Ali v Hartley Poynton Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No.2039 of 1999

RAHMAT ALI	Plaintiff
V
HARTLEY POYNTON LIMITED	Defendant

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JUDGE:	Smith J
WHERE HELD:	Melbourne
DATE OF HEARING:	1-28 February, 1-23 March, 20-27 April, 1-31 May, 1-28 June, 2-31 July, 1-31 August, 3-26 September, 15 and 16 October,2001.
DATE OF JUDGMENT:	16 April 2002
CASE MAY BE CITED AS:	Rahmat Ali v Hartley Poynton Limited
MEDIUM NEUTRAL CITATION:	[2002] VSC 113

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Stockbroker – Discretionary authority – Negligent misrepresentation – False and misleading conduct – Negligent trading – Negligent supervision – Illegal transaction – Contributory negligence – Waiver – Damages – Lost opportunity – Exemplary damages.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr. J. Selimi	Starnet Legal Pty Ltd.
For the Defendant	Mr. F. G. Beaumont QC and Mr. M. Wyles	Phillips Fox

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................................. 6

SUMMARY OF ISSUES................................................................................................................... 6

Plaintiff’s Case............................................................................................................................... 6

The Retainer............................................................................................................................. 6
The Trading Aspect of the Retainer........................................................................................... 7
The Telstra Aspect..................................................................................................................... 8
Other issues – Fiduciary Duty.................................................................................................. 9
Other issues – Exemplary Damages.......................................................................................... 9

The Defendant's Case................................................................................................................... 9

The Retainer............................................................................................................................... 9
The Trading Aspect.................................................................................................................. 10
The Telstra Aspect................................................................................................................... 10
Other Defence Issues................................................................................................................ 11
Counterclaim............................................................................................................................ 12

STRUCTURE OF REASONS FOR JUDGMENT....................................................................... 13

Introduction................................................................................................................................. 13

The Critical Issues....................................................................................................................... 13

(1)Credibility............................................................................................................................ 13
(2)Identity of the Client........................................................................................................... 13
(3)Representations and Terms of the Retainer........................................................................ 14
(4)Liability – Trading Aspect.................................................................................................. 14
(5)Liability the Telstra Aspect................................................................................................. 14
(6)Defences............................................................................................................................... 14
(7)Damages.............................................................................................................................. 14
(8)Counterclaim....................................................................................................................... 15
(9)Exemplary Damages........................................................................................................... 15
(10)Events Subsequent to the Agreement – Annexure A....................................................... 15

CREDIBILITY OF KEY WITNESSES.......................................................................................... 15

Introduction................................................................................................................................. 15

Credit of Liyakat Ali and Martin.............................................................................................. 16

Their Positions......................................................................................................................... 16
A Comparison.......................................................................................................................... 17
Credibility of Liyakat Ali – Overview..................................................................................... 18
Credibility of Liyakat Ali – The Diary..................................................................................... 19
Liyakat Ali – conclusion.......................................................................................................... 21
Credibility of Martin – presentation in court.......................................................................... 21
Credibility of Martin – undisputed conduct........................................................................... 22
(a)Innovax................................................................................................................................ 22
(b)Loan to Martin’s father....................................................................................................... 24
(c)The Petroz Parking.............................................................................................................. 24
(d)Cross trades – for his father................................................................................................ 25
(e)Privileged Information........................................................................................................ 25
Credibility of Martin –disputed conduct................................................................................. 25
(a)Withholding information from client.................................................................................. 25
(b)Explanation of admissions.................................................................................................. 26
Credibility of Martin – conclusion.......................................................................................... 28
Credibility of Martin & Liyakat Ali - conclusion.................................................................... 28

Credibility of Rahmat Ali........................................................................................................... 28

Defence criticisms.................................................................................................................... 28
Analysis................................................................................................................................... 29

Credibility of Barba..................................................................................................................... 30

Barba’s role............................................................................................................................... 30
Defence Criticism - Analysis................................................................................................... 31
Barba’s File Notes.................................................................................................................... 33
Barba and Martin.................................................................................................................... 35
Barba - Overview..................................................................................................................... 36
Overview – Qualification........................................................................................................ 37

THE ISSUE OF THE IDENTITY OF THE CLIENT................................................................... 38

Pleading History......................................................................................................................... 38

The Evidence................................................................................................................................ 38

Direct Evidence........................................................................................................................ 38
Indirect Evidence..................................................................................................................... 40

Identity of Client - Conclusion.................................................................................................. 43

REPRESENTATIONS AND TERMS OF THE AGREEMENT............................................. 43

Pleadings of Parties and Positions Taken................................................................................ 43

Common ground...................................................................................................................... 43
Terms and representations relevant to trading aspect............................................................. 44
Terms and representations relevant to Telstra aspect............................................................. 47

Trading Aspect - the Evidence.................................................................................................. 49

Approach to analysis................................................................................................................ 49
Trading Aspect - Meeting of 27 August 1997......................................................................... 50
Trading Aspect - Meeting of 15 September 1997.................................................................... 51
Trading Aspect; Evidence of meetings – comment................................................................ 56
Trading Aspect - Demonstration Period................................................................................. 60
Trading Aspect - Comment on the evidence of the demonstration.......................................... 63
Trading aspect; the initial terms and representation – conclusion....................................... 64
Trading Aspect; Initial Terms – Conundrum and Conflict.................................................. 67

Trading Aspect- Events occurring during the retainer......................................................... 68

Relevance.................................................................................................................................. 68
Terms of the Retainer – agreed but not promised Target........................................................ 69
Terms - Credit Arrangements.................................................................................................. 70
Terms - The Nature of the Discretion...................................................................................... 72
Client Profile - objectives......................................................................................................... 75

Telstra Aspect – the evidence.................................................................................................... 76

Telstra Aspect; Events prior to 17 November 1997.............................................................. 77
Telstra aspect - Other relevant evidence.................................................................................. 84
(a)The use of the No. 2 Account.............................................................................................. 84
(b)Karlson’s evidence............................................................................................................... 85
(c)The stamp duty.................................................................................................................... 86
Telstra Aspect – Terms - Conclusion...................................................................................... 86

ALLEGATIONS ARISING OUT OF MARTIN’S CONDUCT............................................... 87

The obligations of a Stockbroker.............................................................................................. 87

