Walker Crips Stockbrokers Ltd v Detailplain Ltd & Ors

The claimant in the main action, Walker Crips Stockbrokers Ltd. (“WCS”), as its name suggests, carries on business as a stock and share broker.

As I understand it, the parent company of WCS is a company called Walker, Crips, Weddle, Beck plc (“WCWB”). With effect from 6 April 2004, pursuant to the terms of an agreement (“the Sale Agreement”) in writing dated 6 April 2004, WCS took over the stock and share broking business until that time carried on by WCWB.

By clause 2.1 of the Sale Agreement it was provided, so far as is presently material, that:-

“Subject to the terms and conditions of this Agreement, WCWB shall sell and transfer (which expression where appropriate includes an assignment or novation) and WCSL shall with effect from the Transfer Date [6 April 2004] purchase the Business as a going concern and some of the assets and rights of WCWB used in the conduct of the Business including, but without limitation:

….

2.1.3

the benefit (subject to the burden) of the Business Contracts;

…”

In clause 1.1 of the Sale Agreement the expression “Business” as used in that agreement was defined as meaning “the business of stockbroking of WCWB”, while the expression “Business Contracts” was defined as including “the Customer Contracts”. The latter expression was defined in the same sub-clause as:-

“all those contracts, engagements or orders entered into on or prior to the Transfer Date by or on behalf of WCWB with customers for the provision of services by WCWB in connection with and in the ordinary course of the Business which at the Transfer Date remain to be performed in whole or in part by WCWB.”

The second defendant in the main action, and second Part 20 claimant, Mr. Paul Cramman, was born in England and is, by profession, a chartered accountant. He left the United Kingdom in 1977. Since 1993 he has resided in Canada. He became a customer of WCWB as from 12 December 2003, pursuant to the terms of an agreement (“the Cramman Agreement”) in writing signed by Mr. Cramman on that date. I shall come back to the terms of the Cramman Agreement. That agreement was continuing in existence as at 6 April 2004, and thus the benefit of it was assigned by clause 2.1 of the Sale Agreement by WCWB to WCS.

The first defendant in the main action, and first Part 20 claimant, Detailplain Ltd. (“Detailplain”), was incorporated in England and Wales on 23 February 2001. Mr. Cramman is now the sole director and shareholder in Detailplain. Until 1 April 2005 the third defendant in the main action, Mr. Adrian Miles, was also a director of Detailplain. As from 4 September 2004 Detailplain became a customer of WCS, pursuant to the terms of an agreement (“the Detailplain Agreement”) in writing signed on behalf of Detailplain by Mr. Cramman on 4 September 2004.

Mr. Miles took no part in this action.

The principal claim of WCS in this action against each of Mr. Cramman and Detailplain was for payment of sums alleged to be due in relation to shares purchased by WCS respectively on the instructions of each, but which had not been paid for. The sums claimed were expressed in United States dollars. The amount sought from Mr. Cramman in respect of his own purchases of shares through WCWB or WCS totalled $793,399.13. The amount sought from Detailplain came to a total of $4,044,653.

A secondary, alternative, basis upon which exactly the same sums were claimed against Mr. Cramman and Detailplain, respectively, was for alleged breach of an agreement (“the July Agreement”) in writing signed on behalf of WCS on 11 July 2005 and made between Mr. Cramman, Detailplain and WCS by which Mr. Cramman and Detailplain agreed to discharge, in a manner set out in the July Agreement, their respective obligations to WCS.

A further claim against Mr. Cramman, and also against Mr. Miles, was pursuant to a guarantee (“the Guarantee”) in writing signed by each on 7 September 2004 by which they, as the board of directors of Detailplain, agreed:-

“to indemnify Walker Crips Stockbrokers Ltd. against any loss arising as a result of the failure of the company to meet its obligations in its share or option dealings. ”

Quite simply, it was contended on behalf of WCS that both Mr. Cramman and Mr. Miles were liable to indemnify it against the losses which it had suffered as a result of the failure of Detailplain to pay to it the sum which it owed on the balance of its account.

All the shares which it was said that Mr. Cramman had instructed WCWB, and both Mr. Cramman and Detailplain had instructed WCS, to purchase were shares traded on an unlisted and unregulated market in the United States which was known as the “Over the Counter” or “Pink Sheet” market. It appears that the companies the shares of which are traded in this market are typically newly created and that dealing in such shares involves high risks, but the possibility of high returns. However, it seems also to be a feature of this type of share that the demand for it can be very limited, so that it may be difficult to sell, if one should want to do that. The shares in this class are thus described as “illiquid”

Subject to one transaction, or pair of transactions, on about 9 June 2005 and said by WCS, but disputed by Detailplain, to have been undertaken on behalf of Detailplain, it was not in dispute that the particular share transactions upon which the claims of WCS were based had taken place, and that they had been undertaken pursuant to instructions given by Mr. Cramman either on his own behalf or on behalf of Detailplain. It was not in dispute that only one amount of money, US $35,000, had been paid to WCS on behalf of Mr. Cramman and that no sum had been paid to WCS on behalf of Detailplain. The amount of US $35,000 was paid by Mr. Cramman on 15 April 2004 in settlement of the purchase of shares which WCWB, as it happened, had been instructed by Mr. Cramman to purchase on his behalf. The shares involved were 50,000 in a company called Osprey Gold and the overall purchase cost was US $34,834.96. All of the other shares which were purchased by WCS on the instructions of either Mr. Cramman or Detailplain were purchased on credit provided by WCS. Only the Osprey Gold shares were purchased by WCWB. Over time some security was provided by Mr. Cramman on his behalf or on behalf of Detailplain. That security was realised over a period starting from about 4 May 2005, in the case of Mr. Cramman personally, and from rather later in the case of Detailplain. The sums claimed in this action by WCS were in fact the balances on the respective accounts of Mr. Cramman and Detailplain at the conclusion, on about 25 July 2005, of the realisation of the security held. In fact WCS retained, at the date of the trial, some security in the form of shares in “Pink Sheet” companies, but by about 25 July 2005, and continuously thereafter, the value of each of the shares held was infinitesimal in comparison with the sums owed to WCS.

