Geniki Investments International Ltd. v Ellis Stockbrokers Ltd

In January 2001 the claimant, Geniki Investments International Ltd, which is a British Virgin Islands company, opened an account with the defendants, Ellis Stockbrokers Ltd, which is a firm of stockbrokers based in Crawley, West Sussex. The opening balance in sterling terms was about £217,000. By July 2001, most of the money had been lost in trading. By letter of 19 July 2001, Geniki sought to repudiate the loss-making trades on the basis that they had been entered into without its authority. Unfortunately, an attempt to resolve the matter through the Financial Ombudsman Service was unsuccessful, and in January 2007, just within the limitation period, this action was commenced. In essence, the central question remains the same as it was in 2001. Were the trades authorised or not? If they were not, then the trades do not bind the company, and it is entitled to have the account reconstituted. If they were, Geniki’s account was correctly debited with the losses.

To break the issue down into a little more detail, there were (according to the schedule produced by the parties in closing) about eighty trades on the account during the relevant period. Of these, Geniki has identified about sixty two which it says were unauthorised. Of these, thirty five set out in Schedule 1 of the Particulars of Claim were loss making, and these have formed the subject matter of the claim. Its case is that the company did not place specific instructions for these trades, and that since the defendants cannot show to the contrary, it is entitled to judgment. The defendants on the other hand say that the company did place the orders concerned, alternatively that the trades were de facto authorised by the course of dealing between the parties, alternatively that the company is liable on the basis of affirmation, adoption or estoppel. As a backstop, they rely on a contractual term as to the conclusive nature of the contract notes.

The alter ego of Geniki is Mr George Pavlides, who is a chartered accountant living in Cyprus. Mr Pavlides worked, and still does work, in the financial services industry. In 1997, he was working for a company which dealt in debt securities. Through his work he got to know Mr Philip Mason who was then at a firm of stockbrokers called Townsley & Co (which became Insinger Townsley) and who he says became a trusted friend. In the latter part of 1997, Mr Pavlides mentioned to Mr Mason that he was selling his house in London, and Mason persuaded him to invest the sale proceeds in the stock market. He discussed the matter with members of his family, and his mother and two brothers put in some money too. It is right that I should say at the beginning of this judgment that it is plain that he feels strongly that he has been cheated by the defendant firm, and that he and his legal advisers have pursued this claim with considerable perseverance. I do not doubt that this has been partly motivated by a desire to recoup the losses that have been suffered by other members of his family as well as himself.

Mr Pavlides purchased Geniki, which is an off the shelf company incorporated in the BVI, and began trading through it with Townsley. He says that he had no prior experience in share trading, but it is to be noted that he accepts that he informed Townsley in the account opening forms that he had traded equities and other investments in Romania and Russia. His evidence was that he completed the forms in this manner because he was told to do so by Mr Mason, whom he trusted.

Mr Pavlides’ evidence was that he gave Mr Mason instructions to trade based on Mason’s recommendations. From the beginning, Geniki went into what Mr Pavlides accepted were quite high risk investments. It lost a lot of money in the 1998 Russian debt crisis, but he told me that it made it back again when Mason advised him to take advantage of the boom in technology stocks, so that by the time he left Townsley, he had ended up roughly where he started. At trial, there was a dispute between the parties about the course of trading between Geniki and Mr Mason while he was at Townsley. It is clear that there was very active trading on the account. There were apparently a hundred and thirty three trades during the last three months of 2000 alone. Mr Pavlides told me that in the case of all these trades, he gave express instructions beforehand to Mr Mason on the phone. He said in cross-examination that he was on the phone to Mr Mason on a daily basis. Since it is of some importance as regards the matters directly in dispute, I should say that I accept that contact between the two was frequent, but that given the scale of the trading, I find it implausible to suppose that Mr Pavlides expressly authorised each trade in advance. He was, after all, in full time employment in Cyprus. Some of these trades were substantial, and entered into on a geared basis, in other words on credit so far as Geniki’s account with Townsley was concerned. I accept the defendants’ submission that it was an inevitable feature of Geniki’s trading relationship with Townsley that Mr Mason was allowed some degree of discretion in the execution of trades without Mr Pavlides’ specific prior instruction, and I am satisfied that this is in fact a fair description of what happened.

At the end of 2000, Mr Mason left Townsley to join the defendant firm. The defendants have since been taken over, but at the time were a small firm of stockbrokers, with a total staff of about twenty. A feature of this trial has been that Mr Mason has not been called to give evidence. As I shall explain, Mr Mason left the firm fairly soon after the events in dispute, and the defendants say they have lost contact with him, which is perhaps not surprising given that it took so long for the action to be begun. A number of his statements were served under the Civil Evidence Act shortly before the trial began. In the event, Mr Neil Badger, the firm’s Chief Executive, gave evidence for the defendants (along with an employee called Mrs Karen Williamson). Together with Mr Pavlides, those were the only witnesses I heard from. I set out later in this judgment my assessment of Mr Pavlides as a witness. As to the defendants’ witnesses, Mrs Williamson’s evidence was only of marginal relevance, and though I found Mr Badger to be an impressive stockbroker with a good grasp of the issues, he had little first hand involvement at the time.

