QUEEN'S BENCH DIVISION
Rolls Building, 7 Rolls Buildings, London EC4A 1NL
B e f o r e :
| Euroption Strategic Fund Limited
|- and -
|Skandinaviska Enskilda Banken AB
Daniel Toledano Esq, QC & Sam O'Leary Esq
(instructed by Clifford Chance LLP) for the Defendant
Hearing dates: 18th-22nd July 2011; and 25th, 26th and 29th July 2011
Further written submissions received on 2nd August 2011
Crown Copyright ©
Mrs Justice Gloster DBE:
i) Having exercised its right to close out, at the time it chose to do so, SEB had a duty to conduct the close-out in a manner that was not arbitrary, capricious, perverse and/or irrational; see Socimer International Bank Ltd (in Liquidation) v Standard Bank London Ltd (No 2)  1 Lloyd's Rep 558; Paragon Finance Plc (formerly National Home Loans Corp) v Nash  1 WLR 685.
ii) In addition, or in the alternative, SEB had a contractual and/or tortious duty of care to conduct the close out exercise competently and with reasonable care.
iii) The contract conferred no discretion on SEB as to how to carry out the forced liquidation of the portfolio once it had decided to do so; clause 11 was a narrow clause requiring SEB to close out the entire portfolio with no delay; it had no contractual entitlement to put on new positions or to manage the portfolio over any period of time; in circumstances where SEB breached that obligation, and "stepped outside" what it was entitled to do under the contract, it assumed a tortious responsibility to Euroption.
SEB's breaches of duty
iv) SEB was in breach of all three duties in its conduct of the close out of the portfolio. Euroption's complaints about such breaches were articulated under three different heads of claim:a) Claim 1: that SEB, having begun the close out at, or around, 12:44 on 9 October 2008, negligently, and in breach of its duty not to act in an arbitrary, capricious, perverse and/or irrational manner, delayed in the close out of the portfolio. All the positions could and should have been closed out by close of business on 9 October. However, Claim 1 was not contingent on Euroption showing that the entire close out could and should have been completed by the end of 9-10 October, since Euroption alleged that closure of some of the positions on 9-10 would still have yielded a better return for Euroption. (However if, as Euroption contended, the portfolio could and should have been closed out in its entirety by the close of business on 9 October 2008, then there would have been no need to put on any new trades on 10 October 2008, which was the subject matter of Claim 2.)b) Claim 2: that SEB opened new "combination" positions without contractual or other authority on 10 October 2008 which caused loss to the portfolio. Claim 2 only arose for consideration if, contrary to Euroption's position under Claim 1, there would still have been positions left on the books on 10 October.c) Claim 3: in the event that SEB had begun the forced liquidation on 10 October 2008 or that positions were left open on that date, that SEB negligently, and in breach of its duty not to act in an arbitrary, capricious, perverse and/or irrational manner, delayed the closure of five short call positions which should have been closed on 10 October (but were only closed on 13 or 14 October) and one short call position which should have been closed on the morning of 13 October 2008 (instead of in the afternoon), which caused Euroption loss. (This claim was an alternative claim to Claim 1).
v) The quantum of Euroption's claim in respect of the direct losses (namely the difference between the value of the positions as closed out compared to their value if they had been closed out by close of business on 9 October 2008) allegedly suffered in respect of Claim 1, as a result of SEB's alleged delay in the close out of the portfolio, varied between approximately €31 and €6.2 million (depending on whether the Court were to find that all or just some part of the positions should have been closed out on 9 October 2008), subject to an appropriate deduction to reflect:a) the need for Euroption to pay a bid/offer spread to close the positions; andb) the effects of "slippage" (namely, the extent to which the market might have been moved as a result of a very large open position being closed out).
vi) The quantum of Euroption's claim in respect of the direct losses allegedly suffered under Claim 2 was €666,700 and Ł1,072,224.
vii) The quantum of Euroption's claim in respect of the direct losses allegedly suffered under Claim 3 was:
€40,460 €6,547 €214,750 Ł247,887 Ł104,060 (Ł165,000) (credit) €261,757 Ł186,947
viii) In addition to its claim for diminution in the value of its fund as a result of the close out, Euroption claimed damages for consequential loss of profits. Euroption contended that, if the Fund had been liquidated at close of business on 9 October, it would have had a value of €36.1 million on that date; that sum would have been re-invested and employed as part of the Fund's trading strategy, as part of a larger fund. Accordingly, Euroption claims damages in respect of the profits, which it alleges that the Fund would have earned had the value of the Fund not been damaged by SEB's actions, calculated by reference both to the Fund's historical performance prior to October 2008 and its actual performance thereafter.