A possible interpretation of the state of account of Detailplain with WCS was that, at the end of the realisation of securities of value held by WCS on about 25 July 2005 what was outstanding due was what was said to have resulted from the transaction, or pair of transactions on 9 June 2005 which was said to have been unauthorised. Certainly that was the analysis which Mr. Cramman urged upon me in his oral evidence. The consequence for which he contended of that analysis was that Detailplain owed WCS no sum at all.

Apart from the issues in relation to the transaction, or pair of transactions, on 9 June 2005, the first principal line of defence advanced by Mr. Cramman from the witness box on behalf of himself and Detailplain was that he had been led to believe, by the person at WCS with whom he ordinarily dealt at the outset, Mr. Robert Savill, that it was possible for him to finance the purchase of shares on credit by a system of what were called “rollovers” and “bed and breakfast” transactions. Both Mr. Cramman and Detailplain were permitted by WCS to purchase shares through it on terms that payment for the shares bought would be made 20 days after the transaction date on which the purchase was made – what was described in the trade, apparently, as “T+20”. A “rollover”, according to Mr. Cramman, was a simultaneous pair of transactions by which shares which had been purchased previously and which were due to be paid for in accordance with “T+20” terms could be sold, thereby raising the sum necessary to settle the original cost of purchase, and then immediately repurchased on “T+20” terms. The effect of such a transaction was to obtain an additional 20 days for payment of the bulk of the price of the shares. Because there would be a difference between the sale price and the repurchase price an amount would have to be paid to secure the advantage of the extension of credit, but it was modest in the context of the total price of the shares. However, it was understood that, at least in keeping with the spirit of the rules of London Stock Exchange Ltd., such a “rollover” transaction should only take place once in respect of each purchase of shares, as otherwise a false indication might be given of the interest in the market in the shares in question. To overcome that possible problem, according to Mr. Cramman, what one did after the first “rollover” transaction was to sell the shares one day, but purchase an equivalent number of shares the next. That was a “bed and breakfast” transaction. In theory, contended Mr. Cramman, the break between the time of the sale and the time of the new purchase meant that it was not a “rollover” transaction, but a genuine new transaction, which could have its own legitimate “rollover” transaction at the point at which the new shares would otherwise be due for payment. Mr. Cramman accepted in cross-examination that this method of proceeding by “rollover” and “bed and breakfast” he always knew was subject to the need for a director of WCS to approve each “rollover” transaction, so that this mode of operation could be interrupted at any “rollover” stage by refusal of approval, and that, if that happened, the shares in question would really have to be paid for. However, the pleaded case of the first and second defendants was that it was a breach of contract on the part of WCS to interrupt the process, or that to interrupt it exposed WCS to liability for misrepresentation. In fact it appeared, in the light of the evidence of Mr. Cramman given in cross-examination, that any criticism of WCS interrupting the method of operation using “rollover” and “bed and breakfast” transactions was quite unsustainable.

The second principal line of defence advanced by Mr. Cramman on behalf of himself and Detailplain in his oral evidence was to the effect that WCS owed him a duty to advise him as to what practices of funding purchases of shares were considered in the relevant market to be legitimate, that the use of “rollover” and “bed and breakfast” transactions contravened some unspecified provisions or requirements of Financial Services Authority and/or of the United States Securities and Exchange Commission, that he and Detailplain had been led into dealing in shares as they had by not having had it pointed out to them that such method of funding was not permitted, and it was being encouraged to operate in that way which had caused them to lose money. Thus, it was said, each of Mr. Cramman and Detailplain had a cross-claim in respect of its losses which it could set off against whatever sum would otherwise be due from it to WCS. I shall return to this line of defence.

In relation to the claims of WCS based on alleged breach of the July Agreement the suggestion made on behalf of Mr. Cramman and Detailplain by Mr. Robin Halstead, who appeared on their behalf at the trial, was that the agreement had been frustrated by the refusal of WCS to comply with instructions given by Mr. Cramman, on behalf of Detailplain, to sell some shares in a company called Stonebridge Resources Exploration Com (“Stonebridge”). Again I shall return to that matter.

The Cramman Agreement was comprised in a standard form agreement entitled “Two-way Private Customer Agreement Letter” used by WCWB. For present purposes the material terms of the Cramman Agreement were these:-

“2.

EXECUTION-ONLY AGREEMENTS

Please note that we will not advise you about the merits of a particular transaction if we reasonably believe that when you give the order for that transaction, you are not expecting such advice and are dealing on an execution-only basis. In such circumstances, we will inform you at the time that we will execute your order on that basis.

….

11.

DEFAULT REMEDIES

In the event of your failure to make any payment or to deliver any securities due to us (or agents used by us), we reserve the right to retain any funds, securities or other assets due to you and to offset the liability against them.Please see attached Terms of Trade for full particulars of our proposed remedy in respect of transactions in which a customer has defaulted.

…

23.

AMENDMENTS

We may amend these arrangements by sending you a written notice describing the relevant changes.Such changes will become effective on a date to be specified in the notice which must be at least one week after the notice is sent to you.

You can amend these arrangements by notifying us in writing that you do not agree to any of the matters set out in this arrangement. However, any such amendment which you wish to make will only become effective when we receive a letter from you setting out the amendment concerned.”

The “Terms of Trade” referred to in clause 11 of the Cramman Agreement, and incorporated therein, included:-

“SETTLEMENT

Payment for Stock and Share transactions must be made on or before the appropriate Settlement Date in accordance with the London Stock Exchange Rules and Regulations. Contract Notes will indicate the relevant settlement date for sales and purchases which will follow a specific number of days after the bargain date. ….

NON-STANDARD SETTLEMENT

Transactions will only be accepted on a Non-Standard Settlement basis if arrangements have been made for clients to use the WCWB Nominee Service and where appropriate relevant Collateral and/or Margin facilities are in place.

DEFAULT

If settlement of a transaction is not received on the due date, WCWB reserves the right to take the following action:-

1.

Charge interest on unsettled balances at 5% over Clearing Bank Base Rate subject to a £15 minimum late settlement levy.

2.

Dispose of any securities purchased, which are held by us or our appointed nominees, pending registration of any securities held on behalf of a client so that complete or part settlement of an account is effected.

3.

Institute legal proceedings for recovery of the debt and charge legal and other collection costs to the client.”

