The Djafar Mohseni Family Trust [‘the Trust’] was settled by the late Djafar Mohseni for the benefit of his descendants and for charitable purposes. Credit Suisse Trust [CST] is the trustee. The claimants, Valse Holdings SA [Valse], are a company registered in Panama on 16 April 1990, and were, from February 1997, wholly owned by the Trust. Valse is managed by CST, and its directors and officers are CST personnel. Valse owned a portfolio of investments worth, at the end of March 2000, about US$15 millions. Valse retained the defendants [MLIB or Merrill Lynch] as their bankers and financial advisers. Valse’s accounts were kept in MLIB’s Lugano branch from the inception (1990) through to 1996, when the accounts were transferred to London. Valse’s dealings in securities were traded by MLIB’s brokers, Merrill Lynch Pierce Fenner & Smith Inc [MLPFS], who nominally held some of Valse’s trading accounts. However, all communications relating to Valse’s various accounts were through MLIB. As a result of the events giving rise to the present dispute the account with MLIB was closed in February 2002 and was transferred elsewhere.

Valse’s claim is for negligent mismanagement and financial advice during the period 1999 to 2002 and for a loss of about US$3.93 million, plus interest. There is also a claim for unauthorized dealings on the account, which includes making transactions without authority, and failing to comply with instructions. It is common ground that the account with MLIB was under advisory rather than discretionary management. This meant that MLIB advised on investments and were not authorized to trade without express instructions. In a nutshell, Valse say that between February 1999 and February 2002 the account was managed by a senior financial consultant at MLIB, Mr Jourabchi, and that under his management ‘the Portfolio performed disastrously’: the value of the portfolio reduced from US$13.9 million at the end of January 1999 by some US$4.4 million by the end of January 2002. The principal allegation is that MLIB pursued an extraordinarily risky investment policy: the portfolio was concentrated in volatile equities, especially in the technology sector and was highly leveraged, in the sense that it was investing not only its own capital but money loaned to it by MLIB. The loan facility agreement dated 4 August 1992 provided for a US$6.5 millions credit line, which replaced an earlier facility of US$5.6 millions. The 1992 level was further increased to US$10 millions in January 2000.

Throughout the relevant time, Mr Mohammed Mohseni, the settlor’s son, was the person who had regular day to day contact with MLIB, although for formal matters such as the execution of [non-trading] contracts, or account opening forms, CST were responsible. Mr Mohseni had authority to give investment instructions to MLIB.

When the account was moved to London, Mr Jourabchi’s predecessor, Mr Goodarzi, arranged for the opening of new trading and banking accounts under an umbrella service called the Merrill Lynch Private Client Group Cash Management Account [CMA]. At MLIB’s suggestion, Valse also opened a futures trading account.

Valse’s main investment activities were trading in equities, mutual funds, fixed income securities and foreign exchange. The procedure for effecting a trade on Valse’s behalf would have been a telephone call between Mr Mohseni, who was based in Canada, but sometimes travelled in the course of his business to London, where he visited his daughter, and Mr Jourabchi, who was based in London. Mr Mohseni has been able to disclose his own telephone accounts which show land-line calls he made from Vancouver. The substance of the telephone calls was not recorded at either end, but a record of the outgoing calls made from London to Mr Mohseni, was made by MLIB. Regrettably, after the proceedings were started, and after MLIB had served a detailed request for further information about Valse’s case in relation to the ‘phone calls, MLIB’s records were destroyed. The records had been held by an independent contractor; the contractor was changed; these records were not transferred to the new company and were destroyed by the old contractor in August 2003. As counsel for the Claimants puts it:

The paperwork which was generated by MLIB when a transaction was undertaken was, in the first place, an internal order ticket; thereafter a printed trade confirmation document would be sent by post to CST in Geneva and (from 1997) a copy was also sent to Mr Mohseni’s daughter, Noushin Daneshi, in London. Further, monthly account statements were sent, at the relevant time, to the same two addresses. MLIB also rely on the fact that spreadsheets or statements showing investments bought or sold in the portfolio were faxed frequently, generally weekly, to Mr Mohseni personally. They also say, and I accept, that during the telephone calls it was quite common for Mr Mohseni to be taken through Valse’s portfolio, either in its entirety, or by reference to particular securities which had ‘moved’ in the market. There would also be half yearly meetings between Mr Mohseni and CST for which the latter would prepare reports showing Valse’s assets and currency allocation. Copy account statements were couriered periodically to Mr Mohseni in Vancouver.

The procedure for the taking of an order for the sale or purchase of equities was as follows:

I can deal with the allegation that there was unauthorized dealing on the Valse account very shortly. It is a most serious allegation to make that a trader has, with regard to a non-discretionary account, carried out trades on that account without instructions from the client. The burden of proof clearly rests on Mr Mohseni to prove his case. In my view he has not done so, and Mr Jourabchi should be completely exonerated from this unpleasant allegation, which appears to me to be baseless in fact.

In order to understand this part of the case it is necessary to say something of the background to the way in which Mr Jourabchi came to take over the running of this account. In late 1998, Mr Mohseni alleged that Mr Jourabchi’s predecessor had failed to carry out an instruction to buy some S & P futures “because I felt that the markets were poised to rebound”. When the markets rose the next day, Mr Mohseni was expecting to be told that he had made a profit of some $100,000. However, Mr Goodarzi had failed to make the trade because, so Mr Mohseni alleged, “he had changed his mind after speaking to me.” The dispute was settled by MLIB crediting the account with $50,000 in full and final settlement. Mr Mohseni lost all confidence in Mr Goodarzi, principally because Mr Goodarzi had denied receiving the instructions and it seemed to Mr Mohseni that he was no longer to be trusted because of what he regarded as a false denial. Hence the need to change financial consultants. Mr Jourabchi was asked to attend what he regarded as a beauty parade for Valse to decide whether he was a suitable replacement for Mr Goodarzi. It seemed to him that the main reason why Mr Mohseni chose or accepted him was because “we are both Iranian and a number of my clients are, like Mr Mohseni, expatriate Iranians”.

