Pre-action disclosure

July 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

Asymmetry of information is a perennial problem for individuals and businesses who think they may have a claim against one of the major banks. Often it is only the bank that has the full picture. And it is a fair assumption that the bank is unlikely to admit it has been up to no good, whether you ask it to or not. As it can be practically impossible to decide whether even to start litigation without getting hold of critical information which only the bank has, what can be done to level the playing-field?

Pre-action disclosure

Litigants in English courts can apply for pre-action disclosure (PAD). As the name suggests, this process enables potential claimants to obtain documents from potential defendants before starting proceedings. If successful, it can better enable a claimant to decide whether or not to start substantive proceedings. English proceedings start by issuing and serving a claim form. From that point on the claimant is potentially liable for all the defendant’s costs. In contrast, with pre-action disclosure, no claim is started and the only adverse costs that the applicant may have to pay are those of the application itself and the defendant’s costs of providing the documents. As such, it is a relatively low-risk low-cost option that can be used to help resolve claims and avoid the expense of full-blown litigation.

The recent ECU v HSBC case provides a good example of a successful application for PAD. In particular, it shows how even suspicions which originally arose as far back as 2006, prior to the financial crisis and discovery of the widespread and varied wrongdoing by major financial institutions, can still provide a good basis for potential claimants to obtain PAD.

The facts

ECU is a company which manages multi-currency loan facilities for its clients. In early 2006 it controlled about $1bn of clients’ debt – 45 percent of which involved mutual clients of ECU and HSBC. To limit client losses ECU placed ‘stop loss’ orders with HSBC: where foreign exchange rates for a particular pair of currencies rose above an expected level the ‘stop-loss’ would trigger and HSBC would buy or sell that currency pair to stop further losses.

In January 2006, ECU placed three large stop-loss orders (Trades). All three Trades were triggered within minutes of being placed. This was so unexpected that ECU felt it could only be the result of unusual volatility or ‘front running’, i.e., traders at HSBC using their own buy or sell activities to push the relevant rates up and trigger the stop-loss orders. Provided HSBC had secured its own positions, it would make large profits for HSBC at the expense of ECU and its clients. ECU asked HSBC to confirm the extent to which HSBC had profited from buying or selling ahead of the stop-loss orders. In March 2006, HSBC replied that it had conducted a thorough investigation and there was no evidence of any wrongdoing.

And there matters rested until mid-2016 when the US Department of Justice (DOJ) indicted two of HSBC’s most senior former FX traders, on charges related to front-running in 2011. In October 2017, one was convicted of fraud and conspiracy, the other faces extradition to the US. ECU still did not know how the Trades had been affected, and there was no independent way for ECU to check what had happened because all the relevant information and documents were internal to HSBC. So ECU applied to the High Court in London for PAD.

The criteria for PAD

An applicant for PAD must set out its evidence in a witness statement. To obtain PAD, that evidence must meet three criteria: (i) the applicant and respondent are likely to be party to the same subsequent proceedings; (ii) if proceedings were commenced then the respondent would have to give standard disclosure of the documents sought in the usual course; and (iii) pre-action disclosure is desirable to dispose fairly of the anticipated proceedings or to assist the dispute to be resolved without proceedings being commenced or to save costs.

The first tends not to give rise to much difficulty. Generally it is pretty clear that the applicant wants pre-action disclosure in order to bolster its case against the respondent. Although not an express requirement, it is implicit that the envisaged proceedings would be in English courts. Provided the High Court has jurisdiction over the defendant, then an application can be made for a foreign defendant to be ordered to disclose documents located overseas. This can be particularly useful where, for example, the defendant’s alleged wrongdoing may have taken place in multiple locations worldwide. As for the second, the applicant must set out very clearly the issues that will arise in the intended litigation, to enable the court to determine which documents, or classes of documents, would have to be disclosed if proceedings were commenced. The applicant should define the documents or classes of documents sought as narrowly as possible. A vague or general request will look like a fishing expedition and will be rejected.

