RICHARDSON GREENSHIELDS OF CANADA (PACIFIC) LIMITED v. LUK KAM MAN, MICHAEL

1987, No. A6984

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an action by Richardson Greenshields of Canada (Pacific) Limited (the plaintiff) against Mr Michael Luk (the defendant) for monies due in respect of the defendant's account with the plaintiff relating to transactions carried out on the Hong Kong Stock Exchange and Hong Kong Futures Exchange, when the plaintiff acted as his broker and dealer. This is the first case of this kind to be heard following the collapse of the market on the 19th October 1987 better known as 'Black Monday'.

2. The claim arises as a result of an agreement between the plaintiff and the defendant dated the 30th December 1986, for a balance due after the liquidation of the defendant's account consequent upon his failure to maintain his margin with the plaintiff. The total claim, together with interest amounts to $188,731.93. Apart from an allegation that the plaintiff did not exercise due care in rendering its services to the defendant, the thrust of the defendant's defence centred upon an allegation that instructions given by him to the plaintiff on the 19th October 1987 were not carried out with the result that the defendant suffered a total loss of over $232,000 which is the subject matter of a counterclaim. A further allegation set out in the defence that the Hang Seng Index Futures Contracts were gaming contracts and were, therefore, void and unenforceable, was not pursued at the hearing having regard to a ruling made by Sears, J. in a recent decision that they did not amount to gaming contracts see Richardson Greenshields of Canada (Pacific) Limited v. Keung Chak Kiu and Hong Kong Futures Exchange Limited (Third Party), 1988 No. C.L.51.

3. It is not in dispute that the defendant's account was under margin by over $42,000 as at the 15th October 1987, and that on the 19th October 1987, it was under margin by over $99,000. In fact the defendant's account had been under margin for 20 days before the 19th October. A cheque drawn by the defendant on the 14th October 1987 for the sum of $15,000 in favour of the plaintiff, in order to reduce his margin, was dishonoured due to insufficient funds.

4. Mr Terrence Cheung, who is an accounts executive with the plaintiff, dealt with the defendant's account at the relevant time. He testified that the New York and Tokyo markets had fallen on the 19th October 1987 so he telephoned the defendant at about 9:50 a.m. on that date informing him of the position, and suggested that as his account was under margin the defendant should sell his futures contracts at market price. The defendant had bought two October futures contracts on the 24th September 1987 at 3815. The defendant expected the Hong Kong market to open low, but that it would rise. However, instead of accepting Mr Cheung's advice, he gave a limit order to sell the two futures contracts at 3950. Mr Cheung said that he wrote down this figure on an order slip, but the slip is no longer in his possession.

5. It is common knowledge that frantic selling took place on the two exchanges that morning and that trading in futures contracts was suspended at about 11:30 a.m. until after lunch and was again suspended a short time after the exchange re-opened in the afternoon. Mr Cheung spoke to the defendant later that day on the telephone after 2:30 p.m. when he informed him that he had not been able to sell the October futures at 3950. The defendant then placed an order with Mr Cheung to sell three October futures contracts at market price. The effect of this order was for the plaintiff to sell the two futures contracts that he had actually purchased and therefore owned whilst the third was for a contract to sell short, a security that he did not own, in expectation of buying back in future at a profit. As the defendant was under margin, the policy of the plaintiff is not to accept a new position by selling short under these circumstances unless there is an immediate likelihood of funds forthcoming from the client. A deposit of $15,000 is required to be paid when a new position is taken, but no deposit was paid by the defendant on this occasion. Although Mr Cheung accepted the order, it was not executed as the market had closed and did not re-open until the 26th October. Between the 19th October and the 26th October Mr Cheung was in almost daily contact with the defendant. On the 22nd October 1987, the defendant paid $35,000 to the plaintiff which reduced his margin to about $60,000.

