Mahmoud Haji Haider Abdullah (and others) v. Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited [2017] EWHC 3016 (Comm)

This claim related to investment advice allegedly given in breach of FCA rules. The claimants were a wealthy Kuwaiti family comprising a father and his three sons, although the judgment indicates that only two of the brothers dealt with Credit Suisse for present purposes. Each was entitled, as a private person within the meaning of section 138D of FSMA, to seek damages for breach of FCA rules. The bare facts of the case are that the family invested in notes (Structured Capital-At-Risk Products or SCARPs) issued by Credit Suisse and, in one case, another bank (the Notes). Such investments were made pursuant to the advice of a Mr Zaki, employed at the time by Credit Suisse.9 The investments were also leveraged and when, following market turmoil in October 2008, Credit Suisse made a margin call in relation to the Notes, the family decided not to meet it, in the knowledge that its positions would be liquidated. This decision, referred to contemporaneously by Mr Zaki as "financial suicide", cost the claimants US$21 million as against retaining the Notes they held to maturity and meeting the margin call (and any future ones).

The issues arising were therefore: (a) whether Credit Suisse had breached the FCA rules as alleged; and (b) even if it had, whether the claimants' refusal to meet the margin call was so unreasonable as to amount to a failure to mitigate loss or a break in the chain of causation.

The rules said to be relevant in this case were: (i) COBS 9.2.1R, requiring a firm to take reasonable steps to ensure that any personal recommendation is suitable for the client, including associated information gathering duties; (ii) COBS 9.2.2R, requiring a firm to have a reasonable basis for believing that any specific transaction recommended meets the client's investment objectives and is such that he/she has the necessary experience and knowledge to understand the risks involved; and (iii) COBS 4.2.1R, requiring a firm to ensure that a communication or financial promotion is clear, fair and not misleading.

There were three relevant Notes for the purposes of the claim, and the judge considered the claimants' investment objectives to be different in relation to each. The judge found that they had accepted the second of these Notes (the 19th they had traded with Credit Suisse) as higher risk. The final Note was intended as a restructuring to try to avoid further losses being incurred on previous Notes. In relation to the first of the relevant Notes (Note 18 in the judgment), however, the judge found that the claimants were willing to accept a notional risk to their capital, but only if the events that would give rise to a capital loss were very unlikely to occur. He did not find them to be aggressive investors.

One of the more interesting aspects of the judgment is the judge's consideration of how an adviser should deal with recommending a product that is riskier than one the client has previously traded. The judge said that, in this regard, there was no reason why an adviser could not present such a product, but that he or she would need to take great care in doing so. He added that, "as a practical reality, if a riskier product is presented to an advisory client without its riskier nature being brought squarely to the client's attention and explicit confirmation being obtained from him … that he is content to be exposed to the greater level of risk, there will be a real prospect that the COBS suitability duties will not have been discharged". In this case, the judge found that the claimants relied on Mr Zaki and trusted his assessment as to the likelihood of a capital loss arising. He declined, however, to find that any incentives available to Mr Zaki in relation to sales of the Notes made it more likely that he would breach the relevant rules.

The judge also found Credit Suisse to have breached COBS 4.2.1R in relation to the last Note sold, in that it led the claimants to believe that the restructuring which resulted in its purchase would not require the injection of new funds from them. This was not, as it turned out, the case, as a result of the way in which the replaced Notes had been marked to market.

Before turning to this issue, the judge conducted an extensive exercise in determining what the claimants would have done had Note 18 not been sold to them, which of the outstanding Notes would have proceeded to maturity, and what (if any) margin calls would have been made in relation to them.

In relation to the decision not to meet the margin call that was actually made, Credit Suisse argued that this was an irrational decision taken by the claimants (and one of them in particular) in a fit of temper. While agreeing that a decision not to meet a margin call can, in principle, break the chain of causation, the judge held that, in this case, the claimants' decision was reasonable. They had been asked to inject a further US$12 million, in circumstances where the worst might not be over. They had also lost confidence in Mr Zaki's advice (and he advised them strongly to meet the margin call). The judge held that it was reasonable for them to decide not (potentially) to throw good money after bad.

The judgment makes interesting reading, particularly on the points above, but there are some interesting issues on which it does not touch (because it did not need to). One is that the judge made express criticisms of the fact find process undertaken by Credit Suisse, which he held to be inaccurate in a number of respects. The judgment does not explore the extent to which this was relevant to liability, perhaps because there was no suggestion in the judgment that Mr Zaki actually misunderstood either the claimants' financial knowledge or their objectives. Second, the judge noted on a number of occasions that the claimants advanced their claims en bloc, and he therefore treated them as such. There was therefore no separate consideration (beyond the judge mentioning it with disquiet) of Credit Suisse's effective failure to engage with two of the claimants.