When he joined the defendants Mr Mason took the Geniki account among others with him. Mr Pavlides was sent a letter by the defendants dated 19 January 2001 which attached their terms of business. These two documents constitute the agreement between the parties. It is to be noted that this was the second set of documents he had been sent, having rejected the first, he says, on Mr Mason’s advice, because the documents did not make it clear that the dealing relationship was to be “execution only”. This phrase has loomed large during the trial, and the claimant has placed great emphasis on it. Given that fact, I should say a little more about the evidence in this regard. An account with a stockbroker can fall into one of three categories—an execution-only account, where the firm may only trade on specific instructions from the customer, an advisory account, where the firm gives advice to the customer, or a discretionary account, where the firm trades on behalf of the customer. The evidence shows that in practice the distinction between an execution-only and an advisory account may not be hard and fast. In legal terms (and leaving aside the way these types of account may be treated for regulatory purposes), the fundamental distinction is between an account in respect of which the broker can only place orders with the client’s authority (with or without giving the client advice), and an account where the broker has authority to trade on the client’s behalf.

I have to say that I find Mr Pavlides’ explanation for rejecting the first set of contractual documents unconvincing. It is correct that they describe the broker as providing advisory services, rather than “execution only”, but this as I have indicated was the kind of service that Mr Mason had provided whilst at Townsley. In cross-examination, Mr Pavlides expressly accepted that he expected the same treatment whilst at the defendant firm. He accepted that he perused the documents, and he certainly signed the letter of 19 January 2001 on behalf of Geniki. Mr Pavlides is an accountant, and his own case is that he was concerned about the legal effect of the documents he was signing. I am satisfied that he read both the letter and the attached terms. He must have appreciated that the passage which stated that “We will deal with you solely on the basis that you are not expecting advice on the merits of any transaction and are dealing on an execution-only basis”, did not accurately reflect the role that he expected Mr Mason to play in the course of trading which he was about to embark on. At the very least, he was certainly expecting advice. The issue I have to determine is whether in reality, he was also expecting Mason to act with a measure of discretion as well.

The letter states that it is a “Notice of treatment as a Non-Private Customer”. The significance of this is that under the regulatory regime that applies to investment firms, business done with a private customer such as an individual who is an unsophisticated investor is subject to various protections which are not applicable to a non-private customer. The letter begins by stating that Geniki had been categorised as such because of its experience and understanding of various investments including shares in British and foreign companies. When that was put to Mr Pavlides in cross examination, he said that this description wasn’t true, adding however that “I wouldn’t say I misled” the defendants.

Geniki’s case is that the move from Townsley to the defendants gave Mr Pavlides an opportunity to reflect on the performance of Geniki’s investments, and that going forward he wanted to reduce the risk to which Geniki was exposed. As he put it, the previous three years had been pretty much of a roller coaster, and that’s why, he said, he had told Mr Mason at the time of moving over his account that he didn't want to trade as actively as he had done before, or in such risky stocks. In fact, at least so far as trading was concerned, this is supported by other evidence, since there clearly was less trading on the account than there had been at Townsley. A factor that may have contributed in this regard relates to Mr Mason himself. He was an Arabic speaker, and was recruited by the defendants to open an office in Bahrain. Though this ultimately came to nothing, the project took him out of the office for a couple of days a week. However, there does not appear to have been any fundamental change in the nature of the stocks traded, which remained focused in the technology sector through the time in question.

In terms of documentation for the individual trades, things were much as they had been at Townsley. The defendants sent out contract notes in respect of individual deals, together with monthly account statements. At Mr Pavlides’ request, these were sent to a P.O. box maintained in Nicosia in Geniki’s name by reason, he says, of postal problems in Cyprus. He says he checked it about twice a week.

As already noted, the contractual documentation recorded an “execution only” relationship with the firm. On that basis, according to Mr Pavlides’ own version of events, things began to go wrong right at the beginning. He says that he wanted to reduce Geniki’s exposure to technology shares. Accordingly, he spoke with Mr Mason on 25 January 2001 and told him to sell shares in Alcatel, Equant and Akamai that day. There followed conversations over the next few days when various trades were discussed, and Mr Mason told him that only the Alcatel shares had been sold. Mr Pavlides says that he told Mason that Geniki had lost money because of the failure to sell Equant and Akamai. His evidence was that Mason said that he had effected successful trades of shares in Coflexip and Atos, but that he (Mr Pavlides) told Mason that he could not trade without his instructions. The defendants submit with force that if Mr Pavlides’ account of these events is correct, Mr Mason, his friend and trusted adviser, appears from the start to have departed from the previous course of conduct between them and determined to ignore what Mr Pavlides contends was the fundamental feature of their trading relationship—namely that Mason would only trade on instructions. Be that as it may, his own case is that from the start Mr Mason did in fact ignore instructions to sell the technology stocks he wanted to get rid of, and made various sales and purchases without his instructions. As a result, he says, he told Mason that trading without instructions from him had to stop.

In the light of that clear and apparently uncomplicated prohibition, what happened next (on Mr Pavlides’ evidence) is hard to explain. The agreed schedule shows trading on the account in February, including large trades in Thomson Multimedia. On Mr Pavlides’ case, there were various conversations in which he gave instructions which he says were not complied with. He says that on 14 February 2001, he told Mr Mason that he had not authorised dealings which had taken place in Akamai. He says that a couple of days later he received contract notes in respect of the Thomson Multimedia shares. These showed a €400,000 purchase which was largely unwound the same day and the following day. According to Mr Pavlides, he challenged Mason, who came up with an excuse about diversification which Mr Pavlides agreed in cross-examination was a “remarkably stupid excuse”. More to the point, on the claimant’s case, the transactions were unauthorised, and Mr Pavlides says that he told Mason that “it was not acceptable for him to expect me to take trades which I had not authorised”. However he did nothing about it. In fact, he did nothing about any of the subsequent trades that he says were unauthorised until the letter of 19 July 2001 which I mentioned at the beginning of this judgment.

