JPMorgan

IN THE HIGH COURT OF JUSTICE 2008 Folio 1052 BENCH DIVISION COMMERCIAL COURT BETWEEN: (1) JPMORGAN CHASE BANK, N.A. (2) J.P. MORGAN SECURITIES PLC Claimants and BERLINER VERKEHRSBETRIEBE (BVG) ANSTALT OFF ENTLICHEN RECHTS Defendant and CLIFFORD CHANCE VON RECHTSANWALTEN, STEUERBERATERN UND SOLICITORS Third Parg WRITTEN OPENING SUBMISSIONS For trial commencing on 13 January 2014 TABLE OF CONTENTS I. INTRODUCTION .. 4 Bundles and documents .. 4 (2) Outline of the case .. 5 (3) Factual and expert witnesses .. 8 (4) The additional claim .. 10 (5) Disclosure .. 10 II. FACTUAL BACKGROUND .. 14 (1) The parties .. 14 (2) The cross--border leases .. l4 (3) The ICE Transaction in outline .. 17 (4) Initial negotiations between the parties .. 20 (5) Approval of the ICE Transaction by BVG's decision-making bodies .. 34 (6) Further negotiations, and the involvement of Clifford Chance .. 38 (7) Closing of the ICE Transaction .. 47 (8) Market volatility post-closing .. 47 (9) Events in February 2008 .. 48 (10) Further discussions concerning restructuring .. 50 (1 1) The occurrence of credit events under the PM Swap .. 51 CLAIM .. 53 IV. DEFENCE AND COUNTERCLAIM: SUMMARY .. 54 V. ULTRA VIRES .. 58 (1) Introduction .. 58 (2) The history of the ultra vires doctrine in the proceedings .. 59 (3) The issues between the parties in relation to ultra vires: outline .. 61 VI. MISREPRESENTATION AND NON-DISCLOSURE .. 65 (1) Summary of BVG's case .. 65 (2) Misrepresentation: the law .. 69 (3) Fraudulent misrepresentation: the meaning of fraud and standard of proof .. 71 (4) Non--disclosure: the law .3 .. 73 (5) The alleged misrepresentations: case .. 73 The alleged Senior Tranche representation .. 73 No such representation was made .. 73 (ii) Any such representation was correct .. 79 Insofar as there was any misrepresentation, this was corrected in any event .. 81 (iv) No reliance .. 82 The alleged Pro--Rated Loss Profile representation .. 85 No such representation was made .. 86 (ii) Any such implied misrepresentation was corrected and/or disclosure was made .. 105 No reliance .. 106 The alleged Credit Risk representation .. 108 No such representation was made .. 108 (ii) Any such representation was correct .. 116 No reliance .. 121 VII. MISTAKE .. 124 (1) BVG's case: the alleged mistake .. 124 (2) Mistake: the law'. .. 125 (3) Application of the law to the facts .. 126 (4) BVG's subsidiary case: a mistake of which JPMC "ought to have known" .. 129 (5) The effect of any mistake as to the terms of the JPM Swap: void or voidable .. 132 (6) The effect of the express terms of the JPM Swap .. 134 NEGLIGENCE BY JPMS .. 136 (1) The alleged duty of care .. 136 The alleged duty of care in relation to misrepresentations .. 136 The alleged duty of care in relation to mistakes .. 137 The alleged duty of care to provide a "full and fair" description of the JPM Swap .. 138 (2) Alleged breach of duty .. 149 (3) Causation .. I52 (4) Contributory fault .. 153 IX. VALUATION ISSUES .. 155 (1) The performance by JPMC of its role as calculation agent .. 155 (2) Interest .. 159 X. CONCLUSION .. 161 (1) INTRODUCTION These opening submissions are filed on behalf of the First and Second Claimants (respectively and in respect of the trial of JPMC's claim against the Defendant and (2) BVG's counterclaim against JPMC and JPMS. Save where it is necessary to distinguish between the two, JPMC and JPMS are referred to below as Bundles and documents The parties have agreed to use the Magnum "Opus 2" electronic trial bundle. In these opening submissions, references to the documents in the trial bundle are given in the format {bundle/tab/page} e. g. 1/ The references also include hyperlinks to the documents in the electronic bundle, to allow them to be located easily and swiftly. A hard-copy core bundle has also been prepared, containing the key documents (this is also on the electronic system, as bundle E). Copies of the authorities referred to below may also be found in the trial bundle (bundle K). Many of the contemporaneous documents in the trial bundle (in bundle H) are in German (this is particularly true of documents disclosed by BVG). Documents in German have been translated into English, pursuant to an agreed protocol, by a jointly--instructed translation company. Where documents have been translated, both the original German document and the English translation appear in the bundle. References to translations of German language documents are indicated by the letter in the reference -- e.g. The parties have agreed between them aiproposed trial timetable, subject to the agreement of the Com": (filed herewith). The parties are also in the process of producing a suggested list of pre--trial reading for the Court, an outline chronology and a dramatis personae. As well as translations produced according to the agreed protocol described here, the trial bundle also includes some "informal" translations prepared by the parties. (2) Outline of the case JPMC's claim is for the sums due, in the amount of $204,422,532.7l plus interest,2 under a credit derivative transaction (known as a single--tranche collateralised debt obligation or entered into between JPMC and BVG on 19 July 2007 (referred to in the statements of case as the PM The JPM Swap was part of a wider series of related transactions to which BVG was a party, all concluded on the same date, known compendiously as the Transaction".4 As well as the JPM Swap, the ICE Transaction included a number of credit default swaps entered into between BVG and a German bank, Landesbank Baden--W1'jrttemberg "the LBBW LBBW is not a party to these proceedings. The ICE Transaction, and the circumstances in which it was concluded, are described in detail below. In summary, however, the overall narrative of the dispute is as follows: (1) Under the ICE Transaction, BVG acquired two things, namely credit protection (under the LBBW Swaps) in respect of concentrated credit risks to which it was exposed (and in relation to which it had concerns) arising out of some very complex (but highly profitable) cross--border lease transactions that it had previously concluded; and an upfront payment of some $6.1 million. (2) In return, BVG assumed a credit risk in respect of a portfolio of 150 reference entities, by means of a STCDO -- the JPM Swap. That new credit risk was rated by Standard Poor's a leading rating agency; that rating translated to a default probability of around 0.19% over the 10- All references below should be read as references to United States dollars. The transaction documents are at and stands for "Independent Collateral Enhancement". The transaction documents are at and (3) (4) (5) year life of the transaction.6' It was, of course, not anticipated by either BVG or JPM that such a minutely small risk would ever eventuate. From BVG's perspective, the taking on of such an extremely low risk in return for obtaining the credit protection it sought, plus a substantial cash payment, was attractive. However, as the facts of this case demonstrate, extremely low risk is not the same as no risk, and, unfortunately for BVG, the transaction was concluded just over a year before a global financial crisis of almost unprecedented scale and severity saw the collapse of a number of well~established companies, many of which were (on account of their high credit ratings when the transaction was concluded) in the reference portfolio in respect of which BVG had sold credit protection. A5 a result of these corporate failures, substantial sums have become due from BVG under the JPM Swap. in Regrettably, but perhaps inevitably, the response of BVG to the occuirence of these events has been to search for someone to blame, including among its own employees. In addition, BVG has, in an attempt to avoid the consequences of the bargain that it made, also resorted to what may properly be described as the "usual" arguments deployed by investors who have ended up on the wrong side of a transaction. This includes contending that the transaction was ultra vires, as well as a number of allegations of misrepresentation and indeed fraud. BVG has been driven to make allegations of fraud in order to attempt to circumvent the various exclusions and disclaimers in the contractual documentation that, it appears to be accepted, would otherwise largely preclude its claim. But BVG's search for someone else to blame did not stop there. Thus, at a very late stage in these proceedings, after most disclosure had been provided, and no doubt prompted by a dawning realisation that the very serious According to a publication by Fitch Ratings, on which BVG relied when assessing the probability of default under the JPM Swap: see and paragraph 215 below. In this context default probability means the chance of suffering any loss, not the chance of suffering a total loss. allegations it had seen fit to make could not properly be supported by the evidence, BVG decided that the Third Party ("Clifford Chance") should also be brought into these proceedings. This act, involving a final desperate throw of the dice, has resulted in a material extension to the length of the trial, which, as noted in the agreed timetable, is now estimated to last some 10 weeks. (6) These proceedings were commenced as long ago as October 2008. The reason that the trial is taking place over five years later, in January 2014, arises from the fact that BVG has managed to delay the progress of the litigation for the best part of three years by pursuing a jurisdiction challenge, in both England and Germany, that was rejected as misconceived by every court that considered it in both jurisdictions as well as by the European Court. 9 Thus, although there is no dispute as to the meaning or effect of the contractual documentation pursuant to which the JPM Swap was concluded, BVG nevertheless denies that it is liable under the transaction. It contends that the transaction is void, either on the basis that it is ultra vires or for unilateral mistake; or alternatively that it is voidable, and has been rescinded, for mistake or misrepresentation (mostly on the basis of alleged "implied representations"). In the further alternative, BVG advances a counterclaim against both JPMC and JPMS for damages (in the sum of any amount found to be due under the JPM Swap, thereby extinguishing JPMC's claim), based on allegations of fraudulent misrepresentation and (in the case of JPMS) negligence. JPM's case, which it is submitted should be accepted, is (in summary) as follows: (1) The JPM Swap was not ultra vires BVG. (2) JPM did not make any misrepresentations to BVG. In particular, JPM did not make the representations alleged; insofar as any such representations were made, they were correct and/or corrected; and in any event BVG did not rely on any of them. 10. (3) ll. 12. (3) The JPM Swap is not void or voidable for mistake on the part of BVG. Insofar as BVG entered into the PM Swap under a mistake as to its terms, JPM were not aware (and, to the extent that this is relevant, ought not to have been aware) of this. (4) BVG is not entitled to damages from JPM, whether for misrepresentation, negligence or otherwise. BVG's defences and its counterclaim are set out in statements of case of unnecessary and oppressive length.7 It is important, however, not to equate prolixity with complexity: despite the great bulk of the pleadings,8 the issues between the parties are in fact both relatively narrow and comparatively straightforward, as will be explained below. Factual and expert witnesses With the exception of ultra vires, which is a pure question of German law on which the parties have served expert evidence, BVG's defences and its counterclaim depend on allegations made concerning the period during which the ICE Transaction was being negotiated between JPM and BVG. That period lasted an unusually long time, approximately 14 months, between late May 2006 and the closing of the transaction on 19 July 2007. It is common ground that the negotiations were conducted through one principal point of contact on each side -- Mr Johannes Banner for PM and Dr Matthias Meier for BVG. Mr Banner and Dr Meier will be the principal factual witnesses for PM and BVG respectively. JPM intends to call nine witnesses in total, and BVG six. Five of JPM's witnesses are German, although all intend to give evidence in English. All of BVG's At the case management conference on 6 July 2012 Eder remarked of BVG's Defence and Counterclaim, which then ran to 125 pages (and in its amended form now runs to 130 pages), that "pleadings should be much shorter and focused": page 12 of the transcript at line 21 {B/14a/95.17} And the large amount of contemporaneous documentation which has been disclosed and been included in the trial bundle. Transactions such as the one with which these proceedings are concerned inevitably generate large amounts of (mostly electronic) documents, but relatively few of them really go to the issues in the case. 13. 14. witnesses are German, and it is' understood that all of them apart from Dr Meier will give evidence in German through an interpreter. There is a particularly notable absentee from BVG's list of witnesses: in its case management information sheet dated 29 June 2Ol2,9 BVG said that it intended to call as a witness Mr Andreas Sturmowski, who was the chairman of its Management Board when the ICE Transaction was concluded. In the event, no witness statement was ever served from him, and the reason for this has never been explained. It is understood, however, that Mr Sturmowski left BVG in 2010, in somewhat acrimonious circumstances,10 and that he has been under criminal investigation for alleged offences of embezzlement (unrelated to the facts of this case) while at BVG and at his subsequent employer, the Chamber of Industry and Commerce of Rostock. It appears that Mr Sturmowski denied the allegations and that the investigation was terminated on payment of "a lowfive-figure amozmr".I2 Mr Sturmowski's absence from the trial is particularly significani because, as explained below," his electronic documents were deleted by BVG in their entirety two years after the commencement of these proceedings. As mentioned above, the parties have served expert evidence on German law in respect of the ultra vires issue. JPM's expert is Professor Matthias Lehmann, and BVG's is Professor I-leinz--Dieter Assmann.'4 Both experts are German; Professor Lehmann intends to given his evidence in English, and Professor Assmann apparently intends to give evidence in German. 13b} See the article at {H/2840a} See the article at {H/2847b} H/2828a} and See the articles at {H/2847a} {H/2850a} Paragraph 23 below. In its case management information sheet dated 29 June 2012 13b} BVG identified a different German law expert, Professor Horst Eidenmtiller. It was only on 14 August 2013 (two weeks before the then deadline for the exchange of expert reports) that BVG wrote to say that, in fact, Professor Assmann would be its expert No sufficient explanation has ever been provided for this late change. l5. (4) 16. (5) 17. l8. l9. The parties have also seived expeit evidence on certain issues relating to STCDOS (the relevance of which will be explained below). JPM's expert evidence on these issues is from Dr Ian Robinson, and BVG's is from Ms Thu--Uyen Nguyen. The additional claim The Court is also conducting the trial of BVG's claim, brought by way of additional claim pursuant to CPR Part 20, against Clifford Chance. As noted above, the additional claim was issued very late in the day, in April 2013. Disclosure It is convenient at this point to say a word about the disclosure exercise that has been carried out by PM in these proceedings. The amount of disclosure that JPM have been required to give has been vast, even by the standards of high--value commercial litigation such as this. This has been justified by BVG primarily on the ground that BVG had felt able to advance a case of fraud against JPM. At the first case management conference in July 2012, JPM were ordered by Cooke J15 to carry out searches for the documents of 66 custodians (even though Cooke recognised at the hearing when he made that order that it was likely that many of those individuals would have no relevant documents -- a prediction that has turned out to be in the event, 72 custodians' documents were searched. An initial set of over 8.2 million electronic documents was narrowed by de--duplication and date range and keyword filters, resulting in a pool of approximately 880,000 documents that have been manually reviewed. To date over 14,000 documents have been disclosed to BVG. JPM estimate that they have spent around million on disclosure. Despite the great to which JPM and their solicitors, Linklaters LLP, have gone to ensure that relevant documents are found and disclosed, they have been 10 custodians produced fewer than 25 disclosable documents; 11 custodians produced fewer than 10 documents; and 16 custodians produced no documents at all. 10 20. subjected to a constant stream of unreasonable requests and complaints about disclosure from BVG, commonly made in correspondence with an unusually unpleasant and aggressive tone. These requests, which have generated reams of correspondence and large amounts of wasted costs, seem to have been motivated by BVG's increasingly desperate need to try to find documents to support its fraud case. Nevertheless, JPM and Linklaters have worked tirelessly to satisfy BVG's ever--increasing and unreasonable demands wherever possible. Among the documents that JPM have disclosed are 299 recordings from the telephone lines of Mr Banner and one of his colleagues, a Mr Kieran O'Connor. These have been transcribed and (where necessary) translated. The background to this aspect of the disclosure exercise is as follows. As pait of their standard disclosure exercise JPM agreed to carry out a search for recordings of relevant telephone calls made or received by Mr Banner in the period 1 January 2006 to 31 August 2007." Having presumably (and correctly) concluded that the material disclosed by JPM in this regard did not support the serious allegations that it had made, on 28 August 2013, BVG made an application for disclosure of recordings from five further custodians," over periods which in the aggregate amounted to 37 months." The application was heard by Flaux on 28 October 2013,20 who dismissed it save in relation to some (but not all) of the periods for which BVG has 20 Disclosure of calls from the period 23 July 2006 to 31 August 2007 was given on 15 February 2013. JPM were initially unable to locate Mr Banner's calls for the period 1 January to 23 July 2006, but calls for the period 13 March to 23 July 2006 have now been located and (where relevant) disclosed. At the pre-trial review on 6 December 2013 Eder made an order {B/29a} dispensing with further searches for the missing period of 1 January to 12 March 2006. Mr O'Connor, Mr Robert Sheppard, Mr Daniel Theuerkauf, Mr Frank Haering and Mr Martin Wiesmann. In the case of Mr O'Connor, BVG sought disclosure of his calls for the 20-month period between 1 January and 2006 and 31 August 2007. This request was justified on the basis that, as explained in footnote 17 above, JPM had at that stage been unable to locate Mr Banner's calls for the period 1 January to 22 July 2006. As Flaux remarked at the hearing of the application, BVG's attempt to rely on the absence of Mr Banner's calls for less than seven months to justify searching for Mr O'Connor's calls for 20 months was "an illogical non sequitur". {B/23a} See the order at 11 21. 22. 23. sought disclosure of Mr O'Connor"s calls." Since that order was made, JPM have agreed to carry out limited further searches of Mr O?Connor's calls." The vast scale of the JPM disclosure exercise is important, because where the Court is dealing with an allegation of fraud, the fact that the Court has access to this quantity of contemporaneous material (in particular transcripts and e--mails) is critical in enabling the Court to gain an insight into what was going on between the key protagonists, and therefore to assess the credibility of the fraud allegation. What is striking about this case is that, despite the huge quantity of documents that have been produced, and the enormous sums of money spent in having to find them, there is not a single shred of evidence emerging from the documents that supports the serious allegations that BVG has made. By contrast with the extensive and onerous disclosure exercise undertaken by I PM, the disclosure provided by BVG has in a number of respects been seriously deficient. In particular, BVG informed JPM in its disclosure statement, served on 15 February 2013, that the electronic documents of two of its custodians had been entirely deleted and that the electronic documents of a further seven custodians had been partially deleted." Among those whose electronic documents had been entirely deleted was Mr Sturmowski, who, as noted in paragraph 13 above, will not be giving evidence despite the fact that he was (as the chairman of BVG's Management Board) one of the key decision--makers at BVG who approved the conclusion of the ICE Transaction. Mr Sturmowski's electronic data was deleted in its entirety following 2] 22 23 In recent interlocutory exchanges, and no doubt in order to justify their belated application for disclosure of his telephone calls, BVG have attempted to portray Mr O'Connor as one of the central figures on the JPM side of the case. This is unreal and contrived. Mr O'Connor had very limited direct dealings with BVG. Accordingly, at the first case management conference in July 2012, BVG did not even seek an order for disclosure of his calls -- only Mr Banne1"s calls were sought. Such an application was not made until over a year later, on 28 August 2013 -- as Flaux put it, "very [are indeed" 166} . It does not seem to be a coincidence that BVG's strategy of emphasising the role played by Mr O'Connor has come about since learning that Mr O'Connor (who left JPM's employment in March 2009) would not be a witness at the trial. Searches have now been carried out for Mr O'Connor's calls for the periods 1 January to 12 December 2006 and I May to 31 August 2007. 12 his departure from BVG's employment in October 2010 (two years these proceedings were commenced). BVG's solicitors, Addleshaw Goddard LLP, have explained that the deletion apparently occurred pursuant to BVG's "standard practice" to delete an employee's e--mails (as well as other electronic data) once the employee had left.24 However, BVG has been unable to identify any written document which refers to this "standard practice''.25 JPM have requested (quite reasonably in the circurnstances) confirmation from Addleshaw Goddard that BVG had been advised of the need to preserve potentially relevant documents for the 26 purposes of the litigation. Addleshaw Goddard have refused to provide that confirmation, on the ground that any such advice would be privileged." 24 25 26 27 {1/197/377} and 13 II. 24. 25. (1) 26. (2) 27. FACTUAL BACKGROUND The detailed factual background to the proceedings is set out, from JPM's perspective, primarily in the witness statement of Mr Banner." There is substantial common ground on the facts, in part because the history of the relevant negotiations can be largely pieced together from contemporaneous (mostly electronic) documents. What follows is a summary of the key aspects of the factual story, much of which it is anticipated will not be in dispute. The more contentious factual issues are addressed separately, in the context of the defences and counterclaims advanced by BVG. The parties The parties to the proceedings are as follows: (1) JPMC and JPMS are members of the JPMorgan international investment banking group. JPMC is incorporated in the United States of America. JPMS is incorporated in England and is an indirect subsidiary of JPMC. (2) BVG is a public law institution, founded under German law. It operates the public passenger transportation system in the city of Berlin. (3) Clifford Chance is a law firm incorporated as a partnership under the laws of Germany. The cross--border leases The origin of the present dispute can be traced back to 1997, when BVG entered into a number of cross-border lease transactions involving certain of its fixed assets, with parties domiciled in the United States. Although the Court need not be concerned with the detail of their provisions, the CBLS were highly complex tax-driven transactions, the purpose of which was to enable the parties to them to 28 14 28. 29. 30. take advantage of certain provision of US federal tax law relating to the depreciation rules regarding fixed assets located outside the US. Under the CBLs which are material to this case," BVG leased (pursuant to a head lease agreement) part of its fleet of public transport vehicles to a special purpose trust established under the law of Delaware ("the Trust"), in return for upfront payments. Pursuant to a sub--lease agreement, those assets were simultaneously leased back by the Trust to BVG, in return for periodic rental payments. BVG had the right to terminate the CBLs at a specified point in time by paying a capital sum to the Trust. The upfront payments under the head leases were financed in two ways: (1) First, they were financed in part by a loan from a lender ("the Lender") to the Trust. In Equipment Trusts A-1 to A-4, the Lender was Credit Suisse (Luxembourg) SA, and in Equipment Trust F, the Lender was Credit Suisse First Boston AG. (2) Secondly, they were financed by an equity investment in the Trust by a US- based investor ("the US Investor"). In Equipment Trusts A-1 to A-4, the US Investor was First Chicago Leasing Corporation ("First Chicago"), and in Equipment Trust F, the US Investor was FNBC Leasing Corporation The periodic rental payments under the sub-leases were also financed in two ways: (1) First, they were financed in part by a payment undertaking agreement (a or "assumption agreement") between BVG, the Trust and a bank known as an "Assumption Bank".30 In the case of each of the CBLs, the Value of the payments required to be made to the Trust by the Assumption Bank (as well as the payment schedule) was the same or virtually the same as 29 30 There are five of these, known as Equipment Trust l997--A--l", Equipment Trust Equipment Trust Equipment Trust and Equipment Trust The relevant contractual documentation can be found at and These agreements are at {F/ll} and 15 31. 32. the value of the loan from the Lender, and each PUA was apparently intended to finance the repayment of the relevant loan. In Equipment Trusts A--l to A-4, the Assumption Bank was initially Credit Suisse First Boston AG, but later became Credit Suisse AG. In Equipment Trust F, the Assumption Bank was Credit Suisse First Boston, London Branch (later renamed Credit Suisse (London Branch)). (2) Secondly, the periodic rental payments were financed in part by payments made pursuant to instruments described as "Debt Certificates",3] sometimes referred to as the "Equity Collateral", issued by a bank known as a "Subscription Bank".32 The Equity Collateral was intended to finance the repayment of the US lnvestor's investment and the exercise of BVG's early termination option. In Equipment Trusts A-l to A-4, the Debt Certificates were issued by Landesbank Berlin Girozentrale In Equipment Trust F, the Debt Certificates were issued by Bayerische Vereinsbank AG (now UniCredit Bank AG, but trading under the brand "HypoVereinsbank" and therefore referred to as Under the terms of the CBLS, BVG remained liable for payments under the sub- leases, and was therefore exposed to the risk of default by the Assumption Banks and the Subscription Banks. BVG also bore the risk of a credit rating downgrade in respect of the Subscription Banks, in that if the credit rating of a Subscription Bank fell below a specified minimum, BVG could be required by the US Investor to replace the Equity Collateral provided by the relevant Subscription Bank. This latter risk materialised in 2003, when, following the downgrading of HVB's credit rating, FNBC (the US Investor under Equipment Trust F) informed BVG that it required the Equity Collateral to be replaced. Following negotiations between FNBC and BVG, it was agreed that instead of the Equity Collateral from HVB being replaced, BVG would (at considerable expense) provide additional 31 Referred to in some of the documents by their German name of Debt Certificates for Equipment Trusts A33. 34. (3) 35. 36. security by purchasing a letter of credit from another bank, Landesbank Hessen~ Thiflringen Girozentrale (referred to as "HeLaBa"). BVG apparently entered into a total of 22 CBL transactions with various parties." According to evidence given by Mr Falk (one of BVG's witnesses and now the Finance Director of BVG) to the State Parliament of Berlin in 2009, these transactions involved a total of 427 underground railway carriages and 511 trams, and generated an overall profit for BVG ofEURl04 million.34 In 2004, following a series of corporate mergers, First Chicago and FNBC, the US Investors under the CBLs that are relevant to these proceedings, became part of the JPMorgan group." These 'entities' interests in the CBLS were from that time administered by staff from JPMorgan Capital Corporation based in Chicago. The ICE Transaction in outline The circumstances in which the ICE Transaction came to be concluded will be described below. It is, however, convenient at the outset first to describe the transaction and the rationale behind it. In summary, the ICE Transaction was designed as a means of allowing lessors under CBL transactions, such as BVG, to restructure the credit exposures that they The ICE Transaction with BVG, which was executed on 19 July 2007, consisted of the had under their CBLS whilst also generating an upfront payment. following two related elements: (1) BVG entered into four credit default swaps with LBBW (referred to in the statements of case as the Under the LBBW Swaps, BVG 33 34 35 36 BVG's Amended Rejoinder and Reply to Defence to Counterclaim paragraph 15.2 and This is explained in paragraph 30 of JPM's Amended Reply and Defence to Counterclaim {A3a/13} and 17 37. bought credit protection from LBBW in respect of the Assumption Banks and the Subscription Banks, namely LBB, HVB and the two Credit Suisse entities referred to in paragraph 30(1) above. (2) The JPM Swap." Under this transaction BVG net sold credit protection to JPMC in respect of a tranche of a reference portfolio containing 150 reference entities, by means of a STCDO. One of the requirements imposed by BVG in relation to the ICE Transaction was that the notional amounts of both the LBBW Swaps and the JPM Swap should amortise over time, in order to match BVG's gradually decreasing exposure under the CBLs. This requirement led to the incorporation of two superficially complicating features into the JPM Swap, although these did not obscure the basic economic operation of the transaction: (1) Under the JPM Swap, the credit protection sold by BVG was divided into 40 "legs" (each "leg" in fact being a separate tranche), each of which had a different notional amount and termination date (the termination dates fell between 2008 and 2017).33 These "legs" were described in the contractual documentation as "Long Legs". They had lower boundaries (sometimes referred to as "attachment points" or "subordination cushions") of between 1.5% and and they were each 1% in width (meaning that their upper boundaries, or detachment points, were all 1% greater than their lower boundaries).39 For each Long Leg, JPMC paid an upfront premium to BVG 37 38 39 and See the "tranche terms" in the JPM Swap confirmation The concepts of tranche attachment and detachment points (or lower and upper boundaries) are explained in Appendix 2 to the expert report of Ian Robinson dated 27 September 2013 15.2} . Essentially, an investor in a tranche of a STCDO will not come under a payment obligation upon the occurrence of the first defaults among the entities in the reference portfolio: payment obligations will only accrue once the subordination from which the tranche benefits, is exhausted (or, in other Words, the attachment point, or lower boundary, is reached). In a portfolio of 100 reference entities, for example, each entity accounts for 1% of the portfolio. Upon the occurrence of a credit event (such as a default) in relation to one of the entities, the reference obligation for that entity must be valued to determine the "recovery rate" (or "final price"). Assuming a recovery rate of 50% per default, each default would generate losses in the portfolio of 0.5% 1% If the tranche in question has a lower 18 38. at the time that the PM Swap was concluded. The JPM Swap provided that BVG would start to incur payment obligations if the notional losses suffered in the reference portfolio exceeded the lower boundary for one or more Long Legs, up to the notional amount for the relevant Long Leg(s), insofar as the relevant Long Leg(s) had not yet reached their termination date(s). The sum of the notional amounts of all of the Long Legs under the JPM Swap was $228,905,964. (2) The JPM Swap also had seven tranches, or "Short Legs", under which JPMC sold credit protection to BVG in respect of the reference portfolio. The reason why the JPM Swap was divided into the Long and Short Legs was that, although BVG's exposure under the CBLS would in general decline over the lifetime of the transaction, it occasionally rose by a modest amount. The Short Legs were necessary to ensure (following BVG's request) that the notional amount of the JPM Swaplalways matched BVG's exposure under the CBLs. The economic rationale for the ICE Transaction was that BVG would, without needing to amend any of the agreements associated with the CBLs, change the composition of its risk exposure under the CBLS, while also generating an additional profit. In return for assuming credit exposures under the JPM Swap to the 150 entities in the reference portfolio, BVG received an upfront premium of $7,856,537, of which $1,763,387 was used to pay for the protection that BVG received under the LBBW Swaps. BVG therefore received a net payment of $6,093,150 when the ICE Transaction was concluded. It is easy to see why BVG would wish to enter into a transaction that provided it with such benefits, provided boundary of 4 defaults will be needed to exhaust the subordination (4 0.5% Any further defaults will cause payment obligations to be incurred. If the tranche is 1% wide it has a detachment point of a further default with a recovery rate of 50% will cause half of the tranche's notional amount to be lost, and another default of the same magnitude after that will cause the entire tranche notional to be lost (because the detachment point will have been reached). Once a tranche's detachment point has been reached, no further losses can be incurred even if more defaults occur in the reference portfolio. 19 39. 40. (4) 41. 42. 43. that the risk that it was undertaking in retum was reasonably regarded as a miniscule one (as indeed it was in this case).40 The JPM Swap was documented in a 2002 ISDA Master Agreement (and Schedule) dated 17 August 2007 between PMC and and a confirmation dated 5 September 2007 between the same parties ("the Set out below is a detailed account of the negotiations between the parties leading to the conclusion of the ICE Transaction. Initial negotiations between the parties In rnid--2006, JPM approached BVG with a proposal that by entering into certain credit derivative transactions, BVG would be able to restructure the credit exposures that it had under the CBLS, while also generating an upfront payment. This proposal became the ICE Transaction. i As mentioned in paragraph 11 above, the negotiations that led to the conclusion of the ICE Transaction were conducted on JPM's behalf primarily by Mr Banner, while BVG was represented by Dr Meier. Mr Banner became involved in the negotiations at the request of Mr O'Connor, who worked in JPM's Structuring and Solutions team and who specialised in transactions designed to restructure CBL exposures. Mr O'Connor had obtained Dr Meier's contact details from The negotiations were conducted primarily in German, the first language of both "Mr Banner and Dr Meier. Mr O'Connor did not speak German. At the beginning of the negotiations, Mr Banner was a relatively junior salesman in the London-based team at PM that was responsible for the marketing of derivatives to clients based in Germany, Austria and Switzerland." He had about a 40 41 42 44 See paragraph 7(2) above. As there stated, the risk of default for a rated CDO was, according to Fitch Ratings, 0.19% over 10 years. and Banner, paragraph 16 1/4} 20 44. 