The English Commercial Court has found that a major banking institution made misrepresentations to, and was negligent in its communications with, one of its clients under a stock lending programme.
The claim against Bank of New York Mellon was made by a Swedish pension fund, Forsta AP-Fonden (AP), represented by Bird & Bird. AP claimed losses of US$35.5 million arising from BNY Mellon's management of AP's stock lending programme. The losses arose from investment by BNYM Mellon of cash collateral received from borrowers of AP’s stock. In early 2007, BNY Mellon had invested in Sigma Finance Inc, the world's largest structured investment vehicle at that time. Sigma went on to fail in September 2008, at the height of the financial crisis, leading to billion dollar losses for clients of BNY Mellon and JPMorgan among others.
BNY Mellon had contacted AP in May 2008 about a fall in the pricing of the Sigma investment. The Court ruled that BNY Mellon had been negligent and in breach of its contractual duty in those communications. The Judge found that the views and recommendations given to AP by BNY Mellon had been "opposite and irreconcilable" with the views expressed to other clients. BNY Mellon gave a misleading picture that amounted to negligent misstatement and negligent misrepresentation.
This is a significant judgment both for the way banks run their stock lending programmes and also for how they communicate with their clients generally. As soon as BNY Mellon became aware that an investment was at serious risk of a default that could result in significant losses to its clients, BNY Mellon was duty-bound to give a fair assessment of the situation to those clients.
BNY Mellon could not rely on the subsequent collapse of Lehman Brothers and the impact that had on Sigma’s liquidity. The Judge found that the collapse of an investment was in the reasonable contemplation of the parties even before the credit crunch and subsequent financial crisis. Nor could BNY Mellon rely on its contentions that AP was a sophisticated investor or that AP should have been monitoring the situation more closely.
The case demonstrates that the English courts are prepared to find against banks in circumstances where different clients are not treated fairly or are not given correct and complete information such that clients can make an informed decision.
The judgment, which was handed down on 16 October 2013, is available at: http://www.bailii.org/ew/cases/EWHC/Comm/2013/3127.html. For more information, please contact Luke Arbuthnot (Litigation & Regulatory).