The trading continued. On 5 March 2001, Mr Pavlides says he received contract notes for Bouygues Offshore, France Telecom and Alcatel Optronics trades in respect of “purchases and sales which had all allegedly taken place on 22 February and of which I knew nothing”. One of the contract notes showed a loss on the sale of Bouygues Offshore of over €7,000. He says that he had difficulty getting in touch with Mr Mason until a telephone conversation on 8 March 2001. Mr Mason’s response to Mr Pavlides’ objection that he had conducted these trades without authority is said to have been to “bear with him”. In his witness statement, Mr Pavlides says that he tried unsuccessfully to speak to Mr Mason the following week, but by this stage “already felt trapped and embarrassed that I was in this position. I simply did not know who to turn to or what to do. I am by nature not someone who engages in confrontation. I had never before been in a legal dispute with anyone. I did not feel comfortable with the thought of making a complaint about Mr Mason, and still hoped, in hindsight misguidedly, that Mr Mason was a friend and professional who I could trust. At the back of my mind perhaps, I simply hoped the problems would go away. Further, I did not want my family to be as distressed as I was”.

Consonant with the approach of counsel for the parties during the hearing, I need not go through each and every one of the subsequent transactions shown on the schedule. Suffice it to say that the same pattern is repeated, and like counsel, I will pick out certain transactions. In the first two weeks of May 2001, Mr Pavlides was in London on business, and met up with Mr Mason. Mr Pavlides says that he “expressed my concerns to Mr Mason and told him that he was not instructed to act without my say so and that he could not expect me to accept the unauthorised trades for Geniki”. According to Mr Pavlides, they went on to discuss the market. Mason said that a trade in Thomson had made a profit of about €10,000, adding, “So we were all right on that one then”. Mr Pavlides says that he did not agree, saying that they were far from alright. He says that Mason was evasive, and that he left the meeting angry and depressed, feeling totally isolated and powerless to deal with the situation. Again, I have to say that I find this account of the meeting implausible. Having seen him give evidence over some two days, I am satisfied that if Mr Pavlides had really told Mason that he “could not expect him to accept unauthorised trades”, he would have done something about it. The fact that he took no action and the trading proceeded shows that, despite the clear statement in the documentation that the relationship was to be execution only, the reality was that Mason had a degree of discretion allowed him by Geniki.

Mr Pavlides returned to Cyprus on 14 May, and says he visited the P.O. Box a few days later and found the contract notes for an Alcatel trade placed on 24 April which lost over €34,000. He says that this was the first he knew of the trade, and that Mr Mason had not mentioned it when they met in London. This trade is one on which Geniki has understandably placed great emphasis in developing its case. Mr Pavlides says, and this seems quite likely given the Bahrain commitment, that he was having difficulties getting hold of Mr Mason on the phone at that time. But on any view, this transaction showed a significant loss. There was a further feature of the transaction that appeared from the contract notes. They showed a buy order for 5,000 shares at a price of €40.19 followed by a sell order the same day at a price of €33.45, which on its face was a fairly inexplicable transaction. Alcatel is a large company, and the contract notes on their face showed, as the defendants submit, an extraordinary drop in one day.

From information provided in the course of the dispute by the French brokers through which the order was executed, we now know that this trade was executed between 27 to 29 March 2001 in a lot size of 10,000 shares, which was split evenly between Geniki and another client called Mr Gupta. The date on which the trade was booked, namely 24 April, in fact comes at the end of the monthly settlement cycle on the French Stock Exchange. Geniki relies on these revelations as showing that Mr Pavlides cannot have placed any such order. But in my judgment, to get at the truth it is also necessary to look carefully at the reaction of the parties to this deal at the time. On his case, not only was this apparently inexplicable trade unauthorised, but furthermore, Mr Mason had concealed it from him when they met in London. In those circumstances, whatever difficulties Mr Pavlides may have had in getting hold of Mr Mason, it seems most unlikely that he would not have persevered by email, fax or letter if necessary to repudiate it. His case is that on 22 May 2001 they did at last speak, and Mr Mason is said to have apologised for the loss on the Alcatel trade referring to it as a “bad call on his part”. Mr Mason apparently also reported a profitable trade on Havas Advertising stock, which Mr Pavlides says in his witness statement was “missing the point. I did not want to do these trades and I did not give instructions in relation to them”. He says that, “I told Mr Mason that the situation was intolerable and that these were family funds. He promised to discuss everything with me going forward and once again abruptly ended the conversation. At this point, I really did not know what to do. My nerves were in a very bad state. I tried to visualise in my mind the scenario of entering into a dispute with Mr Mason – who I still misguidedly considered a friend – and his firm, and the potential entry into a costly legal process – an environment that would be totally unfamiliar to me and alien to my character. I also visualised the distress that this would cause the rest of my family. The whole picture was very stressful to contemplate.” Again, I find this account implausible, and cannot accept it. I do not doubt that he was distressed by the losses, but had the problem really been one of authorisation, as he says, I consider that Mr Pavlides would have insisted that trading stop unless expressly authorised by himself. The fact he did not do so suggests to me that he still hoped that Mason would trade his way out of the losses, as appears to have happened in the past.

From the first week in June, Mr Pavlides says that it was getting even more difficult to communicate with Mr Mason. They spoke on 21 June, when Mr Pavlides complained about the non-receipt of contract notes in respect of certain trades Mason had promised to effect. He says that he was “desperate that Geniki should recoup some of its losses. He [Mason] gave me an upbeat view of the market and suggested that Geniki should buy some Baltimore Technology shares. I recalled that Geniki had made a small profit on this stock in the past, on Mr Mason’s recommendation and I decided to follow his suggestion”. Even at this stage, on his own case Mr Pavlides was looking to Mason for advice, was looking to technology shares to recoup his losses, and was authorising further purchases despite the many deals that had taken place which he says were unauthorised. He told Mason that he was going on holiday but could be reached on his mobile phone.