ix) At the start of the trial, based on Euroption's expert report, the quantum of the claim for consequential loss of profits appeared to be in the region of about €135m. In his closing submissions, Mr. Shivji, suggested that, if I were minded to accede to the loss of profits claim, then I should rule on certain points of principle relating to quantum (namely: (a) average monthly percentage growth (b) time period (c) percentage level of redemptions as at October 2008) with a view to the parties themselves carrying out the appropriate calculation.
Issues that arise for determination
i) Did SEB have a contractual and/or tortious duty of care to conduct the close out exercise competently and with reasonable care or was its only duty to act honestly, in good faith and not arbitrarily, capriciously, perversely or irrationally? (I define this latter duty as "the duty to act rationally".)
ii) If SEB had a duty of care to conduct the close out exercise competently and with reasonable care, what was the scope of that duty?
iii) What, if any, discretion did SEB have as to the conduct of the close out once it had decided to liquidate Euroption's portfolio? In particular was SEB contractually entitled, as part of the close out process, to execute further trades?
iv) Claim 1:a) When did SEB begin to exercise its right to close out Euroption's positions?b) If SEB exercised this right on 9 October, did SEB carry out the close out in breach of its duty of care and/or to act rationally on that day?c) In particular, should SEB have closed out all, or at least some, of Euroption's positions on 9 October?
v) Claim 2:a) Did SEB have authority under clause 11 of the Mandate to execute new "combination" trades?b) Did Euroption in any event give instructions for one of the combination trades and expressly authorise/ratify the other?c) In any event, were the combination trades in breach of any relevant duty of care or to act rationally?
vi) Claim 3: Was SEB in breach of its duty of care and/or to act rationally by virtue of delay in closing out the short calls?
vii) What was the quantum of Euroption's claim in respect of its alleged direct losses?
viii) Was Euroption entitled as a matter of law to claim consequential loss of profits?
ix) Were the damages claimed too remote and too speculative to be capable of having any monetary value placed upon them?
x) If not, what was the quantum of such losses?
Order of determination of the issues
Relevant background facts
Equity index options
i) The intrinsic value: This is the difference between the strike price and the market price of the underlying instrument. The ratio between changes in the value of the underlying instrument and changes in the option price is measured using a concept called "delta". The delta of an option is dynamic, such that the delta changes as the price of the underlying instruments moves in comparison to the strike price. The ratio of a change in the delta of an option compared to a change in the value of the underlying asset is measured using a concept called "gamma".
ii) The volatility of the underlying instrument: in the case of the more volatile instruments, the price of the option tends to be higher because there is an increased chance that on any one day the market in the underlying instrument will move sharply, so that the option is in the money for a period of time. Volatility is measured using a concept called "vega". The vega applicable to an option will fluctuate over the life of the option.
iii) The period of time remaining before expiry of the option: the longer the period remaining before expiry of the option, the more valuable the option will be. This is because there is a greater chance that, over the life of the option, the market in the underlying instrument will move sharply so that the option is in the money for a period of time. This is measured using a concept called "theta". The value of theta falls over the life of the option.
iv) The impact of a one percent change in either the interest rate or the dividend yield on the price of an option; this is measured using a concept called "rho".
The relevant terms of the Mandate
i) OSL was defined as "the Fund Manager";
ii) Recital (a) provided: "SEB carries on investment business, including that relating to exchange traded futures and options";
iii) Recital (b) provided: "SEB is willing to settle and/or execute exchange traded futures and options, and settle OTC futures and options that are cleared via an exchange on behalf of the Client subject to the terms and conditions set out herein";
iv) Under clause 2, "margined transaction" was defined as:"… a contract under the terms of which a customer will be, or may be, liable to make deposits in cash or collateral to secure performance of obligations under the contact".
v) Clause 3 provided so far as material:"SEB is a Swedish bank and authorised to conduct securities business under Swedish law. Finansinspektionen in Sweden is the home-country supervisor of SEB. However, in relation to its exchange traded futures and options at the London branch, SEB is also regulated by the FSA."