45. 46. 47. year's full--time experience in his role, although the negotiations with BVG were the first time that he had been involved in marketing a STCDO (his previous experience had largely been in interest--rate derivatives).45 Dr Meier had worked at BVG since 2001.46 He worked in the finance department, and had particular responsibility for BVG's portfolio of CBL transactions." He has a degree in mathematics as well as a master's degree and a doctorate in economics." During an initial introductory telephone call between Mr Banner and Dr Meier on 1 June 2006, Dr Meier explained that BVG (and in particular Dr Meier) had been approached by other banks with a proposal for restilicturing the exposures that BVG had under the Dr Meier's evidence is that he had previously spoken to, and received outline proposals from, two other banks, although those discussions had not led to the conclusion of any transactions." a Following the initial discussion on 1 June 2006, the first meeting between the parties took place on 21 June 2006, in Berlin." JPM were represented by Mr Banner and Mr O'Connor, and BVG by Dr Meier52 and his boss, Ms Angelika Mattstedt. At the meeting Mr Banner and Mr O'Connor introduced the concept behind the ICE Transaction by reference to a presentation document (written in German) which contained a general and high-level description of the proposed transaction (referred to in the statements of case as "the June 2006 As the June 2006 Presentation explainedFrom around March 2007, Dr Meier described himself in his e--mail signature as a "specialist infinancepproducrs": see, and {H/7llT} Banner, paragraph 21 Mr Banner's evidence is that Dr Meier introduced himself at the meeting as "head of structured finance" at BVG: Banner, paragraph 21 and 21 48. (1) The basic idea behind the ICE Transaction was that JPM would assume the credit risks to which BVG was exposed under the CBLS (this would be achieved by JPM and BVG concluding credit default swaps in relation to the entities to which BVG was exposed under the CBLS54) and, in return, BVG would assume credit risk on a tranche of a reference portfolio (with a credit rating of, for example, through the means of a STCDO. (2) Importantly for BVG, the proposed transaction would not have required any amendment to the CBL documentation; the substitution of BVG's credit exposures would be achieved (3) It was anticipated that the economics of the two limbs of the transaction would be such that the premium that BVG would receive for assuming the risk of the STCDO tranche would exceed the cost of the protection that BVG would obtain under the credit default swaps, allowing the balance to be paid to BVG as profit. Mr Banner's evidence is that at the meeting on 2] June 2006, Dr Meier said that he was familiar with the concept of a CD0 and that he did not wish to discuss this finther because, as he had already told Mr Banner on the telephone on 1 June 2006, he had previously discussed similar proposals with other banks (Dr Meier explained at the meeting that these were UBS and Deutsche Bank).55 Dr Meier accepts that he had an understanding of CDSs and CD05 from his previous discussions with UBS and Deutsche Bank, although he describes this as "high level".56 It is, however, common ground that at the meeting Dr Meier's principal concern was to ensure that the transaction that PM were proposing would not have any adverse effect on BVG's position under the Dr Meier explained that 54 55 LII 7 At this initial stage it was proposed that the transaction would relate only to HVB and/or HeLaBa, and that JPM would hedge BVG's exposures under the CBLS. Ultimately BVG entered into four credit default swaps as part of the ICE Transaction: in respect of HVB, LBB and two entities from the Credit Suisse group. The counterparty to these was LBBW rather than JPM. The reason for this is explained in paragraph 57 below. . BVG has disclosed a number of presentation documents from UBS and Deutsche Bank: see and Meier, paragraph 46 and 22 49. 50. 51. BVG would only proceed with the transaction if a representation could be obtained from the US Investors under BVG's CBLS (who, as explained above, were by now members of the JPMorgan group) that there would be no adverse impact on those transactions. At this early stage in the negotiations, it was anticipated that the transaction would be concluded in 10 to 12 weeks (page 8 of the June 2006 Presentation).58 In the event, however, as noted above, the transaction was not concluded for more than a year, until 19 July 2007 (although the negotiations were not always active during that time). In fact, little happened in the negotiations in the weeks following the meeting on 21 June 2006, beyond the sending by Mr Banner to Dr Meier of drafts of a term sheet summarising the proposed ICE Transaction. These term sheets were sent on 4 and 14 July 2006,59 and described the principal features of the proposed transaction as they then stood. In his covering e--mail of 14 July 2006,60 Mr Banner gave Dr Meier a preliminary indication of the size of the upfront amount which could be payable to BVG under the ICE Transaction if BVG assumed the risk of a rated tranche. Mr Banner also explained that if a AA rated tranche was taken instead, the upfi'ont amount would be approximately 50% higher. On 18 July 2006, Dr Meier telephoned Mr Banner to discuss the draft term sheet that he had received from Mr Banner on 14 July." They had a long discussion about the proposed transaction, in particular about the relationship between the size of the upfront payment that BVG could earn from it and the level of risk that BVG would assume in return. Mr Banner's e--mail of 14 July had said that the upfront payment, on the basis that BVG invested in a rated tranche, could be in the order of EUR6 million.62 Dr Meier said he was surprised that this figure was so high. He also showed that he had a clear understanding that a higher upfront payment 58 59 60 62 and and and {H/166a} and and 23 52. 53. 54. meant higher risk ("no risk nofimBanner), and in particular that the level of the upfront payment was determined by credit spreads, which were in turn a reflection of credit risk.63 Dr Meier explained that he had been doing his own calculations based on credit spreads, from which he had deduced that for so high an upfront payment to be possible, "there must be some kind of [ever or driving factor" in the structure of the transaction. Dr Meier and Mr Banner also discussed, on their call of 18 July 2006, the concept of subordination in the context of a STCDO tranche. Mr Banner gave Dr Meier a detailed explanation of how losses in the reference portfolio would erode the subordination from which a particular tranche benefited. He also explained the relationship between the level of the upfront payment that could be made under a STCDO transaction and the level of subordination from which an investor's tranche would benefit. Mr Banner explained that the higher the upfront payment, the lower the subordination would be, and that by accepting a lower upfront payment the investor could, in effect, "purchase fiirther subordination". Dr Meier said that he understood the "mechanism" involved in CD0 transactions. Dr Meier also explained during the call the importance of credit ratings to BVG's assessment of the proposed transaction. He said that he considered that BVG's decision--n1aking bodies would approve the conclusion of the transaction only if it had "the highest credit rating". Mr Banner sent Dr Meier a revised version of the term sheet for the proposed transaction on 28 July 2006.64 On this version the portfolio had been updated in accordance with Dr Meier's instructions, which he had communicated to Mr Banner. In particular, each of the 150 reference entities in the portfolio had a credit rating of A or better and (at this stage) it was proposed that JPM would hedge BVG against the default risks of the two Subscription Banks under the CBLS (HVB and LBB). 64 "The credit risk is what comes at a price. This is exactly what the spreads and 24 55. 56. 57. On 31 July 2006, Dr Meier telephoned Mr Banner to discuss various aspects of the proposed transaction.65 One of the matters they discussed was the capital structure of a CD0 (which is divided into senior, mezzanine and equity tranches). Mr Banner explained that a tranche rated would be considered as having the highest credit quality. Dr Meier asked about the amount of subordination from which a tranche would benefit. Mr Banner explained that this was determined by the rating agency, based in part on the perceived credit quality of the entities in the reference portfolio: the higher the credit rating of the reference entities, the lower the subordination cushion required to achieve a given rating for the tranche. JPM's initial proposal, as described in the June 2006 Presentation, was that JPMC would be BVG's counterparty for both the hedging of BVG's credit exposures under the CBLS and the STCDO under which BVG would sell credit protection on the STCDO tranche. However, in late July or early August 2006, it became necessary to change the structure of the transaction because of a concern that if JPM sold credit protection to BVG on the Subscription Banks, the beneficial tax treatment of the CBLs might be put at risk." This function therefore had to be performed by a different financial institution. In the event, following discussions between JPM and BVG, it was decided that LBBW would assume the position of seller of credit protection to BVG in respect of the Subscription Banks. On 10 August 2006, a further meeting took place between PM (l\/Ir Banner and Mr O'Connor) and BVG (Dr Meier and Ms Mattstedt).67 In response to a query that Dr Meier had raised about the proposed pricing of the transaction, on 16 August 2006, JPM arranged for him to have access to an online service provided by JPM called "M0rganMarkets".68 This service provided market information, research models and fiinctions such as pricing tools -- in particular, it contained a tool called Pricer" which was intended to enable a user to calculate the present value of 66 67 and Banner, paragraph 41 See Mr Banner's attendance note at 25 58the upfront amount which would be payable under such a transaction. 69 Dr Meier was given access to this programme to enable him to answer any pricing--related queries that he might have. In an e-mail of 16 August 2006, Mr Banner offered to go through the CDS Pricer tool on the telephone with Dr Meier.70 Dr Meier did not take up that offer, despite the fact that, as he now says in his witness statement," he did not understand how to use it. Mr Banner's e--mail of 16 August 2006 also attached an updated version of the June 2006 Presentation (referred to in the statements of case as "the Amended June 2006 the main amendments to which were to reflect the fact that it was no longer proposed that JPM would sell credit protection to BVG in respect of the Subscription Banks, and also to reflect the fact that it was now proposed that BVG would buy credit protection on LBB as well as HVB. At this time, it was anticipated that the protection seller would be a German bank named Kreditanstalt fur Wiederaufbau (referred to in the documents as although, as explained above, this role was in the event taken by LBBW (this decision was taken in late August or early September 2006). On 20 August 2006, Mr Banner sent Dr Meier a further version of the June 2006 Presentation ("the August 2006 to which a few minor amendments had been made since the version sent on 16 August 2006. This was followed, around two weeks later, by the first draft of the Confirmation in respect of the proposed JPM Swap, which was sent by Mr Banner to Dr Meier on 4 September 2006.74 Because the negotiations between the parties were still at a relatively early stage, and a number of the key terms of the JPM Swap were yet to be determined (such as the list of reference entities, the notional amount and the lower and upper boundaries of the tranche on which BVG would sell protection), 69 70 72 73 74 and and Meier, paragraph 95 and {E/l2}and and 26 61. 62. 63. the Confirmation contained blank spaces (or place holders in square brackets) for these terms. These terms could only be completed once Dr Meier had determined his requirements for the transaction whether the notional amount of the transaction would be flat or would amortise to match BVG's exposure under the CBLS), and the lower and upper boundaries could not be set until shortly before closing as these depended on market conditions at that time. In the next few weeks the negotiations progressed slowly: JPM sent Dr Meier a further draft of the Confirmation on 21 September 2006,75 and there were numerous discussions about the wording of the representations to be provid.ed to BVG by the US Investors concerning the ICE Transaction." This was an issue of great importance to Dr Meier instructed Freshfields Bruckhaus Deringer LLP ("Freshfields") to advise BVG on these matters. On 26 October 2006, Mr Banner and Dr Meier had a meeting in Berlin.77 During the course of this meeting, Dr Meier expressed his desire that the notional amounts under the JPM Swap should amortise in order to match BVG's exposure under the CBLS (rather than remaining flat for the whole term of the transaction). Dr Meier also explained that he wanted the ICE Transaction to restructure BVG's credit exposures to both the Subscription and the Assumption Banks under the until that point the discussions between the parties had related only to the Subscription Banks, namely HVB and LBB. The effect of adding the Assumption Banks to the transaction was significantly to increase the notional amount of the JPM and LBBW Swaps. During the meeting Dr Meier also said that he was preparing an internal memo for the purposes of explaining the ICE Transaction internally at BVG. In late October and early November 2006, the discussions between the parties continued to focus on the wording of the representations to be provided to BVG by the US Investors concerning the ICE Transaction. At around the same time, the 76 77 Banner, paragraphs 67-9 Banner, paragraph 83 1/22} 27 64. 65. negotiation of the ISDA documentation for the ICE Transaction was proceeding; this was handled on the PM side by Ms Donna Greenwood, who worked in PM's ISDA negotiation team. Ms Greenwood sent Dr Meier a first draft of the proposed Schedule to the ISDA Master Agreement on 13 October 2006.78 In addition, JPM's case, which is disputed by BVG, is that on or around 16 November 2006 JPM's standard terms and conditions were sent to BVG by On 20 November 2006, a telephone call took place between Mr Banner and Dr Meier.80 The discussion on that call focused primarily on the wording of the representations to be given by the US Investors, although Dr Meier also explained that BVG had been distracted by problems that had arisen in connection with other CBL transactions involving other US investors that were not part of the JPMorgan group. Dr Meier also explained that Mr Kruse (BVG's Finance Director) and BVG's Management Board had been due to discuss the ICE Transaction with Dr Sarrazin, the chairman of BVG's Supervisory Board, the previous week, but that these problems with other transactions had meant that this had not been possible. Dr Meier said that he had prepared a "handout" for the abortive meeting with Dr Sarrazin, which contained a high--level summary of the ICE Transaction, but that the handout had not been presented to Dr Sarrazin because, as noted, the ICE Transaction was not in the event discussed. Dr Meier also explained during the telephone call on 20 November 2006, that the problems that BVG had experienced with other transactions meant that the ICE Transaction would be delayed until at least the new year; it would not be possible for it to be considered by BVG's Supervisory Board until its first meeting of 2007, which would not be until April. Mr Banner commented that he needed to update his colleagues at JPM on the status of the transaction, especially in view of the substantial delay to its execution that Dr Meier had just announced. In response, Dr Meier then offered to send Mr Banner "s0mez'hz'ng in writing" on the status of the ICE Transaction at BVG. Mr Banner said that that was not necessary, but Dr 79 and This is explained in the witness statement of Rebecca Smith, filed on behalf of JPM and 28 66. 67. 68. Meier nevertheless offered to send Mr Banner the handout that had been prepared for the meeting with Dr Sarrazin. Mr Banner accepted this offer. Dr Meier did not indicate that he expected Mr Banner to read and comment on the handout; on the contrary, his offer was made simply to provide Mr Banner with an update on the status of the ICE Transaction in BVG's internal decision--making machinery. Later on 20 November 2006, Dr Meier sent Mr Banner an e--mail which enclosed detailed comments from Freshfields regarding the representation to be given by the US Investors." At the bottom of his e--mail, Dr Meier wrote that he had attached his "handout about the transaction". The handout was a PowerPoint presentation of 11 slides which contained a summary of the proposed ICE Transaction ("the 1 November 2006 BVG's case is that the 1 November 2006 Presentation contained a description of the ICE Transaction as it was then understood by Dr Meier (whose understanding is to be attributed to BVG), and that this understanding was incorrect in three pa1ticularrespects.83 It is further alleged by BVG that it should be inferred that Mr Banner read the 1 November 2006 Presentation and, further, that he understood that Dr Meier had made these mistakes, and that by not correcting them he should be taken as having impliedly represented that he agreed with the statements made in the presentation. These allegations, all of which are denied, will be addressed below, in the context of the defences and counterclaims advanced by BVG. With the execution of the ICE Transaction now delayed until at least the spring of 2007, and Dr Meier occupied on other projects at BVG (as he told Mr Banner on 19 December 2006),84 the negotiations between the parties slowed down. In December 2006, however, the negotiations concerning the representations from the US Investors were substantially completed, and on 13 December 2006, FNBC and 81 82 84 and and ADC, paragraphl 04 68} and 29 69. 70. 71. First Chicago issued representations consenting to the purchase by BVG of credit protection on the Subscription Banks from On ll January 2007, a meeting took place in Berlin attended by Mr Banner, Dr Meier and Ms Mattstedt,86 as well as by Mr Frank Haering, to whom l\/Ir Banner reported at JPM. Mr Banner recalls this meeting as a fairly general discussion about the relationship between JPM and BVG, which gave Mr Haering the opportunity to meet Dr Meier and Ms Mattstedt for the first time. There was also a discussion about some aspects of the ICE Transaction, including whether BVG intended to engage a portfolio manager to manage the JPM Swap. Mr Banner's and Mr Haering's recollection" is that Dr Meier's clear view, having considered the matter, was that this was not necessary because of the high credit quality of the entities to be selected for the reference portfolio (due to his requirement that each name in the portfolio would have a rating of A-- or better). a On 22 January 2007, Mr Banner and Dr Meier had a discussion on the telephone These included the representation letters that had been sent by the US Investors in December 2006, about a number of matters relating to the ICE Transaction.83 and the notional amounts of the proposed JPM Swap and LBBW Swaps (this was in the context of the proposal to incorporate a restructuring of BVG's exposures to the Assumption Banks into the ICE Transaction). There was also, on the call of 22 January 2007, a discussion about the credit events applicable under standard ISDA credit derivatives documentation, which it was anticipated would be used to document both the JPM Swap and the LBBW Swaps. Mr Banner gave Dr Meier a description of the calculation of the "recovery rate" that would determine the amount payable by a protection seller under a CDS contract in the event of a default of the reference entity. Dr Meier asked Mr Banner if he had a summary of the different credit events that he could include in his submissions to the Supervisory Board. Mr Banner explained that he had a 86 87 Banner, paragraph 131 {C/l/34} and and 30 72. 73. 74. presentation that contained this information that he could send to Dr Meier. Mr Banner also explained that the presentation included a good description of how the Settlement mechanism under a credit derivative transaction worked. Meier said that he would not describe the settlement mechanism in his submissions to the Supervisory Board, as this was '"techm'cal", but said that he would be pleased to receive a copy of the presentation that Mr Banner had mentioned.89 Later the same day (22 January 2007), Mr Banner sent Dr Meier the presentation which he had mentioned on the call, which was entitled "Introduction to Credit Derivatives" ("the January 2007 The January 2007 Presentation contained a detailed description of credit derivatives and their application, including (at slide 46) an explanation of how a credit protection seller could use tranched credit products to create a customised risk/return pr0file.9l Also on 22 January 2007, FNBC and First flChicago issued representations consenting to BVG's conclusion of the JPM Swap.92 These representations were issued after the representations dealing with the LBBW Swaps (referred to in paragraph 68 above) in order to mitigate any potential negative tax implications on the CBLS. On 31 January 2007, Dr Meier e--mailed Mr Banner to thank him for the January 2007 Presentation, which he indicated would be helpful for him when preparing the documents for BVG's institutional bodies.93 Dr Meier said that it was anticipated that the ICE Transaction would be considered by BVG's Supervisory Board at its meeting on 25 April 2007 (as in fact happened: see paragraph 86 below). Dr Meier indicated in his e--mail that he had prepared a calculation model to show the development of the outstanding amounts under the CBLS over time. Dr Meier reiterated that it was important that the protection under the ICE 75. 76. 77. Transaction be linked as closely as possible with the outstanding amounts under the CBLS. On 6 February 2007, Dr Meier telephoned Mr Banner to discuss, among other 94 Dr Meier indicated that things, default probabilities under the ICE Transaction. he would like to include information about default probabilities in his presentation for the Management Board. Dr Meier showed that he was aware that there was a possibility of the Assumption Banks, the Subscription Banks and LBBW all defaulting and the "portfolio with the 150 companies becoming distressed". Mr Banner offered to provide Dr Meier with some further information on the probability of default for a tranche. Although Dr Meier accepted the offer, he indicated that he would not like to analyse these issues in depth for the puipose of his presentation for the Management Board, as his interest was to show that default was a "theoretical possibility" but it was not of practical relevance given the high rating. Later on 6 February 2007, Mr Banner sent Dr Meier an e--mail that attached a slide containing the default probabilities that they had discussed.95 He also sent Dr Meier a publication from concerning rating transition data.96 In a further call two days later, on 8 February 2007,97 Mr Banner asked Dr Meier whether he was happy with the information that Mr Banner had sent, and whether he required any further information. Dr Meier answered that he did not. Dr Meier also asked about the pricing of the transaction, to which Mr Banner responded that it was not possible to provide an update on the pricing as it would be necessary to model it again in View of the new payment schedules for the CBLS that Dr Meier had recently provided. On 8 March 2007, Mr Banner provided Dr Meier, by e--mail, with an update on the pricing of the ICE Transaction and the likely upfront amount that could 78. achieved based on the market conditions at that time.98 Mr Banner explained that JPM could pay a net upfront amount of $5.1 million (after deduction of the hedging costs under the LBBW Swaps). This figure was based on Dr Meier's preferred structure, where the notional amounts under the JPM Swap amortised to match BVG's exposure under the "debt" and "equity" side ofthe CBLS. Two weeks later, on 21 March 2007, Mr Banner and Dr Meier had a conversation on the telephone in which they discussed, among other things, the size of the upfront amount that could be paid to BVG under the ICE Transaction.99 Dr Meier mentioned the $5.1 million figure that Mr Banner had given in his e--mail of 8 March 2007, which equated to around EUR3.5 million. Dr Meier was disappointed with this figure, commenting that it was "not very much, but that's the way it is". Mr Banner reminded Dr Meier that the reason for this was BVG's insistence that none of the entities in the reference portfolio should have a rating below A--. Dr Meier asked Mr Banner whether there was anything that could be done to increase the amount that BVG would earn under the ICE Transaction, without discarding this "premise". Mr Banner replied that one way of achieving this would be to include other secuiities, such as CD03 or asset--backed securities, in the reference portfolio as well as standard single--name credit default swapsloo Mr Banner explained that if BVG entered into a CD0 squared, "the leverage in the structure would farther increase because you will have a CD0 on a Dr Meier said that he would consider this proposal; he was particularly interested because, he explained, he had said in his submission to BVG's institutional bodies that the ICE Transaction would earn BVG approximately EUR5 million. He was therefore keen to explore ways of increasing the size of the upfront payment so that it reached this level. 99 100 and and Where the reference portfolio for a CD0 contains CDOS, this is known as a squared". This is a two--tier structure, with an "outer that contains a number of "inner Once the subordination on the inner CD03 is exhausted and losses begin to accrue on the inner CD03, this in turn leads to the subordination on the outer CDO being eroded. 33 79. 80. (5) 81. 82. 83. The next week, on 29 March 2007, Mr Banner sent Dr Meier a chart showing the development of the iTraxx indexlm since August 2006.102 Mr Banner explained to Dr Meier that the spreads had widened since JPM's last pricing update (earlier in March), which would allow an additional $300,000 to be generated for the upfront payment. Mr Banner referred to the telephone call with Dr Meier on 21 March 2007, and indicated that JPM were still investigating ways in which the upfront amount under the ICE Transaction could be further increased. In a telephone conversation later that day,l03 Dr Meier said that he had amended the Supervisory Board submission so that the anticipated upfront payment was now stated to be $5 million rather than EUR5 million. This meant that the stated target upfront amount would be considerably reduced; Dr Meier indicated that the change would be beneficial for political reasons as it would be likely that the final upfront amount would exceed that stated in the board submission. Approval of the ICE Transaction by BVG's decision-making bodies BVG is a public law institution founded under German law. It was established, for relevant purposes, by a piece of legislation known as the Berliner Betriebegesetz, or Berlin Service Company Law Under the BSCL, BVG's decision--making bodies are (in ascending order of seniority) (1). its Management Board, (2) its Supervisory Board and (3) the Guarantors' Assembly. Only the first two of these bodies, each of which authorised the conclusion of the ICE Transaction, are relevant to the present dispute. The Management Board apparently consisted of three people, and it was (as its name suggests) responsible for the day-to--day management of BVG. At the time material to these proceedings the members of the Management Board were Mr 102 103 104 This is an index that reflects a number of benchmark indices in the credit derivatives market. and and and 34 84. 85. 86. 87. Sturmowski (its chairman), Mr Lothar Zweiniger and Mr Thomas Necker.'05 Perhaps surprisingly, none of those individuals is a witness in these proceedings]06 The role of the Supervisory Board, which consisted of 18 people, was in broad terms to oversee the Management Board. Certain transactions, which were specified in BVG's articles of association, also required the Supervisory Board's approval before they could be concluded. BVG's case, which is not challenged by JPM, is that under the BSCL and its articles of association, the conclusion of the ICE Transaction required the approval of both the Management Board and the Supervisory Board -- in the latter case because the ICE Transaction was "particularly significant" within the meaning of article of BVG's articlesm At all events, it is common ground that the conclusion of the ICE Transaction was approved by BVG's Management Board on 29 March 2007108 and by the Supervisory Board on 25 April 2007.109 The conclusion of the ICE Transaction had, apparently, been due to be considered at a meeting of the Management Board on 27 March 2007.1") Dr Meier had prepared a formal submission to the Management Board, and a PowerPoint presentation describing the transaction,'" each dated 21 March 2007 (neither of these documents was shown to JPM at the time). It seems from the agenda for the 105 106 107 108 109 ll] and As explained above, BVG said in its case management information sheet dated 29 June 2012 {B/13b} that it intended to call Mr Sturmowski as a witness, but in the event, and for reasons that have never been explained, no witness statement was ever served from him. As noted above, this is more than usually significant because of the wholesale deletion of his electronic documents described in paragraph 23 above. It has also never been explained why the other members of the Management Board have not been called as witnesses. It is understood that at least one of them (Mr Lothar Zweiniger) is still an employee of BVG. The articles are at and See generally paragraphs 15-25 and 107 of the ADC and and Falk, paragraph 34 and 35 88. 89. 90. H2 that 15 minutes were allotted to the discussion of Management Board meeting the ICE Transaction. It appears from the Management Board minutes disclosed by '3 that at the meeting on 27 March 2007 the issue of the ICE Transaction was deferred until the next meeting on 3 April 2007, but that in the event the members of the Management Board approved the conclusion of the ICE Transaction, and referred the matter to the Supervisory Board for its consideration, following a telephone call with Dr Meier on 29 March 2007. Surprisingly, there is no evidence at all of what was said during this important telephone conversation: there is no documentary record, and the only party to the call who has made a witness statement (namely Dr Meier) says that he cannot recall."4 The Court therefore has no direct evidence whatever as to the matters on which the BVG Management Board in fact relied in approving the conclusion of the ICE Transaction. On 3 April 2007, Dr Meier sent Mr Banner an e--mail with comments on the draft ISDA Schedule and the draft JPM Swap Confirmation that he had reviewed." His e--mail contained a number of detailed observations (for example, regarding the governing law and particular ISDA definitions). Dr Meier asked that JPM clarify the issues with its legal department and then send him a complete set of all of the current drafts so that he could send them on to BVG's lawyers, Freshfields, for them to review. Dr Meier was sent a finther draft of the Schedule, which took account of his comments, by Dr Bjorn Reinhardt (one of Mr Banner's colleagues), the following day. 1 16 In accordance with the Management Board's resolution to refer the ICE Transaction to BVG's Supervisory Board, Dr Meier prepared a formal submission to the Supervisory Board (dated 11 April which included a draft and and Meier, paragraph 193 16/521} and and and 36 91. 92. 93. resolution authorising the conclusion of the transaction, and a further PowerPoint presentation that was substantially the same as the one prepared for the Management Board (dated 25 April Again, neither of these documents was shown to JPM at the time. BVG's Supervisory Board considered the ICE Transaction at its meeting on 25 April 2007. The conclusion of the transaction was approved, and the Supervisory Board made a resolution"9 in materially the same terms as the draft that had been included by Dr Meier in his submission dated 11 April 2007. It was also stipulated in the resolution that the execution of the transaction was to be conditional on BVG obtaining a legal opinion that the ICE Transaction "would not lead to any unfavourable claims from JPMOrgari under the existing US leases, that the contracts corresponded to internationally accepted standards and that the legal position of VG was appropriately secured in this respect". BVG has disclosed copies of the minutes of the Supervisory Board meetingm and an audio recording of the meeting which has been transcribedm (none of these documents were provided to JPM at the time). These are somewhat curious documents, because it appears that the Supervisory Board meeting considered the ICE Transaction for a total of four minutes, during which the transaction was described by Mr Sturmowski in a way that can only be described as incoherent; and both Dr Sarrazin (the chairman of the Supervisory Board) and Mr Sturmowski indicated that they did not understand the transaction. Nevertheless, the Supervisory Board passed the resolution authorising its execution. As with the BVG Management Board, therefore, there are serious issues arising in relation to the evidence before the Court as to the matters on which the BVG Supervisory Board in fact relied in approving the conclusion of the ICE Transaction(6) 94. 95. Further negotiations, and the involvement of Clifford Chance On 20 April 2007, Mr Banner sent a revised draft of the JPM Swap Confirmation to Dr Meier for his review.'22 As with the earlier drafts that had been sent on 4 and 21 September 2006,93 this draft also contained blank spaces for many of the key terms of the proposed transaction (such as the list of reference entities and the lower and upper boundaries of the tranche on which BVG would sell credit protection). Although the negotiations had by this time been going on for several months, these details had not yet been determined. As mentioned above, BVG's Supervisory Board had required that a legal opinion be obtained in respect of the ICE Transaction before it could be entered into. BVG apparently approached Freshfields, who had already advised BVG in relation to the representation letters from the US Investors (see paragraph 61 above), in this respect, but felt that the quote they received from Freshfields was too high.]24 When Dr Meier told Mr Banner this in late April 2007, Mr Banner offered to obtain indicative quotations from other law firms with which JPM had existing relationships. Dr Meier accepted this invitation, and in the event, JPM approached Clifford Chance to obtain the opinion that BVG required. The first contact between JPM and Clifford Chance in relation to BVG was on or around 27 April 2007There is an issue between BVG and Clifford Chance, in the additional claim, as to whether Clifford Chance's client was JPM or BVG. Although the resolution of that issue is not strictly necessary for the purposes of the claims and counterclaims between JPM and BVG, JPM's position had initially been that BVG was Clifford Chance's client (see response 19 in JPM's Further Information dated 27 July 2012). On 16 December 2013, JPM amended their Further Information dated 27 July 2012 to allege that JPM were Clifford Chance's client, albeit that it was envisaged that Clifford Chance's opinion would be addressed to and/or be capable of being relied on by BVG {A/6a/371.1} . As explained in Linklaters' letter of 5 December 2013 {l/795/1657} the reason for the amendment was that the circumstances surrounding the instruction of Clifford Chance had been the subject of fiirther investigation since the Further Information was served in July 2012. 38 96. 97. 