Man with intellectual difficulties awarded €2.1m over stockbroker Davy's 'deliberate neglect'

Monday 21 July 2014 15.52
Mr Justice Peter Charleton said there was a "systems failure" in Davy concerning its treatment of the individual concerned
Mr Justice Peter Charleton said there was a "systems failure" in Davy concerning its treatment of the individual concerned

A "very vulnerable" young man with intellectual and other difficulties having suffered two strokes by the age of ten has been awarded €2.1m by the High Court against stockbroking firm J & E Davy over its "deliberate neglect" of him resulting in substantial investment losses.

In a judgment with significant implications for duties owed by stockbrokers to clients, Mr Justice Peter Charleton made the award over Davy's breaches of contract and duty of care in encouraging the man from August 2005 to invest €1.75m of his €5m inheritance in contracts for difference.

There was a "systems failure" in Davy concerning its treatment of the man, failures in its documents section and failure in responsibility by higher management, including a senior manager who had certified, in a "paper-covering exercise", the individual concerned was suitable for CFD trading, the judge found.

The man, who was an orphaned only child aged just 20 when he began his investment relationship with Davy in 2005, was "not a person in the full of their intellectual, physical and mental health".

That "should have been obvious to any observer of average perception" and many tests carried out on him showed "alarming degrees of impairment", he said.

It was "probable to a high degree" Davy was aware, or at least put on notice, of the man's limitations but negligently made no enquiry when one was manifestly called for.

Out of his €5m property inheritance, the man, encouraged by Davy, raised €2.84m loans and put €1.75m of that into his CFD account when he did not know what CFDs were.

Davys never properly explained them to him and he "remains mystified" about them, the judge found.

While CFDs were represented by those firms dealing in them as "perfectly respectable", some examples might suggest to reasonable people they are "seriously risky".

During his relationship with Davy between 2005 and 2007, the man was exposed in transactions to a potential risk of €30m essentially concentrated on two to three companies when his assets, including his home, amounted to €5m, he said.

Davy owed a duty of care appropriate of an experienced stockbroker to the man, was paid to exercise that care but manifested an insufficient level of care throughout its entire relationship with the man and failed to provide the service paid for, he found. 

This amounted to "deliberate neglect" and examples of that included Davy having the man sign blank forms and, unknown to him, treating him as a "gold star" client with an "aggressive" attitude to risk. 

The terms and conditions of the advisory service provided by Davy to the individual concerned limited liability to "deliberate neglect" and Davy's approach demonstrated such "deliberate neglect".

"Disastrous positions" on Ryanair shares were entered into in 2007 while the man was being treated as an in-patient in a hospital psychiatric unit, he also said.

Rejecting Davy's denials it was unaware of the individual's limitations, he noted, when the man finally persuaded Davy in late 2010/early 2011 to give him an interview for a job, Anthony Moyles of Davy emailed another employee saying:.."go easy on him".

In the context of the evidence, that expressed "shared awareness" by Davy of the nature of the individual's condition.

There was a "complete failure" by Davy to get to know the man for what he was, he found.

Davy, as a matter of law and expert opinion, was first bound to get to know him properly.

If he showed a desire and appropriate knowledge to engage in CFD investments, he should, due to his background and vulnerability, have been strongly advised in writing against such investments.

A share portfolio spread over time and investments would minimise risk and provide a reasonable prospect of a steady but conservative return.

None of that happened and that failure represented negligence and breach of contract through deliberate neglect over the period of the man's relationship with Davy, the judge found.

There is "a serious legal duty" on any stockbroking firm selling financial products to particular clients "to find out who that client actually is".

That duty of care was comparable to that of a solicitor to a client but Davy made a "hollow" argument taking a "pen picture" was enough to get to know a client.

There was also a duty under Irish Stock Exchange Rules to ensure the advice from Davy did not encourage unsuitable activity.

The individual was entitled to be put back in the position he would have been in had no trades taken place, the judge ruled, and he assessed the total award as €2.1m, based on net losses of €1.25m from CFD trading accounts, plus non-recoverable CGT and interest.

During his judgment, he also remarked the circumstances entitling stockbrokers to bonuses was "fogged" in the evidence.

He had sued J & E Davy, trading as Davy, Bank of Ireland and Bank of Ireland Mortgage Bank alleging he was not liable for loans of some €2.78m made by Bank of Ireland to him between 2005-2007, mostly for CFD investments.

His case against the BOI defendants was previously settled.

A medical report described him as "significantly impaired" looking after his financial affairs.