The Allegations............................................................................................................................ 88

Negligent Representations prior to the retainer..................................................................... 89

The Pleadings........................................................................................................................... 89
The evidence............................................................................................................................. 90
Negligent representations –conclusion.................................................................................... 91

Representations – false and misleading conduct................................................................... 93

Pleadings.................................................................................................................................. 93
Analysis and Conclusion......................................................................................................... 94

Negligent Advice during the Retainer..................................................................................... 95

Pleading................................................................................................................................... 95
Issues........................................................................................................................................ 95
Evidence................................................................................................................................... 96
Analysis and conclusion.......................................................................................................... 99

Negligent Trading....................................................................................................................... 99

The Pleadings........................................................................................................................... 99
Trading without a reasonable basis....................................................................................... 101
Context of retainer................................................................................................................. 102
Trading negligently – overview of the evidence.................................................................... 103
Qualification of Experts – criticism of Jasch......................................................................... 104
The issues............................................................................................................................... 104
Evidence of Jasch.................................................................................................................... 105
(1)Controlling the extent of actual losses.............................................................................. 106
(2)Maximising actual profits................................................................................................. 108
(3)Risk management.............................................................................................................. 110
(4)Comparison of general trading with day trading.............................................................. 116
(5)General conclusions.......................................................................................................... 117
Specific defence criticisms of Jasch......................................................................................... 117
Negligent trading –liability................................................................................................... 121

Telstra Negligent Sale............................................................................................................... 121

ALLEGATION OF NEGLIGENT SUPERVISION.................................................................. 121

Pleadings.................................................................................................................................... 121

Parties’ Primary pleadings.................................................................................................... 121
Plaintiff’s particulars............................................................................................................. 122

Plaintiff’s Submissions............................................................................................................. 126

Acknowledgments of need to supervise.................................................................................. 126
Need for Supervision - General.............................................................................................. 129
Additional Need for Supervision – Martin’s history............................................................ 129
Extent of Supervision............................................................................................................ 135
Breaches of ASX Rules and the Law...................................................................................... 136
Defendant’s submission......................................................................................................... 136

Negligent Supervision and Control – Conclusion............................................................... 140

ALLEGED BREACH OF TELSTRA ASPECT OF AGREEMENT – SALE OF THE SHARES 143

Issues........................................................................................................................................... 143

The Sale....................................................................................................................................... 144

The evidence for the plaintiff of the events of 17 & 18 November 1997................................ 144
Defence evidence; Martin.................................................................................................... 146
Defence evidence; O’Halloran............................................................................................. 148
Subsequent conversations...................................................................................................... 149
Other defence issues............................................................................................................... 152

Alleged breach of Telstra Aspect – Conclusion.................................................................... 155

SPECIFIC DEFENCE - TELSTRA ASPECT.............................................................................. 155

Illegality...................................................................................................................................... 155

The Pleadings......................................................................................................................... 155
The illegality issues................................................................................................................ 157
The Legislation....................................................................................................................... 158

Defendant’s argument........................................................................................................... 160
Analysis of onus argument.................................................................................................... 161
Defendant’s alternative submission....................................................................................... 164

Conclusion.................................................................................................................................. 165

DEFENCES OF WAIVER, ACQUIESCENCE, ESTOPPEL AND ELECTION................... 167

Introduction............................................................................................................................... 167

Trading aspect........................................................................................................................... 167

Telstra Aspect............................................................................................................................ 170

DEFENCE OF FALSE AND MISLEADING CONDUCT...................................................... 173

SPECIFIC DEFENCE - CONTRIBUTORY NEGLIGENCE................................................... 173

Defendant’s pleadings............................................................................................................ 173
Defendant’s actual submissions............................................................................................. 175
Trading Aspect - Analysis..................................................................................................... 177
Trading Aspect - Conclusion................................................................................................. 189
Telstra aspect - Analysis........................................................................................................ 198

DAMAGES...................................................................................................................................... 199

Trading aspect - Damages....................................................................................................... 199

Pleadings................................................................................................................................ 199

Causation.................................................................................................................................... 200

General Issues........................................................................................................................ 200
Causation - Representations.................................................................................................. 202
Causation - Negligent Advice................................................................................................ 203
Causation - Negligent Trading.............................................................................................. 203
Causation - Negligent trading - Analysis............................................................................. 204
Causation - Supervision........................................................................................................ 208

Quantum - Trading Aspect...................................................................................................... 213

Issues- Lost opportunity........................................................................................................ 213
Plaintiff’s Submissions.......................................................................................................... 215
Defendant’s Submissions....................................................................................................... 216
Approach to Analysis............................................................................................................. 219
Loss of Opportunity from Misrepresentation........................................................................ 220
Loss of Opportunity from Negligent Supervision................................................................. 222
Loss of Opportunity from Negligent Trading....................................................................... 223
Lost Opportunity - General................................................................................................... 224

Telstra Aspect - Damages........................................................................................................ 224

The claims as pleaded............................................................................................................. 224
Plaintiff’s Case....................................................................................................................... 224
Defendant’s Submissions - Introduction............................................................................... 227
Claim of reconstruction......................................................................................................... 228
No lost opportunity................................................................................................................ 228
No lost opportunity - analysis............................................................................................... 234
Quantum – Insufficient evidence?........................................................................................ 235
Quantum - Items not allowed in Francis’ estimates............................................................. 235
Quantum - DiscountingVariables?....................................................................................... 237
Quantum – alternative Defence submissions........................................................................ 241
Quantum - Analysis.............................................................................................................. 241

Damages – summary of findings............................................................................................ 245

COUNTER-CLAIM........................................................................................................................ 246

EXEMPLARY DAMAGES............................................................................................................ 247

Pleadings.................................................................................................................................... 247

Parties Submissions.................................................................................................................. 247

Plaintiff’s submissions........................................................................................................... 247
Defence Submissions.............................................................................................................. 249

The Law...................................................................................................................................... 251

Analysis of issues...................................................................................................................... 255

CONCLUSION............................................................................................................................... 263

ANNEXURE A................................................................................................................................ 265

Introduction............................................................................................................................... 265

State of accounts and events to the middle of January 1998............................................... 265

Operation of the accounts - Mid January to March............................................................. 272

Operation of the Accounts – March correspondence and discussions............................. 274

