CHINA MAN MADE FIBER CORPORATION v. GOLDMAN SACHS (ASIA) LLC

HCA 2756/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2756 OF 2008

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

BETWEEN

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

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

D E C I S I O N

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

1.  Before the court are cross applications for specific discovery. The case is an example of complex commercial litigation. Should the matter come to trial it is expected to take up to 6 weeks of court time. The first round of discovery has produced a large number of documents; almost 1,000 from the plaintiff and almost 2,000 from the defendant. Both sides complain that the other has been deficient in its discovery obligations. When both sides seek extensive further discovery, as they do in these applications, the court is faced with the difficult task of finding the right balance between exercising control and restraint so that the case remains manageable for trial purposes on the one hand, and ensuring that both parties are allowed to do justice to their respective pleaded cases at trial on the other hand.

2.  At this stage it is often simply not possible to conclude with certainty that a particular class of documents satisfies the “trinity of principles” (that the document exists, that it is relevant and that it is in the party’s possession, custody or power) so as to make an order.  Of course, the party seeking discovery does not have to establish “certainty” but the lack of certainty merely goes to illustrate the difficulty in drawing the line between “fishing” for evidence on the one hand and the discovery of genuinely necessary evidence on the other.

3.  With the above in mind, I make two preliminary remarks.  Firstly, a case of this nature will inevitably generate a considerable amount of paper.  There are many complex issues.  The evidence concerning those issues is likely to be documentary in nature.  The court’s temptation to adopt a parsimonious response should be tempered with caution. The time may come when it says “enough is enough” but in a case such as this that time may come later rather than sooner.

4.  Secondly, as both counsel in these applications agreed (Mr Laurence Li for the plaintiff and Mr Jat Sew Tong, SC leading Mr Alexander Stock for the defendant) simply because a document has been discovered it does not necessarily mean that it will ultimately find a place in the trial bundles.  There is a serious responsibility on both sides to evaluate the results of a discovery application.  The knee jerk reaction to make half a dozen copies of a document as soon as it has been discovered should be preceded by careful analysis of its true value and importance.

THE ISSUES

5.  The real issues in the case should remain at the forefront of one’s mind when deciding each application for the discovery of a particular class of documents.

6.  The plaintiff is claiming a loss of US$24 million arising from derivative products purchased through the defendant.  It is also claiming an unquantified sum for loss of profits it alleges it would have made if it had embarked on a different financial strategy.

7.  Very briefly, the plaintiff, which is a Taiwanese manufacturer and exporter of chemical products, wanted to hedge its exposure to currency fluctuations between the US$ and the Taiwanese$.  In the past this need had been met by forward contracts. The defendant, it is claimed, advised a product known as a TARN (“target redemption”).  The plaintiff alleges that the defendant owed it a duty to advise on its investments; it further alleges fraudulent and negligent misrepresentation, breaches of statutory duty and regulatory requirements.  It claims the product recommended was unsuitable for its needs.

8.  The defendant denies all liability.  It says the plaintiff knew what it was doing, its chairman being an experienced and sophisticated investor.  It was an arm’s length professional arrangement in which the plaintiff knew the risks.  The alleged professional duties were not owed to the plaintiff and even if they were, they were not breached.  The defendant denies all allegations of misrepresentation, fraud, undue pressure and sequential loss.

9.  In outline the issues at trial will include:

(i) The suitability of the TARN as a financial product to the plaintiff.

(ii) The nature and extent of the defendant’s duties, if any, to the plaintiff.

(iii) The plaintiff’s investment history which will be relevant to the defence allegation of the plaintiff being an experienced and sophisticated investor who knew the risks involved.

(iv) Whether the defendant was in an advisory capacity with the plaintiff concerning the specific transactions.

(v) What were the plaintiff’s “hedging needs” at the material time?  What were its objectives in entering into the TARN transactions?

(vi) Were representations made, were they relied on, were they negligently made, were they fraudulently made?

