KGI FUTURES (HONG KONG) LTD v. LI KAR HUEN CHRISTINE

HCA 194/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 194 OF 2010

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BETWEEN

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J U D G M E N T

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1.  The plaintiff is a company licensed by the Hong Kong Securities & Futures Commission to deal in futures contracts. On 5 February 2007 the defendant became one of its clients. She opened an account with them in order to trade in futures.

2.  In this action the plaintiff claims that the defendant is indebted to it in the sum of $1,161,044.16.  This arises because on 14 June 2007 the defendant through the electronic trading system (which permitted her to execute futures contracts via the internet) instructed the plaintiff, as her agent under the Standard Terms and Conditions, to open 41 Hang Seng China Enterprises Index Futures Contracts (“HHI Futures”) and close 128 HHI Futures.  This remained the position at the end of the trading day and thus there were 87 HHI Futures in open short position but her account only had a balance of $208,661 which was insufficient to cover her margin requirements.  The actual shortfall was approximately $4.1 million.

3.  The next day Ms Gillian Wong of the plaintiff eventually (after several unsuccessful attempts by telephone) succeeded in contacting the defendant at about 11:00 am.  Ms Wong informed her of the position, namely that there was a $4.1 million shortfall in the account, and told her she must either deposit sufficient cash to cover it or close out her open positions.  The defendant did neither and therefore, pursuant to the Terms and Conditions of the plaintiff’s agency with the defendant, the plaintiff closed out the outstanding contracts resulting in a net loss to the plaintiff of the $1.161 million claimed.

Defendant’s absence at trial

4.  The trial proceeded in the defendant’s absence. She had been represented and had filed a defence and counterclaim dated 30 June 2010.  At that time her address for service had been filed.  Since then all relevant documents have been properly served on her at that address either by post or by hand or both.  Additionally, on the court’s direction, in the week before trial attempts were made to contact both the defendant and her brother (who had filed a witness statement) but without success.  Pursuant to RHC Order 35, rule 1(ii) I acceded to the application to hear the trial in the defendant’s absence.

Terms and conditions of the defendant’s account

5.  At trial the two witnesses called by the plaintiff, namely Mr Norris Lau Hung Chuen whose job description was a “Responsible Officer” of KGI Futures (HK) Ltd and Ms Gillian Wong Ka Lun, an Investment Representative of KGI, both gave detailed evidence of the nature of Futures contracts and how they are traded in Hong Kong together with the circumstances in which the defendant opened her account on 5 February 2007.  In view of the defendant’s absence at trial the plaintiff’s witness statements were unchallenged.  I found the entirety of their evidence to be reliable.

6.  The nature of Futures contract is fully set out at paragraphs 7‑16 inclusive of Norris Lau’s statement which it is unnecessary to recite herein.  I will however set out certain clauses in the documents which the defendant signed, having read and understood them, on 5 February.  The Account Opening Form is a lengthy document which includes a Risk Disclosure statement which spells out all the risks involved with trading in futures and options.  It commences with the following:

“RISK OF TRADING FUTURES AND OPTION

The risk of loss in trading futures contracts or options is substantial.  In some circumstances, you may sustain losses in excess of your initial margin funds.  Placing contingent orders, such as ‘stop-loss’ or ‘stop-limit’ orders, will not necessarily avoid loss.  Market conditions may make it impossible to execute such orders.  You may be called upon at short notice to deposit additional margin funds.  If the required funds are not provided within the prescribed time, your position may be liquidated.  You will remain liable for any resulting deficit in your account.  You should therefore study and understand futures contracts and options before you trade and carefully consider whether such trading is suitable in the light of your own financial position and investment objectives.  If you trade options you should inform yourself of exercise and expiration procedures and your rights and obligations upon exercise or expiry.”

7.  The opening forms also required the defendant to tick one of three boxes to indicate the level of risk she was prepared to undertake; low, medium or high.  She ticked the “high” box. 

8.  Even lengthier is KGI’s Standard Terms and Conditions for Futures and Options Trading.  The following clauses are some of those which are particularly relevant to these proceedings.

“2.1 The Client may from time to time instruct KGI, acting as the Client’s agent, to enter into or close out any Contract for the Account. KGI may decline to accept any instruction from the Client in its absolute discretion and without assigning any reason, whether in relation to the entering into or closing out of any Contract, or the exercise of any rights thereunder.

2.3 …the Client shall, independent and without reliance on KGI, make the Client’s own judgment and decision with respect to the entering into and closing out of each Contract.

3. Electronic Trading.

3.5 Unless otherwise agreed by KGI, KGI will not execute the Client’s instructions until there are sufficient cleared funds, securities or other property in the Account to settle the Client’s transaction.

3.12 The Client hereby confirms that due to unpredictable traffic congestion and other reasons, the Electronic Trading Services may not be a reliable medium of communication and that such unreliability is beyond the control of KGI. …the Client accepts the risk of conducting financial and other transactions via the Electronic Trading Services.