Operation of Accounts - March to July 1998......................................................................... 283

Position of parties at end of July 1998.................................................................................... 302

Operation of Accounts – August............................................................................................ 302

Operation of Accounts – September 1998.............................................................................. 311

Operation of Accounts – October 1998.................................................................................. 314

Operation of Account - November 1998................................................................................ 317

HIS HONOUR:

INTRODUCTION

Between September 1997 and February 1999, the defendant, Hartley Poynton Limited (Hartley Poynton), through its broker, Christopher Martin, conducted trading on the Australian Stock Exchange in several accounts bearing the name of the plaintiff, Rahmat Ali. They were the Rahmat Ali Account (152319977), (“the trading account”), the Rahmat Ali Number 2 Account (1525675) and the Rahmat Ali – Short Sale Account (1527416). During that period, the plaintiff alleges that the defendant traded over $39 million worth of shares and derivatives, earning brokerage of at least $134,061.32 and incurred stamp duty of at least $41,923.65. The plaintiff also alleges that the defendant made trading profits of $523,540.96 and trading losses of $825,899.62. Monies had been provided to the defendant totalling $296,818.54. By February 1999, this money had been dissipated and the defendant claimed that brokerage of $67,017.10 was outstanding.

The plaintiff seeks damages from the defendant. The defendant has counterclaimed for alleged outstanding brokerage.

The case has been elaborately pleaded and argued by both sides. I propose to refer in more detail to aspects of the pleadings as I deal with particular issues. At this point, it is sufficient to summarise the issues which the parties treated as the issues in contest at the conclusion of the trial.

SUMMARY OF ISSUES
Plaintiff’s Case
The Retainer

The plaintiff alleges that in late October 1997 he, through his agent, Liyakat Ali (his son), entered into an agreement with the defendant through its agent, Christopher Martin, to engage the defendant to act as his share broker.

The plaintiff's case is that there were two aspects to this retainer each giving rise to claims for damages.

The Trading Aspect of the Retainer

The plaintiff alleges first that, as one aspect of the retainer, it was agreed that the defendant would act as his broker to produce, by trading, a return of 15% to 20% per week compound, later changed in March 1998 to 25% to 35% per month compound. The plaintiff further alleges that it was agreed that this trading was to be conducted on a discretionary basis by the defendant subject to the overriding control of the plaintiff. Thus, any instructions given by him were to be complied with by the defendant. Another alleged term of the discretionary agreement was that stocks were to be sold if the price fell below an agreed stop loss limit of between five and ten per cent.

It is common ground that an amount of $101,818.54 was initially provided to the defendant for use in trading on the share market.

The plaintiff alleges breaches of the agreement and negligence in the trading conducted by Martin and in the advice given by him. He also alleges negligent supervision of Martin by the defendant. The plaintiff alleges losses were suffered as a result of the breaches and negligence, comprising the funds provided ($101,818.54) and the opportunities of which he was deprived (assessed at $267,971.67).

He also alleges that he gave instructions (through his agent, Liyakat Ali) in respect of a number of transactions listed in Schedule C to the statement of claim but that, in breach of the agreement, the defendant did not carry them out. In relation to those transactions the plaintiff claims damages for loss of opportunity of between $1,782,645.00 and $6,000,436.49.

The plaintiff also relies upon statements he alleges were made prior to entering into the retainer and investing money with the defendant, and made to induce him to do so, relating to the above-mentioned returns, the carrying out of instructions, lack of risk and the above stop loss limits and also as to the acquisition of a long term investment in Telstra – an issue to which I will return. The plaintiff alleges that the representations included a demonstration in September and October 1997 of realisable returns and other matters. He also relies on representations allegedly made in March 1998 about achievable returns, in particular, 25% to 30% compounding per month. The plaintiff relies upon these alleged representations as a basis for claims for negligent misrepresentation and false and misleading conduct under the Trade Practices Act 1974 and The Fair Trading Act 1985. Damages are claimed for the losses allegedly suffered, being the loss of the initial investment and the lost opportunity to generate a reasonable rate of return.

The Telstra Aspect

The other aspect of the plaintiff's claim relates to the acquisition and sale of Telstra instalment receipts (Telstra shares). The plaintiff alleges that, as represented by the defendant prior to entering into the retainer, an allocation of 100,000 Telstra shares in the initial Telstra float was offered to him, and ultimately secured for him, by the defendant. It is common ground that an amount of $195,000 was provided to purchase the Telstra shares. He also alleges that there was a plan developed as part of the retainer with the defendant, through Martin, for those Telstra shares, once they were provided to him, to be held as a long term investment and to be used, by means of margin lending, to build up initially a portfolio of Telstra shares and later blue chip shares. It is put that the defendant was so instructed prior to and at the time of the shares coming on to the market.

The plaintiff alleges that the defendant sold the shares contrary to instructions and then used the proceeds, contrary to instructions, to trade in securities in the trading account. The plaintiff alleges that negligently and “in contumelious breach of the plaintiff’s instructions” the defendant sold the Telstra shares and misused the proceeds. He also alleges that those acts or omissions occurred as a result of inadequate supervision by the defendant of its broker, Martin.

The plaintiff also alleges that the defendant represented that the 100,000 Telstra shares would be retained as a long term investment in accordance with the plaintiff’s instructions. The plaintiff alleges that this representation was negligently made. The representation is also relied upon as a basis for claims for compensation under s.52Trade Practices Act 1974 and s.11 Fair Trading Act 1985, for misleading or deceptive conduct or conduct likely to mislead or deceive.

The plaintiff claims the sum of $195,000 paid for the Telstra shares and, further, or alternatively, $250,723 being the proceeds of the sale of the Telstra shares used for trading. He also claims compensation for an opportunity loss on the Telstra shares, if invested and prudently geared, calculated, as at February 1999, of between $2,536,125 and $2,689,715 or, at the date of trial, $3,343,555.38.

Other issues – Fiduciary Duty

The plaintiff also pleaded a claim for breach of fiduciary duty relating to both the trading and Telstra aspects but in the end conceded that this did not take the plaintiff’s claims any further. The allegations of breach of fiduciary duty were not developed as the basis for any particular relief.

