Jersey Unreported Judgments

royal court

(Samedi Division)

14th July 1999

Order of Justice seeking damages for money invested in Bonds by Defendant for Plaintiffs.  All the money was lost when company went into receivership.

Advocate A. Hoy for the Plaintiffs

            Advocate T.J. Le Cocq for the Defendant

judgment

the deputy bailiff:

BACKGROUND

1. This Order of Justice is brought by Michael Matthew Godfray Voisin and Abacus (C.I.) Limited, the Trustees of the Mrs. W. M. I. Prior Settlement.  That trust was set up by an irrevocable declaration of trust dated 12th April 1972 between Winifred Mary Isobel Prior née Jackson, the widow of Commander Redvers Michael Prior and the plaintiffs.
2. Mr. Peter John Morgan is a chartered accountant, a director of Abacus and a partner since 1980. Mr. Morgan told us that this was in every sense an unusual trust operation.  The unusual operation came about in this way.
3. Mr. Stanley Butterworth came to Jersey in about 1971 - 1972.  He is 87 years old and his evidence was of great assistance to us because it was lucid, logical and in our view, totally trustworthy.  After he was demobilized, Mr. Butterworth ran his own engineering company until 1965 when he sold 75% of it.  He remained with the company for four years then gained some City experience.  He had limited experience of the Stock Exchange but his next door neighbour in Malta was a jobber and he gained some experience of converting his assets into bonds, gilts and equities.  Mr. Butterworth is married to one of the beneficiaries and he came to live in Jersey in about 1987 when his wife asked him to keep an eye on the trust.  The trust consisted of some 15% bonds and gilts, bank deposits, equities and local shares and its purpose at that time was to produce some income for Mrs. Prior, his mother-in-law, but mainly to provide capital growth.  After the death of Mrs. Prior the requirement changed.  The four beneficiaries wanted income and he persuaded the trustees on the basis of that new requirement to sell off local investments and invest in high yielding income bonds.  The objective was to have high income with security and with a capital gain, if possible.  After the local shares were sold the trust purchased bonds and made cash deposits.  The bonds were recommended by a director of the then brokers to the trust, the well known local stockbroking firm of Le Masurier, James & Chinn.  It was there that Mr. Butterworth began a very long standing business relationship with Mr. Anthony  Hillsden.  This relationship developed and the trust prospered.  Mr. Butterworth did not mind how many bonds were sold or how much commission the broker earned as long as the trust made money.  In 1981 when there was a merger, Mr. Hillsden left Le Masurier James & Chinn but Mr. Butterworth and his wife had developed such a good relationship with him - he spoke of complete faith and trust - that when he went to Shepherds, Mr. Butterworth was able very easily to convince the trust that it should move its account.  Shepherds advertised themselves at the time as specialists in Eurobonds.As the relationship developed between Mr. Butterworth and Mr. Hillsden, so the method of working developed.  There was a weekly valuation, they spoke together most days of the week and sometimes more than once.  Then Shepherds was bought by Matheson Securities (Channel Islands) Limited and again the relationship continued because Mr. Hillsden said that he was very happy with Mathesons as he had better information available to him from an  international company.  The account maintained by Mathesons in respect of the trust’s portfolio of investments was known as “Abacus Nominees Limited P.197”.  Mr. Butterworth and his wife also had a personal portfolio.  As Mr. Morgan explained to us, Mr. Butterworth had a consultancy rôle.  He was able to give what Mr. Morgan described as “tender loving care” to the trust business.  It was not a situation that Mr. Morgan had come across before but as he quite candidly told us, he could never have devoted as much time professionally to the interests of this trust as did Mr. Butterworth in his daily conversations with Mr. Hillsden.   Basically, this was a decision making exercise between Mr. Butterworth and Mr. Hillsden and, subject always to the trustees’ approval, matters proceeded amicably and profitably.  Nothing happened in the development of this particular trust without input from Mr. Butterworth and sometimes there was background information provided to the trust by Mr. Hillsden at the time when he might suggest investment or a switch.  Mr. Morgan, from his wide experience, was able to say that he found Mr. Butterworth financially aware, albeit slightly pessimistic and he was clearly not a man to act rashly.  He made his decisions in a measured way.  What is perhaps extraordinary about this relationship between Mr. Butterworth and Mr. Hillsden is that despite this action for negligence against Mathesons,  Mr. Butterworth bears no personal animosity towards Mr. Hillsden and does not hold him responsible for the loss that the trust has sustained.  Indeed, Mr. Hillsden still acts for the trust.  We find that first view understandable in view of their special relationship but the second view is not entirely comprehensible in law.

