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England and Wales High Court (Commercial Court) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> CMC Spreadbet Plc v Tchenguiz [2022] EWHC 1640 (Comm) (01 July 2022) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2022/1640.html Cite as: [2022] EWHC 1640 (Comm) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
LONDON CIRCUIT COMMERCIAL COURT
Fetter Lane London, EC4A 1NL |
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B e f o r e :
(Sitting as a Deputy High Court Judge)
BETWEEN:
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CMC SPREADBET PLC | Claimant | |
- and - | ||
ROBERT TCHENGUIZ | Defendant |
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ZOË BARTON QC and DANIEL LEWIS (instructed by Withers LLP) appeared on behalf of the Defendant.
Hearing dates: 18-21 October 2021
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Crown Copyright ©
This judgment was handed down by circulation to the parties' representatives by email and release to Bailii. The date and time for hand-down will be deemed to be 2 pm on 01/07/2022. A copy of the judgment in final form as handed down can be made available after that time, on request by email to TranscriptRequest.Rolls@justice.gov.uk.
DAVID ELVIN QC (Sitting as a Deputy Judge of the High Court)
Introduction
"1. Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus if the Dow Jones index is, say, at 10,000, one can "buy" or "sell" the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10010. If one buys, one is betting that the market will rise above 10010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain £1 for every point that the index exceeds 10010. If one sells and the market falls, one stands to gain £1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose £1 for every point that the index exceeds the spread point in the wrong direction. Thus if one sells at 10,000 with a sell spread point at 9990, one will make £1 for every point the market falls below 9990 and lose £1 for every point the market rises above 9990. Until the bet or "trade" is closed, the gains and losses are merely "running" gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sale spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose £10 for every £1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory winnings based on rising markets are infinite (in practice of course they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero.
2. Normally, of course, to gain by £1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than £1. In effect, one's £1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be £100 to £200 richer or poorer per £1 stake within a matter of hours of his trade. On a trade of £100, those figures become £10,000 to £20,000.
3. The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator's customer: nor, in the present case, have the applicable terms been disclosed."
See also HH Judge Pelling QC in Quinn v IG Index Ltd [2018] EWHC 2478 (Ch) at [3]-[10].
(1) A spread betting agreement was entered into by Mr Tchenguiz in December 2019 following a request made on his behalf by Mr William Thompson, a solicitor with R20 Advisory Ltd ("R20"), for an initial position of 2.7 million share equivalents which was subsequently increased at his request to 3 million.
(2) The position with CMC was taken out at least initially because R J O'Brien ("RJO"), a SBF with which Mr Tchenguiz had a position of 18 million share equivalents in December 2019, considered its exposure to risk was too great and asked Mr Tchenguiz either to reduce his position with them or to accept a higher margin. At any rate, his position with RJO was reduced which led to his request to open an account with CMC (and probably other SBFs) which appeared to be willing to offer a more competitive margin.
(3) At the time Mr Tchenguiz also had spread bet positions with a number of SBFs, in each case the relevant SBF sought to classify him as an elective professional client meaning he would have enjoyed fewer protections than if it had been a retail client, including significantly the lack of "negative balance protection" ("NBP") which protects retail clients from losing more than their stake with the SBF. In cross-examination Mr Tchenguiz was asked about the other accounts with SBFs held in early December 2019 and to confirm that "in relation to all of those accounts, you were classified as an elective professional client" which he agreed. He was then asked
"[Q] In relation to all of those accounts, you had signed forms confirming that you wished to be classified as an elective professional client?
A. Yes.
Q. And each of those spread betting companies had warned you before you became a professional client about the protections that you would lose by becoming a professional client?
A. It wasn't high on my -- yes, I presume yes."
(4) That agreement was on CMC's Terms of Business ("TOB") (January 2018) which was provided to Mr Tchenguiz on-line on 16 December 2019, together with CMC's Risk Warning Notice and Order Execution Policy.
(5) A "Risk Warning Notice for Financial Betting (January 2018)" ("RWN"), which is expressly referred to in the TOB at cl. 1.1.3 as forming part of the agreement, was provided on-line to Mr Tchenguiz on 16 December 2019 as was the Order Execution Policy ("OEP").
(6) An account was opened by CMC for Mr Tchenguiz initially on retail terms but was the subject of a "request to become an elective professional client" ("the Request Form") dated 17 December 2019 and what has been described as an "opt-up agreement", more precisely the "Professional Client Categorisation and Title Transfer Collateral Agreements Agreement" dated 19 December 2019 ("the Opt-Up Agreement"), both agreed and signed by Mr Tchenguiz.
(7) Mr Tchenguiz was notified that his account was "active" on 19 December 2019 following receipt of the signed Opt-Up Agreement.
Defence to the claim
"Q. You understood perfectly well how the account was going to work.
A. Fair enough.
Q. Well, do you agree or not?
A. How the account ... My issue is not with the account opening, my issue is with the closeout, okay? So I've accepted every point you've made on the account opening, okay. I've said that if I've signed it, I have to stand by it.
Q. … Are you saying now that you don't wish to pursue any of the defences that you're taking about the account opening and classification process?
A. No, I'm not saying that. I mean, if the account opening was not dealt with correctly, it's not dealt with correctly, and it has to be appointed by this court. The point I'm trying to make here, my bigger issue with this is the closeout. If I've signed a document I stand by the document I signed. The onus is on me to have read the … the small print."
Relevant regulatory provisions
"A professional client is a client that is either a per se professional client or an elective professional client."
"Elective professional clients
A firm may treat a client other than a local public authority or municipality as an elective professional client if it complies with (1) and (3) and, where applicable, (2):
(1) the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");
(2) in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:
(a) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
(b) the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
(c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged; (the "quantitative test"); and
(3) the following procedure is followed:
(a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;
(b) the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and
(c) the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections."
"Before deciding to accept a request for re-categorisation as an elective professional client a firm must take all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the relevant quantitative test."
"3.8.1R Policies and procedures
A firm must implement appropriate written internal policies and procedures to categorise its clients.
3.8.2R Records
(1) A firm must make a record of the form of each notice provided and each agreement entered into under this chapter. This record must be made at the time that standard form is first used and retained for the relevant period after the firm ceases to carry on business with clients who were provided with that form.
(2) A firm must make a record in relation to each client of:
(a) the categorisation established for the client under this chapter, including sufficient information to support that categorisation;
(b) evidence of despatch to the client of any notice required under this chapter and if such notice differs from the relevant standard form, a copy of the actual notice provided; and
(c) a copy of any agreement entered into with the client under this chapter.
This record must be made at the time of categorisation and should be retained for the relevant period after the firm ceases to carry on business with or for that client.
(3) The relevant periods are:
(a) indefinitely, in relation to a pension transfer, pension conversion, pension opt-out or FSAVC;
(b) at least five years, in relation to a life policy or pension contract;
(c) five years in relation to MiFID or equivalent third country business; and
(d) three years in any other case."
"2.1.1R The client's best interests rule
(1) A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule).
(2) This rule applies:
(a) in relation to designated investment business carried on for a retail client;
(b) in relation to MiFID, equivalent third country or optional exemption business, for any client; and
(c) in relation to insurance distribution, for any client.
(3) For a management company, this rule applies in relation to any UCITS scheme the firm manages."
"(1) In order to comply with the client's best interests rule, a firm should not, in any communication to a retail client relating to designated investment business:
(a) seek to exclude or restrict; or
(b) rely on any exclusion or restriction of;
any duty or liability it may have to a client other than under the regulatory system, unless it is honest, fair and professional for it to do so.
(2) The general law, including the Unfair Terms Regulations (for contracts entered into before 1 October 2015) and the CRA, also limits the scope for a firm to exclude or restrict any duty or liability to a consumer."
"(2) A contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty."
Issue (1) client categorisation
"19.1 Step 1: "Create your account": the applicant is required to provide an email address and create a password. There is a link to CMC's legal documentation. At the time that Mr Tchenguiz applied to open his account, the legal documentation included Financial Betting Terms of Business dated January 2018, (the "Terms of Business"), CMC's Order Execution Policy Summary for Financial Betting (as amended from time to time) (the "Order Execution Policy"), CMC's Risk Warning Notice for Financial Betting (as amended from time to time) (the "Risk Warning Notice") (1 to 40 of SN1).
19.2 Step 2: "About You": the applicant is required to provide personal information at this stage.
19.3 Step 3: "Financial Background": the applicant is required to provide information and answer questions in relation to: (i) their employment status; (ii) at the "Relevant Experience" section, applicants are asked a number of questions relating to past trading experience and knowledge to determine their appropriateness for CMC's products; and (iii) under the section "Features and Risks", there are a number of questions regarding the applicant's understanding of certain issues relating to spread betting.
19.4 Step 4: "The Declarations": in order to complete the online application, each applicant must tick a number of declarations relating to the information contained in the application form."
"17. … Opening an account gives the customer access to CMC's spread betting platform, the Next Generation Platform ("the Platform"). The application form can be completed online via the CMC website or via the CMC mobile application.
18. The CMC website provides details about spread betting, including the risks associated with spread betting."
(1) Under the heading "Features and Risk" -
"I understand that when trading leveraged products, I risk losing all of my invested capital. It is my responsibility to monitor my positions and to manage the risks of trading by utilising the risk management tools available to me…"
(2) Under the heading "Declaration" -
"I understand and accept that CMC Markets will provide services to me in accordance with the following documents which, for my own benefit and protection, I should read: terms of business, order execution policy, risk warning notice, key information and cost disclosure."
"1. Introduction
Investing in financial betting products, Digital 100s and/or Countdowns carries a high level of risk to your capital, which may not be appropriate for all investors. The prices of financial bets may change to your disadvantage very quickly. When investing in Bets, it is possible to lose more than your investment and you may be required to make further payments. This does not apply to a CMC Start Account, an Account with Negative Balance Protection enabled or an Account with Shield Mode enabled, with which you risk losing only your Invested Capital. Therefore you should ensure you understand the risks involved and seek independent advice if necessary.
1.1.1 This document (referred to as the "Terms") is part of a wider agreement between you (also referred to as "our client", "your" and "you") and CMC Spreadbet Plc (also referred to as "CMC Spreadbet", "we", "us" and "our") in relation to your activities carried on with us
1.1.2 Capitalised words in these Terms, the Risk Warning Notice and the OEP for Financial Betting have a special meaning which are explained in the Definitions section in Schedule 4.
1.1.3 Our agreement with you consists of these Terms, our OEP for Financial Betting, our Risk Warning Notice for Financial Betting and any specific terms and conditions you accept on the Platform. These documents are available on our Website and through our Platform and are together referred to as the Agreement. In accordance with clause 9, we will notify you of any changes to the Agreement. You must ensure that you keep informed of these changes. If we agree to provide you with our sales trader service, we will provide confirmation in writing. Any additional terms agreed in writing between us and you in relation to that service will form part of the Agreement.
1.1.4 There are additional documents and information available to you on our Website and through our Platform which contain useful information but are not part of the Agreement. These include Key Information Documents, our Summary Policy of Conflicts of Interest, our Privacy and Security Policy, our Complaints Procedure and costs disclosures.
1.1.5 For your own benefit and protection, you should take sufficient time to read the Agreement, as well as the additional documents and information available on our Website and through our Platform, before you apply to open an Account and/or place any Order. If you do not understand any aspect of this Agreement, you should contact us before opening an Account, or you should seek independent professional advice.
