Merrill Lynch wins landmark decision on fraud damages

Ashurst Morris Crisp is claiming victory for its client Merrill Lynch after a House of Lords ruling which will see US bank Citibank having to pay the investment bank £14m damages over a fraudulent share sale.

In 1989 broker Smith New Court, now owned by Merrill Lynch, paid Citibank Securities £23m for 28 million shares in defence company Ferranti International Signal.

Smith New Court said Christopher Roberts, then a Citi-bank director, claimed he had two other bids for the shares, thereby driving the price up. But Smith New Court later discovered the claims were untrue.

The loss to Smith New Court was exacerbated by the discovery six weeks later that Ferranti's boss James Guerin had been making up fictitious contracts to make the company look more profitable. Ferranti's share price plummeted and Smith New Court eventually sold the shares for about £13m.

In 1992 the High Court found in Smith New Court's favour and ordered Citibank to pay £10.7m compensation plus £4m interest.

Citibank, represented by Wilde Sapte's Malcolm Glover, who instructed Jonathan Sumption QC, appealed, saying it was not responsible for the Guerin fraud.

The Court of Appeal reduced the damages to £1.5m in early 1994. But Merrill Lynch took the case to the Lords, which has now vindicated the High Court's original ruling and in the process made what Ashursts litigation partner Chris Vigrass calls a "historic and landmark decision".

The House of Lords ruled that Citibank, in acting fraudulently in the share sale, was liable for the full damages to Smith New Court even though it had no responsibility for the Guerin fraud.

"This is the first time the House of Lords has ever given a decision on what is a measure of damages in fraud," said Vigrass.

"We now have seven principles set out by the House of Lords which will be very useful for lawyers advising their clients in the future as to what level of loss they can claim as compensation for fraud."