The significance of this incident so far as the present dispute is concerned is that Mr Mohseni kept a reasonably close eye on his account and the state of the market and was not slow to come forward with a complaint when he considered that his instructions had not been complied with. Mr Jourabchi was aware of this incident and the reason why he was replacing Mr Goodarzi. He would have known, therefore, that he was dealing with a client who, to some extent, needed to be handled with kid gloves. He had no reason to believe that Mr Mohseni would have been other than scrupulous in looking at the various documents which recorded his trades and showed his holding. Any deviation from instructions would be likely to be discovered. And one might well ask: what would Mr Jourabchi stand to gain from trading on the account without authority? The answer is: nothing financially, but he risked his future employment. The suggestion that he would make such unauthorized trades to ingratiate himself with, or impress Mr Mohseni does not make sense, as Mr Mohseni had shown that he was intolerant of trading mistakes and a failure to carry out instructions. As a matter of probability, this claim that Mr Jourabchi had acted without instructions looked ‘thin’ and improbable. Furthermore, the claim was not formulated in detail until November 2002, after Mr Mohseni had more than one occasion on which a complaint of this sort would naturally have been made: viz the draft letter from Mr Jaeger in June 2001 and the conversation with Mr Woolnough three days earlier [for which see below]. The size of this part of the claim runs at over US$1 millions.

I reject the explanation that I was given by Mr Mohseni for this apparent lapse. He said he thought that Mr Jourabchi would ‘make it up to him’ and that the market would recover. During the period June to September 2000, on Mr Mohseni’s case, Mr Jourabchi had failed to carry out instructions to sell about a quarter of his portfolio. The market fell in April 2000 and I accept the submission made by Mr Hapgood QC, on behalf of MLIB, that the obvious reason why the shares were not sold was because the market had fallen. I am satisfied that Mr Jourabchi was right when he described Mr Mohseni as instinctively reluctant to take a loss; he was capable of convincing himself that the market was going to come back. In these circumstances, I am prepared to draw an inference that the reason why the shares were not sold was not an inexplicable failure on Mr Jourabchi’s part to carry out an instruction, but rather because, contrary to what he now was saying, Mr Mohseni never instructed Mr Jourabchi to sell the shares in the first place. Mr Mohseni says he realized that the shares had not been sold, when they should have been, during the summer of 2000. This failure caused a substantial loss to the account: of the order of $1.3 millions. His explanation for the failure to complain about Mr Jourabchi’s misconduct was unconvincing. He said that he had accepted assurances from Mr Jourabchi [which Mr Jourabchi denied] that ‘he would make it up to him and that the market would recover’. The evidence shows that Mr Jourabchi was more cautious about the state of the market than Mr Mohseni. The latter had, in my judgment, the defect of a gambler who was unwilling to accept losses and move on. It was he, rather than Mr Jourabchi, who found it difficult to accept losses on his account and dispose of stocks which were showing a loss. The only possible way that Mr Jourabchi could make it up to Mr Mohseni would have been through preferential access to new share issues; but this avenue was outside Mr Jourabchi’s control and I reject as improbable the idea that Mr Jourabchi was promising something which he could not deliver.

This conclusion is borne out by the following facts:

The particulars of this allegation relate to some 68 transactions which were largely unauthorized purchases carried out during the period March 1999 to May 2001. This claim was abandoned as a separate head of damage and, sensibly, and in accordance with the overriding objectives, Mr Malek QC limited his cross-examination to a sample of the transactions in question. And he prepared a list of some 26 trades which was accompanied by Mr Mohseni’s second witness statement. In the event, Mr Malek QC concentrated on some 12 transactions, including the purchase and sale of shares in three motor manufacturers on 24 March 1999 and 3 May 1999, the purchase of 50 shares in Priceline.com Inc on 29 March 1999; the purchase of 20,000 shares in Vodafone Airtouch on 10 February 2000; the purchase and sale of shares in Reuters Group on 8 and 10 February 2000; the purchase of 1000 Seligman New Technologies Venture Fund II shares on 28 March 2000 and finally the purchase of 50 shares in Palm Inc on 2 March 2000.

Again, I am satisfied that the case advanced by the Claimant is based on reconstruction rather than on accurate contemporary recollection. The allegations stem largely from an examination of the time stamps on the trade tickets from which Mr Mohseni concludes that he could not have authorized the transaction in question because there was no contemporary telephone call or he would have been asleep in Vancouver at the time in question. The trade ticket has a space to indicate whether the trade was ‘solicited’ or not. A trade is solicited if the trade is carried out on the recommendation of the Bank. This is not always straightforward. For example a customer might initiate the telephone call and put forward a stock for discussion with the Bank’s trader. If the trader expresses a positive view about the projected transaction then that might be a recommendation which makes the trade solicited rather than unsolicited. Within this scenario one can think of examples where the trader indicates his approval of the trade proposed by the customer without going as far as to recommend it. It is clear that Mr Jourabchi did not follow the precise wording of the manual which defines what constitutes a solicited trade. Essentially he took the view that if the discussion about a trade was initiated by the customer the subsequent trade would be categorized as unsolicited; whereas if the trade was one of those being recommended by the Bank in the numerous handouts it sent to its customers, the trade would be solicited. I concluded that it was unfair to criticize Mr Jourabchi for the way he filled in the trade tickets. The problem with the rule book is that it is easier to write than to operate in practice. Mr Jourabchi’s approach was sensible and involved a sensible judgment as to whether it was the customer or the Bank which in reality was causing the trade to be done. The rule, which is strict, in the sense that marking an order “unsolicited” when in fact it was solicited “is strictly forbidden”, gives as an example of a trade which must be marked solicited:

There is more force in the criticism made of Mr Jourabchi’s failure to observe the rule that “tickets must be written and time stamped when the client places the order”. Further, the order tickets have a box which the Trader is bound to tick to indicate that the order has been read back to the client. Because Mr Jourabchi failed to follow the procedure correctly, sometimes preparing tickets the day after an order had been given, that has enabled Mr Mohseni to reconstruct events and seek to show that at the time stamped on the ticket he was asleep in Vancouver and therefore the particular trade was unauthorized. It is this failure which has enabled Mr Mohseni to say that some tickets were completed when he could not have been on the telephone. It also enables Mr Malek QC to submit with some force that if the tickets were not completed when the order was given then the statement on the ticket that it had been read back to the client was false. Further, if Mr Jourabchi had a firm order from Mr Mohseni to buy at a particular price or to buy at the market price on opening then it would be difficult for Mr Jourabchi to fill in an honest ticket if, as was likely to be the case, the price changed between the time when the market opened and the time when Mr Jourabchi got into work and filled in the ticket. Thus, Mr Malek QC submitted, the probability is that Mr Jourabchi felt he had a mandate from Mr Mohseni to exercise some discretion in the timing and pricing of the trades, especially where the details of the trades had been discussed before. To some extent, the way the orders were given may have led Mr Jourabchi to exercise discretion, and this was to some extent borne out by the fact that when Mr Jourabchi was away there is some evidence that instructions from Mr Mohseni were regarded by others as too imprecise to be capable of execution. There is also limited support for the Claimants’ case in relation to new issues [IPOs]. There is evidence which shows that applications for allotments in advance of IPOs were made by Mr Jourabchi without instructions having been noted in any record. If Mr Jourabchi felt able to make application through the usual channels then here is an example of him exercising some kind of discretion in advance of him being given formal instructions from Mr Mohseni.