1.1.6 It is our intention that this Agreement contains all the terms and conditions that govern our relationship and your activities carried on with us in relation to the Platform and supersedes any prior oral or written representations and/or agreements between you and us which relate to our Platform.
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2.2 Client categorisation.
2.2.1 We will treat you as a Retail Client for the purposes of Applicable Law, unless we have informed you otherwise in writing. If we have categorised you as a Professional Client or an Eligible Counterparty (whether or not at your request) you will not be entitled to certain protections afforded to Retail Clients by Applicable Law, including certain protections under the FCA's client money rules (see clause 5.1). You have the right to request a different client categorisation. If you request a different client categorisation, we will contact you to explain the process and any additional requirements applicable to the change.
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2.7 Order execution, conflicts of interest, risk warnings and Price sources.
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2.7.2 We enter into all Bets, Digital 100s and Countdowns with you using Prices quoted by us through our Platform or through our client management team. Our Prices are not identical to prices for similar financial instruments or their underlyings quoted on a Trading Venue or by other providers. By entering into Bets, Digital 100s and/or Countdowns via our Platform or through our client management team you consent to your Orders being executed outside of a Trading Venue and in accordance with our OEP for Financial Betting.
2.8 Duration of the Agreement and your rights to cancel.
2.8.1 The Agreement will become legally binding between you and us on the date that we confirm in writing that we have accepted your application to open an Account. Subject to clause 2.8.2, you may cancel the Agreement by giving us notice in writing within fourteen (14) calendar days of this date. Following a valid notice of cancellation, we will return any money that you have transferred to us.
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3.1 Account types and features.
3.1.1 We offer different Account types and features. Depending on your knowledge and experience or client categorisation, some of these may not be available to you. We reserve the right to convert your Account type and/or enable/disable (as applicable) Account features if, in our sole discretion, we determine that a different Account type/feature (as applicable) is more appropriate for you or if otherwise required by Applicable Law.
3.2 Account opening process.
3.2.1 When we receive your completed application form, we may use your information to conduct any further enquiries about you as we (in our sole discretion) determine are necessary or appropriate in the circumstances. You should provide us with information about any relevant factor that could affect your betting activities with CMC Spreadbet. Where our enquiries include searches with credit reference agencies, they may appear on your credit history. We may also carry out any additional checks or periodic reviews that we (in our sole discretion) determine are necessary or appropriate in the circumstances. You will need to co-operate with us and supply any information that we request promptly.
3.2.2 We rely on the information that you provide us in your application form or otherwise as being correct and not misleading at all times, unless you notify us otherwise in writing (see clause 6.1.4). In particular, you must notify us as soon as possible in writing if any of the details provided to us in your application form or if your circumstances have subsequently changed.
3.2.3 We use any information we have about you to make an assessment of whether or not entering into Bets, Digital 100s and/or Countdowns and/or operating an Account with us is appropriate for you.
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5.1 Your money.
5.1.1 If we have categorised you as a Retail Client (see clause 2.2.1) in accordance with Applicable Law then, subject to clauses 5.1.3 and 5.1.4, we shall hold and maintain an amount equal to your Account Value for each Account you hold with us in a segregated client money bank account. Where we consider it appropriate to do so and in accordance with our regulatory permissions, we may from time to time hold client money in segregated client money bank accounts with fixed term deposits or notice periods. Such fixed term deposit accounts or notice periods will not affect your ability to deal with or withdraw your money in the ordinary course of business. However, there is a risk that, in exceptional circumstances, the longer notice period could result in a delay in returning some or all of your money to you until the expiry of the relevant fixed term or notice period.
5.1.2 If we have categorised you as a Professional Client or an Eligible Counterparty then, as permitted by Applicable Law, you acknowledge and accept that:
(a) we will acquire full ownership of all amounts received from you or credited by us to your Account;
(b) such money does not constitute client money for the purposes of Applicable Law and may be used by us in the course of our business; and
(c) you will rank as a general creditor of us in respect of this money in the event of our insolvency.
5.1.3 At the close of business on each Business Day, we carry out client money reconciliations between money required to be held in the client money bank accounts and client money that is held in the client money bank accounts in accordance with Applicable Law. Any required transfer to or from the client money bank account in respect of your Account will take place on the following Business Day.
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5.2 Payments and withdrawals.
5.2.1 You are responsible for making any payments to us which are required under the Agreement. We may reject any payment that is not made in accordance with our payment procedures (details of which are available on our Platform).
5.2.2 When making payments to us, you may wish to leave "headroom", especially during volatile and potentially volatile periods, (i.e. an Amount that ensures you have sufficient funds above your Margin requirements and that your Account Revaluation Amount is in excess of your total Margin requirements (if applicable) or the Amount required to keep the Account Revaluation Amount above the applicable Close-Out Level on any Account). You should consider your Positions, Bets, Digital 100s, Countdowns and Pending Orders, the volatility of the particular Product concerned and the relevant markets for the underlying asset, the time it will take for you to make further payments of cleared funds to us and any other matter which you may think relevant.
5.2.3 Any payment made by you will only be given effect once our systems have credited it to the relevant Account and it is shown on our Platform. We cannot guarantee how long this process will take and, subject to clause 7.3.2(b), we will not be liable to you for any loss arising as a result of any delay in us crediting any payment to your Account.
5.2.4 You are responsible for any costs and charges incurred in the process of making any payment to your Account. You may also be liable for other charges that are not imposed by us, including bank transfer fees, and fees to internet and telephone service providers. If you make a payment by debit card or credit card or withdraw money from an Account, we may charge an administration fee to process that payment and/or withdrawal in accordance with Applicable Law.
5.2.5 You may make a request to withdraw money up to the lower of your Available Equity or Cash from your Account. Details on how to make withdrawals of money from your Account are available on our Website or from our client management team upon request.
5.2.6 Unless we agree otherwise or in order for us to comply with Applicable Law, we will only accept a request for a withdrawal of money from an Account that is given directly by you or certain Authorised Persons. We will not accept any request for a withdrawal of money from an Account from any other person. Withdrawals of money from your Account will only be made in the Account Currency and will only be processed by us where the destination for the money being withdrawn is the same as the origin of your payments made under clause 5.2.1, unless (subject to our prior approval) you have notified us in writing that your payment details have changed.
5.2.7 We may in our reasonable discretion refuse or delay giving effect to your request for a withdrawal of money from your Account (in whole or in part), including as a result of any request to close that Account under clause 9.6.1. We will notify you as soon as reasonably practicable if we decide to refuse or delay giving effect to your request for a withdrawal and such action shall be a Specified Event (see clause 8.1).
5.2.8 If your Account has a negative Cash value following Account Close-Out or termination of this Agreement, that negative Cash value represents a debt owed to us which is due and payable immediately. This clause
5.2.8 does not apply to a CMC Start Account, an Account with Negative Balance Protection enabled or an Account with Shield Mode enabled.
5.2.9 If we have agreed to provide you with the sales trader service, any negative balance should be cleared promptly regardless of whether the balance is within the relevant Close-Out Level.
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Schedule 1 – Product terms for Bets
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7. CMC Start Account and Negative Balance Protection.
7.1 With a CMC Start Account or an Account with Negative Balance Protection enabled, you cannot lose more than your Invested Capital. If at any time you have a negative Cash value on your CMC Start Account or an Account with Negative Balance Protection enabled, we will waive our right to claim the deficit and will return the Account balance to zero (0). Please note, this may not happen immediately.
7.2 With a CMC Start Account or an Account with Negative Balance Protection enabled, you are still obliged to ensure that your Account Revaluation Amount is at all times above the applicable Close-Out Level displayed on our Platform. We retain the right to close any open Bets if you fail to maintain sufficient funds on your Account to keep your Account Revaluation Amount above the applicable Close-Out Level.
7.3 Negative Balance Protection is only enabled on your Account if we have provided you with notice that it is enabled.
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Limits on your Bets.
8.4 We will set various limits in relation to your Bets and it is your responsibility to ensure that you know what all the current limits are before placing or modifying any Order to open a Bet by checking the information available on the Platform. If we have agreed to provide you with the sales trader service, we may, at our sole discretion, waive such limits in relation to your Bets.
8.5 If, at the time an Order would otherwise be executed, the execution of that Order would result in a breach of a limit relevant to that type of Order, the Order will be automatically rejected. Where the acceptance of a Pending Order or modification of an existing Pending Order would result in a breach of a relevant limit, the relevant Order or modification will be rejected by our Platform, save where agreed otherwise between you and our client management team.
8.5 In addition, an Account may be subject to a limit restricting the number of Bets, Positions and/or Pending Orders that could result in opening a new Position or Bet on the Account at any time. This limit is set by us in our sole discretion. We are entitled to vary such a limit at any time in accordance with clause 9.3 and it is your responsibility to ensure that you know what the current limit is before entering any new Position or Bet, or placing a new Pending Order by checking the information available on the Platform.
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12. Account Close-Out.
12.1 You must ensure that for each Account your Account Revaluation Amount is at all times above the applicable Close-Out Level for your Account displayed on our Platform. Where your Account Revaluation Amount is less than the applicable Close-Out Level, our Platform may automatically initiate Account Close-Out in accordance with your Account settings. Further details on the applicable Close-Out Level for your Account, and the methods of Account Close-Out, can be found on our Platform. Account Close-Out does not and is not intended to limit your entire liability to us in respect of your Bets. You can lose more than your investment and you may be required to make further payments, except in respect of a CMC Start Account, an Account with Negative Balance Protection enabled or an Account with Shield Mode enabled, where you cannot lose more than your Invested Capital.
12.2 Where you have open Bets relating to Manual Products or Manual Orders, if the Platform has carried out an Account Close-Out and your Account Revaluation Amount is still at or below the Close-Out Level, the client management team will (as it sees fit in its sole discretion) manually close all or a portion of the Bets relating to Manual Products or Manual Orders within the applicable Trading Hours and where betting is not otherwise suspended.
12.3 Where we have agreed to provide you with the sales trader service, if our client management team has previously agreed with you that it may suspend or override any Account Close-Out initiated by the Platform and your Account Revaluation Amount falls to an Amount at or below the Close-Out Level, our client management team may (as it see fit in its sole discretion) during UK office hours try to contact you to request payment into the Account. If the client management team is unable to contact you and/or you are unable to fund your Account within a reasonable time, it may manually close all or a portion of the Bets in respect of any Product (including those relating to Manual Products or Manual Orders) within the applicable Trading Hours and where betting is not otherwise suspended.
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Schedule 4 – definitions
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Account Close-Out - A procedure by which our Platform may close the whole or a portion of your Bets and/or Positions.
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Agreement - Has the meaning set out in clause 1.1.3.
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Bet - A financial spread bet on a Product entered into through our Platform on an Account, which relates to the difference between the relevant Price from the time the bet was entered into and the time at which it was closed. …
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Close-Out Level - In relation to any Account, the applicable level at which our Platform may close the whole or a portion of your Bets as necessary.
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Negative Balance Protection - An Account function which, if enabled, ensures that you will not lose any more than your Invested Capital. Information relating to this function is in paragraph 8 of Schedule 1.
OEP for Financial Betting - Means our order execution policy summary for financial betting which details how we execute Orders. It is available on our Website.
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Risk Warning Notice for Financial Betting - Means the notice that we are required to provide to you under Applicable Law in respect of any financial bet, Digital 100 or Countdown on any Product, which is made available on our Website."
