various balances[395].

506.          In 1993, the Audit Planning Memorandum referred to tight regulation by SIMEX. It noted, for both companies, that “the local operations is [sic] directly controlled by Mr James Bax and Mr Simon Jones, directors of the local companies who are closely involved in the day to day running of the companies… We have no reason to doubt their integrity”. D&T concluded that the engagement risk for the Baring Securities (Singapore) Group (that is, the assessment of whether the auditor should accept the client’s instructions) was “Normal[396].

507.          The Audit Planning Memorandum made similar comments under the heading “Understanding of the Control Environment”, noting that “management’s attitude towards control is good” and that London oversaw the local operations.

508.          In both years D&T’s working papers for the Audit Summary Memorandum include the Risk Assessment: “No specific risk has been identified during the planning stage and the course of our audit.” In both years, their Audit Procedures Questionnaire stated that they had “evaluated the adequacy of controls within the accounting system and identified whether reliance on their operation may be possible” and stated that there were no significant weaknesses in the company’s systems.

The risk of unauthorised trading

509.          An aspect of audit risk for the audit of any trading company is the risk that the auditor may be given, as accurate, company records which do not accurately record the transactions entered into by the company for the period being audited. Unauthorised trading by a company’s trader which binds the company is a paradigm example of circumstances where this may occur. Where a trader knowingly enters into a trade which binds his employer which he knows he was not authorised to do (the position is different where he expects it to be ratified later), he will wish to conceal the trade by falsifying the company’s records.

510.          Mr Swinson contended, and Mr Mah, Mr Spence and Dr Fitzgerald (D&T’s expert on banking management)[397] accepted, that, where a company has authorised its employee to trade on a market in the company’s name, there will always be an inherent risk that the auditor will receive inaccurate trading records as a result of unauthorised trading. A futures broker is an obvious example of such a company. Thus at paragraph 6.66 of his report Mr Spence listed, as one of the three principal audit risks affecting a futures broker, “operational risk, including the risk of unrecorded or incorrectly recorded transactions, either caused by concealment of unauthorised trading or accounting breakdown.” He agreed in the course of cross-examination, as did Mr Mah, that unauthorised trading was an inherent risk for a futures broker and would usually involve concealment.

511.          On the other hand, it was accepted by all the experts that BFS did not appear to pose any unusual risk of unauthorised trading over and above the basic inherent risk in any futures broker – or, as Mr Spence pointed out, any company which employs traders.

Non-segregation of duties

512.          I have described above (see paragraph 193 to 199), how Leeson came to be in charge of the back office and the trading floor at BFS, and himself took an active, indeed a dominant, role as a floor trader. He was thus in a position to control both the execution of trades and how they were reported. This continued throughout the relevant period.

513.          Mr Bax, Mr Norris, Mr Killian, Mr Swinson, Mr Spence and, to a degree, Dr Fitzgerald agreed that, for a small execution-only broker, it was common to have one person in charge of both front and back offices. There is no evidence that, when performing their audits, D&T knew BFS to be doing anything other than execution-only trading. Therefore BFS did not pursue their allegation that D&T were negligent in failing to draw attention in their audit reports to the lack of segregation.

Increased risk of unauthorised trading

514.          Mr Swinson and Mr Spence agreed that lack of segregation in a broker was a control weakness which increased the inherent risk of unauthorised trading, and that the auditor had to take that increased risk into account in conducting his audit[398]. However Mr Swinson agreed with Dr Fitzgerald that, for an execution-only broker, the risk posed by non-segregation was “fairly minimal” or “very modest”[399]. Mr Swinson accepted that D&T might reasonably have perceived the audit risk as low, even taking into account the lack of segregation of duties[400]. Mr Spence in cross-examination put it slightly differently, that the BFS audit was a normal risk for a futures broker, with mitigating factors[401].  

515.          In principle, it seems to me that lack of segregation allows a trader, if fraudulent, to misreport his trades. The possibility of misreporting means that checks by the customer or by risk control for unauthorised trades might be ineffective. And by, for example, reporting trades he has not done, a trader could obtain margin for unauthorised trades. Therefore lack of segregation must increase the risk of unauthorised trading. However I have to take account of BFS’ own expert’s view that the increase in risk was “fairly minimal”.

Mitigating factors

516.          D&T, and Mr Spence on their behalf, relied on a number of factors which mitigated the risks of unauthorised trading posed by the nature of BFS’ business, as increased (to the extent it was) by the lack of segregation. As Mr Spence put it in his report: “the inherent risks associated with a futures trader could reasonably be seen by the auditors to be considerably reduced in the case of BFS.[402]” These factors were that: Leeson merely reviewed the work of the settlements staff, rather than doing it himself; Mr Jones actively supervised those staff; BFS had no funds of its own but relied on funds provided by its customers, who would check the calls it made on them; BFS was an execution-only broker; and BFS had only four customers, three of whom were related companies. I shall deal with these in turn.

Leeson was a reviewer, not a doer

517.          BFS’ front- and back-room staff formed separate teams, so below Leeson’s level trading and settlement functions were segregated. A number of witnesses, including Mr Norris, expressed their surprise that the BFS back-room staff obeyed Mr Leeson’s instructions without question over two and a half years. D&T reasonably contended that they could not have anticipated that. The presence and role of such staff at BFS meant that Leeson’s unsegregated role would have appeared less of a risk than it would have done if he had been performing both sides of BFS’ activities on his own. 

518.          On the other hand, all the settlements staff employed by BFS were extremely young and had no previous experience in the securities or futures industry. Miss Hassan, Miss Kader and Miss Sng gave evidence before me that they just did what Leeson told them to do, he was their boss and they assumed what he told them to do must be legitimate and normal in the industry. Mr Hawes gave evidence that, when in October 1994 he met Miss Hassan, who had been employed at BFS since July 1992, she seemed to have no knowledge of anything beyond the mechanical settlements tasks assigned to her. The staff’s lack of experience limited even their apparent value as a mitigating factor.

Supervision of Leeson

519.          BFS did not allege that D&T were negligent in believing Mr Bax and Mr Jones to be performing their proper role as active committed managers. However, insofar as D&T rely on their supervision of Mr Leeson as a mitigating factor, it is appropriate to examine the evidence relating to that supervision.

520.          Mr Jones’ evidence to me was clear. He told me that “no one, for a minute, thought I was involved on the settlements side of BFS.” He made no enquiries as to the operation of BFS’ control systems and had little idea what the settlements staff did. He said that he was not involved with BFS at all during 1992, until the end of the year accounts, and had less involvement in 1993. He acted as, at most, half an executive Finance Director. Once he began playing the other half of the role in February 1995, it took him less than a day to find things in BFS’ finances with which he was unhappy.

521.          This accorded with the evidence of Miss Hassan, Miss Kader and Miss Sng, all of whom told me that they had no contact at all with Mr Jones.

522.          Mr Jones’ evidence also accorded with that of Mr Hawes. Mr Hawes visited BFS for one day in February 1994. The most Mr Hawes could say in Mr Jones’ favour was that Mr Jones gave the impression of having a general overview of BFS’ activities and having a hand in controlling BFS. However on his return Mr Hawes asked Mr Norris whether he was happy for Leeson to be effectively running BFS alone (though Mr Norris did not recall that). Mr Hawes agreed that he knew that Mr Jones was not responsible for settlements or trading. He said that Mr Jones had no knowledge of the detail of BFS’ affairs, save in the area of cash management, and it was a waste of time to ask him about them. At least later in 1994, Mr Hawes knew that Mr Jones was not fulfilling the role of a finance director for BFS either. Mr Hawes passed these impressions on to James Baker in mid-1994 in advance of the internal audit. Mr Baker’s note of 22 June recorded that:

“Nick Leeson has too dominant a role looking after both trading (agency and proprietary) and settlements aspects of the business; there is no deputy to challenge him… TH believes that SJ basically leaves NL to his own devices. While he has no evidence to suggest that NL has indeed abused his position, the potential for his doing so needs examining.”[403]

523.          Mr Hawes told the Singapore inspectors that his comments were based on his one-day trip in February 1994, and a few subsequent conversations on the phone with Leeson.

524.          Likewise James Baker testified that, when he arrived at BFS in July 1994:

“It was quickly apparent from my work that Leeson had an all-embracing role within BFS which put him in charge of the trading of the company, for both house and clients, and in charge of the settlements department… Leeson had sole responsibility for the supervision of BFS’ back office team, he had cheque-signing and journal-passing powers, he was reviewing and signing off SIMEX deposit, variation margin and collateral reconciliations and he was reviewing and signing off bank reconciliations. It was also clear that Simon Jones had little, if any, role in the running of the settlements department of BFS. The indications that Leeson was in charge with little supervision by Jones, which I had received during my audit planning… were confirmed. I also found that, although Rachel Yong, the Financial Manager for BSS, prepared the accounts for BFS, she had no proper involvement in the accounts for BFS, but simply took whatever trading balances Leeson gave and produced BFS’ accounts from the figures given to her by Leeson.[404]

525.          Mr Jones’ lack of involvement in BFS’ affairs struck Mr Hawes in the course of a day’s visit, and struck James Baker “quickly”. It would be surprising if the perception of D&T’s audit team, who spent so much longer at BFS’ offices than Mr Hawes, was that Mr Jones was actively involved in supervising Leeson’s activities. Miss Koo spent 100 hours, and the other staff 33 hours, on the 1992 audit. Miss Koo spent 190 hours, and the other staff 79.5 hours, on the 1993 audit[405]. Those figures ignore the time the more senior D&T staff spent on the BSS audit, when they would also have had contact with Mr Jones. 

526.          Mr Mah’s evidence was somewhat contradictory. In chief, he said that in discussions with Mr Jones he received the impression that Mr Jones was actively involved in BFS’ affairs. In cross-examination, he agreed that D&T did not understand Mr Jones to exercise day-to-day supervision over either trading or back office operations, but merely a finance and accounting function. In re-examination he said that Mr Jones did have day-to-day involvement in BFS’ operations, and that he had no reason to believe that Mr Jones was not supervising Leeson[406].

527.          The problem here is that Mr Mah spent 4 hours on the 1992 BFS audit and 8 hours on that in 1993, no doubt mostly in his own office. His evidence as to D&T’s perception of the level of supervision of Leeson is of little value. Miss Koo, who spent far longer in BFS’ office and would have been better placed to give evidence on the point, was not called as a witness.

528.          It seems to me likely that Mr Mah’s evidence in cross-examination was correct: D&T were aware in both 1992 and 1993 that Leeson was effectively unsupervised on a day-to-day basis by anyone in Singapore in his running of BFS’ trading and settlements. They may have believed Mr Jones to have performed at least some financial control function, although James Baker’s evidence suggests otherwise.

529.          Accordingly I do not attach much weight to D&T’s perception that Mr Jones was supervising the back office as a factor which they were entitled to treat as reducing the audit risk. However they may have been entitled to take some comfort from Mr Jones’ role on the finance side.

BFS had no funds of its own[407]

530.          D&T contended that they perceived BFS to have very limited funds of its own, but to be reliant on margin received from its customers, who would reconcile margin calls to the trades conducted. Therefore it had very little, if any, scope for unauthorised trading since it would not be able to fund it.

531.          This was certainly a perception shared by BSL management, and indeed by Mr Bax. However they had considerably less knowledge of the workings of the SIMEX market than did Mr Mah.

532.          As explained at paragraphs 93 to 106 and 318 above, BFS was required by SIMEX to obtain significantly more margin from its customers than it was required to deposit with SIMEX. Furthermore, while BFS was only obliged to call for further margin if a customer’s equity balance fell below its maintenance margin, BFS in fact required its customers to keep their margin with it topped up to the initial level. Therefore BFS always held, for futures trades, about 25% more margin than it had to deposit with SIMEX. As of 30 September 1992, the excess margin was US$16.7m and as of 31 December 1993 it was US$18m[408]. We now know that during 1992 and 1993 Leeson financed his unauthorised trading largely from these excess customer margins, though by the end of 1993 he was also resorting to the use of BFS’ overdraft with Citibank (see paragraphs 317 to 324 above).

533.          Mr Mah’s evidence was that D&T were aware that BFS would hold these excess margins. D&T’s workpapers confirm this, and also note that BFS intended to require customers to maintain margin at the initial level[409]. Mr Mah’s only answer, when it was put to him that these were funds available for Leeson to use for unauthorised trading, was that they were customer funds which the customer could demand back at any time. That of course hardly answered the point.

534.          Against this, Mr Gaisman for D&T pointed out to Mr Swinson in cross-examination that neither he in his first report nor Messrs Bax, Jones, Norris or Hawes, nor the Singapore inspectors, nor Jonathan Parker J in re Barings plc (No. 5), appreciated that BFS had access to the excess margins.  Mr Gaisman put it to Mr Swinson, and Mr Swinson accepted, that in that light his criticism of D&T for not appreciating the point “does seem rather strong”.[410] I can understand Mr Swinson’s embarrassment at having come to the point late, but neither he nor any of the others listed had the experience of SIMEX which Mr Mah had. Mr Spence agreed that D&T could not just assume that BFS had no funds of its own, but needed to evaluate the evidence[411]. D&T knew that BFS did have access to this source of funds and cannot now rely on the fact that others, with less relevant knowledge than they, did not, as a factor reducing the audit risk.

535.          A second source of funds for Leeson’s trading was BFS’ overdraft, described at paragraph 321 above. Leeson was not using this at the time of the 1992 audit. In 1993, his use of it was not apparent at the planning stage, and therefore not relevant to D&T’s initial assessment of audit risk, but was apparent by the time D&T received the trial balance sheet in January 1994. Mr Mah pointed out, correctly, that this was intended to be a “daylight” facility only, not to be drawn on overnight. But it was obvious from the 1993 balance sheet that the overdraft was being used on an overnight basis. It was shown as a current liability, to the extent of S$13.75m. Mr Spence agreed that it was obviously being used overnight, for funding trading, and that that undermined any assumption made by D&T that BFS had no resources of its own with which to trade.

536.          Furthermore, BFS’ bank records, had D&T examined them, would have shown that BFS’ bank account had been overdrawn for most of November and December 1993. Therefore it was being used as a continuing source of funding, and certainly not as a daylight-only facility.

537.          D&T contended that they were entitled to expect BSL to monitor its excess funds in BFS’ hands. But D&T had no evidence that BSL either did this or understood that there should be excess funds.

538.          It might more strongly be argued that Mr Jones, as Finance Director, should have been monitoring the funds held by BFS and its overdraft, and ensuring that excess margins were on deposit at Citibank, not at SIMEX. Undoubtedly Mr Jones should have been doing that, and it was a natural assumption that he would do so. But it was only an assumption, and not tested. An effective finance function would also not negate the risks posed by Leeson running both trading and settlements. It might have prevented a trader using the excess margins to trade with, but it would not necessarily prevent him finding funds by other means. For example, he might report fictitious trades to clients and call margin in respect of them to finance his own trading; or build up extensive positions using the profits from temporarily profitable trading, which could expose the company to large losses if the market turned against him.

539.          Accordingly BFS’ apparent lack of funds to use in unauthorised trading was of rather less weight as a mitigating factor than D&T contended.

Execution-only broker

540.          Mr Swinson, Dr Fitzgerald and Mr Spence all agreed that, other things being equal, the risk of unauthorised trading was less for an execution-only broker than for a discretionary broker. This was because an execution-only broker had (i) limited resources and (ii) a customer watching over his shoulder.

541.          I accept that BFS being an execution-only broker reduced the risk of unauthorised trading. However reason (i) is weakened by BFS’ access to excess customer margins, considered above. Reason (ii) assumes both that a customer is more efficient than internal risk control in monitoring limits and that the broker reports trades accurately – an assumption which is weakened where there is no segregation of duties.

Small number of related company customers

542.          It is difficult to see why this should significantly reduce the risk of unauthorised trading. Mr Spence in cross-examination said only that it helped somewhat, but did not radically reduce the risk.

Conclusion on audit risk

543.          In 1992 and 1993, there was an inherent risk that an employee of BFS might have engaged in unauthorised trading. But that risk was no higher than was present in any futures broker.

544.          Mr Leeson’s position in charge of both front and back offices was usual for small brokers in Singapore and was agreed by Mr Swinson to increase the risk of unauthorised trading to only a minimal extent. Once the decision had been taken to carry out a substantive audit, the only impact of Leeson’s position was to require the auditors to be cautious about accepting representations from Leeson’s staff as audit evidence. However in a substantive audit they were anyway obliged to obtain external confirmation for the figures in the financial statements.

545.          The mitigating factors relied on by Mr Mah were of less force than D&T contended. But my scepticism as to some of them does not mean that the audit was in any sense high risk. Mr Swinson agreed that D&T were justified in assessing the audit as low risk and Mr Spence said it was normal risk, in both cases with no specific risk of unauthorised trading. In the light of that evidence I cannot agree with BFS’ submission that D&T should have perceived there to be a substantial risk of unauthorised trading and its concealment.

Effect of audit risk on audit procedures

D&T’s planning process

546.          Whether because of the simplicity of BFS’ balance sheet and its limited number of customers (D&T’s reason[412]) or because SAG 7 required it where there was limited segregation of duties (BFS’ reason), the parties agreed that D&T was correct to carry out a substantive audit of BFS. This required D&T to obtain reasonable assurance that the figures in the financial statements were correct and complete, otherwise than from the operation of the company’s systems and controls.

547.          The planning procedure in D&T’s audit manual required D&T, at the planning stage, to assess the audit risks to which BFS was subject and whether it was subject to any specific identified risks which required “particular attention in developing [their] audit plan[413]. If D&T decided to rely on the company’s controls, they would test the controls and perform basic substantive tests. If performing a wholly substantive audit, then for each specific risk identified, D&T were obliged to perform “focused substantive tests” to address that risk. To address potential errors for which they had not identified specific risks, D&T were obliged to perform an intermediate level of substantive tests.

548.          This approach was not criticised by BFS. Nor could Mr Swinson identify any specific risks which D&T should have identified at the planning stage. He hesitated as to how Leeson’s unsegregated role should have been categorised under the D&T approach, but did not suggest that either unauthorised trading or particular methods of concealing it should have been identified as a specific risk. Mr Spence agreed that unauthorised trading and its concealment were not, on the information available to D&T, specific risks which D&T should have identified and devised special procedures to detect.

549.          Thus, when Mr Mah gave evidence in chief that:

“we had no reason to identify the possibility of BFS entering unrecorded [which he explained as including unauthorised] transactions as a risk, and did not do so. Accordingly there was no reason for us to devise procedures to test for such transactions”[414],

he was referring to the identification of specific risks in the planning process required by D&T’s audit manual. When his comment is interpreted in that sense, Mr Swinson’s evidence was to similar effect.

Lack of segregation of duties

550.          Mr Swinson’s evidence was that D&T had to take the lack of segregation of duties into account in assessing the weight to be given to particular evidence, in particular explanations from Leeson. However he agreed with Mr Spence that in all other respects Leeson’s position was adequately dealt with by the decision to conduct a substantive audit. That position did not require the substantive audit procedures to be more rigorous, or the audit evidence stronger, than usual[415]. As I have noted, Mr Swinson agreed that BFS reasonably appeared to be a low risk audit, even after taking into account both the inherent risk of unauthorised trading and Leeson’s role.

Size of risk

551.          BFS contended that nevertheless there was a risk of unauthorised trading and its concealment. D&T should have guarded against that risk by devising procedures that catered for it. However I accept D&T’s submission that it is not enough to identify the existence of a risk, without paying attention to its size. Otherwise an auditor would always be liable whenever a fraud occurs. By definition there would have been a risk of that fraud occurring and the auditor would have failed to devise procedures that detected it. That cannot be correct.

552.          It is instead necessary to decide whether, in the circumstances of which the auditor should have known, the procedures which he followed gave him reasonable assurance that the financial statements were accurate. Only if a risk of which he should have known should have indicated to him that those procedures did not give such reasonable assurance was he required to carry out other procedures to cater for that risk. Clearly the size of the risk is relevant to that assessment. This seems to me the planning process laid down in the D&T manual and in my judgement was the correct approach.

What tests should D&T have conducted?

553.          BFS made three detailed criticisms of the tests which D&T conducted:

i)                    D&T should have controlled the procedure for sending out requests for customer confirmations;

ii)                   D&T should have conducted a test for open positions, of the sort devised by Mr Swinson; and

iii)                 D&T should have obtained a customer confirmation for the 88888 account.

554.          I consider each in turn.

Confirmation procedure

555.          As I have mentioned, BFS sent out the confirmation requests, and received them. They were in the form of specially-created faxes, rather than attaching reports from CONTAC. D&T subsequently checked the figures in which they were interested against CONTAC, but not others (such as most of the open positions listed in the faxes).

556.          There was a rather arid debate between the experts as to whether Statement of Auditing Practice 1 (“SAP 1”), which governed the verification of debtor balances, applied to BFS’ balances with its customers and, if so, whether D&T were in breach of it. It does not matter greatly, since D&T were not in clear breach of SAP 1 even if it applied, but in my view SAP 1 did not apply, as the customers were creditors.

557.          The point of substance is whether D&T should have retained control of the process of obtaining confirmations. This would have prevented Mr Leeson manufacturing a forged confirmation of the 88888 account in 1992. Mr Swinson’s evidence was that it was acceptable for BFS to send out the requests on faxes as it did, but that D&T should have had the returns directed to them. Mr Spence said that in an intra-group context it was usual to rely on inter-company correspondence, so it was acceptable for the returns to go to BFS. Mr Mason, BFS’ expert on Singapore practice, supported him. In the light of that evidence, I do not find D&T to have been at fault in allowing BFS to control the confirmation process.

The need to test open positions

The effect of the audit guidelines

558.          As is clear from SAG 4, quoted at paragraph 496 above, an auditor is concerned to obtain reasonable assurance of the completeness of the information in the financial statements, particularly where he is conducting a substantive audit. Mr Swinson gave evidence that, when auditing a futures broker, this required an auditor to obtain reasonable assurance that the brokers’ records agreed both with the exchange and with customers (to the extent that the broker was not trading on its own account). This was true for open positions as well as balances. Mr Spence agreed with the requirement to obtain reasonable assurance of the completeness of the records, and I think with its application to open positions, although he disagreed as to what test should be done to achieve that assurance.

559.          In any event, Mr Swinson’s basic proposition must be right, both as a matter of common sense and in the light of SAGs 4 and 7 above. A broker trades as a principal on SIMEX. If it has entered into trades on SIMEX which a customer refuses to acknowledge, the broker is liable for those trades. Conversely, if its customer has instructed it to effect certain trades but it has not done so, it is liable to the customer for breach of contract. An auditor has to obtain reasonable assurance that liabilities of this kind which would affect the financial statements as reflecting a true and fair view of the audit client’s affairs have been disclosed to him.

560.          An aspect of this duty on an auditor is a duty under SAG 12 (quoted at paragraph 501 above) in an appropriate case to plan his audit so as to obtain reasonable assurance that no unauthorised trading has taken place, and to follow audit procedures that will give him that assurance.

How should D&T have tested for completeness?

561.          Mr Swinson said that a test for completeness of the records of positions might be done in different ways for different company audits. But in BFS’ case, D&T had available an independent source of evidence in SIMEX. Mr Swinson suggested that D&T should have compared the total positions shown on the SIMEX CMP schedule with the total positions shown on the customer confirmations. This would have ensured that all positions entered into by BFS were authorised by customers. Given BFS’ small number of customers, such a test would have been quick and reasonably cheap to complete.  

562.          Mr Mah disagreed. He explained that D&T’s audit approach was to verify the balances owed to customers and owed to or by SIMEX. He accepted that an auditor needed to test for completeness of the data produced by the accounting system and reflected in the financial statements. He accepted that there was nothing in the audit guidelines to the effect that, in conducting his tests, an auditor need only look at balances and may ignore positions. But he contended that, in the case of BFS, substantive verification of the entire balance sheet was possible, and that provided D&T with reasonable assurance that the financial statements were complete.

The assurance to be gained from tests of the financial balances

563.          This was because any transaction had an effect on the financial balances. I have explained at paragraphs 113 to 121 above how CONTAC dealt with futures and options trades. It will be evident from that that any transaction entered into on behalf of a customer had an immediate effect on the equity balance for that customer. Futures transactions gave rise to an immediate margin requirement which, when paid, increased the equity balance and to a continuing requirement for settlement variation which increased or reduced the equity balance. Option trades gave rise to an immediate realised profit or loss which affected the equity balance as the premium was debited (on a purchase) or credited (on a sale). On a sale, the seller had to put up margin which, when paid, increased the equity balance. Therefore, Mr Mah said, verifying the equity balance on an account verified whether or not there were open positions on that account: if the balance was nil, D&T could feel satisfied that there would be no open positions on it.

564.          Mr Spence agreed with this logic. His evidence was that D&T complied with their duty, to obtain reasonable assurance that the financial records were complete and that no unauthorised trading had taken place, by doing a fully substantive audit which covered all balances. The customer confirmation for each account with a positive or negative financial balance established that all positions on that account were authorised. The fact that the confirmations added up to the exact total of amounts owed to customers shown in CONTAC meant that it was reasonable for D&T to believe that there were no other active accounts than those which had been confirmed. Mr Spence’s opinion was that D&T were not obliged to do more unless they were specifically put on enquiry as to the risk of fraud and thus of the manipulation of balances[416].

565.          BFS disagreed with this. First, it pointed out that, on a sale of an option, only the premium was reflected in the equity balance immediately. Margin was not reflected until paid, which might be late or never. However the important point is that any transaction had an effect on the equity balance on the trading day, whether or not it also had a further effect on subsequent days.

566.          Secondly, I heard much debate as to the chances of an account balance being nil despite having open positions on it, other than through deliberate manipulation. Mr Swinson’s expert report originally took the point that, when one looked at the trading general ledger produced by CONTAC for 31 December 1993, there were a large number of BFS accounts which had nil balances but clearly had open positions, since they showed a figure for settlement variation. Under cross-examination this proved to be a misapprehension. In fact all the accounts to which Mr Swinson referred were inactive accounts with no open positions. The only account which had a nil balance but open positions was the 88888 account.

567.          Mr Swinson’s misunderstanding of the description “variation margin” on the trading general ledger was perhaps understandable. But his contention that a test on balances alone was an inadequate test for open positions was clearly weakened by his acceptance that there were not, after all, other accounts with open positions which the balances test was unable to detect.

568.          Despite this, Mr Swinson adhered to his view that, even in the absence of fraud, there was a realistic possibility that an account which had open positions might have a nil balance by chance. He said that nil was a number like any other, and the chances of a balance being nil by chance were no different to those of it being any other number. Mr Swinson’s position on this seemed to me unrealistic. His own logic indicated that he was wrong. The chances of a particular active account ending up at the accounting reference date with any particular balance, including a nil balance, are infinitesimal without deliberate manipulation.

569.          Thirdly, BFS contended that D&T’s approach was inadequate because it was liable to be defeated by fraudulent manipulation of balances. Mr Swinson stated that auditors should be alive to the risk of accounts being manipulated to achieve a desired effect, whatever the type of company. Therefore BFS contended that D&T should have devised a test, such as Mr Swinson’s, which would not have been defeated in that way. I deal with this below.

570.          It was put to Mr Swinson in cross-examination that D&T’s audit of balances included agreement of the figure for settlement variation between BFS’ records and those of SIMEX. That was the total of all margin, settlement variation on futures positions, option premiums and realised profit and loss. Mr Swinson accepted that the fact that BFS’ records agreed with SIMEX rendered it likely that BFS’ records reflected all transactions entered into by BFS on SIMEX (as of course they did). The converse would only be true in the event of deliberate fraud[417].

571.          Mr Swinson further agreed that the agreement of the balances in CONTAC to customer confirmations would (if the confirmations were prepared properly, which, in relation to balances, they were) detect both inadvertent and fraudulent unauthorised trades. The only exception would be if balances had been fraudulently manipulated to zero[418].

572.          Accordingly it seems to me that Mr Mah was right that, subject to one proviso: (i) D&T in planning their audit were entitled to do so on the basis that any transaction would have an effect on the equity balance of the account to which it was booked; (ii) therefore the chances of an account having a nil balance but open positions were extremely low; (iii) therefore D&T were entitled to assume that, when they had obtained customer confirmations for account balances which added up exactly to the total in BFS’ books for sums due to customers, there were no other accounts which had open positions; (iv) therefore they had reasonable assurance that the financial statements they were auditing were complete, in the sense that they reflected all transactions entered into by BFS.

573.          The one proviso was the possibility that, not only had there been unauthorised trading, but it had been concealed by fraudulent manipulation of the financial balances. This issue therefore comes down to whether D&T were negligent in not carrying out a test directed specifically to the risk of such manipulation.

Risk of manipulation of balances

574.          D&T put forward a number of reasons indicating that the test devised by Mr Swinson (that is, agreeing open positions between SIMEX records and customer confirmations) was not a test which any reasonable auditor would have carried out in the circumstances of the BFS audit:

i)                    BFS was able to point to no audit literature or guidance which suggested such a test, nor to produce an expert witness who had conducted such a test when auditing a futures broker (though Mr Swinson himself had conducted it once, on the audit of a commodity broker 27 years ago);

ii)                   C&LS did not carry out such a test in their 1994 audit. Nor did C&LL in their audits of BSL;

iii)                 the Singapore Public Accountants Board, which brought disciplinary proceedings against Mr Mah arising out of the BFS audits[419], did not bring any charge based on his failure to perform such a test.

575.          With less force, D&T pointed out that Mr Swinson’s test would not have been practicable in auditing a bigger broker with more customers, not all of whom would return confirmations. However in that case the auditor would carry out a controls-based, rather than a fully substantive, audit. Presumably he would devise tests that would check that those controls would produce complete records and detect unauthorised trades: that was not a question explored in evidence before me. But in this case D&T were carrying out a substantive audit precisely because BFS was a small operation, with few customers, and that was why it was verifying the balance sheet by looking for external evidence.

576.          However I think the decisive point is Mr Spence’s evidence that D&T were not required to perform a test which was designed only to detect this particular form of concealment of fraud by unauthorised trading. I have, at paragraph 543 above, reached the conclusion that unauthorised trading, and deliberate concealment of that unauthorised trading, were inherent risks in any audit of a futures broker. However in the case of BFS, all the experts agreed that there did not appear to be any specific risk of unauthorised trading. Mr Swinson accepted that the risk appeared low. I have further concluded, at paragraphs 572 and 573 above, that the procedure followed by D&T would have detected any form of unauthorised trading save where it had been concealed by manipulation of the balances.

577.          Given those conclusions, Mr Spence must be correct that the audit procedures which D&T followed gave them reasonable assurance that there had been no misstatement due to unrecorded or unauthorised trading, and D&T were not obliged to devise further procedures specifically directed to that risk. Still less were D&T obliged to devise procedures which had no other purpose than to detect one particular means by which fraudulent trading might be concealed. Mr Swinson’s test would have had no other purpose than that: he accepted that the only misstatement which his test would catch and D&T’s approach would not was one where the balances had been fraudulently manipulated to zero.

578.          Accordingly I find that D&T were not negligent in failing to carry out Mr Swinson’s test for open positions in either 1992 or 1993. Given the considerations I have listed above, it is impossible to say that they fell below the standard described by Lord Bingham in Eckersley v Binnie, 18 ConLR 1, at p.80:

“[A professional man] must bring to any professional task he undertakes no less expertise, skill and care than any other ordinarily competent members of his profession would bring, but need bring no more. The standard is that of the reasonable average. The law does not require of a professional man that he be a paragon, combining the qualities of polymath and prophet.”

579.          BFS’ contention on this issue would require Mr Mah to have been a prophet, rather than ordinarily competent.

Confirmation of the 88888 account

580.          There is a separate issue as to whether D&T should have insisted on a confirmation of the balance on the 88888 account in 1993, despite it having a nil balance. BFS’ argument here depended upon D&T appreciating that the 88888 account was a principal account, rather than one of the many sub-accounts of the omnibus accounts (for example the BSL segregated account). Otherwise there was no more reason for them to obtain a confirmation for it than for any of those sub-accounts. Mr Swinson accepted that, in the 1994 audit, it was understandable for C&LS not to confirm nil balances, where they believed the balances in question to be included in the omnibus accounts[420].

581.          BFS relied on D&T having seen a confirmation for the 88888 account in 1992 (that forged by Leeson) and noted that in their 1993 working paper dealing with amounts due to related companies. Therefore, Mr Brindle argued, D&T knew it was a principal account. As such it should have been confirmed. Even though the balance on it was zero, that might be the result of fraudulent manipulation. It was also possible that the customer believed the balance to be something other than zero, but would not have the chance to correct BFS’ misapprehension if it was not asked.  

582.          I take BFS’ point that, logically, an account which was confirmed separately in 1992 cannot have been a sub-account of one of the other BSL accounts which was also confirmed. Otherwise its balance would have been counted twice. Therefore it must have been a separate, principal account.

583.          However it follows from my conclusion on BFS’ wider case on testing for open positions that that does not take BFS far enough. I have concluded already that, in the absence of any specific identified risk of fraud involving manipulation of balances, D&T were entitled to assume that a nil balance would not have open positions. They were presented with confirmations of balances from customers which added up in total to the exact figure shown in CONTAC for the balance owed to customers. That gave them reasonable assurance that all other accounts must be nil and therefore had no open positions. In the absence of any warning bells, there can be no reason to require them to obtain a confirmation of any such accounts.