The terms of settlement in fact agreed with Mr. Cramman, “T+20”, were non-standard. Mr. Cramman did enter into an agreement to use the WCWB Nominee Service. That agreement was contained in a standard form of “Letter of Authorisation”. The latter document included:-

“I/We hereby authorise you to hold my/our investments in the name of W.B. NOMINEES LIMITED or an eligible custodian in accordance with FSA Rules, and WCWB’s service particulars as attached.

I/We acknowledge and agree that if I/we fail to settle any account of WCWB on the due date then where such account remains unsettled following notification from WCWB notifying me/us of such default and of its intention to exercise its rights under the client agreement/terms of trade in respect of such default then WCWB may:

a)

…

b )…

c)

collect in and retain all dividends, interest payments and other rights accruing to the client as shareholder (or to the holder of shares re-designated under paragraph (b) above) and apply the same towards settlement of the client’s account with WCWB – plus applicable interest and administration costs; and/or

(d)

sell any shares designated as shares of the client and registered in the name of W.B. Nominees Limited (or any other designated nominee of the client); and/or

(e)

apply the proceeds of any sale of shares for the client (after deduction of relevant costs) towards settlement of the client’s account with WCWB plus applicable interest and administration costs; and/or

WCWB reserves the right to sell the shares designated in the name of the client or take any other action permitted under the said client agreement/terms of trade to which reference above on three business days’ (or in exceptional circumstances one business day’s) written notification of its intention so to do and I/we acknowledge and agree that in such event I/we shall have no claim whatsoever against WCWB or W.B. Nominees Limited for any loss sustained as a result of such sale or other permitted action whether for direct loss, loss of profit or for any other costs, claims, damages or expenses arising therefrom.”

The provisions of the Detailplain Agreement were very similar to those of the Cramman Agreement. However, the standard form “Two-way Private Customer Agreement Letter” used by WCS amalgamated within that form the “Terms of Trade” previously contained in a separate document incorporated by reference in the main document. For present purposes the material provisions of the Detailplain Agreement were:-

“4.

EXECUTION-ONLY ARRANGEMENTS

Please note that we will not advise you about a particular transaction if we reasonably believe that when you give the order for the transaction, you are not expecting advice. In such circumstances, we will inform you that it is being executed on that basis either at the time that your order is taken or in the contract note for your transaction. You should inform us if our treatment of such an order is incorrect.

…

18.

SETTLEMENT

Payment for Stock and Share Transactions must be made on or before the appropriate Settlement Date in accordance with the London Stock Exchange Rules and Regulations.Contract Notes will indicate the relevant settlement date for sales and purchases which will follow a specific number of days after the bargain date. …

20.

SETTLEMENT ON BALANCE

Only purchases and sales effected for settlement on the same date may be offset, subject to satisfactory completion of stock deliveries. Bargains with different settlement dates will be subject to separate settlement on the dates shown on the relevant contract notes.

…

22.

NON-STANDARD SETTLEMENT

Transactions of a trading nature will only be accepted on a non-standard Settlement basis if arrangements have been made for clients to use the WCSB Nominee Service and where appropriate relevant Collateral and/or Margin facilities are in place. WCSB also reserves the right to impose T+3 or other specific settlement terms on closing trades. WCSB reserves the right to impose extended non-standard settlement in conducting business and also reserves the right to impose a limit on the extent of the non-standard settlement.

23.

DEFAULT REMEDIES

In the event of your failure to make any payment or to deliver any securities due to us (or agents used by us), we reserve the right to retain any funds, securities or other assets due to you and to offset the liability against them.If settlement of a transaction is not received on the due date, WCSB reserves the right to take the following action:

(a)

Charge interest on unsettled balances at 5% over Bank of England Base Rate subject to a minimum late settlement levy as stated in our standard tariff.

(b)

Dispose of any securities purchased, which are held by us or our appointed nominees, pending registration of any securities held on behalf of a client so that complete or part settlement of an account is effected.

(c)

Institute legal proceedings for recovery of the debt and charge legal and other collection costs to the client.

….

33.

AMENDMENTS

We may amend these arrangements by sending you a written notice describing the relevant changes.Such changes will become effective on a date to be specified in the notice which must be at least one week after the notice is sent to you.

You can amend these arrangements by notifying us in writing that you do not agree to any of the matters set out in this arrangement. However, any such amendment, which you wish to make, will only become effective when we receive a letter from you setting out the amendment concerned.

We may amend the Agreement on written notice to you. Unless provided otherwise, such amendment shall take effect in respect of any transaction entered into between us after the date on which the notice is sent. In addition, we may, on prior notification to you and at our sole discretion, without being liable to you for any loss, refuse to carry on business for you, or withdraw, restrict, vary or extend any or all of our services.

No amendment will affect any outstanding order or transaction or any legal rights or obligations, which may already have arisen.

….

39.

JURISDICTION AND OTHER MATTERS

All transactions made under this Agreement are subject to the customs, rules and regulations in force for the time being or as may be subsequently altered by the Financial Services Authority, the London Stock Exchange and/or, where applicable, the customs, rules and regulations of the exchange or the market where the deal is executed.

…”

Detailplain also was permitted to deal with WCS on non-standard “T+20”, terms and entered into an agreement to use the WCSB Nominee Service. The relevant agreement was again in a standard form of “Letter of Authorisation” used by WCS. That form was, so far as is presently material, in terms identical to that used for the WCWB Nominee Service, save that the references in the earlier document to WCWB were altered variously to “any company in the WCWB group” or to “WCSB”.

The evidence put before me was to the effect that Mr. Cramman came into contact with WCWB by being introduced by an acquaintance to Mr. Savill. Mr. Savill was not an employee of WCWB, but rather operated on a self-employed basis as an agent of WCWB, referred to as an “Associate”. However, he ran the Bexhill-on-Sea branch office of WCWB, and later that of WCS. It was he with whom Mr. Cramman was accustomed to deal until about 7 June 2005, and he to whom Mr. Cramman gave instructions on behalf of himself, and, later, Detailplain.

While, in a general way, the activities of Mr. Savill on behalf of Mr. Cramman and Detailplain were monitored in the head office of WCWB, and then that of WCS, in London, it was not until about the middle of April 2005 that anyone at head office became concerned about the deals which WCS was undertaking on behalf of Detailplain. Only subsequently did head office become involved in looking closely also at the state of the account of Mr. Cramman with WCS.