   THE DUTY OF A STOCKBROKER:

4. Neither party dissented from the view of the law that this Court expressed in Dixon v. Jefferson Seal (1997) JLR 205 at 209:

   “in regard to its customer a stockbroker’s duty lies primarily in contract and stockbrokers are liable if they fail to use that skill and diligence which a reasonably competent and careful stockbroker would exercise  In Eckersley & Ors. v. Binnie & Ors. (1988) 18 Con LR1 at 99 Con. the Court of Appeal, at 79, said this:-

                          “In defining the duty of the first defendants the judge correctly ruled that the standard of care required was that of reasonably competent engineers specializing in the design of water transfer systems, including tunnels, applying the standards appropriate at the time of design, construction and operation.  The law requires of a professional man that he live up in practice to the standard of the ordinary skilled man exercising and professing to have his special professional skill.  He need not possess the highest expert skill;  it is enough if he exercises the ordinary skill of an ordinary competent man exercising his particular art.  So much is established by Bolam v. Friern Hospital Management Committee [1957] 1 WLR 582, which has been applied and approved time without number.

   “no matter what profession it may be, the common law does not impose on those who practice it any liability for damage resulting from what in the result turn out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made.”

   (See Saif Ali v. Sydney Mitchell & Co [1978[ 3 All ER 1033 at 1043, [1980] AC 198 at 220, per  Lord Diplock)”.

              It is stated in Charlesworth & Percy on Negligence (9th Ed’n 1997)  8 - 209 that “the stockbroker’s duty includes that of ascertaining with reasonably accuracy facts relating to any particular transaction and transmitting them to the customer.  If the latter suffers loss by the stockbroker’s breach of duty it matters not whether the stockbroker had acted innocently or fraudulently”.  Of course since the decision in Hedley Byrne & Co. ltd. v. Heller & Partners (1964) AC 465, a stockbroker also owes a duty in tort to his customer even in regard to a third party with whom he has no contractual relationship.  The rule is a strict one.  If a stockbroker gives free but negligent advice or material information on request to a client then if he believes that that advice is likely to be acted upon and does not issue a disclaimer of responsibility he may also be liable should loss or damage be suffered as a result of his negligence.” 

   We must immediately say that while Dixon v. Jefferson Seal also deals with the collapse of the Confederation Life Bond and its consequences for three investors, the background to this case is quite different and whilst some of the factual matrix applies now as it did then, the relationship between the parties is so different that we do not need to visit the earlier case in this judgment.

5. The objectives of the trust were very well understood by Mr. Hillsden.  That is not disputed by the plaintiff.  The investment objective, as explained to us by Mr. Butterworth in his measured and helpful evidence was to maximize income subject to the protection of capital and to achieve capital growth where possible subject to maintaining the income level within the portfolio.

   We speak of Mr. Hillsden because, somewhat surprisingly, there was a division of interests within Mathesons.  We do not find that it was material.  Mr. Hillsden had a long experience of stockbroking in Jersey and he worked at Mathesons with what he described as “a team”.  Mr. Nick Marston was a member of that small team that had come from Shepherds but Mr. Hillsden was in charge.  The head of Mathesons’ primary bond desk was Mr. Miguel Arraya.  He has now left Mathesons to join a leading clearing bank in Jersey.  An interesting facet of this case is that Mr. Arraya and his father held, and lost, their bond holding in Confederation Life.  In total Matheson clients held some £800,000 worth of this Bond.  We have no doubt but that while Mr. Hillsden had his own  clients, numbered amongst which were P.197 and Mr. Butterworth, he would have conferred with Mr. Arraya and followed his advice if a decision of moment were required to be taken.