584.          That accords with the evidence of Mr Mah and Mr Spence. It also accords with the evidence of Mr Mason, save that Mr Mason suggested that he would make an exception for accounts which appeared on a “lead schedule”[421]. I do not see any reason why either that factor (which bore strong signs of being manufactured to fit the present facts) or the related factor that a particular account had a balance the previous year and therefore ought to be the subject of a confirmation, should affect my conclusion.

585.          As for BFS’ point that the customer might believe the balance to be something other than zero, I take Mr Spence’s point on that. He asked whether BFS suggested that D&T should have sought confirmations from third parties who were not shown as customers on CONTAC but who might have proved to be such and to have balances. I agree that BFS’ argument strays well beyond the limits of the speculation in which an auditor can be reasonably required to indulge when assessing whether he has reasonable assurance of the accuracy of a balance in the accounts.


586.          I therefore conclude that D&T reasonably assessed the audit risk as normal for a futures broker, with no specific risk of unauthorised trading over and above that applicable to any futures broker. They checked the balances shown on CONTAC against both SIMEX’s records and customer confirmations. Given the level of risk which they had reasonably assessed to exist, that gave them reasonable assurance that (i) all transactions into which BFS had entered on SIMEX were reflected on CONTAC, (ii) BFS’ customers had authorised all transactions entered into on the accounts which were the subject of customer confirmations, (iii) those were the only active accounts and therefore (iv) the financial statements were complete.

587.          D&T’s approach was liable to be defeated only by fraudulent manipulation of the balances on CONTAC. It was not alleged that D&T should have identified that as a specific risk. Therefore they were not required to devise and perform a procedure which had as its sole object the detection of such a fraud. Therefore D&T were not negligent in either the 1992 or the 1993 audit in failing to perform the test on open positions devised by Mr Swinson.

588.          Nor were D&T negligent in following the procedure they did for obtaining customer confirmations nor in failing to obtain a customer confirmation for the 88888 account in 1993.


589.          Even if D&T had carried out Mr Swinson’s test in 1992, it would not by itself have detected Leeson because he had closed out all open positions on the 88888 account as at the 31 September 1992. However that created a Ą670m “hole” in the accounts which it became necessary for Leeson to conceal from the auditors. The method that he used to do so was one which D&T’s audit approach, of confirming and reconciling balances only, was capable of uncovering.

Leeson’s concealment

590.          As I have mentioned at paragraph 305 below, at the time of the September 1992 audit the 88888 account contained losses of Ą664 million (c.S$9.2 million). Leeson concealed them by the following steps[422]:

·on or before 30 September, he requested BSL to remit to BFS’ customer account the sum of Ą670 million for value 1 October. It seems likely that he made this request to Mr Bowser, head of the BSL Settlements Department at the time. Before me Mr Bowser had at least a vague recollection of Leeson telephoning him twice to ask for advance margin, giving as explanations market volatility or a holiday. It seems likely that one of these occasions was in September 1992, and the other was when Leeson repeated the trick in December 1992;

·          BSL personnel completed and authorised a payment request form on 30 September 1992, requesting payment for value on 1 October[423]. This was authorised by the signature of Mr Bowser. It was given effect to by a telex (which is not in evidence) from the BSL payments office, apparently direct to Barclays Bank in Tokyo, instructing it to make payment to BFS. In the books of BSL (which were not available at BFS so that an auditor of BFS would have been unaware of the fact) the payment was recorded as being made on 1 October 1992;

·          the sum was received by Citibank in Singapore into BFS’ customer account, via Citibank in Tokyo, on 1 October. This is evidenced by a faxed advice from Citibank Singapore to BFS, which is dated 1 October and states “Credit advice: Yen 670,000,000 Value 10.01.92 [using American date notation]. We credit your account no. 0/888832/025 [BFS’ customer account]”[424]

·          Miss Hassan prepared a journal entry which would have correctly credited the receipt on 1 October to the BSL Segregated Customer account in CONTAC. It is not known whether the receipt was in fact so credited in CONTAC. However Leeson deleted that journal entry, either on 1 October (in which case it is likely that the entry was never made in CONTAC) or on 6 October (in which case the credit in CONTAC must have been retrospectively reversed)[425],

·          instead, Riselle Sng made a journal entry crediting the sum to the 88888 account in CONTAC on 30 September. There is no evidence whether she did this on her own initiative or not, though the strong supposition is that it was on the instructions of Leeson. Miss Sng gave evidence before me but was not questioned on this point. There were in evidence both the journal entry prepared by Miss Sng (debiting Bank and crediting the 88888 account) and an extract from the daily activity statement for the 88888 account[426]. That carried the date of 30 September and showed the Ą670m as cash received into that account and that the account holder was BFS itself;

·          this credit gave rise to a difference between BFS’ books (which showed the sum as received on 30 September) and BFS’ bank account (which showed it as not received on that date[427]). The difference was shown in the BFS bank reconciliation for 30 September, prepared by Miss Hassan on 1 October. In it she described the difference as “Funds due from BSL – Seg A/C[428];

·          crediting the Ą670 million to the 88888 account left a small credit on the account, of Ą5.6m. Given D&T’s substantive approach to the 1992 audit, this balance would need to be confirmed by the customer. Leeson prepared a confirmation request to BSL, describing the account as “Baring Securities Limited London (88888)”, in respect of this balance. It is agreed that he forged Mr Bowser’s signature on it, dated 7 October[429],

·          on 6 October Leeson created a journal entry, transferring the Ą670m from the 88888 account in CONTAC to the BSL Segregated Customer account[430],

·          when Leeson carried out a similar manoeuvre in December 1992, his fax asking Mr Bowser for Ą395m said “As with the end of September, please arrange to pay an additional margin call of JPY 395m for value 4.1.93. As before, we will return this amount as soon as possible after this date.”[431] The text of the December 1992 fax implies that the September funds were returned to BSL. No individual repayment of the Ą670 million has been found but, once it had been credited to BSL’s account with BFS, it would increase the equity balance. Therefore it would automatically be taken into account in future margin calls and repayments of margin to BSL[432].

D&T’s investigation

591.          The field work for the 1992 audit was conducted by Miss Koo. It appears that she investigated the Ą670m receipt. She did not give evidence either to this court or to any of the various bodies which have investigated the collapse of the Barings group. Therefore we can discern what Miss Koo did and saw only from the documents in the audit file, in particular from her markings on the documents in that file.

592.          From the audit file, it appears that Miss Koo reviewed the bank reconciliation for 30 September (“the Bank Reconciliation”) on 7 October 1992, when auditing the figure in the trial balance for “Other deposits”[433]. This figure included amounts on deposit with Citibank and at SIMEX, in both cases in BFS’ house and customer accounts. In the final balance sheet those amounts were shown as “Cash”.

593.          From her manuscript notes on the relevant working papers, it appears that Miss Koo checked the cashbook figure for the Citibank customer account shown on the Bank Reconciliation against the Trading General Ledger Account balance summary in CONTAC. She verified the smaller reconciling item, which was settlement variation (which CONTAC took into account the day before SIMEX withdrew it from BFS’ bank using its direct debit mandate). Likewise she checked the figure for the bank balance against the Citibank statement. Miss Hassan had described the other reconciling item, of Ą670m, as “Funds due from BSL – Seg A/C”. Miss Koo clearly received an explanation for this item from BFS staff, because she annotated the Bank Reconciliation as follows:

“Baring Futures took into their books the receipt of funds based on customer advice that they will transfer funds value 30/9/92. However cash was not received as at 30/9/92.

“Sighted Citibank fax advising the receipt of $670m [sic] value 1/10/92”

594.          It is not known which of BFS’ staff provided this explanation to Miss Koo.

595.          I have described above the Citibank fax referred to in this note, which did indeed describe the receipt as (allowing for the notation) “value 1/10/92”.

596.          Miss Koo saw a further relevant document, probably also on 7 October although she has not dated it. This was the daily activity statement for the 88888 account dated 30 September, showing the Ą670m as cash received, which I have mentioned above. Miss Koo wrote, against the Ą670m credit, “Cash received”. The statement shows the client as Baring Futures (Singapore) Ltd, with BFS’ address and “Attention: Nick Leeson”. The account number is shown as 88888.

597.          Also on 7 October 1992 Miss Koo started her work on the item in the trial balance representing liabilities due to related companies. The evidence of Mr Spence was that Miss Koo would have started with the six confirmations which BFS had sent to, and received back from, BSL and BSJ (or apparently had done so in the case of the forged confirmation of the 88888 account). These were for four BSL accounts (the segregated, non-segregated, house and 88888 accounts), and the two accounts for BSJ Tokyo and BSJ Osaka. The totals of the figures for “account balance” and “variation margin” on each account confirmation, all added together, equalled exactly the total figure for “client payable” in BFS’ trial balance. That was itself checked against the client general ledger in CONTAC.

598.          Accordingly BFS’ records showed that BFS owed related companies S$80.212m; and Miss Koo had confirmation that the related companies agreed that BFS owed them that amount. She also knew that, for example, BFS and BSL agreed that, of that S$80.212m, S$61.6m was in respect of the BSL segregated account (though Miss Koo did not check this figure against CONTAC). This meant that, if Miss Koo believed that BFS had credited the Ą670m to BSL’s segregated account on 30 September (and thus included the Ą670m in the S$61.6m), she might infer that BSL had also treated the payment as made on 30 September (and so done the same).

599.          One of the consequences of the complete absence of evidence from Miss Koo is that we do not know in which order she dealt with the two topics of Cash at the bank and Liabilities to related companies. The work sheets for both are dated 7 October. However the fax from BSL providing the confirmation for the segregated account was sent in two versions, at 13.46 and 15.10 respectively London time on 7 October. Singapore was eight hours ahead of London. Therefore it seems unlikely that Miss Koo saw the BSL confirmation for the segregated account on 7 October. So she would have been unable to conclude her work on the issue of liabilities to related companies until the following day.

600.          We do not know for certain when Miss Koo concluded her work on Cash. But she had all the documents necessary for that on 7 October. Therefore it must be likely that she concluded her work on the cash issue before she received the BSL confirmation for the segregated account and concluded her work on Liabilities to related companies.

The parties’ arguments

601.          BFS: BFS’ case was that conventions, described by Mr Swinson, governing the accounting treatment of receipts are clear. A mere promise to pay on a particular date does not justify booking the payment on that date unless it is actually received on that date. To do otherwise is to record an untruth. BFS however accepted an exception to this general rule in the case of payments between companies in the same group, in order to maintain consistency between the books of the paying and recipient companies. Thus BFS accepted that Miss Koo would have been justified in allowing BFS to treat the payment as having been received on 30 September 1992, and so in the period of the 1992 accounts, if she was satisfied that BSL was treating it as having been paid on that date.

602.          BFS contended that the explanation given to Miss Koo was not to that effect, but was of a promise which had not been fulfilled. Timing differences were not an explanation: the Citibank fax made it clear that BSL intended the payment to be made on 1 October. Therefore it was clearly wrong to treat the payment as received on 30 September. It was of prime importance that payments were recorded in the correct financial year. In particular, auditors should be alert to the risk of window-dressing as a result of payments or receipts taking place close to accounting reference dates, and this payment was just the sort of transaction which should have been investigated with that in mind.

603.          BFS contended that there was no evidence that D&T paid any attention to the BSL confirmation in resolving the anomalous treatment of the Ą670m payment. They could not have done so on 7 October, as the confirmation was not available until the next day. In any event, D&T should not have treated the confirmation as trumping the Bank Reconciliation or the evidence of receipt on 1 October. Instead they should have contacted BSL or C&LL to establish how the Ą670m had been treated in BSL’s books.

604.          BFS suggested that Miss Koo sought to check the double-entry to the customer’s account and saw the daily activity statement for the 88888 account. She should then have investigated the obvious discrepancy between the payment being credited to that account and the explanation that the payment was to BSL’s segregated account. She should also have investigated the purpose of the 88888 account.

605.          D&T: D&T contended that they had no ground when auditing the payment for suspecting fraud. Nor could they suspect that BSL would make such a payment on Leeson’s simple request, thus enabling him to practise such window-dressing. Mr Swinson’s conventions as to the recording of receipts were not firm, or even written, rules, but were just means to the end of ensuring the accounts gave a true and fair view. The key issue was to ensure that BFS’ treatment of the Ą670m payment was consistent with BSL’s.

606.          The explanation apparently given to Miss Koo was consistent with BSL intending the payment to be made, and therefore booked, on 30 September. Problems caused by timing differences were commonplace, as Singapore was a working day ahead of London, so the explanation provided for the delayed receipt was plausible. The money was received in accordance with the explanation, from BFS’ parent and in cash. Given that BSL confirmed the inter-company balance, the only plausible explanation was that BSL had also booked the payment on 30 September.

607.          Miss Koo looked at the daily activity statement in order to ensure that the payment was recorded in CONTAC for 30 September. Mr Swinson accepted that she could not be expected to remember that 88888 was not the number of the BSL segregated account. It was far too narrow a ground to hang a finding of negligence on, that Miss Koo should have noticed that the account holder was shown as BFS, given that in BFS’ books there was by that time another (error) account in BFS’ name.

Factual witness evidence

608.          The only factual witness evidence before me on this issue was that of Mr Mah, even though all the field work on both the 1992 and 1993 audits was done by Miss Koo. D&T explained that they were unable to call Miss Koo to give evidence: she declined to assist on the grounds that her current employer was not prepared to allow her to spend time on the case. BFS contended that this was no reason for not obtaining Miss Koo’s evidence in some form, if only by serving a witness statement, which might have been admitted in evidence, or by letter of request. D&T accepted that they had been in touch with Miss Koo. I concur with BFS’ criticism. As the following description shows, Miss Koo was plainly a material witness.

Cut-off and window dressing

609.          All the expert witnesses agreed that the issue of cut-off, or ensuring that transactions are recorded in the right accounting period, is one to which auditors should be alert. This is so without regard to the possibility of fraud or window-dressing: it is fundamental to ensuring that accounts give a true and fair view of a company’s affairs that a payment or a receipt is recorded in the correct period. This is made clear in the D&T International Audit Manual:

“In identifying specific risks, we need to identify how material mis-statements might occur. There are six types of possible mis-statements…:

…Cut-off: Transactions are recorded in accounts in the wrong period.”[434]

and again:

“The incidence of misstatements is greater for transactions recorded (or improperly omitted from recording) at or near the end of an accounting period (i.e. cutoff)”[435]

610.          Window-dressing is a particular aspect of cut-off. It is not necessarily the product of fraud such as was encountered here: the company may just be seeking to improve its current year’s results. The Coopers & Lybrand manual devotes a section to window dressing[436], which it defines as:

“the process by which transactions are recorded before the year end but then reverse or mature soon after the balance sheet date. The purpose and substance of such transactions is to alter the appearance of the balance sheet.”

611.          Among the examples given is “including in the bank balance monies received after the balance sheet date. This has the effect of inflating balances in the cash records.”

612.          The manual advises that “when checking intra-group transactions, especially between group companies with different accounting dates, the auditor should be alert for entries intended to support window dressing.”

613.          Likewise SAG 12 lists examples of conditions or events which increase the risk of fraud or error. Of the four categories, one is “Unusual transactions”, examples 1 and 2 of which are:

“1. Unusual transactions, especially near the year end, that have a significant effect on earnings.

2.   Transactions with related parties.”

614.          Accordingly D&T should have been alert to checking that transactions were recorded in the right accounting period, and the propriety of transactions just before or just after the end of the accounting period. That was so even though they had reasonably not identified any specific risks (including that of window-dressing) at the planning stage. The D&T audit manual states:

“The fact that we have not identified a specific risk relating to an account does not mean that a misstatement in that account cannot exist. Our audit plan is designed to ensure that, if a material misstatement exists, we are reasonably likely to detect it. Therefore, in developing our audit plan, we need to ensure that none of the six types of potential errors that may relate to each significant account balance or to the financial statements as a whole [one of which is cut-off] is overlooked.”[437]

615.          In conducting its audit of BSS in 1992, D&T conducted an express window dressing test”, which involved checking the bank accounts for five days either side of the year end and satisfying themselves that there were no significant unusual items. Mr Mah was unable to say why no such test was done for BFS (nor was it for BSS in 1993). There was a very similar test listed in an audit programme attached to the 1992 working papers for one of the BFS bank accounts[438]:

“Select material payments from bank statement and ensure that these are recorded in the correct accounting period. Basis: amounts above $5,000.”

616.          This was marked as outstanding on the work paper. While Mr Spence treated this programme in his report as applicable to all BFS’ accounts, D&T suggested that it only applied to one account, and that was not a trading account. Mr Spence also suggested it only applied to payments, not receipts.

617.          Whether that was so or not, Mr Mah accepted that in this audit D&T looked at cut-off as being one of the areas of risk[439]. Mr Spence accepted the importance of ensuring that transactions were recorded in the right accounting period and that, when considering the Ą670m, D&T were addressing cut-off[440]. Therefore it can be no explanation, for example for Miss Koo not looking at the account details on the daily activity statement for the 88888 account, that she was just auditing the cash figure and needed to do no more than check that the cash had been received. She needed to check also that it had been recorded in the right accounting period.

The conventions as to recording payments and receipts

618.          Mr Swinson formulated what he described as the accounting conventions as to the recording of receipts. He derived them from the UK Statement of Standard Accounting Practice 2, which states that “revenue and profits are not anticipated, but are recognised by inclusion in the profit and loss account only when realised in the form either of cash or of other assets the ultimate cash realisation of which can be assessed with reasonable certainty.” 

619.          According to Mr Swinson’s conventions, a recipient of a payment should account for it on the date of receipt. Money is only treated as received if it has been received in cash or in a form convertible into cash without further action by the payer (for example, a cheque). Therefore the recipient of a payment which was promised for 30 September, but not received until 1 October, should account for it on 1 October.

620.          If a payer instructed payment to be made for value on a particular date, the payer would book the payment on that date. Mr Swinson caused a certain amount of confusion about this, in that he stated at one point that a payer generally records payments in its cashbook when it issues instructions to make the payment. But in the light of his later evidence, and that of Mr Spence, it seems that a payer would only do that if it believed that payment was to be made on the same day. Thus Mr Swinson told me that, if BSL gave instructions on 30 September for payment to be made on 1 October, BSL would record the payment in its books on 1 October (as happened). Furthermore he said that it would not be reasonable for an auditor to assume that, because BSL must have given the instruction on 30 September, it must have booked the payment on the same date[441].

621.          Mr Mah and Mr Spence accepted Mr Swinson’s conventions as the general rules to be applied[442]. However Mr Spence said that, since the conventions were not written down, Miss Koo would not necessarily have thought in terms of them. He contended that the Ą670m came within an exception to the conventions. He identified two possible exceptions. The first was that the payment was equivalent to an unbanked cheque, a suggestion which he put in his report but did not strenuously maintain before me. The second was that D&T might have assumed that BSL had intended the payment to be made on 30 September and the late receipt was due to the time difference between London and Singapore.

622.          I accept that Mr Swinson’s conventions are not written down in the auditing guidelines. But they amount to little more than the expression of a common sense approach to accounting for receipts which I should have thought would be basic to any auditor’s approach. I was not shown any auditing textbooks but it seems fairly obvious, even to a layman, that a recipient of a payment should usually account for it on the date on which it is received. To do otherwise is to record an untruth. Likewise a payer should account for the payment on the date on which it is paid or intended to be paid. The experts agreed that, in an intra-group context, it is necessary that payer and payee should account for a payment on the same date and, depending on the method of payment, that may require a divergence from the usual rule. But the usual rule would be the auditor’s starting point.

The Bank Reconciliation and BFS’ explanation

623.          Given the identified need to pay attention to the issue of cut-off, Mr Swinson’s view was that Miss Koo should have looked carefully at the transaction and the explanation she was given. This was so even though Miss Koo might not at that stage necessarily have considered window dressing as a possible explanation of the Ą670m item on the Bank Reconciliation. I agree with that. The credit seems to an outside eye a paradigm potential suspect for a window dressing transaction, given that it was between related companies, on the last day of the accounting period, and of a significant amount. Even Mr Mah admitted[443] that with hindsight the explanation given to Miss Koo raised obvious risks of window-dressing and double-counting. I accept, as did Mr Swinson, that at the time there was no evidence or suspicion of fraud. However, as I have recorded above, Mr Mah accepted that cut-off was a risk area and Mr Spence accepted[444] that, when considering the Ą670m, D&T were addressing cut-off. Miss Koo should have been concerned to check not only that the cash had been received, but that it was accounted for in the right accounting period. She should have investigated the accounting treatment of the receipt, and probed the explanation given, carefully.

624.          In the light of the accounting evidence I have described above, the explanation that Miss Koo had been given indicated that BFS had accounted for the payment in the wrong accounting period. A payment received on 1 October should have been accounted for on 1 October. The only reason to depart from this rule would be if BSL had accounted for the payment on 30 September. In that case, for BFS to account for the receipt on 1 October would lead to inconsistent treatments of the payment in the group consolidated accounts. Mr Swinson accepted that in such circumstances BFS might account for the receipt on 30 September, but only after the question had been discussed with BSL or its auditors and such treatment had been agreed.

625.          There was no reason to conclude from the explanation given that BSL had booked the payment on 30 September. Nor was there from the Citibank fax. Indeed, BFS contended that the statement on the fax that the payment was value 1 October (as Miss Koo noted on the Bank Reconciliation) should have indicated to her that BSL intended the payment to be made, and therefore booked, on 1 October. However I accept D&T’s contention that the fax signified no more than that Citibank Singapore credited the payment to BFS’ account as of 1 October, and did not denote that the payment was expressly made for value 1 October.

626.          It seems from the expert evidence that there are only two circumstances in which BSL would have accounted for the payment on 30 September. These are if (i) BSL instructed its bank to make payment to BFS and believed wrongly that the payment would be made on 30 September, or (ii) BSL agreed with BFS that both would book the payment on that date. Given that both telexed instructions and telegraphic transfers are effectively instantaneous, an auditor would not assume (i) without further clear evidence. (ii) would clearly need to be confirmed with BSL.

627.          Thus Miss Koo needed clear evidence that, for one or other of these two reasons, BSL had booked the payment on 30 September. She in fact saw two further pieces of evidence, the daily activity statement for the 88888 account and the customer confirmations.

The daily activity statement for the 88888 account

628.          Mr Mah stated that it was not necessary for Miss Koo to trace the credit into a customer account at all. She was just verifying the cash balance[445]. Mr Swinson’s evidence was that Miss Koo should have verified the explanation given to her. That included checking that the payment had been booked into the BSL segregated account in CONTAC[446].

629.          Mr Spence’s evidence was that Miss Koo needed to look for the double entry (that is, to find where in BFS’ books appeared the credit corresponding to the entry in the cashbook) only if the BSL confirmation had not satisfied her that the Ą670m had been recorded on the right date:

“I think even to get to that point she would have to be unhappy about the consistency point we discussed this morning, about the agreement of the balances. So to get to that point where she was looking for the double entry, I think she would have to have some reason to be unhappy with the overall position[447].

630.          She might be unhappy with the position, and therefore need further evidence, because she did not regard the confirmation as sufficient evidence or because she had not dealt with the client confirmations at that point.

631.          When Mr Spence was asked why Miss Koo should have looked at the daily activity statement at all if she were not looking for the double entry, he was unable to suggest an alternative explanation[448]. In fact, Mr Spence’s own conditions requiring Miss Koo to look for the double entry seem to have been satisfied. The BSL segregated account confirmation was not received until late on the evening of 7 October (see paragraph 599 above). So it was not available to satisfy her that the Ą670m had been recorded on the right date. On that basis, it followed from Mr Spence’s evidence that he agreed with Mr Swinson that Miss Koo should have checked where in BFS’ books the Ą670m appeared.

632.          The daily activity statement showed that the Ą670m had been paid into the 88888 account and that was an account in the name of BFS (there was one other account in BFS’ name, a legitimate error account, but that was opened only on 7 October 1992[449]). Mr Swinson accepted that Miss Koo could not have been expected to remember that the BSL segregated account had a number other than 88888. But the account name on the statement made it clear that it was not the BSL segregated account. The statement was therefore inconsistent with the explanation that the payment had been from or to BSL’s segregated account. Mr Mah agreed that he would have found the statement most remarkable, for that reason[450].

Client confirmations

633.          Mr Mah and Mr Spence accepted that the explanation from BFS, the Citibank fax and the daily activity statement did not justify treating the Ą670m as received on 30 September[451]. However they said that clear evidence that BSL had treated the payment as made on 30 September, which justified BFS in doing the same, was provided by the second further piece of evidence which Miss Koo saw, the BSL confirmations. As I have said, it seems likely that Miss Koo only saw the complete set of confirmations after 7 October.

634.          Mr Spence accepted that there is no evidence in the audit files that Miss Koo relied upon the BSL confirmation in this context. Mr Mah did not rely upon the argument in his February 2000 witness statement, though he denied in evidence that this was because he did not rely on the point at the time. We have no evidence from Miss Koo.

635.          Without Miss Koo’s evidence, we shall never know, but it seems to me likely that Miss Koo did not in fact probe the Bank Reconciliation any further at this point. She regarded herself as carrying out an exercise to audit the figure for cash at bank. She was not given any express window dressing test to carry out. She had established that the money had been received into BFS’ bank and into CONTAC. At that point, she simply accepted the explanation given to her without giving any thought to cut-off or window dressing. She treated the client confirmations as a separate exercise, part of auditing the liabilities owed to related customers.

636.          However, the relevant question is whether the effect of the confirmations was such as reasonably to satisfy the concerns which a reasonably competent auditor should have had, whether Miss Koo had them or not. 

637.          The confirmations showed that BSL agreed the amounts owed to it by BFS as set out in the confirmation requests. The requests set out overall totals for each omnibus account, so the confirmations did not provide express confirmation that the Ą670m was included in any particular account. Mr Spence inferred that Miss Koo must have believed that both BFS and BSL had treated the figure for the BSL segregated account, as shown on the confirmation for that account, as including the Ą670m. Mr Spence said that she must have concluded that both treated the payment as credited to that account on 30 September in order to be satisfied that the balance sheet gave a true and fair view[452]. The question is whether, on what we can infer Miss Koo knew at the time, and in the absence of any direct evidence from her, she was justified in so concluding.

638.          There are two objections to D&T’s contention that she was so justified. First, I have found that Miss Koo should have reached the point where she had a concern that the Ą670m had been treated as paid in the wrong accounting period, and needed clear evidence to allay that concern. She might have obtained that evidence by contacting C&LL, or raising the point with BSL. She did neither. The fact that BSL confirmed the balances for its accounts was consistent with the explanation that had been given by BFS. But the evidence of Mr Swinson, which I accept, was that it was not sufficiently clear evidence to rebut the concern that the payment was being recorded on a different date to that on which BSL had recorded it[453].

639.          The second objection is even stronger. Miss Koo knew from the Bank Reconciliation that the payment of the Ą670m was from BSL, to its segregated account. She had seen the daily activity statement recording the entry of the Ą670m into BFS’ books. I have found that she should have observed who was shown as the account-holder, if not the account number. That was BFS. Had she noticed that, she could not have regarded confirmation of the balance on the BSL segregated account as confirming that the two companies had treated in the same way a payment which BFS had paid into an account in its own name. Nor could the (forged) confirmation on the 88888 account have provided any comfort, given that the payment was from BSL, and to its segregated account.

The order of events

640.          There was some debate during the hearing as to whether this conclusion would be different if Miss Koo did the work on the confirmations before that on the cash. In the light of my finding that Miss Koo would not have received all the confirmations until after 7 October, this point does not arise.

641.          However it would not affect my conclusion even if the order were reversed. In that case, Miss Koo would have established first that BFS and BSL agreed the balances on BSL’s accounts. She would later have found a large payment which appeared to have been booked by BFS on the wrong date (according to the normal rules) and on a different date to that on which BSL would be assumed (according to those rules) to have booked it. Without further enquiry, it would not be open to her simply to assume that BSL must have booked it on 30 September. But she then would have seen the credit to the 88888 account. That should have made her realise that either the explanation which she noted on the Bank Reconciliation was wrong (in that BSL must have paid the money for credit to the 88888 account) or the confirmations for both the segregated account and the 88888 account were wrong.

642.          My conclusion is therefore unaffected by the order in which Miss Koo carried out the two exercises.


643.          I therefore conclude that:

i)                    the Bank Reconciliation and BFS’ explanation of it should have caused D&T to look for clear evidence that BSL had booked the Ą670m to the same accounting period as had BFS;

ii)                   in seeking such evidence, Miss Koo looked at the daily activity statement which showed the money being credited to a client account. She should have noticed that the account concerned was in the name of BFS, and was not the BSL segregated account;

iii)                 Miss Koo’s work on the confirmations, which she concluded subsequently, did not provide clear evidence that BSL had booked the payment to the same accounting period as had BFS, and was quite inconsistent with the payment being credited to an account in BFS’ name.

644.          Therefore Miss Koo should not have accepted an accounting treatment of the Ą670m in BFS’ books as having been received on 30 September. She or those supervising her should have required evidence from BSL or its auditors that BSL had treated the payment as made on 30 September. The acceptance by Miss Koo of the explanation apparently given to her as to the accounting treatment of this payment without further investigation was, in my judgement, negligent. 


645.          D&T contended that, even if I find Miss Koo to have been negligent in relation to the Ą670m, the claim against them based on this issue fails on causation grounds. They argued that the onus is on BFS to establish that proper performance of D&T’s duty would have prevented further losses. D&T said that, if they had challenged the treatment of the Ą670m, the minimum they were required to do was either to require the sum to be treated as received on 1 October, or to confirm that BSL treated it as paid on 30 September.

646.          D&T contended that, if they had required the sum to be treated as received on 1 October, Leeson would have forged a confirmation from BSL for the previous balance less Ą670m. The resulting discrepancy between BFS’ and BSL’s records would not have been picked up on consolidation because the BSL financial control department was too incompetent and/or would have accepted whatever explanation Leeson gave them. In support of this, D&T pointed to an impressive contemporaneous example of incompetence in the BSL financial control department’s treatment of sums due between BFS, BSL and BSJ. D&T said that BSL would have been no more competent over this issue.

647.          On the alternative hypothesis, that D&T sought confirmation from BSL that it had treated the payment as made on 30 September, D&T said that it is likely that Leeson would have forged a fax to that effect; or possibly persuaded Mr Bowser to provide such confirmation. In support of this, D&T pointed to Mr Bowser’s inexperience in the area of inter-company reconciliations and his sharing the relaxed mores of the BSL settlements department. They alleged that, when the possibility was put to him in cross-examination, his objection was one of practicality rather than propriety.

648.          BFS accepted that the onus of proving causation was on it. It said that the correct test was, not the minimum that D&T could have done without being negligent, but what it is most likely that they would have done if they had not been negligent. Mr Swinson’s evidence was that D&T should have both taken the Ą670m out of cash and investigated the transaction leading to it. BFS also challenged the hypotheses that D&T would have accepted a revised confirmation and that Mr Bowser’s evidence gave any reason to suppose that he would have agreed to rewrite BSL’s records to assist Leeson.

649.          In my view BFS is correct as to the test to be applied: see BBL v Eagle Star, [1997] AC 191, at page 221-2. However that issue is rendered irrelevant, and D&T’s hypotheses are answered, by BFS’ further contention. This was that, if D&T had not been negligent, they would have discovered that the Ą670m had been credited, not to the BSL segregated account, but to the 88888 account in BFS’ name. In the light of that, neither a forged balance confirmation from BSL nor a forged fax stating that BSL had treated the payment as made on 30 September would have answered the questions D&T should have asked.

650.          That seems to me correct. If D&T had appreciated the significance of the daily activity statement, they would have pointed out to Leeson that it was inconsistent with the Bank Reconciliation. If he removed the inconsistency by crediting the Ą670m to the BSL segregated account instead, the balance on that account would then no longer match the BSL confirmation. This would prove that BSL had not treated the payment as made on 30 September. The debit balance on the 88888 account would also increase by Ą670m. Leeson might have produced a further forged confirmation for the increased balance, but it is difficult to see how D&T could reasonably have accepted it in those circumstances.

651.          If instead Leeson had told D&T that the explanation recorded on the Bank Reconciliation was wrong, and the credit was to the 88888 account, that should have prompted questions about that account and why BSL was paying S$9 million into an error account. Those questions would have been in addition to the need to resolve the original question as to whether the receipt had been booked to the wrong date. That would have required Leeson either to treat the sum as received on 1 October and produce a revised confirmation for the 88888 account or to obtain a confirmation from BSL that it had treated the payment as made on 30 September. By that stage D&T would have been on notice to look carefully at whatever Leeson produced. It is difficult to see how their enquiries, if pursued competently, would not have revealed the truth.

652.          Therefore I find that, if D&T had not been negligent in their investigation of the Ą670m receipt, the 88888 account and Leeson’s unauthorised trading would have been revealed. Accordingly that negligence was a cause of the subsequent losses.


653.          One of the pleaded allegations of negligence against D&T summarised at paragraph 470 (iii) above is a failure to investigate a fact apparent from BFS’ 1993 balance sheet, that the total of the margin deposited with SIMEX as at the 31 December 1993 by BFS exceeded that shown as owing to BFS customers.  BFS contended that D&T should have realised that this was anomalous and that the difference should have been the other way round.  Such a realisation should have triggered enquiry by D&T into this anomaly which would have led to the discovery of the 88888 account and Leeson’s unauthorised trading.