Other issues – Exemplary Damages

The plaintiff seeks exemplary damages arising out of the conduct of the defendant and its broker, Martin, in relation to both the trading aspect and the Telstra aspect, referred to earlier in the pleading. That conduct is described as “reprehensible, unconscionable and deceptive” and “in contumelious disregard of the best interest of the plaintiff” and for the purpose of generating fees. (See para 29, Statement of Claim).

The Defendant's Case
The Retainer

The defendant accepts that there was a retainer but argues that Liyakat Ali or “the club” was the client not Rahmat Ali and that it was entered into on 14 October 1997. It also disputes the terms of the retainer.

The Trading Aspect

The defendant denies the above mentioned critical terms and relies in part on the various agreement documents (sponsorship, account application, warrant trading) executed by Liyakat Ali in the name of the plaintiff. It also argues that, assuming that the correct conclusion is that there was no “over-arching” contract with terms controlling the defendant, then the case involves an examination of the conduct of the defendant in relation to each transaction. In any event, it says that all transactions, save for about six, were conducted with instructions from Liyakat Ali who wished to trade aggressively.

It accepts that it was an implied term of its retainer that it would exercise that reasonable care and skill required of a stock broker. It argues that it did so act and, in particular, that all decisions were made with reasonable care – there was no negligence. As to the Schedule C transactions, it alleges that there were no instructions and that, in any event, there was no money available to enable them to take place and the market would not have permitted transactions of the size claimed by the plaintiff.

The defendant also argues that the plaintiff’s conduct gave rise to waiver acquiescence and estoppel in relation to the alleged breaches of the retainer and alleged negligent trading. The arguments are difficult to analyse. It is put, as I understand it, that the plaintiff accepted and confirmed the transactions and did not complain to the defendant about non-compliance with instructions in breach of alleged obligations under the terms of the agreement. In final submissions it was put that the plaintiff chose to continue using the services of the defendant even though Martin persisted in acting contrary to instructions. The defendant alleges that the result of the above conduct was acquiescence or waiver by the plaintiff resulting in the plaintiff being estopped from pursuing any of the claims made. I will attempt to refer in more detail to this aspect when dealing with the issue of “waiver” (below).

The Telstra Aspect

The defendant's response is again that Liyakat Ali was the client and not Rahmat Ali. Further, it is said that the Telstra shares were sold and the proceeds were used in trading with the agreement and instructions of the client. As to the damages claimed, the defendant's position is that there was no plan for a long term holding and there was no plan to use margin lending to build up a Telstra or blue chip portfolio. It is further put that margin lending could not have taken place as allegedly planned.

The defendant also raises issues of waiver, acquiescence and estoppel. Again the analysis is difficult. In summary form, my understanding is that the defendant alleges that Liyakat Ali, assuming he was the agent of Rahmat Ali, completed all documents necessary to perfect the sale of the Telstra shares after they had been sold and did not raise any objection at the time and, thereby, confirmed the legitimacy of the transaction. Further, the defendant alleges that the plaintiff “excused” or “waived” any breach by his failure to make any complaint to the defendant, as allegedly obliged under the agreement, his instructions allowing the use of the proceeds of the Telstra sale to purchase other shares, and failure to instruct the defendant to re-purchase the Telstra shares, and his , finally, claim to the benefit of the purchases made with the proceeds of sale (5J-K).

In addition the defendant alleges that such conduct gave rise to a representation by the plaintiff that the defendant was properly and adequately carrying out its obligations in making the sale. It further alleges that it relied on this representation and that the plaintiff is estopped from seeking damages arising out of the sale of the Telstra shares and the use of the proceeds of that sale (5G – N).

The defendant also argues that the Telstra purchase was conducted in an unlawful manner and as a consequence the plaintiff cannot now recover compensation for any losses that may have flowed from the sale of the Telstra shares.

Other Defence Issues

In response to the claims for damages in respect of both aspects of the retainer, other than those based on alleged representations, the defendant in its defence alleges that if it breached its duty of care, the loss and damage was caused or contributed to by the plaintiff ‘s own negligence (6A). The conduct relied upon in the pleadings is that referred to above which the defendant argues amounted to waiver and acquiescence. The conduct referred to in final submissions on contributory negligence included many other matters. While a failure “to mitigate loss” was pleaded, it was not pressed.

The defendant disputes the claim for exemplary damages denying there is any basis for them and arguing that, if there is, the defendant cannot be made liable vicariously.

The defendant also raises a misleading and deceptive conduct argument in response to the claims, other than those of the plaintiff based on the alleged representations relating to both the trading and Telstra aspects. It argues that the plaintiff, acting in breach of the terms of the retainer, represented to the defendant that it was performing its obligation under the retainer in a manner acceptable to the plaintiff by failing to make complaint about Martin’s conduct to the defendant. Reliance by the defendant is alleged and it is said that the representations constituted misleading or deceptive conduct in breach of s.52 Trade Practices Act 1974 and s.11 of Fair Trading Act1985 resulting in loss and damage, that loss being that chose in action being relied upon by the plaintiff in this proceeding. The defendant argues that the plaintiff's suit fails for circuity (5O – 5S). I note also a pleading in this context alleging that Liyakat Ali represented to the defendant that the plaintiff had understood the explanatory book issued by the ASX about trading in warrants and that Liyakat Ali desired the defendant to accept the plaintiff’s instructions to trade on his behalf in warrants (the warrants representation). I will consider this issue, although I do not believe it was pressed.

Counterclaim

Finally, the defendant has counterclaimed for unpaid brokerage totalling $67,017.00.

STRUCTURE OF REASONS FOR JUDGMENT
Introduction

The parties have supplied extremely detailed and lengthy written submissions and added to them with substantial detailed oral submissions. I do not intend to specifically address every argument on every issue put by counsel for the parties. In the end that is not necessary and would unreasonably delay the giving of reasons. Rather I propose to address the critical issues in sequence and only deal with those issues that need to be determined. In addition, on those issues, I will refer only to those arguments, that, in my view, require specific mention in these reasons.

The Critical Issues
(1) Credibility
The first task is to indicate my assessment of the credibility of four key witnesses – Liyakat Ali, Rahmat Ali and Dominic Barba, for the plaintiff, and Christopher Martin, for the defendant. Their credibility is critical to the first substantive issue to be considered - the question of the identity of the client of Hartley Poynton - was it Liyakat Ali, “the club”, or was it Rahmat Ali? Their evidence is also critical on the questions of the representations made, the terms of any retainer agreement between the plaintiff and the defendant, variations of that agreement, and the defendant’s arguments based upon the subsequent conduct of Liyakat Ali. Thus, I will comment first on the credibility questions. I will comment elsewhere, where necessary, as to the credibility of other witnesses.