(vii) Did the plaintiff suffer a loss and if so what is the quantum of that loss?

(viii) Was there contributory negligence on the plaintiff’s part?

10.  The above list is not intended to be exhaustive, it is merely intended to demonstrate the overall flavour of the commercial dispute.

THE CROSS APPLICATIONS

11.  As a result of discussions in court, the parties were able to reach an agreement in relation to the plaintiff’s application.  In order to understand the agreement, it is necessary to set out, in full, the plaintiff’s application.  It sought discovery of five classes of documents as follows:

“1. Unredacted versions of the following of the Defendant’s manuals (the ‘Manuals’):-

(i) Fixed Income, Currency and Commodities Asia (Excluding Japan) Policies and Procedures Manual;

(ii) FICC and Equities Global OTC Derivatives Policies and Procedures Manual; and

(iii) Guidelines for Restructuring Existing Equity and FICC Derivatives Transactions.

2. Any documents created in the course of any internal corporate sales audit conducted by the Defendant and/or its affiliates involving any of the transactions between the Plaintiff and Goldman Sachs International (‘GSI’) set out in Appendix 1 of the Defendant’s Defence and Counterclaim dated 29 July 2009 (the ‘Transactions’).

3. Any documents of the Defendant and/or its affiliates relating to the know-your-client (KYC) and counterparty due diligence process conducted on the Plaintiff, whether as referred to in the Manuals or otherwise, including (i) the due diligence process carried out on the Plaintiff’s capacity and authority to enter into the Transactions; and (ii) the due diligence conducted for restructuring transactions entered into between the Plaintiff and GSI.

4. Any documents of the Defendant and/or its affiliates relating to the credit approval process carried out in relation to the Plaintiff and to the Transactions, including any credit or loan files, whether as referred to in the Manuals or otherwise.

5. Any documents of the Defendant and/or its affiliates relating to the origination, structuring and/or marketing of the Target Redemption (TARN) products sold to the Plaintiff, including:-

(a) documents which evidence the product approval process of the Defendant and/or its affiliates in relation to such products;

(b) documents which describe the purpose, economic effect and risks of such products;

(c) internal training documents, manuals or guidelines which describe where, to whom and how such products should be marketed; and

(d)  documents setting out product suitability policies and procedures of the Defendant and/or its affiliates which were applicable to such products, and any documents created in the process of carrying out, supervising or auditing the carrying out of such policies and procedures with respect to the Plaintiff, including but not limited to suitability checklists.”

12.  The complaint about request 1 was that two of the three manuals which were disclosed in the first round of discovery were so heavily redacted that the plaintiff was unable to make any sense of them.  The redaction was made, according to the defendant, primarily for reasons of relevance.  However, neither the plaintiff nor the court were able to evaluate the relevance of the redacted parts for obvious reasons.

13.  The plaintiff is content that this request can be adjourned with liberty to apply upon the defendant’s undertaking to provide the headings in the manuals in the table of contents, which had hitherto been redacted, to enable the plaintiff to consider its position as to the relevance of the subject matter which has been blocked out.  For the avoidance of doubt, the table of contents include ‘sub headings’ which will also been unredacted.

14.  With regard to requests 2‑5, apart from a lack of discovery, the plaintiff’s preliminary complaint was that the defendant’s form of words in the affidavit stating that no more documents existed for the purpose of discovery was that of the defendant’s legal counsel saying “as far as I am aware no further documents exist …”.

15.  I expressed my agreement with the plaintiff that this was not good enough.  Mr Jat thereupon undertook on the defendant’s behalf to file fresh affidavits in which, he anticipated, it would be the defendant who would depose as to the non existence of further documents where it was able to do so.

16.  On this basis it was agreed that items 2‑5 would also be adjourned with liberty to apply.

THE DEFENDANT’S SUMMONS

17.  The defendant seeks discovery of seven classes of document (originally it was eight but one, class E, has not been pursued).

