QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| (1) ED&F MAN COMMODITY ADVISERS LIMITED
(2) ED&F MAN SUGAR INC
|- and -
|(1) FLUXO-CANE OVERSEAS LIMITED
(2) S/A FLUXO-COMERCIO E ASSESSORIA INTERNACIONAL
Stephen Males Q.C. (instructed by Hill Dickinson LLP) for the Defendants
Hearing dates: 23, 25, 26 & 30 November & 3 December 2009
Crown Copyright ©
Mr Justice David Steel :
a) Mr James Jenkins. He was the Managing Director of MCA and other companies in the ED&F Man group of companies ("the MAN group"). He was responsible for the decision to liquidate FCO's position and had overall responsibility for the manner in which it was conducted.
b) Mr Andres Galindo. He was a senior derivatives trader with the MAN group in New York. He undertook the bulk of the trades in regard to the liquidation of FCO's position.
a) MCA called Mr Desmond Fitzgerald.
b) FCO called Peter Nicolescu.
Both witnesses were well qualified in the field of risk management. There was much common ground. Indeed this increased during the trial. But on the crucial issues of controversy, I felt strongly that the evidence of Dr. Fitzgerald was to be preferred for the reasons set out later in this judgment.
"1 Our particulars
We are regulated by the Financial Services Authority ("FSA") and are therefore an authorised person under the Financial Services and Markets Act 2000.
Our registered office in the UK is Cottons, Centre, Hay's Lane, London SE1 2QE. Our telephone number is 020 7089 8000.
For the purposes of FSA's rules, we will treat you as a market counterparty.
7.6 Best Execution
We do not owe you a duty of best execution under FSA's rules or otherwise in any circumstances.
14.1 Deposits, margins and Payments
You will pay us on demand:
14.1 In relation to all Customer Contracts (other than one for the purchase by you of an non margined option, the premium for which is payable in full immediately on purchase) such sums of money by way of deposit or initial margin or margin or maintenance as we require and will supplement that payment from time to time on demand;
14.4 Failure to provide margin.
If you fail to provide margin when required to do so we (or any applicable exchange, clearing house or counterparty) may close out your positions and exercise the rights described in Clause 17. We will additionally have the right to close out your positions in any other circumstances provided in this Agreement.
16.1 You are warned that, if at any time:
16.1.1 you have not provided any deposit, margin or other payment due in respect of any Customer Contract by the close of business on the Business Day next following the demand, or you have failed to comply with a request made by us; or ...
16.1.11 you are in breach of any representation or warranty made to, or any covenant entered into with us ...
16.1.12 you are in breach of any of the provisions of this Agreement; or
16.1.13 you are declared a defaulter for the purposes of the default rules of any exchange or clearing house.
16.1.14 we reasonably consider it necessary or desirable for our own protection,
Then we may without prejudicing any other rights we might have, take any one or more of the steps [set] out in Clauses 17 to 19.
17 Consequences of default
If any of the events of default specified in Clause 16 above (except for the event of default specified in Clause 16.11.6) occurs we shall be entitled at our discretion and with or without prior notice to you to do any of the following:
17.1 to close out all or any unperformed Customer Contracts notwithstanding that any date fixed for performance of all or any of you [sic] Contracts to be closed out may not have arrived; or ...
24.8.1 Right to Assign
(i) Assignment by us. We may assign this Agreement to any person or associate without your consent, provided that we give you at least seven business days prior written notice.
Any notices, instructions, demands, confirmations, contract notes or requests ("Notices") may be given orally unless required in writing by this Agreement, references to writing include electronic mail.
25.2 Method of transmission
Any notice in writing may be given as follows:
(c) by sending by telex, facsimile transmission or any other instantaneous electronic transmission and it will be deemed delivered upon transmission. Proof that it was transmitted to the correct number or destination and the proper answerback was received (in the case of telex) will be sufficient proof of delivery (d) by sending by electronic mail and it will be deemed delivered 12 hours after transmission. Proof that it was sent to the correct electronic mail address will be sufficient proof of delivery.
Any contract note, confirmation, account or other statement which we give in writing will, in the absence of manifest error, be deemed correct, conclusive and binding on you if not objected to in writing within five Business Days of despatch by us.
