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Case No: CHANF 1998/1637/A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (Jonathan Parker J)
Royal Courts of Justice
Strand, London, WC2A 2LL
Friday 25th February 2000
B e f o r e :
LORD JUSTICE MORRITT
LORD JUSTICE WALLER
and
LORD JUSTICE MUMMERY
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|
|
Ronald
Allwyn Baker
|
Appellant
|
|
-
and -
|
|
|
The
Secretary of State for Trade and Industry
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Respondent
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Ron. Baker (in person)
Miss E.Gloster QC, Mr M. Davis-White and Mr E.Nourse (instructed by the
Treasury Solicitor for the respondent)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
MORRITT LJ
This is the judgment of the Court.
1. In February 1995 the Barings Group collapsed under the weight of the loss of
£827m. incurred through the unauthorised activities of Mr Nick Leeson ("Mr
Leeson"), the assistant director and general manager of Barings Futures
(Singapore) Pte Ltd ("BFS"). In consequence, on 26th and 27th February 1995,
administration orders were made by the court in England in respect of Barings
plc ("Plc"), Bishopcourt (BB&Co) Ltd ("BB&Co"), Bishopcourt (BS) Ltd
("BSL") and Baring Securities (London) Ltd ("BSLL"). On 27th February 1995
BFS was placed in interim judicial management under the laws of Singapore.
Enquiries into the unauthorised activities of Mr Leeson and the causes and
circumstances of the collapse of Barings were conducted in London and
Singapore. The enquiry in London was carried out by the Board of Banking
Supervision of the Bank of England. Its report ("BoBS") was published by HMSO
on 18th July 1995. The enquiry in Singapore was carried out by Inspectors
appointed by the Minister of Finance. Their report dated 6th September 1995
("SIR") was published by the Ministry of Finance in Singapore later that
year.
2. On 21st February 1997 the Secretary of State for Trade and Industry
instituted proceedings under the Company Directors Disqualification Act 1986
seeking, pursuant to s.6, disqualification orders, as defined in s.1, against
ten respondents who were directors of one or more of Plc, BB&Co, BSL and
BSLL. We make plain at the outset that the Secretary of State did not
question the honesty and integrity of any of the respondents. The material
relied on in support of the application included BoBS and SIR and evidence
given to those investigators. Orders ranging from two to five years were made
against five of the respondents under the Carecraft procedure (see Re
Carecraft [1993] BCLC 1259) and against another two of them without
opposition. The application in respect of the remaining three, Mr Ron Baker,
Mr Andrew Tuckey and Mr Anthony Gamby, was heard by Jonathan Parker J over 44
days between 12th May and 21st October 1998. In his judgment given on 1st
December 1998 (reported at [1999] 1 BCLC 433) he determined that
disqualification orders should be made against each of them. After hearing
further submissions as to the length of such orders, on 21st December 1998, he
ordered them to be disqualified for six, four and five years respectively.
This is the appeal of Mr Baker from the order made against him. He argued his
appeal in person. He did so with an ability, clarity and, given the mass of
material, brevity for which we both thank and commend him. Given the
publication of BoBS, SIR and the comprehensive judgment of Jonathan Parker J we
will confine our description of the background to this appeal to what is
necessary to explain the judge's decision, the grounds of appeal and our
conclusions on them.
Introduction
3. Mr Baker became a director of BB&Co on 27th April 1992. He was also a
member of the Treasury and Trading Committee of BB&Co and of the assets and
liabilities committee ("ALCO") into which it merged in November 1994.
BB&Co carried on the business of a merchant bank specialising in corporate
finance and debt trading. It was the wholly owned subsidiary of Plc and the
holding company of BSL. BSL was a broker dealer operating primarily in the
Asia Pacific region. The indirect subsidiaries of BSL included Baring
Securities (Japan) Ltd ("BSJ"), Baring Securities (Singapore) Ltd ("BSS"), BSLL
and BFS. As we have indicated Mr Leeson was employed by BFS. In terms of
"line management" whereby juniors report to seniors in a particular geographic
location or within a particular company Mr Baker was not responsible for his
activities. But Barings also operated a system of "matrix management" whereby
each type of trading, business activity or financial product had a head
responsible for the conduct of that activity or for that product throughout the
world and across the various companies within the group. Mr Baker had been the
head of Debt Financial Products Group and, with effect from 1st January 1994,
became the head of Financial Products Group ("FPG"). It is common ground that
as from 1st January 1995 Mr Baker, as the head of FPG, was responsible for the
activities of Mr Leeson under the Matrix management system. Jonathan Parker J
considered ([1999] 1 BCLC 433 at p.450f and 531a) that he was so responsible at
all times since the formation of FPG at the end of 1993. This is a conclusion
which Mr Baker disputes.
4. This issue arises from the nature of the business conducted by BSJ and BFS.
The business of BSJ included proprietary trading in derivatives as well as
agency business for third party clients. BSJ transacted business in Japan on
the Tokyo and Osaka exchanges ("TSE" and "OSE" respectively). BFS operated in
Singapore on the Singapore International Monetary Exchange ("SIMEX").
Originally BFS operated an agency business only. Its clients were, save for
Banque National de Paris, all clients of either BSL in London or BSJ in Japan.
Until 1st January 1995 such agency business of BFS was included in a different
group from FPG, namely Futures and Options Sales. But from 1992 onwards BFS
also executed trades on SIMEX for other Baring companies, including BSJ, on
behalf of their proprietary traders. As the judge explained [ibid p.451c]
"If...any of the..'house' traders in BSJ wanted to deal on SIMEX, they
would use Leeson for that purpose. Initially Leeson was doing little more than
performing an execution service - otherwise known as order-filling - for BSJ.
In due course, however, as will be seen, the tables were turned: Leeson
became the dominant player, with BSJ playing an increasingly subordinate
role."
5. Mr Baker accepts that from June 1994 when limits within which Mr Leeson was
authorised to carry on proprietary trades were imposed he was responsible as
head of FPG for the conduct of those trades. But even then he does not accept
that the steps Mr Leeson took before 1st January 1995 to conceal the outcome
of those trades came within the area of his, Mr. Baker's, responsibility. He
contends that those activities were undertaken within the execution and
settlement functions performed by BFS as part of its agency business and were,
therefore, a part of the Futures and Options Sales Group. That group became
part of FPG with effect from 1st January 1995 and, as Mr Baker accepts, the
corresponding responsibility then rested with him. Mr Baker also claims that
if and insofar as Mr Leeson's activities included speculating in options he, Mr
Baker was not responsible because such speculation never formed part of FPG.
6. Accordingly it is necessary to have some understanding of the nature of the
authorised trading undertaken by BFS, the unauthorised activities of Mr Leeson
and the methods by which he concealed the consequences. Our description is
simplified and incomplete but, we believe, sufficient for present purposes.
7. Futures and options are derivatives because their value depends on the price
of the underlying asset, be it a commodity, investment or index. The three
derivatives relevant to this appeal are Nikkei 225, JGB and Euroyen. Nikkei
225 is an index based on 225 Japanese stocks traded on TSE and is the basis for
the major Japanese equity derivatives contracts, namely Nikkei 225 futures or
options. Such derivatives are traded on both OSE and SIMEX. JGB stands for
Japanese Government Bond. A JGB future or option is based on such a bond with
10 years to run to maturity with a standardised coupon of 6%. JGB futures and
options are traded on TSE and SIMEX. Euroyen is a yen denominated instrument
traded outside the formal control of the Japanese monetary authorities.
Euroyen futures and options are traded on SIMEX and Tokyo International
Financial and Futures Exchange ("TIFFE"). (Further details will be found in
BoBS Appendix V)
8. The fact that the same derivative is traded on more than one exchange means
that there are likely to be price differentials on the two markets arising from
the different conditions prevailing on them. The exploitation of such price
differentials by the purchase of a derivative on one market and the sale of the
same derivative on the other market is known as arbitrage (see BoBS p.276
Glossary of Terms). If both transactions are carried out simultaneously then
there is no risk, but delay in "putting down" the second "leg" gives rise to
the risk of market movement in the meantime. BFS was peculiarly well placed to
arbitrage derivatives traded on SIMEX because it had a seat on SIMEX. SIMEX
still operated a system of open outcry trading. The Japanese exchanges had
adopted a system of electronic trading. Thus the trader at BFS could know the
prices on each market for the same product at the same time.
