Off On A Tangent: Fraud Claims And Lost Trading Profits

Claims to recover losses on derivatives are often as speculative

as the trades themselves. But throw a fraudulent broker into the

mix and everything changes, as last week's case of

Parabola Investments Ltd v Browallia Cal Ltd &

Ors demonstrates.

The High Court awarded some £20 million to Tangent, an

investment vehicle run by Rajesh Gill, a well-known trader with an

enviable track record trading in "market makers". Mr Gill

had relied on daily dishonest misrepresentations by a Man Financial

Group broker that his trading in CFDs (contracts for differences)

was profitable.

Not only did the Court find that the broker ought to make good

the losses on trades, but it also awarded damages for the profits

Tangent would have probably made on alternative investments. Flaux

J went further and held that the lost profits should be calculated

not just for the period of the fraud, but up to the date of

trial.

The fraud

Between June 2001 and February 2002, Tangent traded through

Matthew Bomford, a senior broker at MF Global UK. Much of Flaux

J's judgment is coloured by what he put as Mr Bomford's

"disastrous three days in the witness box". The judge

described him as "a persistent and inveterate liar" and

"a stranger to the truth".

Mr Bomford, he found, made daily and weekly misrepresentations

to Mr Gill that his derivatives trading was profitable. In fact, Mr

Gill was consistently trading at a loss - or, in the charming words

of Mr Bomford, "losing his arse".

Mr Bomford also made fraudulent misrepresentations as to the

funds in Tangent's account. On 26 October 2001, he told Mr Gill

that the company's funds stood at £9.27 million when they

in fact stood at some £2.8 million. The Court said these

misrepresentations were significant because they were intended to

give Mr Gill the impression that the account was continuing to grow

because of his profitable trading, and also that his year-end

target of £10 million, of which Mr Bomford was aware, was

achievable.

Recoverable losses

The Court awarded damages for the capital loss of the amount by

which the trading fund was depleted as a consequence of the

fraud.

The Court also awarded the loss of profits that Tangent would

have made on investments in alternative trades during the period of

the fraud, plus damages for loss of profits for the period after

February 2002 until trial.

Loss of profits during the period of the fraud

The defendants argued that, in all of the cases in deceit where

loss of profits has been held...

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