Not least because the events happened some time ago, it would have been helpful to have compared the position as Mr Pavlides describes it in his witness statement and oral evidence with contemporary material. Mr Pavlides accepts that he and Mr Mason were in email contact over this period, which is not surprising given that he was in Cyprus and Mason was in England. He says however that it is not his practice to keep emails for more than a few months, and they would have been deleted. I find this surprising given that he is an accountant by profession, and that the emails related to investments that on his case were proving very troublesome at the time. Mr Clutterbuck, counsel for the defendants, submits that the emails were deleted because they did not support Mr Pavlides’ case, otherwise he would have deployed them after he challenged the transactions in July 2001. He did accept in cross-examination that he never sent an email to Mr Mason complaining about the unauthorised trading, which in itself seems to me to be surprising given his evidence about the conversations he says took place between them.

In the event there are a few emails from July 2001 that have survived, and these are very relevant. Mr Pavlides’ first day back was 10 July 2001. He says in his witness statement that “mindful of the horrendous losses that were being ascribed to Geniki by [the defendants], I was at this time looking more anxiously at newspapers and periodicals to see what commentators were saying about the market and individual shares. I had also considered trying to start making small trades on the account to recover the losses. I had read something positive about Marconi shares and wanted to get his opinion as he had recommended them to me in April and I had made a small profit on his recommendation”.

On 10 July, Mr Pavlides emailed Mr Mason. The first thing to note about the email is that the opening words, “Phil Hi, It is very difficult to get hold of you”, support his case as to the difficulty of getting hold of Mason on the phone at this time. Otherwise however, the email seems to me to be inconsistent with his case that Mason was abusing his account by persistently entering into unauthorised trades. As the defendants submit, it bears no hint of tension or complaint. It continues: “I was interested in Marconi on Friday but I don’t know at this level. Please give me a call. Thanks, George”. Clearly therefore, Mr Pavlides was contemplating continued trading through Mr Mason. It is also relevant to note (given that his case is that he wanted to reduce Geniki’s exposure to technology shares) that Marconi is such a stock.

Mr Shivji, counsel for the claimant, submits (in my view rightly) that the evidence shows that Mr Mason was given considerable latitude in the way that he worked at the defendant firm. The firm’s management appears to have become alive to potential problems with the Geniki account at the beginning of July. The position is by no means clear, and this time it is the defendants who can be criticised for the lack of contemporary documentation. But based on the evidence of Mr Badger and what is known of the facts at the time, I find that the most likely sequence of events is as follows. Following a board meeting on 4 July 2001, Mr Badger expressed concern to Mr Mason about the open positions on Geniki’s account and instructed him either to call for funds or reduce the outstanding positions. Mr Badger told me that after 4 July there was a large closing sale which reduced the open position on Geniki's account by quite a large amount. This I think he agreed was the sale of Bouygues Offshore stock on 11 July 2001. He maintained that it was not a position closed down by the firm, but accepted that he could not say whether Mr Mason discussed it with the client or not. In this regard, I accept Mr Shivji’s submission that the emails from Mr Pavlides on 10 July and another on 11 July 2001 as to difficulties in contact support Geniki’s contention that it did not place the order.

However, if not beforehand, Mr Pavlides found out about it shortly afterwards, and this explains what happened next. The contract notes and the monthly statements for June 2001 showed that most of Geniki’s positions had been closed out and that the value of the account had decreased in the month by approximately £110,000. This led to action by Mr Pavlides. On 18 July 2001, he emailed Mr Mason complaining “yet again” about unauthorised trades booked into his account, and referring to the fact that he had “repeatedly raised with you the issue”. Whilst on the face of it this supports his case as to authority, and the claimant relies on it as such, it is to be noted that it is the first reference in any of the contemporary material to the authority issue, and it has to be read in the light of the fact that by this time Mr Pavlides had plainly decided to repudiate the losing trades. On 19 July 2001, he followed up by fax and registered mail to the defendants’ compliance officer. He said that he had just received the June statement and the “balance of our account would appear to have been completely wiped out by transactions that we have not authorised and of which we are unaware. This appears to be the culmination of a series of unauthorised actions by your broker/representative Mr Philip Mason”.

I shall come back to this letter. It received a reply from the defendants’ compliance officer dated 25 July 2001. This says that trading was only partly responsible for the losses, and that had the portfolio which was transferred from Townsley in January been held, it would have lost half its value. This it is to be noted accords with Mr Badger’s evidence as to the slide in tech stocks experienced in 2001 following a boom in 2000. Otherwise, Mr Pavlides in my view fairly describes the letter as unsympathetic. No doubt the firm took the view that his complaint was without merit, but it is a pity that it did not receive more detailed attention at the time given the deficiencies in the defendants’ documentation that subsequently came to light and which I shall discuss shortly. Some time afterwards, the account was closed. Mr Pavlides told me that Geniki got back about €5-6,000 and some shares he had initially bought for about €10,000.

Mr Badger accepted that this affair, together with a problem with Mr Gupta, another of Mr Mason’s clients, shook the firm’s faith in Mr Mason. He told me, and I accept, that they did not consider Mr Mason to be a “rogue trader”, but that all in all by September they decided that they did not want to proceed with the Bahrain office. That of course was the primary reason for Mr Mason joining the firm. Mr Badger said that Mason was unhappy at the decision and that by the end of the year he had left the firm and returned to Insinger Townsley. It appears that under their contractual arrangements with him, the defendants are holding Mr Mason personally liable for their costs of this dispute and any liability that they may have to Geniki.

