IMPORTANT: This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. Release Date: 03 April 2009

Briefings

In a case that will have a significant impact in post Lehmans litigation, judgment has just been handed down in the matter of Global Trader, a spread betting company that last year went into liquidation.

Mishcon de Reya was appointed to assist the Court to determine the issues by acting in what was "non hostile" litigation. The case centred on an articulation of detailed FSA rules with insolvency law, and ruled on complex issues that had not before been decided. The decision is likely to influence outcomes for some years to come in post credit crunch financial services cases.

What was the case about?

When Global Trader went into liquidation, there were some funds remaining in segregated accounts and a greater level of funds in non segregated accounts. The total, however, was insufficient to meet Global Trader's liabilities. In essence, the case decided the ability of different classes of creditor to lay claim to different categories of funds. Amongst other things, it involved a detailed consideration of the impact on client money status of pre and post MiFID types of documentation. 

What are the implications for FSA firms?

First, purely from a business point of view, firms will be interested in the reasons for Global Trader's insolvency. We have seen over recent months how important it is to have proper systems for maintaining margin and for collecting debt when limits are breached. Global Trader's demise is an object lesson in the importance of maintaining sufficient margin. 

Second, Global Trader hedged its positions by having mirroring contracts with its prime brokers. Its prime brokers had the right to close out contracts when Global Trader went into administration. Although back to back, Global Trader had no equivalent rights to close out its own contracts. The gap in its documentation led to Global Trader being exposed when its prime brokers started to close out.

Third, FSA requirements on documentation are to be interpreted strictly. In Global Trader, the Judge found that a failure to have all the risk warnings prescribed by the FSA Rules meant that documentation was ineffective to take money out of the client money rules. Whilst, for other reasons, this did not alter the result in this particular case, the implications are clear: the FSA requirements on documentation are to be strictly adhered to. If they are not, appropriate protection may be lost and the regulatory system will not deliver what it is intended to achieve. Firms need to ensure that their documentation is in order.

Fourth, clients may assume that they have client money protections they are intended to benefit from.  However, if in reality, their money has not been treated in the appropriate way, the general funds standing to the firm on insolvency cannot be appropriated by them and treated as client money.

Where documentation is not achieving its aims or money is not being treated as it should be, firms and their directors may be called to account by the FSA. Equally, they may be called to account by disadvantaged investors or counterparties.

What are the implications for counterparties more generally?

The immediate lesson for counterparties is to ensure that their funds are being treated in the way intended.  The Judge in Global Trader found that even if monies ought at law to have been client monies, if they were not separately identifiable, the statutory trust could not bite.  In that sense, any protection that they thought they had was illusory. Counterparties need to ensure that their money really is being treated as intended. This may mean different things in different circumstances, ranging from receiving proper assurances through to conducting proper verification.

If the worst happens and the firm is unable to pay its debts, counterparties need to ensure that they maximise recovery. This will involve the urgent analysis of their client money entitlement, the trust claims available to them and any pre-emptive strike they need to make to safeguard their position.

Global Trader Europe Ltd (in Liquidation) sub nom Joanne Milner & Stephen Cork (Liquidators of Global Trader Europe Ltd) v (1) Andre Crawford-Brunt (2) Rossib (Cyprus) Ltd (3) Sergey Soukholinsky (4) City Facilities Management Ltd [2009] EWHC 602 (Ch).

Click here to view the full Judgment.

For further information please contact Adam Epstein by e-mail or call +44 (0)20 7440 7102, or contact Matthew Hancock by e-mail or call +44 (0)20 7440 7471.