In a judgment delivered on 18 June 2018, the Privy Council has dismissed the appeal by Emirati businessman Riad Tawfiq Al Sadik against judgments of the Grand Court and the Cayman Islands Court of Appeal which had both dismissed his claim to recover in excess of US$50 million in leveraged investment losses in hedge funds that were suffered during the 2008 financial crisis.[1]
The Privy Council rejected all of the arguments advanced by Mr Al Sadik in an attempt to establish liability on the part of Investcorp Bank BSC (“Investcorp”) for his investment losses. The judgment highlights the robust approach taken by the courts to wide-ranging but weak claims brought by investors against a fund’s promoter in an attempt to recover investment losses. The judgment also addresses the consequences, and potential injustice, of excessive delay by a court in the delivery of its judgment.
Background
Mr Al Sadik is a wealthy businessman based in Dubai who in early 2008 invested approximately US$136 million in a Cayman Islands hedge fund structure promoted by the investment firm Investcorp. The investments were leveraged and during the ensuing global financial crisis they sustained heavy losses. When Mr Al Sadik redeemed his investments in December 2009 he crystallised losses of some US$56 million (i.e. 41%).
Grand Court and Court of Appeal proceedings
In proceedings commenced in 2009 in the Grand Court of the Cayman Islands, Mr Al Sadik pursued wide-ranging and serious claims against Investcorp, including allegations of fraudulent misrepresentation, unauthorized leveraging which was deceitfully not disclosed, and breach of trust. Mr Al Sadik also claimed that a collateral contract existed whereby Investcorp effectively guaranteed him a 45% return on investment over three years.
Mr Al Sadik initially claimed Investcorp had wrongfully leveraged his investments for its own purposes (to fund its own liquidity needs), however that allegation was abandoned on day 26 of the ten-week trial.
All of the claims were rejected by both Mr Justice Jones QC at first instance and subsequently by the Cayman Islands Court of Appeal. The first instance judgment was delivered promptly, however there was an unexplained delay of three years and ten months in the delivery of judgment by the Court of Appeal.
Appeal to the Privy Council
Undeterred, Mr Al Sadik pursued an appeal to the Privy Council, maintaining the allegations that Investcorp had (i) breached the share purchase agreement (the “SPA”) between Mr Al Sadik, Investcorp and Shallot IAM Ltd (“Shallot”) which governed the terms of his investments and (ii) deceitfully failed to disclose investments in an SPV.
The SPA claim
As the construction of the SPA was a question of law, the Privy Council considered it afresh, even though the Grand Court and the Court of Appeal had both found against Mr Al Sadik.
The essence of the claim was that although the SPA provided for Mr Al Sadik’s investments to be managed on a leveraged basis, it did not permit Investcorp to:
- transfer Mr Al Sadik’s investment fund from Shallot by way of a share purchase by Shallot of an SPV, Blossom IAM Ltd (“Blossom”); or
- implement “first layer” leverage at the portfolio level (i.e. via borrowing by Blossom for the purpose of making leveraged investments) rather than “second layer” leverage through hedge funds or feeder funds.
Lord Briggs, who delivered the judgment on behalf of the Board of the Privy Council, broadly summarised Mr Al Sadik’s arguments as follows:
- Mr Al Sadik’s money was not simply paid to Blossom to be held on trust for him for the purposes of investment. It was paid by Shallot to Blossom as the subscription price for redeemable preference shares. Blossom had its own business of leveraging and investment, using its own money (rather than money from Mr Al Sadik) for that purpose. Therefore Shallot’s payment to Blossom was an investment, and since (as the Court of Appeal had found) Blossom was not a hedge fund within the meaning of the SPA, Shallot’s investment in it was unauthorised.
- The SPA made no express reference to leverage, and authorised neither Investcorp nor Shallot to carry out leverage as a “preliminary” to investment. Whilst that did not prevent second layer leverage, because it would be carried out by an investee hedge fund (or feeder fund), there was therefore no authority in the SPA for first layer leverage such as that done by Blossom.
