Bank Leumi (UK) Plc v Wachner

This case concerns trading in foreign exchange options conducted by the defendant, Linda Wachner, (to whom I will refer as Ms Wachner), with the claimant bank, (to which I will refer as “BLUK”, to distinguish it from its affiliate company Bank Leumi USA, “BLUSA” with which Ms Wachner also traded during the relevant period). The dispute is focused on one particular type of Euro/dollar foreign exchange option which Ms Wachner traded in 2008, both in the form of calls and puts, namely reverse knock-in options (“RKIs”). The nature of these options is discussed in more detail below. No complaint is made about other foreign exchange trading in which Ms Wachner engaged during the relevant period, including in vanilla options.

Ms Wachner had traded foreign exchange with BLUSA since 2003 pursuant to a foreign exchange (FX) trading facility she had with that bank, on an execution only basis. She traded increasing volumes over the years, spots and forwards, as well as some options. In 2005 she wished to set up another FX trading facility with BLUK. For the purposes of that facility, she was classified by BLUK pursuant to the Financial Services Authority (“FSA”) Code of Business Rules (“COB”) as an “intermediate customer” rather than a “private customer”. Under BLUK’s internal policy, only those individuals who were classified as intermediate customers were permitted direct access to the dealers in BLUK’s Dealing Room.

The facility provided to Ms Wachner was on an execution only basis. Between September and December 2005 under that facility, Ms Wachner traded FX spot, forwards and options with BLUK. She did so primarily through a professional trader who acted on her behalf, Mr Nabil Moussallem. She terminated that trading abruptly in December 2005 because losses were being made and she was evidently not happy with Mr Moussallem’s trading. She closed all her positions and transferred the funds elsewhere, although her account with BLUK was not formally closed. She remained a customer of BLUK throughout 2006 and 2007, but on a dormant basis. At various stages she exhibited an interest in resuming trading with BLUK, but after initial enthusiasm, declined to take up a facility. In the meantime she continued to trade with BLUSA.

From July 2007 onwards, the so-called BLUSA Agency Agreement operated, which enabled Ms Wachner to trade under her facility with BLUSA not only during New York hours (when BLUSA’s trading desk was open), but also during London hours, through the dealing room at BLUK, until New York opened at 1230 London time each day. She dealt initially with Mr Daniel Gabb (one of the traders at BLUK), but from March 2008 increasingly with Mr Martin Leslie, the senior trader in BLUK’s dealing room, with whom she had initially dealt in 2005. One of the issues in the case is as to the legal effect of the BLUSA Agency Agreement, specifically whether, as she contends, Ms Wachner acted as agent for BLUSA in her dealings with BLUK or whether, as BLUK contends, it was BLUK which was acting throughout as agent for BLUSA with which all Ms Wachner’s trades were concluded.

In March 2008, Ms Wachner traded her first RKIs with BLUSA through the BLUSA Agency Agreement. Within a short period of time she was also trading RKIs with HSBC Geneva pursuant to a separate trading facility she had had with that bank since about February 2008.

In June 2008, BLUK extended a €75m nominal value FX trading facility to Ms Wachner. On this occasion, she did take up the facility at the beginning of September 2008, which, as had been the case with the facility in 2005, was on an execution only basis. At various dates in September and October 2008, she closed out her positions with BLUSA and HSBC and transferred those positions into BLUK, albeit in the form of new options in each case, not by way of assignment, novation or the like. From early September 2008 she traded options (principally RKIs) with BLUK, rolling out the options she had transferred in from BLUSA and HSBC. This coincided with the collapse of Lehman Brothers and what was undoubtedly a period of unprecedented turmoil and volatility in world markets, including currency markets. This affected Ms Wachner’s marked to market loss and, as it was entitled to do under the terms of the facility, BLUK made a series of margin calls on Ms Wachner.

She paid some of these margin calls but after 23 October 2008, she made no further payments and her position continued to deteriorate. In the circumstances, under the terms of the facility, BLUK was entitled to close out Ms Wachner’s open positions and, on 14 November 2008, it began to do so. After applying the margin that Ms Wachner had provided, closing out her positions resulted in a loss to Ms Wachner’s account of €13,434,947.98.

The present proceedings were begun by BLUK to recover that sum plus interest, on the grounds that, under both BLUK’s Terms of Business, (which have applied since Ms Wachner first became a customer of BLUK in 2005) and the terms of the June 2008 facility, Ms Wachner is liable to make good that loss. Subject to her Counterclaim, that is no longer disputed by Ms Wachner.

The Amended Defence and Counterclaim (as elucidated by Further Information provided as recently as 24 September 2010) raises three causes of action against BLUK:

Although the misrepresentation and breach of duty of care cases remained alive throughout the trial, in her closing submissions, Ms Sue Prevezer QC indicated that the thrust of her client’s case was really focussed on the case of breach of statutory duty, realistically recognising that the other causes of action do face problems which I will indicate later in the judgment.

Prior to March 2008, Ms Wachner traded only vanilla options. These involve the seller agreeing to sell, for a premium payable now, a set amount of the relevant foreign currency (usually Euros in the case of Ms Wachner) if the exchange rate rises or falls (depending on whether it is a call or a put) to a particular level (“the strike price”) by the maturity date. If the strike price is not reached by the maturity date, then the option expires worthless and the seller simply retains the premium. If the strike price is reached and the buyer chooses to exercise the option, the seller will have to sell the relevant foreign currency to the buyer. How much it costs to do so will obviously depend upon how much the exchange rate on the maturity date exceeds the strike price, colloquially how much the option is “in the money”.

From March 2008, Ms Wachner also traded reverse knock in options or RKIs. In her statement and in the various submissions put before the Court these were described as exotic matched derivative options (“EMDOs”) but this is not a recognised term and, in so far as it was intended to convey that RKIs are more risky than vanilla options, it was unhelpful and, indeed, inaccurate. They differ from vanilla options in that, in addition to the strike price, there is a knock-in price, set (depending upon whether it is a call or a put) above or below the strike price. Unless the exchange rate hits the knock-in price or barrier before the option matures, it never becomes live or exercisable. If the option does knock in, it will still only be exercisable if at the maturity date, the exchange rate has remained above or below the strike price (depending on whether it is a call or a put).

By way of example, taking one of the first pair of RKIs Ms Wachner traded on 6 March 2008, this was a €10 million call maturing or expiring on 19 May 2008. It was sold at a time when the spot Euro/dollar exchange rate was 1.5319. It had a strike price of 1.50, but a knock-in price of 1.57. In other words, the option would not be activated at all unless the exchange rate hit 1.57 before the maturity date, even if the exchange rate was below 1.57 but above the strike price throughout the life of the option. Of course, an equivalent vanilla option sold at sixty days maturity with a strike price of 1.50 would already be more than three points in the money and the seller of such an option would be gambling on the exchange rate dropping during the intervening period to lower than the strike price. In that sense it can be seen that, because the RKI has to hit the “barrier” of 1.57 before it is activated at all, as a generic product, it is no more risky and, is in fact less risky than a vanilla option with the same strike price. Where the greater degree of risk may arise is in the way in which RKIs are traded: for example, they enable sales of options in a more aggressive manner, with tighter strike prices nearer to the current spot price, but that is not something inherent in an RKI itself, just in the way it is traded.

By the beginning of this century, Ms Wachner was an extremely successful businesswoman. She was born in 1946. She was the former CEO of Warnaco, a “Fortune 500” company, which she built into a US$1.4 billion company. During the course of her career, Ms Wachner built up a considerable private fortune. She purchased a number of valuable properties both in the Hamptons, New York and an apartment in Paris and paintings, including an Andy Warhol of herself.

Ms Wachner first traded on the FX market through HSBC in Paris in 2002. Although, in a subsequent document prepared by Tina Brunner of BLUK, it was suggested that she had experience of FX trading whilst CEO of Warnaco because she had been involved in hedging foreign exchange exposures of the company, when this was put to Ms Wachner in evidence, she consistently denied having any such experience. I accept that evidence. It is clear from the company’s financial statements filed with the US authorities that its foreign exchange exposure was very limited, as the vast preponderance of its trading was in US dollars. Such hedging as took place was on far too small a scale to have concerned the CEO. Ms Brunner seems to have got this information from a note of Mr Pereira’s (although understandably she could not recall) but at all events, the information did not emanate from Ms Wachner and looks to have simply been a misunderstanding.

On 7 July 2003, Ms Wachner set up an FX trading facility with BLUSA which was explicitly on an execution only basis. By the terms and conditions of that facility, Ms Wachner agreed, inter alia, that:

“The decision to acquire, hold and dispose of the Assets will be made by you following your consideration of the risks involved, including (without limitation) the risks referred to in this paragraph, and you acknowledge that BLUSA has made no representations or warranties to you relating to any such risks. You further acknowledge that you are a sophisticated investor able to evaluate the merits and risks of all investments in the Assets and are able to bear the economic risk of these kinds of investments.”

That term applied to all her trading with BLUSA over the years. The volume of trading with BLUSA was as follows: US$477 million (for the part year 2003); US$1.1 billion in 2004 and US$1.538 billion in 2005. It is important to note though that these are no more than the arithmetical totals of the nominal values of all the trades effected. They do not represent the total value at risk. During that period, Ms Wachner’s individual trades were essentially spot and forward, with some options, but in relatively small amounts of a few million dollars. Her overall exposure at any given time was thus not great.

In the first half of 2005, Ms Wachner was introduced to BLUK by Ms Susan Pearce, the private banker at BLUSA who was her account officer. The reason for the introduction was that Ms Wachner wanted to mortgage her Paris apartment to provide margin for proposed FX trading. In the event the mortgage did not go ahead, but BLUK did provide Ms Wachner with a FX trading facility. As already noted in the summary at the outset of the judgment, in order to do so, BLUK had to classify Ms Wachner as an “intermediate customer”; otherwise she would not have been permitted direct access to the traders in the BLUK Trading Room.

The initial contact was made by Susan Pearce with Mr David Griffiths at BLUK in the middle of February 2005. She sent him the latest BLUSA annual review of Ms Wachner, which showed that she had net worth as at 31 March 2004 of some US$62 million, of which $26 million was in liquid assets. Mr Griffiths passed on the details to Mr Tim Pereira who was the head of private banking at BLUK. Mr Pereira had a short telephone conversation with Ms Wachner and Ms Pearce on about 23 February 2005. Mr Pereira did not talk in this call about the type of foreign exchange dealing Ms Wachner would be doing or about her experience of such trading but learnt that she was going to have a professional trader, Mr Moussallem who would do the trading on her behalf. He was impressed that she was businesslike and to the point.

He then discussed the proposal with Mr Baruch Lederman, a senior executive in BLUK in an email on 23 February 2005 and he was happy in principle for Mr Pereira to proceed. Mr Pereira then arranged to meet Ms Wachner at her Paris apartment on 9 March 2005. Before that meeting, he had an email exchange with Ms Pearce. In his email of 1 March 2005, he asked Ms Pearce to provide four categories of information which he told her he required in order to justify to the Compliance department of BLUK classification of Ms Wachner as an intermediate customer for regulatory purposes: (i) knowledge and understanding of the relevant designated investments (FX) and markets; (ii) length of time the client has been active in these markets; (iii) size and nature of transactions and (iv) the client’s financial standing. He said it would be useful to know what FX facilities she had at other banks and whether she had dealt in other investments, such as bonds or shares on a “professional” basis and that it would be helpful to have a few lines on her expertise in the FX markets.

Mr Pereira accepted in cross-examination that he was asking for information in this email to justify a decision he had already made to classify her as an intermediate customer, that it was “part of the process” by which I took it he meant the four stage process with a new client which he described as going on at around the same time: credit approval, “know your client” due diligence, classification for regulatory purposes and account opening. Although the email does betray an enthusiasm to make Ms Wachner an intermediate customer, which Mr Pereira essentially accepted, I am quite satisfied that Mr Pereira was a careful and professional banker who would not have classified Ms Wachner as an intermediate customer if he had not thought it appropriate to do so.

Ms Prevezer accepted that the questions he had asked in his email corresponded with four of the criteria to which BLUK should have had regard under COB 4.1.10G except that the first did not include knowledge and understanding of “the risks involved” to which Mr Pereira responded that that was covered in the letters Ms Wachner subsequently signed. In initial response to his email, Ms Pearce sent Mr Pereira copies of her recent call reports on Ms Wachner, one dated 8 November 2004 relating to a weekend she had spent at Ms Wachner’s luxurious property in The Hamptons, one relating to a visit Ms Wachner and her accountant had made to BLUSA on 15 November 2004 where they had gone over all her positions: loans, equities and foreign exchange trading and the third to another visit Ms Wachner and her accountant had made to BLUSA on 22 December 2004 where again her FX positions and outstanding loans were reviewed.

Ms Pearce provided a fuller response to his email in her email of 7 March 2005 in which she referred to having known Ms Wachner since April 1998 when she became a private banking client of HSBC, formerly Republic Bank of New York, with whom she had an unsecured line of credit of US$20 million, increased over time to US$31 million and fully repaid. She had been trading FX with BLUSA since July 2003. She had a $20 million facility with a 10% initial margin, 7% call and 4% close out, secured by time deposits. She could trade spot, forwards (up to 60 days) and FX options. In the second six months of 2003, the FX volume was $477 million and she did a number of options. In 2004 the volume of FX trading was $1.1 billion, and she also did options. She had also traded equities with BLUSA since 2004, on a cash and margin basis including options. She traded FX through her account with HSBC in Paris and did structured transactions, as well as trading equities with HSBC. She had a brokerage account with Bear Sterns and dealt directly with Ace Greenberg both on a cash and margin basis. Ms Pearce concluded “We consider Linda to be a very sophisticated and market savvy investor”.

In cross-examination Mr Pereira accepted that although this response was very helpful it hadn’t answered all the questions he had asked in his email. He, like all the other BLUK employees who gave evidence, accepted candidly that he had not thought about whether Ms Pearce was a “connected person” within the meaning of COB, although they all accepted that she was. Mr Pereira had not checked the information Ms Pearce provided with Ms Wachner herself.

Mr Pereira then met Ms Wachner at her Paris apartment on 9 March 2005 to discuss potential loan facilities to provide margin for forex trading. He prepared a note which in large measure reiterated what Ms Pearce had said in her email. It included a reference to the fact that during her 22 years in the fashion business she was involved in hedging out foreign trade exposures on the purchase of goods from the Far East. Although Mr Pereira insisted in evidence that he had not made this up, how it came to be written remains a mystery since, as I have already held, I accept Ms Wachner’s evidence that she had no such experience of hedging foreign exchange. Mr Pereira accepted that at the Paris meeting he did not discuss with Ms Wachner her foreign exchange strategies or experience, but she had showed him a communications system she had (presumably the Bloomberg) which she told him gave her information and pricing on options.

On 11 April 2005, Ms Wachner attended at BLUK’s offices in London and met Mr Lederman. She also met Mr Martin Leslie, one of the BLUK traders. There is something of a conflict of evidence about this meeting and what was discussed. Mr Pereira was present for at least some of the time. His evidence in his witness statement, which he confirmed in cross-examination, was that Mr Leslie and Ms Wachner had struck up a good relationship. They had not spoken in detail about trading, as it was more of a “press the flesh” “should you trade with us he will be your contact in the dealing room” sort of meeting but Mr Leslie had got on well with and was impressed by her.

This assessment of a short “high level” meeting accorded with Ms Wachner’s recollection, that she and Mr Leslie had met in a small side room for about fifteen minutes. In cross-examination she said: “I remember being in that little room talking about CNBC … I was interviewing Mr Leslie. He wasn’t interviewing me … We had a general conversation … I could not have possibly said anything different to him on that day than I just said to you now: I’m trading simple spot, I’m trading small options, that’s it – small spot, simple options … I interviewed Mr Leslie. I spoke to him about the fact that I was trading foreign exchange in the way I just described it to you”.

Mr Leslie had little recollection of the meeting but agreed with Mr Pereira’s assessment of it as a “press the flesh” meeting. He thought it had lasted about half an hour. In cross-examination he purported to recollect that foreign exchange strategies had been discussed: “she was talking to me about various numbers that were coming up out in the market and how it was going to affect the market” and “talked about trading the delta”. I agree with Ms Prevezer that this cannot have been a genuine recollection.

More convincing to my mind was Mr Leslie’s evidence that there had been some discussion of foreign exchange strategies and he had been able to form a view that she was an expert in foreign exchange trading. As he put it:

I can tell within a -- five minutes of talking to someone what their knowledge of foreign exchange is, to a limited extent, unless they choose to lie to me. I'm sorry, two professionals talking -- if you spoke to Mr Cox, I'm sure you would know that he's a barrister relatively quickly or whether he knew nothing about the law. When one professional talks to another, you talk in such a way that you understand each other very clearly. There was no question about whether – there was no doubt in my mind whatsoever about Linda's expertise on foreign exchange.

Pressed by Ms Prevezer as to the form this conversation would have taken, understandably he could not be specific. He said the gist of a conversation with someone he would recognise as an FX expert would be: “‘Did you see those numbers last week? What did you think? Do you think it is a bear market? Do you think it is a bull market? What do you reckon is going to be happening when the numbers come out next week? What have you been doing? Are you long, are you short?’” Although Ms Prevezer suggested to him that anyone who had been watching CNBC could use this terminology which would not make them an expert, he insisted that he would know that such a person was not an expert.

I suspect that the truth about this meeting lies somewhere between the two extremes of Ms Wachner’s and Mr Leslie’s evidence. The meeting was relatively short and high level. I consider there was some discussion about her experience of FX trading (including in options) and strategy, which whilst it was not in depth was long enough for Mr Leslie to form the view that she had sufficient expertise of FX trading to be able to trade with the BLUK dealing room. In my judgment, it is important to assess the meeting by reference to the trading she had in fact done at the time, not with the hindsight of the disastrous trading she subsequently undertook in the second half of 2008.

Although in her evidence Ms Wachner tried to portray herself as something of a novice at the time in FX option trading, the reality is that between November 2003 and March 2005, prior to this meeting, Ms Wachner had traded 18 vanilla options with BLUSA, albeit for relatively small amounts and with short term maturity dates, so she was hardly a novice. Furthermore, it seems to me inherently unlikely that Mr Leslie would have told his colleagues such as Mr Pereira and Mr Perry Asforis (then the chief dealer) after the meeting that he was impressed with her knowledge of foreign exchange trading unless that was his genuine impression.

Mr Leslie also said in cross-examination that he thought that he or Mr Asforis must also have spoken to the BLUSA traders about Ms Wachner’s trading at around this time. This was not something which he mentioned in his witness statement and, although in one sense it would have been a likely thing for them to have done, it is not necessary to make any specific finding about it, since as Ms Prevezer rightly submitted, it was on Mr Leslie’s view of Ms Wachner (not that of the BLUSA traders) that private banking in BLUK relied in classifying her.

After the meeting in London, nothing much happened as Ms Wachner was unhappy about the modest size of the facility BLUK was prepared to grant and although the bank arranged for a valuation of her apartment to take place at short notice, she cancelled the appointment and said she had decided to go with a facility with HSBC in Paris. Later in the year, in July 2005, her interest in having a facility with BLUK revived.

Ms Tina Brunner prepared the documentation for the purposes of approval by senior management of a proposed US$10 million forward FX/option trading facility and for classification purposes, although Mr Pereira had ultimate responsibility. The documentation she prepared included a memorandum on Ms Wachner. Much of the information in that document clearly derived from the information given by Ms Pearce, including in her email of 7 March 2005. Ms Brunner had not spoken to or met Ms Wachner, so she did not verify the information with her, though she thought others in BLUK had done.

In that document Ms Pearce’s statement about Ms Wachner being a very sophisticated and market savvy investor has mutated into “We understand from Susan Pearce that she is a “savvy” FX trader.” Ms Prevezer sought to make much of this change as having given the wrong impression of Ms Wachner. Asked to explain the change, Ms Brunner thought that the phrase in Ms Pearce’s email had been a “kind of catchall” covering all the products she had listed Ms Wachner as trading and Ms Brunner had drawn out of that the FX element because that is what this credit application related to. Ms Brunner denied in cross-examination that she had misrecorded the information which had come from Ms Pearce. In my judgment this was not a case of having misinterpreted what Ms Pearce had said. Given that one of the “investments” in which she was said to be market savvy was FX trading, if Ms Brunner was preparing a document relating to a FX trading facility, it seems to me perfectly understandable to have described Ms Wachner as a “savvy” FX trader.

One of the other statements which Ms Brunner set out in the document on which she was taxed in cross-examination was: “Martin Leslie, who met with LW earlier this year, concurred with this opinion having discussed FX markets in depth”. Ms Brunner said in cross-examination that she had spoken to Mr Leslie and although she could not recall exactly what he told her: “he certainly told me she could hold her own in a conversation with him and they had a good rapport and she knew what she was talking about”. She had not checked up with anyone else who was at the meeting but took Mr Leslie at his word. Mr Pereira’s evidence was that the description of an in depth discussion did not accord with his recollection of the meeting between Ms Wachner and Mr Leslie, although he was not sure he was at the whole of the meeting.

It seems to me that whilst Ms Brunner may have overstated the position (albeit unintentionally) in saying that Mr Leslie and Ms Wachner had discussed FX markets in depth, the favourable impression Mr Leslie had clearly formed of Ms Wachner was conveyed by him to Ms Brunner such as to justify her concluding that he concurred in the view that she had knowledge and experience of FX trading which is what is conveyed by describing her as a “savvy FX trader”.

After that document was prepared, the documentation required to open the facility was completed by Ms Brunner on 25 July 2005 and approved by Mr Collin Cumberland, a senior executive of BLUK on 26 July 2005. Ms Brunner then sent Ms Wachner a package of the documentation relating to the new Forward FX/FX Option facility under cover of a letter of 26 July 2005. The documentation sent included two copies of each of the bank’s formal Facility Letter, the Terms of Business and the formal letter of Classification as an Intermediate Customer, one copy of each of which was to be duly accepted and returned. This package and covering letter appear to have been sent via Ms Pearce, being referred to as “enclosed” with a letter in similar terms dated 26 July 2005 to Ms Pearce. Ms Brunner agreed in cross-examination that she had not talked to Ms Pearce about how she should take Ms Wachner through the Classification letter explaining the risks involved as set out in that letter.

On 3 August 2005 Ms Wachner signed and returned copies of the Facility Letter, the formal Classification letter and BLUK’s Terms of Business. Before looking at that Classification letter in a little more detail, I should just complete the picture as regards the classification process. Ms Brunner explained in her witness statement the private banking internal procedures in relation to classification as an intermediate customer. In order to classify Ms Wachner as an intermediate customer they had to satisfy themselves of a number of matters: (i) that they believed on reasonable grounds that she had sufficient experience and understanding to be so classified. The factors to be taken into account in assessing whether there were reasonable grounds essentially tracked the criteria in COB 4.1.10G; (ii) that they had given a clear written warning of the protection she would lose; (iii) that they had given her sufficient time to consider the implications of being classified as an Intermediate Customer and (iv) that they had obtained her written consent to be treated as an Intermediate Customer. Thus, these internal procedures essentially followed the requirements of COB 4.1.9R which I consider later in this judgment.

The documentation which went to the Compliance department included the final version of Ms Brunner’s memorandum and a Call Report dated 8 August 2005 which to an extent was a précis of that memorandum, stating that Ms Wachner had been introduced to Mr Leslie with whom she had a compatible trading style. This accords with the view Mr Leslie had formed and with what he told Ms Brunner. That document also referred to the fact that Ms Wachner had appointed Mr Moussallem as her investment adviser who would be able to trade with the dealing room on her behalf. Separate classification documentation was also prepared in relation to Mr Moussallem, but no complaint is now made about his classification.

There was also another document prepared by Ms Brunner dated 8 August 2005 headed “Customer Details-Trading Record/Ability”, countersigned by Mr Leslie, who said in evidence that he would have had a discussion with Ms Brunner before signing this. This dealt with the four criteria in COB 4.1.10G and in the case of the first two, knowledge and understanding and length of time active in the market, seems to have overstated how long Ms Wachner had been engaged in foreign exchange trading, stating that she had had an unsecured FX trading facility of $20 million with Republic National Bank in November 1998. Ms Brunner was unable to explain how this came to be written but it is fairly clear that it was a misunderstanding of Ms Pearce’s reference in her email of 7 March 2005 to Ms Wachner having had such a $20 million unsecured “line of credit”, not an FX facility.

Whether anyone reading this would have been left with the impression that Ms Wachner had in fact been trading foreign exchange for seven years seems to me rather doubtful, as the document said the facility had been repaid in 1999 and then refers to Ms Wachner having commenced FX trading with BLUSA in July 2003 (which was correct). Neither Mr Pereira (who signed one version of this document) nor Mr Leslie appears to have been misled by this into thinking that she had been trading foreign exchange longer than she in fact had. Furthermore, Ms Brunner’s evidence was that she had sent the document to Ms Pearce for verification and thought she must have had a conversation about it with Ms Pearce.