   No formal meetings were held but as Mr. Marston, a stockbroker since 1987, told us, there was plenty of time to talk to the bond desk (at which Mr. Arraya worked) and because the bond desk had Bloomberg screens, he would have expected the bond desk (or Mr. Arraya) to keep him and Mr. Hillsden informed of any matter that required particular attention.

6. Let us say immediately that there is no dispute about the ethical standards of any of the employees of Mathesons.  Mr. Arraya did not sell his own holding of Confederation Bonds (some £26,000) nor the holding of his father (some £36,000).  He told us it would have been unethical to have treated his family holdings any differently from those of his clients’ holdings.  We fully accept that he acted (as did all the Matheson brokers who gave evidence before us) with complete honesty.  That, of course, does not assist if they acted, as the plaintiffs assert, negligently.
7. In order to select bonds suitable for the requirements of their clients, Mr. Arraya said that Mathesons would use the Bloomberg screen to see which bonds were available and look at publications, were they from market suppliers or the International Securities Market Association itself (the ISMA guide).  This would give them a number of factors including the maturity and yield, the liquidity (the issue size and the number of reporting dealers) the risk tolerance which would be based on the rating, and the maturity of the bond.  He had on his desk the Midland Global Marketing Report to which we shall refer later.  His desk made on average four hundred calls a day to the market makers.  Mathesons would use the Bloomberg screen to access general as well as specific news stories.  These news stories flashed past all day in, on average, a five second window.  They were, however, stored and there was an index available if information on specific bonds were required.

   Nowadays, much more use is made of E-mail facilities and of  the Bloomberg system.

8. Mr. Arraya wrote a document recommending a switch from a holding of Norsk Hydro.  He had obtained the information from the market supplier.  It was recommended by BZW.  Essentially the basis of the switch (with much more background information) was that Norsk Hydro’s credit rating was placed on negative credit by Standard & Poors with negative implications.  The note is fully detailed and contains these two sentences:-

   “The switch into Confederation Life provides an improvement in rating together with an increase in yield by a combination of a slightly improved coupon and a reduction in price” and

              “We have felt it prudent to reduce exposure to Norsk Hydro in the event of a downgrade to “BBB” category”. (that is, outside the investment grade).

   Several clients of Matheson who held Norsk Hydro switched. There is no dispute that at the time of purchase Confederation Life was appropriate for the plaintiffs’ portfolio when it was purchased in March 1994.  The recommendation was accompanied by the information on Confederation Life supplied for the switch from Norsk Hydro.  Mr. Butterworth switched (on the same information) from Britannia Building Society.

   We must recall that P.197 was not known to Mr. Arraya and he never spoke to Mr. Butterworth.  He would have been unaware of his existence.  The desk that Mr. Hillsden worked from serviced his own clients and he was expected to come up with his own recommendations to his clients and to monitor but there was no distrust or animosity between the two desks.  Mr. Arraya was always available to Mr. Hillsden.  The situation was unusual but not fatal.