"CMC Spreadbet Plc (referred to below as "CMC Spreadbet", "we", "us" or "our") is committed to treating you fairly and acting in your best interests when we execute your Orders. In this document, we summarise the process by which our Platform executes your Orders in accordance with our regulatory duty to take all sufficient steps to obtain the best possible result for you. When you enter into a Bet, Digital 100 and/or Countdown through our Platform you consent to your Orders being executed in the manner described below, outside of a Trading Venue.
The words and expressions in this document that begin with capital letters have the meanings set out in Schedule 4 of our Financial Betting Terms of Business."
"1. Key points.
This section identifies the key points of this order execution policy summary.
1.1 We are the sole execution venue for your Orders. This means that your Orders are executed via a bilateral transaction with us as the counterparty to your trades, through our Platform and not through a transaction on any Trading Venue or other external execution venue.
1.2 Our Platform is fully automated for pricing and Order execution. By placing an Order, you are giving our Platform an instruction to place that Order on your Account on the basis of the Prices and/or Settlement Prices generated by our Platform. Please see our Financial Betting Terms of Business and our Website for further details on how your Orders are placed and executed, as well as further details on pricing.
1.3 Our Prices and Settlement Prices are electronically generated by our Platform, and such Prices and Settlement Prices may be different to prices generated by Trading Venues, other markets, execution venues or providers. The Prices and Settlement Prices for a Product may differ depending on whether they relate to a Bet, Digital 100 or Countdown.
1.4 You must contact our client management team to enter into or close a Bet relating to:
1.4.1 a Manual Product; or
1.4.2 if we have agreed to provide you with the sales trader service, a Manual Order.
Our client management team will provide the relevant Price and other terms relating to the opening or closing of that Bet which you will be free to accept or reject.
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5. Factors we consider when determining best execution
5.1 When executing orders, we will take all sufficient steps to obtain the best possible result for you taking into account the type of financial instrument the Order relates to, and other execution factors.
5.2 We will take into account the following execution factors when executing your Order, ranked in order of importance from highest to lowest:
5.2.1 Price,
5.2.2 speed of execution;
5.2.3 likelihood of execution and settlement; and
5.2.4 size of your Order.
…
9. How your Bets are closed without instructions from you.
9.1 There are some circumstances where the whole or a portion of your Bets will be closed without instructions from you. This includes where Account Close-Out occurs, where you fail to reduce any Position to below the applicable limit within the relevant time limit specified by us or where we exercise our rights to close your Bets. Please refer to our Financial Betting Terms of Business for more information.
9.2 Unless closed by you or us beforehand, any Bet will be closed and settled by our Platform automatically at the time and date of expiry on a Forward (and any Pending Order will also be cancelled on this basis).
9.3 Where the whole or a portion of your Bets and/or Positions are to be closed without instructions from you, or Account Close-Out is to occur in accordance with the elections you have made in your Account, certain procedures apply. Further informat ion on these procedures can be found on our Platform. …"
"It is important that you read and understand this risk warning notice before accepting it. Except where expressed otherwise, certain terms used in this risk warning notice have specific meanings as set out in Schedule 4 of the Financial Betting Terms of Business.
CMC Spreadbet Plc (referred to below as "CMC Spreadbet", "we", "us" or "our") is committed to treating you fairly. In this notice, we provide you with information to help you understand the nature and risks of your Bets, Digital 100s, Countdowns and our services. However, this notice does not explain all of the risks and other significant aspects involved in our Bets, Digital 100s and/or Countdowns. You should take sufficient time to read all the relevant information that we provide to you before entering into a Bet, Digital 100 or Countdown.
Our Products can carry a high risk to your capital as Prices may move rapidly against you, particularly during volatile market conditions. Certain Products, such as Bets on cryptocurrencies, are more volatile than others and may be even more susceptible to sharp and sudden movements in Price. When entering into Bets you can lose more than your investment and you may be required to make further payments. This does not apply to a CMC Start Account, an Account with Negative Balance Protection enabled or an Account with Shield Mode enabled, with which you risk losing your Invested Capital. The higher the leverage involved in a Bet, the higher the risks involved. By comparison, your potential losses from Digital 100s and Countdowns are limited to the amount of your Digital 100 Amount or Stake (as applicable).
You should not enter into Bets, Digital 100s and/or Countdowns with us unless you fully understand the risks involved. If you are in any doubt you should seek independent professional advice."
"1. Bets, Digital 100s and/or Countdowns may not be appropriate for you.
1.1 We are under a regulatory duty to assess whether our products and services are appropriate for you. When we process your application to open an Account with us, we will conduct an assessment as to whether you have sufficient knowledge and experience to understand the risks involved in investing in Bets, Digital 100s and/or Countdowns based on the information you provide us. We will inform you if, as a result of our assessment, we consider that Bets, Digital 100s and/or Countdowns may not be appropriate for you. However, our assessment does not relieve you of the need to carefully consider whether to enter into our Products. Any decision to enter into our Products is entirely at your own risk.
1.2 If we warn you that entering into Bets, Digital 100s and/or Countdowns may not be appropriate for you on the basis of your knowledge and experience, then you should refrain from entering into Bets, Digital 100s and/or Countdowns. If you still wish to enter into Orders, you should only invest once you have acquainted yourself sufficiently with Bets, Digital 100s and/or Countdowns through the demo account available on our Website and understand the risks involved.
…
5. You may lose more than any deposit when you enter into Bets with us, except with a CMC Start Account, an Account with Negative Balance Protection enabled or an Account with Shield Mode enabled.
5.1 When you enter into Bets with us, you risk losing more than the amount (if any) that you deposited with us and you may be required to make further payments. This does not apply to a CMC Start Account, an Account with Negative Balance Protection enabled or an Account with Shield Mode enabled, with which you risk losing your Invested Capital. Although our Platform has features that are designed to help limit your risk of loss, none of these other than the Shield Mode and Guaranteed Stop Loss Orders are guaranteed and you should not rely on them.
5.2 The amount of loss for an individual Bet will be the amount that you owe us when that Bet is closed. Bets involve leverage (also known as 'gearing' or 'margining'), which means that the effects of small movements in Price are multiplied and may have large impacts on the value of your Positions, both in respect of profits made and losses incurred and the higher the leverage rate, the higher the risk involved. In addition, the nature of leverage means that your losses may exceed the amount of any deposit (if any) that you hold with us when entering into a Bet.
5.3 It is therefore important that you monitor your Bets closely and the rate of leverage utilised. A small movement in Price may have a large impact on your Bets and Account and may result in immediate Account Close-Out.
5.4 There are costs associated with betting with us. Depending on the Bets you enter into, and how long you hold them for, we may require you to pay holding costs. If you keep Bets open for an extended time, the aggregate holding costs may exceed the amount of any profits or increase your loss. Only trade with money you can afford to lose.
5.5 If we have agreed to provide you with the sales trader service and have waived or permitted a negative Margin on your Account, this does not restrict your losses or financial liability. You are still liable to pay all losses which are due and payable to us.
…
8. Your Bets, Digital 100s and/or Countdowns and Positions are at risk of being closed automatically.
8.1 The automatic closure of your Bets and/or Positions by our Platform and/or our client management team (if we have agreed to provide you with the sales trader service) is intended to prevent you incurring further losses and we may close all Bets and/or Positions on your Account, not just Bets that are making a loss. However, we do not guarantee such closure and you must not rely on it. It is your responsibility to monitor your Positions and your Account Revaluation Amount closely. Our Platform and/or our client management team will attempt to notify you when your Account Revaluation Amount reaches a specific level, although you should not rely on our Platform and/or our client management team giving you this warning. To prevent Account Close-Out, you should keep an amount in your Account that allows sufficient headroom to keep your Positions open in case of sudden changes to the required Margin amount resulting from Price movements. It is important to note that an amount deposited into your Account (which appeared to be sufficient) can very quickly become insufficient, due to rapidly changing market conditions. …"
"Good to speak to you earlier. Further to our conversation please find below the link which leads you straight to the account opening page. https://oaf.cmcmarkets.com/en-gb/onboarding-start?iaid=351052. Please click on this and complete the form as required. It shouldn't take more than a few minutes to fill in. Please call me either on 0203 0038598 or on my mobile 07831 544429 if you have any questions. After the account is set up I will send you the form to upgrade to Professional status. We will then discuss what facilities you require. We can set you up on something known as the FRS (fixed rate schema) for margins. This will ensure that all your equity trades will be margined at either 10% or at a maximum of 25% whatever size you are dealing in depending on the market cap of the stock in question. Please note there will be a cap on the actual amount you can trade in on this scheme per share but usually it is a pretty decent size. Obviously all other non-equity business will be at the normal Professional rates which are probably the most competitive in the industry. All clients that get introduced by me have access to our bespoke dealing desk. The desk will deal with all your trades and are incredibly professional both in their manner and execution of the business. I'm sure you will be more than happy with the service. First thing first though is to get the account open so please let me know either by email or through a quick call when the application has been made and I'll make sure we get this processed as quick as possible. Looking forward to doing some good business together…"
"In order for us to classify you in this way, we must assess your expertise, experience and knowledge, and be reasonably assured that in light of the transactions and services envisaged, you are capable of making your own investment decisions, understand the risks involved and are able to bear those risks in making out assessment, we may rely on information we already possess about you and/or request additional information from you and/or call you to discuss your investment experience. In addition to this qualitative test, you must satisfy at least two of the three quantitative criteria."
(1) the size of his financial instrument portfolio exceeded €500,000; and
(2) he had worked in the financial sector for at least one year in a professional position which required knowledge of the transactions or services envisaged.
"Protections you lose
Communications and Financial Promotions
Certain FCA (or equivalent) rules relating to the form and content of information provided by CMC Markets do not apply, including those relating to communications and financial promotions.
Financial Ombudsman Service (or equivalent)
Access to the Financial Ombudsman Service (the "FOS") will not extend to all Professional Clients (only those that meet the FCA Handbook definition of a consumer) and may therefore not extend to you. The FOS is an independent service for settling disputes between FCA regulated firms and eligible complainants. If you are not sure whether you will be entitled to refer your complaint to FOS, we suggest you contact FOS directly.
Leverage restrictions
CMC Markets is required to restrict leverage to between 30:1 and 2:1 on the products we offer to retail clients. Higher leverage can work against investors and amplify losses.
Negative balance protection
Retail clients benefit from negative balance protection. However, this functionality is not available to professional clients.
Risk warnings
CMC Markets will not be required to provide you with the risk warnings we must provide to retail clients in relation to transactions in complex financial products."
"You retain the right to request a different categorisation at any time, for example if you wish to be afforded the higher level of regulatory protections. You understand that in these circumstances CMC Markets may not be able to provide certain services to you."
(1) he had on average traded 10 times or more over the last four quarters though not with CMC; and
(2) under "relevant work experience" his most relevant employer was R20 Advisory Limited of which he was director. Further details were provided –
"Mr Tchenguiz is a director of R20 Advisory Limited which is a company that provides asset management, corporate finance and consulting services to various related entities in family trust structures. These financial services include advising on investments in both public and private companies, for example in the venture capital and private equity sector, and across various asset classes including equities, fixed income and other money market instruments. The Company also assists in the financing of related parties. Prior to 2010, these services were provided by a related company, R20 Limited, of which Mr Tchenguiz is also a director."
"For your own benefit and protection you should read this form carefully before accepting the risks. If you do not understand any point please ask for further information."
"Spread Bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Professional clients: Losses can exceed deposits when spread betting and trading CFDs. Countdowns carry a level of risk to your capital as you could lose all of your investment. Invest only what you can afford to lose. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice."
