Valse Holdings S.A v Merrill Lynch International Bank Ltd.

In an advisory, non-discretionary investment account, an expert client remains responsible for accepting or rejecting advice and for the resulting investment choices. The adviser has no contractual duty to ensure that the portfolio as a whole is suitable where no non-discretionary management agreement exists. The adviser must keep the client’s investment objectives in mind when making recommendations, review those objectives periodically and discuss the portfolio’s shape with the client. That duty does not require the adviser to prevent a knowledgeable client from taking substantial risks or trading beyond the stated objective. Broad investment-objective categories are not to be construed strictly and may accommodate materially different portfolios according to risk appetite.

Valse Holdings S.A maintained an advisory, non-discretionary investment account with Merrill Lynch International Bank Ltd. It claimed damages for alleged unauthorised trading, failures to follow instructions, negligent investment advice and mismanagement between 1999 and 2002. The portfolio was heavily concentrated in technology equities and was leveraged. Valse argued that Merrill Lynch should have advised that the portfolio was inconsistent with its long-term-growth objective and excessively risky. Merrill Lynch denied unauthorised dealing and relied on Valse’s classification as an expert customer, the contractual terms and the absence of any non-discretionary management agreement. The central issues were whether the alleged duties existed, whether they were breached, and whether any breach caused recoverable loss.

1. Unauthorised dealing. The claim that Merrill Lynch traded without instructions or failed to comply with instructions was rejected. On the balance of probabilities, the transactions were authorised or sufficiently explained by the evidence. The claimant’s reconstruction from trade-ticket time stamps was unreliable, and procedural defects in completing tickets did not establish discretionary trading.
2. Nature of the duty. In an advisory account the client remains in charge of the portfolio. Because Valse was designated an expert customer and no non-discretionary management agreement existed, Merrill Lynch owed no contractual duty to ensure the suitability of the portfolio as a whole. The client was responsible for accepting or rejecting advice. Merrill Lynch was required to recommend investments which did not appear to conflict with the client’s objectives, but it was not required to prevent the client from taking risks.
3. Investment objectives. The bank’s objective categories were broad and were not to be construed strictly. A portfolio could fall within an aggressive-growth objective despite being highly risky and volatile, depending on the client’s appetite for risk. Merrill Lynch had to keep the objective in mind when giving advice, review it from time to time and discuss the portfolio with the client. It did not have to impose firmer control where the client understood the risks and wished to proceed.
4. Breach and causation. The bank had advised Mr Mohseni to diversify, reduce leverage and alter the portfolio when market conditions deteriorated. He understood the risks but preferred to retain concentrated technology investments in the hope of a market recovery. The alleged failure to give more strategic advice therefore did not cause loss. The claim was dismissed.