Shine Grace Investment Ltd v. Citibank, N.A. and Another
Read the full judgment text of HCCL 28/2008 on BabelCite. This HCCL judgment was delivered on 30 July 2018.
1. The main action HCCL 28/2008 (“ Main Action ”) is concerned with 9 Equity Accumulator Contracts (“ Disputed ACs ”) entered into by the Plaintiff (“ Shine Grace ”) via Mrs Anita Chan Lai Ling (“ Mrs Chan ”) with the 1 st Defendant (“ Citibank ”) on 15 and 16 October 2007. Since 20 November 2007, Citibank has issued margin call notices under the Disputed ACs demanding Shine Grace to deposit additional margin security. From 21 November 2007 onwards, Shine Grace has, by various letters to Citib
Cited by 9 cases · Cites 4 cases
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HCCL 28/2008 [2018] HKCFI 1737 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL ACTION NO 28 OF 2008 ____________
____________ HCCL 28/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL ACTION NO 28 OF 2013 ____________
____________ HCCL 29/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL ACTION NO 29 OF 2013 ____________
____________ (Heard together)
________________ J U D G M E N T ________________ Table of Contents
A. Introduction 1.The main action HCCL 28/2008 (“Main Action”) is concerned with 9 Equity Accumulator Contracts (“Disputed ACs”) entered into by the Plaintiff (“Shine Grace”) via Mrs Anita Chan Lai Ling (“Mrs Chan”) with the 1st Defendant (“Citibank”) on 15 and 16 October 2007. Since 20 November 2007, Citibank has issued margin call notices under the Disputed ACs demanding Shine Grace to deposit additional margin security. From 21 November 2007 onwards, Shine Grace has, by various letters to Citibank, disclaimed the Disputed ACs and asserted that they were invalid and unenforceable. Citibank’s repeated margin calls were not met. 2.The stocks which underlay the Disputed ACs were 4 Hong Kong listed shares vizChina Petroleum & Chemical (“Sinopec”), Petrochina Company Limited (“Petrochina”), China Shenhua Energy Company (“Shenhua”) and China Life Insurance Company (“China Life”). 3.The Disputed ACs resulted in heavy financial losses for Shine Grace. Out of the 9 Disputed ACs, 2 were “knocked out”[1] on the same day ie 15 October 2007 and 1 was “knocked out” on 1 November 2007. The remaining 6 open Disputed ACs were closed out and unwound by Citibank on 22 January 2008. The total unwinding costs of the open positions on those 6 Disputed ACs exceeded HK$427 million, while the losses suffered from the sale of the shares accumulated under all the Disputed ACs were around HK$51 million, making a total of HK$478 million. 4.In order to understand the background against which these losses were incurred, the best way is to plot the movement of the Hang Seng Index (“Index”) and the share prices of the 4 stocks underlying the Disputed ACs at the material times:
5.After the 6 open Disputed ACs were closed out and unwounded, there was still a substantial shortfall which Citibank demanded from Shine Grace. Shine Grace did not meet the demand. Citibank then turned to Shine Grace’s two guarantors viz Shinning International Holdings Limited (“Shinning”) and Bonds & Sons International Limited (“BSI”) and transferred funds from their accounts with it ie HK$25,609,002.71 and HK$39,109,301.58 respectively to satisfy the outstanding liability. 6.In the Main Action, Shine Grace alleges what is commonly known as mis‑selling of the Disputed ACs by Citibank. A summary of its complaints against Citibank and the 2nd Defendant (“Ms Mak”) (collectively “Defendants”) can be found in Section F below. Ms Mak was at all material times the relationship manager of Shine Grace and Mrs Chan. 7.In the prayer for relief, Shine Grace seeks inter alia a declaration that (i) it has not contracted with Citibank in respect of the Disputed ACs, (ii) the Disputed ACs are unenforceable, (iii) all notices, including margin call notices in respect of the Disputed ACs are invalid and of no legal effect. Shine Grace also seeks an order for the return of all securities and monies held by Citibank for or otherwise due to it as well as damages. Shine Grace further seeks damages or restitutionary relief against Ms Mak. 8.Each of Shinning and BSI had provided two limited guarantees (“Shinning Guarantees[2]” and “BSI Guarantees[3]”) in support of Shine Grace’s dealings with Citibank. These guarantees were the subject of the proceedings in HCCL 28/2013 (“Shinning Action”) and HCCL 29/2013 (“BSI Action”) (collectively, “Guarantor Actions”) commenced by Shinning and BSI against Citibank. 9.In the Guarantor Actions, Shinning and BSI challenge the appropriation of HK$25,609,002.71 and HK$39,109,301.58 from their respective Citibank accounts on 25 January 2008 to satisfy Shine Grace’s liability under the Disputed ACs. The basis of their challenge is that Shine Grace had not contracted with Citibank in respect of the Disputed ACs, alternatively, the Disputed ACs were void and/or unenforceable and thus Shine Grace had no liability under them. Citibank therefore had no right to call on the guarantees and appropriate funds from their respective accounts. They seek inter alia an Order that the funds appropriated by Citibank be re‑credited to their accounts with interest. 10.An additional issue raised in the BSI Action is that BSI claims it had already terminated the BSI Guarantees by written notice on 26 July 2007. As far as the 2004 Guarantee is concerned, BSI claims it was terminated on 27 October 2007, upon the expiry of the 3‑month notice period pursuant to clause 3 thereof. As far as the 2006 Guarantee is concerned, BSI claims it was terminated as of 26 July 2007. Upon their termination, BSI ceased to have any further liability under the BSI Guarantees. BSI therefore also seeks a declaration that the two guarantees were terminated on the aforesaid dates. B. Mrs Chan 11.While Shine Grace was the contracting party of the Disputed ACs and the Plaintiff in the Main Action, the person at the heart of this case was Mrs Chan. She was a director of Shine Grace from 2 January 2003 until she passed away on 17 October 2007. There is no dispute that prior to her death, Shine Grace was solely beneficially owned, controlled and operated by her. There is also no dispute that all of Shine Grace’s investment decisions were made by Mrs Chan and all its investment orders, including the Disputed ACs, were placed by her on behalf of Shine Grace. For these reasons, and for the sake of simplicity, a reference to Mrs Chan in what follows is intended to include a reference to Shine Grace and vice versa, unless the context expressly or impliedly indicates otherwise. 12.After Mrs Chan’s death, the only other director of Shine Grace, her brother, resigned with effect from 3 November 2007 while on 2 November 2007, Mrs Chan’s 4 children (Anson, Johnson, Lily and Zandra) were appointed directors of Shine Grace. 13.By way of background, Mrs Chan was the sole beneficial owner of the so‑called Lady Secret Group of companies. Shine Grace was a company within the Lady Secret Group. So was Shinning. 14.Mrs Chan was also the Chairman and Chief Executive of the Bonds Group, the holding company of which was Bonds & Sons Holdings Ltd (“B & S Holdings”). BSI was wholly‑owned by B & S Holdings and hence a company within the Bonds Group. While the core business of the Bonds Group was in property investment, management, leasing and development, BSI itself also engaged in the trading of securities, including derivative instruments, from time to time. In December 2003, the Bonds Chan Family Unit Trust (“Trust”) was established and all the shares of B & S Holdings were owned by the Trust. Mrs Chan had 44.45% beneficial interest in the Trust and hence the Bonds Group. Mrs Chan also had a minority interest in the trustee company which managed the Trust and was one of its six directors. Notwithstanding the niceties of the shareholding structure, the evidence shows that when Mrs Chan was alive, it was she who “called the shot” in BSI. 15.Mrs Chan was in many ways a remarkable person. 16.According to her eldest son Mr Anson Chan’s description, she was born in Hong Kong in 1938 into a lower middle class family. She received education only up to Form 5. She was married to the late Mr Chan Shu‑kui and, from 1965 until 1973, assisted her husband in running his businesses including inter alia real estate, education and a local stock brokerage firm Standard Capital Brokerage Limited. After her husband had passed away in 1973, Mrs Chan ran the family business including the brokerage firm. The firm only ceased business in 2002 when it was placed in voluntary liquidation. She was a licensed dealer, dealing director, commodities trading adviser and securities investment adviser. Mrs Chan had no formal business education. Mr Anson Chan described her as a “self‑taught businesswoman, learning by experience”. 17.Citibank has been one of Mrs Chan’s bankers since 1980s. As shown in the bank’s Annual Credit Approval in June 2007, her net worth was estimated at around US$400 million, US$430 million and US$453 million in 2005, 2006 and 2007 respectively. By any standard, she was a hugely successful businesswoman and an ultra‑high net worth individual. 18.In terms of investment experience, Mrs Chan had decades of experience of active trading in the capital market. According to Ms Agatha Lai (“Ms Lai”), during the 1980s and 1990s, Mrs Chan had investments through a number of financial institutions for her own investment companies, on behalf of companies in the Bonds Group including BSI, and companies owned by her sons. Her investments covered a wide range of products including local and foreign equities, Hong Kong stock index futures, Hong Kong index options, stock options, foreign exchange contracts, funds, bonds, treasury bills, and structured products such as equity linked notes and market linked instruments. 19.In January 2004, Mrs Chan was introduced to the then relatively new product of equity accumulators. From 2 January 2004 to 16 October 2007, Shine Grace, via her, entered into 282 equity accumulator contracts (“ACs”) with Citibank, the last 9 of which were the Disputed ACs. In addition, BSI, via Mrs Chan, had entered into over 130 ACs with Citibank. Apart from Citibank, Mrs Chan had also entered into 50 ACs with the Bank of East Asia between 20 April and 16 October 2007. 20.With such a large investment portfolio, Mrs Chan had a team of support staff to assist her, including Ms Lai. According to Ms Lai, the team’s role was solely of an administrative nature ie facilitating the settlement of trades, arranging funding for settlement, attending to accounting matters and compiling position and cash reports. All investment decisions were made and all orders were placed by and only by Mrs Chan. Mrs Chan normally worked from home and placed orders over the phone with Ms Mak[4]. 