SIMEX rules on margins

654.          I have explained at paragraphs 93 to 106 above that SIMEX required members to call margin from their customers at the initial margin level, but only to deposit margin with SIMEX at the maintenance margin level. For futures, initial margin was 25% higher than maintenance margin[454]. For options, initial margin was also higher than maintenance margin although, since option margin was calculated by SPAN, the relationship was not so rigid.

655.          The result was that a broker which did not trade on its own account would always hold more margin on behalf of its customers than it deposited on their behalf with SIMEX. As I have explained at paragraph 533 above, D&T knew of this and that BFS margined its customers at the initial margin level.

656.          There were two possible exceptions to this general rule. The first was timing delays. Where a broker entered into a futures contract on day T, he had to pay maintenance margin in respect of that trade to SIMEX early on day T+1. The same applied to margin due on option sales on day T. Likewise if market movements on day T resulted in the broker having to pay to SIMEX further margin on short option positions or settlement variation on futures positions, it had to do so on day T+1. By contrast, the customer was required under SIMEX rules to pay margin to its broker by day T+3.

657.          So a broker might have to fund margin for a customer for up to two days, while waiting for funds to be received. On the other hand, this effect might be balanced out by a similar delay in the broker paying to the customer funds received from SIMEX as a result of earlier transactions.

658.          The second possible exception arose because SIMEX only repaid margin (which might be swelled by profits on successful trades) to a broker if asked. Therefore if the broker did not ask for margin back from SIMEX promptly, the amount deposited at the exchange might be artificially inflated. Of course, in that event, the broker would be unlikely to have paid the equivalent amount to the customer either. In any event, BFS always asked for margin to be repaid promptly.

659.          As of 31 December 1993, the surplus margin actually held by BFS in respect of authorised trades was about US$21m[455], although this was entirely consumed in funding the unauthorised trading on the 88888 account.

The 1993 balance sheet

660.          In 1993, the BFS balance sheet showed the amount receivable from SIMEX to be S$103,895,471. One would have expected the amount owed to customers to have been about 125% of that: S$129 million. Instead, the balance sheet showed the amounts due to related companies (BSL and BSJ) to be S$88,329,749 and trade payables (amounts due to BNP) to be S$966,179 – a total margin held on behalf of customers of S$89,295,928. This was S$40 million less than would have been expected[456]. So amounts due to customers were 31% less than would be expected; or, to put it the other way round, the amount deposited at SIMEX was 45% more than expected.

661.          The difference between the margin held on behalf of clients and that receivable from SIMEX (S$14.6 million) was approximately equal to the figure for Bank Overdraft in the balance sheet. That showed that that was how BFS was financing the difference and, by doing so, breaking the terms of its overdraft, which was a daylight facility only.

662.          There is no evidence that Miss Koo appreciated the significance of this difference during her field work (the figures giving rise to the imbalance are included in her workpapers dated 9 January 1994[457]). Mr Mah gave evidence that he would have reviewed the overall financial statements at the analytical review stage of the 1993 audit (which was probably on 24 January1994). But there is no record in the audit files of such a review and he did not recall giving any attention to this ratio. It passed equally unremarked by local and London management, SIMEX, C&LL and (later in 1994, in the course of their 1994 audit of BFS) C&LS.

The parties’ cases

663.          BFS contended that D&T were negligent in not investigating this margin imbalance. There were only two explanations for it: either BFS was financing its customers’ margins or it was trading on its own account. The former would have been a breach of SIMEX rules except to the extent it was due to the two business days’ timing difference mentioned above. In any event, it was irrational for BFS to be financing customers’ margin shortfalls. The latter would fundamentally contradict D&T’s understanding of BFS’ activities and would require urgent investigation.

664.          D&T replied that any auditor, seeing this imbalance at the end of the audit, would assume it to be due to delays in receiving margin from customers at the year-end. If they had enquired of Leeson, that would have been an entirely plausible explanation for him to have given (and if they had asked Mr Jones, he would have given them the same brush-off as he did later to more serious questions from C&LS). BFS did not pay BSL interest on margin held on its behalf (whereas it did pay interest to BSJ), so it was not surprising if, in return, it bore the cost of funding delays in the receipt of margin from BSL. Given that local and London management, who would be expected to know the financial arrangements between BFS and its customers, did not question the imbalance, why should D&T have done so?

Accounting guidelines

665.          SAG 13 deals with Analytical Procedures. It states that analytical procedures include:

“study of relationships among elements of financial information that would be expected to conform to a predictable pattern…”

666.          Paragraph 4 states that analytical procedures are used for three purposes: in planning the audit, as a substantive test to obtain audit evidence and as an overall review of the financial information in the final review stage. They should be used in all audits for the first and last of these purposes.

667.          SAG 13 continues:

Investigating unusual fluctuations and items

13. When analytical procedures identify unusual fluctuations and items, that is, relationships that are unexpected or inconsistent with evidence obtained from other sources, the auditor should investigate them.

14. The investigation usually begins with inquiries of management and the auditor should: corroborate management’s responses – for example by comparing them with his knowledge of the business and other evidence obtained during the course of the audit; [and] consider the need to apply other audit procedures based upon the results of such inquiries.

15.Further investigation… would be required if management is unable to provide an explanation or if the explanation is not considered adequate.

Analytical procedures used in the overall review

16. In forming his overall conclusion that the financial information as a whole is consistent with his knowledge of the entity’s business…, the auditor should perform analytical procedures at or near the end of the audit. The conclusions drawn from the results of such procedures are intended to corroborate conclusions formed during the audit on individual items of financial information and assist in arriving at the overall conclusion as to the reasonableness of the financial information. However they may also identify areas requiring further procedures.”

The need to investigate

668.          The expert witnesses largely agreed on this issue. Mr Swinson and Mr Spence both said that the balance was the wrong way round (which Mr Mah also accepted), that the two explanations suggested by BFS were the only possible explanations for the imbalance, and that one of them (financing customers’ margins) raised compliance concerns. They agreed that D&T need not have jumped to any conclusions, but should have enquired into the issue[458]. Mr Mah accepted that[459].

669.          The fact that the imbalance in margins was mostly financed by BFS’ overdraft does not affect that conclusion. As Mr Swinson said, it did not explain how the imbalance arose, merely how BFS was filling the gap. Indeed Mr Spence agreed that the use of the overdraft to fund the imbalance reinforced the need for an enquiry, since it undermined one of the assumptions relied upon by D&T in planning the audit, that BFS had no funds of its own[460].

670.          D&T pointed out that this issue arose at the very end of the audit (though that is only because Miss Koo did not spot it during the field work), at a time when D&T had substantively tested virtually 100% of the balance sheet. They had seen no evidence suggesting unauthorised trading. There was an obvious plausible explanation for the imbalance. D&T contended that it was merely an error of judgement, not negligence, not to investigate the issue.

671.          I do not see that this contention can stand with the unanimous evidence of the experts and Mr Mah that an enquiry should have been made. D&T should have investigated this issue, either while Miss Koo was carrying out the final fieldwork for the statutory audit or when Mr Mah carried out his analytical review.

672.          D&T attempted to draw a distinction between an enquiry (a question put to management) and an investigation (something more searching). They contended that the expert evidence established only that the former, not the latter, should have been made. The question of substance underlying that rather fine distinction is whether D&T would have been entitled to accept an explanation given by management in response to their enquiry, or whether they should have required supporting evidence for it. It is to that question that I now turn.

Would D&T have been entitled to accept Leeson’s explanation?

673.          No doubt if Miss Koo or Mr Mah had asked Mr Leeson about the imbalance, he would have sought to explain it away by saying that BSL and/or BSJ were late with their margin payments. Given Mr Jones’ behaviour in early 1995, he might well have supported Leeson.

674.          Mr Swinson accepted that this would be a plausible explanation, but only if it were consistent with the records and if the funds were later received[461]. His position that D&T should not have accepted such an explanation on its own as sufficient evidence seems borne out by SAG 20, paragraph 5. That states that, when management makes representations on a material matter, the auditor should:

“seek corroborative audit evidence from sources inside or outside the entity, evaluate whether the representations… appear reasonable and consistent with other audit evidence obtained…, and consider whether the individuals making the representations can be expected to be well-informed on the matter.”

675.          D&T contended that this paragraph did not apply, as the matter was not a material one, given the stage the audit had reached. But the purpose of the analytical review, according to SAG 13, paragraph 16, was “to corroborate conclusions formed during the audit on individual items of financial information and assist in arriving at the overall conclusion as to the reasonableness of the financial information”. If the result of the review was contrary to those conclusions, then (quite apart from the rest of SAG 13, which I deal with next) resolution of that contradiction must have been a material matter.

676.          Paragraph 14 of SAG 13, quoted above, also requires corroboration of management responses to enquiries about unusual relationships thrown up by analytical procedures. D&T contended that paragraph 14 applied only to the use of analytical procedures as substantive tests and that paragraph 16, which dealt with their use in the overall review, did not refer to corroborating management responses. I agree that, as a matter of construction of the Guideline, paragraph 14 is located in the part dealing with substantive tests. But application of paragraph 16 leads me to a similar conclusion. As I have said, paragraph 16 states that analytical procedures at the review stage are intended to corroborate earlier conclusions. It goes on that, if their results show a relationship which is inconsistent with earlier conclusions or (which seems the import of the final sentence) are themselves unexpected, the auditor should resolve the point by further audit procedures. The obvious guide as to what those procedures should be is paragraph 14.

677.          Mr Spence agreed that, if management responses were given to D&T in relation to the imbalance, they would have to be corroborated[462]. It is true that he had been referred to paragraph 14 at that point, and was not referred to paragraph 16. But he was dealing with the subject of what D&T should have done after spotting the margin imbalance at the review stage. He agreed with the proposition put to him, that management responses would have to be corroborated. Insofar as Mr Spence’s evidence generally had any weight, it was as evidence of good audit practice, rather than just evidence as to what the SAGs say (especially since he had no experience of auditing in Singapore), and I take his evidence on the topic in that light.

678.          So I conclude that the SAGs would have required D&T to have corroborated Leeson’s explanation. This conclusion is reinforced when I look at the plausibility of an explanation that the imbalance was due to delays in the receipt of margin from customers. That could only have been put in one of two ways (BFS established that a possible third, an advance margin call by SIMEX ahead of the 1 January holiday, was not made). Leeson might have attributed the imbalance to:

i)                    margin calls in relation to heavy trading on 29 and 30 December[463], resulting in BFS paying margin to SIMEX on T+1 (prior to the year-end) but the customers not having to pay margin until T+3 (that is, within the three business days allowed by SIMEX rules, but after the year-end); and/or

ii)                   BFS’ customers paying margin later than T+3.

679.          Taking these in reverse order, explanation (ii) would have meant that BFS was in breach of SIMEX margining rules. SIMEX had fined BFS for breach of these rules in its 1993 audit, and D&T did tests during the 1993 audit to check that BFS was now complying with them. So D&T should have been alert to investigate indications that BFS was breaking the rules and should certainly have taken further steps if that was the explanation. Any enquiry within the Barings group would have revealed that BFS’ customers were not in the habit of late payment of margin.

680.          But in fact the explanation would have been inconsistent with the tests on margining which D&T had done. Their workpapers[464], produced in the early work prior to the year end, show that BSL paid margin on T+1 and BSJ paid on T+2 (this was true for every one of the 20 payments for which test results are given, save for one payment of Ą230m, of which Ą214m was paid on T+1 and Ą29m on T+3). So the explanation would have been implausible but, if believed, should have led to further investigation.

681.          I therefore reject D&T’s contention that corroboration was provided by D&T’s knowledge that there was an inherent tendency for a SIMEX broker to pay margins to SIMEX before it received them from customers. Nor does it add anything for D&T to point out that, as BFS did not pay interest to BSL on the balances it held on BSL’s behalf, there would have been nothing irrational in BFS meeting the cost of the short-term funding thus required. 

682.          Explanation (i) would have seemed improbable for several reasons.

683.          First, the explanation would have seemed inconsistent with the tests on margining I have mentioned, which showed that BFS’ customers were paying margin very promptly. There seems no particular reason why this position should be different because of the Christmas and New Year holidays: BSL or BSJ would have been arranging payment of margin on 29 and 30 December, after the Christmas break and before the New Year one[465].

684.          Secondly, the size of the discrepancy (customer margins were 31% less than the level which would have been expected) would have seemed too large to be accounted for by such a factor. Indeed, trading by BSJ, BSL and its customers on 29 and 30 December might if anything be expected to be much lighter, rather than much heavier, than usual. D&T pointed to the size of the flows of cash in and out of BFS’ account. On one date they picked from BFS’ bank statements, the flow out of the yen house account was over S$13 million. But the amounts held for customers were S$40 million less than would have been expected. An exceptional series of transactions might have explained a discrepancy of such a size, but it would have been exceptional and needed to be verified.

685.          Thirdly, the explanation would have been disproved by even a cursory glance at BFS’ bank records. Those showed that the overdraft had continued for most of November and December 1993. The imbalance was not the result of a short-term unusual pattern of trading over Christmas.

Others saw the imbalance and did not react

686.          A further factor upon which D&T relied to support their argument that they would have been entitled to accept the explanation given by Leeson or Jones was that the imbalance of margins was apparent on the face of the accounts. They were entitled to assume that local or London management would see it and take action if it seemed suspicious, especially since Mr Jones and Mr Hawes were believed to be monitoring BFS’ overdraft.

687.          That argument assumes that D&T believed management to have sufficient knowledge of SIMEX to appreciate, not only that the balance was the wrong way round, but the extent of the imbalance. Mr Bax and London management certainly had no such knowledge. Mr Jones gave evidence in the course of the preliminary issue that he reviewed the balance sheet and there were no figures in it which he did not understand[466], so he clearly did not have the necessary knowledge. D&T might perhaps have expected BFS’ Finance Director to appreciate the consequences of SIMEX margining, but they had no evidence that he did and I have expressed above (see paragraphs 519 to 529) my doubts as to how far they were justified in believing Mr Jones to be fully involved in BFS’ activities.

688.          More importantly, SAG 13 makes it clear that, once an auditor has identified an unexpected relationship, he must investigate. A management explanation on its own is not enough to satisfy the investigation. In the light of that, it cannot be enough for an auditor not even to investigate, because he assumes that management would have an explanation if he did.

689.          Nor could D&T reasonably rely on the failure of C&LS, C&LL or SIMEX to notice the imbalance. When they took over in 1994, C&LS had no reason to query the results of the previous year’s audit and the imbalance had disappeared (because of the Dollar Funding) in the accounts they were to audit. At least as it appears in advance of hearing the evidence which may be adduced in Phase 2 of the trial, C&LL were relying on the local auditors and were as ignorant of the consequences of SIMEX margining rules as London management was. As for SIMEX, it did not know that BFS was not supposed to trade on its own account, or to have resources of its own. On the contrary, SIMEX knew that BFS had a House account and had no reason not to believe that to be used for house trading.


690.          Therefore I conclude that D&T should have investigated the anomalous imbalance of margins on 31 December 1993. If they had done so, they should not have accepted an explanation from Leeson or Mr Jones. They should have looked for evidence that the customer margin was indeed received in the few days after 31 December 1993, and that the balance then reverted to the expected way round. If the margin was received, they should have established how long it had been outstanding, to check whether BFS had broken SIMEX rules.

691.          Once they established that the margin was not received, D&T would have realised that Leeson’s explanation was incorrect. Therefore the only other possible explanation for the imbalance was the true one. The imbalance represented margin on positions at SIMEX which were not held on behalf of customers - BFS was trading for its own account. D&T could have checked this explanation, among other means, by comparing the positions shown on SIMEX’s CMP statement with the customer confirmations. That would have confirmed that there were indeed a large number of positions booked to BFS but not confirmed by clients.

692.          In my judgement, this failure to investigate by D&T constituted negligence.


D&T’s case

693.          This aspect of the case bears strong similarities to the preliminary issue upon which I gave judgment on 20 March 2002. In that, D&T alleged that Mr Jones was reckless in signing the representation letters addressed to D&T as part of the audit process in 1992 and 1993. They contended that his action gave rise to a counterclaim in deceit for damages equal to D&T’s liability in the present case. I concluded that Mr Jones had not been reckless in signing the letters and therefore decided the preliminary issue against D&T.

694.          D&T based the present counterclaim upon three representations which they alleged were made to them in the course of the 1992 audit by or at the instigation of Leeson. These representations were as follows:

i)                    the representation given to Miss Koo on or about 7 October 1992 in the course of her audit of Cash to explain the reconciling item of Ą670m in the bank reconciliation. This is fully described at paragraph 593 above. As recorded on the bank reconciliation[467], the representation was that:

“[The Ą670m represented] Funds due from BSL – Seg A/C”. “Barings Futures took into their books the receipt of funds based on customer advice that they will transfer funds value 30/9/92. However cash was not received as at 30/9/92.

ii)                  the representation as to the nature of the 88888 account, given to Miss Koo on or about 20 October 1992 in the course of her testing of BFS’ data processing system. As recorded on her worksheet[468], the representation was that:

“The a/c 88888 represent trade errors done by Baring Futures, thus no commission is charged. NB: The errors done by Baring Futures is fully absorbed by Baring Securities (London)”

iii)                 the representation that the true balance on the 88888 account as at 30 September 1992 was Ą5,685,310. This was comprised in a fax confirmation, apparently from Mr Bowser but actually created by or at the instigation of Leeson. It was shown to Miss Koo on or about 7 October 1992 in the course of her work on the amounts due to related companies (see paragraphs 590 and 597 above).

695.          D&T alleged the following:

i)                    the representations were made by or at the instigation of Leeson,

ii)                  they were false,

iii)                 they were made with the intention of deceiving D&T,

iv)                D&T relied upon the representations in signing their 1992 audit certificate and thus putting their name to BFS’ financial statements, and their action in doing so was reasonable,

v)                  as a consequence of the representations, D&T suffered loss and damage in an amount equal to any liability that they may have to BFS, and

vi)                BFS was responsible for Leeson’s actions in making the representations.

696.          D&T pleaded that as a result BFS’ claim failed for circuity, and/or D&T were entitled to set off their claim for damages for deceit in diminution or extinction of BFS’ claim.

697.          BFS admitted (i) to (iii) above. They did not admit (iv) in relation to the second representation. They denied (v) and (vi), causation and vicarious liability, for all three representations.

Vicarious liability

698.          BFS contended before me that D&T had to show that Leeson acted within both the course of his employment and the scope of his authority before BFS should be made liable for his fraudulent representations. D&T argued that, while in most cases the two concepts lead to the same result, it is sufficient to render BFS liable if either is satisfied.

699.          Both parties relied on The Ocean Frost [1986] 1 AC 717, in which Lord Keith considered the liability of an employer for the deceit of its employee. He stated, at page 782, that in cases of fraudulent misrepresentation, “the essence of the employer’s liability is reliance by the injured party on actual or ostensible authority” and, later on that page, that:

“At the end of the day the question is whether the circumstances under which a servant has made the fraudulent misrepresentation which has caused loss to an innocent party contracting with him are such as to make it just for the employer to bear the loss. Such circumstances exist where the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer’s business. They do not exist where such belief, although it is present, has been brought about through misguided reliance on the servant himself, when the servant is not authorised to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorised to do, and when the employer has done nothing to represent that he is authorised to do it.”

700.          The Ocean Frost was a case which turned upon whether an employer was bound by a contract concluded on its behalf by an employee who had no actual or apparent authority to do so. The misrepresentation founding the fraudulent misrepresentation claim was that of the employee, as to his own authority. Therefore the issues fell to be determined in a predominantly contractual context. In essence the case simply reaffirmed that a fraudulent agent’s own representation cannot found his own ostensible authority to conclude a contract on behalf of his principal.

701.          By contrast, cases involving the liability of the employer for torts committed by employees, including deceit, outside a contractual context are usually decided by application of the course of employment test. Lord Woolf MR in Credit Lyonnais v ECGD, [2000] 1 AC 486, at page 494, stated that:

“the wrong of the servant or agent for which the master or principal is liable is one committed, in the case of a servant, in the course of his employment, and, in the case of an agent, in the course of his authority.”

702.          I gratefully adopt that statement. There seems to me nothing to be said for the application of two, potentially conflicting, tests to decide whether an employer is liable, as in this case, for a fraud practised on a third party by an employee giving rise to a claim in deceit. In such a case course of employment is the test.

703.          However in the event that I am wrong about that, I shall consider both aspects of BFS’ argument. They say that, firstly, Leeson was not acting within the course of his employment and therefore had no ostensible authority to make the representations. Secondly, even if he was, D&T should have known that he had no actual authority to make them and therefore are unable to rely on ostensible authority.

Course of employment

704.          BFS rely on the New Zealand case of Dairy Containers v NZI Bank [1995] 2 NZLR 30, to argue that Leeson’s representations were not within the course of his employment. In that case, three managers defrauded the claimant company over a period of years, undetected by either the Board or the auditors. The auditors conceded that, in assessing the company’s fault for the purposes of contributory negligence, the company was not liable for the fraudulent acts of the managers. But they argued that the company was liable for each manager’s failure to report on the defaults of the other two.

705.          Thomas J both agreed that the concession had been rightly made and rejected the auditors’ argument based on concealment. He stated at page 77 that “concealing [fraud] is an essential part of the fraudulent activity” and that the managers’ “fraudulent activity, including concealing that activity, was entirely outside the scope of their employment.” He concluded at page 78 that:

“Certainly an employer may be vicariously responsible for acts which are intended or wilful, or which are dishonest or even fraudulent (see Lloyd v Grace Smith & Co), but the employees’ action in this case in concealing, not only their own frauds, but the frauds of each other, does not have about it the character of conduct which can be said to be undertaken in the course of employment. It was dramatically and deliberately hostile to the employer’s interest; it cannot be viewed as merely an unauthorised mode of performing an authorised duty; it cannot be said to be ‘acts to which the ostensible performance of his master’s work gives occasion or which are committed under cover of the authority the servant is held out as possessing or of the position in which he is placed as a representative of his master’ (see Deatons v Flew)…”

“To my mind, therefore, the interests of the fraudsters in concealing the frauds and the interests of the company were antithetical in the extreme. It would be inappropriate to hold the company responsible pursuant to either the principle of corporate identification, the doctrine of imputed negligence or the concept of vicarious liability. These doctrines are notoriously elastic in their definition and application, but they are not so elastic that they must be extended to behaviour which was essentially part of a programme of fraudulently bilking the company.”

706.          BFS contended that the two recent House of Lords authorities of Lister v Hesley Hall [2001] 2 WLR 1311 and Dubai Aluminium v Salaam [2002] 3 WLR 1913 support its argument. In the former, owners of a children’s home were found liable for the acts of sexual abuse committed by the warden. BFS pointed to the emphasis which their Lordships placed on the need for a close connection between the wrongful act and the employment. Thus Lord Steyn stated at paragraph 20:

“If this approach to the nature of employment is adopted [that propounded by Salmon LJ in Rose v Plenty], it is not necessary to ask the simplistic question whether in the cases under consideration the acts of sexual abuse were modes of doing unauthorised acts. It becomes possible to consider the question of vicarious liability on the basis that the employer undertook to care for the boys through the services of the warden and his employment. After all, they were committed in the time and on the premises of the employers while the warden was also busy caring for the children.”

707.          Lord Steyn’s emphasis on the employer undertaking to care for the boys was echoed by Lord Hobhouse. He said at paragraph 55 that “the liability of the employers derives from their voluntary assumption of the relationship towards the plaintiff… and their choosing to entrust the performance of duties to the servant”. Likewise in Lloyd v Grace Smith & Co, BFS contended that the firm of solicitors was held liable for the fraud of their managing clerk because they had assumed responsibility to the claimant to take care of her affairs, and entrusted the clerk with the task of doing so. BFS contended that in this case BFS did not undertake any responsibility to D&T.

708.          I conclude on this issue that Thomas J’s comments in Dairy Containers cannot accord with English law (or indeed with Australian law: see Duke v Pilmer [1999] SASR 64). The English cases establish clearly that the liability of employers to third parties harmed by the actions of their employees is not to be narrowly confined. It is difficult to think of conduct more “antithetical to the interests of” the owners of a children’s home than abusing the children in their care, or to the interests of a solicitors’ firm than defrauding their client. Yet both resulted in the employers being liable. Indeed in Lister, the House of Lords overruled Trotman v North Yorkshire CC [1999] LGR 584, in which the Court of Appeal had found employers not liable on the grounds that the employee’s act was “a negation” of the employer’s duty. Lord Millett said that “it is no answer that… [the employee’s] conduct was the very negation of his employer’s duty”. Clearly therefore Thomas J’s approach is inconsistent with English law.

709.          BFS is correct that there is a requirement that, in Lord Steyn’s words in Lister, the torts were “so closely connected with his employment that it would be fair and just to hold the employers vicariously liable.” However the cases I have quoted show that the requirement of close connection is far less strict than that for which BFS contended. In this case it was part of Leeson’s duties as manager, and then general manager, of BFS to provide information to the auditors. He was not moonlighting, like the valuer in Kooragang v Richardson & Wrench [1982] AC 462. His action in providing information to D&T, albeit false information for his own dishonest purposes, had the necessary close connection with his employment.

710.          Nor do I view the assumption of responsibility identified by BFS as present in Lister and Lloyd v Grace Smith as providing any valid distinction from the present case. Lord Millett in Dubai Aluminium commented that it is not essential, before holding an employer vicariously liable for intentional wrongdoing, that the employer has undertaken a duty to the claimant and entrusted its performance to the employee. It is difficult to see any meaningful assumption of responsibility in Fennelly v Connex [2001] IRLR 390, in which a train company was held liable for a ticket inspector’s assault on a passenger at a station. But in any event, BFS assumed a responsibility under its contract with D&T to provide information to them for the purpose of their audit, and entrusted that responsibility to its general manager and his staff. Therefore, if an assumption of responsibility was required, it was present.

Scope of authority

711.          BFS’ alternative case was that Leeson had no actual authority to make representations which dishonestly concealed his unauthorised trading from the auditors. Nor could D&T rely on his ostensible authority to make those representations. They ought, ex hypothesi (since the counterclaim arises only if D&T have been found to have been negligent in conducting their audit), to have known, not only that Leeson was lying, but that he was not authorised to make such false representations. Thus the position was unlike that in Lloyd v Grace, Smith [1912] AC 716 and similar cases, where the widow had no reason to doubt the authority of the fraudster. Nor, BFS contended, was its argument blocked by Standard Chartered Bank v Pakistan National Shipping [2002] WLR 1547, which does not deal with an employer’s liability for its employee’s deceit.

712.          This is not a case where D&T were or ought to have been aware that Leeson had no authority to make representations of the sort that he made, as was The Ocean Frost. There is no doubt that Leeson had actual authority to do that sort of act, by virtue of BFS’ conduct in putting him in the position of manager. BFS’ argument depends upon the court having regard to the employee’s authority to make the individual representation concerned.

713.          I can see that in principle it is possible for an employer to take away an employee’s authority to make an individual representation, which would otherwise fall within the employee’s ostensible authority. D&T might have reported to Mr Jones a representation Leeson had made about the accounting system and Mr Jones might have told them not to rely on that because Leeson knew nothing about that area of the firm. However, when looking at vicarious liability to third parties who have been injured by an employee’s acts, the approach of the courts is to look at the class of acts which an employee is authorised to perform, and at limitations on the employee’s authority to perform that class of acts of which the third party knows. It will almost always be possible for the employer to say that he did not authorise the employee to injure third parties and that the third party must have known that. But that does not prevent the employer being liable.

714.          This is very clear in the cases on course of employment. Lord Millett in Dubai Aluminium said that “the vicarious liability of an employer does not depend upon the employee’s authority to do the particular act which constitutes the wrong”, but rather upon “the closeness of the connection between the employee’s wrongdoing and the class of acts which he was employed to perform”. Later he referred to “the closeness of the connection between the duties which, in broad terms, the employee was engaged to perform and his wrongdoing.” Likewise in the field of ostensible authority, Robert Goff LJ in The Ocean Frost in the Court of Appeal stated:

“Generally speaking, [the employee’s] act will be within his ostensible authority when it is within that class of acts which a person in his position usually has authority to perform; it will not be within his ostensible authority, either when it does not fall within that class of acts, or where, in the case of the particular servant, his authority is limited and the third party has notice of the limitation on his authority.”

715.          By “notice of the limitation on his authority” Robert Goff LJ can hardly have had in mind the third party’s knowledge that the employee was not authorised to defraud others.

716.          So BFS may be correct that Leeson had no actual authority to make the individual representations concerned. But it is clear from the authorities I have cited that in considering ostensible authority I must look at the class of acts, not the individual act. The cases show that the employer does not cease to be liable merely because the injured third party knew that the employee was not authorised to injure him. Still less can that result follow just because the third party ought to have known that the employee was not authorised to injure him. Yet that is the case as put by BFS: D&T ought to have known that Leeson had injured them (by lying to them); therefore they ought to have known that he was not authorised to do so; therefore BFS is not liable. 

717.          In Standard Chartered Bank, the representee was not negligent in believing the deceitful representation. But in my view D&T are correct that BFS’ argument is inconsistent with Standard Chartered Bank. BFS accepts that, according to that case, it is not open to the maker of a fraudulent representation to rely on the recipient’s negligence in believing the representation. Yet its argument would mean that the employer of the representor could do so, and thus avoid liability even where the representor was acting in the course of his employment, because the recipient’s negligence would always put him on notice that the representor had no authority to make the representation. This would confine the principle in Standard Chartered Bank to deceit by individuals. Given the liberal approach of the English law to the liability of employers to third parties harmed by the actions of their employees, such a result cannot be correct.

Special rule of attribution

718.          BFS repeated before me a further argument which it put in the preliminary issue and with which I dealt at paragraphs 153 to 159 of my judgment. This was that D&T were officers of BFS and therefore “insiders”. They were therefore not entitled to rely on the Lloyd v Grace, Smith rule of attribution which applies to third parties. Instead, I should fashion a special rule of attribution that reflected D&T’s status, as was permitted by Meridian Global Funds v Securities Commission [1995] 2 AC 500 and was done in Arab Bank v Zurich Insurance [1999] 1 Lloyd’s Reports 262 and British Racing Driving Club v Hextall Erskine [1996] 3 All ER 667.

719.          Mr Brindle took me, in rather more detail than in the preliminary issue hearing, to the Arab Bank decision. I agree that Rix J did there decline to apply straightforward Lloyd v Grace, Smith attribution where to do so produced a result inconsistent with the object of the insurance policy with which he was dealing. However my opinion remains that, even if it were open to me to fashion a special rule of attribution in this case, I should not be justified in doing so to reflect the supposed status of the auditors as insiders. This is for the reasons set out in paragraph 155 of my judgment on the preliminary issue. If anything, as D&T point out, the case for doing so is even weaker in this case than it was in relation to Mr Jones, since Mr Jones was a director and therefore a fellow insider, whereas Mr Leeson was not.

720.          I therefore conclude that BFS is vicariously liable for the fraudulent representations made by Leeson upon which D&T rely.


Causation in deceit claims

721.          I concluded in my judgment on the preliminary issue that causation is a requirement in a claim for deceit (paragraphs 126 to 131). I also noted the two approaches to causation represented by Lord Steyn’s judgment in Smith New Court v Scrimgeour Vickers (Asset Management) Ltd, [1997] AC 254, and Lord Hoffmann’s judgment in Environment Agency v Empress Car Co (Abertilley) Ltd, [1999] 2 AC 22. In the former case, Lord Steyn equated and approved the tests of whether the alleged deceit was “a substantial factor in producing the result”, and whether “in common sense terms there was a sufficient causal connection”. In the latter case, Lord Hoffmann looked to the purpose and scope of the rule concerned (paragraphs 134 to 139). This dichotomy is reflected in the speech of Lord Nicholls in Kuwait Airways v Iraqi Airways (No.s 4 and 5) [2002] 2 WLR 1353, from which I quote more extensively later in this judgment. At paragraph 71, Lord Nicholls explained that the court will first apply a simple “but for” test, and then go on to make a value judgement:

“In most cases, how far the responsibility of the defendant ought fairly to extend evokes an immediate intuitive response. This is informed common sense by another name. Usually there is no difficulty in selecting, from the sequence of events leading to the plaintiff’s loss, the happening which should be regarded as the cause of the loss for the purpose of allocating responsibility. In other cases, when the outcome of the second enquiry is not obvious, it is of crucial importance to identify the purpose of the relevant cause of action and the nature and scope of the defendant’s obligation in the particular circumstances. What was the ambit of the defendant’s duty? In respect of what risks or damage does the law seek to afford protection by means of the particular tort? Recent decisions of the House have highlighted the point.”

722.          He went on to mention BBL v Eagle Star [1997] AC 191 and Reeves v Commissioner of Police of the Metropolis, [2000] 1 AC 360, discussed below.

723.          In my earlier judgment I also quoted from the decision of the Court of Appeal in Standard Chartered Bank v Pakistan National Shipping Corp (No. 4) [2001] QB 167. In that case, the Court of Appeal decided that the maker of a fraudulent statement is liable for all losses caused to a representee who is induced by it to enter into a transaction. This is so even if the representee was negligent in doing so. As long as the deceit was a cause of the claimant’s loss, it is to be treated as the only cause. The decision of the Court of Appeal has since been reversed in part by the House of Lords ([2002] 3 WLR 1547), but without affecting that element of the judgment.

