In The ECU Group plc v HSBC Bank plc(1) the High Court held that HSBC, the proposed defendant, had to provide pre-action disclosure of Bloomberg messages, emails, trading data and compliance documents. This was despite the fact that the claimant's potential claim arising out of alleged front-running by HSBC was many years out of time unless it could show, as alleged, that HSBC had deliberately concealed a relevant fact from it.

Facts

ECU is a currency debt management company which manages multi-currency loan facilities for its clients. HSBC placed stop-loss orders from ECU aimed at limiting its currency exposure. When exchange rates for a pair of currencies rose above a designated ceiling, the stop-loss was triggered and HSBC would buy or sell the relevant currency pair to avoid further losses.

In January 2006 ECU placed three substantial stop-loss orders with HSBC relating to three different currency pairs. However, unusually, the first stop-loss was triggered within 31 minutes of being placed, the second stop-loss was triggered within 10 minutes of being placed and the third stop-loss was triggered within five minutes of taking effect (there having been a two-and-a-half hour gap between it being placed and taking effect). Two of the three relevant spot rates had in fact been falling away from the prescribed ceiling but reversed just a few minutes after the stop-loss orders were placed.

ECU suspected that HSBC had been engaging in front-running. In other words, its traders had manipulated the market in the time between the orders being placed and their being activated so as to artificially push the rates up. ECU calculated its clients' losses at £6.17 million, 20% of which was borne by ECU in lost fees.

ECU wrote to HSBC in February 2006 demanding an explanation of HSBC's profits from buying ahead of the stop-loss orders. In March 2006 HSBC responded that it had conducted a full investigation and denied any suggestion of front-running or other wrongdoing. ECU was not entirely satisfied by the explanations proffered, but felt that it was not in a position to take the matter further. As it noted to the court, this was in the period before the 2008 financial crisis when assurances given by banks were more likely to be taken at face value.

However, some 10 years later, in July 2016 the US Department of Justice issued a formal indictment against two of HSBC's most senior former forex (FX) traders relating to alleged front-running in 2011. The relevant client had complained at the time, but had been assured by HSBC after a full investigation that there had been no wrongdoing. HSBC's flawed investigation was widely reported and it was fined $175 million for FX abuse by the US Federal Reserve. It was also fined £216 million by the Financial Conduct Authority in 2014 as a result of misconduct including front-running and abuse of stop-loss orders and agreed with the New York Commodity, Futures and Trading Commission to pay $275 million for similar conduct. In light of these disclosures, which chimed with ECU's own experience, ECU reviewed its position in relation to the 2006 trades.

ECU applied for pre-action disclosure of documents which would shed light on what had happened at the time that the 2006 stop-loss orders had been placed. HSBC resisted the application.

Legislation

Pre-action disclosure

Under Rule 31.16 of the Civil Procedure Rules the court has discretion to make an order for pre-action disclosure if:

  • the applicant and respondent are likely to be parties to subsequent proceedings;
  • the respondent's duty by way of standard disclosure would extend to the documents sought (if proceedings had already been started); and
  • pre-action disclosure is desirable to:
    • dispose fairly of the proceedings;
    • assist the dispute to be resolved without proceedings; or
    • save costs.

Black v Sumitomo(2) set out a number of principles relating to this provision, including that the latter three requirements represent both a jurisdictional threshold and a set of factors to be considered in more detail when the court considers whether to exercise its discretion.

In considering the law, the court made clear that, although it is unlikely to rescue any widely drafted pre-action disclosure application by redrafting the categories of documents sought, it does have some power to adjust the categories of disclosure to deal with any particular concerns which become apparent in the course of determining the application.