21.Leaving aside the Disputed ACs, Shine Grace’s trading in ACs with Citibank was very profitable. From Shine Grace’s internal records, its net realized profits between 2004 and 2007 were close to HK$180 million. 22.Apart from being an enthusiastic and prolific investor, Mrs Chan had an exceptional ability to read the stock market. In a telephone conversation she had with Ms Mak on 15 October 2007 at 3:19 pm, Mrs Chan expressed her view that the Index would go up to 32,000 before it would come down. On that day, the Index opened at 29,147 and closed at 29,540. The Index peaked on 30 October 2007 at 31,638. Mrs Chan’s prediction 15 days ago that the Index would go up to 32,000 only fell short by 362. Thereafter, the Index did begin to go south, as Mrs Chan had expected. Within 3 weeks, the Index dropped to 26,004 on 22 November 2007. After a short‑lived rebound in late November and early December 2007, the Index went downhill sharply. By 22 January 2008, when the 6 remaining Disputed ACs were closed out, the Index dropped to 21,757. 23.Given her age of 69 in 2007, Mrs Chan was still highly energetic. Between 3 September and 5 October 2007, she, using Shine Grace as her vehicle, entered into over 40 ACs and realized HK$81 million profits from them. She was hospitalized on 6 October 2007 due to momentary loss of consciousness caused by overdose of medication. On 10 October 2007, Mrs Chan was discharged from hospital. It was recorded in the hospital’s clinical discharge summary and the coroner’s report that she recovered well without complication from this incident. 24.A few days later, Mrs Chan resumed trading in ACs. 25.On 15 October 2007, Shine Grace entered into 3 of the Disputed ACs with Citibank and 2 ACs with Bank of East Asia. On 16 October 2007, Shine Grace entered into the other 6 Disputed ACs with Citibank and 4 more ACs with Bank of East Asia, making it a total of 15 ACs in 2 days. On 15 October 2007, during the trading hours of the Hong Kong Stock Exchange, Mrs Chan had over 20 telephone conversations with Citibank’s staff, mostly Ms Mak. On 16 October 2007, she had 18 such telephone conversations. This court has heard the audio recordings and read the transcripts of those conversations. Mrs Chan sounded alert, sometimes very animated and always good with figures. She was able to make quick decisions on whether to enter into an AC for a particular listed stock, at what price and for how many shares. She was also able to exchange views with Ms Mak on the movement of the Index. Notwithstanding her recent hospitalization, this court finds Mrs Chan's cognitive ability was not impaired to any significant extent and she was able to make investment decisions of her own accord and in what she considered to be her best interests. 26.Unfortunately, Mrs Chan passed away on 17 October 2007 as a result of overdose of prescribed medication, the details of which are irrelevant for the present purpose. 27.On the evidence, Mrs Chan had no complaints about the Disputed ACs during her lifetime. It stands to reason that Shine Grace’s present complaints against the Defendants are those of its directors appointed after her death. C. Factual and expert witnesses 28.With the passing away of Mrs Chan, the testimony of the single most important person who could shed light on the factual issues raised in this action is no longer available at trial. 29.Shine Grace called two factual witnesses to testify on its behalf at trial:
30.Ms Lai was the financial controller of the Bonds Group and the head of the team which provided accounting and other administrative support for Mrs Chan’s large investment portfolio. Her evidence was primarily, though not exclusively, on the background and other relatively non‑controversial factual matters. Since Ms Lai had no role to play in determining Mrs Chan’s investment strategy, was never involved in Mrs Chan’s investment decisions and was not privy to Mrs Chan’s numerous communications, by phone or otherwise, with Ms Mak, her evidence sheds little light on crucial factual matters concerning Mrs Chan’s decision to enter into the Disputed ACs on 15 and 16 October 2007. 31.Ms Lai did have some dealings with Citibank’s staff, principally Ms Mak, particularly after Mrs Chan’s death. Ms Lai also has direct knowledge of the facts pertaining to the issue in the BSI Action regarding termination of the BSI Guarantees. 32.Mr Anson Chan is one of the current directors of BSI, having been appointed a director of BSI in about 2000, and Shine Grace. However, he became a director of Shine Grace only after Mrs Chan’s death. He had no role in the formulation of Mrs Chan’s investment strategy in ACs when she was alive. He also had no direct knowledge of Mrs Chan’s investment strategy, decisions or the extent of her knowledge of the risks associated with ACs. Back in 2006 and 2007, Mr Chan already had some experience with ACs, both as a director of BSI (he told this court he entered into less than 10 ACs on behalf of BSI out of about 100) as well as on his own account. In the witness box, Mr Chan gave the impression that he was quite knowledgeable about ACs. Nevertheless, Mr Chan told this court that he and Mrs Chan never discussed about the ACs entered into by her — they only talked about stocks in general. 33.Like Ms Lai, Mr Chan was not privy to Mrs Chan’s communications with Ms Mak and his evidence can shed little light on crucial factual matters concerning Mrs Chan’s decision to enter in the Disputed ACs on 15 and 16 October 2007. While Mr Chan appeared to have listened to the tape recordings between Mrs Chan and Ms Mak on those two days and purported to analyse his mother’s investment strategy and market outlook, the testimony he gave on those matters is more akin to submissions rather than factual evidence. 34.At trial, the Defendants called 4 factual witnesses. 35.Ms Mak is the Defendants’ main witness. She was first assigned by Citibank to manage Mrs Chan’s accounts in mid‑1997 and independently so in mid‑1999. From 1999 until 17 October 2007, Ms Mak was the relationship manager of Mrs Chan, and from March 2003 until 6 December 2007, she was the relationship manager of Shine Grace. Given her long‑standing relationship with Mrs Chan and her frequent contact with Mrs Chan, it stands to reason that she must have developed an in‑depth knowledge of Mrs Chan’s investment experience, strategy and appetite. She said so in her witness statement and there is no reason for this court to doubt that. Ms Mak is of course the person directly involved in the events on 15 and 16 October 2007 when Mrs Chan decided to enter into the Disputed ACs. 36.The other 3 Citibank factual witnesses are:
37.In addition, the statements of all other Citibank’s witnesses, save for that of Mr Gopalakrishnan, were agreed to be in evidence, without the need for cross‑examination. It seems to this court that the evidence of Ms Cheung, Mr Lo and all those who were not called, is quite peripheral and of little assistance. Ultimately, it is the credibility of Ms Mak, and, to a much smaller extent, Ms Yim, which has a significant impact on this court’s deliberation on the factual issues raised. 38.This court has carefully considered the testimony, as well as the demeanour, of all factual witnesses, and assessed it against the documentary evidence and the known and undisputed circumstances of this case. This court has in particular considered the inherent probabilities or otherwise of their testimony and assessed their credibility accordingly. Fortunately, this court is greatly assisted in its task since most, if not all, of the material telephone conversations between the parties’ representatives were recorded and the audio recordings and transcripts of those conversations were in evidence. 39.But, at the outset, this court wishes to record that it finds Ms Mak a truthful witness. 40.Ever since the commencement of the Main Action in 2008, Shine Grace has been making scathing attack on Ms Mak’s integrity and professionalism. Such attack would put anyone in Ms Mak’s position under tremendous pressure either to embellish her testimony or become highly defensive and argumentative while in the witness box. Yet, this court finds little sign of that. Ms Mak gave her evidence clearly and her response to questions, whether from Shine Grace or from this court, was mostly direct and prompt. Her credibility has withstood the test of cross-examination. 41.Importantly, Ms Mak was willing to admit to matters unfavourable to the Defence, the most prominent example of which was her admission that she did not know exactly how the Mark to Market value of the Disputed ACs was calculated. This in turn means she could not have been able to explain it adequately to anyone from Shine Grace, whether it was Mrs Chan who was simply not interested or Ms Lai who did ask her about it after Mrs Chan had passed away. Her credibility has withstood the test of cross‑examination, notwithstanding the points made in Shine Grace’s closing submissions at paragraphs 26‑64 urging this court to reject her evidence. 42.At trial, Shine Grace and the Defendants each called 1 expert witness:
43.Both experts are knowledgeable in their areas of expertise and on the whole this court finds them fair and honest witnesses. Their evidence, apart from facilitating this court’s understanding of the nature, structure, rationale, potential risks and benefits of ACs in general, is primarily germane to Shine Grace’s complaint of breach of duty by the Defendants. While the experts have produced voluminous expert reports, joint expert report, supplemental expert report and addendum to joint expert report, fortunately, most of the expert evidence can be regarded as common ground. Naturally, there are differences in opinion between the experts. After substantial refinement by the parties in the course of the trial, there are only three key areas of difference between the experts:
44.The relevant parts of the expert evidence will be discussed where appropriate, and the difference between the experts will be resolved only if and in so far as may be necessary, in the section “Breach of Duty” below. At this juncture, it is appropriate to repeat the warning on the utility of expert evidence sounded by Oliver J (as he then was) in Midland Bank v Hett, Stubbs & Kemp [1979] Ch 384 at 402 C‑D:
D. Shine Grace Account with Citibank — contractual framework 45.While Mrs Chan had been a customer of Citibank since 1980s, Shine Grace only opened an account with the bank in March 2003. On 12 March 2003, Mrs Chan on behalf of Shine Grace signed a number of account opening documents. They included what Mr Shieh SC described as first tier documents viz general banking documents between Shine Grace and Citibank as well as second tier documents viz those which governed derivative transactions. 46.For the present purpose, the most relevant first tier documents were:
