City Index Ltd (t/a Finspreads) v Balducci

This is the trial of a claim for payment of the sum of £313,067.02 plus interest. The debt is said to have been incurred by the defendant, Mr Balducci, in spread betting on the price of heating oil over a period of two and a half years. That sum represents the negative balance outstanding since 14^th May 2008 on an account with the claimant numbered BL64606.

Mr Balducci counterclaims the sum of $1.625m (as well as damages for breach of confidence and psychiatric injury) on the basis that his spread betting losses were wrongfully incurred owing to the claimant’s fault. In short, his case is that the claimant unlawfully gave him advice relating to spread bets.

The claimant offers its customers spread bets in financial derivative products. All the claimant’s financial products are margined, that is to say that the customer is only required to deposit a percentage of the full value of the position that is opened. Trading is, or is supposed to be, conducted on an execution-only basis, which means that the claimant is not authorised to give advice, as opposed to information, about the products or the market. The customer is supposed to make his own trading decisions and trade at his own risk. The claimant’s role is limited to opening and closing spread positions on instructions and providing him with market information on request. The distinction is set out in the risk warning notice described below, in the following terms:

“Your bookmaker is prohibited under FSA requirements from providing you with investment advice relating to investments or possible transactions in investments or from making investment recommendations of any kind. This prohibition is subject to an exception where advice given amounts to the giving of factual market information or information, in relation to a transaction about which you have enquired, as to transaction procedures, potential risks involved and how those risks may be minimised.”

Spread betting is regulated by the Financial Services Authority and I observed that throughout the trial the description of Mr Balducci’s activities was the language of ‘trading’, ‘investing’, ‘buying’ and ‘selling’. However what the customer is doing is betting on whether that underlying market will rise or fall and this is emphasised by the use of the word ‘bookmaker’ in the risk warning notice I have quoted. The claimant offers two prices on every market, and the spread is the difference between the two. If the customer thinks the market will rise he will ‘buy’ the market at the higher price. If he thinks it will fall he will ‘sell’ the market at the lower price. Either position can subsequently be closed by placing an equal transaction in the opposite direction. Whether he wins or loses depends on the movement, and the size of the movement, of the underlying market. There is also a rollover procedure whereby a bet in one betting period is closed and the same bet is opened for the next period, prolonging the exposure to the market. If the market moves adversely to the customer the claimant makes a margin call, that is to say a call for an amount to cover the losses.

The classic description of spread betting is contained in the judgment of Rix LJ in Spreadex v. Battu [2005] EWCA Civ 855 at [2]-[4] as follows,

“[2] Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus, if the Dow Jones index is, say, at 10,000, one can ‘buy' or ' sell ' the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10,010. If one buys, one is betting that the market will rise above 10,010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain £1 for every point that the index exceeds 10,010. If one sells and the market falls, one stands to gain £1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose £1 for every point the market rises above 9990. Until the bet or 'trade’ is closed, the gains and losses are merely ‘running’ gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sales spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose £10 for every £1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory, winnings based on rising markets are infinite (in practice, of course, they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero.

[3] Normally, of course, to gain by £1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than £1. In effect, one’s £1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be £100-£200 richer or poorer, per £1 stake within a matter of hours of his trade. On a trade of £100, those figures become £10,000 to £20,000.

[4] The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere, seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator’s customer: nor, in the present case, have the applicable terms been disclosed.”

Mr Balducci’s account as at 14^th May 2008 relates to June contracts in heating oil opened on 23^rd and 24^th April 2008. The claimant’s evidence was not challenged that in order to limit its exposure to these contracts it hedged most of them by opening derivative positions and had to pay its broking counterparty on the hedge. If it does not succeed in the claim it will therefore make a substantial overall loss.

Mr Balducci started spread betting in September 2005 with the claimant’s predecessor, IFX Markets Limited (“IFX”) trading as “Finspreads”. He says that he was introduced to Finspreads by his bank manager at HSBC, Mrs Shah, who is married to Mr Shah, an employee of IFX and subsequently of the claimant.