On the other hand, if any of the trades of which complaint is made had not been authorized by Mr Mohseni, he surely would have noticed the fact and done something about it. He made no contemporary complaint. The first time he mentioned unauthorized trading was at the meeting he had on 29 June 2001, and even then no details were provided in support of this allegation. The detail came because, I think, Mr Mohseni was re-constructing what had happened from material then in his possession. It is improbable that he could have recalled the detail of these transactions so long after the event. Further, I accept without question Mr Gulliver’s evidence that in conversations on 5 and 10 October 2001 Mr Mohseni acknowledged that he would have known of unauthorized trades within five trading days, because statements were faxed to him weekly and that he was aware of trades allegedly done without his permission but because he is “a nice guy” he was persuaded to run with the positions. This shows, I think, that at the time Mr Mohseni did not regard any of the transactions as not binding on him, however they had come to be transacted. In relation to 7 of the disputed trades there is documentary evidence to show that Mr Mohseni himself made reference to them without alleging or complaining that they had been unauthorized. Finally, in relation to a handful of the disputed trades they were in fact carried out by Mr Gulliver and not by Mr Jourabchi. It is inherently unlikely that there were two traders at the Bank who were indulging in discretionary trading on this account.

In relation to the purchase of motor manufacturer shares, Mr Jourabchi’s own diary indicates that he spoke to Mr Mohseni on both 23 and 24 March 1999 and the entry for 24 March refers to German Autos. I infer that Mr Jourabchi’s recollection that these trades were authorized by Mr Mohseni is correct. I have no reason to disbelieve it. Mr Mohseni must have known about the purchase within days of them being made and his attempts to say that he only noticed them several months later was unconvincing since they were three stocks out of a list of just over 50. As to their sale in May 2000, Mr Jourabchi remembered, and I accept, that Mr Mohseni discussed these stocks and decided to realize the considerable profits which they had shown. There is no extant note of the instruction but I believe what Mr Jourabchi told me about this; not just because I thought he was being truthful but also because the overwhelming probabilities are that there was no discretionary trading on this account, for the reasons already expressed. As to the purchase of the Priceline.com stock the position is the same. There is no note in Mr Jourabchi’s journal referring to this stock, but otherwise there is nothing to support the allegation that this transaction was done without instructions. As to the purchase of Vodaphone Airtouch shares, it seems to me that Mr Mohseni’s case developed during the course of the trial. He had initially said that he had discussed these shares with Mr Jourabchi but gave no instructions for them to be bought. He later denied ever discussing these shares and professed ignorance in the stock. I am unable to accept his evidence at this point. His denial of knowing about the stock was unconvincing since it is well known and Mr Mohseni must have been aware of them. He had an appetite for Telecom shares and Vodaphone had just acquired the US Corporation Airtouch midst much publicity. This was another purchase on the European market and therefore the time stamp says nothing about the timing of the discussion with Mr Jourabchi because of the system he adopted when making out trade tickets.

As to the purchase of the shares in Reuters, initially Mr Mohseni complained of the sale of these shares [two days after they were bought] rather than of their purchase. On the evidence I have no doubt that Mr Mohseni cannot convincingly say that the purchase or sale of these shares was without his authority. This is, I think, yet another example where his purported recollection stems from a reconstruction of the events based upon the time stamp on the ticket. The sale was recorded as taking place at 8.40am. The purchase of shares in Seligman New Technologies Venture Fund was, I find, done on the express instructions of Mr Mohseni. I see no reason to doubt Mr Jourabchi’s specific recollection of this trade which included a telephone call from Mr Mohseni in Egypt.

Finally, the purchase of shares in Palm on 2 March 2000 was done as a result of Mr Mohseni being allocated only 50 shares from an IPO. On the day the trade was made Mr Jourabchi informed Mr Mohseni by fax that he had been allocated the 50 shares and in response Mr Mohseni faxed back saying “Thanks, yet again”. I reject the suggestion that Mr Mohseni had not authorized the application in the first place and that after the shares had increased in value Mr Jourabchi told him that he had taken the allocation as a favour. There is nothing to confirm Mr Mohseni’s evidence on this point. The simple “thank you” does not tie in with this recollection. In my view, Mr Mohseni would have expressed concern that trades were being done for Valse without his authority, even if the end result was a profit.

In summary therefore I reject all the allegations that Mr Jourabchi traded on the account without instructions and that he failed to comply with instructions which he had been given. I have reached this position because:

On a balance of probabilities, there would have been timeous and loud complaints had this been going on. Mr Mohseni had ample opportunities to see what trades had been done and it is inconceivable that he did not keep abreast of the account during Mr Jourabchi’s period of stewardship.

On a balance of probabilities, no trader would take the risk of making and revealing to the client an unauthorized trade; especially in the light of Mr Mohseni’s previous and immediate complaint against Mr Goodarzi. Mr Jourabchi had absolutely nothing to gain from treating the account as a discretionary account; on the contrary he had everything, including his job and possibly his career, to lose. I have no doubt that as time went by and the two principals in this matter came to understand one another better, a rather vague instruction might be treated by the trader as sufficient; whereas others might regard the instruction as too loose to be implemented. I find nothing significant in the fact that during Mr Jourabchi’s absence from the office a vague instruction was rejected by a trader. Mr Jourabchi and Mr Mohseni were in contact almost every day and discussed the market and particular stocks. Mr Jourabchi would have had a clear idea as to his client’s likes and dislikes and would come to know the way his client wished to trade in a way which a new trader would not understand.