47.Clause I(H) and I(O) of the General Terms provided:
48.Under Clause 3 of the Bank Mandate, Citibank was instructed to honour Shine Grace’s written instructions provided that they were signed by the requisite number of authorised signatories. Schedule 1 to the Bank Mandate contained Shine Grace’s list of designated authorised signatories. The authorised signatories were divided into two groups, Group A and Group B. Under Group A, Mrs Chan was authorised to sign solely. Under Group B, two signatories were required viz Ms Lily Chan together with either Ms Lai or Mr Ho Shek Tim. 49.The most important second tier documents was the Master Derivative Agreement (“MDA”), which, by virtue of Clauses 2.1 and 6.2, incorporated inter alia the General Terms, RDS and Derivative Terms. The MDA set out the terms which governed the relationship between Shine Grace and Citibank on existing and future derivative transactions. 50.The key provisions of the MDA were:
51.The relevant parts of the RDS provided that:
52.Clauses 12, 13 and 14 of the Derivatives Terms dealt with margin, termination and close‑out and liquidation:
53.The third tier of contractual documents are Citibank’s Confirmation (“Confirmation”) and Tailored Investment Proposal (“TIP”) relating to every individual AC, including the Disputed ACs, which were sent to Shine Grace after each AC trade. The provisions of these two documents will only be comprehensible after an explanation of the nature and main features of Citibank’s ACs to which this court now turns. E. Basic elements of Citibank’s ACs 54.Both parties’ experts agree in general on the nature, structure and payoffs of the kind of ACs relevant to the present case. It is therefore only necessary to give a brief summary of them for ease of comprehension of this Judgment. 55.A derivative is a contract between two or more parties the value of which is tied to a specified underlying financial asset, in the present case, listed shares. ACs are bespoke derivatives, illiquid and not publicly traded. They are known as “over‑the‑counter” derivatives since the contracting parties do not go through a recognised exchange in order to trade. 56.Under an AC, an investor contracts to purchase from Citibank a fixed number of the underlying listed shares (“daily number of shares”) at the accumulating forward price (“AFP”or“strike price”) on each trading day for the duration of the contract ie 1 year. The AFP is set at a discount to the market price (“spot price”) of the listed shares prevailing at the time of the AC. The discount is typically 10‑20% below spot price in order to make the AC attractive to investors. In the case of the Disputed ACs, the AFP was fixed at between 81.30% to 84.80% of the spot price. 57.If the spot price of the listed shares rises to or above the pre‑agreed knock‑out price level (“knock‑out price”), the AC will terminate and the investor is no longer entitled or obliged to purchase further shares. The knock‑out price is set at a premium to the spot price of the listed shares at the time of the AC. The premium is typically 2‑5% above the spot price. In the case of the Disputed ACs, it was set at 2% above spot price. In other words, the knock‑out price of each of the Disputed ACs was set at 102% of the spot price. 58.Settlement under the AC takes place at the end of the month. The investor will receive the shares which had been “accumulated” in the preceding month and has to make payment to Citibank for them. If, on the date of settlement, the spot price of the listed shares is higher than the AFP, the investor gains an unrealised profit. If, on the other hand, the spot price is lower than the AFP, the investor suffers an unrealised loss. In both instances, the gain or loss is not realised until the investor sells the shares in the market. 59.The Disputed ACs in the present case provide for a guaranteed period of 1 month. This means the investor is entitled to purchase 1 month’s number of the listed shares at the AFP from Citibank even if, for instance, the AC is knocked out on the 1st day. The investor can take delivery of the shares or place an order to sell all of them without waiting until the end of the month. 60.The ACs contain a step‑up feature. This means when the spot price of the listed shares closes below the AFP on a trading day, the investor is obliged to purchase double the daily number of shares (“stepped‑up daily number of shares”). This “step‑up” feature has the effect of magnifying the losses of the investor. 61.At any given point of time, a value can be attributed to an AC. The process of calculating the value of the AC is referred to as MTM. The MTM value of the AC represents the estimated credit exposure of the parties to each other in case of non‑performance. From Citibank’s point of view, the MTM value represents the amount which it is likely to lose if the investor defaults at that moment in time. The MTM value of an AC depends on a number of variables, including the spot price of the underlying shares, the implied volatility of the underlying shares, their expected dividend, interest rate and the remaining duration of the contract. Since an AC is not publicly traded, ascertaining the MTM value of the AC is highly complicated. It requires the use of sophisticated financial models which are not available to the public. Different banks have different formulae for ascertaining the MTM value of an AC. 62.All financial institutions, including Citibank, require investors to put up margins. These margin requirements can be divided into two broad types.
63.With this brief introduction in mind, this court now returns to the third tier contractual documents which are the most important documents in light of the issues in this case. 64.The purpose of the Confirmation was to set out the terms and conditions of each individual AC in question. The TIP was annexed to the Confirmation. 65.The Confirmation provided that:
66.Importantly, the Confirmation contained a representation and acknowledgement by the investor:
67.As far as the TIP is concerned, it contained information on the product description, investment objectives, investment rationale, risks of the trade as well as its detailed terms and conditions. The following features of the TIP are particularly important. 68.First, the Product Description section provided:
69.Second, the sections entitled “Investment Objectives” and “Investment Rationale” provided a summary of the suitability of the investment. For ACs with a guaranteed period, the section “Investment Objectives” stated:
70.Third, the section entitled “Investment Rationale” provided:
71.Fourth, the section entitled “Risk Information” gave a summary of the risks of the trade including inter alia the following:
72.Fifth, in the rectangular box at the bottom of the front page, there was a disclaimer which read:
73.Sixth, each TIP contained a “sensitivity analysis” providing projections as to how the investor’s realised gain or loss would be impacted by (a) the price at which the investor sold the accumulated shares, (b) the percentage of the contract duration which had elapsed before the AC was knocked out and (c) the number of days on which the step‑up feature was engaged. 74.Lastly, the TIP provided that the risk rating for the ACs was “Very High (5)”, which was the highest possible rating. F. Shine Grace’s case in the main action 75.As prolifically pleaded in the Re‑amended Statement of Claim but skillfully refined in Shine Grace’s closing submissions, its complaints against Citibank and Ms Mak consist of three broad categories. 76.First, breach of duty to advise on the (un)suitability of the Disputed ACs for Mrs Chan/Shine Grace. At paragraph 107 of Shine Grace’s closing submissions, it is submitted that the Defendants had breached their duty in respect of ensuring the suitability of the ACs for Mrs Chan. However, given the central plank of Shine Grace’s entire case is that the ACs were wholly unsuitable for Mrs Chan, and in light of Shine Grace’s submissions from paragraphs 111 to 122 on “Duty to advise on suitability”, it seems reasonably clear to this court that Shine Grace’s real complaint is that the Defendants were in breach of their duty to advise or warn Mrs Chan that the Disputed ACs were unsuitable for her. 77.Shine Grace contends that the Dispute ACs were manifestly unsuitable for Mrs Chan because:
78.Second, breach of duty to provide reasonable, fair, accurate and honest advice and breach of duty not to mislead. In this regard, Shine Grace contends that
79.Shine Grace further contends that the following matters were not accurately, adequately, and properly disclosed by Citibank and Ms Mak and/or positively misleading:
80.Third, misrepresentation. Shine Grace contends that Citibank and Ms Mak had misrepresented the risks of entering into the Disputed ACs in light of the market conditions on 15 and 16 October 2007. In particular, Shine Grace contends that Ms Mak had represented that its ACs position was very safe (even though there was an anticipated downturn in the market) because it would have been released from its open positions by the time of the anticipated downturn. Shine Grace submits that the message conveyed by Ms Mak to Mrs Chan was that all of Shine Grace’s ACs would be knocked out before the anticipated market downturn and for that reason Shine Grace’s position was very safe, and it was safe for Shine Grace to enter into further ACs ("Alleged Representation"). The relevant telephone conversation took place on 15 October 2007 at 3:19 pm. 81.Shine Grace contends that both Citibank (through the TIPs and its staff) and Ms Mak made misleading statements of half‑truths by dedicating elaborate effort in describing risks or loss relating to absolute share price movements without adequate, if any, reference to substantial MTM losses and sudden margin calls irrespective of absolute share price movement. Further, Ms Mak had no reasonable basis to expect, or to encourage Mrs Chan to expect, the price of the underlying shares would reach Knock‑out level within a short period of time and failed to inform Mrs Chan of the same. Lastly, Ms Mak could not have held an honest belief that Shine Grace’s position would be very safe given that it was not investing in the ACs for the designed purpose as set out in the TIPs. G. Citibank’s and Ms Mak’s defence in the main action 82.Citibank’s and Ms Mak’s positions have been succinctly summarised in the opening section of their closing submissions. 83.First, the Defendants did not owe the alleged duty to provide Shine Grace “full, accurate and proper” advice on the suitability and risks of its investments (“Advisory Duties”).