In the course of 2001, Geniki’s complaint was taken up by its lawyers, who at an early stage identified certain trades where there was a price mismatch between the date of the trade, and the range within which the stock was trading at that date. This has been a significant feature of the trial, and involves the deficiencies in the defendants’ documentation which I have just mentioned. By February 2002 all of the trades of which Geniki complained had been identified. But the parties did not agree. Geniki made a complaint to the Financial Ombudsman Service on 4 March 2002. The adjudicator wrote to its lawyers on 7 May 2003 concluding that on the evidence she had reviewed, she was unable to recommend that its complaint be upheld. Following further representations, she agreed to look into the matter further, but on 21 January 2005, the Ombudsman wrote to Geniki’s solicitors stating that he did not have jurisdiction to handle the complaint since Geniki was a non-private customer. As I have indicated, it was another two years before this action was commenced.

I have mentioned that at an early stage in this dispute, Geniki’s solicitors realised that certain trades showed a price mismatch. Most if not all of these trades were in French stock, executed by the defendants through Natexis, a French broker. Put simply, the price of the trade as shown on the contract note did not correspond with the range within which the stock was trading at that date on the Paris bourse. Geniki’s solicitors sought to pursue the matter, and eventually obtained the defendants’ internal dealing sheets mainly completed by Mr Mason which purported to record the dates of orders received from Geniki and the trades executed in the market. It is not in dispute that twenty out of the thirty five trades challenged by Geniki in this action could not, as a matter of fact, have traded at the price in question on the date recorded.

Geniki’s solicitors pressed further, and eventually the defendants approached Natexis for the transaction details regarding the purchase of Alcatel shown to have taken place on the French stock exchange on 24 April 2001. As I have said, information supplied by Natexis showed that the purchase had been executed over three days between 27 to 29 March 2001. Natexis also provided information on the purchase of Bouygues Offshore booked on 22 February 2001, which showed that the shares were actually purchased on 7 to 9 February 2001. The defendants did not request any further information from Natexis in relation to any of the other trades, and this has been subject to what I think is justifiable criticism by Geniki. In any event, it is not challenged that, at least in relation to the twenty price mismatch trades, the information as to the date and time of the trades contained in the dealing sheets and therefore the contract notes is to a greater or lesser degree incorrect. Also, for the trades executed by Natexis, Mr Badger told me that there is no corresponding dealing sheet for Mr Mason as there should be.

Various explanations of these discrepancies have been offered by the defendants based for example on the time of receipt of the trade execution report from Natexis at the end of the month. It is a fact that the French stock market operated a deferred settlement scheme during the material period. This meant that Mr Mason was able to defer the settlement (that is the payment of the purchase price or the delivery of shares depending on whether it was a buy or sell order) until the end of the month. Since Natexis did not know the identity of the underlying client, Mr Mason appears to have been able to buy and sell shares, defer settlement, and only book them to the client’s account at the end of the period when the profit or loss had already crystallised.

This was all the subject of considerable investigation at trial, but I need not go into all the detail in this judgment, because in closing Mr Clutterbuck accepted that none of the theories that have been advanced on his side really amounted to a full explanation. This he submitted was in part because the full facts were unknown, in particular what may have been said between Mr Mason and Natexis on the phone. At least a partial explanation, he submitted, is that the contract notes cannot have been sent out until the Natexis report was received from France at the end of the settlement cycle. That would not however provide a justification for the bargain date as recorded in the contract notes in question, let alone a justification for the date and time the order was received as recorded in the dealing sheets. In a letter to the Financial Ombudsman Service dated 15 September 2004, Mr Badger said that “…it is unfortunate that because of the record-keeping deficiencies we have never been able to explain the sequence of events in relation to the client’s orders in such a way as to prove clearly to the client that none of the transactions was unauthorised”. I consider that this way of putting it understates the position. For obvious reasons, it is entirely unacceptable that contract notes sent out by a stockbroker, and the internal dealing sheets on which they are based, should wrongly record the date of the orders placed by the client. But without in any way condoning this state of affairs, it does not in itself show that the trades were unauthorised, or that Geniki is not otherwise bound by them. In that regard, counsel for both parties submitted to me, and I agree, that the outcome must depend in considerable measure on the view that I take of the credibility of the evidence given by Mr Pavlides, which I must now consider.

At various stages above I have commented on aspects of the evidence given by Mr Pavlides, and need not repeat those comments here. It is however worth repeating that he is a chartered accountant working in the financial services industry. He dealt through Geniki, a company which is incorporated in the British Virgin Islands. He was well used to the ups and downs of the stock market, as his dealings through Mr Mason when he was at Townsley show. I found him to be a careful, but unconvincing witness, who I believe has reconstructed in his own mind the events of January to July 2001 to attribute the blame for the losses exclusively to Mr Mason and the defendants. I have no doubt that he trusted Mason’s financial acumen, and ended up feeling very distressed and badly let down. However I find his case that this was because Mr Mason had repeatedly entered into trades without the authority of Geniki to be very implausible. He accepted, as he had to, that he knew about the trades at the time, or shortly afterwards when he collected the contract notes and/or account statements from Geniki’s P.O. Box to which he had asked them to be sent. He said that he repeatedly remonstrated with Mason about unauthorised dealing. His evidence was to the effect that his trust in Mason and his friendship with him was such that he felt embarrassed in making a complaint when such dealing did not stop. I do not accept that evidence. If, back in January 2001, or at any time afterwards, he had told Mr Mason to stop trading without authorisation, as he said he did, I am satisfied that he would immediately have put a stop to it if it had happened again. There was no need for a complaint. All that was required was to make it clear to Mr Mason, or to someone else in the defendant firm if Mason ignored him, that no trades were to take place without his express instructions. This is what he did do in his letter of 19 July 2001 after the scale of his losses became clear. The fact that he did not do so earlier leads me to reject this central element of his factual account.