vi) Clause 4 provided:"4. APPOINTMENT OF A FUND MANAGER(a) The client has appointed the Fund Manager as its agent to enter into transactions with SEB under this Agreement on its behalf.(b) The Client authorises and requests that SEB accepts and acts upon any instructions or communications from, enters into transactions with, and makes and receives payments to and from the Fund Manager (including any person who SEB believes in good faith to be the Fund Manager's authorised representative) in each case on the Client's behalf. The Client also authorises SEB to communicate all details concerning its account with SEB and any transactions under this Agreement to the Fund Manager.(c) SEB shall be entitled to presume the continuing authority of the Fund Manager and its representatives until it receives written notification to the contrary."
vii) Clause 6 provided that:"[Euroption] will make all trade decisions. The services SEB will provide are, subject to the restrictions contained in Clause 7 below [best execution], advisory services regarding dealing in exchange traded futures and options (and securities where the securities transaction in question is ancillary to a transaction in the foregoing) or such other services as may be agreed from time to time between SEB and [Euroption] in writing.SEB will contract only as a principal in respect of contracts in the terms of an Exchange Contract. In respect of every contract made between SEB and the Client, SEB shall have made an equivalent contract on the relevant market either by open outcry or in the electronically traded market.These services may include preparing and executing margined transactions in the investments referred to above. SEB may at any time impose or alter limits applicable to the Clients activities under this Agreement."
viii) Clause 11 provided:"11. MARGIN PAYMENTWhere SEB effects transactions for the Client pursuant to Clause 6 above, the Client must, immediately upon SEB's request, transfer to SEB a margin payment of an amount specified by SEB and representing at least the amount stipulated for the transaction by the relevant exchange on which the transaction is to be carried out. The Client will be required to supplement that payment at any time when the Client's account with SEB shows a debit balance or an increase in the Client's margin requirement. Time shall be of the essence with respect to margin payments from the Client to SEB.Margin transfer must be made in cash unless otherwise agreed between the Client and SEB.The parties agree that all right, title and interest in and to any margin (whether cash or other property) will, at the time of transfer, vest in SEB free and clear of any liens, claims, charges or encumbrances or any other interest. Each transfer of margin will be made so as to constitute or result in a valid and legally effective transfer of all legal and beneficial title to SEB.The parties do not intend to create in favour of SEB any mortgage, charge, lien, pledge, encumbrance or other security interest in any cash or other property transferred as margin.The Client is warned that, if at any time it has failed to provide sufficient margin or other payment or delivery due in respect of any transaction as required, SEB shall be entitled to close out the Client's open contracts at any time without reference to the Client. Furthermore, it is an FSA requirement that where clients' margin calls are not met within five business days, all positions must be closed out. Any sum due to SEB as a result of closing out those contracts will be payable by the Client to SEB immediately.SEB also reserves the right, at its discretion, to close out the Client's position having made reasonable efforts to contact the Client in the event of the Client's insolvency, or in the event of the Client having a winding-up, bankruptcy, administration or similar order made against it, or in the event of any failure by the Client to meet any obligations, whether in this Agreement or otherwise, or in the event that the Client makes any misrepresentation to SEB, or at any time SEB deems it necessary for its own protection.In addition, the Client authorises SEB to transfer any funds which SEB may be holding on the Client's behalf as may be necessary to meet any of the Client's obligations, including the obligation to make margin payments, in respect of the Client's dealings with SEB.In some instances the original securities or the original type of securities may not be returned to the Client and where the securities have matured, the Client will be credited with the equivalent value of the collateral."
ix) Clause 12 (c) provided:"SEB may at its absolute discretion refuse any instruction given in accordance with this Clause".
"3.27 Margin Liability of Clients
3.27.1 Not less often than once each Business Day a Member shall calculate or recalculate the liability for Margin of each of his clients, including clients who are Members, in respect of open positions in his books. The amount of such liability shall on each occasion be calculated to be no less than the amount of a Clearing Member's liability to the Clearing House for Margin in respect of the same open positions if they, and no other positions, were at that time registered with the Clearing House in his name.
3.27.2 Subject to LIFFE Rule 3.27.4, Margin shall be promptly collected in full from a client whenever the calculation made under LIFFE Rule 3.27.1 shows that a new or increased liability for Margin has arisen on the part of the client. Subject further to LIFFE Rule 9.2.5, a Member shall take all steps reasonably necessary and available to ensure such collection or, in the event of the client's default, such steps as are open to him to reduce the client's liability.
