Stanford International Bank, the saga rumbles on
In September 2020, I wrote an article on the above case in the Chancellery Division of the High Court, which can be found here and here. By this point, the case had progressed through trial proceedings in which Nugee J (as he then stood) had ruled on two preliminary applications before a full hearing.
Since then, the judgment of Justice Nugee on these two preliminary claims has been appealed to and ruled on by the Court of Appeal, and the judgment of the Court of Appeal on this subject. was itself the subject of an appeal to the Supreme Court.
(although we don’t have the Supreme Court ruling yet).
So what is going on?
Recall of facts
Stanford International Bank Ltd (“SIB“) was the investment bank owned and operated by Robert Allen Stanford which was essentially a huge Ponzi scheme and fraud on the many holders of certificates of deposit issued by SIB. SIB is highly insolvent with a net liability position on its balance sheet of some US $ 5 billion, representing the balance between its assets and the claims of its investors (being the holders of the certificates of deposit). HSBC, as correspondent bank, maintained four bank accounts for SIB, each denominated in a different currency.by SIB’s liquidators that by paying into these accounts amounts totaling approximately Â£ 118 million between August 1, 2008 and February 2009, HSBC breached its âQuincecare duty of careâ to SIB since she should have been aware that something was seriously wrong during this period and should have frozen the accounts. As a result, SIB alleges that HSBC did not not taken sufficient precautions to ensure that monies were paid from his accounts for purpose and he is therefore liable in damages for the full amount of payments made as a result of his negligence in this regard. In the alternative, SIB alleges that HSBC dishonestly aided SIB in the commission of the fraud against SIB’s investors by authorizing the various payments to be made. If either of the claims is successful, SIB’s liquidators will have funds of around Â£ 118million which could then be paid to SIB’s various creditors or be used to finance the liquidation.
At first instance, HSBC brought two preliminary requests that SIB’s claims be summarily dismissed as follows:
- First of all – HSBC argued that the “loss-based” claim based on “Quincecare’s duty of care” must necessarily fail on the grounds that, where the monies in question were paid to certain holders of SIB certificates of deposit, a SIB’s corresponding liability with respect to each certificate of deposit itself has been released and, therefore, the effect on SIB’s balance sheet has been neutral and, therefore, SIB has not suffered any loss on which to base a claim for damages.
- Second – HSBC argued that the request for “dishonest assistance” must fail since SIB failed to establish that a person within HSBC knew that SIB was in fact a fraudulent Ponzi scheme or that such a person had acted dishonestly or overlooked the fact of the fraud.
HSBC was unsuccessful on the first âloss-based claimâ claim, but was successful on the second âdishonest assistance claimâ claim.
With respect to the “loss-based claim”, the essence of Judge Nugee’s judgment stems from the hopeless and irremediable insolvency of SIB, the result of which was that the extinguishment of a liability in the form of the buyout. of a certificate of deposit made little difference to the overall picture, whereas if HSBC had not disbursed the specified funds, those funds would have been available for enforcement by the liquidators. On this basis, he concluded that there was a loss upon which a claim for damages could be based on a breach of “Quincecare’s duty of care” and that this particular claim was therefore subject to a claim. hearing.
HSBC appealed Justice Nugee’s ruling on the âloss-based claimâ and SIB appealed its ruling on the âdishonest assistance claimâ.
Court of Appeal
The judgment of the Court of Appeal was delivered by Sir Geoffrey Vos, Master of the Rolls, with whom Moylan LJ and Arnold LJ both agreed.
The loss-based claim
In the opinion of the Court of Appeal, Nugee J erred in his trial decision because he failed to take due account of the distinction between an operating company (as long as it is solvent or insolvent ) and a company in insolvency proceedings, noting that all payments made by HSBC which were at issue in the proceedings were made while SIB was in business.
Vos MR pointed out that while a company is operating, the directors of the company must consider the interests of shareholders and creditors by considering all of the assets, debtors and creditors of the company. However, HSBC’s obligation under the âQuincecare duty of careâ was narrow and owed only to the company and not to its creditors. In doing so, Vos MR referred to his own judgment in Singularis Holdings Ltd (in liquidation) v. Daiwa Capital Markets Europe Ltd
in which he said:
“… the scope of duty of Quincecare [was] narrow and well defined. This [was] to protect a banker’s client from the loss of funds held in a bank account with that banker when circumstances put the banker in question.
Vos MR then concluded as follows in disposing of the âloss-based claimâ appeal in favor of HSBC:
“Thus, for these purposes, the real distinction is between a company which carries on a commercial activity and a company for which a liquidation process has started, and not between a solvent trading company and an insolvent trading company. [Nugee J’s] Language, if the company trades, even if it is insolvent, then the Â£ 100 paid to a creditor reduces its assets, but is offset by a corresponding benefit to the company by reducing its liabilities. The fact that a firm has slightly lower liabilities is an advantage commensurate with its net asset position even if the firm is in a highly insolvent position. Having more liquidity available at the eventual onset of insolvency “for the liquidators to pursue claims they thought they could usefully pursue and to distribute to their creditors” is an advantage for the creditors but not for the company while carrying out its activities. “
The dishonest request for assistance
The Court of Appeal, however, refused to allow SIB’s appeal regarding the “dishonest assistance request”, primarily on the grounds that SIB has so far been unable to allege that a specific employee of HSBC was either dishonest or suspected of Ponzi schemes and made a conscious decision to refrain from asking questions or raising a red flag. In doing so, Vos MR noted that:
âSIB cannot hide behind the fact that HSBC is a big company. It doesn’t make any difference. one or more natural persons. “
The net effect of the two Court of Appeal rulings in this regard is that SIB’s claim against HSBC increases from around Â£ 118million to Â£ 2.4million in respect of a payment made by HSBC on behalf of SIB to the English Cricket Board. SIB therefore applied to the Supreme Court for leave to appeal, which was granted.
The saga therefore rumbles on â¦â¦
Reflections of the author
My personal opinion is that the SIB will not succeed on appeal to the Supreme Court over the “dishonest assistance request”, which has now been overlooked by the High Court and the Court of Appeal. It seems to me that unless SIB can provide clear evidence of the knowledge or dishonesty of one or more HSBC employees, the claim is hopeless.
The “loss-based claim” seems to me to have a better chance of success. Even though the Supreme Court agrees with the Court of Appeal that Nugee J erred in failing to distinguish between a trading company (whether insolvent or not) and a company in insolvency proceedings, there is an aspect of Nugee J’s judgment that the Court of Appeal did not address. This is the argument drawn from the inherent nature of a Ponzi scheme as stated by Justice Nugee in his judgment as follows:
“”â¦ .. [T]The precise amount of liabilities that SIB had [as] just being allowed to continue for about 6 months can be very different because, as with all Ponzi schemes, you have to keep attracting new investors to pay the old ones. The proof is that from September 2008 there were several large withdrawals in favor of depositors (something which was argued as a mini run on the bank), and since over Â£ 80million was paid out, it seems likely that new depositors must have been, and were found to fund (at least in part) these payments, so without a full investigation it cannot be said whether the total liability amount in February 2009 was in fact greater total liabilities would have been in August 2008 It is certainly not obvious, at least to me, that the aggregate liability would have been Â£ 118million or even Â£ 80million lower. That seems to me to be a sobering point in itself … …) “
It seems to me that, At first glance, there is a valid point here which remains open and which potentially gives SIB an opportunity to challenge the Court of Appeal’s decision on the âloss-based claimâ.
We will see what happens at the Supreme Court!