Mr Balducci presented himself as an innocent in business matters, a humble coffee shop proprietor who was caught in Finspread’s toils and who trustingly and unquestioningly did everything that Mr Shah told him to do. That simply does not hold water. Mr Balducci is indeed a coffee shop proprietor, but that does not automatically import the lack of understanding and lowly intellectual status for which he contends. He is a successful businessman. For a time he had more than one coffee shop in the Mayfair area. He also had access to very large sums of family money. Indeed his brother lent him some £3m, apparently knowing, at least in general terms, how he would use it. Mr Balducci owned properties in Kensington and at one stage ran the family leather business in Venezuela. Furthermore he himself admitted in a telephone conversation on 14^th March 2008 that to engage in spread betting on the price of heating oil,

“You have to know a little bit about oil and I know a little bit…”

By contrast his apparent astonishment at finding that the claimant was not an expert in the oil market sits uneasily with his admitted conversation with Mr Singh of the claimant in which Mr Singh told him (without any query from Mr Balducci) that he Mr Singh did not know anything about RBOB heating oil.

Mr Balducci’s story is that Mrs Shah effectively told him that Mr Shah would look after Mr Balducci and that he would secure for Mr Balducci, as he had done for her, returns of some 10% per month. In the course of his evidence Mr Balducci changed his version about what he says was the promised return, at first saying it was 10% per annum but eventually reverting to his original figure of 120% per annum. He came across as an intelligent man and it is simply incredible that he nevertheless implicitly believed, as he says he did, that spread betting was a low risk activity. Even at the start of his relationship with IFX he made some heavy losses and he neither stopped spread betting nor did he complain at any stage prior to the time when these proceedings were in contemplation that he had been misled by Mr or Mrs Shah.

On 31^st March 2007 the claimant took over the Finspreads business from IFX. The transition was seamless in that Mr Balducci retained the same account with the same account number and details and continued to deal with the same people under the same trading name of Finspreads. On 5^th March 2007 a letter was sent to Mr Balducci telling him of the transfer. From 1^st November 2007 new terms and conditions were framed. Again, these were notified to Mr Balducci in advance. I find as a fact both that Mr Balducci signified his consent to becoming a client of the claimant by clicking the acceptance box electronically and that he accepted the terms and conditions electronically on 11^th October 2007. Mr Balducci complains that the evidence of this is inadequate in that the printed records are sparse, computerised and have been heavily redacted to remove names of unconnected clients of the claimant. However I accept the claimant’s evidence as to the provenance and nature of these records. That evidence is fortified by the fact that Mr Balducci continued to trade with the claimant without complaint.

Mr Balducci has raised issues as to whether he contracted with the claimant at all and if so, whether he contracted on any particular terms. I note in this regard that he admitted in his pleading that he was a retail client of the claimant holding the relevant account and that since November 2007 he entered into numerous spread bets with the claimant the profits and losses on which were placed to the account and that the last open position on the account was closed on 14^th May 2008. I also note his non-admissions (rather than denials) that there was an agreement between him and the claimant dated 1^st November 2007, that the sum claimed by the claimant is (mathematically) correct and that the claimant was entitled to close Mr Balducci’s positions when it did so.

I accept Mr Pelling’s submission on behalf of the claimant that it has proved the matters that it was required, by virtue of these non-admissions, to prove. Mr Balducci was given notice in correspondence of the terms of the 1^st November 2007 customer agreement with the claimant and that Finspreads was a division of the claimant from 31^st` March 2007 onwards. The trading histories have also been proved. The witness evidence, backed by the margin journal, shows that at the time when the positions were closed, Mr Balducci had failed to meet margin calls made on 7^th, 8^th and 9^th May 2007. By clause 4 of the margining terms, the claimant was therefore entitled to close Mr Balducci’s positions when it did.

One positive allegation made by Mr Balducci in this regard was that Mr Shah told Mr Balducci that the claimant would not treat the deadline on the margin call as having been breached, provided that Mr Balducci asked his sister to send a confirmation of the dispatch of funds from Credit Suisse to HSBC and HSBC confirmed to the claimant that the money would be transferred to the claimant on arrival at HSBC. However, I think it was accepted by the time of closing speeches, and in any event I find that it was plainly the case, that the claimant always stipulated for actual confirmation from the transmitting bank, not just Mr Balducci's assurance that he had asked someone else to procure the money to be sent.

