In Al Sulaiman v Credit Suisse Securities (Europe) Limited(1) the Commercial Court considered a claim for breach of duty in recommending investments on which substantial losses were incurred following the claimant's failure to meet a margin call, and the distressed sale of the investments, in the wake of the collapse of Lehman Brothers.
The claimant, Ms Basma Al Sulaiman, is a wealthy Saudi national. Between 2005 and October 2008 she invested in 23 structured notes – 18 through the first defendant, Credit Suisse Securities (Europe) Limited, and five through the second defendant, Plurimi Capital LLP, both of which acted in an advisory capacity. Her personal adviser in each case was Mr Ramzy Rasamny, who left Credit Suisse and established Plurimi at the start of 2008.
The notes paid coupons linked to the performance of various equity and fixed-income indices. Some were capital guaranteed (provided that they were held to maturity) and others were not. Almost all of the notes were leveraged by loans provided by Credit Suisse. The loans were secured by pledges against the notes themselves.
The loans from Credit Suisse carried a maximum loan-to-value ratio (LTV), being the maximum amount of borrowing permitted as a percentage of the value of the security in place. In the event that the value of the notes fell and the LTV was exceeded, Credit Suisse was entitled to issue a margin call requiring Al Sulaiman to put up additional security and, if this was not provided, to liquidate the notes and realise the proceeds.
Following the collapse of Lehman Brothers on September 15 2008, the value of the notes fell to the extent that Al Sulaiman exceeded the maximum permitted LTV on the loans from Credit Suisse. On October 15 2008 Credit Suisse issued a margin call in the sum of $7.5 million, to be provided within two days. Al Sulaiman procured two bank guarantees as additional security, but for less than half of that sum.
On October 23 2008 Credit Suisse changed the permitted LTV on the loans and, accordingly, issued an increased margin call the following day in the sum of $10.2 million, to be provided by the following Monday. Even though Al Sulaiman had assets available to meet the margin call (as the court ultimately found), she failed to do so, and Credit Suisse liquidated the notes. The proceeds were less than Al Sulaiman's outstanding debt, so Credit Suisse also called the two guarantees provided and appropriated Al Sulaiman's deposits with the bank. Her total loss was approximately $37 million.
Al Sulaiman made a claim under Section 150(2) of the Financial Services and Markets Act for breaches of statutory duties in the Financial Services Authority's(3) (FSA) Conduct of Business Rules (for the notes purchased up to October 31 2007) and Conduct of Business Sourcebook (for the later notes). Al Sulaiman also claimed breaches of contractual and tortious duties, but it was common ground between the parties that these added little to the statutory claim.
In summary, Al Sulaiman claimed that, in recommending the transactions, the defendants breached their duties to:
- take reasonable steps to ensure that she understood the risks and, in particular, the effect of the leverage on the notes; and
- take reasonable steps to ensure that the recommendations were suitable for her.
By the end of the trial, it was conceded on behalf of Al Sulaiman that the notes were in fact suitable investments for her, given her target returns, risk appetite and the fact that she had assets available to meet any margin call. In relation to the remaining duty, she alleged that the defendants had failed to explain that:
- the notes were pledged as security for the loans;
- Credit Suisse could call for additional security if the value of the notes fell; and
- Credit Suisse could liquidate the notes if she failed to provide that additional security.
Al Sulaiman and Rasamny's evidence diverged significantly as to the explanations provided and the extent to which Al Sulaiman understood the investments and the associated risks. Rasamny said that he had provided explanations on numerous occasions and that it had been obvious that Al Sulaiman understood to the relevant extent the mechanics of the notes and the concepts of leverage, security and margin calls, all of which were also set out in numerous documents provided to her. Al Sulaiman said that she understood very little and did not read the documents provided to her, including many that she signed.
The judge preferred Rasamny's evidence and found that Al Sulaiman had been dishonest, both at trial and through the conduct of the proceedings. In particular, there had been an attempt to conceal the extent of her other investments and dealings with advisers, which included entering into other structured notes with leverage of up to 100%. She did understand the relevant concepts and had displayed a degree of financial sophistication which was inconsistent with her witness evidence before the court. Moreover, given that Al Sulaiman was a literate and intelligent woman, the defendants were entitled to assume that she had read the written information provided, provided that it had been expressed in clear terms.
The judge stated that:
"Her attempt to portray herself… as a woman who understood little about her investments, was told little, left decisions to her advisers and was wholly in their hands when it came to selection of investments did not do her any credit."
He concluded that:
"The reality is that [Al Sulaiman's] case is based on a fiction… that she was not told and did not understand the basics of loans, collateral, margin and margin call, despite leveraged trading in 23 of such Notes through [Rasamny], despite borrowing money elsewhere for investment, despite signing numerous loan facility documents and pledges with various banks, some or all of which contained warning of varying degrees of clarity."
Following the decision in Zaki v Credit Suisse,(4) the judge confirmed that the focus of duties imposed by the FSA rules is on substance and not form. In other words, given that the investment was in fact suitable and the risks were adequately explained and understood, any failings in the process did not matter. Accordingly, the fact that Rasamny had adopted what the judge described as a sometimes "careless approach" to formalities such as the completion of suitability forms for each investment (which were supposed to document the explanations that had been given to Al Sulaiman) did not constitute a material breach.
The judge also found that there was no obligation on the part of the defendants, in recommending a leveraged product and explaining the effect of leverage to Al Sulaiman, to attempt to estimate the size of any potential margin call.
The judge found that the cause of Al Sulaiman's loss was her decision not to meet the margin calls made in October 2008, rather than any advice or recommendation provided by the defendants. It was conceded on behalf of Al Sulaiman that at that time she had had approximately $15 million of assets which could have been readily pledged, plus further assets of approximately $70 million. She had also received repeated advice from Rasamny, to which she was resistant, to sell some of the notes in order to reduce her leverage in light of the prevailing market conditions.
In the circumstances, the decision not to meet the margin call was, the judge said, "so irrational as to be almost incomprehensible" and suggestive of "blind irrational pique at [Credit Suisse's] movement of the goal posts on LTV" or a failure to believe that Credit Suisse would really take the step of liquidating the notes to realise the proceeds.
The judge also cited "the unforeseeable collapse of the market and change in the LTV ratios required by [Credit Suisse]" as competing causes of the loss, without considering them in detail in light of factual findings made.
Although the judge's decision turned primarily on the dim view he took of Al Sulaiman's evidence, it confirms the focus in claims under the FSA rules on whether the product recommended is in fact suitable and whether adequate explanations of the product and its risks were provided, rather than on any procedural failings.
The decision is also of broader relevance to claims arising from leveraged investments. It confirms, first, that an adequate explanation of the effect of leverage need not include an estimate of the size of potential margin calls, and, second, that the failure to meet a margin call can break the chain of causation between any breach of duty and the loss suffered.
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(1)  EWHC 400 (Comm).
(2) Now Section 138D.
(3) Now the Financial Conduct Authority.
(4)  EWHC 2422 (Comm) and  EWCA Civ 14.