84.Second, even if the Defendants owed a duty to advise Shine Grace on the risks of its investments, the Defendants were not in breach of such duties.
85.Third, there is no causal link between the alleged breaches of duty and Mrs Chan’s decision to enter into the Disputed ACs.
86.Fourth, Shine Grace is contractually estopped from asserting that the Defendants were under duties to provide full, proper and accurate advice concerning the suitability and risks of the Disputed ACs. 87.Fifth, Ms Mak did not misrepresent that Shine Grace’s position would be very safe and that it would be very safe for Shine Grace to enter into further ACs. In any event, this could not have had any influence on Mrs Chan as she was the one who suggested that they were very safe. H. Duty to advise 88.The starting point is this: the mere fact that the relationship between the parties is one of banker and customer does not mean the bank has a duty to consider the prudence of an investment transaction from the customer’s perspective or to warn him of the risk involved: Firth on Derivatives §4.012. 89.Of course, in any given case, it is possible that a bank may assume responsibility to provide advice to a customer. However, the mere giving of “advice” does not necessarily mean that a bank has assumed legal responsibility for it. In Chang Pui Yin & Ors v Bank of Singapore Limited [2017] 4 HKLRD 458 at [29] Lam VP said:
90.On the court’s approach in determining whether a bank has assumed legal responsibility, Lam VP had this to say at [35] to [37]:
91.One important aspect of the objective evidence in determining whether a bank has assumed legal responsibility to provide advice and owes a duty of care to its customer is the terms of the contract between them: Titan Steel Wheels Ltd v Royal Bank of Scotland Plc [2010] 2 Lloyd’s Rep 92 at [85]‑[89]; DBS Bank (Hong Kong) Ltd v San‑Hot HK Industrial Co Ltd [2013] 4 HKC 1 at [223]. 92.In Titan Steel Wheels Ltd v Royal Bank of Scotland Plc at [85]‑[89], David Steel J explained the various ways in which the contractual terms might impact on the issue of assumption of responsibility. At [89], the learned Judge concluded:
93.Similarly, in DBS Bank (Hong Kong) Ltd v San‑Hot HK Industrial Co Ltd, DHCJ Pow SC summarized the proper question to ask at [223]:
94.In Chang Pui Yin & Ors v Bank of Singapore Limited at [44(a)]‑[44(b)], Lam VP reiterated the importance of examining the terms of the contract between the parties as follows:
95.During his oral opening, Mr Jat SC properly accepted that a banker is under a general duty not to mislead. Subject to that, he submits that the terms of the contract between Citibank and Shine Grace are inconsistent with the alleged duty to advise which Shine Grace contends for. In this regard, Clauses 4.12(b) and (d) of the MDA are of particular significance:
96.A similarly‑worded Acknowledgment can be found in the RDS: see paragraph 51 above. The MDA and RDS are what Mr Shieh SC describes as second tier contractual documents. 97.The scope of Clause 4.12 is broad and its meaning is plain: Shine Grace should make its own judgment in relation to its investment transactions. Citibank and its staff disclaimed any duty to give advice or make recommendations and if suggestions were made by them, they assumed no responsibility for any investment made by Shine Grace. There is nothing in Clause 4.12 which limits the sort of advice, recommendations or suggestions which were intended to be covered by it. There is also nothing in Clause 4.12 which limits the situations in which it was apt to cover. In this regard, this court finds Shine Grace’s argument that (i) a distinction should be drawn between Shine Grace’s “own judgment” and Shine Grace’s “own independent judgment” and (ii) some limitations should be placed on its scope at paragraphs 231.1 and 231.3 of its closing submissions rather contrived and should be rejected. Shine Grace’s argument at paragraphs 231.2 of its closing submissions is completely at odds with the express terms of Clause 4.12(b) (iii) and must similarly be rejected. 98.Mr Jat SC submits and this court agrees that the alleged duties to advise on (a) the suitability of the Disputed ACs or (b) the nature of the MTM calculations, the effect of volatility on the MTM value of the Disputed ACs, the possibility of sustaining MTM losses even where the share price remained above the AFP etc are simply inconsistent with the terms of Clause 4.12. Indeed, the alleged duties to advise are inconsistent with the terms of all the three tiers of contractual documents taken as a whole, including in particular those parts of the General Terms (first tier) and the TIPs (third tier) referred to in sections D and E above which are part of the objective evidence of the relationship between Citibank and Shine Grace that the Court can and should look at in order to determine the issue of assumption of responsibility. 99.Mr Shieh SC, on the other hand, relies on Clause 5.1 of the MDA and submits that the SFC Code of Conduct (“SFC Code”) was expressly incorporated into the agreement between the parties for the purposes of a “derivative transaction or its underlying instrument” such as the Disputed ACs. As such, in so far as the SFC Code imposes a duty on a registered financial institution such as Citibank, including, for instance, a duty to act responsibly, diligently and carefully in providing advice or recommendations suitable to the client or a duty to ensure the client understands the nature and risks of a recommended transaction, the duty also became a contractual duty. 100.This is purely a matter of contractual interpretation and, with respect, this court is unable to accept the interpretation put forward by Mr Shieh SC. 101.Clause 5.1 of the MDA provided:
102.As its title makes clear, Clause 5.1 is concerned with the law governing the “derivative transaction or its underlying instrument or asset” rather than the parties to the transaction or the underlying instrument ie between a financial institution and its customers. Clause 5.1 subjects the transaction, instrument or asset to the relevant rules and regulations etc of relevant governmental and other regulatory bodies and agencies such as stock exchanges and markets as well as customary practices of those exchanges and markets. If Clause 5.1 was intended to have the effect submitted by Shine Grace ie all the duties imposed by the SFC Code on a registered financial institution shall be incorporated into the contracts between the institution and its customers, the drafter of Clause 5.1 could easily have done so in clear and express terms. But that was not the case. 103.Further, it cannot be said that Clause 5.1 has the effect suggested by Mr Shieh SC by necessary implication. As submitted by the Defendants, there is no discernible commercial reason to incorporate all of the relevant rules, regulations and market practice applicable to a derivative transaction into the contract between Citibank and its customers. On the contrary, it would be pointless to do so. The example provided in the Defendants’ opening submissions at paragraph 207 is a fair case in point. The Rules and Regulations of the Hong Kong Stock Exchange fall squarely within the phrase “rules, regulations…at the applicable exchanges” in Clause 5.1 but they are not concerned with the legal rights and duties of a financial institution vis‑à‑vis its customers. If so, why should Clause 5.1 be construed in a way so as to have such a pointless effect? 104.Lastly, while Clause 5.1 deals with the Governing Law of a “derivative transaction or its underlying instrument or asset”, it is well‑established that the SFC Code does not have the force of law: Ever‑long Securities Co Ltd v Wong Sio Po [2004] 2 HKLRD 143 at [51]; Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA unrep, HCCL 7/2010, 21 June 2012, Reyes J at [133]‑[135]. Rather, it is primarily promulgated for the purpose of determining whether a person is a fit and proper person to be or to remain as a licensed or registered person under the Securities and Futures Ordinance: DBS Bank (Hong Kong) Ltd v San‑Hot HK Industrial Co Ltd at [217]. Hence, this court is not satisfied that the SFC Code is within the ambit of Clause 5.1 or that the parties to the MDA, whether Citibank or Shine Grace, intended to incorporate it into the MDA for the purpose of defining the scope of Citibank’s duties towards Shine Grace. 105.To conclude, this court is satisfied that the contractual terms, taken as a whole, are only consistent with the conclusion that Citibank and Shine Grace had agreed to deal with each other on the basis that Citibank did not assume any duty or responsibility to advise, no matter what recommendations or suggestions might have been provided to Shine Grace by Citibank in the course of their relationship. 106.This court now turns to examine whether “other relevant factual circumstances surrounding the dealings between the parties” support Shine Grace’s contention that the Defendants had assumed legal responsibility to advise which went beyond the terms of the contractual arrangement. 107.In this regard, Mr Shieh SC places heavy emphasis on the Suitability Confirmation Letters[8] issued by Citibank to Shine Grace from time to time. In the Suitability Confirmations dated 31 August 2006 and 20 April 2007, under the heading “Type of relationship”, Citibank expressly confirmed that “You seek predominantly investment advisory services from us”. Mr Shieh SC submits that this is an express confirmation of the nature of the relationship between Citibank and Shine Grace as “investment advisory”. Similarly, in various bank statements and transaction confirmations sent by Citibank to Shine Grace, Shine Grace’s account was described by Citibank as “Investment Advisory” and “Investment Advisory Portfolio”. 108.While Shine Grace cannot point to any definition of the “Investment Advisory” classification by Citibank in the contemporaneous documents, it prays in aid paragraph 13 of the Re‑re‑amended Defence and Counterclaim which states that “Advisory” most accurately described Mrs Chan’s investment relationship with Citibank.[9] The first of the four categories of relationships was pleaded as:
109.It does not appear to this court that paragraph 13 of the Re‑re‑amended Defence and Counterclaim takes the matter any further. Shine Grace might well wish to be advised or informed of investment products suitable and consistent with its investment objectives and Citibank might well be willing to provide such advice or information, but it is a quantum leap to suggest that therefore Citibank must be taken to have assumed legal responsibility for providing such advice or information which went beyond the contractual arrangement between the two which negated such legal responsibility. If, as held by Lam VP at [37] in Chang Pui Yin & Ors v Bank of Singapore Limited, the giving of advice per se does not answer the question as to assumption of responsibility for such advice, it is difficult to accept the mere classification of the relationship as “Advisory” or “Investment Advisory” would answer the question. 110.But the matter does not stop there. The evidence before this court shows that Mrs Chan was a very strong-minded as well as confident investor. In her own words during a telephone conversation with Ms Mak on 7 September 2007, Mrs Chan had navigated the stock market for over 30 years. The evidence also shows that Citibank’s staff were on more than one occasion expressly asked not to interfere with her investment decisions. This is reflected in a Call Detail Report dated 24 November 2014 of what transpired at a dinner between Mrs Chan, Ms Mak and Dr Yau, as well as another Call Detail Report dated 16 August 2016 of what was discussed transpired at a dinner between Mrs Chan and Ms Mak. 111.Indeed, the evidence shows Mrs Chan was too confident and perhaps impatient to seek or listen to advice on the suitability of ACs from Citibank, particularly advice on the risks due to market movement, the method for the calculation of MTM values or the failure to meet margin calls. In this regard, Ms Mak summed it up at paragraphs 44 and 45 of her witness statement as follows:
112.As Ms Mak pointed out during cross‑examination on Day 8, what Mrs Chan wanted was someone smart enough who could execute trades quickly, efficiently and accurately. She was not looking for a person to advise her on what trades she should or should not do or what risks those trades involved. 113.Looking at all “other relevant factual circumstances” in the round, this court is satisfied that Citibank did not assume legal responsibility to advise Mrs Chan on the suitability and risks of ACs, as this court finds, on the evidence, that Mrs Chan did not require such service, at least in relation to the Disputed ACs. 114.Lastly, Shine Grace submits that Citibank was subject to an “intermediate” common law duty of explanation to the effect that
115.Reliance was placed by Shine Grace on Bankers’ Trust International Plc v PT Dharmala (Sakti Sejahtera) [1996] CLC 518, Crestign Ltd v National Westminster Bank & Royal Bank of Scotland [2014] EWHC 3043 (Ch) [2015] 2 All ER (Comm) 133 and Wani LLP v Royal Bank of Scotland Plc [2015] EWHC 1181 (Ch) in support of its submission. 116.However, the proposition that there exists such a free‑standing common law duty, irrespective of whether a banker has assumed legal responsibility to advise its customers in light of the contractual arrangement between the parties and all other relevant factual circumstances, is inconsistent with the approach adopted by the Court of Appeal in Chang Pui Yin & Ors v Bank of Singapore Limited which is of course binding on this court. The proposition is also inconsistent with the reasoning in Titan Steel Wheels Ltd v Royal Bank of Scotland Plc and DBS Bank (Hong Kong) Ltd v San‑Hot HK Industrial Co Ltd, which, albeit not binding, this court finds persuasive. In view of this court’s conclusion at paragraph 105 above, this court would similarly reject Shine Grace’s submission that Citibank was subject to an “intermediate” common law duty of explanation. I. Breach of duty 117.Shine Grace’s complaints of breach of duty by the Defendants have already been set out in section F above. For ease of reference, they are summarized below:
118.While the Defendants contend they were under no duty to advise Shine Grace, and this court agrees, they nevertheless go onto submit that they have fully and properly advised Shine Grace on the suitability of and the risks associated with the Disputed ACs. It goes without saying that the Defendants also submit they have not misled Shine Grace in any way. (Un)Suitability of the Disputed ACs 119.To put Shine Grace’s complaint in its proper perspective, it is useful to remind oneself at the outset that Mrs Chan’s trading of ACs with Citibank has been highly profitable. On Shine Grace’s own calculation, the net realized profit from 2004 to 2007 (excluding the Disputed ACs) was over US$22.6 million (~HK$180 million). Out of that, a whopping US$18.634 million (~HK$146 million) was made in 2007. According to the Defendants’ calculation, which was not contradicted, Shine Grace made a profit of around HK$80 million in September and earlier October 2007 alone. It is also useful to bear in mind there is no suggestion that the Product Description, Investment Rationale and Investment Objectives stated in the TIPs of the Disputed ACs were materially different, if at all, from those stated in the TIPs of the earlier ACs which were profitable. If so, what was so unsuitable about the Disputed ACs that the Defendants were supposed to advise? 120.In the “Product Description” section of the TIPs, Citibank set out the strategy for which the Disputed ACs were suitable and originally designed.
121.In its closing submissions, Shine Grace seizes upon this part of the TIPs in support of its submission that the Disputed ACs were manifestly unsuitable for the following reasons. 122.First, Mrs Chan’s market outlook and strategy immediately prior to entering the Disputed ACs in October 2007 were inconsistent with the Product Description and Investment Rationale of ACs as stated in the TIPs. This is because her expectation of an imminent market correction after the Hang Seng Index had reached 30,000 or 32,000[13] did not accord with any expectation that “the price of the underlying security to remain stable at or above the current spot level as of trade date for the duration of the contract.” 123.Second, the volume and size of the Disputed ACs were unprecedented and could not have been supported by Mrs Chan’s personal financial resources. The Shenhua ACs were particularly unsuitable as Mrs Chan was unfamiliar with Shenhua yet the MAIA of the 2 Shenhua ACs was over HK$1.1 billion and the initial margin was around HK$200 million. 124.For ease of reference, details of the Disputed ACs are set out below:
125.In summary, the total MAIA of the Disputed ACs was around HK$3.109 billion. If one disregards the first 2 Disputed ACs ie EA71015066 and EA71015026, which were knocked out on the same day, the total MAIA would be around HK$2.6 billion. If one further disregards the 6th Disputed AC ie EA71016137 knocked out on 1 November 2007, the MAIA came to around HK$2.25 billion. The initial margin of all the Disputed ACs, set at either 15% or 18% of the MAIA, was around HK$515 million. 126.Third, the Defendants knew of the steady and gradual “changing of the guard” in the leadership of the Bonds Group such that the assets of BSI were to be separated from Mrs Chan’s personal trading. Hence, trades of the size of the Disputed ACs were plainly unsuitable. 127.With respect, none of the reasons put forward establish that the Disputed ACs were unsuitable for Mrs Chan. 128.First, as submitted by the Defendants, ACs are not only suitable for investors who intended to accumulate shares over the entire one‑year duration of the ACs. As stated in the “Investment Objectives” section of the TIPs:
129.All the Disputed ACs contained a guaranteed accumulation period of one month even if the ACs were knocked out before then. This allowed Shine Grace to accumulate at least one month’s worth of the underlying stocks at a substantial discount — in the case of the Disputed ACs, the AFP was fixed at between 83.10% to 84.80% of the spot price so the discount would be between ~ 15% to ~ 17%. If the share price rose to 102% of the spot price and the AC was knocked out, which happened to 3 of the Disputed ACs, Shine Grace could have sold those shares at a significant profit ie the discount plus 2%. This is a beneficial result for any investor. It is also consistent with one of the Investment Objectives set out in the TIPs. 130.Importantly, it is also consistent with one of Mrs Chan’s trading strategies as established on the evidence. In response to this court’s question on Day 7 regarding a phone conversation between Mrs Chan and Ms Mak on 15 October 2007 at 2:47 pm, Ms Mak testified, at that time, Mrs Chan hoped the ACs would be knocked out quickly so she could earn a quick profit and then use the money to enter into another AC. This court accepts Ms Mak's testimony and shall so find. This strategy has worked well for Mrs Chan in the past. According to Schedule 3 of the Re‑re‑amended Defence and Counterclaim by Citibank, of the 282 ACs traded by Mrs Chan since January 2004, only 12 were not knocked out and she had made a handsome profit out of them. 131.Second, Mrs Chan’s trading strategy was not based solely on the expectation that the Disputed ACs would all be knocked out during the guaranteed period. Although Mrs Chan envisaged a market correction sometime in the future, she did not think it would be as serious as it eventually turned out to be, as shown by the figures in paragraph 4 above. This can be seen from the transcripts of phone conversations on 15 October 2007 at 10:19 am, 16 October 2007 at 11:13 am where Ms Mak and Mrs Chan exchanged their views on the market outlook. As Ms Mak pointed out in her evidence, Mrs Chan did not have a bearish view of the market in the medium to long term. On the contrary, Mrs Chan had a positive long‑term outlook in relation to the underlying shares in question and the market as a whole, so she was prepared to accumulate the shares even if the Disputed ACs were not knocked out. Again, this court accepts Ms Mak's testimony and shall so find. 132.Concerning the alleged unprecedented volume and size of the Disputed ACs, they were in fact not that unprecedented. 133.One example given by the Defendants is that Mrs Chan entered into 34 ACs in September 2007, including 3 China Life ACs on 28 September 2007 with a total MAIA of ~ HK$1.3 billion. This is to be contrasted with the MAIA for the 2 Shenhua ACs she entered into on 15 and 16 October 2007 which was ~ HK$1.1 billion. Another example comes from Shine Grace’s own internal records. Prior to the Disputed ACs, its maximum exposure came close to or hit the HK$2 billion mark three times: on 14 September 2007 (at HK$1.97 billion), 17 September 2007 (at HK$2.12 billion) and then on 5 October 2007 (at HK$2.014 billion). This was not much smaller from the MAIA of the Disputed ACs if one disregards the first two which were knocked out on the same day ie ~ HK$2.6 billion[14]. There is no suggestion that Shine Grace’s outstanding ACs as at 14, 17 September or 5 October 2007 were unsuitable by reason of their volume and size. It lies ill in Shine Grace’s mouth to argue the Disputed ACs were unsuitable owing to their volume and size whereas those earlier profitable ACs were not. 134.A similar response can be made of the argument that the Defendants knew of the “changing of the guard” in the leadership of the Bonds Group such that the assets of BSI were to be separated from Mrs Chan’s personal trading and hence the size of the Disputed ACs were plainly unsuitable. Shine Grace claimed the “changing of the guard” started by early 2007 when Mrs Chan evinced a clear intention that BSI was to be kept separate from Shine Grace’s trading. But the fact remains that Mrs Chan very actively traded in ACs in 2007, having entered into over 100 ACs with Citibank prior to the Disputed ones. Nevertheless, instead of reducing the size and volume of her AC trades, Mrs Chan’s maximum exposure on her AC trades gradually increased from around HK$190 million in January 2007 to HK$1 billion in March 2007 and reached the HK$2 billion level in September and early October 2007, without showing any signs of difficulty in financing her trading of that size and volume. In these circumstances, it can hardly be said the so‑called “changing of the guard” had rendered the Disputed ACs unsuitable for Shine Grace. 135.To conclude, this court finds the Disputed ACs were not unsuitable and that Shine Grace’s complaint in this regard is unfounded. MTM calculations, risks of MTM losses due to implied volatility and MTM losses where spot price was above AFP 136.Concerning MTM calculations, much is agreed by the two experts:
137.As explained in section E above and as is clear from the evidence, the financial models used by banks to calculate the MTM value of ACs are highly complex and sophisticated and not readily available to outsiders. The inputs used to generate the MTM value of an AC at a given point of time include the spot price of the underlying shares, their implied volatility, their expected dividend, interest rate and the remaining duration of the contract. Hence, in theory and in practice, the MTM value can and does vary from time to time for the duration of an AC since, at the very least, the spot price of the underlying shares is likely to change from time to time, even though the extent of which may not be substantial in a relatively stable market. 138.Shine Grace seizes upon this, as well as Ms Mak’s description of MTM calculations as “black box” in her phone conversation with Ms Lai and submits that, at the very least, the fact that the Disputed ACs involved a black-box calculation ought to have been drawn to Mrs Chan’s attention which the Defendants have failed to do so. By reason of the Defendants’ failure, the investor ie Mrs Chan would not have been in a position to gauge the extent of MTM losses (and cater for cash flow to meet sudden margin calls) in advance, and hence could not have made an informed and calculated decision whether or not to enter into the Disputed ACs. 139.Relying on Mr Das’ criticisms of Citibank’s risk disclosure and his suggestion that Citibank should have provided more complete disclosure of inter alia an investor’s exposure to implied volatility risk, both qualitative and quantitative, in section H of his Expert Report and section F of the Joint Expert Report, Shine Grace further submits that the TIPs have overemphasized the HTM risk and absolute share price movement but failed to (i) sufficiently explain the nature of implied volatility and its impact on the value of an AC and potential margin calls; (ii) adequately disclose MTM risks, including the possibility that there could be MTM losses even when the spot price remained above the AFP; (iii) provide any quantitative analysis on MTM risks. 140.To put these submissions in their proper perspective, one should first set out what the Defendants have disclosed in the TIPs under the section “Risk Information”:
141.It seems to this court that the TIPs have summarized, in “layman’s” language, what the parties’ experts have set out extensively in their reports concerning the risk of MTM loss, how such loss can arise and its impact on the margin requirements. In particular, the TIPs inform the investor that MTM loss can occur, and additional margin calls may follow, if there is an adverse variation to any one of the factors that go into valuing an AC, including, in particular, a drop in the spot price of the underlying share and, in the event of market fluctuation, an adverse change to implied volatility. Of course, with the benefit of hindsight and if one compares the TIPs with the hundreds of pages of expert reports adduced in these proceedings, one can always find fault with the TIPs and make the point that the TIPs could have explained this or that concept, such as implied volatility, or disclosed this or that risk, such as MTM risk, more fully. But hindsight is not a very reliable guide. 142.Given that the MTM value of an AC depends on a variety of factors, some of these factors can and do vary in the 12‑month duration of the AC, and the extent of variation of these factors eg share price movement and implied volatility, for the entire 12 months are difficult to predict correctly before an AC is entered into, this court does not see what useful purpose it would serve for the Defendants to emphasise to Mrs Chan, prior to her entering into the Disputed ACs, that the calculation of their MTM value was very complicated and was akin to a black box. In any event, one can readily tell from the TIPs that it was a complicated process and that should there be an adverse change to the MTM value, an investor might be required to make additional margin deposits at short notice or to liquidate his/her position at a loss. 143.In response to Mr Das’ criticism and Shine Grace’s submissions aforesaid, the Defendants make a number of points in reply. This court finds those points persuasive and holds that they render Shine Grace’s complaint of inadequate disclosure by the Defendants wholly unjustified. 144.First, the additional disclosure suggested by Shine Grace is unsupported by market practice or regulatory guidance. 145.As far as market practice is concerned, this is confirmed by Mr Malik who explained in his Expert Report that he was not aware of any bank term sheets for structured products provided to investors at the material time which included various MTM values for the contract’s duration or which explained in detail how implied volatility affected MTM values, how it was derived or the quantum effect of changes in implied volatility on the value of an AC and its margin requirement. Mr Malik further explained it would be unusual to provide quantitative scenario analyses of potential MTM values on different dates as such analyses would be rife with assumptions and could be proved wrong by market events. This court accepts Mr Malik’s explanation. 146.In court, Mr Das also accepted there was no market practice as such and that he had not seen any documentation created by financial institutions at the material time which set out a sensitivity analysis on implied volatility. This court should add that no documentation has been adduced in evidence in these proceedings which contained sensitivity analysis on implied volatility or the additional disclosure suggested by Shine Grace. 147.Concerning regulatory guidance, suffice it to note that, even after the 2008 financial crisis, the Hong Kong Monetary Authority (“HKMA”), in their letters dated 22 December 2010 and 31 October 2011 to Authorised Institutions setting out its expected standards of conduct for those institutions engaged in selling accumulators, did not specifically require banks to explain the concept of implied volatility and its role in the calculation of MTM values or to set out scenario analyses showing the effect of changes in implied volatility over time. 148.The parties disagree on who has the burden of proving market practice. It seems to this court the point regarding the absence of market practice (or regulatory standard) is not so much about which side has the burden of proving an established market practice or regulatory standard on risk disclosure. The point is simply that Shine Grace’s criticism of the Defendants’ risk disclosure to customers cannot be justified by reference to any market practice prevailing in 2007 or the regulatory standard set by the HKMA afterwards. 149.Second, Shine Grace’s suggested additional explanation of the concept of implied volatility and scenario analyses setting out the effect of changes to implied volatility on MTM value are more likely to confuse than to enlighten investors. 150.The difficulty in seeking to explain the concept of implied volatility is self‑evident. All one has to do is to go through the transcript of the “top‑up” examination‑in‑chief of Mr Das in the morning of Day 10 to appreciate this. In response to a question by this court, Mr Das accepted that investors, sophisticated or not, would have difficulty understanding the detailed explanation provided by him earlier on in the witness box, as illustrated by the following exchange between Mr Das and the Court:
151.Mr Das has himself prepared a Suggested Sensitivity Analysis for Changes in Implied Volatility at Annexure 4 of his Expert Report (“Sensitivity Analysis”). He also contended that a chart of implied volatility sensitivity prepared by Mr Malik (“Chart”) and set out in paragraph F.30 of the Joint Expert Report could have been done and would have been useful to investors before they entered into an AC. 152.However, the Defendants submit and this court agrees that the Sensitivity Analysis and the Chart are unlikely to be helpful to investors in understanding implied volatility risks over and above what has already been disclosed in the TIPs. There are several reasons for it. 153.The first reason is that investors would not be able to understand the Sensitivity Analysis and the Chart unless they first have a workable understanding of the concept of implied volatility and what is meant by a percentage increase (or decrease) in implied volatility in the first place. The following exchange during cross‑examination between Mr Das and Mr Dawes on the Sensitivity Analysis fairly illustrated this problem:
154.Of course, different investors have different educational background and level of understanding of structured products. But it does seem far‑fetched, and unsupported by evidence, to suggest a retail investor, even a sophisticated, experienced, high net worth one, would be able to comprehend something like the Sensitivity Analysis or the Chart without a serious lecture by someone equally knowledgeable as Mr Das or Mr Malik. 155.The second reason is that MTM sensitivity analysis involves the provision of MTM values for various scenarios at various points in time in the future for which, ex hypothesis, there is no actual market data at the time an AC was entered into. Because of that, the analysis necessarily depends on the making of a broad range of assumptions. It goes without saying that the analysis provided to an investor prior to an AC may turn out to be inaccurate if the assumptions are later shown to be incorrect. 156.For instance, the Sensitivity Analysis proposed by Mr Das assumes all variables (other than spot price, time remaining to maturity and implied volatility) are held constant while the volatility assumed is held constant for the remaining term of the AC. If so, the figures of MTM gains and losses set out in the analysis will turn out to be inaccurate if any of the assumed constant changes. This was frankly acknowledged by Mr Das in cross‑examination. 157.The third reason is that valuation of an AC is a dynamic process which depends heavily on the fluctuation of spot price of the underlying shares. This is the point illustrated in paragraph F.9 and section K of the Joint Expert Report and emphasized by Mr Malik who testified during cross‑examination that an adverse change to the MTM value of an AC was primarily driven by a drop in the spot price:
158.The potential for a sensitivity analysis to mislead or confuse investors was clearly explained in Mr Malik’s examination‑in‑chief in the morning of Day 11:
159.This court accepts Mr Malik’s testimony. 160.This problem was also recognised by Mr Das who ultimately acknowledged the suggested sensitivity analysis can only be used for the purpose of illustrating that changes in implied volatility could have an adverse impact on the MTM value:
161.But the suggested sensitivity analysis is wholly unnecessary for this purpose. The information is already set out in the TIPs. If so, the suggested MTM sensitivity analysis provides no added value to an investor. Instead, as Mr Malik pointed out, if the investor is really interested in finding out the impact of volatility on the MTM value of an AC, the easiest way would be to ask the bank to provide MTM valuations on a regular basis. 162.Lastly, Shine Grace complains that the lack of disclosure that the ACs could show MTM losses even where the spot price had dropped but remained above the AFP, which both Mr Das and Mr Malik agreed was possible, was especially misleading. 163.This court does not find this complaint at all valid. The TIPs have clearly disclosed the MTM value of an AC can be affected by inter alia the price of the underlying security, meaning there could be MTM losses (as well as additional margin calls) as long as the spot price of the underlying share has dropped. Obviously, the bigger the drop, the bigger the MTM losses. As illustrated by the example given by Mr Malik, there could be MTM losses if the spot price dropped from $100 to $81 but was still above the AFP of $80. The reason can be found in this exchange between the court and Mr Malik:
164.In any event, as submitted by the Defendants, this complaint is highly artificial as there is no real connection between this complaint and what actually happened with the Disputed ACs. What actually happened was that the spot prices of the underlying shares had fallen well below AFP when those 6 Disputed ACs were finally closed out on 22 January 2008, as shown by the following table.