724.          Thus in the preliminary issue, Mr Jones’ representations to D&T induced D&T to sign off the accounts and, if they had been proved to be fraudulent, would have been treated as the sole cause of D&T being sued for negligence. That would have been so even though another cause of D&T’s exposure to suit was assumed to be their own negligence in conducting the audit.

D&T’s negligence in not detecting the misrepresentations

725.          In the present case, however, there is a factor which was not present in the preliminary issue. In the preliminary issue it was not alleged that D&T were negligent in failing to spot Mr Jones' alleged fraud. In this case the position is different. Looking at the representations individually:

·        representation (i) (explanation of the Ą670m reconciling item): I have already concluded (see paragraphs 643 and 644 above) that D&T were negligent in their investigation of the Ą670m reconciling item and in accepting the explanation offered for it;

·        representation (ii) (as to the nature of the 88888 account): it was not pleaded that D&T were negligent in accepting this representation. However BFS alleged that this representation was part of the concealment of the 88888 account, which D&T should have detected. When reviewing the credit of the Ą670m to the 88888 account, D&T should have asked the purpose of the account. An explanation that it was an error account should have seemed extraordinary and caused D&T to investigate the account;

·        representation (iii) (as to the balance on the 88888 account): if D&T had not been negligent in their investigation of the Ą670m reconciling item, they would have found that that item had wrongly been credited to the 88888 account as of 30 September 1992. Therefore they would have detected that the representation as to the balance on the 88888 account was false.

726.          Since the position differs as between representations (i) and (iii), on the one hand, and (ii), on the other, I shall deal with (i) and (iii) first.

Causation for representations (i) and (iii)

727.          BFS accepted that these two representations induced D&T to sign their audit certificate in 1992. Therefore the argument turned upon whether, for the purposes of D&T’s counterclaim, signature of that certificate was to be treated as the cause of D&T’s exposure to suit.

728.          In the case of these two representations, D&T were negligent in failing to detect the falsity of the very representations which they now claim induced them to suffer loss. It would seem surprising if D&T were able to extinguish their liability for that failure by bringing a claim in deceit based on those representations and invoking Standard Chartered Bank. Almost any auditors’ negligence case based on a failure to detect fraud at an audit client will involve deception of the auditors by the fraudster. If the auditor has an automatic and complete defence to any negligence claim by bringing a counterclaim in deceit, it is surprising indeed that the auditors in none of the audit cases I referred to in this judgment took that course. Yet, as D&T admit, this argument “has not been run before”.

“Informed common sense”

729.          There is no doubt that Leeson’s deceit, and the signature of the audit certificate which it induced, was a “but for” cause of D&T’s exposure. However, going on to the second inquiry described by Lord Nicholls in Kuwait Airways, I have no doubt as to my “immediate intuitive response”. It is that D&T had a contractual duty to BFS to investigate the truth of the representations made to them by Leeson, just as they had a duty to investigate the accuracy of the trial balance provided to them at Leeson’s instigation. They failed to investigate either properly, and BFS is suing them for breach of that duty. That breach is the cause of their loss. It makes no more sense to say that Leeson’s representations were the cause of D&T’s liability than to say that his provision to D&T of a misleading trial balance was the cause. Both the trial balance and the representations were merely the subject matter upon which D&T should have exercised their professional skill, and failed to do so. In the words of Lord Steyn in Smith New Court, in my view the deceit by Leeson were not “a substantial factor in producing the result” – that is, D&T’s exposure to suit.

730.          This contrasts with the preliminary issue. In that, there was no allegation that D&T should have detected the falsity of Mr Jones’ representation letters. BFS could not argue that D&T’s loss was caused by their failure to do so. BFS could only point to D&T’s assumed negligence in the audit generally. That was undoubtedly a contributing factor to D&T’s loss, but it did not prevent the letters also being a cause.

731.          There are two factors to set against this immediate intuitive response. The first is decisions going back to Reynell v Sprye, 1 De GM&G 660, to the effect that it is no defence to a claim for deceit that the claimant was negligent in believing the defendant’s false statement:

“However negligent the party may have been to whom the incorrect statement has been made, yet that is a matter affording no ground of defence to the other. No man can complain that another has too implicitly relied on the truth of what he has himself stated” (per Lord Cranworth LJ at p.710)

732.          That might appear to cover the situation here. However I think a distinction must be drawn. Lord Cranworth was dealing with the common situation where A makes a fraudulent statement to B. B believes it, even though he should not have done so if he had made proper enquiry. In that sense B was negligent, but the cases decide that A cannot say “you should not have believed me”, nor A’s employer say “you should not have believed him”.

733.          The present case is different. Here, B was under a pre-existing contractual duty owed to A’s employer to test the truthfulness of A’s statements. Had B performed his duty, he would have realised the statements were false. B failed in that duty and believed the statements. His only loss is his liability to A’s employer for failure to perform that duty. A’s employer can say “it was your job to check the truth of what A said. You cannot sue me for being deceived when, if you had done your job, you would not have been.”

734.          This also demonstrates the incorrectness of an argument put by D&T in closing. They contended that it would be preposterous if D&T could not sue Leeson himself, because he would be able to argue that their negligence, not his fraudulent representations, caused their loss. That argument would not succeed, because D&T owed no pre-existing duty to Leeson to investigate the truth of his representations: it would simply be a case of the fraudster saying “you should not have believed me”. That would indeed be the situation to which Lord Cranworth was referring, whereas the situation in this case is not.

735.          The second counter-argument to set against my immediate response is the well-established rule as to remoteness of damage in claims for deceit, which is more generous than that applicable to other tort claims. Thus Lord Steyn in Smith New Court at page 282 stated:

“Concentrating on the tort measure, the remoteness test whether the loss was reasonably foreseeable had been authoritatively laid down in The Wagon Mound in respect of the tort of negligence a few years before… Doyle v Olby (Ironmongers) Ltd settled that a wider test applies in an action for deceit. The dicta in all three judgments, as well as the actual calculation of damages in Doyle v Olby, make clear that the victim of the fraud is entitled to compensation for all the actual loss directly flowing from the transaction induced by the wrongdoer. That includes heads of consequential loss.”

736.          As Lord Nicholls noted in Kuwait Airways, remoteness is one of the labels which lawyers use in applying the second stage of the causation enquiry. Lord Steyn was explaining that, in deciding which losses a court will regard as caused by the deceit, it will apply another two-stage test: first, did the representation induce the representee to enter into the transaction; and secondly, was entering into the transaction a cause of the representee’s loss? If it was, Standard Chartered Bank states that it is to be treated as the only cause.

737.          The authorities on inducement make clear that the test for inducement is whether the representation affected the representee’s judgement in deciding whether to enter into the transaction (see Lord Cross in Barton v Armstrong [1976] AC 104, at p. 118). BFS accepted that representations (i) and (iii) induced D&T to sign their audit opinion for the 1992 audit.

738.          One then has to look at the signature of the audit opinion and decide whether that was a cause of D&T being sued in this action. I concluded in the preliminary issue (paragraph 143), in the context of Mr Jones’ representation letters, that it was impossible to say that it was not.

The purpose and scope of the rule: Empress Car and Reeves

739.          Therefore this is a case in which, as Lord Nicholls said, “the outcome of the second inquiry is not obvious”, and cannot be answered by the use of informed common sense. Instead, I need to have regard to “the purpose of the relevant cause of action and the nature and scope of the defendant’s obligation”. This requirement was made clear by Lord Hoffmann in Empress Car, at page 31:

“… one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule. Does the rule impose a duty which requires one to guard against, or makes one responsible for, the deliberate acts of third persons? If so, it will be correct to say, when loss is caused by the act of such a third person, that it was caused by the breach of duty. In Stansbie v. Troman, Tucker L.J. referred to a statement of Lord Sumner in Weld-Blundell v. Stephens, in which he had said:

‘In general, even though A is in fault, he is not responsible for injury to C which B, a stranger to him, deliberately chooses to do. Though A may have given the occasion for B's mischievous activity, B then becomes a new and independent cause.’

“Tucker L.J. went on to comment:

‘I do not think that Lord Sumner would have intended that very general statement to apply to the facts of a case such as the present where, as the judge points out, the act of negligence itself consisted in the failure to take reasonable care to guard against the very thing that in fact happened.’

“Before answering questions about causation, it is therefore first necessary to identify the scope of the relevant rule. This is not a question of common sense fact; it is a question of law. In Stansbie v. Troman the law imposed a duty which included having to take precautions against burglars. Therefore breach of that duty caused the loss of the property stolen.”

740.          That passage seems to me to hold the key to reconciling the rule as to causation in cases of fraudulent misstatement which I have described above with the rule rendering auditors liable for losses caused by frauds which they negligently fail to detect. Clearly an outside third party who was misled by Leeson’s false statements into entering into a transaction would be able to recover all losses flowing from that transaction. But D&T were not an outside third party. They were in breach of a pre-existing duty, owed to BFS, to guard against being misled by just such false statements. When I have regard to the policy of the two rules, it is clear that the rule imposing liability on D&T for its breach should prevail. To adopt Lord Hoffmann’s reasoning, it is “correct to say, when loss was caused by [D&T’s breach of its duty to detect Leeson’s deceit], that the loss was caused by the breach of duty”, not by the deceit.

741.          The House of Lords had to deal with a somewhat similar issue in Reeves. In that case, Mr Lynch had hanged himself in a police cell. The police were found to have been in breach of a duty of care to take reasonable steps to prevent Mr Lynch committing suicide. Had it not been for the existence and breach of that duty of care, the normal rule of novus actus interveniens would have meant that Mr Lynch’s own act was regarded as the only cause of his death. The question for the House was whether that rule should be displaced by the nature and breach of the police’s duty.

742.          The House held that it should. Lord Hoffmann said at page 367 that the general principle was that:

“‘the free, deliberate and informed act or omission of a human being, intended to exploit the situation created by the defendant, negatives causal connection.’ However, as Hart and Honoré also point out…, there is an exception to this undoubted rule in the case in which the law imposes a duty to guard against loss caused by the free, deliberate and informed act of a human being. It would make nonsense of the existence of such a duty if the law were to hold that the occurrence of the very act which ought to have been prevented negatived causal connection between the breach of duty and the loss.”

743.          Likewise in the present case D&T were in breach of a duty to detect representations of the very type that were made. To adapt Lord Hoffmann’s words only slightly,  “it would make a nonsense of the existence of [that] duty if the law were to hold that the occurrence of the very act which ought to have been prevented” gave rise to an equal and opposite counterclaim and thereby “negatived causal connection between the breach of duty and the loss”.

744.          D&T made two objections to the application of Reeves to their counterclaim. First, they pointed out that Reeves was not a fraud case. Add in fraud, they said, and the rule of policy that, if fraud is a cause of the loss, it is to be treated as the only cause, prevails. To that BFS replied that indeed Reeves was not a fraud case, but nor was Standard Chartered Bank a “very thing” case. This is the first occasion on which a court has had to grapple with these two conflicting rules of policy. They contended that, where the person misled by the fraudulent representation was only misled because he or she was in breach of a duty to detect the fraud, there is no doubt how that policy should be resolved.

745.          BFS’ contention on this seems to me correct. Mr Brindle asked whether the result in Reeves would have been different merely because Mr Lynch deceived one of the warders into letting him have a rope, in breach of that warder’s duty to prevent Mr Lynch killing himself. Clearly the result would have been the same. The Commissioner for Police would not have been able to set up a counterclaim based on Mr Lynch’s deceit to extinguish his liability for breach of duty. That illustrates that in appropriate circumstances (where, as here, one party had a duty to detect the fraud) the Reeves rule should prevail over that in Standard Chartered Bank.

746.          I should here note D&T’s contention that, in my judgment on the preliminary issue, I decided that the rule in Standard Chartered Bank prevailed over Reeves, and that I should not depart from that. In that judgment I made no mention of Reeves, because it had no application where D&T were not pleaded to have been negligent in not detecting Mr Jones’ alleged fraud. Rather, I balanced, on the one hand, the rule imposing liability on the maker of a fraudulent representation for all losses flowing from the transaction which his fraud induced against, on the other, that imposing liability on auditors for negligence in conducting their audit. In the absence of negligence in detecting the fraudulent representation, I decided at paragraphs 146 to 148 that the former rule prevailed. Only once such negligence is present, as it is in the present case, does Reeves become relevant.

747.          D&T’s second objection was that Reeves was the other way round. Reeves involved a defendant who was under a duty and a claimant whose act did not provide a defence. Here D&T are the claimants in the counterclaim, yet BFS has argued that it is D&T’s breach of duty which gives BFS the defence.

748.          This seems to me an argument of form not substance. The counterclaim only arises because D&T are being sued for negligence, and their liability in that suit is the subject of the counterclaim. They have argued that they can escape liability for their negligence by relying on an act of the claimant (that is, Leeson’s deceit) which they allowed to occur in breach of their duty to prevent it. This is exactly parallel with the Commissioner of Police being sued and arguing that he could escape liability by relying on Mr Lynch’s act which he had a duty to prevent.

749.          Accordingly, when assessing causation for the purposes of D&T’s counterclaim based on representations (i) and (iii), I conclude that I should apply Empress Car and Reeves and have regard to the policy of the rules concerned. Doing so leads me to conclude that the cause of D&T’s exposure to suit was not their signature of the audit certificate which was induced by representations (i) and (iii). It was rather their own negligent failure to detect the falsity of those representations. This is a factor which was not present in the preliminary issue and which explains why the conclusion proves to be different. 

Causation for representation (ii)

750.          I have set out representation (ii), the representation that the 88888 account was an error account, at paragraph 694 above. It was made to Miss Koo on or after 20 October 1992, while she was conducting the regulatory audit, pursuant to D&T’s statutory duty to report to SIMEX under the Futures Trading Act. She was working through the Model Audit Programme for Customer Orders, section 4 of which required her to test the accuracy of BFS’ data processing system[469]. This directed her to select a sample of trades from the system and to check their records in the system against outside documentation in a number of respects. The particular worksheet on which Miss Koo recorded representation (ii) was a worksheet with the heading: “To ensure that open positions, unrealised gain/loss and realised gain/loss are reflected properly in their system[470]

751.          The case in relation to representation (ii) is somewhat different to that in relation to the other two representations, in that there was no direct allegation that D&T were negligent in accepting representation (ii). Originally BFS contended that D&T were negligent in not reviewing the 88888 account once told it was an error account but in its closing submissions BFS did not persist in that contention. Nor did BFS allege that Miss Koo should have remembered, when told that the 88888 account was an error account, that that was the account to which the Ą670m had been credited and should have found that strange.

752.          Therefore D&T contended that, since they were not alleged to have been negligent in failing to detect that representation (ii) was false, the Reeves principle was not engaged. As it was also clear that the representation was relevant to Miss Koo’s completion of the audit work on the data processing system, inducement was also established and there was no answer to the counterclaim.

Applicability of Reeves

753.          BFS replied that the Reeves principle applied to this as to the other representations. It had indeed dropped the allegation that D&T should have reviewed all error accounts. But it had not dropped the allegation that D&T should have investigated the 88888 account when told that the Ą670m had been credited to it. Mr Brindle relied on Mr Swinson’s evidence that, on discovering the credit of the Ą670m to the 88888 account, D&T should have asked the purpose of the account. If they were told it was an error account, as they were on 20 October, that should have caused them to investigate the account, as Ą670m would represent an amazing level of errors after three months floor trading. Therefore, BFS contended, D&T’s acceptance of representation (ii) without question was a part of their negligence in relation to the Ą670m. It would be artificial to treat this representation as entirely separate from Leeson’s other representations. The Reeves principle applied to representation (ii) as much as to the other representations.

754.          I accept BFS’ argument that I should not treat this representation as separate from the other representations. All were elements of Leeson’s concealment of the unauthorised trading on the 88888 account by covering up the balance on it and describing it as an error account. I have found that D&T were negligent in failing to detect that concealment, through their work on the Ą670m. It would be a strange result if D&T were able to escape altogether their liability for that negligence by a counterclaim based on one of the other representations made as part of the same concealment.

755.          No doubt in any audit negligence case involving fraud, there will be representations made to the auditors aimed at concealing the fraud. If the auditors have been negligent, they will have been negligent in believing some of the representations made to them. Other representations they will not have been negligent in believing. It cannot be right that the auditors have only to find one false representation in the latter category, to escape liability altogether for their negligent failure to detect both the fraud itself and the representations intended to conceal it.

756.          I hold that it is not right. Representation (ii) was part of the concealment of the fraud which D&T were negligent in failing to detect. The Reeves principle applies to it in the same way as it applies to the other representations dealt with above, and means that representation (ii) was not an effective cause of D&T’s loss.


757.          Furthermore, BFS seems to me correct in its contention that representation (ii) did not induce D&T to sign the audit certificate. The representation consisted of two elements. The first, that the cost of BFS’ errors was borne by BSL, was truthful and was already obvious from the accounts. Therefore that representation had no effect. The second was that the 88888 account was an error account and therefore no commission was charged in relation to transactions entered on it.

758.          D&T contended that this second element of representation (ii) induced Miss Koo to sign off on the data processing system test. If that test had not been completed satisfactorily, they contended, D&T would not have signed the audit certificate.

759.          There are three points on this. First, D&T did not call Miss Koo as a witness or produce any written evidence from her. In support of their contention that she was induced by the representation to sign off on the data processing test, they relied upon the fact that she recorded the representation on her workpaper and therefore, they said, she must have considered it significant in reaching her conclusion. Secondly, Miss Koo conducted the test in question when carrying out the regulatory audit. That was carried out after D&T had completed their work on the statutory audit and not for the purpose of signing off on that. Thirdly, it is now common ground that D&T were under no duty to review error accounts as a matter of audit routine. Therefore the information that this was an error account would not precipitate an investigation. Only such an investigation would have prevented them signing the audit certificate: a minor issue as to charging or recording of commissions on a particular transaction would not have done so.

760.          I appreciate that the test for inducement in deceit cases, which I have set out earlier in this section, is not an exacting one. I am also conscious of the presumption described by Morritt LJ in Barton v County NatWest [1999] Lloyd’s Reports 408 that “if the false statement is of such a nature that it would be likely to play a part in the decision of a reasonable person, it will be presumed that it did, unless the representor satisfies the court to the contrary.

761.          However I am asked to decide this counterclaim in D&T’s favour, so as to give them a complete defence to BFS’ claim, in circumstances where (a) they have led no evidence from the witness who was allegedly induced, (b) the inducement was in relation to work which was not needed, or done, in order to sign off the statutory audit and (c) the issue involved was not one which was likely to have prevented D&T signing the audit certificate.

762.          Of these circumstances, (b) and (c) indicate that representation (ii) was not “of such a nature that it would be likely to play a part in the decision of a reasonable person”. Even if it were, I should have regard to (a). I have found already that Miss Koo reviewed the daily activity statement for the 88888 account, in circumstances in which she should have been checking that the Ą670m had been credited to the BSL segregated account, and failed to notice that it was in fact credited to the 88888 account. It is entirely possible that, if she had been called to give evidence, BFS would have been able in cross-examination to “satisfy the court to the contrary”: that is, to establish that representation (ii) did not induce D&T’s signature of the audit certificate. Since she has not been called, BFS has not had that opportunity. Accordingly, if my conclusion on the application of Reeves were incorrect, I should conclude that D&T had not established inducement. 

763.          Therefore I conclude that D&T’s counterclaim also fails in relation to representation (ii).

Contributory negligence

764.          I should deal here with one further argument put by D&T. They contended that Leeson’s representations must be a cause of their loss, because otherwise the representations could not even be taken into account in assessing contributory negligence. That, they contended, would self-evidently be wrong and contrary to Reeves, in which the deceased’s action did amount to fault for the purposes of contributory negligence.

765.          I deal with contributory negligence at paragraphs 961 to 964 below. But there are two flaws in D&T’s argument. The first is that D&T’s loss which is the subject of their counterclaim is their liability to suit by BFS. This is not the same as the subject of BFS’ claim, which is BFS’ losses caused by Leeson’s trading. The two losses do not have identical causes. Leeson’s trading on SIMEX and his concealment of it, including his representations, were self-evidently an effective cause of BFS’ losses. They were a “but for” cause of D&T’s exposure to suit. But the effective cause of that exposure was, not the trading and concealment, but D&T’s negligent failure to detect them.

766.          The second flaw is that, as Lord Hoffmann has made clear, issues of causation in different contexts are heavily influenced by the policy of the rule being applied. The basic rules as to factual causation in contributory negligence are the same as those in other actions: Jones v Livox Quarries [1952] 2 QB 678. But the policy of the rule as to contributory negligence under the 1945 Act requires the court to take into account all aspects of fault so as to achieve a just and equitable apportionment of loss. That may lead to a different conclusion, as it does here.


767.          In the result I conclude that the Reeves principle applies to all of the representations made by or at the instigation of Leeson upon which D&T based their counterclaim and therefore none of them caused D&T’s liability to BFS in this litigation. That was the result of D&T’s negligence in failing, among other things, to detect the falsity of those representations. Representation (ii) also did not induce D&T to sign their audit certificate. Accordingly D&T’s counterclaim based on Leeson’s deceit fails.


768.          I deal next with D&T’s counterclaim based upon Mr Jones’ negligent signature of the representation letters. His signature of those letters was of course the subject of the preliminary issue, in which D&T contended that he had signed them recklessly. Their reason for making that contention, and the reason why I ordered the preliminary issue as a potential means of avoiding a full trial, was that, if successful, it would have provided a complete defence to BFS’ claim.

769.          That was because of the rule in Standard Chartered Bank that, where loss has been caused by deceit, the law takes no account of other causes of that loss, such as, in this case, D&T’s negligent audit. I have considered this in the preceding section, in the context of Leeson’s misrepresentations. Mr Gaisman for D&T acknowledged when applying for the preliminary issue that, if Mr Jones were merely negligent in signing the letters, that would not provide a complete defence, but that one would then be in the field of comparative fault[471].

770.          That being so, it might seem surprising that D&T contended before me at trial that they could achieve exactly the same result, based on Mr Jones’ negligent signature of the representation letters, as they sought to do by establishing his fraud. As then, they said that they suffered loss through relying on the letters, in the amount of their liability in the present suit, and had a counterclaim for that loss. As then, they said that that loss should not be reduced under the Law Reform (Contributory Negligence) Act 1945 Act to take account of D&T’s own negligent audit.

771.          It is the last of those contentions that is disputed: the rest follow from my judgment in the preliminary issue or I find later in this judgment to be established. D&T base that last contention upon Gran Gelato v Richcliff [1992] Ch 560. In that case the defendant, through his solicitors, made a negligent representation which was intended to, and did, induce the claimant to enter into a loss-making transaction. Sir Donald Nicholls V-C found the defendant liable both at common law (that is, under the rule in Hedley Byrne v Heller [1964] AC 465) and under section 2(1) of the Misrepresentation Act 1967. He decided that in principle the 1945 Act applied to both claims, but made no deduction from the claimant’s damages. He said at page 574:

“it would need to be a very special case before carelessness by … the representee would make it just and equitable to reduce the damages payable to compensate [the representee] for loss suffered by it in consequence of doing the very thing which, in making the representation, [the representor] intended should happen.”

772.          Mr Brindle for BFS pointed out that the focus of the court in Gran Gelato was on the remedy against the vendor under section 2(1) of the Misrepresentation Act; the claim under Hedley Byrne was considered only as against the vendor’s solicitors and failed. Mr Brindle contended that under section 2(1) it is not necessary to establish reasonable reliance on the representation: the section is a remedy for fraud, extended to situations where the defendant is not fraudulent. By contrast, under Hedley Byrne reasonable reliance is a requirement of the cause of action. It was therefore understandable that in Gran Gelato Sir Donald Nicholls was influenced by the Standard Chartered Bank rule, and made no deduction for contributory negligence. In the present case, section 2(1) does not apply (as no contract was induced by the representations). The claim is brought only under Hedley Byrne, so the reasonableness of the reliance, and therefore contributory negligence, is relevant.

773.          The contrast between the cause of action under section 2(1) and that under Hedley Byrne is perhaps not as clear-cut as Mr Brindle maintained. Under Hedley Byrne reasonable reliance is a requirement for the existence of the duty. But that is an all-or-nothing issue. Once a duty is established, whether the claimant’s damages are to be reduced because it was negligent falls to be decided under the 1945 Act. Gran Gelato decided that that applies to section 2(1) as well as to claims under Hedley Byrne and (relevantly here, as D&T rely in the alternative on an implied term of the contract) to parallel claims in contract: Vesta v Butcher [1989] AC 862.

774.          Nevertheless, Mr Brindle is right in his principal submission. The court’s focus in Gran Gelato was on section 2(1): the finding that the defendant was liable was (at page 569B): “Accordingly, subject to proof of loss, Gran Gelato has established a good cause of action for damages against Richcliff under section 2(1) of the Misrepresentation Act 1967.” The court’s approach to contributory negligence was no doubt influenced by that focus. In any event, Sir Donald Nicholls was simply expressing his conclusion on the basis of the facts in that case. The facts in this case are very different, and BFS, though vicariously liable for Leeson’s acts, was not at all in the same sort of position as the claimant in Gran Gelato.

775.          The cases to which Sir Donald Nicholls referred do not assist D&T. All were before the passing of the 1945 Act and were in rather different contexts to the present. The dictum from Reynell v Sprye which Sir Donald Nicholls cited was expressly dealing with a case of deceit. Indeed the passage before that dictum read:

“It was said that during the whole of the negotiations Captain Sprye not only left Sir Thomas Reynell at perfect liberty to consult his friends and professional advisers, but even on several occasions recommended him to do so. To a great extent this certainly was the case; and if the relief sought in this suit had rested on mere mistake, if Captain Sprye had not by misrepresentations of fact, which I cannot treat as unintentional, led Sir Thomas Reynell to believe that his rights were different from what in truth they were, it may be that the argument to which I am now adverting would have prevailed. In such a case, perhaps, this court might have considered that it was the folly of Sir Thomas Reynell to have acted without advice, and might have refused to assist any person who was so singularly little alive to his own rights. Qui vult decepi, it is said, decipiatur. But no such question can arise in a case like the present, where one contracting party has intentionally misled the other…”

776.          That is very far from supporting D&T’s contention.

777.          Sir Donald Nicholls next referred to Redgrave v Hurd [1881] 20 Ch. Div. 1. That was a claim to rescind a contract which had been induced by misrepresentation. The court below had decided that, because the representee had had a chance to investigate the truth of the representation and did not take it, he did not rely on the representation. The Court of Appeal held that such a failure to inquire did not negative reliance, and therefore did not bar a claim for rescission. Again, that has little relevance to the question of apportionment of comparative fault under the 1945 Act.

778.          Finally Sir Donald Nicholls referred to Nocton v Lord Ashburton [1914] AC 932. In that case a solicitor had failed to make full disclosure of his interest in a transaction, and grossly misled his client, in advising his client to enter into it. The Court of Appeal held him to have been fraudulent. The House of Lords overturned that, but found him to have been in breach of his fiduciary duty. It is therefore not surprising that the House rejected the solicitor’s argument that the client’s claim should fail altogether because, if the client had pieced together various facts of which he had known 18 months before, he might have realised the truth. Even now that the 1945 Act is available, the courts in recent times have refused to apportion blame in cases of breach of fiduciary duty: Alliance and Leicester v Edgestop [1993] 1 WLR 1462.

779.          It may be that, by virtue of the fiction of fraud which applies to the remedy under section 2(1) of the Misrepresentation Act 1967, the court should in cases under that section have regard to the Standard Chartered Bank rule. However none of the cases I have just discussed suggests that that rule should provide any guidance in assessing contributory fault in a case of negligent misrepresentation under the rule in Hedley Byrne or in breach of a parallel duty in contract.

780.          Accordingly D&T’s counterclaim based on Mr Jones’ negligent signature of the representation letters is not a complete defence to BFS’ claim. Damages under the counterclaim fall to be apportioned in accordance with comparative fault. Therefore it leads to a result no different from that reached by taking Mr Jones’ conduct into account as contributory fault in assessing BFS’ damages under its claim.


781.          It is D&T’s contention that, even if they are found to be negligent, the damages recoverable against them by BFS are limited by the fact that damage occasioned by Leeson’s unauthorised trading which was funded by the Dollar Funding fell outside the scope of their duty to BFS. Alternatively, whereas the losses caused by Leeson’s unauthorised trading were foreseeable, the accumulation of management fault by the management of BFS and of other Barings companies and employees was such that it subsumed the causative effect of their negligence. Thereafter the loss must be treated as having as a cause that management fault alone: in the commonly-used phrase, the “chain of causation was broken”.

782.          In his speech in the House of Lords in Kuwait Airways Corporation v Iraqi Airways, at paragraphs 69 to 72, Lord Nicholls said:-

“69How then, does one identify a plaintiff’s “true loss” in cases of tort?  This question has generated a vast amount of legal literature.  I take as my starting point the commonly accepted approach that the extent of a defendant’s liability for the plaintiff’s loss calls for a twofold enquiry: whether the wrongful conduct causally contributed to the loss and, if it did, what is the extent of the loss for which the defendant ought to be held liable.  The first of these enquiries widely undertaken as a simple “but for” test, is predominately a factual enquiry. …

70The second enquiry, although this is not always openly acknowledged by the courts, involves a value judgment (“ought to be held liable”).  Written large, the second enquiry concerns the extent of the loss for which the defendant ought fairly or reasonably or justly to be held liable (the epithets are interchangeable).  To adopt the language of Jane Stapleton in her article… the enquiry is whether the plaintiff’s harm or loss should be within the scope of the defendant’s liability, given the reasons why the law has recognised the cause of action in question.  The law has to set a limit to the causally connected losses for which a defendant is to be held responsible.  In the ordinary language of lawyers losses outside the limit may bear one of several labels. They may be described as too remote because the wrongful conduct was not a substantial or proximate cause, or because the loss was the product of an intervening cause.  The defendant’s responsibility may be excluded because the plaintiff failed to mitigate his loss.  Familiar principles, such as foreseeability, assist in promoting some consistency of general approach.  These are guidelines, some are more helpful than others, but they are never more than this.

71In most cases how far the responsibility of the defendant ought fairly to extend evokes an immediate intuitive response. This is informed commonsense by another name. Usually there is no difficulty in selecting, from the sequence of events leading to the plaintiff’s loss, the happening which should be regarded as the cause of the loss for the purpose of allocating responsibility. In other cases, when the outcome of the second enquiry is not obvious, it is of crucial importance to identify the purpose of the relevant cause of action and the nature and scope of the defendant’s obligation in the particular circumstances.  What was the ambit of the defendant’s duty?  In respect of what risks or damage does the law seek to afford protection by means of the particular tort?  Recent decisions of this House have highlighted the point.  When evaluating the extent of the losses for which a negligent valuer should be responsible the scope of the valuer’s duty might first be identified see Banque Bruxelles Lambert SA v Eagle Star Insurance Company Ltd [1997] AC 191. In Reeves v Commissioner of Police of the Metropolis [2001] AC 360 the free, deliberate and informed act of a human being, there committing suicide, did not negative responsibility to his dependants when the defendant’s duty was to guard against that very act.

72The need to have in mind the purpose of the relevant cause of action is not confined to the second, evaluative stage of the twofold enquiry.  It may also arise at the earlier stage of the “but for” test, to which I now return.  This guideline principle is concerned to identify and exclude losses lacking a causal connection with the wrongful conduct.  Expressed in its simplest form, the principle poses the question whether the plaintiff would have suffered the loss without (“but for”) the defendant’s wrongdoing.  If he would not, the wrongful conduct was a cause of the loss.  If the loss would have arisen even without the defendant’s wrongdoing, normally it does not give rise to legal liability. … of course, even if the plaintiff’s loss passes this exclusionary threshold test, it by no means follows that the defendant should be legally responsible for the loss.”

783.          D&T accepted that, if their audits were found to have been negligent, their negligence caused the loss resulting from Leeson’s unauthorised trading in the sense that,“but for” that negligence, his campaign of unauthorised trading would have been smothered in infancy.

784.          In order for the court to arrive at a conclusion that, even if the defendant’s negligence was, as a matter of fact, a cause of the loss in the “but for” sense, it caused the claimant’s loss as a matter of law (Lord Nicholls’ “value judgement”), it is necessary to determine “the purpose of the relevant cause of action”.  To do so the court must examine the rule or rules pursuant to which the cause of action arises: see per Lord Hoffmann in the BBL caseat page 212, where he is examining the scope of a defendant’s duty, and in the Reeves case at page 369 where he examines the issue of “breaking the chain”.

785.          In the present case the relevant duty is that of an auditor owed to his client.  That duty was defined by Lord Oliver in his speech in Caparo v Dickman [1992] AC 605, at page 630 where he says:-

“What is the purpose behind the legislative requirement for the carrying out of an annual audit and the circulation of the accounts?  For whose protection were these provisions enacted and what object were they intended to achieve?  My Lords, the primary purpose of this statutory requirement that a company’s accounts shall be audited annually is almost self evident….. it is the auditors function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, second, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided.”

786.          Therefore D&T owed to BFS concurrent duties in contract (arising from an implied term for the exercise of reasonable care and skill in the contract by which they were employed to audit by BFS), by statute (arising from the relevant Singapore company law provisions) and in tort, for the purposes outlined by Lord Oliver. They also owed a tortious duty for the same purpose to BSL in its capacity as BFS’ controlling shareholder.

Are BFS’ damages limited by the scope of D&T’s duty to BFS?