The culmination of the documentation relating to the classification process was Appendix 1 Classification of Customer which said, so far as relevant, that someone could only be treated as an intermediate customer if they were an ‘expert’ Private customer and then stated: “Note that “expertise” must be carefully assessed and that the customer must be an expert in relation to the investment product(s) and service(s) in respect of which regulated services are carried on”. This document classifying Ms Wachner as an intermediate customer had to be completed and signed by two FSA approved persons, in this instance Ms Brunner and Mr Barratt, he thought because Mr Pereira was away. Mr Barratt had not spoken to Ms Wachner, Ms Pearce or anyone else at BLUSA before signing off. Although he thought he would probably have spoken to Mr Leslie, he had not confirmed with Mr Leslie that he had discussed FX strategies in depth with Ms Wachner. This classification was approved by the compliance officer, Ms Hammersley.

Ms Prevezer was critical of the fact that the package of documentation was sent out to Ms Wachner before her classification as an intermediate customer had in fact been approved by the Compliance department of BLUK. It was not until 10 August 2005 that this approval took place and the submission was that this was all a form-filling exercise with a pre-determined outcome. I do not accept that submission.

Mr Pereira explained that it was the standard procedure of the bank to get all the documentation in order (including getting the documentation to the client) before the classification was signed off by Compliance and Ms Brunner confirmed this, saying that Compliance could have said this was unacceptable. On occasions they do say that there is insufficient information. She said this was not just rubber-stamping or box ticking nor was the bank going to classify Ms Wachner as an intermediate customer regardless. Given that standard procedure was being followed, unless it were going to be suggested that BLUK always just engaged in a form filling exercise with a predetermined outcome with all FSA classification (which would be a serious allegation which was not made) there was nothing sinister in any of this. All the BLUK employees involved in the classification exercise who gave evidence (Mr Pereira, Mr Barratt and Ms Brunner) struck me as conscientious people who would not have been prepared to classify her as an intermediate customer unless they thought they were justified in doing so.

Returning to the formal Classification Letter, this constituted an appropriate written warning within the meaning of COB4.1.9R of the protection under the regulatory system which she would lose if she were an intermediate customer. At the end of the letter was a declaration which Ms Wachner signed on 3 August 2005 which stated:

I/We have taken the time to consider the implications of being classified as an Intermediate Customer and have read and understood the above warning and consent to be treated as an Intermediate Customer.

Ms Wachner’s evidence in cross-examination about signing this letter and BLUK documentation generally was: “Susan did all the documentation work … What Susan did for all things I signed was say – especially this – “This is like your New York account. Here it is. Initial every page” – this might have been in my car in New York or sitting at the edge of her desk – “initial every page”. It is a private bank, that’s what they do, they tab these little things with yellow or red stickies. “You sign it, it is the same as your account in New York.” Later she said that she had probably not even read the letter before signing it: “Probably just the first half of where I saw my name and address to tell them the address was wrong.” Ms Pearce could not and did not explain the letter to Ms Wachner as she had no understanding of the meaning and effect of classification as an intermediate customer, as she accepted in her deposition in this case.

I was not all that impressed with Ms Wachner’s evidence that she simply had not read any of this documentation before signing it. It seems to me highly unlikely, if she spotted that the address was wrong, that she did not read the whole of the classification letter, which was hardly a lengthy letter. Furthermore, as will be seen in relation to some later documentation prepared by Mr Miller which Ms Wachner was asked to approve, she was quick to notice any errors in documentation, suggesting that, contrary to what she says now, she did read the documentation before signing it on 3 August 2005.

BLUK’s Terms of Business contain a number of provisions which are important in the context of the issues in the present case, particularly the Counterclaim for negligent misrepresentation and/or advice:

1.

SCOPE AND APPLICATION

1.1

These Terms of Business (“the Terms”) are legally binding and subject to clause 1.3, govern all regulated activities (as defined in the Financial Services and Markets Act 2000 (“FSMA”)) which are carried on with or for you by Bank Leumi (UK) plc (“we” or “BLUK”).

1.2

BLUK is authorised and regulated by the Financial Services Authority (“FSA”). From the information you have supplied to us, we have classified you as an intermediate customer for the purposes of the rules contained in the handbook of rules and guidance of the FSA (“Rules”).

…

6.

CONDUCT OF BUSINESS

…

6.4

Margined Transactions

In the event that BLUK enters into or arranges derivative transactions with or for you under which you may be liable to make further payments, we may require that you provide us with initial and/or additional collateral in a form acceptable to us. If you fail to provide us with such margin no later than the close of business on the business day after we have notified you of such requirements, we may suspect any payment or delivery of securities required to be made to you and may close out your account by purchasing from, or selling to, a third party in a commercially reasonable manner the futures, options, underlying securities or collateral (or comparable securities).

6.16

Suitability

Unless BLUK enters into a specific agreement with you to do so, BLUK shall not owe you any duty to advise on the merits or suitability of any investment entered into or contemplated by you. You agree that you will rely on your own judgment for all trading decisions.

6.17

Advice

Furthermore, any trading recommendation, market or other information communicated to you is incidental to the provision of services by BLUK under these Terms and BLUK gives no representation, warranty or guarantee as to its accuracy or completeness or as to the taxation consequences of any investment.

…

6.19

Charges and Interest

(A)

We may charge you interest in the following circumstances:

(1)

where you are in default by virtue of late payment for or delivery of investments, interest may be charged at a rate at our discretion; and

(2)

where there is an agreed debit balance on your account with us, interest may be charged at the rate agreed between us.”

As already noted, Ms Wachner also appointed Mr Nabil Moussallem as her investment adviser enabling him to act on her behalf in respect of her trading on her account with BLUK. Mr Moussallem was classified by BLUK separately and in addition to its classification of Ms Wachner. Mr Moussallem was based in Luxembourg and was engaged by Currency Investments LLC (through FW Currency Investments LP) as a trader. Currency Investments LLC was a Delaware corporation of which Ms Wachner was 99% shareholder.

The account with BLUK was opened on 10 August 2005. Once BLUK had been put in funds for margin purposes, trading under the facility began on 9 September 2005 and continued until just before Christmas that year. In evidence, Ms Wachner claimed that all the trading had been done on her behalf by Mr Moussallem, but Mr Leslie had a recollection of having done a few trades with Ms Wachner herself. I am prepared to accept that evidence, but ultimately, it may not matter much, since, on any view, the vast preponderance of the trading was done on her behalf by Mr Moussallem.

The trading done included the sale of vanilla FX options. All the trading was done principal to principal, on an execution only basis. BLUK did not take a position on the options it bought from or sold to a client such as Ms Wachner. Rather it only bought or sold options in circumstances where it laid off the risk by a corresponding sale to or purchase from a market counterparty. The profit BLUK made on option trading was the difference between the price it offered to its client and the price it received from its market counterparty.

On 21 December 2005, Ms Wachner abruptly informed Mr Pereira of BLUK that she was upset by Mr Moussallem’s performance on her behalf and wanted to stop trading. Any unused margin was to be remitted back to Ms Pearce at BLUSA immediately. In her evidence, Ms Wachner insisted that she had instructed BLUK that she wanted to close her account and terminate the facility, but, when it came to it, had great difficulty in identifying the individual to whom these instructions had been given. What really emerged is that, perhaps naturally because no money was left in her account with BLUK, she assumed that the account and facility had been terminated, but it is quite clear that she did not give any instructions to that effect. On the contrary, as the email which Ms Brunner sent Ms Wachner on 21 December 2005 (confirming that her option positions had been closed and funds transferred to BLUSA) made clear, the facility with BLUK would remain in place until 31 August 2006 and all she would need to do was transfer margin funds to the account in order to resume trading.

Because the account with BLUK was not closed, Ms Wachner remained a customer of BLUK, albeit a dormant one. In those circumstances, BLUK conducted six monthly customer reviews in February 2006, August 2006, February 2007 and August 2007. As explained by Mr Barratt of BLUK, this was the regular appraisal of classification before MiFID came into force. In each case the review, conducted by Ms Brunner and/or Mr Barratt, was a limited one, which did not involve any discussion with Ms Wachner herself. Ms Prevezer was critical of the somewhat perfunctory manner in which these reviews were carried out, with no attempt by those responsible for the reviews to discuss with Ms Wachner or with BLUSA the continued suitability of her classification as an intermediate customer. BLUK’s response is that this was essentially because, as the Customer Review Forms completed recorded, Ms Wachner was not currently trading with BLUK and until she resumed trading with BLUK, no substantive review was in fact necessary.

That approach is challenged by Ms Wachner, essentially by reference to the BLUSA Agency Agreement, on the basis that, so Ms Wachner contends, during the operation of that Agreement, she was in fact an active client of BLUK. I will deal with this issue in later sections of the judgment where I deal with the correct legal analysis of the BLUSA Agency Agreement and the allegations of breach of statutory duty.

Throughout 2006, Ms Wachner continued to trade with BLUSA, including vanilla options, without the assistance of an investment adviser, although in evidence she said that she frequently sought the advice of Mr Moussallem about her trading. This was borne out, at least in general terms, by Mr Moussallem’s evidence. In his witness statement he referred to her seeking his “guidance on her trading on her BLUSA account” during the period he worked for Currency Investments LLC, that is between July 2005 and July 2007.

In cross-examination, Mr Moussallem said that she would telephone him six to eight times a day and that his “leitmotiv” by way of guidance was that she should buy long term vanilla options to protect any investment and then sell short term calls or puts against them or buy spot against them, by way of hedge. He indicated however that she would not follow his advice, in effect to buy long term options to hedge in advance, as she was an impulsive trader who was obsessed with money coming in by way of cashflow and she hated paying out premium. This reflects in large measure the way in which she continued to trade thereafter and Mr Leslie and Mr Gabb’s experience of her trading. The fact that she does not ever seem to have followed that advice from Mr Moussallem has some bearing on the question which I will consider in more detail later, whether Ms Wachner would ever in fact have followed the advice which she contends BLUK should have given her.

There was a sharp increase in the volume of the trades from US$1.538 billion in 2005 to US$13.939 billion in 2006 and US$12.173 billion in 2007. As in previous years, however, too much reliance should not be placed on these figures which represent the aggregate nominal value of all trades, not the value at risk at any given time. Perhaps a better guide to the trading is that, in the first six months of 2006, Ms Wachner traded about sixty eight options with BLUSA. During that trading period, evidently at Ms Wachner’s request, BLUSA agreed to increase the aggregate notional amount of all her open contracts from US$20 million to US$35 million on 30 May 2006, from US$35 million to US$50 million on 19 June 2006 and from US$50 million to US$55 million on 28 September 2006.

However, after 30 June 2006, apart from one option traded on 25 July 2006, her option trading came to an abrupt halt for some months. This may have coincided with the meeting she said in evidence that she had with Mr Rosen, a senior executive at BLUSA, in mid 2006, at which he told her that he had formed the view, on the basis of her poor results in 2005 and 2006, that she did not understand the foreign exchange trading she had been doing with BLUSA and suggested that she hire a professional trader to engage in FX trading on her behalf. On 11 August 2006, Ms Wachner wrote to BLUSA informing them that Mr Marc Chandler and Mr Thomas Molloy were authorized to trade on her behalf. The letter also stated that Mr Moussallem’s appointment as her agent was terminated.

Mr Chandler is an experienced FX trader with Brown Brothers Harriman whom Ms Wachner evidently consulted about her trading from time to time, although he does not seem to have actually traded on her behalf. Mr Molloy, on the other hand, was employed by Ms Wachner to trade on her behalf with BLUSA for a brief period in late 2006 and early 2007, although he only traded two vanilla options, a bought put on 1 December 2006 and a sold put on 4 January 2007. Mr Molloy resigned with immediate effect on 28 February 2007.

At around this time in late 2006, Ms Wachner wanted to be able to trade outside the New York trading hours during which BLUSA did business. She already had in place an arrangement whereby BLUSA would place “overnight orders” on her behalf with HSBC, but she was keen to trade during the period when London was open but before New York opened, even though, if she were in New York herself, that would entail trading in the middle of the night. On 18 October 2006 Mr Bob Giordano of BLUSA sent Mr Leslie by email a document headed “Procedure for [BLUSA] Foreign Exchange Customers trading through [BLUK]” which set out the basis upon which BLUSA would authorise its customers to trade with BLUK during hours when BLUSA was closed and BLUK was open. The end of that document stated:

“All trades that the customer executes will be back to back trades between (the customer and BLUSA) and (BLUSA and BLUK)”.

In the event, it was not until 1 May 2007 that BLUSA sent Ms Wachner a letter amending her facility with BLUSA to allow for this trading via BLUK and this was not accepted by Ms Wachner until 27 June 2007. Contemporaneously, neither of those documents was sent to BLUK. The letter of 1 May 2007 provided, inter alia as follows:

“We propose to make available to you the capacity to trade through [BLUK] for your account with us at those times when we are closed but BLUK is open. Except as otherwise stated in this letter, trading through BLUK for your account with us will be upon the same terms as if such trading were directly through us.

In order to implement this capacity, near the end of our business day we shall forward an authorization to BLUK expiring at 7.30 a.m. (NY time) on the next New York business day. Accordingly, even though BLUK may then be open, you will be unable to trade through BLUK after 7.30 a.m. (NY time).

Our authorization to BLUK will state

(1)

All trades for spot value;

(2)

the individuals authorized to trade for your account with us…

(3)

line availability; and

(4)

open order details (if any), including the financial institutions with which such orders were left and contact information for such institutions.”

I set out in more detail how the BLUSA Agency Agreement operated in practice in a later section of the judgment dealing with its operation and the legal analysis. For the present, it is only necessary to note a few matters. First, that under this arrangement, Ms Wachner was keen that Mr Gabb or Mr Leslie speak to her when they first arrived in the office at eight o’clock or earlier London time to discuss the state of the market and possible trades, even though it was then three in the morning in New York, where Ms Wachner usually was.

Second, where trades were entered into, as they were on almost a daily basis, although discussed and agreed between Ms Wachner and Mr Gabb or Mr Leslie over the telephone, the actual option contracts entered into were between Ms Wachner and BLUSA. In so far as she was given prices, they were only ever for those trades that she could enter into with BLUSA if she accepted the price. She was never privy to the prices agreed between BLUSA and BLUK or between BLUK and the relevant market counterparty. I consider the significance of this later.

Trading under the BLUSA Agency Agreement began in July 2007, with the first option traded on 22 August 2007. From then until the end of the year, she traded some twelve options with BLUSA through the Agency Agreement, as well as also trading about six options direct with BLUSA during New York trading hours.

On 1 November 2007, MiFID and the new FSA Code of Business Sourcebook (“COBS”) made as a consequence of it came into force. I consider the various provisions and their significance in more detail below, but for the present it is only necessary to note that because Ms Wachner was an existing intermediate customer of BLUK, albeit a dormant one, BLUK was able to use the “grandfathering” procedure under COBS Transitional Provisions to convert her into an elective professional client with effect from 1 November 2007, without any further analysis or review. Nonetheless, Mr Pereira did note on one of the forms completed at the time: “Suitability: Information Gathering” “If account becomes active update of information required via BLUSA and customer”.

By mid-November 2007, Ms Wachner was interested in reviving her facility with BLUK and Mr Leslie discussed with Tina Brunner a possible €35 million option line with a 10% margin. He was keen to have this line in place if she decided to switch her business from BLUSA to BLUK. In Ms Brunner’s email to him of 14 November 2007 copied to Mr Barratt and Mr Miller (a relatively junior employee of BLUK) she set out what BLUK would need to enable Ms Wachner to trade: approved facility and signed Facility Letter, margin funds, completed W9 tax form, updated financial accounts from her accountants and confirmation of the time horizon for her investment objectives, which Ms Brunner believed was less than 12 months for Ms Wachner’s trading positions.

The email then set out the bank’s monitoring procedures which included that “facilities may be granted to experienced investors (currently defined as intermediate customers) of the Bank in respect of speculative foreign exchange contracts and option trading (foreign exchange and stock exchange) facilities with a security margin”. As Mr Barratt said in evidence, the email was intended to be directed to both the credit aspect and the classification aspect, albeit primarily the former.

On 15 November 2007, Ms Brunner sent a further email to Mr Cumberland, copied to Mr Leslie, Mr Barratt and Mr Miller which stated:

The latest accounts we hold for her are from December 2004, and it is on this basis that we have completed her suitability (as an advisory professional client). Although under MiFID we may rely on information held until an update is provided by a client, we would look to update this on receipt of her latest financial information. With regard to her investment horizon, Martin has confirmed that this is < 12 months and Chris will update the suitability form to reflect this information.

Mr Barratt recalled that “on the FSA file there was some quite large print saying we needed to get some updated information” but said that, apart from the information in Ms Brunner’s email, nothing more was needed for Ms Wachner to trade. There was some confusion about the note on the file but it was eventually located and read: “Please note that Linda Wachner’s account is currently inactive. Should the account become active again, it will be necessary to obtain an updated W9 form” [a reference to a form required by the Revenue and Customs].

Mr Miller then prepared the application for an advance and wrote an accompanying note dated 26 November 2007. As he accepted in evidence, much of what he wrote was lifted from earlier proposals, which is apparent from the documentation, though he thought it was possible he had had informal discussions with the dealers or someone else in the department. As Mr Barratt said in evidence, the facility was thus “put in place around about December 2007, was then not taken up by Ms Wachner, and was re-visited again, from a credit perspective, in I think June or July 2008.”

On 7 December 2007, a teatime meeting took place between Ms Wachner and Mr Leslie and Mr Gabb at Claridge’s Hotel in London. Ms Wachner places much reliance on this meeting. Her pleaded case is that the meeting was to discuss how she might improve her trading results which had been poor and that it was at this meeting that Mr Leslie first suggested that she trade in RKIs. One of the matters of which Ms Wachner and those advising her seem to have been acutely aware is that, by virtue of clause 6.16 of the Terms of Business, there is no question of BLUK being under any duty to advise her on the suitability of any particular investment unless BLUK “enters into a specific agreement to do so”.

Her pleaded case in paragraph 56 of the Reply to the Amended Defence to Counterclaim is that BLUK did enter such a specific agreement, the so-called “Advisory Agreement” which is pleaded as having been made with Mr Gabb on 21 December 2007 and confirmed by him on 29 August 2008. I will deal a little later with this pleaded case but note that, although there is no pleaded case that the Advisory Agreement was made at the Claridge’s meeting, it is clear from her evidence and submissions at trial that Ms Wachner’s case is that the Advisory Agreement was in part made at the Claridge’s meeting as well as in the subsequent telephone conversation on 21 December 2007.

In Ms Prevezer’s closing submissions, what is alleged is that Ms Wachner had indicated that she needed to make US$20,000 a day to make up her trading losses, which had reached some US$1.7 million and that, whilst she does not suggest that Mr Leslie and Mr Gabb guaranteed to make her that much a day, she says that they agreed to find a strategy for her and to implement it.

To the extent that this is being relied upon to establish that a specific agreement to advise Ms Wachner as to strategy and as to the suitability of investments was made at the meeting on 7 December 2007, this case seems to me hopeless. In considering the meeting and its possible significance, the starting point is its context. That context is that it was around this time in late 2007 that Ms Wachner was expressing to Mr Leslie and Mr Gabb her dissatisfaction with BLUSA. During a conversation on 5 December 2007, she talked to Mr Gabb about trading with BLUK throughout the London trading day, not just until New York opened. Mr Gabb pointed out that since she was BLUSA’s customer, this would require the consent of New York, but that the other option was for her to transfer all her business to BLUK, something which she was certainly considering doing.

Those were the “options” and “ideas” to which Mr Gabb was referring, not options in the sense of options to be traded. In other words, so far as Mr Gabb and Mr Leslie were concerned, going into the Claridge’s meeting (which was clearly an informal one in any event) the “strategy” was how she could spend more time trading with BLUK, as Mr Gabb described it in cross-examination a “time management strategy” rather than a “trading strategy”. This is also clear from a telephone conversation Mr Gabb and Ms Wachner had on the morning of 7 December 2007, before the meeting.

It is also clear that RKIs were not discussed at the meeting. From the telephone records it is quite clear that when Mr Gabb first raised them as a possible investment for Ms Wachner in a telephone conversation on 4 March 2008 she had never heard of them before, so it is difficult to see how they could have been discussed at a meeting only three months previously.

Mr Leslie had little if any recollection of the Claridge’s meeting. Whilst he accepted in cross-examination that he and Mr Gabb may have said at the meeting that they would be happy to work with her in reducing her losses and that they would work on a trading strategy to do that, he was doubtful that there was any specific discussion of such a strategy at the meeting, let alone of particular types of option or products available. He thought that any discussion would have been of the market generally.

Mr Gabb equally had little recollection of the meeting, but doubted that there had been any discussion about a specific trading strategy given the context in which the meeting was taking place, namely the time management strategy, although there may have been some general market discussion.

It seems to me impossible to spell out of all this anything which even approaches a “specific agreement” to advise made at the Claridge’s meeting and, to the extent that in her evidence Ms Wachner was suggesting there had been such an agreement, I reject that evidence and prefer the evidence of Mr Leslie and Mr Gabb.

Turning to the telephone discussion between Ms Wachner and Mr Gabb on 21 December 2007, which is actually the pleaded basis of the specific Advisory Agreement, this was very short and went as follows:

“LW ...we’ll get a chance to talk and work in the New Year...I need to talk to you and to Martin about how we’re going to handle this thing.

DG Sure.

LW But we’ll get it handled because I really just want to change around my hours and work some more with you and..

DG Yeah.

LW And you know to start this 20 a day thing, and that’s it, and do nothing with New York but we’ll leave some money there and, you know. But I’ve got to get that money, I’ve got to get this back and..

DG Yeah.

LW I think that 20 a day would be helpful.

DG I mean in the New Year, like you say we, we can work out a, a, a plan of action, and see how we’re going to get around it and I think everything’s in place here if you wanted to put some money into the bank here. Aside from a little bit of paper that needs to be signed, the facility is in, erm, it’s there, it’s ready to go. It just… it needs a few signatures from you, erm, and obviously some money.

LW Okay, okay. Alright. We’ll take care of it in the New Year, take care.”

Whilst Ms Wachner clearly did refer to her losses and to her need and desire to recover $20,000 a day, it seems to me that Mr Gabb was still essentially focused on the time management strategy as he described it and how Ms Wachner might trade with BLUK direct again. It is wholly impossible to construe what he was saying as amounting to a specific agreement to advise Ms Wachner on her trading strategy, let alone such an agreement on the part of BLUK whilst her actual trading was with BLUSA. At its very highest, he was making encouraging, but non-committal noises about what might be done if she left BLUSA and came to BLUK. There is no question of some specific agreement.

Furthermore, after New Year 2008, the nature of Ms Wachner’s trading with BLUSA, whether through BLUK under the Agency Agreement or direct during New York hours, did not immediately change dramatically, as it might be expected to have done if some new specific Advisory Agreement were now in place. She did not in fact take up the proposed facility with BLUK or transfer her trading from BLUSA to BLUK. In fact, in January and February 2008, her trading in options was very limited, one Euro put and two Euro calls sold to BLUSA direct in New York trading hours and one €10 million call sold to BLUSA under the BLUSA Agency Agreement on 19 February 2008 for 30 days with a strike price of 1.4825. It was to fund the cost of buying back the latter vanilla option that the first RKI traded by Ms Wachner was entered, as set out in more detail below.

What is clear from perusal of the transcripts of telephone conversations between Ms Wachner and Mr Gabb and Mr Leslie is that, both before and after the New Year 2008, Mr Leslie and Mr Gabb were putting forward suggestions as to options which Ms Wachner might sell or buy or positions she might adopt. To that extent, they were both “advising” her on a regular, pretty much daily basis. However, for reasons which I will elaborate in detail later in this judgment, much of this is correctly categorised as “trading floor opinion” and, in any event, it simply does not follow that BLUK owed some wider duty of care to advise Ms Wachner about the make-up of her portfolio. It is also worth noting again the narrowness of the pleaded advice case, limited as it is to the same matters as are alleged to give rise to the claim for negligent misrepresentation.

By 4 March 2008, the Dollar/Euro exchange rate had risen to 1.5190, so that the €10 million call 30 day option sold by Ms Wachner on 19 February 2008 with a strike rate of 1.4825 was now, half way through the period to its maturity, some three and a half points in the money. This was a matter which clearly concerned Ms Wachner, as is apparent from her telephone discussion with Mr Gabb at about 8.30 London time on 4 March 2008. She refers to the fact that if the rate goes to 1.55, this option will be a “complete disaster”. She asks Mr Gabb about selling a corresponding put that day, but the amount involved would only be some $12,000. She asks what she could sell to get a couple of hundred thousand dollars and he makes the valid point that to sell something which is going to make that sort of premium, it’s going to be quite risky.