   THE EXPERTS

9. Mr. Peter John Leahy was called by Mathesons as an expert.  He is the owner and director of a financial training consultancy company specializing in bond markets. His area of specialty is bond markets.  He has been involved with these markets since 1982, for the most part as a seller of bonds responsible for institutional customer relationships at firms such as JP Morgan, Kleinwort Benson and Bear Sterns, although he has also held management positions.  He was until 1995 a general registered representative authorised by the Securities and Futures Association.  Prior to the structural changes to the Stock Exchange in 1986 he was a stockbroker specializing in bonds at the then prominent firm, de Zoete & Bevan.  He passed all of the core Stock Exchange exams and was authorised to act as a stockbroker.  His company now trains, amongst others, employees of such companies as Citibank, Credit Suisse, Nomura, Lehman Brothers and HSBC in relation to bond markets and bond sales.  He personally delivers the bond market component of the Securities and Futures Authority exam training courses given by his company.  He is from time to time a consultant lecturer at the City University Business School and lectures on matters related to bond markets. In addition to his training activities he is frequently called in as an expert by financial institutions to assist in complex or problematic bond transactions.
10. Mr. Stephen Scholl was called by the plaintiffs as their expert.  He is a stockbroker, a former member of the London Stock Exchange, a current member of the Securities Institute, a holder of the Security Industry Diploma and a member of the Academy of Experts.  He has practiced in stockbroking since 1969.  His work over the last 30 years has been varied, advising a large number of different types of investors, including both private investors and financial institutions.  Since 1983, he has lived and worked in the Channel Islands and during that period, he has gained particular experience of the investment requirements and practices of Channel Island investors.  He encountered Eurobonds on a daily basis when he established Rowan and Company in Guernsey in the late eighties.

    Both these experts have provided singular assistance to the Court.

    THE INITIAL PURCHASE

11. Mr. Scholl made it clear under cross examination that he had no problem with the initial purchase. 

    Mr. Butterworth was not a tyro in the field of Eurobonds.  He accepted that the purchase was appropriate at the time.  He of course questioned the standing of Confederation Life.  He was told, quite rightly, that they were one of the largest insurance companies in Canada and of long standing in that community.  Mr. Butterworth confessed to what he termed “a slight unease” and he questioned Mr. Hillsden more closely, particularly as the trust was to purchase £212,000 of the Confederation Life bond.  Mr. Butterworth, when questioned, knew what a subordinated bond meant (“We would be last in line for payment”)  and he was perfectly at ease with the information with which he had been supplied, particularly when told that neither Mr. Hillsden nor Mr. Marston had any qualms.  It is quite clear that their expression of belief in the bond was genuine.  The bond, although subordinated  in a mutual company, had, on the face of it, assets of C$ 19.2 billion.

    On 4th March P.197 and Mr. Morgan  were contacted by Mr. Hillsden, on the authority of Mr. Butterworth, and a switch was made.  £200,000 Britannia Building Society, 10.5% 2.3.2000 bonds were sold and the proceeds reinvested to purchase £213,000 Confederation 97/8% 3.3.2003 bonds.

    We heard much evidence of ratings but we would here observe that from time to time, Mr. Butterworth would switch into an unrated bond (such as the Fisons bond and the Britannia Building Society bond) because those bonds were held by “household names”.

12. The evidence of the witnesses of fact has left us in no doubt that because capital was preserved and income maximized the trust (apart from loss of the Confederation Life bond) had no complaints against Mathesons.  Indeed, Mathesons retained the portfolio for several years after the crash of Confederation Life because the advice given had been, in the words of Mr. Morgan of Abacus “more than satisfactory, apart from the one holding that had been wiped out.”

    The evidence of the witnesses of fact has left us in no doubt that because capital was preserved and income maximized the trust (apart from loss of the Confederation Life bond) had no complaints against Mathesons.  Indeed, Mathesons retained the portfolio for several years after the crash of Confederation Life because the advice given had been, in the words of Mr. Morgan of Abacus “more than satisfactory, apart from the one holding that had been wiped out.”

13. We agree with the defendants that Mr. Butterworth had purchased A-rated bonds.  The HSBC bond is an example.  But HSBC was a “household name”.  The Bank of Greece bond was rejected.  It was out of character and “rather dodgy”.  The name of the company, and the income yield was of prime importance to Mr. Butterworth, but we believe that any bond that looked problematic would not have been purchased.

    We say that in acknowledgment of the words of Cummings or McWilliams v. Sir William Arrol & Co. Ltd. and Another (1962) 1 All ER 623 at 634 where the House of Lords said:

    “But here the question is not what the deceased did but what he would have done.  That is a matter incapable of direct proof;  it must be a matter of inference...   A man’s actions in the past may well be a safer guide than his own forecast of his actions in the future.”