787.          I have found that D&T were in breach of the duty of care that they owed to BFS concurrently in contract and in tort. As a result, they negligently certified BFS’ accounts for 1992 and 1993 as giving a true and fair view of the affairs of BFS in those periods of account. They thus failed to alert BFS and BSL, its controlling shareholder, to the unauthorised trading of Leeson. In consequence Leeson was able to continue that unauthorised trading, with consequent loss to BFS. Because the management of BFS was not alerted, Leeson’s unauthorised trading continued through 1994 until he fled shortly before the collapse of the Barings group on 26 February 1995. The question therefore arises whether, subject to questions of whether BFS’ claim for damages should be reduced by its own contributory negligence or should be contributed to by other parties, D&T are liable for the entirety of BFS’ loss caused by Leeson’s unauthorised trading.

788.          Consequent on the claimants’ settlement with the Coopers defendants, BFS unilaterally elected not to proceed with any claim for damages against D&T referable to any period after 31 December 1994. No logical explanation has been given for why that date was selected. It was suggested on behalf of BFS that, notwithstanding that its claim as pleaded claimed damages representing losses resulting from Leeson’s unauthorised trading up to the date of collapse, D&T’s liability for their negligence in 1992 and 1993 was spent as a result of C&LS taking over as auditors of BFS’ accounts for 1994. However that cannot explain the 31 December date: C&LS’ audit work started in October 1994 and they did not, in fact, sign off the accounts before the collapse.

789.          It is not in issue that liability for continuing loss resulting from a negligent audit continues after the audit work is complete (see Sasea Finance Ltd v KPMG [2000] 1 All ER 676).  It seems to me that the appointment of fresh auditors, who themselves do not discover the cause of the continuing loss, cannot break the chain of causation of that loss flowing from the original auditor’s negligence, although the fresh auditors may become liable to contribute to any claim for damages by the audit client. Undoubtedly there will come a time when an auditor’s negligence will be held to cease to be causative of such continuing loss, as a result, usually, of an accumulation of acts or defaults of the client’s management over time. Eventually limitation will bar any claim against the original auditors. 

790.          It follows that, but for BFS’ unilateral waiver, D&T were potentially liable for all the losses resulting from Leeson’s unauthorised trading up to the date of the collapse. It seems to me, further, to follow that, in considering D&T’s “scope of duty” defence, the fact of BFS’ concession should not affect my view of the potential liability of D&T for which BFS contends.

The Dollar Funding

791.          The issue whether or not D&T can deploy their scope of duty defence centres on the Dollar Funding by which Leeson was able on demand to obtain from Barings, through BSL, the funding required to continue his unauthorised trading activities. Earlier in this judgment, at paragraph 330 and following, I have described how the Dollar Funding started. BFS accepted that the provision on demand of substantial unreconciled funding in the manner which I have described constituted serious management fault. It was the unchallenged evidence of Dr Fitzgerald, D&T’s business management expert, that, whereas it might have been appropriate in order to avoid default to pay the first request for funding of this type, that request should have triggered an investigation which should have led to the second request being refused. 

792.          The earliest written requests by Leeson for Dollar Funding have not survived and there is no other direct evidence of how those payments came to be made. Therefore it is only possible to come to a conclusion as to when, precisely, the Dollar Funding (in the sense of payments made in dollars as a result of Leeson’s initiative, as compared with payments resulting from the initiative of clients) started, by looking at the nature of the payments themselves. Doing so, it seems to me that the first payment, which it is reasonably clear was made without any client initiative, was the payment of $32 million on 9 February 1994. It seems probable from the contemporary fax from Mr Jones to Mr Hawes, quoted at paragraph 331, that Mr Jones may have played a part in procuring this payment to be made.  That factor does not seem to me to make any difference to the conclusion that this was probably the first of the unreconciled dollar payments. It follows from the evidence of Dr Fitzgerald that that request, although it could have been paid, should have triggered enquiry which would have led to the next request for Dollar Funding being refused. 

793.          The next payment which has all the hallmarks of being one obtained on the initiative of Leeson alone was that for $40 million on 1 March 1994. Had that payment been refused and no further payments been made without proper justification, which Leeson would have been unable to provide, it is clear that the unauthorised trading would have had to have stopped and detailed enquiries would have been made which would have revealed the fraud.

794.          This is evident from the recorded statements of Leeson, made in the course of enquiries into the collapse of the Barings group, and the evidence of BFS’ back office staff[472]. From those, it emerges that Leeson asked for Dollar Funding as a last resort. He did so when all other sources of funding (the overdraft facility and the margin surplus) had been exhausted and it was necessary to find money to fund margin calls (both maintenance margin and settlement variation) in respect of transactions which had already been undertaken. This is what one would expect, given the risks involved in asking for the Dollar Funding. If it was needed to meet margin calls on transactions which had already been undertaken, refusal of the Funding would have led to BFS defaulting on its obligations to SIMEX and immediate investigation.

795.          BFS contended before me that the Dollar Funding in fact only funded the margins on Leeson’s unauthorised trading, and that the losses were met from premiums received on the sale of options and from the excess margins held by BFS. This ignored the fact that premiums received on the sale of options were wholly balanced out by the margin which had to be posted – which Leeson met out of the dollars.

796.          BFS also suggested that it might have been possible for Leeson both to liquidate his positions and to avoid an investigation following any refusal by BSL of his request for Dollar Funding. That would of course still leave him a large hole in the accounts to conceal, and it seems to me extremely unlikely that BSL would have refused the request for Funding yet not investigated why it was needed. But in any event it is clear that further unauthorised trading, such as in fact occurred, would have been impossible.

797.          It was D&T’s submission that the Dollar Funding exhibited management failings which put it into a special category of management fault. This was borne out by the reaction from ex-Barings management after the collapse, which combined unanimity that BSL should not have paid out any sums by way of funding without understanding the reason for it with incredulity that it had. Peter Baring said “Should all major financial flows within the group be properly reconciled to their underlying transaction? … Yes, yes, a hundred times, yes.” Andrew Tuckey described it as “such a fundamental thing where you have something you cannot understand, cannot reconcile it and it is going. …I do not think it is a matter of quantum. …it seems to me inconceivable that that was not reported upwards as a matter of urgency.[473]

798.          Mr Bax, BFS’ managing director, described himself as “flabbergasted” to be told that BSL was not reconciling all margin payments to trades and clients, a control which he described as “elementary”, “the basic control mechanism for the business”. He said “you stop on day one that you have discovered you are not reconciling the business[474]. He agreed that the Dollar Funding created “an entirely new situation” which was “quite unimaginable … way beyond the scope of what anyone in Singapore could have contemplated or did contemplate.” [475] Mr Bax was a witness for BFS.

799.          When that evidence was put to Mr Norris, the chief operating officer of BSL until September 1992 and thereafter chief executive officer, he said that “flabbergasted” would have been an understatement to describe his own reaction. He said that, if one discovers that payments cannot be reconciled, “good practice says all of this, you know, whack, stop it”, though in reality it may be necessary to continue the payments for a short period while investigating the position and putting right the problem. But “you would certainly not do that repeatedly[476]. He described the inability to reconcile the payments which threw up the ever-increasing K2/P4 balance as “key” to what went wrong in Barings. He said “if somebody had proposed to me in 1994 that that group of people [meaning those in control of funding in London] could have rationalised these circumstances through that mechanism [the solo consolidation accounts] and parked it as an issue for later consideration, I would not have believed them”[477]

800.          Mr Norris accepted the description of Mr Baker, the head of the Financial Products Group to whom Mr Leeson reported for the proprietary side of his trading from 1 January 1994 until the collapse, who said: “if someone came down from Mars and looked at what happened in Barings in 1993/1994, they would think that the behaviour in London in respect of the flow of funds out to Singapore was far more apparent than what Leeson did in BFS.  It is far more weird.”[478] Mr Norris was a witness for BSL.

801.          Mr Hawes, a witness for BSL, agreed with Mr Norris’ views. He accepted that it was an elementary control for a Settlements Department to understand the basis for margin funding before making a payment and that BSL was at fault in not doing so, at least within a reasonable time after the payment.

802.          Dr Fitzgerald, the only business management expert to give evidence (albeit his expertise lay in the front office rather than the back office), agreed. His evidence was that:

“It is a fundamental principle of bank management that payments should never be authorised without a clear and verifiable understanding of the purpose for which the monies are required. …cash should only be paid out of [an omnibus client account] if it is verifiably on behalf of one of the identified individual clients and reflected in the information presented to that client.

“…I would have expected any competent back office settlements manager to follow up on [the first Dollar Funding margin call] to get a precise definition of what it was for and how it was to be allocated to clients… I do not believe any competent settlement manager should have authorised the second payment if he had not been able to reconcile fully the first payment. I would have expected in these circumstances the settlements department to contact the relevant senior manager to discuss the issue with him.”[479]

803.          D&T submitted that the Dollar Funding enabled BFS to mutate into a different creature from that which it was intended to be. Instead of being primarily an execution-only operation executing on SIMEX the instructions of related Barings securities trading companies, it became a trader with access to unlimited amounts of unreconciled and uncontrolled funding. This permitted a whole new order of losses on that market and Japanese markets to be incurred. As a result of the Dollar Funding, Leeson was able to exploit a source of funds to finance his unauthorised trading, without limit (or only such limit as was imposed by the extent of the assets of the Barings group), so placing at his disposal the whole of Barings’ capital. The resulting losses, in particular those which were suffered as a result of the massive increase in unauthorised trading which occurred between November 1994 and the end of February 1995, led to the collapse.

804.          I accept D&T’s submission. The transformation of BFS made possible by the Dollar Funding is well illustrated by the amount of the losses incurred as a result of Leeson’s trading during the relevant periods. The loss incurred during the four month period of the accounts to 30 September 1992 was Ł3.6 million; that for the 15 month period to 31 December 1993 was Ł12.6 million; that for the 12 month period to 31 December 1994 was Ł147.8 million; and that for the last period of two months to the date of the collapse was Ł627 million.            .

805.          D&T accepted that the damage flowing from losses made by unauthorised trading in the course of a securities trading business such as that being operated by BFS was foreseeable and so not too remote to be recoverable. The fact that the scale of those losses turned out to have been much greater than an auditor could have foreseen did not affect that conclusion: see Brown v KMR Services [1995] 2 Lloyd’s Rep. 513.

806.          D&T did contend, however, that the losses incurred as result of the continuation of BFS’ trading after the commencement of the Dollar Funding were not recoverable from them by BFS because they were beyond the scope of D&T’s duty to BFS. This was because D&T could not have contemplated, at the time they accepted instructions to audit BFS’ 1993 accounts or at any stage until they concluded their audit work, that the Barings group through BSL would be prepared to provide BFS with funding in such an improvident way. This course of conduct started after D&T had ceased to be BFS’ auditors. None of the information garnered by D&T in the course of their 1992 and 1993 audits might have led them to contemplate that this might happen. That it did happen transformed BFS.

The authorities on scope of duty as a control mechanism

807.          The identification of the scope of the duty of a defendant, who has made a misstatement or given incorrect advice in breach of a contractual or tortious duty to a claimant, as a means of imposing a “control mechanism” to keep the resulting damages claim, otherwise foreseeable, within reasonable bounds, is a modern development. It results from a series of decisions of the House of Lords, starting with Caparo v Dickman [1992] AC 65, of which the most recent is Aneco v Johnson & Higgins [2002] 1 Lloyd’s Rep. 157. The principles of law governing the liability for damagein such cases apply to the certification by an auditor that the financial statements of a company represent a true and fair view of that company’s affairs if the certification is given negligently, that is, in breach of contractual or tortious duty or both.

808.          It is in the speech of Lord Hoffmann in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, widely referred to as “the BBL case”, that these principles are to be found in their fully-developed form. That case dealt with appeals in three separate cases brought by mortgagee banks against valuers upon whom they had relied to value properties as security for loans of money. The valuations were found to have negligently overvalued the properties in question. The loans were made but, when the borrowers defaulted, the security proved to be deficient and the banks suffered loss. That loss was found to have been caused, in part, by the negligent overvaluations of the security without which the loans would not have been made and, in part, by a substantial fall in the value of property generally during the period when the loans were extant.

809.          The Court of Appeal had concluded that, in the circumstances, the valuers were liable for all the loss suffered by the banks, including that referable to the fall in property prices. This was because the banks would not have entered into the loans but for the representations they had received from the valuations. The House of Lords allowed two of the appeals, concluding that the only damages recoverable in those circumstances were those flowing from the valuations being incorrect: namely the difference between the true values of the securities and those shown on the negligent valuations at the date the loans were made.

810.          The effect of the BBL decision was summarised in the speech of Lord Hoffmann when one of the three cases considered in it, Nykredit plc v Edward Erdman Ltd ([1998] 1 WLR 1627), was brought back before the House of Lords. At page 1638 he said:-

“Your Lordships identified the duty as being in respect of any loss which the lender might suffer by reason of the security which had been valued being worth less than the sum which the valuer had advised. The principle approved by the House was that the valuer owes no duty of care to the lender in respect of his entering into the transaction as such and that it is therefore insufficient, for the purpose of establishing liability on the part of the valuer, to prove that the lender is worse off than he would have been had he not lent the money at all. What he must show is that he is worse off as a lender than he would have been if the security had been worth what the valuer said. … it was accepted that the whole loss suffered by reason of the fall in the property market was, as a matter of causation, properly attributable to the lender having entered into the transaction and that, but for the negligent valuation, he would not have done so. It was not suggested that the possibility of a fall in the market was unforeseeable or that there was any other factor which negatived the causal connection between the lending and losing the money. …the essence of the decision was that this is not where one starts and that the valuer is responsible only for the consequences of the lender having too little security.”

811.          In his speech in the BBL case itself Lord Hoffmann quoted a passage from the speech of Lord Bridge in the Caparo case, where he said:-

“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”

812.          Lord Hoffmann then continued in BBL, at page 212:-

“In the present case there is no dispute that the duty was owed to the lenders.  The real question in this case is the kind of loss in respect of which the duty was owed…

The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably likely to expect nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking. What therefore should be the extent of the valuers liability?”

813.          He answered that question at page 213:-

“Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate”.”

814.          Then at page 214:-

“Your Lordships might, I would suggest, think that there was something wrong with the principle which, in the example which I have given produced the result that the doctor [who had negligently advised a mountaineer that his knee was in a good enough condition to undertake a climb, in the course of which the mountaineer fell as a result of a different cause and injured himself] was liable…

“I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide the information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong.  A duty of care which imposes upon an informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them….

“If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.”

815.          In the Nykredit case, Lord Nicholls summed up the effect of Lord Hoffmann’s speech in BBL in these words (at page 1631 of the report):-

“However for reasons spelled out by my noble and learned friend Lord Hoffmann in the substantive judgments in this case, a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for consequences which would have arisen even if the advice had been correct.  He is not liable for these because they are the consequences of risks the lender would have taken upon himself if the valuation advice had been sound. As such they are not within the scope of the duty owed to the lender by the valuer.”

Application to the present case

816.          By contrast with the present case, the cases being examined by the House of Lords in the BBL decision were “one transaction cases”: that is, cases where the claimant, in reliance on negligent advice, had elected to enter into a loan transaction. In the present case the negligent certification by the auditors of BFS’ 1992 and 1993 financial statements was one of the causes which allowed Leeson to continue his unauthorised trading until a few days before the bank collapsed.  Had the financial statements truly reflected the results of Leeson’s trading, they would have shown BFS to have been loss-making in both years and, by December 1993, substantially insolvent. Other causes of Leeson being allowed to continue his fraudulent activities were the failure of the management of BFS so to organise its affairs as to prevent this happening and that of the Barings group as a whole to detect that it was happening. One of the principal reasons why Leeson was enabled to continue his unauthorised trading and to cover the losses from past unauthorised trading was the provision of the Dollar Funding from early 1994 until the collapse.

817.          If the only test for what falls within the scope of a defendant’s duty is “all the foreseeable consequences of the information being wrong” (BBL, at page 214F – in this case the representation comprised in the auditor’s certificate being wrong) then D&T's contention, that loss occasioned by unauthorised trading financed by the Dollar Funding is outside the scope, fails the test. It is conceded that loss caused by unauthorised trading was foreseeable, and such loss does not cease to be foreseeable merely because the trading was funded from an unforeseeable source. As Mr Brindle, for BFS, submitted, until the beginning of 1994, Leeson had been financing his unauthorised trading in a number of illicit ways which continued after the Dollar Funding started. The Dollar Funding was just another form of such funding, the facilitation of which by BSL was particularly improvident.

818.          Lord Hoffmann’s test, to enquire whether the losses funded by the Dollar Funding “would have occurred even if the information which [D&T] gave had been correct” does not assist.If the 1993 audit certificate had been correct, it would mean that there had been no unauthorised trading up to 31 December 1993. In those circumstances it must be most unlikely that Leeson would have started unauthorised trading in 1994. It would be unwarranted speculation to assume that Leeson would have done so.

819.          Nonetheless a reasonable “common sense” case can be made for saying that D&T should not be liable for loss occurring after the commencement of the improvident Dollar Funding, of which D&T could have known nothing and from which they could be under no duty to protect BFS. In Al Saudi Banque v Clark Pixley [1990] 1 Ch 313, a company which had carried on the business of import/export finance to overseas customers, and to which a group of banks had made loans, had subsequently gone into liquidation. One of the issues considered by Millett J was whether the auditors of the company owed a duty of care to those banks which were existing creditors of the company when the auditors carried out their audit. Having concluded that no such duty existed because of lack of proximity between the auditors and the banks, Millett J’s judgment continues at page 337:-

“This makes it unnecessary to consider whether, if the requirement of proximity was satisfied it would be just and reasonable to impose a duty of care to the existing bank creditors.  But in case the matter goes further I ought to indicate my own views. In my judgment, it would not. Caparo’s case [which had only reached the Court of Appeal at this time] shows that even if the duty of care is confined to the creditors whose existence was known to the defendants, the potential liability is not restricted to the amount of existing indebtedness.  The defendants will be liable to a bank which made an additional facility available to the company in reliance on the audited accounts. Accordingly though there is no danger of exposing the defendants to a liability to an indeterminate class, they will be exposed to liability for an indeterminate amount. Moreover, this is potentially a far greater exposure than in Caparo’s case where the company was solvent though overvalued in the accounts. In the worst case the maximum liability would be measured by the amount by which the value of the company was overstated. Where the value of a company is negligently overstated or understood in the accounts, the auditors liability to investors and shareholders would be measured by or at least related to, the extent of their own negligence. That is not so where creditors are concerned and the company is alleged to have been insolvent. In the case of a subsequent and irrecoverable advance, the auditors’ maximum liability would fall to be measured by the amount of the advance, which would be unknown to the auditors and could not be foreseen by them. It would bear no necessary relationship to, and could be many times greater than, the value of the company as shown by its published accounts.  In the present case the company had a paid share capital of Ł325,000. The 1982 accounts showed net assets of just under Ł800,000 and bank borrowings of Ł6.4M.  They could have been used to support further borrowings of many millions of pounds. Even if the requirement of proximity was satisfied, I would not for my own part, unless constrained by authority, extend the duty of care to a prospective lender, unless the amount or at least the scale of the proposed loan was known to the defendant.”

820.          Millett J was directly considering an issue of whether a duty of care existed, as opposed to one where the duty is accepted and the issue is whether the scope of that duty included a particular kind of loss. However that does not, it seems to me, make any difference to whether Millett J’s reasoning is capable of application to the facts of the present case. Nor does it seem to me to make any difference that the liability argued to be outside the scope of duty was loss from transactions made possible by advances obtained from the claimant’s parent company, at the instance of a fraudulent general manager of the claimant, over whom no controls of any kind appear to have been exercised by the management of the claimant or by that of the lending parent.

821.          In Al Saudi Bank, Millett J was dealing with a claim by a lending bank not, as here, by the audit client. However it seems to me that his reasoning, that auditors ought not to be made liable for the consequences of events of which they were unaware and which they could not have foreseen, is applicable to a claim by an audit client when the relevant event is an action of the client. Here the auditors can say that it was never within their knowledge, or within their contemplation at the time they undertook the audit, that uncontrolled funding of this kind would be made available to BFS.

822.          Mr Gaisman for D&T drew my attention to two cases, one American and one Australian, where similar issues were considered. The first was the judgment of Chief Justice Lucas in Bily v Arthur Young & Co [1992] P.2d p745,in the California Supreme Court. In that case the Chief Justice was considering a claim by investors in a corporation’s warrants and common stock against accountants who had audited the company’s accounts prior to a public offering. Having referred to the celebrated dictum that “an auditor is watchdog, not a bloodhound” from the judgment of the Court of Appeal in Re Kingston Cotton Mill Company [1896] 2 Ch 279, at page 288, the Chief Justice said (at page 763 of the report):-

“Although the auditor’s role in the financial reporting process is secondary and the subject of complex professional judgement, the liability it faces in a negligence suit by a third party is primary and personal and can be massive. The client, its promoters, and its managers have generally left the scene, headed in most cases for government-supervised liquidation or the bankruptcy court. The auditor has now assumed centre stage as the remaining solvent defendant and is faced with a claim for all sums of money ever loaned to or invested in the client. Yet the auditor may never have been aware of the existence, let alone the nature or scope, of the third party transaction that resulted in the claim.”

823.          And then at page 764:-

“In view of the factors discussed above, judicial endorsement of third party negligence suits against auditors limited only by the concept of foreseeability raise the spectre of multibillion dollar professional liability that is distinctly out of proportion to:(1) the fault of the auditor (which is necessarily secondary and may be based on complex differences of professional opinion): and (2) the connection between the auditor’s conduct and the third party’s injury (which will often be attenuated by unrelated business factors that underlie investment and credit decisions).

As other courts and commentators have noted, such disproportionate liability cannot be justified on moral, ethical or economic grounds. As one commentator has summarised: ‘The most persuasive basis for maintaining the limited duty [of auditors] is a proportionality argument… it can be argued as a general proposition in these cases that the wrongdoing of an accountant is slight compared with that of the party who has deceived him (his client) as well as the plaintiff. This rationale for non-liability is similar to the proximate cause grounds on which wilful intervening misconduct insulates a “merely negligent” party from liability.’

824.          Chief Justice Lucas’ judgment was extensively referred to in the judgment of McHugh J in the High Court of Australia in Esanda Finance v Peat Marwick (1997) 71 ALJR 448. McHugh J said, at page 471 of the report:-

“It is by no means certain that the demands of corrective justice require auditors rather than these sophisticated creditors and investors to absorb the losses that flow from lending to or investing in the auditor’s client. Auditors can have only a vague idea as to the potential loss that may flow from the failure to detect fraud or error in the affairs of the client being audited…. creditors and investors on the other hand are likely to be in a better position than auditors to know the likely extent of their losses. The investor or creditor knows the maximum extent of any likely loss. Unlike most plaintiffs in negligence cases, these investors and creditors can take steps to protect themselves against loss…”.

825.          However it seems to me that to exclude loss facilitated by the Dollar Funding from the scope of D&T's duty to BFS would require me further to narrow the test of the “kind of loss” capable of falling within the defendant’s scope of duty which emerges from the speeches in the BBL case. I should have to exclude loss which would be otherwise the foreseeable consequence of the information, which is alleged to have been negligently given, being wrong.  Even assuming that, consistently with precedent, I am able to do this, it seems to me that I should not do so, particularly in the light of my conclusion, which I shall shortly set out, on causation and breaking the chain. To do so might involve reopening D&T's concession that the loss resulting from Leeson’s unauthorised trading was foreseeable and so not too remote.

Was the “chain of causation”, from D&T's negligence to the loss sued for, broken by management fault and if so when?  

The appropriate test

826.          I accept Mr Gaisman’s submission, backed by authority, that the metaphor of breaking the chain of causation is capable of confusing. It suggests that only the intervention of events occurring after the negligence sued on are relevant to the issue of whether there has been any relevant break. As Staughton LJ said in Total Transport Corporation v Arcadia Petroleum Ltd [1998] 1 Lloyd’s Rep. 351 at page 361:-

“It is common to refer to a chain of causation between the wrongful act and the plaintiff’s loss and to an intervening act which may or may not break the chain. If that is always the appropriate metaphor, of course it must follow that an event occurring before the wrongful act cannot break the chain. It is as simple as that. But I for my part do not accept that the chain metaphor is an appropriate one for causation in contract. Instead one has to ask whether in commonsense the wrongful act was a cause of the plaintiff’s loss, or whether something else was.”

827.          D&T's case on this issue is summarised in their written closing submissions as follows[480]:-

“It is D&T's primary case that the conduct of the bank and of its servants or agents in the mismanagement of Leeson and of his activities makes it impossible for BFS to establish a sufficient causal connection between any breach of duty on the part of D&T and the losses that are being claimed. This is because the evidence reveals that the antecedent, concurrent and subsequent failings on the part of the Barings entities and their servants and agents amounted to conduct which was so egregious and so grossly deficient that it is to be regarded as the real cause, and the sole cause in law, of BFS’s loss. If ever there was such a case, when gross failings should be held to eclipse venial ones, this must be it.”

828.          Accordingly I accept Mr Gaisman’s submission that the “causal enquiry” inevitably involves analysis of the comparative causative potency and efficacy of the relevant conduct, to which it is irrelevant whether the competing causes on which D&T rely to negate causation started before or after any breach of duty on the part of D&T.

829.          The proper approach to this question is dealt with in the 18th edition of Clerk & Lindsell on Torts from paragraph 2-36 onwards.  Selected passages from the text read as follows:-

“2-36… the defendant’s conduct may have satisfied the “but for” test, in the sense that without his wrongful conduct damage would not have occurred. But this, in itself, is not determinative of whether he should be held responsible where other causally relevant events have played a role. Thus, in the majority of cases where a plea of novus actus [breaking the chain] succeeds, there will have been a prior finding that the original wrongdoing does indeed satisfy the “but for” test of factual causation. It is a cause of the damage. On grounds of equity and policy, the court then proceeds to find that in the light of subsequent events, the defendant should not be held answerable for consequences beyond his control. A novus actus may take three forms:

(1) some natural event independent of any human agency;

(2)an act (or omission) by a third party;

(3)the conduct of the claimant himself;

Whatever its form, the novus actus must constitute an event of such impact that it obliterates the wrongdoing of the defendant.

“2-37Often the courts have to resort to metaphor and, again, “common sense”. Did the intervening event “isolate” or “insulate” or “eclipse” the defendant’s conduct so that it was merely the occasion of the harm rather than the cause of it?  Was the intervening act “no mere conduit pipe through which consequences flow from defendant to claimant, no mere part of a transmission gear set in motion by the defendant”? The proliferation of expressions indicates that there is no simple test and, though common sense may point the way, the language of causation tends to obscure the evaluative nature of the decisions that the courts must inevitably make.”

830.          We are here concerned both with conduct of BFS itself, the claimant, and with the conduct of third parties, primarily BSL and BSJ, or with servants of those and other Barings companies concerned with the oversight of aspects of BFS’ business under the matrix system of management.

831.          At paragraph 2-41, Clerk & Lindsell considers intervening conduct of third parties:-

“No precise or consistent test can be offered to define when the intervening conduct of a third party will constitute a novus actus interveniens sufficient to relieve the defendant of liability for his original wrongdoing. The question of a novus actus “can only be answered on a consideration of all the circumstances and, in particular, the quality of that later act or event.”  Four issues need to be addressed. Was the intervening conduct of the third party such as to render the original wrongdoing merely a part of the history of the events? Was the third party’s conduct either deliberate or wholly unreasonable?  Was the intervention foreseeable? Is the conduct of the third party wholly independent of the defendant, i.e. does the defendant owe the claimant any responsibility for the conduct of that intervening third party? In practice in most cases of novus actus more than one of the above issues will have to be considered together.

832.          At paragraph 2-51, Clerk & Lindsell considers the approach where the conduct said to break the chain is that of the claimant:-

“2-51 When the conduct of the claimant exacerbates, or adds to, the injuries of which he complains, that conduct will generally result in a reduction of his damages on grounds of contributory negligence, or failure in his duty to mitigate damage. However it may be that the conduct of the claimant is so wholly unreasonable and/or of such overwhelming impact that that conduct eclipses the defendant’s wrongdoing and constitutes a novus actus….

2-52 It is submitted that, for the claimant’s subsequent conduct to be regarded as a novus actus interveniens, it should be such as can be characterised as reckless. Unreasonable conduct can be dealt with by a finding of contributory negligence. Once the court has determined that the defendant was in breach of a duty to exercise reasonable care for the claimant’s safety, the claimant’s negligent conduct should not lead to a finding of novus actus.”

833.          It was D&T’s submission that the Barings’ management fault revealed by the evidence qualifies for the epithet “reckless”. They further submitted that where there are two causes of relevant loss, of which one is found to be reckless and the other merely negligent, then there is a rule which emerges from the authorities that the reckless conduct is to be treated as the sole cause of the loss. Thus, in an action to recover damages for the conduct merely negligent, the reckless conduct breaks the chain of causation from that negligence.

834.          Mr Gaisman cited a number of authorities in support of the second submission.  In my view they do not amount to authority for the proposition that reckless conduct will always “trump” merely negligent conduct and so always be treated as the sole cause of loss of which the negligence was factually also a cause. The high point of Mr Gaisman’s authorities was the passage in the judgment of Hobhouse J in Berg v Adams [1993] BCLC 1045 at page 1070 where he said this:-

“Causation cannot be examined independently of the identification of the alleged cause of action; it involves the relationship between the loss or damage suffered by the plaintiff and the fault of the defendant. As regards the alleged liability of Dearden Farrow in tort to Union Discount, the failure of the defendants to show reasonable foreseeability in relation to the losses claimed is fatal to their claim as a matter of causation as well. However since I have concluded that, if Union Discount did rely upon the certification in relation to the relevant discounting transactions they were acting recklessly, it would follow that in law the only relevant cause of their loss was their own reckless conduct.”

835.          The authority of this passage for Mr Gaisman’s purpose seems to me to be undermined by the passage in the speech of the same judge, now Lord Hobhouse, in the Reeves case where he said:

“human conduct, which is not entirely reasonable, for example, where it is itself careless, but is within the range of human conduct that is foreseeable and normally contemplated as not unlikely, may add a further cause of the relevant subsequent event but would not normally mean that an earlier event ceases also to be a cause of that later event. Careless conduct may ordinarily be regarded as being within the range of normal human conduct when reckless conduct ordinarily would not.”

836.          In my view the authorities only support the proposition that where there are two causes of relevant loss, one properly to be categorised as reckless and the other only as negligent, the reckless conduct will ordinarily be treated as the sole cause of the loss, but not inevitably. That conclusion is consistent with paragraph 2-52 in Clerk & Lindsell which I have cited above. 

837.          However I am not able to accept the “submission” contained in the first sentence of that paragraph if, as seems to be the case, it is intended to suggest that, for the conduct of a claimant to break the chain, his negligent intervening conduct must be of a more serious and blameworthy kind than that of an intervening third party. I can see no logical reason why this should be so and the authority cited for the passage does not appear to support it. It seems inconsistent with decisions such as that of the Court of Appeal in Knightley v Johns [1982] 1 WLR 349. Once the claimant’s fault becomes the sole cause of the loss, contributory negligence ceases to be an appropriate reason for denying any relief. 100% contributory negligence is a contradiction in terms.

838.          Mr Gaisman for D&T cited a number of authorities as defining the test for what may constitute a breaking of the chain of causation from a particular act of negligence, by a claimant or by a third party. It seems to me that what will constitute such conduct is so fact-sensitive to the facts of any case where the issue arises that it is almost impossible to generalise. If one must do so, I would say that it must be some unreasonable conduct, not necessarily unforeseeable (see McKew v Holland and Hannen [1969] 3 All ER 1621, per Lord Reid), a new cause coming in and disturbing the sequence of events  (The Oropesa (1942) 74 Lloyd’s Rep. 86 per Lord Wright), not necessarily reckless (Lambert v Lewis per Roskill LJ in the Court of Appeal, [1982] AC 227 at page 252), which may result from an accumulation of events which in sum have the effect of removing the negligence sued on as a cause (Knightley v Johns [1982] 1 WLR 349), which accumulation of events may take place over time (see Schering Agrochemicals Ltd v Resibel NVSA, unreported, in the Court of Appeal 26 November 1992).

Application of the test

839.          I am not prepared to hold, as contended for by D&T, that by 1 November 1992 (the date from which BFS claims that damage consequent on D&T's negligent audit of the BFS accounts to 30 September 1992 falls to be calculated, five months from the commencement of BFS trading) Barings’ management fault had become the sole cause of the losses caused by Leeson’s unauthorised trading.

840.          That being so, it seems to me that the proper approach is to examine the history of BFS’ trading from its commencement in July 1992 to see whether there came a point after November 1992 when Barings’ unreasonable management fault eclipsed the causative effect of D&T’s negligence, so as itself to become the effective cause of the losses resulting from Leeson’s unauthorised trading.  But before embarking upon that process it is convenient to consider what probative effect an audit certificate, certifying that the audit client’s financial statements represent a true and fair view of the client’s affairs, has.