It is in this context that Mr Gabb raises for the first time the possibility of trading RKIs. The conversation went as follows:

DG There’s also a few things, we may be able to do some, a little bit more sort of eh, on the options make it a bit more emm...make it a little more structured. As in put in, do you know what an RKI is?

LW No, what’s that?

DG Well basically, it’s umm, it’s an option, it’s a. Rather than a vanilla, if you sold a one fifty, you know your one fifty three, you could put em..obviously if you hadn’t done that one, that’s a plain vanilla. If the market goes above one fifty three

LW Right

DG Umm...the market’s gonna take Euros from you.

LW Right

DG Now you coulda put an RKI on that, which effectively makes it two options. So the first part is, it has to touch a certain level for the option to come live

LW I see

DG So it’s two options in one, if the option never kicks in, then the second part of the option doesn’t. It’s quite a good way of sorta getting better levels.

......

(Brief pause)

LW I really need to learn a lot here, ya know

DG Well RKIs are quite often quite good because if it doesn’t kick in, if the option doesn’t hit, it’s not always correct, cos sometimes it can kick in and it hurts you, but they’re quite a good way of sorta, emm, getting some extra..

.......

DG So [they] quite often give you a little bit more juice. You know, and if it never touches one forty-nine, then you’re happy, you know, nothing happens. So it’s two options in one. If it touches one forty-nine your risk is then you’ve sold a one fifty-one put. But for you..

LW Right, and you get delivered at one fifty-one.

DG Yeah but for you it gives you an opportunity to be a little bit more aggressive.

LW Right

DG But only if we hit a certain level

......

DG ...but the RKIs may be, for you, a way forward to get a bit more aggressive in the market, you know.

LW Right

DG Than the ordinary vanillas.

LW Ok, well that’s something to learn. I should have. I should be sitting there in London and learning things.

DG Well, we’re always here. You’re more than welcome.

......

LW ....I think if it goes lower, we have to do that option, that put.

DG Yeah if we see it down at sixty level, then maybe, umm, maybe look at it again. The RKI looks to me to be the most sensible, it gives you that extra, extra umm premium, and actually not quite so much risk.”

Later the same day, 4 March 2008, after Ms Wachner had had a conversation with Mr Leslie about things she might do to hedge her liability under the 1.4825 call, Mr Gabb returns to the theme of RKIs:

“DG And also that one we spoke about this morning, you know, that 149 RKI 151

LW right

DG that again I think rather than doing plain vanilla options which is what you have been doing.

LW Yeah I should do these other

DG because it just gives you an extra bit of leeway, an extra bit of you know, because you tend to be quite aggressive in the options and it just gives you a bit more room. You know, these plain options sometimes I don’t think gives you the best return, you know.

LW Ok. Yeah I agree with you because it’s on all or nothing

DG yeah, by doing an RKI it’s like having two bets. The first bet is that it doesn’t touch a level, the second bet, well if it does, does it go there anyway. You know, you’ve got two chances

LW right

DG It just makes more sense to me.”

The following day, 5 March 2008, Ms Wachner remained concerned about her potential exposure under the €10 million 1.4825 vanilla option in circumstances where the exchange rate had risen to 1.5280. She discussed with Mr Gabb the possibility of buying the option back, but as he pointed out, it would be horrendous to do so. However, as Mr Leslie then pointed out on 6 March 2008, whilst the cost of buying back the option was $600,000, this could be financed by the sale of RKIs:

LW But look, listen, please. If I buy back the 1.48 and a quarter, it’ll cost me 600k Dollars, Euros, right?

DG No but it won’t Linda because what you’ll do is sell off something else to cover it.

ML Yeah

LW Tell me what I am going to sell to get back 600k Dollars

ML Right, so...you currently have the risk, the market’s up at 1.53, you have the risk but you and-presumably it’s going to happen that you’re going to deliver Euros at 1.48 and a quarter.

LW Right

ML So that’s obviously as bad shit as it could be. So we are going to buy that back, sell an option for the 19^th May which has a strike at 1.50, so it’s already better-you know even if it hits it’s still 1 and ¾ points better....but this does not even come to life until the market trades 1.55.

LW Ok and what do I get for that?

ML ..Hold on, it’s not just that, right, you’re also gonna sell a Euro put at 1.51 for the.....28^th April, which goes against the Euro call that you’ve got at 1.53, so..that’s at 1.51 which also, that does not knock in unless 1.49 trades. So the hope being obviously that if it can stay in the range...if it does stay in the range then you’re ok. Right?

LW Right

ML now for....selling those two options you actually are net flat, right, and then you get to the position of, effectively, having your one sided call, the 1.48 and a quarter move to 1.50 although with a knock in which might not even exist if 1.55 does not trade, right...

LW So how much am I out when I do that?

ML well, I mean

DG If you do all of it, you will be net flat.”

Following that conversation on 6 March 2008, Ms Wachner traded her first RKIs with BLUSA (via BLUK). These consisted of a pair of options as discussed with Mr Leslie: a €10 million put with a strike price of 1.5075 and a knock-in price of 1.47 and a €10 million call with a strike price of 1.50 and a knock-in price of 1.57. The combined premium for these two options was €342,000, which was also the price to buy back the 1.4825 vanilla option which was causing Ms Wachner such concern. As Mr Leslie said in evidence, at the time the market was quiet and the premiums for vanilla options were low. Trading in RKIs provided Ms Wachner with higher premium which she wanted to buy back the 1.4825 vanilla option. As Mr Leslie explained the position:

The very first 6^th March RKI was done because Linda had – this is obviously from memory – effectively said, “I don’t believe level X is going to hit”, whatever it was, 150 for argument’s sake, was going to hit. Had she just sold a vanilla option at 150, she would have received next to no premium. By doing an RKI, where the actual strike of the option was 145, but the kick in level – the knock in level was 150, she received a lot more.

In her evidence Ms Wachner sought to suggest that she had not really understood RKIs and that she was effectively being led by the nose like a lamb by Mr Leslie and Mr Gabb. I agree with Mr Cox QC that this was a position adopted to suit her case and does not accurately reflect her experience at the time. She had been trading in vanilla options for some years. Furthermore, the concept of the barrier in RKIs is not a difficult one and she soon picked up the concept and how RKIs worked. She evidently found RKIs attractive as they generated far more premium than vanilla options and enabled a more aggressive position to be taken.

Indeed, Ms Wachner was sufficiently enamoured of this form of option that, the very next day, 7 March 2008, she traded an RKI with HSBC under her facility with that bank, a €8 million put with a strike price of 1.52 and a knock-in price of 1.48, maturing on 8 May 2008, for which the premium was €80,000. Although at various points in her evidence Ms Wachner sought to suggest that Mr Gabb and Mr Leslie had advised her about her RKI trading with HSBC as well (and there are a handful of emails where they make general suggestions as to what she might do with open HSBC positions, as for example in a telephone conversation with Mr Leslie on 28 May 2008), there is no evidence that this RKI was negotiated by her with their assistance. She seems to have been sufficiently confident in her own judgment to trade RKIs with HSBC and it is clear that this put was sold to make money, as she accepted in cross-examination. It is striking that something in the region of a third of all the RKIs which Ms Wachner traded between March and October 2008 were with HSBC and thus nothing to do with BLUSA or BLUK at all. I agree with Mr Cox QC that this rather gives the lie to the suggestion that she was somehow lured by Mr Leslie and Mr Gabb into carrying out these transactions.

So far as the first two RKIs she traded on 6 March 2008 are concerned, by a week later on 13 March 2008, the exchange rate had risen to 1.5577 and Ms Wachner was concerned that it was about to go to 1.57, the knock-in level for the call. She discussed with Mr Gabb and Mr Leslie what to do about the RKIs and Mr Leslie’s advice was to buy back both the call and the put and sell something with a higher RKI for a longer period:

ML I am looking at these options and obviously the problem of course is defensively on the high side it’s never going to be easy, so I am just looking at different things at the moment, I am not, I am not going to jump in and give you any ideas until it makes sense to

LW What does that mean?

ML ...it means that the problem is of course if we are defensive now, yeah, because it’s right on the top, it is difficult to do. So it’s a question of, of not panicking and doing too much, you know we could buy back, emm the sensible thing is to buy back the whole

LW How much is it?

ML If you had to buy back it’s about 400,000 Euros to buy back the actual option. The sensible thing is to buy back the whole strangle, because obviously the 1.5075, 1.47

LW and then sell it higher

ML exactly, sell something higher and slightly longer, but it is just a question of you know not being in a place of selling the Euro put too high.......so it’s a question of getting it right rather than rushing in, so I haven’t forgot you in any way, I am trying to look as we speak and will call you as soon as I find something that looks like a sensible deal, ok.

Just before a further telephone conversation about twenty five minutes later, when Mr Leslie and Mr Gabb put forward suggestions about buying back the RKIs and selling other RKIs to fund that buy back, Mr Gabb says in an aside to Mr Leslie: “She’s basically going to do whatever we tell her to do, you know what I mean?” Inevitably, Ms Prevezer sought to make much forensic play of this as demonstrating the extent to which Mr Gabb and Mr Leslie considered they could manipulate Ms Wachner’s RKI trading. Equally inevitably, Mr Gabb sought to downplay the comment in his evidence, suggesting that it related only to spot trading, on which he had just had a very good run.

I suspect the truth lies somewhere between the two extremes: that this was indeed a reference to the fact that Mr Gabb thought that on this occasion Ms Wachner would follow their advice on RKI trading, but that it does not follow that he thought that he could manipulate her trading on every occasion or that he and Mr Leslie did so. Nor is this evidence that she was somehow lured into these transactions. In any event, as a matter of legal analysis, it seems to me that this off the cuff comment cannot expose BLUK to liability where there would otherwise be none.

In the ensuing conversation, Mr Leslie discusses with Ms Wachner the deal which he is recommending following their earlier conversation when he said he was going to look for suitable deals. On the call side this was to buy back the €10 million call with a strike price of 1.50 and a knock-in price of 1.57 and sell a call still with a strike price of 1.50 but with a knock-in price of 1.62.

Mr Leslie recommended this but warned her of the risk of this if the market went to 1.62:

ML ...the cost to close the 150 157 right is currently like 4.2%, if my personal belief is that the market doesn’t go to 162 right that’s why I personally would do this deal. However if the market does go to 162 then rather than it costing you 4.3% then it will cost you a lot more because obviously you will have a 150 when the market is 162 rather than having a 150 when the market is 157...

....

LW I’m with you. I’m just trying to figure out if this is a smart thing to do being 12 points away which is a million two one Euros.

....

ML ..you can consider walking away... don’t get me wrong, it’s not my advice but I’m trying, I’ve got to try and show you every which side of the coin, yeah, if the market goes to 162 you will have a 150, right, hold on, right, which will be 8% in the money, ok, your current deal if you just said you’ve had enough of this, it would cost you about 4.3% to close...

LW I can always do that in another 2 points and have it still be the 4.3% is that not correct?... If I wanted to get out and we went to a 160.

ML If the market went to 160 yeah and you had the new deal then it would probably ..cost 6% approximately 6 and a half, obviously as the spot goes higher..

LW But if the market went back to 154

ML If the market went back to 154 then..we are selling a deal at about 3.2%, right, erm, if the market went down to 154 you would probably be able to buy it back for 2% or maybe even lower, no question.

LW Right so that’s what we have to pray and every time it goes down instead of saying ah isn’t this wonderful, cos it’s going down, we gotta

ML have a look. The thing is don’t forget if it goes down a good few big figures then obviously we are taking the top out of the picture and we could either (a) say look you know what, I am happy to walk, I pay 2% I don’t care, I am happy, I am quite happy to walk away and pay 2% because I remember when I was losing 4.

It is quite clear from this exchange that, from this very early stage of her RKI trading, Mr Leslie had explained the risks involved in buying back one option and selling another with a higher knock-in price, that if the exchange rate went up to the knock-in rate and stayed there, she would have to pay out far more on the new option. That Ms Wachner understood this is clear from the fact that she referred in her discussions with Mr Leslie and Mr Gabb to the cost to her if she had to pay out on a RKI call with a strike price of 1.50 and a knock-in price of 1.62 as being €1.2 million. It is also clear that Mr Leslie told her that she could always “walk away” and take her loss by paying out on the existing option if the exchange rate did hit the knock-in rate of 1.57.

Although her reference to the €1.2 million shows she was concerned about the extra risk involved in selling a new option with a knock-in rate of 1.62, she chose to take that course of selling what she appreciated was a riskier option, rather than taking her loss either by letting the existing option run to expiry and paying out then or by closing it out now at the 4.3% Mr Leslie mentioned without financing the buy back by selling the new option.

19 March 2008 was one of the days on which Ms Wachner traded RKIs having told Mr Gabb that she needed to make about $1 million which was the money she owed from December. There is no doubt that it was the desire to make up the money she had previously lost which motivated much of Ms Wachner’s trading, but that cannot be blamed on BLUK. This is a fortiori the position since the trading on which she had made that loss was in vanilla options, in relation to which no complaint is made in these proceedings. This was in fact one of the days when Mr Gabb warned her not to get too carried away. Ms Wachner sold a short term straddle, that is a call and a put with the same strike price (1.57) and different knock-in prices, 1.61 for the call and 1.53 for the put, at a time when the exchange rate was 1.5692, with maturity on 27 March. Despite the warning, Ms Wachner was evidently sufficiently comfortable with selling short term options close to the strike rate that, on the same day, she also sold a straddle to HSBC with the same strike rate and knock-in rates and maturity on 28 March.

By 3 April 2008, Ms Wachner was concerned about having to pay out on a €10 million call vanilla option with a strike rate of 1.53 which she had sold to BLUSA on 27 February 2008, with a maturity date of 28 April 2008. At this point the exchange rate was slightly above 1.55, so it looked as if this option was going to be at least 2 points in the money at maturity. Ms Wachner asked Mr Leslie to investigate the possibility of buying back the option. Mr Leslie informed her that this would cost about €220,000:

LW It’s still 2 points away. What does it cost to buy it out?

ML It would cost, to buy it back, it would cost about 220,000 Euros.

LW Wow, so they are not giving up, huh?

ML On, no. So it’s not too bad, I mean, Delta wise. Is not...It’s quite high, it’s got a relatively high Delta so you are pretty much just paying, you are not paying too much over the odds, what’s that 1.5

LW right right…It’s running at the rate, now it’s not running at the rate plus.

ML I mean it’s rate plus but it’s not rate plus massive. If the market is 155.55 effectively you are paying 156.30.

LW right right

In my judgment this exchange is striking in the context of Ms Wachner’s oft-repeated assertion in cross-examination that she was never warned by BLUK of the “embedded cost” of pushing out options, part of which was the increased bid-ask spread when she wanted to buy back an option which was close to the knock-in rate, in other words as explained by Dr Fitzgerald, a somewhat inflated price reflecting the reluctance to trade of the seller (the counterparty with whom BLUK would trade) from whom the option was being bought back. Although this conversation related to a vanilla option not an RKI, in it Mr Leslie was indicating the sensitivity of the option price to movements in exchange rate, the delta of the option, in terms which indicated that there would be an additional cost to reflect the fact that the exchange rate was currently above the strike rate. Ms Wachner seems to have understood what was being explained to her and did not query it.

Ms Wachner did buy back that option and financed that purchase by selling an RKI Euro call with the same strike rate of 1.53 but a knock-in rate of 1.6025 and a maturity date of 23 June 2008. Seven days later on 10 April 2008, the exchange rate had moved up to about 1.5850 and Ms Wachner was anxious about the RKI she had sold on 3 April knocking-in. Mr Leslie put to her various possibilities for pushing out both as regards dates and knock-in rates and also suggested the possibility of purchasing a stop loss which would place a limit at a certain level on her total loss from the option. Ms Wachner was evidently not interested in this and instead bought back the 3 April option for €410,000, funding that purchase by selling a strangle (ie a call and put with a different strike rate) consisting of another €10 million call with a strike rate of 1.53 and a knock-in rate of 1.622 for which the premium was €342,000 and a €10 million put with a strike rate of 1.545 and a knock-in rate of 1.47 for which the premium was €68,000. Both had a maturity date, as before, of 23 June 2008.

The rationale for this was, as Mr Leslie said to her, that if the exchange rate traded in the period to 23 June 2008 between 1.62 and 1.47, she would have “nothing”, in other words neither option would be effective. He accepted in cross-examination that he had not warned her in this discussion about embedded cost. In the event, in the period to 23 June 2008, spot did trade in that range so neither option knocked in and they both expired worthless.

On 10 April 2008 after New York had opened, Mr Leslie also had a telephone conversation with Ms Susan Pearce of BLUSA in which, as Mr Leslie accepted in cross-examination, Ms Pearce was asking whether Ms Wachner knew what she was doing in her option trading, because Ms Pearce was concerned. He referred to Ms Wachner being “in the shit at the moment” but as he said in answer to a question I asked him, this was a reference to the fact that Ms Wachner had the problem of the December losses at the outset which she had not wanted to take and now she was locked in, together with the problem of the 1.53 vanilla option which was the origin of these particular RKIs.

On 9 May 2008, Ms Pearce had a further conversation with Mr Gabb in which she expressed her concerns about Ms Wachner’s trading. He said that her positions, being long and short at the same time, did not make sense to him and referred to Ms Wachner not wanting to take any losses. He said that it was nothing to do with them in London (evidently a reference to the fact that her actual trading was with BLUSA) and said it was not up to him to tell her what to do.

On 9 June 2008, Mr Leslie had a long telephone conversation with Mr Giordano and Mr Bernzweig of BLUSA about the fact that because they took account of the delta on RKIs although her trading limit with BLUSA was US$75 million, they reassessed it as US$55 million and she was currently over the line by some $5 million. There was some discussion about whether she should be required to close out certain options to bring her within that limit, but as Mr Leslie pointed out in evidence, the options she had open at that stage were all substantially out of the money.

There was also discussion in the same telephone conversation about her strategy of “pushing out”, the BLUSA traders being effectively of the view that by doing so she was simply delaying the loss she was going to suffer. Mr Leslie made the point that provided she had enough margin she would never get hit. As he accepted in cross-examination, his attitude was she could in effect “beat the market”, if the knock-in price did not trade, the options would expire worthless. He also made the point that although he did not know what her margin was, BLUSA had never come back and said she had insufficient margin and that in any event, he regarded her as BLUSA’s customer.

Ms Wachner continued trading RKIs throughout June 2008, although in fact she traded more with HSBC than with BLUSA through BLUK. By this stage she was interested once again in reviving the facility with BLUK. On 17 June 2008 she was in London and met Mr Leslie and Mr Gabb at the Connaught Hotel and discussed her opening an account at BLUK. Shortly after this, there was a telephone discussion between Ms Wachner, Mr Leslie and Mr Barratt in which, according to Ms Wachner, Mr Leslie suggested using her old account with BLUK from 2005.

Mr Miller sent an email to Mr Cumberland of 20 June 2008 which stated:

The customer has subsequently asked whether the FX margin can be 7% rather than the usual 10%.

In view of the customer’s wealth, extensive knowledge of FX trading and her good relationship with BLUSA, do you think that the CRMC would consider such a request favourably?

Mr Miller was taxed by Ms Prevezer in cross-examination about how he could have said that Ms Wachner had extensive knowledge of FX trading. His evidence was: “I think it would have been from a few things really. One would have been from the previous proposal. And – I mean, I know that having customers trading FX facilities, they are usually experienced. So there that one side. From probably general chats with the dealers, say Martin, I would pick up that she would – was – had lots of experience trading.” As part of the application for the facility, Mr Miller prepared a memorandum on Ms Wachner dated 23 June 2008, much of which was derived from earlier documentation, though he was confident in evidence that he would have had some informal discussions with the dealers. The proposal to make the facility available was approved and on 27 June 2008 a facility letter was sent out to her for a €75 million line, although it was not signed by her until 5 September 2008.

On 8 July 2008 Ms Wachner and Mr Leslie had a conversation about her option positions. At that time the spot rate was at just over 1.57. Mr Leslie pointed out that she had a pair of options (in fact a straddle) due to mature the following day with a knock-in range of 1.60 to 1.50 (in fact 1.6025 to 1.5075), a pair of options (in fact a strangle) due to mature on 14 July with a knock-in range of 1.62 to 1.47 and another pair of options (in fact a straddle) due to mature on 22 July 2008 with a knock-in range of 1.62 to 1.52.

As Ms Wachner herself agreed in that conversation, the positions couldn’t be “more perfect”. In that context, Mr Leslie suggested that now would be a perfect time to close out the options, which Ms Wachner was not interested in doing, asking why she would do that as she’d lose money, to which Mr Leslie replied that she would pay less to close out than she had received by way of premium. If she felt uncomfortable, this was the time to buy back, to which she said that she was not uncomfortable. She asked whether she had anything for 7 August and then asked what trade she could do that day which would make her about 200,000. Mr Leslie said rather than rushing into an answer, he would call her back.

There was a subsequent discussion about doing a straddle with a strike rate of 1.57 with Ms Wachner asking about what were on any view some quite aggressive knock-in rates, where Mr Leslie indicated that there was no way one of the options would not knock in. It is evident that Mr Leslie was becoming slightly nervous about her strategy, as an exchange then took place as follows:

Ms Wachner accepted in cross-examination that in this discussion, Mr Leslie was expressing his concern that the market was eventually going to break higher or lower and that if that happened, she would have to push out her options. She also accepted that he was saying she had to be cautious and not trade too much. Her reference to France was to her trading with HSBC. It seems to me that this was a fairly clear warning by Mr Leslie to Ms Wachner of the risk she faced if the market did break higher or lower.

Mr Leslie then negotiated a deal whereby she would sell a €10 million call and put straddle with a strike price of 1.57 and knock-in rates of 1.62 and 1.51 for maturity on 7 August 2008, with a premium on each of €55,000. After Mr Leslie had negotiated that deal, they had a further conversation where he continued to warn her, as he had done earlier that morning, about what would happen if the market moved much higher or lower:

ML It's like anything, these things, I mean I am Mr Selling Options, I love selling options, as long as the one day you get caught and you are not wearing trousers.

LW Your pants are down totally, yeah.

ML So it's always a question of ... the one problem people have when they sell options and I've seen it, obviously I've been trading for a hell of a long time, [unclear] getting to a place where they don't think they can lose, right and --

LW And that's now 1.62 ... and that's when something happens..

ML The problem you're gonna have, you know, is the market is if the market hits 1.70, yeah, 1.52 we can [unclear].

LW Right, yeah, 1.70 is a bad [unclear]…. Right, we’re fucked.

ML Yeah basically, so that's why it's always worth doing short dates, yeah.

LW Yeah, close them…..

ML [controllable] amounts…. because one day it's going to go to 1.70.

LW Do you think so?

ML No, no, it could go to 1.40.

LW Yeah, yeah, you are talking about the range.

ML Something is going to happen, it's going to bust out [the range], right.

LW Right I gotcha.

ML There's nothing, I tell you, right, on the cable [a currency trade expression for sterling], right, which has always been my main currency, it stayed in a range of, like, erm, hold on, it stayed in a range of kind of like, 1.45 to 1.65 for 12 years.

LW Until it went to 2

ML Yeah, but what I'm saying is that it stayed in that range for ten years so for ten years you would be taking in, taking in, taking in, taking in yeah? Then I had loads of customers that did it, but they are now, these are guys who are generally dollar buyers, so they were selling dollars puts, right, all the way all the way, then suddenly in 2003 they sold all these dollar puts or, you know, the market was down at 1.47, 1.40 odd they sold these dollar puts at 1.50 and now the market is 2…

As Mr Cox put to Ms Wachner in cross-examination, this was Mr Leslie warning her that, although she had done well, the market could turn against her dramatically so that she should take care. Notwithstanding the warning Ms Wachner proceeded with the straddle he had negotiated which gave her €110,000 which she described as “wonderful”. It is also striking that two days later on 10 July 2008, she traded another €5 million call and put straddle with HSBC at the same strike price of 1.57 but with knock-in rates of 1.60 and 1.53, also for maturity on 7 August 2008, with a premium of €45,000 and €35,000, riskier options than the BLUSA straddle, given the narrower spread. As to why Ms Wachner wanted to go on selling RKIs despite warnings about the risks of doing so, as Mr Leslie had said, up until then her trading had been successful and as she said at the time and repeated in cross-examination: “I am trying to make up what my losses had been, which had been ridiculous and this is the only way I could do it.”