"Exclusive benefits for CMC Pro clients
- Margin rates from 0.2%
- Dedicated account manager
- Access to cash rebates and rewards^
- Priority access to new products
- Access to Countdowns"
"Protections you may lose
As a professional client, please remember that you may lose some of the FCA protections afforded to retail clients:
- Our communications, including financial promotions, will not be subject to all of the retail regulatory requirements
- We may assume your level of experience when assessing whether our products are appropriate for you
- Access to the Financial Ombudsman Service only extends to professional clients that meet the FCA's Handbook definition of a consumer
- You won't receive negative balance protection, so your losses can exceed deposits
- CMC Markets are required to restrict leverage to between 30:1 and 2:1 on the products we offer to retail clients. Higher leverage can work against investors and amplify losses."
"CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Professional clients: Losses can exceed deposits when spread betting and trading CFDs. Countdowns carry a level of risk to your capital as you could lose all of your investment. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose."
"The Client hereby understands, agrees and confirms that:
They are to be treated as a Professional Client, as opposed to a Retail Client, in respect of the investment activities the Client conducts with CMC Markets.
They are capable of making their own investment decisions, understanding the risks involved and bearing those risks.
As a Professional Client, the Client will not be entitled to the protections and rights afforded exclusively to Retail Clients under the FCA (or equivalent) rules
…
They will retain the right to request a different categorisation at any time for example by requesting to be categorised as a Retail Client because they believe that they are unable to properly assess the risk involved and wish to be afforded the higher level of regulatory protection.
…
Upon signing this Agreement, they will be treated as a Professional Client and will continue to be treated so until CMC Markets inform them otherwise.
The following protections and rights that apply to Retail Clients will not apply to the Client or will be limited in application to the Client as a result of being categorised as a Professional Client:
• Retail client leverage level restrictions will not apply
• You will not benefit from negative balance protection
• The mandatory margin close out on an account basis (at 50% of minimum required margin) may not apply
• Our communications, including financial promotions, will not be subject to all the retail regulatory requirements including risk warnings
• Access to the Financial Ombudsman Service only extends to professional clients that meet the FCA Handbook's definition of a consumer
• Your funds will not be subject to the client money rules and will not be segregated by us
…
Declaration
The Client confirms that they wish to be treated as a Professional Client by CMC Markets for the purpose of their Account(s). the Client has read the above written warning from CMC Markets regarding the protections and rights that the Client may lose and how CMC Markets will treat the client's money and the Client accepts the consequences of losing such protections and rights."
"Further to our recent discussions regarding your Account 18245808, I am pleased to confirm that, in accordance with the Sales Trader Terms of Business (the "Terms"), CMC Markets has agreed to apply the following to your Account:
[Manual Account Close-Out
…We have agreed that if and when your Account Revaluation Amount falls below the Close- Out Level, the client management team will be able to suspend or override any Account Close-Out initiated by the Platform and initiate Manual Account Close-Out.]
Absolute Close-Out Level
An Account Close-Out is triggered when your Account Revaluation Amount (i.e. your Cash + Net Unrealised Profit or Loss) falls to an amount equal to or below the Close-Out Level specified for your Account. The Absolute Close-Out Level for your Account is 80%.
Please note that the negative Absolute Close- Out Level is designed as a short term buffer to cover variation margin. Any debit balance should be cleared promptly.]
Please note that [neither the Absolute Close-Out Level nor the manual account close out] is a credit facility or a loan. They do not restrict your losses or your financial liability to us in any way.
We may amend or remove the [Manual Account Close-out, Absolute Close- Out Level) at any time in accordance with the Terms. You should ensure that you have read and understood the provisions of the Terms and Sales Trader Risk Warning Notice that relate to these changes to your Account
If you are happy to proceed and are comfortable that you understand the above, please reply to this email to confirm your acceptance of these credit arrangements and I will have the necessary changes applied to your Account
In addition to the above you have also been approved for our FRS (fixed rate scheme) scheme with regards to margin requirements."
"Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Professional clients: Losses can exceed deposits when spread betting and trading CFDs. Countdowns carry a level of risk to your capital as you could lose all of your investment. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose."
"That's ok with me."
"We just need you to:
1. verify your email address to activate your account; and
2. confirm whether you are a private or non-private investor.
For your own benefit and protection, you should visit the Legal section of our website and ensure you read the cost disclosure and the Key Information Documents, as well as the Terms of Business, Risk Warning Notice and Order Execution Policy, before you start to trade."
"CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Professional clients: Losses can exceed deposits when spread betting and trading CFDs. Countdowns carry a level of risk to your capital as you could lose all of your investment. Invest only what you can afford to lose. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice."
"MR SAOUL: Now, as a result of those warnings, Mr Tchenguiz and as a result of your wider experience, you were well aware that if you were classified as a professional client, you would lose a number of protections that are available to retail clients.
A. Yes.
Q. And you were well aware that one of the protections that would be lost was negative balance protection.
A. Yes.
Q. And you knew what negative balance protection meant, didn't you?
A. Yes.
Q. It means -- and you knew at the time that you opened your account with CMC that removing negative balance protection meant your account could go into deficit?
A. Yes.
Q. Now, becoming an elected [sic] professional client with each of those brokers, before you opened your account with CMC, allowed you to acquire very substantial spread bet positions in relation to the First Group shares?
A. Yes.
Q. And it enabled you to trade on a highly leveraged basis with each of them?
A. Market leveraged basis, yes.
Q. And it meant in practice that you could have exposure to a very substantial amount of First Group shares without having to put down anywhere near the amount of money that would have been required to buy the shares themselves?
A. Yes.
Q. Now, prior to opening your account with CMC, you held a spread bet position with RJ O'Brien which was equivalent to approximately 18 million shares in First Group; do you remember that?
A. Yes.
Q. And you wanted to move some of those positions away from RJ O'Brien because they were increasing their margin requirements from 20% to 35% in your case. Do you remember that?
A. Yes."
"[RJO] recognised the risk of 18 million shares to Robert Tchenguiz was too high and one of the ways of dealing with it is to increase margin or telling me to reduce the position, hence why, when I went to CMC, they knew that they're going to take this position out of RJ O'Brien, a proportion of it, which is a 2.5 million share. They knew it. And it wasn't a margin issue, it was just that RJ O'Brien did not want me to have -- they didn't want to hold more than a certain amount of shares, once they recognised I have over 54 million shares in the market."
"Q. Had CMC not been able to take on the 2.5 million shares from RJO, you would have looked to move that 2.5 million shares to another spread betting company.
A. Yes.
Q. And that's in all likelihood what you would have done; do you agree?
A. Yes.
Q. And the market in due course over the following three months would then have moved against you as it did in fact; do you agree? Let me ask that again. The market then would have moved against you in exactly the same way that it did.
A. Yes.
Q. But you have no basis to suggest, do you, that if one of these brokers had had the 2.5 million shares in addition that they would have behaved any differently?
A. Well, probably they wouldn't have behaved differently, but I could have stayed with RJO and had a totally different outcome, which is a different outcome had it stayed with RJO.
Q. You've accepted in answer to one of my earlier questions that had CMC not taken on the 2.5, you would have looked to move it to one of the other operators --
A. Fine.
Q. Do you accept that?
A. Fine, I accept that …"
"[12/17/19, 11:56:51] David Garbacz: Hi Robbie - I sent you an email confirming your account is open and we now need to fill in the cmc Pro form. Would you like me to come and meet you somewhere to sort it with you and then we can discuss other terms for your account and I can take you through how we work?
[12/17/19, 12:06:21] Robbie Tchenguiz: That would be great David. I could do any today except at 5 pm. I will send 300k today to you if you tell me where to send it.
[12/17/19, 12:09:26] David Garbacz: I've unfortunately got to go to a funeral this afternoon so wouldn't really be back until around 5. What about tomorrow either first thing or any other time is good for me . I'll send you the bank details
…
[12/17/19, 12:25:49] David Garbacz: Ok superb - see you tomorrow at 9am. I sent you the bank details to your email by the way.
[12/17/19, 12:25:56] Robbie Tchenguiz: Thx
…
[12/18/19, 14:46:09] David Garbacz: Hi Robbie - lovely to meet you earlier. There are a couple more bits and pieces of paperwork to be organized which I've spoken to William about so it looks like, all being well, we will aim to do the trade tomorrow after everything is in place. Hope that's ok with you. Cheers
[12/18/19, 16:14:15] Robbie Tchenguiz: Thank you
[12/19/19, 13:49:43] David Garbacz: Hi Robbie - I hope you are well. Just to let you know we are nearly there with regards the account set up...
The pro opt up is done and complete.
I just sent you the document re the non-seg which is standard for clients on the FRS scheme that we discussed. This needs your signature and to return to me.
Also sent you an email confirming the account is a manual liquidation one at an account value of zero (not that I would expect it to ever get
there hopefully) and confirmation that you were approved for the FRS.
If you could just reply to that email saying you agree. Once we receive those two bits back we can then start to receive instructions and we can do the switch from RJ if you want .
Many thanks and looking forward to a successful relationship.
Regards
David
[12/19/19, 13:50:27] Robbie Tchenguiz: Thank you will do in the next hour."
"Good to speak to you earlier. Further to our conversation please find below the link which leads you straight to the account opening page.
https://oaf.cmcmarkets.com/en-gb/onboarding-start?iaid=351052
Please click on this and complete the form as required. It shouldn't take more than a few minutes to fill in. Please call me either on 0203 0038598 or on my mobile 07831 544429 if you have any questions. After the account is set up I will send you the form to upgrade to Professional status.
We will then discuss what facilities you require. We can set you up on something known as the FRS (fixed rate schema) for margins. This will ensure that all your equity trades will be margined at either 10% or at a maximum of 25% whatever size you are dealing in depending on the market cap of the stock in question. Please note there will be a cap on the actual amount you can trade in on this scheme per share but usually it is a pretty decent size. Obviously all other non-equity business will be at the normal Professional rates which are probably the most competitive in the industry. All clients that get introduced by me have access to our bespoke dealing desk. The desk will deal with all your trades and are incredibly professional both in their manner and execution of the business. I'm sure you will be more than happy with the service.
First thing first though is to get the account open so please let me know either by email or through a quick call when the application has been made and I'll make sure we get this processed as quick as possible. Looking forward to doing some good business together,
Many thanks and kind regards,
David"
"MR SAOUL: Even prior to CMC sending you the various forms that they sent you, you knew that electing up to professional status would mean you would not benefit from certain protections that retail clients get.
A. Yes.
Q. And you knew in particular that you would not get the benefit of negative balance protection.
A. Yes.
Q. And you knew what that meant which was that your losses could exceed your deposits?
A. Yes.
Q. Now, let's just pause there for a moment, Mr Tchenguiz. Had CMC not classified you as a professional client, and had they instead treated you as a retail client, you would not have been able to move the position from RJ O'Brien to CMC, would you?
A. Sorry, why do you say that?
Q. Well, CMC were clear with you, weren't they, that to accept this position, they required you to be elected to [sic] a professional client?[1]
A. Oh fine, if that was the term, fine.
Q. Let's assume that's right.
A. That's your assumption."
Were adequate warnings given of the losses of regulatory protection?
"In breach of COBS 3.5.3(3)(b), the Request Form did not give the Defendant a clear written warning of the protections and investor compensation rights he may lose. The Request Form failed to mention a number of protections that would be lost altogether, and/or it failed to give any clear description of the protections it did mention, sufficient to bring home to a person in the position of the Defendant the consequences of losing all the retail client protections and investor compensation rights."