Schedule 1 Interpretation
In these Terms of Business:
(f) "Business Day" shall mean any day which is not a Saturday or Sunday, Christmas day, Good Friday or a Bank Holiday in the United Kingdom."
"Continuing restriction on Fluxo's option trading is anomalous. Fluxo is a customer in good standing with six exchange clearing member firms, has never missed a margin call, is a long established and successful exporter of sugar, is one of the best capitalised like sugar companies now trading on the exchange and is operating far below the sugar futures contract equivalents hedge limits that the exchange has granted it."
"My calculations show that your futures equivalent position increased yesterday by about 5000 contracts so that your position was in excess of 80,000 lots entering today's trading. My review indicates that increase was primarily the result of additional selling of futures although deltas did have some impact as well. It is hard to understand how you are trying to reduce your position when you continue to sell thousands of lots of futures. As the price of the market contract is down today we expect to see a substantial decrease in your short futures position".
"As of receipt of this email, the Exchange is directing you to stop selling the March'08 Sugar 11 futures contract and to cease any other trading strategies that would result in an increase in your Mar '08 short position. You are further directed to immediately cancel all sell orders involving the Mar'08 futures contract as an outright or a spread or any other orders that would increase your short Mar'08 position. These instructions result from your continued violation of your single month position limit and the significant increase in your Mar '08 short position yesterday. Further, data received in this office indicates that you have now exceeded your 65,000 lot all months position limit as well. Please take immediate steps to correct this situation.
In addition, we are currently considering other steps the Exchange may take to ensure that you bring your positions in compliance with your position limits. You have now been in violation of your position limit for 10 business days."
"Your March '08 position had been in violation of the single month position limit established for Fluxo-Cane Overseas Ltd. for 10 consecutive days entering today's trading. If your trading activity today did not bring the position in compliance with the position limit, the Exchange will invoke the authority provided by ICE Futures U.S. Rule 6.13 on Monday, January 14, 2008 and instruct firms carrying your positions to reduce such positions by the close of trading on Tuesday, January 15."
"I am writing to advise you that a special meeting of the Board of Directors of ICE Futures U.S., Inc ("the Exchange") was held on January 15,2008, at which the following actions were taken pursuant to Exchange Rule 21.29:
(1) the Board of Directors determined that there is a substantial question as to whether a "Financial Emergency", as such term is defined in Chapter 21 of the Exchange Rules, exists with respect to Fluxo-Cane Overseas, Ltd. and you; and
(2) the Board of Directors determined that all orders for the account of Fluxo-Cane Overseas Ltd. and its affiliates (including you) ("Fluxo") in the Sugar No. 11 Futures Contract and any options on such contract may only be placed or executed by through a clearing member and not by or through any other person.
The decision of the Board of Directors with respect to the placement of order, as specified above, becomes effective on Wednesday, January 16, 2008 upon the posting of a Release to Members of the Exchange's website, and will remain in effect until further notice. The decision of the Board of Directors was based upon the facts, including but not limited to, that: Fluxo has significantly exceeded the position accountability levels established for it by the Exchange with respect to the futures equivalent position permitted to be held by Fluxo in the March 07 Sugar No 11 delivery month and in all delivery months of the Sugar No 11 contract, combined; Fluxo has refused to brings its positions into compliance with the levels established by the Exchange, notwithstanding repeated requests to do so by the Exchange; and Fluxo has increased its short futures equivalent position when instructed to reduce such position in the March 08 delivery month.
Due to the gravity of the situation, it was not practicable for the Exchange to afford you a hearing before taking action. Accordingly, you and Fluxo may request a hearing before the Board regarding the actions described above. Any such request should be made in writing to the undersigned within five business days of the date hereof, and should specify when you would be available for such a hearing and whether you will appear in person or through counsel or other representative.
On a separate but related matter, in addition to the actions described above, please be further advised that, pursuant to Rule 6.13, the Exchange has instructed each firm carrying positions for Fluxo in the Sugar No. 11 Futures Contract and/or options thereon to:
(a) reduce Fluxo's short futures equivalent position in the March 08 Sugar No. 11 delivery month to not more than a specified level, based on the proportion of Fluxo's position carried by such firm, such that by the close of business on January 23, 2008 Fluxo is in compliance with the position limits established for it by the Exchange with respect to the March 08 delivery month and to not increase the futures equivalent position carried in all Sugar no. 11 delivery months combined, beyond its current level.