9. The arbitrage of BFS, known in Barings as "switching", arose out of the
hedging strategy of the proprietary traders of BSJ who operated a volatility or
"vega" book speculating on the size of market movements in Japan. Initially
such arbitrage was confined to Nikkei 225 futures. In 1994 it was extended to
JGB and Euroyen contracts. There was more than one variant. First there was
the straightforward "price anomaly arbitrage" carried out for the purpose of
exploiting price differences for the same derivative on SIMEX and one of TSE,
OSE or TIFFE. In such cases BFS profited from capturing the price
differential. Second there was what was known as "liquidity arbitrage". The
occasion for such arbitrage arose if the order was for a quantity of the
relevant derivative greater than that which could be bought or sold on the
relevant exchange without thereby causing a price movement. In that event BFS
would take the contract itself and lay it off by effecting a corresponding
transaction on a more liquid exchange. In this case BFS profited by the
charge to its client of an extra "price tick", that is the minimum unit of
price for that particular contract. The less liquid exchange was SIMEX, which
was smaller, so that, depending on the derivative concerned, the more liquid
exchange was TSE, OSE or TIFFE. Third was a variant of liquidity arbitrage
involving an element of directional or speculative trading whereby putting down
the second leg in TSE, OSE or TIFFE was delayed or one or other leg was lifted
before the other.
10. The judge considered that it was likely that Mr Leeson's switching business
in Nikkei 225s started in July 1992. Mr Baker became aware of this activity
when he visited the Far East in January 1994. He also learnt then of the
significant contribution such switching made to the volatility book in Japan.
Mr Leeson extended his switching to JGBs and Euroyen in April and May 1994, as
Mr Baker found out when he visited Singapore during the latter month. On that
visit he also discovered that Mr Leeson was in charge of both the front and the
back office of BFS, a situation he subsequently described to BoBS as
"fundamentally wrong in principle".
11. In June 1994 formal risk limits were imposed on Leeson's switching
business. They were intra-day limits only so that Mr Leeson had no authority
to carry open positions overnight. They were imposed by reference to futures
contracts traded on OSE which were twice the size of those traded on SIMEX. In
relation to futures traded on SIMEX the limits were 400 Nikkei 225s, 200 JGBs
and 1,000 Euroyen.
12. In July 1994 the internal audit department of BSL carried out an internal
audit of BFS as part of its review of the Barings companies operating in South
East Asia. The report was completed in October 1994 and circulated to Mr Baker
as the head of FPG. The three key recommendations regarding BFS, as summarised
by the judge were
(1) "BF(S)'s back office should be reorganised so that the General Manager
[ie. Leeson] is no longer directly responsible for the back office" - ie.
Leeson's roles should be segregated;
(2) "BF(S)'s trading activities should be independently reviewed to ensure
that regulations are followed and risk limits observed. A suitably
experienced manager should be appointed to review the records, perform some
tests of detail and discuss activity with BFS's traders"; and
(3) "London Group Treasury should perform a comprehensive review of BF(S)'s
funding requirements".
As the judge found, none of these recommendations was carried out.
13. The Internal Audit Report, which is reproduced as Appendix 2 to the
judgment of Jonathan Parker J (ibid pp 603-620), also recorded that the
reported revenues from the switching activities in Nikkei 225s for the first
seven months of 1994 amounted to £11m. The reported revenues for the
switching in JGBs and Euroyen from their commencement to the end July 1994 was
a further £8.75m. Thus for the first seven months of the year the total
revenue from Mr Leeson's switching activities was said to be £24.3m when
the total revenue for the entire banking group for the same period was
£59.7m. The figures for the whole of 1994 are even more striking.
Taking the figures for Nikkei 225s for the first seven months of 1994 as being
£11m and adding them to the separately reported figures for Nikkei 225s
for the succeeding five months and of JGBs and Euroyen for all 12 months the
total reported revenues generated by Mr Leeson's switching activities for the
year were £45m. when the total revenue for the whole banking group was
only £85m. The corresponding profit would have been between 13% and 17.5%
of profits of Barings as a whole.
14. According to the evidence given to both BoBS and SIR and as found by
Jonathan Parker J these figures had been artificially inflated by Mr Leeson in
a number of ways through Account 88888. Account 88888 had been opened by Mr
Leeson on behalf of BFS with SIMEX in July 1992. It was designated internally
as an "error account" and described by Mr Leeson to SIMEX as a related house
account. Through this account Mr Leeson carried on unauthorised trading in
futures and options on a huge scale. In addition he used this account so as
falsely to enhance the profits of the switching business. This was achieved
in a number of ways which are described in detail in SIR (paragraphs 3.10 -
3.40) and BoBS (paragraphs 5.2 - 5.24). In essence losses, genuine or
created for the purpose, were parked in account 88888 so as to enable Mr Leeson
to attribute to the genuine account 92000 corresponding apparent profits.
15. SIMEX required the payment of margins in respect of the purchase or sale of
futures or options. Consequently the trading activities of Mr Leeson through
SIMEX generated margin liabilities which had to be met by payment to SIMEX. BFS
did not have the funds for payment of margin on the trades carried out by Mr
Leeson. This problem was dealt with by Mr Leeson in two ways. First he
concealed from SIMEX the true extent of the margin liability of BFS. (SIR
paragraphs 3.35 - 3.40 and BoBS paragraphs 5.34 - 5.40) Second Mr Leeson
obtained from BSL, BSLL and BSJ the funds necessary to fund his trading by
misrepresentions as to the need for "advance margin calls" and the timing for
intra-day margin calls. (SIR paras. 3.41 - 3.45 and BoBS Chapter 6) These
misrepresentations remained undiscovered, in part at least, because BSL, BSLL
and BSJ had been unable for some time to reconcile the funds so provided with
their own or their clients' dealings.
16. It was estimated by BoBS (paras 4.7 - 4.11) that by 31st December 1994 the
cumulative losses arising from Mr Leeson's trading activities were £208m.
Plainly losses of that magnitude took some concealment particularly at the
year end. One of the artifices used by Mr Leeson was to cause a fictitious
transaction to be recorded in the books of BFS whereby £50m was credited
to the 88888 account, thereby reducing the deficit on that account to zero, and
reversing the entry on 3rd January 1995. The reversal left a discrepancy
between the books of BFS and the account of BFS with SIMEX. This discrepancy
was discovered by the external auditors for BFS. They asked Mr Leeson for an
explanation. After giving a number of different accounts Mr Leeson's ultimate
explanation was that the sum in question was due to BFS by a broker called
Spear, Leeds and Kellogg ("SLK") as part of an over-the-counter derivative
transaction and that the sum in question had been repaid to BFS on 2nd February
1995. In fact there had been no such transaction, debt or repayment. The
discrepancy and Mr Leeson's explanation was reported to Mr Baker on 6th
February 1995. His subsequent conduct in relation to it ("the SLK Receivable")
is one of the specific matters on which the Secretary of State relies.
17. In the meantime, on 17th January 1995 there was a serious earthquake at
Kobe, Japan. This led to an increase in market volatility in the instruments
in which Mr Leeson was dealing which, in turn, gave rise to substantial losses
on the open positions on certain short straddle options he had been selling.
(BoBS paras 4.74 and 4.75) As Jonathan Parker J recorded (ibid. 465f)
"Faced with mounting losses, Leeson appears to have attempted to prop up the
index, and thereby to protect his open position, by purchasing large quantities
of futures. This in turn led to a massive increase in Leeson's reported
positions, in his reported revenues and in his demands for funding."
Thereafter the pace of events accelerated.