In an email of 28 July 2008, Mr Barratt notified Mr Miller of FSA reviews up to the end of August, some of which were past due and asked him to deal with these as a matter of urgency. Ms Wachner was listed as due for review by 31 August 2008, presumably because a facility letter had gone out to her on 27 June 2008, albeit that she had not signed it. The review was not completed by 31 August 2008 and was still outstanding when Mr Barratt sent a chasing email on 22 September 2008 saying that it was vital that these outstanding reviews were completed without any further delay. Mr Miller did not in fact carry out the review until 28 November 2008 after her trading with BLUK had effectively ceased.

By 8 August 2008, the spot rate had dropped to 1.5074 and a number of her RKI puts knocked in. Ms Wachner continued the practice of buying back those options (and the corresponding puts). Obviously the cost of doing so, in the case of the puts, was substantial and she financed this by selling further RKI pairs with maturity dates in October and November 2008. As Mr Gabb accepted in evidence the effect of the wide spreads she was taking in August and then subsequently in September 2008 meant that she was increasing the risk she faced.

On 8 August 2008, Mr Gabb had a lengthy discussion with Mr Bernzweig of BLUSA about her trading and her open positions, in which Mr Bernzweig was highly critical of Ms Wachner, saying that from the outset he had been telling Mr Gabb she was insane. In cross-examination about this, Mr Leslie said that when the BLUSA traders were being very negative to him and Mr Gabb about her, they ignored what BLUSA were saying. He also made the perfectly valid point that she was BLUSA’s customer and if they had an issue and wanted to close her out, it was up to them.

In that context and the implicit suggestion that BLUK should somehow have stopped her trading at this stage, it is striking that Ms Wachner had also been knocked-in on a number of RKI puts with HSBC and adopted the same strategy of buying them back and financing that purchase by the sale of other riskier RKIs with maturity dates in October and November 2008. Of course no claim has been pursued against HSBC in these or any other proceedings.

On the next trading day after the conversation between Mr Gabb and Mr Bernzweig, 11 August 2008, the “authorisation sheet” sent by BLUSA to BLUK overnight contained an additional limitation: “Please note that this authority is for transactions no greater than November 10 2008”. This restriction on Ms Wachner’s trading remained in place in all authorisation sheets until 10 September 2008 after which it was restricted to transactions no greater than two months. Obviously this limited Ms Wachner’s ability to push out her options and seems to have been the catalyst for her eventually signing up to the $75 million facility with BLUK on 5 September 2008.

That she wanted to be able to push out the options further than New York would permit is clear from the conversation she had with Mr Leslie first thing in the morning of 5 September 2008 after she told him she was going to fax over the signed papers [the facility letter and other documents including the W9 form]:

On 8 September 2008 she provided BLUK with “margin” or collateral under the facility of US$2 million and €1 million and trading commenced. Also on 8 September 2008, Mr Barratt raised with Mr Miller whether the paperwork on Ms Wachner was in order, in an email which stated:

Please note that having reviewed the FSA file for the above, I note that the updated information is not there – see list below – hopefully you have this paperwork to file.

1.

Updated investment agreement – as Linda is a Professional Customer, you will have to complete the Elective-Professional route;

2.

Updated suitability information – you should get this information from Martin & Susan Pearce;

3.

Completion of Form W9 – I believe she is a US citizen and this is the relevant form to complete.

I have assumed that you have all the necessary facility & security documentation in place and you have marked the appropriate limit.

If this information is NOT with you, then we should not have re-started this relationship until t was in place. THE FILE IS CLEARLY MARKED. You need to get this completed without any further delay or we will have to cease trading.

Mr Miller thought this email was rather strange because the file simply did not state what Mr Barratt was contending, the only note on the file being the one already referred to, about the need for a W9 form. Mr Miller said he spoke to Mr Barratt and told him “the only thing on the file is the W9 and that has been sorted. So I didn’t proceed – I didn’t proceed any further than that at that time.” In fact, Ms Wachner signed the W9 form on 5 September 2008 at the same time as the facility letter.

Before looking at the trading which did take place in September and October 2008, I will just complete the picture as regards classification by referring to the interchange between Mr Miller and Ms Wachner on 22 September 2008. I agree with Mr Cox that this is a telling interchange, in which she confirmed to Mr Miller that she was an experienced trader of options. In an attachment to an email that morning, Mr Miller sent Ms Wachner a “Confidential Information Form” asking her to let him know if any of the information was incorrect. The context of this was that she had carried out some share transactions through BLUK the previous week.

This form included a client profile completed by Mr Miller stated that Ms Wachner had been CEO of Warnaco for 15 years, indicated a “good” level of experience (the highest grade) and a high frequency of trading in derivatives and in FX options and other FX products. The column indicating an understanding of risk was marked “Y” for “Yes”. Finally, a box marked “Non-Advisory Sales Services” was ticked.

It is quite apparent from the email chain and telephone conversations that Ms Wachner checked this document as she responded in due course:

Please re send as I am no longer the Ceo…However, I was the CEO for 16 years…I have over 7 years experience in trading foreign exchange, and over 20 years experience trading equities…this should be reflected on your forms.

Mr Miller noted this and corrected the form, sending the amended copy back to Ms Wachner.

In her witness statement, Ms Wachner had said that when she got the original version of the form she noted that it was inaccurate and wrong, not just because it stated she was still the CEO of Warnaco but because it stated she had good knowledge and experience in various forms of investment including foreign exchange. She claimed that she had told Mr Leslie this and he had said the information came from Google. She also claimed that although she had asked for the inaccuracies to be changed, Mr Miller had not changed the incorrect information about her experience. In cross-examination, she originally confirmed that these passages in her witness statement were correct. Although she tried to maintain that she had told Mr Miller that the information about her experience of the various investments was wrong, when the correct sequence of communications is pieced together, it is quite apparent she did not.

I did not consider this part of Ms Wachner’s evidence as very impressive and I suspect she was being less than frank because she knew that the truth was that, at the time, as Mr Cox submitted, she had approved the contents of the form, including that she was an experienced trader in foreign exchange options. It may not suit her case now that she gave that confirmation at the time, but it is an insight into her own self-perception at the time in September 2008.

Once Ms Wachner had provided BLUK with margin on 8 September 2008, on that date and following dates up to 6 October 2008, there was then a “transfer in” to BLUK from BLUSA and HSBC of the open RKIs. In her submissions Ms Prevezer sought to contend that what had happened was that Ms Wachner closed her BLUSA and HSBC positions in September and early October 2008 by buying them back with her own funds and “started afresh with BLUK with a new book of RKI positions”. I agree with Mr Cox that this is not what happened. In the case of each set of RKIs with BLUSA (or for that matter HSBC) Ms Wachner closed out her positions by buying back the options in question. The cost of that purchase was, in each case, funded by the sale by Ms Wachner of corresponding options to BLUK.

The point can be demonstrated by reference to the first set of options “transferred in”. These were a €10 million call (trade 376) with a strike rate of 1.35 and a knock-in rate of 1.481 and a €10 million put (trade 377) with a strike rate of 1.585 and a knock-in rate of 1.379. The premium was €383,500 and €646,500 respectively. In each case these were sold to BLUSA (under the BLUSA Agency Agreement) on 5 September 2008 when the exchange rate was 1.4247 (and dropping) and had a maturity date of 10 November 2008. On 8 September 2008 Ms Wachner “bought back” these options (trades 392 and 393) at a cost of €312,500 and €802,500 respectively, €1,115,000 in all.

Contrary to Ms Wachner’s opening submissions and what she maintained in evidence, it is quite clear that the cost of buying back those options was funded by the sale to BLUK on the same day, 8 September 2008, of a €10 million call and a €10 million put (trades 398 and 399) with the same strike rates but knock-in rates of 1.498 and 1.357 respectively and a maturity date of 12 January 2009. The premium was €390,000 and €725,000 respectively, totalling €1,115,000, the same amount as the cost of “buying back” the BLUSA options.

That the premium from the sale of these options to BLUK was used to fund the purchase of the offsetting options which closed out trades 376 and 377 with BLUSA is not only clear from the dates and amounts but also from the discussion Mr Leslie and Ms Wachner had on 8 September 2008:

What Mr Leslie told Ms Wachner about crediting her account and then paying out to New York is borne out by her bank statement on her current account with BLUK. This shows the two sums of €390,000 and €725,000 (the premiums for the options sold to BLUK) being credited to the account on 8 September for value on 10 September 2008 and a corresponding debit of the same amount €1,115,000 being paid out on 10 September 2008.

A similar pattern emerges with other open positions with BLUSA and with HSBC (to which what Ms Wachner said about “doing the same thing to Paris” clearly refers) whereby Ms Wachner bought back those options, financing that purchase with corresponding options sold to BLUK. Accordingly I agree with Mr Cox’s analysis that, although there was no assignment or novation of the BLUSA and HSBC trades to BLUK, the existing positions were effectively transferred from one bank to another. In all there were four pairs of RKI options (i.e in each case a call and a put) transferred in to BLUK from BLUSA on 8 September, 9 September, 2 October and 6 October 2008 respectively and two pairs of RKI options transferred in to BLUK from HSBC on 17 September 2008.

So far as the last two pairs of options transferred to BLUK from BLUSA on 2 and 6 October 2008 are concerned, the extent to which this was a transfer and not in truth “new” trading is even clearer. Two pairs of options had been sold to BLUSA by Ms Wachner on 26 September 2008 (trades 498 to 501). These were all trades under the BLUSA Agency Agreement and accordingly BLUSA, having purchased from Ms Wachner had sold to BLUK and BLUK in turn laid off the risk by selling on the open market (I deal with the mechanics of the Agency Agreement in the next section of the judgment). It was easy in those circumstances simply to transfer Ms Wachner’s open positions with BLUSA to equivalent open positions with BLUK on the same terms, which is precisely what was done with nil premium charged for closing the trades with BLUSA or for opening them with BLUK. Thus, no premium was charged either on trades 535, 536, 554 and 555 which closed the positions with BLUSA or on trades 542, 543, 556 and 557 which opened the positions with BLUK.

At around the time that transfers from BLUSA and HSBC were taking place in September 2008 Lehman Brothers collapsed, filing for Chapter 11 bankruptcy protection on 15 September 2008, having reported huge losses on 10 September 2008. As is well known, this led to unprecedented turbulence in financial markets. So far as Ms Wachner is concerned, she continued the defensive strategy she had adopted in her trading with both BLUSA and HSBC of seeking to avoid RKI options knocking in by rolling or pushing them out, buying back existing options and financing that through the sale of new options.

The pattern of this trading can be demonstrated by following what happened in terms of “pushing out” to the first set of options “transferred” to BLUK on 8 September 2008 (trades 398 and 399 which financed the closing out of trades 376 and 377 with BLUSA). The maturity date of those two options was 12 January 2009. Ms Wachner evidently wanted at that time to reduce the length of the option and, accordingly, on 11 September 2008 bought back those two options. In order to finance that she sold a further call and put to BLUK with an increased nominal value of €12 million, the same strike rate of 1.35 but knock-in rates of 1.4825 and 1.3445 and an earlier maturity date of 18 December 2008 (trades 423 and 424). By this date, the exchange rate had fallen further to 1.3934, so only five points away from the knock-in on the put, hence no doubt the premium for it of €1,200,000. On 16 September 2008, the day before two pairs of options she had sold to HSBC on 8 September 2008 were transferred to BLUK in the same manner as the pair transferred from BLUSA to BLUK on 8 September 2008, Ms Wachner paid a further US$999,980 to BLUK by way of margin, but the following day, 17 September 2008, US$1 million was apparently withdrawn by Ms Wachner

In the period around the collapse of Lehman Brothers, as Mr Leslie put it in his witness statement, the market was just all over the place. Just taking rates from the options transferred in and from the BLUSA rolling out done by Ms Wachner, by 15 September 2008 the exchange rate had gone back up to 1.41, by 22 September it was at 1.4571.

By 22 September 2008, Ms Wachner was concerned about a number of options she had with a knock-in of around 1.48. These including the €12 million call sold to BLUK on 11 September 2008. Accordingly, Ms Wachner closed out that pair of options, buying them back at a cost of €936,480 in the case of the call and €365,000 in the case of the put, €1,301,480 in all. She financed that purchase by selling another €12 million call and put (trades 470 and 471) with a slightly lower strike rate of 1.3450 in the case of the call and the same strike rate of 1.5850 in the case of the put. The knock-in rates were 1.5350 in the case of the call and 1.3520 in the case of the put, with the premium €762,000 and €546,000 respectively, totalling €1,308,000. The maturity date was now 16 February 2009.

Another development on 23 September 2008 was in relation to the authorisation given by BLUSA to BLUK under the BLUSA Agency Agreement. With effect from that day, the email sent by BLUSA overnight included in bold the instruction: “You are not authorised to increase the notional amount of the client’s existing option exposure”.

In the last week or so of September 2008 the market continued to be volatile. Again taking rates from trades done by Ms Wachner, on 23 September the rate rose to 1.4731 but then began to drop again, being at 1.4349 on 29 September 2008 and 1.3903 by 2 October 2008. This dramatic drop clearly worried Ms Wachner who said to Mr Gabb:

She also told him that she wanted to take the options back to December, by which she meant reduce the period of the options, but Mr Gabb pointed out that would not be possible because the market was close to the bottom of her range. What she in fact did in relation to the two trades 470 and 471 was to push out again. She bought back those options at a price of €346,400 for the call and €1,586,000 for the put. That was financed by the sale of a further pair of options (trades 538 and 539), a €12 million call with a strike rate of 1.2850 and a knock-in rate of 1.5175 and a €12 million put with a strike rate of 1.62 and a knock-in rate of 1.2925. The premium for these was €592,000 and €1,340,400 respectively. However, contrary to what Ms Wachner had wanted to achieve, the maturity date of these options was not earlier than the options they replaced, but two months further out, 16 April 2009.

By 2 October 2008 (when BLUSA had become aware that she had transferred or was about to transfer the last two pairs of options to BLUK) BLUSA effectively closed down any further trading under the Agency Agreement. BLUSA sent an email to BLUK overnight stating in large bold capital letters:

“This instruction [supersedes] all previous instructions you have received today. You are not authorised to open on our book any new option positions for the client. The client can only close existing option positions. To repeat, you are not authorised to open on our book any new option positions for the client.”

As noted above the last two pairs of options were transferred from BLUSA to BLUK on 2 and 6 October 2008, with no premium being charged. Before those options were transferred Ms Wachner provided further margin to BLUK of US$2 million. Immediately after this, senior management of BLUK, in the shape of Dr Thomas Walford, who had taken over as head of private banking from Mr Pereira, became concerned about her positions. He sent an email to other senior management and the traders on 3 October 2008 expressing his concern that she appeared to have lost $3.7 million in the last month, those losses being caused as he put it “by increased volatility meaning that the spreads have widened causing a seller losses. This has been due to the long time value of the options-max is 16^th April 2009”. He was particularly worried by the fact that without the margin transfer of US$2 million she would have been US$1.2 million overdrawn.

In response Mr Barratt pointed out that, although Ms Wachner had lost substantially on her open positions, he was satisfied that BLUK was not exposed, rather there was a surplus of US$96,000 against liabilities. As she had both call and put options, in reality only one would be exercised, so prudently he had taken the most expensive to close.

Following an internal meeting within BLUK on 6 October 2008, Ms Wachner’s positions were monitored on a daily basis and as the position deteriorated, Mr Barratt made margin calls by email for US$1.16 million on 8 October 2008, US$1.1 million on 10 October 2008, US$2.8 million on 16 October 2008 and US$1.73 million on 17 October 2008. In each case the actual margin being asked for was calculated on only the one side of a pair of options, although by this stage the document sent to her showed the margin that would be required if it were demanded on both sides. It was in this context that Mr Barratt referred in an email to the joint chief executives of BLUK to moving the goal posts half-way through the game. BLUK’s stance was that, if Ms Wachner wanted to push out her positions beyond April 2009, it would require margin calculated on both sides of a pair of options.

On 21 October 2008, Ms Wachner bought back the pair of options she had sold on 2 October 2008 and financed that purchase with the sale to BLUK of a €12 million call with a strike rate of $1.12 and a knock-in rate of 1.4350 and a €12 million put with a strike rate of 1.6450 and a knock-in rate of 1.24 (trades 609 and 610) for premium of €969,000 and €1,921,000 respectively. However, because BLUK would not allow her to push out further than 16 April 2009 without providing margin on both sides which she was evidently not prepared to do, she could not push out the options and their maturity date remained 16 April 2009. The exchange rate at that point was 1.3184, still volatile and, as would transpire, on a dramatic downwards slide.

So far as margin payments are concerned Ms Wachner made three payments, each of US$1 million on 14, 17 and 23 October 2008. However, by 23 October 2008, the position had deteriorated significantly again and on that day Tina Brunner sent Ms Wachner an email setting out the position as it then stood, which was that, even on the basis that she was about to pay the further US$1 million, and even with margin required on only one side, the margin requirement remained some $7.5 million. In response the following day, Ms Wachner said that she intended to close the positions in an orderly fashion and was in the process of selling a significant piece of real estate the proceeds from which would cover her outstanding obligations.

Finally, so far as the subsequent trading derived from the first pair of options transferred from BLUSA to BLUK on 8 September 2008 is concerned, on 27 October 2008 when the exchange rate had fallen to 1.2460 so that the put sold on 21 October 2008 was about to knock in, Ms Wachner bought back the two options, the premium being paid for the put being the substantial sum of €3,858,000. that purchase was financed by the sale of a further pair of €12 million options, a call with a strike rate of 1.05 and a knock-in rate of 1.37 and a put with a strike rate of 1.65 and a knock-in rate of 1.18. The maturity date remained 16 April 2009. This was in fact the last pair of RKIs sold by Ms Wachner. The subsequent trading derived from the other pairs of options transferred from BLUSA and HSBC to BLUK concluded with pairs of options sold on various dates between 22 and 27 October 2008. By 27 October 2008, the position had deteriorated to the point where the margin requirement (still on only one side) was some $13 million.

In a conference telephone call on 29 October 2008 between Ms Wachner and Mr Leslie and Mr Collin Cumberland (a senior executive at BLUK) she reiterated her intention of making further payments from the sale of property. However, after the US$1 million paid by Ms Wachner on 23 October 2008, despite what she had said about further funds becoming available, she made no more payments in respect of margin. On 14 November 2008 BLUK closed out one of her positions and the others followed over the next couple of months. In due course BLUK commenced the present proceedings against her to recover the amounts she was liable to pay on the trades closed out.

Before considering the various causes of action relied upon by Ms Wachner in more detail, I propose to consider the way in which the so-called BLUSA Agency Agreement operated and, specifically, the issue as to whether, as Ms Wachner contends, she was acting as agent for BLUSA and so was a client of BLUK or whether, as BLUK contends, it was acting as agent for BLUSA in dealings with Ms Wachner so that the relevant contractual relationship remained one between Ms Wachner and BLUSA.

I have already set out earlier in the judgment the “Procedure” email sent by Mr Giordano to Mr Leslie on 18 October 2006 and the 1 May 2007 letter from BLUSA to Ms Wachner offering the extension of her facility provided by the BLUSA Agency Agreement.

To illustrate how the arrangement worked in practice, the parties took the documentation relating to trade 310, the sale by Ms Wachner on 8 August 2008 of a €10 million put with a strike price of 1.575 and a knock in price of 1.4575, maturing on 10 October 2008. In accordance with the arrangements first proposed between the two banks in 2006, when New York closed on 7 August 2008, BLUSA sent to Mr Leslie at BLUK the authorisation sheet headed: “List of Customers Authorized to Deal in [BLUK]” [in fact listing only Ms Wachner] stating that it was valid for trading in BLUK Dealing until 0730 New York time (12.30 London time) on 8 August 2008. The document then set out the current positions of Ms Wachner and the open client orders left with HSBC New York. It also set out the basis upon which trading could take place, stating (as all such daily lists did) that the authorisation was only valid for spot deals. It also set out what was to be reported to BLUSA by BLUK at the conclusion of each authorised trading day.

It is clear from the transcript of telephone conversations between Mr Gabb and Ms Wachner on 8 August 2008 that the sale of this put, together with the sale the same day of a €10 million call (trade 311) financed the buy back that day (trade 303) of a €10 million put with a strike price of 1.575 and a knock in price of 1.5125 sold by Ms Wachner to BLUSA on 7 August 2008 (trade 292, one of the short positions shown on the overnight authorisation sheet). Having recommended that course to Ms Wachner, Mr Gabb obtained prices for the two trades (310 and 311). He did not actually give her the prices, but just told her they were “done for net zero, net flat”, a reference to the fact that the price she would get for the sale of those two options would equate to the cost of buying back the previous €10 million put (which was €407,000). That was indeed the case since the prices she obtained for the two options (trades 310 and 311) were €275,000 and €132,000 respectively.

In fact, what happened is that there were three separate trades taking place. Ms Wachner was selling to BLUSA at a premium of €275,000, BLUSA was selling to BLUK at the slightly higher price of €276,000 and BLUK laid off the trade in the market by selling to HSBC at €279,000. These last two trades were shown on the Derivatives Dealing Slip completed by Mr Gabb at the time (0915 London time). The terms of the deal between BLUK and HSBC were also confirmed in a Confirmation fax sent by HSBC at 0940 London time. The terms of the deal between BLUSA and BLUK were confirmed in a letter of 8 August 2008 which set out the terms of the deal and stated “We have acted as Principal”.

The details of the trading done with Ms Wachner before New York opened on 8 August 2008 were set out in a Reuters communication between the two banks sent by Mr Leslie to Mr Dan Bernzweig at BLUSA at 11.34 GMT (12.34 London time). Of these transactions it stated: “She then sold a EUR put 1.5750 RKI 1.4575 Exp 10 Oct in EUR 10 mio. We deal at 2.76%, she deals at 2.75%”. Finally, BLUSA sent written confirmation of the deal whereby it had purchased the RKI option from Ms Wachner in a letter dated 18 August 2008 which stated the premium as €275,000.

Ms Prevezer QC relied upon a number of matters as demonstrating that under this BLUSA Agency Agreement, Ms Wachner was authorised to act on behalf of BLUSA in dealing with BLUK and was thus an agent for BLUSA. She relied upon the fact that that is how the BLUK traders who dealt with Ms Wachner during the operation of this arrangement, Mr Leslie and Mr Gabb, interpreted the arrangement. Mr Leslie in his witness statement referred to trading with Ms Wachner “as if she was BLUSA” and confirmed this in cross-examination when he said that they treated it as if she was a trader who worked for BLUSA. Mr Gabb’s evidence was to like effect.

It was submitted on behalf of Ms Wachner that the documentation from the 8 August 2008 transaction also demonstrated that Ms Wachner was acting as an agent of BLUSA in dealing with BLUK. The correct chronological sequence of events was said to be as follows. First the sale of an option by BLUSA to BLUK, agreed over the telephone between Ms Wachner, acting as agent for BLUSA and Mr Leslie or Mr Gabb (on this particular transaction, Mr Gabb) of BLUK, acting as principal, as its own confirmatory documentation subsequently stated. Next, the sale of an equivalent option by BLUK to the market counterparty, HSBC, to lay off BLUK’s exposure. Finally, the sale of an equivalent RKI by Ms Wachner to BLUSA, which did not take place until later the same morning, when New York opened. Both parties were acting as principal. Ms Prevezer accepted that under this construction of the arrangement, Ms Wachner was not bound contractually until later in the day, but submitted that this was only for a short time and that Ms Wachner had never been aware that this was the legal position.

Mr Cox QC submitted that this analysis was incorrect and that the only trade being agreed by BLUK over the telephone with Ms Wachner during the operation of the Agency Agreement was that whereby Ms Wachner sold the option to BLUSA and that, in relation to that trade, BLUK acted as agent for BLUSA. Ms Wachner was simply not involved, whether as agent for BLUSA or otherwise, in either the trade between BLUSA and BLUK or the trade between BLUK and the market counterparty.

In my judgment, Mr Cox’s submission is correct for a number of reasons. First, when one analyses the actual telephone discussion between Ms Wachner and Mr Gabb, in relation to the specific 8 August 2008 transaction (which I have referred to above) it is clear that what he is agreeing with her is her deal i.e. the sale she is making to BLUSA. Hence his reference to it being “net zero, net flat”, which without referring to an actual price can be shown, as I have said, to be referring to a price of €275,000. He must by that stage have obtained a price for the onward sale by BLUK to HSBC (€279,000) and thus have worked out the premium for the sale by BLUSA to BLUK (€276,000) in order to tell her that she has sold “net zero, net flat”.

There is no hint in the telephone conversation that the actual conclusion of the relevant contract whereby Ms Wachner is selling to BLUSA is somehow to be postponed until New York opens. Furthermore, the conversation between Mr Gabb and Mr Bernzweig just after 1300 London time, which is also recorded, seems to me to be discussing deals she has done that morning, not matters that had not been concluded until New York opened. That the deal whereby Ms Wachner sells to BLUSA had been concluded with BLUK before New York opened is confirmed in the Reuters message to which I have referred: “she then sold a EUR put....We deal at 2.76%, she deals at 2.75%”. In other words the supposed “time gap” until the transaction was concluded between BLUSA and Ms Wachner to which Ms Prevezer referred does not exist.