"(d) the information is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received,
(e) the information does not disguise, diminish or obscure important items, statements or warnings,"
"I scanned over them. They weren't that important to me at the time."
"A. It was a small position relative, and it was --- wasn't that important, but I guess if I've signed it, I'm bound by it, that's fine, I don't say anything wrong, but you're asking me whether I read it in detail, no, I didn't read it in detail.
Q. And you didn't --
A. But I've signed it, so that's what it is . Or have I signed it? Yes, I have.
Q. Well, I think this was in electronic form. I think you signed subsequent forms.
A. Yes, fair enough. I'm not dodging the fact of what I've signed. I signed. I 'm responsible for it.
Q. No, no, and you didn't read the risk warning notice because so far as you were concerned you fully understood all the risks that came with this?
A. I did, I understood the risks that came, yes."
(1) Mr Tchenguiz had already been provided with explanations/warnings in the TOB and RWN before he submitted the request for Opt-Up. See para. 7 of Schedule 1, and the definition of "negative balance protection" in Schedule 4 and Section 5 of the RWN.
(2) Mr Tchenguiz acknowledged his agreement to the proposed terms on several occasions e.g. in the email of 19 December at 14:00 responding to that from Mr Garbacz at 13:36 which reminded Mr Tchenguiz in bold of the need to read the RWN.
(3) The warning in the Request Form, quoted above, especially when taken in the context of the earlier warnings and the repeated warnings included in the correspondence, was sufficient to make clear that Mr Tchenguiz would lose a number of the protections available to retail clients under "Protections you lose" and, in particular, NBP.
(4) While signing the declaration in the Opt-Up Agreement might appear not to have been a statement "in a separate document from the contract", in fact the account was not confirmed to be open or activated until later on 19 December (at 16:14 and 18:50 respectively) and Mr Tchenguiz had had the opportunity before then to read its terms and warnings before signing it. Activation and trading only took place after the Opt-Up Agreement had been signed. In my judgment it is necessary for there to be a degree of pragmatism in approaching the application of COBS 3.5.3R and the fact that it was subsequently accepted as forming the basis for opening and activating the account does not alter the fact that the warnings had been acknowledged before this occurred.
(1) TOB clauses 2.2.1, 5.1.2, Schedule 1 sections 7 and the Schedule 4 definitions set out earlier in this judgment.
(2) The Opt-up Agreement set out earlier in this judgment.
(3) The "Welcome to CMC Pro" confirmation of acceptance of the application to opt-up on 19 December which contained further warnings under "Protections you may lose."
"You will not benefit from negative balance protection"
- was inadequate given the lack of any explanation of the meaning of "negative balance protection". In my judgment, the meaning of NBP was already made sufficiently clear in earlier documents as set out above.
(1) COBS 2.1.3(1) provides that "a firm should not, in any communication to a retail client relating to designated investment business" seek to exclude or restrict any duty or liability other than under the regulatory system, or rely on such restrictions, "unless it is honest, fair and professional for it to do so".
(a) The Defendant submits that this is separate from the duty not to exclude or restrict duties under the regulatory system (under COBS 2.1.2) and that the Defendant ought to have been told that he was losing the protection of an FCA rule that would otherwise protect him. Even if the Claimant's contract provided the same level of protection as the FCA rules, it is submitted that contractual rights are inferior to the protection FCA rules afford if contravened and have less generous limitation periods.
(b) CMC submits that it does not seek to exclude or restrict such duties any further than was notified and that any limitations are only valid and enforceable in any event if they are honest, fair and professional. It follows that since the Defendant was not losing that protection the matter turns on the significance of the difference between a contractual limitation period (for the agreement as it stood following the Opt-Up Agreement).
(c) I agree that the correct construction of COBS 2.1.3(1) having regard to its purpose is that any exclusion contrary to its provisions would not be effective and CMC accepts that it does not seek the right to deprive a client of the ability to challenge on that basis (though 2.1.3 only applies to retail clients).
(d) I do not consider that the prospect of a difference in approach to limitation periods between tortious and contractual claims (in reliance on Martin v Britannia Life [2000] Lloyd's Rep P.N. 412 at [9.2]) is an exclusion or restriction of liability within COBS 2.1.3(1) nor, if it were, is it sufficient to warrant the need for a warning of the detailed differences between tortious and contractual claims with regard to potential limitation periods, where the basic periods are the same but there is scope for the extension of the tortious period for negligence, I assume, in accordance with ss. 14A-14B of the Limitation Act 1980 (given the reference to Martin – see [9.3.1] of the judgment). The application of a limitation period relates to the eventual barring of a remedy rather than the existence or limitation of a duty or liability and I do not consider that it falls within the purpose of COBS 3.5.3R(3)(b) to give a warning "of the protections and investor compensation rights" that may be lost. I also note that there appears to be little or no realistic prospect of its being relevant to the circumstances of the Defendant.
(2) COBS 11.2A.9-11 (R and G). Whilst the best execution rule applies to all clients, that rule has a specific variation for retail clients in COBS 11.2A.9-11. Those provisions require that, when carrying out best execution for retail clients, the "best possible result" must be determined –
"in terms of the total consideration, representing the price of the financial instrument and the costs related to execution, which must include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order"
(a) In this case, it is submitted that CMC's OEP is insufficient and does not mention the requirement that the best possible result be determined by total consideration including reference to fees since those fees included the 10 basis points added to each underlying share transaction by the CMC.
(b) In my judgment this point lacks substance since CMC applies the same OEP, and the duty of best execution, in the case of both retail and professional clients. It is referred to in the TOB as part of the agreement at cl. 1.1.3 (above) and defined in Schedule 4 in terms that apply in principle to all transactions. That policy does not distinguish between retail and professional clients. That policy includes at cl. 6.1 provision for "total consideration" including price and costs which would in my judgment include the fees referred to by the Defendant -
"6.1 The best possible result when executing your Order will be determined in terms of the total consideration (i.e. the price of your Order and costs related to execution)."
(c) Further, in relation to COBS 11.2A.11 see also the OEP at cl. 5.2 -
"We will take into account the following execution factors when executing your Order, ranked in order of importance from highest to lowest:
5.2.1 Price;
5.2.2 speed of execution;
5.2.3 likelihood of execution and settlement; and
5.2.4 size of your Order."
(d) With regard to the issue of the substitution of the contractual protection in the OEP with the specific protection of retail clients in COBS 11.2A.9-11, the provisions provide the same protection subject to a difference in approach to limitation periods between tortious and contractual claims as made in connection with the previous point concerning COBS 2.1.3(1).
(3) COBS 22.5.6 requires SBFs to include additional risk warnings in its communications with regard to disclosure of information about investor losses and "whether you can afford to take the high risk of losing your money" which were intended to provide protection for retail investors.
(a) The Defendant submits that CMC was required to provide a clear written warning about the fact that it would not need to provide such warnings, and provide such disclosure, to professional clients. While there was a general warning in the Request Form, it was insufficient and failed to give any detail as to the nature of the warnings or the fact that the statements required by the FCA also required disclosure of average performance by clients of the firm over a 12-month period. Without a summary explanation of the protection that a risk warning affords, it is submitted that the anodyne reference to the loss of "risk warnings" was insufficient for the purpose of COBS 3.5.3
(b) It is accepted by the Defendant that a written warning was given, in particular the terms of the Opt-Up Request Form quoted above, and the Defendant signed the declaration that he understood he would lose the protections (though it appears from his answers in cross-examination, that he was little concerned with these in any event). I reject the submission that the risk warnings were "anodyne", or "bland and lacking in real content", and the lack of detail rendered them inadequate. In my judgment they were expressed in broad but nonetheless clear terms that –
"Communications and Financial Promotions
Certain FCA (or equivalent) rules relating to the form and content of information provided by CMC Markets do not apply, including those relating to communications and financial promotions."
"Risk Warnings
CMC Markets will not be required to provide you with the risk warnings we must provide to retail clients in relation to transactions in complex financial products."
(c) The Op-Up Agreement itself stated in respect of loss of protections -
"Our communications, including financial promotions, will not be subject to all the retail regulatory requirements including risk warnings."
(d) Moreover, as I have mentioned, frequent warnings were given in the communications from CMC (e.g. in the Request Form and David Garbacz's emails of 19 December quoted above at [50]).
(e) I consider that these warnings did meet the requirements of COBS 3.5.3R both of itself and taken together with the reference to the ability to ask for clarification of any point -
"For your own benefit and protection you should read this form carefully before accepting the risks. If you do not understand any point please ask for further information."
(f) I do not consider that a detailed listing of all the warnings lost that might have been given to a retail client, for example with regard to annual average performance, is necessary in order to provide the "clear written warning" required, having regard to the requirements of 4.5A.3. The nature of the loss or protection was clearly spelled out. I also consider that the warning was fair and sufficiently prominent and was not disguised, diminished, or obscured. I add that it appears to me to be open to question whether the sort of very detailed listing urged by the Defendant would create any greater clarity or whether such detail might be counterproductive and might lose the clarity of the warning or possibly obscure or diminish it.
(4) COBS 22.5.13R imposes a duty to observe particular margin close-out requirements for retail clients including where "net equity falls below 50% of the margin requirement, the firm must close the retail client's open position(s) on restricted speculative investments as soon as market conditions allow".
(a) The Defendant submitted that no warning was given of the loss of this protection except in unsatisfactory conditional terms in the Opt-Up Agreement –
"The mandatory margin close out on an account basis (at 50% of minimum required margin) may not apply"
(b) I accept CMC's submission that this does not mean that the 50% margin would be lost simply by reason of recategorisation. In any event I do not consider that it was necessary at that stage to say any more than that there was a possibility that it might not be applied – that was a risk that was highlighted to the Defendant and in respect of which he signed the declaration in the Opt-Up Agreement.
(c) Further, by his email of 14:25 on 19 December Mr Garbacz notified Mr Tchenguiz under "Absolute Close-Out Level" that the close-out level would be changed to 80%. The email requested that if he was happy to proceed and "comfortable that you understand the above" he should confirm acceptance which, as I have already set out, Mr Tchenguiz did by email at 14:35 on the same day ("That's ok with me").
(d) I therefore consider that, viewing the above documents and correspondence as a whole, proper warning was given to the Defendant that his margin level for close-out would be changed to 80%, which was accepted by him.
(5) COBS 22.5.15R imposes a duty to provide a clear description of how the Close-Out Level would be calculated -
"A firm must provide to a retail client a clear description in a durable medium or make available on a website (where that does not constitute a durable medium) that meets the website conditions of how the retail client's margin close out level will be calculated and triggered:
(1) in good time before the retail client opens their first position; and
(2) in good time before any change to the terms and conditions applicable to the retail client takes effect."
(a) This was touched on without much elaboration in opening by Ms Barton but it did not feature significantly in closing.
(b) I agree with CMC's submission that it is not clear on what basis this complaint was pursued but having regard to the documentation I have already set out above, I do not consider that there was a failure to describe clearly how close out would be calculated and triggered. See the terms of the TOB including Schedule 1, including but not limited to para. 12 "Account Close-Out" and the definitions in Schedule 4. See also Section 9 of the OEP, the RWN, and the changes made in the Opt-Up Agreement and following regarding level of margin, considered above.
(c) It follows in my judgment that a clear description was provided and that nothing was lost which required a warning to be given to the Defendant on recategorisation.
