Koh Kim Teck and another v Credit Suisse AG, Singapore Branch

• Jurisdiction: Singapore
• Judge: Aedit Abdullah J
• Judgment Date: 25 March 2019
• Neutral Citation: [2019] SGHC 82
• Court: High Court (Singapore)
• Docket Number: Suit Nos 942 of 2013 and 1123 of 2014
• Year: 2019
• Published date: 02 November 2019
• Hearing Date: 05 September 2017,12 September 2017,04 July 2018,06 September 2017,07 August 2018,20 March 2018,18 September 2017,10 April 2018,09 April 2018,22 March 2018,04 September 2017,04 May 2018,08 September 2017,31 October 2017,17 April 2018,11 September 2017,08 June 2018,30 October 2017,29 August 2017,30 August 2017,16 April 2018,12 April 2018,01 September 2017,07 September 2017,11 April 2018,23 October 2017,31 August 2017
• Plaintiff Counsel: Choh Thian Chee Irving, Kor Wan Wen Melissa and Lim Bee Li (Optimus Chambers LLC)
• Defendant Counsel: Alvin Yeo Khirn Hai SC, Daniel Chan, Lim Wei Lee, Noel Chua Yi How, Sanjay S Kumar, Vithiya d/o Rajendra (Wongpartnership LLP)
• Subject Matter: Tort,Negligence,Duty of Care,Banking,Credit and Security
• Citation: [2019] SGHC 82

Aedit Abdullah J: Introduction

The plaintiffs sued the defendant bank, Credit Suisse AG, Singapore Branch (the “Bank”), for losses stemming from the poor performance of financial products purchased from the Bank in the financial crisis of 2007 to 2008. At the height of the crisis, the plaintiffs’ bank account (“the account”) was closed out and the assets in the account were liquidated. The plaintiffs suffered losses of about US$26m.

Having considered the parties’ submissions, I dismissed the plaintiffs’ claims, finding that the Bank owed no duty of care in contract or tort to advise the plaintiffs on investment matters or in respect of the closing out of the plaintiffs’ account. The plaintiffs have since appealed.

Background facts

The first plaintiff, Mr Koh Kim Teck (“Mr Koh”), currently resides in Singapore. Prior to his relocation, Mr Koh had a successful career, first, as a stock dealer and, later, as a manager at various financial institutions in Malaysia. Upon his retirement at 50, Mr Koh was the senior general manager and a shareholder of a stockbroking company that was previously listed in Malaysia.¹ The second plaintiff, Smiling Sun Limited (“Smiling Sun”), is a company registered in the British Virgin Islands (“BVI”). It was set up to facilitate Mr Koh’s investment activities with the Bank. In these grounds of decision, no distinction is drawn between Mr Koh and Smiling Sun except where necessary and the term “plaintiffs” will be used occasionally to describe Mr Koh and Smiling Sun collectively.

The circumstances surrounding the opening of the plaintiffs’ account with the Bank and the assurances given to entice Mr Koh to invest with the Bank were matters of some dispute. Regardless, it was accepted that Mr Koh became a client of the Bank sometime in 2003. In September 2003, Smiling Sun was incorporated, with its shares held by the Bank’s nominee shareholder on trust for Mr Koh.² A nominee and/or agent of the Bank was also pointed as a corporate director of Smiling Sun.³ Mr Koh was and remains the sole beneficial owner of Smiling Sun.⁴ On or around the time Smiling Sun was incorporated, the account was also opened under Smiling Sun’s name. This was the account Mr Koh would eventually carry out his investment activities from. The account was a non-discretionary account.⁵

To Mr Koh’s recollection, there was little investment activity in the early years of the account.⁶ However, from 2006, Mr Koh began to trade more heavily through the account. Over the course of 2007 and 2008, Mr Koh purchased structured products known as knock-out discount accumulators (“KODAs”) and dual currency investments (“DCIs”) from the Bank.⁷

Knock-out discount accumulators

A KODA is an over-the-counter structured derivative product that is typically used by investors to accumulate shares at a discounted price in hopes of selling the accumulated shares at a higher market price at a future date. Under a KODA, the investor purchases a pre-determined number of shares (“underlying shares”) during the term of the KODA, typically between 6 to 12 months. The purchase price of the shares (“strike price”) is fixed at a discount and therefore below the market price of these shares at the time the customer enters into the KODA. The investor agrees to purchase a pre-determined number of shares on each business day at the strike price during the term of the KODA. The investor is therefore obliged to pay for and take delivery of these purchased shares on a regular basis. The termination of the KODA depends on the “knock-out price”, which is a pre-determined price agreed on by the investor:⁸ If the market price of the underlying shares rises above the knock-out price, the KODA will be effectively terminated. The investor will have to pay for and take delivery of any shares that were purchased before termination at the strike price. If the market price of the underlying shares remains below the knock-out price, the investor is obligated to purchase the pre-determined number of shares at the strike price for the duration of the term of the KODA, even if the market price of the underlying shares falls below the strike price.