Second, whilst I suppose that is theoretically possible for someone to enter a whole series of transactions as another party’s agent without knowing one of the critical terms of the relevant transactions, here the price, it seems to me inherently unlikely that BLUSA would constitute Ms Wachner as its agent to deal with BLUK without her knowing the price at which she was to trade. Yet at no stage did Ms Wachner know the price at which BLUSA sold to BLUK, notwithstanding that on her case, it was she who had effected the sale on its behalf.

Third, the documentation seems to me to point to BLUSA authorising BLUK, not Ms Wachner, to act on its behalf. Thus the letter of 1 May 2007 from BLUSA to Ms Wachner talks of the daily authorization to be given by BLUSA to BLUK expiring at 07.30 New York time and of the proposed arrangement being to enable “trading through BLUK for your account with us” which is stated as being “on the same terms as if such trading were directly through us”. In other words, through BLUK, BLUSA was able to provide Ms Wachner with a longer period for her trading with BLUSA than New York hours. However, as the letter makes clear, it is still trading for her account with BLUSA. What was thus required was for BLUK to provide that additional period of trading on behalf of BLUSA, not for Ms Wachner to be authorised by BLUSA to act as its agent in its trading with BLUK.

Similarly, the daily overnight “authorisation sheet” sent by BLUSA to BLUK seems to me more consistent with any deals which are concluded with Ms Wachner being between her as principal and BLUK as agent for BLUSA. Nothing in those sheets suggests that Ms Wachner was being authorised by BLUSA to act as its agent. Although they were imposed after the Agency Agreement came into force, the restriction imposed by BLUSA on notional option exposure on 23 September 2008 and the prohibition on any new option positions after 1 October 2008 are only consistent with BLUK having been acting as agent for BLUSA; hence BLUSA imposing those limitations on BLUK’s authority.

This leaves Ms Prevezer’s perfectly valid point that Mr Leslie and Mr Gabb seem to have considered that they were dealing with Ms Wachner as if she were a trader employed by BLUSA, in other words as BLUSA’s agent. However, how the individual traders viewed the position, whilst obviously important, cannot ultimately affect what is the correct legal analysis of the various relationships. When, for all the reasons I have given, the other factors point so strongly to BLUK acting as BLUSA’s agent in dealing with Ms Wachner, not to Ms Wachner acting as BLUSA’s agent in dealing with BLUK, it seems to me those other factors must prevail. Accordingly, in my judgment, the correct analysis of what occurred under the so-called BLUSA Agency Agreement is that in dealing with Ms Wachner from about July 2007, BLUK was acting as agent for BLUSA and she was acting as principal.

The allegations made by Ms Wachner of negligent misrepresentation were set out in paragraph 17 (c) of the Amended Defence and Counterclaim. Two of those allegations were dropped by Ms Wachner in her Opening Submissions: that it was represented by Mr Leslie and/or Mr Gabb that RKIs would give Ms Wachner a “better opportunity” and that they lessened the need to trade every minute. A further allegation that Mr Leslie misrepresented that he had previous experience of pushing out successfully for other clients was not pursued by the end of the trial, no doubt because it was recognised that it was true and so could hardly amount to a misrepresentation.

This leaves three misrepresentations pleaded as having been made by Mr Leslie and/or Mr Gabb:

One of the problems which this misrepresentation case faces is the difficulty of pinning down exactly when the relevant representation was made and in which particular conversation the representation relied upon by Ms Wachner was made. The pleaded case is these representations were all made by Mr Leslie and/or Mr Gabb in discussions with Ms Wachner subsequent to the 7 December 2007 Claridges meeting but before March 2008. The significance of the latter date is presumably that the representations are said to have been made before Ms Wachner started trading RKIs which was on 6 March 2008, although her pleaded case is that these representations induced her to enter into the Facility in September 2008.

Nonetheless, some of the alleged representations can be traced with the benefit of the transcripts of conversations and the evidence to specific conversations. I propose to consider the evidence in relation to each alleged representation in turn and whether it was a misrepresentation before going on to consider other issues such as inducement and the effect of clause 6.16 of BLUK’s Terms of Business.

So far as the representation that RKIs were less risky than vanilla options is concerned, it seems to me clear that that is the effect of what Mr Gabb said in the two conversations he had with Ms Wachner on 4 March 2008 (quoted in paragraphs 87 and 88 above) when he first introduced the concept of RKIs. Mr Leslie accepted in cross-examination that this representation had been made to Ms Wachner:

Q …. The second representation that was made to Ms Wachner was that RKIs would give Ms Wachner a slightly smaller premium than a plain vanilla, but they were less risky than plain vanilla options, so they would ultimately be more lucrative.

A. Well, because they were -- what we were explaining at the time was she would get less of a premium than if she did the vanilla underlying with the strike, and they are less risky, because there was less chance of them being in the money than there was the vanilla.

However, in my judgment the case for Ms Wachner that this representation was a misrepresentation is without merit. The representation was correct. Despite the attempts by Ms Wachner and her legal team to characterise RKIs as extremely risky, for example by labelling them as “exotic matched derivative options”, as I have already said in the section of the judgment dealing with the nature of the options traded, as a generic product, an RKI is if anything less risky than an equivalent vanilla option because of the existence of the “barrier”. Whilst, as I have said, a greater degree of risk may have arisen from the way in which they were subsequently traded by Ms Wachner, it seems to me impossible to spell out of the representations which were made by Mr Gabb and Mr Leslie in early March 2008 some representation that however Ms Wachner subsequently traded RKIs, doing so would always be less risky than trading equivalent vanilla options.

In that context, in closing submissions, Ms Prevezer relied in support of the case that the representation that RKIs were less risky than vanilla options upon the expert evidence of Dr Fitzgerald to the effect that (i) RKIs are not less risky than vanilla options in terms of response to market input especially when the RKI is close to knock-in, the point which Dr Fitzgerald made very eloquently about nobody else in the market wanting to “buy back” the RKI at that stage so that the price of buying back was inflated; (ii) the trading strategy recommended by BLUK was particularly risky because it involved pushing out RKIs when they were at their most unstable, when they looked like knocking in; (iii) selling pairs of RKIs exposed her to “the Greeks”, so called gamma and delta volatility risk and the risk of “whip-sawing”; (iv) trading in RKIs on the scale in which she engaged required management of the risk by sophisticated software to at least measure her overall position, which Dr Fitzgerald said she did not have.

I remained unconvinced by Ms Wachner’s constant protests throughout her evidence to the effect that she did not know what she was doing and was essentially dependent upon Mr Leslie and Mr Gabb. I consider that she did have a pretty good idea at any given time of her overall position and, indeed, of specific trades she had undertaken, despite not having any sophisticated software, although it is clear that she did have access at least for some of the time to Bloomberg software. One only has to read the transcripts of the discussions with Mr Leslie and Mr Gabb for a relatively short period to be able to build up the picture of Ms Wachner as a sophisticated “operator” who was well aware of her open positions at any one time and hence of her overall position.

So far as the other aspects of Dr Fitzgerald’s expert evidence upon which Ms Prevezer relies in this context, I accept his evidence and, indeed, as she rightly points out, much of it was accepted by BLUK’s own expert Dr Dolbear. However, there are three related answers to the suggestion that this expert evidence supports the case of misrepresentation (or for that matter of breach of a duty of care). First, the criticisms Dr Fitzgerald makes of Ms Wachner’s trading strategy in terms of a failure to appreciate the volatility of RKIs, particularly close to knock-in, whatever the validity of those criticisms, cannot conceivably establish that the representation in March 2008, ex hypothesi before any of the relevant trading took place, that RKIs were “less risky” was a misrepresentation. Second, it is important to note that, however legitimate Dr Fitzgerald’s criticisms may be in the abstract, they go way beyond any pleaded case, whether in relation to misrepresentation or in relation to breach of a duty of care (a matter to which I return in more detail below). Third, to the extent that the riskiness of RKIs is being tied in with the idea of pushing them out, I agree with Mr Cox that the case on the alleged “less risky” misrepresentation adds little or nothing to the alleged “pushing out” misrepresentation, to which I now turn.

So far as the allegation of a representation that Ms Wachner could manage the risk of RKIs by “pushing out” is concerned, it is correct, as Ms Prevezer submits, that Mr Leslie accepted that Ms Wachner had rolled out the RKIs to avoid them being knocked-in, on the advice of himself and Mr Gabb. Mr Leslie also accepted that when he and Mr Gabb had first discussed the concept of pushing out in the conversation with Ms Wachner on 6 March 2008 he had said that by selling new RKIs to buy back existing ones, she would be “net flat” by which he meant that there would be “zero cashflow”, it would cost her no money. Mr Leslie also accepted in cross-examination that “during the whole period she traded under the BLUSA agency agreement, [his approach] was to tell her that she could keep pushing out and pushing out and not panic.” Of course any representation made during the course of her trading RKIs is outside the scope of the pleaded case, which alleges that the representation(s) relied upon were made after the Claridges meeting and before March 2008, when RKIs were first traded by her.

The representations made about pushing out at zero cost are said to have been misrepresentations because, although pushing out may be cash flow neutral, it is never “zero cost” given that the previous losses under the RKIs which are bought back are rolled forward into the new RKIs sold to replace them, so that the new RKIs are always higher risk than the old ones. In addition, on each push out, a significant bid-offer spread is paid. Furthermore, RKIs can only be pushed out indefinitely if the customer has unlimited margin and unlimited facility space.

In cross-examination, Mr Leslie accepted that pushing out of RKIs had these characteristics and it was common ground between the experts in their Joint Memorandum, that pushing out would “inevitably lead to the option positions held increasing their riskiness through time”. Nonetheless, in my judgment there is considerable difficulty in regarding any of this as having the consequence that what Mr Leslie and Mr Gabb did say about pushing out amounted to misrepresentation. The true nature of the complaint is that Mr Leslie and Mr Gabb did not inform Ms Wachner about these characteristics of pushing out. As Ms Prevezer puts it in her written closing submissions: “This was never explained to Ms Wachner.” That is a case of failure to advise, namely breach of a duty of care, not a case of misrepresentation.

The final representation relied upon is that, in circumstances where the trades Ms Wachner undertook were in pairs, BLUK would only calculate the cost to close the options for the purposes of margin calls on one side of the trade. Mr Leslie accepted in cross-examination that he had told Ms Wachner this at the time, saying “Well, we were. It’s a fact” and that that was always intended to be the position. He could not recall ever telling her that the position might change, which suggests that he did not. As Mr Cox submitted in closing, the date when this statement was made by Mr Leslie was never pinned down. However, it is difficult to see how it can have been made during the period pleaded. The nature of what was said makes it more likely that it was said at some point after she had started trading RKIs in pairs in March 2008 and before she started trading direct with BLUK again in September 2008.

Ms Prevezer submitted that the representation was false when it was made, because it was always the case that, in changed market circumstances, BLUK might change its practice. It seems to me that this is to inflate what Mr Leslie actually said way beyond any significance that it can have had at the time. Mr Leslie was doing no more than making a statement as to what the practice was at BLUK at the time, which was a correct statement. The fact that when the decision to seek margin on both sides of the trade was taken on about 17 October 2008 Mr Barrett referred to this as “seeking to move the goalposts half way through the game” suggests that the possibility of asking for margin on both sides had not occurred to BLUK until then. It seems to me impossible to construe what Mr Leslie said as some form of warranty that BLUK would never change its practice in the future. Again, the real nature of the complaint seems to be that Mr Leslie failed to advise Ms Wachner that there was a risk that BLUK might change its practice in the future.

Ms Prevezer also contended that the representation became a misrepresentation when BLUK did change its practice in October/November 2008. However, that contention does not help Ms Wachner. Even assuming what Mr Leslie had said was a continuing representation (as to which I have considerable doubts) in entering the relevant RKI trades, Ms Wachner can hardly have relied on a misrepresentation made after she had entered all the relevant trades.

It follows that, in my judgment, no actionable misrepresentation was made by Mr Leslie or Mr Gabb to Ms Wachner. In those circumstances, it is not strictly necessary to go on to consider the issue of inducement or reliance, although I will do so briefly. What is said on behalf of Ms Wachner is that in reliance on these misrepresentations she commenced trading RKIs under the BLUSA Agency Agreement in March 2008 and on her BLUK account in September 2008. Even if she could establish that there were misrepresentations which she relied upon, there is a substantial legal obstacle in way of this allegation, namely the final sentence of clause 6.16 of BLUK’s Terms of Business which provides: “You agree that you will rely on your own judgment for all trading decisions” and clause 6.17 which provides: “Furthermore, any trading recommendation, market or other information communicated to you is incidental to the provision of services by BLUK under these Terms and BLUK gives no representation, warranty or guarantee as to its accuracy or completeness”.

The effect of provisions such as these is to operate as an estoppel by contract from any argument that Ms Wachner was induced by any representation by BLUK to enter into particular transactions or types of transactions, such as RKIs: see the decisions of the Court of Appeal in Peekay Intermark Limited v Australia & New Zealand Banking Group [2006] EWCA Civ 386; [2006] 1 CLC 582 at paras 56-57 per Moore-Bick LJ and Springwell Navigation Corporation v JP Morgan Chase Bank [2010] EWCA Civ 1221 at paras 84 and 141-169, particularly 164-169 per Aikens LJ.

So far as the negligent advice claim is concerned, in her closing submissions Ms Prevezer sought to put forward on behalf of Ms Wachner a case that BLUK through Mr Leslie and Mr Gabb assumed a general duty to advise Ms Wachner on an ongoing basis as to the suitability of the RKI options which she traded and as to whether she should cease trading such options and that BLUK was in breach of that duty because it failed to warn Ms Wachner of the risks involved in RKI options. In my judgment, there are a number of problems with this argument.

First and foremost, in relation to the transactions which Ms Wachner entered into with BLUK directly from September 2008, clause 6.16 of BLUK’s Terms of Business provides:

Unless BLUK enters into a specific agreement with you to do so, BLUK shall not owe you any duty to advise on the merits or suitability of any investment entered into or contemplated by you. You agree that you will rely on your own judgment for all trading decisions.

Ms Prevezer accepts that, unless she can show a specific agreement by BLUK to act in an advisory capacity, the effect of this provision (as I have indicated above in the context of the misrepresentation claim) is to operate as a contractual estoppel to any attempt to contend for a duty to advise. As to what would constitute a “specific agreement”, Ms Prevezer submitted that the use of the word “agreement” rather than “contract” suggested that a degree of informality was permissible in determining whether there had been a specific agreement. She may well be right that a formal written contract is not required, but what is required is an agreement by BLUK that it will assume a duty to advise Ms Wachner in relation to the merits or suitability of either any particular trade or of the trading generally.

For reasons which I have already given in my findings on the detailed chronology set out above, I consider it impossible to construe either what was said by Mr Leslie and Mr Gabb at the Claridges meeting of 7 December 2007 (unpleaded as a specific agreement) or the telephone conversation between Ms Wachner and Mr Gabb on 21 December 2007 or anything subsequently said by Mr Leslie or Mr Gabb in discussions with Ms Wachner before she started trading RKIs with BLUSA under the BLUSA Agency Agreement on 6 March 2008 (or for that matter anything in the subsequent discussions between BLUK and Ms Wachner until her trading ceased) as amounting to a “specific agreement” sufficient to satisfy clause 6.16.

In a very real sense, the absence of any “specific agreement” is the beginning and end of Ms Wachner’s case that there was a duty to advise in relation to the transactions which Ms Wachner entered into with BLUK directly. It was no doubt recognition of the difficulty of demonstrating any “specific agreement” on the evidence which led Ms Prevezer to concentrate on the case of breach of statutory duty in her closing submissions.

Second, even if the hurdle of clause 6.16 could be overcome, the contractual relationships in place here present an insurmountable obstacle to the existence of a duty of care owed by BLUK to Ms Wachner, at least during the operation of the BLUSA Agency Agreement which is the period upon which much of the allegations of breach of such a duty focus. This is because as I have held, BLUK was acting as agent for BLUSA in its dealings with Ms Wachner under the Agency Agreement and under the terms of business in the contract between BLUSA and Ms Wachner the relationship is expressly a non-advisory one leaving no room for the imposition of a duty to advise on BLUSA. In those circumstances, it is difficult to see how BLUK as agent could be under a duty which was not imposed on its principal, given that any advice given in the relevant period between March and September 2008 must have been given as agent for BLUSA. It seems to me that Ms Wachner’s case did not really grapple with this difficulty.

Of course, if that analysis were wrong and Ms Wachner was the client of BLUK throughout the BLUSA Agency Agreement as Ms Prevezer contends, then the relationship between her and BLUK would be governed by the Terms of Business throughout, including clause 6.16 and, in the absence of a specific agreement, any duty to advise would remain precluded.

Third, what is alleged on behalf of Ms Wachner is a general duty to advise as to the merits and suitability of RKI trading generally. I agree with Mr Cox that try as Ms Prevezer might to suggest that such a general duty to advise was pleaded, it was not. The pleaded case is that the negligent advice given consisted of the same matters as were alleged to constitute the misrepresentations. No application for permission to amend was made and in my judgment there would have been no grounds for permitting a wider general case (which BLUK had not come prepared to meet) to be pursued at trial.

It follows that any case of failure to advise or of giving negligent advice must essentially be limited to (a) an allegation that when Mr Leslie and Mr Gabb told Ms Wachner that she could “push out” RKI options at “zero cost” there was a failure to advise Ms Wachner that pushing out would entail the incurring of “embedded costs” by reason of the increased “bid-ask spread” when RKI options were bought back and new options sold to fund that purchase; (b) a related point that in suggesting to her that RKIs were less risky, Mr Leslie and Mr Gabb failed to advise her of the volatility of these options, particularly close to the knock-in price which is often when she chose to buy them back; (c) a failure to advise Ms Wachner that the RKIs could only be pushed out for so long as Ms Wachner had sufficient margin to cover the relevant percentage of her exposure and (d) a related failure to advise her that although on a pair of options it was BLUK’s practice only to calculate the margin on one side of the trade, that practice might change if different market circumstances arose.

It can be seen that even this limited case of breach of duty is largely dependent upon the “advice” which Mr Leslie and Mr Gabb did give about trading RKIs amounting to specific advice or the absence of it. In that context both parties relied upon the judgment of Gloster J in JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm). In that case, the learned judge highlighted (in paragraph 44 of the judgment) the importance of distinguishing at the outset between a “general claim based upon a wide duty to advise on the one hand, and any more specific claim in negligent misstatement or misrepresentation on the other”, a distinction which seems to me to be of particular importance here where for the reasons I have already given, an allegation of a wide duty to advise is not open to Ms Wachner.

In that case at paragraph 57 of the judgment, Gloster J accepted the formulation of counsel for Springwell, Mr Brindle QC, as to the appropriate test for determining whether a duty to advise arose:

Mr Brindle submitted that....the width of the advisory activities which JA held himself out as performing, and actually performed, during the subsistence of the relationship, was "sufficient to crystallise advisory obligations on their own". He accepted that the extent of any advisory obligations assumed was always a fact-sensitive enquiry and that there can be different types or degrees of advice; thus he accepted that a bank which gives a client an ad hoc piece of investment advice once should not be taken to have assumed the role of a general investment advisor. He helpfully identified the Court's task as follows:

"It is critical, therefore, to assess the width of the advisory activity which a party holds itself out as undertaking. There is a spectrum of possibilities. At one end there will be an ad hoc piece of advice in response to a specific request with no expectation by either party of a further request or of further advice to come. At the other end a party will hold itself out as advising and willing to advise on an on-going basis both on particular investments and on the general composition of a client's portfolio as a whole."

I agree with that approach.

In her submissions, Ms Prevezer submitted that here “the width of the advisory activity undertaken by Mr Leslie and Mr Gabb was at the advisory end of the spectrum”. The immediate difficulty with this submission is that if, as I have held, the scope of the alleged duty is limited to the same matters as the misrepresentation claim, the advisory activity was nothing like as wide as Ms Prevezer contends. Irrespective of the barrier which clause 6.16 presents, it is simply not arguable that this case is at the advisory end of the spectrum, in the sense that Mr Leslie and Mr Gabb were holding themselves and BLUK out as advising as to specific trades or the trading as a whole. As regards the specific trades, whilst there were occasions when Mr Leslie said things like he recommended a particular deal, this falls a long way short of any sort of “personal recommendation” within COBS 9.

In Springwell, Gloster J also referred to the concept of “trading floor” opinion which as she pointed out could only give rise to a “low level duty of care” which she defined in these terms in paragraph 108:

But even if the word "advice" or "advisor" was used by EM in the context of his introduction of JA, it could not reasonably have been understood by AP – at least at this early stage - as creating an ongoing advisory relationship of the extensive nature alleged by Springwell, whether with CIBL or with CMB. All that Springwell was being offered, through AP being given access to JA, was the provision of an alternative product to time deposits. Moreover, such personal recommendations, or advice, as AP was being given by JA – at least at this early stage – about the products that CIBL, by JA, was offering to sell (mainly ECP), has to be viewed, in my judgment, as no more than the recommendations of a trader to a buyer as to what was available, on what terms, and perhaps also as to the respective merits of the products on offer, given the requirements of the particular client. It may well be that, theoretically, in such circumstances, a low level duty of care would arise on the part of the salesman not to make any negligent misstatements, or even to use reasonable care not to recommend a highly risky investment without pointing out that it was such, but a low level duty along those lines is worlds away from the wide duty of care that was pleaded or relied upon as having arisen at this early stage. In Mr. Brindle's words, it was at the lower end of the spectrum.

I agree with Mr Cox that much of what Mr Leslie and Mr Gabb “advised” Ms Wachner falls into the lower end of the spectrum, at most giving rise to a low level duty of care (if clause 6.16 did not preclude any such duty at all) which is not sufficient to establish either the sort of duty or the breach of duty for which Ms Wachner contends.

In the recent case of Wilson v MF Global [2011] EWHC 138 (QB) (which was decided after the trial of the present case concluded and in relation to which I received helpful additional written submissions from both sides on 14 February 2011) Eady J had to consider “opinion” and “advice” given by the broker to Mr Wilson. Having considered the learned judge’s summary of the broker’s activities derived from one of the expert reports, it is striking that the relationship in the present case between Mr Leslie and Mr Gabb and Ms Wachner seems to have been a not dissimilar one.

Eady J concluded that this sort of opinion or advice was not capable in itself of giving rise to a duty to advise on the part of the defendants in the absence of an express agreement. Paragraphs 94, 96 and 105 of his judgment are of particular relevance:

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 written 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.

105

Mr Asif QC has argued that, in appropriate cases, the court should have regard to the reality of a particular trading relationship rather than focussing solely on the formal position expressed in a contract: see e.g. Geniki Investments International v Ellis Stockbrokers [2008] EWHC 549 (QB), [2008] 1 BCLC 662, at [40]-[41]. Yet nothing I have seen on the transcripts, or heard on the sample tapes, would justify the conclusion that Mr Gainsley decided, off his own bat, to change the basis of his relationship with Mr Wilson and to make "personal recommendations".

Fourth, considering those allegations of a breach of a duty of care to advise which are open to Ms Wachner on the pleadings, even if clause 6.16 did not preclude this case altogether, there are a number of problems with those allegations. As regards embedded cost and volatility of RKIs, as I have already said, those are matters which are not inherent in RKIs but which arose from the way in which Ms Wachner traded them. Given that any contractual relationship was executory and not advisory (even assuming in Ms Wachner’s favour and contrary to the findings I have made, that prior to September 2008, she was a customer of BLUK in relation to trading under the BLUSA Agency Agreement), I agree with Mr Cox that, save in very limited circumstances, it would not be possible for BLUK to prevent Ms Wachner conducting whatever trading she wished within the limits of her facility. Those matters seem to me to point away from any duty of care.

In any event, so far as volatility is concerned, it seems to me that, albeit in the context of vanilla options, the discussion with Ms Wachner on 9 July 2008 to which I have referred in paragraphs 112 and 114 above was a sufficient warning about the volatility of options close to any rate (whether the strike rate or the knock-in rate) which could lead to their being in the money. Even without that warning, I consider Ms Wachner was an experienced trader (despite all her protestations to the contrary) who understood the risks she was running.

It was a constant theme of Ms Wachner’s evidence, when confronted with discussions where the choices available to her had essentially either been spelt out by Mr Leslie or Mr Gabb or were obviously known to her anyway from what she said to them, that she was simply following their advice and that they never explained to her the “embedded cost” in rolling over or pushing out options. Ms Wachner made repeated protestations that she did not understand how RKIs worked and that Mr Leslie and Mr Gabb did not explain to her the “embedded cost”, in the sense that each new rolled over option sold was riskier than the option whose purchase back was financed by the sale and also the bid-ask spread increased with any purchase which took place when the spot rate was approaching the knock-in rate.

