ZILLION GLOBAL LTD v. UBS AG

HCA 1754/2014

[2020] HKCFI 953

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1754 OF 2014

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REASONS FOR DECISION

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1.  This is an application for specific discovery brought by the defendant against the plaintiff. At the end of the hearing I granted the application with costs to the defendant. These are my reasons for doing so.

2.  The plaintiff is an asset-holding company wholly owned by Mr Pan Fangren.  Mr Pan was born in Zhejiang in 1941 and grew up in Taiwan.  He is a very wealthy individual and the plaintiff was one of the companies through which he had investments with different banks.  In particular, in 2007 the plaintiff opened a private banking account with the defendant (“Account”).

3.  This action, instituted in 2014, is concerned with two investments made by the plaintiff through the Account.  First, on 11 October 2007, the defendant purchased for the Account an accumulator relating to China Shenhua Energy Co Ltd (“Shenhua”), a company listed on the Stock Exchange of Hong Kong, with a notional amount of approximately USD33 million, based on the price of HKD57.60 per Shenhua share.  The plaintiff alleges that its instruction (given through Mr Pan) to the defendant was to purchase a Shenhua accumulator based on the share price of HKD51.65, equivalent to a notional amount of USD30 million, and that the execution of purchases at HKD57.60 was unauthorised and in breach of mandate.  The plaintiff says that had the accumulator been purchased with reference to the share price of HKD51.65, it would have been knocked out on 12 October 2007 and the plaintiff would have made a profit.  Instead, because of the defendant’s conduct, the plaintiff was required to receive Shenhua shares at the strike price of HKD45.792 per share over a one-year period, leading to an eventual loss of over HKD265 million.

4.  Secondly, the plaintiff purchased a structured inflation product (“Inflation Product”) with a notional amount of USD10 million through the Account on 25 February 2008 and purchased some more, with a notional amount of USD30 million, on 6 March 2008, using margin financing provided by the defendant.  Margin calls were made on the plaintiff in September 2008, and the plaintiff closed out approximately one-third of the notional amounts of the Inflation Product contracts, suffering a loss of USD1.08 million.  The plaintiff says that it has suffered further losses in the form of the net interest paid to the defendant which amounted to over USD12.9 million by March 2018.  The plaintiff claims that the purchases of the Inflation Product were made in reliance on incorrect or misleading representations made by the defendant negligently to Mr Pan.  It is said that the recommendation or advice given by the defendant to the plaintiff to enter into the Inflation Product contracts was in breach of the defendant’s duties in that the product was not suitable for Mr Pan or the plaintiff because it was a derivative with a complex structure; it was only suitable for inflation-sensitive institutional clients or individual investors very familiar with complex investment products; Mr Pan was not a very sophisticated investor; the plaintiff’s risk tolerance level was merely “medium” (which the defendant unilaterally revised to “high” in February 2008); and the Inflation Product did not match the concern on inflation risk expressed by Mr Pan. It is also said that the defendant breached its duties in that it did not adequately advise the plaintiff on the risks relating to purchasing the Inflation Product and using margin facilities, and failed to recommend products more suitable to the plaintiff.

5.  Also in 2014, the plaintiff herein, together with another company used by Mr Pan for investments, namely, Fields Pacific Ltd, brought an action in Singapore against Deutsche Bank AG, Singapore Branch (Suit No 716 of 2014) in which complaints were also made in relation to the investment accounts held by those two companies with Deutsche Bank.  That action went to trial in the High Court of Singapore in February and March 2018 in which Mr Pan and Ms Grace Zhang gave evidence as two of the plaintiffs’ witnesses.

6.  By the present application, the defendant seeks an order pursuant to Order 24 rule 7 of the Rules of the High Court (Cap 4A) requiring the plaintiff to file and serve an affirmation for specific discovery of the following extracts of the court transcripts (or notes of evidence) of the trial of the Singapore action:

(1)  the cross-examination and re-examination of Mr Pan in relation to (a) his experience, sophistication and risk appetite is an investor in financial products; and (b) the role and authority of Ms Zhang in the handling and/or managing of Mr Pan’s investments; and

(2)  the cross-examination and re-examination of Ms Zhang in relation to (a) her experience and knowledge of financial products; and (b) the role and authority in the handling and/or managing of Mr Pan’s investments. 

7.  There is no dispute that the documents sought by the defendant exist and are in the possession, custody or power of the plaintiff.  In fact, the plaintiffs in the Singapore action had filed therein affidavits of evidence-in-chief of Mr Pan and Ms Zhang, which have been obtained by the defendant from the Supreme Court Registry of Singapore and subsequently disclosed in its own list of documents in this action.  The transcripts of oral evidence, however, which had been privately procured by the parties to the Singapore action, could not be obtained without the consent of the plaintiffs there (though Deutsche Bank has given its consent).  Hence this application.