The way the evidence emerged it became clear that Mr Mohseni has sought to exploit the timings on the trade documents in particular to re-create a scenario so that discussion lists became clear orders and trading times on the documents became the precise moment when a deal was contracted. There is criticism to be made of the way Mr Jourabchi completed the trade tickets: both in relation to the time when they were brought into existence and in relation to the ‘solicited/unsolicited’ box. But those defects in procedure do not justify a finding that Mr Jourabchi treated the account on a discretionary basis and felt able to countermand instructions on the one hand or invent them on the other. In short, apart from his use of hindsight, there was nothing to suggest that Mr Mohseni’s evidence on these issues was reliable.

The second and more difficult allegations concern the duty of the Bank to give advice about the account, the nature of the account and any loss caused by a failure to advise properly. In considering this issue I have had the benefit of two distinguished experts: Dr Fitzgerald and Mr Weiner, instructed by the Claimants and Defendants respectively. The fact that they came from somewhat different disciplines [basically, the more academic and the more practical] was of assistance to the court. But they also reached a considerable measure of agreement between themselves and this greatly shortened the evidence. I express my gratitude to them both. As experts informing the court in a non-partisan way their input has been of assistance.

I start with the pleadings. Valse asserted that from about May 1990 until February 2002 it retained the Defendant to provide general investment dealing and advisory services and that the terms of the retainer were contained in an undated copy of its standard terms and conditions. It alleged that there was a general implied term of the retainer that the defendant would exercise the care and skill reasonably to be expected from an expert investment dealer and advisor and in particular:

that it would carry out Valse’s instructions promptly and completely

that it would not act without instructions.

The duties in (4) and (5) are not relevant for present purposes. They relate to the unauthorized trading issue with which I have already dealt. Duties (1) and (2) were admitted by the Defendants, duty (3) was denied.

Valse say that an investment portfolio properly managed in accordance with the investment objectives would typically be composed of about 55%-60% equities with the balance in debt instruments and would be leveraged by not more than 20%; would have limited turnover and limited movement between classes of assets with investments held typically for 3-5 years and would be weighted towards long-term retention in well-established companies and would contain bonds with an average AA rating and not less than A rating and maturity not more than 10 years.

The Defendants also rely on the undated Statement of Terms and Conditions which were expressed to be

The Defendants pleaded that the Statement of Terms and Conditions included the following provisions:

It is common ground that Merrill Lynch offered its customers the following classification of investment objectives:

The defendants accepted that Valse’s objectives in relation to the Portfolio “included long-term growth and/or aggressive growth” but they denied that Valse ever instructed them that the portfolio should be managed conservatively or that “capital preservation” was an investment objective. Merrill Lynch say that Mr Mohseni consistently proposed and instructed them to purchase and retain stocks in the telecommunications, e-commerce and technology sectors and that Valse was willing to accept substantial risk “while pursuing larger potential total returns”.

This case is not concerned with the question whether any particular recommendation made by Mr Jourabchi on the basis of Merrill Lynch research was suitable. The real point that is made is that the portfolio as a whole was far too risky and Mr Mohseni should have been advised of that.

There are various ways by which the risk involved in a portfolio may be quantified. First it is possible to measure the sensitivity of the portfolio to movements in the stock market generally by comparison with a benchmark [hypothetical portfolio] which the experts agree would be a middle of the range Long Term Growth Portfolio. If the market fluctuates the effect on the actual portfolio can be measured against the effect on the benchmark portfolio. If the actual portfolio is more greatly affected, then the beta [the measure of sensitivity] would be more than 1. If the actual portfolio is leveraged then the beta effect would be multiplied. In this case, with leverage, the beta rose to over 2.5 [more than twice as adversely affected by a downwards market movement than the hypothetical portfolio], whereas when Mr Jourabchi inherited the portfolio from Mr Goodarzi the beta was 0.8.

The second measure is to look at what the experts call “active risk”. Active risk represents the risk which the portfolio contains and is to be expected where the objective is to outperform [beat] the market. Active risk as measured by the experts in this case was about 20% taking account of leverage, whereas Dr Fitzgerald would anticipate a measurement of no more than about 5%-6% for a portfolio with a Long term growth objective.

The experts have also been able to calculate what is called the ‘volatility of the portfolio’s performance’. The benchmark portfolios considered by the experts had volatilities ranging from 11.1% for the most conservative benchmark portfolio for Long Term Growth; whereas the most aggressive of the benchmark portfolios showed a volatility of 13.5%. The Valse Portfolio had a volatility of 41% and this may be compared with the volatility of the S&P 500 Index itself which was measured at between 21%-23%. Both experts accepted that the portfolio represented a very high risk; Mr Weiner and Dr Fitzgerald only disagreed about whether such risks could be described as characteristic of a Long Term Growth objective with an aggressive attitude to risk. Mr Weiner said that with a customer who relished aggressive risk, the portfolio in question could be described as having as its objective Long Term Growth; whereas Dr Fitzgerald was firmly of the view that, applying what he called a madness test, this portfolio was to be regarded as a mad one if the objective was Long Term Growth, even if the customer had a healthy appetite for risk. In his opinion it lacked the characteristics of a portfolio described as Long Term Growth or indeed Aggressive Growth. The reason why he took that view was essentially because of the portfolio’s composition: concentrated as it was in equities and largely concentrated in equities in a risky sector of the market: E commerce and telecommunications.

Mr Mohseni’s case was that he would have wished Mr Jourabchi to have reviewed the portfolio in a strategic way and advised him that it did not satisfy the definition of a Long Term Growth Portfolio and was unduly risky for the stated objective. It was his view that Mr Jourabchi was a trader rather than an adviser; that Mr Jourabchi was keen to ‘do business’ and was not a banker. Indeed Mr Mohseni made this point at one of his meetings with the bank in 2001. The Bank, for their part, say that Mr Mohseni was in charge of the account; he made his mind up as to what he wanted to do; he was a gambler who enjoyed the high risk implicit in the E stock boom and was happy to enjoy the success which the portfolio enjoyed until the boom was over and the E market declined.

In order to understand the general nature of the parties’ case it is necessary to look at the composition of the portfolio on Mr Jourabchi’s watch in some detail.