What brought Detailplain and its trading activities forcefully to the attention of the head office of WCS, in the form of Mr. Stephen Simper, the administration director of the company, were two purchases of shares in a company called National Detection Clinics Ltd. (“NADE”). The first purchase was a bargain effected on 8 April 2005 by which an amount of 150,000 shares were bought for the sum of US $2,638,500, with settlement due on 9 May 2005. That was followed on 12 April 2005 by a purchase of 100,000 NADE shares for the sum of US $1,750,500, again with settlement due on 9 May 2005. Detailplain had thus bought a total of 250,000 NADE shares and had to find a total of US $4,389,000 for payment on 9 May 2005. The NADE shares were traded on the “Pink Sheet” market. The size of the purchase was considerably larger than any previous purchase by Detailplain or Mr. Cramman.

Mr. Cramman, in his oral evidence, frankly accepted that in fact Detailplain was not able to pay for the price of the NADE shares when due for settlement on 9 May 2005. What in fact happened was that a “rollover” transaction was effected in relation to those shares on 9 May 2005. The 250,000 shares were sold on that day at 15.30 hrs at a total consideration of US $4,375,000 for settlement on 10 May 2005 and, at the same time, the same quantity was purchased at a total consideration of US $4,400,000 for settlement on 7 June 2005.

After the “rollover” transaction of 9 May 2005 the directors of WCS, in particular Mr. Simper and the finance director, Mr. Rodney Fitzgerald, were concerned about what was going to happen when the price of US $4,400,000 became payable on 7 June 2005. Meanwhile Mr. Cramman continued to deal on a day to day basis with Mr. Savill. Mr. Cramman told me that he discussed with Mr. Savill a strategy for raising funds to pay for the NADE shares due to be settled on 7 June 2005. What Mr. Cramman had in mind was raising funds by means of a reverse stock loan. He seems to have anticipated, at least as the date 7 June 2005 approached, that in order to put in place such an arrangement he would need to obtain a deferment of the obligation to pay for the NADE shares of about two and a half to three weeks. This was discussed by Mr. Cramman with various representatives of WCS, but no definite means of achieving such a deferment was agreed between Mr. Cramman and anyone at WCS.

Between 9 May 2005 and 7 June 2005 Mr. Cramman had instructed that a certain number of NADE shares be sold. There had also been a split in the shares, such that each of the original shares had been divided into 10. As a result of these developments the NADE shares remaining unsold of the original 250,000 as at 9 June 2005 numbered 24,180,000. In this judgment I shall refer to those shares as “the Unsold Shares”.

In the event it became clear to Mr. Fitzgerald on 7 June 2005 that Detailplain was not going to put WCS in funds to settle the price of the NADE shares. Without consulting Mr. Cramman Mr. Fitzgerald decided that the appropriate course was to arrange a further “rollover” transaction of the Unsold Shares. At 19.00 hrs on 9 June 2005 the Unsold Shares were sold for a total sum of US $4,836,000, with a settlement date of 13 June 2005, and an equivalent number purchased for the total sum of US $4,872,270, with a settlement date of 7 July 2005. The cost of the “rollover” transaction, in terms of the difference between the price realised on sale and the cost of the repurchase, was US $36,270. However, WCS also debited the account of Detailplain with it with a commission of US $24,425.77 on the sale and a further commission of US $24,607.12 on the repurchase. Thus it sought to achieve a total commission benefit of US $49,032.89 on the “rollover” transaction. In addition, WCS levied a “Compliance Charge” of US $54.61 on each of the sale and the repurchase. Taking those into account, Detailplain’s liabilities to WCS, as recorded in the account of Detailplain with WCS, were increased by US $85,412.11 as a result of the “rollover” transaction on 9 June 2005, as compared with its position immediately before that transaction was effected. Mr. Fitzgerald explained to me that there were really two reasons why the “rollover” transaction of 9 June 2005 was effected. The first was that it was believed that that was what Detailplain wanted to do in order to seek to obtain more time in which to raise the sums necessary to settle purchase price of the NADE shares. The second was that WCS was not able to sell the Unsold Shares on the market because there was no buyer. The sale was in fact made to a market maker, a firm of stockbrokers called Wood Gundy, which was prepared to buy only because WCS agreed simultaneously to repurchase the Unsold Shares at the higher price which I have recorded, amounting to US $0.0015 per share.

Mr. Cramman told me in cross-examination that he was aware of the “rollover” transaction on 9 June 2005 in relation to the Unsold Shares either on the day that it happened or the next day. At that stage the account of Detailplain with WCS showed that Detailplain owed WCS an amount of US $4,390,911.16, rather less than the “rollover” repurchase cost of the Unsold Shares, while Mr. Cramman’s personal account with WCS showed that he owed WCS an amount of US $1,711,233.17.

Along the road to the transactions of 9 June 2005 there had been various communications between WCS and Mr. Cramman. The detail of those communications are not, as it seems to me, material to the issues in this action. It is enough to say that Mr. Cramman told me, and I accept, that he felt under pressure from WCS to settle his, and Detailplain’s, financial obligations towards them. Most communications with Mr. Cramman were effected by telephone. However, in a letter dated 7 June 2005 Mr. Fitzgerald wrote to him about his personal position, as follows:-

“We have received your fax of today setting out your proposals for liquidating positions to settle the above indebtedness.

Contrary to your statement that this would show an aggressive selling programme over the next few days, your stated intention to sell USD 1 million of stock gradually at USD 50,000 a day is unacceptable. Not only do we require settlement of this debit balance but also a significant and swift reduction in the size of positions currently held.

Therefore, you are under notice that we will today be commencing liquidation of your positions from our London office this afternoon with a view to satisfying your financial obligations to this company.

Effective immediately, all future transactions will be handled by our London office (Richard Whiting/Stephen Simper). Trading by our Bexhill office is no longer authorised.”

Following the “rollover” transaction of 9 June 2005 communication between representatives of WCS, in particular Mr. Fitzgerald and Mr. Simper, and Mr. Cramman continued, again mostly by telephone. There were, however, some communications in writing, and those set the background to the making of the July Agreement.