18.  With some reluctance, I think it is necessary to set out the requests in full.  To help get an overall picture, each one is preceded by a one line summary.  The requests are lengthy and detailed.  First impressions are that this leads to a request that is too wide, oppressive and all-encompassing.  In some instances however, on further analysis the length and detail of the request helps to clarify and focus on what, it is said, is necessary for a fair disposal of the trial.  (Subject, that is, to simplification by use of the court’s “blue pencil” which both parties concede may be utilized.  Although Mr Li conceded that such an approach was permissible he urged against it, to which I refer later at paragraph 35).

A.  Accounting documents relating to derivative transactions

“Documents created, amended, sent or received by or on behalf of CMFC during the period from 1 January 2007 to 31 December 2008 referring or relating to CMFC’s accounting of the Transactions (as defined in the Defence and Counterclaim) and other derivative transactions, including (without limitation):-

(1) calculations of marked to market (MTM) valuations of CMFC’s derivatives transactions (whether or not prepared by CMFC);

(2) company and management accounts showing the valuation of CMFC’s derivatives transactions;

(3) management accounts, quarterly accounts, financial statements and cash flow statements; and/or

(4) internal and external communications (including, but not limited to, correspondence with auditors and accountants) regarding CMFC’s accounting treatment of its derivative transactions.”

19.  The plaintiff has indicated that with respect to items (1) and (4), it will confirm on affirmation that there are no further documents to be discovered.

20.  The heading refers to a 2‑year period which is reasonable.  In order to make the entire request comply with the basic principles in discovery applications it shall be amended as follows:

(i) line 3 delete “referring or”;

(ii) line 5 delete “and other derivative transactions”;

(iii) line 5 delete “(without limitation)” and

(iv) delete item (3).

21.  I take the view that the issues at which (ii) and (iv) above are directed are either too broad or are sufficiently dealt with in subsequent requests.  Also as far as this request is concerned the discovery already made at (3) is either sufficient or publicly available in any event.

B.  Derivative transactions with Third Parties

“Documents created, amended, sent or received by or on behalf of CMFC on or prior to 31 December 2008 regarding CMFC’s actual or proposed derivative transactions with third parties, referring or relating to: (i) the nature, type, value, risks, returns and/or purpose of those transactions; (ii) CMFC’s evaluation, assessment or understanding of those transactions; (iii) CMFC’s decision to enter into or reject those transactions, and/or the reasons for that decision; (iv) the proposal, presentation, sales, marketing and/or explanation by the relevant third party of those transactions; and/or (v) the negotiation of the draft and final contract documentation of those transactions, including:

(1) a complete set of CMFC’s internal reports of its derivative transactions with third parties;

(2) internal and external records or communications (whether paper or electronic) relating to the nature, purpose, advantages and disadvantages of actual or proposed derivative transactions, and/or the reasons for deciding whether or not to enter such transactions;

(3) draft and final term sheets, contracts (including ISDA documentation) and confirmations for actual or proposed derivative transactions;

(4) presentations, emails or other communications from third parties used to explain or identify features of actual or proposed transactions; and/or

(5) CMFC’s communications with other parties (including its advisers) regarding actual or proposed derivative transactions.”

22.  The defendant concedes that there should be a restriction as to time.  Mr Jat suggests four years, Mr Li has countered with one year.  

23.  It is fair to say that the plaintiff’s derivative transactions go to the core of the defendant’s defence.  Subject to a simplification of the request the three principles are satisfied.  However, the plaintiff responds that it has made adequate discovery in this class of document.  In my judgment an order in abbreviated terms is merited.  If, under any of the sub-categories (1)‑(3) no further documents exist, then the plaintiff should specifically depose thereto.