18. It was reported to a meeting of ALCO held on 24th January 1995 that, but
for a booking error, the daylight overdraft limit of BFS with Citibank would
have been broken with the likely and disastrous consequence of a default by BFS
with SIMEX. Mr Baker was not present at that meeting but was told of the
problem. The following day, 25th January, he spoke to Mr Norris (then the
Chief Executive Officer of BIB, the non-statutory entity combining the
businesses of BB&Co and BSL) and agreed that Mr Leeson's positions should
be reduced by half. In fact, as Mr Baker was told by Ms Walz (the head of a
part of FPG called Structured Products Group who reported to Mr Baker) on the
telephone on 26th January, Mr Leeson doubled his positions. Also on 26th
January there was a meeting of ALCO attended by Mr Baker by speakerphone from
New York. The minute of that meeting records that the action required
included
"Nick Leeson to be advised that positions should not be increased from current
levels and when possible reduced pending further instructions from ALCO"
At a meeting of ALCO held on 27th January, which Mr Baker did not attend it was
reported that Mr Leeson's position in Nikkei 225s had risen from $US1,546m to
$US2,983m. It was resolved that Mr Leeson be advised that "there is to be no
increase in the Nikkei position beyond this level". The judge recorded that
Mr Leeson's position increased on each of 1st, 2nd, 7th, 8th, 10th, 13th, 14th
and 16th February.
19. By the end of January 1995 concern regarding the position of Barings was
being expressed from outside. Thus on 27th January SIMEX wrote to BFS seeking
reassurance that BFS would be able to meet its margin requirements in the light
of the open positions as at 30th December 1994. By the time the letter was
written such positions had been enormously increased. On the same day Barings
was contacted by the Bank for International Settlements reporting rumours in
Asia that Barings had taken massive losses on the Nikkei and could not meet its
margin calls and BSJ was told by Bloomberg, an information service, that
everyone was commenting on the very long positions of Barings in Japan.
20. On 6th February 1995 Mr Baker returned to his office in London. As we have
already recorded he then learned about the SLK Receivable. There was waiting
for him a fax from Mr Bax, the regional manager for South East Asia,
suggesting, by reference to the SLK Receivable, that current operational
weaknesses of the business of BFS with SIMEX had been highlighted and urgently
needed a new approach. Mr Baker discussed it with Mr Bax and with Mr Norris on
the same day. On 7th February he received a report concerning the SLK
Receivable from Mr Hawes, another member of ALCO, pointing out some of the
discrepancies in Mr Leeson's explanation. But Mr Baker took no action whether
by contacting Mr Leeson or otherwise.
21. On 8th February Mr Baker attended the meeting of ALCO. Mr Norris reported
that the SLK Receivable was a
"recent operational error in Singapore due to a trade misposting which took
several weeks to come to light. A full report will be produced by James Bax at
a later stage."
On the same day Ms Walz told Mr Baker that Mr Leeson had once again increased
his positions contrary to the previous instructions of ALCO.
22. Mr Baker attended the meeting of ALCO held on 16th February. It was agreed
in principle that Mr Leeson's switching business should be subjected to
long/short gross limits. It was also agreed that Mr Leeson should be advised
that there should be no further increase above the positions at the close of
business on that day as reported to the meeting. At the meeting of ALCO held
on the following day Mr Baker reported that he had not spoken to Mr Leeson as
required by the decisions of ALCO reached at the meeting held the day before.
He undertook to inform Mr Leeson over the weekend that his positions should be
reduced. The figures for Mr Leeson's positions as reported to the meeting on
17th February showed a further increase in the Nikkei position although the
positions in JGBs and Euroyen had reduced. The following day, 18th February,
Mr Baker left for his holiday. He succeeded in contacting Mr Leeson that
evening and admonished him. By the time Mr Baker returned from holiday Mr
Leeson had fled from Singapore and the administrative receivers had been
appointed. BoBS calculated that the losses at 27th February 1995 had grown
since 31st December 1994 from £208m to £827m, an increase of
£619m in the space of 57 days. The cumulative loss after liquidation of
the open positions came to £927m. (BoBS paras 4.8 - 4.14)
23. We have already referred to the inquiries conducted by BoBS and SIR. On
14th March 1996 the Securities and Futures Authority instituted disciplinary
proceedings against Mr Baker. The tribunal found one of the three charges
proved and ordered that Mr Baker be reprimanded. Mr Baker appealed to SFA
Appeal Tribunal. By their order dated 11th June 1997 the Disciplinary Appeal
Tribunal allowed Mr Baker's appeal.
The Proceedings
24. Company Directors Disqualification Act 1986 s.6 provides
"(1) The court shall make a disqualification order against a person in any case
where, on an application under this section, it is satisfied -
[(a)..]
(b) that his conduct as a director of that company...makes him unfit to be
concerned in the management of a company."
By s.9(1) it is provided that the court shall have regard in particular to the
matters mentioned in the schedule to the Act. The relevant matters are "any
misfeasance or breach of any fiduciary or other duty by the director in
relation to the company" and "the extent of the director's responsibility for
the causes of the company becoming insolvent". (Schedule 1 paras 1 and 6).
25. As we have already indicated these proceedings were instituted by an
Originating Summons issued on 21st February 1997. It was supported by
affidavits of Mr Christopher Taylor, a partner in Price Waterhouse, and Mr
Chillery, the Principal Examiner in the Disqualification Unit of the Insolvency
Service. In paragraph 6 of his affidavit Mr Chillery formulated, by reference
to the affidavit of Mr Taylor and the exhibits thereto, the matters on which
the Secretary of State relied in support of his contention that Mr Baker was
unfit to be concerned in the management of a company. They were
The SLK receivable
1. Mr Baker failed to investigate (or cause to be investigated) promptly and
properly the SLK receivable and its implications. Further, he positively
sought to downplay its significance and to discourage its proper
investigation.
Monitoring and controlling Leeson's activities
2. Mr Baker failed to perform (or cause to be performed) any proper or detailed
examination of BFS's reported profitability;
3. Mr Baker failed to ensure that the responsibility for the front and back
office of BFS was not vested in Leeson;
4. Mr Baker failed to ensure that BFS's positions were reduced after 24th
January 1995;
5. Mr Baker failed to ensure that Leeson's activities were properly monitored
and/or controlled. In particular, Mr Baker failed to pay any or any sufficient
regard to
a) the extraordinarily high reported profitability of BFS,
b) the lack of any proper system by which to monitor and control BFS's risk
limits,
c) the lack of any proper assessment of BFS's compliance with risk limits or
reported profitability against those risk limits,
d) the fact that Leeson was allowed to run the front and back office,
e) the absence of a risk and compliance officer at BFS,
f) the rapid growth of and subsequent failure to reduce BFS's switching
positions,
g) the liquidity difficulties caused by those positions,
h) the market rumours resulting from those positions,
i) the difficulties in relation to the breakdown and reporting of the funding
to BFS,
j) the Simex letter of 27th January 1995,
k) the SLK Receivable.
We would again emphasise that the Secretary of State does not question the
honesty or integrity of Mr Baker. His case is based on alleged
incompetence.
26. In his affidavit Mr Taylor explained how it was he came to make the
principal affidavit. He deposed to his belief that the Secretary of State had
taken the view that given Mr Taylor's experience and qualifications he would be
able not only to summarise the relevant facts but also "to identify the
failings on the part of the respondents and comment on the nature of those
findings". He added that in doing so he did not intend to express an opinion
on the ultimate issue for the court whether the conduct of the respondents made
them unfit to be concerned in the management of a company. On 12th May 1998,
the first day of the hearing, counsel for Mr Baker, Mr Tuckey and Mr Gamby
contended that insofar as Mr Taylor claimed to be giving expert evidence he was
not qualified to do so because, having in substance adopted the role of an
office-holder, he was not independent. This submission was upheld by the
judge. He decided
"In so far as he [Mr Taylor] has made use of his experience and expertise in
explaining the background to the allegations which have been made, he has, of
course, given the greatest assistance to the court. But, in my judgment, that
is as far as he may go, given that he has de facto assumed the role of the
office-holder in putting forward the Secretary of State's case."
27. We should also record that at a later stage in the proceedings Mr Baker
applied for a stay of the proceedings against him on the ground that their
further prosecution would infringe the double jeopardy rule because he, Mr
Baker, had already successfully resisted the disciplinary proceedings brought
against him by SFA. By his order made on 5th June 1998 Jonathan Parker J
dismissed this application. His decision was upheld by the Court of Appeal on
9th June 1998 Re Barings (No 3) [1999] 1 BCLC 226 (Ch D and CA).
28. As we have already mentioned the hearing before Jonathan Parker J lasted
for 44 days. It concerned Mr Tuckey and Mr Gamby as well as Mr Baker. On the
days which concerned Mr Baker he was represented by solicitors and junior
counsel. Mr Baker, who had sworn seven affidavits in answer to one or more of
the three affidavits sworn by Mr Taylor, was cross-examined on behalf of the
Secretary of State for over eight days.