Against that background, I come to my findings on the factual issues that will determine liability in this case. The first is whether the thirty five loss making trades which form the subject matter of the claim were authorised by way of specific instructions given by Mr Pavlides on behalf of Geniki to Mr Mason on behalf of the defendants. Geniki submits that such instructions would have to specify the amount, the stock and the price. Mr Pavlides says that he did not give such instructions in respect of any of the trades. The defendants’ case on the other hand is that he gave specific instructions in respect of all of them.

Contact between Mr Pavlides and Mr Mason happened mainly on the phone. Mrs Karen Williamson gave evidence (which I accept) that on the three or so days a week that Mr Mason was normally in the office, he and Mr Pavlides would speak regularly, often on a daily basis. Though I accept that contact became less frequent towards the end of the relationship, in broad terms this would fit with the pattern which existed when Mr Mason was at Townsley. However, Mrs Williamson could not hear what was said between them. At the time, the taping of conversations between client and broker was not a regulatory requirement, and did not happen at the defendant firm so there are no records of such conversations. That being so, one turns to the dealing sheet to establish that the order was placed. However as I have explained, in the case of twenty out of the thirty five trades, these sheets wrongly record the date and time of the order. There is much force in Geniki’s submission that in consequence none of these dealing sheets can be considered reliable. Furthermore, in the case of the order of 11 July that followed the defendants’ board meeting held on 4 July, difficulties in contact between Mr Pavlides and Mr Mason mentioned in the emails of 10 and 11 July 2001 support Geniki’s contention that it did not place that order, and I am satisfied in that case that it did not do so.

But it does not follow that none of these trades were placed following specific instructions from Mr Pavlides. Geniki’s case is that out of about eighty trades on the account during the relevant period, the great majority (about sixty two) were placed without specific instructions. This I consider extremely unlikely. As the defendants submit, Mr Pavlides accepts that, save as regards frequency of dealing and the degree of risk in the stocks, his trading through Mr Mason at Ellis was intended to follow the same pattern as at Townsley. His case (though implausible) is that each and every trade placed at Townsley through Mr Mason followed specific instructions from himself. It is inherently unlikely that the nature of the trading would change suddenly. I find as a fact that some though not all of the disputed trades were made following specific instructions given by Mr Pavlides, but that in the absence of reliable dealing sheets, it is not now possible to say which ones.

The defendants have an alternative case. Based on the proposition that at Townsley a relationship built up in the course of which Mr Pavlides allowed Mr Mason leeway in the conduct of trades on Geniki’s account without prior specific instruction from Mr Pavlides, the defendants submit that this arrangement continued when Mr Mason moved to their firm. They submit that Mr Pavlides’ own evidence as regards the behaviour of Mr Mason when faced with alleged protests about unauthorised trading is consistent with Mr Mason having a belief that he had such leeway. It is also consistent, it is argued with Mr Pavlides’ behaviour in not protesting to the firm against the trades, and with his behaviour in accepting the profitable trades and thereby communicating his approval thereof to Mr Mason. As to the latter point, there are twenty eight such trades set out in the schedule to the Reply. In respect of each one of these trades, Geniki’s pleaded case that “Mr Mason informed Mr Pavlides by telephone on the day of execution, albeit after the event, that the trades had taken place”. (Credit is given for them in calculating the amount of the claim.) In my judgment, Geniki had no very good answer to the defendants’ submissions. It is not sufficient to point to the fact that the agreement between Geniki and the defendant firm was execution only if, as I am satisfied was the case, Mr Pavlides in fact permitted Mr Mason a measure of discretion in how Geniki traded.

I accept the defendants’ submission that this view of the facts is generally a realistic interpretation of the evidence. In summary, I am satisfied that the trades on Geniki’s account were placed either on specific instructions from Mr Pavlides, or that notwithstanding the execution-only nature of the agreement between the parties, Mr Mason’s trades were de facto authorised pursuant to the discretion allowed him by Mr Pavlides. I have carefully considered whether I should treat the 11 July 2001 trade differently. Clearly it followed instructions from Mr Badger to Mr Mason. On the other hand, it was a sale by which the losses on the previous trading were crystallised. The claim has been put from the beginning on the basis that all the disputed trades were unauthorised, without particular focus on this one. On balance I have concluded that it would be artificial to pick it out, and that this trade should be treated the same way as the others.

Geniki has contended that Mr Mason was fraudulent in various respects. Mr Mason has not given evidence, and as I have mentioned, the defendants have lost contact with him, perhaps because the dispute was already nearly six years old when this action was begun. It is correct, as I have emphasised already, that the way he completed the documentation was entirely unacceptable. It is also clear that the defendants lost faith in him after this dispute blew up. But I am not satisfied that I have heard a full account from Mr Pavlides of the course of dealing between the two men, and I think the same consideration weighed with Mr Badger in the passages in his cross-examination relied on by Geniki in submitting to me that Mason was dishonest. I have taken Geniki’s submissions into full account, but on the evidence I do not feel able to make a finding to that effect. I consider that the disputed trades (or at least some of them) may have been subject to more discussion at the time than Mr Pavlides has been prepared to acknowledge. That includes the trades where there is a demonstrable price mismatch. On the other hand, the question arises as to what positive weight to attach to such evidence on behalf of Mr Mason as is before the court. As I have mentioned, a number of his statements were served under the Civil Evidence Act shortly before the trial began. I think Geniki was right to criticise the non-disclosure of these statements earlier. I agree with Mr Shivji that the documents have to be treated with caution, and in the event have not given them any weight.