(b) not to accept any orders, electronic or otherwise, that would result in an increase of Fluxo's short futures equivalent position in the March 08 Sugar No. 11 delivery month or its short futures equivalent position in all delivery months combined; and
(c) not approve the transfer of any Sugar No. 11 futures or options contracts carried for Fluxo to an account at another clearing member, without first notifying the Exchange of the intended transfer.
You may obtain further details directly from your clearing members regarding the position reductions that have been requested of each such firm, or contact Susan Gallant at the Exchange at 212-748-4030.
Please be aware that the foregoing action is not intended in any way to preclude the clearing members from further reducing positions or taking any other action which they may deem necessary or proper in light of the relevant circumstances."
"JB: ….this is Jeff. I have a question for you, or something I would like you to consider. Since there is multiple clearing houses involved, perhaps it would be in the best interests of everyone involved that if a decision is made to buy or minimise the positions that all the trading be done through one house. Whoever that house is that we can decide. Instead of having 5, 6, or 7 people er, er, chasing the market at the same time, It might be in all of our best interests to have one entity buying.
JK: Sorry, this is James at Fortis. At this stage I am not clear whether the responsibility and the instructions to close out are to come from Fluxo or are to come from the clearers? Think that each clearer, if it is the responsibility of the clearer, should be looking out for his own, er, for himself rather than it being in the hand of a third party. That's my initial observation. And am not clear at this stage, but I haven't seen the letter, er, whether, er, you know I assume that Fluxo if you like they have price destiny in their hands they just know what the timetable is rather than us deciding what the timetable is. "
i) that Mr Garcia regarded himself as being 26,000 or 27,000 lots too short.
ii) that from the point of view of paying margin calls the critical level was 12 cents.
iii) given the likely impact of purchases on the market it was best as Mr Garcia saw it to be at "the front of the queue" in liquidating the FCO position.
iv) that payment of margin by FCO would have to await "looking at the numbers".
"My financial situation deteriorated each minute, because also information was coming from the Exchange or people linked with the Exchange showed everywhere including my Counsel that I was prepared with millions contracts to put the market down. And they, heroes, protect the market. All my lines in Brazil was blocked yesterday, and my effort now will be rebuilding my relation and will be not possible by phone during early morning of this day like I did yesterday and the day before yesterday and I don't think we have too much to talk about coordination, everyone made their own decision. Someone also sold hedge linked with long time strategy. I don't know if it is the proper time to tell, but without strategy many of my position was sold with huge loss. Then coordination, it is funny to talk about. Your only concern is if I will have money to pay this crazy system to liquidate or not, and I need to tell you that I need to go to my Counsel and with my face in front of the Bank try to rebuild the relation in order to have condition to support this crazy loss that was provoked since the beginning by some strange and unusual system to liquidate from the Exchange and your decision and your desire to accelerate the problem by buying my position back without criteria and asking every second. I provoke you more hundred million dollars, can I receive today? Then I have no more things to do; I only need to tell you that you made a good and excellent service providing me nearby bankruptcy. Thank you all of you and I never imagined that serious people like you was capable to meet me and in the same time talking about coordination at the same time making authorization to buy back or to sell call likes crazy thousands and thousands and thousands in a relatively small market (or moment?). And it is very easy to understand that because the volatility of yesterday made the market between 12 to 13 today the market went down because there was no more guys to buy back under 12 in few minutes and came back upside then the next liquidator starts one more time to execute crazy order. That's it, I have no more consideration to tell."
"We refer to our messages this week demanding margin payments in respect of your accounts with us. Due to your failure to make the required margin payments we have exercised, are now exercising, and shall continue to exercise our right to liquidate all of your accounts with us. All resulting loss, cost and expense incurred by us shall be solely your responsibility."
i) Was FCO in default in respect of margin payments?
ii) Can MCA rely ex post facto on other provisions in the Customer Agreement as justifying the liquidation?
i) It failed to give credit for options held by FCO.
ii) It added an additional margin greater than the 20% required by ICE.
i) They were not pleaded.
ii) No objection was taken by FCO to the margin call on either basis.
