A clear test for commercial dishonesty has been set out in the recent case of Stokors SA and others v IG Markets Ltd.

It will be valuable in helping professional firms to manage their client relationships if they suspect that one of their clients is acting dishonestly.

The case follows the collapse of Echelon, a Scottish wealth management business in 2008, which left some of its clients with massive financial losses.  Three Swiss-based former clients of Echelon sued IG, the spread-betting group, for up to €25m on the grounds that IG employees had dishonestly assisted in breaches of fiduciary duty by Echelon.

The claimants had taken out Contracts for Difference (CFD) through Echelon, which were placed with IG.  Echelon was meant to keep its clients’ money in segregated accounts – but in fact used it to fund deficits run up by another of its clients.  The claimants sought to recover their losses from IG, arguing that its employees had dishonestly assisted in breaches of fiduciary duty by Echelon.

The case was heard in the Commercial Court in March 2013.  Mr Justice Field dismissed the claim against IG on the basis that the claimants had failed to establish dishonest participation by the defendant’s employees in Echelon’s wrongdoing.   The judgement is available on BAILII here.

In reaching his decision, Mr Justice Field summarised some of the principles relating to dishonesty which will be of interest to all professional firms in managing client relationships, these include:

  • A defendant’s knowledge of the transaction has to be such as to render his participation contrary to normally acceptable standards of honest conduct.
  • An honest person does not deliberately close his eyes and ears, or deliberately not ask questions lest he learn something he would rather not know.
  • Dishonesty can be found on the basis of commercially unacceptable conduct.

“In dismissing the claim against IG, the judge made it quite clear that turning a blind eye to suspicious behaviour is unacceptable,” said James Burgoyne, Director, Brunel Professional Risks.  “The lesson for all professional firms is to take immediate and effective action if they suspect that one of their clients is acting dishonestly.  If not, they face a real risk of being accused of dishonest assistance.”

The collapse of Echelon was covered in the Financial Times and Daily Telegraph.  A summary of Stokors SA and others v IG Markets Ltd hs been published by Law-Now.