3.27.4 A Member shall not be obliged to collect Margin arising from open positions in full promptly from a client pursuant to LIFFE Rule 3.27.2 provided that such Member's decision not to collect Margin in full promptly is made pursuant to prudent management policies and procedures which satisfy any criteria which may be specified by the Board from time to time".
Events leading up to SEB's close out of Euroption's positions
"can we meet face-to-face to discuss? Early next week please. If we are unable to trust clients to meet calls we really don't want them as clients".
In fact no such meeting took place, but no doubt SEB's confidence in Euroption's ability to meet margin calls had been undermined as a result of this incident.
"… they'd reduced their margin call by €33 million, so I was in a far more comfortable position"
"… won't help I'm afraid. They want the whole amount, or liquidation. We have to show them that we are closing some positions. Again, this is about buying you more time. So let's decide what to cover. SEB are expecting constant updates".
"A. I wanted cash and I wanted positions cut, and, you know, at this stage I didn't know I was getting cash, but I don't think I'd ever said to anybody that I was going to liquidate the portfolio at this stage."
"Mr. Martin: We need to do these in parallel. You get the positions out and I want to know if the client's got any cash because if he hasn't I'll take some action. So I need to know.
Mr. Caldon: Well, OK. What are you talking about "taking action"?
Mr. Martin: I'll take the whole lot out."
According to Mr. Martin's own evidence, the reference to "… take the whole lot out." was a reference to a forced liquidation of the portfolio.
Issue 1: when did SEB begin to exercise its right to close out Euroption's positions?
i) Mr. Martin's own established practice in relation to margin calls dictated that he would have taken the decision to close out Euroption's positions by 12:44 on the 9 October 2008;
ii) whether or not Mr. Martin intended to commence a close out of Euroption's open positions, TSL's conduct indicated that it understood the e-mail to be such an instruction;
iii) under the terms of the Mandate a close out commenced when, at 12:44, Mr. Martin assumed responsibility for making trade decisions on Euroption's account;
iv) under the relevant regulatory framework, as Mr. Martin understood it to operate, SEB was bound to commence the close out on 9 October 2008.
"Sorry. I have not been explicit about this, but I guess you are working on this assumption anyway. No new positions on this account whatsoever until further notice. We are working to close only"
"no new positions, working to close positions only. Not close the entire portfolio, not shut it down, but the third line relates to the second line. So your interpretation of that e-mail I'm afraid is one hundred percent incorrect."
"It doesn't matter. Our only chance is to show SEB that we are closing positions from the open. We have to start with the CAC. If SEB decide we are not closing fast enough, they will take over."
And at 12:08 on 9 October, Mr. Trimming expressed concern that:
"SEB are really increasing the pressure on us Stefano. They have told us that we are not reducing exposure fast enough. I am worried that they will start covering some positions themselves."
"Looking back at the transcript of that call now, I think that I did not feel it was necessary at the time to spell out that SEB would be giving the instructions in relation to the portfolio from this point onwards. Mr. Caldon and I are both professionals, and we had both seen the carnage on the markets from the opening of trading on 10 October 2008. My sense at the time was that it would have been absolutely clear that Euroption's trading of its portfolio was over and that SEB would be calling the shots from then on."
"Wednesday 8th October
The client was called for Euro 3,822,856.15, and again there was no response to our call. Tavira were called again and advised us that the client could not meet the margin call.
Tavira were instructed to immediately commence cutting the clients positions.
The client cut
[details of trades]
Although these were cutting existing positions, the client had rolled a number of positions to position himself further down the market. New positions given up on the day were.
[details of trades]
Further increased volatility hurt the client on the overnight revaluation. As at COB Wednesday October 8th the client had negative free cash of Euro 57,002,822.39 and Equity balance of Euro 71,294,333.02 and a portfolio liquidation value of Euro 31,529,928.
Thursday October 9th
The client was called for Euro 57,002,882.39, the call was not responded to. Tavira were advised that SEB wanted naked positions cut aggressively. The market conditions were exceptionally volatile with liquidity hard to come by in any serious size.
We believed that Tavira were best placed to execute the closing trades, as they knew the clients, and the market makers. Executing close out instructions in these indexes via a fixed income desk, was considered to be too risky.