When Mr Jourabchi took the portfolio over from Mr Goodarzi in February 1999 he regarded it as a highly aggressive fund because of the effect of leverage and the concentration of the equities in a relatively few sectors [pharmaceuticals and IT financial services]. He had discussions with Mr Mohseni to ascertain what the client wanted and was told, as I accept, that Mr Mohseni wanted the portfolio to carry on along essentially the same lines. At no stage did Mr Mohseni give instructions that he wanted to preserve capital. On the evidence, Mr Mohseni was not concerned with the formal “investment objectives” nor with any idea of benchmarks. What he wanted was “growth”; however the portfolio was to be formally labelled. Mr Mohseni was an enthusiastic trader; he enjoyed choosing the stocks in conjunction with Mr Jourabchi. Sometimes he took his advice; sometimes he did not. At no stage in the first year of Mr Jourabchi’s reign did he suggest that Mr Jourabchi was doing other than fulfilling his expectations. Indeed, between the two of them the fund prospered and grew by nearly 20%. In this period Mr Jourabchi urged Mr Mohseni to put the proceeds of the sale of investments in Templeton Global Income Fund of Bonds into the Merrill Lynch Global Funds Advisor programme, together with the proceeds of sale of sufficient equities to produce a fund of US$2 million. Putting money into such a fund diversifies the risk and reduces the concentration in just one or two sectors. Mr Mohseni was reluctant to accept this advice as he considered that such a programme involved paying the investment advisor to the Fund for doing a job which he, Mr Mohseni, was quite capable of doing himself. Despite this, as at April 1999 Mr Jourabchi was reporting that the client had a diverse portfolio managed on a long-term growth mandate. I think he was entitled to take this view. The equity component of the portfolio was reasonably diverse at this time and included a significant holding of bonds.

Every year there was an Annual Client review. Merrill Lynch described the process in evidence as the completion of a form showing that the financial consultant has contacted the client and they have reviewed the portfolio and effectively re-profiled the client and updated for any change in circumstances

At the end of 1999 Mr Mohseni [Valse] transferred out of the portfolio the bond holding and exchanged it for blue chip equities and cash. The reasons for this change are not entirely clear. I find it hard to accept the explanation offered by Mr Mohseni that as Mr Jourabchi looked unfavourably on bonds he thought he would transfer them to another bank. There was a hint in the witness statement that Mr Mohseni was concerned that Mr Jourabchi might dispose of the bonds without instructions but that was a false impression and in any event, the latter did not, I think, have any unfavourable view of bonds but rather regarded them as a component of a balanced portfolio. Whatever the motive, the effect of the transfer was to increase the risk profile of the portfolio, although at no time did Mr Jourabchi give any express advice to that effect. He did not need to do so. The effect of the transfer was obvious and Mr Mohseni must have understood the effect of what he had done. Bonds were a different animal from equities and gave the portfolio balance; it must have been obvious to him that without the bonds the portfolio was less diverse and therefore more prone to risk.

Between January and March 2000 the portfolio was very successful because of its high concentration in technology type stocks. That market was booming and the value of the portfolio reached its peak at the same time as the Nasdaq index peaked [March 2000]. In May, Mr Jourabchi took the view that that market had reached its peak and was spiralling downwards. He advised Mr Mohseni to “add $2million to MLAM managed portfolio. To look into Mutual Funds and Value stocks to diversify out of the heavy tech positions”. It was good advice. Mr Jourabchi had correctly read the way the market was moving and had the advice been followed the portfolio would not have suffered the heavy losses which then started to accrue. I have no reason to doubt Mr Jourabchi’s evidence at this point. His recollection is supported by a contact report evidencing a conversation with Mr Mohseni. Mr Mohseni expressed interest in a further investment in MLAM and a meeting was arranged for him to meet the manager. The result of that meeting seemed to Mr Jourabchi to be encouraging. He reported:

On 31 August 2000, Mr Jourabchi wrote to Mr Mohseni as follows:

Subsequently, Mr Jourabchi, on 4 September 2000 sent Mr Mohseni a 14 page fax which said amongst other things:

Finally during this period, Mr Jourabchi sent a further Fax to Mr Mohseni, dated 6 November 2000 in which he said that he was enclosing some details of

This advice cannot, I think, be faulted. Mr Jourabchi cannot be expected to be an expert in calculating the beta risk of the portfolio, although he knew more about this than a less expert trader. But Mr Mohseni was clearly aware, in the light of information from Merrill Lynch’s own Research Department, which plays an important part in attracting customers to that bank, of the downturn in the market and the need to diversify. I do not think he was obliged to do more, having regard to the fact that Mr Mohseni was not a private client but was considered an expert in investment matters. That was how he was categorized at the outset of his relationship with Merrill Lynch.

In February of the New Year, 2001, there was a client contact report referring to a meeting which took place on 23 February 2001 where the objective was to review the portfolio and plan for the next year. It was also an opportunity for Mr Chris Gulliver, an assistant to Mr Jourabchi to be introduced as a team member and to discuss the team approach. The result of the meeting is recorded as follows:

On 12 March 2001 Mr Jourabchi wrote to Mr Mohseni and advised him of the latest state of the portfolio. He also enclosed “the latest Global Research highlights.”

Quite reasonably, I think, Mr Mohseni rejected the idea of hedge funds or hedge style portfolios. He did not share Mr Jourabchi’s view that they represented a limited risk profile.

Following a telephone call between Mr Jourabchi and Mr Mohseni, the latter wrote on 19 May inquiring what the next step should be. He said that he was not very clear about the advice he had been given which did not appear to be structured or coherent. He enclosed a long memorandum and suggested that they renewed their discussions on the telephone. He expressed the hope that this would give Mr Jourabchi a “very good direction for the next six to twelve months”.

Mr Mohseni seemed to me to be a most courteous man. He was reluctant to criticize Mr Jourabchi either to his face or to senior management. At the same time, when he felt that he had not been properly treated he was quite capable of expressing himself forcefully, as in the Goodarzi incident. In this context I consider that this letter amounted to something of a rebuke to Mr Jourabchi for not presenting him with a structured plan of action in the light of the heavy losses sustained by the portfolio, which was now worth about $16 million as opposed to the $21 million at its peak in the Spring of 2000, when the Nasdaq reached its peak [10 March 2000]. The Nasdaq reached its lowest ebb [1423.19], during the relevant period of Mr Jourabchi’s control, on 2 September 2001. As at May 2001 it stood at just over 2000.

