Deutsche Bank AG v Chang Tse Wen and another appeal

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 19 September 2013
• Neutral Citation: [2013] SGCA 49
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeals Nos 164 of 2012 and 2 of 2013
• Year: 2013
• Published date: 21 November 2013
• Hearing Date: 21 May 2013
• Plaintiff Counsel: Ang Cheng Hock SC, Tan Xeauwei, Tan Kai Liang and Joel Lim (Allen & Gledhill LLP)
• Defendant Counsel: K Muralidharan Pillai, Sim Wei Na and Ng Chun Ying (Rajah & Tann LLP)
• Subject Matter: Tort,Duty of Care,Misrepresentation
• Citation: [2013] SGCA 49

Sundaresh Menon CJ (delivering the judgment of the court): Introduction

Dr Chang Tse Wen (“Dr Chang”) was an investor who first met a representative from Deutsche Bank AG (“DB”) in March 2007. Some months later, Dr Chang opened an account with DB into which he transferred a large amount of money. Through this account, Dr Chang purchased a very significant quantity of a financial product known popularly as an accumulator. The acquisition of the accumulators proved to be ill-fated. Dr Chang suffered substantial losses which wiped out the entire amount he had transferred to DB and then some. In fact, Dr Chang was informed by DB that having lost all the money he had transferred to his account, he still owed DB a further sum of US$1,788,855.41 (“the Contract Sum”). DB sought payment of this amount but Dr Chang refused to pay it. DB then sued him and he in turn responded by counterclaiming his losses, which, he maintained, had been sustained because of DB’s negligence, breach of fiduciary duty and misrepresentation.

The trial judge (“the Judge”) dismissed DB’s claim for the Contract Sum. As for Dr Chang’s counterclaim, the Judge dismissed it to the extent it was founded on the grounds of misrepresentation and breach of fiduciary duty. However, the Judge allowed Dr Chang’s counterclaim in negligence and awarded him the sum of US$49,047,721.12 in damages. Dissatisfied, DB filed Civil Appeal No 164 of 2012 against the Judge’s decision dismissing its claim and allowing Dr Chang’s counterclaim in negligence, while Dr Chang brought a cross appeal, viz, Civil Appeal No 2 of 2013, against the Judge’s dismissal of his counterclaim in misrepresentation. The Judge’s decision is reported as Deutsche Bank AG v Chang Tse Wen [2013] 1 SLR 1310 (“Judgment”).

A number of evidentiary battles were fought below. On appeal, however, DB contended that its case did not depend on a materially different view of the facts being taken from that which the Judge took. It was the legal conclusions that the Judge drew, with which DB took issue.

Some interesting questions have been raised. Under what circumstances will a bank come under a tortious duty to exercise care in advising a customer on the management of his wealth where the bank has not undertaken a contractual duty to do so? Will such a duty extend to stopping that customer from entering into transactions, the features of which he does understand? Is it legitimate to have regard to the contemporaneous or subsequent execution of contractual documentation between the bank and that customer to determine whether any such tortious duty arose?

Facts

This litigation finds its origins in a meeting that took place in Hong Kong in December 2006. That meeting was attended by Dr Chang, his fiancée Professor Carmay Lim (“Professor Lim”), and Mr Wan Fan Ting (“Mr Wan”). Mr Wan was then a priority banking manager in the employment of Standard Chartered Bank, Hong Kong (“Standard Chartered”). Mr Wan learnt from this meeting that Dr Chang would soon come into considerable wealth from the sale of his shares in Tanox Inc (“Tanox”), a NASDAQ-traded company. The sale would enable Dr Chang to monetise his life’s work as a scientist.

In February 2007, Mr Wan left his employment with Standard Chartered and joined DB’s Hong Kong operations as a relationship manager. In that capacity, Mr Wan initiated his second meeting with Dr Chang and Professor Lim. That was an important meeting in the narrative of this case and it took place on 15 March 2007 in Taipei.

At this meeting, Mr Wan introduced Dr Chang and Professor Lim to DB’s private wealth management services. Mr Wan presented them with a brochure detailing DB’s services (“the Brochure”). Professor Lim was persuaded at this meeting to open an account with DB and she duly signed an account application form. Dr Chang did not do the same; instead, he told Mr Wan that he would complete and submit the account application form after he had received the proceeds from the sale of his Tanox shares.

Over the next four months or so, Dr Chang made no request for DB to provide him with any advisory or other investment-related services, save that in or about April or May 2007, he did seek some advice from Mr Wan on the sale of his Tanox shares. This advice was given and acted on without incident or complaint.

