Skip to content

High Court dismisses claim for investment losses caused by a fraudulent third party

Related people
Hitchins Sarah
Sarah Hitchins

Partner

London

View profile →

03 April 2013

In the case of Jeremy D Stone Consultants Ltd & anr v National Westminster Bank plc & anr [2013] EWHC 208 (Ch), 11 February 2013, a bank and one of its employees were not liable for investment losses which were caused by the actions of a fraudulent third party. Although the claimants were unsuccessful in this case, it still serves to demonstrate the types of claim which may be brought by those who suffer losses as a result of a third party’s fraudulent activities, as well as the scrutiny that banks’ internal anti-money laundering and fraud prevention systems and controls may be subjected to by a court in these types of cases.

Background
The claimants were persuaded to invest large sums of money (about GBP 20 million) in Saunders Electrical Wholesale Limited (the Company) by one of its owners, Jolan Saunders (the Owner). However, the claimants later learned that the business operated by the Company was actually a fraudulent Ponzi scheme operated by the Owner (the Scheme).

The first defendant, National Westminster Bank plc (the Bank), operated a number of accounts for the Company. Some of these accounts were used by the Owner to operate the Scheme and it was into one of these accounts that the claimants paid large sums in order to invest in the Company. The second defendant, Mr Paul Aplin (the Relationship Manager), was employed by the Bank as relationship manager for a number of high value clients, including the Company.

Claims brought
By the time the claimants discovered the Scheme, a number of large withdrawals had been made by the Owner and his associate from the Company’s accounts held with the Bank. As a result, the claimants were only able to recover a very small proportion of the monies they had invested in the Company (GBP 1.4 million).

The claimants alleged that the Relationship Manager “knew about or deliberately turned a blind eye to” the Owner and his associate using various accounts they held with the Bank (including those held by the Company) to carry on the Scheme. They also alleged that the Relationship Manager knew that the Owner had misled the claimants and other investors about the business which was supposed to have been operated by the Company.

The claimants therefore brought claims against the Bank and the Relationship Manager and sought the return of the monies they had paid into accounts held by the Company with the Bank, as well as damages or equitable compensation in relation to the losses they suffered as a result of their investment in the Company.

The claimants made the following claims:

Dishonest assistance: The Relationship Manager had dishonestly assisted the Owner’s breach of fiduciary duty to the claimants.

Deceit: The Relationship Manager had committed the tort of deceit by making false and misleading statements to the claimants about the Company.

Conspiracy to injure by unlawful means: The Relationship Manager had conspired with the Owner and one of his associates to injure the claimants by unlawful means.

Negligence: The Relationship Manager had assumed responsibility for the accuracy of the information he gave to the claimants about the Company and he failed to take reasonable care to ensure that this information was accurate.

Unjust enrichment: The Bank had been unjustly enriched as a result of it receiving monies paid into the Company’s accounts held with the Bank on the basis of mistake.
With the exception of the last claim, the claimants alleged that the Bank was vicariously liable for the actions of the Relationship Manager.

High Court decision
The High Court dismissed each of the claimants’ claims for the following reasons:

Dishonest assistance: In order to establish a claim of dishonest assistance, the claimants were required to show that the Relationship Manager had acted dishonestly. On the facts, the High Court found that the Relationship Manager had not acted dishonestly; he was unaware of the Scheme and did not know that the Owner was acting in breach of the fiduciary duties he owed to the claimants.

Deceit: The High Court found that the Relationship Manager had made no false statements or representations to the claimants about the Company, nor did he intend to mislead them in anything he said or did in relation to the Company.

Conspiracy to injure by unlawful means: The High Court found that on the facts the Relationship Manager was not a party to any conspiracy with the Owner or one of his associates.

Negligence: The claimants acknowledged that the Relationship Manager owed duties to the Company, not to them. As a result, the High Court held that the Relationship Manager did not assume any responsibility to the claimants in relation to the accuracy of information he supplied to them about the Company. Rather, it was found that he “took care not to lead the claimants to believe that they could rely on him for information about what was happening on [the Company’s] accounts”.

Unjust enrichment: The High Court rejected the claimants’ claim for unjust enrichment against the Bank on the basis that the Bank was not enriched by the payments made by the claimants into bank accounts it operated for the Company. This is because although the Bank was beneficially entitled to these monies, in accordance with the typical relationship between a bank and its customer, the Bank could not withhold payment of sums representing credit balances on the accounts held by the Company if and when it was instructed by the Company to pay them. Sales J added that if, contrary to his overall decision, the claimants did have a claim for unjust enrichment against the Bank, he considered that the Bank would be able to rely on the defences of good faith change of position and/or ministerial receipt. Both of these defences would mean that the Bank was not liable to return the monies paid into accounts operated by the Bank for the Company to the claimants.

Comment

Although the claimants were unsuccessful in this case, Sales J commented obiter dicta that the claimants would have had a claim for unjust enrichment against the Company. However, it was noted that the Company had insufficient funds to return the monies invested in the Company by the claimants and that this was the reason why the claimants had decided to pursue claims against the Bank and the Relationship Manager as opposed to the Company.

This case is therefore an example of those who have suffered losses as a result of fraudulent activities looking for well-funded parties from whom to recover their losses, as well as the types of claim such claimants may attempt to bring in such cases.

In coming to the conclusion it did in this case, the High Court scrutinised the Bank’s relationship with its customers and, in particular, focused on how it monitored its relationship with the Company. It did so in order to establish whether the Bank and the Relationship Manager should have been able to identify the Scheme before the claimants did.

However, the High Court found that the Bank and the Relationship Manager had appropriately monitored their banking relationships, including their relationship with the Company, in accordance with anti-money laundering legislation and relevant industry standards.

The emphasis Sales J placed on this point in his judgment highlights the importance a court may attach to banks’ anti-money laundering and fraud detection systems and controls in this type of case.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.