841.          It should first be noted that audit guidelines, in this case SAG 12, place the primary duty to prevent and detect fraudulent conduct on the management of the audit client. At page 1055 of the report of Hobhouse J’s judgment in Berg v Adams, the judge was considering a claim by the liquidators of an audit client company and a bank which discounted its bills, against the auditors for negligently certifying its accounts. He said this:-

“Audited accounts are in any event only one of the sources of information which a prudent banker takes into account. Within a reasonable period after the end of the year covered by the accounts, those accounts may have a dominant role. With the passage of time thereafter, the role of the audited accounts becomes progressively less important and other more up-to-date information, including up-to-date references and up-to-date experience of transactions and accounts of whatever kind, covering later periods, become progressively more important. By August 1983 it was not reasonably foreseeable, nor was it foreseen by Deardan Farrow, that any material reliance would be placed by a banker or discount house upon the audited accounts of Berg for the year ending March 1982, except possibly for the purpose of historical comparison.

“At no material time was it reasonably foreseeable by Deardan Farrow that any failure to qualify their auditors’ certificate would cause any loss or damage to Berg or its members. It was not reasonably foreseeable that any loss could be suffered by Berg or its members as a result of the terms of the certificate to the 1982 accounts provided that all relevant facts were known to Mr Golechha [Berg’s controlling shareholder and director].

“The contemplation of the parties to the contract whereby Berg instructed Deardan Farrow to carry out the 1982 audit and Deardan Farrow accepted those instructions was similar. It would not have been within the contemplation of those parties that, in any material respect, an unqualified certificate would cause any serious loss or damage to Berg. Nor was it within their contemplation at that time that, provided Mr Golechha knew all the relevant facts and had all the relevant information, any loss could be caused to Berg by any matter material to this action.”

842.          In the Esanda Finance case at page 473, McHugh J said:-

“An annual audit report is out of date so far as the business of the client is concerned when it is published.  The report gives merely a picture of the business on a particular date, which may be from 6 to 10 weeks or more before the audit is published. By publication date, the details of the business will have changed even if the fundamentals of the business have not. The gap between financial reality and the financial position represented by the audit increases as each week goes by.”

The situation in April 1994

843.          Subject to any argument based on the Reeves case, with which I will shortly deal, I have come to the conclusion that the chain of causation from D&T's negligence to the losses caused by Leeson’s unauthorised trading was broken by the causative effect of an accumulation of Barings’ management fault both inside and outside BFS and that this had occurred by the end of April 1994. By that time:

i)                    BSL was itself enabling Leeson to continue his fraud by providing the Dollar Funding. Otherwise he would have been unable to continue margining his positions and BFS would have defaulted in its payments to SIMEX;

ii)                   the Dollar Funding had continued for a sufficient duration so that, by any reckoning, BSL should have investigated it. Such an investigation would have detected Leeson’s fraud;

iii)                 quite apart from the Dollar Funding, BSL management knew of a range of other warning flags which should have caused them to investigate Leeson’s trading and to detect his fraud.

844.          Therefore at that date D&T’s negligence ceased to be an operative cause of BFS’ losses.

845.          I have dealt in the preceding section with (i) above: the reasons why BSL’s provision of the Dollar Funding enabled Leeson to continue his unauthorised trading when otherwise he would have had to stop. In relation to (ii) and (iii), I set out below the circumstances existing in April 1994 which were known to BSL management and should have triggered an investigation of Leeson’s trading.

846.          In relation to the financial control aspects, I do so by reference primarily to Mr Hawes’ evidence. The three BSL departments which should have controlled payments to BFS were settlements, treasury and financial control. No witness emerged from financial control. Of the two witnesses from BSL settlements, Mr Bowser had left by the time the Dollar Funding started and Mr Railton was relatively junior. Mr Hawes was head of BSL treasury and such steps as were taken to uncover the reason for the Dollar Funding were taken by him. He can therefore be seen as the directing mind of the company in that area. I am conscious that this may create an impression which may be unfair to Mr Hawes, since he was by no means the only individual who ought to have been concerned about these issues and to have investigated them. The fact is that he was the only one who was and did, and he was a witness.

The level of the Dollar Funding

847.          The first Dollar Funding payment was on 9 February 1994. That was repaid after eight days. The second, which was not and in which Mr Jones was not involved to lend extra credibility to the request, was on 1 March (see paragraph 334 above). Ignoring the genuine payments of dollar collateral by BSL in January and February, the total of “classic” Dollar Funding rose during March to a peak of US$99 million on 15 March and stood at US$57 million on 28 March. It reached US$102 million on 11 April but fell back to US$32 million by 28 April 1994[481].

848.          Therefore by the end of April the Dollar Funding had been for over six weeks at a level which should have caused concern to any treasurer or financial controller, and it had reached peaks which should have rung immediate and loud alarm bells.

The K2/P4 balance

849.          Prior to the start of the Dollar Funding on 7 February 1994, the K2/P4 balance (see paragraph 340 above) had fluctuated between Ł5 million and Ł35 million since it was first identified in March 1993. It rose from Ł30 million at the end of February 1994 to peak (like the Dollar Funding) on 15 March at Ł78 million. The balance fluctuated during April between Ł48 million and Ł99 million, like the Dollar Funding peaking on 11 April, before dropping to Ł26 million on 28 April 1994[482].

The connection between the two

850.          It might be thought that Mr Hawes would make the connection between the start of the Dollar Funding and the rise in the K2/P4 balance immediately. He received details of both, they tracked each other closely, and he knew (as I describe below) that the K2/P4 balance was not attributable to customers paying their margins late.

851.          Part of Mr Hawes’ evidence did indeed suggest that he had made this connection when he visited Singapore on 24/25 February 1994, by which time there had been the request for US$32 million on 9 February. He said that he formed the view then that the delay in sending yen from BSJ to BFS was a potential reason for the K2/P4 line. However when, later in his evidence, it was put to Mr Hawes that he came to associate the K2/P4 balance with Singapore in January or February 1994, Mr Hawes said that it was later, in March or April 1994:

“Q: There came a time – and I am still seeking to summarise your evidence – which I think you would put as either January or February 1994, when you associated at least part of the K2 funding with the funding of Singapore?

A:I would say it was later than that. I think it was March/April 1994.

Q:I do not want to go back over that, Mr Hawes; but your evidence was you asked particular questions of Mr Leeson about this when you went on your visit to Singapore in 1994. You told my Lord yesterday that he gave you the same sort of answers as he gave Deirdre O’Donoghue in June and you in October.

A: Yes, that was particularly in connection with his requests for additional dollar funding.

Q: There came a point, whenever it was, in the first quarter of 1994 you associated the K2 problem with funding of Singapore, but before that you say you did not know what it was?

A: That is correct, yes.”[483].

852.          Whether or not Mr Hawes had made the connection between the Dollar Funding and the K2/P4 line at the time of his trip to Singapore in February 1994, it is clear that he had the information to make the connection by the end of March 1994 and did so at the latest by the end of April 1994. Accordingly he knew that the funding which Leeson was requesting largely accounted for the shortfall between fiduciary assets and the funds received from customers.

The debtors’ report

853.          Furthermore Mr Hawes knew that neither the K2/P4 line nor the Dollar Funding was attributable to customers failing to pay margins on time. Mr Hawes received daily the debtors’ report prepared by Miss Granger[484]. That showed whether agency clients were late with margin payments. Miss Granger told the Singapore inspectors that she added up the debtors’ list and found it did not equal the Dollar Funding:

“if you add up the client debtors’ report on a daily basis, it didn’t take a rocket scientist to see that the debtors did not equal the loan account. I did that in the beginning, when the funds started going up. Look at my debtors. Look at the amount of money that was in Singapore. It wasn’t a proper record. That information was available to everybody.”[485]

854.          Miss Granger said that the discussions with Mr Hawes and others about the Dollar Funding started in the summer of 1994[486]. But clearly BSL had the information available, from the first payment onwards, to check the K2/P4 balance and the Dollar Funding against the actual shortfall in margin received from customers, and Miss Granger did so.

Knowledge that BSJ was paying its margins

855.          Mr Hawes told the Singapore inspectors that BSJ was meeting its margin requirements on its SIMEX business, and that was consistently apparent to Treasury in London[487]. So funding BSJ business could only be, as he told me, an explanation “round the edges”, due to short-term delays in transferring yen to BFS.

Conclusion on Dollar Funding

856.          Thus in April 1994 we have the inexplicable phenomenon upon which I have remarked already (paragraph 360 above). Mrs Granger and Mr Hawes worked very near to each other and discussed the Dollar Funding repeatedly, yet held completely different and unreconcileable views as to the reasons for it. At the least one can conclude that those responsible at BSL should have concluded that they did not know why the Dollar Funding was needed and that it should be investigated.

Knowledge of BFS’ overdraft

857.          BFS had a daylight-only overdraft with Citibank, so BFS’ bank accounts should not have been overdrawn overnight. In fact BFS was consistently overdrawn between September 1993 and May 1994. 

858.          This was clear to BSL from a number of sources. First, D&T signed off on BFS’ accounts on 28 February 1994 and shortly thereafter BSL and Mr Hawes had available BFS’ 1993 balance sheet. That showed that Leeson was running an overnight, and therefore unauthorised, overdraft. On the face of the balance sheet this was apparently caused by BFS having more funds deposited with SIMEX than it held for customers. Secondly, Mr Hawes had seen a letter from Mr Stanley of Citibank of 18 February 1994 complaining about the abuse of the overdraft by Leeson (and had met Mr Stanley in Singapore a week later). Thirdly, BSL was receiving daily reports showing the state of all its subsidiaries’ bank accounts, and those showed the state of BFS’ overdraft.

859.          Mr Hawes accepted in cross-examination that issues such as overdrafts fell within his supervisory remit[488]. So he should have been aware by April 1994 that, not only was BFS requiring more funds from BSL than were justified by the trades it was doing, but even so BFS was consistently placing more funds with SIMEX than it received from BSL.

Imbalance of margins

860.          The 1993 balance sheet also showed that BFS had more funds deposited with SIMEX than it held on behalf of customers. Given that BFS was not meant to be trading on its own behalf, that was the wrong way round. Indeed, for anyone knowledgeable about the basics of SIMEX margining, it was the wrong way round by a very significant margin: the amount deposited at SIMEX was 45% more than would be expected from the level of customer funds (see paragraph 660 above).

861.          As an investment bank with, by 1994, an important derivatives business, BSL should have had financial controllers with the technical expertise to appreciate that. Indeed Mr Hawes visited BFS in February 1994 to discuss, among other things, its need for funding. One would have expected Mr Jones to explain the relative levels of margin, paid by customers to BFS and by BFS to the exchange, as a basis of that discussion. That he did not, was no doubt the result of Mr Jones’ even more inexcusable failure to master the basic financial principles underlying the business of which he was the Finance Director.

862.          Therefore the December 1993 imbalance was another warning flag to which Barings management should have responded by April 1994.

Lack of segregation and supervision at BFS

863.          In addition to these financial flags at the London end, Mr Hawes and others at BSL knew of operational flags at the Singapore end. I have described at paragraph 522 above how, on his February 1994 visit to Singapore, Mr Hawes realised that Leeson was running both the front and the back office, unsupervised by Mr Bax or Mr Jones. On his return he asked Mr Norris whether he was happy for Leeson to be running BFS alone and later passed his concerns on to James Baker. Mr Hawes told the Singapore inspectors that his comments to James Baker in June 1994 were based on his one-day trip in February 1994, and a few subsequent conversations on the phone with Leeson. As recorded by James Baker, they were:

“Nick Leeson has too dominant a role looking after both trading (agency and proprietary) and settlements aspects of the business; there is no deputy to challenge him… TH believes that SJ basically leaves NL to his own devices. While he has no evidence to suggest that NL has indeed abused his position, the potential for his doing so needs examining.”[489]

864.          Thus Mr Hawes appreciated by March 1994 the lack of both segregation and supervision in Singapore and the risks that posed. He admitted to me that he was seriously concerned about this[490]. Mr Hawes must also have been aware in March 1994 that Mr Killian, whom everyone except Mr Killian himself appeared to have thought was responsible for monitoring Leeson’s and BFS’ agency trading, moved from Japan, the office from which the F&O agency trading was run, to the USA.

865.          This concern should have been all the greater because by March 1994 Barings management knew that Leeson was engaged in discretionary proprietary trading, rather than just executing trades on the instructions of others. Mr Killian had learnt that Leeson was running his own book in all but name by the autumn of 1993. He agreed in evidence before me that he appreciated at the time that as a result Leeson should no longer have been in charge of both front and back offices and should have been subject to risk management[491]. By early 1994, Mr Baker was likewise fully aware of what Leeson was up to: he had been out to Japan and met Leeson, and at an off-site in December 1993 had asked Mr Gueler to explain how Leeson made his money.

866.          There was general agreement among the expert witnesses that, while non-segregation of functions was of limited concern while a broker carried out execution trades only, that changed once it was carrying out discretionary, and particularly proprietary discretionary, trading.

Leeson’s profits

867.          Finally, BSL was aware by April 1994 of the unusually high profits which Leeson was reporting. I have described the development of these at paragraphs 245 to 248 and 263 to 265 above. On the Nikkei trading, they began in November and December 1993. Dr Fitzgerald’s analyses have highlighted the significant change in the pattern of the profits on Mr Brindle’s volatility book in those months. Dr Fitzgerald’s evidence was that in those two months:

“fundamentally there has been a sea change in the nature of this book. Most of the volatility up and down has been removed; and its level of profitability is extremely significantly higher than what we saw before. So my view, if I was a derivatives risk manager of this book, there would be a trigger then, you know, to say, ‘Given this sea change in the book, you know, what is going on? What are the new strategies being followed? Is a whole new approach to the business being taken?’ Or whatever. It would be a trigger to ask questions, I think.

Now, if we go further, the next graph updates that through February 1994… And I would say on that, I guess my view as a derivatives risk manager is the evidence from the extra couple of months would certainly have considerably reinforced my view on the different nature of the book and the need for investigation would be bolstered, in my mind.”[492]

868.          Dr Fitzgerald commented in more detail on the levels of profitability at this stage in his reply report:

“as early as November 1993 Leeson’s profits amounted to 34.1% of all the Financial Product Group’s profits, and to well over 50% in January and February 1994… I would have expected the individuals with direct responsibility for Leeson and Brindle, and members of senior management, to be aware of such levels of profitability and to obtain cogent explanations for them….

The average monthly P/L in the Volatility Book in 1993 up to October was Ł370,000 – then the figure reached Ł3,257,000 in November and Ł2,617,000 in December… this should have triggered an investigation into what was going on and what was new.”[493]

869.          This evidence was unchallenged. So by March 1994 BSL and BFS were on notice that Leeson’s trading was generating unusual profits and should have investigated it.

870.          From 5 April 1994 there was a further warning flag, as Leeson started JGB trading. In his first week, Leeson reported profits from this activity of Ł1.87 million, purporting to effect 69% of the total trades done on SIMEX and to earn 6.5 ticks on every contract he traded. Dr Fitzgerald commented:

“I find it inconceivable that nobody in April and May 1994 felt the need to question how an entirely new business could immediately start doing weekly trading volumes constituting between 38% and 91% of all exchange traded volumes, and generating an income of Ł3,840,000 in the first two months of operation. This profit figure constituted over 37% of the entire FPG income in the months of April and May 1994 for a totally new venture. I cannot conceive of any other investment bank in the world simply taking such figures for granted without verifying them by detailed further investigation.”

871.          Again this evidence was unchallenged. Therefore by the end of April there was further evidence of something untoward going on at BFS, calling for a thorough investigation of Leeson’s activities. That did not happen.

872.          It seems to me to be relevant to this issue that Mr Hawes did not give, as a reason for his inaction, that he had derived any comfort from the clearance given to BFS’ accounts by D&T in their 1992 and 1993 audits.


873.          Thus by the end of April 1994 the following factors were, or should have been, in Mr Hawes’ mind. Barings’ knowledge of them, and failure to act upon them, amounted to an accumulation of management fault which broke the chain of causation from D&T's negligence to the losses caused by Leeson’s unauthorised trading:

i)                    large sums of United States dollars were being paid by BSL to BFS at the request of Leeson, but the necessity for those payments and what they related to had not been satisfactorily explained or determined;

ii)                   the K2/P4 balance on the Barings solo consolidation balance sheet was rising and falling, mirroring the payments and repayments of dollars. That led Mr Hawes to conclude that there was a connection between the two. Thus the explanation for the necessity for the Dollar Funding payments was to be found in BFS’ trading and its requirement for funding for margin payments in respect of its transactions on SIMEX;

iii)                 Mr Hawes, if he was not, should have been aware of BFS’ 1993 balance sheet. From that and from his contacts with Citibank in Singapore, he should have been aware that BFS was running a substantial overdraft and thus abusing its overdraft facilities which were daytime facilities only. The nature of BFS’ business should not have required substantial overdraft facilities and certainly not a large “hard core” borrowing;

iv)                 from the same balance sheet he should have noticed the anomalous imbalance between amounts for margin held by SIMEX and amounts held  by BFS in respect of margin from clients. It did not require an expertise in F&O markets to see that these totals should at least have balanced. A reasonable expertise in the SIMEX market should have led him to conclude that the balance was in fact dramatically the wrong way round. That Mr Hawes was inexpert in the technicalities of F&O markets can be no excuse to Barings. This should have led him to conclude that either BFS was financing its clients in substantial sums  or it was itself conducting trades on SIMEX which it was not authorised to do;

v)                  he knew that BSL clients were in general not in the habit of paying margin calls by BSL late;

vi)                 he knew that BSJ was funding margin calls in respect of its own transactions on SIMEX from its own sources;

vii)               he should have been aware of the recent substantial increase in the apparent profits resulting from BFS’ trading, the reason for which was largely unexplained;

viii)              he was aware that, while combining responsibility for both the front office and the back office of BFS, Leeson was himself conducting substantial proprietary trading; and

ix)                 he was aware that Leeson was running BFS single-handedly with virtually no supervision from senior management.

The Reeves principle

874.          Earlier in this judgment, at paragraphs 739 to 742, I have set out extracts from the speeches of Lord Hoffmann in the Empress Car and Reeves cases. From these cases emerges what I have called the “Reeves principle”, namely that the occurrence of the very thing which it was the defendant’s duty to the claimant to prevent ought not to negate a causal connection between the breach of duty by the defendant and the loss to the claimant.

875.          It was BFS’ submission that, applying the Reeves principle, D&T could not contend that the chain of causation between their negligence and the loss occasioned by Leeson’s unauthorised trading was broken by acts or events which were “the very thing” from which D&T was under a duty to protect BFS. It was D&T's submission that the Reeves principle could not apply either where there was no relevant duty owed by the defendant to the claimant or, if there was such a duty, where the claimant had not established, or even alleged, that that duty had been broken. Thus they submitted that D&T could have been under no duty to protect BFS from matters which occurred after D&T had ceased to be BFS auditors. D&T also drew attention to the narrow ambit of the audit negligence case which was pursued against them.

876.          It seems to me that D&T submissions on this point are demonstrably correct.  Thus only one of those matters which I have found should have been in Mr Hawes mind at the end of April 1994, item (iv), was also the subject of an allegation of negligence by the claimants against the defendants which I have found to be established. 

877.          By far the most important reasons why Mr Hawes should have insisted on an immediate investigation of BFS’ trading to discover the reasons for the Dollar Funding were the emergence of the Dollar Funding itself and his realisation of the connection between it and the unexplained fluctuations in the K2/P4 balance. I have found that the first request for dollar payments made by Leeson which should have been refused was the payment of $40 million on 1 March 1994, two months after the close of the period of the 1993 audit and after D&T had signed off the 1993 financial statements. Therefore it could be no reason for Barings not to investigate the reasons for the Dollar Funding that D&T had given a clean audit certificate for the year to December 1993. The Dollar Funding was a problem that had arisen wholly since that date.

878.          In my judgement, excluding Mr Hawes’ and thus Barings’ failure to appreciate the significance of the anomalous margin imbalance shown by BFS’ 1993 accounts, there were ample other reasons which should have driven Mr Hawes to insist upon a thorough investigation of BFS’ affairs. Given the state of knowledge of Mr Hawes in late April 1994, or what it should have been, even if he was not himself able to deduce that unauthorised trading was being undertaken on SIMEX through BFS, he should have instituted an investigation. That investigation would inevitably have led to the uncovering of Leeson’s unauthorised trading. His failure, or that of his superiors, so to act had the effect of subsuming D&T's negligence as a cause of the loss resulting from Leeson’s unauthorised trading which took place after 30 April 1994.

Alternative cut-off dates

879.          Later in this judgment I deal with the question of whether the damages consequent on the negligence of D&T which I have found established fall to be reduced by reason of the contributory negligence of BFS. In the course of doing so I come to the conclusion, for the reasons there set out, that the culpability of BFS for management fault increased after 30 April 1994, in mid-June 1994 and again at the end of October 1994. For the same reasons, if I am wrong in my conclusion that D&T’s negligence ceased to be a cause of the loss resulting from Leeson’s unauthorised trading at the end of April 1994, then I find that it had ceased to be such a cause in mid-June 1994 or, if that be wrong, the end of October 1994.

Fluctuations in loss after the cut-off date

880.          Before moving on to consider issues of contributory negligence, it is convenient at this point to deal with a difficult question of causation of damage which results from my conclusion that the “cut-off” for the calculation of loss flowing from D&T's negligence should be advanced to 30 April 1994 from the date of 31 December 1994 for which BFS contended.

881.          Schedule G to this judgment reproduces an appendix attached to D&T's closing submissions. BFS agreed that this schedule shows the losses on the 88888 account at any date for which figures are available between 1 November 1993 and the BFS cut-off date. The figure in the last column of Schedule G shows the sum, expressed in sterling[494], of (i) the amount which it would have cost to close out the outstanding positions and (ii) the realised losses or (rarely) profits, in both cases resulting from the unauthorised trading at any date during that period. It will be seen that this figure is subject to substantial fluctuation although the general trend is upward, that is, towards increased losses.

882.          I have concluded that there should be a cut-off date for damages, as a result of a break in the chain of causation from D&T’s negligence, of 30 April 1994. The nearest date for which figures are available is 28 April 1994. That shows the accumulated loss to be temporarily on a downward trend, presumably as a result of a brief period of successful unauthorised trading by Leeson, to stand at Ł27,564,128, down from a peak of Ł49,968,630 on 11 April 1994. The trend ended on 2 May 1994 with a trough figure of Ł25,138,505, after which point the losses grew and were always thereafter greater than the end of April figure.

883.          Mr Gaisman was quite candid that the fact that the accumulated loss stood at a historically low figure at the end of April 1994 was one of the reasons why he contended for that date as the cut-off date for damages. However when his submissions, as reflected in the reasons given in this judgment for acceding to them, are analysed, it will be seen that there does not emerge any compelling reason why the date for cut-off should have been 30 April as against 11 April or 2 May.  Nonetheless substantial differences in the amount of damage turn on the choice of the date.

884.          It seems to me, if unconstrained by authority, in a broad sense just that, once it is concluded that the causative effect of D&T’s negligence has ceased, D&T should be entitled to take advantage of any subsequent profitable unauthorised trading by Leeson, but should not be penalised as a result of success turning to failure and the figure for accumulated losses rising again. Profitable trading had the result of reducing, i.e. mitigating, BFS’ loss and resulted from a continuation of the pattern of trading which gave rise to the previous losses, which were caused by D&T's negligence. But it cannot be said that the resumed losses, after cut-off, were caused by D&T's negligence.

885.          The potential injustice to D&T is more starkly illustrated if my alternative cut-off date of mid-June 1994 is taken. Then the accumulated losses stood at Ł84,589,059 (17 June).  By 2 September 1994 the accumulated losses stood at only Ł44,115,078.  Why should D&T have to pay twice as much in damages to BFS, if they could establish that BFS became solely responsible for the loss resulting from Leeson’s unauthorised trading at mid-June 1994, than they would have to pay if they could only establish that fact later, at the beginning of September? That would have the odd effect that, the earlier that BFS knew or should have known what Leeson was doing (but failed to investigate), the more D&T would have to pay.

886.          Mr Gaisman eschewed the argument that he was entitled to pray in aid the result of subsequent profitable unauthorised trading by Leeson as a reduction in damages payable by D&T, as based on any established principles of mitigation of loss. I reluctantly accept that he was correct to do so. The profitable trading, though undertaken by BFS, was not undertaken as a result of BFS (as opposed to Leeson) being aware that it had incurred substantial loss as a result of being procured to embark on trading which it was not authorised to do and so at its own risk. Thus it cannot be said that the continuation of trading, which for a time produced profits, was a deliberate act of mitigation, though its effect was to mitigate the loss. (In fact it appears that the initial motive for Leeson’s unauthorised trading may have been an ill-conceived attempt, fraudulent because unauthorised, to conceal ill-advised transactions in the early days of BFS trading by realising sufficient profits to subsume the resulting losses.) The profitable trading cannot be said to be the result of a “reasonable and prudent course quite naturally arising out of the circumstances in which [BFS] was placed by the [damage]”, i.e. the accumulated losses at that point (see per Lord Haldane in British Westinghouse Electric v Underground Electric Railways Co [1912] AC 673, at page 691). In Hussey v Eels [1990] 2 QB 227, at page 241, Mustill LJ put the decisive question as being “Did the negligence which caused the damage also cause the profit?” As I have decided that D&T’s negligence had no causal effect after 30 April 1994, the answer in respect of profits after that date has to be no. Nor can any of the transactions which constituted the profitable trading be said to be “part of a continuous transaction” (as Mustill LJ put it in that case) with the loss-making transactions which preceded them: each trading transaction was separate.

887.          Mr Gaisman contended that, once facts justifying breaking the chain of causation had been proved, he was entitled to select any date thereafter at which to ask the court to impose a cut-off. In the alternative he contended that, in the exercise of the Singapore equivalent of section 727 of the Companies Act 1985, the court had power to give partial relief to D&T so as to nullify the consequences of the apparent injustices which I have described. As will be seen from paragraphs 1146 to 1148 below, I accept that the court has power under section 727 to give partial relief to an auditor and that it should do so, if necessary, in this instance. However both the solutions proposed by Mr Gaisman seem to me intrinsically unsatisfactory. The first is arbitrary and not apparently based on any principle. The second permits the court to grant relief only to a limited class of defendants - officers and auditors under section 727 of the Companies Act and trustees under section 61 of the Trustee Act 1925. Why should the court have power to relieve auditors but not, for example, investigating accountants?

888.          At paragraph 348 of McGregor on Damages 16th edition at page 229 the author deals with mitigation of damage and in particular with actions taken by the plaintiff after the date of breach. That paragraph reads:-

“Actions taken after breach by the plaintiff himself are directly within the principles laid down in British Westinghouse…: it is here that is found the core of the problem.  The matter is not well worked out in the authorities and all that can be done is to sketch what the law probably is.”

889.          McGregor then goes on to a review of the authorities, many of which appear to be in conflict but none of which deal with the sort of facts and the problem which this case raises.  It seems to me that, on principles analogous with those governing mitigation of damage, where the loss occasioned by the defendant is that flowing from the continuation of a specific trading activity (such as that carried out at Leeson’s instance on SIMEX, under cover of the 88888 account) and the defendant’s negligence has ceased to be a cause of the continuation of that trading, then, for the purpose of calculating the damage for which the defendant is liable, the defendant should be entitled to take the point in time thereafter which is most favourable to himself as the time at which the damages fall to be calculated.

890.          To take a hypothetical case, suppose that, on day one, an unlawful trading activity starts which is not disclosed or prevented as a result of the defendant’s negligence. On day two, by reason of supervening events, the defendant’s negligence ceases to be a cause of that continued trading. The trading continues profitably until day three, when it ceases. Subsequently action is brought, claiming against the defendant damages for negligence. It seems clear that the measure of damage will be the amount of the net loss on day three. Plainly in those circumstances the defendant is obtaining the benefit of accrued profits from the course of trading which occurred after his negligence ceased to be a cause. Equally plainly, if the profitable trend ceases and losses restart in the course of trading, for the continuation of which only the claimant can be responsible, the defendant cannot be made liable for the result of those losses.

891.          On the basis of my cut-off date of 30 April 1994, I therefore hold that D&T’s liability, subject to the deductions with which I shortly deal, falls to be calculated by reference to the loss on the 88888 account as at 2 May 1994, of Ł25,138,505. This figure is Ł2,425,623 lower than the loss as of 30 April, though the point could become more significant if a later cut-off date were adopted.


892.          At paragraphs 873 and 879 above, I have concluded that D&T’s negligence was not an operative cause of BFS’ loss after 30 April 1994 or, in the alternative, after later dates in June and October 1994. If that is right, questions of contributory negligence only arise in relation to the period from 1 November 1992 to 30 April 1994, or the later alternative dates. If I am wrong that the chain of causation was broken in 1994, then contributory negligence falls to be considered in relation to the whole period up to BFS’ cut-off date of 31 December 1994. 

The applicable law

893.          The Singaporean Contributory Negligence and Personal Injuries Act provides at section 3(1) that:

“Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.”

894.          By section 2:

“‘fault’ means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to the defence of contributory negligence.”

895.          These provisions are identical to the equivalent provisions in the English Law Reform (Contributory Negligence) Act 1945. No evidence was led to the effect that Singapore law on contributory negligence differed from English law and the parties agreed that I should treat it as being the same as English law.

896.          The parties also agreed as to the effect of that English law, and therefore I need elaborate on it little further. Contributory negligence was agreed to apply to a claim in contract such as that brought by BFS: see Vesta v Butcher [1989] 1 AC 852 (in this respect Australian law is to the opposite effect: Astley v Austrust [1999] Ll. Rep. (PN) 758). As O’Connor LJ commented in Vesta, both parts of the definition of fault apply to the claimant: “whereas the defendant cannot be at fault unless in breach of duty owed to the plaintiff, the plaintiff’s contributory negligence may or may not involve a breach of duty owed to the defendant.” Thus a claimant may be at fault for these purposes through negligently failing to protect his own interests.

For whose actions was BFS responsible?

897.          BFS accepted from the beginning of the case that there was substantial contributory fault on the part of BFS and those for whom it was responsible. How far the latter phrase comprised individuals employed by other companies in the Barings group was the subject of a considerable amount of argument, in the course of which the positions of the parties developed and converged, in the light of suggestions from me.

898.          D&T’s primary case was that the court, in assessing “the claimant’s share in the responsibility for the damage”, should apply a rule of attribution which took into account the policy of the 1945 Act. It was permitted to do so by Meridian Global Funds Management Asia Ltd v Securities Commission. That rule should have regard to the reality of the Barings group, in the same way as the Court of Appeal had regard to the reality of one-ship ship-owning companies in The Ert Stefanie [1989] 1 Lloyd’s Reports 349.

899.          D&T contended that Barings was run as a global investment bank, with individuals being allocated functions in the management of Barings’ business without regard to which company employed them. BFS was simply one of the corporate vehicles through which Barings carried out its integrated derivatives business. BFS did not have a business of its own, but was no more than the presence on SIMEX of the Barings securities business, created to comply with SIMEX’s technical requirements.

900.          Accordingly D&T contended that the court should take into account all fault of individuals and entities within the Barings securities business who were responsible for controlling BFS’ activities and safeguarding the assets which were exposed by reason of Leeson’s unauthorised trading.

901.          I reject D&T’s primary case. BFS was not just one of the corporate vehicles for BSL’s securities business, but was a functioning corporate entity, in reality as well as in theory. It had its own General Manager and board of directors, albeit the board delegated many of their supervisory functions to others outside the company. BFS had a distinct function within the Barings group. It maintained its own accounts of its operations, which it employed auditors to audit. BFS’ function, and thus its business, were those of a broker on SIMEX, primarily for customers within the group but also for one external customer. It is true that BSL guaranteed BFS’ bank facilities and provided funding when needed, and that BFS’ profits were managed so as to ensure the most favourable tax treatment for the group as a whole. Those factors demonstrated that the relationship between the two companies was not purely one of broker and customer, but also one of parent and subsidiary. They did not mean that BFS was not an entity with its own business.

902.          By contrast, BFS began by taking the position that many important management functions should, under matrix management, have been performed by employees of other companies as independent contractors. BFS was not negligent in leaving it to those other employees to perform those functions or in failing to check whether they were performing them. Therefore BFS was not negligent in not performing those functions itself, nor was it liable for the failure of those who should have performed them.

903.          In the course of the hearing, BFS accepted that this position was unrealistic. Instead, it conceded that it was responsible for fault in the management of BFS’ business, even where the individuals concerned were employed by other companies in the Barings group. 

904.          BFS’ concession seems to me in principle inevitable. As Jonathan Parker J said in Re Barings plc (No. 5), at [1999] 1 BCLC at page 489, having cited a passage of Sir Richard Scott VC’s judgment in the same proceedings:

“Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors. Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust in their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.”

905.          This was also the approach of Thomas J in the New Zealand case of Dairy Containers v NZI Bank [1995] 2 NZLR 30, at page 79:

“…it is the fundamental task of the directors to manage the business of the company. Theirs is the power and the responsibility of that management. To manage the company effectively, of course, they must necessarily delegate much of their power to executives of the company, especially in respect of its day to day operations. Although constantly referred to as “the management”, the executives’ powers are delegated powers, subject to the scrutiny and supervision of the directors. Responsibility to manage the company in this primary sense remains firmly with the directors.”…

“The directors may delegate powers and functions, using that term in a broad sense, but they cannot delegate the management function itself.” … “If a director negligently disregards the obligation to oversee the conduct of the company’s business, he or she has manifestly failed to perform that function with reasonable care.” 