The client along with Tavira closed
[details of trades]
However, again a lot of these were closed by rolling positions further down the price curve and further out the time line.
The combo trades tied to the closures resulted in the following new positions
[details of various call and put options]
It was clear to us that the client was managing the position as opposed to cutting the position.
Although the client's actions improved the cash position slightly as at COB Thursday 9th October the client had a negative cash balance of Euro 26,173,887.52 and Equity balance of Euro 67,715,510 and a portfolio liquidation value of Euro 35,684,966.
Friday October 10th
Friday October 10th opened with stock markets in full rout mode. Heavy overnight losses in Asia transferred to large opening losses on the European indices and another significant volatility spike.
Mindful of the clients reluctance to close naked positions, and also aware of the rapidly reducing liquidation value of the client, Tavira were instructed to close only in accordance with SEB instructions.
The client was taken out of the loop and we commenced cutting positions ourselves. Again given Tavira's knowledge of the markets and the clients positions it was considered sensible to work the closing orders through their broking desk.
Although our aim was to liquidate the entire portfolio as quickly as possible we were mindful of market conditions. We concentrated on liquidating the closest to the money strikes, in either direction first.
By close of the markets we had closed
[details of various put options]
The vast majority of these we had managed to close naked, however in some cases we had to pick up a little upside exposure to get the trades away.
New positions taken on were
S1300 November Eurostox 2650 Calls (traded against some of the 2350 puts that were closed)
S2083 November FTSE 4600 Calls (traded against some of the 3600 puts that were closed)
Friday 10th October closed with record falls in most major European Stock Indices, and volatility at records levels.
Despite aggressive cutting of close to the money positions, the clients account with SEB Futures remained on call.
As at COB Friday 10th October the client had negative free cash of Euro 58,580,816.39, a positive equity balance of Euro 38,562,715, but portfolio liquidation value that was Euro 7,636,594 negative." (Emphasis supplied)
"… instructed to close only in accordance with SEB instructions. The client was taken out of the loop and we commenced cutting positions ourselves".
The memorandum was written at a time when the start date of the close out was not known to have any legal significance.
"… continued to close out put options (especially the Eurostoxx 2600 puts and FTSE 4000 and 4100 puts)".
Issue II: did SEB owe Euroption contractual or tortious duties to conduct SEB's close out of Euroption's positions with reasonable care and skill?
"In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill." [Emphasis supplied.]
i) advisory services regarding dealing in exchange traded futures and options (and securities where the securities transaction in question was ancillary to a transaction in futures or options); and
ii) settlement and exchange services whereby SEB acted as clearing broker for trades executed by or on behalf of Euroption.
These services were to be provided in the course of SEB's business and, accordingly, section 13 of the Act would have applied to the provision of them.
i) When a contract allocated only to one party a power to make decisions under the contract which might have an effect on both parties, a decision maker's discretion was 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 was that the discretion should not be abused. Although terms such as "reasonableness and unreasonableness" were also concepts deployed in the context of a duty to act rationally, those words were not being used in that context in the same sense as when speaking of a duty to take reasonable care.
ii) In the circumstances of the case, no term was to be implied to the effect that an objective valuation or one which complied with a duty to take reasonable care, was required. Such an implied term was not necessary or sufficiently certain.
"66. 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 was 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. Gloster J was therefore, in my judgment, right to put to Mr Millett in the passage cited at para 57 above the question whether a distinction should be made between the duty to take reasonable care and the duty not to be unreasonable in a Wednesbury sense; and Mr Millett was in my judgment wrong to submit that it made no difference which test you deployed. Lord Justice Laws 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. A similar distinction was highlighted by Potter LJ in para 51 of his judgment in Cantor Fitzgerald. For the sake of convenience and clarity I will therefore use the expression 'rationality' instead of Wednesbury-type reasonableness, and confine 'reasonableness' to the situation where the arbiter on entirely objective criteria is the court itself.