In short, a KODA enables an investor to purchase the underlying shares at a significant discount to the market price. But if the market price of the underlying shares falls under the strike price for an extended period during the term of the KODA, the investor’s loss will be the difference between the market price of the shares and the strike price at which the investor has to buy the shares under the KODA.⁹

A variation obliges the investor to purchase double (or another multiple) the number of shares at the strike price for each day on which the market price of the underlying shares falls below the strike price. Such KODAs have lower strike prices, thus giving a greater discount on the purchase of the underlying shares.¹⁰ Mr Koh referred to these KODAs as having a “multiplying effect”.

Between 8 October 2007 and 29 August 2008, Mr Koh purchased 29 KODAs through the account.¹¹ Mr Koh claims that the Bank did not properly advise him on the effect of the KODAs on the account and failed to adequately bring to his attention key information about the KODAs, such as the penalty to be paid for premature termination of the KODAs and the multiplying effect of certain KODAs.

Dual currency investments

DCIs are short-term structured investment products under which an investor deposits a principal sum in a selected investment currency with the bank for a fixed tenure or term. An alternative currency and a pre-determined conversion rate between the investment currency and alternative currency are agreed on at the outset. The principal sum will be repaid with the yield at maturity. The bank has the option of repaying the principal and yield either in the original investment currency or in the alternative currency after conversion at the pre-determined conversion rate. This decision depends on the market foreign exchange rate on the day of the trade and the pre-determined conversion rate:¹² If the investment currency against the alternative currency is weaker than the pre-determined conversion rate at maturity, the principal will be redeemed in the investment currency. If the investment currency against the alternative currency is stronger than the pre-determined conversion rate at maturity, the repayment is in the alternative currency, converted at the pre-determined conversion rate.

A loss may result if the investment currency is repaid in the alternative currency. The investor thus bears the currency risks and the speculative risks in fixing the pre-determined conversion rate. DCIs are not principal protected and are exposed to foreign exchange rate fluctuations. The DCIs purchased by Mr Koh generally involved Australian dollar (“AUD”) and Japanese Yen (“JPY”) pairings.

Between 21 February 2008 and 23 October 2008, Mr Koh purchased 891 DCIs through the account.¹³ Mr Koh stated that he did not know that DCIs involved significant risk and that the risks that eventuated would affect the account.¹⁴

The collateral shortfall and close out of the account

Having procured a credit facility for the account in 2006, the investments made through the account were funded primarily, if not entirely, by credit. In return for the credit facility, Smiling Sun had to maintain sufficient collateral in the account. The credit limit of the facility was increased at various points; the collateral requirements were also correspondingly increased. As it transpired, the investments in structured products, the portfolio of the account and drawdowns on the credit facility led to substantial credit exposure.

Sometime around September to October 2008, the collapse of Lehman Brothers sparked off a global financial crisis by which stock markets worldwide were hit. One of the several ramifications of the crisis was that the AUD rapidly depreciated against the JPY. The sudden and significant depreciation of the AUD against the JPY resulted in Mr Koh sustaining substantial losses as his investments were heavily concentrated in the AUD, while the loans were substantially in the JPY. The corresponding decrease in collateral values resulted in a substantial collateral shortfall in the account.

On 24 October 2008 at about 10am, Mr Koh received a close out notice from the Bank informing him that he had until 2pm to provide a top-up of US$5.7m. Mr Koh claimed that this close out notice gave an unreasonably short length of time for him to furnish additional collateral and that he would have been able to do so had he been given a reasonable amount of time. Further, the entire close out fiasco might have been avoided if he had known that the account was in a collateral shortfall earlier.¹⁵

Suffice it to say that Mr Koh did not provide the top-up. The Bank proceeded to close out all of the account’s open investment positions, including the KODAs and DCIs that were then in place, and liquidated all the assets in the account.

It was also not really disputed that the KODAs and DCIs and the drawdowns on the credit facility contributed to the collateral shortfall in the account. This shortfall, in turn, led to the eventual close out of the account and the losses that are now the subject of the present action. The ultimate question that falls to be decided is whose responsibility it is to bear the losses arising from the close out.

As a result of the close out, Mr Koh suffered losses of US$26m. Mr Koh sought to reclaim his losses by pursuing actions against the Bank for breaches of the Bank’s duties of care in contract and tort, claiming that the Bank failed in its duties by advising him to invest in products that were unsuitable for his purposes and by mismanaging his account. The Bank’s response was that that it owed Mr Koh no duty of care; furthermore, Mr Koh was not a risk-adverse and naive investor....