14. We accept all that the plaintiffs say about the anomalies in the portfolio but we have formed an impression of Mr. Butterworth as a man of great integrity who had no reason to remain with a bond that had any problem with its cash stability.

    Much time was spent asking Mr. Butterworth whether he would have purchased an A-rated bond.  Despite his reluctance to answer the question, we believe that he would have purchased a bond even if it had been rated at an A-grade while the information given by way of background remained the same and where it was recommended by Mr. Hillsden.

    WAS THERE APPROPRIATE MONITORING?

15. We must first examine whether the defendant had in place in 1994 a system appropriate to its duty of care  to inform Mr. Butterworth.  Advocate Hoy put it this way.  He said that the stockbroker has a duty to monitor and a duty to inform.  The whole argument of the plaintiffs is based on a foundation that there was no system in place to allow for proper monitoring.

    The Securities and Futures Authority rule book says this at 5.31:-

    “A firm which acts as (a) an investment manager for a private customer or (b) a discretionary investment manager for a non-private customer must ensure that the customer’s portfolio account remains suitable having regard to the facts disclosed by that customer or other relevant facts about the customer of which the firm is or reasonably should be aware.”

    The important word in that rule is the word “remains” because that implies a continuing obligation.  That is what was said by the Court in Dixon v. Jefferson Seal.

    “The defendant owed the plaintiffs a duty to act in their best interests, a duty to exercise the standard of skill and care of a competent and prudent investment adviser and the duty to keep the plaintiffs advised of all material information and developments which might have a material bearing on the investment held by the plaintiffs.”

16. Mr. Hillsden (for it was “his” desk at Mathesons that dealt with P.197) said that his first line of monitoring was the price both absolute and relative to the gilt market.  He used the weekly valuation report for the portfolio as part of his monitoring service and, of course, discussed this regularly with Mr. Butterworth.  He monitored the Press and talked to the market on a frequent basis.  He communicated, when necessary, with the other main bond desk run by Mr. Arraya.
17. Regarding individual bonds the daily information that was relied on was the Midland Global Market Report (“The Midland Report”).  That was received each morning and used throughout the day.

    This Midland Report was updated each day and was received by some 3,000 clients of the Midland Bank each day.  It was, according to Mr. Leahy, one of the three or four most authoritative and influential companies operating in the Sterling Eurobond Market.  Although Mr. Scholl expressed the view in his initial report that it was not a sufficient source he was, as he candidly admitted in evidence, not correct because although he had cited lack of yield spread information, that, in fact, is in the report.  Mr. Scholl was not aware of the Midland Report in 1994 and, for that reason, his firm did not subscribe to it.  He was able to say in evidence that it was in fact a better document than he had originally thought.  Mr. Hillsdon also received the ISMA guide, which was a weekly publication.

18. There are two extraordinary matters here. Between issue and suspension, the Standard & Poor’s credit agency rating of Confederation Life went from A+ to A on 10th June 1993, from A to A- on 14th April 1994 and then from A- to BBB- on 5th August 1994.

    The Midland report, on which so much reliance was placed, was in error but bizarrely only in relation to Confederation life.  Throughout the period under review, it showed Confederation Life as having a constant credit rating of A+.

    The ISMA guide only reflected the Standard & Poor’s rating, which it showed as A+ until 9th August 1994 when it shows an S & P credit rating of BB- and, on 9th August, a Moody’s rating of BBB-.

    There is nothing in the system used by Mathesons that gives any indication of a problem in the market and between March 1993 until 5th August 1994, the bond’s monitored market performance had been satisfactory with most trading occurring within a narrow band around 50 bps spread over benchmark gilt yields.

    The dealers at Mathesons spoke regularly to the market makers and in particular, to BZW the lead market maker.