J. Misrepresentation 165.The misrepresentation claim is wholly devoid of merits and can be disposed of quickly. 166.Shine Grace’s claim for misrepresentation consists of: (i) misrepresentation at common law, (ii) under the Misrepresentation Ordinance, Cap 284 and (iii) under section 108 of the Securities and Futures Ordinance, Cap 571. In each case, Shine Grace must establish that:
167.First, in determining the meaning of an alleged representation, as in all matters in law, context is paramount. The test is what a reasonable person would have understood from the words used in the context in which they were made: IFE Fund SA v Goldman Sachs International [2006] 2 CLC 1043 at [50]. 168.For the present purpose, the context was this:
169.If one reads the transcript of the relevant conversation properly or listens to the voice log in context, it is clear, and this court finds, Ms Mak did not make the Alleged Representation that all of Shine Grace’s accumulator positions would be knocked out before the anticipated market downturn and that for this reason Shine Grace’s position would be very safe and it was very safe to enter into further ACs including the Disputed ACs. 170.Second, what Ms Mak said to Mrs Chan during the said telephone conversation was a statement of opinion relating to future market movement. It is trite law that such statements are not actionable unless the opinion is not honestly held: Chitty on Contracts 32nd Ed Para 7.007‑7.008. There is no evidential basis for Shine Grace to suggest that Ms Mak did not honestly hold the opinion she expressed in that telephone conversation. All that Shine Grace can say in their closing submissions is that Ms Mak “could not have honestly held such opinion and/or did not have reasonable or any grounds for holding the same”. That is really no more than a bare assertion on the part of Shine Grace. 171.Third, Shine Grace failed to establish the necessary causal link between what Ms Mak said and Mrs Chan’s decision to enter into the Disputed ACs. As stated above, it was Mrs Chan who expressed her view to Ms Mak that “we were very safe” and Ms Mak was only going along with Mrs Chan. This is wholly insufficient to establish causation: Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plcat [153]‑[162]. On the evidence, this court finds Mrs Chan to be a very strong‑minded person and an enthusiastic, confident and prolific investor. Given her past success with her ACs trades, this court finds it hard to accept that Mrs Chan entered into the Disputed ACs because Ms Mak echoed her view that “we were very safe”. For the same reason, albeit this relates more directly to Ms Mak's alleged breach of duty rather than misrepresentation, this court rejects one of Shine Grace's attack on Ms Mak that she used unethical high pressure sales and solicitation techniques in inducing Mrs Chan to enter into the Disputed ACs. K. Causation 172.It is trite law that in order to establish liability, Shine Grace must prove that it would have avoided the losses claimed but for the Defendants’ alleged breaches of duties: Clerk & Lindsell on Torts 21st Ed at para 2.15. The test is a subjective one: Clerk & Lindsell on Torts 21st Edat para 2.15, Montgomery vs Lanarkshie Health Board [2015] AC 1430 at [96]‑[105]. 173.In the present case, Shine Grace submits that Mrs Chan would not have entered into the Disputed ACs, irrespective of past transactions and her trading history, had she been given a proper explanation of the significant risks (including the black box nature of the MTM calculations) underlying the Disputed ACs and had she been warned of their (un)suitability. Since the test is subjective and since this court does not have the benefit of hearing from Mrs Chan as to whether and if yes in what ways she would have acted differently, it is inherently difficult to see how Shine Grace can pass this hurdle of establishing causation. 174.The Defendants, on the other hand, submit that all the available evidence suggests that Mrs Chan would have entered into the Disputed ACs any way — in other words, Shine Grace has failed to establish the necessary causal link between the alleged breaches of duties and Mrs Chan’s entering into the Disputed ACs. 175.This court accepts the Defendants’ submission and will so find, for these reasons. 176.First, this court has already made a finding that Mrs Chan was a very strong‑minded person and an enthusiastic, confident and prolific investor. Indeed, Mrs Chan was so strong‑minded and confident that, once she had formed a view to go for a particular trade, the Defendants’ staff, as well as her other bankers, were expressly instructed not to interfere. 177.One example is the report of a dinner between Ms Mak, Mrs Chan and Dr Yau on 24 November 2004, which stated as follows:
178.A similar example can be found in Ms Mak’s written report of her dinner with Mrs Chan on 16 August 2006 which recorded the following exchange:
179.That this was Mrs Chan’s character and attitude was confirmed by Ms Mak in court on Day 7 and Day 8, whose testimony this court accepts:
180.In these circumstances, it is wholly speculative for Shine Grace to suggest that the Defendants could have dissuaded Mrs Chan from entering into the Disputed ACs by advising her that they were somehow unsuitable for her, whether generally or in light of the circumstances prevailing on 15 and 16 October 2007. 181.Second, it seems to this court highly improbable that Mrs Chan would have been dissuaded from entering into the Disputed ACs simply by the Defendants warning her of the risk of MTM losses due to eg spot price movements or fluctuations in implied volatility and the possibility of additional margin calls. Mrs Chan herself was a person of substantial net worth and she had access not just to Shine Grace’s but also BSI’s and Shinning’s resources, as well as credit lines available to her various PICs, to support her trades.