6. Mr Cheung said that he first became aware of the defendant's complaint that he he had placed an order for four lots to be sold at market price on the 19th October when the defendant came to the plaintiff's office on the 26th October. On the previous evening, Mr Cheung obtained instructions from the defendant by telephone to sell the two futures contracts and a number of shares at market price which he recorded on a piece of paper, exhibit P1. Although there is no reference on the document to market price or limit order, Mr Cheung was sure that the order given was to sell at market price. The defendant's two futures contracts were sold on the 26th October for 2,100 and 2,200. However the shares were not sold at this time for the defendant wanted to speak to Mr O'Rourke, the plaintiff's Executive Vice-President in order to make a complaint. Later, Mr Cheung received instructions from Mr O'Rourke to sell the defendant's shares as the defendant was still under margin, and those shares were sold on the 26th and 27th October, apart from a few odd lots in Hang Lung Development Limited and Amoy Properties Limited. The defendant's holdings were liquidated pursuant to Clause 4 of the agreement which where relevant provides:-

"Without prejudice to any other rights or remedies that you may have against the undersigned, you may, at your absolute discretion, liquidate the undersigned's account(s) with you upon the happening of any one or all of the following events:

(a) .............

(b)    the undersigned fails to maintain or supply such deposit, security or margin, where applicable, requested by you;

................."

Mr Cheung saw the defendant and his friend Mr Cheng on the 26th October when a complaint was made about the instructions that were given on the 19th October.

7. The defendant gave evidence that he is at present an accounts officer with the Amro Bank, and that in October 1987, he was an Assistant Manager with the Standard Chartered Bank. He has some experience in the stock market and futures market for he attended a course of lectures on the subject at the Modtech Institute. Later he became a lecturer at the Institute in the same subject.

8. The defendant was aware that the markets in New York and Tokyo had been falling before the 19th October and confirmed that he had a telephone conversation with Mr Cheung that morning at 9:30 a.m. He said Mr Cheung informed him that as he was under margin, he should sell some shares and futures contracts. Accordingly he gave instructions to sell four October futures contracts at market price, 6,000 shares in Cheung Kong Holdings and 10,000 shares in Bond Corporation International. He denied Mr Cheung's allegation that he gave instructions to sell two futures contracts at 3950. In another telephone conversation at 11:30 a.m., which Mr Cheung disputed took place, the defendant claims that Mr Cheung informed him that trading in futures had been suspended, but when he asked if his order had been carried out, Mr Cheung said he could not trace the order paper on his desk so that he would have to check the position. During a further telephone conversation at 3:30 p.m. the defendant alleged that Mr Cheung was still trying to find the order. Further enquiries were made by the defendant as to whether Mr Cheung had been able to find the order, but again met with no result. On the 25th October the defendant said Mr Cheung telephoned him with regard to the sale of two contracts in order to cut all his margin, but said nothing in respect of the two futures contracts. He also said that the plaintiff had decided to sell all his shares and futures on the 26th October. On the 26th October, the defendant paid two visits to the plaintiff's office. He was informed by Mr Cheung during the morning visit that he had sold the two futures contracts for 2100 and 2200. During the second visit in the afternoon he made a complaint in the presence of his friend Mr Cheng to Mr O'Rourke that Mr Cheung had been instructed to sell four contracts at market price at 9:30 a.m. on the 19th October and that he did not know if the order had been executed. Mr O'Rourke agreed to investigate the matter. The defendant confirmed his complaint by a letter to the plaintiff on the 30th October. On the 28th October, the defendant said he was informed for the first time that his instructions were disputed when Mr Cheung said in the presence of Mr Cheng, that he had placed a limit order at 3950.

9. The defendant claims that he would have made a profit of over $230,000 if the plaintiff had carried out his instructions to sell two futures contracts on the 19th October and two new contracts. Although the defendant was aware that a deposit of $15,000 was required in order to take a new position he said that it was not necessary to deposit $30,000 for the two new contracts for that amount would have been covered by the sale of his shares in Cheung Kong Holdings and Bond Corporation International. The defendant accepts that by Clause 4 of the agreement that the plaintiff was entitled to close out his position as he was under the margin limit, but maintained that if his order had been executed, he would have made a profit.

