Interesting SFT judgment concerning the custodian bank’s liability for external asset managers

Interesting SFT judgment concerning the custodian bank’s liability for external asset managers

The Swiss Federal Tribunal (SFT) has rendered an interesting judgment on 15 June 2017 (matter 4A_379/2016) concerning the issue of a custodian bank’s liability for unlawful acts of an independent / external asset manager (EAM).

On 26 June 2017, I have published an article on the above-mentioned topic, i.e., on the liability of custodian banks for actions of EAM, with the title Zur Frage der Haftung der Depotbank für Handlungen des externen Vermögensverwalters (Jusletter 26 June 2017).

My thoughts below are not a comprehensive analysis of the above-mentioned new SFT judgment concerning the mentioned EAM-topic. Rather, I am commenting on this new judgment through the prism of my above-mentioned article, since at the time I was drafting my article, the judgment was not yet available. Obviously, I am particularly interested whether or not the new judgment represents a shift in the relevant SFT jurisprudence.

In a strongly compressed and simplified version, this is the dispute that led to the above-mentioned case:

The bank customer A had been attended to by the bank employee B for many years. When B left the bank Z (where A had deposited her assets, managed by the bank Z) to join the EAM V, the bank customer A terminated the asset management agreement with the bank Z and entered into a new asset management agreement with the EAM V. Additionally, A granted the EAM V a limited power of attorney (LPoA) vis-à-vis the bank Z, authorizing the EAM V (represented by B) to manage her assets deposited at the bank Z, but not to make any withdrawals (therefore, limited PoA).

Following such new structuring of A’s banking relationship, B embezzled the above-mentioned assets of A, basically by having forged wire instructions directed to the bank Z, which have allegedly been signed by A (but forged by B). More specifically, the forged wire instructions in a total amount of approximately EUR 1.2m ordered the custodian bank Z to transfer A’s monies to a company T, active in precious metals trading. When an employee of the bank Z double checked certain instructions with B the latter told the bank that the customer A wished to invest in precious metals.

When A learned that her assets have been embezzled by B she sued the custodian bank Z to recover her assets.

As mentioned in my above-mentioned Jusletter article, Swiss EAM often operate in small structures, without substantial assets, so that a damaged EAM-customer might be motivated to sue the deep pocket custodian bank, instead of the EAM. This would also seem to have been the case in the matter discussed herein.

The SFT’s legal considerations are quite complicated, but simplifying the legal situation quite a bit, below are some interesting considerations contained in the judgment at issue.

From the custodian bank’s perspective, in a case like the present one, there are two basic lines of defense: The first line of defense is based on the LPoA, basically arguing that the damaging instructions were covered by the LPoA (LPoA Argument). The second line of defense is based on the custodian bank’s general terms and conditions (GTC), in which banks usually include a clause pursuant to which the risk of forged instructions is shifted to the bank customer, subject to grossly negligent mistakes made by the bank (GTC Risk Shifting Argument).

(1)          Line of defense no. 1: LPoA Argument

In the case 4A_379/2016 here discussed this argument did not fly, because the relevant transactions were not covered by the relevant LPoA (see consideration 5.3.2 of the judgment). LPoA granted to EAM usually state that the EAM may not instruct transactions that lead to outflows without a corresponding inflow. In other words, an EAM can – based on the LPoA – instruct the custodian bank to purchase, on behalf of the relevant customer, financial assets, because the relevant outflow (purchase price) leads to an inflow (the purchased financial asset, such as shares or bonds). However, in the matter in question, the relevant transactions (wire transfers to the company T) did not have any corresponding inflow, such as physical gold. Such transactions were, therefore, not covered by the relevant LPoA.

(2)          Line of defense no. 2: GTC Risk Shifting Argument

In light of the relevant circumstances, the SFT concluded that the custodian bank Z should have double checked the instructions at issue with its customer, not only with the customer’s EAM (see consideration 5.3.2 of the judgment). Further, the SFT explained its opinion that having failed to do so the custodian bank had – in light of the relevant circumstances – grossly violated its duties of diligence in the present context, and that for this reason the custodian bank was not entitled to invoke the GTC risk shifting clause related to forged instructions (Id.).

(3)          Assessment

The judgment 4A_379/2016 discussed above has not been marked by the SFT as being a new precedent that shall be published in the SFT’s official journal of leading cases. This indicates that this judgment does not represent a shift in the SFT’s jurisprudence related to the custodian banks’ liability for acts of EAM.

As is explained in my above-mentioned Jusletter article, the SFT has confirmed several times its established jurisprudence that custodian banks are, as a general principle, not obligated to supervise the asset management activities of an EAM (in the name and on behalf of a bank customer) to which a LPoA has been granted by the bank customer (see consideration 3.1 of the judgment). However, this general principle is subject to pathological situations, in which it would, essentially, be unfair and intolerable if the custodian bank would not be held liable for the EAM’s unlawful actions.

It would appear that in the matter at issue the SFT was arguably looking at such a pathological situation, namely for the following reasons (in random order):

  • The relevant instructions were, as mentioned, not covered by the LPoA in question;
  • The transactions in question were very important (among others, one outflow of roughly EUR 1m because of two transactions carried out on the same day), also in relation to the customer’s total assets in the portfolio held at the custodian bank;
  • The transactions at issue led to a total depletion of the customer’s portfolio at the custodian bank, without any corresponding inflow in the form of financial investments, such as shares or bonds;
  • Prior to the unlawful actions the customer’s portfolio had been diversified during a period of several years, being composed of shares, bonds, etc. It is to be considered unusual if such a bank customer suddenly wishes to invest all his or her assets in gold or silver.

This article has first been published on LinkedIn on 25 August 2017.

PHH, Zurich, 4 January 2018 (www.haberbeck.ch)

The information contained in this post is for general informational purposes only and is not intended to constitute legal advice. Readers of this post should not take any actions or decisions without seeking specific legal advice.

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