(6) COBS 22.5.20R (not subject to an application for permission to amend though it results from an erroneous pleaded reference at para. 9(2)(j) to COBS 22.5.18) provides that there was a duty not to offer monetary or non-monetary incentives and no warning that this was lost on recategorisation:
(a) This was unsatisfactory and should have been the subject of an application for permission to amend by the Defendant, especially given the unhelpful (and inaccurate) response in Answer 7 given on 4 November 2020 to CMC's Request for Further Information - but was not. However, since the allegation pleaded related to 22.5.20R ("duty not to offer monetary or non-monetary incentives") as a matter of substance, and plainly was not dealing with 20.5.18, I will deal with the allegation.
(b) CMC responds that it did provide warnings which covered this issue in the warnings regarding communications and financial promotions in the Request Form and the Opt-Up Agreement (quoted above) and that the email at 13.46 on 19 December 2019 informed Mr Tchenguiz that a feature of being a professional client (under "Exclusive benefits for CMC Pro clients") was "Access to cash rebates and rewards". CMC also points out that Mr Tchenguiz did not in fact receive any incentives. CMC therefore submits that the Defendant did not lose anything in this respect and so did not require a warning.
(c) I agree that sufficient warning was given and reject the Defendant's criticism.
(7) There is also an allegation at para. 9(2)(l) of the Amended Defence that CMC did not draw attention to the loss of client money protections in CASS and gave the false assurance that the client money protections would continue to be available.
(a) This protection existed until Mr Tchenguiz accepted the terms of the Opt-Up Agreement as noted above and that agreement, which was sent to him prior to approval as a professional client, stated (under the list of protections lost or limited) –
"Your funds will not be subject to the client money rules and will not be segregated by us"
(b) I do not therefore consider that false or inaccurate assurances were given to the Defendant and that his attention was sufficiently drawn to the loss of client money protections before he signed the Opt-Up Agreement and prior to the activation of his account and his ability to trade as a professional client.
Conclusions on the first main issue
Issue (2): Close out of Mr Tchenguiz' positions with CMC
(1) in a manner that was reasonable and not irrational, arbitrary or capricious. See Rix LJ in Socimer v Standard Bank [2009] Bus LR 1304 approved by Lady Hale in Braganza v BP Shipping [2015] 1 WLR 1661 which has both procedural and substantive aspects and applies an approach akin to the Administrative Law concept of Wednesbury reasonableness;
(2) in accordance with the duty under COBS 2.1.1R to act in the best interests of the client.
(1) It is unnecessary to imply such a term in a detailed and professionally drawn contract and which is subject to regulation by COBS and is subject to the Braganza duty. Moreover, the terms on which CMC may close out accounts is set out in detail in the agreement between CMC and Mr Tchenguiz.
(2) Evidence has not been adduced which would demonstrate with clarity the existence of a specific market practice, or what such a term would mean here, with regard to close outs. Such a term cannot in my judgment be demonstrated with sufficient clarity and certainty.
(3) As Dyson J. (as he then was) held in Bedfordshire CC v Fitzpatrick Contractors Ltd [1998] 62 Con. LR 64
"Secondly, the court should in any event be very slow to imply into a contract a term, especially one which is couched in rather general terms, where the contract contains numerous detailed express terms such as the contract in this case. In my judgment, in such a case, the court should only do so where there is a clear lacuna. The parties in this case took a great deal of trouble to spell out with precision and in detail the terms that were to govern their contractual relationship. The alleged implied term is expressed in broad and imprecise language. I can see no justification for grafting such a term on to a carefully drafted contract such as this."
See also Lord Neuberger in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 724 at [14]-[32] and Lord Hughes in Ali v Petroleum Company of Trinidad and Tobago [2017] ICR 531 at [7].
(1) in making the decision to close out Mr Tchenguiz' position ("the Close Out Decision"); and
(2) the manner in which the Claimant executed the liquidation ("the Execution Decision").
(1) The approach by CMC to requiring Mr Tchenguiz to make payments into his account to restore his balance due to the volatility in the market for the shares in respect of which Mr Tchenguiz had taken a spread bet position;
(2) The refusal to accept offers of security made on behalf of Mr Tchenguiz;
(3) The manner in which close out was conducted and in particular the speed of close out which it is alleged harmed Mr Tchenguiz' interests since if close out had been conducted more slowly, this would have allowed the opportunity for the value of his position to improve and for his losses to be reduced.
The evidence
"With the downward pressure continuing on Firstgroup your account is about to go on a margin call. As mentioned could you please arrange to send £200,000 to the details below so that we can keep the account above call levels."
"Your Account Revaluation Amount is approaching the close-out level, which is the amount of funds required to support your open position(s). If your overall Account Revaluation Amount reaches the close-out level, then any or all of your open positions may be closed in accordance with the Terms of Business."
(1) a margin call was made by InterTrader on 12 March 2020 which started closing out Mr Tchenguiz' accounts the following day. By 13.41 on 13 March 2020, InterTrader had sold 2.8m positions out of 45m and completed its sales on 16 and 17 March. Thus, several days before CMC had begun closing out Mr Tchenguiz' positions, InterTrader had already sold nearly as many positions as CMC held in total.
(2) Mr Tchenguiz also faced a margin call from RJO on 13 March 2020 and from Spreadex on 16 March 2020. RJO liquidated its 8.75m position over 20 days from 17 March.
(3) IG Index started selling its positions on 16 March 2020, before CMC did, and closed out its total position of 17,499m over 4 days.
(4) Spreadex also started selling on 16 March 2020 and made it clear to Mr Tchenguiz that they could not wait and watch the stock go down. Spreadex's total position of 3.894m was closed over 16 and 17 March.
(5) ETX closed out its 2m position completely on 16 March 2020 (the day before CMC).
"I hope you guys appreciate the position we are in.
I hope you will all assist with a normalised process in reduction or replacing of the position.
I have the following positions
45m @ InterTrader
18m @ IG
3 m @ CMC
8.75 m @ RJO
4.250m @ Spreadex
2m @ ETX
Could you all assist Intertrader … to have a controlled way forward."
"… today's move in FGP now has the account owing £1.24m. Can you let us know urgently when this can be transferred over please. I realise conditions are pretty unprecedented but our credit team are pushing us for an update."
"Intertrader is coordinating a process i have sent emails to all my brokers."
"At the time I sent the email I was not aware that InterTrader … had already closed out on 13 March on 2.3 million shares."
"Fully understand the circumstances but unfortunately aside from any instruction to give out positions to Intertrader we can't speak to them on any co-ordinated basis as they have no POA over your account. If you're not able to transfer funds today and we don't get an instruction to either sell or move the position it's likely they will instruct us to close the trade today which naturally we all want to avoid. So if you could update us on the plan we will in turn speak to our credit team to try and keep this all within our control."
"Again we realise the situation and appreciate you are in contact with David G, but I'm afraid we really do need confirmation on what the intention is here.
At present it looks like there are 3 options:
- Fund the £1.1m outstanding on the account
- Give out the position elsewhere.
- Sell position on your instruction.
If we don't have a clear instructions shortly its likely this will be out of our hands and the position will be sent to market, so please give us a ring or reply to this chain to state your intentions if we want to avoid this. If we want to have any chance of an extension on this we will need a clear plan to go back to our Risk/Credit teams with."
[3/16/20, 14:46:47] David Garbacz: Robbie please can you get back to Toby on the sales trading - we've heard nothing from IT and time is running out
[3/16/20, 14:53:57] Robbie Tzenguiz: David please speak to Oliver Basi. He is speaking to Intertrader.
[3/16/20, 14:59:35] David Garbacz: He isn't speaking to them sir. He is only concerned about what is happening with your position here at cmc and as far as cmc are concerned the options are quite clear..
1. You find the margin required
2. You find someone else to give it up to
3. We sell the position in the market on your instruction
4. We sell the position if you can't pay the margin
Sorry to be blunt on this Robbie but I'm getting huge heat from the board and have to have a decision."
"Could you see if this asset could help buy some time with all brokers?"
The forwarded email claimed:
"I am able to procure this asset. Basically it a 54 year lease to Whitbread which has a present value of cash flow at today's interest rate of over 35m. I have a 5 year loan from ICICCI bank ( credit approved) of 15m. I also enclosed JPMs cash flow valuation ( last year) plus a PWCs placing to a pension fund."
"[3/16/20, 16:55:16] David Garbacz: Hi Robbie I've managed to get you leeway overnight however we will need funds or proof of funds by tomorrow morning 8am or we will have to either ... Give it up to inter trader in the morning which would be preferable for all concerned or if they don't want to do that we would then have to sell in the market. I'm doing the best I can sir but obviously need to know and can't just let this run.
[3/16/20, 17:58:36] David Garbacz: If you are not sending the margin and Inter trader will take the stock then please let us know ASAP so that we can organize with them."
"As you know, I act on behalf of the trustees of certain trusts which Robert is a beneficiary of. Robert has explained his personal position, which has arisen as a consequence of the unprecedented market conditions, to the trustees, and has asked the trustees for assistance, as Robert himself has no personal assets and as such is unable to meet the demands being made of him today. The trusts however are discretionary trusts, and although the trustees may be willing to help Robert, they are not obligated to do so and need to consider the request in all of the circumstances.
With this in mind I have been asked to contact you to see whether there is a compromise that can be reached with all the brokers (InterTrader, IG, RJ O'Brien, Spreadex, CMC, ETX) in respect of the existing First Group position. The existing value of the position today is c.£33 million. The trustees have identified an asset that possibly could be made available to support Robert's position; I understand that Robert has already provided you some information in relation to this asset, which is a long leasehold of a property in Cardiff let for 54 years to Whitbread. Before any recommendation can be made to the trustees however, I would appreciate it if you could let me know whether this proposal is viable. I expect that we would need to agree an extension of time for at least 12 months for regularising Robert's position, given the current state of affairs. Could you please revert urgently as to whether in principle you consider this is a viable option, and whether you believe you will be able to enlist the co-operation of the other brokerage firms."
(1) It was not a cash asset and not readily available to make good the deficit in Mr Tchenguiz' account but was only being offered as security. Ms Nicole Anne Martin made in clear in evidence that she was not aware that the provision of security was not appropriate since Mr Tchenguiz did not own shares but only a contractual spread bet position. Moreover, it was clear from her evidence that she had not been provided with information as to Mr Tchenguiz' exposure – "I truly do not recall Mr Tchenguiz giving me any total amount of exposure at all".
(2) The property was not vested in Mr Tchenguiz and, looking at the matter as beneficially as possible, it would have taken time to secure its availability even if it had been of sufficient value and even if the provision of security rather than cash had been acceptable to meet contractual obligations.