182.Mrs Chan was a seasoned investor and knew full well that additional margin calls could arise whenever the market turned which could be any time. Hence, Mrs Chan knew full well that ACs were only suitable for investors with substantial financial strength like herself. This can be seen from the telephone conversation on 2 October 2007 at 4:02 pm:
183.The evidence shows that Mrs Chan had never paid too much attention to margin calls — that was the responsibility of Ms Lai. This can be seen from a telephone conversation between Ms Mak and Ms Lai on 30 September 2004 at 4:55 pm:
184.On the evidence, there were previous occasions between October 2004 and September 2007 where Shine Grace ran into margin shortfalls ranging from US$0.6 million to US$23 million. On most occasions, Ms Lai was able to arrange sufficient funds to rectify the shortfall although there was an occasion where the shortfall was resolved through improvement in market conditions. L. Conclusion on liability 185.For all the above reasons, this court concludes that Shine Grace has wholly failed to establish liability on the part of the Defendants. No useful purpose will be served for this court to go on to consider the parties’ submissions on quantum. M. Guarantor actions Shinning Action 186.Shinning had provided Citibank with two Shinning Guarantees on 10 March 2006 for US$4 million and on 16 June 2006 for US$3 million by which Shinning agreed to satisfy on demand
187.After the 6 open Disputed ACs had been closed out and unwounded and after Shine Grace had failed to meet Citibank’s demand to pay for the shortfall, on 24 January 2008, Citibank issued a letter of demand to Shinning for ~US$3.276 million. This demand was not met and on the next day, Citibank appropriated HK$25,609,002.71 from its accounts. 188.The sole basis of Shinning’s claim against Citibank is that Shine Grace was not liable to pay Citibank any sums under the Disputed ACs or otherwise and therefore it was not entitled to issue the letter of demand to Shinning or to appropriate funds from its accounts. In other words, Shinning’s claim against Citibank is dependent on Shine Grace succeeding in the Main Action. Given that Shine Grace has wholly failed to establish liability against Citibank in the Main Action, which in turn means Shine Grace was indeed liable to pay Citibank for sums due under the Disputed ACs, Shinning’s claim against Citibank must also fail. BSI Action 189.BSI has also provided Citibank with the 2004 Guarantee on 18 October 2004 for US$5 million and the 2006 Guarantee on 23 May 2006 for US$7 million by which BSI agreed to satisfy on demand Shine Grace’s liabilities to Citibank. 190.As in the case of Shinning, after the 6 open Disputed ACs had been closed out and unwounded and after Shine Grace had failed to meet Citibank’s demand to pay for the shortfall, on 24 January 2008, Citibank issued a letter of demand to BSI for ~US$4.958 million. This demand was not met and on the next day, Citibank appropriated HK$39,109,301.58 from its accounts. 191.The first basis of BSI’s claim against Citibank is the same as that of Shinning’s claim against Citibank ie Shine Grace was not liable to pay Citibank any sums under the Disputed ACs or otherwise and therefore it was not entitled to issue the letter of demand to BSI or to appropriate funds from its accounts. For reasons already explained at paragraph 189 above, this basis of BSI’s claim against Citibank must fail. 192.The only additional issue raised in the BSI Action is that on 26 July 2007, BSI gave Citibank:
193.Clause 3 of the 2004 Guarantee provided:
194.Unlike the 2004 Guarantee, the 2006 Guarantee did not contain an express provision for the giving of notice of termination by BSI. 195.On the basis of the above, BSI contends that:
196.Citibank does not dispute that BSI did issue the Termination Notices on 26 July 2007. But it submits that the BSI Guarantees had not been terminated because BSI, via Ms Lai, had agreed to suspend the termination of the 2 guarantees, the reason being they were needed as part of the collateral in support the trading of Shine Grace. As evidence of the agreement to suspend the termination, Citibank refers to a phone call between Ms Lai and Ms Yim on 17 August 2007 at 3:55 pm (“1st phone call”) and a phone call between Ms Lai and Ms Mak on 5 October 2007 at 12:00 pm (“2nd phone call”). 197.The 1st phone call took place on 17 August 2007. On that day, Ms Lai and Ms Yim had altogether 7 phone conversations. The subject matter of those conversations revolved around Shine Grace’s trading, its margin position and collateral position including, in particular, BSI’s exposure by virtue of its guarantees for Shine Grace’s liabilities. The following is the English translation of the relevant part of the 1st phone call:
198.What is reasonably clear from the 7 phone conversations, particularly the 1st phone call, is that Ms Lai
199.In its written closing, Shine Grace submits that Ms Lai did not give instruction to Ms Yim to put the Termination Notices on hold in the 1st phone call. Rather, Ms Lai was simply referring to the fact that the Termination Notices had been put on hold by Citibank. 200.This court does not accept this submission. 201.First, while it is true that Ms Yim and her colleague in the credit department viz Ms Amy Cheong did appear to have decided internally not to take action on the Termination Notices during a phone conversation on 14 August 2007, that was an internal matter of Citibank — there is no evidence that Ms Lai was aware of that when she spoke to Ms Yim 3 days later on 17 August 2007. 202.Second, when Ms Lai was cross‑examined on the 1st phone call on Day 5, she first said “When I said ‘hold it’, I mean hold that letter, hold that termination letter.” The next moment of her cross‑examination, Ms Lai retracted and said what she actually meant was that Citibank “were holding the letter; according to my understanding, they had not done that matter”. That retraction was obvious to this court and has dented Ms Lai’s credibility. 203.Third, when Ms Yim was cross‑examined on the 1st phone call by Counsel for Shine Grace, the line of the cross‑examination was not that Ms Lai had not made a request to put the Termination Notices on hold or Ms Yim did not accede to the request. Rather, the line of cross‑examination was that Citibank did not put the Termination Notices on hold because of Ms Lai’s request. 204.For these reasons, and having heard the audio recording and read the Chinese transcript of the 1st phone call, this court has no doubt that Ms Lai did give instructions to Ms Yim to put the Termination Notices on hold in that conversation and shall so find. In this regard, the English translation of the relevant part of the conversation is simply wrong. 205.The 2nd phone call took place on 5 October 2007. The following is the English translation of the relevant part of the 2nd phone call:
206.In cross‑examination, Ms Lai accepted that she agreed to the suspension of the Termination Notices in that conversation and that the BSI Guarantees would remain in place in order to support Mrs Chan’s AC trades because she was told Mrs Chan had entered into new ACs and she was “afraid that the surplus might not be enough”. It is reasonably clear from that conversation that the agreed suspension of the Termination Notices would last until at least the end of October 2007. 207.The Defendants submit and this court agrees that the context surrounding the 2 phone calls is of importance. Between August and October 2007, Shine Grace entered into over 60 ACs with Citibank and, apart from brief intermittent periods lasting for a few days, there was a collateral shortfall in Shine Grace’s account from 13 August to 5 October 2007. That is the context of the phone calls between Ms Lai, Ms Yim and Ms Mak and that provides the obvious explanation as to why Ms Lai requested and agreed to put the Termination Notices on hold. 208.Lastly, this court has taken in account of the fact that:
209.For all these reasons, this court has no hesitation in finding that Ms Lai did instruct and agree with Citibank to suspend the Termination Notices pending further discussions after the completion of Citibank’s annual credit review at the end of October 2007. In so far as Ms Lai denies having done so, this court rejects her evidence. 210.The next issue is Shine Grace’s submission that Ms Lai had no authority to agree to the suspension of the Termination Notices. 211.In the view of this court, the submission is also without merits. 212.Ms Lai was the Financial Controller of the Bonds Group since 1992 and the undisputed evidence is that she was the one who gave instructions to Citibank on matters relating to BSI’s account and, in particular, the use of BSI’s funds to support Mrs Chan’s AC trades. This court has already referred to the phone conversation between Ms Lai and Ms Mak concerning margin calls in general at paragraph 183 above. This court has also referred to the 7 phone conversations between Ms Lai and Ms Yim on 17 August 2007 concerning Shine Grace’s trading, its margin and collateral position especially BSI’s exposure by virtue of its guarantees for Shine Grace’s liabilities at paragraph 198 above. At paragraphs 72 and 74 of her 1st witness statement, Ms Lai said this regarding funding for the Shine Grace’s account:
213.On the totality of the evidence before this court, it is reasonably clear that Ms Lai was the financial “gatekeeper” of companies controlled by Mrs Chan, including Shine Grace and BSI, and gave instructions on their behalf to Citibank from time to time regarding their financial affairs. There is no reason for this court or Citibank to think that specifically in relation to the BSI Guarantees, Ms Lai lacked the necessary authority to agree to suspend the Termination Notices. No convincing reason has been suggested by Counsel for BSI. 214.To conclude, this court finds Ms Lai had the authority to and did on behalf of BSI instruct and agree with Citibank to suspend the Termination Notices until further discussions after end of October 2007. Since such discussions never took place, this court also finds the BSI Guarantees had not been terminated. 215.For all the above reasons, BSI’s claim against Citibank fails. N. Citibank’s counterclaim against Shine Grace 216.In view of this court’s findings in the Guarantee Actions, Citibank’s counterclaim against Shine Grace becomes academic. O. Disposition and costs order nisi 217.The Plaintiff’s claim in the Main Action is dismissed. There shall be judgment in favour of the Defendants with costs, to be taxed if not agreed and paid forthwith, with certificate for 3 counsel. 218.The Plaintiff’s claim in the Shinning Action is dismissed. There shall be judgment in favour of the Defendant with costs, to be taxed if not agreed and paid forthwith, with certificate for 3 counsel. 219.The Plaintiff’s claim in the BSI Action is dismissed. There shall be judgment in favour of the Defendant with costs, to be taxed if not agreed and paid forthwith, with certificate for 3 counsel. 220.Lastly, I thank the legal representatives of all parties for their helpful assistance.
Mr Paul Shieh SC, Mr Jin Pao and Mr Byron Chiu, instructed by Reed
Smith Richards Butler, for the Plaintiff in HCCL 28/2008, Mr Jat Sew Tong SC, Mr Victor Dawes SC and Mr Joshua Chan, instructed by Clifford Chance, for the 1st and 2nd Defendants in HCCL 28/2008 and the Defendant in HCCL 28/2013 and HCCL 29/2013 [1] The meaning of which shall become apparent later in section E. [2] In March and June 2006 respectively. [3] In 2004 (“2004 Guarantee”) and 2006 (“2006 Guarantee”) respectively. [4] Save from 23 April to 31 August 2007 when Ms Mak was on extended leave. [5] As recorded in her telephone conversation with Ms Mak on 15 October 2007 at 3:19 pm. [6] See the section entitled “Investment Rationale” in the TIP. [7] Telephone conversation between Ms Mak and Ms Lai on 15 November 2007 at 2:44 pm at counter 95. [8] Which are not contractual in nature. [9] Ms Mak also accepts this best described Citibank’s role in the management of Mrs Chan’s relationship in her witness statement. [10] Paragraph 153 of Shine Grace’s opening submissions and section D1 of Shine Grace’s closing submissions. [11] Telephone conversation between Ms Mak and Ms Lai on 15 November 2007 at 2:44 pm at counter 95. [12] A shorter version of it appears in the “Investment Rationale” section of the TIPs. [13] In a telephone conversation she had with Ms Mak on 15 October 2007 at 3:19 pm. [14] Shine Grace’s own calculation was that its maximum exposure on 16 October 2007 was ~ HK$2.7 billion. |
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