98. On 30 April 2007, there was a telephone conversation between Dr Meier and Banner, in which they discussed (among other things) the CD0 squared idea that had first been mentioned by Mr Banner on 21 March (see paragraph 78 Dr Meier explained that his preference at that time was not to incorporate CDO squared into the JPM Swap because he wanted to keep the transaction "simple". Dr Meier said that he realised that this would result in a lower upfront payment for BVG, but he equated that reduction with a corresponding decrease in risk. In order' to come to a final decision, however, he asked Mr Banner for a comparison between a reference portfolio containing 150 companies and a reference portfolio containing 20% CD03 and 120 companies. Dr Meier said he would like to comparethe upfront payments and the rating distributions that would be involved in these two different structures. Mr Banner provided the information requested by Dr Meier on I May 2007. He explained in his covering e--mai1m that, based on then--current market conditions, BVG could earn approximately $5.125 million with a standard STCDO, but that this would increase by million if the reference portfolio were composed of 20% CDOS. Mr Banner also explained that the CD0 squared Variant would mean that there was higher leverage in the structure, although this leverage would only lead to a loss for BVG if the subordination (which would be greater in a CD0 squared) were exhausted. As part of JPM's internal transaction approval process, the ICE Transaction required the approval of JPM's Reputational Risk Committee The RRC approved the transaction on 1 May 2007 .128 The RRC was chaired by Mr Andrew Cox, from JPM's credit department; Mr Cox will be giving evidence at the trial. In addition, internal approval for the ICE Transaction was given by JPM's credit department on 1 June 2007.129 126 127 128 129 and and 1} 1} Bishop, paragraph 18 39 99. 100. 101. On 2 May 2007, Dr Meier e-mailed Mr Banner to query the indicative pricing of the reference portfolio and the credit rating distribution that had been provided by Mr Banner the previous day.'30 Dr Meier had noticed that the proposed credit rating distribution was worse than that which had been discussed previously. He asked for an explanation why the upfront amount was not substantially higher, especially in circumstances where (as Dr Meier noted) credit spreads had recently widened. Mr Banner and Dr Meier discussed these and other issues on the telephone later the same day. 13 I During that conversation, Dr Meier explained that credit rating was his most important criterion for the selection of reference entities. He also made it clear that he understood the relationship between the size of the upfront amount that could be paid to BVG under the ICE Transaction and the risks involved in entering into the transaction: in Dr Meier's own words, "there is nothing for free, theiie is no flee lunch". Dr Meier said that he was still considering the CD0 squared idea; he said that he understood that this would involve "higher leverage" than under a regular STCDO. Dr Meier also asked about the level of subordination that was "priced in" to the JPM Swap. Mr Banner explained that the level of subordination would be set by the rating agency, as they had requirements for how much subordination was required for a tranche to receive an overall rating of Later during the same call, Dr Meier requested information on the default probabilities for a CD0 squared structure as compared with a "plain" reference portfolio without a CD0 squared component. The discussion then moved onto pricing. Mr-Banner offered to send Dr Meier a pricing model in order to provide BVG with "absolute transparency" on pricing. Dr Meier declined this offer, saying that he did not want "too much insight" on pricing, or he might otherwise be faced with questions from "other people", presumably at BVG.132 130 131 132 and and and 40 102. 103. 104. On 9 May 2007, Mr Banner sent Dr Meier a set of slides containing filrther information on CD0 squared, to assist Dr Meier in deciding whether the JPM Swap should incoiporate a partial CDO squared st1ucture.!33 Mr Banner's covering e--mail]34 explicitly compared the leverage in a CD0 squared structure to the leverage in a classic CDO: it explained that a CD0 squared structure would have a larger upfront amount and higher subordination, but that this would be paid for with higher leverage, meaning that once the subordination buffer was exhausted, the tranche would be impaired more quickly. The slides attached to Mr Banner's e--mail contained a comparison between a regular CD0 and a CD0 squared structure.]35 The slides, like Mr Banner's covering e--mail, explained that a CD0 squared structure would have higher subordination and would therefore be able to sustain a greater number of defaults among the entities in the reference portfolio before losses were incurred by the investor, but that a CD0 squared structure also had "higher leverage", meaning that losses would be incurred more quickly if further defaults occurred once the subordination had been exhausted. The slides contained two graphical representations of the loss profiles of both a CD0 and a CD0 squared. The graphs showed that no loss would be incurred by the investor for the first defaults (as the subordination was eroded), but that once the subordination was exhausted, losses would be incurred until all of the tranche notional was lost. The graphs also showed that once this had happened, no further losses would be sustained by the investor even if more defaults occurred in the reference portfolio (and therefore showed that a total loss can be incurred without the default of all of the reference entities). In his witness statement, Mr Banner refers to the slides as "the Hockey Stick Presentation" because the graphical representation of the loss profile under a CD0 is shaped like a hockey stick, in that it begins horizontally and then rises in a steep vertical105. 106. 107. It is difficult to see how anyone considering these slides with care could have thought (as BVG alleges that it thought) that losses arising under a CD0 would occur in a pro--rata way such that total loss could only be incurred if there was a default with regard to each entity in the underlying reference portfolio. Similarly, given that the presentation so clearly and expressly indicated that the contrary was the position, it is, with respect, difficult to see how it can sensibly be argued that Mr Banner, who had sent this to Dr Meier, could have harboured an intention deliberately to mislead Dr Meier (or BVG) into thinking that a total loss in relation to a CD0 could only be incurred if each reference entity suffered a default. A week later, on 16 May 2007, Dr Meier informed Mr Bannerin an e-mail that he did not wish to pursue the CD0 squared idea, because BVG's Supervisory Board resolution (passed on 25 April 2007) had been based on a portfolio containing 150 reference entities with a minimum rating of A. 136 Dr Meier also raised a number of detailed points on the draft documentation for the proposed JPM Swap and LBBW Swaps. On 22 May 2007, Mr Banner sent Dr Meier a proposal for the composition of the reference portfolio for the JPM Swapm This was the first proposal to contain the actual names of particular reference entities -- previous discussions had concerned more general matters such as BVG's requirement that the portfolio should contain only names rated A-- or higher. Mr Banner asked Dr Meier to confirm if he was happy with the proposal or if he wanted to substitute any names. During a telephone conversation with Mr Banner later the same day, Dr Meier said that he had reviewed the portfolio and was principally concerned with the reference 138 He also entities' credit ratings rather than the identity of individual names. explained that he would not be in Berlin from 1 June onwards (as he would be on a 2-month sabbatical in the United States108. 109. 110. Later on 22 May 2007, Mr Banner sent Dr Meier a revised draft of the JPM Swap confirmation.'39 The draft had been updated to refer to a number of "legs", with the notional amounts set out in the "tranche terms" for each leg. The tranche terms at the end of the draft contained blank spaces, reflecting the fact that these terms had not yet been determined. Mr Banner sent Dr Meier a further draft of the confirmation, as well as draft confirmations in respect of the LBBW Swaps, on 29 May 2007.140 On the same day, Dr Meier raised a number of specific questions about six names in the provisional list of reference entities which had not been rated by Mr Banner responded to these queries by e--mail the next day, on 30 May 2007,14?' and also explained to Dr Meier that the iTraxx index had fallen by 3 basis points since early May and that this had reduced the net present value which could be generated by the ICE Transaction by approximately $1.5 million. Mr Banner referred to the leverage in the structure and explained that the leverage was the reason why a relatively small change in the spread could have such a large impact on the net present value. Mr Banner made a number of suggestions to increase the upfront payment, such as adjusting the rating distribution of the portfolio to include names that paid a higher credit spread and reducing the number of reference entities in the portfolio, allowing less efficient names to be removed. The following day, 31 May 2007, Dr Meier said in a telephone call with Mr Banner that the level of upfront payment mentioned by Mr Banner in his e--mail of 29 May 2007 was "too low", because his approval from BVG's Supervisory Board was for a transaction that would earn BVG at least $5 million. 143 Meier and Mr Banner also discussed the relationship between credit spreads and market- perceived probability of default: Dr Meier expressed the View that wider spreads indicated that "the risk of default [is] higher". Dr Meier indicated that BVG would 139 140 141 142 I43 and and and and and 43 112. 113. M4. wait to conclude the transaction until the upfront amount that could be generated from it had increased to at least $5 million, which he recognised was dependent on the widening of credit spreads. Dr Meier confirmed this in an e--mail to Mr Banner later on 31 May 2007.144 On 1 June 2007, Dr Meier travelled to the United States, although while he was there he remained BVG's principal point ofcontact in relation to the negotiation of the ICE Transaction. He remained in regular e--mail contact with his colleagues at BVG and with Mr Banner. In early June 2007, Mr Banner and Dr Meier had a further exchange about the composition of the reference portfolio of the JPM Swap. Mr Banner had provided Dr Meier with a further proposal, which allowed a higher upfront payment to BVG, on 31 May 2007,"? and Dr Meier confirmed on 11 June 2007 that he was happy with the proposal.]46 Dr Meier also asked Mr Banner for a further pricing update. Mr Banner provided this on 12 June 2007; as he said in his e--mail to Dr Meier of that date, the upfront amount that could be paid to BVG at that time was $4.4 millionm Mr Banner provided Dr Meier with a fuither pricing update on 22 June 2007.148 Due to the widening of the credit spreads in the market, BVG's target upfront payment of $5 million had almost been reached. Dr Meier replied the next day, saying that he was pleased that the target amount had been reached so quickly. 149 On 2 July 2007, Mr Banner sent Dr Meier an update on the pricing of the transaction.]50 The indicative pricing at that stage showed that $5.12 million could i be generated from the transaction, after taking into account the cost of the LBBW Swaps. Dr Meier replied later the same day, expressing his approval at the pricing 144 I45 I46 147 148 149 150 and and and and and and and 44 115. 116. 117. 118. and explaining that he would "not mind if the spreads widened further", as this would allow a higher upfront payment to be generated from the transaction.l5' Dr Meier requested a further pricing update the next day, 3 July 2007. '52 On 4 July 2007, Mr Banner sent Dr Meier revised drafts of the ICE Transaction documentation, including the confirmations for the JPM Swap and the LBBW Swaps. 153 This draft of the JPM Swap confirmation incorporated, for the first time, the tranche terms including the proposed notional amounts and lower and upper boundaries of the JPM Swap. The exact lower and upper boundaries had been determined by JPM's structuring team in conjunction with in light of the current market conditions and Dr Meier's requirement to receive a rating on the tranche (with each reference entity rated .A-- or higher) and a target upfront payment of $5 million. Later on 4 July 2007, Mr Banner provided Dr Meier with an update on the pricing of the transaction as Dr Meier had requested the previous day.154 On 6 July 2007, Dr Meier informed Mr Banner that he could not open the drafts of the transaction documents that Mr Banner had sent on 4 July. 155 Dr Meier asked if Mr Banner could re--send the documents in a different format, which Mr Banner did the same day, 6 July.]56 Dr Meier replied later the same day to say that he could now read the documents"? Again, it is somewhat difficult to understand how anyone, exercising any care in reading the draft confirmation for the JPM Swap, could have failed to appreciate (as BVG claims to have done) the level of subordination that was applicable to the transaction, or could have thought (as BVG claims to have thought) that the loss profile under the transaction was pro-rated. Similarly, given that the draft 151 152 154 155 157 and and and and and and and 45 119. 120. 121. confirmation that Mr Banner sent to Dr Meier on 4 and 6 July 2007 clearly set out the tranche terms, from which BVG could see the precise level of subordination and that the loss profile was not pro--rated, it is, with respect, difficult to see how it can sensibly be argued that Mr Banner, or anyone else at JPM, could have harboured an intention deliberately to mislead Dr Meier (or BVG) into an understanding of the transaction that was inconsistent with the express terms of the contractual documentation. On 11 July 2007, a meeting took place in Berlin between Mr Banner, Dr Reinhardt, Mr Kruse and Ms Mattstedt, at which the timetable and procedure for closing the - - 153 transaction were discussed. On 13 July 2007, Mr Banner sent Dr Meier (who was still in the United States) an update following the meeting in Berlin and informed him that two of the names in the reference portfolio had been downgraded to Mr Banner proposed a number of changes to the portfolio to ensure that it continued to meet Dr Meier's requirement that each of the names in it be rated A- or better. Mr Banner also sent Dr Meier a revised draft of the PM Swap confirmation which was now in substantially final form. This draft had the list of reference entities inserted for the first time (which had already been agreed, subject to the changes that Mr Banner proposed in his e--mail). Dr Meier approved Mr Banner's proposed substitutions on 15 July 2007.160 On 16 July 2007, Mr Banner provided Dr Meier with an updated indicative pricing for the ICE Transaction of $6.1 million.161 Mr Banner and Ms Mattstedt also discussed pricing and current market conditions on 18 July 2007.162 Also on 18 July 2007, Mr Banner sent Dr Meier and Ms Mattstedt the final draft confirmations for the JPM Swap and LBBW Swaps.]63 Mr Banner noted one further change to Banner, paragraph 227 Reinhardt, paragraph 18 118the reference portfolio because one of the reference entities in the previous draft had been downgraded to and had therefore been replaced. Mr Banner informed Dr Meier that the indicative upfront amount that BVG could earn from the transaction was just over $6.4 million. Mr Banner had several telephone discussions and e-mail exchanges with Ms Mattstedt on 19 July 2007 during which Mr Banner kept her updated on pricing 64 The ICE Transaction was then concluded over the telephone on the afternoon of 19 July 2007.165 The parties to the trade call were Mr Banner, Dr Meier, Ms Mattstedt and Ms Ines Ebert (one of Ms Mattstedt's colleagues at Under the ICE Transaction as concluded, BVG received $6,093,150. This was made up of $7,856,537 paid to BVG under the JPM Swap, less $1,763,387 paid by BVG under the LBBW Swaps. The net sum due to BVG was converted into euros before payment, and amounted to On 16 August 2007, issued their rating letter in respect of the JPM Swap, and Towards the end of August 2007, the global credit markets began to experience volatility, as what has since come to be known as the "credit crunch" began to take hold. In particular, the credit spreads of some of the entities in the JPM Swap Although the transaction closed on 19 July 2007, its "Effective Date" was 22 August 2007. (7) Closing of the ICE Transaction 122. movements and market conditions.' 123. 124. 125. assigned it a rating of 1 67 (8) Market volatility post--closing 126127. 128. (9) 129. 130. 131. reference portfolio widened significantly, which meant that the mark--to--market value of the PM Swap deteriorated substantially from BVG's perspective. In view of these developments, JPM and BVG began to discuss the possibility of restructuring the JPM Swap, and a meeting took place in Berlin on 22 August 2007 to discuss the various options open to BVG, such as reweighting the reference portfolio to reduce the weighting of riskier names. 168 By September 2007, however, the markets had calmed down again and the credit spreads had narrowed. The possibility of restructuring the JPM Swap was therefore for the time being not pursued. JPM continued to keep BVG informed of market developments and their impact on the value of the PM Swap. Events in February 2008 On 31 January 2008, Banner and Dr Reinhardt met Dr Meier and Ms Mattstedt - in Berlin.l69 They discussed the current state of the credit markets, which had become unsettled again, and the market value of the JPM Swap, which was at that time expected to have fallen to around 50% of the notional amount. One of the other issues discussed was the way in which the JPM Swap would be mentioned in BVG's accounts for the year ended 31 December 2007. On 11 February 2008, Mr Banner sent Dr Meier some information on how mark- to--market values were calculated, and how losses were calculated under the JPM Swap.]70 Dr Meier had requested this information from Mr Banner, seemingly as a result of the work that BVG's auditors, Ernst Young, were doing in relation to the accounts. On 12 February 2008, Dr Meier telephoned Mr Banner to ask him about the loss 171 profile under the JPM Swap. Mr Banner explained this to him over the phone, describing how the recovery rate would be used to calculate the loss in the 168 169 170 17] Banner, paragraph 257 Reinhardt, paragraphs 28-33 120} Banner, paragraph 271 Reinhardt, paragraph 46 124} and Banner, paragraph 275 -48 132. 133. 134. 135. portfolio, and that once the lower boundary of the tranche was reached, the loss increased on a straight--line basis until the upper boundary was reached and the entire notional amount of the tranche was lost. This, of course, reflected the description of how losses would be incurred that was shown in the Hockey Stick Presentation which Mr Banner had sent Dr Meier on 9 May 2007. It also, of course, reflected the terms of the PM Swap, including the draft confirmation with which Dr Meier had (on 4 and 6 July 2007) been provided for his review and consideration prior to the closing of the transaction. Be that as it may, Dr Meier responded that he had misunderstood how the loss profile worked. He said that he had not appreciated how the upper boundary of the tranche operated and that the entire notional amount could be lost in this manner. Later the same day, 12 February 2008, Dr Meier sent Mr Banner an e--mail in I which he said that he was 'not sure" if he had correctly understood the default mechanism under the JPM Swap, and asked Mr Banner to provide him with worked examples showing the effect under the transaction of different numbers of defaults, assuming a recovery rate of Dr Meier did not refer to the telephone conversation that he had had earlier in the day with Mr Banner. In the weeks that followed Dr Meier's claim that he had misunderstood the loss profile of the JPM Swap, a number of calls and meetings took place between JPM and BVG. - At a meeting in Berlin on 19 February 2008, JPM presented a number of re- structuring proposals to reduce the risk of payments becoming due from BVG under the JPM Swapm JPM also recommended that BVG appoint a portfolio manager to manage the composition of the reference portfolio with a View to reducing the risks of the transaction. At this time BVG's main concern appeared to be that the ICE Transaction may not have fallen within the scope of the 172 173 and Banner, paragraph 285 Reinhardt, paragraphs 62-65 128} . The meeting was attended by Mr Haering, Mr Theuerkauf, Mr Banner, Mr Wiesmann and Dr Reinhardt for and by Mr Kruse, Mr Unger, Mr Gutheit, Dr Meier and Ms Mattstedt for BVG. 49 (10) 136. authorisation provided by the Supervisory Board resolution made on 25 April 2007. Further discussions concerning restructuring BVG did not take up any of the suggestions made at the meeting on 19 February 2008. In the weeks and months that followed, however, JPM continued to suggest to BVG that it restructure the JPM Swap and/or that it appoint a portfolio manager to monitor the transaction and manage the risks under it. For example: (1) (2) (3) On 13 March 2008, Mr Theuerkauf and Mr Banner wrotem to Mr Unger, the Head of the Division Accounting and Finance of BVG.175 Their letter explained that had put 14 of the long legs in the JPM Swap on "negative watch". The letter again recommended that BVG take action to protect its position under the JPM Swap, through restructuring or the appointment of a portfolio manager. On 7 April 2008, Mr Wiesmann, a Frankfu1t--based Managing Director at JPM, spoke to Mr Kruse, and reiterated that JPM were still willing to help BVG to restructure the JPM Swap.]76 Mr Kruse said that he would mention the idea again to BVG's finance team, but again the offer was not taken up. At a meeting on 16 July 2008, BVG agreed, on JPM's strong recommendation, that a portfolio manager should be appointedm JPM then spent considerable time and effort identifying suitable portfolio managers and arranging meetings between them and BVG (which took place in July and August 2008). BVG did not ultimately appoint any of the numerous portfolio managers to which it was introduced by PM. BVG's resistance to the idea of appointing a portfolio manager is not easy to understand, but it 174 176 177 and Wiesmann, paragraph 27 Reinhardt, paragraph 69 129} 50 (11) 137. 138. 139. 140. 141. appears that BVG was again unwilling to incu.r the cost that this would have - 7 8 The occurrence of credit events under the JPM Swap In September 2008, as is now well known, the global economy began to suffer a catastrophic and almost unprecedented deterioration. What followed has since been recognised as the worst financial crisis since the Great Depression of the 19305. BVG was one of a large number of investors for whom, in the ensuing financial turmoil, economic risks -- risks that, when they were assumed, looked vanishingly remote -- unfortunately materialised. On 7 September 2008, as the crisis gathered pace, the first credit events took place in relation to the entities in the JPM Swap reference portfolio when the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporationng were placed under the conseivatorship of the US government. This was followed, the next week, by a further credit event when, on 15 September 2008, Lehman Brothers Holdings Inc filed for protection under Chapter 11 of the United States Bankruptcy Code. That same day, I PM again emphasised to BVG in a conference call the importance of taking steps to restructure the JPM Swap so as to reduce the risks under the transactionlso further call on 16 September 2008." This message was reiterated in a The restructuring of the JPM Swap was again discussed at a meeting between JPM and BVG in Berlin on 19 September 2008.182 JPM explained to BVG the urgency of restructuring the JPM Swap and the options that were available in this regard. On 26 September 2008, a fourth credit event occurred when Washington Mutual Inc filed for protection under Chapter 11 of the United States Bankruptcy Code. 178 179 180 181 182 Reinhardt, paragraph 71 Commonly known as "Fannie Mae" and "Freddie Mac" respectively. and 1} and 1} Reinhardt, paragraph 90 Haering, paragraph 50 165} 51 142. 143. 144. 145. That day, 26 September 2008, several conference calls took place between JPM and BVG, during which JPM explained that if the JPM Swap was to be I'eSlI'l1ClLl1'6(l, this must happen imrnediately.'83 The urgency of the situation was also emphasised on the same day by Mr Wiesrnann in an e--mail to Mr Sturmowski,]84 and by Dr Reinhardt in an e--mail to Mr Unger and Ms Mattstedt.]85 Further discussions took place later in September 2008 and into the first few days of October 2008.186 By 3 October 2008, however, market conditions had deteriorated to such an extent that restructuring the JPM Swap was no longer possible. On 7 October 2008, credit events occurred in relation to Glitnir Banki hf and Landsbanki Islands hf (both of which were reference entities in the JPM Swap reference portfolio). This meant not only that the restructuring of the JPM Swap was no longer possible, but also that a payment obligation under the JPM Swap would occur once the relevant notices had been served and the valuation exercise specified in the PM Swap documentation had been completed. In total, 11 credit events under the PM Swap have now occurredReinhardt, paragraphs 105-128 52 146. 147. 148. 149. CLAIM As noted above, claim, as set' out in the Re--Amended Particulars of Claim is for $204,422,532.71 (plus interest), this being the sum due from BVG under the JPM Swap following the 11 credit events that have occurred with respect to the reference entities in the JPM Swap reference portfolio. The calculations that lead to this sum are explained and set out in the expert report of Ian Robinson.]88 Although BVG has formally put JPM to proof in relation to the sum that would, but for the defences and counterclaims relied on by BVG (as described below), be due to BVG has never pleaded a positive case that the figure is wrong, and indeed it is common ground between the two banking experts that the figure is correct.'90 There is no dispute that JPMC has complied with the formal requirements (such as the serving of the notices prescribed by the contractual documentation) that entitle it to the sum claimedm In addition to its monetary claim, JPMC also claims declaratory relief as to the validity of the PM Swap and related matters. 192 In the alternative, if it is found that the JPM Swap was Void or voidable (and in the latter case that it has been rescinded), JPMC claims restitution of the premium received by BVG pursuant to the transaction, in the sum of $7,856,535. BVG accepts that in these circumstances it would be obliged to make restitution of this 193 sum. JPMS does not make a claim in the proceedings, but is a defendant to BVG's counterclaim, as described belowparagraphs 16-20 and Appendices 2 and 3 . The loss mechanics of a transaction such as this are explained in footnote 39 above. ADC, paragraph 229 132} Joint memorandum dated 13 November 2013, paragraph 6 ADC, paragraphs 227 and 229 and RAPOC 1/ 1 1} ARRDC, paragraph 153 53 IV. 150. DEFENCE AND COUNTERCLAIM: SUMMARY As noted above, in its Amended Defence and Counterclaim BVG seeks to defend the claim on the following grounds: (1) (2) It is alleged that the JPM Swap is ultra vires BVG (as a matter of German law) and therefore void. It is alleged that the conclusion of the JPM Swap was the result of one or more fraudulent and/or deceitful misrepresentations and/or failures to disclose by JPM and/or negligent misstatements and/or failures to disclose by JPMS and/or misrepresentations and/or failures to disclose by JPMC. It is further alleged that, by reason of these misrepresentations, BVG was entitled to and has lawfully rescinded the JPM Swap, and/or that BVG is entitled to damages which can be set off against JPMC's claim. In this regard the alleged misrepresentations relied on by BVG are as follows: (3) (0) It is alleged that JPM expressly or impliedly represented to BVG that the ICE Transaction would involve the sale by BVG to JPMC of credit protection in respect of a "Senior tranche" of a reference portfolio, with a "significant" amount of subordination. It is alleged that this representation was not true. It is alleged that JPM impliedly represented to BVG that the loss profile under the JPM Swap was such that the maximum loss to BVG as a result of a default by any reference entity was 1/ 1 50th of the total notional amount of the JPM Swap (or in other words that the loss profile under the JPM Swap was "pro-rated" across all 150 reference entities in the reference portfolio), when this was not the case. It is alleged that JPM impliedly represented to the Defendant that the ICE Transaction would involve "no, alternatively no material, increase in BVG's credit risk exposure" compared to what BVG's credit risk exposure would be if the transaction had not been concluded. It is alleged that this representation was not true. 54 151. (3) (4) (5) It is alleged that the JPM Swap is void and/or unenforceable and/or voidable for mistake on the part of BVG. It is alleged that the conclusion of the JPM Swap was the result of one or more breaches of a duty of care alleged to have been owed by JPMS to BVG. It is alleged, in the alternative, that even if BVG does not have a complete defence to the claim, the sum claimed by JPMC to be due under the JPM Swap is incorrect, because it is to be inferred that when calculating the sums due from BVG following the credit events that have occurred in respect of the entities in the JPM Swap reference portfolio, JPMC breached alleged implied terms of the JPM Swap in relation to the performance of its role as calculation agent. The grounds of defence and counterclaim relied on by BVG are, it is submitted, wholly contrived and entirely misconceived. Each of those grouhds is considered in detail below. In summary, however, JPM's position is as follows: (1) (2) It is denied that the JPM Swap is ultra vires BVG and that the JPM Swap is void. As to the allegations of misrepresentation and non--disclosure: It is denied that JPM made any of the express or implied representations relied on by BVG. It is denied that the representations on which BVG relies amounted to statements of fact, and insofar as they did, it is denied that the first and third representations alleged were in any event untrue. Insofar as the alleged representations were made, they were corrected by the express terms of the JPM Swap. BVG is in any event precluded by the express terms of the JPM Swap from asserting that it relied on any representations made by JPM. It is denied that either JPMC or JPMS acted dishonestly, recklessly or negligently as alleged. 55 It is denied that BVG relied on the alleged representations. It is denied that the JPM Swap has been rescinded, or that BVG has the right to rescind it. (3) It is denied that the JPM Swap is void and/or unenforceable and/or voidable for mistake on the part of BVG. (4) It is denied that JPMS owed BVG any relevant duty of care, and further denied that any such duty as was owed was breached. (5) It is denied that JPMC breached the implied terms of the JPM Swap in relation to the performance of its role as calculation agent. (6) Further or alternatively, insofar as JPMS is found liable to BVG in negligence, it is alleged that any damages to which BVG is entitled should be reduced on account of BVG's contributory fault. 152. The Court may wish to note that, in their Amended Reply and Defence to Counterclaim JPM have also alleged (in paragraphs 229(3), 230 and 23l)194 that (insofar as JPM are liable to BVG in damages) BVG unreasonably failed to mitigate its loss by failing to take any steps to restructure the JPM Swap and/or to appoint a portfolio manager, even after Febiuary 2008, by which time BVG had (on its own case) properly understood the loss profile of the JPM Swap. As to this: (1) It is clear from the chronology summarised in paragraphs 136-144 above that BVG acted in a dilatory fashion in failing properly to pursue any of the proposals that were put to it by JPM. (2) However, for the reasons identified above and more developed below, BVG's defences and its counterclaim should be rejected, and it follows that mitigation arguments do not arise. 194 {A/3a/109} 56 I53. BVG's unreasonable faiiure to mitigate will therefore not be pursued as a separate point at the trial. The effect of this should be to reduce the extent to which the Court needs to make detailed findings in relation to the period following the closing of the ICE Transaction on 19 July 2007. 57 (1) 154. 155. ULTRA VIRES Introduction As noted above, BVG's case is that the JPM Swap is ultra vines and therefore void because it was outside the scope of BVG's sphere of activity to enter into it.195 It is common ground that the issue whether the JPM Swap is ultra vires is governed by Genman law. As explained above, JPM and BVG have each served expert - - - 196 evidence on this issue. The expeits, who are both professors of German law, have produced a joint memorandum outlining the issues on which they agree and disagree,]97 and each expert has also produced a supplemental report dealing with the areas of disagreement." It is material to note that, by contrast to its case in relation to the JPM Swap, BVG's case is that both the CBLS and the LBBW Swaps were imfra vires and therefore valid. '99 It is fair to say that, in seeking to isolate the JPM Swap from the LBBW Swaps for the purposes of the ultra vires doctrine, the approach taken by BVG is highly artificial. (1) The JPM Swap and LBBW Swaps were, and were seen by BVG as, two parts of one composite transaction, pursuant to which BVG's exposures under the CBLS were restructured. Neither part of the transaction would have been concluded without the other also being concluded; in substance, it was a single transaction. (2) As explained in paragraph 56 above, the ICE Transaction would have been executed as a single transaction in form as well as substance (with JPMC as BVG's counterparty), but for the perceived need to sever the transaction in order to avoid jeopardising the beneficial tax treatment of the CBLS. 195 196 197 199 ADC, paragraph 146 Professor Lehmann's report is at and Professor Assmann's is at 155} ADC, paragraph 150 58 (2) 156. 157. 158. 159. The history of the ultra vires doctrine in the proceedings Before summarising the nature of the disagreement between the experts on the ultra vires issue, it is instructive to consider briefly the role that the ultra vires doctrine has thus far played in this litigation. Thus: (1) As explained above, BVG's case is that it did not properly understand the ICE Transaction, and in particular the loss profile under the JPM Swap, until February 2008. Even after BVG had (on its case) correctly understood the transaction, it made no suggestion that it considered the JPM Swap to be ultra vires. (2) Neither was any such suggestion made when the first credit events occurred in September 2008, as a result of which BVG began to incur payment obligations under the transaction. (3) The present proceedings were issued on 10 October 2008, following allegations made by BVG in a meeting in early October 2008 that JPM had misrepresented or not properly described the transaction to BVG. There was again no suggestion at that time that the JPM Swap was ultra vires. This is despite the fact that, by this time, the transaction had been the subject of detailed scrutiny at every level within BVG, by its auditors and, no doubt, by external legal advisers. The claim form and particulars of claim were served on 21 January 2009. The first occasion on which BVG alleged that the JPM Swap is void on account of being ultra vires was on 9 March 2009, when BVG made an application seeking to challenge the jurisdiction of the English courts to hear the claim. On that date, BVG issued an application for an order, under CPR rule 11(1), that by virtue of Article 22(2) of EC Council Regulation 44/2001 ("the Regulation"), which would, if it applied, trump the jurisdiction clause in the JPM Swap, the English courts had no jurisdiction to hear the claim. Article 22(2) of the Regulation provides as follows: 59 The following courts shall have exclusive jurisdiction, regardless of domicile: (2) in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat. As part of its application, BVG submitted that the proceedings were "principally concerned with" the issue of ultra vires. It was necessary for BVG to make that submission having regard to Article 25 of the Regulation, which provides as Where a court of a Member State is seised of a claim which is principally concerned with a matter over which the courts of another Member State have exclusive jurisdiction by virtue of Article 22, it shall declare of its own motion that it has no jurisdiction. Also on 9 March 2009, BVG commenced proceedings against JPM in Berlin, seeking damages for alleged "incorrect aclvice" and a declaration that JPM Swap BVG's challenge to jurisdiction under Article 22(2) came before Teare who had BVG's appeal against that decision was unanimously dismissed by the Court of upheld Teare 's decision. Both Teare and the Court of Appeal rejected BVG's submission that the proceedings were "principally concerned wit the ultra vires issue. Those decisions were made before BVG had filed a defence to the claim, but their assessment has been borne out by the fact that ultra vires now accounts for all of two pages in BVG's l30--page ADC. 160. follows: 161. was ultra vires and therefore void. 162. no difficulty in dismissing it.200 163. 