24.  The court’s amendments, which do not alter the substance of the request, merely narrow it, are as follows:

(i) line 1 delete “on or prior to” and substitute “between 1 January 2005 and”;

(ii) line 2 delete “actual or proposed”;

(iii) line 3 delete “referring or”;

(iv) line 3 after “parties” add “in particular the TARN entered into with Systech Capital Inc. on 31 March 2008;

(v) lines 6‑8 delete items (iv) and (v);

(vi) line 8 delete “without limitation”;

(vii) under (1) delete “a complete set of”;

(viii) under (2) delete “actual or proposed”;

(ix) under (3) delete “actual or proposed”; and

(x) delete (4) and (5).

(c)  Derivative transactions with the defendant

“Documents created, amended, sent or received by or on behalf of CMFC between 1 January 2007 and 31 December 2008 regarding CMFC’s actual or proposed derivative transactions with GSI, referring or relating to: (i) the nature, type, value, risks, returns and/or purpose of those transactions; (ii) CMFC’s evaluation, assessment or understanding of those transactions; (iii) CMFC’s decision to enter into or reject those transactions, and/or the reasons for that decision; and/or (iv) the negotiation of the draft and final contract documentation of those transactions, including (without limitation):

(l) a complete set of CMFC’s internal reports of its derivative transactions with GSI;

(2) internal and external records or communications (whether paper or electronic) relating to the nature, purpose, advantages and disadvantages of actual or proposed derivative transactions, and/or the reasons for deciding whether or not to enter such transactions;

(3) presentations, emails or other communications explaining or identifying features of actual or proposed transactions; and/or

(4) CMFC’s communications with other parties (including its advisers) regarding actual or proposed derivative transactions entered into with GSI.”

25.  Subject to a similar “narrowing” of this request (infra) it plainly seeks documents which are at the heart of the defence.  The limitation of 2 years is appropriate.  The plaintiff’s discovery of internal documents is currently lacking in this regard.  If there are no more they must specifically affirm thereto.

(i) line 2 delete “actual or proposed”;

(ii) line 3 delete “referring or”;

(iii) lines 6-7 delete item (iv);

(iv) line 7 delete “without limitation”;

(v) under (1) delete “a complete set of”;

(vi) under (2) delete “actual or proposed”; and

(vii) delete (3) and (4).

26.  In (B) and (C) one effect of the above deletions is to remove the “proposed” transactions.  This has been done primarily as a result of the court’s desire to exercise a degree of control over the discovery process but also because of lack of precision in the request.  In any event, with regard to category (C) the defendant will, inevitably, already be in possession of much of the relevant documentation.

D.  Hedging needs

“Documents created, amended, sent or received by or on behalf of CMFC during the period from 1 June 2006 to 31 December 2008 referring or relating to CMFC’s hedging needs (including forecasted needs) for CMFC’s financial years from 2007 onwards, including but not limited to:

(1) projected, forecast and/or actual revenues and expenditures, and the currencies in which each of them were denominated; and/or

(2) records of meetings, correspondence, discussions, analysis , and advices referring or relating to CMFC’s hedging needs.”

27.  There can be no doubt that the plaintiff’s ‘hedging needs’ are relevant to the key issues of the suitability of the product and the defendant’s knowledge of such products.  It is a proper request subject to the following minor amendments.

(i) line 2 delete “referring or”;

(ii) line 4 delete “but not limited to” (phrases such as this are deleted simply because they add nothing to the meaning); and

(iii) under (2) delete “discussions, analyses” and “referring or”.