Another positive allegation made by Mr Balducci was that the account for which the claimant contended was not a true account. He sought at trial (without prior permission) to adduce what I can only describe as quasi-expert evidence from a Mr Hersey that there had been double counting in the claimant's figures. I would not allow this evidence to be admitted, although I observed that if the figures were incorrect the matter could be dealt with by way of submission. For convenience sake I also permitted Mr Balducci’s counsel, Mr Watson-Gandy, to work from Mr Hersey’s statement on the understanding that it was not in itself evidence. Mr Watson-Gandy nevertheless sought to admit it as evidence by means of the expedient of having it adopted without notice by Mr Balducci in chief. However save in general terms Mr Balducci did not understand the allegations that Mr Hersey had made, let alone was he able to explain them. His counsel did not fare much better in submissions, merely in essence relying on the content of Mr Hersey’s statement.

Mr Hersey’s criticisms are comprehensively dealt with by Mr Frostick of the claimant in his second statement. The bets were rolled over, as recorded in the trading records, on an unrealised basis. Where market prices were different, that was because Mr Hersey had failed to allow for the fact that the claimant used intra-day prices while his source was end of day closing prices.

It was accepted that the method of treating rollovers was not in accordance with the claimant’s contractual terms and conditions. The evidence was that this method was used where the customer requested it. It is not now known whether in this case Mr Balducci did make such a request: the claimant simply assumed that he had done so at some time in the past. However I do not consider that this makes any difference to the parties’ respective cases. I note that Mr Hersey’s criticisms were not advanced until some three years after the claimant issued proceedings.

The claimant accepted that there were some minor errors in the accounts but these were, as Mr Balducci admitted, errors in his favour. Nevertheless, he sought to rely on them on the basis that if there were acknowledged errors that was proof that the figures were wholly unreliable. I reject that submission.

In order to cast the claimant’s business in a prejudicial light Mr Balducci also relied on the facts that (1) Mr Shah is being prosecuted (although the trial has not taken place and he has not been convicted) for money laundering offences, and (2) that the claimant has been found guilty of and fined by the FSA for transaction reporting failures. Those matters are not directly relevant to the claims although I take them into account in assessing the credibility generally of the claimant’s evidence.

I find that the claimant has proved its case. The issue is therefore whether Mr Balducci can prove his counterclaim.

Mr Balducci claims under s. 20 of the Financial Services and Markets Act 2000 (“FSMA”) and under s. 150 of FSMA. S. 20 (read with The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 Article 53) applies where an authorised person carries on a regulated activity, or purports to do so, without permission from the FSA. Under the 2001 Order advice on the merits of “a particular investment” is a regulated activity as far as spread betting is concerned. By s. 20(3) a contravention under s. 20 is actionable at the suit of a person who suffers loss as a result, subject to the defences and other incidents applying to actions for breach of statutory duty. S. 150 FSMA provides that an action for damages will lie (again subject to the defences and incidents applying to actions for breach of statutory duty) where there has been contravention of a rule (made by the FSA under FSMA) and loss has been suffered as a result.

The relevant FSA Conduct of Business Rules applicable to Mr Balducci’s contract with IFX were those contained in the FSA Sourcebook for investment business and known as “COB”. However the Conduct of Business Sourcebook known as “COBS” (see 2011/44 Capital Resources Requirements for Personal Investment Firms (Amendment) Instrument 2011) took effect from 1 November 2007, replacing COB. This reflected the replacement of the Investment Services Directive on that date by the Markets in Financial Instruments Directive (known as MiFID) as part of the European Union’s Financial Services Action Plan.

Mr Balducci's case is that he did not expressly enter into any written contract with IFX and therefore that the requirements of COB Rule 5.4.3 were not complied with. He says that he recalls filling in an application form, but that he does not remember signing it. In oral evidence his case was somewhat watered down and he accepted that he might have signed it. It is the claimant's case (denied by Mr Balducci) that the form was completed online. COB Rule 5.4.3 provides that a firm must not do certain things, which it is common ground (under sub-rule (3)) includes the type of transactions implemented by the claimant for Mr Balducci,

“…unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved.”

The IFX application form and the IFX customer agreement both contained a clearly expressed risk warning notice (“RWN”), pointing out in some considerable detail that IFX was a financial bookmaker, that spread betting was not undertaken on a recognised investment exchange and involved a high risk, that large losses could be incurred in excess of any agreed credit limit and (as I have said) that the bookmaker was prohibited from providing investment advice and from making investment recommendations of any kind.