20? and 201 and 60 164. 165. (3) 166. But BVG did not stop there, insisting on pursuing its jurisdiction challenge to the bitter (and unsuccessful) end. To complete the story: (1) (2) (3) (4) BVG's parallel German proceedings were stayed under Article 27 of the Regulation on the application of PM. BVG, however, appealed to the Berlin Court of Appeal, which referred certain questions as to the application of Article 22(2) of the Regulation to the Court of Justice of the European Union (the "European Court"). In parallel with this, following BVG's appeal from the decision of the (English) Court of Appeal, the Supreme Court also made a reference to the European Court,202 primarily, it seems, on the basis that a reference had already been made by the German court. The European Court gave judgment on the German reference in May 2011, and held that the German proceedings did not fall within Article 22(2) of Regulation 44/2001.203 Following the decision of the European Court dismissing BVG's jurisdiction challenge, the English reference from the Supreme Court necessarily fell away and was withdrawn. As noted above, BVG, despite being unsuccessful at every level before the English and European courts, had managed, by pursuing its jurisdiction challenge, to delay - these proceedings coming to trial by the best part of three years. The issues between the parties in relation to ultra wires: outline The issue whether the PM Swap is ultra vires, being a question of German law, falls to be resolved by the Court by reference to the expert evidence that has been served. As mentioned above, both experts will be giving evidence at the trial. 202 203 {B/Ila} 61 167. The proper time for detailed submissions on ultra viresiis therefore after the Court has heard the expert evidence. For present purposes, however, the following points relevant to this issue might be noted: (1) (2) (3) It is common ground between the two experts that there is only one decided case in the whole history of German law in which a private-law transaction has been held to be void on the ground of ultra vires.204 That was a decision of the German Federal Supreme Court in 1956. That was something of a unique case, decided in factual circumstances which bear no resemblance to the present dispute, as Professor Lehmann explains in paragraphs 44-47 of his first report.205 Since 1956, and in the over half a century that has passed, the German courts have been invited on numerous occasions to declare particular transactions invalid on the basis of the ultra vires doctrine. These cases have almost all concerned contracts concluded by public bodies of one kind or another, because it is universally acknowledged that the ultra vires doctrine has no application in German law to companies incorporated under private law. On each and every occasion, the invitation to declare a transaction invalid on the basis of the ultra vires doctrine has been declined. These cases include, in particular, a string of 19 recent decisions concerning financial derivative transactions in which the public bodies concerned have attempted (unsuccessfully) to rely on the ultra vires doctrine to extricate themselves from derivatives under which they have ended up out of pocket.20(' The present case of course conforms to that same pattern. It is common ground between the two experts, and this is seen clearly in the cases cited by Professor Lehmann, that the tendency of the German courts has been to deal with cases such as this one, not by resorting to an ultra vires doctrine, but by invoking duties, which seem significantly wider than those 204 205 206 Joint expert memorandum, paragraphs 5 and 8 156} These are analysed in detail by Professor Lehmann at {D/l/25} and 62 (4) (5) (5) (7) that apply in English law, concerning the information and advice that must be provided by banks to their customers.207 In the present case, however, it is common ground that the relationship between JPM and BVG is governed exclusively by English law, and so these aspects of German law are irrelevant. Similarly irrelevant are other German doctrines, referred to in some of the cases, such as a supposed prohibition on "speculative transactions", and arguments based on German public policy. These doctrines, like the information duties on which many of the German cases are based, have nothing to do with alrra vires, and this is acknowledged by Professor Assmann.208 The position, therefore, appears to be that whilst one cannot say that the ultra vires doctrine forms no part of German jurisprudence, it is a doctrine that, in practice, has been denuded of all vitality and which has very limited (if any) relevance in modern German law. Be that as it may, it is common ground between the experts that the issue whether the JPM Swap is ultra vires BVG, depends on whether or not the transaction falls within the scope of BVG's functions and sphere of activity, as delimited by the BSCL209 and BVG's articles of association.2'0 The issue between the experts may ultimately boil down to a dispute as to the true constiuction of these documents. Thus, for example: The BSCL and BVG's articles both empower BVG (among other things) to "perform tasks relating to their 208 209 210 Joint expert memorandum, paragraph 9 Professor Assmann's supplemental report, paragraph 16 and Professor Lehmann's first report, paragraph 113 1/43} 63 168. (8) (0) Professor Assmann expresses the opinion that in the context of the ultra vires doctrine the concept of "relating to" "has a narrow and restricted The basis on which Professor Assmann holds this view is not entirely clear, since he does not cite any authority in support of it. By contrast, Professor Lehmann's opinion is that, as the decided cases irrefutably demonstrate, the practice of the German courts is to take a broad View of the scope of the functions and Sphere of activity of a public body. The German courts have not, in upholding the valid_ity of a Wide variety of financial derivatives, felt the need to pinpoint specific provisions in the relevant bodies' constitutional documents as authorising the transactions in question; their reasoning has been more general, emphasising that derivatives are part of the way in which municifial bodies manage their budget and debt, and are therefore permissible even if they are not specifically authorised by the relevant statutes?" Professor Assmann's View on the construction to be placed on the Words "relating to", as they are used in BVG's constitution, is, it is submitted, incorrect. Insofar, however, as it is relevant to consider whether those words should be given a narrow or a wide meaning, the results of the cases demonstrate that German law takes a very wide View of provisions such as these in this context. For the reasons given above, it is submitted that Professor Lehmann's evidence is to be preferred, and that BVG's ultra vires defence should be rejected. 212 213 Professor Assmann's first report, paragraph 110 146} Professor Lehmann's first report, paragraph 118 64 VI. (1) 169. 170. 171. MISREPRESENTATION AND NON--DISCLOSURE Summary of BVG's case BVG alleges that it was induced to enter into the JPM Swap by misrepresentation and/or a breach of a duty to disclose on the part of JPMC and/or JPMS. The alleged misrepresentations and failures to disclose are said to have been fraudulent in the case of JPMC, and to have been fraudulent, or alternatively negligent, or alternatively innocent, in the case of JPMS. Three misrepresentations and two failures to disclose are alleged, as follows. First, BVG allegeszm that JPMC and/or JPMS, acting through Mr Banner and/or Mr O'Connor, expressly or impliedly represented to BVG that "the transaction which JPMot"gat2 proposed and/or the terms of any contract between JPMC and BVG would involve" the sale by JPMC of credit protection "in respect of a senior tranche of a reference portfolio, ,,215 (cc with a amount of subordination the Senior Tranche representation"). As to this: 1) This representation is alleged to have been made, expressly or impliedly, in the June 2006 Presentation,216 the Amended June 2006 Presentationm and the August 2006 Presentation?" (2) BVG also alleges that this representation was impliedly made by Mr Banner outside the context of those presentations. More specifically, BVG contends 219 that page 7 of the 1 November 2006 Presentation (which was prepared by Dr Meier and was sent to Mr Banner by e--1nai1 on 20 November 2l4 216 217 218 219 220 ADC, paragraph 165 As for the inter--re1ationship between the seniority of a tranche and the amount of subordination, BVG's case (as pleaded in Response 3.1 of its Further Information dated 9 November 2012 is that whether a given tranche of a reference portfolio can be said as a matter of objective fact to be senior depends on the amount of subordination from which the said tranche benefits. See paragraph 67 above. 65 172. (3) (4) conveyed an understanding or belief that the proposed transaction would involve the sale by BVG to JPMC of credit protection in respect of a senior tranche with a significant amount of subordination. In this context, what is suggested by BVG is that Mr Banner, despite having had no involvement whatever with its production, irnpliedly represented that he agreed with the contents of the 1 November 2006 Presentation, including in particular page 7 of that document. This implied representation is alleged by BVG to have been made by Mr Banner: in a telephone conversation with Dr Meier in January or February 2007, when Mr Banner is alleged to have commented expressly on another part of the 1 November 2006 Presentation (thereby impliedly representing that he agreed with those parts of the Presentation upon which he did not expressly comment), and/oar by receiving the 1 November 2006 Presentation from Dr Meier and returning it to him as an attachment to subsequent e-mails without expressly commenting on it. BVG allegesm that the representation was false because, in essence, the tranches upon which BVG sold credit protection under each of the Long Legs in the JPM Swap were not "senior trenches", but were in fact mezzanine tranches, and/or had "only very little, alternatively little, subordination." BVG relies upon the fact that the level of the Lower Boundary on each Long Leg varied between 1.5% and 4.2%.222 Secondly, BVG alleges223 that JPMC and/or JPMS, acting through Mr Banner, irnpliedly represented to BVG that the loss profile under the JPM Swap was pro- rated across all 150 reference entities in the portfolio, such that BVG would incur 221 222 223 ADC, paragraph 170 BVG pleads that of the 40 long legs, four had lower boundaries below 23 had lower boundaries from 2% to ten had lower boundaries fiorn 3% to 4% and three had lower boundaries of 4% and above. ADC, paragraph 180 66 liability of, at-most, 1/ 15011' of the total value of the portfolio of the notional amount of the transaction) each time one of the reference entities defaulted ("the Pro--Rated Loss Profile representation"). As to thiscommon ground that the loss profile under the JPM Swap was not in fact pro--rated. It may be noted that BVG alleges224 that Dr Meier believed that the transaction would have a pro--rated loss profile, even though he also believed that the transaction would benefit from a protection buffer such that the first defaults by reference entities would not lead to BVG incurring a payment obligation. These two (alleged) beliefs obviously could not both be correct in circumstances where, as is common ground, 100% of the notional amount of the transaction was at risl<.225 BVG nevertheless alleges226 that the statement contained on page of the 1 November 2006 Presentation, that BVG's maximum default under the ICE Transaction would not occur unless LBB, HVB, LBBW and all 150 reference entities in the portfolio defaulted, could only reasonably be understood to mean that the first defaults by reference entities would not lead to BVG incurring a payment obligation arfl that BVG would incur a liability of (at most) 1/ 150th of the total value of the portfolio each time one of the reference entities defaulted. But as already noted, these propositions could not both be correct. Notwithstanding this, BVG a1leges227 that Mr Banner impliedly represented that the loss profile of the transaction was pro--rated. This implied representation is alleged to have been made in the same way as the implied 224 225 226 227 ADC, paragraph 92 If the default of each reference entity could at most cause the loss of 1/ 150th of the notional amount of the transaction, but the first few defaults would not cause any loss at all because of the protection buffer, it would be impossible for the entire notional amount of the transaction be lost, even if all 150 entities defaulted. ADC, paragraph 104.3 ADC, paragraph 189 108} 67 173. (5) representation referred to above relating" to the seniority of the tranche, namely when Mr Banner did not comment on page 10 of the 1 November 2006 Presentation in a telephone conversation between Mr Banner and Dr Meier in January or February 2007 or when returning the 1 November 2006 Presentation without comment to Dr Meier by e--mail. BVG further allegeszzg that upon Mr Banner receiving and reading the 1 November 2006 Presentation, JPMC and/or JPMS came under a duty to disclose to BVG that the proposed transaction and/or the terms of the contract would not involve the sale of credit protection where the loss profile would be pro--rated. Thirdly, BVG a1leges229 that JPMC and/or JPMS, acting through Mr Banner and/or Mr O'Connor, represented to BVG that the proposed transaction would involve no, or no material, increase in BVG's credit risk exposure as compared with the credit risk to which BVG would have been exposed if the transaction were not concluded ("the Credit Risk representation"). As to this: (1) (2) (3) BVG says that this representation was made in the June 2006 Presentation, the Amended June 2006 Presentation, the August 2006 Presentation and in an e--mail sent by Mr Banner to Dr Meier on 14 July 2006 (at 18:57). BVG's case230 is that the alleged representation was false, in that BVG was exposed to a greater degree of credit risk after entering into the ICE Transaction than it would have been had it not done so. Mr Banner is also alleged to have impliedly represented (in the alleged circumstances referred to in paragraph 171(3) above) that he agreed with page 3 of the 1 November 2006 Presentation, which stated that "diversification leads to higher return in case of constant risk".23l BVG 228 229 230 231 ADC, paragraph 193 109} ADC, paragraph 197 ADC, paragraph 200 BVG's translation in its pleading (ADC, paragraph 95) is "diversification leads to higher returns with the risk remaining constant" 68 174. (2) 175. 176. alleges that this was representation was false, because Mr Banner must have 233 that known that that statement on page 3 was false?" BVG further alleges upon Mr Banner receiving and reading the 1 November 2006 Presentation, JPMC and/or JPMS came under a duty to disclose to BVG that the proposed transaction would not lead to the iisk remaining constant. As already noted, I PM submits that these allegations of misrepresentation, and the suggestion that there has been fraud on the part of PM, are seriously misconceived and should not properly have been advanced. The detailed reasons why this is so are considered below, first by identifying the applicable law and, thereafter, applying the relevant principles to the facts of the present case. Misrepresentation: the law It is trite law that a misrepresentation is a false statement of fact, past or present, as distinct from a statement of intention or a mere commendatory statement?" Whether any and if so what representation has been made has to be "judged objectively according to the impact that whatever is said may be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee": MCI Worldcom International Inc Primus Telecommunications Inc [2004] EWCA Civ 957, [2004] 2 All ER (Comm) 833, per Mance LJ at A statement of opinion or intention may be a misrepresentation if the maker does not in fact hold the opinion or have the intention stated. Accordingly, if it can be proved that the person who expressed the opinion did not hold it, or could not, as a reasonable man having his knowledge of the facts, honestly have held it, the statement may be regarded as a statement of fact.235 232 233 234 235 ADC, paragraph 213 ADC, paragraph 215 Chitty on Contracts (31st ed., 2012), paragraph 6--006. Chitty, supra, paragraph 6-008. 69 177. 178. Silence by itself cannot found a claim in misrepresentation (fraudulent or othe1wise).236 But an express statement may impliedly represent something. The test for an implied representation set out by Toulson in IFE Fund SA Goldman Sachs International [2006] EWHC 2887 (Comm), [2007] Lloyd's Rep 264, at is often cited: In determining whether there has been an express representation, and to what effect, the court has to consider what a reasonable person would have understood from the words used in the context in which they were used. In determining what, if any, implied representation has been made, the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor's words and conduct in their context. It is clear from the authorities that the more Vague, imprecise or ill--defined the alleged implied representation is, the less likely it is that the court will find it to have been made. In Standard Chartered Bank Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm), Hamblen rejected the defendant's case that the claimant bank had made implied representations that certain transactions were "a true hedge" or "part of a proper hedging strategy." The Judge said (at The Term Sheets do not refer to any of these matters and they are vague, imprecise and inherently implausible statements for a selling bank to make. The vague and uncertain nature of the statements means that they are il1--suited to constitute actionable statements. What, for example, is meant by a "true hedge", a "proper hedging strategy" and how, precisely, is a bank meant to judge whether the benefits fo.r its counterparty of any transaction outweigh its risks? A reasonable person would not have understood that [the claimant bank] was making representations in such vague and ill--defined terms. 236 Raiffeisen Zentralbank Osterreich Royal-Bank of Scotland 1310 [2010] EWHC 1392 (Comm), [2011] 1 L1oyd's Rep 123, at [84] (Christopher Clarke J). 70 179. 180. 181. (3) 182. A person may also make a misrepresentation by conduct. nod or a wink or a shake oft/1e head or a smile" may amount to a representation if it is intended to induce the other party to believe in a certain state of factsm In order for the misrepresentation to be actionable: It is also necessary for the statement relied on to have the character of a statement upon which the representee was intended, and was entitled, to rely. In some cases the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it. Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on.238 In addition, the claimant must show that he in fact understood the statement in the sense which the court ascribes to it, and that having that understanding, he relied upon it.239 Fraudulent misrepresentation: the meaning of fraud and standard of proof To establish that a misrepresentation was fraudulent, the representee must prove that the representor did not honestly believe that his representation was true, and that he intended the representee to act upon the statement. Mere lack of care does not suffice, either as to the truth of the statement, or as to the realisation that the 238 239 Chitty, supra, paragraph 6-018, referring to the well--known dictum in Walters Morgan (1861) 3 De G.F. J. 718. Raiffeisen, supra, at Raiffeisen, supra, at 71 183. 184. 185. statement might have the consequence that a person in the representee's position might suffer harm by acting on it.240 The meaning of fraud was settled in Derry Peak (1889) 14 App Cas 337. Lord Herschell said (at 374): First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made. Where there is disagreement about the meaning of the alleged fraudulent representation, the representee must not only establish that he understood the statement in the sense that the court ascribes to it, but that the representor knew the falsity, or was reckless as to the tiuth, of the statement in the meaning that he intended to be understood or knew that it would or might be so inte1preted.24] The burden of proof of the representor's fraud lies on the representee. It is well established that although the applicable standard of proof is the civil, balance of probabilities, standard, the courts take into account that the more serious the allegation, the greater the proof needed to persuade the court that the allegation is 240 241 Cartwright, Zvlisrepresentation, Mistake and N0n--Disclosure (3rd ed., 2012), paragraph 5-13. Cartwright, paragraph 5-18. 72 (4) 186. 187.' (5) 188. (0) 189. established: the very gravity of an allegation of fraud is a circumstance which has to be weighed in the scale in deciding as to the balance of probabilities.242 Non-disclosure: the law The general rule in English law, save in relation to contracts of the utmost good faith, is that there is no duty on the parties to a contract to disclose mateiial facts to each other. Tacit acquiescence in another's self--deception does not itself amount to a misrepresentation, provided that it has not previously been caused by a positive misrepresentation.243 Although a complete non-disclosure does not amount to a misrepresentation, a partial non-disclosure may do so, for example where the statement made omits facts which render what has actually been stated false or misleading in the context in which it is made. Such instances may potentially be analysed either as cases of actual misrepresentation, or as cases in which there is a duty to disclose certain additional facts by reason of the facts actually stated?" The alleged misrepresentations: JPM's case For the reasons set out below, JPM submits that BVG's misrepresentation case fails. he alleged Senior Tranche representation No such representation was made BVG's case based on the Senior Tranche representation falls at the first hurdle: PM did not represent to BVG that the transaction that was being proposed, and/or 242 243 244 Cartwright, paragraph 5-46, citing (among others) Smith New Court Securities Scrimgeour Vickers (Asset Management) [1997] AC 254 (HL), at 274 (Lord Steyn), and Re (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 (HL), at 586-587. Chitzy, supra, paragraph 6-017. Chitty, supra, paragraph 6-020. Which analysis is adopted may matter where a claim is made under the Misrepresentation Act 1967, because that Act applies only to misrepresentation but not to a breach of a duty to disclose. 73 190. 191. 192. 193. the terms of any contract between JPMC and BVG, would involve the sale by BVG of credit protection "in respect of a senior tranche of a reference portfolio, with a significant amount of subordination". BVG alleges that this representation was made expressly or impliedly on pages 12 and 13 of the June 2006 Presentation.245 Page 12 was entitled "Basic Principle of the Collateralized Debt Obligation -- Over--collateralisation and Diversification". It explained, in general terms, how tranches of notes of differing seniorities and with differing credit ratings could be created from a portfolio of coiporate credit risks for a CD0 to be purchased by BVG. Three tranches of debt were illustrated, Equity, Mezzanine and Senior. At the bottom of page l2, there was a statement, "The equity and mezzanine debt tranches represent a buffer against credit defaults in the portfolio for the senior debt tranche BVG aileges246 that by making this statement, JPMS and/or JPMC expressly or impliedly represented that it was proposed that BVG should sell credit protection on a "senior" tranche of the reference portfolio. Contrary to BVG's case, JPM did not make any such representation, either expressly or impliedly. A reasonable reader of that statement in the June 2006 Presentation would have understood it to be explaining, in general terms, that equity and mezzanine tranches provide a buffer for the senior debt tranche against credit defaults in the portfolio. Page 12 did not make any statement, express or implied, about the tranche on which it was proposed that BVG would sell credit protection. Page 13 of the June 2006 Presentation247 was entitled "Subordination as Safety Bajfer against Defaults." It explained, again in general terms, how subordination is used in a CDC) to create different tranches with different risk profiles, and how 245 246 ADC, paragraph 166.l.l 74 194. 195. 196. more senior tranches benefit from greater default protection than lower tranches (with the so--called "first loss" or "eqm'ty" tranches having no subordination). The final bullet point on the page said, "For example, BVG invests in an A rated tranche ofa portfolio and thus assumes the risk corresponding to that of an rated In its pleading,249 BVG purports to quote this sentence, but distorts it by omitting the words "For example". BVG alleges that since a A rating is the highest possible rating, this sentence implied that tranches were, by their nature, "senior in the tranching structure". It is unclear what, precisely, BVG means by "sembr in the tranching structure". The diagram on page 13 illustrated a tranche with a detachment point at 9.00%, above which there was a Junior Super Senior tranche with a detachment point of 12.00%, above which there was a NR (Not Rated) tranche. BVG alleges250 that by this diagram, JPM expressly or impliedly represented that the tranche upon which BVG should provide credit protection could properly be characterised as senior within the tranching structure and/or that it benefitted from a significant subordination cushion. BVG's case faces a number of insuperable difficulties. (1) First, the June 2006 Presentation did not make any representation as to the tranche upon which BVG should provide credit protection. Pages 12 and 13 of the presentation contained a general description of CD03 and of using different debt tranches and subordination to provide over--col1ateralisation buffers. The commercial parameters of any transaction, such as the rating of the tranche or the composition of the portfolio in respect of which BVG should sell credit protection, were yet to be negotiated and agreed. Indeed, the reference to BVG investing in a tranche was expressly stated merely to be by way of example. There was, in short, no representation of 248 249 250 There is an issue between the parties on the pleadings, which probably does not matter, as to whether a is a "mortgage bond" or a "covered bond": see ADC, paragraph 166.l.2 paragraph 46 paragraph 22 ADC, paragraph 166.l.2 ADC, paragraph 166.1.2 75 (2) (3) (4) (5) fact or of existing opinion or intention: the June 2006 Presentation merely outlined proposals and ideas for a potential transaction. Secondly, there was no express representation either that BVG would (or should)25] sell credit protection in respect of a senior tranche (or upon 'a tranche "which could properly be described as senior'')252 or that that tranche would benefit from a significant amount of subordination. Thirdly, there can be no question of implying any such representation either. According to Ms Nguyen,253 the banking expert instructed by BVG, the tranche classifications of "sem'or" and "mezzanine" became "more subjective" following changes in rating model in late 2005. Ms Nguyen's evidence, if accepted, would give rise to the same sort of difficulty for BVG's case as was identified by Hamblen when rejecting the implied representations alleged in Standard Chartered Bank Ceylon Petroleum Coijporationz the vague and uncertain nature of the meaning of "senior tranche" renders that phrase ill--suited to constitute an actionable statement. The View of Dr Robinson, the banking expert instructed by JPM, is that at the time of the ICE Transaction (and indeed now), the market would consider a tranche rated by as ''senior''.254 If one were to ascribe a ceitain meaning to a "senior" tranche, by equating it with a rated tranche, BVG's misrepresentation allegation would be bound to fail. The representation would have been true, because the tranche in respect of which BVG sold credit protection was indeed rated by As for an implied representation that the tranche would have "a significant amount of subordination", this is hopelessly vague. What does "significant amount" actually mean? A reasonable reader of the June 2006 Presentation 251 252 253 254 BVG's pleaded case flips between "would" and "should": compare ADC paragraph 165 withADC 166.1.2 ADC, paragraph 166.1.2 . Contrast with ADC paragraph 165 Nguyen report, paragraph 233 Robinson report, paragraphs 174-182 76 197. 198. 199. would not have understood JPM to have been making a representation in such vague and meaningless terms. BVG also alleges that the alleged representation that the tranche would be a senior tranche with a significant amount of subordination was additionally made in the Amended June 2006 Presentation. Two of the pages relied upon by BVG in the Amended June 2006 Presentation, pages 13 and 14,255 were the same as pages 12 and 13 of the June 2006 Presentation,256 and the points made above in relation to those pages therefore apply. BVG also relies upon page 7 of the Amended June 2006 Presentation.257 This page set out a schematic of the transaction structure in order to illustrate how the proposed transaction would work. The bullet points under the schematic described six steps, the second of which was selects a rating for the new credit risk in a diversified portfolio -- e. A tranche." It is clear from the inclusion of that JPM were not making any representation, express or implied, about the seniority or amolunt of subordination of the tranche in respect of which BVG would provide credit protection. That was a matter that remained for discussion and agreement. BVG further relies upon the August 2006 Presentation.258 This presentation was in all material respects identical to the Amended June 2006 Presentation, save for the deletion of the bullet on page 14 of the Amended June 2006 Presentation259 (which had also appeared on page 13 of the June Presentationz?o), "For example, BVG invests in a rated tranche of a portfolio and thus assumes the risk corresponding to that of an rated Pfandbrief'. The August 2006 Presentation accordingly does not take this part of BVG's case any thither. Finally, as noted above, BVG alleges that Mr Banner impliedly represented that he agreed with the contents of the 1 November 2006 Presentation, including 200. 201. 202. particular page 7 of that document.26l Page 7 of this presentation contained a diagram which, on the right hand side, depicted three tranches in separate boxes. The tranches were described as "Equity "Mezzanine Tranche g. and "Senior Tranche The letters appeared in the last of these boxes. BVG alleges that Mr Banner read the 1 November 2006 Presentation, and that he understood page 7 of that presentation to convey a belief or understanding on the pait of its author, Dr Meier, that the proposed transaction (or the terms of any contract between JPM and BVG) would involve the sale by BVG of credit protection in respect of a senior tranche with a significant amount of subordination. BVG goes so far as to allege that page 7 "could not reasonably have been 572 understood In any other way. 62 In fact, page 7 of the 1 November 2006 Presentation made no reference to subordination. It is impossible to spell out of it any belief or understanding about the amount of subordination that would be available to the tranche in respect of which BVG might sell credit protection. As for the seniority of that tranche, page 7 described the tranche upon which BVG might sell credit protection as "Senior Tranche At most this description might have carried with it the implication that Dr Meier understood that the tranche upon which BVG might sell protection under the proposed transaction, which tranche had yet to be identified, could be described as senior and might be rated Any such understanding on Dr Meier's part would have been entirely correct. In any event, Mr Banner did not impliedly represent that he agreed with the 1 November 2006 Presentation. This is addressed below in context of the alleged pro--rated loss profile representation. 262 ADC, paragraph 104.2 78 203. 204. 205. (ii) Any such representation was correct If, contrary to JPM's primary case, JPM represented to BVG that that tranche on which BVG would sell credit protection would be a senior tranche with a significant amount of subordination, such representation was, in the event, correct. The tranche upon which BVG ultimately sold credit protection was rated the highest rating issued by and had a sufficient amount of subordination, in the opinion of to justify that highest rating. BVG's primary case is that JPM's alleged representation that the tranche would be senior or would have a significant amount of subordination amounted to a statement of fact. It is very difficult to see how a representation that a tranche would be (or was) "senior" could, in the circumstances of this case, be a representation of fact rather than of opinion. The same is true of a representation that a tranche would have a "significant" amount of subordination: opinions op what constitutes a "significant" amount may well differ. JPM have asked BVG to clarify what is meant by "sigrnficant" in this context. In Response 4.2 of its Further Information dated 9 November 2012363 BVG alleges that "the term 'significant' means that a tranche benefits from a subordination cushion of suflicient thickness to confer a tangible degree of protection, regardless of any quantitative considerations". This is not an enlightening response: it simply converts a debate about the meaning of "significant" into one about the meaning of "tangible". BVG al1eges264 that JPM, acting through Mr Banner and/or Mr O'Connor, must have known, "either at the time when the representations were made or at some point thereafter but before the JPM Swap was concluded", that the proposed transaction or the terms of PM Swap would involve the sale of credit protection in respect of a mezzanine tranche with "only very little, alternatively little" subordination cushion. 263 264 ADC, paragraph 172 79 206. 207. 