E. (No longer pursued)

F. Investigations

“Documents, created, amended, sent or received by or on behalf of CMFC referring or relating to any regulatory or stock exchange investigation related to or touching upon its entry into, accounting treatment of, corporate governance and/or disclosures in relation to, the derivative transactions entered into between CMFC and GSI which are the subject of these proceedings, including (without limitation):

(1) Documents created, amended, sent or received during the period from 1 March 2007 to 31 May 2008 and relevant to the purported ‘clerical error’ made in CMFC’s filings with the Taiwan Stock Exchange by regarding its classification of the Transaction entered into with GSI including (but not limited to) who was responsible for these errors, why and how they came to be made, how they were identified and what steps were taken to rectify them and/or prevent the recurrence of a similar error; and

(2) Documents, created, amended, sent or received during the period from 1 February 2008 to 31 May 2008 referring to CMFC’s failure to make disclosures in relation to the derivatives transactions it had entered into with GSI in accordance with the Taiwanese Securities Exchange Act and Regulations Governing the Acquisition and Disposal of assets by Public Companies, including but not limited to any investigations undertaken internally or by the Financial Supervisory Commission, the Taiwan Stock Exchange or other regulatory authorities, including the outcome of any such investigations, and any sanctions or penalties imposed  upon CMFC or its officers.”

28.  Both parties were investigated by the Taiwan Stock Exchange arising out of the same transactions which are at the centre of this litigation.  The defendant seeks discovery of the plaintiff’s documents in this regard but argues that its own documents arising from the investigation(s) are irrelevant because the subject matter was different.

29.  In my judgment there are sufficient documents in the public domain concerning the issues in both (1) and (2) (supra) and further, it is not possible to conclude at this stage that one party’s documents are relevant whilst the others are irrelevant.  Subject to the trial judge’s ruling on the question of relevance, any evidence over and above what is already available should be confined to that which may emerge as a result of cross-examination.  Given that the core issues are suitability, the duty to advise and the plaintiff’s underlying knowledge and sophistication in matters of high finance, the investigations carried out afterwards may ultimately be regarded as a peripheral distraction.  The criticism made by the plaintiff that in many respects it amounts to a fishing expedition which, at best, will land fish which will be unnecessary to the fair trial of the action, is not without merit.

30.  I shall make no order under F.

G.  Individual records

“Personnel or individual records for employees of CMFC who had involvement with GSA or the Transactions, including Kyle Wang, Chia‑Yu Chen (also known as Sannie Chen) and Kevin Lin, relating to their education, experience, training and/or expertise in derivatives and foreign currency hedging, including (without limitation):

(1) curricula vitae;

(2) details of professional training courses attended or delivered;

(3) copies of academic qualifications, certificates, diplomas or transcripts of academic records;

(4) job descriptions; and/or

(5) letters of reference.

31.  Seeking all records etc. relating to all employees who had involvement with the defendant without limitation of time is too wide and oppressive.  The real target of the defence of ‘sophistication’ is Kyle Wang.  Normally one would expect some reference to his educational background and experience to be included in his witness statement.  Nonetheless, in case it is silent on such matters I will grant a much reduced discovery order in relation to Kyle Wang only.  In respect of any other plaintiff witnesses at trial it is to be expected, although I can make no such direction, that their witness statements will contain a summary of their educational background and length of experience in the financial field.  Failure to do so would be a matter for cross-examination.

32.  After the use of the blue pencil it will read:

“Records for Kyle Wang relating to his education, experience, training and expertise in derivatives and foreign currency hedging, in particular, academic qualifications and professional training courses.”

H.  Restructuring and Unwinding the Transactions

“Documents, created, amended, sent or received by or on behalf of CMFC between 27 February 2008 and 31 December 2008 in respect of CMFC’s restructuring and unwinding of the Transactions, referring or relating to: (i) the nature, type, value, risks, returns and/or purpose of actual or proposed restructuring or unwinding transactions; (ii) CMFC’s evaluation, assessment or understanding of those transactions; (iii) CMFC’s decision for entering into or rejecting those transactions, and/or the reasons for that decision; (iv) the proposal, presentation, sales, marketing and/or explanation by any third party of those transactions; and/or (v) the negotiation of the draft and final contract documentation of those transactions, including (without limitation):-

(1) internal and external records or communications (whether paper or electronic) referring or relating to the nature, purpose, advantages and disadvantages of actual or proposed derivative transactions (including the Fourth TARN Trade and the Restructured TARN Trade), and/or the reasons for deciding whether or not to enter such transactions;

(2) draft and final term sheets, contracts (including ISDA documentation) and confirmations for actual or proposed derivative transactions;

(3) presentations, emails or other communications from third parties used to explain or identify features of actual or proposed transactions; and/or

(4) CMFC’s communications with other parties (including its advisers) regarding actual or proposed derivative transactions.”