For their part, the defendants invite me to find that Mr Pavlides has fabricated a case against them. I make no such finding. As I have made clear, I have been unable to accept the reliability of much of his evidence, but I am satisfied that as an accountant with much experience in the financial services industry he would not set out to mislead the Court. Perhaps because some of the money that was lost belonged to members of his family, or because of the distressing nature of the experience, he has however (in my judgment) convinced himself that the fault lies with the defendants, and not with him.

Correctly in my view, Mr Pavlides’ letter of 19 July 2001 identified the central issue in this case as being one of authority. Both counsel accepted (at least in their oral submissions) that this was indeed the case. The claimant in particular drew attention to various rules issued by the Securities and Futures Association (SFA), which was the regulatory authority with responsibility for the defendant firm until the Financial Services Authority (FSA) took over in December 2001 under the regulatory regime introduced by the Financial Services and Markets Act 2000. It is common ground that there is no independent cause of action under section 62 of the Financial Services Act 1986 arising out of any breaches of the rules, since Geniki was not a “private customer”. Whilst some reference to the regulatory regime has been useful as a matter of background, I do not consider that the SFA Rules are determinative of any issue in the case. My conclusion as to the various legal points argued by the parties are as follows.

Breach of contract, negligence, and breach of fiduciary duty

Mr Shivji, who has argued his client’s case with tenacity and courtesy, has sought to put the claim on the basis of breach of contract, negligence, and breach of fiduciary duty. So far as breach of contract and negligence is concerned, he submits that if, as Geniki contends, it did not give specific instructions to Mr Mason or the defendants to carry out the disputed trades, then the defendants acted in breach of the terms of the agreement entered into between the parties, or were negligent in effecting trades on Geniki’s account. The agreement as I have said was constituted by the letter dated 19 January 2001 from the defendants to Geniki which attached their terms of business. Mr Shivji relies in particular on breach of clause 4.1 of the terms, which provided that the defendants would “execute all orders given by [Geniki] strictly in accordance with their terms”. As a result, it is submitted, there has been a breach of contract, and Geniki has suffered loss and damage in respect of the losses sustained on those trades.

I reject this argument. In my view, this provision followed simply from the fact that Mr Pavlides had stipulated that the terms of the parties’ relationship were to be execution only, rather than advisory or discretionary. However as I have explained, this was not the reality of the trading he conducted on the account, or for that matter the trading which I have no doubt he anticipated would be conducted on the account at the time when the agreement was entered into. He cannot rely on this provision to repudiate transactions which he authorised expressly or de facto pursuant to the discretion he allowed Mr Mason. The claim for breach of fiduciary duty is based on the fact that the defendants acted as agent for Geniki in effecting orders on the stock market, and I do not think that it is suggested that it adds anything to the breach of contract claim.

Affirmation, adoption and estoppel

Subject to a point on misrepresentation, that conclusion is sufficient to decide the case in the defendants’ favour. But the defendants submit that even if Geniki’s case is correct, and the disputed trades were entered into by Mr Mason without its authority, the transactions were affirmed or adopted by Geniki, or Geniki is now estopped from disputing them. The factual basis for these arguments is largely the same in respect of each point.

As to adoption, reliance is placed on Bowstead & Reynolds on Agency, 18^th edition, Article 17, and in particular Article 17(3) which states that:

Ratification will be implied whenever the conduct of the person in whose name or on whose behalf the act or transaction is done or entered into is such as to amount to clear evidence that he adopts or recognises such act or transaction: and may be implied from the mere acquiescence or inactivity of the principal.

See also Yona International Ltd v. La Réunion Française SA [1996] 2 Lloyd’s Rep 84 at 103, per Moore-Bick J, where the principles as regards ratification are analysed. Geniki submits that there is no question of affirmation or adoption in this case, and that the most the defendants’ case can amount to is one of waiver, which is not pleaded. The defendants submit that the threshold is passed, and that if it is found that Mr Mason traded without specific instructions and did not have prior authority in the sense of an element of discretionary permission, then Mr Pavlides by his conduct nevertheless affirmed and adopted the trades by his continuing failure to protest and make clear that he was disowning the trading.

So far as estoppel is concerned, the defendants submit that Mr Pavlides’ failure to disclose to them that the trades booked to Geniki’s account were not, as he alleges, in fact Geniki’s, amounted to a representation by conduct that they were Geniki’s. The defendants acted in reliance on that representation in continuing to allow the trading on the account to continue, and Geniki is now estopped from contending to the contrary. For Geniki, Mr Shivji placed reliance on two cases dealing with a similar question in the context of bank accounts. In Greenwood v. Martins Bank Ltd [1933] AC 51, it was held that a customer is under a duty to inform his bank of any forgery of a cheque purportedly drawn on his account as soon as he becomes aware of it. In that case, failure to do so was held to estop the customer from asserting that signatures on the cheques concerned were forgeries. In Tai Hing Ltd v. Liu Chong Hing Bank Ltd [1986] AC 80, a case in which the customer was unaware of the forgeries at the material time, it was held that there was no wider duty requiring a customer to check his bank statements in order to notify the bank of any items which were not in fact authorised.