Subsequently, in July 2007, Dr Chang contacted Mr Wan to inform him that he was ready to sign the account application form. He asked Mr Wan to send him the form, which he duly signed and returned. The form was dated 1 August 2007 and it incorporated by reference a service agreement (“the Service Agreement”). By 31 August 2007, Dr Chang had deposited a total of around US$26m into his new DB account. This represented about 20% of the total amount he received from the sale of his Tanox shares.

Dr Chang signed a second agreement on or around 23 November 2007, namely, the Master Agreement for Foreign Exchange Trading and Derivatives Transactions (“the Master Agreement”).

The purchase of Discounted Share Purchase Programs

The term, Discounted Share Purchase Program (“DSPP”), is used by DB to refer to a type of financial instrument known colloquially as an accumulator. In Teo Wai Cheong v Crédit Industriel et Commercial and another appeal [2013] 3 SLR 573, we briefly described the salient features of an accumulator contract for shares (at [4]). For all practical purposes, these were also applicable to DSPPs and are as follows: First, an investor agrees to accumulate a certain specified quantity of shares of a specified counter from a counterparty over an agreed period (“the agreed period”). The agreement is fixed at a price which reflects a discount to the market price at which that counter is trading at the beginning of the agreed period. This market price is called the “Initial Price” and the discounted price is known as the “Forward Price” or the “Strike Price”. The investor’s obligation, which is to acquire an agreed number of shares on each trading day for the duration of the agreed period, may be prematurely terminated by agreement. However, if the market price of the shares rises above a certain specified price, known as the “Knock-Out Price”, the accumulator is automatically terminated or “knocked out”. This serves to cap the loss of the counterparty. As long as the prevailing market price is above the Strike Price but below the Knock-Out Price, the investor is obliged to purchase the specified quantity of shares at the Strike Price. In doing so, the investor will be accumulating shares at a discount to the prevailing market price. As already mentioned, once the Knock-Out Price is struck, the transaction ends. On the other hand, where the market price falls below the Strike Price, the investor may be obliged to purchase a multiple of the previously agreed quantity of shares (“the Multiplying Effect”) at the Strike Price. This is also called “gearing” in banking circles. In such circumstances, the investor is incurring losses because the Strike Price is no longer at a discount to the market price. Moreover, in such circumstances, the losses are multiplied as a result of the Multiplying Effect. Assuming the accumulator does not get knocked out, the investor’s maximum exposure under the accumulator in dollar terms is the cost of purchasing the multiple of the specified quantity of shares at the Strike Price for each day of the entire period of the transaction. The maximum exposure is derived on the basis of the market price being below the Strike Price for the entire period of the transaction, on which premise the Multiplying Effect would have been triggered.

Between 19 November and 12 December 2007, Dr Chang purchased 32 DSPPs using his DB account. Two more DSPPs were subsequently purchased in February 2008. In total, Dr Chang purchased 34 DSPPs for shares in Citigroup Inc (“Citigroup”), UBS AG, Société Générale SA and Washington Mutual Inc.

Dr Chang purchases shares and DSPPs on the side

Dr Chang had, aside from the account with DB, opened at least two other trading accounts at the time; one was with Fidelity Investments and the other with Citigroup Smith Barney. Unbeknownst to DB, Dr Chang used these two accounts to purchase 672,000 Citigroup shares in November 2007 for a total outlay of around US$21m.

Dr Chang later opened yet another account with Citigroup Smith Barney in December 2007, but this was in the name of Augusta Auswin Limited (“AAL”). AAL was Dr Chang’s investment company; it was incorporated in the British Virgin Islands on 18 January 2007 and Dr Chang was its sole shareholder and director. Between January and May 2008, Dr Chang purchased a total of 32 DSPPs for shares in UBS AG, Société Générale SA and Cheung Kong (Holdings) Limited through the AAL account.

The close-out

On 6 March 2008, Mr Wan and his superior, Ms Cecilia Yan, informed Dr Chang that his total exposure under the DSPPs that had been purchased and booked in his DB account was around US$76m. In fact, between January and November 2008, several margin call letters had been issued by DB to Dr Chang. In addition, Dr Chang and Mr Wan had several discussions during this period on the best way to unwind his DSPPs. Eventually, in early November 2008, Dr Chang began selling some of the shares that he had accumulated under his DB account. The DSPPs he had purchased through his DB account but which had not been knocked out were unwound. On 21 and 24 November 2008, DB exercised their contractual termination and security rights and sold Dr Chang’s accumulated shares which had been booked in his DB account. After the sale of all the shares, Dr Chang still owed DB the Contract Sum, which formed the basis of DB’s original claim.

According to Dr Chang, he suffered a total loss of about US$49m from the 34 DSPP transactions that were entered into under his DB account. 18 DSPPs were knocked out while 16 DSPPs were closed out. Dr...