10. Mr O'Rourke confirmed that the defendant and Mr Cheng saw him on the 26th October when a complaint was made that two futures contracts had not been sold, and that as an afterthought reference was made to the failure to sell short two other futures contracts.

11. Mr Cheng corroborated the defendant's evidence with regard to the visits to the plaintiff's office on the 26th and the 28th October.

12. Mr Cheung was quite clear in his evidence that the defendant gave him a limit order to sell the two futures contracts at 3950, but was unable to effect a sale at that price. Later the defendant revised his instructions to sell three futures contracts at market price, but again Mr Cheung was unsuccessful due to the closure of the Futures Exchange.

13. The defendant has contended that despite being under margin to the extent of about $99,000, on the 19th October, Mr Cheung had accepted an order to sell the two futures contracts that he owned together with two other futures contracts to be sold short, without being required to make any deposit. In his evidence, the defendant contended that he was not aware that the instructions that he gave on the 19th October had not been carried out until the 28th October. Yet this evidence clearly contradicts the contents of the letter from the Director of Legal Aid to the plaintiff's solicitors dated the 14th December 1987 which states that he had been informed on the morning of the 19th October at 11:30 a.m. The defendant had obviously overlooked this discrepancy for he attempted to explain it away by blaming the solicitor of the Legal Aid Department in failing to understand his instructions. I have no hesitationa in rejecting this explanation as untrue. Indeed, I have had no difficulty in determining the truth between the evidence given by Mr Cheung and the defendant. I am quite satisfied that Mr Cheung was a truthful and honest witness. There is no doubt, in my judgment, that the defendant gave a limit order to Mr Cheung on the 19th October to sell the two futures contracts at 3950 which could not be executed having regard to the state of the market, and that he did not give instructions to sell at market price. It is significant that according to Mr O'Rourke, whose evidence I accept, that a salesman will receive a higher rate of commission on a trade than upon a limit order so there is no conceivable reason why Mr Cheung should dispute the defendant's evidence that he did not place a limit order when he could have sold the futures contracts at market price in the morning in any event. Subsequently, the defendant changed his instructions in the afternoon of the 19th October for the sale of the two futures contracts and to sell short a third futures contract at market price. Mr Cheung was unwise to accept a third contract in view of the defendant's financial position with the plaintiff, but in the event the sale could not be effected.

14. The defendant is undoubtedly intelligent and knowledgeable about the stock market and futures contracts, but like the majority, he did not predict the dramatic events that occurred on "Black Monday". The defendant demonstated that he is cunning by formulating his defence in his letter of the 30th October, but this was a concocted account put forward in a vain and desperate attempt to avoid his legal obligations to the plaintiff. However, before he wrote this letter he had on the 22nd October, paid $35,000 to reduce his margin which clearly indicated that he believed that he owed money to the plaintiff which is quite inconsistent with his testimony that he expected to make a profit out of the order that he gave on the 19th October. It was some time after this payment that the defendant decided to fabricate the evidence which he gave in this action. The defendant was an unimpressive witness.

15. There was no evidence to support the defendant's allegation that the plaintiff had in any way acted negligently in carrying out its duties as broker and dealer. The defendant was in breach of his contract with the plaintiff as he was under margin with the result that the plaintiff was quite entitled to liquidate all hi holdings under Clause 4 of the agreement with the exceptions to which I have referred. The defendant's defence was devoid of merit.

16. Judgment will, therefore, be entered for the plaintiff while the defendant's counterclaim is dismissed.

17. It is pertinent to observe that the defence has been conducted out of public funds. Apart from the fact that the defendant has not told the truth, it is surprising that the taxpayer should be expected to pay for the defence of a banker who has speculated with substantial sums of money on such a highly volatile market as the Futures Exchange. As a matter of public policy, it seems to me to be wholly inappropriate that such funds should be used for a case of this nature when the legally aided person was clearly the author of his own misfortune.