112. Thus in the specific context of a default and a forced -retention of designated assets, Standard is compelled by its buyer's default to retain what it never sought, save to the extent that it can immediately liquidate the assets on the termination date. The question whether it can sensibly in the interests of either party liquidate on the termination date is part of the complex uncertainties of this emergency situation. If it decides not to liquidate, it is forced to retain. If in that context it has to value the assets, why should it not be entitled to value them at a value which reflects the value of such assets to itself? It may dislike the risk they pose, in terms of the nature of the particular asset, its currency and/or nationality and so on. The decisions have to be taken very quickly, namely, 'on the date of termination' …. Once the asset is not immediately sold, the risk of retention is entirely transferred to Standard. In theory and sometimes in practice anything may happen the next day, or within the time in which a sale might become possible. The difficulty multiplies if the asset is relatively or entirely illiquid. Then there is no market price by which the value can be set on the relevant day. Who knows at what price the asset can be sold when a buyer appears? In such circumstances, Standard is entitled, it may be said, to consult its own interests, subject of course to the requirements of good faith and rationality. Those factors include both subjective and objective elements, but the essence of that construction is that the decision remains that of Standard, not of the market or the court, and that in coming to its assessment, subject to the limitations of good faith and rationality, it is entitled primarily to consult its own interests."
"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 [sic] 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."
"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  and . 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."
"… by asking whether Fluxo-Cane can demonstrate negligence, because unless it can, it will clearly be unable to demonstrate gross negligence. It is not suggested that this is the case of wilful default or fraud."
He then went on to consider whether the forced liquidation had been conducted negligently and concluded that it had not. At paragraph 65 he emphasised that it was important to resist the temptation of hindsight when judging the reasonableness of the broker's actions. He said:
"65. I have discussed the evidence in this respect in some detail already. There are two principal reasons why in my judgment Fluxo-Cane's submissions cannot be accepted. The first, I have already referred to, and is that it was not negligent to wait until after the meeting of 29 January 2008 in Sao Paulo before finally liquidating the account. On the contrary, this was (I am satisfied) a reasonable course to take. The other is that I am quite satisfied that Dr Fitzgerald is correct to express the view that it is only with the benefit of hindsight that it can be seen that liquidation during the period 22 to 25 January 2008 would have been most advantageous. The market might have risen, as Mr Levy thought it would, or Mr Garcia might have been proved correct in his conviction that the market would fall. I am satisfied that following the action taken by the Exchange, the liquidation of Fluxo-Cane's positions was going to be extremely problematic, as indeed both Mr Garcia and Mr Overlander foresaw. I very much doubt in these circumstances whether there is a single template by reference to which it can be said that liquidation was, or was not, negligent. Be that as it may, I am satisfied in this case that the criticisms made of Sucden's conduct of the liquidation are unfounded. The highest Fluxo-Cane puts the required standard is that Sucden was under a duty of care to act reasonably and to conduct the liquidation to the highest possible professional standards required in the circumstances. Even if that is correct as a matter of law, which is not something which I need to decide in this case, I do not consider that the duty has been breached. Negligence has not been established, let alone gross negligence."
"88. Further, under the new client classification that applied from 1 November 2007, FCO was not a retail client, but was either an eligible counterparty or a professional client. If an eligible counterparty, the exemption referred to above would have applied, and if a professional client, Marex's Order Execution Policy (which was incorporated by reference in the letter dated 8 October 2007) expressly provided that the duty of best execution owed by Marex to professional clients only applied 'where we execute orders on your behalf and where we receive and transmit client orders'. Since however, the close out of FCO's positions under clause 14.1 (or clause 15.1) was in Marex's discretion pursuant to its independent right to close out rather than pursuant to FCO's orders, it follows that the duty of best execution (or COBS 11.2.1) was inapplicable anyhow.
89. Indeed, the distinction between executing FCO's orders and exercising a right to close out upon FCO's default was, in my respectful judgment, rightly relied upon by Blair J in the Sucden proceedings in support of the general proposition that 'the COBS ... do not apply when the broker is liquidating the customer's account pursuant to an Event of Default ... because these rules apply when the broker is executing its customer's orders, which is not the case in a liquidation' (para. 53 of the Sucden judgment).
90. Such an approach is consistent with general market understanding, which is described by Dr Fitzgerald as follows:
'[The] general market understanding [is] that best execution and best interests obligations do not apply in a situation where a broker is liquidating positions on behalf of a client who is in a state of default'
'... Moreover, in my view, the requirements of best execution and bests interests would cease to apply if the client is deemed to be in default, when I believe the broker would have a wide discretion in limiting and closing down the set of positions, which could now constitute a direct risk exposure for the broker itself.'
