Patrick Hann on responsibility for investors’ financial losses. Patrick Hann is a partner and head of the commercial litigation group at Middleton Potts, which represented the defendant in Morgan Stan

In the past, the courts have displayed little sympathy towards investors seeking to resist liability for losses sustained as a result of trading in commodities, futures or derivatives.

In 1991 Morgan Stanley recommended to its client Puglisi, an Italian businessman, that he invest in Perls, a structured investment devised by Morgan Stanley. Its redemption value was to be calculated by reference to a formula based on a short position in one or more hard currencies.

In addition to the inherent leveraging in Perls, Morgan Stanley provided 90 per cent of the finance, by means of a master re-purchase arrangement.

As Puglisi did not speak English, he conversed with Morgan Stanley’s trader in Italian. The trader faxed documentation to Puglisi written in English, including a risk disclosure acknowledgement and the master re-purchase agreement which Puglisi signed and returned immediately.

By 16 September 1992 (Black Wednesday) Perls had lost a large part of its value. When the time for re-purchase arrived, Morgan Stanley declined to roll-over the investment. It sold the Perls at a considerable loss and sued Puglisi for the shortfall.

The Commercial Court found that Morgan Stanley did not make it clear to Puglisi that he was at risk of losing both his own capital and the amount of his borrowing, that he would be obliged to re-purchase at six monthly intervals at a price that might not reflect the value of the investment and that it had no commitment to provide further funding.

The court found that Perls was not a suitable investment for Puglisi and that Morgan Stanley had not established Puglisi’s financial position nor how much he was prepared to lose.

The court refused to hold that a businessman should be bound by the terms of a risk disclosure statement voluntarily signed by him, because it was satisfied that the statement was not understood, being written in a foreign language.

This decision demonstrates that the court will give relief in appropriate cases involving investors who are inexperienced in the investments, whether they are experienced businessmen or little old ladies.