Mr Balducci admits that he received the customer agreement and the application form in early September 2005. Both documents contained the RWN. Clause 1.3 of the customer agreement stated that Mr Balducci should read the RWN. Mr Balducci also accepted that he had received (although he says he did not read) a letter of 5 September 2005 which told him in terms to ensure that he had read and understood the RWN. The RWN was also on IFX’s website at all material times. In my judgment COB Rule 4.5.3 was complied with.

It seems most unlikely in the circumstances that Mr Balducci never made any application at all. One way or another, on paper or online, he must have declared to IFX that he had read and understood the RWN.

In any event, Mr Balducci faces two significant difficulties in his case that he did not make any formal application. First, any failure to take reasonable steps to ensure that Mr Balducci understood the nature of the risks involved in spread betting would have been a failure by IFX, not by the claimant. Secondly, by the time Mr Balducci became a customer of the claimants in 2007, he was an experienced trader who had traded financial spread bets voluminously since 2005. Whether or not he had acknowledged an express risk warning by IFX in the form of the RWN, the claimant had every reason to think that he was fully aware of the risks involved.

Indeed, Mr Balducci must in fact have been aware of the risks of spread betting. He placed over 900 spread bets over the period of two and a half years he traded through IFX and there is a consistent history of margin calls having been made and met. It must have been entirely obvious to Mr Balducci that spread betting was a very risky business. Even if it is true that he did not understand the risks at the beginning he must have discovered them very quickly. Nevertheless, he continued to engage in large-scale financial spread betting. There is a dispute as to what was said in one of the recorded telephone conversations but, having listened to the recording many times, I have found that Mr Balducci said in 2008, “…it is too risky but anyway, I like risky.” Even if I am wrong about this, it defies belief that Mr Balducci could have been unaware of the risks involved in spread betting. This is not a man for whom risk warnings or the lack of them could ever have been a material factor.

Mr Balducci relies on the “Know Your Customer” requirements of COB 5.2. COB 5.2.2, requiring a statement of demands and needs of the customer, is Guidance only and not embodied in a Rule. Mr Balducci relied on the Rule at COB 5.2.5 of “the requirement to know your customer” before a personal recommendation was given concerning a designated investment. However I do not see how this rule can apply at all where the firm concerned is not permitted to make a personal recommendation. If it does so despite the prohibition an action will lie under s. 20 FSMA irrespective of the Rules.

In any event, by the time Mr Balducci was trading through the claimant, COBS and not COB contained the relevant Rules. Mr Balducci relies on the suitability provisions of COBS 9. Again, however, those rules are inapplicable as they only apply to a firm making a personal recommendation in relation to a designated investment. If a personal recommendation is made in breach of the prohibition, an action will lie irrespective of any failure to assess suitability.

The relevant provisions are contained in COBS 10, which imposes requirements to assess appropriateness on a firm providing investment services in the course of MiFID business other than making a personal recommendation and managing investments. I note in particular the following provisions:

“COBS 10.2.1 (R)

(1)

When providing a service to which this chapter applies, a firm must ask the client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded. So as to enable the firm to assess whether the service or product envisaged is appropriate for the client.

(2)

When assessing appropriateness, a firm:

(a)

must determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service offered or demanded;…

COBS 10.2.2 (R)

The information regarding a client's knowledge and experience in the investment field includes, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved, information on:

(1)

the types of service, transaction and designated investment with which the client is familiar;

(2)

the nature, volume, frequency of the client's transactions in designated investments and the period over which they have been carried out;

(3)

the level of education, profession or relevant former profession of the client.

COBS 10.2.3 (R)

A firm must not encourage a client not to provide information required for the purposes of its assessment of appropriateness.”

However, the Guidance at COBS 10.2.6 and COBS 10.2.8 is crucial. They provide:

“COBS 10.2.6 (G):

Depending on the circumstances a firm may be satisfied that the client's knowledge alone is sufficient for him to understand the risks involved in a product or service. Where reasonable, a firm may infer knowledge from experience …

COBS 10.2.8 (G)

If a firm is satisfied that the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service, there is no duty to communicate this to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation, unless it complies with the rules in COBS 9 on suitability.”

COBS 10.3 contains provisions about risk warnings.