29. In his judgment given on 1st December 1998 Jonathan Parker J said of the
evidence of Mr Baker
"Mr Baker gave evidence both on affidavit and orally. He was cross-examined
for some 8 days. I regret to say that my impression of him as a witness was
not favourable. In many respects his evidence in this Court differed from his
evidence to BoBS and SIR. As I acknowledged in the case of Mr Tuckey, some
divergence from earlier evidence is inevitable in a matter as complex as this,
but in Mr Baker's case I take the view that the divergence cannot be explained
away so easily. In addition, when faced with awkward questions in
cross-examination, Mr Baker was given to evasiveness and a tendency to try to
blind the Court with science in an attempt to extricate himself from what he
plainly regarded as a difficult position. On many occasions Mr Baker sought
to put a gloss on the clear meaning of contemporary documents. Finally, in a
number of respects (to which I shall refer in due course) Mr Baker's was, I am
sorry to say, misleading and untruthful.
All in all, I have formed the view that Mr Baker's reliability as a witness
is open to serious question and that in consequence his evidence on contentious
matters must be treated with considerable caution, particularly where it is not
corroborated by the contemporary documentation or by the evidence of other
witnesses (including for this purpose evidence given by other witnesses to BoBS
and SIR)."
The judge, in his extremely careful and lucid judgment, considered that each of
the matters on which the Secretary of State relied, which we have quoted in
paragraph 25 above, had been made out. In doing so he had to consider and
resolve a large number of factual issues arising from the evidence and
explanations given by Mr Baker. In every relevant case he specifically
rejected the evidence of Mr Baker, on many occasions in trenchant terms.
30. We shall, of course, consider the judge's judgment in detail in due course.
But before doing so we would refer to the notice of appeal served by Mr Baker
on 29th December 1998 in which he sets out 15 grounds of appeal. Each of them
contains one or more generalised assertions to the effect that the relevant
finding was contrary to the weight of the evidence. At a directions hearing
held by Chadwick LJ on 6th August 1999 Mr Baker was directed to prepare a
schedule identifying by reference to the trial bundles and pages each finding
of fact which Mr Baker seeks to challenge and the oral and documentary evidence
relevant to it. In due course Mr Baker produced a schedule as directed setting
out no fewer than 61 passages in the judgment which he contended to be
factually wrong. Those which are relevant have been subsumed by the grounds of
appeal and the written and oral argument of Mr Baker to which we will refer in
due course.
31. We should also refer to Mr Baker's applications for permission to adduce
fresh evidence. His first application came before this court on 15th October
1999. It was successful only insofar as the Secretary of State did not object
to permission being given in relation to tape recordings of the evidence Mr
Baker gave to BoBs in March to June 1995. In the event the tapes did not
feature on the hearing of the appeal. The second application was made on 31st
January 2000. This application related to (1) statements or transcripts of
evidence given by three named individuals to the SFA Disciplinary or Appeal
Tribunals, (2) the agenda for an FGP Management Meeting held in New York in
December 1994 and (3) the bundle of documents before this court on the first
application which was determined on 15th October 1999. At the conclusion of
the hearing of the second application during the hearing of the appeal we
indicated that we rejected the application and would give our reasons later.
32. Our reasons for that conclusion may be shortly stated. The appeal is from
the decision of a judge of the High Court after a hearing on the merits.
Accordingly what have become known as the rules in Ladd v Marshall
[1954] 1 WLR 1489 apply. In accordance with those rules fresh evidence will
not be admitted unless it is shown that (1) the evidence in question could not
with reasonable diligence have been obtained for use at the trial, (2) the
evidence, if given, would probably have an important influence on the result of
the case and (3) the evidence is apparently credible. In our view it is clear
that the first and second classes of fresh evidence do not comply with the
first and second rules. The third class is not relevant to the appeal at all
for either it contains evidence for which permission has already been refused
or it is not evidence which relates to any issue arising on the appeal.
The judgment
33. We turn now to the judgment to describe in more detail the findings of the
judge relevant to this appeal. In Section II he set out the factual
background. It was more detailed than our introduction as it had to serve as
the factual background to the cases against Mr Tuckey and Mr Gamby as well as
Mr Baker. The first 9 of Mr Baker's challenges to the judge's findings of fact
arise from this section. As they are either irrelevant to the grounds of
appeal or arise again at a later stage we need say no more about them.
34. In Section III the judge dealt with certain issues of law. We refer to
some of them, not because they were challenged by Mr Baker, but because they
are relevant to the approach the judge took to the evidence and the matters
relied on by the Secretary of State as demonstrating the unfitness of Mr Baker.
35. In Section III A the judge made a number of observations on the proper
construction and application of the Act to which we refer, not because we
disagree with the judge, but because we wish to emphasise the propositions to
which he referred. First, the court must consider the question of "unfitness"
by reference to the conduct relied on by the Secretary of State and decide
whether "viewed cumulatively and taking into account any extenuating
circumstances [it] has fallen below the standards....of competence appropriate
for persons fit to be directors of companies". (ibid.p.483b) Thus it is no
answer to the allegations of the Secretary of State that separately and
individually none of them is sufficiently serious to demonstrate the requisite
unfitness. Second, the matter referred to in Schedule 1 para.6, namely, "the
director's responsibility for the causes of the company becoming insolvent"
requires a broad approach and is not to be assessed by reference to nice legal
concepts of causation. (ibid. p. 483f-g) Thus it matters not that others may
also have been responsible for the causes of the insolvency whether more or
less proximately. Third, where the allegation is incompetence without
dishonesty it is to be demonstrated to a high degree. (ibid. pp.483j-484b)
This follows from the nature of the penalty. Nevertheless the degree of
incompetence should not be exaggerated given the ability of the court to grant
leave, as envisaged by the disqualification order as defined in s.1,
notwithstanding the making of such an order. Fourth it is not necessary for
the Secretary of State to show that the person in question is unfit to be
concerned in the management of any company in any role. This test, described
by the judge as the lowest common denominator approach, is not what the Act
enjoins. As the judge observed the court is concerned only with the
respondent's conduct in respect of which complaint is made set in the context
of his actual management role in that company. If his conduct in that role
shows incompetence to the requisite degree then a finding of unfitness and a
consequential disqualification order should be made. (ibid. p.485d-h) Fifthly
a finding of breach of duty is neither necessary nor of itself sufficient for a
finding of unfitness. (ibid. p.486d-g) As the judge observed a person may be
unfit even though no breach of duty is proved against him or may remain fit
notwithstanding the proof of various breaches of duty.
36. In Section III B Jonathan Parker J considered the duties of directors by
reference to the authorities he cited. For our purposes it is sufficient to
cite from his summary in paragraph B7 (ibid. p. 489a-d) with which we agree.
The judge said
"(i) Directors have, both collectively and individually, a continuing duty to
acquire and maintain a sufficient knowledge and understanding of the company's
business to enable them properly to discharge their duties as directors.
(ii) Whilst directors are entitled (subject to the Articles of Association of
the company) to delegate particular functions to those below them in the
management chain, and to trust their competence and integrity to a reasonable
extent, the exercise of the power of delegation does not absolve a director
from the duty to supervise the discharge of the delegated functions.
(iii) No rule of universal application can be formulated as to the duty
referred to in (ii) above. The extent of the duty, and the question whether
it has been discharged, must depend on the facts of each particular case,
including the director's role in the management of the company."
37. In Section III C Jonathan Parker J dealt with various questions of expert
evidence. They arose primarily in connection with evidence tendered by Mr
Tuckey in respect of the Secretary of State's case against him. But in
paragraph C18 the judge recorded the submission of counsel for Mr Baker that
the failure of the Secretary of State to call expert evidence was fatal to the
charge of unfitness made against Mr Baker because (ibid. p.495c)
"The Court is left in the position of attempting to reach a decision on the
appropriate and reasonable practice of a manager of a derivatives business
within a complex global investment bank without any relevant evidence from a
member of that profession."
The judge rejected that submission on the ground that (ibid. p.495d)
"...the issue in this case is not whether the respondents'conduct fell below
some accepted standard in merchant banking, but whether in all the
circumstances of the case they were incompetent. In any event, I respectfully
doubt whether managing an investment banking business can accurately be
described as a profession."