19. There is one incident which is of importance.  On 16th March 1994,  the Bloomberg screen ran a newsflash: “S & P puts Confederation Life, units ratings on watch neg.”  If that had been researched the screen would have revealed a news story that starts with these words “S & P places its double “A” minus claims paying ability rating of Confederation Life Insurance Co. and its U.S. subsidiary  Confederation Life Insurance and annuity company on credit watch with negative implications.  S & P also places its ratings of this Canadian company and its related entities on Credit watch with negative implications.  The credit watch placements reflect S & P’s expectation for lower earnings and capitalisation, largely due to significant provisions for investment losses in the company’s C$ 8.5 billion consolidated mortgage investment portfolio.  The company is actively involved in negotiations that would provide a sizable capital infusion as well as a possible strategic affiliation.”

    Of that news item, Mr. Arraya (who had a personal holding and had advised his father to purchase) said that if he had seen it he would have telephoned his clients to inform them. His advice would have been to consider selling.

20. What is surprising to us is that nothing whatsoever was said to anyone at Mathesons about Confederation Life by BZW.  Mr Leahy said on more than one occasion that he was of the opinion that Mathesons were let down by the market makers.  Mr. Arraya (or Mr Hillsden or Mr. Marston) should have been told that Confederation life had been placed on credit watch with negative implications.   Had Mr. Arraya been told, we have no doubt that he would have informed the other desk.  He would certainly not have put his own family interests before those of his clients and the fact that he would have informed his father again leaves us in no doubt but that he would have advised his fellow bond dealers to advise.  There is no doubt in the expert’s mind.  There is no doubt in our minds.  The market maker should have passed this information on. Why it failed to do is not for us to conjecture.  A market maker is aware that a stockbroker has clients, some of whom might have special requirements and, according to Mr. Leahy, Mathesons could have expected to receive some indication of a wind of change from his market makers.

    As we have said, Mr. Arraya told us in evidence that had he seen that news flash, he told the Court that he would certainly have contacted his clients in keeping with the rationale behind the original switch from Norsk Hydro.  The rationale there was to switch out of a bond with a negative outlook.

    Of course, had that news flash been seen as it flashed before him, it would, at that point, have been possible to flesh out the background with the other stories held in the memory bank of the Bloomberg screen.  Even if Mr. Hillsden and Mr. Marston had gone against the advice of Mr. Arraya (for we have no doubt he would have told them of his intentions), it becomes at that point impossible for us to believe that Mr. Hillsden would not have informed Mr. Butterworth, even if he would then have advised him not to sell.  They had a special relationship.  The plaintiff quite correctly points out that Mr. Hillsden never spoke to Mr. Butterworth about bonds once purchased unless in the context of a switch recommendation and Mr. Butterworth never requested information concerning bonds already purchased unless allied to a switch.  Mr Hillsden even went so far as to say that when Mr. Butterworth purchased Fisons (an unrated but household name bond), he did so partially in the knowledge that it was developing an asthma drug.  What would have happened if, perchance, the asthma drug had failed?  Mr. Hillsden doubted that, after enquiry, he would have passed on the information unless it might have had an adverse effect on the price.  In hindsight, he would not have told Mr. Butterworth, even had he known about the credit watch.  Mr. Marston agreed.  The downgrading and the placing on credit watch with negative implications was not seriously worrying news.  It certainly did not disturb the market, the price or the spread.

21. There might then, in our view, have been a problem in Mathesons’ office.  One broker on the lead bond desk would have informed clients;  another on the other desk might not.  There was no Chinese wall.  We just do not believe that if Mr. Arraya had made his decision for his clients to sell the others would not have followed suit even if only to inform in accordance with their legal obligation.  We must, in the context of this deliberation, recall that Mr. Butterworth told us that had he known that the “Warburg bond” had gone on credit watch (as it did) it would not have concerned him.  Mr. Butterworth explained that to us.   S.G.Warburg had been a pillar of the City for many years.  His first question on Confederation Life before he agreed to purchase the bond was to ask who on earth they were.  Constantly, Mr. Butterworth spoke of his “special relationship” and told us that his agreement was for Mr. Hillsden to tell him of anything that affected the valuation.