In a letter dated 14 June 2005 to Mr. Cramman Mr. Fitzgerald wrote, so far as is presently material:-

“We refer to your Trading accounts in both your own name (084636) and in the name of Detailplain Limited (086508) and your continuing failure to settle the combined overdue US Dollar balance on these accounts which now stands at USD 1,209,629.86 at the close of business on 13 June 2005 [that is, leaving out of account the payment for the Unsold Shares now due on 7 July 2005]

Whilst we appreciate your co-operative efforts to assist us in liquidating the underlying holdings, the sales are not being achieved quickly enough to meet our minimum requirements of USD 1,000,000 sales proceeds per week.

In addition, you have been promising to introduce funds to clear your indebtedness but have so far failed to produce any evidence to substantiate either the source or the nature and timing of the incoming cash to our satisfaction.

Therefore, you are now put on formal notice that legal proceedings will commence on Tuesday 21 June 2005 to recover all outstanding amounts unless by close of business on Monday 20 June 2005:-

•

A minimum of a further USD 1,209,629.86 has been achieved in sale proceeds to clear your combined account debit balance AND

•

Written evidence has been produced substantiating the amount and source of incoming funds to meet the settlement of your NADE share purchase of approximately USD 4,897,000 due on 7 July 2005.

….”

Mr. Cramman replied to the letter dated 14 June 2005 in a letter dated 17 June 2005. Before he wrote that letter he had taken advice from a Mr. Peter Tuovi, a barrister and solicitor in practice in Toronto. In his letter Mr. Cramman wrote:-

“I acknowledge your letter of 14 June and reply as follows:

1.

Detailplain Limited: This account is in credit by approximately US $500,000 and held on deposit with you and available to be netted off against my personal account (letter on file to this effect).

2.(a) P. Cramman: This account is in debit to the extent of approximately US $650,000 at the present time.

2.(b) You are well aware that securities are being sold on a daily basis to eradicate this debit. Averagely US $100,000 to US $150,000 is being raised on a daily basis which I had previously informed you would happen. On this basis my account by the end of next week will be in credit with you.

3.

The collateral which you hold in P. Cramman, amounts to circa US $2,020.000

Detailplain Limited amounts to circa US $12,000,000

3.

I appreciate your anxiety in respect of National Detection Clinics – settlement due on 7 July which will be the only outstanding item to be settled.

3.

As I have previously informed you, I have made arrangements to settle this amount as I wish to take up the security and pay for it in full to the value of US $4,897,000 on 7 July 2005.

5.

As you require written evidence of my ability to pay for the shares under item 5 above, I enclose a letter from my lawyer in Toronto to confirm that payment will be forthcoming on the due date from the evidence which I have provided to him.

I trust that the above information is sufficient to meet your requirements but if you have any queries, please do not hesitate to inform me. ”

Mr. Tuovi did indeed write a letter dated 20 June 2005 in response to the letter dated 14 June 2005 written by Mr. Fitzgerald to Mr. Cramman. It was a long letter and it is unnecessary for the purposes of this judgment to quote the whole of it. However, in the course of it Mr. Tuovi did make these points:-

“Mr. Cramman still cannot believe the negligence, the incompetence, of the form and manner in which your offices undertook to purchase shares of NADE, leading to the US $4,897,000 closing obligation you reference. Had your offices properly arranged for the purchase in accord with Mr. Cramman’s wishes, we would not have had need to write this letter.

It is not Mr. Cramman’s fault that your offices accepted the particular stock as having the value it did, and in effect granting credit against that stock. You cannot simply change your valuation philosophy without cause or prior notice. Mr. Cramman and Detailplain Limited have incurred deficit positions in reliance on the assurance of your Bexhill offices that their stock positions provided sufficient cover to permit their activities. It would now be inappropriate to require Mr. Cramman and Detailplain Limited’s holdings to be liquidated in a time frame and in a manner of selling that did not reflect the original basis for that stock being accepted by your firm. The stock had the value attributed to it based on being capable of being sold over a period of time, in a controlled and consistent manner. That is the basis that must be applied to any liquidation, otherwise your offices made fundamental misrepresentation to Mr. Cramman and Detailplain Limited that induced them to take a position to their detriment.

We note the approximate sum of US $4,897,000 required to meet the settlement on 7 July 2005 of a NADE share purchase. We recognize that despite the negligence of your offices, the asset purchased is to benefit my client, Detailplain Limited and that as a result, a payment is due. Efforts continue to monetize sufficient assets on or before that date in order to satisfy the obligation. I have been apprised of and been requested to assist in parts of one such effort, which remains ongoing, and which Mr. Cramman is confident will provide the source of funds for Detailplain Limited for that obligation and more. As matters get closer to finality, disclosure can be provided to you. At this time, disclosure would only increase the risk that the particular transaction fails, and cause damage to Mr. Cramman, Detailplain Limited, and yourselves.

We request that your offices not take any action against Mr. Cramman and Detailplain Limited at this immediate juncture. Allow them to continue to pay down the existing cash deficit from selling conducted in a proper, efficient manner, so as not to cause undue harm. Mr. Cramman and Detailplain Limited reaffirm that on average at least US $50,000 will be sold daily, if not more, perhaps as high as $100,000 - $150,000 per day, if, but only if Mr. Cramman determines that there is sufficient market support. Mr. Cramman’s actions and successes of the past ten days in bringing down the outstanding account balances speak to the sincerity and to the bona fides of the assurances given. The US $4,897,000 is being worked on, and is expected to be available on time for 7 July 2005, and if for some unforeseen reason it isn’t ready, Mr. Cramman will be in a position to advise of when, not if, in July those funds will be available.”

From the terms of Mr. Cramman’s letter of 17 June 2005, and those of Mr. Tuovi’s letter of 20 June 2005, it is plain that, whatever the rather obscure complaints of negligence and incompetence intended to be conveyed by Mr. Tuovi’s letter actually were, they did not relate to the “rollover” transaction effected on 9 June 2005. Rather those two letters seemed, in my judgment, to amount to ratification of the action taken by WCS in relation to the Unsold Shares.