But in any event having accepted FCO's primary case on the period allowed for the payment of margin, the point is academic.
i) On 16 January, ICE had ordered each clearing member to reduce FCO's position.
ii) MF Global's obligation in this regard was in turn MCA's obligation.
iii) Compliance with ICE directives was of itself reasonably necessary or desirable from MCA's perspective.
iv) Yet by the end of 17 January no reduction had been made.
v) MCA learned from the letter of 16 January forwarded to them that:
a) FCO had significantly exceeded its permitted limits.
b) FCO had refused to rectify the position despite ICE demands.
c) FCO had on the contrary increased its short position.
vi) In the meantime it had emerged that FCO had no less than 9 other brokers all required to reduce FCO's position (albeit on an unknown scale).
vii) By the time of the meeting on 17 January (and indeed during the meeting) it was apparent that some brokers were already embarking on the process of closing the excess positions.
viii) Mr Garcia was somewhat coy during the meeting as regards his willingness to pay margin calls, a feature enhanced by the indication from the back office of FCO that any margin payment would have to await the outcome of 17 January meeting.
i) The instruction was also directed at not increasing the short futures equivalent for all months.
ii) The strategy of MCA was to purchase May futures, the market being more liquid than for March, and then switch back into March.
i) The market price had increased as a result of purchases made by his brokers.
ii) The market was fully aware of his short position.
iii) His financial position had accordingly deteriorated.
iv) His finance lines in Brazil had been blocked.
v) The absence of any coordinated response by brokers had made him nearly bankrupt.
With that he left the room.
i) The extent of FCO's exposure was increasingly apparent.
ii) The Exchange had been complaining for some considerable time that FCO was in excess of its limits yet nothing had been disclosed FCO to MCA about the situation (whether disputed or not).
iii) Now it was being made apparent that whether already due or not the margin calls would not be met.
Conduct of liquidation
i) The initial complaints were set out in some detail in Appendix 1 to the Defence and Counterclaim. This identified a very large number of trades said to demonstrate mismanagement of the closing as from 18 January through to 25 February. All these complaints were in due course abandoned.
ii) At the commencement of the trial FCO appeared to be relying on their expert's statement to the effect that MCA should have deferred any liquidation until after 18 January at which stage the market would have stabilised.
iii) This position in turn did not survive cross-examination. Mr Nicolescu's position became one of making a complaint simply about the scale of trading on 18 January. In his view whilst closing out 20% of the position would have been acceptable some 36% was not.
i) There had already been a significant delay in complying with ICE's instructions.
ii) The weekend and a U.S. national holiday was about to intervene.
iii) All the dealings were executed at the best price available on the market from time to time.
iv) All (or almost all) of the other 9 brokers retained by FCO were liquidating their position in whole or in large part (indeed there are a range of other proceedings both in this jurisdiction and in the U.S. in which the same complaint is made by FCO of premature and/or excessive trading).
v) The motivation for all brokers (including MCA) was to reduce risk and reduce the book.
i) Documents relating to the operation of MCA's "error account" for 18 January.
ii) All trading tickets relating to the liquidation of FCO's position.
i) The request was unacceptably late, some 5 months after standard disclosure and very close to the trial.
ii) As regards the error account, documents relating to trades which had been in the error account (as a result of administrative confusion or lack of information) but subsequently allocated to FCO had been disclosed and there was no allegation of mis-allocation of trades made on behalf of another customer.
iii) As regards the trading tickets, full details of the trades made to close FCO's account had been produced in the spreadsheets in May 2008: there had been considerable correspondence relating to the same: concerns about apparent discrepancies between MCA and ICE had been resolved: corrections to the timing of certain trades (recorded as Chicago time as opposed to N.Y. time) hade been made: no allegation had been made that any, let alone any significant, trades were wrongly allocated or recorded: the task of isolating and producing the underlying trade tickets was wholly disproportionate.
Any contract note, account or other statement which we give in writing will in the absence of manifest error, be deemed correct, conclusive and binding on you if not objected to in writing within five Business Days of despatch by us."
