Tough Judgement for Fraud Claims

Whilst a number of seemingly optimistic economists have recently called an end to the credit crunch, it is anticipated that more substantial fraud will be uncovered over the coming year. The significance of fraud claims being proven lies substantially in the damages awarded, as once fraud has been shown the claimant is commonly entitled to any loss that flows from the fraud even if the losses were not necessarily foreseeable. As a result, battle lines in fraud cases are drawn and hotly contested over the scope of damages recoverable as a consequence of the fraud. This was the case in a recent decision by the Court of Appeal in Parabola Investments Ltd and Ors v Browallia Cal Ltd and Ors [2009] EWHC 901 (Comm).

The facts

The claim in this case was brought by a group of companies incorporated by Mr Rajesh Gill for the purpose of conducting his trading activities (collectively referred to as Tangent). Tangent claimed damages for deceit against the defendant broker company (Man) and its employee (Mr Bomford). Mr Gill, by all accounts, was an exceptionally gifted trader with "overwhelming evidence" of a long standing record of trading profitably in both bull and bear markets in certain types of stocks and shares and related derivative products. Indeed he had earned the title "the 7-to-7 man" because he turned a starting fund of £7,000 into £7m in two years. The only time he was said to have traded unprofitably was for a period of some eight months from July 2001 to February 2002 during which he used Man as his broker.

During this unprofitable period Gill traded in contracts for differences in the shares of FTSE 100 companies (SETS). Bomford was said to have deceived Mr Gill on a daily basis by telling him that the trading in SETS was profitable when, in fact, in Bomford's own words, he was "haemorrhaging money". On 24 December 2001 Bomford advised Gill his account had increased in value from £4.25m to £9.27m when in fact it had decreased in value to approximately £1.5m.

Man accepted vicarious liability for the frauds of Bomford. Tangent claimed to be entitled to recover not only the capital loss of the amount by which the trading fund was depleted as a consequence of the fraud, but also the loss of profits that Tangent would have made on alternative trades during the period of the fraud and for the subsequent period until trial. Man argued in its defence of these claims that (1) Tangent had not shown that it had been induced by Man/Bomford to engage in the disastrous trading by the deceit practised by Bomford, and; (2) the claim for loss of profits to the date of judgment was too speculative and recovering more than the diminution in the fund with interest would over-compensate Tangent.

Decision

The Judge damningly found that Bomford was "a persistent and inveterate liar in almost everything he said, both in evidence and elsewhere." The Judge had no difficulty in finding that Gill had been induced to continue to trade as he had (unprofitably) in the period as he had relied on Bomford for the daily updates he gave to determine his trading decisions and strategy. The Judge also found that Gill would have cut his losses early and would have ceased or scaled back trading in SETS to refocus on his profitable trading had he known he was losing money on an almost daily basis. Specifically, the Judge found Gill was "not some manic or compulsive trader who would have driven himself, lemming like, over the cliff if he had known the true position."

The Judge decided that the claim for loss of profits was not too speculative. Tangent was therefore entitled in principle to recover loss of profits during the period of the fraud on the alternative trading it would have carried out but for the fraud. Based on the evidence of actual profits made subsequent to the fraud, with a larger starting fund available, the Judge found that it was more likely than not that Gill would have made even more profit subsequent to the fraud up to the date of trial. As a result, the Judge found that there was no reason in principle why, if Tangent was still suffering from the adverse effects of the fraud at the date of the trial, those lost profits should not be recoverable as damages for the entire period until the trial.

Comment

The Judge stressed that the element of speculation in trading should not be confused with the real question of whether the prospects of making a profit from trading was so speculative that the court should not regard it as a recoverable loss. The decision in Parabola provides useful guidance of the recoverability of lost profits in fraud claims in particular:

• To recover lost profits it will not always be necessary to have to show that there was an alternative transaction which was necessarily profitable.
• Likewise, it may not always be necessary to show a specific alternative transaction which would have been entered into but for the fraudulent misrepresentation.
• The fact that trading in contracts for differences contained an element of speculation did not mean that the prospect of making a profit trading those derivatives was so speculative that the court should regard that as not a recoverable loss.

Trading in derivatives is inherently speculative. Absent evidence of fraud and recovering future loss of profit will always be a difficult and uncertain venture. However, in claims where fraud can be shown, the prospect of recovering future lost profits increases dramatically. The decision in Parabola shows that where fraud is proven at trial, the Judiciary will take a robust stance.

It must be taken into consideration that each case will still depend upon its own facts, and that the actions of the broker in Parabola were extreme. Civil fraud cases are, however, decided on the balance of probabilities and when it comes to proving future loss, a claimant will always be well advised to have ready evidence that any alternative transaction, series of hypothetical transactions or business would have been profitable. Claimants will also be well advised to produce sufficient evidence that they would have made alternative investments and those alternative investments would have been profitable. Not every claimant will have the "7-to-7 man's" investment track record.