906.          In Dairy Containers, Thomas J found that the directors left the investment side of the company’s business wholly to one director, who was one of the fraudsters. They “effectively abdicated their fundamental responsibility to oversee or monitor a significant part of the company’s business.” As a result, the company’s recovery from its auditors was significantly reduced to take account of its contributory negligence.

907.          Dairy Containers was a more difficult case than the present, because it was conceded there that the fraud of the director to whom the management of the company’s investments had been delegated was not attributable to the company. Therefore Thomas J focused on the negligence of the other directors in not supervising their delegate. This case is more straightforward, in that there was no fraud on the part of those to whom the BFS board delegated the supervision of Leeson’s activities (Mr Jones, Mr Baker and Mr Gueler among others) and therefore no such focus is necessary.

908.          It is the responsibility of a company’s board of directors to manage all aspects of the company’s business. The board will delegate many aspects of that task to individuals or committees, either within or (more rarely) outside the company. But if the delegates fail in their tasks, such that the company fails to take proper care of its own interests, their failure is to be attributed to the company and its board of directors. Where the company is a claimant, and its management failures are relevant to an issue of negligence or breach of contract, those failures are to be treated as fault for the purposes of a defence of contributory negligence.

909.          So it is clear that the fault of the board’s delegates is attributable to BFS. Therefore, whether one focuses on the delegates’ negligent failure to perform their function, or the resulting failure of the board to manage the company’s affairs, the company failed to take care of its own interests and thus contributed to its loss. 

910.          Accordingly, when looking at “the claimant” under the Contributory Negligence and Personal Injuries Act, I should look at BFS itself, and those to whom were delegated the functions which a company’s directors and management would usually perform. This is correctly reflected in the principle, if not the detail, of BFS’ concession.

The ambit of BFS’ business

911.          This leads on to the question of what was the ambit of BFS’ business. I made a ruling, setting out my conclusions only, on this issue on 21 March 2003. As I explain at paragraphs 1070 to 1079 below, that was in order to avoid unnecessary argument as to D&T’s contribution claims against BSL and BSJ. I set out below the conclusions I reached then and the reasons for them.

912.          BFS’ position at the end of the trial was that BFS’ business was that of a futures broker on SIMEX, with its own management, accounts and customers. This was unaffected by the fact that most of its customers were other companies in the Barings group, or the close co-operation which existed between BFS, BSL and BSJ. Accordingly BFS accepted, inevitably, that BFS’ business included management of BFS’ trading activities (within which it included the monitoring of Leeson’s intra-day risk limits), settlement activities and operational and financial control functions. But it contended that BFS’ business did not include the monitoring of the profits made by BFS’ trading; the conduct of BSL settlements or Treasury in London; the risk control functions in London or Japan; group compliance and financial control functions; or the conduct of the internal audit.

913.          D&T contended that, if the court were to have regard to BFS’ business, that had to be defined widely, recognising the extent to which BFS’ board relied on others outside the company to manage its activities. D&T pointed out that BFS’ pleaded case contains averments[495] that:

i)                    BFS’ trading activities were managed and controlled by BSL and BSJ management;

ii)                   the London settlement department had overall responsibility for and the control of the settlement of trades executed by BFS; and

iii)                 risk monitoring and compliance supervision in relation to BFS’ activities were the responsibility of, and performed by, management in London and Japan and, from about October 1994, Mr Bowser in Hong Kong. Monitoring the risk of BFS’ proprietary trading was the responsibility of the BSL risk monitoring function and the BSL risk committee was responsible for BFS’ risk management. The BSL compliance function was responsible for overseeing compliance issues for BFS.

914.          These averments were made by BFS at a stage in the proceedings before it had made the concession set out above. BFS was then seeking to argue that most of the management responsibility for its activities lay with other companies in the Barings group. The averments lay uneasily with BFS’ case, as it stood by the end of the trial, that certain of the functions mentioned were not part of BFS’ business. However they remained BFS’ pleaded case.

915.          I shall deal individually with the functions which BFS denied were attributable to it. However it is worth making three general points.

916.          First, I have accepted BFS’ proposition that BFS had its own business as a SIMEX broker. But I do not accept BFS’ further proposition that therefore I should treat its relations with other companies in the Barings group in the same way as I should treat relations between those companies and an independent broker. Matrix management meant that many functions that would normally be carried out within a company were, in BFS’ case, delegated to individuals employed by BSL or BSJ. Functions so delegated formed part of BFS’ business, and that is unaffected by the fact that BSL and BSJ were BFS’ customers.

917.          Secondly, in a group such as Barings, the fact that an individual performed a function as part of his employer’s business did not mean that he did not also do so as part of another group company’s business. There is no reason why a function had to be performed exclusively as part of one group company’s business.

918.          Thirdly, if a BSL employee knew that BFS management regarded his function as one of the controls on BFS’ activities, and relied on him to perform it, that function was part of BFS’ business. It follows from the two preceding points that that was so even though the function also served the interests of BSL, and even though it was a function which a customer of an independent broker would also perform, exclusively in its own interests.

Monitoring of trading profits

919.          BFS contended that BFS’ business was that of a broker, conducting trades only on behalf of its customers – BSL for agency trading and BSJ and BSL/BSLL for proprietary trading. All its trading was booked to trading books in the names of those customers, and the profits on that trading accrued to the benefit of those customers. BFS’ profits came only from commission on the trades it executed and interest on margins it held for its customers. Therefore, BFS contended, the monitoring and assessment of the profits resulting from BFS’ trading were part of the customers’ business, not BFS’. Had Mr Baker, Miss Walz, Mr Gueler and Mr Killian monitored the profits resulting from Leeson’s trading and asked questions as to the level of those profits, they would have done so as part of BSL’s and BSJ’s business, not BFS’.

920.          I reject this contention for two reasons. First, it is of course true that the person primarily interested in the profits resulting from the trades which a broker executes for its customer is that customer. The customer receives the profits and suffers the losses. But that does not mean that competent management of the broker is uninterested in the broker’s trading, or can ignore surprisingly high profits or losses resulting from it. High losses even on execution-only trades may raise concerns as to the customer’s credit. Losses on discretionary trading for a customer must raise an immediate concern that the customer may claim against the broker for negligence.

921.          Likewise if profits from trading are higher than would be expected, the likely explanations all pose dangers for the broker. The trader may be trading in unauthorised securities or exceeding his trading limits, or the trader may be front-running other customers, which may result in civil liability and regulatory penalties. It must be remembered that a member of the SIMEX market, such as BFS, trades as a principal and is liable for the performance of trades if its customer defaults. To the extent that losses are attributable to unauthorised or excess trading, the member is liable for any loss without the possibility of reimbursement by a customer.

922.          Therefore a well-run broking business should monitor the trading profits of its traders, as part of the broker’s monitoring of its own operational risks. BFS should have done this. If it delegated that function to Mr Gueler and others, they fulfilled it as part of BFS’ business, even though it was also part of BSL’s and BSJ’s businesses.

923.          Secondly, BFS conceded that monitoring compliance with Leeson’s risk limits was part of its business. Dr Fitzgerald gave evidence that monitoring profits is one of the most important and elementary means of monitoring compliance with risk limits[496]. Mr Gueler and a number of other witnesses agreed[497]. Ms Walz was concerned at the time that Leeson’s profits might indicate that he was breaching his limits[498]. It must follow from BFS’ concession that monitoring profits was also part of BFS’ business.

London settlements and Treasury

924.          I shall deal with these together because the only issue is as to the settlement and funding of BFS’ trading on SIMEX, in which both were concerned. Insofar as Mr Bowser had a role in supervising the BFS settlements department and Mr Hawes had a role in supervising BFS’ finance function, those are admitted to be part of BFS’ business.

925.          It is common ground that BFS’ business included the settlement of trades with SIMEX and with its customers (including BSL and BSJ). The latter function included reporting to customers as to trades done on their behalf and the financial consequences of that trading, and paying profits to, or calling margin from, customers in accordance with those reports.

926.          BSL’s settlements department was responsible for settling in a similar way with its own customers, and with BFS as its broker (and of course with other brokers, internal and external). I have described this process at paragraphs 147 to 149 above. Briefly, it involved transferring the trade and margin data sent by BFS onto First Futures, using it to report to BSL’s clients and to obtain the necessary margin from them, and sending the margin to BFS. For margin on BSL/BSLL’s proprietary trading (and also to the extent that there was a shortfall in margin received from BSL’s clients), the margin was obtained from Treasury.

927.          There is no doubt that BFS’ settlement with SIMEX was part of BFS’ business, and that BSL’s settlement with its clients was not. The question is as to the settlement and flow of funds between BFS and BSL.

928.          Mr Brindle for BFS divided this process into four elements:

i)                    the sending of margin by BSL,

ii)                   supervision and control of the sending of margin,

iii)                 the requesting and receiving of the margin by BFS, and

iv)                 supervision and control of the process of requesting margin and of its use once received.

929.          BFS accepted that (iii) and (iv) were part of BFS’ business, although BFS did not accept that, insofar as (iii) consisted of Leeson’s fraudulent requests, they were to be attributed to it. I deal with this below. As for (iv), BFS said that, insofar as Mr Hawes exercised a supervisory function over Mr Jones and the BFS finance function, his failure to exercise it competently added nothing to Mr Jones’ fault.

930.          Element (i), the mere sending of the margin, is of little relevance. I find that it was part of BSL’s business only, and not part of BFS’.

931.          The important element is (ii), the controls over the sending of margin. Relevantly, it included Mr Bowser’s action in sending the Ą670m to BFS, BSL’s not recalculating the margin requested by BFS, the payment of Dollar Funding which was clearly not reconciled to individual trades or clients, and the failure to investigate the Dollar Funding (including the failure to review the margin feed). I deal with the detail of all these in paragraphs 1007 to 1033 below.

932.          On the face of it, BSL’s settlements department might be thought to check the margin sent to BFS as part of BSL’s, not BFS’, business. Normally a customer using a broker checks the broker’s reports to him and the funds demanded of him for his own self-protection, not out of any duty to the broker. When BSL used external brokers, it reconciled their margin demands against trades from just that motive. Likewise, BFS pointed out that BNP paid margin to BFS. If it had paid too much, it could not be said that BNP’s inadequate controls over its payment of margin to its brokers were part of BFS’ business.

933.          However this is an area where the three general points which I have made above apply. If a BSL employee knew that BFS management relied on him to perform his function as one of the controls on BFS’ activities, that function was part of BFS’ business, even though it was a function which a customer of an independent broker would also perform, in its own interests.

934.          Mr Bax, Mr Bowser and Mr Norris all accepted that one of the controls on BFS should have been that the BSL settlements department ensured that Leeson was only funded in relation to authorised transactions and in the correct amount. Mr Bax confirmed that he relied on the operation of that control. Indeed when, during the internal audit, the question of lack of segregation came up, he concluded that it was not a serious control weakness because BSL was controlling and reconciling the margin[499].

935.          Furthermore Mr Bowser accepted that he knew that BFS management were relying on BSL to ensure that Leeson was only funded in relation to authorised trades. Mr Norris did not disagree, though he emphasised that the prime responsibility in this area was on local management[500].

936.          BFS’ management did indeed have a duty to ensure that Leeson did not make fraudulent margin calls on customers and that margin, once received, was used for authorised purposes. However the evidence I have referred to makes clear that BSL’s duty to pay out margin only in respect of authorised trades was a control on BFS’ business relied on by BFS management to the knowledge of BSL. As such it was part of BFS’ business and, to the extent that it failed, that was fault on the part of BFS.

Risk control

937.          The purpose of risk management in an investment bank, as explained by Dr Fitzgerald[501], is the development and monitoring of risk reports and risk limits, to ensure that risk is taken only within “a framework which achieves an appropriate trade-off between risk and reward”. BFS accepted that the monitoring of Leeson’s trading limits was part of BFS’ business. It might therefore seem surprising that it contended that other aspects of the risk control function were part of BFS’ customers’ businesses, not BFS’. However BFS contended that risk control is primarily concerned with the control of market risk. That is borne in most circumstances by the customer, whose capital and trading profits are at risk, and therefore it constitutes part of the customer’s business. Risk control within BFS’ business was limited to operational risk (which includes trading errors and unauthorised trading).

938.          The fact that market risk is in the first instance risk for the customer does not mean that a broker, carrying out agency and discretionary trading only on behalf of customers, should not have an effective risk management function. This is partly for the same reasons as I have already set out in the context of monitoring profits. Profits may be the customer’s, but trading in excess of limits, whether set by the broker or the customer, creates risk for the broker. Furthermore, market risk is not the only type of risk to which Dr Fitzgerald explained futures brokers to be subject. Credit risk, funding risk, liquidity risk and operational risk all apply to a greater or lesser extent to a broker trading on behalf of customers. Operational risk in particular is clearly a risk which cannot be passed on to the customer.

939.          Accordingly a well-run broker should have its own risk management function. The internal audit report recommended that BFS should have its own Risk and Compliance Officer. If appointed, such an officer would certainly have been part of BFS’ business. Prior to that appointment, BFS did not have its own Risk and Compliance Officer, but entrusted the risk management function to BSL and BSJ, as a control upon which (according to Mr Bax[502]) BFS management relied. It must follow that the relevant individuals were equally, in dealing with BFS’ activities, part of BFS’ business.

Group compliance and financial control

940.          Much the same applies to these functions, insofar as they related to BFS. Dealing with compliance first, according to the internal audit report Leeson was “responsible for compliance monitoring and dealing with the regulatory authorities, but there is no Compliance Officer as such[503]. As noted above, the report recommended the appointment of an independent Risk and Compliance Officer.

941.          Clearly Leeson’s role in compliance monitoring was, and that of the compliance officer once appointed would have been, part of BFS’ business. To the extent that BSL or group compliance personnel filled the gap that existed at BFS in the absence of a dedicated compliance officer, that role was part of BFS’ business.

942.          Likewise financial control was a function which would normally be performed within the company itself and of course was performed, inadequately, by Mr Jones and Miss Yong. To the extent that group financial control acted as a further control over the funding of BFS’ activities, that was part of BFS’ business.

Internal audit

943.          The internal auditors were employed by BSL and their audit of BSL was initiated by BSL. If anything, BFS personnel were obstructive: Mr Jones first delayed the audit and then failed to implement it.

944.          However any well-run broker should have conducted its own internal audit. BFS did not do so because it was one of the services which were supplied by BSL from the centre. But the findings of the internal audit were circulated to and discussed with the BFS directors and relied on by them: Mr Bax gave evidence that he took comfort from the internal auditors’ investigation of Leeson’s trading[504]. No doubt it was in BSL’s interests to carry out the audit, but it was also part of BFS’ business.


945.          Therefore I conclude that the following activities were part of the management of BFS’ business, insofar as they related to BFS’ activities: supervision of Leeson’s trading and monitoring of his profits and risk; BFS’ settlement activities and operational and financial control functions, and supervision of them from London; the conduct of BSL settlements and Treasury in funding BFS’ trading (save for the mechanical action of making payments); group compliance and financial control functions; and the conduct of the internal audit.

946.          Activities which were debated before me and which I conclude were not part of BFS’ business were the actions of senior management, at the level of Mr Norris and Mr Tuckey; the filing of regulatory reports by BSL with the Bank of England; and investigation (or lack of it) of the K2/P4 line. The first two of these need no further explanation. The third was purely part of BSL’s business from its appearance in early 1993 until it was identified as being at least partly attributable to Singapore in April 1994. It then became an aspect of the Dollar Funding issue which, as I have held, was part of BFS’ business.

“Double-dipping” and the need to consider the details of management failings

947.          BFS contended that there was one basic fault on the part of Barings management: allowing Leeson to control both front and back offices of BFS without adequate or effective supervision. All other faults alleged by D&T were just aspects of this. For example, Mr Jones was at fault in signing the representation letters without adequate knowledge of the business, but that was just an aspect of his inadequate supervision of Leeson.

948.          BFS admitted the gravity of the fault that had occurred. But it submitted that I should be wary of “double-dipping”, as it was termed in AWA v Daniels [1992] 7 ACSR 463 and [1995] 16 ACSR 607, and counting fault more than once.

949.          That leads on to a related issue, which is the extent to which I need to have regard to the fault of individuals within the Barings group. I posed the question in the course of argument whether it was not enough to identify a failure to do something that ought to have been done, without needing to identify who precisely was responsible for it.

950.          The answer to both issues lies in the guidelines as to the court’s approach to assessing fault under the 1945 Act to be found in cases such as Davies v Swan Motor Co. [1949] 2 KB 291 and The Miraflores [1967] 1 AC 826. They show that, in Lord Pearce’s words in the latter case, “‘fault’ … includes blameworthiness as well as causation”. Lord Pearce went on:

“This is most easily illustrated by taking an extreme case from a type of litigation which is tried daily in the courts. A dangerous machine is unfenced and a workman gets his hand caught in it. So far as causation alone is concerned it may be fair to say that at least half the cause of the accident is the fact that the workman put his hand into the danger. But so far as "fault" (and therefore liability) is concerned the answer may be very different. Suppose that the workman was a normally careful person who, by a pardonable but foolish reaction, wanted to save an obstruction from blocking the machine and so put his hand within the danger area. Suppose further that the factory owner had known that the machine was dangerous and ought to be fenced, that he had been previously warned on several occasions but through dilatoriness or on the grounds of economy failed to rectify the fault and preferred to take a chance. In such a case the judge, weighing the fault of one party against the other, the deliberate negligence against the foolish reaction, would not assess the workman's fault at anything approaching the proportion which mere causation alone would indicate.”

951.          In the light of this, I accept D&T’s submission that in assessing blameworthiness it is not enough to ask only whether the company failed to do what it should have done, though that must be the starting point. I need to have regard to the warning signs that should have prompted action, the explanations given and the reasons why the company failed to take action. However where, for example, the decision of one or other of two Barings employees was the cause of the fault, in most cases it is not necessary to reach a conclusion as to which it was.

952.          This also puts in context BFS’ “single fault” argument. BFS’ formulation does not anyway express adequately the various faults which, in the light of my decisions as to attribution, are to be taken into account. But since I am looking at blameworthiness, it matters little how one aggregates or sub-divides the management failings. What matters is their gravity in total. In that context, it adds little to the fault to say that, for example, Mr Baker, Ms Walz and Mr Gueler all had the responsibility to question Leeson’s profits and did not do so adequately, rather than to say just that BFS failed to do it. But it is relevant to consider how improbable the profits should have seemed to an experienced derivatives trader, the period of time involved, the apparent reasons for the profits, and whether concerns were raised and ignored.

The deduction for contributory negligence in audit cases

953.          BFS referred me to a number of Commonwealth cases involving auditors: AWA v Daniels, Dairy Containers v NZI Bank and Duke v Pilmer. In none of them did the court make a deduction for contributory negligence exceeding 50%. BFS contended that this reflected the principle that it was the auditors’ duty to protect the company and its shareholders from the misdeeds and follies of its own management (see Caparo v Dickman). The same principle underlay Reeves v Commissioner of Police, where even suicide did not merit a deduction of more than 50%, reflecting the defendant’s duty to prevent that happening. Accordingly BFS contended that a finding of contributory negligence in an audit negligence case of anything approaching 50%, let alone exceeding it, is likely to be extremely rare and should not be made in this case.

954.          D&T deprecated the use of the facts of other cases to try to discern a philosophy which should guide the court in this case. They also pointed to other cases involving professionals in which much higher deductions had been made, such as Nationwide B.S. v Archdeacons [1999] PNLR 549 and Nationwide B.S. v Balmer Radmore [1999] PNLR 558.

955.          I accept that an auditor’s duty to the company is one of the factors to be taken into account in deciding the apportionment of loss under the 1945 Act. In Astley v Austrust (a case involving solicitors, but which considered the Australian audit cases), the High Court of Australia said:

“In our opinion the reasoning of the Court of Appeal in Daniels is correct. There is no rule that apportionment legislation does not operate in respect of the contributory negligence of a plaintiff where the defendant, in breach of its duty, has failed to protect the plaintiff from damage in respect of the very event which gave rise to the defendant’s employment…

“The duties and responsibilities of the defendant are a variable factor in determining whether contributory negligence exists and, if so, to what degree. In some cases, the nature of the duty may exculpate the plaintiff from a claim of contributory negligence; in other cases the nature of that duty may reduce the plaintiff’s share of responsibility for the damage suffered; and in yet other cases the nature of the duty may not prevent a finding that the plaintiff failed to take reasonable care for the safety of his or her person or property. Contributory negligence focuses on the conduct of the plaintiff. The duty owed by the defendant, although relevant, is one only of the many factors that must be weighed in determining whether the plaintiff has so conducted itself that it failed to take reasonable care for the safety of its person or property.”

956.          The High Court was saying there that the nature of the defendant’s duty is relevant to the assessment of the claimant’s fault. There will be occasions when the claimant was justified in relying on the defendant to protect him from damage. Therefore he was not at fault in failing to protect himself from that damage. On other occasions his reliance will diminish his fault.

957.          So BFS can only pray in aid this principle to the extent that its failure to supervise its business and guard against fraud was excused by its reliance on D&T’s audit. Beyond that, it cannot use the Commonwealth cases to support any kind of reduction in the attribution of blame merely because the defendants were auditors with a duty to report to shareholders on the company’s management. Still less do those cases support any artificial ceiling in audit negligence cases, of 50%, as BFS argue, or of any other figure.

958.          Likewise in Reeves there was a conjunction between the defendant’s negligence and the claimant’s contributory negligence. It is true that the nature of the defendant’s duty caused the House of Lords to limit the deduction for contributory negligence to 50%, rather than the deduction of 100% favoured by Morritt LJ:

“… a 100% apportionment of responsibility to Mr Lynch gives no weight at all to the policy of the law in imposing a duty of care upon the police. It is another different way of saying that the police should not have owed Mr Lynch a duty of care…. The apportionment must recognise that a purpose of the duty accepted by the commissioner in this case is to demonstrate publicly that the police do have a responsibility for taking reasonable care to prevent prisoners from committing suicide.” (per Lord Hoffmann at page 372)

959.          However in Reeves the defendant had breached a duty to prevent the very thing which amounted to contributory negligence – Mr Lynch’s suicide. Again, the case assists BFS only to the extent that D&T were negligent in not detecting the claimant’s fault which is relied upon to found a deduction for contributory negligence. As I have held, an example was D&T’s failure to detect the falsity of Leeson’s representations as to the Ą670m. The fault attributable to BFS in relation to those representations, and other failings which D&T should have detected, is to be assessed with regard to the Reeves principle. But that case does not support a wider principle, such as BFS proposed, which would limit the deduction for contributory negligence in respect of all management fault, whether or not the auditors should have detected it.

960.          As I have previously pointed out in the part of this judgment dealing with the breaking of the chain of causation, the period audited by D&T finished on 31 December 1993. D&T completed their work in early March 1994 and had no further relevant contact with BFS after that. They could not have detected any later BFS failings, including the Dollar Funding or the failure to investigate Leeson’s increasing apparent profits. Their duty to protect BFS from new management failings had ceased, although they remained liable for the consequences of earlier failures: see the Sasea case. Therefore, whatever the application of the Reeves principle until no later than early March 1994, it cannot reduce the fault attributable to BFS in relation to any of its failings after D&T’s departure from the scene.

Vicarious liability for Leeson

961.          I mention this issue only in passing, because I have already dealt with it fully at paragraphs 698 to 720 above, in the context of D&T’s cross-claim based on Leeson’s fraudulent representations. BFS relied on the same arguments as are there considered to contend that Leeson’s actions are not to be attributed to it for the purposes of contributory negligence. For the same reasons as are there set out, I reject those arguments.

962.          BFS’ further argument in this context was that in any event Leeson’s fraud was subsumed in the management fault admitted by BFS, and that it would be unfair to penalise BFS twice over by counting it as separate fault. This argument finds support from the judgment of Thomas J in Dairy Containers v NZI Bank. However, as I have stated at paragraph 708 above, Thomas J’s view that fraud which amounts to “bilking the company” is not attributable to the company as contributory fault does not in my view represent English law. So there is little help to be gained from the logic which he employed to avoid that view causing injustice to the defendant.

963.          Therefore Leeson’s fault is to be attributed to BFS for the purposes of apportionment under the 1945 Act. However this is subject to the application of the Reeves principle considered above. Leeson’s fraudulent unauthorised trading was of course a cause of BFS’ loss, in common sense terms overwhelmingly the most important cause. But I have to recognise D&T’s fault in failing to detect that fraud and therefore cannot attribute to it the overwhelming causative influence which it would otherwise have.

964.          I have dealt at paragraph 877 above with the Dollar Funding, which is a rather different case. Not only did Leeson’s fraudulent requests for that funding commence after the period covered by D&T’s audits, but BSL’s action in paying the requests for a year was one which D&T can certainly not be blamed for not detecting or anticipating.


965.          BFS accepted that the fault of its management contributed to the losses flowing from Leeson’s unauthorised trading. This part of the judgment is concerned with an assessment of the degree of responsibility which BFS must carry for that loss. It seems to me that there are two aspects to this enquiry: the culpability of BFS for any failure to monitor or analyse BFS’ trading and the reports of that trading supplied by BFS to its customers; and the culpability of BFS for the admitted failure to exercise day-to-day supervision of Leeson in his capacity of de facto, and ultimately de jure, general manager of BFS. But these two aspects should not obscure a third, that Leeson, as general manager of BFS, fraudulently initiated and concealed the unauthorised trading.

The establishment of BFS

966.          I have described the circumstances of Leeson being sent to Singapore at paragraph 180 and following. As of November 1992, the position was that BFS was run by a 25-year old who had lied to the SFA on his application form. He had no previous trading experience, yet, not only was he in charge of both the trading and settlement teams, he had himself been trading actively on the SIMEX floor since July. Neither this transition to a trading role nor indeed Leeson’s decision that BFS should start executing trades itself had been authorised by anyone above him in Barings. In fact, no one above Leeson accepted responsibility for giving such authorisations or for supervising his trading.

967.          BFS admits that it was at fault in failing to ensure that there was adequate segregation between its front and back offices[505]. This was a basic fault, but it had serious consequences only because of the failure to supervise which I describe next. As explained at paragraphs 207 and 512 to 515 above, the evidence from Mr Killian and others was that it was not uncommon for small execution-only brokers to be run by a manager who was in charge of both front and back offices. But such a structure increased the risk of unauthorised trading which was present in any broking business. It required the board to implement clear reporting lines and controls on both the trading and settlements sides, including an independent finance function.

968.          In fact, the BFS board simply assumed, without checking, that the mechanical controls put in place when BFS was set up were effective. Neither BFS nor BSL supervised Leeson’s activities. BFS provided no active finance function at all. Leeson was thus allowed to exist in a management vacuum for nearly three years.

969.          I deal first with the settlements and finance sides within BFS.

Settlement and finance supervision within BFS

Mr Bax

970.          Mr Bax was managing director of BFS and, as such, had overall responsibility for it. BFS contended that Mr Bax believed Mr Jones at least to be exercising financial control over Leeson and that BFS’ activities were not within Mr Bax’s regional responsibilities.

971.          Mr Bax gave evidence that, when BFS was set up, he was left in no doubt that he was not to be involved in BFS’ trading, or indeed to have any day-to-day involvement with BFS’ affairs[506]. However in my judgement this did not acquit him of all responsibility for BFS so long as he remained a director of it, let alone its managing director. He remained responsible for ensuring that BFS’ trading, both that carried out by Leeson and also by others, was properly monitored and that Leeson’s other functions, including in particular the control of BFS’ settlements and back office, were properly supervised by at least one representative of senior management. The former responsibility required Mr Bax to ensure that he had at least some grasp of the nature of Leeson’s trading for this purpose. As to the latter responsibility, it was Mr Bax’s evidence, and that of everyone else including Mr Norris (save Mr Jones himself), that supervision of Leeson’s operations was or should have been undertaken by Mr Jones. If Mr Bax was relying on Mr Jones to do supervise Leeson, he should have checked from time to time that Mr Jones was actually doing so.

972.          Mr Bax did not meet these minimum requirements. On the trading side, he did not even know, at any time before the crash, that Leeson was running a proprietary book and taking positions himself. Had he known that, Mr Bax told me that he would have required the appointment of a compliance officer at BFS[507]. In relation to the back office and finance, Mr Bax relied upon the controls which he understood to have been incorporated when the business was set up – in particular BSL’s and BSJ’s control of funding – to ensure that BFS was properly supervised and controlled. He took no steps to ensure that those controls were working. Mr Bax accepted that he had no contact with BFS’ trading staff or with the back office staff. Indeed Mr Bax further accepted that he had no involvement at all in BFS’ affairs between the initial discussions about setting it up and the internal audit report in late 1994, beyond reading the monthly accounts and the SIMEX audit letter[508].

973.          Mr Bax accepted that Mr Jones had overall responsibility for supervising settlements between BFS and SIMEX, verifying transactions and sending out information to customers. Mr Bax assumed Mr Jones was exercising those responsibilities, largely on the basis that Mr Jones never reported a problem. He did not check that Mr Jones was doing so, let alone ensure that he was, and was surprised to learn of Mr Jones’ evidence that he had not done so[509].

974.          I find that Mr Bax did not fulfil his responsibilities as managing director of BFS. Had he done so, Mr Leeson’s fraud would have been prevented or detected.

Mr Jones’ supervision of BFS settlements and back office

975.          BFS accepted that Mr Jones should have supervised BFS’ back office and exercised a financial control function. It attributed his failure to do so effectively to his trust in Leeson and an over-reliance on outside controls on Leeson’s activities. Mr Jones did not appreciate that Leeson had available excess margins to fund unauthorised trading and he believed BSL was reconciling all margin requests before paying them. He failed to appreciate that Leeson might use BFS’ other cash resources and that he might manipulate BFS’ systems to conceal his activities.

976.          There is a conflict of evidence, which I have described at paragraph 191 above, as to the extent of Mr Bowser’s role in relation to the BFS settlements department. The conflict is irrelevant to the present issue, in the light of BFS’ acceptance that any supervisory function Mr Bowser had was part of BFS’ business for attribution purposes. In any event, Mr Bax accepted that Mr Jones was responsible for supervising Leeson’s running of the back office or, as Mr Norris put it, “the proper functioning of local reconciliation and reporting and internal controls and verification of transactions”[510]. That being so, it is a little difficult to see what Mr Bax thought Mr Bowser should have been doing, beyond ensuring that BSL paid out the correct amounts of margin. 

977.          In the present context, what matters is whether either Mr Jones or Mr Bowser exercised, or even attempted to exercise, any active supervision over the BFS back office. The need to do so should have been obvious, as BFS accepted[511], given that Leeson was in control of both trading and settlements. Since both Mr Jones and Mr Bowser deny any responsibility for exercising such supervision, it is not surprising that neither did so.

978.          I have already summarised at paragraph 520 above Mr Jones’ evidence as to his own position in BFS. He admitted in evidence that he did not take any steps to supervise the running of the BFS back office. He did not try to understand the procedures followed, so as to be able to check for deviations from what would be expected. Mr Jones was responsible for BFS’ reporting to London but he did not check that the feeds to London were working correctly. Nor did he make any attempt to establish contacts with the staff which would have encouraged them to bring concerns to him. He did not discuss with them what they were doing and why. He simply abdicated responsibility, so that Leeson was able to persuade the back office staff to assist him in corrupting the information sent to London and to falsify BFS’ records on a daily basis.

979.          Mr Jones’ answer to these criticisms in his evidence before me was that he did not regard himself as being under any duty to exercise day-to-day supervision of Leeson. He relied on the controls which were put in place when BFS was set up to control Leeson: the feeds to BSL, the reconciliation of margin by BSL and the bar on taking money out of the Citibank account[512]. Like Mr Bax, however, this did not excuse him from any responsibility for the supervision of Leeson and BFS. Mr Jones was the only other executive director of BFS besides Mr Bax. He must have known of Mr Bax’s role, or lack of it, and that no one else of any seniority was supervising Leeson from day to day. Mr Jones’ excuses might have been persuasive if he had taken any steps at all to satisfy himself that the controls upon which he relied were working, or even existed. He did not. As the evidence showed, the feeds were not working correctly and no effective reconciliation by BSL ever took place. Nor could Mr Jones have expected the staff to act as a control, firstly because of their inexperience but secondly because he never spoke to them so as to be able to assess whether they would.

980.          Accordingly BFS was at fault in failing to supervise Leeson’s running of the BFS settlements department. The controls which were believed to be in place do not excuse that fault, given that Mr Jones took no steps to check that they existed and were working.

BFS’ finance function

981.          Mr Bax told me that, as Finance Director, Mr Jones was responsible for monitoring BFS’ cash assets, including the excess margins held on behalf of customers[513]. Again, Mr Bax assumed Mr Jones was exercising those responsibilities. Mr Jones told me that in fact his finance role was limited to the year-end accounts and minor administrative matters.

982.          As with Mr Bowser in settlements, Mr Bax placed some reliance on London as providing treasury and financial control functions. Mr Hawes admitted to at least a general supervisory function over funds within BFS and oversight of BFS’ overdraft and banking arrangements. Again no purpose is served by apportioning blame between London and Singapore, given that BFS has accepted that fault by Mr Hawes in exercising such functions is attributable to it.

983.          Even allowing for Mr Hawes’ failings, given that Mr Jones was an experienced financial manager his failure to exercise any financial control over BFS was, if anything, more culpable than his failure to supervise the back office. Dr Fitzgerald gave unchallenged evidence as to the financial controls that should have operated in the derivatives business of a well-run investment bank in the early 1990s. He stated that a trading operation such as BFS should have as a matter of course carried out regular reconciliations of trades on SIMEX against margin requests, and reconciled all cash flows[514].