91. Moreover, as I held in the Man proceedings, the application of COBS 2.1.1 (where there is no issue as to the honesty, fairness and professionalism of the broker, but a question as to whether he has acted in the client's best interests) is a difficult one:
[and he quoted paragraph 76 already cited above]
92. I conclude that the correct approach has to be that the only relevant standard applicable to Marex's close out of FCO's positions was that resulting from clause 15.1 of the Terms of Business (or clause 17.1 of the New Terms of Business), namely, that Marex would not be liable to FCO save in respect of losses 'arising directly from [Marex's] gross negligence, wilful default or fraud'. Since there is no suggestion by FCO that there was any wilful default or fraud on the part of Marex, the relevant question is whether Marex conducted the close out with 'gross negligence'.
93. Quite what the epithet 'gross' adds is not at all clear. For the moment it is sufficient to consider Marex whether has made out its case that it conducted the close out in a professional and competent manner. For this purpose, it is important to bear in mind that a broker's liquidation or close out of its client's positions when the client is in default is an exercise in risk reduction or elimination. The broker's primary interest in that situation is (rightly) to reduce or eliminate risk since any resulting losses could end up being borne by the broker. As Dr Fitzgerald put it:
'2.6 ... It needs to be recognised that futures and options brokers are not normally in the business of taking outright risk positions, since they generally have neither the market expertise nor the level of capital required to do so. ...
2.7 It is also worth pointing out that a broker left with client positions is generally in a more risky situation than a client, such as Fluxo, who is classified as a hedging client. Such a client has the potential to delivery physical commodities against its derivatives positions, and the derivatives losses if any will be offset by profits on the physical positions. The broker by contrast will only have one side of the client's position, and thus end up with a purely speculative position of someone else's choosing. In my view, a reasonable broker in such circumstances would be concerned to eliminate the risks as quickly as possible.'
94. It is important to resist the temptation of hindsight when judging the reasonableness of the broker's actions. Blair J was well aware of that temptation. As he put it at para. 65 of the Sucden judgment:
[which Steel J then quoted]
95. Indeed the natural reaction of a broker, anxious to mitigate his exposure (and indeed the liability of his client) would be to close out the position quickly, liquidating as much as possible, as soon as possible, even if in the event the exposure was enhanced. This is precisely what Marex did. That such was the only sensible course is reinforced by the following considerations:
i) the persistent failure on the part of Mr Garcia to pay margin or give orders to buy;
ii) the extraordinary and unprecedented intervention of ICE in respect of FCO's positions;
iii) the severe impact that such intervention had had on the market on 16 January 2008;
iv) the continuing and significant upward trend in prices throughout 17 January 2008 (rising from 11.77 to 12.57 ct/lb between 6.30 a.m. and 6.30 p.m.);
v) the sheer number of brokers who held FCO's positions and were affected by the problems of unpaid margin and need to reduce positions;
vi) the uncertainty as to whether any co-ordinated way forward would be possible, failing which mass liquidation was likely to follow;
vii) the general uncertainty, speculation and panic that was rife throughout the market at that time.
96. The liquidation process was handled by the joint Heads of Agriculture at Marex. They were senior members of Marex's management with a long history of experience in the commodities markets. The proposition that people of that experience and calibre grossly (or even negligently) mismanaged the close out is difficult to conceive, all the more so in circumstances in which the broker's interest in risk reduction or elimination in this context would be expected to be aligned with the client's interest. I reject the allegation."
"The House of Lords has warned against the danger of extending the ambit of negligence so as to supplant or supplement other torts, contractual obligations, statutory duties or equitable rules in relation to every kind of damage including economic loss: see C.B.S. Songs Ltd. v Amstrad Consumer Electronics Plc  AC 1013, 1059; Caparo Industries Plc v Dickman  2 AC 605 and Murphy v Brentwood District Council  1 AC 398. … There will always be expert witnesses ready to testify with the benefit of hindsight that they would have acted differently and fared better."
i) This was not a case where the basis of the relationship involved Euroption relying on SEB to make sensible trading decisions with care and skill. Euroption was the specialist options trader and had responsibility (in the usual course of events) for making all trading decisions.
ii) Although SEB acted voluntarily, it did so only because of the difficult position it had been put in by Euroption.
iii) It was within Euroption's power to avoid SEB taking over by complying with its obligations to make margin payments, but Euroption did not take the steps which would have allowed it to retain complete control over the trading decisions.
