Misrepresenting the share issue

Roger Pearson looks at a case which will examine the assessment of damages in share dealings

A multi-million pound shares row which will focus on ways of assessing damages in cases where shares have been purchased on the basis of fraudulent misrepresentations is headed for the House of Lords.

Leave has now been given for an appeal by Smith New Court Securities against a Court of Appeal ruling last year and a cross appeal by Citibank NA against the same decision.

On 21 July 1989, Smith New Court bought over 28 million shares in Ferranti International Signal for 82.25p each.

The shares were sold to the company by Scrimgeour, acting as a broker for Citibank. However, in September 1989, Ferranti suspended trading in its shares and announced it had been the victim of a serious fraud.

It said that a provisional financial statement for 1988/89 which had been published previously was misleading. When trading in Ferranti shares resumed on 3 October 1989, the price had dropped to 55p a share.

Smith New Court later sold its shares for between 30p to 49p each, incurring an u11,353,220 loss. The company then sued Scrimgeour and Citibank for damages alleging fraudulent misrepresentation by the head of Citibank's private banking department, who was an executive director of Scrimgeour and who was joined as a third party to the proceedings by Scrimgeour.

When the case was heard in the High Court Chancery Division by Mr Justice Chadwick in March 1992 he ordered Citibank to pay Smith New Court u10,764,005. He assessed its liability as the difference between the price paid for the shares and their real value at the time of the misrepresentation had all the facts relating to the Ferranti fraud been known to the market. He assessed this price at 44p.

However, the Court of Appeal in February last year allowed an appeal against that award. It ruled instead that the damages should be assessed on the basis of the difference between the price paid and the market price at the time which a block of shares of that size would have fetched – 78p.

Last December Smith New Court was given leave to challenge that ruling, which had resulted in a new damages bill of u1,196,010, and now Citibank has been given leave to cross appeal.

Smith New Court is represented by Ashurst Morris Crisp and Citibank by Wilde Sapte.