By the time the claimant became contractually involved with Mr Balducci he had been trading in spread betting for two and a half years and had made more than 900 trades. In all the circumstances the requirements for assessment of appropriateness of spread betting were satisfied and there was no breach of the rules and thus no action lies under s. 150 FSMA.

Mr Balducci also submitted that an issue arises as to whether the claimant is able to import the contract he had with IFX on the basis that no novation or notice of assignment has been proved. However, it seems to me plain that a contract arose between Mr Balducci and the claimant from the parties’ dealings. Mr Balducci was, as I have found, aware of the claimant’s takeover of the Finspreads business and accepted the new terms and conditions applicable from 1^st November 2007.

I therefore turn to the main issue on Mr Balducci’s counterclaim, namely whether on the facts he has a cause of action against the claimant under s. 20 of FSMA for unlawfully giving him unauthorised advice. The counterclaim is also framed in negligence and breach of contract, but essentially relying on the same facts.

COBS Rule 9.2.1, reflecting the previous COB Rule 5.3.5, demonstrates that the claimant, as an execution-only service provider, was prohibited from advising Mr Balducci in his capacity as an investor or potential investor on the merits of buying or selling a particular investment (in this context, making a particular spread bet), in short, making a particular personal recommendation: see the discussion by Eady J in Wilson v. MF Global [2011] EWHC 138 quoted below.

It is to be observed that contravention of a Rule for the purposes of s. 150 FSMA does not of itself make any transaction void or unenforceable. The same is true of s. 20 FSMA. Both sections only afford rights of action to persons who suffer loss as a result of (as the case may be) a breach of the rule or the giving of unauthorised advice. In both cases, again, the claim is one of breach of statutory duty and the defences and incidents of such a claim apply.

In this case the essential issue is one of fact: namely did the claimant, through Mr Shah or otherwise, give advice outside its execution-only contract and brief. In this context I bear in mind the observations of Henderson J in Walker v. Inter-Alliance Group PLC and Another [2007] EWHC 1858 (Ch),

“It seems to me that the concept of investment advice is broad enough to include any communication with the client which, in the particular context in which it is given, goes beyond the mere provision of information and is objectively likely to influence the client’s decision whether or not to undertake the transaction in question.”

On that basis, Henderson J held that the investment adviser’s,

“repeated references to what he would do if he were in Mr Walker’s position were clearly intended by Mr Boakes to have persuasive effect, and could only reasonably have been understood by Mr Walker as constituting advice which would help him make up his mind.”

The Court can and should have regard to the reality of the trading relationship rather than merely the formal position expressed in the contract: see e.g. Geniki Investments International v. Ellis Stockbrokers [2008] 1 BCLC 662 at [41]. That does not however mean that the contractual position is irrelevant; it is the background against which the alleged advice falls to be construed and understood.

By contrast with the facts of Walker, there are the facts of the recent decision in Wilson. That case is of particular relevance in that it was another case in which a client of a spread betting firm alleged that a relationship contractually designated as execution-only became an advisory one because of what was said by the trader on the telephone. The similarity can be seen from the following passages:

“[4]…Detailed terms of business governed relations between the parties…A notable feature of this case is that Mr Wilson seems often not to have taken the trouble to read or fully understand the terms governing his relations with the Defendants.

[5] That is the background against which it is claimed in this litigation, on his behalf, that Mr Wilson did not understand the nature of the trading activities he undertook… Despite the “execution only” basis of his dealing through the Defendants, he now seeks to present himself as having sought and depended upon the Defendants’ advice as to his general strategy and as to particular trading transactions.

[6] To this end, reliance was placed on transcripts of telephone conversations between himself and Mr Dean Gainsley, one of the relatively junior brokers employed by the Defendants over the relevant period. These transcripts, although running to two lever arch files, represent only a fraction of the communications that took place between them…”

Eady J went on,

“[92] …The claimant’s case appears to be that in practice, and whatever the contractual documents actually said, the Defendants in fact took on an advisory role.

[93] It is thus important to have regard to the role of an account handler, such as Mr Gainsley, given the “execution only” contractual framework… This is made entirely clear in the express provisions of the terms of business for each of the relevant accounts. There was no duty on the part of the Defendants to advise, although they were entitled in their discretion to give clients market information, advice and/or recommendations. It would be clearly understood by any reasonable client in Mr Wilson’s position, and especially if he had read the contracts concerned, that he was not being given advice on the merits of particular transactions and that any information or opinions offered were to be regarded as merely “incidental” to the dealing relationship.