Mr. Tuovi mentioned the “rollover” transaction of 9 June 2005 in a letter to Messrs. Campbell Hooper, solicitors acting on behalf of WCS, dated 4 July 2005.While there was a hint of criticism as to how that transaction had been undertaken, there was no attempt to disavow it. The material part of Mr. Tuovi’s letter was in these terms:-

“As I now understand it, the immediate concern is that we have a somewhat dicy situation for both of our clients, in that it would appear that the settlement date for certain trading by DPL was rolled to June 7, 2005 in accordance with accepted procedures in the UK, and then your client of its own volition purchased and held onto the stock and then financed it for a further 20 business days to July 7, 2005 putting the liability back on the DPL account, following perhaps not so accepted procedures.

Mr. Cramman met with your client yesterday, and I understand he will be in communication with your client again later this week concerning a plan to satisfy the DPL obligation.”

Mr. Cramman did indeed produce a plan to satisfy the obligations of himself and of Detailplain to WCS. The plan was set out in a letter dated 8 July 2005 written by Mr. Tuovi to Messrs. Campbell Hooper. That plan was slightly modified in manuscript on the letter, and the letter as so modified was signed on behalf of both parties on 11 July 2005 to become the July Agreement.

By clause 1 of the July Agreement Detailplain and Mr. Cramman agreed to deposit as security a further 25,000,000 NADE shares with WCS as soon as possible, and in any event by 18 July 2005. However, no such shares were ever provided.

By clause 2 of the July Agreement a plan for liquidation of the securities held in each of the account of Mr. Cramman and the account of Detailplain with WCS was set out. The plan provided for an amount of US $250,000 to be raised by sales in the week ending 16 July 2005, an amount of US $350,000 to be raised by sales in the week ending 22 July 2005, and other sums in later weeks until, by the week ending 26 August 2005, all sums outstanding had been settled by funds raised by sales. In the event an amount of US $250,000 was raised one day late in respect of the first week’s intended sales. However, the other intended sales were not achieved.

The consequences of complying, or failing to comply, with the provisions of the July Agreement were contained in clauses 8 and 9:-

“8.

Walker Crips reserves the right to commence legal proceedings for immediate recovery of outstanding debts if the market value of the collateral cover for the indebtedness falls below 200% of the outstanding debt at any time or if Cramman or DPL are two weeks in default of providing the cumulative totals reference in item #2 above. Provided, Cramman and DPL may within 5 days of being notified of them being in breach of this item #8 cure default in collateral cover by depositing sufficient additional securities such that collateral cover for the indebtedness meets or exceeds 200% of the outstanding debt and may cure default in debt repayment by satisfying the then applicable cumulative total.

9.

Provided Cramman and DPL are then in compliance with the liquidation program cumulative minimums stated in item #2 above, Walker Crips will not institute (or maintain, as the case may be) market disposals without prior approval of Cramman. If Cramman and DPL are not then in compliance with the said minimums, Walker Crips may institute market disposals in any week of its own initiative to a maximum of the dollar amounts Walker Crips would have received had Cramman and DPL been in compliance. The intent of the prior sentence is to reflect the fact that reasonable limits on selling will more effectively and more probably provide for full cover to Walker Crips in due course out of dispositions of securities on account and such other collateral securities deposited than would an overly aggressive selling initiative.”

It was, as it seems to me, plain, as a matter of construction of the July Agreement, that its focus was settling terms upon which WCS would not exercise what it considered to be its rights as against Mr. Cramman under the Cramman Agreement and its rights as against Detailplain under the Detailplain Agreement. It did not have the effect of rendering either Mr. Cramman or Detailplain liable to pay any sums to WCS in addition to whatever was due under the Cramman Agreement or the Detailplain Agreement, as the case might be. Consequently, in my judgment, there was no real need in this case to consider the July Agreement at all. It was not in dispute that the conditions to be met by Mr. Cramman and Detailplain, if WCS was not to be able to enforce immediately its rights under the Cramman Agreement and the Detailplain Agreement, had not actually been met.

It was contended on behalf of Mr. Cramman that the July Agreement had been frustrated because Mr. Richard Whiting of WCS had refused, on 21 July 2005, to comply with instructions from Mr. Cramman to sell a quantity of Stonebridge shares belonging to Detailplain. Mr. Whiting did indeed refuse to comply with those instructions because it was considered by WCS that the price which could be obtained for the shares at the date of the instruction, about US $45,000, was insufficient to justify selling at that point. That refusal to comply with instructions was probably a breach of the Detailplain Agreement, but it does not seem to me that it could even arguably be said to amount to frustration of the July Agreement. However, for the reasons which I have given, it seems in fact to be immaterial whether the July Agreement was brought to an end by frustration or by a failure on the part of Mr. Cramman and Detailplain to comply with the conditions to be met if WCS was to stay its hand.

I have already mentioned the principal matters relied upon by Mr. Cramman himself in his oral evidence by way of defence to the claims of WCS against him and Detailplain. Prior to the trial Defences had been served on behalf of each of Mr. Cramman and Detailplain. Those Defences had been settled by Counsel. Each of the Defences took similar points. One such point was that it was an express or implied term of each of the Cramman Agreement and the Detailplain Agreement that the relevant customer of WCS should be permitted to fund share purchases indefinitely using “rollover” and “bed and breakfast” transactions, or that each relevant agreement was amended to that effect after it had been made, or that the relevant customer had been induced to enter into the relevant agreement by a representation that it would be able to fund share purchases using “rollover” and “bed and breakfast” transactions, or that WCS was estopped from denying the existence of such representation. No obvious conclusion was drawn from these various contentions, but the underlying thought seemed to be that WCS was in breach of its obligation to permit Mr. Cramman or Detailplain to fund share purchases using “rollover” and “bed and breakfast” transactions by seeking to compel the relevant customer to pay for shares purchased on its instructions. None of these lines of defence were pursued at the end of the trial, no doubt as a result of the evidence of Mr. Cramman to which I have referred.

In addition to the Defences pleaded, Part 20 claims were made on behalf of both Mr. Cramman and Detailplain against WCS and Mr. Savill. Mr. Savill took no part in the trial. On behalf of Detailplain a Part 20 claim was made against WCS in relation to the “rollover” transaction concerning the Unsold Shares on 9 June 2005. It was said that that transaction was unauthorised, and, by amendment, it was alleged that the loss which Detailplain had sustained as a result of that unauthorised transaction was the amount due in respect of the Unsold Shares on 7 July 2005. The answer to that claim plainly was that, if the transaction were unauthorised, Detailplain could not be liable in respect of it, unless it ratified it after the transaction had been undertaken.