Having read the transcripts of the discussions between Ms Wachner and Mr Leslie and Mr Gabb and having had the opportunity to assess Ms Wachner in the witness box, I was unconvinced by her attempt to portray herself as a financial ingénue who simply followed blindly the advice of Mr Leslie and Mr Gabb both in trading RKIs and in the rolling over or pushing out strategy she adopted. Contrary to the impression she sought to create, she was clearly a sophisticated businesswoman and investor who knew her own mind. Whilst it is true that she followed “advice” given by BLUK, that was by no means invariably the case.

Furthermore, despite what Dr Fitzgerald said, I do not consider that it was necessary for Ms Wachner to have sophisticated software of the kind he advocated either to appreciate the embedded cost of pushing out or to assess her overall position at any given time. I consider that despite the constant mantra in her evidence that she did not understand the embedded cost of pushing out, the reality is that the risks involved in buying back options close to the knock-in rate and financing those purchases by the selling of new options with ever more aggressive strike and knock-in rates in order to generate the premium required are evident from a cursory examination of the transactions in question and must have been obvious to an experienced foreign exchange trader such as Ms Wachner clearly was, despite her attempts to portray herself as inexperienced.

So far as the allegations about sufficiency of margin and the “moving of the goalposts” in relation to how the margin was calculated by BLUK are concerned, I am wholly unconvinced by the case that there was any breach of duty in this regard. Ms Wachner must always have appreciated (particularly given her experiences with BLUSA who were concerned about her exceeding her margin) that pushing out could only continue if she had sufficient margin to cover her open positions. Similarly, as I have held, it is clear that BLUK’s practice, until it actually insisted on two sided margin in October/November 2008 as a condition of any further pushing out, was to require only one sided margin. Once the practice changed, she was informed, so that there is nothing which could be said to amount to a failure to advise.

Ultimately the whole case of breach of a duty to advise founders either on the rock of clause 6.16 and the inability of Ms Wachner to establish a “specific agreement” in relation to transactions which Ms Wachner entered into with BLUK directly, or the insurmountable obstacle of the contractual relationships under the BLUSA Agency Agreement. However, to the extent that it is necessary to make findings as to what would have happened if the “right advice” as alleged by Ms Wachner had been given, I consider that even if BLUK had advised Ms Wachner in more specific terms about the embedded costs and volatility or about the need for sufficient margin to keep on pushing out, in all probability she would still have engaged in the trading which she did. It is apparent that, at least until July 2008, her RKI trading was broadly successful and she was completely uninterested in Mr Leslie’s suggestion on 8 July 2008 that she should close out her open positions and take a modest profit overall.

It is clear from reading the transcripts that throughout 2008 Ms Wachner’s trading was motivated by her desire to make up the losses of some $1.7 million that she had made on her trading up to December 2007 (for which on any view BLUK was not responsible). Even when warned in clear terms by Mr Leslie of the risks of the market turning dramatically against her (as it subsequently did) in the discussions on 8 July 2008, her attitude was that she had to make good those losses and continuing to trade in RKIs was how she was going to achieve that aim.

That remained the position when Ms Wachner was effectively closed down by BLUSA in August 2008, in the sense that they would not let her trade options greater than two months ahead. She transferred her options to BLUK starting on 8 September 2008, precisely because she wanted to carrying on trading RKIs pushing out for longer periods with a view to beating the market. This is clear, for example, from the conversation she had with Mr Leslie on the morning of 5 September 2008, quoted at paragraph 121 above.

Despite what Ms Wachner said in her evidence about what she would have done or not done if she had been given the “right advice”, I remain unconvinced that, given her desire to make good those losses, she would not still have carried on trading as she did. That conclusion is borne out by the evidence of her own personality. Having heard and considered all the evidence, including all the transcripts, my overwhelming impression is of someone who seeks to “soak up” advice from a variety of sources but who ultimately knows her own mind and takes her own course, irrespective of what that advice is.

Two examples will demonstrate that point. First, the evidence of Mr Moussallem that she never followed his advice about protecting or hedging her positions with long term options and second the fact that, despite the warnings from Mr Leslie in July 2008 about the risk of the market going against her and about not trading too much she continued to trade on a substantial scale both with BLUSA, then BLUK, and with HSBC. All the indications are that, whatever advice or warnings Ms Wachner now alleges should have been given, she would still have conducted the same or a similar pattern of trading. From this it follows that, even if, contrary to all the points I have made above, BLUK owed a duty to advise and was in breach of that duty, it has not in reality caused Ms Wachner any loss.

The statutory framework

Before considering the various respects in which it is contended by Ms Wachner that BLUK was in breach of the COB and/or COBS Rules, it is necessary to set out something of the statutory framework. Section 150 of the Financial Services and Markets Act 2000 (“FSMA 2000”) provides as follows:

The relevant provisions of the Conduct of Business Rules (“COB”) promulgated by the Financial Services Authority (“FSA”), in force when Ms Wachner was first introduced to BLUK in 2005 and which are relevant to the first aspect of the case of breach of statutory duty were as follows:

COB 2.3.3R

A firm will be taken to be in compliance with any rule in COB that requires a firm to obtain information to the extent that the firm can show that it was reasonable for the firm to rely on information provided to it in writing by another person.

COB 2.3.4E

(1)

In relying on COB 2.3.3R, a firm should take reasonable steps to establish that the other person providing written information is:

(a)

not connected to the firm; and

(b)

competent to provide the information.

...

(3)

Contravention of (1) may be relied on as tending to establish contravention of COB 2.3.3R.

COB 4.1 Client classification

COB 4.1.1R

(1)

This section applies to a firm intending to conduct, or conducting designated investment business or ancillary business relating to designated investment business…..

COB 4.1.3G

(1)

This section requires a firm to classify the persons with or for whom it intends to carry on designated investment business, to achieve appropriate application of the rules in COB and MAR3 (Inter-professional conduct). Its purpose is to ensure that clients are appropriately categorised so that regulatory protections are focused on those classes of client that need them most, while allowing an appropriately “light touch” approach for inter-professional business.

COB 4.1.4R

(1)

Before conducting designated investment business with or for any client, a firm must take reasonable steps to establish whether that client is a private customer, intermediate customer or market counterparty.

(2)

A firm which takes reasonable steps to classify its clients, as required by the rules in this section, and treats a client in accordance with the classification it has established for that purpose, does not breach any other rule in COB to the extent that the breach arises only from inappropriate classification of that client.

COB 4.1.5R

(1)

If a firm (“F”) is aware that a person (“C1”) with or for whom it is conducting designated investment business, or related ancillary activities, is acting as agent for another person (“C2”) in relation to that business, C1 and not C2 is the client of F in respect of that business if:

(a)

C1 is another firm or an overseas financial services institution, or

(b)

C1 is any other person, provided that avoidance of duties which F would otherwise owe to C2 is not the main purpose of the arrangements between the parties.

COB 4.1.9R

(1)

A firm may classify a client who would otherwise be a private customer as an intermediate customer if:

(a)

the firm has taken reasonable care to determine that the client has sufficient experience and understanding to be classified as an intermediate customer, and

(b)

the firm:

(i)

has given a written warning to the client of the protections under the regulatory system that he will lose;

(ii)

has given the client sufficient time to consider the implications of being classified as an intermediate customer, and

(iii)

has obtained the client’s written consent, or is otherwise able to demonstrate that informed consent has been given.

COB 4.1.10G

(1)

To take reasonable care to determine that a client has sufficient experience and understanding to be classified as an intermediate customer for the purposes of COB 4.1.9R(1)(a), the firm should have regard to:

(a)

the client’s knowledge and understanding of the relevant designated investments and markets, and of the risks involved;

(b)

the length of time the client has been active in these markets, the frequency of dealings and the extent to which he has relied on the advice on investments of the firm;

(c)

the size and nature of transactions that have been undertaken for the client in these markets;

(d)

the client’s financial standing, which may include an assessment of his net worth or of the value of his portfolio.

(2)

It is likely that a firm will need to have regard to more than one of these criteria, or to other criteria, before it can be satisfied that a client, who would otherwise be a private customer, is eligible to be classified as an intermediate customer.

COB 4.1.15R

(1)

If a firm classifies:

(a)

a client as an intermediate customer under COB 4.1.9R;

...

it must review that classification at least annually to ensure that it remains appropriate to the designated investment business which the firm carries on with or for that client, unless (2) applies.

(2)

If a firm has not conducted designated investment business with or for a client during the previous 12 month period, the firm may defer the review referred to in (1) until the firm next conducts designated investment business with or for the client.

Two points arise in relation to the interpretation of these provisions. First, the view expressed by Morgan J in Spreadex Ltd v Sekhon [2008] EWHC 1136 (Ch); [2009] BCLC 102, at paragraph 134, that COB 4.1.9R is “not a rule which imposes an obligation but is a permissive rule which permits a firm to classify a client if the firm goes about it in the correct way” and is thus not a rule breach of which is actionable under section 150 of FSMA 2000, seems to me to overlook that any “permissive” element to COB 4.1.9R must be subject to what is in effect an overriding mandatory provision in COB 4.1.4R.

In other words, before conducting designated investment business with or for a client, the firm must take reasonable steps to establish whether the client is an intermediate customer and it will only be if the firm has taken those reasonable steps that it is entitled to classify that client as an intermediate customer. As to what those reasonable steps are in any given case, COB 4.1.9R sets out that the firm has to take reasonable care to determine that the client has sufficient experience and understanding to be classified as an intermediate customer and 4.1.10G provides guidance as to the factors to which the firm should have regard in taking such reasonable care.

It seems to me that if there is a contravention of COB 4.1.9R because the firm has failed to take reasonable care, there will inevitably also be a contravention of COB 4.1.4R and those contraventions will give rise to a right to bring an action for damages under section 150 of FSMA 2000. Furthermore, section 150(2) of the Act contemplates that the entitlement to bring an action for damages for contravention of a Rule may be excluded if the relevant Rule so provides. There is nothing in section 4.1 of COB to suggest that the right to bring a claim for damages for breach of statutory duty in respect of contravention of the classification Rules has been excluded.

The second point is that these COB Rules as to classification do not require the firm to arrive at an objectively correct classification of a client, but only to have taken reasonable steps to arrive at the correct classification. In other words, even if objectively Ms Wachner did not in fact have sufficient experience and understanding to be an intermediate customer, BLUK will only be in breach of COB 4.1.4R and 4.1.9R if it has failed to take reasonable steps and reasonable care in classifying her as an intermediate customer.

This is a point which was made by Morgan J in Spreadex at paragraphs 128 and 130 of the judgment:

However, in the present context, the difference between a private customer and an intermediate customer is dealt with in COB 4.1.9 R and those differences do not turn upon the objective characteristics of the client but turn on a number of matters such as complying with procedural requirements including the all important requirement that the client consents to the classification. Accordingly, the definitions of private customer and intermediate customer in the glossary distinguish between clients who have and those who have not been classified “in accordance with COB 4.1.9 R”, rather than by reference to the objective characteristics of the client. This reading of the rules is also supported by COB 4.1.14 R which allows a firm to classify as a private customer any client who would otherwise be an intermediate customer. Thus, in determining whether there is “appropriate” classification of a client as an intermediate customer where the classification procedure adopted is under COB 4.1.9 R one does not ask whether the client has the characteristics, objectively considered, of an intermediate customer but one instead asks whether COB 4.1.9 R has been complied with.

….

130 I do not accept Mr Tregear's submission based on a suggested distinction between substance and procedure, essentially for the reason I have already stated when describing the operation of the rule. That reason is that the classification under COB 4.1.9 R does not depend upon the objective characteristics of the client but depends upon compliance with COB 4.1.9 R, which contains a number of procedural safeguards before the classification is effective or “appropriate”.

A similar analysis of these COB classification Rules, that compliance does not depend upon the objective characteristics of the customer but on having followed the procedural requirements, was adopted by Andrew Smith J in Maple Leaf Macro Volatility Master Fund v Jacques Rouvroy [2009] EWHC 257 (Comm); [2009] 1 Lloyd’s Rep 475 at paragraph 353:

I am unable to accept the first submission is either relevant or correct. The difference between a private customer and an intermediate customer depends not upon the objective characteristics of the client but upon the view taken by the firm and upon compliance with procedural requirements.

Those two cases were recently followed by Eady J in Wilson v MF Global UK Ltd [2011] EWHC 138 (QB). At paragraph 24, he put the principle as follows:

I agree with the approach in those cases. Accordingly, it will only be if BLUK failed to take reasonable steps and reasonable care in its initial classification of Ms Wachner that it will have been in breach of COB 4.1.4R and 4.1.9R and thus potentially liable in damages under section 150 of the 2000 Act. This is an important consideration in the context of the allegations made in the present case, since whatever Ms Wachner may now say in her evidence about her lack of experience and expertise in trading RKI options (as to which for reasons developed elsewhere I am somewhat sceptical), even if that lack of experience or expertise were established as an objective fact, it would not follow that BLUK was in breach of duty under section 150: it would only be if BLUK failed to take reasonable steps and reasonable care in its classification of Ms Wachner either at the initial stage of classifying her as an intermediate customer or thereafter, that any case of breach would arise. In other words, BLUK is not to be held liable for her lack of experience or expertise (if such it was) unless its failure to appreciate such lack of experience or expertise was due to a failure to take reasonable steps and reasonable care in its classification of Ms Wachner.

I consider that similar considerations would apply to the obligation to review the classification on at least an annual basis under COB 4.1.15R. It would only be if BLUK failed to take reasonable care in conducting a review which the Rules obliged it to take that there would have been a contravention of that provision.

The significance of this point is that, unless in the relevant annual period, BLUK conducted designated investment business with or for Ms Wachner as a client, then COB 4.1.15R(2) entitled BLUK to defer any review until such business was next conducted. It seems to me to follow that, if BLUK is right that: (i) such business was not conducted by it with or for Ms Wachner as a client until the facility was provided in September 2008 (by which time MiFID was in force and COB had been superseded by COBS) and (ii) COB was not otherwise applicable to the trading under the so-called BLUSA Agency Agreement, then it is difficult to see how BLUK was in contravention of 4.1.15R as regards the six monthly reviews it did conduct in the period February 2006 to August 2007, even if the somewhat perfunctory nature of those reviews is open to criticism.

I have already set out earlier in this judgment the reasons why I have concluded that in conducting the trading with Ms Wachner under the so-called BLUSA Agency Agreement, BLUK was acting as agent for BLUSA and Ms Wachner was acting as a principal and not as agent for BLUSA, from which it must follow that COB 4.1.5R was not applicable to the trading carried out by BLUK on behalf of BLUSA from July 2007 onwards under the BLUSA Agency Agreement, since Ms Wachner was not acting as an agent for another person.

Nonetheless, Ms Prevezer submits that, on a true construction of COB, BLUK was conducting “designated investment business” with or for Ms Wachner as a client throughout the BLUSA Agency Agreement, even if there was no direct contract entered between BLUK and Ms Wachner. BLUK’s traders spoke to her on a daily basis, discussing her trading and advising her in relation to trades she then entered with BLUSA. At the very least they were taking steps the end result of which was that she entered into transactions, albeit with BLUSA not BLUK. Since BLUK was thus once more conducting designated investment business with an existing client in July 2007, there was an obligation on BLUK under COB 4.1.15R to review at that stage its classification of Ms Wachner as an intermediate customer.

This analysis is all predicated upon BLUK having conducted such designated investment business with Ms Wachner as a client of BLUK, since it is clear that the COB regime (and indeed the COBS regime which superseded it) is intended to protect only people who are a “client” of the relevant firm. I agree with Mr Cox that merely because Ms Wachner was an existing client of BLUK from her previous trading through Mr Moussallem, which had ceased at the end of 2005, it does not follow that in its dealings with her under the BLUSA Agency Agreement (in which as I have found BLUK was acting as agent for BLUSA), Ms Wachner was the client of BLUK as opposed to BLUSA.

The term “designated investment business” is defined in the COB Glossary:

“Any of the following activities, specified in Part II of the Financial Services and Markets Act 2000 (Regulated Activities) Order (Specified Activities) 2001 [“RAO”] which is carried on by way of business:

(a)

dealing in investments as principal (article 14)....

(b)

dealing in investments as agent (article 21) but only in relation to designated investments

(c)

arranging (bringing about) deals in investments (article 25(1)), but only in relation to designated investments”.

As already described above, in practice, each “deal” under the so-called BLUSA Agency Agreement involved three separate options being effected. As regards the sales by BLUSA to BLUK and by BLUK to the market counterparty (HSBC or whoever else), BLUK clearly dealt as principal within article 14 of the RAO, but, importantly, Ms Wachner was not party to either of those transactions and so in neither case was BLUK conducting designated investment business with her as a client.

The option to which she was a party was the one which she sold to BLUSA. Albeit that this was agreed over the telephone before New York opened with either Mr Leslie or Mr Gabb of BLUK, in every case, for the reasons I have already set out, BLUK was acting as agent for BLUSA. Article 21 of the RAO provides: “Buying, selling, subscribing for or underwriting securities or contractually based investments...as agent is a specified kind of activity”. To the extent that BLUK was buying options from Ms Wachner on behalf of BLUSA, it was conducting “designated investment business” within limb (b) of the Glossary definition. However, since BLUK was acting as agent for BLUSA, there is no question of that “designated investment business” within limb (b) having been conducted with or for Ms Wachner as client of BLUK.

To the extent that it was sought to be contended on behalf of Ms Wachner that BLUK was conducting designated investment business within limb (c) of the Glossary definition because, in the daily discussions before New York opening, BLUK were “arranging” deals in investments subsequently concluded with BLUSA, whilst this argument has a superficial attraction, it fails on the true construction and scope of the RAO. As Mr Cox points out, article 28(1) of the RAO excludes from article 25(1) (with which limb (c) is dealing): “any arrangements for a transaction into which the person making the arrangements enters or is to enter as principal or as agent for some other person”. Since in each case, the transaction being arranged was one entered by BLUK as agent for BLUSA, this exclusion obviously applies.

Accordingly, in my judgment, in all these BLUSA Agency transactions, Ms Wachner remained the client of BLUSA and although the options were agreed on behalf of BLUSA by agents in London, they are regulated by US federal laws and not by the FSMA 2000. It follows that neither at the inception of the BLUSA Agency Agreement nor at any stage before COB was superseded by COBS was the requirement for an annual review of the status of Ms Wachner as an intermediate customer of BLUK triggered under COB 4.1.15R.

With effect from 1 November 2007, the Markets in Financial Instruments Directive (MiFID) came into force, replacing the previous Investment Services Directive. COB were superseded by the FSA Conduct of Business Sourcebook (“COBS”) with effect from that date. COBS 3.2 and following deals with the definition and categorisation of “clients”. Specifically, COBS 3.5.3R deals with the categorisation of “elective professional clients” [the category corresponding to those categorised as “intermediate customers” under COB] in these terms:

“Elective professional clients

A firm may treat a client as an elective professional client if it complies with (1) and (3) and, where applicable, (2):

(1)

the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");

(2)

in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:

(a)

the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

(b)

the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;

(c)

the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;

(the "quantitative test"); and

(3)

the following procedure is followed:

(a)

the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;

(b)

the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and

(c)

the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections

The system of annual reviews required by COB 4.1.15R is not repeated in COBS. Instead, COBS 3.5.9R provides that if a firm becomes aware that a client no longer fulfils the initial conditions which made it eligible for categorisation then it must take “the appropriate action”, not defined in COBS save that 3.5.9R(2) makes it clear that this may include re-categorisation:

“(1)

If a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for categorisation as an elective professional client http://fsahandbook.info/FSA/glossary-html/handbook/Glossary/?definition=G1979, the firm must take the appropriate action.

(2)

Where the appropriate action involves re-categorising that client as a retail client, the firm must notify that client of its new categorisation.”

However, COBS TP1 provides Transitional Provisions relating to Client Categorisation which apply in relation to existing customers of the firm. COBS TP1.2R provides:

“(2)

An existing client that was correctly categorised as an intermediate customer immediately before 1 November 2007:

(a)

is an elective professional client if it was an expert private customer that had been re-classified as an intermediate customer on the basis of its experience and understanding; or  

(b)

is otherwise a per se professional client; 

unless and to the extent it is given a different categorisation by the firm under COBS 3.”

In other words, this provision deals with the categorisation or classification of those who are existing intermediate customers of the bank. Provided that the client was correctly categorised as an intermediate customer immediately prior to MiFID coming into force, this provision permits the firm to re-categorise the client as an elective professional client without more. This is known as the “grandfathering” procedure and was used by BLUK to classify Ms Wachner as an elective professional client of the bank from 1 November 2007 onwards. I deal in the next section of this judgment with the factual issue as to whether she was correctly classified as an intermediate customer immediately prior to 1 November 2007. What is clear though is that these transitional provisions will only avail the firm if that prior classification was correct. If it was not, then before a firm can categorise a client as an “elective professional client”, it must comply with COBS 3.5.3R.

COBS TP1.3G deals with the question of how COBS 3.5.9R is to be applied and interpreted in relation to clients who started off as intermediate customers:

“Under COBS 3.5.9 R, if a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for categorisation as an elective professional client, the investment firm must take the appropriate action. In the case of a client that has been classified as an elective professional client under COBS TP 1.2R(2)(a), the initial conditions are those that applied to the client's initial categorisation as an intermediate customer.”

It should also be noted that COBS 3.5.8G provides that: “Professional client[s] are responsible for keeping the firm informed about any change that could affect their current categorisation”.

Ms Prevezer submitted that there were a number of occasions after COBS came into force when BLUK became aware that Ms Wachner no longer fulfilled those initial conditions, even if, contrary to her primary case, she had fulfilled them back in 2005 and should therefore have carried out a proper review of her classification. These were specifically in March 2008 (before the first RKI was sold), in April 2008 (when Ms Pearce of BLUSA expressed a concern that Ms Wachner did not understand the RKIs she was trading) and at the end of August/beginning of September 2008 just before direct trading between Ms Wachner and BLUK resumed. I will consider in the next section of the judgment whether as a matter of fact BLUK had become aware on any of those occasions that Ms Wachner no longer fulfilled those initial conditions. For the present, the issue is whether, at least in relation to the first two occasions alleged, the obligation to take appropriate action by re-categorising Ms Wachner arises in circumstances where the only relevant trading taking place was under the BLUSA Agency Agreement.

Just as it was submitted on behalf of Ms Wachner that the operation of the BLUSA Agency Agreement should have led to proper annual reviews within COB 4.1.15R from July 2007 onwards, so it is submitted that the continued operation of the BLUSA Agency Agreement obliged BLUK to re-categorise Ms Wachner as a private client in March 2008 before any RKIs were traded at all or soon thereafter in early April 2008, in which case little trading in RKIs would have taken place. The two arguments advanced in support of this proposition reflect the arguments Ms Prevezer put forward as to why in relation to the trading under the BLUSA Agency Agreement, BLUK was conducting designated investment business with or for Ms Wachner. First Ms Prevezer relies upon COBS 2.4.3R, which is essentially in the same terms as COB 4.1.5R. Since, for the reasons I have given, Ms Wachner was not acting as an agent for BLUSA in her trading under the BLUSA Agency Agreement, this argument fails under COBS as it did under COB.

The second argument is that in relation to the trading under the BLUSA Agency Agreement, Ms Wachner was the client of BLUK, “client” being defined in COBS 3.2.1R as a person “to whom a firm provides, intends to provide or has provided...a service in the course of carrying on a regulated activity.” The same analysis as applied under COB to the various options entered into applies under COBS. The only option to which Ms Wachner was ever a party was the one she sold to BLUSA and although the agreement to buy that option was made by Mr Leslie or Mr Gabb on the telephone, BLUK was acting exclusively as agent for BLUSA.

In those circumstances, the options concluded were between a US citizen and a New York bank and were governed by US federal laws not by FSMA 2000. It is clear that the Act is not intended to apply to such extra-territorial business. The general prohibition in section 19 of the Act is against the carrying on of “regulated activity in the United Kingdom” by someone who is not either an authorised or an exempt person. The short answer to the submission that, in relation to the trading she carried out under the BLUSA Agency Agreement, Ms Wachner was the client of BLUK is that BLUK was not providing a service to her in the course of carrying on a regulated activity involving her in the United Kingdom. In so far as BLUK was providing a service, it was a service to BLUSA for which it was acting as agent, not to Ms Wachner, who was BLUSA’s counterparty.