This precludes any new challenge on a different basis.
i) Mr Garcia was the President and sole shareholder of both CIC and Fluxo Commercio.
ii) The guarantee formed part of the consideration for the credit facility granted to CIC under the Customer Agreement.
iii) The same credit facility remained in place after the merger.
iv) MCA was informed by Fluxo's lawyers on 11 December 2006:
"Considering the e-mails received about the merge of Cane/Fluxo Overseas, I would like to clarify as follows:
It is a merge of a parent company (Fluxo Overseas) and it's subsidiary (Cane). As you will see in the plan of merge and in accordance with the BVI laws, upon the merger, the separate corporate existence of Cane shall cease and Fluxo Overseas shall: (i) become the owner, without other transfer, of all the rights and property of Cane; and (i) become subject to all liabilities, claims, debts, obligations and penalties of Cane. So, all the existing contracts of Cane will remain in full force. That's why I our opinion, there's no need, or at least no hurry, to execute new contracts. The surviving company name will be Fluxo-Cane Overseas Ltd and, of course you will receive all documents related to the merge and to the surviving company for your files."
v) It is not challenged that MCA relied on these statements and accordingly continued to supply credit to FCO.
24.8.1 Right to assign
(i) Assignment by us
We may assign this Agreement to any person or associate without your consent, provided that we give you at least seven business days prior notice.
(ii) Assignment by you
Your rights under this agreement are personal to you and not capable of assignment
24.8.2 Successors and assigns
The obligations under this Agreement bind, and the rights will be enforceable by you and us and our respective successors, permitted assigns and personal representatives."
i) Is a partial assignment or an assignment of rights permitted?
ii) If so, what is the effect of the absence of notice?
i) Clause 24.8.2 provides for the enforceability of rights by permitted assigns: it follows that where not permitted, assignments are prohibited.
ii) Clause 24.8.1(1) concerns the agreement as a whole.
iii) Rights under the agreement as opposed to the agreement itself are accordingly not assignable as in the case of Clause 24.8.1(ii).
iv) In the result, MCA can seek to assign the agreement to another company in the group (or an outside group) the notice period permitting FCO to engage a different broker if so advised.
i) The starting point should be a chose in action is assignable unless prohibited.
ii) Clause 24.8.1(1) permits FCO a reasonable opportunity to make alternative arrangements if MCA wishes to transfer the broking arrangements.
iii) It follows that the clause is solely directed to the entire agreement.
iv) There is accordingly no prohibition against assigning accrued debts under it (and indeed there would be no commercial purpose to such a prohibition).
"The question is to what extent does clause 17 on its true construction restrict rights of assignment which would otherwise exist? In the context of a complicated building contract, I find it impossible to construe clause 17 as prohibiting only the assignment of rights to future performance, leaving each party free to assign the fruits of the contract. The reason for including the contractual prohibition viewed from the contractor's point of view must be that the contractor wishes to ensure that he deals, and deals only, with the particular employer with whom he has chosen to enter into a contract. Building contracts are pregnant with disputes: some employers are much more reasonable than others in dealing with such disputes. The disputes frequently arise in the context of the contractor suing for the price and being met by a claim for abatement of the price or cross-claims founded on an allegation that the performance of the contract has been defective. Say that, before the final instalment of the price has been paid, the employer has assigned the benefits under the contract to a third party, there being at the time existing rights of action for defective work. On the Court of Appeal's view, those rights of action would have vested in the assignee. Would the original employer be entitled to an abatement of the price, even though the cross-claims would be vested in the assignee? If so, would the assignee be a necessary party to any settlement or litigation of the claims for defective work, thereby requiring the contractor to deal with two parties (one not of his choice) in order to recover the price for the works from the employer? I cannot believe that the parties ever intended to permit such a confused position to arise."
i) The clause does not prohibit assignment: it indeed expressly permits assignment of the Agreement even absent consent (subject to notice).
ii) As 28.8.1(ii) makes clear a distinction is being drawn between assignment of the Agreement and assignment of rights under the Agreement.
iii) As regards MCA there is no implicit bar to assignment of accrued rights of action: it is simply implicit that no prior notice is required.
iv) The complication and confusion that could arise in a building contract are not to the point: it is not remotely perverse for MCA to be permitted to assign accrual claims to a third party.