UK: Off On A Tangent: Fraud Claims And Lost Trading Profits

Last Updated: 15 May 2009
Article by Andrew Howell and Liz Vannelli

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 to be recoverable, the award has been based on a specific alternative transaction which would have been entered into by the claimant but for the fraud. In contrast, in this case the claim for loss of profits related to a series of hypothetical alternative transactions: had Mr Gill known the losses he was incurring, he claimed he would have stopped them and instead would have made profitable alternative trades in market makers.

Flaux J held that these losses were all properly recoverable. Where, on the balance of probabilities, the court concludes that some profits would have been made from alternative transactions which the claimant would have entered into but for the fraud, then the court can - and should - award damages for such loss of profits. It is not necessary that the claimant must have identified a specific alternative transaction into which he would have entered had it not been for the fraudulent misrepresentation.

The Court also rejected the defendants' argument that trading in stocks or derivatives is in its nature speculative, and that loss of profits is not recoverable in the case of such speculative trading: "the element of speculation inevitably present in trading of this kind" is "a separate question [to] whether the prospects of making a profit trading those derivatives is so speculative that the court should regard that as not a recoverable loss".

Based on Mr Gill's stellar track record both before and after the fraud, the Court held that but for the fraud he would have continued to trade profitably. It would "offend common sense and justice" to ignore this and conclude that the loss of profits was too speculative to be recoverable.

Loss of profits after February 2002

As for the claim for loss of profits for the period after the fraud was discovered to the date of trial, the Court dismissed the argument that this was a claim for "profits on profits" and not recoverable save by an award of interest.

The judge found that, had Mr Gill had more trading capital at his disposal, the probable result would have been that he would have made more profits in that period. Relying on Smith New Court Securities v Citibank NA [1997] AC 254, the Court stated that if a claimant is able to demonstrate that it is still suffering from the adverse effects of a fraud at the date of the trial and has still not made the profits from its business that it would have made had the fraud not occurred, damages should be assessed up to the date of the trial.

The claimants also sought exemplary damages. That, however, was a step too far; particularly in a case, Flaux J said, where Man's liability was vicarious liability.


Calculating alternative investment losses is often a speculative exercise. It was a point debated in JP Morgan v Springwell [2008] EWHC 1186 (Comm) and also recently in Sempra Metals v Inland Revenue [2008] S.T.C. (S.C.D.) 1062 (in relation to compound interest) and 4 Eng Limited v Harper (2008) EWHC 915 (Ch) (fraudulent misrepresentation on a corporate acquisition).

This case, however, is a striking illustration of the courts' willingness to compensate a claimant in the right case, however potentially uncertain the underlying trades.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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