It follows that even if, by virtue of what it knew of Ms Wachner’s trading under the BLUSA Agency Agreement in either March or April 2008, BLUK became aware that Ms Wachner no longer fulfilled the initial conditions for its classification of her as an intermediate customer, that did not as I see it require BLUK to somehow take steps to stop her trading with BLUSA under the Agency Agreement.

When one stands back from all the furore generated in this case by all the allegations about negligent advice about RKIs given by Mr Leslie and Mr Gabb or misrepresentations made by them, there is nothing remotely surprising or unusual in that conclusion. After all, the relevant option contracts were all, as I have said, between a US citizen and a New York bank. Why, one might ask rhetorically, should those contracts be regulated by the United Kingdom regulatory regime, any more than any other option or other foreign exchange contract entered by Ms Wachner with BLUSA over the years? It would surely be very odd if they were, in circumstances where, once New York opened every day, Ms Wachner carried on trading direct with BLUSA in exactly the same way, after March 2008 selling and buying RKIs. It would be inconceivable that those “direct” contracts should be regulated under FSMA 2000 and, therefore, surprising and unusual to say the least, if essentially similar option contracts between the same parties made through BLUSA’s agent earlier in the day, were regulated by FSMA 2000.

The position at the beginning of September 2008 is different, in the sense that direct trading between Ms Wachner and BLUK was about to resume after a gap of more than two and a half years. I can quite see that if BLUK had become aware by that stage that Ms Wachner no longer fulfilled the initial conditions justifying her classification as an intermediate customer back in 2005, the “appropriate action” required may well have included consideration of whether she should be permitted to trade RKIs or other options direct with BLUK at all. This is a matter to which I propose to return in more detail in considering later in the judgment the criticisms levelled against BLUK by Ms Wachner. For the present, all I would say is that, to the extent that Mr Cox sought to argue that “appropriate action” could not include a refusal to trade with the client at all, I reject that submission. What is appropriate will depend on all the circumstances, and, as I have already noted, COBS does not define or circumscribe the scope of appropriate action.

Alleged improper classification as an intermediate customer in 2005

In considering the various allegations of breach of COB by BLUK in 2005 it seems to me important to bear in mind two matters. First that, as the recent authorities to which I have referred confirm, the issue with which the court is concerned is not whether the actual classification was objectively correct, but with whether BLUK took reasonable care to determine that Ms Wachner had sufficient experience and understanding to be classified as an intermediate customer. Second that that issue is to be determined by reference to what was done and known at the time, not by reference to the hindsight of disastrous trading in fact undertaken by Ms Wachner in September and October 2008. In other words, looking at what happened subsequently and saying that was disastrous trading, therefore she must have been classified incorrectly, is not the right approach.

The first allegation made on behalf of Ms Wachner is that it was improper and unreasonable to rely upon information provided by Susan Pearce, because she was a “connected person” within the meaning of COB 2.3.4E (as the BLUK employees who gave evidence accepted). Ms Prevezer goes so far in her submissions as to say that as a consequence BLUK was not entitled to rely on the information provided by Ms Pearce.

It seems to me that there are a number of problems with this allegation. First, whatever the BLUK witnesses may have accepted in cross-examination, the question whether Ms Pearce was a “connected” person within the meaning of COB is one which requires an analysis of the reasoning behind the relevant provisions, specifically COB 2.3.3R and 2.3.4E. It seems to me that Mr Cox is right that these provisions are aimed at discouraging the obtaining of information from persons who might have an interest in giving a looser classification than the relevant regulations require. There is simply no basis for any suggestion that Ms Pearce fell into that category and, accordingly, I do not consider that she was a “connected” person as alleged. It follows that the criticisms of BLUK for relying on the information she provided about her relationship with BLUSA and her experience and understanding of foreign exchange trading are unfounded.

Second, even if “connected” has the meaning for which Ms Wachner contends, which is that it encompasses any employee of an associated company of BLUK or of a fellow subsidiary of Bank Leumi, so that Ms Pearce was a “connected” person within COB 2.3.4E, that provision, which is concerned with evidence and is not a rule, does not say that a firm can never rely upon written information provided by a connected person, just that, in effect, if information is obtained from a connected person, that may tend to establish a contravention of the rule, COB 2.3.3R. That provides that a firm will be taken to be in compliance with any rule which requires it to obtain information to the extent that it can show that it was reasonable for the firm to rely upon written information provided by another person. In other words, there is no prohibition against relying on information provided by a connected person. It is just that it may be more difficult to show that it was reasonable to rely upon information from that connected person, as opposed to someone else.

Ms Prevezer accepts that it would have been unreasonable for BLUK not to take into account Ms Wachner’s relationship with BLUSA in classifying her. To the extent that she contends that BLUK should have sought information from the BLUSA traders rather than Ms Pearce, it is difficult to see why they would not have been open to the same criticism as Ms Pearce that they were “connected” persons. The real force of Ms Prevezer’s submissions is that the information should have been sought from Ms Wachner.

This submission has an obvious superficial attraction, but immediately begs the question (which Ms Prevezer’s submissions do not really grapple with) to what extent the information in fact provided by Ms Pearce would have been materially different if it had been provided by Ms Wachner. No doubt there are certain inaccuracies which found their way into the documentation produced by Ms Brunner, such as the reference to Ms Wachner having experience of hedging foreign exchange exposures whilst she worked in the fashion trade or the apparent misunderstanding about whether she had had a foreign exchange facility with Republic National Bank for a short period in the late 1990s, which would have been ironed out. However, those matters were pretty peripheral in the overall picture of classification.

On the central question which BLUK was addressing about whether Ms Wachner had sufficient experience or understanding of foreign exchange trading to be classified as an intermediate customer, I have serious doubts as to whether the critical information about her actual experience and understanding would have been any different if it had been provided by Ms Wachner herself rather than Ms Pearce. This is partly because the actual information about her trading provided by Ms Pearce was accurate: she had traded foreign exchange with BLUSA since July 2003 and, whilst the figures for the amount of trading were the nominal value of all the trades conducted and not the value at risk at any given time, they were nonetheless a fair indication of a considerable volume of foreign exchange trading. Similarly in relation to the information from Ms Pearce that this trading included options. This was accurate, since Ms Wachner had traded some eighteen options with BLUSA up to March 2005. As Ms Pearce said, Ms Wachner also had a separate facility trading foreign exchange with HSBC in Paris.

One suspects that whatever impression Ms Wachner now wishes to create of herself as a novice or ingénue in the hands of Mr Leslie and Mr Gabb when it came to foreign exchange trading, particularly options, if she had been asked at the time in 2005 (or for that matter 2008) whether she agreed that she was a “savvy” market investor or a savvy FX trader, I suspect she would have said yes. Whilst I am not suggesting for one minute that she would have misrepresented her own self-assessment, the picture that emerges contemporaneously from documents and transcripts of conversations (and indeed from observing her giving evidence over a number of days) is of an experienced businesswoman who was self-confident and knew her own mind. She is no shrinking violet, rather someone quite capable of a self-assessment that she had the appropriate experience and expertise to be classified as an intermediate customer or elective professional client, as the subsequent approval of the form prepared by Mr Miller demonstrates.

The suggestion by Ms Prevezer that BLUK should have relied on Ms Wachner rather than Ms Pearce for information about her relationship with BLUSA also gives rise to the question whether in one sense it may not have been more reasonable to rely upon information from a BLUSA employee, albeit a “connected person”, rather than Ms Wachner herself. Whilst, as I have said, I would not suggest that Ms Wachner would have misrepresented the position, the recent case of Wilson v MF Global does demonstrate the extent to which the information provided by the client, as opposed to a third party, may have the capacity to be inaccurate. In those circumstances information from an employee of a fellow subsidiary of Bank Leumi who had been Ms Wachner’s account manager for a number of years, albeit not a FX trader herself, seems to me to be potentially more reliable than information from Ms Wachner herself. Certainly I do not consider that BLUK can be criticised for relying on information from Ms Pearce rather than insisting on receiving any information from Ms Wachner herself.

Thirdly, although Ms Prevezer makes the perfectly valid point that Ms Pearce was not herself a FX trader with BLUSA and so had never traded with Ms Wachner, it seems to me somewhat unreal to suggest that she was not competent to provide information about Ms Wachner’s foreign exchange trading with BLUSA. Ms Pearce was her account manager and, as the various call reports she sent to Mr Pereira demonstrate, as part of that function, she had had to review Ms Wachner’s foreign exchange positions and trading. Whilst, as Ms Pearce accepted in her evidence on deposition, she didn’t deal with the foreign exchange or the options, it seems to me that she was in as good a position as anyone else at BLUSA to give the sort of overview of Ms Wachner’s trading which she did in her email of 7 March 2005.

The second allegation made on behalf of Ms Wachner is that Mr Leslie had no basis on which to form a view that she had sufficient experience and understanding of foreign exchange trading to be classified as an intermediate customer. Of course Mr Leslie was not responsible for classification, so what one is really talking about is his being able to form a sufficiently favourable view of her experience and understanding of foreign exchange trading that would enable others in BLUK to make that classification. I have already made findings in the section of the judgment dealing with the facts, contrary to Ms Wachner’s evidence, that the discussion they had at the meeting in London in April 2005, although brief, was long enough to enable Mr Leslie to form the view that she had sufficient expertise of FX trading to be able to trade with the BLUK dealing room. In the circumstances, this allegation by Ms Wachner is not made out on the facts.

The third allegation made on behalf of Ms Wachner is that, on any view, she was inexpert in foreign exchange trading. I am unimpressed by this allegation. By the time of the classification in August 2005, she undoubtedly had considerable experience of spot and forward trading other than options. Whilst it is right that the unchallenged evidence of Dr Fitzgerald was Ms Wachner’s spot trading experience would not tell one very much if anything about her experience of trading foreign exchange options, the fact remains that by March 2005, she had traded some 18 options with BLUSA since November 2003. By the time her classification as an intermediate customer was approved in August 2005, she had traded a further 17 options with BLUSA in the four months April to July 2005. So far as one can tell from the monthly schedules of Ms Wachner’s profit and loss, the option trading with BLUSA in the first seven months of 2005 was reasonably successful, making an overall profit of slightly in excess of $100,000.

The fourth allegation is that BLUK predetermined that Ms Wachner would be an intermediate customer before undertaking the classification process. Again this is an allegation which, in large measure, I have already dealt with in my findings on the facts. To the extent that this is an allegation that, from the very outset BLUK had decided to classify her as an intermediate customer regardless, I do not consider this allegation to have any foundation. In so far as what is being complained of is the fact that the relevant package of documentation was sent to Ms Wachner for approval before the classification as an intermediate customer was formally agreed within BLUK, I do not consider that there is anything in this point or that there is anything sinister in the procedure adopted by BLUK.

Furthermore, it is striking that BLUK does not seem to have been alone in adopting this procedure. It is clear from Wilson v MF Global that MF Global also had a similar procedure in place. In that case MF Global was criticised by the claimant for the classification of the client as an intermediate customer in a letter of 6 May 2003 before it had received the signatures and information schedule from the client consenting to being treated as an intermediate customer. Eady J rejected that contention, making the point that the only requirement under COB was that classification must take place before the designated investment business was conducted and that the MF Global system of a preliminary classification followed by a final classification was something which was within the discretion of MF Global: see [2011] EWHC 138 (QB) at paragraph 50. I agree entirely with that analysis and approach.

The fifth allegation is that BLUK failed to explain to Ms Wachner the meaning and effect of her classification as an intermediate customer. Again, in my findings on the facts, I have rejected Ms Wachner’s evidence that she never read the relevant documentation which spelt out the risks of her being an intermediate customer. Her suggestion that she simply initialled each page and did not read the documents, finds an echo in the equally unconvincing evidence of the claimant in Wilson v MF Global that he did not read the documentation he signed. In my judgment, it is inconceivable that a sophisticated and demanding client such as Ms Wachner was, would not have read the documentation presented to her before signing it.

Based upon the allegation that Ms Wachner had not read the documentation, Ms Prevezer goes on to submit that the signature does not amount to informed consent as required by COB 4.1.9R. Given my rejection of the suggestion that Ms Wachner had not read the documentation before signing, it seems to me that it must follow that her signature was sufficient informed consent. In terms of compliance with COB 4.1.9R it seems to me that BLUK was entitled to rely upon Ms Wachner’s signature of the documents as acceptance that the requirements of COB 4.1.9(b) had been satisfied: see by parity of reasoning paragraph 54 of Wilson v MF Global.

In all the circumstances, in my judgment the various criticisms made on behalf of Ms Wachner as to the procedure adopted by BLUK in its original classification of her as an intermediate customer are simply not made out. Even if, contrary to that conclusion, there were any force in the criticisms made (which go essentially to the first criterion in COB 4.1.10G, namely Ms Wachner’s knowledge and understanding of FX trading, particularly of options and of the risks involved in such trading) there is no requirement under COB that BLUK had to satisfy all four criteria in that guidance. As Eady J recognised in Wilson v MF Global, COB 4.1.10G merely indicates that it is likely that in establishing that it has taken care for the purposes of COB 4.1.9R the firm will need to have regard to one or more of the criteria set out in COB 4.1.10G: see paragraph 47 of the judgment in that case.

In the present case I consider that the evidence establishes that on the basis of the information it had, BLUK had regard to all four criteria, but even if it did not have regard to the first, it had regard to the other three, the length of time Ms Wachner had been trading foreign exchange, the size and nature of the transactions she had undertaken (including that she had traded options) and her financial standing. If BLUK had only had regard to three criteria, the fact that BLUK’s internal procedures required employees to satisfy themselves on all four criteria (as did MF Global’s internal manual in that case) cannot be prayed in aid as a breach of COB. This point was also dealt with by Eady J at paragraph 47 of his judgment where he stated:

The guidance contained in COB 4.1.10G did not require the Defendants to have regard to all of the four factors identified, but it indicates merely that it is likely that a firm will need to have regard to more than one of them, or to other criteria, before being satisfied as to the appropriate classification. Even this has the status of guidance only ("G"). It is of some interest, however, that the Defendants' own manual at the time appears to have set a higher standard, consistently with their desire to achieve best practice. This made it clear that the Defendants would aspire to have regard to all four of the guidance criteria. The Claimants have prayed this in aid. Yet Mr Smith argued that internal compliance manuals are irrelevant to the present task, since the court is concerned with requirements of law. There is no legal obligation to "score" on all four criteria. That would appear to be correct.

Of course when the process of classification in 2005 is subjected to the microscopic examination and criticism to which it has been subjected in Ms Prevezer’s cross-examination of BLUK’s witnesses and in her submissions, some “cracks” or mistakes inevitably appear, such as the reference to an “in depth” discussion with Mr Leslie and the suggestion that Ms Wachner had a FX facility with Republic National Bank in late 1998 and 1999. As I have indicated, it seems to me doubtful whether, even if these mistakes had been corrected, they would have made any difference to her classification.

As Mr Cox submitted and I accept, classification under COB involved taking reasonable steps to establish whether Ms Wachner was an intermediate customer, not exhaustive steps. The process is thus not an absolute one but requires the taking of reasonable care. I agree that it was reasonable for BLUK to rely on information from Ms Pearce and that it was not necessary to talk to BLUSA’s traders. In any event Mr Leslie who was a trader met Ms Wachner and formed a favourable view of her experience and understanding. As I have also said, I do not consider that it was necessary to cross-check all information with Ms Wachner herself or that doing so would in fact have made any difference to the classification she received. Nothing in COB 4.1.9R actually requires the firm to interview or meet with the client (and in Wilson v MF Global the firm did not do so) but in the present case there were in fact two meetings between BLUK employees and Ms Wachner prior to classification, one in Paris and one in London.

Taking the issue of compliance with COB 4.1.9R in the round, I am quite satisfied that BLUK took reasonable care to determine that Ms Wachner had sufficient experience and understanding to be classified as an intermediate customer and that BLUK complied with the requirements of COB 4.1.9R (2). In those circumstances, BLUK was entitled to classify Ms Wachner as an intermediate customer in 2005 and was not in breach of statutory duty in doing so.

Alleged breaches of COB and COBS prior to resumption of trading under the facility in September 2008

Although BLUK did in fact carry out both FSA reviews and KYC reviews on a twice yearly basis in the period February 2006 to August 2007, because for reasons I have given earlier in this judgment BLUK was not conducting designated investment business with Ms Wachner in that period, the requirement under COB 4.1.15R for a review of classification at least annually was not triggered.

Similarly, for the detailed reasons I have already given, Ms Wachner remained the client of BLUSA in all the BLUSA Agency Agreement transactions and those transactions were regulated by US federal laws not by the FSMA 2000. Accordingly, neither at the outset of the BLUSA Agency Agreement in July 2007 nor at any other stage before COB was superseded by COBS in November 2007 was the requirement for an annual review under COB 4.1.15R triggered.

When MiFID came into force on 1 November 2007, COBS superseded COB. BLUK was entitled to use the “grandfathering” procedure to treat Ms Wachner as an “elective professional client” provided that she was correctly categorised as an intermediate customer immediately before 1 November 2007. As I have held, Ms Wachner had been correctly categorised or classified as an intermediate customer back in August 2005 and in my judgment, there was nothing about the trading carried out under the BLUSA Agency Agreement before 1 November 2007 (in fact only the sale of four vanilla options which were part of two or three stage strangles with BLUSA direct trades) which could conceivably have affected adversely the appropriateness of that classification. If anything, the nature of that trading would have emphasised that Ms Wachner had more experience and understanding of foreign exchange option trading than she had had in August 2005. In my judgment, immediately before 1 November 2007 she was correctly categorised as an intermediate customer, so that BLUK was entitled to use the grandfathering procedure.

COBS did away with the requirement for annual reviews set out in COB 4.1.15R and replaced it with COBS 3.5.9R which provides that if a firm becomes aware that a client no longer fulfils the initial conditions which made it eligible for categorisation, then it must take “the appropriate action”, which may include re-categorisation. Ms Prevezer submitted that there were two occasions before the resumption of direct trading between Ms Wachner and BLUK in September 2008 when BLUK had become aware that Ms Wachner no longer fulfilled those initial conditions and should therefore have carried out a proper review of her classification. These were on 6 March 2008 immediately prior to the trading of the first RKI and on 10 April 2008 when Ms Pearce discussed with Mr Leslie her concerns about Ms Wachner’s options trading.

Since on both those occasions the relevant trading was under the BLUSA Agency Agreement, for reasons I have given COBS did not require BLUK to take steps to stop her trading under that Agreement, even if it had become aware that she no longer fulfilled the initial conditions for classification as an intermediate customer.

In those circumstances, it is not strictly necessary to consider whether BLUK had in fact become aware in either March or April 2008 that Ms Wachner no longer fulfilled those initial conditions, although I will deal with that issue briefly. Much was made by Ms Prevezer of a lack of communication within BLUK between the traders such as Mr Leslie and the private bankers such as Mr Barratt who would be responsible for any review of classification. It is certainly true that, as Mr Barratt said in evidence, he was not aware that Ms Wachner was about to trade RKIs or that she had done so until much later, in October 2008 when he looked into the debacle caused by her disastrous trading. At that stage he concluded that RKIs were “aggressive because their nature would magnify losses”. In cross-examination, Mr Barratt accepted that RKIs are “different … in terms of risk” from plain vanilla options, and “a different form of option … a new instrument effectively”.

Ms Prevezer understandably relies on that evidence in support of the proposition that if Mr Barratt had become aware that Ms Wachner was about to trade these RKIs he would have needed to review her classification, which he effectively accepted in evidence. However, in my judgment it is important to have in mind that Mr Barratt is not an option trader and that his opinion about RKIs is in any event given with the benefit of hindsight, knowing now what no-one knew then about how her pushing out strategy fell apart during a period of unprecedented financial turbulence in the markets in the early autumn of 2008. As at 6 March 2008, all of that was in the future and I suspect that if Mr Barratt had learnt she was about to trade RKIs it would not have caused him any concern or led him to review her classification.

In any event, in the context of the concern expressed by Ms Pearce on 10 April 2008, Mr Barratt’s evidence was that because Ms Wachner was not at that stage a customer of BLUK but of BLUSA, had he learnt of Ms Pearce’s concern, he would have referred that to the compliance department. It seems to me he would have had the same reaction if anything as at 6 March had caused him concern.

On the hypothesis that any concerns on either of those dates would have been referred to the compliance department, in my judgment it is extremely unlikely that they would have seen the need to review her FSA classification. This is for the simple reason that the head of compliance Mr Simon Rothberg would have concluded that because this was all trading under the BLUSA Agency Agreement, COBS did not apply, any more than COB had, the view he had expressed in his email to Mr Leslie of 23 October 2006, when the possible BLUSA Agency arrangement was first being discussed. In those circumstances, it is extremely unlikely that the compliance department of BLUK would have reviewed her classification, let alone thought that the appropriate action was to stop her trading RKIs or restrict her access to the BLUK dealing room.

Classification position in September 2008

It seems to me that before the BLUSA and HSBC options were transferred to BLUK in September 2008, there should have been an FSA review of Ms Wachner, as Mr Barratt clearly contemplated in his emails to Mr Miller of 28 July and 22 September 2008. That review did not take place, for which BLUK can certainly be criticised, but since COBS does not in fact require such reviews, it simply does not follow that the failure to hold that review was a breach of COBS. The issue as to whether there was a breach of COBS in continuing to treat her as an elective professional client and thus permit her to have access to the dealing room comes down to whether, as COBS 3.5.9R and COBS TP 1.3G provide, BLUK became aware in early September 2008 that she no longer fulfilled the initial conditions which applied to her categorisation as an intermediate customer in 2005. It is only if BLUK was aware of that, that there is any requirement to take appropriate action, which may include reclassification.

In support of her case that there was a breach of COBS 3.5.9R as at 8 September 2008 when the direct trading resumed, Ms Prevezer relies upon all the previous history together with a number of other matters: (i) on 3 September 2008 Ms Wachner advised Mr Gabb that she did not know what she was doing in relation to her RKI trading, (ii) the conversation between Ms Pearce and Mr Leslie on 5 September 2008 where Ms Pearce said that Ms Wachner’s position “sucks” and she was worried about Ms Wachner over-trading; (iii) on 8 September 2008 and thereafter, Ms Wachner followed the advice of Mr Leslie and Mr Gabb in closing her RKI positions with BLUSA and HSBC and opening corresponding positions with BLUK; (iv) that BLUK through Mr Leslie knew that this strategy led to an immediate loss for Ms Wachner; (v) her trading up to 8 September 2008 had become increasingly irrational.

In support of a number of these allegations, Ms Prevezer relies upon the expert evidence (particularly that of Dr Fitzgerald, although it is fair to say Dr Dolbear did not dissent from much of what he said) to the effect that any reasonably competent derivatives market participant would have appreciated by early September 2008 that Ms Wachner was not a sophisticated and professional trader and that the pushing out strategy which Ms Wachner was adopting (and which in large measure was the reason why she switched to BLUK because BLUSA had effectively limited Ms Wachner’s option trading in the sense that she could no longer push out RKIs for longer than two months) was increasingly risky with each rolled over or pushed out option.

Clearly, in relation to a case of a breach of a general advisory duty if there had been a specific agreement to do so within the meaning of clause 6.16 of BLUK’s Terms of Business, that expert evidence would have proved helpful to Ms Wachner’s case. However, it is important to have in mind that any negligence case would not depend upon establishing actual knowledge of the matters complained of. It would be enough if those were matters of which BLUK ought to have been aware if it had exercised reasonable care.

However, in my judgment, on the wording of COBS 3.5.9R and COBS TP1.3G, a case of breach of statutory duty based upon an alleged failure to reclassify depends upon establishing that BLUK was aware that Ms Wachner no longer fulfilled the initial conditions on the basis of which she had been classified in 2005 as an intermediate customer. It is not enough that BLUK ought to have been aware of that, if it had exercised reasonable care. It seems to me entirely appropriate that these provisions require actual knowledge that the client no longer fulfils the initial conditions, given that the original classification was on the basis of reasonable steps rather than objectively correct classification.

So far as reliance upon the history of her trading of RKIs prior to early September 2008 is concerned, although an expert like Dr Fitzgerald may regard it as irrational and not what he would expect of a professional trader, in fact at least until July 2008 her trading seems to have been reasonably successful. In his discussion with Ms Pearce on 5 September 2008 referred to below, Mr Leslie seems to have thought that it was only some three weeks or so previously that things had started to go wrong and he blamed that on BLUSA’s unwillingness to allow Ms Wachner to push out her options further than two months.

Turning to the specific matters relied upon, I do not consider that too much can be read into Ms Wachner having said to Mr Gabb on 3 September 2008: “I don’t know what I’m doing to tell you the truth”. Mr Leslie’s evidence was to the effect that in the heat of the moment traders will often make this sort of comment. This accords with my own experience of cases of this kind, where even the most successful of traders can make this sort of comment.