[94] Against this background, it is inappropriate to go through the hundreds of conversations that took place between Mr Wilson and Mr Gainsley, or even the relatively few that are available, with a view to classifying everything that fell from Mr Gainsley’s lips according to a rigorous analysis into separate categories of “information”, “opinion”, “advice” and “recommendations”. That is simply not the way the conversations were conducted. Obligations of that sort could not be imported without express amendment without express amendment to the terms of business governing relations between the parties.

[96] It is clear from the conversations that there was a good deal of banter and light-hearted badinage and, from having seen the transcripts and listened to a few samples from the audio tapes, it is clear to me that what was happening can best be characterised as exchanging information and “bouncing ideas” off each other or swapping hunches about the market. Much of it was spontaneous and off the cuff. It would be unfair and unrealistic to pick upon certain passages in Mr Gainsley’s observations, with six or seven years of hindsight, and to conclude that he had suddenly changed into “advice mode” and was undertaking an obligation, on his own initiative, to give advice on behalf of his employers to an “intermediate customer”. If such conversations were to be subjected regularly to analysis of that kind with a view to changing the express terms of the parties’ relationship, brokers would not be able to operate and communications would soon be drastically curtailed.

[97] It is important also to have regard to the notion of “personal recommendation” and the definition given to it at various stages by the FSA Handbook. At the times with which I am concerned in this litigation, and until 1 June 2005, the definition was somewhat skeletal: “a recommendation given to a specific person.” The it was rendered a little more specific: “a recommendation which is advice on investments given to a specific person”. This clearly reflects the fact that “advising on investments” is a regulated activity within Article 53 of the FSMA 2000 (Regulated Activities) Order 2001.

[98] The definition was then fleshed out further with effect from 1 November 2007:

‘A recommendation that is advice on investments and is presented as suitable for the person to whom it is made, or is based on the consideration of the circumstances of that person.’

[99] I would regard the extended definitions applied subsequently as merely intended to clarify the concept, rather than narrowing it. The claimants are suggesting that some of what Mr Gainsley said to Mr Wilson, from time to time, constituted personal recommendations. Accordingly, I take the claimants’ case to be that Mr Gainsley gave Mr Wilson…advice specific to him that was purporting to be based on a careful consideration of his…circumstances; moreover, that he was giving such advice, not generally about the market or certain categories of investment, but by making a recommendation of a specific investment. Implied in any such recommendation is that the adviser has made it in preference to alternative investment possibilities which had been considered and compared….

[102] How would a reasonable person in either of the parties’ shoes interpret Mr Gainsley’s observations? It is not simply a question of taking passages from the transcripts in isolation, regardless of those individuals’ past relationship, and asking whether it should be construed to contain a personal recommendation. Their communications took place against a particular factual background. This included an “execution only” account, specifically designed to enable Mr Wilson to implement his own strategy and personal day-to-day judgments about the market and the opportunities it presented. That strategy was always the backdrop against which their discussions took place.”

I therefore have to decide whether, on the facts, this case falls into the category considered by Henderson J in Walker, or the category considered by Eady J in Wilson. Before answering that question I make a number of preliminary observations.

First, the defence and counterclaim were originally pleaded (by counsel) in 2008. Since then they have been significantly expanded. The original pleading simply said that the claimant in breach of FSA rules and in breach of contract had given advice to Mr Balducci “as to the merits of buying and selling spread betting positions” and that he had, “in reliance on advice given by [the claimant’s] employees, opened and/or closed spread betting positions in relation to the price of energy commodities and suffered financial loss and damage as a result.” It was said that particulars would be provided following disclosure and no particulars of any of these pleaded matters were given. I have sympathy with Mr Pelling’s submission that Mr Balducci was in effect seeking disclosure of transcripts of conversations so that he could look for comments which he could categorise as advice and then assert that he had traded in reliance on it. I say this because this is what he appeared to me to have done in practice.

The claimant served a written request for information. Disclosure came and went but no amendments or amplifications were made to Mr Balducci’s case until earlier this year when new particulars were advanced of the advice that was said to have been given, although there is still no detailed pleading as to causation of loss.

