Bank Leumi (UK) Plc v Wachner

The claimant bank (BLUK) recovered losses arising from the close-out of foreign exchange option positions sold by the defendant (Ms Wachner). The court analysed (a) the legal effect of the BLUSA Agency Agreement, (b) the nature of the reverse knock-in options (RKIs) traded, (c) alleged misrepresentations and negligent advice and (d) alleged breaches of the FSA classification rules (COB/COBS) under section 150 FSMA 2000. The judge held that BLUK had acted as agent for its New York affiliate BLUSA during the Agency Agreement, that the characteristic description of RKIs given by traders was not a misleading generalisation, and that the defendant’s claims in misrepresentation and negligent advice failed. The court further held that BLUK had taken reasonable steps in classifying the defendant as an intermediate customer in 2005, that the MiFID/COBS "grandfathering" applied, and that BLUK was not in breach of a statutory duty to re‑classify in the events relied on. As a result the defendant's counterclaim was dismissed and BLUK was entitled to judgment for the debt of €13,434,947.98 (plus interest to be determined).

Background and parties. The dispute concerned extensive FX option trading by Ms Linda Wachner with BLUK and with Bank Leumi USA (BLUSA). BLUK sued to recover the loss incurred when it closed out the defendant's positions after margin default; the defendant counterclaimed for damages under three heads: breach of statutory duty under s.150 FSMA 2000 (wrongful classification), negligent misrepresentation (Misrepresentation Act 1967 / common law) and negligent advice (Hedley Byrne / Henderson v Merrett type duty).

Nature of the trading and the agency issue. From 2007 a BLUSA arrangement permitted trading through BLUK during London hours (the so‑called BLUSA Agency Agreement). The disputed products were reverse knock‑in options (RKIs). The judge analysed the three‑party mechanics of trades done before New York opened and concluded that BLUK was acting as agent for BLUSA in its dealings with Ms Wachner (so her immediate contractual relationship in that period was with BLUSA), not that she was acting as BLUSA's agent in dealing with BLUK.

Relief sought and issues framed. The defendant sought damages for (1) breach of statutory duty for alleged mis‑classification under COB/COBS, (2) misrepresentation inducing her to trade RKIs and (3) negligent advice about RKIs. The court had to decide (i) the legal effect of the BLUSA Agency Agreement, (ii) whether RKIs had been mis‑described or whether advice or representations were actionable, (iii) whether BLUK breached the COB/COBS classification and review obligations and (iv) causation and contributory negligence.

Court’s reasoning and conclusions.

• Agency: the contemporaneous dealing sequence and confirmations showed BLUK acting as principal/agent for BLUSA in the London‑period trades. The telephone discussions with the defendant recorded agreement to sell options to BLUSA; BLUK then laid off its position to market counterparties. The judge therefore treated BLUK as BLUSA's agent during the Agency Agreement.
• Misrepresentation and negligent advice: alleged representations (that RKIs were less risky, that positions could be "pushed out" at zero cost, and that margin would be calculated one‑sidedly) were either true as generic descriptions, were statements of existing practice or amounted to trading‑floor opinion. The bank's Terms of Business (notably clauses 6.16–6.17) excluded an advisory duty absent a specific agreement; no sufficient specific agreement to advise was proved. The misrepresentation and negligence claims failed both on substance and on inducement/causation.
• Classification and statutory duty: the judge applied the COB/COBS framework. BLUK had taken reasonable steps in 2005 to classify the defendant as an intermediate customer, and COBS transitional "grandfathering" into elective professional client status from 1 November 2007 was available. The court found no relevant breach of COB/COBS requiring reclassification before or in September 2008, and held that trading under the BLUSA Agency Agreement was regulated by the US trading relationship rather than by BLUK in the United Kingdom.
• Causation and loss: even if advisory or statutory breaches had been established, the court found it unlikely the defendant would have behaved differently: she repeatedly rejected conservative advice and pursued an aggressive "push out" strategy to recover prior losses. Contributory negligence would have been a substantial factor.

Outcome. The defendant’s counterclaim failed and BLUK recovered the sum found due; interest and consequential matters were reserved for further submissions.

At first instance the court entered judgment for the claimant. The defendant's counterclaim was dismissed. The judge found that BLUK was acting as agent for BLUSA under the BLUSA Agency Agreement; RKIs were not misdescribed as a class; there was no actionable negligent advice or negligent misrepresentation by BLUK; BLUK had taken reasonable steps in client classification in 2005 and was entitled to rely on COBS transitional provisions; and, on causation, the defendant would in any event probably have continued the trading strategy. The claimant was therefore entitled to recover €13,434,947.98, interest and consequential relief (interest and other consequential matters to be determined).