(2) Identity of the Client
I will then turn to the identity of client issue. I deal with it as the first substantive issue because if that issue is decided in favour of the defendant that is the end of the matter. For the reasons set out below, however, I have come to the conclusion that the plaintiff was the client of the defendant and it is therefore necessary to go on and consider the other issues.

(3) Representations and Terms of the Retainer
In addressing representations and the terms of the agreement, I will refer to the pleadings between the parties in more detail and then consider the evidence and submissions relating to the negotiation of the agreement and the representations allegedly made and the terms ultimately agreed upon by the parties. I will also refer to aspects of the subsequent conduct which is relevant to those issues, and which is set out in more detail in Annexure A.

(4) Liability – Trading Aspect
In light of the findings made on these aspects I then propose to consider the case put by the plaintiff of
(a)negligent misrepresentation and false and misleading conduct and of a want of reasonable care on the part of Martin in giving advice and in conducting the trading; and
(b)want of reasonable care on the part of other officers of the defendant in their supervision and control of Martin
and the defence responses on those matters.

(5) Liability the Telstra Aspect
I will consider the plaintiff's claim of alleged breaches of the agreement in relation to the Telstra aspect and the defendants responses to the plaintiff's case.

(6) Defences
I will then consider the illegality defence in relation to Telstra claim. I will also consider the specific defence issues of waiver, acquiescence, estoppel and election, false and misleading conduct together with contributory negligence.

(7) Damages
I will consider causation issues and the plaintiff’s damages claims in respect of both the trading aspect and the Telstra aspect.

(8) Counterclaim
I will then deal with the defendant’s counterclaim.

(9) Exemplary damages
Finally, I will consider the issue of exemplary damages.

(10) Events Subsequent to the Agreement – Annexure A
I have analysed at some length the evidence and submissions relating to what transpired between the parties after entering into the agreement. This evidence is relevant to the credibility of Liyakat Ali, Barba and Martin and to a consideration of the representations and the terms of the retainer, its alleged breach, the alleged want of care on the part of Martin and the other officers of the defendant and issues raised by the defendant such as “waiver” and contributory negligence. The evidence of what occurred in those months is detailed and lengthy. It is not possible sensibly to isolate parts of that evidence by reference to the issues in the case. Accordingly I have, in Annexure A to these reasons, set out chronologically and discussed evidence of salient events that occurred subsequent to November 1997.

CREDIBILITY OF KEY WITNESSES
Introduction

My normal approach is to comment no further than is necessary about the credit of witnesses – particularly where those comments are adverse. I am very conscious of the fact that my judgment on that issue is based solely on the evidence and argument put before me in the artificial context of the courtroom. However, the importance of the assessment of the key witnesses and the detailed submissions made necessitate a detailed analysis in these reasons. The remarkable allegations of the plaintiff also require close consideration of the credibility the witness called in support of his case.

Credit of Liyakat Ali and Martin
Their Positions.

Both Liyakat Ali and Martin have a great deal at stake in these proceedings.

Liyakat Ali, the plaintiff’s son, negotiated the agreement and dealt with Martin. He is seeking vindication and the saving of face within his family. He has been the powerful driving force behind the presentation and pursuit of the plaintiff’s claim. This is obviously of such importance to him that, as counsel for the defendant has correctly submitted, he is obsessed with winning the case.

As to Martin, his reputation as a trader is under challenge. So too are his honesty and ethical standards. He also has a personal interest in the outcome of the case. He is in the situation that, without an accommodation being reached with the defendant, he remains personally liable for the alleged substantial debts remaining in the relevant accounts. He has given evidence that he has received an indemnity from the defendant in exchange for giving evidence but the precise terms of that indemnity have not been the subject of evidence. Prior to receiving that indemnity it seems that he made his witness statements. His sworn evidence was given after receiving that indemnity. Further, while he was giving evidence, he was negotiating with the defendant’s solicitors to recover the costs of legal representation which he obtained to advise him on possible use of the privilege against self-incrimination.

He has been put under considerable pressure by the defendant. On about 10 December 1998, he was threatened by Tim Moore, one of the senior officers of the defendant, that he would be black banned from work as a share trader throughout the world. Prior to service of the writ by the plaintiff, the defendant had decided to issue proceedings against him (12 February 1999, P65 document 10) and had instructed Freehills to obtain his passport (5 March 1999). It was after being served with the plaintiffs’ writ that the defendant decided on 30 April 1999, to put proceedings against Martin on hold.

A Comparison

Liyakat Ali presented as an impetuous, emotional, volatile, erratic, unsystematic person, intelligent but undisciplined. He is full of bluster. Martin, on the other hand, generally presented as an intelligent and normally self-assured, controlled, decisive and disciplined person, very confident in his abilities as a trader in all securities. He appeared to have a quick mind. He spoke coherently and confidently about share and derivative trading. He had the capacity to be very persuasive as a witness.

In their memory they were very different. Liyakat Ali had a remarkable memory for the details of the case – although not always accurate. Martin, on the other hand, had at times a remarkably poor memory of events. One striking example was his lack of memory of the events around the signing of a discretionary trading agreement in August 1998. I have come to the conclusion that on that, and other aspects, his lack of memory was selective.

Both were subjected to prolonged, aggressive cross‑examination. Liyakat Ali was cross-examined for approximately 18 days, and Martin for over 14 days. The cross‑examination of Liyakat Ali was significantly more hostile and aggressive. He, however, coped with this very demanding and stressful experience very well. He found the experience, at times, frustrating and infuriating but did not appear generally to be feeling stressed. He seemed to relish the opportunity to cross swords with defence counsel – which he did at every opportunity. Martin, on the other hand, did not cope at all well. His evidence had to be delayed several times on the basis that he was not able to continue. He was unfit in the week beginning 19 June 2001. He returned on 28 June 2001 – witnesses having been interposed. On 5 July 2001 he was given the opportunity to seek legal advice about claiming privilege against self-incrimination.. He was visibly shaken by the suggestion that he consider seeking it. His own counsel appeared on 6 July 2001, and expressed concern about Martin ‘s condition and the length of the cross-examination. He resumed his evidence on 9 July 2001 and again on 16, 17 and 18 July 2001. On the morning of 19 July 2001, Seatscan evidence was given of the trading in the Telstra shares, which contradicted his evidence. Shortly after recommencing his evidence he appeared unwell, left the witness box and shortly afterwards commenced to dry retch. His evidence was resumed on 23 July 2001. His evidence concluded on 25 July 2001.