Apart from the claim on behalf of Detailplain in respect of the “rollover” transaction concerning the Unsold Shares, the claims included in the Part 20 claim of each of Mr. Cramman and Detailplain against WCS and Mr. Savill were more or less identical. The allegations included in the Part 20 claim of Detailplain can be taken as indicative of those also made on behalf of Mr. Cramman:-

“24.

Further or alternatively, in breach of the said express term and/or the said implied term of the 4 September [i.e. Detailplain] Agreement, WCS refused to allow DP [that is, Detailplain] to trade according to the terms set out in paragraphs 4 and/or 5 above [that is, using “rollover” and “bed and breakfast” mechanisms of funding].

25.

By reason of the said breach, DP suffered loss and damage, such loss to be particularised by DP as soon as practicable following the provision by WCS of the necessary documentation.

26.

Further or alternatively, it was a term implied by section 13 of the Supply of Goods and Services Act 1982 that WCS would exercise reasonable skill and care in providing investment and broking services to DP and, in particular, would to prevent DP incurring excessive liabilities which required the provision of broking services on terms which WCS decided not to provide and/or to exercise proper supervision and control over the activities of its agent or employee, Mr. Savill.

27.

In breach of the said implied term, WCS failed to exercise reasonable skill and care in providing investment and broking services to DP and, in particular, to prevent DP incurring excessive liabilities which required the provision of broking services on terms which WCS decided not to provide and/or to exercise proper supervision and control over the activities of its agent or employee, Mr. Savill:

(1)

WCS facilitated and/or failed to prevent and/or correct Mr. Savill’s breach of the requirements of the WCS Compliance Manual and paragraph 4.1.5 of the Associate Agreement between Mr. Savill and WCS as referred to in the letter from the solicitors for WCS to Mr. Savill dated 1 July 2005;

(2)

WCS facilitated and/or failed to prevent and/or correct the misrepresentation made on its behalf by Mr. Savill or by Mr. Savill on his own behalf set out in paragraph 33 below.

28.

By reason of the said breach of the said implied term, DP suffered loss and damage, such loss to be particularised by DP as soon as practicable following the provision by WCS of the necessary documentation.

29.

Further or alternatively, WCS by Mr. Savill advised orally on or about January 2005 and 11 May 2005 that it was possible for DP to trade through the offices of WCS using the collateral contained in DP’s Managed Cash Deposit Account at WCS and/or pursuant to the terms set out in paragraphs 4 and/or 5 above.

30.

As set out above, DP relied on this advice and/or on these representations made by Mr. Savill on behalf of WCS and it was reasonable for DP so to rely.

31.

In the premises, the advice given and/or the representations made by Mr. Savill on behalf of WCS were false since WCS did not intend to permit DP and, after mid-April 2005, did not permit DP, to trade:

(1)

pursuant to the terms set out in paragraphs 4 and/or 5 above; and/or

(2)

using the collateral referred to in paragraph 29 above since under the relevant terms and conditions as set out in the WCS Compliance Manual, the relevant trades were entered into using unacceptable collateral without authorisation;

(a)

the WCS Compliance Manual requires that “trades of a non-standard assessment nature must be conducted through a nominee account. Twenty five per cent cover is required by way of stock in WB Nominees Limited or cash on deposit before any transaction is carried out. AIM and OFEX stock will not be accepted as collateral”; and

(b)

the collateral offered by DP and accepted and approved by Mr. Savill was the equivalent in the United States of the stock deemed unacceptable under the terms of the WCS Compliance Manual.

32.

By reason of this misrepresentation DP has suffered loss and damage, such loss to be particularised by DP as soon as practicable following the provision by WCS of the necessary documentation.

33.

Further or alternatively, in breaching the term and/or fiduciary duty set out in paragraphs 5, 21 and 26 above and/or in making the misrepresentation set out in paragraph 29 above, Mr. Savill acted on his own behalf.

34.

In the premises, Mr. Savill is liable for the loss and damage caused by the breach of the said terms and/or fiduciary duty and/or by the said misrepresentation.

35.

Further, as against WCS and/or Mr. Savill, DP claims an account of profits and an order for payment of sum assessed to be due to DP, together with any interest, arising out of the said breach of fiduciary duty.”

At the end of the trial none of these claims was really pursued by Mr. Halstead on behalf of Mr. Cramman or Detailplain. He did not pursue the point made by Mr. Cramman in his oral evidence to which I have referred as his second main line of defence. That latter point was not pleaded and, as a matter of law, was of no substance because plainly, as it seemed to me, WCS did not owe Mr. Cramman or Detailplain the duty for which Mr. Cramman contended.

In his closing submissions Mr. Halstead focused his attention first on the “rollover” transaction concerning the Unsold Shares. He contended that the proper interpretation of what had happened on that occasion was that WCS had exercised its power under clause 23 of the Detailplain Agreement to sell the Unsold Shares, as it was entitled to do, and had thereby raised sufficient to settle the payment for NADE shares due on 7 July 2005. WCS had then bought back the Unsold Shares on its own account. The attempt to assign the repurchased Unsold Shares to the account of Detailplain was unauthorised and therefore ineffective. The sale of the Unsold Shares on 9 June 2005 had raised sufficient to reduce the balance on Detailplain’s account with WCS to nil.

The problem with Mr. Halstead’s submission, as it seemed to me, was that it left wholly out of account that, as at 9 June 2005, Mr. Cramman wished to retain the Unsold Shares for Detailplain, that Detailplain needed time to raise funds to settle the amount due in respect of the Unsold Shares, and he plainly, directly and through Mr. Tuovi, ratified the “rollover” transaction in his letter of 17 June 2005, Mr. Tuovi’s letter of 20 June 2005, and by entering into the July Agreement. Thus I reject this submission.

Mr. Halstead submitted that, because, as he contended, the effect of the “rollover” transaction in the Unsold Shares on 9 June 2005 was that Detailplain ceased to owe any amount to WCS, the July Agreement was unenforceable, at least as against Detailplain, because Detailplain gave no consideration for entering into it, alternatively the parties entered into the July Agreement under the mutual mistake that there was a continuing liability on the part of Detailplain. As I have rejected the submission of Mr. Halstead that Detailplain had indeed been discharged from liability to WCS as a result of the transaction in question, it follows that I reject this submission also. Actually, as I have explained, the enforceability of the July Agreement was something of an irrelevance.

