FUNG SIU POR t/a ROCTEC FUTURES TRADING CO AND ANOTHER v. LEE CHEUNG FUNG SHU, VERONICA

C.L. No. 233/88

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This is one of those sad cases in which a heavy loss was sustained during the Black Monday session in the Hong Kong Market on the 19th October 1987. Investors and supeculators alike were affected, including the present defendant.

2. The 1st plaintiff is a Futures company with which the defendant entered into a written agreement dated the 1st April 1987.  The 2nd plaintiff is a securities/shares company with which the defendant signed a Customer's Agreement dated 7th December 1983. Apparently, the same man ran both the 1st plaintiff and the 2nd plaintiff companies at the material time. Soon after the signing of the Customer's Agreement with the 2nd plaintiff, shares were traded by the defendant through the 2nd plaintiff.  After April 1987, the defendant also played the futures market as well. Futures contracts transactions were processed and executed through the 1st plaintiff.

3. The 1st plaintiff itself had futures transactions cleared by the international Clearing Corporation House known as "ICCH". Regulations and rules of the clearing house demand a deposit by way of margin of not less than $15,000 per unit. In turn, the 1st plaintiff required a similar margin deposit from the defendant. Prior to Black Monday, the defendant had taken up 20 lots or units in four separate contracts. These were all November Futures Contracts. Needless to say, at the inception, sufficient margin deposit had been paid.

4. On the 19th October 1987, generally known as the Black Monday, the market declined uncontrollably. There was general pandemonium. According to the defendant, in the afternoon she visited the office of the plaintiffs and gave specific instructions to Mr Sung to liquidate all her 20 lots November Futures Contracts and to close her Futures Account No. CL620.  Having given instructions, she allegedly left the premises of the 1st plaintiff. As a matter of fact, no sooner had the Futures Market opened in the afternoon, at 2:54 a limit down was imposed for November Index Futures. There were two further limits down in that afternoon: at 2:58, there was a limit down for December Index Futures and shortly after 3, 3:07, another limit down was brought in for Spot Index Futures i.e. October Index Futures.

5. There has been conflict between the plaintiffs and the defendant, the 1st plaintiff and the defendant in particular, as to whether the defendant had stayed in the plaintiffs' premises, long enough to witness at least the first limit down for November Index Futures. The defendant denies that she lingered on after she had left instructions with Mr Sung. She was cross-examined as to the precise time of her departure and her alleged robust reaction to the limits down, but there was no evidence from the 1st plaintiff to pinpoint the hours of her stay in the afternoon of the 19th nor to establish her alleged outburst. That is not a matter of crucial importance.

6. The defendant testifies that she was later informed by Mr Sung, soon after she had arrived at home, that her instructions for the disposition of her November Futures Contracts could not be executed. Mr Sung allegedly gave no specific reason.

7. Early in the afternoon, the defendant had also instructed Mr Sung to dispose of some shares, 50,000 Kowloon Wharves and 210,000 Tylfull. In this later telephone conversation with the defendant at her residence, Mr Sung also confirmed that those shares had been sold. According to the defendant, only in this telephone conversation was she told by Mr Sung that there was such a limit down for November Index Futures.

8. For the 20 lots of the defendant's November Index Futures, they were ultimately disposed of on the 2nd November 1987. According to Mr Sze of the plaintiffs, the 2nd defendant was time and again pressed to put in additional margin, but to no avail. The 1st plaintiff was doing its utmost to postpone ultimate liquidation of the defendant's position in the hope that her futures contracts could be suitably funded. On the 2nd November by pre-arrangement the defendnat went to the office of the 1st plaintiff and she was confronted with Mr Sze and a gentleman subsequently known to her as Mr Yip. There are some disputes as to what precisely was asked of the defendant, but it is reasonably clear that proposals and suggestions were made to the defendant to try to meet additional margin or liquidation loss from every possible source and that discussions were had as to the means for economy so that the 1st plaintiff might be reimbursed.

9. According to Mr Sze of the 1st plaintiff, who is the Assistant General manager of both companies, the defendant categorically stated that she was in lack of fund, in fact impecunious.  Thereupon, a decision was taken by the 1st plaintiff to have the position of the defendant wholly liquidated. That was done.

10. Coming back to the shares of the defendant, apart from the 50,000 Kowloon Wharves and 210,000 Tylfull sold on instructions of the defendant on the 19th October, on the 26 October 1987 some shares in the defendant's portfolio were sold to bring down her loan ratio from 52.35% to 34.03%.  Some more shares were sold on the 27th October, 3rd November and as well as the 4th November. The defendant seems to have been confused as to the date of 5th November for the sale of her shares. She names the last sale as being on the 5th November but that could well be an innocent error for misreading the date on the statement.

11. Some matters are not in dispute. A few days after each transaction, futures or shares/securities, statements were sent to the defendant.  As for the shares, the rule of thumb adopted by the 2nd plaintiff for what is called the 1:3 ratio does not seem to be seriously contested by the defendant. After all, judged by her claim to skill and expertise the defendant was a seasoned player. The defendant had obtained advances from the 2nd plaintiff to finance her share transactions. Money so advanced by the 2nd plaintiff was tied to a ratio of 33.33%, that is to say no more than about 1/3 of the market value of the defendant's shares would be lent by the 2nd plaintiff.  In another words, for every million dollars market value worth of shares of the defendant's, the 2nd plaintiff would be willing and ready to advance $333,333 or thereabout. If the market value dropped, the loan would have to be proportionately adjusted. It is evident that under the agreement signed with the 2nd plaintiff, the 2nd plaintiff was entitled to dispose of the defendant's shares for preserving this 1/3 ratio without notice.