38. Mr Baker made, in effect, three points. The first was the same as that
made by counsel on his behalf in the court below to the effect that the
Secretary of State was unable to discharge the onus resting on him if he did
not adduce expert evidence. The second was to the effect that on technical
matters to do with the derivatives market it was not open to the judge to
reject the evidence of Mr Baker as to how it works without affirmative evidence
to the contrary from one as experienced as Mr Baker. The third was to the
effect that in the absence of such evidence the judge evidently failed to
understand the nature of the issues. We reject each of those submissions.
39. With regard to the first of them we agree with the reasoning of the judge.
The issue is not whether Mr Baker was an incompetent operator in the financial
products or derivatives market. It is wrong to equate disqualification
proceedings with a professional negligence claim. The standard of competence
to be shown by a person as a director is a different question and is one of
law. Whether the respondent failed to achieve that standard is a question for
the court on which only exceptionally could the evidence of an expert be
admissible. In our view this case is not one of those exceptions.
40. We reject the second submission on the ground that it was a matter for the
judge whether or not to accept the evidence of Mr Baker on matters pertaining
to the derivatives market as well as on the other issues in respect of which he
had to reach a conclusion. We reject the third submission on the ground that
there is no indication that the judge failed to understand any matter relevant
to the decisions he had to make. In respect of both the second and the third
submissions we would observe that if Mr Baker had considered that expert
evidence would be required at the trial then it was up to him to adduce it.
Further it is noteworthy that although Mr Baker made two applications for
permission to adduce fresh evidence on the hearing of this appeal in neither of
them did he include any expert evidence. For all these reasons we do not
accept Mr Baker's first ground of appeal.
41. In Section III D Jonathan Parker J considered whether the material
contained in BoBS and SIR was admissible in evidence and if so what weight
should be attached to it. He did not give any similar consideration to the
evidence before or findings of the SFA Disciplinary or Appeal Tribunals for
neither party relied on them. The Secretary of State did not seek to rely on
BoBS or SIR insofar as it contained "evaluative judgments or express
criticisms" of Mr Baker. Accordingly the judge made no ruling on whether such
judgments or criticisms were admissible. He went on to consider (ibid. p.495g
- 496d) two broad categories of material, namely,
"(a) pure hearsay statements (of whatever degree)(e.g. recitals of what a
witness told the inquiry, or of the contents of documents, or of the analysis
which the inquiry had done on them);
(b) findings of primary or secondary fact."
The judge considered both categories to be admissible in evidence, the weight
to be attached to them, in any given case, being a matter for the court. Mr
Baker does not challenge any of these conclusions. In the circumstances these
issues were not argued before us. We see no reason to doubt the validity of
the judge's conclusions, quite the reverse; but, as will be seen, they are
important in that Mr Baker in asserting that there was no evidence on a
particular point appears to have ignored the evidence given to BoBS and SIR and
their findings.
Issues on the Appeal
42. In Section V of his judgment (ibid. pp.529d - 575) Jonathan Parker J dealt
at length with the Secretary of State's case against Mr Baker. He did so under
a number of headings which, broadly, correspond with both Mr Baker's grounds of
appeal and his written submissions (339 pages) and oral argument. Accordingly
we propose to consider the judge's judgment and Mr Baker's appeal therefrom
topic by topic before dealing with the judge's overall conclusions. The topics
to be considered are
(1) Mr Baker's management role,
(2) The failure to segregate Mr Leeson's roles,
(3) The conduct of the switching business,
(4) Whether the profits reported by Mr Leeson were false,
(5) The SLK Receivable.
43. Common to each of these topics and to each of the judge's findings which Mr
Baker seeks to challenge is the question when an appellate court is entitled to
depart from the judge's factual conclusions. As has been frequently observed,
the judge having had the advantage of seeing and hearing the witness being
cross-examined is in a better position than the appellate court to assess the
reliability and credibility of the witness. Consequently the judge's findings
of primary fact will not lightly be interfered with, particularly where they
depend on his assessment of the credibility of a witness's oral evidence. Cf
Benmax v Austin Motor Co.Ltd [1955] AC 370, 373. In relation to
disqualification proceedings it is also necessary for the judge to make
findings as to the fitness or otherwise of the respondent to be a director. In
that regard we would adopt the views of Mr Jules Sher QC in Re Hitco 2000
Ltd [1995] 2 BCLC 63, 65 which were approved by this court in Re Grayan
Ltd [1995] Ch. 241, 255 that
"The ultimate determination for the trial judge is whether the proven charges
render the director unfit to manage a company. That determination is not one
of primary fact. It is a determination which involves the evaluation of the
seriousness of the charges which have been proved and a judgment of the trial
judge as to whether, taking all the circumstances into account, including all
matters of mitigation and extenuation, the director is or is not unfit. The
subjective evaluation of all this material by the trial judge is emphasised by
the opening words of the section: `The court shall make a disqualification
order against a person in any case where ... it is satisfied ..... that
his conduct ...... makes him unfit' (my emphasis). Nonetheless, the ultimate
conclusion as to fitness or otherwise is itself a conclusion of fact. In the
words of Dillon LJ in Re Sevenoaks Stationers (Retail) Ltd [1991] BCLC
325 at 330, [1991] 3 All ER 578 at 583:
`..... the true question to be tried is a question of fact, what used to be
pejoratively described in the Chancery Division as "a jury question".'
Plainly, the appellate court would be very slow indeed to disturb such
conclusion as to fitness or unfitness. In many, perhaps most, cases the
conclusion will have been so very much assisted and influenced by the oral
evidence and demeanour of the director and other witness that the appellate
court would be in nowhere near as good a position to form a judgment as to
fitness or unfitness than was the trial judge. But there may be cases where
there is little or no dispute as to the primary facts and the appellate court
is in as good a position as the trial judge to form a judgment as to fitness.
In such cases the appellate court should not shrink from its responsibility to
do so, and, if satisfied that the trial judge was wrong, to say so."
These are the principles to be applied to Mr Baker's challenges to the judge's
findings.
1. Mr Baker's management role
44. As we have already pointed out (para. 3 above) the judge concluded that Mr
Baker, as the head of FPG, was responsible for the activities of Mr Leeson
under the matrix management system since the formation of FPG at the end of
1993. This finding or its possible consequence is disputed by Mr Baker on a
number of grounds. First he contends that until June 1994, when intra-day
limits were imposed on the switching activities of Mr Leeson, he had no
responsibility as head of FPG for any of the activities of Mr Leeson. Second,
he maintains that from June 1994 to January 1995 the unauthorised activities of
Mr Leeson in misreporting the revenues of the switching business, which he does
not admit, arose from the execution and settlement functions of BFS. He
contends that those functions were part of the agency business of BFS and did
not fall within FPG until 1st January 1995. Third, he contends that the
proprietary trading in derivatives carried out by Mr Leeson outside the
switching business in its three variants to which we have referred in paragraph
9 above were never part of FPG so as to be the responsibility of Mr Baker.
45. These and similar arguments were rejected by the judge (ibid. p.531f-g)
"....as nothing more than an ex post facto attempt on his part to outflank the
charges made against him by establishing limits on his responsibility for the
switching business in respects which never occurred to him - and rightly never
occurred to him - at the time. The attempt is made all the more unattractive
by the fact that Mr. Baker plainly had no scruples about including Leeson's
revenues in the FPG revenues and in using those revenues as a bargaining
counter in negotiating bonuses for FPG staff, including himself and Leeson."
46. It is true, as Mr Baker pointed out to us, that the agency business of BFS
did not fall within FPG until 1st January 1995. But the essence of the matrix
management system is to define responsibility by reference to the product or
trading activity, not the corporate entity by which it is carried on. The
relevant product and trading activity in this case was proprietary trading in
derivatives. There is no doubt that the switching business involved both
proprietary trading and derivatives. Moreover it had grown out of the
proprietary trading of BSJ which did form part of FPG from its inception at the
end of 1993. All this had been discovered by Mr Baker on his first tour of the
Far East in January 1994.