208. The terms of the tranche upon which BVG ultimately sold credit protection, including the lower and upper boundaries of the various legs of the JPM Swap, were not settled upon by .lPM's structuring team, in conjunction with until around late June or early July 2007, in light of the then prevailing conditions in the market. On 4 July 2007 (and again on 6 July 2007), Dr Meier was provided with a draft confirmation for the PM Swap that set out the terms of the tranche, including its lower and upper boundaries.265 Two points arise from these facts. (1) First, Mr Banner could not have known in 2006 the amount of subordination that would be inco1porated into the JPM Swap. He would merely have known that if (for example) BVG decided to sell credit protection on a rated tranche, that tranche would need to have sufficient subordination, having regard to market conditions and the proposed composition of the reference portfolio, to satisfy that a rating was appropriate. (2) Secondly, BVG was informed of the amount of subordination actually incorporated into the JPM Swap: it was clearly set out in the JPM Swap confirmation executed by BVG and in drafts of the confirmation provided to BVG from 4 July 2007. BVG's case,266 which it may be noted is put in fraud as well as in negligence, is that Mr Banner was aware of what should be described as "equity", "mezzanine" and "senior" tranches and of "the degree of subordination which each of these descriptions fairly implied in general, alternatively in relation to the specific transaction proposed by This serious allegation should only have been made if there was a proper basis for doing so. BVG, in its Further Information dated 9 November 2012,267 however, says that it is not alleged that there is any specific minimum numerical value of subordination that a tranche of a reference 265 266 267 ADC, paragraph 172.3 At Response 3.2 80 209. 210. 211. portfolio must have in order for that tranche to be senior. The reality is that BVG is unable to articulate any coherent case as to the degree of subordination which the description "senior" implied, let alone that Mr Banner was or must have been aware of it. BVG should not, in these circumstances, have felt able to make allegations of negligence, let alone fraud. Insofar as there was any misrepresentation, this was corrected in any event On 4 July 2007, Mr Banner sent Dr Meier (among other things) a copy of the draft confirmation for the PM Swap that included the tranche terms.268 This confirmation clearly set out, among other things, the lower and upper boundary for each of the 47 legs of the transaction. The amount of subordination, expressed as a percentage, was therefore clear on the face of the document. On 6 July 2007, Dr Meier e--mailed Mr Banner to say that he could not open the zip attachments to Mr Banner's 4 July e--mail, and asked that they be provided in another format.269 Mr Banner duly provided the documents again, in Word format.270 Dr Meier sent an e--mail to Mr Banner later that day (copied to Ms Mattstedt) thanking Mr Banner for the Word-formatted version of the documents, and confirming that BVG was able to read them." Notwithstanding this e--mail, BVG's pleaded casezn is that Dr Meier was unable to conduct a "satisfactory review" (whatever that is intended to mean) of the draft confirmation because Dr Meier was in New York (where he stayed during June and July 2007273). Dr Meier conspicuously fails to support this allegation in his witness statement. JPM therefore submit that even if, contrary to their submissions above, they had previously made any misrepresentation at to the seniority of the tranche or the 268 269 270 271 272 273 ADC, paragraph 175.5 ADC, paragraph 122 81 212. 213. 214. amount of subordination available to the tranche, such misrepresentation was corrected in the draft confirmation that was sent to Dr Meier on 4 and 6 July 2007, and indeed in the executed version of the confirmation for the JPM Swap. (iv) No reliance BVG claims274 that by 3 August 2006, BVG believed and/or understood that the proposed transaction would involve the sale by BVG of credit protection in respect of a senior tranche of a reference portfolio, with a significant amount of subordination. BVG claims that the alleged representation by JPM as to these matters was intended by JPM to induce BVG to enter into the JPM Swap, and that BVG was so induced and would not have entered into the JPM Swap if the representation had not been rnade.275 BVG fuither alleges276 that it would have considered that a swap under which it sold credit protection on a mezzanine tranche of a reference portfolio, with only a small or very small amount of subordination, would carry an unacceptable level of risk for BVG, even if the transaction was rated A. It is respectfully submitted that BVG's case on reliance is contrived and incoherent. All that mattered for Dr Meier and for BVG from a risk perspective was (1) that none of the reference entities included in the portfolio should have a credit rating at inception of the PM Swap of less than and (2) that the tranche upon which it sold credit protection should be rated (Dr Meier and BVG were entirely comfortable with the very low probability of default implied by a rating). 274 275 276 ADC, paragraph 177 ADC, paragraph 178 103} ADC, paragraph 178.2 82 215. 216. Dr Meier examined the probability of default implied by a rating277 and concluded, that that implied probability was vanishingly small (albeit that this risk has now come to pass as a result of nea1'--unprecedented economic conditions). In his 1 November 2006 Presentation, Dr Meier pointed out that according to Fitch (one of the rating agencies), the probability of default for any loan portfolio rated was less than 0.01% after one year, 0.05% after five years and 0.19% after 10 years. Dr Meier based these figures on a Fitch publication that he apparently obtained for himself on the lnternet.278 It is not credible that BVG's assessment of the risk, which was based upon the credit rating of the tranche and the probability of default that that rating implied,279 would have been any different if the label "mezzanine" (or "senior/mezzanine") had been applied by JPM to the tranche, or if BVG, with the understanding of the relevance of this that it would have had following Dr Meier's discussion of the concept with Mr Banner,280 had been told that the tranche had a "small or very small amount of sub0rdinati0n".28] The short point is that regarded the seniority of the tranche on which BVG sold credit protection, and the amount of subordination available to that tranche, to be sufficient, having regard to the composition of the portfolio (including the fact that no reference entity was rated lower than A-), to ascribe a rating to that tranche. BVG was perfectly content to rely upon that ratingclear from a manuscript note of Dr Meier which set out the default probability of a rated tranche of a CD0 over 1, 5 and 10 years based on the Fitch CDO default matrix and the default probability of an A rated borrower over the same periods based on cumulative historical default probabilities Meier, paragraph 167 The publication in question, along with some manuscript calculations carried out by Dr Meier, is at The importance to Dr Meier of the default probability implied by credit ratings is clear not only from the 1 November 2006 Presentation and the other intemal presentations that Dr Meier prepared, but also from the communications between Dr Meier and Mr Banner: see, the transcript of their telephone conversation on 6 February 2007 Mr Banner told Dr Meier in terms, for example in telephone conversations on 31 July 2006 186} and 2 May 2007 that the rating agency would dictate the amount of subordination that was required in order to achieve a rating, and that this was not therefore fixed. Dr Meier understood this perfectly well. This submission is without prejudice to JPM's case that BVG was told in the JPM Swap confirmation (and drafts of it) precisely what level of subordination was available to the tranche upon which BVG sold credit protection. 83 217. 218. As for BVG's case that JPM "intended to induce BVG to enter into the JPM Swap" by means of false representations as to the seniority of the tranche or the level of its subordination this 1S entirely misconceived. (1) (2) As explained above, these representations were simply not made, because the focus of the discussions between the parties was on the credit rating of the tranche, not on whether some vague and meaningless label ("senz'0r" tranche, "significant" subordination) could be applied to it. As also noted above, Mr Banner explained to Dr Meier how subordination worked, and how the level of subordination would be determined by the rating agency in order for the tranche to achieve BVG's desired credit 283 Mr Banner also sent Dr Meier drafts of the confirmation for the rating. JPM Swap which set out the precise levels of subordination from which BVG's tranche benefited.284 None of this would have happened if JPM had been intending to mislead BVG as to the seniority of the tranche or the amount of its subordination. Furthermore, JPM will if necessary contend that BVG is estopped from contending that it relied when entering into the JPM Swap upon the alleged representation as to the seniority of the tranche and the amount of subordination. As to this: (1) (2) By clause 9(a) of, and paragraph 12 of Part 4 of the Schedule to, the ISDA Master Agreement between the parties,285 each party was deemed to give the and customary representations as to non-reliance and assessment understanding. The effect of these representations, under well--known principles derived from cases such as JP Morgan Chase Bank Springwell Navigation 282 283 284 285 ADC, paragraph 178 For example in the telephone conversations of 31 July 2006 and 2 May 2007 On 4 and 6 July 2007 84 219. 220. Corporation [2010] EWCA Civ 1221, [2010] 2 CLC 705 and Cassa di Risparmio della Repubblica di San Marino Barclavs Bank [2011] EWHC 484 (Comm), [2011] 1 CLC 701, is to estop BVG (absent fraud on the part of JPM) from contending that it relied upon the alleged representation when entering into the JPM Swap. BVG does not advance any case to the contrary.286 For the reasons identified in summary above, it is respectfully submitted that BVG's case on the alleged Senior Tranche representation is untenable and should be dismissed. The alleged Pr0~Rated Loss Profile representation As noted above, BVG's case under this head is that JPMC and/or JPMS impliedlj/87 represented, through Mr Banne1',283 that the loss profile under the PM Swap was pro--rated across all 150 entities in the reference portfolio. As also noted above, this case is based upon the receipt by Mr Banner of a copy of the 1 November 2006 Presentation289 as an attachment to an e--mail sent to him by Dr Meier on 20 November 2006,290 and an alleged subsequent conversation between l\/lr Banner and Dr Meier during which it is said that they discussed an aspect of that presentation.29I 286 287 288 289 290 291 ADC, paragraph 225 This representation is alleged to have been made only by implication: no express representation is pleaded. Only Mr Banner is alleged to have made this representation, in contrast to the other two representations which are alleged to have been made by Mr Banner and/or Mr O'Connor. The references to Mr O'Connor in paragraphs 187 and 193.4 of BVG's ADC are assumed to have been inadvertent. BVG's case is also based on the fact that, as explained below, the 1 November 2006 Presentation was attached, sometimes inadvertently, to a number of e--mails sent by Mr Banner between 20 November 2006 and 5 December 2006. 85 (1) No such representation was made It is submitted that BVG's case again falls at the first hurdle: JPM did not irnpliedly represent that the proposed transaction had a pro~rated loss profile. In order to understand why this is so, it is necessary to set out in more detail the (1) On 26 October 2006, Mr Banner met Dr Meier for breakfast at the Grand Hyatt Hotel in Potsdamer Platz in Berlin. This meeting had been initially mooted in a telephone call between Mr Banner and Dr Meier on 12 October 2006,292 and the arrangements for the meeting had been firmed up in further telephone conversations between Mr Banner and Dr Meier on 16 and 20 (2) During this latter conversation, Dr Meier told Mr Banner that he was discussing internally whether to prepare a "resolution paper" or an "information paper" for the Supervisory Board, and that Dr Meier's preference was for an information paper. Dr Meier explained that he was also planning to produce a list of FAQS294 (Frequently Asked Questions) in which he was intending to give a simple explanation of issues that tended to be raised internally in relation to the proposed transaction, for example as to the nature of PM's interest in it. Dr Meier said that he might perhaps want to provide his FAQ list to Mr Banner before circulating it internally, and Mr Banner said that he would be glad to have a look at it. Dr Meier also mentioned that BVG might not be in a position to enteriinto any transaction during 2006 due to the infrequency of Supervisory Board meetings.295 According to his witness statement (paragraph 127), Dr Meier was intending to produce the FAQS list for Mr Kruse to use as an aide memoire with Mr Sturmowski and with BVG's upper 221. chronology of the relevant events. 222. Thus: October 2006.293 a 292 293 294 management 295 Mr Banner told Mr O'Connor in a telephone conversation on 27 October 2006 that he could not see the ICE Transaction closing in 2006 86 (3) (4) At their breakfast meeting on 26 October 2006, Dr Meier and Mr Banner discussed the notional amount of the transaction and the period for which the full notional amount would be at risk.296 Meier said that he did not like the idea of the full notional amount being at risk until maturity, and that he would prefer the notional amount to amortise so as to match BVG's exposure under the CBLS. Dr Meier was, however, keen on increasing the notional amount of the transaction so as to include both the "debt" and "equity" sides of the CBLS, as this would increase the amount of the upfront payment that BVG would receive.297 Dr Meier also said that BVG's legal department was of the view that the ICE Transaction did not have to be approved by the Supervisoiy Board. The ICE Transaction was merely to be discussed with Dr Sarrazin (who was then Berlin's Senator of Finance and the chairman of BVG's Supervisory Board) and it was not proposed that the transaction would be formally approved at that stage. It seems that Mr Banner and Dr Meier also discussed, at their breakfast meeting on 26 October, an internal document prepared by Dr Meier in relation to the ICE Transaction. This appears from an e--mail sent by Mr Banner to Dr Meier on 19 November 2006,298 which stated (so far as relevant in the present context): During our breakfast meeting you mentioned that you had prepared an internal letter in which you describe the transaction and, for example, also address JPMorgan's motivation in carrying out this transaction.' As I am currently in the process of drafting a similar letter for one of our customers, I would be grateful if you could provide me with your version at your convenience. 296 297 298 Mr Banner tol_d Mr O'Connor in their telephone conversation on 27 October 2006 that Dr Meier was not concerned about any risk of Credit Suisse defaulting on the debt side of the CBLs, but thought that it made sense to include this debt side in the ICE Transaction in order to generate a higher upfront payment. In his witness statement (at paragraph 130), Dr Meier says that BVG was not entirely comfortable with the position of Credit Suisse on the debt side of the CBLS 87 (5) (6) (7) Mr Banner believes that he asked for this document because Mr O'Connor was expressing growing doubts at around this time as to whether Dr Meier was serious about entering into the transaction. Mr Banner asked for the internal document because he did not feel that he could explicitly question Dr Meier's commitment to the ICE Transaction without running the risk of offending Dr Meier.299 Dr Meier did not respond to Mr Banner's e--mail. However, they spoke to each other on the following day, 20 November 2006, when Dr Meier called Mr Banner to discuss the transaction.300 After discussing various matters, Dr Meier indicated to Mr Banner that BVG would not be able to execute the transaction by the end of the year. Mr Banner said words to the effect that it was useful to have received this update as he could update other people involved in the transaction at PM. Dr Meier asked Mr Banner if he needed a written update, to which Banner responded that he did not, and that the oral update that Dr Meier had just given would do fine. Dr Meier then said that he had prepared ten or so slides for Dr Sarrazin (the reason there were only a few slides was that "it has to be discussable eflectively within five mimttes"), and offered to send them to Mr Banner. Mr Banner replied, "That would be nice", and added that he would not use them externally. Shortly after this conversation, Dr Meier e--mailed Mr Banner with some detailed comments from Freshflelds regarding the wording of the "permitted act" representation that BVG wished JPM to provide (the wording of this representation was being heavily negotiated at this time).301 At the bottom of his e--mail, Dr Meier wrote, "Attached please find our handout about the transaction''. The e--mail attached the 1 November 2006 Presentation. It is thus clear that Dr Meier did not send the document to Mr Banner for Mr Banner to review and comment on it, and Mr Banner did not suggest that he would conduct any such review or offer any such comment. 299 300 30] Banner, paragraph 98 {C/l/27} 88 (8) (9) (10) Shortly after receiving Dr Meier's e-mail, Mr Banner foiwarded it to Mr O'Connor (at 10.18) under cover of an e-mail that stated "pls lets discuss."302 Mr O'Connor responded (at 10.59) '"When's a good time? I'll be at my desk 39 303 shortly to which Mr Banner replied (at 1 1 "can you stop at my desk . 304 when you arrive? Am under water today On the evening of the following day, 21 November 2006 (at 18:41), Mr Banner forwarded Dr Meier's e-mail to Mr O'Connor for a second time.305 Mr Banner wrote in his covering e-mail, "see the attached. thi's is what Meier uses internally. hope this gives you a bit more comfort bac Mr Banner explains in his witness statement306 that the purpose of folwarding the 1 November 2006 Presentation to Mr O'Connor was to provide comfort to Mr O'Connor that Dr Meier genuinely proposed to proceed with the transaction. Mr O'Connor replied (at 19:37), "Give me a call when you get a chance to catch your breath -- or tomorrow ydu prefer".307 Mr Banner sent a further e-mail around 15 minutes later in which he wrote "Will call tomorrow", before turning to address a different transaction.308 Later that night (21 November 2006, at 22:36), Mr Banner replied to Dr e-mail, setting out some revised language for the "permitted act" representation that JPM proposed to provide to BVG309 Although Mr Banner did not make any reference at all in his e-mail to the 1 November 2006 Presentation, it was attached to Mr Banner's e-mail. Mr Banner did not intentionally attach the presentation to his e-mail, and it seems that the reason why it was attached was because it had somehow been embedded in Dr Meier's e-mail to which Mr Banner was replying (rather than having been 302 303 304 305 306 307 308 309 Banner, paragraph 107 1/29} 1} and 89 (11) (12) attached as an ordinary attachment). Mr Banner"s e-mail was copied to Ms Mattstedt, and blind copied to Mr O'Connor. Mr O'Connor replied to Mr Banner a few minutes later (at 22.42) using his blackberry, stating is almost famous! 10 By 27 November 2006, Mr Banner had not received any response to his e- mail to Dr Meier of 21 November 2006 (22:36). Mr Banner therefore forwarded that e-mail to Dr Meier on 27 November (at 14:51) and asked Dr Meier whether he had heard anything regarding the wording of the representation." 1 Once again, the embedded 1 November 2006 Presentation was attached, inadvertently, to Mr Banner's e--mai1. Once again, there was no comment or reference whatever to it or its content, the fact that it continued to be attached being (as noted above) a consequence of the way it had become embedded in the e--mail chain. a On 30 November 2006 (at 09:56), Dr Meier forwarded to Mr Banner an e- mail that had been sent to him by Mr Joergens of Freshfields (New York) commenting on JPM's draft wording for the "permitted act" representation.3 12 Mr Banner forwarded Dr Meier's e--mail to Mr O'Connor (at 10:04) and suggested they discuss it" Mr Banner and Mr O'Connor (who was working from home that day) then spo1<e,314 during which conversation Mr O'Connor asked Mr Banner to forward the version of the representation that Mr Banner had sent to Dr Meier (Mr O'Connor said that if need be, he would transfer it to his computer at home). Mr Banner then forwarded his e-mail to Dr Meier of 27 November 2006 (14:51) to Mr O'Connor, with the result that the 1 November 2006 Presentation was again 15 inadvertently attached to this e--mail to Mr O'Connor.3 Once again, no reference was made to the 1 November Presentation or its contents in any of 310 311 312 313 314 315 {H/568aa} and and {H/580a} and 90 223. 224. (13) these exchanges, the focus and purpose of the exchanges having been related to an entirely different issue. On 1 December 2006 (at 11:06), Mr Banner and Mr O'Connor had a further discussion regarding the wording of the representation that had been proposed by JPM (Mr O'Connor had noticed that, due to a grammatical error, it did not make Following some further e--mai1 exchanges between Mr Banner and Mr O'Connor regarding the representation, Mr Banner (at Mr O'Connor's suggestion) sent Dr Meier a revised version of the wording for the representations, in the form of two letters that would be signed by First Chicago and FNBC317 Mr Banner did so (at 13.25) by replying (again) to the e--mail that Dr Meier had sent to him on 20 November 2006 (at 10:07), with the result that the 1 November 2006 Presentation was also attached (again inadvertently) to Mr Banner's e--mai1.318 On 5 December 2006 (at 13:07), Mr Banner forwarded this e--mail to Mr O'Connor, and again the 1 November 2006 Presentation was inadvertently attached to this e- mail.3l9 As before, no reference was made to the 1 November Presentation or its contents in any of these exchanges, the focus and purpose of the exchanges having been related to an entirely different issue. Against this background, BVG alleges that the 1 November 2006 Presentation was discussed in at least one telephone call between Mr Banner and Dr Meier. BVG originally pleaded in its Defence that that conversation took place in January 2007, but it has recently amended this plea to allege that the conversation took place in January or February 2007.320 BVG alleges that during the relevant call or calls, Mr Banner referred to Dr Meier's belief that "purely theoretically, the derivative structure doubles the maximum default", and suggested to Dr Meier that this might not be the best way 316 317 318 319 320 and and ADC, paragraph 102 91 to present the proposed transaction to decision making bodies because it gave an unduly pessimistic impression of the risk of the proposed transaction. BVG says that this belief on the part of Dr Meier was stated on page 10 of the 1 November 2006 Presentation, and that it is to be inferred that Mr Banner read the presentation and/or turned a blind to it at around the time that he received it, and that BVG was entitled in any event to assume that Mr Banner had read it. 225. It is material to note that BVG's pleaded case that Dr Meier and Mr Banner discussed the 1 November 2006 Presentation is not supported by the evidence of either Dr Meier or Mr Banner. Dr Meier's witness evidence is rather curious on this issue, as explained below. 321 (1) At paragraph 164 of his statement, Dr Meier explains that in early 2007, he developed a PowerPoint presentation to explain the ICE Transaction in support of submissions to BVG's organs. Dr Meier calls this presentation the "Board Presentation". (2) Dr Meier then says this at paragraph 165: I based the Board Presentation on the existing 1 November 2006 Presentation. This was for obvious reasons: the 1 November 2006 Presentation set out my understanding of the ICE Transaction as it had been presented to me by JPMorgan. It had also, I believed, been read by Mr Banner, and at least implicitly approved by him because, having read it and discussed it with me in conversations which took place, as far as I can recall, in January/February 2007 (for example, in the conversations I mention below), he had not corrected anything in it, nor suggested that it was in any way inaccurate. (3) The curiosity about Dr Meier's evidence is that although he suggests, in paragraph 165, that the 1 November 2006 Presentation was discussed with Mr Banner in January February 2007, it is clear from what follows in his witness statement that it was the Board Presentation that he claims to have 32' 92 discussed with l\/lr Banner in early 2007, n_o't the 1 November 2006 Presentation. In paragraph 166,322 Dr Meier states: In fact, I enlisted Mr Banner's assistance with aspects of the Board Presentation. In particular, I recall discussing with him the reference, at page 10 of the Board Presentation, that there was a theoretical possibility that the transaction structure doubled the maximum level of risk of default. I remember that Mr Banner did not appear to be keen on this idea of presenting a doubling of the maximum risk of this section of the Board Presentation because it painted an overly negative picture of the risks involved in the transaction. As it was, it remained in the final version. (4) Dr Meier's recognition, in paragraph 166, that the discussion that he believes he had with Mr Banner in January 2007323 would have taken place in the context of the Board Presentation rather than the 1 November 2006 Presentation, seems logical. There does not appear to be any reason (and Dr Meier does not suggest any reason) why Dr Meier would have raised for discussion with Mr Banner in January/February 2007 a presentation that he had drafted two months earlier in circumstances where he was then engaged in writing a new presentation for BVG's organs. (5) Importantly, it is not suggested by BVG that Mr Banner was ever provided with a copy of the Board Presentation.324 226. It is submitted that Dr Meier's evidence in paragraph 166 has significant implications for BVG's case. 3" 323 No recording has been found of any conversation between Dr Meier and Mr Banner in which Mr Banner commented that the notion that the derivative structure doubled the maximum default gave an unduly pessimistic impression of the risks of the ICE Transaction. However, both Dr Meier and Mr Banner recall Mr Banner making a comment along those lines. 324 This document, which was dated 6 February 2007, is at 93 It does not support BVG's plea325 that Dr Meier and Mr Banner discussed the 1 November 2006 Presentation in the course of at least one telephone conversation in January or February 2007. (2) It also fatally undermines BVG's casem' that "by identifizing a specific statement in the 1 November 2006 Presentation and suggesting to Dr Meier that it might be an unduly pessimistic way in which to present the proposed transaction, Mr Banner impliedly represented that he agreed with those parts of the said presentation on which he did not expressly comment On the basis of Dr Meier's own evidence, the discussion with Mr Banner did not take place by reference to the 1 November 2006 Presentation, and therefore (contrary to BVG's pleaded case) Mr Banner therefore would not have identified or commented on any specific statement in that presentation. The same must be true of the Board Presentation: Mr Banner was never provided with a copy of it. The whole basis of BVG's case therefore falls away. 227. For completeness, it may be noted that in paragraph 167 of his statement,327 Dr Meier refers to a telephone conversation with Mr Banner on 6 February 2007 during which Dr Meier said that he would have to' indicate somewhere in his presentation for BVG's management board:328 that um there is a probability, even if it is Very small, that um quasi everything defaults, that is um Credit Suisse, secondly Landesbank Berlin, thirdly HypoVereinsbank, Landesbank Baden- Wurttemberg as protection grantor and then also um this portfolio with the 150 companies becoming distressed. 325 ADC, paragraph 102 326 ADC, paragraph 189 108} 3" . 328 and 94 228. Dr Meier criticises Mr Banner, in paragraph 167 of his statement, for failing to correct Dr Meier's reference to 150 companies becoming "distressed". But this criticism is misplaced: (1) Dr Meier referred to the portfolio becoming distressed, not to all 150 companies becoming distressed. (2) As Mr Banner explains in his statement,329 he believed that Dr Meier understood that the portfolio could become distressed and that the entire notional amount under the JPM Swap could become due with fewer than 150 of the reference entities defaulting; and Mr Banner did not understand Dr Meier to be saying in his comment quoted above that the tranche could become distressed only if all 150 companies became distressed. The thrust of Dr Meier's evidence in paragraph 166 of his statement is consistent with Mr Banner's evidence. In paragraphs 121 to 123 of his Witness statement, Mr I have reviewed the documents and have considered the chronology of events relating to the November 2006 Presentation. I am now aware that at the time I received the presentation from Dr Meier, the deal had already been delayed and he had explained that the slides had been finalised for a meeting with Dr Sarrazin where they had not been presented. Having given careful thought to the context in which I received the November 2006 Presentation and the stage that the negotiations had reached, I do not believe that I ever discussed the presentation with Dr I would have had no reason to look at the November 2006 Presentation or discuss it with Dr Meier at a later stage of the transaction. In (I believe) January 2007 I had a telephone discussion with Dr Meier about the notion that the derivative structure of the ICE Transaction doubled I have a limited Although this issue is the maximum default amount. recollection of this call. 229. Banner says:.33O Meier. 329 Banner, paragraph 142 1/37} 330 95 230. 231. In light of the evidence of Dr Meier and Mr Banner, it is respectfully submitted that BVG's case - that Mr Banner expressly commented on part of the 1 November 2006 Presentation, and thereby impliedly represented that he agreed with those other parts of the presentation upon which he did not expressly covered in the November 2006 Presentation, we did not (to the best of my recollection) discuss the specific wording of the presentation on this or any other issue. I do not believe that 1 would have had the November 2006 Presentation in front of me during the call and I cannot now recall which of us initiated the discussion. During the course of a conversation (possibly the conversation I refer to above), I remember saying to Dr Meier that the notion that the derivative structure doubled the maximum default gave an unduly pessimistic impression of the risks of the ICE Transaction. This was because it was not strictly correct to say that the derivative structure alone doubled the maximum default amount. The fact that BVG's exposure under the ICE Transaction was theoretically doubled was because it remained exposed to its credit risks under the CBLS (which would be hedged via the LBBW Swaps). I also felt it was very unlikely that there would be defaults of the Assumption and Subscription Banks and LBBW and the entire notional amount of the JPM Swap would become due. comment -- should be rejected. Before leaving this issue, however, it may be worth noting one final point in the context of JPM's pleaded case. (1) place in or around January 2007. JPM originally admitted in their Reply and Defence to Counterclaim served on 16 March 201233' that Dr Meier and Mr Banner discussed the 1 November 2006 Presentation in the course of one telephone call which took 331 ARDC, paragraph {A/3a/39} 96 JPM have recently amended their 232. 233. pleading,332 with the consent of BVG, in order to bring it into line with Mr Banner's evidence in his witness statement.333 (2) At BVG's request, JPM have explained in correspondence334 that its original plea was based upon Mr Banner's recollection of events at the time that the Reply was drafted, at which time Mr Banner did not have available to him the full documentary record which has since become available through the disclosure process. (3) As Mr Banner states in paragraph 121 of his witness statement,335 Mr Banner has reviewed the documents and considered the chronology relating to the 1 November 2006 Presentation, and having given careful thought to the context in which he received the presentation, he does not believe that he ever discussed the 1 November 2006 Presentation with Dr Meier. Dr Meier's evidence is consistent with Mr Banner's evidence on this point. BVG advances an alternative case336 that by receiving the 1 November 2006 Presentation (having requested that it be sent to him) and by returning it to Dr Meier as an attachment to subsequent e-mails without express comment, Mr Banner impliedly represented that he agreed with the contents of the presentation. As to this: (1) JPM respectfully submit that no implied representation can be derived from the fact that, by virtue of the 1 November 2006 Presentation having been embedded in Dr Meier's e-mail to Mr Banner, the 1 November 2006 Presentation was inadvertently attached to three e--mails sent by Mr Banner 332 333 334 336 ARDC, paragraphs {A/3a/39} In the version of the draft ARDC that was attached to JPM's application to amend dated 18 November 2013 {B/29c/210.47} it was pleaded in paragraph 87(2)(b) that "The 1 November 2006 Presentation was not mentioned by either Mr Banner or Dr Meier". On reflection, it was appreciated that this statement went further than Mr Banner had gone in his witness statement, and so this sentence was not included in the version of the ARDC that was served on 16 December 2013. Linklaters' letter to Addleshaw Goddard dated 5 December 2013 {l/795/ 1657} ADC, paragraph 189, final sentence 108} 97 234. 235. 236. in reply to Dr M'eier's e-mail. Mr Banner made no comment on the 1 November 2006 Presentation in any of those e--mails, and Dr Meier cannot reasonably have inferred that Mr Banner was implicitly representing by sending those e--mails that he agreed with and/or had reviewed and approved the contents of the presentation.337 (2) This is all the more so in circumstances where Dr Meier did not send the 1 November 2006 Presentation to Mr Banner for his review and comment. Dr Meier sent that presentation to Mr Banner following their conversation on 20 November 2006 during which Mr Banner had indicated a wish to update his colleagues on the progress of the transaction.338 Indeed, Mr Banner told Dr Meier that he did not need a written update, and that the oral update that Dr Meier had provided would suffice. Dr Meier nevertheless offered to send his slides to Mr Banner, and Mr Banner politely accepted that offer. i There is a further factual issue on the pleadings which is conveniently addressed at this stage, even though it is probably more relevant to BVG's 'case (addressed below) on duty of care and/or mistake, namely whether Mr Banner read the 1 November 2006 Presentation and appreciated that Dr Meier had misunderstood the loss profile of the JPM Swap. BVG alleges339 that it is to be inferred (1) that Mr Banner read the 1 November 2006 Presentation, and (2) that upon doing so he appreciated from page 10 that BVG understood the proposed transaction to have a pro-rated loss profile. As to this: (1) Mr Banner no longer recalls when he first opened the 1 November 2006 Presentation. His evidence340 is that he believes that before foiwarding Dr Meier's e-mail attaching the presentation, he would have opened the 337 338 339 340 It is worth noting that Dr Meier does not say in his witness statement that he understood Mr Banner to be making any such representation by virtue of these e-mails. and ADC, paragraphs 103-104 Banner, paragraph 108 1/29} 98 attachment to that e-mail and seen that it was a PowerPoint presentation. He believes that he would have flicked through the presentation quickly to see the general nature of the slides." (2) Mr Banner does not recall reading or reviewing the contents of the presentation in any detail and does not believe that he would have done so: his focus was upon the existence of the presentation rather than its contents.342 (3) Mr Banner did not notice the statements on page 10 of the 1 November 2006 Presentationm that the maximum default under the JPM Swap would only occur if LBB, HVB, LBBW and all 150 reference entities in the portfolio were insolvent.344 (4) It is clear from the contemporaneous documents in the disclosure that Mr Banner was very liusy on other matters on the day that he received Dr Meier's e-mail,345 and that the key issue at around this time regarding the ICE Transaction was the wording of the "permitted act" representation to be given by PM. 341 342 343 344 345 JPM made some minor amendments to paragraphs 88(1)(a) and 89(1) in the ARDC {A/3a/39} and {A/3a/42} so that the pleading reflects Mr Banner's evidence. In paragraph 60 of its ARRDC BVG seeks to make much of these amendments, notwithstanding that they are inconsequential. Mr Banner explains in paragraph 107 -that Mr O'Connor had been expressing doubts as to whether BVG was serious about proceeding with the transaction . The existence of the presentation provided comfort that BVG was serious. and Banner, paragraph 119 1/32} Dr Meier sent his e-mail attaching the 1 November 2006 Presentation to Mr Banner on 20 November at 10:07 . Mr Banner forwarded it to Mr O'Connor at 10:18 . At 11:04, Mr Banner said in an e-mail to Mr O'Connor that he was "under water today" . At 09:16 on 21 November 2006, Mr Banner said in an e- mail to Mr O'Connor, Really busy. Closed one trade already, live in another one in 15 mins. Tomorrow might close another big . On 21 November at 18:31, Mr Banner forwarded Dr Meier's e-mail to Mr O'Connor a second time ("see the attached. this is what Meier uses internally. hope this give you a bit more comfort back") 1} . Mr O'Connor replied at 19:37, asking Mr Banner to call him when Mr Banner got a chance to catch his breath -- or tomorrow if Mr Banner preferred 1} . Mr Banner said he would call tomorrow 66/1} 99 237. 