So far as the Guarantee was concerned, Mr. Halstead submitted that Mr. Cramman could not be liable to WCS under it unless Detailplain was liable to WCS. That submission is sound, but, in the light of my finding that Detailplain did indeed owe sums to WCS, immaterial.

In his closing submissions Mr. Halstead drew to my attention some evidence of a transcript of a telephone conversation between Mr. Simper and a representative of Wood Gundy on 7 June 2005 in which it appeared that Mr. Simper had disclosed to that representative that a customer of WCS, unidentified, wished to “rollover” the Unsold Shares in order to have more time to raise the funds to pay for them. That transcript was not put to Mr. Simper in cross-examination. Mr. Halstead submitted that the disclosure of the information to which I have referred amounted to a breach of a fiduciary duty owed by WCS to Detailplain to maintain confidentiality in its dealings. The effect of that alleged breach of fiduciary duty was that it became known in the market, according to Mr. Halstead, that millions of NADE shares were likely to enter the market, and that drove the price down to almost nothing. That gave rise to a Part 20 claim against WCS, said Mr. Halstead, and also amounted to a breach on the part of WCS of its duty to mitigate its loss in respect of the failure of Detailplain to pay sums due.

As it seemed to me, there were a number of problems with the submission of Mr. Halstead in relation to alleged breach of fiduciary duty. First, I am unpersuaded that the disclosure to Wood Gundy that an unidentified customer of WCS wished to “rollover” the Unsold Shares in order to have more time to raise the price for them amounted to a breach of fiduciary duty. Whatever the precise scope of any fiduciary duty owed by WCS to Detailplain, I cannot see that it was breached by the information in question, which could not be linked by the recipient with Detailplain. Second, on the facts the disclosure of the information did not cause the price of NADE shares to collapse. The alleged disclosure was on 7 June 2005. The evidence of Mr. Cramman himself was that the collapse of the price of NADE shares occurred on about 14 July 2005. Third, so far as I am aware, a party owed a liquidated sum does not in law owe any duty to the debtor to mitigate his loss. The creditor is entitled to payment of the sum due. The suggestion that the circumstances gave rise to an unpleaded Part 20 claim failed in any event because, on the facts, disclosure of the information did not cause the collapse of the share price.

The next submission Mr. Halstead made he characterised as falling under the head “volenti”, but the point which he made actually seemed to relate to causation. At its simplest the point was that the cause of the loss sustained by WCS was that it had not obtained sufficient security to cover the purchases of shares which it undertook on the instructions of Mr. Cramman and Detailplain. Mr. Halstead drew to my attention the internal rules of WCS in respect of the amount of security required for non-standard trades, and he submitted, correctly, that Mr. Cramman and Detailplain had not been required to provide security to that standard. However, his submissions, as it seemed to me, missed the point. The claims of WCS in this action were in debt, for liquidated sums. They were not for damages. No question of any loss, other than in the form of non-payment of debt, arose. There was thus no relevant issue of causation. Consequently it was just not material to consider any issue of causation. If it had been, I should have rejected the submission of Mr. Halstead on the facts. The reason why WCS was out of pocket was because Mr. Cramman and Detailplain had not paid what they owed. The fact that, if sufficient security had been taken by WCS, it might have been able to recompense itself from that security, would not have meant that somehow Mr. Cramman and Detailplain had not failed themselves to pay what they owed. It would just have meant that WCS had an effective means of obtaining payment of what was due without having to sue.

The last point which Mr. Halstead took by way of defence was to appeal to public policy. He asserted that it was contrary to public policy to enter into a contract which was contrary to the economic interests of the United Kingdom. He submitted that the Cramman Agreement and the Detailplain Agreement were both contrary to the economic interests of the United Kingdom because to undertake more than one “rollover” transaction in shares was a distortion in the market in shares because it gave a false indication of the volume of trading in particular shares and thus led to false confidence in those shares. Moreover, contended Mr. Halstead, under the Cramman Agreement and the Detailplain Agreement each of Mr. Cramman and Detailplain were encouraged to trade on ever increasing credit. While Mr. Halstead accepted that there was no duty in law on WCS to discourage trading on credit, it was a very important moral duty, such that the public policy which he sought to invoke should be applied.

It is correct that, by Rule 3050 of the Rules of the London Stock Exchange, it is provided that:-

“A member firm may carry out a roll over trade in respect of any position in a relevant security on one occasion only.”

The expression “roll over trade” is defined for the purposes of the Rules of the London Stock Exchange as meaning:-

“a set of Exchange transactions in a domestic market security or an AIM security, the effect of which is to postpone the final settlement of a position in such security by closing an existing unsettled transaction and entering into a new transaction in the same security, which creates a new position for settlement on a later date.”

The Rules of the London Stock Exchange also include definitions of the expressions “domestic market security” and “AIM security”. It is unnecessary to set out those definitions for the purposes of this judgment. It was common ground that shares traded in the “Pink Sheet” market were neither domestic market securities nor AIM securities. However, Mr. Halstead sought to rely upon the supposed underlying justification for Rule 3050 in support of his public policy argument.

“Pink Sheet” shares are United States shares. The market in them in the United States is unregulated. It would seem that the issue whether the market in “Pink Sheet” shares should be regulated is a matter for the public policy of the United States. Certainly I can see no issue of English public policy which is invoked in relation to how “Pink Sheet” shares are traded or in respect of whether whatever market there is in such shares may be distorted. I thus reject this submission of Mr. Halstead also.

In relation to the position of Mr. Cramman as an individual Mr Halstead made no submissions as to why I should not find that he owed to WCS the sum claimed, US $793,399.13.

Mr. Halstead gave but little attention in his closing submissions to the Part 20 claims of Mr. Cramman and Detailplain. He confined his attention to alleged breach of fiduciary duties, a matter which I have already addressed.

In the result there will be judgment in favour of WCS against Detailplain for the sum of US $4,044,653, against Mr. Miles also for the sum of US $4,044,653, and against Mr. Cramman for the total of that amount plus US $793,399.13, being US $4,838,052.13, in each case together with interest, as to which I will hear Counsel. The Part 20 claims against WCS and Mr. Savill are dismissed.