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Euroption appeals SEB ruling

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Specialist banking litigation firm Stewarts Law LLP is filing an appeal in the matter of Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB (“SEB” and the “Euroption Proceedings”) for its client, Euroption.

The widely reported Euroption proceedings relate to Euroption’s claim that, during the October 2008 “credit crunch”, SEB negligently conducted a close out of Euroption’s open option positions in breach of a duty of care owed to Euroption. The SEB close out arose after the increasing market volatility (following the collapse of Lehman Brothers, Kaupthing Bank hf and other financial institutions) caused SEB to make large margin calls on Euroption which could not be met.

Euroption’s primary case was that SEB negligently managed the close out process with the consequence that Euroption’s net value was reduced, over the space of about a week, from EUR70 million to about EUR2 million. Euroption sought damages based on the reduction of its net value and loss of profits on this principal sum. Euroption’s lost profits were based on its documented returns of about 300% from 2009 onwards.

Euroption’s secondary case was that SEB had, without authority, and as part of the alleged close out process, closed certain positions via “combination” trades (which involved closing put options but in combination with opening new call options). The new call options, opened in Euroption’s name and at Euroption’s risk, caused losses booked to Euroption when markets rallied.

The trial of this matter took place in July 2011 and on 15 March 2012 the Honourable Justice Gloster, DBE delivered her long-awaited judgment.

The Court’s judgment dismissed Euroption’s claim and included decisions that: i) a broker in the position of SEB owes no duty of care to its customer in a close out situation and ii) “combination” trades were both authorised and a permissible mechanism in a close out situation.

Previous “credit crunch” decisions on the extent of a broker’s duty in a close out situation had left open the question whether a duty of care was owed to the customer (see, for example, ED & F Man Commodity Advisers Ltd & Another v Fluxo-Cane Overseas Ltd & Another [2010] EWHC 212 (Comm), Sucden Financial Limited v Fluxo-Cane Overseas Limited [2010] EWHC 2133 (Comm) and Marex Financial Ltd v Fluxo-Cane Overseas Ltd [2010] EWHC 2690).

Euroption is naturally disappointed with the judgment and is lodging an appeal to the Court of Appeal including against the decisions that: i) no duty of care is owed in a close out situation and ii) “combination” trades are a permissible close out mechanism.

Stewarts Law’s Sean Upson says: “The Euroption decision is highly important and its outcome affects a host of “credit crunch” close out cases. It has naturally, therefore, generated significant market interest.

"The finding that a broker owes no duty of care to its customer in a close out situation, particularly, where the broker is free to open new positions in the customer’s name, is surprising. Taken to its logical extreme a broker would be free to open risky positions or trade an account safe in the knowledge that it is conducting a “one-way bet”. The customer will pay if the decisions taken were wrong.”

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