CITIBANK N.A. v. NOBLE TREASURE LTD AND OTHERS

HCA 2639/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2639 OF 2008

_________________________

BETWEEN

_________________________

------------------------

DECISION

------------------------

1.  This is an application by the defendants for leave to adduce expert evidence.

BACKGROUND

2.  D1 used to have an account with a Swedish bank in Hong Kong for holding Swedish currency and earning interest on deposits.  D1 did not use that or any account for investment or speculation.  On opening a private banking account with the plaintiff, D1 explained to the plaintiff that the only purpose was to get the same services as previously provided by the Swedish Bank.  D1 stressed that there should be no risk with the money as it represented working capital of its group and there should be no loan or margin facilities involved.  D2 and D3 were the directors of D1 and the authorized signatories to the account held with the plaintiff.

3.  In October 2008, there was a shortfall in the account and the plaintiff requested D1 to provide additional margin, which D1 failed to do.  The plaintiff closed out and liquidated D1’s investment.  The plaintiff now claims for about HK$7.7 million due and owing from D1 in respect of unpaid margin loans and under personal guarantees as against D2 and D3.

4.  The defendants’ case is that D1 acquired financial products as a result of the plaintiff’s misrepresentation, undue influence and breach of duties as financial adviser.   According to D1, the plaintiff’s employees encouraged it to invest in some financial products described as “VIP products” which would only be available to VIP customers such as D1.  The plaintiff through its employees made representations to D2 and D3 acting on behalf of D1 to the effect that the products were: (1) basically equivalent to shares purchased at a discount; (2) of low risk and D1’s access to its funds would not be restricted; and (3) suitable for D1 to invest in, having regard to the stated purpose of opening the account with the plaintiff.

5.  Over a period of time, D1 invested in a total of 39 contracts of financial products with the plaintiff.   D2 and D3 have executed written guarantees to pay and satisfy all sums of money and liabilities due and owing by D1 to the plaintiff.

6.  It turned out that those products were accumulators and decumulators (“the Products”).  They involved a complex structure in which there was high risk, involved margins and a severe imbalance of risks between the plaintiff and D1. The investments were inconsistent with the purpose for which the account was opened and the shares could not be sold on the market for cash.  In particular, it is D1’s case that the plaintiff failed to advise on the nature, method, operation and risks and potential consequences of the products, in particular the maximum gain and maximum loss, and that these involved such high risk that they should not have been offered at all unless with the clearest warning and to sophisticated investors only.  These were denied by the plaintiff.

7.  D1 counterclaimed for rescission of the accumulator and decumulator contracts based upon the plaintiff’s failure to properly advise, and ensuring that the information it provided to D1 was accurate.  The estimated loss under the counterclaim was about US$4.8 million. 

THE APPLICATION

8.  The defendants seek to adduce expert evidence on the following issues:

(i)     Nature and risks involved in the investment products sold by the plaintiff to D1 (Issue 1);

(ii)    The suitability of the products as an investment generally and for D1 (“Issue 2”);

(iii)   The sufficiency and/or adequacy of the risk warnings and information concerning the said products (“Issue 3”).

(iv)   The manner and cause of the losses suffered by D1 as a result of the products (“Issue 4”).  This has since been amended during the hearing to “the quantum of losses suffered by D1 if liability can be established” (“the Amended Issue 4”).

D1 proposes to call Mr. Solomon Green as its expert.

9.  Mr. Rogers’ position initially was that expert evidence was not necessary and even if leave is granted, it should be on a much narrower scope.  He also challenged the expertise of Mr. Green.  At the hearing, he does not strongly oppose expert evidence on Issue 1 (although he says that the so called expert evidence required is limited) and the Amended Issue 4. 

LEAVE TO ADDUCE EXPERT EVIDENCE

10.  The principles for giving leave to adduce expert evidence are not in dispute.  They have been laid down in the cases of Wong Hoi Fung v. AIA [2002] 3 HKLRD 507 and Kam Hing v. PIC [2009] 4 HKC 531.  In a nutshell, a test of admissibility and relevance is applied.  Where the proposed expert evidence is plainly inadmissible or irrelevant, the court ought to exercise its discretion to refuse the admission of such evidence.  However, if the court cannot form a clear view on the relevance of the proposed expert evidence or where it considers that the proposed evidence is clearly relevant, then it should grant leave for the evidence to be adduced at the trial.  Expert evidence is relevant if it is helpful to the court in arriving at its decision on one or more issues to be resolved.

11.  With regard to Issue 1, D1 has produced a draft report on one accumulator as an illustration of the sort of analysis which would feature in the expert report if leave to adduce it is granted.  Mr. Green’s analysis showed that although the maximum loss was over HK$15,000,000 for that contract, the maximum gain was less than HK$3,500,000.  He further explained why the apparent notional discount was “illusory”. Mr. Rogers submits that the evidence required is not really complex and it can be summarized in the proposed evidence of Mr. Green on e.g. pages 131-2 of the hearing bundle; ultimately it will be adding up all the losses which the Court finds D1 to have suffered.  However, he does not strongly oppose adducing expert evidence under Issue 1. 