There is a handwritten note made by Mr Jourabchi of the telephone discussion which took place on, I think, 21 May 2001. This note reads, relevantly,

The more formal letter prepared by Mr Gulliver, dated 22 May, set out the position:

On the same date Mr Jourabchi reported to his manager [Mr Woolnough] through a note to file.

There are a number of points to make about these documents. In the first place I cannot accept that Mr Gulliver and Mr Jourabchi had “repeatedly” advised Mr Mohseni to sell the whole of his portfolio. Mr Gulliver denied that he had done so. On the other hand, I do believe that at one stage the prospect of a sell-out was discussed between Mr Jourabchi and Mr Mohseni, most probably in 2000. I also accept Mr Jourabchi’s evidence that he had gone so far as to negotiate a favourable deal over the costs of this sell-out. The reason why I accept this evidence is based partly on my view of Mr Jourabchi as a witness who tried to speak the truth, and partly because I think it improbable that he had simply invented the favourable rate. Mr Mohseni was, with some justification I think, quick to ensure that Merrill Lynch were not doing themselves a favour by the recommendations that they were giving him. Advice to sell out would have earned commissions and I think it probable that he would have reacted exactly as Mr Jourabchi has recorded namely to find out what it would cost him, and expect some kind of discount from normal rates. I also take the view that Mr Jourabchi was concerned that he was going to be blamed for the large drop in the portfolio’s value. The first paragraph of the file note is not an accurate account of what happened. As I read the documents it was Mr Mohseni who wanted a record made: “we felt it best be documented” did not truly represent the state of play. Mr Jourabchi’s talents lie, I think, in trading and assessing the market. He was not as diligent with his paperwork as he should have been. He regarded, I suspect, the annual review procedure as tiresome and not something that was really important. He did not accurately apply the rule book over the way solicited and unsolicited trades were recorded. His written English is adequate but Mr Gulliver’s is better and that is why, I think, the latter signed the letter to the client.

That said, the overall position is reasonably clear. Mr Mohseni expected the Nasdaq index to rise to 3000: he was wrong: the Index fell slightly between May 2001 and February 2002 [having recovered from its low in September 2001]. On that basis he was prepared to run with a portfolio which was weighted towards that sector. Once the index had risen and the value of his portfolio had increased then he was prepared for the future to move assets into a Consults programme which diversified his risk exposure. I am satisfied that Mr Mohseni understood that this strategy involved a large risk with a relatively high leverage rate [40%]. If he were to sell in 2001 then he would be taking losses, but if the market went up then those losses would be avoided or limited. In gambling terms do you stay at the tables when facing losses in the hope that your luck will change?

The next significant event is Mr Jourabchi’s trip to see the client in Vancouver in early June 2001. One of the purposes of the visit was for Mr Jourabchi to exploit, if he could, a contact which Mr Mohseni had passed on to him as a possible source of business. Another purpose was to complete the questionnaire which every participant in the Consults programme would have to complete. I suspect, also, Mr Jourabchi was keen to see the circumstances in which Mr Mohseni lived. In the documents there are various figures put forward as to the extent of Mr Mohseni’s wealth. As Mr Jourabchi explained, it is not appropriate for a trader such as himself to ask the client directly how much he is worth. He secures the information less directly by, for example, discussing investments and seeking to find out what other positions the client held. Such a trader will be prone to make false estimates because clients may exaggerate their own wealth to impress or simply to keep the trader quiet. I find nothing significant in the fact that Mr Jourabchi consistently over-estimated Mr Mohseni’s other assets. There is ample room for confusion in the game of cat and mouse that was to an extent being played so far as Mr Mohseni’s wealth was concerned. What Mr Jourabchi saw in Vancouver when he visited Mr Mohseni’s home greatly impressed him.

During the course of the visit the Consults programme questionnaire was discussed and certain questions were asked and answered about it. There is a difference in recollection between the two witnesses about this meeting. Mr Mohseni believed that it was a short meeting around ten minutes or so. Mr Jourabchi seemed to be more concerned with discussing the prospect and he arrived late. Mr Jourabchi said that the meeting took about an hour and a half. I suspect the form was discussed for a relatively short time. It is just the sort of form on which Mr Mohseni would not have wished to spend time. But equally, the main questions would have been asked and answered. As a result of the answers given, Mr Jourabchi calculated that Mr Mohseni had the highest rating for risk. I do not place much weight on this unsigned form, although it would be fair to say that it confirms that Mr Mohseni had a healthy appetite for risk. He wanted to recoup the losses he had made on his portfolio and if money were to be invested in the Consults Programme then he expected the fund to perform well and if it did not then he would “develop a more aggressive strategy within Consults”; and that, I think, exemplified his attitude to the portfolio and risk more generally.

Having returned from Vancouver Mr Jourabchi then completed a client contact report form. There was a meeting in London, first with Mr Jourabchi and his team and second with Mr Woolnough Mr Jourabchi’s manager. At the latter meeting Mr Mohseni raised the question whether it would be better if a banker were present at such meetings. He expressed satisfaction with the service which Mr Jourabchi and Mr Gulliver had given him but he nonetheless did not consider that Merrill Lynch was acting as a true private bank. This, I think, reflects Mr Mohseni’s view that Mr Jourabchi and his team were traders rather than bankers. It was explained to him that he was the ‘relationship manager’ and that he would introduce bankers and product specialists as required. This episode lends support to Mr Mohseni’s case that no-one seemed to see the wood for the trees and he needed advice of a more reflective nature. On the other hand, he would never have expressed satisfaction with the team’s work had they been trading without authority.

Following a telephone call, Mr Mohseni and the team had a meeting on 28 June 2001. The report of that meeting indicated that Mr Mohseni appeared to be shaken. He told them that he had been put under pressure by the trustees of Valse in relation to the bad performance of the account and implied that some compensation should be paid. For the first time he said that he was not aware of some trades on the account. He suggested that he should be paid compensation of between $0.5 and $1 million. The immediate response was that Merrill Lynch did not share in their client’s profits or losses. Mr Jourabchi says that as he was leaving the office Mr Mohseni said words to the effect that he would deal with the Trustees personally and there was no need for the team to discuss “this” with higher management. This is strongly disputed by Mr Mohseni. I did not regard the evidence of either Mr Jourabchi or Mr Mohseni as inherently unreliable. Neither was an easy witness in the sense that each tended to give long answers when short ones would have sufficed. Both people seem to me to be inherently honest. What is in issue here is some remarks made at a meeting over three years ago. I am not sure that the note we have is a contemporaneous record – the date has been altered in two places from April 2002 to 29 June 2001. If it were crucial to make a finding I would not be prepared to say that Mr Mohseni spoke all the words attributed to him although I do think it likely that he indicated that he would deal with the trustees personally rather than involving Merrill Lynch Management in doing so. In fact, Mr Mohseni did contact the trustees personally.