I am satisfied that on each of the above occasions he was not coping with the situation of being a witness under cross‑examination in this case. In addition, on occasions he, uncharacteristically, sat in the witness box bent well forward with head bowed while he listened to and answered questions. At such times it was not possible to observe his face. He obviously found the experience extremely stressful.

Credibility of Liyakat Ali – Overview

Liyakat Ali repeatedly argued the plaintiff’s case in answer to questions in cross‑examination. He constantly gave directions to counsel in court, whether it be as to asking questions or making submissions. He was prone to highly emotional outbursts in the court room and in the witness box. It must be acknowledged that other factors contributed to his behaviour. I refer to the outwardly aggressive, and extremely critical manner in which the defence cross-examined him. It obviously seemed to him to be an almost constant personal attack on him. The conclusion, however, is inescapable that his behaviour was that of a person who was obsessed with winning the case.

Counsel for the defendant submitted that this obsession had caused Liyakat Ali over the intervening two to three years to reconstruct events into a story which he now fervently believes. I accept this assessment. This obsession has caused significant reconstruction of his evidence which at times did not accord with the realities. I refer, for example, to his evidence about what was agreed and his position that he was not aware that the account was in trouble until November 1998. He kept a very close eye on the account throughout. In my view it has also caused him to be less than frank on issues such as the conduct of the case itself, the Khan Account and the "second demonstration” and the use of the proceeds of the Telstra sale. I accept too that by the middle of 1998 he was much more knowledgeable than he now claims to have been when it came to the share market. He had acquired a familiarity with the various trading instruments and markets. His knowledge and understanding, however, was still limited and not soundly based. His instructor was Martin. He did not, for example, understand that trading very large quantities of warrants might not be realistic and did not have an accurate appreciation of the risks of share and derivative trading. To quote the defendant’s broker, Whiting, who handled the plaintiff’s accounts in August 1998 when Martin was on leave, in describing Liyakat Ali;

“…..I mean, he didn’t really know what he was doing, whether he was long or short, as long as there was a transaction occurring”.

Whiting also commented that while his knowledge of trading and trading instruments particularly warrants was well above average he was not “astute in his view and understanding of the market and factors influencing it”.

I note that questions have been raised about the propriety of Liyakat Ali’s tax returns and tax payments but that evidence is inconclusive in that it is unclear whether this occurred on advice of employees of Barba or on Liyakat Ali's own initiative The issue was not resolved.

Credibility of Liyakat Ali – The Diary

Before leaving the issue of Liyakat Ali’s credit, it is necessary to comment on the diary that he kept through 1998. This diary was admitted into evidence after initial objection early in the trial. I note that the defendant did not subsequently renew its objections. It was prepared by Liyakat Ali at the suggestion of Dominic Barba, his accountant.

The defendant has presented detailed arguments directed ultimately, as I understand them, to the proposition that the diary has been largely reconstructed by Liyakat Ali in his obsession to win the case.

I do not propose to comment at this point on the detail of all the matters canvassed by defence counsel. In relation to alleged errors in the diary entries, in some instances the arguments turn on the interpretation to be placed on the words used when other interpretations which are open, and more likely, would point to no error. The arguments also assume that the diary entries recording information allegedly received from Martin which are shown to be erroneous were not the result of Martin himself making an error or Martin deliberately misleading Liyakat Ali.

For example, reference was made to the diary entry of 2 November 1998. This purports to record a conversation with Dominic Barba about his conversation with Martin in which Martin purported to go through the share holdings indicating what their prospects were. Defendant’s counsel has been able to demonstrate that at the time some of the stocks were not in fact held in the account – at least, in the accounts which have been identified and for which we have seen statements. There are explanations for such errors in the diary and as far as Liyakat Ali is concerned it is reasonable to assume that he was simply recording what Barba told him. It may be that Barba misunderstood Martin. It may be that Martin made an error himself. It may be that Martin lied to Barba. It may be that these stocks were held in an account that we know nothing about now – perhaps the second trading account referred to in document 2223 an e-mail dated 16 October 1998 (see Annexure A) written by Martin to Liyakat Ali.

Counsel for the defendant also submitted that evidence of fabrication is to be found in the fact that errors can be identified in the diary entries which would have been demonstrated to Liyakat Ali when he examined the weekly reports. It was put that Liyakat Ali was spending so much time on the trading, that it is inconceivable that he would not have checked the diary entries with the weekly reports. It was then argued that such entries are more readily explained on the basis that they were inserted later and inaccurately.

Accepting that Liyakat Ali is impetuous and lacks discipline, I find it inconceivable, nonetheless, that if he had set his mind to writing up diary entries, in circumstances where he had a source available to him like the weekly report, he would not have accurately copied what was in it. The discrepancies rather, point to a document being prepared reasonably contemporaneously with the conversations recorded and containing the very sort of flaws and errors to be found in a document that was prepared spontaneously and hurriedly and not as part of a conspiracy to build up a case against the defendant.

In my view, the diary has all the appearance of a genuine, spontaneous, reasonably contemporaneous diary. The fact that, as counsel has demonstrated, some of the entries cannot be contemporaneous, that matters are not recorded that one might have expected to be recorded and that errors appear, reinforces, in my view, the conclusion reached from a reading of the diary that it is a genuine and spontaneous document. It is the sort of diary one would have expected Liyakat Ali to keep. At the same time it is appropriate to approach its entries with care when considering whether to rely on them and, in particular, to identify whether the facts asserted are supported by other evidence, the probabilities or other relevant considerations.

Liyakat Ali – conclusion

For the above reasons, I have come to the conclusion that it is generally unsafe to act upon the oral evidence of Liyakat Ali in the absence of independent reliable support. Much of his evidence, however, is so supported.