Limitation

Under Section 32(1) of the Limitation Act 1980, where a claim is based on the defendant's fraud or a relevant fact has been deliberately concealed, the limitation period will not begin to run until the claimant discovers the fraud, concealment or mistake (or could have discovered it with reasonable diligence). It is not enough that the relevant fact is something which would improve the claimant's case. It must be a fact that without which the claim would be incomplete.(3)

Decision

The court held that the jurisdictional threshold had been reached. In light of the events of 2014 and 2016 it was not inconceivable that HSBC could be liable for the matters alleged. There was also a real prospect that if pre-action disclosure was ordered, it would be likely to shed real and direct light on whether there was front-running in relation to ECU's 2006 trades. If front-running was revealed by the documents, there would be a real prospect that any claim would be settled without litigation or at an early stage (even with the prospect of a limitation dispute). Alternatively, there would be a real prospect of narrowing the issues. All of this would lead to the prospect of a real saving of costs. Conversely, if the documents revealed no front-running then ECU would need to consider carefully whether any further action could be justified.

Further, the court could see nothing in respect of the general merits which would count seriously against the exercise of its discretion. The claim was not speculative (as alleged by HSBC). Here, unlike in Sumitomo, there was a direct and long-established contractual relationship between ECU and HSBC. Further, the putative claim was backed up by evidence of precisely the sort of conduct that ECU was alleging against HSBC.

The court was not persuaded that, as contended by HSBC, the strength of the limitation defence was such that any claim would never even get to the disclosure stage. The limitation issue was significant and a factor to be weighed in the balance against ECU, but it was far from an overwhelming or compelling factor. Among other things, it could not be assumed that the concealment was not deliberate given HSBC's track record and, contrary to HSBC's position, ECU had not discovered the fact of front-running in 2006 as it had effectively been "put off the scent".(4)

The overarching point was that the pre-action disclosure would (if it revealed front-running) make it much easier for ECU to make the underlying claim. ECU had not said that without such disclosure it could not plead a case at all, but that is not the sole criterion.

There is no rule that where there is a dispute on limitation in the context of a pre-action disclosure application the proper approach is to dismiss it and let the proceedings take their course. The limitation issue is simply a matter to be weighed in the exercise of discretion.

Finally, the fact that ECU might well have been able to plead out an inferential case without the disclosure was not fatal to the application. Direct evidence of front-running would have a real bearing on the ability to dispose of the case without proceedings or to narrow the issues and save costs in any event. Accordingly, all of the requirements under Rule 31.16 of the Civil Procedure Rules had been made out at the discretion stage.

As a result, and on the basis that ECU would pay the costs of the pre-action disclosure in the first instance, the court ordered disclosure of:

  • Bloomberg messages (limited to periods of just over four hours in total);
  • emails (limited to a six-week period);
  • relevant trade data (for a 25-minute period); and
  • compliance documents relating to the internal investigation (using keywords and date ranges).

Comment

Although the principles regarding the rules on pre-action disclosure have been rehearsed many times before (in particular in Sumitomo), this case is an instructive example of the application of those rules. It is clear from this case that, even if a claimant is ostensibly out of time and will need to rely on the exception under the Limitation Act 1980 for fraud or concealment, the court may be prepared to order pre-action disclosure in the right circumstances.

However, the fact that HSBC had been hit with large fines from a variety of regulators across the globe in relation to conduct which was the same as that alleged in the claim had a significant impact on the decision.

The decision is also a useful example of the categories of documents that the court may be prepared to order against a bank in respect of pre-action disclosure. However, the scope of disclosure was kept narrow, a factor which no doubt played in ECU's favour, and this is always the approach to be recommended.

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For further information on this topic please contact Simon Hart or Edward Holmes at RPC by telephone (+44 20 3060 6000) or email (simon.hart@rpc.co.uk or edward.holmes@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) [2017] EWHC 3011 (Comm) (November 24 2017).

(2) [2002] 1 WLR 1562.

(3) Arcadia v Visa [2015] EWCA 883 and Johnson v Chief Constable of Surrey, November 23 1992.

(4) Wetherspoon v Van Den Berg [2007] EWHC 207.