Mr Mohseni then sent a draft of a fax which he requested Valse send to him and this was done. Although the letter appears on Valse paper it does not represent the independent views of Valse; rather, it is a letter from Mr Mohseni to himself for use in his discussions with Merrill Lynch. The letter is dated 29 June 2001.

Merrill Lynch provided to Valse the information which they requested, namely a record showing the performance of the portfolio on a quarterly basis and a proposal to move the MLIM portfolio to an aggressive growth objective. The latter was discussed at a meeting on 6 July 2001. The formal response from Mr Jourabchi to Valse’s letter is dated 10 July 2001. It is a long letter and I summarise its contents:

Mr Mohseni was pressing his case for compensation and seeking admissions, off the record, from Mr Jourabchi who was becoming increasingly concerned about the developments. He believed that Mr Mohseni was taping the phone calls and reported this to one of his managers. In his E mail to her, Mr Jourabchi said:

On 15 August 2001, there was a telephone call between two managers [Mr Woolnough and Ms Soha Nashaat] and Mr Mohseni. Mr Mohseni was asked to explain his concerns about his account to them. Mr Mohseni accepts, broadly, the contents of the note of the conversation made by the managers. He said that he wanted the issues to be resolved amicably but “some things had fallen through the cracks and that trust was broken when trades are done without instructions.” Ms Nashaat asked whether Mr Mohseni was “alleging discretion” and he said he did not know our laws. He did not want to incriminate either himself or Mr Jourabchi. Merrill Lynch said that he was making very serious allegations and they would need to be investigated. Mr Mohseni said he needed to investigate further and would get his lawyers to write but would prefer a quick fix and settlement after a 16 year relationship, “he said it is not about money!!” He said he was not sure what his issues are and would have to do his homework. The note continues

On 5 October 2001 Mr Mohseni repeated to Mr Gulliver his general (unparticularised) allegation that Mr Jourabchi had been dealing on his account without his knowledge. Mr Gulliver pointed out that Merrill Lynch faxed him statements weekly and that “worst case scenario he would have known about any such trade if they occurred within 5 trading days. He admitted “well yes, but …” There was more along the same lines on 9 October in a further long telephone call with Mr Gulliver: “reminder how client feels trades were done without permission but admitted that he was aware of those trades but because he was a ‘nice guy’ was ‘persuaded’ to run with positions.”

There was a problem in Mr Mohseni’s view with a transaction involving the exchange of Canadian Dollars for Japanese Yen. The issue was whether the exchange should have occurred at one time or, as happened, in tranches. Mr Mohseni wrote for the attention of Mr Jourabchi

I must deal with a general allegation that was made by Mr Mohseni, namely that the notes and internal documents referred to do not accurately reflect what was said at the time but that they have been written up with a view to assisting the Merrill Lynch case. That allegation is unsustainable. These records do demonstrate the nature of the relationship between the parties and do evidence what was said on various different occasions. Indeed, I regard the facts as best demonstrated from the contemporary documents. With the best will in the world it is difficult for the witnesses truly to remember odd telephone calls and meetings taking place years before. Where the document contains an exaggeration I have said so.

Second, it seems to me that the procedures then in operation at Merrill Lynch were less than sensible. There were two different systems for recording investment objectives and appetite for risk and I agree with the experts who describe the documentation as “inconsistent and confusing”. They disagreed as to the effect of this confusion. Dr Fitzgerald considered that the documentation fell below the standards to be expected of a reasonably competent private banking portfolio investment service; whereas Mr Weiner was of the view that written documentation of risk tolerance and trading objectives is of secondary importance to the principle of actually “knowing your client” which is what the documentation merely seeks to reflect. I agree with Mr Weiner if one is looking at the causal effect of the poor documentation but I also agree that it fell below a proper standard. The alleged failures in this case did not stem from inconsistent and confusing documentation; it stemmed from Merrill Lynch’s approach towards a private client who was classed as an expert. The reality in this case is that Mr Jourabchi had a very good understanding at all times of his client’s wishes, however they might be expressed in terms of ‘objectives’ and attitude to risk. He acted as Mr Mohseni wanted him to act.

In the light of the facts, what are the conclusions to be drawn?

Mr Malek QC made the following submissions:

For Merrill Lynch, the submissions were these.

I shall deal with the question of duty, breach and damage separately, although they obviously overlap.

On the question of duty the experts were in broad agreement, although ultimately this is a question for the Court. Essentially the difference between a discretionary account and an advisory account is that in the former the trader has discretion to make trades without taking the client’s instructions. With an advisory account, however, the client is essentially in charge of his own portfolio, with the benefit of the Bank’s advice. Where, as here, the client is designated an expert, and this designation as such has not been challenged, then the technical position as regards the FSA Rules is as set out in Mr Hapgood QC’s submissions (recited above). The Bank does not take responsibility for the suitability of the advice they give. There was no Non-Discretionary Management Agreement in existence and no contractual duty, in my view, owed to Valse, the client, as to the suitability of the portfolio as a whole. The bank is, essentially, under an obligation to carry out the client’s instructions and may not refuse to do so simply on the grounds that the instructions may conflict with an agreed investment objective. The client is the master of the account; the investment objectives are his servant and must be adapted to meet the client’s trading decisions. The advisor must recommend investments which do not appear to him to conflict with the client’s investment objectives, but the client takes responsibility for accepting or rejecting any advice which is tendered to him.