238. (5) Mr Banner does not believe that he discussed the 1 November 2006 Presentation with Mr O'ConnoI',346 and there is no evidence that he discussed it either with Mr 0'Connor or with anyone else. If such a discussion had taken place, this would have been revealed by the extremely comprehensive searches that have been carried out of Mr Banner's and Mr O'C0nnor's documents, including the transcripts of the telephone calls between them. (6) But, despite the production of both documents and transcripts of telephone conversations that took place at the time, there is not a jot of evidence emerging that would suggest any such discussions took place. It is submitted that this presents a very serious obstacle to BVG's case in this regard. As to whether Mr Banner not only read the 1 November 2006 Presentation but also appreciated that BVG had misunderstood the loss profile of the JPM Swap: (1) Mr Banner's evidence is that he was hot aware of any misunderstanding on the part of Dr Meier as to the loss profile under the JPM Swap.347 (2) Indeed, Mr Banner says (quite fairly) that he does not understand how Dr Meier could have believed that the loss profile was pro--rated, because such loss profile would be inconsistent with the JPM Swap benefitting from a subordination cushion (the existence of that cushion meant that a number of reference entities had to default before any payment would become due from Bvo).34" It follows from the above that BVG's case based on an alleged duty to disclose that the loss profile was not pro--rated must fail (even putting to one side the serious legal difficulties of establishing any such duty in the absence of a partial 346 343 Banner, paragraph 108 Banner, paragraph 120 Among other things, Dr Meier was on 6 February 2007 provided by Mr Banner with a graph showing the percentage portfolio losses which would lead to first losses in a tranche with 5% subordination (the level of subordination then priced for BVG), assuming a recovery rate of 40%, as compared with Moody's cumulative default rates over a period of 10 years since 1970 for A-- rated issues 1} 1} {H/643.2/l} and 100 239. 240. representation), because it is a necessary ingredient of that case that JPM realised that BVG had misunderstood the loss profile. 349 As for the allegation of dishonesty made by BVG against Mr Banner on this part of the case, it is clear from information subsequently provided to Dr Meier by Mr Banner (described below) that Mr Banner cannot have had any intention to mislead BVG as regards the loss profile. In particular: (1) (2) On 21 March 2007, Mr Banner had a telephone conversation with Dr Meier about an indication that Mr Banner had provided of the amount of the upfront payment that could be paid to BVG under current market 350 conditions. Dr Meier described the amount that had been indicated, 1 m, as "not very much". a Dr Meier and Mr Banner discussed the fact that the JPM Swap was "afi- market" because only companies with a minimum rating of A-- were to be included in the portfolio. Dr Meier asked Mr Banner what could be done to make the transaction closer to an on--market transaction whilst maintaining the premise of a minimum A rating for all entities in the portfolio. Mr Banner replied that one possibility would be to include other securities (rather than just single names) in the portfolio, being either CD03 or asset backed securities. Mr Banner explained that if CD03 were included, "the leverage in the structure would further increase because you will have a CD0 within a Dr Meier told l\/Ir Banner that he would like to look into the possibility of including some other securities in the transaction because he had mentioned an upfront amount of in his submission to the Supervisory Board (Dr Meier regarded JPM's indicative figure of $5m as being "quite afar cry" from his figure of 349 350 ADC, paragraphs 193.3 and 194 and 101 241. (3) (4) Dr Meier did not query Mr Banner's comment in their conversation on 21 March 2007 that the inclusion of a CD0 in the structure would "furtl1er increase" the leverage. As Mr Banner explains in his statement?" the presence of leverage in the transaction was incompatible with the loss profile being pro--rated: once the subordination of the tranche is exhausted, the leverage means that each default of a reference entity in the portfolio would have a magnified effect in eroding the tranche. The leverage in the structure is accordingly relevant to the number of defaults that can be sustained before the detachment point is reached and the entire notional of the tranche is lost. Moreover: (1) (2) On 30 April 2007, Mr Banner had a further discussion with Dr Meier regarding the possibility of including a CD0 in the transaction stiucture, and the fact that the existing proposed structure (with only single names in the portfolio) had less risk and less leverage than would a more elaborate - 2 transaction st1ucture.35 Dr Meier asked Mr Banner to present two possible transaction stiuctures, one based on a portfolio of 150 companies and another where 20% of the 150 companies were replaced with a CD0 a CD0 squared component). On 1 May 2007, Mr Banner provided Dr Meier with indicative pricing for a transaction with a 20% CD0 squared component, which Mr Banner said would increase the amount of the upfront payment that could be generated for BVG by $2--2.5m.353 Mr Banner explained in his covering e-mail that there would be higher leverage in the CD0 squared structure, but that this would only lead to a loss if the subordination was exhausted (and there would be greater subordination in a CD0 squared). Attached to Mr Banner's 351 352 353 Banner, paragraph 155 1} and {H/879/l} and 102 e--mail were' rating distribution slidesm relating to the two possible transaction structures that he had discussed with Dr Meier on the previous (3) On 2 May 2007, Dr Meier called Mr Banner regarding Mr Banner's e- 1 356 mai They had a wide--ranging conversation regarding the proposed transaction. Among other things, Dr Meier stated that the decision whether or not to incorporate a CD0 squared component would be made independently from the composition of the portfolio. He then said:357 Well, I mean, 2 million euros more sure are a lot, and the question immediately will be, there is nothing for free, there is no free lunch, where does the additional risk have any effect. And this is the point where we say, sure, we have a higher leverage now which, however, will only be effective if the subordination resulting from the CD0 no longer exists. (4) On 9 May 2007, Mr Banner provided Dr Meier with slides in relation to the CD0 squared structure (the Hockey Stick Presentation).358 In his covering e- mail, Mr Banner wrote:359 As discussed, you "purchase" the higher cash value and the higher subordination in the through a higher leverage. The A tranche therefore can tolerate more defaults until it is weakened. However, each additional default consumes more of the tranche than would be the case with a classic CDO. (5) On the first slide of the 'Hockey Stick Presentation was a diagram showing the different typical payment profiles of a CD0 and a CD0 squared.360 354 355 356 357 358 359 and one with a portfolio of 150 entities and one where 20% of those companies were replaced by a CD0. and and and and 103 (6) (8) (0) (C1) The diagram showed the leverage inherent in typical CD0 and CD0 squared structures in the shape of a hockey stick. The diagram showed that a CD0 squared structure could typically sustain more defaults before any loss was suffered by the investor; but that once the subordination was exhausted, the rate at which losses would then be sustained as further defaults occurred would be higher in a CD0 squared stnicture than in a CD0 and the detachment point (the point at which the entire notional of the transaction would be lost) would be reached more quickly in a CD0 squared structure. It is clear from the diagram that further defaults may occur after the detachment point is reached in both a CD0 squared and a CD0 structure. This is not consistent with a pro--rata loss profile whereby the notional amount is only fully lost at the point when all of the reference entities in the portfolio have defaulted. It is very difficult to square any intention on the part of Mr Banner to deceive Dr Meier about the loss profile of this kind of transaction with his sending to Dr Meier the Hockey Stick Presentation, given that it illustrated the loss profile of a CD0, from which it could clearly be seen that the loss profile was not pro--rated. Finally, on 30 May 2007, Mr Banner explained in an e--mail to Dr Meier that because the iTraxx index had fallen by 3 basis points since early May, the upfront payment which could be generated by the ICE Transaction had fallen by approximately $1.5 million. 362 Mr Banner explained that "the leverage in the structure" was the reason why a relatively small change in the spread could have such a large impact on the net present value of the transaction. 360 361 362 and Compare the steepness of the two lines on the diagram. and 104 242. 243. 244. These exchanges between Mr Banner and Dr Meier between March and May 2007, as set out in paragraphs 240 and 24] above, are all flatly inconsistent with any suggestion that Mr Banner intentionally and dishonestly misled BVG as to the loss profile or allowed BVG to labour under a mistaken belief as to that profile. (1) If this had been Mr Banner's intention, he would not have made such repeated references to the "leverage" in the JPM Swap (the very idea of leverage being inconsistent with a pro-rated loss profile). (2) Nor would Mr Banner have sent Dr Meier the Hockey Stick Presentation, from which Dr Meier could and should have seen that the loss profile of the JPM Swap would not be pro--rated. (3) Nor would Mr Banner, on 4 and 6 July 2007, have sent Dr Meier drafts of the confirmation for the JPM Swap,363 from which again Dr Meier could and should have seen that the loss profile of the transaction would not be pro- rated. It is submitted that BVG's case that Mr Banner spotted the error in the 1 November 2006 Presentation concerning the loss profile of the proposed transaction, and deliberately chose not to point out BVG's mistake, is simply not credible in light of Mr Banner's evidence and the exchanges referred to above. This allegation should be rejected. (ii) Any such implied misrepresemfarion was corrected and/or disclosure was made Even if, contrary to JPM's primary case, Mr Banner did impliedly represent in January or February 2007 that the loss profile of the transaction was pro-rated, such representation was subsequently corrected not only in the exchanges referred to in paragraphs 240 and 241 above, but also in the draft and final versions of the 363 105 245. 246. confirmations that were provided to BVG from 4 July 2007.364 the context of BVG's non--disclosure case, PM did disclose to BVG that the loss Put another way in profile of the JPM Swap was not pro--rated. So far as the corrections and disclosures in the confirmations are concerned, it is illuminating in this context to consider BVG's allegation,365 that page 4 of Dr Meier's 3 August 2006 Presentation reflected his belief and/or understanding that the tranche in respect of which BVG would provide credit protection, would detach at 100%. (1) If (which JPM denies) any such belief on the part of Dr Meier was based upon any misrepresentation that had been made by JPM, that misrepresentation was corrected in the transaction confirmations which expressly set out the detachment points (upper boundaries) of each leg of the JPM Swap. (2) Those detachment points as Dr Meier could and would readily have seen from the contractual documentation with which he was provided -- were set between 2.5% and well below 100%. N0 reliance Without prejudice to the submissions already made above, JPM do not accept that BVG relied upon any implied representation made as to the loss profile of the PM Swap when deciding to enter into the ICE Transaction. As already submitted above, it was the minimum A-- rating for all of the reference entities in the portfolio and a rating of the tranche (with the tiny probability of default implied by that rating) that mattered to BVG's risk assessment. 364 365 ADC, paragraph 70 . The relevant page of the 3 August 2006 Presentation is set out under ADC, paragraph 68 106 247. 248. 249. 250. BVG alleges366 that if it had been aware that it could be liableto JPM for the full notional amount of the transaction upon the occurrence of between approximately 10 and 15 credit events (out of 150 reference entities), it would have considered that the JPM Swap carried an unacceptable level of risk for BVG, even if the tranche upon which it was to sell credit protection was rated A. It is submitted that this allegation is contrived. As Dr Meier himself wrote in his internal presentations,367 according to Fitch Ratings the implied probability of default of a rated portfolio was 0.01% after one year, 0.05% after five years and 0.19% after ten years. It was these probabilities that were relevant to BVG, rather than the number of entities that would have to default in order for it to be liable for the entire notional amount of the transaction. Further, as regards the issue of reliance, it is notable that BVG's evidence of reliance, both from its Management Board and its Supervisory Board, is at best exceedingly thin. As already noted above, BVG appears unable (or unwilling) to put forward any witness who can give relevant evidence in this regard, whilst the contemporaneous evidence as to what transpired when the ICE Transaction was considered by the Supervisory Board suggests a somewhat cavalier approach to the approval of the transaction. This is at odds with any realistic contention that BVG's decision-making organs had any particular understanding of the loss profile of the transaction, still less that this made any difference to their decisions-to approve the transaction. Fuithermore, it is clear, for example from an e-mail sent by Dr Meier to Mr Kiuse on 19 October 2006,368 that Dr Meier had already decided to recommend the transaction internally within BVG before the 1 November 2006 Presentation was sent to Mr Banner. In addition to the points made above, JPM will, if necessary, further contend that BVG is estopped, in the absence of fraud, from contending that it relied upon the 366 367 368 ADC, paragraph 195.2 and and 107 251. (C) 252. 253. 254. alleged representation as to the loss profile of the JPM Swap when entering into the ICE Transaction (see paragraph 218 above). For the reasons identified in summary above, it is respectfully submitted that BVG's case on the alleged Pro-Rated Loss Profile representation is untenable and should be dis1nissed.369 The alleged Credit Risk representation Under the third limb of its misrepresentation case, BVG alleges that JPMC and/or JPMS represented to BVG that the proposed transaction would involve no, or no material, increase in BVG's credit risk compared to what BVG's credit risk would be if the transaction was not concluded. (1) No such representation was made Once again, JPM submit that the representation alleged by BVG was not in fact made. In support of its case to the contrary, BVG relies upon four different means by which the representation is alleged to have been made. First, BVG relies") upon statements made in the June 2006 Presentation, the Amended June 2006 Presentation and the August 2006 Presentation that: (1) the proposed transaction would allow BVG, and indirectly PM, to hedge the risk of a potential fuither downgrading of HVB and HeLaBa and (2) BVG would benefit directly from the proposed transaction through hedging its credit risk and receiving a payment of net present value, and PM would benefit indirectly from the proposed transaction through the further hedging of BVG's credit risk under the CBLs. 369 370 JPM makes the same submission in respect of BVG's counterclaim (pleaded at ADC paragraph 248) for damages under section 2 of the Misrepresentation Act 1967, which is also based upon the alleged Pro--Rated Loss Profile representation. ADC, paragraph 197.1 which cross refers to paragraph 90.1. 108 255. 256. 257. 258. Neither of these statements was, or would have been understood by a reasonable representee to be, a representation that the proposed transaction would involve no, or no material, increase in BVG's credit exposure compared to what BVG's credit exposure would have been if the transaction was not concluded. Indeed, on closer inspection, BVG does not allege that these statements amounted to any such representation. (1) Rather, BVG alleges" 1 that these statements meant (and were intended and understood to mean) that it was in the interest of neither BVG nor JPM for BVG to increase its risk exposure under the CBLS. (2) But even if this interpretation of the statements were con*ect, it would be irrelevant: the representation that BVG seeks to establish is a different one -- namely that the proposed transaction would involve no or no material increase in credit exposure compared to what that exposure would have been if the transaction was not concluded. Secondly, BVG relies372 upon the statements said to have been made by JPMC and/or JPMS that, in view of the possibility that the credit risk against which BVG was to provide protection might be taken onto JPM's books in the case of early termination of the JPM Swap, the transaction should be entered into "on a 'risk- free basis and that JPM should have the right to change the entities in relation to which credit protection was sold. The words "risk--free basis" are taken from an e- mail sent by Mr Banner to Dr Meier on 14 July 2006 in which Mr Banner used the expression in inverted commas and also wrote, "We thus see an rating as an appropriate structure for the portfolio note." BVG alleges374 that these statements meant (and were intended and understood to mean) that it was in the interest of neither JPM nor BVG for BVG to assume any substantial credit risk under the JPM Swap. BVG does not define what 371 372 373 374 ADC, paragraph 197.1 ADC, paragraph 197.2 112} which cross--refers to paragraph 90.2. ADC, paragraph 197.2 112} penultimate sentence. 109 259. 260. 261. "substantial" means in this context, but presumably the credit risk of a rated tranche would not be regarded as "substantial" for these purposes given Mr Banner's comment in his 14 July 2006 e--mail that a rated structure would be suitable. On this basis, BVG did not assume any "substantial" credit risk under the JPM Swap. However, BVG further alleges375 that "At the very least, the said statements must have meant that the credit risk assumed by BVG after the conclusion of the I CE Transaction would be no greater, alternatively not materially greater, than would have been the case absent the said transaction." This, with respect, is a non- sequitur: a statement by PM that the JPM Swap should be entered into on a "risk- free", rated basis does not state anything about the credit risk assumed by BVG after the conclusion of the ICE Transaction as compared with the risk to which BVG was exposed in the absence of that transaction. i Thirdly, BVG alleges376 that in the June 2006 Presentation, the Amended June 2006 Presentation and the August 2006 Presentation, JPMC and/or JPMS expressly told BVG that the proposed transaction would involve "hedging" of the credit risk to which BVG was exposed, that it amounted to "optimisation" of its existing CBL arrangements, that it would achieve "greater security" for BVG and that it would involve BVG taking over a "matching risk" to that to which it was previously exposed. It is helpful to provide the context in which the above words appeared in the June 2006 Presentation:377 (1) The June 2006 Presentation378 contained a statement that the proposed transaction allowed BVG to hedge the risk of a potential further downgrading of HVB HeLaBa; that BVG would directly benefit from the 375 376 377 ADC, paragraph 197.2 112} ADC, paragraph 197.3 which cross--refers to paragraph 94.4. Although some changes were made in the Amended June 2006 Presentation and in the August 2006 Presentation, these are not thought by JPM to be of any great significance in the present context. Accordingly, only the wording in the June 2006 Presentation is considered here. and 110 proposed transaction through hedging the credit risk and the receipt of a payment of net present value; and that the optimisation could be implemented and straightforwardly. 379 (2) The context in which the June 2006 Presentation (at page 10) made reference to "greater security" was as follows: 0 CDOS may be interpreted as notes for which the credit risk is not solely concentrated on one single issuer, but diversified to several names. 0 The investor realises a higher security through such diversification. 0 A CDO offers an attractive level of over-- collateralisation as compared to historical credit default rates. This means that several issuers would have to "default" as debtors first, before the CD0 investor! would suffer a loss of his lnvestment. - In contrast thereto, the single name note investor would be affected immediately in case of any default of his debtor - The over--collateralisation mitigates the credit default risk and enables a stable rating 0 A CDO Portfolio consists of investment-grade names with high rating, and is widely diversified 0 Ratings are based on the stress tests carried out by the rating agencies, and not on entity--specif1c ratings based on information provided by the entities (3) As for "matching risk", BVG's pleaded case proceeds on the basis of an inaccurate translation of the June 2006 Presentation.380 The relevant part of that presentation (on page 6)381 reads in the certified translation as follows: 379 and 380 "Matching" should read "corresponding". See also ARDC paragraph 44 and ARRDC paragraph 21 {A/3a/16} and 33' and - By way of a swap, one credit risk can be swapped with another 0 The existing credit risk may thus be swapped with a Diversified Risk. - JPMorgan assumes the credit risk and - The lessee will assume a corresponding risk connected with a diversified rated portfolio. 262. None of the above statements would have been understood by a reasonable representee to mean that the credit risk assumed by BVG after the conclusion of the ICE Transaction would be no greater, alternatively not materially greater, than would have been the case absent that transaction. Indeed, none of these statements involves in any way an attempt to quantify and compare the relative risks involved in the transactions. ., 263. The only statement that requires any comment in this regard is the statement on page 10 that the investor would realise a "higher security through such diversificari0n".382 (1) When read in context, it is clear that what was meant by this was that an investor would not suffer a loss upon the default of one entity (as would have happened to BVG, before the ICE Transaction was concluded, if any of the Assumption or Subscription Banks had defaulted). As the next bullet point went on to explain, several entities would have to default before the investor would suffer a loss of his investment. I (2) In other words, what was being compared was the relative position between being exposed to a concentrated, as contrasted with a diversified, risk. The statement was not, and could not reasonably have been understood to be, a comparison between BVG's credit risk position (howsoever measured) before and after the ICE Transaction as it was ultimately concluded (which, of course, also involved a substantial upfront payment being made to BVG). 382 and 112 264. 265. 266. BVG alleges383 that in the June 2006 Presentation, the Amended June 2006 Presentation and the August 2006 Presentation, JPMC and/o1'JPMS expressly told BVG that the proposed transaction would achieve "diversification",384 which "was at the core of good corporate financing" and led to "greater security for the investor". The passages in the June 2006 Presentation relied upon by BVG are addressed below.385 Page 5 of the June 2006 Presentation, headed, "Basic Principles", began with the words, "Everyone understands the following principle, 'You should never put all eggs in one basket'", and "Diversification is at the core of good corporate financing -- income can be inaximised and sgecific risks can be minimised using it" (underlining supplied).386 The point was then made on page 5387 that the CBLS only allowed single--debtor payment undertaking agreements (PUAS), and that as a result, investors accumulated concentrated credit risks on single names.388 The presentation went on to explain that US investors had acquired concentrated credit risks on PUA counterparties, which they had diversified using a structL1re at the level of the holding companies. The presentation continued (again on page 5) that the same benefits were now available for lessees, and that the sequence involved in such a transaction was set out over the following pages of the presentation. The final bullet point on page 5 read (underlining supplied): 383 384 385 336 387 388 ADC, paragraph 197.4 In ADC paragraph 93.3 BVG pleads the Bloomberg Financial Definition of the term "diversification" (namely "the spreading of an investment over a large number of securities, in order to reduce financial risk"). It is not clear why BVG pleads this particular definition: it is not alleged that Dr Meier understood "diversification" in the way defined by Bloomberg, or that "diversification" could only be understood in accordance with that definition. Again, some changes were made in the Amended June 2006 Presentation and in the August 2006 Presentation, but these are not thought by JPM to be of any great significance in the present context. Accordingly, only the wording in the June 2006 Presentation is considered. and and Unless they invested in low--yie1d US government bonds. 113 267. 268. 269. The opportunities are clear diversified collateral in the PUA reduces the specific risks, and furthermore enables the payout of a second net present value benefit to the lessee. The statements made on page 5 of the June Presentation did not say or mean that the credit risk assumed by BVG after the conclusion of the ICE Transaction would be no greater, or not materially greater, than would have been the case absent that transaction. BVG's case to the contrary overlooks the word "specific" that appeared twice on the page. Page 6 of the June 2006 Presentation was headed "Work flow: How can the risk for the be Changed Without Affecting the Leasing Transaction ?".389 The aim of this slide was to explain how the credit risk of the lessee on the PUA debtor could be swapped with another risk. It was in this context that the fourth bullet on the page said: 0 The existing credit risk may thus be swapped with a Diversified Risk. - JPl\/lorgan assumes the credit risk and The lessee will assume a corresponding risk connected with a diversified rated portfolio. Again, the above statements did not say or mean (and would not have been understood by a reasonable representee to mean) that the credit risk assumed by BVG after the conclusion of the ICE Transaction would be no greater, or not materially greater, than would have been the case absent that transaction. The same is true of page 10 of the presentation,390 which is addressed in paragraphs 261(2) and 262 above. The same is also true of page 12,391 headed "Basic Principle of the Collateralized Debt Obligation -- 0ver--collateralisati0n and diversification". Under the subheading "Description of a it stated: 389 390 391 and and and 114 270. 0 The CD0 to be purchased by BVG consists of a diversified portfolio of corporate credit risks with equal weighting 0 By using securitisation technology, notes of different seniority will be created -- similar to the capital structure of an entity - In case of any credit default, only the securities of the "equity tranche" will be affected initially Only if the entire equity tranche defaults as a consequence of a multitude of credit defaults, will the securities of the "mezzanine debt tranche" be affected in case of further credit defaults Only if the entire mezzanine debt tranche will default as a consequence of further credit defaults, will the securities of the "senior debt tranche" be affected 0 This way, for example, securities rated or AA by and Moody's may be generated from a portfolio of credit risks with an average rating of At the bottom of the page, the following was written: The equity and mezzanine debt tranches represent a buffer against credit defaults in the portfolio for the senior debt tranche. In summary therefore, whilst JPM in the documentation did indeed address the nature of risk, and the advantages in a general way -- of having diversification of risk rather than cluster risk, BVG is wrong to assert that PMC and/or JPMS made any representation to BVG as to the relative quantification of the risks facing BVG were it to enter into the transactions, compared to its position were it to choose not to do so. Similarly, BVG is also wrong to assert that JPMC and/or JPMS represented to BVG that the proposed transaction would involve no, or no material, increase in BVG's credit risk compared to what BVG's credit risk would be if the transaction was not concluded. As already noted, neither JPMC nor JPMS suggested that_ they had carried out any such analysis, nor did they suggest anything about the position in this regard. 115 271. It might also be- observed in this context that it is, in any event, entirely unclear what BVG means by no "material" increase in its credit risk. Hamblen J's observations in Standard Chartered Ceylon Petroleum (see paragraph 178 above) immediately spring to mind. (ii) Any such representation was correct If, contrary to the above, JPM did represent that the proposed transaction would involve no, alternatively no material, increase in BVG's credit exposure compared to what BVG's credit exposure would be if the transaction were not concluded, such representation was, for the reasons set out below, correct. (1) The assessment of credit risk is addressed in the expert reports of Dr Robinson and Ms Nguyen. They agree that the most useful measure for comparing BVG's credit exposure in the two relevant scenarios post-= entry of the ICE Transaction, as compared with the position if that transaction had not been entered into) is "expected l0ss".392 (2) Expected loss is calculated by assessing the probability of default of a position and assessing what the loss would be on that position should the default occur.393 The experts also agree that expected loss can be based upon either credit rating, market-implied credit spreads, or internal assessment based upon fundamental credit risk analysis.394 (3) Dr Robinson analyses BVG's expected loss by reference to credit ratings. He concludes that the overall effect of the ICE Transaction was to reduce BVG's credit risk measured by expected loss by 21%, from $627,408 to $485,876,395 In order to arrive at this conclusion, Dr Robinson makes certain assumptions as to matters such as recovery rates and correlation. As Dr Experts' Joint Memorandum, paragraph 49 Experts' Joint Memorandum, paragraph 50 272. 273. As to this: 392 393 Robinson, paragraph 75 394 395 Robinson, paragraph 135 116 274. 275. (4) Robinson points out, assumptions are required because it is impossible to know at the time that a transaction is entered into what (for example) the correlation between uncertain future events (the default of different entities) will be.396 Dr Robinson is satisfied that one would need to make an assumption about correlation that is well outside a reasonable range of probability in order to conclude that the transaction did not reduce BVG's expected loss.397 Ms Nguyen analyses BVG's expected loss using market--implied credit spreads. She concludes that BVG's expected loss increased significantly (by around $15.8rn) by reason of BVG entering into the ICE Transaction.398 The question accordingly arises on this part of BVG's case as to which approach should be used in order to ascertain whether the ICE Transaction involved no or no material increase in BVG's credit exposure. As to this: (1) (2) This must depend upon what was represented by JPM. Was the representation made by JPM that the proposed transaction would involve no or no material increase in BVG's credit risk exposure when that credit exposure was measured by reference to credit ratings, or did JPM represent that it would involve no or no material increase in BVG's credit risk when measured by credit spreads? The answer to this question depends upon what impact the words stated by JPM might have been expected to have on a reasonable representee in the position of and with the known characteristics of the representee.399 JPM submits that if, contrary to its case above, it represented that the ICE Transaction would involve no or no material increase in BVG's credit risk 396 397 398 399 Robinson, paragraph 134 Robinson, paragraph 145 Nguyen, paragraphs 280-281 Dr Robinson and Ms Nguyen disagree as to whether creditratings or credit spreads provide the most appropriate basis for measuring BVG's credit exposure. Although Dr Robinson's view is to be preferred, this debate is irrelevant. What matters is what was represented by JPM. 117 exposure, that representation proceeded upon the basis of credit risk measured by credit ratings, not by credit spreads. The following points are relevant in this regard: (1) The representations alleged by BVG are said to have been made in the June 2006 Presentation,400 the Amended June 2006 Presentation,40l the August 2006 Presentation402 and Mr Banner's e--mail of 14 July 2006.403 None of those documents made any express reference to credit spreads, but they did make express reference to credit ratings. (2) The June 2006 Presentation stated on page 3 that, by way of a portfolio substitution, BVG could realise a net present value benefit (which would be paid to BVG) and at the same time hedge the HeLaBa credit risk.404 The presentation continued: I This will be achieved by way of the "substitution" of the collateral provided currently with higher-- yield collateralized debt obligations with the same credit rating. The difference between the current coupon and the then higher coupon will be paid out to BVG as a net present value benefit (3) Page 6 of the June 2006 Presentation included the following statements:405 0 By way of a swap, one credit risk can be swapped with another 0 The existing credit risk may thus be swapped with a Diversified Risk. - JPMorgan assumes the credit risk and 276. and and 402 and and 404 and 405 and I18 (4) (5) (6) - The lessee will assume a corresponding risk connected with a diversified rating. 