    On those facts, we shall divide this judgment into the period up to 5th August 1994 and the short period thereafter when Mathesons were, at last, in possession of the facts.

22. Mr. Butterworth was telephoned by a “nervous” Mr. Hillsden on 12th August.  It was then that he learned of a problem with Confederation Life.  He learned that the bond had been suspended by the regulator of Canadian Insurance and being forced to pay off claims.  He was told it could not be sold.  His reaction, after assimilating the view, was decisive  Within five minutes, he had instructed Mr. Hillsden to sell North American Cap. Corp.  He told him to sell without wasting time by advising Abacus.  Within ten minutes, he had sold his own and his wife’s holding.  The sales were made at a loss, but the fall continued in the market after the trust’s and the personal holdings had been sold. 
23. Mr. Butterworth was understandably shaken by the news and needed time to consider the matter.  He rang Mr. Hillsden at home on Saturday 13th August.  There was a chat.  He was told about trouble with down grading, about the proposed Great West merger, about several Canadian insurers clubbing together to rescue.  He asked why he had not been told about this at the time.  There was a pause.  Mr. Hillsden said something to the effect that there had been a discussion at Mathesons and they had decided not to tell.  We do not believe that it was made clear to Mr. Butterworth that all that information had only been made available to Mathesons within the last few days.  Mr. Butterworth was annoyed and threatened legal action against Mathesons.   He was, from his own viewpoint, entitled to be so.  On 2nd August, he had had a face to face meeting with Mr. Hillsden over a period in excess of an hour.  Not a word had he heard of the problems on Confederation life.  What he did not understand was the reason for that was that no one at Mathesons had any idea that these event had occurred until 8th August.
24. Mr. Scholl says in his report that it is unlikely that the down-grading of the ratings alone would have caused investment managers to reconsider their investment policies because the bond maintained its relative market value throughout the events up to 5th August.
25. Mr. Scholl, in his report, says that, prior to 5th August 1994, if Mathesons were not aware of the matters affecting the bond to which we have referred, then in his opinion, they were failing in their duty to assess and filter information and were negligent.  We cannot agree.  There was in place a system.  It was not perfect.  It has been improved upon.  It was in our view adequate.  Mathesons were let down by an error (the only one that has come to light) in the Midland Global Marketing Report.  They were let down by BZW who surely should have given them some indication of a problem even though the entire market worked on the blind assumption that “this bond could not fail.”  It was reasonable for Mathesons to take proper reference to the feel of the market and which in their reasonable judgment were the tools of their trade.
26. The news broke that there were problems on 5th August.   Mathesons were taken by surprise.  On Monday 8th August, Mathesons were fully alerted to the problem.  Time was limited.  In effect they had only until 15th August when Confederation Life finally went into liquidation.  After the 8th August, the market was “basis only”.  There were no bids.  Mr. Arraya became aware of the problem at about 8.30 a.m. on 8th August. 

    Mr. Arraya, immediately he heard the news, checked carefully by telephoning BZW and then all the other reporting market makers to see if a price was being quoted in order to sell the bond.  There were no firm prices.  We are satisfied that there was no possibility of selling the bond.  We must not forget Mr. Arraya told us that “he was hungry to sell”.

27. On 9th August BZW issued a report in connection with the downgrading which concluded that “while the situation remains unclear (as the rating reflects) and until further information is forthcoming, we would expect the Bonds to remain under a cloud”.
28. On 9th August, Mr. Marston spoke to a credit analyst at S.G.Warburgs, one of the market makers of the bond.  He made a note of the conversation.  It reads:-

    “Following the Financial Times headline of the 8th August 1994 which reads “Insurers form Group to Rescue Confederation Life” there has been concern about the credit quality and paying ability of Canada’s fourth largest insurer.  Originally, Great Western whose parent company is Power Corp (market capitalisation C$2.4 billion) was going to inject Tier one capital of C$225 million with further liquidity promises amounting to a total of C$400 million.  However, after due diligence Great Western anticipated that Confederation Life would need around C$600 million total support and therefore have invited about 10 other companies to inject the additional capital.