The investment objectives used by the Bank are not to be construed strictly. They are broad categorizations of objectives (relatively standard in the industry) and the composition of a portfolio within the stated objective may vary widely according to the client’s attitude to risk. I do not accept the argument that risk is already catered for in the definition of the objectives. Just as a matter of language I do not think that this can be so. That said, with a large appetite for risk, a client’s portfolio is unlikely to be categorized with a conservative objective. Although his position can be reduced to absurdity, I nonetheless prefer Mr Weiner’s approach to that of Dr Fitzgerald on the issue whether this portfolio could legitimately be described as aggressive growth with aggressive risk. I agree with Mr Weiner that although this might be categorized as a foolhardy [madly dangerous, to adapt Dr Fitzgerald’s words] account, the portfolio could properly be described as falling within the objective even when, as was the case, it was showing a high beta figure. Dr Fitzgerald’s contrary view, namely that the portfolio was inappropriate even for an account with an objective of aggressive growth or one with an aggressive risk profile, placed too much emphasis, I think, on the distinctions between the categories and did not reflect the regulatory framework within which the contractual relationship between the parties must be viewed. This portfolio was more risky and volatile than Mr Weiner’s benchmark 5 but that is simply, I think, an example of how different portfolios using the same designations may vary according to exact composition and appetite for risk.

The portfolio was subject to a mechanical check to ensure that trades were not done outside the stated objective. There was a computer system which would throw up ‘unusual trades’ and a form [1038] would be generated and sent to the trader for his comments. This happened on some occasions and Mr Jourabchi’s responses were either to reject the ‘complaint’ or to suggest that the objective was going to be or had been changed. To some extent, therefore, Merrill Lynch considered themselves to be responsible for monitoring the client’s choices of investments against the agreed portfolio objective. As paid investment advisors it was their duty to keep the investment objective in mind when making recommendations on the purchase of stocks and when giving other investment advice. However, it is going too far, in my judgment, to suggest that the Bank were obliged to stop the client from taking risk or trading beyond the agreed objective. They were required to review the objective with their client from time to time and discuss the shape of the portfolio with him. Provided they were satisfied that their client knew what he was doing, then they had fulfilled their duty. Amateur expert is not how I regarded Mr Mohseni. I think he knew exactly what he was doing at all times. He was very much in control of the shape of the portfolio and, as was his right, very shrewdly moved the portfolio into a largely equity based portfolio as the markets accelerated upwards in 1999 and early 2000. I am confident that the increase of nearly 20% in the values of the portfolio over a period of just over a year showed an approach to investment which justified Mr Jourabchi in assessing him as a man with a high appetite for risk. It must have been obvious to all concerned that to achieve such a result, the portfolio was as exposed to a downwards trend as it had been to the movement upwards.

Mr Mohseni’s real complaint is in the way the portfolio was managed in a falling market. Only then did he begin to question whether the portfolio was as steady as he thought it should have been. I am afraid that I have come to the conclusion that what happened is that he rejected the advice he was given, because he was unwilling to take losses, preferring to wait until the market rose, and then when things got worse sought to blame others for what had happened. His first attempts to blame Mr Jourabchi for the composition of the portfolio, led to him making what I have concluded were baseless allegations of unauthorized trading. His second attempt was to blame Mr Jourabchi for not advising him that his portfolio was in a dangerous condition, susceptible to market movement.

In my judgment, on the facts, Mr Mohseni was told often enough when the market started to fall that the shape of his portfolio should be altered. The advice was not tendered on the basis of looking at each category of investment objective and trying to fit the portfolio into one category or another. The advice was given on the basis that the highly aggressive portfolio should be spread more evenly across the board. But to do that, Mr Mohseni had to be persuaded to take losses and not wait until the Nasdaq Index increased in value. The submission that Mr Jourabchi gave advice to spread the portfolio and then proceeded to recommend stock in the already over-exposed sectors does not alter the advice that was given and rejected. As he knew his client’s wishes very well there was no point in him recommending stocks in which he knew the client was not interested. The advice to diversify the portfolio was given in writing and orally. As I have already found, Mr Mohseni was not interested in formal labels; his sole interest was in running a portfolio which would grow. He was happy to take a large risk by concentrating his investments in narrow sectors. It was a successful strategy and had he heeded the advice he had been given his portfolio would probably have flourished. No amount of strategic discussions about objectives would have made any difference. I understand why Mr Malek QC concentrated on this part of the case. Mr Mohseni could have had no case to advance in relation to the suitability of the bank’s recommendations on stocks to buy, since he had been designated an expert and the consequences were spelled out in the contractual documents. The case that Mr Mohseni should have been advised that his portfolio was outside the objective is somewhat unreal in the light of the facts. In essence what Mr Malek submits is that the Bank were responsible in law for advising as to the suitability of the portfolio as a whole. But I reject that duty and in any event, Mr Mohseni knew exactly what he was doing. In my judgment the risks were palpable. He is a most able and successful man. He simply took a view of the market which turned out to be wrong. It was not any lack of understanding about the objectives and their labels which was of importance; it was his failure to take advice when it was given and a determination to pursue a course of action which he believed was in the best interests of the portfolio. Had Mr Jourabchi tried to exercise ‘firmer control’ at any time, I consider it probable that he would have been replaced. Mr Mohseni neither wanted nor needed any financial adviser to tell him about the portfolio which he had so successfully built up until the market crashed. Thus, even had there been a breach of duty it was not causative of any loss: the portfolio was in the shape that Mr Mohseni had wanted and he was a knowing and informed investor.

Had there been a breach of duty which caused damage, then the measure of damages would, in my judgment have been on the basis of an incremental approach. The pleadings blame Mr Jourabchi for his stewardship. Mr Jourabchi was instructed to continue the portfolio along the same lines as it had been under Mr Goodarzi’s stewardship. This was plainly a good decision at the time because of the forthcoming boom in the Nasdaq index. Had Mr Jourabchi advised Mr Mohseni to diversify at that stage, such advice would probably have been rejected, and rightly so. Any failure to advise at that time was not causative of any loss. The portfolio only fared less well than a hypothetical portfolio in September 2000 after the ‘crash’. At no stage was the portfolio to be run against a benchmark. That was not what Mr Mohseni wanted or asked for. To measure damage on the basis of a comparison with a hypothetical benchmark seems to me to give Mr Mohseni a right which was not contractually available. Taking the portfolio as it was on the handover and comparing it with how it was at the time when the contract between the parties came to an end seems to me to be the proper measure of damage: the experts have calculated the resulting damages to be $715,000 and this would have been the award had I been minded to find a causative breach of duty by Merrill Lynch.

In the event, I dismiss the claim.