47. It seems to us to be quite unreal to sub-divide the proprietary trading in
derivatives either so as to exclude the settlement and execution of the
individual trades or to exclude such trading in derivatives, for example
options, as fell outside the switching business strictly so called. We see no
reason to take a different view from that of the judge. In any event it must
be remembered that during the period in question, that is from 1st January 1994
to 27th February 1995, Mr Baker was not only a product manager, he was a
director of BB&Co as well. It was his duty to acquaint himself with the
nature of Mr Leeson's trading and, by himself or a suitable subordinate, to
take reasonable steps to ensure that it was properly conducted. (see para.
36(i) above) For all these reasons we reject Mr Baker's second ground of
appeal.
2. The failure to segregate Mr Leeson's roles
48. Mr Baker found out about Mr Leeson's switching activities on his tour of
the Far East in January 1994. He was aware that it contributed substantially to
the revenues of BSJ through which they were reported. In May 1994 Mr Baker
went to Singapore with Ms Ash Lewis the head of the BB&Co internal audit
department. He ascertained that Mr Leeson was the key man and controlled both
the front and the back office. He recognised that such a lack of internal
control was "fundamentally wrong in principle".
49. Mr Baker contended, but the judge did not accept, that he had been
responsible for initiating the internal audit carried out by the Internal Audit
Department of BSL in July 1994. Be that as it may the Internal Audit
Department produced their final report in October 1994 when it was considered
by, amongst others, Mr Baker. We have already set out the key conclusions in
paragraph 12 above. The body of the report drew attention to the respects in
which the internal controls of BFS should be improved. It was pointed out that
there was a significant general risk that the internal controls could be
overridden by Mr Leeson as he could initiate transactions and "then ensure that
they are settled and recorded according to his own instructions". It was
recommended that two additional controls should be introduced, namely that key
accounting and settlement controls should be carried out or reviewed outside
BFS's back office and that the trading activities of BFS should be
"independently reviewed to ensure that regulations are followed and risk limits
observed". The report pointed out that there were no gross position limits and
suggested that the Risk Committee should consider if there should be. It noted
that Mr Leeson was responsible for compliance monitoring and dealing with
regulatory authorities but that there was no compliance officer as such. It
was pointed out at the beginning of the report that the principal source of
evidence had been Mr Leeson himself and that though key reports and records had
been reviewed "no detailed testing of records was undertaken".
50. None of these recommendations was implemented. Before the judge Mr Baker
asserted that he did not know that until 6th February 1995. The judge
considered the evidence in some detail. He concluded (ibid. p.554f-g)
"I have no hesitation in rejecting his evidence that he did not discover that
fact until February 1995. I find that Mr Baker was aware of it at the latest
by November or December 1994. I have no doubt it was a matter which he
discussed with Mr Leeson at one or more of the "offsites" which they attended
together. Moreover, Mr Baker was, as I find, entirely content that that state
of affairs should continue for as long as possible."
51. Mr Baker disputes the judge's conclusion that he, Mr Baker, knew that Mr
Leeson's role remained unsegregated before 6th February 1995. He accepted that
he discovered in May 1994 that the roles were unsegregated but believed that
the recommendations of the Internal Audit Report had been implemented. We see
no grounds on which this court could reach a different conclusion from that of
the judge. The issue depended very largely on the credibility of Mr Baker.
The judge rejected his evidence. We would add that if Mr Baker did not know,
then he should have done. There is no doubt that by the time the Internal
Audit Report had been completed the activities of Mr Leeson fell within Mr
Baker's remit as head of FPG. The Report pointed out in unmistakeable terms
that the internal controls at BFS were inadequate in a respect which Mr Baker
himself described as "fundamentally wrong in principle". In those
circumstances it was the duty of Mr Baker to take some steps to satisfy himself
that the recommendations were being implemented. He took none. For all these
reasons we reject the fourth ground of appeal.
52. Before the judge Mr Baker also contended that the Internal Audit Report was
a full and detailed verification by independent auditors as to the bona fides
of the switching business on which he relied. This submission was rejected by
the judge (ibid. p.547h-548b) on the grounds, amongst others, that it did not
purport to be a verification of the bona fides of the business. He also
rejected Mr Baker's claim to have relied on it. The judge described that claim
"as another example of his seeking to construct a case after the event which
does not correspond with the true position at the time."
53. In the fifth ground of his appeal Mr Baker seeks to challenge the judge's
conclusions. But we are unable to see any basis on which his challenge could
be upheld. It is plain from the face of the Report what it was and what the
Internal Audit Department had done. They did not verify the bona fides of the
switching business; that was not their function or purpose. They made plain
that their principal informant was Mr Leeson himself and that the Internal
Audit Department had not carried out any detailed testing of the records of
BFS. The judge found as a fact that Mr Baker did not rely on the contents of
the Report by rejecting Mr Baker's evidence to the opposite effect. We cannot
go behind that conclusion, particularly because if Mr Baker had relied on it
then he must have taken some step to check that its recommendations were being
implemented; but he did not. For all these reasons we reject the fifth ground
of appeal.
3. The conduct of the switching business
54. There are a number of different aspects of this topic reflected in grounds
6, 7, 8, 11, 14 and 15. These relate to (a) Mr Baker's management of the
switching business (grounds 6, 11 and 14) and (b) the imposition and
enforcement of risk limits (grounds 7, 8 and 15). To some extent they overlap
but we will deal with the issues by reference to those two groups.
3(a) Mr Baker's management of the switching business
55. We have already related how Mr Baker first found out about the switching
business on his tour of the Far East in January 1994 and the extent to which it
contributed to the revenues of FPG. At that stage Mr Leeson traded only in
Nikkei 225s. In April and May he expanded into JGBs and Euroyen. On his visit
to Singapore in May Mr Baker discussed with Mr Leeson the profitability of the
switching business. In June intra-day limits were set for all three
derivatives. In July the Internal Audit Department conducted their review of
the internal controls and business of BFS, their report being made available to
Mr Baker in October. In 1995 there followed in quick succession the SLK
Receivable saga, the Kobe earthquake and the rapidly increasing volume of
business carried out by Mr Leeson in disregard of the limits recommended or
imposed by ALCO in London.
56. The detailed consideration of these events by the judge gave rise to a
number of findings critical of Mr Baker. He found (ibid. p.533e) that by
early 1994 Mr Baker knew that Mr Leeson's activities were not confined to
straightforward price anomaly arbitrage but included intra-day directional
trading. He considered that Mr Baker failed to find out how Mr Leeson was
making money out of JGB switching (ibid. 537c). He thought (ibid. p.538e and
539b) that Mr Baker's understanding of how liquidity arbitrage worked was very
far from complete. He found (ibid. 541b) that Mr Baker never had the
information necessary to enable him to reach any conclusion as to the
profitability of liquidity arbitrage. He considered (ibid. 548d) that Mr Baker
should, following the Internal Audit Report of October 1994, have carried out a
full investigation into the switching business. He found (ibid. p.571h) that
Mr Baker was well aware that the switching business, as he understood it from
Mr Leeson, involved frequent breaches of compliance regulations and was content
to allow that situation to continue.
57. These and other similar conclusions of the judge are challenged by Mr
Baker. He claims that it was not open to the judge, in the absence of expert
evidence, to reject his, Mr Baker's evidence. He suggests that on these and
other similar issues the judge should have followed the findings of the SFA
Tribunals. But the problem facing Mr Baker in this, as in other areas, is
that each of those findings depended on the judge's assessment of Mr Baker's
credibility. In each case the judge was rejecting Mr Baker's assertion to the
contrary of the judge's finding. We see no ground for interfering with any of
these conclusions of the judge. In particular he was entitled to reject Mr
Baker's evidence on matters pertaining to how the derivatives market worked
without having any expert evidence. Further he was bound to make up his own
mind without regard to the conclusions of SFA Tribunals. In ground 11 Mr
Baker suggests that there is no charge in relation to "compliance issues". We
do not agree. Charge 5 alleges a failure properly to monitor and control
generally. Proper monitoring and control involves ensuring compliance with
both internal and external regulations. The generality of that allegation is
not restricted by the lettered sub-paragraphs. In any event (c) covers
internal limits and (e) external regulations. For all these reasons we reject
grounds 6, 11 and 14.