Credibility of Martin – presentation in court

The difficulty Martin had in giving evidence pointed to a witness under enormous stress. I have already referred to some of the pressures upon him. It must be borne in mind also that his wife was expecting their first child and was close to term and then beyond term during his evidence. For the latter part of his cross-examination, he had the added pressure of the need to decide whether to claim the privilege against self-incrimination and of the fear that he might unwittingly incriminate himself by his answers. While he had counsel in court to assist him, he would have been under considerable pressure. Whether there were in fact issues relating to his indemnity from the defendant we do not know. He would also have been well aware that his reputation was under challenge. These are all matters that would cause considerable stress to any witness. But he did not appear to me to be someone who would normally be easily fazed by such problems, especially if he believed that the facts supported him. It seemed to me, that his fundamental problem was that he found himself in the position that he was giving evidence which he knew would be shown to be untrue. The dry retching occurred after the evidence of the Seatscan, which contradicted his evidence about the sale of Telstra. I note also that, when asked about whether he had read the voluminous and detailed witness statements of Liyakat Ali and Dominic Barba, he said he had read them but not in any great detail because as he read them he felt sick.

Credibility of Martin – undisputed conduct

In assessing his credibility as a witness, it is also relevant to consider undisputed evidence about other conduct. It reveals a person who has been dishonest in situations requiring honest behaviour and has ignored legal and ethical requirements without apparent compunction.

His evidence and that of the defendant's own records reveals that he had practised consistent and significant deceptions upon the defendant in various ways. For example, he moved stock between accounts to avoid credit limits imposed on accounts by the defendant. Further, in the course of a long struggle in 1998 with the Debtors Committee of the defendant, Martin's history of making promises and not keeping them reached the point where the Debtors Committee suspended his employment. What emerges from the Debtors Committee meeting minutes and his trading is a picture of a reckless trader who was not troubled about non-compliance with the Corporations Law, the ASX Rules, the defendant’s credit and trading rules, a trader whom the Debtors Committee could not control. I will refer in more detail to those matters when considering the issue of the defendant’s supervision and in Annexure A.

Serious issues are also raised by the following evidence which was not in dispute:

(a) Innovax

I refer to the episode involving the gift of Innovax shares by Martin to the plaintiff on 24 November 1997. Martin explained what occurred in his witness statement and adhered to that account in his evidence. It shows remarkable chutzpah and a worrying view of what is proper conduct.

Some 30,000 shares in Innovax were transferred to the Rahmat Ali trading account at no cost. They were not purchased on the share market but were transferred at no cost by a company associated with the managing director of Innovax. That much was common ground. Martin's evidence was that he had had a previous substantial dealing history with the managing director of Innovax. He said he was approached by the managing director with a proposition that if any of Martin's clients purchased 90,000 Innovax shares he, the managing director, would transfer 30,000 Innovax shares to them at no cost. Martin saw no problem with this arrangement. In his evidence, he said that it was part of the responsibility of any managing director to promote the shares in his company and that this sort of thing was not uncommon.

I find his explanation remarkable. It seems to me obvious that, if Martin’s account be accepted, the managing director was attempting to either artificially cause trading in the shares to give the appearance of liquidity or was trying to boost the price of the shares, or attempting to do both. On that basis, Martin was either putting his trust in the managing director in circumstances where he should not have done so or was knowingly acquiring, for a trading account, stock which he would have known was either illiquid or had poor price prospects or both. Martin, however, had no concerns about the legality or propriety of this transaction. He showed no regard for the interests of the client.

To make the matter worse, Martin purchased for the plaintiff 50,000 of the 90,000 Innovax shares needed for the deal in a cross-trade conducted by Martin for a friend, Richardson, for a price of $0.85 which was the highest price on the day. Martin, acquired the balance on the market for prices ranging from $0.74 to $0.80. There were no other trades that day. Subsequently very little trading occurred. Single trades only occurred on 26 and 27 November 1997 and 1 and 3 December, 1997. The price fell over that period from $0.70 to $0.66 and a total of only 39,000 shares were sold. There were 5 trades totalling 14,000 shares at $0.65 on 5 December 1997, and no trades thereafter until 23 January 1998 (3 totalling 9002 shares at $0.40).

I am also satisfied that neither Liyakat Ali or Barba were given information about the true nature of the Innovax transaction or the source of the shares purchased. It was not in Martin’s interest to tell them. They would have known that he could not be trusted to act in the best interests of the plaintiff. Even his persuasiveness could not have stopped Liyakat Ali terminating the retainer there and then. What he in fact told them was that the managing director had given the 30,000 shares and he, Martin, offered them to Liyakat Ali to mollify him, he still being angry about the sale of 100,000 Telstra shares contrary to instructions. Martin also sought to justify the purchase of 90,000 Innovax shares as a good investment (which he must have known it was not ) and concealed the connection between the two parcels.

(b) Loan to Martin’s father

It was common ground that in May 1998, Liyakat Ali agreed to make available from the plaintiff’s accounts approximately $36,000 interest free as a loan to Martin's father to be used in one of his share trading accounts. There has been a debate as to whether and to what extent the debt has been repaid. I incline to the view that it has not. What is particularly relevant, however, is that the actions of Martin placed him in a situation where he had to serve conflicting interests and he placed his father’s interests ahead of the other client. The beneficiary of the loan was going to be his father’s account. To make the matter worse, he was aware that it was not in the plaintiff’s interests to be suggesting that he part with significant amounts of money when the defendant was tightening its credit arrangements and he was aware that Liyakat and Rahmat Ali were not aware of that tightening. In Annexure A I have referred to the relevant events in April and May 1998 in more detail.

(c) The Petroz Parking

Martin approached Liyakat Ali to allow him to place Petroz stock bought for his father which he could not hold in his father’s account because money was not there to cover it. He explained in evidence that that was a circumstance in which, and the only reason why, you would move a client’s shares into a “friendly” account. He said he could have used another account. He arranged with Liyakat Ali to place them in the Rahmat Ali trading account on the basis that they would in due course be sold and that he, Martin, would make up any loss that might be suffered. The shares were later sold and sold at a loss, but Martin never made good the deficit. In evidence, he acknowledged the arrangements but showed no sign of any regret, embarrassment or discomfort over any aspect of the transaction. Some days later in his evidence he was asked how he could serve two masters at the same time. He said “that’s what brokers try to do”.