12.  In my view, the proposed expert evidence under Issue 1 appears to be relevant and helpful.  In the example given, the analysis will give the court an idea of what each contract may work out in practical terms of loss and gain and the risks involved.  Leave should be given under Issue 1 to adduce expert evidence.

13.  With regard to Issue 2, I am unable to understand why the unsuitability of the products as an investment generally is a fact material to D1’s case.   One is concerned with the situation of the investor D1.  How the general investing public acts is of no concern in the present case.  In any case, this issue will be answered by the expert evidence under Issue 1.  As to the suitability of the products as an investment for D1, considering the expert evidence under Issue 1 and the express instructions given by D1 as to the purpose of opening the private banking account and that the investment must be of low risk, the trier of fact should be the person answering Issue 2.  No leave should be given under Issue 2 to adduce expert evidence.

14.  With regard to Issue 3, presumably the greater the risk involved in the investment, the greater the duty of an investment adviser to bring that to bear upon his customer.  At the trial, each party will call witnesses to state what risk warnings and information concerning the products have been given to D1, whether D1’s representatives understood them, and whether the warnings/information matched up with the risky nature of the investment.  These are matters of fact.  Again, it is the trial judge who will consider them in the light of the expert evidence under Issue 1.  It is not a matter within the province of an expert. 

15.  Mr. Maurellet submits that the extent and form of the information and warnings cannot be considered in vacuo.   Since one is talking about industry practice when selling the Products, much can be drawn by way of comparison with what other institutions have done in similar circumstances and what a code of conduct says.

16.  If the risks involved were very high, the fact that other institutions all gave mild warnings might not exempt the plaintiff’s liability.  As for the code of conduct, there is nothing to suggest that there are, e.g. technical terms that the Court might need assistance on.  If so, the question of construction of the code and whether the plaintiff acted within its terms are all matters for the trial judge to decide.  Leave to adduce expert evidence under Issue 3 will not be given.

17.  With regard to Issue 4, the cause of loss is a question on liability.  It forms the crux of D1’s case as to whether or not The plaintiff had been guilty of misrepresentation, undue influence or breach of duty and hence led to D1’s loss.  The manner of loss is a question of fact, e.g. how the loss came by, the options offered by the plaintiff to D1, when and why the plaintiff chose to liquidate the investment, etc.  These are all for the trial judge to answer. The Amended Issue 4 aims at proving quantum, a matter on which the plaintiff joins issue in the reply and defence to counterclaim.  Mr. Rogers does not oppose adducing expert evidence in this respect.   Given the number of contracts and that each of the contracts has different terms, it would be relevant and helpful to have expert evidence on the alleged loss.  I give leave to adduce expert evidence on the Amended Issue 4.

SUITABILITY OF MR. GREEN AS AN EXPERT

18.  Mr. Green is an actuary said to have the ability to understand complex financial products.  He has relevant practical experience as an investment manager. Until 1998 he pursued full-time career in investment management, and consultancy.  Since then, he no longer invested on a daily basis although he acted as a trustee for several private portfolios and charities and apparently has been extremely busy acting as an expert in a broad range of cases.  He has previously given evidence as an expert in the case of Susan Field v. Barber [2004] 3 HKLRD 871. 

19.  Mr. Rogers does not challenge the integrity of Mr. Green as an expert. However, he submits that Mr. Green is not an appropriate expert in this case. The reasons are as follows:

(i)     The products in question came into being only in about 2004, years after Mr. Green retired in 1998. 

(ii)    It does not appear that Mr. Green has worked for a bank or acted as financial adviser for clients investing in complex structured products, including the ones in question.  Nor has he acted for a regulator regulating such products.  It is one thing to say that he has given broad advice on investment including accumulators, but another to say that he has real experience trading in them.

(iii)   It does not appear that he has published any paper on the topic of the structure, risks involved in and/or selling (or mis-selling) of complex structured products.  The papers and articles he wrote appear to be all about the much broader and fundamentally unrelated topics of the role of the actuary in management of investment portfolios.

(iv)   There were limitations of his experience and knowledge as shown in the case of Susan Field v. Barber, although Barma J eventually accepted him as an expert (at pages 17 and 18 of the judgment).

20.  The Products formed a specialized sub-set of derivatives.  Accordingly, Mr. Rogers submits that if leave to adduce expert evidence is granted, only evidence from an expert who has some direct experience of structuring and working with complex structured products such as accumulators and decumulators should be admissible.

21.  In the light of Mr. Roger’s submission, D1 urgently put in a supplemental affirmation of one Mr. Ma on the day before the hearing, which was not opposed by Mr. Rogers.  This affirmation gives more information about the expertise of Mr. Green, in particular his giving of advice in 5 other cases involving accumulators (some settled and some ongoing), his involvement in 20 cases in the UK involving structured products, and his advice to a major European insurance company on its structures for monitoring the risks of the products in which its client’s funds are invested, including accumulators.  Before any new type of structured product could be marketed, it was necessary for a model to be created so that its performance could be tested against a hypothetical market. He had also bought and sold derivatives for clients for more than 40 years.