8.  I have no doubt that the transcripts of Mr Pan’s evidence relating to his own level of sophistication, experience and risk appetite in investments are relevant in this action.  That matter is clearly in issue in the claim relating to the Inflation Product.  The plaintiff complains in essence that the product was too complex for Mr Pan, did not match its risk tolerance, and was unsuitable for him and therefore for the plaintiff. The defendant has, in contrast, pleaded that Mr Pan was a sophisticated and experienced investor with substantial experience with derivatives and other complex investment products and was an aggressive investor with a high risk tolerance level.

9.  The plaintiff does not dispute that Mr Pan’s evidence in Singapore covers his knowledge, experience and risk profile in investments, as is evident from the judgment of the High Court of Singapore in that action.  Indeed, on behalf of the plaintiff, Mr Nip submits that the claims advanced in the Singapore action were far wider than those in the present case and included allegations that Deutsche Bank had failed properly to advise the plaintiffs on financial products, exposure and margin issues and to provide regular updates on transactions, and that there was a need to make general findings on Mr Pan’s abilities and preferences as an investor.  He submits that the issue of Mr Pan’s sophistication in the present action is narrower, and has to be examined with reference to the nature and features of the Inflation Product.  The plaintiff’s expert has stated in his report that the Inflation Product is significantly different from other leveraged derivative contracts and ought to have been marketed to institutional clients and not high net worth individuals like Mr Pan.  Mr Nip says, therefore, it does not follow from the mere fact that Mr Pan might have had experience with other types of derivative products that he understood the Inflation Product.

10.  I do not accept this argument.  The plaintiff’s pleaded case categorically denies he was a seasoned and experienced investor: see his Amended Reply, paragraph 5.2.  He is not contending as his sole argument that even though he was highly sophisticated and experienced generally, the Inflation Product should not have been recommended to him because he was an individual and not an institutional investor.  He has pleaded that the Inflation Product “was only suitable for inflation-sensitive institutional clients and/or individual investors very familiar with complex investment products”,[1] and that he “was not a very sophisticated investor during that relevant period and the Defendant should not make presentations to Mr Pan that were too complicated”.[2]

11.  As to Ms Zhang’s authority, there is an issue arising from the Shenhua accumulator.  The plaintiff’s case seems to be that Mr Pan placed an order for the Shenhua accumulator at HKD51.65 or the opening market price in the afternoon session of 11 October 2007 (which was also HKD51.65).  The defendant has pleaded that its staff members had received instructions from Mr Pan or from Ms Zhang on its behalf (as allegedly evidenced in the trade blotters) to place orders for the Shenhua accumulator initially at market price, then as a split limit order, and finally at market again, which (it is said) were consistent with the actual purchases made: see Re-Amended Defence, paragraphs 34(d) & (e), 34B, 34C & 34D.  Whilst the plaintiff has yet to re-amend its Reply in response to these pleas which were added by the defendant by re-amendment of its Defence on 18 February 2020, it is clear that the plaintiff maintains the stance that the trades were unauthorised and does not accept that Ms Zhang had authority to act on its behalf in placing any orders. In her witness statement filed on behalf of the plaintiff, Ms Zhang says she was not authorised by Mr Pan to make (and did not make) any decision on the investments with the defendant.  The plaintiff also denies that Ms Zhang placed the alleged orders with the defendant, but if she is found to have done so then the question of her authority will need to be determined.

12.  The question of Ms Zhang’s authority had also arisen in the Singapore action.  There was an argument there of ostensible authority on the part of Ms Zhang[3] in relation to the receipt of margin calls on behalf of the plaintiffs therein but no such plea has been raised in the present case.  Mr Nip argues that the fact that Ms Zhang might have played a certain role in Mr Pan’s dealings with Deutsche Bank is not relevant to whether she had authority in relation to the plaintiff’s Account with the defendant here.  He submits that in the Singapore action, the question of Ms Zhang’s authority concerned the receipt of margin calls and the monitoring of the account details, whereas in the present action, the issue concerns her authority to place orders on behalf of the plaintiff.  I accept that the precise issues are different, but this is not determinative of the question of discovery here.  The touchstone for relevance of documents is the Peruvian Guano[4] test according to which a document is relevant if (a) it is reasonable to suppose that it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or to damage the case of his adversary; or (b) it is a document which may fairly lead the party to a train of enquiry which may have either of those two consequences. 