iv) Euroption was in the business of taking high risks for high rewards. Euroption ought to have made sure that it was in a position to manage the risks. By contrast, SEB was providing an administrative clearing service that did not involve taking such risks.
v) The parties expressly agreed that, in circumstances where Euroption failed to pay margin, SEB could act to protect itself by closing out Euroption's positions. To hold that, in doing so, SEB assumed a responsibility to Euroption, would, in effect, be to turn that agreement on its head.
vi) On Euroption's case, the result would be that Euroption could, by defaulting on its margin, place the responsibility for ensuring the careful management of its portfolio in a highly volatile market onto SEB's shoulders. This was not something that Euroption had contracted for. If Euroption had contracted for SEB to assume such responsibility, the contract would have looked very different.
vii) The imposition of a duty of care would be inconsistent with the nature of a clearing broker's right in a close-out context to take whatever steps it considers appropriate in order to protect its own interests.
Issue III - Claim 2: were the combination trades: (a) in breach of the Mandate as being in excess of SEB's contractual authority; and/or (b) in breach of its duty to take reasonable care or act rationally?
i) the Set H trades (as described on the chart) which involved the purchase of 1,300 Eurostoxx November 2350 puts and the sale of 1,300 Eurostoxx November 2650 calls; and
ii) the Set J trades (as described on the chart) which involved the purchase of 2,083 FTSE 100 November 3600 puts and the sale of 2,083 FTSE 100 November 4600 calls;
"We're covering 37 Puts, we are trying to work a combo on the 36 Puts against 46 Calls, and covering the rest of the ESX. The market is so thin it is very very difficult."
Mr. Scattolon replied, "thank you please work all the combos you can". Mr. Scattolon confirmed in cross-examination that he wanted a combination trade to be done in relation to the 3600 puts and the 4600 calls. A further 1,683 lots were then sold with Mr. Scattolon's express authorisation.
"… was in the dark about precisely what was going on at the time (SEB not having given notice to Euroption of the close out) and was interested (unlike SEB) in rolling out the strike prices so that the portfolio could survive the period of volatility"
and therefore could not be said to have authorised the trades or waived any breach of duty on SEB's part; and that Mr. Martin was negligent/irrational in accepting these trades without demur in circumstances where the combination trades "substantially increased the exposure of the portfolio to upward movements in the market"; see Particulars of Claim, paragraph 13.1.
"… I've now got to get rid of those 46 … I've now got to get rid of 4600 calls as well. Look I don't want any risk on this … account over the weekend."
Mr. Martin therefore made it absolutely clear that he wished to exit these new calls (and indeed all remaining positions) as soon as possible.
Issue IV: Claim 3: Was SEB in breach of any duty of care and/or to act rationally by virtue of delay in closing out certain short calls?
i) 200 November 2650 Eurostoxx calls were not closed out (i.e. bought back) until the afternoon of 13 October, even though the rest of the position (1100 lots) had been closed out early on 13 October;
ii) 1,760 October 3800 CAC40 calls were not closed out (i.e. bought back) until 13 October, when they should have been closed out on 10 October;
iii) 2,000 November 4200 CAC40 calls were not closed out (i.e. bought back) until 13 October, when they should have been closed out on 10 October;
iv) 2,725 October 4800 FTSE 100 calls, 2,200 October 4900 FTSE 100 calls and 11,000 October 5200 FTSE 100 calls were not closed out (i.e. bought back) until 14 October 2008, when they should have been closed out on 10 October.
i) Mr. Martin was a wholly unsuitable person to conduct or supervise the close out because, in particular, he did not have an advanced understanding of "the Greeks";
ii) SEB failed adequately to consider and discuss the possibility of selling the entire portfolio to a single market maker or equity prop (i.e. proprietary) desk;
iii) if closing trades naked was not possible, SEB ought to have given more consideration to the possibility of delta hedging the portfolio by selling futures;
iv) in the event of it not having been possible to close options naked, SEB ought to have sought to carry out "Category 2" trades so as to create put and call spreads;
v) SEB should not have used or relied upon TSL as the execution broker for the close out.
"I think these close-outs, actually, if I can just make a general point, are not done in this kind of scientific modelling way that you're trying to imply. I think the main point is, as I've said, to get rid of positions quickly."
Issue V: What is the quantum of Euroption's direct claim for damages under Claims 2 and 3?
Issue VI: does Euroption have any claim for loss of investment opportunity damages?