0 Collateralized Debt Obligations (CDOS) provide a higher coupon payment than single-name notes with the same rating. The difference between the "old" coupon and the higher CDO coupon (same rating) will be paid out to BVG as net present value Page 11 of the June 2006 Presentation stated, among other things, ofler higher risk--adjasted returns than direct investments of issuers of similar credit rating".406 All this means, consistently with the statements set out above, is that if an investor invests in a CD0 of a given credit rating, he will receive a higher return than he would from an investment in a single company with the same or a similar rating. The above statements in the June 2006 Presentation were also made in the Amended June 2006 Presentation and in the August 2006 Presentation (subject to certain minor changes which are immaterial for present purposes). In addition, the latter two presentations each stated (on page 8)407 that, on the basis of a rated tranche, PM had calculated the hedging costs for HVB and LBB to be approximately EURl.lm, and that JPM would pay BVG up--front (or Libor +65bps running) under the CD0, so that BVG would receive a net payment of On the same page, it was written, "One single transaction by which credit risks are swapped is created through the co--ordination and involvement of both sides". The three presentations referred to above accordingly made it clear that the CD0 would pay a "higher yield" or "higher coupon" than the existing HVB HeLaBa coupon but that the CD0 would have the same rating. It follows, therefore, that any implied representation made by JPM that the proposed transaction would not involve any or any material increase in BVG's credit exposure can only have been in respect of credit exposure measured by credit 406 407 and and and 119 277. 278. 279. 280. 281. ratings, not by credit spreads. The references to "higher yield" and "higher coupon" are inconsistent with any such representation being made based on credit spreads. In relation to its case concerning the alleged Credit Risk representation, BVG also relies upon Mr Banner's e--mai1 to Meier dated 14 July 2006.408 In that e--mail, Mr Banner wrote (among other things): Based on an portfolio note, we are able to pay BVG a net present value amounting to EUR 6 million (indicative). An AA--rating would allow us to raise this net present value by approximately 50%. It is not understood how this e--mail is said to assist BVG's case in relation to the alleged Credit Risk representation. Under a yet further limb of its case, BVG alleges4O9 that l\/Ir Banner impliedly represented that he agreed with the statement on page 3 of the 1 November 2006 Presentation that "Dz'versi'fication leads to higher return in case of constant BVG alleges that this statement on page 3 was false, and that l\/Ir Banner must have known that it was false. BVG further alleges" that JPMC and/or JPMS came under a duty, upon receiving and reading the 1 November 2006 Presentation, to disclose to BVG that that the proposed transaction would not lead to the risk remaining constant. JPM deny, for the reasons already given above, that l\/Ir Banner made any implied representation that he agreed with the 1 November 2006 Presentation, or that any duty of disclose on the part of JPM arose out of the receipt by Mr Banner of the 1 November 2006 Presentation. Moreover, against the background of the June 2006 Presentation, the Amended June 2006 Presentation and the August 2006 Presentation, a reasonable recipient of 408 409 410 411 and ADC, paragraph 212 and ADC, paragraph 215 120 282. 283. Dr Meier's 1 November 2006 Presentation in the position of Mr Banner would have understood Dr Meier to mean by his reference on page 3 to "c0nstan.t risk" that the rating of the CD0 would be the same as (or not lower than) the rating of HVB and LBB. On that basis, Dr Meier's reference to "constant risk" was right and did not call for any correction. N0 reliance It is simply not credible that Dr Meier understood JPM to have been representing to him that the ICE Transaction would involve no or no material increase in BVG's credit risk exposure measured by reference to credit spreads. As to this: (1) (2) Dr Meier's background is in mathematics and economic theorythat he understood at the first meeting with Mr Banner and Mr idiploma in mathematics and an MSC and a doctorate in economics.4]2 evidence" O'Connor on 21 June 2006 that the value of credit obligations was measured in "spreads" and that spreads "reflected risk in some way" (albeit he understood that the risk of a CD0 was reflected in its credit rating, and that A represented the safest investment). It is plain that Dr Meier understood that the amount of the upfront payment that BVG would receive depended upon the width of the credit spreads of the reference entities in the portfolio. Dr Meier had a number of exchanges with Mr Banner on this subject in the run-up to the closing of the ICE Transaction and was himself checking the movement of spreads from time to tirneim in order to ascertain whether his target upfront payment amount could be achieved. 412 413 414 Meier, paragraph 3 Meier, paragraph 46 16/474} Meier, paragraph 234 1421 (3) (4) (5) Indeed, on 19 July 2007 (the day the ICE Transaction closed), Dr Meier sent Ms Mattstedt an e--mail from which his understanding of the relationship between credit spreads, credit risk and the size of the upfront payment is lain.4l5 He wrote: I3 As for the replacement of the name, I basically do not have any bad feelings. The transaction is based on the credit spreads, which now again means a lot of attractive money value and that the risks of lending are now rated higher again. There are really two sides of the same coin: a higher money value on the one side and a higher risk awareness on the other side. Since we have a very conservative portfolio (also is still a good rating, "many well--known companies are graded), the failure rate is also still very low, although some companies in the portfolio do fall below the rating of A-- during the term. Put differently, it is plain that Dr Meier understood that, if BVG was to_ receive an upfront payment, that was because, on a net basis, it was assuming more credit risk (when measured by credit spreads) than it was disposing of. Dr Meier, being (more than) economically and mathematically literate, would therefore have understood from the fact that BVG was to receive in excess of $6 million by way of an upfront payment, that, at least on a credit spread basis, BVG's risk position had not remained the same. In other words, Dr Meier clearly must have known upon closing of the ICE Transaction, that the market value of the credit protection that BVG was writing on the reference entities, as reflected by the credit spreads of those entities, was considerably greater than the price being charged by LBBW to provide BVG with credit protection on the Assumption and Subscription Banks. How else would BVG be being paid a net upfront amount of $6.1 million for entering into the ICE Transaction? 415 and 122 284. 285. 286. 287. (6) It beggars belief that a man with a doctorate in economics can have believed that the credit risk being assumed by BVG under the JPM Swap, measured by credit spreads, was no greater than BVG's credit exposure to the Assumption and Subscription Banks.4l6 As Dr Meier memorably said to Mr Banner in early May 2007, there is no such thing as a free It is submitted that BVG's case on reliance in relation to this alleged representation is hopeless. This is all the more so given the lack of any evidence adduced by BVG as to the matters on which its decision--making bodies relied in approving the conclusion of the ICE Transaction. Furthermore, if necessary, JPM will contend that BVG is estopped, in the absence of fraud, from contending that it relied upon the alleged representation as to the absence of any increase in risk (see paragraph 218 above). BVG does not plead any case to the contrary.4l8 9 For the reasons identified in summary above, it is respectfully submitted that BVG's case on the alleged Credit Risk representation is untenable and should be dismissed. Having dealt with the three ways in which BVG seeks to escape from the consequences of its bargain by reference to alleged misrepresentations, it is necessary to turn next to BVG's attempt to do so on the basis of its "rnistake" argument. 416 417 418 It is also inconceivable that Mr Banner, or anyone else at JPM, would have sought to mislead someone with Dr Meier's qualifications and experience on such a basic issue. and ADC, paragraph 225 123 BVG's case, as pleaded in the ADC, is that the JPM Swap is void and/or unenforceable for mistake. By a recent amendment BVG has also alleged, in the alternative, that the PM Swap is "voidable" for mistakefm The mistake under which BVG alleges that it was labouring when it entered into the JPM Swap is as to the loss profile of the transaction. It is alleged that:420 BVG mistakenly understood that the terms of the Confirmation included terms having the effect that the loss profile under the JPM Swap was pro--rated across all 150 Reference Entities in the Reference Portfolio, whereas there were no such terms. It is to be noted that BVG's case is not one of common miptake as to the subject- matter of the contract: rather, it advances a case of alleged unilateral mistake as to the terms of the transaction. BVG's case is that JPMC was "aware, or ought to have been aware", that BVG entered into the JPM Swap under the alleged mistake as to its terms,42l with the legal consequence that the transaction is void and/or (1) It is common ground that the JPM Swap did not contain terms having the effect that the loss profile under the transaction was pro--rated across all 150 reference entities in the reference portfolio. The loss profile of the transaction would have been pro--rated in this way only if the lower boundaries of the tranches on which BVG sold credit protection were set at 0% and the upper boundaries were set at 100%. VII-. MISTAKE (1) BVG's case: the alleged mistake 288. 289. 290. unenforceable and/or voidable. 291. As already noted above: 419 ADC, paragraph 154 42" ADC, paragraph 154.1 421 ADC, paragraph 154.2 124 292. (2) 293. 294. 295. 4" this (2) As was obvious from the confirmation in respect of the JPM Swap, was not the case: the lower boundaries of the tranches on which BVG sold credit protection were set at levels between 1.5% and and the upper boundaries were set at levels between 2.5% and Be that as it may, it is submitted that BVG's mistake case, like its case based on misrepresentation, is misconceived for reasons more fully explained below. Mistake: the law The starting point for any analysis of BVG's mistake argument is the fundamental principle of English law that where two parties have expressed their agreement in a written document with a clear and objective meaning, if one of the parties wishes to advance a case not only that the document did not accurately reflect his understanding of the terms of the agreement, but also that he should not be held to the terms of the contract as set out in the document, that party has a significant burden to discharge.423 As it was put recently by Moore--Bick LJ in Peekav Intermark Australia and New Zealand Banking Group [2006] EWCA Civ 386, [2006] 2 Lloyd's Rep 511, at person who signs a document knowing that it is intended to have legal effect is generally bound by its terms, whether he has actually read them or not. The classic example of this is to be found in Graucob [1934] 2 KB 394. It is an important principle of English law which underpins the whole of commercial life; any erosion of it would have serious repercussions far beyond the business community. For the reasons given by Moore--Bick LJ, English law has adopted a restrictive approach to the circumstances in which a party to a written agreement may claim 422 423 Including drafts of this document that JPM sent to BVG before closing: see the draft sent on 4 July 2007 re--sent on 6 July 2007 See Cartwright, Misrepresentation, Mistake and Non-Disclosure (3rd ed., 2012), paragraphs 13-33 and 13-34. 125 296. (3) 297. 298. to be excused from perfor'ming' the contract according to its documented terms. In order to rely on a mistake as to the terms of the agreement (absent misrepresentation) for this puipose, the party wishing to resist enforcement of the written contract must show: (1) that he entered into the written agreement under a mistaken belief as to its 424 terms; (2) that the mistake induced him to enter into the contract;425 and (3) that the other party was aware of the mistakefm' Having identified the key requirements for a successful plea of mistake, it is possible next to apply these to the facts of the present case. Application of the law to the facts As to the first of these requirements, it will be for BVG to establish at the trial that it entered into the JPM Swap under the mistaken belief that the loss profile of the transaction was pro--rated even though this was inconsistent with the contractual documentation. As to the second requirement, for the reasons given above in the context of BVG's misrepresentation case, BVG's case on reliance is contrived and incoherent. (1) Dr Meier and BVG were concerned only to ensure that the tranche upon which BVG sold credit protection should be rated (which, as BVG correctly understood, translated to a minutely small probability of incurring losses under the transaction), and to ensure that none of the reference entities included in the reference portfolio should have a credit rating at inception of the JPM Swap of less than A-. 424 425 426 Chitly on Contracts (31st ed., 2012), paragraph 5-077. See Treitel, The Law ofC0ntract (13:11 paragraph 8-046. Chitty on Contracts (31st ed., 2012), paragraph 5-075. 126 299. 300. (2) (3) BVG was, like many other investors at the time, content to rely on the assessment of the rating agencies, and was not interested in going behind the rating or analysing the detailed mechanics of the transaction for itself. The notion that BVG would have refused to enter into the JPM Swap if it had appreciated the non--linear nature of the loss profile (assuming for the moment that BVG did make the mistake that it claims to have made), even though the transaction was rated is simply unreal. In relation to the third requirement, BVG's case is that JPMC (through Mr Banner) was aware, when entering into the JPM Swap on 19 July 2007, that BVG was mistaken about the terms of the transaction in that it (BVG) believed the loss profile to be pro--rated across all 150 reference entities in the reference portfolio. Whatever the position in relation to the first two requirements, it is submitted that BVG's case in relation to this key requirement is untenable. As to this: (1) (2) As with the allegation of implied misrepresentation concerning the loss profile of the transaction (dealt with in paragraphs 220-251 above), the basis for this allegation is (and is only) the receipt by Mr Banner on 20 November 2006427 of the 1 November 2006 Presentation.428 As explained above in the context of the misrepresentation allegation, Mr Banner's evidence is that he does not recall reading or reviewing the contents of the 1 November 2006 Presentation in any detail, and does not believe that he would have done so. Mr Banner did not notice the statements on page 10 of the presentation that the maximum default under the JPM Swap would only occur if LBB, HVB, LBBW and all 150 reference entities in the portfolio were insolventm 427 428 429 and and Banner, paragraph 119 {Cf 1/32} 127 301. (3) (4) (5) (6) Mr Banner's evidence is therefore that he was not aware of any misunderstanding on the part of Dr Meier as to the loss profile under the JPM 430 Swap. If that evidence is accepted, BVG's case on mistake must fail. Critically, it is material to note in this regard that, despite the transcripts that have been revealed of all of Mr Banner's calls during this period, none even begins to suggest that Mr Banner was alive to the error that appears in the 1 November 2006 Presentation. Nor is there any other document that even hints that he might have been so aware. On the contrary, and as explained above in the context of addressing BVG's misrepresentation case, all the evidence of the contacts and communications between Mr Banner and Dr Meier in the period following the 1 November 2006 Presentation suggests, very clearly, that Mr Banner was wholly unaware that Dr Meier may have failed fully to understand this issue; Mr Banner was keen to ensure that Dr Meier did properly understand the transaction; and Mr Banner consistently supplied Dr Meier with materials from which Dr Meier could easily have appreciated the correct position (if he had not previously have done so). As also noted above in the context of addressing the misrepresentation case, since the coirect position was plain and apparent from the terms of the contractual documentation provided by Mr Banner to Dr Meier, it would seem very far-fetched to think that Mr Banner was seeking (dishonestly) to take unfair advantage of a mistake by Dr Meier in this regard. For the reasons identified above, therefore, it is respectfully submitted that BVG's case that JPM were aware that BVG was entering into the ICE Transaction on the basis of a material mistake, is unsupported by the evidence and should be rejected. 430 Banner, paragraph 120 1/32} 128 (4) 302. 303. 304. 305. BVG's subsidiary case: a mistake of which JPMC "ought to have known" BVG, however, advances a subsidiary case, to the effect that even if JPMC did not have actual knowledge of BVG's alleged mistake, JPMC (again through Mr Banner) "ought to have been aware" that BVG entered into the JPM Swap under the alleged mistakefm There are two issues that arise in relation to this subsidiary case: (1) First, whether, as a matter of law, an allegation that JPMC "ought to have been aware" of BVG's alleged mistake is capable in principle of rendering the PM Swap void or unenforceable; and (2) Secondly, if so, whether that allegation is made out on the facts of this case. While it is well established that a party to a contract will be entitled to relief on the grounds of unilateral mistake as to the terms of the contract if the other party was actually aware of the mistake, there is no clear support in the authorities for the proposition that relief will also be available if the other party merely ought to have been aware of the relevant mistake. There are two cases that might be said to support this proposition, but on analysis they bear very little weight. (1) In Centrovincial Estates Merchant Investors Assurance Co [1983] Com LR 158 it appears to have been assumed by the Court of Appeal that it would be sufficient to nullify an apparent agreement that one of the parties to it "either knew or ought reasonably to have known" that the other party was labouring under a mistake as to the terms of the contract. This assumption was, however, made without the benefit of argument, made without directly addressing the issue whether actual knowledge was required, and in any event obiter. (2) The other case is OT Africa Line Vickers [1996] Lloyd's Rep 700, which was a short ex Iempore judgment of Mance J. In that case Mance 431 ADC, paragraph 154.2 129 306. also assumed, without deciding, that a mistake by one party of which the other "either knew or ought reasonably to have known" would be sufficient to engage the mistake doctrinefm The judge based his statement of the law on the Centrovincial Estates case, and on the judgment of the Court of Appeal in The Antclizo Lloyd's Rep 130, in which Nicholls LJ had (at 146) set out a passage of the judgment in Centrovincial Estates, albeit without commenting on this point.433 (3) Again, Mance 's statement in the OT Africa Line case was obiter, since he held that the mistake in that case was not one that the other paity either knew or ought reasonably to have known about. Further, it appears from Mance 's judgment that he was not using the "ought reasonably to have known" formulation as connoting mere negligence in not discovering the relevant mistake; he said that there would, at least, have to be "some real reason to suppose the existence of a mistake" before it could be incumbent on one party in the course of negotiations to make enquiries of the other to check his 4 understanding.43 In practice, therefore, this is likely to mean that wilful blindness is required, which may well be what Mance in fact had in mind. In fact, there appears to be no case in which a contract has been held to be Void or unenforceable on the basis of a unilateral mistake by one party of which the other party did not actually know, but should reasonably have known.435 JP-M's submission would, if necessary, be that actual knowledge is required. In particular: 432 433 434 435 At page 703, column 1. The House of Lords upheld the Court of Appeal's decision, without mentioning mistake, or Centrovincial Estates, at all: [1988] 2 Lloyd's Rep 93. At page 703, column 1. The Court of Appeal in Centrovincial Estates did not consider in what circumstances it might be said that a party "ought reasonably to have known" of the other party's mistake. In the recent case of Deutsche Bank (Suisse) SA Khan [2013] EWHC 482 (Comm), at [264], Hamblen I said that the law in England remained uncertain on this point, and he referred to Centrovincial Estates and OT Africa Line without endorsing them: "As is discussed in Chitty at paragraph 5-076, although there is no clear authority, there are two English cases which suggest that a mistake as to terms may affect the contract if it ought to have been known. to the other party -- Centrovincial Estates; OT Africa Line. If so, that is also not made out on the facts." 130 (1) (2) (3) This is how the principle is expressed in numerous English cases,43(' and is also the View of the Singapore Court of Appeal, which has considered the point in detail.437 It is also consistent with the principle underlying the rule, namely that where one contracting party has actual knowledge that the other party is mistaken as to the tenns of the agreement, the parties cannot be said to be ad idem, meaning that there is in fact no agreement at all.438 Where the knowledge of the mistake is merely constructive, there is much less of a case for displacing the objective principle of contractual formation. Restricting the mile to cases of actual mistake is also consistent with the piinciples by which written agreements may be rectified: where rectification is sought based on unilateral mistake, the other party to the contract must have had actual knowledge of the mistake.439 In any event, however, even if it were sufficient for BVG to prove simply that its alleged mistake as to the terms of the JPM Swap was one of which JPMC "ought to have known", that test is not satisfied on the facts of this case. As explained above, Mr Banner does not believe that he read or reviewed the contents of the 1 November 2006 Presentation in any detail, and he did not notice the statements on page 10 of the presentation on which BVG relies. This is unsurprising, and not something for which Mr Banner can be criticised, especially in circumstances where, as explained above, Dr Meier had not sent the 1 November 2006. Presentation to Mr Banner for his review See, Shogun Finance Hudson [2003] UKHL 62, [2004] 1 AC 919, at [123] per Lord Phillips: "If the ofleree knows that the ofiferor does not intend the terms of the ofler to be those that the natural meaning of the words would suggest, he cannot, by purporting to accept the ofler: bind the ofieror to a contract". Lord Phillips based this statement on Smith Hughes (1871) LR 6 QB 597 and Hartog Colin Shields [1939] 3 All ER 566. Chwee Kin Keong Digilandmallcom Pte [2005] SGCA 2, [2005] 1 SLR 502, at Cartwright, paragraph 13-21; Chwee Kin Keong at [31] and 307. (1) (2) 436 437 438 439 Chitty on Contracts (31st ed., 2012), paragraph 5-123. 131 (5) 308. (3) and comment and did not ask Mr Banner to carry out any such review or provide any such comment. Fuither, the fact that the loss profile of the PM Swap would not be pro--rated was clear from a number of the documents sent by Mr Banner to BVG, and from the discussions between Mr Banner and Dr Meier. For example, the non--linear nature of the loss profile was clear from the Hockey Stick 440 and from the 7 44] Presentation sent by Mr Banner to Dr Meier on 9 May 2007, draft confirmation that Mr Banner sent Dr Meier on 4 and 6 July 200 BVG's alleged belief is also inconsistent with the repeated references to "leverage" in_ the discussions between Mr Banner and Dr Meier.442 Dr Meier never indicated that he did not understand any of this information; on the contrary, he himself referred in his discussions with Mr Banner to his understanding that the JPM Swap was leveraged.443 Against this background, it is very difficult to see how it can fairly be said that Mr Banner ought to have known that BVG was labouring under the alleged mistake. The effect of any mistake as to the terms of the JPM Swap: void or voidable It is usually said that where one party to an apparent contract is mistaken as to the terms of the contract, and the other party is aware of the mistake, the effect is that the contract is void, or at least that the contract will not be enforced against the mistaken party according to its written terms. However, by a recent amendment to its Defence and Counterclaim, BVG has sought in the alternative to run a case that even if the JPM Swap is valid and enforceable at common law, it is nevertheless "v0idable"444 because of an alleged legal principle that "rescission is available 440 441 442 443 444 See, paragraphs 241 and 242 above. See, paragraph 242(2) above. An allegation that the JPM Swap is "voidable" now features in, e. paragraph 154 of the ADC . 132 309. 310. where it is inequitable, by reason of the mistake, for one party to seek to hold the other party to the contract".445 It is understood that BVG's case in this regard is based on a dictum of Mance in the OT Africa Line case, referred to above. (1) In that case Mance J, after rejecting the argument that there was no binding agreement because one of the parties knew or ought to have known that the other had made a mistake as to the terms, had to deal with the mistaken party's alternative submission that the agreement that had been held to exist should nevertheless be "rescinded on account of the unilateral mistake". (2) Mance said that he was "prepared to proceed on the basis that rescission may be available where it is simply inequitable for one party to seek to hold the other to a bargain objectively made",446 although he cited no authority for this broposition. In any event, he held that it would not be inequitable in that case to hold the mistaken party to the bargain to which it was to be taken (by virtue of the objective theory of the formation of contracts) as having agreed. Mance 's comments on this part of the case were therefore also obiter. Insofar as BVG intends to argue that the remarks of Mance stand for any general proposition that the courts have some kind of broad power or discretion to strike down (or "rescind") contracts based on one party's unilateral mistake as to the terms, even though it will, ex hypothesi, have been found that the agreement is valid and binding andlnot void or unenforceable on account of the mistake, the argument is, with respect, misconceived. In particular: (1) If ever there was such a principle as that expressed by Mance J, it has not survived the abolition (by the Court of Appeal in The Great Peace [2002] 445 446 This was the explanation for the late amendment given by BVG's solicitors in their letter dated 5 December 2013 . At page 704, column 2. 133 311. (6) 312. 313. 314. EWCA Civ 1407, [2003] QB 679) of the equitable jurisdiction to rescind a contract for common mistake as to its subj ect-matter.447 (2) The true position is explained by Treitel:448 Where a contract is valid because the mistake of one of the parties is not operative, equity may refuse specific performance against the mistaken party, but it will not rescind and so deprive the other party of his remedy at law on the contract; for to take this step would subvert the certainty which the objective principle is intended to promote. It follows that there is nothing in BVG's alternative formulation to the effect that even if the JPM Swap is valid and enforceable at common law, it is nevertheless "voiclable" because it would in some way be "inequitable" for JPM to hold BVG to the agreed bargain. The effect of the express terms of the JPM Swap As already submitted above, BVG's case on mistake is untenable. There is, however, a further, very simple answer to BVG's case on mistake, which serves to confirm the conclusion already signified above. In particular, and independently of the points already made, BVG is in any event precluded by the express terms of the JPM Swap, and/or estopped, from asserting that it entered into the transaction under a mistake as to the content and/or meaning of its terms. This is by virtue of the well--known principles derived from cases such as JP Morgan Chase Bank Springwell Navigation Corporation [2010] EWCA Civ 1221, [2010] 2 CLC 705. 448 Cartwright, paragraph 13-31, where it is said that OT Africa Line "cannot be relied upon". The decision has also been criticised in Treitel: see The Law of Contract (12th ed., 2007), paragraph 8-058. Treitel, The Law of Contract (13th ed., 2011), paragraph 8-058. See also Chitiy on Contracts (31st ed., 2012), paragraph 5-079: there is no "separate equitable jurisdiction to set aside the contract for unilateral mistake". 134 315.. By virtue of clause 3 of the Master Agreement and paragraph l2(a)(ii) of Part 4 of the Schedule,449 BVG made the following representation to JPMC on the date on which it entered into the PM Swap: Assessment and Understanding. is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of [the JPM Swap]. It is also capable of assuming, and assumes, the risks of [the PM Swap]. This provision alone is fatal to BVG's case on mistake, because it precludes BVG from saying that it did not understand, or was mistaken as to, the terms of the transaction. 449 135 NEGLIGENCE BY JPMS BVG alleges, in the alternative to the grounds of defence relied on above, that the conclusion of the JPM Swap was the result of one or more breaches of a duty of care owed by JPMS to BVG450 This case is not advanced by way of defence as such (because the claim against BVG is brought by JPMC, and only JPMS is alleged to have owed BVG a duty of care), but by way of counterclaim against For reasons more fully explained below, both as a matter of law and on the facts, BVG's case in this regard is, once again, misconceived. BVG alleges that it was owed a duty of care by JPMS, which it is said required 1) not to describe the JPM Swap to BVG in a misleading way or otherwise to make false and/or inaccurate statements and/or (2) to ensure that any description of the JPM Swap which it did provide to BVG was full and fair and/or (3) to correct any material misunderstandings of which it was aware on the part of BVG as to the JPM Swap. The alleged duty of care in relation to mz'Srepresenrati077s Point (1) of the formulation set out above is relevant to BVG's case on misrepresentation and non--disclosure, considered in section VI above: BVG's case is that the alleged misrepresentations and non-disclosures of which it complains were made negligently by as well as fraudulently by both JPMS and 316. JPMS. 317. (1) The alleged duty of care 318. (61) 319. JPMC. 450 ADC, paragraph 155 451 452 ADC, paragraph 155 89} ADC, paragraphs 174 176 187 ,210 214 136 320. 321. (17) 322. While it is accepted that JPMS may in principle have been found to have owed BVG a duty to take reasonable care to ensure that, insofar as it provided any factual information to BVG about the JPM Swap, such information was accurate,453 the existence of such a duty is in this case inconsistent with the express terms of the JPM Swap (the relevant provisions of which are considered below). In any event, however, even if JPMS had owed BVG the duty of care alleged in point (1) of BVG's formulation, it complied with that duty at all times. That is for the reasons given in section VI above, in the context of BVG's case on misrepresentation and non-disclosure. Essentially, JPMS did not make the representations alleged; alternatively, any such representations were true and/or were corrected; and in any event BVG did not rely on any of them. Nor did JPMS come under any duty of disclosure, because it was not aware of any material misunderstanding on the part of BVG in relation to the PM Swap. The alleged duty of care in relation to mistakes Point (3) in the formulation set out above is essentially duplicative of BVG's case on unilateral mistake, considered in section VII above. As there stated,454 a successful plea of mistake will arise where a party to a contract fails to correct a mistake made by the other party, of which the first party was aware, as to the terms of the contract. There is no basis for imposing an essentially identical obligation under the guise of a duty of care sounding in damages. In any event, however, for the reasons given in section VII above in the context of the mistake allegation, the issue does not arise, because, insofar as BVG was mistaken as to the terms of the JPM Swap, Mr Banner (who is the only relevant individual at JPM for this purpose) was not aware of this.455 453 454 455 This is, of course, the kind of duty recognised in Hedlev Bvrne Co Heller Partners Lil [1964] AC 465. Paragraph 295 above. Paragraph 300 above. 137 (C) 323. 324. 325. The alleged duly ofcare to provide a "fall and fair description of the JPM Swap Point (2) in the formulation above is a free--standing allegation that JPMS owed BVG an obligation to provide BVG with a 'full andfair" description of the JPM Swap. As to this: (1) An alleged duty of care framed in those terms is obviously somewhat lacking in precision, but it appears from the Way that the allegation of breach is pleaded (paragraphs 157-162 of the that BVG's real case is that JPMS owed it a duty to provide BVG, during the course of the negotiations leading up to the conclusion of the JPM Swap, with materials referred to as "Loss Mechanics Materials, Scenario Analysis and/or Risk Factor . 457 Materials". (2) JPMS's alleged failure to provide these materials to BVG is the only respect in which this manifestation of the alleged duty of care is said to have been breached. BVG's case that it was owed a duty of care by JPMS under this head is thus restricted in scope: it is BVG's case that JPMS (or for that matter JPMC) owed it a more general duty to give advice on the merits of entering into the ICE Transaction or as to its economic consequences. BVG presumably did not feel able even to allege that JPMS owed it such a wider advisory duty. Nonetheless, BVG's attempt to establish a more limited duty of care to provide BVG with a "full and fair" description of the proposed transaction should also be rejected. Although it is not presented in this way, what this allegation under point (2) in effect amounts to is an argument that JPM were under a positive duty of disclosure -- or, in other words, that transactions such as the JPM Swap should be recognised as a new category of contracts of utmost good faith. 456 457 ADC, paragraph 160 . . These terms are defined in paragraph 34 of the ADC 138 326. 327. The factors relied on in support of the alleged duty 'of care are set out in the 10 sub- paragraphs of paragraph 155 of the ADC.458 JPMS's case, as set out in the ARDC at paragraph 143,459 is that the matters relied on by BVG, to the extent that they are factually accurate, are insufficient to give rise to the duty of care contended for by BVG. As to this: (1) The relationship between JPM and BVG was at arm's length; JPMC was simply a potential counterparty to a proposed transaction, and the role of PMS was limited to marketing that proposed transaction. (2) Neither entity assumed any wider obligation to advise BVG in relation to the proposed transaction, or to give BVG any particular information about it.460 Moreover, BVG's conduct at the time did not suggest that it was looking to JPMS (or for that matter JPMC) for advice about the transaction, or that it expected to be provided with any particular information that it did not specifically request. On the contrary, Dr Meier treated JPM as nothing more than a potential counterparty to a proposed transaction. Consistently with this, he did not provide JPM with and ask JPM to comment on any of the numerous internal documents that he prepared to describe the ICE Transaction at and did not share with JPM the legal advice that BVG obtained from Freshfields in relation to the transaction (over which BVG has asserted privilege in these proceedings). The points made in paragraph 326 above are themselves sufficient to answer BVG's case that JPMS owed it a duty of care that included an obligation to provide BVG with a "fill! and fair" description of the JPM Swap. The position is, 458 459 460 461 {A/3a/58} A similar list of factors to that found in paragraph 155 of the ADC was held to be insufficient to give rise to a common--1aw duty of care in JP Morgan Chase Bank Springwell Navigation Corporation [2008] EWHC 1186 (Comm), at and Standard Chartered Bank Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm), at The only internal document that BVG sent JPM at the time was the 1 November 2006 Presentation. As explained in paragraph 65 above, this document was not provided to Mr Banner for his review and comment. 