984.          Accordingly Mr Jones should have understood the mechanism for calling margin from clients and checked regularly that it was operating as it should. He should have ensured that all margin coming in to BFS was reconciled with positions at SIMEX. He should have asked questions if that reconciliation showed that BFS was calling large amounts of margin outside the established mechanism and holding it as collateral. He should have asked if that collateral was reflected in the regular margin calls which BFS was making.

985.          At an even more basic level, a finance director who made any attempt to understand the financial aspects of BFS’ business would have appreciated that BFS should always have held more margin for clients than it had to deposit with SIMEX. On even a superficial review of the monthly financial statements, he should have been concerned if that excess was not present, as it was not at the end of 1993. He should therefore have questioned the state of the December 1993 balance sheet revealed by the 1993 audit. A finance director should have kept BFS’ daylight overdraft facility under regular review and should certainly have asked questions if BFS was constantly overdrawn, as it was for most of the period September 1993 to May 1994.

986.          The list is a long one. Mr Jones admitted that he was half an executive finance director and that, if he had been a full-time finance director, Leeson’s fraud could not have happened[515]. I find that reasonable diligence by Mr Jones, in his capacity as a part-time finance director and head of operations at BFS, would have prevented or detected Mr Leeson’s fraud at an early stage.

Representation letters

987.          D&T contended that a further element of contributory fault by Mr Jones was his signature of the representation letters, addressed to D&T in the course of both the 1992 and the 1993 audits, which were the subject of the preliminary issue.

988.          I have dealt at paragraphs 768 to 780 with the counterclaim brought by D&T in relation to the representation letters. In the context of contributory negligence, I do not see that the letters add anything to the fault which was otherwise present. Mr Jones was not negligent in believing that Mr Killian and Mr Gueler were supervising Leeson’s trading; but that does not diminish the effect of their negligence in failing to supervise, which is equally attributable to BFS. Likewise, Mr Jones was negligent in confirming that there were no material irregularities, undisclosed liabilities, etc in the accounts. But that adds nothing to his negligence in supervising BFS’ operations which allowed those irregularities and liabilities to exist and to be concealed.

Failure to implement the internal audit report

989.          The internal auditors visited BFS between 19 July and about 9 August 1994. James Baker’s evidence (supported by his contemporary e-mail) is that Mr Jones had already agreed to segregation of Leeson’s roles before James Baker left Singapore[516]. Drafts of the report were in circulation from late August, and BFS implemented one recommendation as from the end of August. James Baker sent a draft of the report to Mr Jones on 26 August, asking him to fill in the management responses relevant to him.

990.          The publication of the final version of the report was held up by Mr Jones’ delay in providing his responses and by his disagreements with the auditors over their treatment of BSS staff turnover. It was published on 24 October and I find that Mr Jones (although he denied it in evidence) saw it on or very shortly after 1 November.

991.          I have set out the main recommendations of the section of the internal audit report dealing with back office controls at paragraphs 441 to 453 above. Despite Mr Jones’ promise of implementation “with immediate effect”, BFS implemented none of those recommendations (though one, as to cheque-signing powers, had already been put in place, in March 1994). Only after the SLK incident did Mr Bax cause Mr Jones to take over responsibility for the back office. Mr Jones took up his new duties on the day that Leeson fled Singapore.

992.          Mr Jones’ explanation for his failure to take steps to implement the report was that Mr Norris told him in November to devote all his time to sorting out a crisis relating to the transfer of settlement functions from New York to Singapore[517]. It seems that there were problems relating to New York at that time. But Mr Norris denied giving any instruction such as Mr Jones alleged, and Mr Bax had no recollection of it[518]. Nor did Mr Jones mention the instruction to the Singapore inspectors when they interviewed him after the collapse. I therefore find that, although Mr Jones did have to deal with New York problems in November 1994, there was no instruction from Mr Norris which excused him from complying with his undertaking to implement the internal audit report. Nor was there any reason why he should not have taken the necessary steps prior to November: he knew what the recommendations were from the end of August.

993.          Mr Bax told me that he believed Mr Jones had implemented the report and had not anticipated that, if Mr Jones said he would implement it, he would not do so[519]. To the extent that Leeson clearly remained involved in the back office, Mr Bax explained that he read the report as allowing such involvement, especially arranging funding[520].

994.          I agree that the internal audit report was somewhat vague as to exactly what role Leeson was permitted to retain in the back office. However it was entirely clear that a number of functions were to be removed from Leeson and assumed by Mr Jones or others. Had Mr Jones complied with those recommendations, Leeson would have been unable to continue his fraud. I find that BFS, through Mr Jones, was at fault in not implementing the recommendations in the internal audit report.


995.          Leeson’s unauthorised trading was in breach of his duty to BFS and caused it loss. He also concealed his unauthorised trading from management and the auditors. This was fault which was a cause of BFS’ loss and, as I have held at paragraphs 961 to 964 above, is to be attributed to BFS, subject to recognition of the Reeves principle.

Other BFS staff

996.          BFS denied any fault on the part of BFS’ staff. It contended that, given their youth and inexperience, they acted honestly and reasonably in following Leeson’s instructions. D&T contended that the staff were guilty of tacit collusion with patently irregular activities or, at the least, of staggering incompetence, caused by BFS’ failure to pay or train its staff adequately.

997.          Miss Hassan, Miss Sng and Miss Kader, the BFS staff who gave evidence[521], all told me that they had no contact with Mr Jones, and looked only to Leeson as their superior. When they were cross-examined about their knowledge of Leeson’s activities, they all relied on their inexperience and said that they just obeyed Leeson’s instructions. They claimed that the instructions to adjust trades and to manipulate a nil balance on the 88888 account at month-ends were just a few among the many routine instructions which they had to process every day, and they assumed them to be legitimate.

998.          In certain respects the evidence of Miss Hassan differed from that which she had given earlier. Thus Miss Hassan told me that she saw nothing odd in the number of trades on the 88888 account, even though it was supposed to be an error account, whereas she told the Singapore inspectors that she had found it odd[522]. Likewise she backed away from the statement in her own witness statement that she found odd the consistent booking and reversal of fictitious trades, which Leeson used to reduce the margin requirement on the 88888 account[523].

999.          I readily accept the youth and inexperience of all the BFS back-office staff. They reasonably regarded Leeson as a respected and important trader, who would not be involved in anything wrong. In Singapore, there is a culture of obedience which renders a junior employee unlikely to question a superior’s instructions. The adjustments which now seem so striking were, no doubt, just some among many routine entries made every day. Even if they had any concerns, Mr Jones had no contact with them, so that they had no effective superior except Leeson with whom to raise them.

1000.      Against that I set that, in the case of Miss Hassan, she accepted that she knew that the 88888 account was excluded from the trade feed to London and that reports to customers did not reflect all the trades entered into on SIMEX[524]. As I have said, in previous evidence she accepted that she found it odd that so many trades were entered on an error account and that the fictitious trades which Leeson instructed her to book gave rise to unreconciled differences between BFS’ and SIMEX’s records. She accepted that she knew the month-end entries on the 88888 account which she executed had the effect of giving the false impression that money was coming into the account, and that she made those entries before the month-end reports were printed out for Rachel Yong[525].

1001.      Likewise Riselle Sng had known that the 88888 account was an error account when she was employed in BFS’ back office and knew it was treated as a trading account on the floor. She knew that it was omitted from the trade feed[526]. Her interviews with the Singapore inspectors[527] suggest she appreciated the effect of cross trades into the 88888 account.

1002.      D&T did not put to these witnesses that they were knowing parties to Leeson’s dishonest dealing: the highest that Mr Butcher put it to Miss Hassan, for example, was that she knew Leeson’s instructions were irregular and called out for explanation but she complied with them[528]. But I conclude that Miss Hassan and Miss Sng should have realised that Leeson was trading on the 88888 account and concealing it from London, and that he was adjusting prices of trades so as to transfer losses into the 88888 account. Miss Hassan should also have known that Leeson was manipulating the balance on the 88888 account to zero at month- and year-ends.

1003.      Accordingly I conclude that Miss Hassan and Miss Sng, despite the extenuating circumstances to which I have referred, were negligent in not questioning what Leeson was doing and raising it with Mr Jones. However this is in reality just another aspect of Mr Jones’ failure to supervise BFS’ back office. The staff seem to have had no training at all, which rendered it more likely that they would obey Leeson’s instructions without realising them to be irregular. Mr Jones must bear some responsibility for that, as he must for their failure to question the instructions or raise concerns with management. Had he performed his supervisory duties properly, he would have elicited from the staff what they were doing, whether or not they regarded it as suspicious, and there would have been a realistic possibility that they might have come to him with their concerns.

BSL’s failure to supervise the BFS back office

1004.      I have already mentioned at paragraph 976 above the conflict of evidence as to whether BSL’s settlements department was responsible for supervising the operation of BFS’ settlements department and monitoring the use of funds within BFS. I have also mentioned at paragraphs 522, 863 and 866 Mr Hawes’ appreciation in February 1994 that Leeson was running both the front and the back office of BFS, unsupervised by Mr Bax or Mr Jones.

1005.      Mr Bax, Mr Norris and Mr Hawes accepted at least a general responsibility on BSL’s settlements department in that regard. Mr Bax told me that Mr Bowser was responsible for managing the settlements operation.  Mr Bowser denied it. I have described at paragraph 191 his account of his meeting with Mr Bax and Mr Jones (denied by Mr Bax) and of Mr Martin’s acceptance that Leeson should not report to Mr Bowser. Mr Gamby likewise denied responsibility for BFS in his CDDA proceedings. Mr Bowser also denied that the BSL settlements department had any responsibility for monitoring BSL’s funds once they had reached BFS.

1006.      It is not necessary for me to resolve this conflict. It was up to BFS to ensure that BFS’ back office was properly supervised. It manifestly did not do so. It matters not whether it was Mr Jones, Mr Bowser or Mr Gamby who failed in his duties, or whether it was the board which failed to delegate the task to any of them. Whichever it was, the supervision which should have been carried out would have been part of BFS’ business and the failure to carry it out was fault on the part of BFS.

Failures by the BSL Settlements Department and Treasury attributable to BFS

The Ą670m payment

1007.      I have found that D&T were negligent in certifying BFS’ 1992 accounts, in that they permitted a payment by BSL to BFS of Ą670m received on 1 October 1992 to be treated as having been received on 30 September 1992, without further enquiry of BSL or C&LL as to whether BSL was also treating the payment as having been made on 30 September. It affords no defence to such a charge of negligence that BSL actually made the payment, thereby giving substance to the explanation apparently given to Miss Koo that this sum represented a balance actually due from BSL to BFS. This is so even though the fact of the payment was in all probability a factor which influenced her in not following up her enquiries about the payment with sufficient vigour.

1008.      Nonetheless the fact that Ą670m was paid on 1 October 1992, and Ą395m in December 1992, by BSL to BFS without any enquiry as to the reasons why such payments had been requested by Leeson must constitute fault attributable to BFS on the principles which I have above set out. Without these payments Leeson would have been unable to conceal the “hole” in BFS’ accounts caused by his unauthorised trading at the 1992 accounts reporting date and, less importantly, at the December 1992 month-end. This was fault by BFS in failing adequately to look after its own interests. However it arose from circumstances which D&T should have investigated and from the consequences of which D&T as BFS’ auditors were under a duty to protect BFS. I have found that they did not discharge that duty with due care. It follows that the Reeves principle applies to reduce the impact of this fault.

Lack of reconciliations by BSL

1009.      I have explained at paragraphs 150 to 155 above that the BSL Settlements Department did not check that the margin demanded by BFS was correctly calculated, or reconcile it to the margin needed for individual trades or customers. In this, BFS was unique among BSL’s external and internal brokers. BFS requested margin by the Funding Spreadsheet. The Settlements Department checked that the figure agreed with the figure for margin required in the London Gross Report, but that was simply checking BFS data against BFS data, and neither report showed a calculation of margin by reference to individual trades. For calculating margin calls from BSL’s customers, the Department simply fed into First Futures the trade and margin data generated by BFS. It did not check the margin requested by BFS against that which BSL was requesting from its customers.

1010.      D&T contended that BSL was negligent in setting up the system in this way, in three respects:

i)                    BSL should have recalculated the margin called by BFS;

ii)                   BSL should have reconciled the margin called by BFS against the margin it had itself called from its customers; and

iii)                 BSL failed to ensure that all data on the margin feed was accepted by First Futures.

1011.      I shall deal with these criticisms in turn.

BSL’s failure to recalculate margin called by BFS

1012.      D&T assembled a formidable array of evidence in support of their criticism. Dr Fitzgerald, albeit not an expert in settlements practice, said that any competently-run bank should have done its own calculation of the margin due on its broker’s reported positions. This was so even though BFS was an in-house broker; he said that each link in the chain should do its own calculation[529]. Mr Railton agreed that it was a deficiency that BSL was unable to recalculate the margin, even though BFS was an in-house broker[530]. Mr Bowser, whose decision it was to set up the system as it was, agreed in cross-examination that it was an important control weakness, even though BFS was in-house[531]. Mr Hawes agreed that in principle it was elementary that a broker (here BSL) should reconcile margin against trades before paying it on behalf of customers[532]. In July 1992, Odette Farmer, then Settlements Controller of BSL, in a report to its Board referred to BSL’s inability to use SPAN to recalculate margin on LIFFE and LTOM (for which exchanges it used external brokers) as a “major outstanding deficiency[533]. Even BSL admitted in its trial opening (though it withdrew the concession in its closing[534]) that it was a system weakness that BSL could not recalculate margin, thus exposing it to the risks of overcharging, or taking a credit risk on, its customers and breaching regulatory requirements.

1013.      Against this near-unanimous chorus, only Mr Norris stood out. He said that, while he would defer to Mr Bowser and Mr Railton on settlement matters, in his view it would make no sense for different parts of the bank to duplicate the same calculation. Instead, he felt that BSL should have carried out such a calculation only on an exceptions basis, when a warning flag had been raised[535]. He gained some limited support from Dr Fitzgerald’s agreement with the report of Mr Taylor, the expert witness for C&LL (Mr Taylor is an expert witness for C&LL in the contribution claim and therefore was not called in this phase of the proceedings). Mr Taylor said that it was reasonable for BSL to assume that its clients would complain very quickly if margin calls were incorrect and to rely on that as a control.

1014.      I have some sympathy for Mr Norris’ stance on this issue. The decision which Mr Bowser took when BFS was activated seems a logical one. BSL did not have SPAN, and at that time did not need it for any other exchange. Therefore BFS’ systems would be set up so that it could calculate margin at the level of BSL’s customers and send the figures direct to BSL’s system via a margin feed. Whereas BSL had to calculate margin on BSJ’s trades because BSJ could only calculate margin as a gross amount, not at the customer level, BFS’ systems would be set up so that it could do both calculations.

1015.      It may be that I shall hear further evidence on this point in Phase 2 of these proceedings. However on the basis of the evidence I have heard so far, I think that, if it mattered, I should have to prefer the weight of evidence ranged against Mr Norris’ view. BSL should have recalculated BFS’ margin demands, at least from the second half of 1993, once BSL was using SPAN software routinely for other exchanges and BFS’ trading had expanded.

1016.      However in practice the point does not matter. All parties agreed that the yen margin demands in 1992 and 1993 were correctly calculated, so a recalculation by BSL would have revealed nothing. In January 1994 Leeson started abusing the transmission of genuine client US dollar collateral by BSL, by failing to take account of it on the Funding Spreadsheet. Soon afterwards he began calling for Dollar Funding himself. Both abuses could have been detected if BSL had recalculated the margin due on its SIMEX positions. But in fact both caused immediate warning flags to be raised, of just the kind described by Mr Norris as requiring a recalculation and investigation on an exceptions basis.

1017.      I have described at paragraphs 325 to 329 above how US dollar collateral was sent to BFS to be used in place of normal margin called in yen. Therefore it should have been deducted from the yen margins called by BFS. It was not. On the Funding Spreadsheet, the US dollar collateral was shown in a separate US dollar collateral section. But it was not shown on the collateral line in the section for the trading account, denominated in yen. Therefore, in calculating the margin required from BSL, the US dollar collateral was not deducted from the total margin due to SIMEX[536].

1018.      Had anyone looked carefully at the Spreadsheet, it would have been obvious that BFS was not giving credit for the US dollars and therefore not calculating the margin correctly. Indeed, Mr Railton realised this in June 1994 but, having raised the issue with Leeson, appears to have accepted whatever explanations Leeson gave him and did not pursue the point (see paragraphs 365 to 367 above).

1019.      The Dollar Funding was even more obvious. Mr Norris in his evidence referred to it as raising two warning flags, one the cause and the other the effect, which should have triggered an investigation. The effect was the increase in the K2/P4 balance. The cause was the fact that “we were being asked for money… and we were not able to reconcile that to any of our underlying transactions[537]. BSL did not need to recalculate margin using SPAN to realise that it was being asked for money which it could not reconcile to transactions. That was evident from the Dollar Funding requests themselves, which were on their face not so reconciled and were outside the established yen margining system.

1020.      Therefore BSL’s inability to recalculate margin requests caused none of its loss up to January 1994 and adds nothing to the negligence of which it was undoubtedly guilty in funding Leeson’s trading in 1994 and 1995.

BSL’s failure to reconcile margin called by BFS against the margin BSL called from customers

1021.      Dr Fitzgerald gave evidence that BSL should have reconciled the sums advanced to BFS against the sums BSL received from its customers. I do not see that this was a separate cause of BFS’ loss. If it is assumed that in 1993 BSL should have recalculated the margin called by BFS, a reconciliation such  as Dr Fitzgerald suggests would have added nothing to that and to Ms Granger’s record of customers who were late in paying margins. In 1994, such a reconciliation would have told Mrs Granger what she already knew from her own record: the Dollar Funding was not attributable to BSL’s customers failing to pay margins. Neither BFS nor D&T carried out such a reconciliation in Singapore, as between margins called from customers and margins deposited on SIMEX, and D&T’s case was that it was not realistic to expect D&T to do it.

Treatment by First Futures of data on the margin feed

1022.      The last criticism is that it was negligent to omit a control which ensured that all data on the margin feed was recognised by First Futures. I have heard no expert evidence on this and only one factual witness, Mr Siegfried, who merely confirmed the absence of the control. That being so, I do not feel in a position to decide the issue.

The investigation of the Dollar Funding

1023.      I have described, at paragraphs 349 to 388 above, the efforts of Mr Hawes and Mr Railton to investigate the Dollar Funding. I have expressed my view at paragraph 873 that BSL’s action in paying the Dollar Funding was an important reason for deciding that D&T’s negligence ceased from April 1994 to be an operative cause of BFS’ losses. On that basis, contributory negligence in relation to this issue is relevant only to losses during March and April 1994, which were in fact nil overall. Therefore I shall express only briefly my conclusions as to the development of the issue during 1994.

1024.      BSL admitted[538] that it was at fault in January and February 1994 in failing to realise that BFS was not giving credit for the US dollar collateral, as described above, and in March 1994 in failing to take effective steps to investigate why BFS needed the Dollar Funding. BSL also admitted that the issue should have received specific attention during the internal audit in July and August 1994. BFS adopted BSL’s submissions on this issue.

1025.      In reduction of its fault, BSL relied principally on the fact that the money appeared to be there at SIMEX, earning interest. This was confirmed by the Enclosure B reports (BFS’ daily reports to BSL of its deposits with banks and SIMEX for large exposure reporting purposes) and, as late as December 1994, by Mr Stunt’s investigation (see paragraph 382). The problem did not appear to be one of disappearing funding, but just one of understanding why BFS needed so much. The actual explanation was that Leeson was selling ever larger numbers of options to raise premium to meet his losses. He used the Dollar Funding to provide the margin on those options (see paragraph 795 above). If options made losses, he sold more options to cover them, so the margin appeared to be there throughout, but increasing.

1026.      BSL had little alternative but to make the admissions it did, in the light of the evidence from BSL management and Dr Fitzgerald which I have quoted above when dealing with causation (paragraphs 797 to 802). I have dealt in that section with the issues relating to the Dollar Funding as at the end of April 1994. Therefore here I need only briefly identify the relevant stages, in the narrative I have set out at paragraphs 325 to 390 above, at which the level of fault changed.

The failure to recognise that BFS was not giving credit for the genuine US dollar client collateral sent by BSL in January and February 1994

1027.      As I have discussed above, it was clear from the Funding Spreadsheets that BFS was effectively obtaining the same money twice. BSL and Mr Railton accepted that the BSL Settlements Department should have picked that up[539]. It did not do so until June 1994, when Mr Railton queried the position with Leeson, but even then he seems to have accepted whatever explanations Leeson gave and the enquiry lapsed. The Settlements Department’s failure to spot Leeson’s double-counting gave him at least US$26 million (considerably more if, as must be likely, he did not repay the extra yen when he repaid US dollar collateral) for use in his unauthorised trading in January and February 1994.

The payment of US$32 million on 9 February 1994

1028.      It follows from Dr Fitzgerald’s and Mr Hawes’ evidence, quoted above, that Mr Jones and Mr Hawes should have immediately enquired into the reasons why this funding was needed and how it was to be allocated to clients. BFS has pointed to the terms of Mr Jones’ fax as indicating the reasons given to Mr Jones by Leeson. But clearly neither Mr Jones nor Mr Hawes conducted any effective investigation into those reasons or attempted to allocate the funding to clients. Therefore I conclude that BFS was at fault in failing to investigate and reconcile this payment.

The payments from 1 March onwards

1029.      BFS and BSL have accepted that they should have made, and did not make, an effective investigation into these payments. In the light of the evidence it is clear that no payments should have been made after 9 February 1994 without a thorough investigation which established the need for the payments and allocated them to customers. The reasons given to Mr Hawes in February 1994 and/or later, which I have summarised at paragraph 379, should not have stood up to even modest scrutiny. Even Leeson’s notoriously persuasive advocacy left Mr Hawes “only just about convinced”[540] as to those reasons. Yet BSL allowed payment after payment to be made, for over a year, reaching extraordinary levels, without making any attempt to check any of them – not even a telephone call to SIMEX to check how many advance margin calls were made. As I have commented before, Mr Hawes and Mrs Granger not only entertained fundamentally different and irreconcilable beliefs as to the true reason for the Dollar Funding, but each had information which should have disproved the other’s belief. Yet, although they seem to have discussed the matter, they seem to have failed to communicate their contrasting views. Neither looked at the margin feed to help solve the mystery.

Mr Hawes and his senior managers

1030.      In the course of his cross-examination, Mr Hawes accepted that by the end of 1993 he was aware that it was not possible to reconcile the K2/P4 balance to individual clients and that this caused him concern[541]. Once the Dollar Funding started in February 1994 that balance increased and by April 1994 Mr Hawes had realised that the increase derived from funding BFS’ trading pursuant to the Dollar Funding.

1031.      There is an issue between Mr Hawes and Mr Broadhurst as to whether Mr Hawes ever mentioned the Dollar Funding problem to Mr Broadhurst. Mr Broadhurst denied it. Mr Hopkins, Mr Hawes’ immediate superior, accepted that Mr Hawes raised his concerns with him. This apparently happened in September 1994[542] and caused Mr Hopkins grave concern. Notwithstanding such concern, Mr Hopkins does not appear to have taken any action, in particular he did not report the problem to ALCO of which he was a member. Mr Hopkins was not called as a witness. There is no evidence that anyone else in senior management was told. In particular Mrs Granger did not raise the matter with her superior, Mr Gamby[543].

1032.      Mr Hawes said that he did not press the matter with Mr Hopkins or seek to go over his head for fear of worsening what he described as his difficult relationship with Mr Hopkins. He contented himself with trying to unravel the mystery himself in the way I have described. His efforts were misdirected and completely ineffective.

Later dates

1033.      Were it necessary, I should find that the level of fault increased over time, as the level of the Dollar Funding increased without any effective investigation. I have stated above (paragraph 873) the reasons why April 1994 seems to me a critical date. However further relevant dates were mid-June and October 1994:

i)                    in mid-June, the levels of Dollar Funding reached US$170 million[544]. There arrived from Leeson the first purported breakdown, which was clearly not a satisfactory reconciliation of the Funding (see paragraph 366). Mr Railton spotted the failure to give credit for the US dollar collateral. Yet Mr Hawes says that he decided not to investigate the Dollar Funding himself but to leave it to the internal auditors, who would not report back for another two months – and then failed to communicate the full problem to them (see paragraphs 371 to 373);

ii)                   in October 1994 it became apparent that the internal auditors had failed to investigate the problem at all, as I have described at paragraphs 376 and 377. Mr Hawes finally confronted Leeson in an attempt to resolve the Dollar Funding problem, and Leeson came up with explanations which should not have been accepted (see paragraphs 378 to 380). But no further investigation was carried out;

iii)                 the position deteriorated yet further in January and February 1995 but, as a result of BFS’ self-imposed cut-off, that is now not relevant to this judgment.

Supervision of Leeson’s trading

1034.      I heard extensive evidence as to who was responsible for supervising Leeson’s trading and, in particular, the extent of Mr Killian’s and Mr Gueler’s responsibilities. It is reflected in the section on BFS’ history and trading at paragraphs163 to 292). However my ruling on attribution renders any debate about this unnecessary. All those whom it is alleged should have supervised Leeson should have done so as part of BFS’ business. Therefore BFS is liable to the extent that they failed to do so. Exactly who did what is irrelevant; all that is relevant is whether Leeson should have been supervised and was not, and the gravity of that failing.

Individual responsibilities

1035.      Barings was an organisation in which lines of responsibility seem often to have been left unclear and therefore some of the individuals concerned may genuinely not have appreciated the extent of their intended roles. That would be relevant if I were considering CDDA or misfeasance proceedings but it is not relevant when I am considering BFS’ fault.

1036.      I shall therefore summarise briefly my conclusions on who should have supervised Leeson’s trading. When BFS was first established, Mr Killian seems to have had immediate responsibility for Leeson’s trading activities, under the ultimate supervision of Mr Baylis. For example, in January 1993, when Mr Leeson wanted to give Eric Chang a pay rise he requested approval from Mr Killian and Mr Killian replied “Please adjust his salary effective 1st January 1993.”[545] 

1037.      After Mr Baylis left, Mr Norris took over interim responsibility for the agency and proprietary groups at BSL Management Committee level. Mr Norris produced a paper on the Derivatives Group on 2 June 1993, a copy of which he faxed to Mr Killian and Mr Gueler on the following day. It said that Mr Killian “will be responsible for all our F&O agency sales in the Pacific Rim” (i.e. Tokyo, HK and Singapore) and Mr Gueler will “continue with overall responsibility for our books in Tokyo and Osaka”[546]. .

1038.      On the face of it therefore BSL reacted to the departure of the existing derivatives management by appointing Mr Killian and Mr Gueler to head the two sides of the derivatives business, reporting to Mr Norris. Although not express, this included responsibility for BFS. Mr Killian’s responsibility for agency sales in the Pacific Rim naturally included responsibility for execution by BFS of agency transactions for his team and customers. Mr Gueler’s responsibility for the Japanese trading books naturally included responsibility for BFS’ trading on those books.

1039.      As of 1 January 1994, Mr Baker and Ms Walz took over supervision of Leeson’s proprietary trading, but continued to rely upon Mr Gueler as Leeson’s immediate manager, in particular to monitor his positions and profits. That was so throughout 1994: not just between June and October 1994, during which period BSJ admitted that Mr Gueler had the specific task of monitoring Leeson’s intra-day limits. The evidence which I have quoted at paragraphs 261, 262 and 276 to 282 allows no other conclusion.

1040.      Mr Killian continued as Leeson’s superior on the agency side during 1994.

The need to supervise Leeson’s trading

1041.      BFS conceded that Leeson’s trading should have been supervised effectively by his managers, and Dr Fitzgerald gave evidence as to what that supervision should have involved. An important element in managing risk in a derivatives business is the setting of trading limits and the monitoring of compliance with them. But that is not something that can be done wholly from a distance, in a purely mechanical manner from Japan, as Barings appear to have attempted. There should also have been someone in Singapore who could see what was happening on the SIMEX floor. Mr Bax accepted that this should have been done once Leeson was taking positions himself[547], and it was recognised in the internal audit report in late 1994:

“The weaknesses of the current arrangement are: While the trading activities of BFS are subject to high level monitoring, there is no one to review day-to-day trading in detail; and BFS’ dealers and traders are not subject to independent compliance monitoring and review.”[548]

1042.      Dr Fitzgerald’s evidence was similar. He discussed the need for a middle office, which would carry out most of the support operations for the traders and monitor cash flows and limits:

“In a medium-sized investment bank like Barings, I believe it would have been normal practice for one or more representatives of the middle office to be resident in all the derivatives trading areas, reporting directly back to the middle office in London. I would certainly have expected any competent management of derivatives trading activities to insist on this being the case for a trading hub which was generating in normal circumstances over 50 per cent of the profits of the entire derivatives trading operation. Such a person based in Singapore would have been able to monitor Leeson’s trading directly as it occurred...”[549]

1043.      Another equally important, one might have thought self-evident, element of supervising a business such as BFS’ was that management should understand the trading that was carried on and the profits it generated. As Dr Fitzgerald said:

“The fundamental principles of risk management in any competently run investment bank required that the precise structure of Leeson’s profits and the exact trading strategies that were being used to generate them be understood, analysed and reviewed in depth by Leeson’s superiors and senior management.”[550]

1044.      I was not persuaded by D&T’s contention that Leeson’s rolls in late 1992 and early 1993 were so profitable that they should have been investigated. However I have quoted at paragraphs 867 and 868, and accept, Dr Fitzgerald’s evidence as to the need to investigate the change in the nature of Leeson’s reported Nikkei profits in November and December 1993 and his JGB profits in April 1994, as described at paragraphs 245 to 248 and 263 to 265 above.

1045.      Dr Fitzgerald reached similar conclusions in relation to Leeson’s reported profits in October 1994. On 18 October, Leeson’s reported JGB trading accounted for 80% of the total volume traded on the exchange. This volume would have required him to trade his full authorised limit of 200 JGB contracts every nine minutes. He earned over Ł1.5 million on that one day, at an average profit of 7 ticks per trade. Dr Fitzgerald concluded that:

“Any reasonably competent observer should have concluded that these profits on JGBs were not being generated by almost riskless arbitrage… Leeson’s trading profits and volumes were so extraordinary that any competent derivatives manager should have realised that either Leeson’s reported profits and trades were wholly unreliable, or Leeson must have been taking on intra-day risks in such enormous volumes that he needed to be stopped immediately before he bankrupted the bank. In other words, that Leeson was either a fraudster or a psychotic.”[551]

1046.      Mr Gueler agreed with Dr Fitzgerald’s evidence that an essential aspect of risk management involves the critical appraisal of a trader’s profits, both independently and by reference to the results of comparable trading. Mr Gueler also accepted that a manager in a remote location has to be alert to anomalies in trading patterns and profitability and that the investigation of profits is relevant to a trader’s adherence to limits[552]

1047.      Mr Killian agreed. As he said to the Singapore inspectors, when asked about the profits Leeson was reporting:

“I guess if I was a... boss of Nick and Nick was making $2 million a day… I’d go down there and I’d stay there for a long time and I’d figure out everything he’s doing…”[553]

1048.      The internal audit report recognised that part of the Risk and Compliance Officer’s role at BFS would be to:

“build up a detailed understanding of the strategies being undertaken by BFS and the nature of the risks being taken. …trading days producing unusual levels of profits or losses should be examined and discussed with the traders.”[554]

1049.      Accordingly, there should have been individuals above Leeson in the management chain who were clearly responsible for supervising his trading. Those individuals should have ensured that they understood what Leeson’s trading consisted of and how he was making his money. That required them to see both sides of his agency and proprietary trading.

1050.      When Leeson’s profits (initially those of Mr Brindle’s volatility book) became significant in November and December 1993, those responsible should have enquired into the profits. They should have ensured that they understood how the profits were generated and that Leeson was breaking no rules or risk limits. With each later surge in profits, this requirement was reinforced. I have set out the monthly figures for switching income in 1994 at paragraph 265. They demonstrate Leeson’s extremely high reported income throughout 1994, rising to new levels in January, April, July and October 1994. 

1051.      Furthermore, from the time when Leeson started carrying out proprietary trading on his own initiative, BFS should have had an independent person in Singapore who understood how Leeson was earning his profits and could check on the ground that he was not breaking his trading limits or SIMEX rules. This could have been a Risk and Compliance Officer, as recommended by the internal audit report, or it could have been Mr Jones or Ms Yong.

The failure to supervise Leeson’s trading

1052.      I have described, at paragraph 208 and following, the evolution of Leeson’s trading and, at paragraphs 395 to 404, the evidence as to the lack of management control over that evolution and the failure of those concerned to analyse the profits reported by Leeson. BFS conceded that Leeson’s “progression from an execution-only order filler to substantial proprietary trader was not properly managed”. It accepted that “Baker and Walz never obtained a sufficient understanding of Leeson’s switching business and consequently failed effectively to monitor or control it”. In defence of Mr Gueler’s failure to monitor Leeson’ trading and limits, it contended only that this was difficult for Mr Gueler as he was only three years older than Leeson, and that he could not effectively monitor Leeson’s intra-day limits from Japan[555].

1053.      Barings did put in p