13.  On this basis, there can in my view be little ground to dispute the relevance of the transcripts relating to Ms Zhang’s role.  Although the precise legal questions might be narrower, the factual allegations and evidence in the Singapore action covered a wider range.  Deutsche Bank’s case was that Ms Zhang was the “main gatekeeper” for the accounts and the key person acting for the plaintiffs with whom Deutsche Bank would often communicate on transactions to be entered into, such as in relation to information on prices, and Ms Zhang would in turn update Mr Pan accordingly.[5] Ms Zhang’s affidavit evidence there was that her main role was to safe-keep and apply one of two corporate seals of a company presumably owned by Mr Pan and that she did not have any financial investment qualifications and knew little about financial investments.  She was cross-examined on that subject matter.  In its judgment, the Singapore High Court found — which suggests that there was evidence to that effect — that Ms Zhang was indeed the main gatekeeper for the accounts, and Deutsche Bank would often communicate information pertaining to the accounts to her and discussed proposed investments with her, for her to update Mr Pan.  She was familiar with the transactions entered into under the accounts.[6]  She was fairly knowledgeable about the relevant parameters and she assisted Mr Pan with monitoring them for the accounts and transactions thereunder.[7] 

14.  In these circumstances, I consider that the transcripts of evidence relating to Ms Zhang’s role and authority in handling Mr Pan’s investments and her knowledge and experience of financial products are relevant to matters in question in this action.  As Ms Tong submits on behalf of the defendant, if Ms Zhang was knowledgeable and experienced in investment matters and had a significant role to play in relation to the accounts held by Mr Pan’s companies with Deutsche Bank, that would be something the defendant could rely upon in the present action for the purpose of advancing their case that Ms Zhang was involved and authorised to give instructions in relation to the Account.  The fact that there was a plea of ostensible authority in Singapore but not (or not yet) in the present action does not alter the fact that there was apparently extensive cross-examination in relation to Ms Zhang’s knowledge, experience and role.  Indeed, the plaintiff indicated in its solicitors’ letter dated 31 October 2019 to the defendant’s solicitors that without prejudice to its view that the transcripts were unnecessary, it was prepared to disclose extracts of the transcripts relating to the role of Ms Zhang, though for unexplained reasons the plaintiff subsequently retracted the offer.

15.  It is also submitted on behalf of the plaintiff that the judgment in the Singapore action is inadmissible.  With respect, this is nowhere to the point.  We are not here concerned with the findings and conclusions in a foreign judgment.  We are not even concerned with a summary or digest of evidence set out in a foreign judgment, which would be admissible: see Capital Century Textile Co Ltd v Li Dianxiao [2018] HKCFI 729 at §29; Rogers v Hoyle [2015] QB 265.  Instead we are dealing with verbatim transcript of the oral factual statements made by Mr Pan and Ms Zhang. The fact that they were made overseas and in the context of legal proceedings there does not alter their nature as primary factual statements made by the persons with direct personal knowledge of the matters referred to.

16.  Mr Nip further submits that even if the documents are relevant, discovery is not necessary for the fair disposal of the matter.  Among other things, it is said that the defendant already has the affidavits of Mr Pan and Ms Zhang filed in the Singapore action.  But I do not understand the basis for saying that the defendant should not be given the record of the cross-examination of a witness because they have the record of his or her evidence-in-chief — a proposition that seems to me to be self-evidently flawed.  Then it is said that the defendant already has the affidavits of Deutsche Bank’s witnesses which contain comments on Mr Pan’s sophistication and risk profile and Ms Zhang’s role.  Again I cannot see why these secondary materials make it unnecessary to disclose the records of the oral evidence given by Mr Pan and Ms Zhang themselves.

17.  The question as to whether discovery is necessary for disposing fairly of the cause or matter in terms of Order 24 rule 8 imports a qualitative assessment of the evidential materiality of the information that the documents sought are likely to yield,[8] as well as a balancing exercise that involves, in the words of McWalters J in Toeca National Resources BV v Baron Capital Ltd & another (unrep, HCA 1913/2009, 31 May 2011) at §33, “a triangulation of interests — the interests of the plaintiff, the interests of the defendant and interests of the judge”, with the last being equivalent, as I understand it, to the interests of the administration of justice.  In the present case, there is no suggestion that having to make discovery of the documents sought would in any way be oppressive or even inconvenient to the plaintiff.  The documents sought are of limited scope and volume.  They contain direct and tested evidence from Mr Pan and Ms Zhang on questions of fact arising in the Singapore action that also feature in the present action.  In all the circumstances it seems to me that the plaintiff has failed to discharge the burden of showing that discovery is unnecessary.

18.  As to timing, the plaintiff was first asked to disclose the documents in question in August 2019, shortly after expert reports were filed in the action.  Obviously this action which was started in 2014 should be proceeded with as expeditiously as possible, but given that it has not yet been set down for trial and the discovery sought is of limited scope, I do not see that there is any reason in that connection to deny discovery of the documents to the defendant.

19.  For these reasons it seems to me the defendant is entitled to an order for specific discovery of the documents sought.