The Commercial Court of England and Wales recently handed down an important judgment allowing the owner of a investment fund to recover (a) his direct losses made as a result of making certain poor investments based on fraudulent misrepresentations made to him by a broker and (b) notably further significant damages for the loss of profits that he successfully argued he would have made had such poor investments not been made but the relevant funds instead invested elsewhere in the market in accordance with his usual (very successful to date) investment techniques.

This judgment was very specific to the facts in that the court was very impressed by expert testimony which pointed towards the fact that the owner of the investment fund was a trader, with an outstanding reputation, who had previously (and apparently always) made profits in ‘bull’ as well as ‘bear’ markets. It was argued that the typical approach of the owner of the investment fund was to use investment techniques and methodologies that were low (calculated) risk and that absent the fraudulent misrepresentations the relevant funds would have been profitably invested elsewhere using this methodology. For example, evidence was given that when a product (usually shares and contracts for difference) began to lose money this trader seemed to always ‘get out’ at the right time and, as the evidence showed, actually made a profit from a falling share price.

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On 6 May 2009 Mr Justice Flaux handed down this, the first reported decision of its nature, in Parabola Investments Ltd and others v Browallia Cal Ltd and others [2009] EWHC 901 (Comm).

In this case Mr. Gill, a very successful trader, controlled the joint claimant called ‘’Tangent’’. The defendant broker dealt primarily in the accounts of Tangent between July 2001 and February 2002 under instruction from Tangent’s parent company. It was found that during this time the defendant broker was deceitful and made significant fraudulent misrepresentations to Tangents parent company in relation to the value of the funds being traded on behalf of Tangent. For example in October 2001 the defendant broker stated the account balance stood at £9.27 million when in fact it had fallen from £4.5 million to £2.8 million.

Tangent argued that due to being induced by such (established) fraudulent misrepresentations it made some very poor investments and it should, accordingly, be entitled to recover its direct losses (and expenses) together with damages for the loss of profits that it suffered by not investing the relevant funds elsewhere in the market in line with Tangent’s usual (tried and tested) successful investment methodology. The defendant argued that Tangent was not entitled to claim profits it would have made either throughout the period of the fraud or thereafter as this was too speculative and was in effect a claim based on cumulative profits (being profits based on the capital amount plus annually accumulated profits over a period of years referred to as ‘profits on profits’ in the judgment).

It was held that, on the balance of probabilities, if any profit (and in this regard no specific investments need to be referred to) would have been made had the fraud not occurred then it was appropriate to award for lost profits. In this regard, expert evidence showed how Mr Gill had never made a loss save for the relevant period of the fraud and evidence showed that Tangent might otherwise have made an average annual profit of 50% (less expenses) during that relevant period and thereafter. This total loss to March 2008 came to between £17m and £20m and the court made an order for damages on that basis - the court agreeing that “Tangent had remained in the grip of the fraud at all times up until the trial”.