Description
Investors entered into agreements with a brokerage under which the brokerage was to enter into contracts for difference with a third party. Instead of placing the investors' trades as their agent, the brokerage placed matching trades under a contract that provided that both parties would deal with each other as principals and the individuals from IG Index handling the account with the brokerage dealt with the brokerage on that basis. The individuals knew that the brokerage was not carrying on proprietary trading and that trades mirrored the trading of the brokerage's clients. IG provided daily spread sheets showing the brokerage's overall position and a large number of anonymous sub-accounts allocated by the brokerage to its individual clients. One of the brokerage's clients was effectively allowed to run up a deficit of £16,000,000 in one of the sub-accounts, but because the brokerage was considered the principal it was permitted to and did allow IG to use the funds in the other sub-accounts to finance this loss. These sums represented sums paid by and due to other clients of the brokerage. The brokerage went into liquidation owing three of its clients substantial sums which cannot be recovered in the liquidation. These clients sought to recover their losses from IG on the basis that three IG employees dishonestly assisted in breaches of fiduciary duty by the brokerage arising out of the brokerage's failure to hold the funds on a segregated basis and to use those funds only for the purpose of supporting their individual trading and for no other purpose. In particular it was alleged that the employees knew or suspected of the increasing deficit and failed to make enquiries, despite knowing or suspecting that the brokerage did not have cash or collateral to cover the shortfall and that one of the employees knew that the brokerage was not permitted by the FSA to trade as a principal and thereby dishonestly assisted the scheme. On the evidence the brokerage's margin trading terms were incorporated into the agreement with the clients. Two of the employees were truthful and reliable witnesses who had acted honestly and no justifiable criticism could be made of them. The third employee did not act dishonestly believing until late in the day that the brokerage had collateral and other assets and the ability to come off margin call if given some time. Accordingly the allegation of dishonestly assisting in breach of fiduciary duty by the brokerage failed.