Mr Shivji argued that the Greenwood principle is inapplicable in the present case, because although Mr Pavlides was aware that Mr Mason was effecting unauthorised trades, he was not aware that Mr Mason (on Geniki’s case) was acting fraudulently. Counsel’s submission was that in the absence of knowledge of fraud, the customer of a stock broker, knowing that unauthorised trades are being booked to its account, is nevertheless entitled to remain silent, and then set the trades aside at some later date. The only restriction on his right to so, it was submitted, is the limitation period. With respect, that submission seems commercially unrealistic, and I consider that it is contrary to the authorities cited in support of it. Applying the Greenwood principle, in my judgment the customer of a stockbroker who knows that one of its brokers is placing orders on his account without his authority may come under a duty to inform the firm of that fact, so that it can take steps to put a stop it. That view is supported by the way the principle is formulated in the judgment of the Privy Council in the Tai Hing case, where it was held (in relation to forged cheques), that a customer has a duty to inform his bank at once of any unauthorised cheques of which he becomes aware (see [1986] AC 80 at 108 A-B). If the customer does not do so, and allows the trading to continue, then he may find himself estopped from repudiating the trades in question. In particular, he cannot wait until it has become clear that a course of trading has been unprofitable, and then seek to repudiate the dealings on the grounds that they have been entered into without his authority.

Whether the principle applies will of course depend entirely on the particular facts. Here, it is Geniki’s own case that it was aware from the start of the relationship with the defendants in January 2001 that Mr Mason was trading without its authority. Its case is that Mason persistently ignored Mr Pavlides’ instructions that trading without authority from him had to stop. But it accepts that Mr Pavlides did not inform the firm about this state of affairs until July 2001, and that in the meantime the firm continued to send out contract notes and account statements without objection from him. Mr Pavlides must thereby have intended the defendants to permit the trading on his account to continue, which they did, without taking the action that could easily have been taken to regularise the position. In those circumstances, it seems to me that the elements of estoppel are made out, and had I not found that the disputed trades were authorised expressly or de facto, I would have found that Geniki cannot now challenge them.

Misrepresentation

Geniki had a case in misrepresentation relating to June 2001 trades, but this has not been pursued in the light of Mr Pavlides’ oral evidence. As I understand it, a case is still pursued on the basis of misrepresentations made by Mr Mason expressly or impliedly that the disputed trades had been made by him on the bargain dates set out in the contract notes. In the twenty cases where there is a price mismatch, this is said to have been clearly untrue. It is submitted that Mr Mason made the misrepresentations knowing that they were untrue or not believing that they were true or was reckless as to whether or not they were true. Mr Mason would, it is submitted, have known from his own dealings that the bargain dates recorded on the contract notes were incorrect. Accordingly, it is submitted, Geniki is entitled to rescission or damages in relation to the transactions concerned.

In the light of my findings as to Geniki’s inaction in the face of what it claims were unauthorised transactions, I do not think that this argument is soundly based. Further, I accept the defendants’ submissions that on the evidence these misrepresentations did not induce Geniki to accept the trades in question. Asked in examination-in-chief what difference it would have made if he had realised that the trades had not in fact been made on the dates set out in the contract notes, he said, “I cannot say for certain, but it might have made me complain in writing earlier than I did do in July”. In cross-examination, he said it might or might not have made a difference. These were I am sure honest answers, and the fact is that the dates in themselves made no difference. His complaint was that the trades should never have been entered into in the first place. The claim in misrepresentation fails therefore. I would however have rejected the defendants’ alternative submission that if Mr Mason did deceive Mr Pavlides, the defendants are not responsible for that deception. Such wrongful conduct would in my view have fairly and properly been regarded as done while acting in the ordinary course of the firm’s business or of his employment with the firm: see Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at para 23, per Lord Nicholls.

The terms of the contract

Finally, the defendants rely on their contractual terms as to the conclusive nature of their contract notes. They submit that the effect is that having failed to give notice in writing of objection to the notes, Geniki is contractually bound by the transactions recorded in them. Clause 5.6 provided that:

“All contract notes in respect of transactions we effect for you will be despatched promptly, generally before the close of business on the business day following the day on which the transaction was effected. In the absence of manifest error all such contract notes will be conclusive and binding on you unless, immediately following the receipt thereof, you give us notice in writing of any objection.”

Geniki submits that this clause fails the test of reasonableness in the Unfair Contract Terms Act 1977. The defendants respond that sections 2 to 4 of the 1977 Act do not extend to a contract “in so far as it relates to the creation or transfer of securities or of any right or interest in securities” (see paragraph 1 of Schedule 1 of the Act), and that the agreement between the parties of 19 January 2001 is such a contract. No authority was cited by the parties, but I have formed the tentative view that the defendants are wrong on this point. As I see it, the agreement of 19 January 2001, and clause 5.6 of the terms, governed the relationship between the parties. Of course in a broad sense it “related to” the creation or transfer of securities, but I consider that this paragraph in Schedule 1 is intended to exclude from the scope of the Unfair Contract Terms Act contracts relating directly to the creation or transfer of securities. However, I need not reach a final conclusion on this point, or on various other objections raised by Geniki to the applicability of this provision, because in my judgment, on its true construction, clause 5.6 does not apply to the contract notes in this case. The errors as to the bargain date which I have described above can properly be described as manifest, and were sufficient to preclude the defendants relying on the notes as conclusive and binding as regards the trades in question.

In the light of my other findings, this does not affect the outcome. For the reasons I have given, this claim is dismissed. I should thank both parties and their legal representatives for the valuable assistance they have given the Court.