Finally, the third criterion involves two hurdles: the judge needs to be satisfied that the application technically falls within the PAD criteria and, if it does, must then decide whether pre-action disclosure is desirable. The jurisdictional threshold is not a high one and even a speculative claim may satisfy it. The real issue is discretion, and some of the factors that influenced HHJ Waksman in ECU are noted below.

First, the judge attached significance to the bank’s unrelated but similar conduct: “the fact that such claims would be viable if there was front-running is given additional support by the events of 2016. Given those events…regrettably it cannot be said that it is inconceivable that HSBC could be liable”.

Second, the judge reasoned: “if front-running is revealed by the documents, then there must also be in principle a real prospect that any claim would be settled without litigation…Conversely, if the documents produced revealed no front-running but simply trading in volatile market conditions, then ECU would be forced to consider very carefully whether any further action could be justified”. This highlights how critical it is for an applicant to focus on the issues and documents. Once a clear link between the two is established then, as the judge’s comments show, an almost ironclad logic can arise in favour of PAD.

Third, the judge noted that PAD is not the norm – it is unusual rather than exceptional – and will only be ordered where the court is satisfied that a claim differs from the norm. The critical issue in most PAD applications is whether it is ‘desirable’, and that is a matter for judicial discretion, taking into account the facts of the case. In short: context is everything.

Fourth, the judge rejected HSBC’s defence that “the underlying claim is speculative”. It was important that there was a longstanding contractual relationship between ECU and HSBC. ECU was not a “stranger” speculatively targeting one market player. HSBC personnel had been found to be involved in “precisely the sort of conduct [ECU] seeks to allege against HSBC”. The fact that neither the individuals nor the time-period concerned were the same showed, at minimum, that ECU’s claim was not “fanciful”. The fact that ECU had raised concerns in 2006 showed that it had not simply “dreamt up” its claims on the back of the US proceedings.

Fifth, the fact that ECU could “plead out an inferential case” without the PAD documents did not mean it should have to do so.

Finally, HSBC argued that ECU’s claim was time-barred. The judge did not have to decide the issue finally – he only had to be satisfied that ECU’s limitation position was not hopeless. The fact that ECU harboured suspicions, even after HSBC’s 2006 letter, but did not pursue its complaints further until more than 10 years later, was not held against it. The judge noted that it could not be said (and even HSBC did not allege) “that ECU could with reasonable diligence have discovered the truth (if that is what it was) at the time, since all the relevant information was within the exclusive possession of HSBC…The fact of front-running was obviously an essential element of its claim”. In this context the judge noted that “HSBC has already been found to have failed to disclose front-running in a different investigation where the client was assured that nothing was amiss. I appreciate that it might be said that any such concealment here was not deliberate but looking at HSBC’s recent track record as stated above, that cannot be assumed if indeed there was front-running in respect of the Trades”.

The judge ordered disclosure of Bloomberg messaging and emails for the relevant HSBC personnel, underlying trading data and global market and compliance documents, i.e., documents relating to the detailed enquiries HSBC made in respect of ECU’s complaint in 2006. The total estimated cost of the exercise of retrieving all these documents was said to be around £50,000. The judge did not agree with HSBC that this was too costly or disproportionate.

Conclusion

It does not seem at all unreasonable to hold major financial institutions to a high standard when dealing with allegations of wrongdoing. When they dismiss complaints, but withhold documents, which would clearly help determine the matter one way or the other, an order for PAD looks like a reasonable solution.

Finally, the judge’s willingness to attach real weight to HSBC personnel’s similar but wholly unconnected wrongdoing is a fair and sensible acknowledgment of the reality of the past 10 years. Given the evidence that has surfaced since 2008, and continues to surface, about unlawful activities in some of the world’s major financial institutions, anyone who harboured suspicions but, like ECU, was given the brush-off, may now want to look again at whether their bank has since been shown to have ‘form’ for the type of wrongdoing that was originally suspected.

Marc Jones is a partner at Stewarts. He can be contacted on +44 (0)20 7822 8053 or by email: mjones@stewartslaw.com.

Marc Jones

Stewarts