- The SPA contained an express but limited power for Investcorp or Shallot to borrow, namely for liquidity purposes only. This excluded any power to borrow for other purposes, including via leverage.
- The Judge’s view (endorsed by the Court of Appeal) that first and second layer leverage are broadly economically equivalent was wrong and, in any case, irrelevant.
- There could be no term implied into the SPA to permit first layer leverage, including by creating an SPV for that purpose.
The Privy Council rejected all of these arguments and upheld the earlier findings that first layer leverage was permitted by the SPA, and that the transfer of Mr Al Sadik’s funds to an SPV was an authorised administrative step rather a substantive investment. In that regard, Justice Jones QC had also held at first instance that the use of Blossom as a separate SPV for that purpose was appropriate because it provided a cleaner security structure (in particular, because it separated the investments from the currency hedges that were being implemented by Shallot at Mr Al Sadik’s request).
Lord Briggs held that it was “plainly legitimate” for the courts to have regard to the fact that the investment proposal (which gave rise to the SPA) had suggested leveraged investments in hedge funds, such that there was no need for any term to be implied into the SPA. There was also no reason to doubt the Judge’s conclusion that first and second layer leverage were, or could be, economically equivalent, however such equivalence was not a necessary element of the Privy Council’s reasoning.
Lord Briggs noted that perhaps Mr Al Sadik’s best argument was that the SPA conferred the power to borrow for liquidity purposes, but did not expressly confer any broader borrowing power. However, that argument fell away because borrowing was necessary to give effect to the investment purpose, which included obtaining leverage.
Deceitful non-disclosure
Mr Al Sadik faced serious difficulty in appealing against the lower courts’ findings that Investcorp had not deceitfully failed to disclose the investments in Blossom, because it is the established practice of the Privy Council not to interfere with findings of fact that have been made by both lower courts, save in exceptional circumstances.
Leading counsel for Mr Sadik argued that such exceptional circumstances existed in this case due to the delay in the Court of Appeal delivering judgment, and the fact that the Court of Appeal judgment made no reference to the oral submissions at the appeal hearing, nor to new arguments advanced by Investcorp at that stage. The Privy Council acknowledged that “objectively speaking, the Board regards such a delay as truly exceptional, and considers that it amounts, without more, to a real injustice to all the parties concerned, all the more so where serious allegations of impropriety were at stake.” However, the Privy Council held that mere delay does not of itself render a judgment unreliable; it simply increases the risk of unreliability. The 150-page judgment of the Court of Appeal was scrutinised carefully, and found to have included a meticulous and careful review of the materials in this complex case. Ultimately, the Privy Council was satisfied that the courts below had given careful and detailed judgment in respect of these factual matters, and therefore the Privy Council adopted its usual practice of declining to intervene in relation to concurrent findings of fact made by the Grand Court and the Court of Appeal.
Having upheld the earlier judgments and dismissed Mr Al Sadik’s claims, there was no need for the Privy Council to address the question of causation. In any event, the Privy Council noted that Mr Al Sadik “would have found it an uphill task to demonstrate that this supposed breach of the SPA caused him loss, in light of the judge’s finding that, had Investcorp perceived that first layer leveraging … was not permissible, it would have adopted second layer leveraging through the feeder funds, which would have caused greater loss than in fact he suffered.”
Conclusion
By dismissing Mr Al Sadik’s appeal, the Privy Council ended one of the most hard-fought investor claims to emerge in the aftermath of the global financial crisis. Having positively sought to invest on a leveraged basis, it is perhaps unsurprising that Mr Al Sadik’s claims failed at every stage of the judicial process. The overriding lesson from the case is that the courts will reject attempts to recover losses where they have been sustained as a result of poor investment performance, rather than wrongful conduct. The case provides a salutary lesson to investors about pursuing litigation where their allegations run contrary to the essential commercial bargain that has been struck between the parties. It also reinforces the importance of carefully documenting the investment terms.
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[1] Al Sadik v Investcorp Bank BSC & Ors [2018] UKPC 15