139 however, put beyond doubt by the express provisions of the relevant contractual documentation. 328. In the first place, the existence of the duty of care contended for by BVG is inconsistent with clauses 7.17 and 7.18 of JPM's standard terms and conditions ("the PM PM invites the Court to find that the PM Terms were sent to BVG by PM, and received by BVG, on or around 16 November 2006,463 and that they thereafter governed the relationship between BVG and both JPMS and JPMC 464 329. Clauses 7.17 and 7.18 of the JPM Terms provided as follows: 7.17 Suitability Unless JPMorgan enters into a specific agreement with you, JPMorgan and/or any of its Associates shall not owe you any duty to advise on the merits or suitability of any investment entered into or contemplated by you. You agree that you will rely on your own judgement for all trading decisions. 7.18 Advice Furthermore, any trading recommendation, market or other information communicated to you is incidental to the provision of services by JPMorgan under these Terms and JPl\/Iorgan or any of its Associates gives no representation, warranty or guarantee as to its accuracy or completeness or as .to the taxation consequences of any investment. 330. In particular, by stipulating that BVG was to rely on its own judgement for all trading decisions (clause 7.17), and that JPM were giving no representation or warranty as to the accuracy or completeness of any information communicated to BVG (clause 7.18), these provisions made it clear that JPMS was not assuming a 462 463 464 This is explained in the witness statement of Rebecca Smith, filed on behalf of JPM 148} BVG's case is that it did not receive the JPM Terms (ARRDC, paragraph 5 There are, however, examples in the trial bundle of documents going missing would therefore be unsurprising if the JPM Terms were received by BVG but did not find their way to Dr Meier. 140 responsibility to BVG to provide a '_'full andfair" (or indeed any) description of the JPM Swap -- still less an obligation to provide "Loss Mechanics Materials, Scenario Analysis and/or Risk Factor Materials". These provisions are also inconsistent with JPMS owing BVG a Hedley Bjgne-type duty in relation to the statements it made to BVG about the JPM Swap (point (1) in BVG's formulation). Furthermore, JPM are entitled to rely upon clause 12(a) of the PM Terms, which Subject to paragraph below, neither we nor any Associate, nor our or its directors, officers, employees, contractors and other agents shall be liable for any loss suffered by you under or in connection with these Terms unless caused by our or their gross negligence, wilful default or fraud. BVG has pleaded that these provisions of the JPM Terms do not avail JPMS for (1) First, BVG has alleged that these clauses amount to unreasonable exclusion clauses, and are therefore unenforceable pursuant to section 2 of the Unfair Contract Terms Act 1977 and/or section 3 of the Misrepresentation Act 1967.465 BVG's case in this regard should be rejected in relation to clauses 7.17 and 7.18: these provisions do not amount to exclusion clauses: rather, they defined the nature of the relationship between the parties and confirmed the basis on which they were dealing with one another. It is well established that clauses of that type do not fall within the statutory provisions relied on by BVG.466 In any event, all of the relevant clauses of the JPM Terms (set 467 (2) Further, BVG alleges that clauses 7.17 and 7.18 are inconsistent with, or should be construed in accordance with, certain provisions of the FSA ARRDC, paragraphs 102.7 109.5 and 154.4 See, JP Morgan Chase Bank Springwell Navigation Corporation [2008] EWHC 1186 (Comm), at [601]; [2010] EWCA Civ 1221, [2010] 2 CLC 705, at [181]. 331. provided as follows: 332. the following reasons: out above) are reasonable. 465 466 467 See JPM's Surrejoinder 141 Handbook.468 Again, it is submitted that this argument should be rejected. BVG's case rests primarily on COB 2.1.3 R, which provided: "W71en afirm communicates information I0 a Customer, thefirm must take reasonable steps to comimmicate in a way which is clear, fair and not misleading." This provision does not assist BVG: it applies only if and insofar as a firm communicates information to a customer. It does not create a positive duty to speak of the kind that BVG seeks to establish. Secondly, the provisions of the Master Agreement (including the Schedule) between BVG and JPMC are also inconsistent with either JPMC or JPMS assuming a duty of care to BVG in the terms alleged. The relevant clauses are in (1) By virtue of clause 9(a) of the Master Agreement, BVG agreed as follows:469 Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with Each of the parties acknowledges that in entering into this Agreement it respect to its subject matter. has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud. (2) By virtue of clause 3 of the Master Agreement and paragraph of Pait 4 of the Schedule, BVG made the following representations on the date on which it entered into the JPM Swap:470 Q) Non-reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice 333. the following terms: 4" ARRDC, paragraph 102 469 470 142 334. 335. from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction, it being understood that information and explanations related to the terms and Conditions of a Transaction will not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party will be deemed to be an assurance or guarantee as to the expected results of that Transaction. ffi) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. advice), Status of Parties. The other party is not acting as a fiduciary for or an adviser to it in respect of that Transaction. Again, the stipulations that BVG had made its own independent decisions to enter into the JPM Swap, based upon its own judgment and upon advice from such advisers as it had deemed necessary, and was not relying on any oral or written representation, are inconsistent with either JPMC or JPMS owing BVG a duty of care that included an obligation to provide a 'full and fair" (or indeed any) description of the JPM Swap. Similarly, the acknowledgement by BVG that it was capable of assessing the merits of and understanding (on its own behalf or through independent professional advice) the JPM Swap, and that it understood and accepted the terms, conditions and risks of the transaction, are inconsistent with JPMS having come under the alleged duty of care. These provisions are also inconsistent with JPMS having come under a duty of care of the type referred to in point (1) of BVG's formulation. It is a striking feature of BVG's case on negligence that only JPMS, and not JPMC, is alleged to have owed BVG a duty of care. This is presumably because BVG 143 336. 337. 338. 339. accepts (correctly) that the express terms of the Master Agreement and Schedule, set out in paragraph 333 above, make the proposition that such a duty was owed by JPMC unarguable. In relation to JPMS, on the other hand, BVG's case is that the provisions of the ISDA documentation are irrelevant because JPMS was not a party to the JPM Swap and is therefore unable to claim the benefit of the relevant 4 1 clauses. 7 As explained in paragraph 327 above, BVG's allegation that JPMS came under a duty of care that included an obligation to provide BVG with a "full and fair" description of the JPM Swap should be rejected, before one even considers the effect of the relevant contractual provisions. However, it is submitted that those provisions provide further (and indeed overwhelming) support for JPM's case that JPMS did not owe BVG the duty of care on which it relies. It is" true that JPMS was not a party to the JPM Swap and that it therefore cannot, as a matter of contract, claim the benefit of its provisions. It does not, however, follow that the provisions of the contract are irrelevant to the question whether JPMS owed BVG a duty of care in relation to the transaction. On the contrary, as explained below, the provisions of the contract are highly relevant even as between JPMS and BVG. Put shortly, the issue for the Court is whether, against the background of BVG's apparent (and inevitable) acceptance that the terms of the JPM Swap preclude a finding that JPMC owed BVG a duty of care, it is nonetheless appropriate to hold that JPMS position in the transaction was, as noted above, simply that of marketer -- nevertheless came under such a duty. For BVG even to begin to make such an argument, one might have expected its witnesses to have sought to contend that they believed that they could look to JPMS, as distinct from JPMC, to provide them with advice or infonnation concerning the JPM Swap. In fact, however, it is clear that nobody on the BVG 471 ARRDC, paragraph 109 . In contrast to the ISDA documentation, both JPMC and JPMS are named as contracting parties to the JPM Terms. BVG's case on these, however, is that they benefit neither entity as they were never received by BVG. 144 side drew any distinction between JPMC and PMS, and it is most likely the case that no one at BVG even realised that there were two JPM entities involved in the transaction: certainly all of BVG's internal presentations about the proposed ICE Transaction refer to it as involving simply "JPM0rgcm", without identifying a specific legal entity or distinguishing between different entities. The only mention that Dr Meier makes in his witness statement of the two separate PM entities is in paragraph 1,472 where he says: "In this Statement I will refer to the two Claz'mants together as JPM0rgan". He draws no distinction between JPMC and JPMS at all, and neither do any of BVG's other witnesses. Moreover, BVG knew from an early stage inthe negotiation of the JPM Swap that the contractual documentation would include the clauses set out in paragraph 333 (1) A draft ISDA Master Agreement containing the entire agreement clause set out in paragraph 333(1) above was sent to Dr Meier by Mr Banner on 16 Augu.st 2006,43 and the first draft of the Schedule to the Agreement (which contained the provisions set out in paragraph 333(2) above) was sent to Dr Meier by Ms Greenwood on 13 October 2006.474 (2) Numerous further drafts of the Schedule, which all contained these provisions, were sent to Dr Meier as the negotiations progressed,475 and it is evident from the detailed comments that he provided in relation to these documents that he read them carefully.476 Dr Meier must therefore be taken to have been aware at least that BVG's proposed counterparty was not assuming any duty of care towards BVG in relation to the . transaction. It is simply unreal, against that backdrop, to suppose that any other JPMorgan entity, such as JPMS, was assuming any kind of responsibility to BVG, 340. above. 341. 4" 473 474 475 476 See See 145 342. 343.. 344. or that BVG believed that this was the case (a factual case which, as noted above, is in any event not even advanced in BVG's witness statements). In these circumstances, BVG's case that a distinction should be drawn between JPMC and JPMS for the purposes of an argument that JPMS should be held to have owed a duty of care when JPMC did not should be seen for what it is: an opportunistic attempt to rely on the wholly fortuitous (and, from BVG's perspective, irrelevant) involvement in the negotiations of two separate legal entities from the JPMorgan group, only one of which ended up as the counterparty to the JPM Swap. BVG's case that the express terms of the JPM Swap are irrelevant to the issue of whether a duty of care should be imposed on JPMS is also inconsistent with the authorities. Thus, for example: (1) In IFE Fund SA Goldman Sachs International [2007] EWCA Civ 811, [2007] 2 Lloyd's Rep 449 a bank that was arranging a transaction with its customer sent the customer, in advance of the conclusion of the transaction, a non--cor1tractual notice making it clear that the bank was not assuming any responsibility for the information provided to the customer in relation to the transaction. (2) When the transaction proved disastrous for the customer, the customer sued the bank, and alleged (among other things) that the bank had owed it a duty of care which included a duty to provide certain information about the transaction. (3) That argument was dismissed both by Toulson J477 and the Court of Appeal, Waller LJ observing tartly that the argument that a duty of care had been assumed by the bank was, in the light of the terms of the non-contractual notice, "hopeless" (at 477 [2006] EWHC 2887 (Comm), [2007] Lloyd's Rep 264, at [64] and 146 (4) 345. Similarly, in the present case the provisions of the draft ISDA Master Agreement and Schedule (set out in paragraph 333 above), which were sent to BVG in advance of the conclusion of the JPM Swap, mean that BVG cannot have understood that either JPMS or JPMC had assumed a duty of care to advise BVG in relation to the transaction. These provisions are entirely inconsistent with any such assumption of responsibility by either JPM entity. The Court of Appeal's decision in was applied in a similar context by Gloster in JP Morgan Chase Bank Springwell Navigation Corporation [2008] EWHC 1186 (Comm). (1) (2) In that case the bank's customer alleged that the bank had owed it a general comrnon--law advisory duty in relation to investments made by the customer. Gloster rejected that argument, holding that the [assumption of any such duty was inconsistent with the express provisions of various contractual and non--contractual documents that regulated the relationship between the parties. Gloster I also held that, when considering whether, against the background of such provisions, a (non--contractual) duty of care came into existence, it was not necessary to subj ect each provision to a detailed textual examination: the question was whether the imposition of a duty of care would be consistent with the general thrust of the relevant documentation. In this respect she said (at I also accept Chase's primary submission that it is not necessary, at least for the purposes of the general advisory claim, to undertake a detailed textual analysis of the precise ambit, extent and legal effect of each clause because the contractual documentation, taken as a whole, has the broader evidential significance of negating the assumption of individual 147 346. 347. 348. any general advisory duty or obligation on the part of Chasem (3) Similarly, at [504] Gloster said that "the evidential significance of the [provisions] goes much wider than their mere contractual eflect, because they provide an evidential basis to negate the coming into existence of any common law duty of care". On this basis, she considered that the provisions in question were capable of negating the existence of a duty of care on the part of Chase entities that were not, as a matter of contract, party to them.479 (4) Gloster 's analysis is equally applicable to the narrower duty of care that BVG is attempting to establish in the present case as it is to the wider advisory duty on which the customer was attempting to rely in Springwell. Gloster J?s decision was upheld by the Court of Appeal [2010] EWCA Civ 122], [2010] 2 CLC 705. In his judgment Aikens (with whom Rix and Rimer LJJ agreed) considered the provisions analysed by Gloster primarily in the context of the customer's claim in misrepresentation rather than negligence; but he agreed with Gloster that the effect of the provisions was that the customer was not owed any relevant duty of care by the banl<.480 Subsequent cases have also supported the proposition that provisions designed to delimit the legal relationship between the parties to a negotiation or a transaction have significance beyond their strict contractual effect: see, Raiffeisen Zentralbank Csterreich AG Royal Bank of Scotland [2010] EWHC 1392 (Comm), and Brown InnovatorOne [2012] EWHC 1321 (Comm), For the reasons given above, it is submitted that PMS did not owe BVG any of the duties of care alleged. 478 479 480 This passage was cited with approval by Hamblen i11 Standard Chartered Bank Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm), at [521], and applied at [525]. See also [526], [535]. See [186]. 148 (2) 349. 350. 351. 352. 353. Alleged breach of duty If, contrary to PM's case, the Court concludes that JPMS did owe BVG the duty of care pleaded by BVG, JPMS contends that, in any event, any such duty of care was in fact complied with. As explained in paragraphs 319 and 322 above, two of the three specific aspects of the alleged duty of care relate to, or duplicate, BVG's case on misrepresentation and mistake. These parts of the counterclaim should be dismissed for the reasons given in sections VI and VII above. As there explained, JPMS did not make the representations alleged; alternatively, any such representations were true and/or were conected; and in any event BVG did not rely on any of them. Nor did PMS come under any duty of disclosure on account of any alleged mistake made by BVG. The only independent allegation of negligence is in respect of BVG's contention that JPMS owed it an obligation to provide a "fall and fair" description of the JPM Swap. As explained above, in the context of this case, what this appears to amount to is an allegation that JPMS owed BVG a duty to provide "Loss Mechanics Materials, Scenario Analysis and/or Risk Factor Materials". JPMS disputes that, even if it did owe a duty of care to BVG, this required that PMS provide such materials to BVG and that, failing this, JPMS would have been in breach of any duty of care owed. As to this allegation: (1) The parties have served expert evidence as to the market practice at the relevant time in relation to the provision, by a bank arranging a STCDO, of the materials that BVG alleges should have been provided by JPMS. (2) The first consideration to bear in mind about this evidence is that it will only become relevant if the threshold issue -- as to whether JPMS owed BVG a duty of care as alleged -- is answered in BVG's favour. Whatever may have been the market practice in relation to the provision of scenario analysis materials, etc., this is irrelevant unless JPMS was under an obligation to 149 (3) (4) provide these materials. It is not pleaded by BVG that the alleged market practice is itself a ground on which the Couit should find that JPMS owed BVG a duty of care which included an obligation to provide these rnaterials;48' the market practice is said to be relevant only to the question of 482 breach. The opinion of JPM's expert, Dr Ian Robinson, is that the information and materials provided to BVG by JPMS were in line with the market standard at the relevant time. It is important to distinguish, when considering the market practice in this respect, between bespoke transactions arranged for one investor and tailored to that investor's particular requirements and (ii) widely syndicated transactions that were structured by an arranging bank and then offered to investors more or less generally. For transactions in the former category, of which the ICE Transaction was one, there was no market standard as to the form and content of the information that would be supplied about the transaction: it would depend on the requirements of the particular investor concerned.483 - - - 484 In relation to scenario analysis, as Dr Robinson explains, based on his considerable experience of the market, it was common for banks arranging transactions such as STCDOS to give their clients access to online modelling These programmes would allow the customer to model the impact on the proposed programmes to enable them to run their own scenario analyses. transaction of different numbers of defaults among the entities in the 482 483 484 And any such argument would be incorrect. "The fact that two parties enter into a contract in a context where it is recognised to be good commercial practice for disclosure of certain information to be made, does not necessarily mean that there will be a legal duty to make such disclosure": Cartwright, Misrepresentation, Mistake and Non-Disclosure (3rd ed., 2012), paragraph 17-36. ADC, paragraphs 157-162 Dr Robinson's first report, paragraphs 147 and 169 This means, essentially, information about the financial consequences of various default scenarios. 150 354. 355. proposed reference portfolio. Providing access to tools such as this was commonly all an arranging bank would do in relation to the provision of scenario analysis. It was not usual for arranging banks to produce detailed scenario analysis in the form of a presentation or similar document435 (5) PM gave Dr Meier access to their proprietary modelling platform, known as "MorganMarkets", and offered to show Dr Meier how to use it (an offer which Dr Meier did not take up).486 This tool would have allowed Dr Meier to perform his own scenario analysis in respect of the proposed JPM Swap.487 Ms Nguyen, BVG's expert, expresses the View that the market practice was for an arranging bank to provide a proposed counterparty with a "pitch book" which would describe the transaction and contain worked examples of default scenarios.488 However: (1) Dr Robinson's view, which is to be preferred, is that this might well have been the market practice in relation to widely syndicated transactions, but not bespoke ones such as the ICE Transaction. (2) Further, Ms Nguyen's opinion appears to be based on the practice that she observed at one bank (Merrill whereas Dr Robinson's experience is significantly wider. In relation to loss mechanics materials,489 these were set out in the confirmation in respect of the JPM Swap. As Dr Robinson explains, it was not usual in the case of a STCDO for this information to be provided in any other way.490 485 486 487 488 489 490 Dr Robinson's first repoit, paragraph 162 supplemental repoit, paragraph 28 This means information such as the attachment and detachment points of relevant tranches, possible loss exposure per reference entity, and how loss amounts are calculated. Dr Robinson's first report, paragraphs 154 and 157 l5l 356. (3) 357. 358. 359. For the reasons given above, it is submitted that, should JPMS be found to have owed BVG the duties of care alleged, the allegation that any such duties were breached should be rejected. Causation For the reasons given above, it is submitted that JPMS did not owe BVG a duty of care at all, but any such duty as may be found to have been owed was complied with. I In any event, however, BVG's counterclaim against JPMS should be dismissed on causation grounds. BVG's case is that if it had been provided with the information that it says JPMS should have provided, it would not have entered into the JPM Swap. It is respectfully submitted that this allegation should be rejected. (1) As explained above in the context of BVG's misrepresentation case, Dr Meier and BVG were concerned, from a risk perspective, only to ensure that the tranche upon which BVG sold credit protection should be rated A (which, as BVG correctly understood, translated to a minutely small probability of incurring losses under the transaction), and to ensure that none of the reference entities included in the reference portfolio should have a credit rating at inception of the JPM Swap of less than A--. (2) BVG was not interested in going behind the rating or analysing the detailed mechanics of the transaction for itself. The notion that BVG would have refused to enter into the JPM Swap if it had been provided with more detailed information (such as scenario analysis including worked examples of default scenarios) than it was actually given about the proposed transaction is simply not credible. For all these reasons it is submitted that BVG's breach of duty of care case should be dismissed. 152 (4) 360. Contributory fault In the alternative, if it is held, despite the submissions made above, that JPMS is liable to BVG in negligence, any damages that BVG might be awarded should be reduced on account of BVG's own contributory fault. For exampleBVG's own case (although, as noted in paragraph 210 above, this is not supported by Dr Meier's evidence) that it entered into the JPM Swap without properly reviewing the draft PM Swap confirmation that BVG was sent on 4 and 6 July 2007.491 If BVG had conducted a satisfactory review, or indeed any proper review, of the draft confirmation, it would have understood the terms of the JPM Swap, and in particular the terms relating to the loss profile of the transaction and the amount of subordination applicable to the Long Legs. It is evident that BVG's Supervisory Board authorised the conclusion of the transaction without making any effort to understand it: see paragraph 92 above. Insofar as Dr Meier and/or BVG did not understand the loss profile of the JPM Swap, that can only have been because they failed to read and/or 492 that understand the documents (such as the Hockey Stick Presentation) they were sent by PM, which made it clear that the loss profile was not pro- rated. BVG's Finance Director at the material time, Mr Detlev Kruse, admitted to Mr Wiesrnann of JPM in February 2008 (once BVG's alleged mistake as to the loss profile of the transaction had come to light) that he had not given the ICE Transaction sufficient attention and had not taken the time to ensure that he understood it.493 491 492 493 19/1} Wiesrnann, paragraph 16 171} 153 361. For these reasons, it is submitted that BVG acted unreasonably, and to the extent that any damages are awarded against JPMS, these should be reduced to reflect the fact that BVG was to a great extent the author of its own misfortune. 154 IX. 362. 363. 364. (1) 365. VALUATION ISSUES Issues in relation to the quantification of claim under the JPM Swap obviously arise only if it is held that BVG does not have a complete defence to the claim. For the sake of completeness, however, JPM sets out below its position in relation to the valuation issues that arise. There were initially two valuation issues between the parties. The first arose consequent on BVG's allegation that, when JPMC calculated the amounts payable by BVG following each of the credit events that have occurred under the JPM Swap, JPMC wrongly proceeded on the basis that each reference entity had a "credit posiIz'o1z"' of 0.67%, whereas it should have used the figure of or 0.6recurring%. BVG alleged that the effect of this was that the amount claimed by JPMC was overstated by "many of thousands of dollars''.494 Despite the fact that 0.67% is the figure specified in the JPM Swap, JPMC has agreed to advance its claim on the basis that each reference entity had a "credit position" of 0.6recurring%; this is the basis on which the claim is pleaded in the RAPOC. The effect of this was in fact to reduce the sum claimed by $84,468.35. The second valuation issue, and the only one that remains live, arises by virtue of BVG's allegation495 that JPMC breached certain alleged implied terms of the JPM Swap as to the exercise of its discretion as calculation agent when calculating the "final prices" (often referred to as "recovery rates") in respect of those reference entities in relation to which credit events have occurred under the PM Swap. This is considered further below. The performance by JPMC of its role as calculation agent The background to this issue is as follows. (1) Following the occurrence of a credit event (such as a default or insolvency) in respect of a reference entity under a credit derivative, it is necessary, in 494 495 ADC, paragraph 236 ADC, paragraph 230 155 366. 367. order for the transaction to be to determine the market price of a particular bond of the relevant entity that will have been specified for this purpose in the transaction documentation (the "reference obligation"). (2) The market price is determined by the calculation agent conducting a "dealer 497 which involves a trader contacting other traders at different banks, requesting that they provide firm quotations in respect of the reference obligation by a particular time on a particular day. (3) This information is then used to calculate the value of the reference obligation, which in turn determines the cash sum (if any) which the protection seller is obliged to 'pay to the protection buyer. (4) Under the JPM Swap the specified valuation method was "Higl1est",498 meaning that the value to be attributed to the reference obligation was equal to the liighest quotation received during the dealer poll. For each of the credit events that occurred in relation to the entitiesiin the JPM Swap reference portfolio, ISDA established a uniform settlement protocol (commonly referred to as an "auction") to enable market participants to settle credit derivative transactions relating to those entities at a price determined by the auction. Participation in the auctions was voluntaiy; parties to credit derivative transactions under which credit events had occurred remained free to use the dealer poll method to settle their contracts instead. An ISDA auction and a dealer poll are different methods of valuing a reference obligation. While both are designed to establish the value of the obligation in 496 497 498 The process described here relates to cash settlement (which was the settlement method applicable to the JPM Swap). It is also possible for credit derivatives to be settled by "physical" settlement. This involves the credit protection buyer delivering to the credit protection seller a bond that meets the characteristics set out in the trade confirmation in exchange for being paid the par value of that bond. Bonds tend to trade at a discount following a credit event, so the market value of the bond delivered by the protection buyer is likely to be lower than its par value. This is explained in the witness statement of Michael Holt, at paragraph 10 Technically known as the obtaining of "Quotations": Article VII of the 2003 ISDA Credit Derivatives Definitions 156 368. 369. 370. 37}. question, there is no reason to assume that the two methods will produce the same result. BVG was given the opportunity by JPM to participate in each of the ISDA auctions that were held in relation to the credit events that occurred under the JPM Swap. Despite JPM's recommendation that it should do so, BVG declined to participate in any of the auctions, and all of the reference obligations that required to be valued following the occurrence of credit events under the JPM Swap were therefore valued by JPMC conducting dealer polls. JPM warned BVG at the time that the result of a dealer poll was uncertain, and could be higher or lower than the price determined by an ISDA auction.499 There have so far been 1 1 credit events under the JPM Swap. In relation to nine of those credit events, the recovery rate determined by JPMC following the conducting of the dealer happened to be lower than the recovery rate determined by the relevant ISDA auction. On two occasions the recovery rate determined by JPMC was higher than the ISDA auction price. BVG's case is that there were implied terms in the JPM Swap requiring JPMC (among other things) not to exercise the contractual discretion conferred on it in its role as calculation agent in a way that is arbitrary, capricious, umeasonable or perversesoo Although JPMC has taken issue with this in the it is accepted for present purposes that it owed such obligations when conducting the dealer polls. BVG alleges that JPMC breached the implied terms on which it relies. The only A basis on which this allegation has been made, however, is that because on nine out of 11 occasions the recovery rate determined by JPMC was lower than the 499 500 501 See, e. Mr Banner's e--mail to Mr Unger and Mr Falk of BVG of 2 October 2008 in relation to the ISDA auctions for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation: "If VG does not want to follow the ISDA Protocol, JPMOrgan would carry out the 'Dealer Poll' already discussed with Mr heuerkauf based on their appointment as 'Calculation Agent'. The result of such dealer poll is of course uncertain and may be higher or lower than the result of the ISDA settlement." ADC, paragraph 233 133} ARDC, paragraph 219 128} 157 372. recovery rate determined by the relevant ISDA auction, it is to be inferred that JPMC must have breached one or more of the implied terms contended for by JPM submit that this is wrong for the following reasons: (1) (2) (3) (4) (5) BVG appears to accept, correctly, that the burden is on it to establish that JPMC breached the (implied) terms of the JPM Swap when valuing the relevant reference obligations. Although the legal analysis is not articulated in detail in the ADC, BVG's case appears to be that whi.le JPMC can claim, in contract, the sums due on the basis of the valuations actually performed (and the notices issued pursuant to the JPM Swap), BVG has a counterclaim for damages for breach of the implied tenns. BVG has, however, pleaded no positive case as to the respects in which it is alleged that the dealer polls were carried but in breach of the implied terms relied on by BVG. The case is based purely on inference. However, there is no basis for the inference, in circumstances where (as described above) ISDA auctions and dealer polls are different methods of valuing obligations, and it is wholly unsurprising that they produce different outcomes. BVG says in the ADC that it could do no better than invite the drawing of an inference against JPM "pending disclosure". BVG has, however, never sought to amend its statements of case so as to -set out a proper case of breach. BVG has also pleaded no positive case, as it would need to have done, as to what it says the recovery rates of the relevant reference obligations would have been if PMC had conducted the dealer polls as BVG alleges it should have done, and how this would affect the sums due under the PM Swap. 502 ADC, paragraph 235 134} 158 373. (2) 374. 375. 376. 377. It follows from the above that case, that JPMC breached the terms of the JPM Swap as to the exercise of its functions as calculation agent, should be rejected. Interest If JPMC is successful in its claim under the JPM Swap, it will be entitled to contractual interest (calculated on the basis of daily compounding) on the principal sum awarded. This is provided for in section 9(h) of the ISDA Master Agreement between JPMC and BVG dated 17 August 2007.503 The rate of interest is referred to in the Master Agreement as the "Default Rate", which is defined to mean: "a rate per annum equal to the cost (without proof or evidence of actual cost) to the relevant payee (as certified by it) it were to fund or of funding the relevant amount plus I per annum.''504 In its original Defence and Counterclairn, BVG denied that JPMC was entitled to an award of interest at all, but did not (in the alternative) take issue with the rate of interest applied by JPMC or the calculation of the overall interest figure claimed. In the however, BVG has complained that the calculations "are based upon what is said to be an internal interest rate calculated by the precise methodology for which has not been disclosed, and therefore which BVG is unable to admit". This objection overlooks the definition of "Default Rate", as set out above. (1) As the definition makes clear, JPMC is not required to produce any proof or evidence of the interest rate used to perform the relevant calculations. (2) As BVG accepts in its pleading, JPMC has provided BVG with details of the calculations used to determine the interest figure that is due, including the 503 504 505 {El 1/ 17} Section 14 of the Master Agreement {El l/24} ADC, paragraph 240 136} 159 rate applied. Under the terms of the contract between the parties, that is all that PMC is required to do. 378. It is submitted, therefore, that if JPMC is successful on its claim, it should be awarded contractual interest as pleaded. 160 X. CONCLUSION 379. For the reasons given above, the Court is respectfully invited (1) to enter judgment in JPMC's favour for the sum claimed (including contractual interest), (2) to make the declarations sought by JPMC, and (3) to dismiss BVG's counterclaims against both JPMC and JPMS. Laurence Rabinowitz QC Richard Handyside QC 8 January 2014 David Murray 161