As for the conversation between Mr Leslie and Ms Pearce on 5 September 2008, in cross-examination Mr Leslie accepted that she was “very concerned”. Mr Leslie also accepted that the underlying feature of this conversation was that “as far as you were concerned, [Ms Wachner] had the money to keep rolling and rolling … And all you needed to do is to keep calm, tell Ms Pearce to keep calm, and things would be alright”. Although Ms Prevezer was critical of this, I consider that what he said during this conversation with Ms Pearce requires a closer analysis. In my judgment, far from this conversation demonstrating that Mr Leslie was aware that she should no longer be classified as an intermediate customer or an elective professional client, it tends to point in the opposite direction.

He says in response to Ms Pearce’s statement that Ms Wachner’s positions “suck”:

“So of course her positions suck but the second the market stops moving, yeah, which I am not saying it is today but the second the market stops moving them she can get… regain control of her positions, okay and the good news is that her, they are not at the moment, they are not that far out. …. We will adjust her positions to have mainly [calls] rather than you know both.”

There is then the following exchange with Ms Pearce:

As I have already indicated, what emerges from this exchange is that it was only in the last few weeks that Ms Wachner’s positions had started to go wrong and that Mr Leslie considered that the problem could have been avoided if the RKIs had been capable of being rolled out to a rate of 1.38 in the first place, which couldn’t be done because to get that rate required a longer maturity date than 10 November 2008, which was as far out as BLUSA would permit Ms Wachner to go. This is confirmed by what he says at an earlier point: “the problem is the way that New York are running her position… we don’t have this two month restriction that they have for some weird reason”.

From the whole passage of transcript and his evidence about it, it appears that if Mr Leslie ignored Ms Pearce’s concerns, he did so because he thought that in the past Ms Wachner had traded profitably (which was indeed the case earlier in the summer of 2008) and he also believed at the time (even though this may have been wrong in hindsight) that by pushing out further, Ms Wachner could effectively beat the market and end up in a situation where her open positions expired worthless. This explains his having referred earlier in his conversation with Ms Pearce to his other client: “I will give a good example. I had a customer who had a shit position, all right. He pushed it out 18 months and it became a good position....It was really expensive. He had the money, you know.”

In terms of Ms Wachner’s financial standing and thus ability to pursue an expensive strategy of that kind, on the day before the conversation with Ms Pearce, 4 September 2008, she had sent Mr Leslie Ms Wachner’s Personal Financial Statement prepared by her accountants as at 31 December 2007, showing a net worth of some US$61 million. This included the property in the Hamptons valued at US$11 million. During their conversation on 5 September 2008, Mr Leslie referred to having received this financial information and Ms Wachner told Mr Leslie that she had recently had an offer of US$50 million on that property, so that as she put it “it’s a pretty damn good balance sheet I think”. Thus, to the extent that Ms Prevezer was criticising Mr Leslie for allowing Ms Wachner to continue pushing out without having any idea whether she could afford to do so, the criticism was somewhat unfair. This financial information suggested that she could afford the pushing out strategy in which she was engaged.

As for the suggestion that the transfers were all done on the advice of Mr Leslie and Mr Gabb, it is true that they considered that if she wanted to push her options out further than BLUSA would permit, she should transfer to BLUK and that is what they suggested. Equally that is what Ms Wachner herself wanted to do. It was the desire to push out her options, effectively the strategy to beat the market by pushing out further which was the real reason why she switched to BLUK, quite apart from personality issues with the BLUSA traders, which had been going on for some time. For reasons which I have already indicated in rejecting the negligent advice claim, I consider that Ms Wachner would have pursued her strategy irrespective of the advice received. In any event, it is difficult to see how the question of whether she did this on advice has any relevance to the allegation that BLUK was aware that she no longer fulfilled the initial conditions.

The next point made on behalf of Ms Wachner is that the switch to BLUK was irrational and led to an immediate loss. Ms Prevezer suggested in her submissions that Mr Leslie had accepted this in cross-examination, in effect that the strategy had no upside for Ms Wachner other than that she felt more comfortable trading with BLUK. Although taken in isolation that is what Mr Leslie said, I consider that it does not represent fairly the totality of his evidence on this point, the thrust of which was that Ms Wachner did not want to close out her positions and take the losses she would have borne if she had done so, which is why she pursued the strategy of transferring the options to BLUK in order to push them out. Mr Leslie said that it had not cost Ms Wachner anything to move her positions to BLUK and said: “every time she rolls, if the market is continuing to move against her -- the cost of the roll is a lot less than the cost of the market moving against her.” Asked by me to explain this, he said that the reason she had sustained huge losses was that the market had moved.

The next allegation by Ms Wachner is related to the previous one. Ms Prevezer also contends that by this stage Ms Wachner’s trading had become irrational and, by reference to the expert evidence, submits that this should have been apparent to any reasonably competent market participant. These two allegations taken together are the closest Ms Wachner comes to suggesting that BLUK (in the person, one assumes of Mr Leslie) had been aware that her trading as at 8 September 2008 was so irrational it should be stopped, but that BLUK had allowed her to continue trading in effect to feather its own financial nest by making profits from her trading. This suggestion, which would have involved a serious allegation tantamount to fraud, was neither pleaded nor put to Mr Leslie in cross-examination, and would simply not have been open to Ms Wachner.

Even if it had been open to be argued, I would have rejected it. Whatever Ms Wachner may say now about not knowing what she was doing, at the time her strategy was a clear one, to push out her RKI options further than 10 November 2008 which is when they all matured, with a view to beating the market so that the last set of options expiring worthless. As a strategy this was not in any sense ridiculous. It exposed her to increasingly volatile RKIs, but if the market had continued downwards in September and October 2008, it is by no means impossible that this strategy would have succeeded. Mr Leslie clearly thought at the time that it could, which was the point he made to Ms Pearce on 5 September 2008, which negatives the suggestion that he somehow lured Ms Wachner into a loss making position by transferring her RKIs to BLUK.

The real problem for Ms Wachner was that after the collapse of Lehman Brothers, the market became unpredictable, going up some of the time and down some of the time, leading to the risk of whip-sawing, where both options in a pair could knock-in and both continue to be in the money at expiry, something not previously considered possible, as demonstrated by the fact that when the facility recommenced on 8 September 2008, BLUK only required one sided margin. In this context, Mr Leslie’s evidence about the unprecedented volatility in the market after the collapse of Lehman Brothers is instructive:

“Q. ….would you agree in general terms that in September 2008 it didn't look like the market was getting better? It was a time of deep financial crisis, wasn't it?

A. It developed into -- in early September, no. In early September it looked like Lehmans were going to go under, which caused a big problem, and hopefully that was going to be it. But then the shit really hit the fan. I apologise, my Lord.

Q. Pushing out, you would accept, meant huge costs, increasingly huge costs for Ms Wachner, wasn't it?

A.

As I say, I don't remember exactly when the volatility went mental, for want of a better expression, but when it went, it went. I mean, it went ridiculous. Because, unfortunately, the volatility which had had a previous all time high of about 15 per cent, and had been trading at 8 per cent, went up to 30 per cent, which is -- even when there had been previous blips and disasters in the market, it had never got anywhere near. No modelling would have allowed for what actually happened.”

It is important not to judge by reference to hindsight the question of whether there was anything which should have led BLUK to conclude that Ms Wachner no longer fulfilled the initial classification as an intermediate customer. There is an inevitable temptation to say that within less than two months of coming back to BLUK to trade, her RKI trading had gone disastrously wrong and to conclude that that demonstrates that she should not have been classified as an intermediate customer or elective professional client. However, that would be the wrong approach and the matter must be looked at as at the date the new facility incepted on 5 September 2008.

Returning to the criteria in COB 4.1.10G which were the initial conditions pursuant to which she was classified as an intermediate customer, by this time in September 2008, Ms Wachner had been trading foreign exchange options with BLUSA for nearly five years and RKIs specifically with both BLUSA and HSBC for some six months in substantial volumes, so that on any view she was an experienced foreign exchange trader. Whatever the experts may think of her pushing out strategy in hindsight, it is clear that Mr Leslie at least in early September 2008 thought that, as with his previous client, this strategy could prove successful.

Mr Leslie said that he ignored the offensive things which the BLUSA traders said about Ms Wachner. It seems to me that this was not because he was shutting his eyes to the obvious or for some ulterior motive, but because his assessment of her was genuinely less critical and because he believed that her pushing out strategy could succeed, as it had for his other client. In the event she was unable to push out beyond April 2009 because, as a consequence of the changed market conditions, from mid-October 2008 onwards BLUK senior management indicated that a condition of being allowed to do so would be the provision of margin on both sides of a pair of options and Ms Wachner was either unable or unwilling to provide such margin. However, those subsequent events cannot affect the genuineness of Mr Leslie’s assessment in early September 2008 that the pushing out strategy might well succeed, which is inconsistent with an awareness that the initial conditions for Ms Wachner’s classification as an intermediate customer were no longer fulfilled.

In my judgment, an important consideration in this context is the attitude of Ms Wachner herself. In the light of the criticism now levelled that BLUK should have re-classified her in September 2008 and prevented her from trading with BLUK, it is striking that, despite COBS 3.5.8G, she never once suggested to BLUK that there were matters which might require her reclassification as a private client who should not have access to the dealing room.

It seems to me that for reasons I have already set out earlier in the judgment, despite Ms Wachner’s portrayal of herself for the purposes of this case as a novice or ingénue led into this trading, which she did not understand, by Mr Leslie and Mr Gabb, the reality of her position at the time was somewhat different. As the transcripts of conversations and the evidence of Mr Leslie and Mr Gabb demonstrate, she was and is a strong-willed person, certainly well able to make her own trading decisions, which did not by any means always accord with BLUK’s recommendations.

The significance of this is that it seems to me that any discussion within BLUK in September 2008 about reclassifying Ms Wachner in a more restricted way would probably have involved some consultation with her. As I say, despite the somewhat helpless image she now seeks to portray, that was certainly not her self-assessment at the time as to her foreign exchange experience and expertise, as demonstrated by her approval of the form prepared by Mr Miller on 22 September 2008. One suspects that any attempt to reclassify her and restrict her access to the dealing room would have been met by indignation bordering on outrage. Whilst her attitude could not and would not be determinative, it is quite a good touchstone as to whether the reclassification for which Ms Prevezer now contends either should or would have taken place.

In all the circumstances, I am of the view that BLUK was not in breach of COBS 3.5.9R in September 2008 and that, even if there had been a review at that time, BLUK would not have concluded that the appropriate action was to prevent Ms Wachner having access to the trading room. In conclusion, I do not consider that the case of breach of statutory duty in relation to COBS 3.5.9R is made out.

Ms Prevezer relies upon a number of other provisions of COBS of which it is contended BLUK was in breach as follows:

COBS 2.1.1R (1) A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule).

(2)

This rule applies in relation to designated investment business carried on:

(a)

for a retail client; and

(b)

in relation to MiFID or equivalent third country business, for any other client.

COBS 2.2.1 (1)  A firm must provide appropriate information in a comprehensible form to a client about:

(a)

the firm and its services;

(b)

designated investments and proposed investment strategies; including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies;

(c)

execution venues; and

(d)

costs and associated charges;

so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis.

COBS 4.2.1R (1)  A firm must ensure that a communication or a financial promotion is fair, clear and not misleading.

(2)

This rule applies in relation to:

(a)

a communication by the firm to a client in relation to designated investment business other than a third party prospectus;

(b)

a financial promotion communicated by the firm that is not:

(i)

an excluded communication;

(ii)

a non-retail communication;

(iii)

a third party prospectus; and

(c)

a financial promotion approved by the firm.

COBS 4.5.2R A firm must ensure that information:

(1)

includes the name of the firm;

(2)

is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks;

(3)

is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received; and

(4)

does not disguise, diminish or obscure important items, statements or warnings.

COBS 9.2.1R (1)  A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client.

(2)

When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client's:

(a)

knowledge and experience in the investment field relevant to the specific type of designated investment or service;

(b)

financial situation; and

(c)

investment objectives;

so as to enable the firm to make the recommendation, or take the decision, which is suitable for him.

COBS 10.2.1R(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;

(b)

may assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.

COBS 14.3.2R A firm must provide a client with a general description of the nature and risks of designated investments, taking into account, in particular, the client's categorisation as a retail client or a professional client. That description must:

(1)

explain the nature of the specific type of designated investment concerned, as well as the risks particular to that specific type of designated investment, in sufficient detail to enable the client to take investment decisions on an informed basis; and

(2)

include, where relevant to the specific type of designated investment concerned and the status and level of knowledge of the client, the following elements:

(a)

the risks associated with that type of designated investment including an explanation of leverage and its effects and the risk of losing the entire investment;

(b)

the volatility of the price of designated investments and any limitations on the available market for such investments;

(c)

the fact that an investor might assume, as a result of transactions in such designated investments, financial commitments and other additional obligations, including contingent liabilities, additional to the cost of acquiring the designated investments; and

(d)

any margin requirements or similar obligations, applicable to designated investments of that type.

14.3.4R Where the risks associated with a designated investment composed of two or more different designated investments or services are likely to be greater than the risks associated with any of the components, a firm must provide an adequate description of the components of that designated investment and the way in which its interaction increases the risks.

The short answer to the allegations of breach of some of these provisions is that they only apply to retail clients. Specifically, COBS 4.5 is actually headed: “Communicating with retail clients” and, by virtue of COBS 14.3.1R COBS 14.3.2R, only applies to retail clients. On the basis that Ms Wachner was appropriately classified as an elective professional client, these provisions are of no application. Indeed in her written closing submissions, Ms Prevezer seems to be pursuing these allegations only on the basis that if Ms Wachner had been reclassified as a retail client as she alleges should have occurred then these provisions would have applied. Given my finding that she remained appropriately classified as an elective professional client, the reality must be these allegations also fall away. Nonetheless I shall deal with them briefly.

The first set of allegations concerns personal recommendations or an appropriateness assessment under COBS 9.2.1R or 10.2.1R respectively. It is contended that Mr Gabb and Mr Leslie made personal recommendations in relation to many of the RKIs Ms Wachner traded, but before doing so failed to seek information from her as to her knowledge and experience of RKIs, whether they met her investment objectives or whether she was able to bear financially associated investment risks.

In the alternative to that contention, it is submitted that, if Mr Leslie and Mr Gabb did not make personal recommendations such that BLUK had no obligation to assess the suitability of RKIs for Ms Wachner, then under COBS 10.2.1R BLUK had an obligation to assess their appropriateness.

It is submitted by Ms Prevezer that, but for those alternative breaches of COBS, Ms Wachner would never have started trading RKIs with BLUSA or continued doing so. Accordingly, all her losses from that trading are said to flow from those breaches.

There are a number of answers to these allegations. First, in so far as Ms Wachner relies upon breach of COBS 9 by BLUK in relation to the RKIs traded pursuant to the BLUSA Agency Agreement, since for reasons I have given those were all trades with BLUSA not with BLUK and Ms Wachner was not the “client” of BLUK for the purposes of COB or COBS, this allegation is misconceived.

Second the obligations in relation to personal recommendations under COBS 9 only arise in relation to specific investments, as is made clear by the definitions in the Glossary of “personal recommendation” as “advice on investments” and of “advising on investments” as advice on the merits of “buying [or] selling a particular investment”. That “personal recommendations” are limited to specific investments is confirmed by Eady J in Wilson v MF Global [2011] EWHC (QB) 138 at paragraph 99. In my judgment, it is simply not possible to say that Mr Leslie or Mr Gabb gave her advice on the merits of any specific RKIs and, as Mr Cox rightly points out in his closing submissions, Ms Wachner has nowhere alleged that in the case of any specific transaction, there was a personal recommendation that was wrong under COBS 9.

Third in the regulatory context, it is important to have well in mind that the relationship between BLUK and Ms Wachner was an execution only one (as indeed was the corresponding relationship between BLUSA and Ms Wachner) governed by BLUK’s Terms of Business which made clear that in the absence of a specific agreement, there was no duty to advise on the merits or suitability of any investments and Ms Wachner would be relying on her own judgment in all trading decisions. I consider those Terms and the nature of the relationship wholly inconsistent with BLUK being under any obligation under COBS 9.

Although in one sense of course Mr Leslie and Mr Gabb did give “advice”, for reasons I have already given in the context of the negligent advice claim, they were more in the nature of “trading floor opinion” than advice on the merits or suitability of any specific investment and in my judgment fell a long way short of any sort of personal recommendation. There is a related point, to which I have already alluded in the context of the negligent advice claim and the need for a “specific agreement” before such a claim could get off the ground. That is that merely because Mr Leslie and Mr Gabb were in one sense providing advice to Ms Wachner, that conduct unless accompanied by a specific agreement within the meaning of clause 6.16, could not change the nature of her relationship with BLUK from execution only to advisory.

In relation to the related “appropriateness” obligation in COBS 10.2, Mr Cox relies on the exception in 10.4 which provides that where execution only services are provided, an appropriateness assessment need not be done, but this only applies to non-complex instruments. An option is a derivative and hence a complex instrument. However, as with the alleged breach of COBS 9, this obligation only arises at all in relation to someone who is a “client” of the firm, which (for the reasons I have given earlier) Ms Wachner was not, until she started trading directly with BLUK in September 2008.

So far as that period of trading is concerned, if, as I have held, Ms Wachner remained appropriately classified as an elective professional client, it is difficult to see how there could have been any breach of this provision, as under COBS 10.2.1R (2) (b) in assessing appropriateness, BLUK would have been entitled to assume that she had the necessary knowledge and experience in order to understand the risks involved in trading RKIs. In any event, as I have also held, despite her protestations to the contrary in her evidence, I am quite satisfied that Ms Wachner was an experienced and sophisticated trader who understood the risks involved in trading RKIs.

Under COBS 10.2.8G, in circumstances where the 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”. As Mr Cox submitted, in those circumstances, the client simply goes ahead with the transaction which is precisely what happened here. Even if BLUK had considered that the RKIs Ms Wachner traded in September and October 2008 were not appropriate for her, it would have been obliged to warn her under COBS 10.3.1R. However, in my judgment and for the reasons I have already given, Ms Wachner would not have heeded any warning but would have pursued her strategy of pushing out with a view to beating the market which was, after all, why she had moved to BLUK in the first place.

Ms Prevezer then makes a series of allegations of breach of the obligation to act fairly and professionally under COBS 2.1.1R, breach of the obligation to provide appropriate information under COBS 2.2.1R, breach of the obligation to communicate fairly and clearly under COBS 4.2.1R and breach of the obligation to provide accurate information under COBS 4.5.2R(2). I agree with Mr Cox that these allegations essentially duplicate Ms Wachner’s allegations about classification, recommendations and appropriateness and for the same reasons as I have given in relation to those allegations, these allegations fail.

Similarly, the allegations of breach of the obligation to provide a description of the nature and risks of the transaction under COBS 14.3.2R and of the obligation to provide an adequate description of the components of an investment under COBS 14.3.4R essentially duplicate the allegations about classification, recommendations and appropriateness and for the same reasons as I have given in relation to those allegations, these allegations fail.

Since I have found earlier in the judgment that BLUK did not make any negligent misrepresentation, was not in breach of a duty to advise and was not in breach of statutory duty, it is not necessary to burden an already lengthy judgment with detailed findings of causation as to whether the loss and damage Ms Wachner claims was caused by the alleged breaches, since on the basis of my findings her claim must fail.

Nonetheless, I will just draw together briefly some points on causation which would in any event have posed serious difficulties in the way of her claim, however it was formulated. First and foremost, it is quite apparent from the evidence that Ms Wachner was determined to continue trading as Mr Cox put it “to the bitter end” carrying on pushing out until stopped by each of BLUSA and BLUK in turn. This was so even after the problems with her exposure to RKIs had become apparent.

The reality is that, throughout her trading, she was averse to taking losses. Even when Mr Leslie or Mr Gabb suggested that she should trade more cautiously or take her losses she disregarded the warnings. Her approach was always to “bank” the premiums and, rather than taking losses, she would “buy back” options and sell further options with later maturity dates and more aggressive terms to finance those purchases. It may well be that, if she had been able to carry on pushing out for as long as she needed, she would in the end have beaten the market, but by November 2008, when BLUK was asking for margin on both sides before it would consider allowing her to push out beyond April 2009, she was either unwilling or unable to provide the margin sought. The allegations of misrepresentation and negligent advice in relation to margin are hopeless and it is not suggested that in closing her out because she would not provide the margin it required for further trading, BLUK was in breach of contract or of any duty it owed Ms Wachner.

It follows that the reality is that, certainly as regards the misrepresentation and negligent advice cases, even if Ms Wachner had made good her case, she would have continued trading regardless, so that it is difficult to see how she could have established that any loss was caused by BLUK’s misrepresentation or breach of duty.

The position may be somewhat different with the claim for breach of statutory duty. For the reasons I have given, even if I had considered this claim was a good one, it would only have arisen at the time when Ms Wachner was allowed to continue trading in September 2008. Given that, as I have said, it is unlikely that any consideration of the possibility of reclassification of Ms Wachner at that stage would have taken place without consultation with her, it seems to me to be distinctly possible that after such consultation, BLUK would not in fact have reclassified her.

However, on the hypothesis that at that point the “appropriate action” for BLUK to take would have been to reclassify Ms Wachner as a private client, she would have been denied access to the BLUK trading room and, in reality would not have been permitted to “transfer” her positions in BLUSA and HSBC into BLUK. In those circumstances, given that in relation to her trading with BLUSA (the trading with HSBC not being the subject of the present claim) she was not permitted to push out further than two months, she could not have pushed out any of her open positions beyond 10 November 2008. In those circumstances, she would have suffered a substantial proportion of the loss if not all of the loss she claims in any event.

In her closing submissions, Ms Prevezer submitted that if Ms Wachner had been reclassified as a retail client on 8 September 2008, she would have closed out her existing RKI positions on that date and not carried out any further RKI trading. On that hypothesis, Ms Prevezer puts forward a claim of some €15 million. I do not accept the assumption on which this claim is based, that if when Ms Wachner wanted to “transfer” her open positions to BLUK, BLUK had said that she could not because she would have to be categorised as a retail client, she would promptly have closed her open with positions with either BLUSA or HSBC that very day, 8 September 2008.

On the contrary whatever she may say now the probability is that she would have carried on trading with both banks until the bitter end in October or November 2008 and that she would certainly not have closed out her positions on 8 September 2008. In those circumstances she would undoubtedly have suffered a loss on eventual closing out far greater than that which she accepts she would have suffered if she had closed out on 8 September 2008. Quite what that loss would have been is a matter of conjecture (not least because the precise terms of her relationship with HSBC remain something of a mystery) but given that the burden of proof would be upon Ms Wachner to establish what loss she had suffered as a consequence of BLUK’s breach of statutory duty, the inability to demonstrate that she would not have suffered the loss she did in any event, even if BLUK had been in breach of statutory duty, is a fatal flaw in her claim.

For the avoidance of doubt, the same fatal flaw would present itself in relation to any claim for breach of a duty to advise, since as I have held, such duty could not arise until Ms Wachner was a client of BLUK in September 2008.

Given my findings on breach and causation, it is strictly unnecessary to consider the defence of contributory negligence, and I only do so for the sake of completeness. The defence is clearly available in respect of each of the causes of action relied upon here (including breach of statutory duty) since section 1(1) of the Law Reform (Contributory Negligence) Act 1945 applies the defence where “any person suffers damage as a result partly of his own fault and partly of the fault of any other person or persons” and “fault” is widely defined in section 4 as meaning “negligence, breach of statutory duty or any other act or omission which gives rise to liability in tort”. Section 150 of FSMA 2000 states that: “[a] contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty”, from which it is clear that the defence is available here.

To the extent that Ms Prevezer sought to argue the contrary in her closing submissions, that was misconceived. It is striking that although she sought to rely upon a passage in the judgment of Morgan J in Spreadex, where the learned judge said: “one of the purposes of the duty imposed on Spreadex by COB 7.10.5R was to protect Dr Sekhon against himself …” he went on to hold that the defence was available to the extent of 85%.

If the issue were relevant, I would have held that Ms Wachner was contributorily negligent to a substantial extent in the present case because: (a) it is clear that despite warnings which she was given she carried on trading regardless and (b) to the extent that she claims to have been led by the nose by the traders from BLUK in what remained an execution only relationship in circumstances where she also claims that she did not know what she was doing (evidence which I do not accept) I agree with Mr Cox that she was substantially at fault for not engaging a professional trader to conduct her trading. Had the point arisen, I would have held Ms Wachner 75% contributorily negligent.

In all the circumstances, Ms Wachner’s counterclaim fails. Accordingly, she is liable in debt to BLUK for €13,434,947.98 due when her positions were closed out, after applying the margin in fact provided by Ms Wachner. To that must be added interest due in relation to which, together with other consequential issues, I will hear further submissions, as necessary.