Hong Kong’s high court hands victory to Citibank in mis-selling claim

The Hong Kong High Court has dismissed a claim brought by Shine Grace Investment against Citibank for failing to provide a 'fair and accurate' advice in relation to equity accumulator contracts. The court's decision in late July puts an end to a 10-year court case.

The dispute stems from nine equity accumulator contracts that Anita Chan Lai Ling - the then director of Shine Grace - invested in through Hailey Amy Seen Kwan Mak of Citibank in 2007. Mak was Chan's account manager at the US bank. The losses from the financial products amounted to HK$478m (US$61m), according to the ruling by the Hong Kong High Court. Chan's purchase of the disputed accumulators was soon followed by her death in the same year, when four of her children took over Shine Grace and filed a suit against Citibank and Mak. Chan's four children argued that Citi had misled her mother and sold the 'unsuitable' equity accumulators by breaching its duty to offer 'reasonable, fair, accurate and honest advice.'

Although a bank may assume responsibility to provide advice to a customer, Peter Ng, the judge of the Court of First Instance, concluded that the assumption does not necessarily mean the bank has legal obligations for giving advice. The judge added that Chan would have entered the market, regardless of the bank's advice. 'She did not rely on the bank's advice, particularly on what trades she should or should not do. On the contrary, she expressly instructed Citibank's staff not to do anything to stop her from trading,' said the statement. The judgement described her as a seasoned investor who has 'decades of experience in active trading in the capital market'.

The court's judgement also read that Mak did not misrepresent any risks entailed in purchasing the accumulators, highlighting how profitable the trading of accumulator contracts has been in the beginning. 'On Shine Grace's own calculation, the net realised profit from 2004 to 2007, excluding the disputed ACs (Accumulator Contracts), was over HK$180 million. Out of that, a whopping HK$146 million was made in 2007,' according to the judgement.

With accumulator contracts, investors have to buy shares or a foreign currency at a fixed price, which is settled regularly and that is also, usually below the market price when the contract begins. With that, the issuer of an accumulator is betting that the underlying security will fall below the strike price, while an investor speculates a company or an exchange rate will trade higher. Generally, an accumulator contract includes a knockout feature that causes the contract to expire if the price of the underlying rises above a certain level, so for an investor to pocket a hefty return, the shares will have to trade between a certain price range - that is between the strike and the knock out price.

Three of the accumulator contracts that caused huge losses to Shine Grace were 'knocked out' while the remaining six were closed out.

Citi welcomed the Hong Kong court's decision. 'The judgement confirms Citi's strongly held view that Citi and banker Hailey Mak had discharged all required statutory and regulatory duties and that the accumulator investments were sold appropriately,' stated the bank.

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