Tat Lee Eaton Securities Co. Ltd. v. Chu Hong Lin

HCA003044/1998

HCA3044/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3044 OF 1998

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Coram : Hon Cheung J in Court

Dates of hearing : 28 and 31 May 1999

Date of judgment : 31 May 1999

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J U D G M E N T

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The Agreement

1. The Plaintiff is engaged in the business as a stockbroker. The Defendant was a client of the Plaintiff. The parties entered into a Margin Client Agreement dated 7th July 1997 ("the Agreement"). The nature of the Agreement was for the Plaintiff to open a margin account for the Defendant and to provide credit facilities to the Defendant to trade in securities with this account. The credit limit was $3 million. Pursuant to the Agreement, the Defendant carried out transactions for sale and purchase of securities on this account. The Plaintiff now seeks to recover $414,144.52 together with interest from the Defendant in respect of sums due to the Plaintiff for the transactions in securities.

2. The following are the relevant clauses of the Agreement :

Mr Wu's evidence

3. According to the first witness, Mr Wu, the Account Executive of the Plaintiff who handled the Defendant's account, the trouble with the Defendant's account occurred in October 1997 when the Hong Kong stock market began to plummet. During this period, the Defendant's position was tight, his loan with the Plaintiff had exceeded what he was entitled to. On 14th October, Mr Wu asked the Defendant to pay money to cover the position in his account. The Defendant paid a cheque of $300,000. The cheque was paid into the bank by the Plaintiff on 16th October because by the time the cheque was received, it was after the closing on 15th October.

4. After this payment, the market continued to fall. On 20th October 1997, Mr Wu further asked the Defendant to pay money to cover his position. The Defendant failed to do so. Mr Wu was unable to contact the Defendant from that time onwards. The Plaintiff began to sell the securities gradually. They were completely sold by 27th October. The balance due to the Plaintiff was $414,144.52.

The defence

5. The Defendant said that on 15th October, he told Mr Wu that he could only pay the last $300,000 to the Plaintiff and he instructed Mr Wu to sell all his securities on the same day and had the Plaintiff followed his instructions he would not suffer any loss.

The issue

6. The case is a simple one and concerns only with whether there was such an instruction being given to the Plaintiff by the Defendant. Despite the Defendant's evidence that he gave the instructions on 15th October, the pleaded case of the Defendant was that the instruction was given on 16th October.

7. Mr Wu denied that the Defendant had instructed him to sell all the securities on 15th or 16th October. On the contrary, the Defendant on 15th October told him not to sell his securities. After the Defendant had paid the $300,000 on 15th October, he only instructed Mr Wu to sell selected shares. In fact, on 16th October, the Defendant asked him to buy shares for him which was refused by Mr Wu.

8. It is clear from the statement of account that the Defendant owed substantial sums to the Plaintiff. On 13th and 14th October, the debit balance was over $3 million. Although the Defendant had securities lodged with the Plaintiff, not all the securities had a margin value. The practice of the Plaintiff since September 1997 was only to allow blue-chip stocks to be used as collaterals for the loan. The position as of 14th October was that while the value of securities held with the Plaintiff was $3,796,081.61, the margin value was only $74,800. The debit balance as of that date was $3,154,103.31. The margin that was called was $3,079,303.31. A customer was required to pay up the margin that was called, but in practice it depended on the ability of the customer to pay the money. The Defendant agreed that the position of his account had been discussed as early as September 1977 when the value of the shares began to fall. The Defendant clearly recognised that he had to pay money to the Plaintiff to cover his position. He had on 15th October paid $300,000 to the Plaintiff.

Taped conversation

9. I accept Mr Wu's evidence that the Defendant had not told him to sell all his shares either on 15th or 16th October. Had the Defendant actually instructed him to do so, there was no reason why he would not obey the instruction.

10. The Plaintiff produced the taped conversation between Mr Wu, his assistant, Candy, and the Defendant. As can be heard from the tape and apparent from the transcript, on 16th and 17th October, the Defendant, far from pressing Mr Wu on whether he had sold all the shares for him, had actually only given instructions to sell specific types of stocks. On 17th October the Defendant actually instructed the Plaintiff to buy stocks for him. These are totally inconsistent with the Defendant's case that he instructed the Plaintiff to sell all his shares.

11. The Defendant said that the taped conversation of 15th October was not between him and Candy but he refused to answer the question whether he had the conversation with Mr Wu and Candy from 16th October onwards. The Plaintiff accepted that the 15th October conversation might not involve the Defendant.

12. In my view, the Defendant is not a truthful witness. He obviously refused to admit the conversation he had with Mr Wu and Candy. I do not accept the evidence of his wife that the Defendant had told Mr Wu that he had to be responsible if he could not sell the shares. In the taped conversation, the Defendant had not given the slightest indication that he would hold Mr Wu responsible if he did not sell the shares. I do not accept that there was any such instruction as alleged by the Defendant.

Explanation of the Agreement

13. The Defendant alleged that when he signed the Agreement, Mr Wu was with another security company and was about to change his employment to the Plaintiff. Mr Wu had not explained the contents of the Agreement to him. He also alleged Mr Wu had agreed to pay back 10% of his commission.

14. It had never been the Defendant's pleaded case that he did not understand the content of the Agreement. I really do not see how the matter now raised affects the outcome of this case. It is not even put to Mr Wu that he had promised to pay part of his commission to him. It is apparent that the Defendant was well conversant with the transaction in margin trading and he obviously knew what he was doing when he signed the Agreement with the Plaintiff.

Encouragement to play the market

15. The Defendant seemed to suggest that Mr Wu had encouraged him to play the market which caused him to lose. He alleged that Mr Wu told him not to sell the shares. I do not accept that was the case. I accept Mr Wu's evidence that, on the contrary, he told the Defendant to reduce his holdings. I accept Mr Wu's evidence that after 20th October he was unable to contact the Defendant and the Plaintiff began to dispose of the stocks to reduce the indebtedness.

Conclusion

16. I find the Plaintiff has established its case and I shall give judgment to the Plaintiff for the sum of $414,144.52. The Counterclaim which is based on the Plaintiff's alleged failure to follow the Defendant's instruction to sell all his shares is dismissed. There shall be interest at judgment rate on the judgment sum from the date of the service of the writ to payment. The Plaintiff is to have the costs of the action on a common fund basis.

Representation:

Mr James Thomson, inst'd by M/s Oldham, Li & Nie, for the Plaintiff

Defendant, in person, present