5. Margin.

5.1 In respect of all Contracts entered into by KGI as agent on behalf of the Client, the Client shall before the relevant Contract is entered into or otherwise immediately upon demand provide KGI with such Margin together with such guarantees and other security in such form and amount and on such terms as KGI may in its absolute discretion require from time to time. …

5.2 KGI shall be entitled to demand from the Client from time to time such additional Margin as KGI shall think fit in its absolute discretion. …

5.5 Margin calls must be met on demand. Without prejudice to the provisions of Clause 10, failure to meet such calls may result in KGI being entitled or obliged by the rules or regulations of the relevant Exchange and/or Clearing House to close out the Open Contracts …

10. Unilateral closing out.

10.1 KGI shall be entitled to exercise its powers under Clause 10.2 upon or at any time after the occurrence of any of the following events:-

(a) the Client fails to pay on demand or when due any sum (in particular, any Margin) due to KGI or any Affiliate of KGI, or fails to perform any of the Client’s other obligations under the Futures Trading Agreement; …

10.2 Upon or at any time after the occurrence of any of the events specified in Clause 10.1, KGI shall forthwith be entitled, without any demand or demand for additional Margin, without notice to the Client and notwithstanding any prior Margin call which has been made, to do any of the following things in its absolute discretion:-

(a) close out perform or maintain any Open Contract in the Account …

10.3 KGI shall have absolute discretion to choose which … Open Contracts to close out … and may sell any security on a single or collective basis. The Client hereby waives all claims and demands … against KGI in respect of any loss …whether in relation to the timing or manner of the exercise of powers or otherwise. The Client specifically acknowledges and accepts that:-

(a) nothing in Clause 10.2 shall impose any obligation on KGI to close out any Open Contract or exercise any option on behalf of the Client; and

(b)   in view of the frequent and rapid changes in spot and future prices, KGI is not under any obligation to assess price movement or market trend in exercising its powers under Clause 10.2 …”

9.  Having opened the account, the defendant embarked on a regular course of trading.  All her trades were carried out electronically over the internet.  She consulted no-one from the plaintiff firm in the course of her trading.  Between 6 February and 13 June 2007 she executed 1,418 Futures contracts which required a total margin funding of over $32 million.

Events of 14 and 15 June 2007

10.  The defendant was plainly aware of the need to maintain sufficient margin funds when trading.  She had traded regularly and there had been occasions when her orders had been rejected because of an insufficiency of funds.  In particular, in the week prior to 14 June she had input a large volume of trades which had been consistently rejected.  However she persisted on a daily basis, regardless of the lack of funding, and on 14 June 3 orders (3 amongst many) got through the system and were allowed to be processed.  2 of the 3 were those referred to in paragraph 2 supra.

11.  The next day Ms Wong acted responsibly and properly by making repeated efforts to contact the defendant.  It was also proper of her to give the defendant an opportunity to remedy the situation herself either by carrying out the sales herself as a matter of urgency or by funding her account to meet the deficit.  Ms Wong also warned her what would happen if she did not.  In the event neither happened and thus, pursuant to the Standard Terms and Conditions, it became necessary later in the day for the plaintiff to close out her unfunded position.  The plaintiff was not under any duty to obtain the best price when selling.  It understandably acted with reasonable speed.

12.  After exercising its rights under Clauses 10.1, 10.2 and 10.3 of the Standard Terms and Conditions the amount due to the plaintiff was $1,161,044.16.  That sum is made up as follows:

Item	Amount (HK$)
Beginning Balance	224,645.94
Trading Loss	(1,379,400.00)
Commission	(5,916.00)
Exchange Fee	(304.50)
Clearing/SFC Fees	(69.60)
Outstanding Balance	1,161,044.16

Defence

13.  In her pleaded defence the defendant raised two issues.  Firstly, she alleged that the plaintiff owed the defendant a duty of care, inter alia, to “act in the best interest of the client”.  Secondly, she alleged that when she opened her account Ms Wong made certain representations to her which were false.  By virtue of the defendant’s absence no evidence was adduced in support of either defence.  The plaintiff’s evidence which contradicted these issues I found to be reliable.  I find that the alleged representations were not made and the plaintiff’s conduct by its employees did not constitute any breach of duty.

Costs

14.  The plaintiff seeks costs on an indemnity basis pursuant to Clause 13.2 of the Standard Terms and Conditions which states:

“… the Client agrees to indemnify fully and keep fully indemnified KGI, … against any … loss whatsoever which may be suffered or incurred. … in connection with the provision of services …”

15.  Due to the defendant’s cavalier conduct both in her trading activity and her response to these proceedings I exercise my discretion to award the indemnity costs, to which she agreed in Clause 13.2, in favour of the plaintiff.

Order

16.  Judgment be entered that the defendant pays the plaintiff $1,161,044.16 plus interest at prime rate plus 1% from the date of the writ to the date of this judgment and thereafter at judgment rate until satisfaction.  The defendant’s counterclaim shall be dismissed.  There will be an order for costs in the plaintiff’s favour on an indemnity basis.