The new case as to advice is broad in scope. In essence it is that Mr Balducci was never told that he would be engaging in spread betting, he was never warned that the market was volatile, he was never the subject of a proper risk appraisal and spread bets were recommended to him although they were wholly unsuitable. This was also very much the tenor of the oral evidence that he gave.

In evidence Mr Balducci cast about for corroboration of his case. One example is his reliance on an ‘advertorial’ in the newspaper City AM by an employee of the claimant in which the claimant asserts expertise in spread bets. At most this supports Mr Watson-Gandy’s submission that “it is far from fanciful that advice would not have been given”. It does not however assist with whether advice was in fact given. I note that no such article was published prior to 2010 and Mr Balducci ceased to trade on 14^th May 2008.

Mr Balducci’s constant complaint at trial was that although all telephone communications were apparently recorded, only a selection were produced on disclosure. I am however satisfied that, because of the difficulties explained during the course of the trial, the claimant has done the best that it can and that there was no deliberate withholding of evidence. Moreover, Mr Balducci’s case in this regard was somewhat undermined by his insistence that he never at any stage placed a single bet save on advice from Mr Shah or another employee of the claimant. His case is that he invariably and slavishly followed advice. The transcripts that are available are therefore highly relevant in testing his case.

I take into account the important fact that Mr Shah has not given evidence, a fact which is capable of lending support to Mr Balducci’s case. I accept that there is a fine line between, on the one hand, the interpretation of market data and passing on market commentary from journalists and others about, for example, resistance levels, on the one hand and giving advice on the other. I also accept that a trader would not always have expressly identified the source of an article the trader was reading out over the telephone so that it might be confused with his own view. There must always be a ‘spin’ when views of others are summarised and passed on. I also accept that there must have been some link, although only an indirect one, between bonuses to members of the trading desk and encouragement of existing customers to trade more.

However, I have read all the transcripts and listened to a selection of the tapes selected at the request of both counsel, and despite Mr Watson-Gandy’s gallant endeavours to persuade me otherwise, and careful analysis of the 26 or so examples he cited in closing submissions, I find that they do not support Mr Balducci’s case that advice was given and that he only ever acted on advice. In my judgments all the conversations fall firmly on the side of the line advocated by Eady J in Wilson. There is ample evidence, accepted by Mr Balducci, that he would call the trading desk several times a day to check on market trading prices. He was given the prices, together with general comments about the market, rather than advice about particular bets. He asked many questions and got general answers about whether the market (particularly in crude oil) was going up or down, and about the behaviour of investors. Nothing was said about the timing of any investment by Mr Balducci or the size of any exposure.

There is one conversation on 26^th February 2009 in which Mr Singh commented that “103 is what I’m hearing on Nymex…103 is the key level…103, after that maybe it [that is to say crude oil] will be a very good sell from there.” I am dubious, adopting the kind of analysis adopted by Eady J in Wilson, whether this remark can really be construed as advice to go short in heating oil.

In any event, Mr Balducci was quite unable to demonstrate that he closed his bet or otherwise changed his position in reliance on the alleged advice. Indeed he was unable under cross examination to think of a single example of such reliance in relation to any alleged advice although he has had a complete record of all the trades on his sterling account since service of the particulars of claim. In some cases, if he is correct and he acted in accordance with advice, he admittedly made a profit rather than a loss on the transaction in question.

Mr Balducci made various other claims, about incorrect information on the trading platform and about an alleged failure to close his account when requested. I do not find any such actionable claims made out.

Indeed, he has been unable to allege more than one instance (the conversation on 26^th February 2009) of alleged advice which was wrong. Even that instance is irrelevant to the counterclaim as it is evident that Mr Balducci did not act on the alleged advice. By March the conversations (and the market) had moved on and Mr Balducci’s trading positions indicated that he took an opposite view of the market to that of Mr Singh. The whole tenor of the recorded conversations at this time indicates not only that there was no advisory relationship but that Mr Balducci did not regard the relationship as an advisory one.

As I have found that no prohibited advice was given the claims in negligence and breach of contract must fail also. In any event it was to my mind inadequately explained how a duty of care, giving rise to liability in the tort of negligence, is supposed to have arisen in the context of a contractual and statutory execution-only relationship.