"25.1 Mr Tchenguiz had not funded his Account, nor had he made any concrete or swift proposals to fund the Account – in fact, he and R20 had told us that he could not do so and that he had significant exposure with other brokers, so the prospect of him being able to fund his Account within a reasonable period of time seemed limited;
25.2 During a margin call there are 4 key considerations:
25.2.1 The state of the account at the time (the negative balance was circa £1.24 million on 16 March 2020 and the Account had been on call at various points in the last week);
25.2.2 Commitments made by the client regarding funding the Account (Mr Tchenguiz had made it very clear that he was not able to fund the positions personally, and thus a close out had to proceed to protect both the client and CMC from further downside if he could not fund the Account);
25.2.3 The size of the position both absolute and relative to the underlying market (the position was large and still had significant downside); and
25.2.4 Market conditions (there was high volatility in the market).
25.3 No instruction was given to us to transfer the positions to another broker;"
"25.4 Whilst the Security Proposal had been made, it was unclear what was actually being proposed and the proposal was being made by a third party (and R20 did not have a power of attorney in relation to Mr Tchenguiz's Account). The Security Proposal was rejected because it did not amount to a concrete, acceptable or reliable offer of security as it was vague and unrealistic:
25.4.1 It appeared that the asset was not owned by Mr Tchenguiz. Indeed, I have been told by DACB that Mr Tchenguiz has confirmed in the pleadings that he does not own the relevant property. It was a complex and unusual third party arrangement;
25.4.2 It was not a liquid asset and there were no clear proposals about the duration of the proposed arrangement save that the Trustees had indicated that the positions may need to remain open for another 12 months, without any funds being paid into CMC to fund the Account;
25.4.3 If CMC was to accept the asset as security, due diligence would need to take place and a charge procured, which would have required the participation of the legal owner of the asset and there was insufficient time for that;
25.4.4 Mr Tchenguiz made the Security Proposal conditional on all operators participating – when the decision was taken to close out the positions, we were focussing on CMC's position and Terms of Business and not all of the operators – CMC's Terms of Business do not require or permit it to liaise with third parties without a power of attorney; and
25.4.5 CMC's business model does not cater for taking proprietary interests in property as a means of securing any deficit on a customer's account.
26. The key point was that Mr Tchenguiz had been given time to provide proposals to fund his Account and it was abundantly clear that he would be unable to do so. We had allowed a period of 24 hours for proposals on funding to be made but it was clear that none would be forthcoming – the decision was made to close out the trades to prevent further losses being incurred on the Account."
"I write further to the positions held by Mr Robert Tchenguiz with your various firms in relation to FirstGroup PLC. As you will be aware, Mr Tchenguiz is a beneficiary of certain discretionary trusts and he has approached his trustees for assistance to help deal with the present situation.
I have spoken to the trustees who are potentially willing to assist Mr Tchenguiz, subject to certain conditions. Their proposal is as set out below.
1. The trustees will replace Mr Tchenguiz's personal guarantee with their own guarantee for FirstGroup shares at 40p/share; the trustees hold assets of over £200m – Mr Tchenguiz has no personal assets.
2. In addition, Mr Tchenguiz will forgo 30% of the upside.
In the event Mr Tchenguiz is able to close out his positions in cash within the next two weeks, then the 30% referred to at (2) above will reduce to 20%.
Can you please revert to me urgently on the above proposal; I am happy to arrange a call to discuss."
"I would imagine RJO would have just taken the view we will do as we see fit, unless -- the only comfort they would have obviously taken on board is if money had come across to meet the margin call. And I was unaware of that situation, so I'd not been advised of anything differently, so, no. The only comfort that any financial firm would take with a client who owes money is money in, and that's it. Outside of that the firm have to do at that point what they think's best in the situation."
"16.3 … the sale of 3 million shares, appropriately staggered during the day (which CMC did, through an algorithm, as I explain below), was unlikely to have an undue effect on the market due to the volumes being traded at the time. Indeed, notwithstanding the sale on 17 May 2020 of the shares in which CMC had an interest, there was consistent trading at or around the price of 30p per share that day.
16.4 In order to monitor the impact that the sale of the shares may be having on the underlying market and to ensure that the sale of the shares did not unduly affect the market (to achieve best execution), the orders for the sale of 3 million shares were divided into three batches of 1 million shares, which were each placed during course of the day. Each order was processed using an industry standard algorithm supplied by Barclays, which would determine the best time and price at which to execute each order (and would in effect do so gradually). Each order of a million shares was therefore processed over time. As I have mentioned, the trades were submitted via an automatic trading algorithm, in this case a VWAP which aims to match trades with volume throughout the day to minimise market impact. To be clear, CMC sold the shares on behalf of Barclays, who then closed out the CFDs to which I referred above. CMC in turn closed-out Mr Tchenguiz's spreadbet positions.
16.5 By using the algorithm, it eliminates issues arising out of individuals using discretion and delays in execution…
16.6 As mentioned above, the shares were sold at an average price of 30.9174. Underlying VWAP for the day on 17 March 2020 was 30.699. In other words, we achieved a better sale price than the average price for the day. The liquidation orders were then booked onto Mr Tchenguiz's account at 30.886 (which includes a 10 basis points standard charge) …. Mr Tchenguiz was informed of the outcome of the close-out on 18 March 2020 ..."
"A. However, the main thing, certainly for me at the time, was to have a very clean record of how we'd executed the trade, because liquidations in my experience tend to be scrutinised after the event ….
"We wanted transparency. If we could do it within a day that would also serve purpose to do -- with regards to the likelihood of execution as well , which is another best execution matter. The trajectory that the stock was on at the time may well have pointed to that market not being available in the near future. Stocks on that sort of trajectory have a habit of going into lengthy suspensions, sometimes taken off the exchange pending news from the underlying company. So we had to factor that in to try and do it as quickly as was reasonable, and given the recent volumes in the previous two days, 3 million shares in one day seemed reasonable, so we set that out with the intention of monitoring it throughout the day to make sure it was still -- remained reasonable."
"That's very hard to see in real time. However, the algorithm that we use, its sole purpose is minimal market impact. So it attempts to split the trade up into a number of different pieces and trade in line with the volume that trades for that day. So we can look at each individual trade or the speed at which we are putting volume to market and whether or not it looks to be our trades as each piece goes through that is moving the market adversely, but it's very hard to see in real time."
"A. However, it does not participate at a set percentage rate. So it will complete on our instruction 3 million 5 shares over the course -- broken up into three separate trades here, but 3 million shares over the course of the day, but it does not know any better than anybody else what the total number of shares will be at the end of the day.
So in addition to using something that tried to trade with the volume that went through, we also wanted to monitor what proportion of the actual volume that was being traded we were participating at.
Q. So you did that separately?
A. Correct.
Q. And what was the purpose of your monitoring it, to do what the algorithm couldn't do?
A. It's an additional sense check."
"Q. Well, if you're already in a peak of excess selling, anything you add to the market in terms of volume is going to exacerbate that position, isn't it?
A. I see these as two separate things. So we can't control, and we would be speculating if we tried to understand why something is trading more than it usually does. We are just looking at our trade versus the underlying market on that day or to set the parameters initially to look at the nearest thing that we have, which was the previous day. In terms of the volume being more, this was in the middle of a pandemic, volumes were through the roof, fairly much, across the board."
'A. … I can't say that this was exactly the same timings as volume levels in the underlying market, all I can say is across the board there were lots of strange things happening with stocks in general and other asset classes as well, and it was no particular surprise to see a large pick-up in volume around that time."
"Q. So you think that CMC's approach was unusual in seeking to unwind in those circumstances. Is that your point, that CMC was somehow going to be doing something different?
A. No, I'd expect everyone to act with the information that they had, but we didn't know who was selling and who wasn't."
"16.8.3 It appears from an account statement provided by RJ O'Brien that it sold its first 3 million shares between 17 March and 24 March 2020. Based on documents provided by Mr Tchenguiz, I have calculated that the average price achieved during that period was 32.4p. i.e. a difference of 1.426p per share, less than 4.5% as compared with the price achieved by CMC, which is a very small difference.
16.8.4 By selling the shares incrementally over a period of 4 weeks, RJ O'Brien took a risk that the share price would worsen further and that Mr Tchenguiz's negative balance would then increase. By selling the shares within a day, CMC avoided such a risk. As I mentioned above, in fact the share price continued to drop the day after CMC had sold the shares in which it had an interest.
16.8.5 I have been told by CMC that the other 4 Operators that Mr Tchenguiz had positions with also closed out the positions in or around the same time. At the relevant time, we did not know whether any of the other Operators were selling or had sold any shares, in what volumes or at what price. Yesterday, Mr Tchenguiz's legal team provided DACB with documents which are said to set out how those other Operators closed out their positions. I have tried to interpret these statements to assist the Court – the number of shares equivalent sold, average closing price, period of close out and average shares sold per day has been set out in the table below for reference."
Was there a breach of the Braganza duty?
""It is plain from these authorities that a decision-maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time. In the latter class of case, the concept of reasonableness is intended to be entirely mutual and thus guided by objective criteria … Laws LJ in the course of argument put the matter accurately, if I may respectfully agree, when he said that pursuant to the Wednesbury rationality test, the decision remains that of the decision-maker, whereas on entirely objective criteria of reasonableness the decision-maker becomes the court itself."
"The first limb focuses on the decision-making process—whether the right matters have been taken into account in reaching the decision. The second focuses on its outcome—whether, even though the right things have been taken into account, the result is so outrageous that no reasonable decision-maker could have reached it. The latter is often used as a shorthand for the Wednesbury principle, but without necessarily excluding the former."
"29. If it is part of a rational decision-making process to exclude extraneous considerations, it is in my view also part of a rational decision-making process to take into account those considerations which are obviously relevant to the decision in question. It is of the essence of "Wednesbury reasonableness" (or "GCHQ rationality") review to consider the rationality of the decision-making process rather than to concentrate on the outcome. Concentrating on the outcome runs the risk that the court will substitute its own decision for that of the primary decision-maker.
30. It is clear, however, that unless the court can imply a term that the outcome be objectively reasonable—for example, a reasonable price or a reasonable term—the court will only imply a term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose. For my part, I would include both limbs of the Wednesbury formulation in the rationality test. Indeed, I understand Lord Neuberger PSC (at para 103 of his judgment below) and I to be agreed as to the nature of the test."
"Where we have agreed to provide you with the sales trader service, if our client management team has previously agreed with you that it may suspend or override any Account Close-Out initiated by the Platform and your Account Revaluation Amount falls to an Amount at or below the Close-Out Level, our client management team may (as it see fit in its sole discretion) during UK office hours try to contact you to request payment into the Account. If the client management team is unable to contact you and/or you are unable to fund your Account within a reasonable time, it may manually close all or a portion of the Bets in respect of any Product (including those relating to Manual Products or Manual Orders) within the applicable Trading Hours and where betting is not otherwise suspended"
(1) The process for the close out of the entirety of Mr Tchenguiz' account on 17 March 20202 was "almost entirely unevidenced" and no evidence in the form of notes or of the factors considered to reach the decision was produced nor was evidence given by either of the Messrs Basi, who were involved in the decision.
(2) The Close Out Decision failed to take into account the unusual trading volumes taking place (going from less than 10m shares to a high of about 29m) when deciding to sell the whole position in one day which must have comprised 35% of the readily tradable volumes on First Group.
(3) Mr Morris was disingenuous in claiming he did not know that everyone was selling since there was a real likelihood of other positions being closed out and this was made clear by Mr Tchenguiz' email of 16 March at 9:34 am of which Mr Morris was aware from his telephone conversation with Mr Basi on 17 March.
(4) Mr Morris made it clear in evidence that he considered Mr Tchenguiz' overall position to be irrelevant to the decision to close out and that CMC's sole concern was with its own position.
(5) No consideration appears to have been given to the soundness of the underlying company, First Group, despite the acknowledged relevance of market distortion, and no consideration of whether the trading price was based on a realistic valuation of First Group. Mr Fletcher, who could not explain the decision-making process of RJO did explain that the market was distorted as a result of the offloading of First Group stock and that this price did not reflect the value of the company.