12. The complaints as finally maintained by the defendant are without much complexity. First, as for the November Futures Contracts, the defendant accuses the 1st plaintiff of having wrongfully failed to execute her instructions given to Mr Sung on the 19th October 1987, and the 1st plaintiff is therefore said to have been in breach of duty, fiduciary, contractual or otherwise, as well negligent in not having liquidated her November Index Futures Contracts in the afternoon of the 19th.

13. According to the Mr Sze, the 1st plaintiff had made every effort to sell the 20 lots of the defendant's. The market was then in a turmoil. There were much less buyers than sellers. Only 3,184 November Futures Contracts were transacted for the whole day on the 19th, and less than 10% of the selling orders was met. The 1st plaintiff, according to Mr Sze, sold no November Index Futures Contracts in the afternoon at all. His evidence was corroborated by the records of ICCH that the 1st plaintiff sold no such contracts for any of its customers or on its own. The trading hours were limited and the limit down was imposed at 2:54. Market had commenced at 2:30.

14. The defendant has sent no written complaint to the 1st plaintiff. At one time, it was suggested that she complained to Mr Sung, but such suggestion is not supported by the evidence. In fact, in the final submission of the defendant, she admits that no complaint was made to Mr Sung on the grounds that it was futile to do so and that she and Mr Sung had a good working relationship. The defendant herself praises Mr Sung for his efficiency. She "would not be able to get someone who would be as good as Mr Sung".  It is inconceivable that the 1st plaintiff had not made all reasonable effort in liquidating the defendant's position on the 19th October.  I accept Mr Sze's evidence.

15. According to Mr Sze, at the pre-arranged meeting on the 2nd November, the defendant raised none of her present complaints at all.  The defendant is adamant that she did but for the first time. Even if the defendant had done so, it would have been almost unforgivable for her to be inactive for some 13/14 days from the 19th October.  She was immediately told by Mr Sung soon after her instructions, in the afternoon of the 19th October, that her futures contracts could not be successfully disposed of.  In the result, there is hardly any or any reliable evidence of alleged breach of duty, negligence or neglect on the part of the 1st plaintiff in not liquidating the futures contracts on the 19th October.

16. As for the shares, if the shares of the defendant had not been sold on the 16th October, the ratio would have been 52.35%.  In the state of the market, it was highly desirable and in fact necessary for the 2nd plaintiff to take steps to reduce the ratio to the usual 1/3.  In fact, shares were sold and at the close of market, ratio was reduced to 34.03%.  Realising prior notice was not essential, the defendant merely maintains that she should have been given some time to top up the ratio or the 2nd plaintiff should have waited at least until the opening of the market the next day, and that if the 2nd plaintiff had done so, she would not have suffered the heavy loss for which she is now sought to be made responsible. The circumstances and the state of the market, the high ratio on the 26th October are no indicia that the 2nd plaintiff had, as a broker, acted in any way unreasonably or irresponsibly.  For the same reasons, so explained Mr Sze, shares were later sold by the 2nd plaintiff to keep the ratio within the usual bounds.  The 1/3 ratio was not inflexible.  The sale on the 4th November brought the ratio down even lower.  This is not a matter of any great significance, and the defendant took no specific point on this in her final address. In no way can the 2nd plaintiff be said to be negligent having acted contrary to the provisions in the Agreement signed with the defendant dated 7th December 1983 for the running of her share account No. PS 093.  The 2nd plaintiff was entitled to reduce and justified in reducing the loan ratio as it did.

17. The loss sustained at the 2nd November 1987 from the November Futures Contracts in the defendant's account CL 620 under the Agreement signed by the defendant dated the 1st April 1987 amounted to $1,434,560.  Estimated value of the defendant's shares in the market is shown in Exh.A. That value is to be taken as the value of the shares of the defendant for all purposes in this action.

18. The defendant has shares valued at $195,800.  There is a credit balance standing also in that account of the defendant's, PS 093, in the sum of $26,107.61. In total, therfore, the defendant's share account PS 093 carries a credit of $221,907.61. Under the Agreement between the 1st plaintiff and the defendant, clause 7, as well under clauses 3 and 4 of the Agreement between the 2nd plaintiff and the defendant, it is virtually beyond argument that 1st plaintiff had a right of set off against the value standing to the credit of the defendant in her shares account PS 093. The loss in the liquidation of her November Index Futures Contracts on the 2nd November  1987 in the sum of $1,434,560 less $221,907.61, would yield a net debit balance of $1,212,652.39.  It is in this sum that the 1st plaintiff must have judgment against the defendant, and judgment is accordingly given in favour of the 1st plaintiff.

19. The 1st plaintiff is entitled to interest on an amount much higher than this judgment sum. But counsel for the 1st plaintiff is content to have interest on the net debit balance as I have calculated, and I award interest on that sum at 8% per annum from the 2nd November 1987 until today. Interest thereafter would be governed by the Rules of Supreme Court for the judgment sum. The 1st plaintiff is to have costs against the defendant. The 2nd plaintiff is joined principally for the credit to the defendant in her shares account PS 093. Subject to what counsel has to say, after set-off it would appear that no specific order need be made in respect of the 2nd plaintiff and costs need not be duplicated. Therefore, subject to what counsel has to say, the question of costs for the 2nd plaintiff in the action should not arise. None of the complaints against the 1st plaintiff or the 2nd plaintiff has been substantiated and the Counterclaim of the defendant cannot stand. It must be dismissed and I so dismiss the counterclaim of the defendant with costs to both plaintiffs.