The High Court has dismissed a claim by a currency debt management firm against three banks in a banking group, which included allegations of front running and/or trading ahead in relation to the execution of certain stop-loss orders (SLOs) in 2006. In doing so, the court found that the claim was time-barred as the claimant failed to show that it had not discovered or could not with reasonable diligence have discovered the claim in the same year that the SLOs were triggered: ECU Group plc v HSBC Bank plc & Ors [2021] EWHC 2875 (Comm).

The decision highlights the difficult threshold for claimants to meet in proving that a bank has engaged in this type of market abuse (although this will always be fact-specific), and demonstrates how such claims may be effectively barred by the Limitation Act 1980 (LA 1980) in appropriate circumstances.

In the present case, the court was satisfied that in the year that the disputed SLOs were triggered, a senior officer of the claimant believed that the SLOs had been deliberately triggered by the banks and that this amounted to market abuse and front running. The court also considered that at the time, the claimant could with “reasonable diligence” have discovered the other claims now alleged (within the meaning of section 32 LA 1980), if it had pursued an application for pre-disclosure or the issue of a claim related to front running and/or trading ahead.

Even if the claim had not been time-barred, the court found (on an obiter basis) that the allegation of front running was not made out. In the court’s view, the claimant had not established that it was more likely than not that the banks had intended to trigger the SLOs. While the court’s finding on this aspect of the judgment does not have precedent value and is not binding, it may be persuasive in future cases with similar facts.

We consider the decision in more detail below.

Background

A currency debt management firm (the Firm) managed multi-currency loans for its customers. This involved placing large SLOs with a number of banks, including the second defendant, as a form of currency-damage limitation for the Firm and its clients to manage the risk of foreign exchange rates for a particular pair of currencies rising above an expected level. The second defendant would pass those orders on to entities within the same banking group. For simplicity, the defendant banks are referred to together as “the Banks” in this blog post.

If the relevant currencies rose above the expected level, then the stop-loss would be triggered and the Banks would buy/sell that currency pair to avoid further losses. If the relevant currencies did not rise above the predetermined ceiling, then no action would be taken on the order.

In January 2006, the Firm placed three SLOs. Each of these orders was triggered very shortly after they were placed. The Firm found this surprising, and expressed its concern to the Banks.  The Firm queried whether there had been front-running on those orders (i.e. whether the Banks had manipulated the markets by their own buying and selling activities in respect of the currencies so as to artificially push the relevant rates up causing the SLOs to trigger). The Banks conducted an internal investigation and responded that they had not found evidence of front-running or wrongdoing but rather that the currency movements were simply due to general market activity.

In February 2019, the Firm brought a claim against the Banks in connection with the loans and/or handling and execution of the SLOs. The Firm’s case was that:

  • the Banks had breached their contractual, tortious and equitable duties as they had engaged in the fraudulent front running of the SLOs, or some of them, to the detriment of both the Firm and the Firm’s customers; or
  • alternatively, the Banks had: (i) made misrepresentations to the Firm in connection with the SLOs; or (ii) failed to execute the SLOs in accordance with the duties that they owed to the Firm and in accordance with the Firm’s instructions.

The Firm also sought to rely on the postponement of the primary limitation period under section 32 of the LA 1980 on the basis that the Banks’ breaches of duty had been committed in circumstances where they were unlikely to be discovered for some time. Alternatively, the facts relevant to the Firm’s right of action had deliberately been concealed from it by the Banks.

The Banks denied the claim. The Banks’ case was that the claim was time-barred given that the material events had taken place between 13 to 15 years prior to the issue of the claim. The Banks also contended that there had been no front running or misuse of confidential information: any trading ahead of the SLOs that may have taken place was simply pre-hedging; this did not constitute a breach of confidence and was a legitimate order management technique that the Banks were entitled to adopt when executing the SLOs.

Decision

The court found in the Banks’ favour and dismissed the claim.

The key issues which may be of broader interest to financial institutions are examined below.

1. Limitation

Limitation legal principles

In its consideration as to whether the claim was statute barred, the court reviewed the authorities and highlighted the following key principles:

  • Under section 32 LA 1980, the limitation period on fraud or concealment does not begin until the claimant has discovered the fraud or concealment or could, with reasonable diligence, have discovered it.
  • One of the main reasons for the statute of limitation is to require claims to be put before the court at a time when the evidence necessary for their fair adjudication is likely to remain available (as per AB v Ministry of Defence [2013] 1 AC 78).
  • The test for discovery of the fraud or the concealment is the “statement of claim” test (as per OT Computers v Infineon Technologies [2021] EWCA Civ 501). This is met if the claimant has sufficient knowledge to plead the claim.
  • For the fraud to be known or discoverable by a claimant under section 32 LA 1980 (such that time will start running against them), it is not necessary that the claimant knows or could have discovered each and every piece of evidence which it later decides to plead (as per Libyan Investment Authority v JP Morgan [2019] EWHC 1452).
  • What reasonable diligence requires in any situation must depend on the circumstances. The question is not whether the claimants should have discovered the fraud sooner, but whether they could with reasonable diligence have done so. The question may have to be asked at two distinct stages: (1) whether there is anything to put a claimant on notice of a need to investigate; and (2) what a reasonably diligent investigation would then reveal. However, it is a single statutory issue, i.e. whether the claimant could with reasonable diligence have discovered the concealment (as per OT Computers).