"16.8 I have seen Mr Fletcher of RJO Brien's witness statement, which suggests that RJ O'Brien held 8.75 million shares in First Group and that it sold them over a period of 4 weeks, with Mr Tchenguiz's spreadbet positions being closed out incrementally along with the share sales. To the extent Mr Tchenguiz might assert that CMC should have done something similar, my observations on that would be:
16.8.1 Firstly, it is not a direct comparable because RJ O'Brien had almost 3 times as many shares as CMC did. Plus, their order execution policy may have different terms.
16.8.2 I note that in Mr Fletcher's statement, at paragraph 17, it was RJ O'Brien's view that it would be able to sell 1 million shares per day without disturbing the share price. Had CMC sold 1 million shares per day following the decision to close out, and therefore sold 1 million shares on each of 17, 18 and 19 March 2020, the average price achieved would likely have been worse, because the average share price over those days was 29.8659,"
"35. I understand from DACB that in his Defence, Mr Tchenguiz asserts that the reasons for the fall in the price of First Group shares in mid-March 2020 (i.e. between 9 and 17 March 2020) may have been affected by the market-wide reaction to the pandemic, which could reasonably have been expected to be a temporary phenomenon. However, in mid-March 2020, that was not clear and the fall in the share price may have been intrinsic to First Group. Even if the fall was related to the pandemic, it was far from clear that any fall in the price could be expected to be temporary (whatever temporary might mean in this context) or that CMC should have known or assumed that the price might recover in the near term. I would add for completeness that pursuant to the Contract in place, CMC was not in any event required to speculate in relation to such matters – but even had we sought to do so, it would have been very difficult to form a reliable view as to what might happen next.
36. The decisions made in relation to close-out were taken at all times based on the situation as it developed (current price and volatility), not speculation as to future price moves – CMC was in no better position than anyone else to guess what may have happened to the share price on a day to day basis. Had CMC not closed out the positions when it did, the share price could have continued to fall, making the losses on the Account higher."
"TM There are buyers, we've found buyers. We had to go quite a long way down to find them so it is down 17%.
OB But that's… alright.
TM I don't know how much of that is natural.
OB Do we know how much other volumes out there are selling because that is going to tell us if IG are doing that?
TM There is more than normal, it looked like it was just me on the open and then it looked like more people were getting involved later on. That is just a hunch but the volumes really picked up.
OB Well I'll wait for him to call me.
TM It is what it is.
OB There is nothing he can really respond saying… none of that email is of any value or any worth to us. Equally we should not be discussing our exposures with 20 other people we don't know over there on that email.
…
TM Well the good news is we are not all selling, well we can't all be selling because there would be hell of a lot more gone through."
"Spoken briefly with Oli too but just for the tapes.
Chain gives us nothing new. No funds coming to support the position and no direct update from the client so we keep going as normal.
Selling another 1m which will finish at 2 and then the final 1m into the close. VWAPs again with a 30p low."
"Q. Thank you. You'll appreciate that it appears to Mr Tchenguiz that rather than cooperate to lessen the effect on the market of what was a very substantial position being unwound with a number of brokers, it appears to him that CMC's approach was to try and get out of the market before larger positions were closed out like that of IG, for example, and that's a fair concern to have in light of the conversation that we see between you and Mr Basi, isn't it?
A. I don't really see how. Again, our knowledge of whether or not other people had sold or were yet to sell was purely speculative. At that point, we didn't realise that InterTrader had actually sold the bulk of their position already. "
"A. There's no conflict there, my Lord, because if there's some suspicion that we purposefully knocked down the price or we would only be increasing the debt realised on the account, our best interests were aligned. If there could have been a way -- if the market had rallied 50% from that point before we had a chance to put anything to market, everyone would have been very happy."
"we will always look to be as market neutral as we can be. So if a client was to buy 10,000 shares of company X and we hedged 10,000 shares of company X, we wouldn't reduce that hedge position unless the client reduces their own position, because we would actually be increasing our risk to the market, which makes no sense."
"There's no conflict there … because if there's some suspicion that we purposefully knocked down the price or we would only be increasing the debt realised on the account, our best interests were aligned. If there could have been a way - if the market had rallied 50% from that point before we had a chance to put anything to market, everyone would have been very happy."
"there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater"
"I entered further trades on 6 and 8 January 2020 which took my position in FirstGroup with CMC to 3 million. It is very hard to accept that it is reasonable that on 3 million shares, CMC have told me they incurred a loss of about £1. lm in closing out my positions when by comparison, RJO, who held 8.75 million shares for me, reported a loss of c.£450,000 when they closed out. On a share-by-share comparison, CMC incurred a loss of 37p/share and RJO 5p/share. CMC have offered no explanation for this discrepancy. My risk at most should be at an equivalent ratio which would have resulted in a loss with CMC of no more than £150,000."
(1) The decision-making process was focussed on CMC's own hedged position, in a falling market, and no disclosure was made of CMC's underlying hedged positions. CMC appears to have "asked itself the wrong question, namely whether to unwind it own hedged position".
(2) The related question of the impact of the market conditions on CMC's own position arising from the tension created by a falling market.
(1) Although Mr Morris' evidence was equivocal in stating that the market was monitored to provide a "sense check" to the automated system the process was automated and there appeared to be no evidence of a manual "sense check".
(2) CMC did not "take proper account" of the communications made by or on behalf of Mr Tchenguiz and there was evidence of a "dismissive attitude" to him.
Duty to act in the client's best interests COBS 2.1.1R
"act honestly, fairly and professionally in accordance with the best interests of its client".
"16. Like the judge I regard section 5 of the Financial Services and Markets Act 2000 as of some assistance in considering the purpose of COBS 2.1.1R. That provides:
"(1) The protection of consumers objective is: securing the appropriate degree of protection for consumers.
(2) In considering what degree of protection may be appropriate, the Authority must have regard to—
(a) the differing degrees of risk involved in different kinds of investment or other transaction;
(b) the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity;
(c) the needs that consumers may have for advice and accurate information; and
(d) the general principle that consumers should take responsibility for their decisions.""
(1) Having regard to the factors recognised by Flaux LJ in Ehrentreu v IG Index Ltd [2018] EWCA Civ 79 in s. 5 of the Financial Services and Markets Act 2000, I take into account Mr Tchenguiz' considerable experience in the spread betting market and the degree of risk he willingly assumed with such a high degree of exposure to volatile markets particularly with regard to one company, First Group (see Rix LJ in Spreadex).
(2) Mr Tchenguiz was unable to comply with his contractual obligations owed to CMC due to market volatility arising from the pandemic and there was no evidence that it would have been possible within a reasonable period of time for him to provide funding so that he could meet the margin call and put his account into a positive balance sufficient to satisfy the close out level requirement. There was inevitably difficulty in acting in Mr Tchenguiz' best interests in dealing with the consequences of his breaches of the agreement with CMC and in closing out in accordance with the contractual provisions.
(3) CMC did not act significantly differently from other SBFs with whom Mr Tchenguiz had opened accounts. 4 of the SBFs acted to begin liquidation of his accounts before 17 March.
(4) The approach adopted by CMC in closing out Mr Tchenguiz' account was at a level which may have been lower than some SBFs achieved, with larger positions and a longer period for execution, but was better than that achieved by a number of SBFs at this time as I have already set out and as appears in Mr Morris' table.
(5) CMC did not pursue a determinedly self-interested course in closing out, as Ms Barton submitted, but one which sought to protect both Mr Tchenguiz and itself, even if Mr Tchenguiz with hindsight says that if they had done something different, they could have put him into a better position. Compliance with the client best interest duty does not proceed by reference solely to the outcome. Moreover, I do not consider that CMC in undertaking the 2.1.1R duty is bound, where the contract has been breached, to ignore its own interests under the contract or the fact that the client has failed to meet contractual obligations.
(6) CMC acted reasonably and fairly in dealing with the state of the market by operating the Barclays trading algorithm and by closing out in tranches over the course of 17 March.
"99. In my judgment the Claimant was not in breach of its duty to act in the Defendant's best interests by not closing out his bets in the period from 15 September to 14 October 2008. In reaching this conclusion I have regard to (1) the fact that it is clear from the evidence that after 7 years the Defendant was a sophisticated and experienced trader, (2) he had made payments in the past when requested to do so: (3) he promised to make the payments requested during this period and in making those promises he intended the Claimant to accept them; and (4) the general principle behind the rules is that consumers should take responsibility for their decisions."
"76. COBS 2.1.1 provides: "A firm must act honestly, fairly and professionally in accordance with the client's best interest" but COBS 2 is also excluded from counterparty business. Even if applicable, it is not suggested as such that MCA acted other then honestly, fairly and professionally. As regards the best interests of the client, this is a difficult concept in circumstances where the client is refusing to pay margin and expecting MCA to close out as best it can. MCA was in effect trading on its own account. Furthermore the interests of MCA were in common with FCO namely to limit the loss that might be sustained as a result of the liquidation. Thus I reject the suggestion if it be made that MCA were obliged by COBS 2.1.1 to manage FCO's position as if still acting as FCO's broker but at its own risk and without the provision of margin."
"52. The first question is what degree of care Sucden had to exercise. In that regard, the parties are in disagreement as to the standards that Sucden had to observe when carrying out the liquidation. Fluxo-Cane has argued that when liquidating the account, Sucden was subject to the provisions set out in the New Conduct of Business Sourcebook (COBS) promulgated by the regulator, the Financial Services Authority. The sourcebook sets out the conduct of business requirements applying to firms with effect from 1 November 2007. It sets out rules to the effect that a firm must act in accordance with the best interests of its client, and must act subject to a best execution obligation. I believe it to be common ground that COBS would apply if Fluxo-Cane was categorised as a "professional client". That is how Sucden did classify Fluxo-Cane in a letter of 26 October 2007. I have to say that Sucden has not satisfied me that in those circumstances the "Eligible Counterparty" exemption (which was decisive in ED & F Man) applies on the facts here. In any event, the annex to the letter of 26 October 2007 acknowledges a best execution obligation, and despite Sucden's submissions to the contrary, I consider that this plainly overrides clause 9.6 of its standard terms of business which are inconsistent.
53. However, I am equally satisfied that the COBS (and the annex to the letter of 26 October 2007 so far as it creates an independent obligation) do not apply when the broker is liquidating the customer's account pursuant to an Event of Default. That is because these rules apply when the broker is executing its customer's orders, which is not the case in a liquidation. It is not correct either that in those circumstances the firm has to act in the best interest of its client. It cannot ignore the client's interests, but as the present case shows, the firm has interests of its own to consider. Here, liquidation was required to eliminate Sucden's own exposure with its counterparty. It was, in my judgment, entitled to put its own interest ahead of that of its client in that regard, although in practice both parties had a mutual interest in liquidation on the best terms possible. This conclusion is the same as that reached in ED & F Man at [75] and [76]. There David Steel J rejected the suggestion that the claimant was obliged to manage the defendant's position as if it was still acting as the defendant's broker, but (as he put it) at its own risk and without the provision of margin."
"That is because these rules apply when the broker is executing its customer's orders, which is not the case in a liquidation. It is not correct either that in those circumstances the firm has to act in the best interest of its client. It cannot ignore the client's interests, but as the present case shows, the firm has interests of its own to consider. Here, liquidation was required to eliminate Sucden's own exposure with its counterparty. It was, in my judgment, entitled to put its own interest ahead of that of its client in that regard"
Conclusion
Note 1 I assume that this is a transcription error for “you to be an elective professional client”. [Back] Note 2 E.g. para. 9(2)(a) of the Amended Defence – see the Defendant’s Skeleton Argument at para. 49. [Back]