33.  This request mirrors requests (B) and (C).  It specifically relates to transactions designed to unwind existing transactions. It is plainly relevant but on the strict understanding that any such unwinding would itself come within those transactions already covered by (B) and (C) I consider it unnecessary to make a separate order.  When the plaintiff responds to (B) and (C) it should clearly understand that documents covered by (H) should also be discovered (subject to the amendments made to (B) and (C) which would have also applied to (H)).

34.  The order I now make is in the terms of the amended schedule as follows:

A.  Documents created, amended, sent or received by or on behalf of CMFC during the period from 1 January 2007 to 31 December 2008 relating to CMFC’s accounting of the Transactions (as defined in the Defence and Counterclaim) including:-

(1) (affirmation to be filed)

(2) Company and management accounts showing the valuation of CMFC’s derivatives transactions;

(3) (no order made)

(4) (affirmation to be filed)

B.  Documents created, amended, sent or received by or on behalf of CMFC between 1 January 2005 and 31 December 2008 regarding CMFC’s derivative transactions with third parties in particular the TARN entered into with Systech Capital Inc. on 31 March 2008 relating to: (i) the nature, type, value, risks, returns and/or purpose of those transactions; (ii) CMFC’s evaluation, assessment or understanding of those transactions and (iii) CMFC’s decision to enter into or reject those transactions, and/or the reasons for that decision, including:-

(1) CMFC’s internal reports of its derivative transactions with third parties;

(2) internal and external records or communications (whether paper or electronic) relating to the nature, purpose, advantages and disadvantages of derivative transactions, and/or the reasons for deciding whether or not to enter such transactions;

(3) draft and final term sheets, contracts (including ISDA documentation) and confirmations for derivative transactions.

C.  Documents created, amended, sent or received by or on behalf of CMFC between 1 January 2007 and 31 December 2008 regarding CMFC’s derivative transactions with GSI, relating to: (i) the nature, type, value, risks, returns and/or purpose of those transactions; (ii) CMFC’s evaluation, assessment or understanding of those transactions; (iii) CMFC’s decision to enter into or reject those transactions, and/or the reasons for that decision;

(1) CMFC’s internal reports of its derivative transactions with GSI;

(2) internal and external records or communications (whether paper or electronic) relating to the nature, purpose, advantages and disadvantages of derivative transactions, and/or the reasons for deciding whether or not to enter such transactions.

D. Documents created, amended, sent or received by or on behalf of CMFC during the period from 1 June 2006 to 31 December 2008 relating to CMFC’s hedging needs (including forecasted needs) for CMFC’s financial years from 2007 onwards, including:

(1) projected, forecast and/or actual revenues and expenditures, and the currencies in which each of them were denominated; and/or

(2) records of meetings, correspondence, and advices relating to CMFC’s hedging needs.

E. Not pursued.

F. No order.

G. Records for Kyle Wang, relating to his education, experience, training and expertise in derivatives and foreign currency hedging, in particular professional training courses and academic qualifications.

H. No order.

35.  In conclusion, I make this final comment.  Mr Li submitted that if a request, as drafted in the summons, was oppressive or too wide or imprecise, the court should reject it entirely.  I have not adopted this approach.  In this case the better course, it seems to me, has been to recognize that where a widely drafted request contains within it a proper request which can be revealed, without prejudice to the other side, the blue pencil test should be applied.

COSTS

36.  On the plaintiff’s summons I made an order nisi that the costs be to the plaintiff.  On the defendant’s summons, I make an order nisi that the costs be to the defendant.