Al Sadik v Investcorp

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 18 May 2012
• Court: Grand Court (Cayman Islands)
• Date: 18 May 2012

Grand Court, Financial Services Division

(Jones, J.)

AL SADIK

and

INVESTCORP BANK BSC and FIVE OTHERS

M. Black, Q.C., M. Staff, N. McLarnon and J. Noble for the plaintiff;

Lord Falconer of Thoroton, Q.C., D. Nambisan, Ms. C. Wilkins and Ms. S. White for the defendants.

Cases cited:

(1) Abbey Forwarding Ltd. v. Hone, [2010] EWHC 2029 (Ch), dicta of Lewison J. applied.

(2) Att. Gen. (Belize) v. Belize Telecom Ltd., [2009] 1 W.L.R. 1988; [2009] 2 All E.R. 1127; [2009] UKPC 10, dicta of Lord Hoffmann applied.

(3) Bristol & West Bldg. Socy. v. Mothew, [1998] Ch. 1; [1997] 2 W.L.R. 436; [1996] 4 All E.R. 698, dicta of Millett, L.J. considered.

(4) Davidson v. Noram Capital Mgmt. Inc.(2005), 13 B.L.R. (4th) 35, considered.

(5) H (Minors) (Sexual abuse: standard of proof), In re, [1996] A.C. 563, dicta of Lord Nicholls applied.

(6) Heilbut, Symons & Co. v. Buckleton, [1913] A.C. 30, dicta of Lord Moulton applied.

(7) Hospital Prods. Ltd. v. United States Surgical Corp.UNK(1984), 156 CLR 41; [1984] HCA 64, applied.

(8) Investors” Compensation Scheme Ltd. v. West Bromwich Bldg. Socy., [1998] 1 W.L.R. 896; [1998] 1 All E.R. 98; [1998] 1 BCLC 531; [1997] CLC 1243, dicta of Lord Hoffmann applied.

(9) Kelly v. Cooper, [1993] A.C. 205; [1992] 3 W.L.R. 936, dicta of Lord Browne-Wilkinson applied.

(10) Laflamme v. Prudential-Bache Commodities Canada Ltd.(2000), 185 D.L.R. (4th) 417; [2000] 1 S.C.R. 638, considered.

(11) National Justice Cia. Naviera SA v. Prudential Assur. Co. Ltd., ‘The Ikarian Reefer’, [1993] FSR 563; [1993] 2 Lloyd”s Rep. 68, dicta of Cresswell J. applied.

(12) Ryder v. Osler, Wills, Bickle Ltd.UNK(1985), 49 O.R. (2d) 609; 16 D.L.R. (4th) 80, referred to.

(13) Williamson v. Williams(1997), 160 N.S.R. (2d) 106, referred to.

Investments and Securities-investment management-scope of management agreement-agreement allowing investment in leveraged funds and wide discretionary mandate interpreted as permitting economically-equivalent leveraging of investment at portfolio level-contractual document to be interpreted according to meaning conveyed to reasonable person having all background knowledge reasonably available to those to whom addressed-not interpreted in way that would flout business common sense

Investments and Securities-investment management-powers and duties of investment manager-only duties of disclosure arising out of investment management agreement those specified in agreement-where fiduciary relationship arises out of contract, scope of fiduciary relationship defined by contractual terms-not appropriate to superimpose additional fiduciary duties

Investments and Securities-guaranteed return on investment-standard of proof-since inherently unlikely that investment bank would guarantee 45% return on investment over three years, stronger evidence required to

prove that did so-when determining whether fact established on balance of probabilities, court to take into account inherent improbability

Evidence-expert evidence-directions by court-directions for expert financial evidence not to be given until specific questions for opinion identified-not generally appropriate to give directions before discovery and exchange of witness statements-if parties use different experts, same questions and factual materials to be provided to both

The plaintiff brought claims for breach of contract, breach of fiduciary duty and breach of trust against the defendants.

The plaintiff was a wealthy businessman with previous experience of high-value investments (including non-guaranteed investments) and his own personal investment manager, Mr. Zaidi. Meetings took place between the plaintiff and the first defendant, a regulated international investment bank, regarding a proposed investment, at which the plaintiff indicated that he wished to obtain a 45% return on an investment of AED500m. (roughly US$167m.) after three years.

The first defendant”s hedge-fund platform comprised a number of funds of hedge funds, emerging manager funds and single-manager funds-material to the present proceedings were the Investcorp Diversified Strategies Fund Ltd. (‘DSF’), the Investcorp Leveraged Diversified Strategies Fund Ltd. SPC (‘LDSF’), the Investcorp Single-Managers Fund Ltd. SPC (‘SMFCo’) and six (later seven) single-manager funds (collectively, the ‘single-managers’). Mr. Al Khatib was the first defendant”s relationship manager and Mr. Al Sadik”s primary contact; other important personnel were Mr. Kironde, Mr. Gharghour, Mr. Gurnani, Mr. Franklin and Mr. Boynton.