3(b) The imposition and enforcement of risk limits
58. The judge concluded (ibid. 544d) that
"Prior to the imposition of risk limits in June 1994 there were no risk limits
at all in operation in relation to Nikkei 225s, JGBs or Euroyen. In allowing
this extraordinary state of affairs to continue for almost six months Mr Baker
was guilty of incompetence of a very high degree. The fact that Mr Baker was
content to allow that state of affairs to continue for so long, coupled with
the fact that he never took any step to satisfy himself that Leeson was
complying with his risk limits once risk limits had been imposed, demonstrates
Mr Baker's general lack of concern with risk limits and even suggests that, had
it been feasible, Mr Baker might have preferred to see no risk limits for the
switching business, leaving Leeson an entirely free hand to generate ever
higher revenues."
Mr Baker challenged this finding on two bases, first that there had been
earlier informal limits and, second, that the switching business was not new
but had grown out of existing activities.
59. In our view neither of these contentions meets the judge's finding or
criticism. With regard to the first the judge emphatically rejected (ibid. p.
537b) the evidence of Mr Baker as to the existence of earlier informal limits.
There is no material to justify us taking a different view. But in any event
given the fact that Mr Leeson's activities included, to the knowledge of Mr
Baker, some directional (sc.speculative) trading proper formal limits should
have been imposed so that they might thereafter be monitored and enforced.
With regard to the second contention it appears to us to be immaterial to the
issue of risk limits how the switching business developed. On the judge's
findings Mr Baker knew quite enough about it by early 1994 to realise that
proper risk limits should be imposed. Accordingly we reject the grounds of
appeal 7 and 15.
60. We have already described how between 23rd January and 27th February 1995
the positions reported from Mr Leeson's switching business progressively
increased. There is no doubt that by then that business was a part of FPG for
which Mr Baker was responsible. Concern at the increases was expressed by Mr
Norris on the telephone to Mr Baker on 25th January. They agreed that Mr
Leeson's positions should be reduced by half. But on the following day Mr
Baker was told by Ms Walz that Mr Leeson's positions had increased. On 8th
February Mr Baker was again informed that Mr Leeson's positions had increased.
On 16th February the meeting of ALCO which Mr Baker attended agreed that Mr
Leeson's business should be subjected to gross limits and should not be
increased.
61. In respect of all these events the judge rejected (ibid. p.560h) the
evidence of Mr Baker that the positions of Mr Leeson in January and February
1995 were in line with his expectations. He added (ibid. p.561a)
"The funding difficulties, Leeson's positions and the market rumours...were all
matters which cried out for some action on Mr Baker's part in exercising some
degree of control over Leeson and the switching business. In the event Mr
Baker lamentably failed throughout the entire period from 1st January 1994
until the collapse to exercise any effective control over Leeson or the
switching business."
In addition the judge found (ibid.p.573b) that there was no effective system in
place for the monitoring of Mr Leeson's risk limits and Mr Baker took no steps
to introduce one.
62. Once again Mr Baker sought to challenge the judge's findings of fact. But
he was unable to point to any effective system or positive action taken by him
prior to his conversation with Mr Leeson on Saturday 18th February indicating
any concern at the increases in Mr Leeson's positions in apparent disregard of
the limits imposed by ALCO. By then he, Mr Baker, was on holiday and unable
or unwilling to follow up the admonition he gave to Mr Leeson. We reject the
eighth ground of appeal, in particular the suggestion made in sub-paragraph
(ii) thereof that Mr Baker took reasonable steps to ensure compliance with the
instructions of ALCO. That suggestion appears to us to be wholly without
foundation.
4. False Profits
63. Before Jonathan Parker J Mr Baker contended that there was no evidence that
the revenues from Mr Leeson's switching business in 1994 had been manipulated.
This arose from paras 4.9 and 8.10 of Mr Baker's affidavit sworn on 20th
October 1997 to which Mr Taylor responded at length in paragraphs 109-114 and
208-240 of his affidavit sworn on 9th March 1998. As Mr Taylor pointed out
the original underlying documents for 1994 had not been available to the
Secretary of State (or BoBS) so that reliance was placed on SIR in particular
Appendix 3G to that report.
64. Before the judge Mr Baker was cross-examined on this issue. The judge
specifically rejected Mr Baker's suggestion that Appendix 3G related not to the
switching business but only to BFS and BSL. His conclusion (ibid. p. 557a-b)
was that
"It is quite clear - and I find - that Leeson falsely enhanced the 1994
reported switching revenues as he did the 1995 reported revenues, through his
use of Account 88888. Moreover, I am satisfied that he did so on a massive
scale. Appendix 3G of SIR clearly establishes this. It shows that during
1994 the reported revenues were enhanced by JPY1,584 million (about £10
million) through "on-market" cross trades alone. Similarly, BSLL's revenues
are shown to have been enhanced by some £23 million, making a total
enhancement for 1994 of £33 million. This represents more than three
quarters of the estimated switching revenues for 1994 of some £40 million
(including revenues from Nikkei 225 switching which were not separately
identified)."
65. Before us Mr Baker suggested that the judge had failed to take sufficient
account of a report which Mr Baker adduced in evidence provided by Foo, Kon
& Tan a firm of Singaporean certified public accountants and a member of
Grant Thornton International. But, as Mr Taylor pointed out in his affidavit
sworn on 9th March 1998 paragraph 109, that report did not purport to be an
analysis of the profitability of the switching business in 1994. Rather it was
an analysis of the theoretical reasons why a client might want to trade on
SIMEX rather than on one of the Japanese exchanges; as such it was of no
assistance on this issue and the judge was right, in our view, to pay no regard
to it.
66. Given that the report of Foo, Kon & Tan was of no help on this issue
there was no evidence before the judge to gainsay the findings of SIR in regard
to the false enhancement of the profits of Mr Leeson's switching business in
1994. In this court, as before the judge, Mr Baker suggested that the profits
could not have been false because they were reported by BFS to BSJ as genuine.
His contention was that either they were genuine in which case the point did
not arise or they were false in which case BFS was liable to make good to BSJ
the profit it would have made if they had been genuine, thereby remedying any
deficiency in the profits as reported. The judge rejected this submission as
unreal in fact and wrong in law. In addition he pointed out that BFS did not
have the means to make good the loss. We agree with the judge.
67. Mr Baker accepted that the revenues for the period 1st January to 27th
February 1995 had been overstated. But he contended that the extent to which
they had been falsely enhanced had been exaggerated. The enhancement of the
revenues for that period was investigated in detail by both SIR and BoBS. In
addition Mr Taylor, in paras 208-240 of his affidavit sworn on 9th March 1998,
explained the case for the Secretary of State on this point in some detail.
68. Mr Baker contended before the judge that he thought that the enormous
revenues from switching reported for the week of 23rd January 1995 had been
generated by liquidity arbitrage and intra-day trading. He suggested that the
size of the trading activity did not involve any breach of the risk limits
because the limits had been increased during the week by aggregation with the
limits allowed to the Japanese traders. The judge rejected the latter
suggestion (ibid. p.558i-559a) as
"....simply an untruthful attempt to explain ex post facto how Leeson could
have generated the reported revenues for 24th January 1995 without at the same
time trading massively in excess of his current risk limits."
69. With regard to that week the judge found (ibid. p.559e-f) that
"The true position in relation to the reported revenues for the week of 23
January 1995 appears to have been as follows. The Kobe earthquake on 17
January 1995 led to an increase in market volatility in the financial
instruments in which Leeson was trading (ie. Nikkei 225s, JGBs and Euroyen).
As a result, the short straddle options which Leeson had sold, and which
depended for their profitability on the market remaining static, became
loss-making. In an attempt to protect his open position, Leeson appears to
have attempted to prop up the market price by purchasing large quantities of
futures. This activity, which was unauthorised, led to a massive increase in
Leeson's reported positions, to hugely increased reported revenues and to
massively increased demands for funding."
In an earlier passage in his judgment (ibid. p.458f-g) the judge had concluded
that
"In January and February 1995, while reporting revenues of over US$30 million,
Leeson falsely enhanced his reported revenues by over US$40 million. In other
words, by using Account 88888 as a receptacle for his trading losses, he turned
an actual loss into an (apparent) substantial profit."
70. Mr Baker contested the latter finding. He suggested that it was quite
impossible to miss from the daily and weekly returns which he and others saw on
a regular basis the loss of so large a sum. He suggested that in fact the
judge's finding took no account of the matching trade on one or other of the
Japanese exchanges which, he submitted, must have taken place if no overnight
open position was shown. The true figure, he argued, was only some $US2.5m.