22.  To these, Mr. Rogers submits that:

(i)     With regard to the assertion that Mr. Green has offered expert advice in 5 other cases involving accumulators, it does not appear that he has actually given expert evidence in respect of any case involving allegations of mis-selling of complex structured products, including accumulators and decumulators. One does not know the extent of what was involved in his evidence which led to settlements in other cases.  The case of Susan Field v. Barber involves different and significantly less complicated products than the ones in issue in the present case.

(ii)    His alleged expertise in derivatives only appeared in the supplemental affirmation filed on behalf of D1 but it was miles away from the Products.  The vague reference to “structured products” in the supplemental affirmation did not expressly refer to accumulators and decumulators.

23.  Mr. Maurellet for the defendants submits that the Products were just a sub-set of derivatives or structured products.  An expert in the field of investment management and risk like Mr. Green would be appropriate. 

24.  Unless it is clearly shown that the expertise is irrelevant or that an expert is clearly unsuitable, a party’s choice of expert should be respected.  In my view, the same approach for considering relevance stated in Wong Hoi Fung v. AIA and Kam Hing v. PIC, above, should be adopted when the Court is asked, at an interlocutory stage, to decide whether or not a person has the relevant expertise to qualify as an expert. 

25.  I have considered Mr. Green’s qualifications and read his draft report exhibited to the affirmation in support of the present application.  The views expressed by Mr. Green purport to answer the queries a trial judge might have, e.g. on Issue 1 and 4.  At this stage, it is not apparent that the lack of experience in trading in the Products clearly disqualifies Mr. Green. 

26.  In Susan Field v. Barber, Barma J was mindful of the attacks on Mr. Green’s qualifications and his limitations in experience before analyzing his expert evidence.  Despite that, he accepted Mr. Green as an expert.  He accepted his evidence as to the risk classification of the investment strategy in question (at para. 103 & 127).  The learned judge (1) rejected his opinion on the motive of the financial adviser when recommending a certain investment structure for the plaintiff; and (2) noted Mr. Green’s criticism of the manner in which the financial adviser assessed the sufficiency of the cushion of collateral available to cover the risk, but found that the existence of the risk was adverted to by the financial adviser (at para. 166 & 168).  These 2 matters were clearly within the province of the trier of fact. 

27.  In my view, the queries that Mr. Rogers have on the qualifications of Mr. Green are best left to be dealt with at the trial, when the plaintiff will be at liberty to cross-examine Mr. Green.  If the queries of Mr. Rogers are established, they go more to the weight to be attached to Mr. Green’s evidence than his suitability as an expert.  The trial judge will also distinguish between opinion evidence on which he may be guided by the expert and evidence of facts which he alone can decide.  Accordingly I will not express further opinion of the points raised by Mr. Rogers in paragraphs 19 & 22.

CONCLUSION

28.  I order as follows:

(1)   I give leave to adduce expert evidence limited to the following issues:

(i)   Nature and risks involved in the accumulator and decumulator products sold by the plaintiff to D1;

(ii)   The quantum of losses suffered by D1 if liability can be established.

(2)   The plaintiff on  the one part and the defendants on the other are each at liberty to adduce expert evidence from one expert in the field of investment management.

(3)   The defendants’ expert will be Mr. Solomon Green.  The name of the plaintiff’s expert shall be supplied to the defendants within 14 days of the handing down of this judgment.

(4)   The defendants are at liberty to serve on the plaintiff within 21 days an expert report signed by Mr. Green;

(5)   The plaintiff is at liberty to serve a signed expert report within 28 days thereafter;

(6)   Within 28 days of the service of the plaintiff’s expert report, the experts shall meet and produce a joint report signed by them, identifying all matters which are agreed, matters which are not agreed and the reasons why they are not agreed.

COSTS

29.  The defendants only succeeded in obtaining leave to adduce expert evidence on 2 out of 4 issues and with some amendment even on those two.  On the other hand, the plaintiff’s objections were not entirely without bases. They were raised in good faith with the underlying objectives in Order 1A in mind.  I am of the view that the proper order should be for costs in the cause with certificate for counsel and I make an order nisi accordingly.

30.  I add that I am still of the view that an affirmation in support is not necessary for an application of this sort save for good reasons.  The supporting affirmation of Mr. Hoare contained mostly a recital of the pleaded facts and submission. Only a portion was about the expertise of Mr. Green and the draft report he is going to produce.  The affirmation of Mr. Ma concerning the expertise of Mr. Green is of course necessary and proper in the light of Mr. Rogers’ challenge to the suitability of Mr. Green as an expert.  Accordingly, insofar as the defendants’ costs are concerned, should the defendants win in the cause, their costs relating to preparation of the affirmation of Mr. Hoare should be reduced by half and I make an order nisi accordingly.