Application of the limitation principles to the present case

The court held that the claim was time barred as the Firm had failed to show that it had not discovered or could not with reasonable diligence have discovered the claim in 2006.

In respect of the allegations of front running and trading ahead, the court commented that for the purposes of section 32 LA 1980, the Firm had sufficient knowledge in 2006 to plead the claim in relation to the SLOs. The court noted that it was satisfied that in 2006 a senior officer of the Firm believed that the SLOs had deliberately been triggered by the Banks and that this amounted to market abuse and front running. The court also said that, as far as knowledge was concerned, the knowledge of the senior officer could be attributed to the Firm and it was not necessary for the board of directors to have shared his belief for the Firm to have knowledge for the purpose of limitation. The evidence also showed that it was unlikely that the Banks’ response in 2006 would have been a barrier to concluding that there was credible evidence enabling a claim to be pleaded.

As to the remainder of the allegations, the court noted that the Firm had not shown in the circumstances that the exercise of reasonable diligence did not extend either to issuing proceedings for the claim in front running and/or trading ahead, or to making an application for pre-action disclosure. Had the Firm taken either of those routes, the Firm could with reasonable diligence have discovered the other claims now alleged within the meaning of section 32 LA 1980. In the court’s view, if the Firm had wanted to know what had happened and exercised reasonable diligence, it would have sought legal advice and taken steps to pursue the claims for trading ahead and front running, yet the Firm decided not to take any further steps in response to the Banks’ response in 2006 that there was no evidence of front running or wrongdoing. The court also noted that the Firm was a sophisticated commercial player with access to lawyers and there was no evidence that it would not have had the resources or the staff to pursue the claims.

2. Front running/misuse of confidential information

Front running/misuse of confidential information principles

In the event that the front running claim had not been time barred, the court in its consideration as to whether there had been front running noted the following key principles:

  • Front running involves a claimant establishing on a balance of probabilities that: (i) for the relevant trade there was trading ahead of the order which was not legitimate; and (ii) the trader(s) involved intended by trading ahead to trigger the SLO.
  • The court had to consider whether it was satisfied on the balance of the probabilities in relation to the individual trades in issue that: (i) trading ahead of the SLO occurred; (ii) such trading was not for legitimate purposes; (iii) such trading had a material effect on the triggering of the order; and (iv) the trader intended to trigger the order by trading ahead.
  • There was a distinction between a trader taking a position ahead of an order (pre-hedging) and front running. The latter would be trading behaviour that was deliberately intended to trigger the stop-loss to the detriment of the client.
  • The experts were agreed that even if there had been a valid instruction to a bank not to trade ahead, trading to fill customers’ orders or to adjust the trader’s own position was legitimate.
  • It was common ground that if the trading ahead had been deliberately intended to trigger the SLOs that would amount to a misuse of confidential information.

Application of front running/misuse of confidential information principles to the present case

The court said that the Firm had not established that it was more likely than not that the Banks had intended to trigger the SLOs and thus the allegation of front running was not made out.

The court noted that there was no trading data and no evidence that the Banks traded ahead. Even if the Banks had traded ahead, there was no evidence as to why such trading ahead occurred, its impact on the market or the motive of the trader. Any such trading ahead could have been to reduce slippage or for other legitimate purposes.

The court commented that the guidance in the regulatory code at the time (relied upon by the Firm in support of its case that there had been illegal front running), the Non-Investment Products Code on FX trading, was aspirational and did not represent actual best practice at the time.

The court also rejected the submission that an adverse inference as to widespread misconduct and systemic failures in the Banks’ FX business should be drawn from subsequent regulatory findings/foreign proceedings in relation to the misconduct of a particular rogue trader.

Finally, the court said that in any case any alleged front running or trading ahead did not affect the rate at which the SLOs were executed since the rate was specified by the Firm when it gave the orders to the Banks and remained a constant; it only affected the time when the SLOs were triggered. In addition, the Firm could not prove that any wrongdoing would have changed the subsequent trajectory of the market for the relevant currency pair.

The court also noted that there was no fiduciary relationship between the Firm and the Banks or between the loan customers and the Banks, so any comparison that the Firm sought to draw with cases concerning the misuse of trust property was inapposite.

Accordingly, for the reasons given above, the court dismissed the claim.

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