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The Commercial Court (Andrew Baker J) has given judgment in favour of the Claimants in their action for damages against Credit Suisse under s.138D of the Financial Services and Markets Act 2000 (FSMA).

The Claimants are a wealthy Kuwaiti family, who entered into various structured capital-at-risk products with Credit Suisse at the recommendation of the bank’s relationship manager (Mr Zaki). In May 2008, they purchased their 18th such product from Credit Suisse, namely a $20 million equity-linked note. In October 2008, following the global economic crisis, in-built barriers on some of the Claimants’ notes were breached, rendering their capital at risk. The bank arranged for most of the Claimants’ existing portfolio to be switched into a consolidated note, stating that this switch would not require additional funds. However, immediately upon that note settling, the bank demanded additional funds to shore up the substantial leverage on the portfolio. The Claimants decided not to meet the bank’s ‘margin call’, and allowed their account to be liquidated. From the approximately $30 million they had put into their account, they were left with an overdraft of $300k.

The Claimants brought a claim under s.138D of FSMA, which provides that a “contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention”. The Claimants claimed that Credit Suisse had acted in breach of the FCA’s Conduct of Business (COBS) rules, in that Credit Suisse (i) did not take reasonable steps to ensure that any personal recommendation was suitable for the client (in breach of COBS 9.2.1R); (ii) did not have a reasonable basis for believing that the transaction recommended met the client’s investment objectives nor that the client had the necessary experience and knowledge to understand the risks involved (in breach of COBS 9.2.2R); and (iii) did not ensure that a communication or financial promotion was fair, clear and not misleading (in breach of COBS 4.2.1R).

The Judge found that the Claimants were willing to invest in the structured products – up to and including the note in May 2008 – only because of Mr Zaki’s assessment that, even where the note terms put capital at risk, they did so conditionally upon events that were very unlikely to occur, so that the risk of loss on the notes was very low.

In respect of the May 2008 note, the Judge found that, in light of the Claimants’ risk appetite, they were misdirected by Mr Zaki to believe that the note matched that appetite. Mr Zaki had no reasonable basis to hold the view that the note involved only a very low risk of a loss of capital. Credit Suisse thereby breached COBS 4.2.1R, 9.2.1R and 9.2.2R.

In respect of the note in October 2008, found that Credit Suisse’s representations to the Claimants that there would be no requirement for further funds were inaccurate and misleading in breach of COBS 4.2.1R.

The Judge rejected Credit Suisse’s arguments that the chain of causation was broken by the Claimants’ decision not to meet the margin call in October 2008 and/or that there was contributory negligence by the Claimants. The Judge also rejected Credit Suisse’s argument that the loss, being caused by the severity of the 2008 market crash, was too remote.

It followed that the Claimants were entitled to damages reflecting the position they would have been in had they not purchased the note in May 2008 (and so had pursued a different restructuring in October 2008).

Ian Mill QC and Daniel Cashman acted for the first, third and fourth Claimants. 

The full judgment is available here. 

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