In our view this argument is unreal. First, it can only apply to on-market
cross-trades. But the documents disclose off-market transactions which were
either fictitious or manipulated. Second, if a figure is false then, by
definition, there cannot be a real cross-trade off-setting it to the same
extent. Moreover we do not consider that Mr Baker's submission should be
allowed to conceal either the findings of both SIR and BoBS as to the extent of
the falsely enhanced revenues for the first seven weeks of 1995 or the very
real losses which, on any view, Barings sustained from the activities of Mr
Leeson before he fled from Singapore on 23rd February 1995. For all these
reasons we reject grounds 9 and 10.
5. The SLK Receivable
71. We have already explained how this matter arose. It is a topic on which Mr
Baker had given evidence to both BoBS and SIR. It was also a matter with which
he dealt at some length in his affidavits on which he was extensively
cross-examined. The judge dealt with this episode at some length (ibid. pp.
561c-568g). In doing so he rejected in emphatic terms at least 10 factual
assertions made by Mr Baker in either his affidavit or his cross-examination.
The sequence of events as found by the judge, which we now relate, was quite
different to that suggested by Mr Baker.
72. When Mr Baker returned to his office on 6th February 1995 he found the fax
from Mr Bax to which we have already referred in paragraph 20 above. He spoke
to Mr Norris about the SLK Receivable. Mr Norris expressed his concern that Mr
Leeson appeared to have brokered an over-the-counter transaction in Singapore,
which he had no authority to do, and that £50m. had gone missing for some
weeks without any one noticing. Mr Norris asked Mr Baker for an explanation.
But Mr Baker was annoyed at what he considered to be an unwarranted intrusion
into the affairs of FPG. He took no steps to look into the matter himself and
told Ms Walz "not to get involved in SLK".
73. On the following day, 7th February, Mr Baker received a copy of a
memorandum entitled "BFS Audit Point" compiled by Mr Hawes, the Group
Treasurer, who was in Singapore. The memorandum raised a number of highly
pertinent questions. The reaction of Mr Baker was of anger that Mr Hawes knew
more about the problem than he did. On 8th February Mr Baker spoke to Mr Bax,
who was also in Singapore, and got him to promise that he would not allow Mr
Hawes to cross-examine Mr Leeson about the SLK Receivable. In fact Mr Hawes
did so on 9th February and Mr Leeson gave a different explanation. In the
light of this explanation on 10th February Mr Hawes produced a further list of
questions for Mr Leeson to answer. This list was put before the members of
ALCO, including Mr Baker, on Mr Hawes return from Singapore sometime before
16th February. Even then Mr Baker took no step to contact Mr Leeson himself
and did not do so until he had left on holiday on 18th February and, as the
judge observed (ibid. p.568f),
"this despite the fact that he knew that the supposed transaction giving rise
to the SLK Receivable must have been of enormous size; that he knew that
Leeson's roles remained unsegregated; that he was very much aware of the
enormous switching revenues which Leeson was currently reporting; and that he
knew that despite ALCO's decision that Leeson's positions should be reduced
they had been massively increased."
74. Such conduct obviously called for some explanation. The judge, having
rejected all those proffered by Mr Baker, supplied his own (ibid. p. 568b-e) in
these terms:
"The fact that Mr Baker took no action can only be explained on the basis that
his attitude in relation to the SLK Receivable was that it was an irrelevance,
and that his efforts should be directed not to finding out what had happened
but rather to protecting Leeson - his "star" trader - from having to answer
questions about it. I am satisfied that from the moment when he first heard
about the SLK Receivable Mr Baker knew very well that it was a matter with
which Leeson was closely involved, and that Mr Baker's overriding concern
throughout was to protect Leeson from investigation - whether by Mr Hawes or
anyone else. There was (as I find) a particular reason why Mr Baker wanted
to protect Leeson from questioning about the SLK Receivable, in addition to his
general concern that Leeson should not be distracted from generating his
switching revenues. By this time (February 1995) the "bonus season" had
arrived, in the sense that the 1994 bonuses were about to be paid, and Mr Baker
was concerned that there was a serious risk that once he had been paid his
bonus Leeson's reaction to any questioning about the SLK Receivable would be
"to walk out the door". In addition, Mr Baker's strategy throughout, in
relation to the SLK Receivable, was to keep Leeson out of the limelight by
claiming that others were responsible for the SLK Receivable, eg. Mr Hawes or
Mr Jones. This strategy was dictated by Mr Baker's realisation that Leeson
had very probably been so seriously at fault in relation to the SLK Receivable
as to justify his being sacked if the truth about it came out, and Leeson's
sacking was something which Mr Baker was anxious to avoid."
75. Mr Baker contests the judge's account of what happened and the criticisms
of his competence. In ground 3 of his notice of appeal he submits that (1) he
did not have sufficient information to form a view as to what had happened, (2)
that he had been told that the money had been returned and that Mr Bax was
writing a report on what had happened, (3) both Mr Norris and Mr Bax had told
him not to get involved and that (4) Mr Baker was entitled to be critical of Mr
Hawes because he was the wrong person to investigate the SLK Receivable.
Point (3) is contrary to the finding of the judge having considered the
evidence of both Mr Baker and Mr Norris. Points (1), (2) and (4) simply do
not meet the criticism that Mr Baker, knowing that something had gone badly
wrong in FPG, an area of his responsibility, concerning Mr Leeson whose current
trading activities were causing so much concern, did nothing.
76. In his oral argument Mr Baker contended that he was informed that the
episode was "an operational error", a phrase from which he understood that the
transaction was one which the front office of BFS did not intend. He
contended that he had been misled by Mr Norris and by Mr Bax. But this
submission flies in the face of the judge's findings to which we have referred
in paragraphs 72 and 73 above. We do not accept the submission and reject the
third ground of appeal.
Conclusion
77. In Part 4 of his judgment Jonathan Parker J concluded, for the reasons he
gave that, in the light of his earlier findings, each of the matters on which
the Secretary of State relied had been proved. He answered the question
(ibid. p. 575c-d) whether the Secretary of State had demonstrated incompetence
of such a high degree as should lead to a finding of unfitness for the purpose
of s.6 of the Act in the affirmative because
"Mr Baker failed to make any serious attempt to discharge his management
responsibilities in relation to the switching business."
78. Mr Baker frankly accepted that if, as we have, we rejected his submissions
on all the relevant issues of fact then the judge was entitled to conclude, in
the words of s.6 Company Directors Disqualification Act, that his, Mr Baker's,
conduct as a director of BB&Co. makes him unfit to be concerned in the
management of a company. Further he does not contend that the period of his
disqualification is excessive.
79. In our view these concessions are rightly made. If one stands back from
all the detail into which the defence of Mr Baker required the judge to descend
it can clearly be seen that the conduct of Mr Baker involved a serious
abdication of responsibility by a senior director of the principal operating
subsidiary of a major public company. At the material time Mr Leeson was 28.
He had joined the back office of BFS in 1992 but by the end of 1993 was trading
on the floor of SIMEX. If his reported revenues were to be believed he alone
was contributing a surprisingly large proportion of the revenues of the Group
as a whole. Mr Baker did not take sufficient steps fully to understand the
nature of the business Mr Leeson was carrying on. It took Mr Baker six months
to ensure that at least some limits were imposed on the extent of the
activities Mr Leeson was authorised to conduct. Thereafter Mr. Baker took no
adequate step to ensure that such limits were observed. By May 1994 Mr Baker
knew that Mr Leeson controlled both the back office and the front office yet he
failed to cause those functions to be separated as well before as after the
Internal Audit Report. Even when the warning signals became so clear in
January 1995 Mr Baker failed to heed them. Mr Baker hoped for the best but the
worst occurred. It is plain that he did not perform his duty to BB&Co and
was responsible to some degree for the causes of the insolvency of BB&Co.
Mr Baker was by no means the only director at fault but that cannot excuse the
effect of his own conduct by reference to which alone he was judged by Jonathan
Parker J.
80. For all these reasons we dismiss this appeal.
Order: Appeal dismissed with costs.
(Order does not form part of the approved judgment).
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