The first defendant drew up an investment proposal, proposing an investment in leveraged funds. The plaintiff and the first defendant entered into an investment-management agreement, taking the form of a share-purchase agreement (‘the SPA’), which inter alia (a) provided that the investment account would be established as a special purpose vehicle (‘SPV’)-Shallot IAM Ltd. (‘Shallot’); (b) gave the first defendant a discretion to manage and invest the plaintiff”s moneys; (c) required the first defendant to provide the plaintiff with a statement of each hedge fund or account in which his moneys were invested; but (d) did not contain the standard-form disclaimer that the investment was speculative and could be lost completely, which had been included in a draft version as cl. E.1.

The plaintiff”s investment was leveraged at the portfolio level through Blossom IAM Ltd. (‘Blossom’)-a wholly-owned subsidiary of Shallot established as a SPV-rather than being invested in leveraged funds, as specifically contemplated by the investment proposal. A multi-party credit facility (‘White Ibis III’) was used to achieve this leveraging. The first defendant did not inform the plaintiff that his investment had been leveraged in this way and, as the result of a communication problem, failed to provide the plaintiff with statements in accordance with the

SPA-incomplete statements were subsequently sent to him. Since the execution of the SPA, the first defendant”s and plaintiff”s communications were consistent with a non-guaranteed investment having been made.

Following the market collapse beginning in September 2008, the plaintiff”s investments began to perform poorly. He informed the first defendant that he was considering redeeming his investment and asserted that he had the benefit of a guaranteed 45% return by way of collateral contract. The first defendant denied the existence of this guarantee.

The plaintiff gave instructions to redeem the investment in December 2009. He received 58% of his initial investment and brought claims for fraudulent misrepresentation, breach of the SPA, deceitful non-disclosure, breach of trust and/or fiduciary duty and breach of the alleged guarantee. The claim for fraudulent misrepresentation was subsequently withdrawn.

The court directed that the parties could adduce expert evidence in relation to the field of hedge funds and quantum. The plaintiff instructed Ms. Murray, who had experience of analysing the financial condition of insolvent companies but not regulated investment banks, to provide an expert report. Her terms of reference asked her to provide opinions on inter alia the adequacy of the defendants” risk-analysis procedures, whether the first defendant used the plaintiff”s money to further its own commercial interests and whether the first defendant was authorized to act as it did. Her report supported the plaintiff”s case and provided an opinion on the first defendant”s liquidity.

Breach of the SPA

The plaintiff submitted that (a) the SPA should be interpreted according to what it would convey to a reasonable person with all the background knowledge reasonably available to the parties to whom it was addressed; (b) on its true construction, it did not give the first defendant authority to leverage his investment at the portfolio level (as opposed to investing in leveraged funds); (c) moreover, it had been expressly agreed that the first defendant would have no authority to apply leverage at the portfolio level; and (d) the first defendant had therefore acted in breach of contract causing him loss.

The first defendant submitted in reply that (a) the purpose of the SPA was to establish an account with the plaintiff, which it would manage pursuant to a discretionary mandate; (b) it had a wide discretion and was not limited to implementing the exact indications in the investment proposal; (c) in the absence of express terms to the contrary, the SPA allowed it to leverage the investment at the portfolio level, which was economically equivalent to investing the money in leveraged funds; (d) its leveraging the plaintiff”s investment at the portfolio level was therefore not in breach of contract; and (e) even if it were in breach of contract, had it used alternative forms of leverage it was likely that the plaintiff”s loss would have been even greater.

Deceitful non-disclosure

The plaintiff submitted that (a) the existence of the fiduciary relationship between him and the first defendant gave rise to an obligation to disclose everything that was or might have been material to the exercise of his judgment; (b) the first defendant breached its fiduciary duty and its duty under the SPA by failing to inform him that it intended to leverage his investment at the portfolio level and invest the proceeds directly; (c) Blossom had been used in order to conceal the existence of the leveraging; and (d) by failing to supply certain statements, the first defendant had deliberately and deceitfully failed to comply with its ongoing duty of disclosure under the SPA in order to conceal the leveraging.

The first defendant submitted in reply that (a) the fiduciary relationship between it and the plaintiff gave rise to no obligations of disclosure beyond those set out in the SPA; (b) it was not required under the SPA to inform the plaintiff of its intention to leverage his investment; (c)...