There is a further aspect of Mr Balducci’s case, namely that in 2007 he had managed to wean himself off spread betting but was enticed back by an unsolicited call. I note that in Calvert v. William Hill [2008] EWHC 454 (Ch) Briggs J held that there is no general duty of care on the part of a bookmaker to avoid exploiting the vulnerability of problem gambler customers. In any event I find that the evidence plainly demonstrates that it was Mr Balducci who repeatedly contacted the claimant over the Christmas New Year break of 2007/8 with a view to trading again.

On 6^th May 2008 the claimant had made a margin call on Mr Balducci. He had made various promises to send substantial sums of money in response to the call, but only one small payment had been made. On 12^th May 2008 Mr Balducci was asked for confirmation from Credit Suisse that money was, as Mr Balducci said, being transferred from Switzerland. On 13^th May 2008 Mr Balducci telephoned Mr Shah, expressing concern that if Mrs Shah (Mr Balducci’s brother’s bank manager) waited until the money had actually arrived from Switzerland to send a confirmation to the claimant it might be too late and Mr Balducci’s positions might already have been closed out. There is then a recorded exchange in which Mr Shah says that if confirmation were received that the money was sent he would get confirmation from Mrs Shah that the funds would be transferred as soon as they hit Mr Balducci’s brother’s account. Mr Balducci expressly consented to this course of action. It is also plain from a letter dated 29^th September 2008 written by Mr Balducci on his brother’s behalf that Mr Balducci had authorised Mrs Shah to confirm to the claimant “whether funds had been transferred to” the claimant in respect of this transaction.

During the course of 14^th May 2008 Mr Balducci stopped answering the claimant’s calls and although he had promised to call himself he did not do so. The claimant was concerned because Mr Balducci’s positions in the heating market were showing substantial losses. It did not want to close his positions if the money was coming from Credit Suisse as Mr Balducci had promised. Mr Shah then spoke to his wife to discover whether any money had been sent by HSBC to the claimant. As I understand it, this part of the conversation is not the subject of complaint as it followed from the agreement reached with Mr Balducci the previous day. However, in the course of the conversation, Mrs Shah also confirmed that the funds had not yet been received into the HSBC account.

Mr Balducci complains of this part of the conversation as a breach of confidence causing him loss. He says that the information was the basis of the claimant’s decision to close Mr Balducci’s positions and that he suffered physical and psychiatric damage as a result as well as financial loss. Monday 12^th May 2008 was a public holiday in Switzerland and he says that if he had received more time he would have been able to raise the money. His case is that if Mrs Shah had not said what she did Mr Balducci would have been given the benefit of the doubt. Instead there was a hardening of the claimant’s attitude towards him.

There are a number of answers to Mr Balducci’s claim. First, Mr Balducci authorised (1) Mr Shah to obtain confirmation from Mrs Shah that when money arrived from Credit Suisse to the HSBC account it would be immediately transferred to the claimant. Mr Balducci authorised (2) Mrs Shah to confirm whether or not HSBC had transferred funds to the claimant. In these circumstances if Mrs Shah had simply repeated her confirmation at (1) and then pursuant to (2) had said that the money had not been transferred to the claimant, it is the obvious and inescapable inference that the only reason for this was that the funds had not been received.

Secondly, it is hard to see what the claimant did that was wrong. The claimant was not a banker and did not release confidential information to anybody. HSBC is not a party to these proceedings. Indeed, neither is Mr Balducci’s brother, to whom the duty of confidence was owed by HSBC.

Most importantly, it is evidently not the case that without the information the claimant would have given Mr Balducci the benefit of the doubt. A text message from Mr Shah to Mr Balducci of 14^th May 2008 and a transcript of an internal call at the claimant shows that the vital issue was confirmation from Credit Suisse to the claimant that the money was on its way. That call repeats the necessity for such a confirmation at least 10 times. It is pointed out that in the past Mr Balducci always had contacted the claimant and that it was imperative to speak to him, otherwise his positions would be closed out at shortly after 1.30 pm on the same day. As Mr Shah said,

“…I don’t know why he isn’t picking up the phone or why we can’t get that TT confirmation.”

Mr Balducci’s undoubted problems were in my view caused by the fact that he had lost a huge sum of money on spread betting rather than because of any breach of confidence by the claimant.

In all the circumstances I give judgment on the claim and dismiss the counterclaim.