    Andy felt that the credit down-grades was largely due to the fact that Great Western would not effectively have majority control of Confederation Life should these other companies be involved, although bond holders would benefit from an additional C$200 million injection and that capital ratios would largely be unaffected.  He felt that Confederation Life’s paying ability was reasonably secure and that there should not be too much more bad news.  As Great Western had carried out the basic ground work of due diligence, there was likely to be an outcome of the bail out within the next two weeks.

    Bond should note that the offer price on the Confederation Life bonds has remained unchanged although the spread has widened with the corresponding bond falling to 5 points below the offer.  This would possibly suggest that market makers were trying to take on bonds from distressed sellers at what they consider attractive levels.”

29. Mr. Arraya again checked carefully with the market makers on 10th August.

    There was active and positive encouragement from the market. There was a briefing note from Richard Bird, a highly paid analyst at BZW who felt that Confederation Life was suffering a short term reduction in capital.  On 11th August the Financial Times published an article concerning the sale of the U.K. arm of Confederation Life to raise capital. The following day the bond was dead in the water.

30. In Allied Naples v. Simmons and Simmons   (1995) 4 All ER 907CA at 915:-

    “Although the question is a hypothetical one, it is well established that the plaintiff must prove on the balance of probability that he would have taken action to obtain the benefit or avoid the risk”.

31. We remain convinced that there was no action that Matheson could have taken.  There was a sale to BZW by Guinness Flight after 8th August.  It was a modest sale of £250,000.  The “clout” (as Mr. Leahy put it) of Guinness Flight far outweighs the relatively modest standing of Mathesons.  In any event, because of the impossibility of selling Matheson’s small holding in relation to the whole market (the defendant’s total exposure was £859,000) there can, in our view, be no causal link between the failure to inform and the loss sustained.
32. In his conclusion, Mr. Scholl says this in his report:-

    “As at 8th August 1994 (and the succeeding days up to 11th August 1994) I think that the worst case envisaged by stockbrokers would have been that the price of the Bond would find a new trading level.  On the information that was then available I do not think that anyone in the market could have foreseen that Confederation life was about to collapse.  In these circumstances I would have taken the view that the most prudent course of action would have been to wait for a short period (possibly a week or two) to allow the market to stabilise, before any selling was attempted.  Further, looking at the matter on 8th August 1994 and the following few days, I would have been concerned that advising clients generally to sell during the week of 8th August 1994 (prior to 11th August 1994) could have had potentially prejudicial effects.  To have attempted to sell a substantial quantity of the Bond into an unsettled market would have depressed the price further and (even assuming that the trades could be completed) could well have resulted in a greater loss being incurred than might have been the case if selling had been delayed until the market had stabilised).”

33. That is in fact not the true issue.  There was no sale for Confederation Life.  We therefore do not need to delve deeper.  Mr. Butterworth’s hands were tied and like many others he was overwhelmed by the approaching storm and his investment in Confederation life was lost.
34. Accordingly, for the reasons stated, we cannot find that negligence is proved and we find for the defendant.

Authorities

Dixon -v- Jefferson Seal (1997) JLR 205.

McWilliams -v- Sir William Arrol & Co., Ltd (1962) 1 All ER 623.

Allied Naples -v- Simmons & Simmons (1995) 4 All ER 907 C.A.

Barnett -v- Chelsea & Kensington Hospital Management Committee [1968] 1 All ER 1068.

Wilsher -v- Essex Area Health Authority [1986] 3 All ER 801.

Mortgage Express, Ltd -v- Bowerman & Partners [1996] 2 All ER 836.

Charlesworth & Percy on Negligence (9th ed’n) Chapter 6:  pp. 439-56.