(d) Cross trades – for his father

There were also several trades of shares in early 1998 on behalf of his father to the Rahmat Ali account but he could see no potential perception of conflict or a need to inform the buyer of the identity of the vendor.

(e) Privileged Information

Another matter of concern is that it is clear that one of the main selling points Martin used in dealing with Liyakat Ali and Barba was that he and his colleagues in the defendant company were privy to “privileged information” from the companies in question and other sources that was not available generally to the market. The contemporaneous notes of people like Barba, from time to time, also refer to Martin claiming to justify his trading in stocks, and particularly his holding of stocks, on the basis that he was privy to such information. Again, this was something that he obviously regarded as not only normal but also proper and caused him no concern.

I turn to some contested matters.

Credibility of Martin –disputed conduct
(a) Withholding information from client

I have also come to the conclusion that Martin practised major deceptions upon Liyakat Ali and Dominic Barba. In particular, I am satisfied that at no time did he alert them to the significant changes that took place within the defendant company on credit trading during the retainer or of his problems with the Debtor’s Committee. I will refer to this issue in more detail below in Annexure A. Suffice it to say that whatever issues the defendant has been able to raise about errors and possible inaccuracies in the diary of Liyakat Ali or the file notes of Dominic Barba, one would have expected sharp references to the changes in credit arrangements if they had communicated. They were critical to the planned trading. Further, they were not mentioned by Martin in correspondence or e-mails when explaining his own actions, actions which were affected by the credit limits. The changes to the rules for credit trading significantly constrained Martin’s ability to trade on the accounts in question and led to forced selling. He also did not inform them when he was required by his superiors in the defendant company to rapidly sell down stock.

If communicated, the above information would have provoked confrontations and major comment in the diary and file notes and written communications through Barba. Nothing like that occurred. Also Liyakat Ali would not have given the trading instructions he did if he had been aware of the true position. I refer to further analysis below in dealing with events subsequent to November 1997 and in Annexure A.

(b) Explanation of admissions

Next, faced with a series of documents typed and signed by him, in which he acknowledged receipt of instructions or recommendations from Liyakat Ali and his failure to carry them out, he asserted on oath that they were false. His explanation for them was that they were induced by threats from Liyakat Ali of physical violence to himself and his father.

The explanation should be rejected. The issue and the evidence in the documents is and was significant. The defendant has taken the position that it acted on and in accordance with the plaintiff’s instructions. Liyakat Ali had referred to Martin’s admission letters in his first witness statement and they were relied upon in the plaintiff’s Reply (paragraph 3(k)). Yet the threat explanation was not mentioned in either of Martin’s witness statements. No satisfactory explanation has been given for Martin’s failure to raise the issue in his witness statements.

The evidence about the alleged threats was vague and fanciful. Martin said that Liyakat Ali claimed to have two business associates, one of whom was a South African, and that they had a private army, a private jet and a hotel in Darwin. The threats alleged to have been made were that if he did not type up these documents on the dictation of Liyakat Ali and sign them and provide them to Liyakat Ali, he, Martin, and his father would be contacted by Liyakat Ali's people. Asked when this threat was made, he said that it occurred only the once and in what he described as the middle of 1998, which meant somewhere in the middle months of 1998.

The plaintiff's counsel was able to point to a substantial body of evidence to meet this vague evidence. First, there were many e-mails passing from Martin to Liyakat Ali after the alleged threat, addressed to Liyakat Ali, expressed in terms of friendly banter and friendly exchange. Secondly, the defence position, in the end, was that the confirmation documents in question were almost certainly written between 10 November and 25 November 1998. On that basis, many months elapsed after the alleged threat before any of them were dictated, let alone signed. There was no evidence of the threatened “contact” in that intervening period or renewal of the threat. I refer also to Martin’s letter of abject apology dated 27 November 1998 (2420). He gave evidence that this too was written in a state of fear induced by the threats made in the middle of the year and never repeated. In it, however, he referred to Liyakat Ali and stated;

“….but I know that someone wanted you and I to meet and be successful as a team. I must be the worst team mate going around.
But I have never walked away and let my true friend handle a battle on their own, and I will never walk away from you!!!!.
You have been through all the shit I kept hitting you with yet you always managed to laugh and see a positive out of a negative. If there are two very special people in my life that will go with me wherever I go, it is you and my father.
I am so sorry, and yes I do love you.
Your friend
Chris”.

He sought to explain his letter of abject apology on 14 December 1998 (2488) on the basis that it too was lies induced by fear for himself but said it was not dictated under alleged threats. He said he was trying to deflame the situation.

In addition, it is clear that he made no mention of any such threats to superiors or to the police. Martin did not strike me as someone who would allow himself to be intimidated by any such vague threats. He would immediately take action to deal with them. He was the manipulator not Liyakat Ali.

For the foregoing reasons, I reject Martin’s explanation of the letters. I accept, however, that he was under great stress, especially in the latter half of 1998 and that the letters were probably written at Liyakat Ali’s request but done to keep the latter pacified. I am satisfied, however, that Martin, contrary to his evidence, was not lying in those documents.

Credibility of Martin – conclusion

Counsel for the plaintiff has submitted that Martin is a compulsive and pathological liar. I would not go that far. For present purposes it is sufficient to state that, for the foregoing reasons, Martin has no credibility as a witness in this case. At the same time the person that emerges from his own and other evidence is one capable of doing what the plaintiff alleges he did.

Credibility of Martin & Liyakat Ali - conclusion

Both the principal protagonists are shown to be seriously flawed as witnesses and their evidence should not be accepted without independent reliable supporting evidence or other reliable support.

Credibility of Rahmat Ali
Defence criticisms

The plaintiff gave evidence. The defence submitted that I should reject his evidence because he was overly concerned to achieve an award of damages in the case.

Particular reliance was placed on a passage in his evidence where he was being challenged about why it was that in his witness statements he had not referred to the alleged long term investment plans in relation to Telstra. He was asked about whether he had been asked to make a witness statement putting down everything about his conversations. In response, he said that it was not each and every word which he recalled which he put in his statement and that he didn't keep any records of conversations. He then said he wished to express his feelings. In summary, he complained that he was before the court because of the cheating, the promises and deception of the defendant and he had to stand there after losing all his money. He complained that the defendant had even told the court that he was a dead person, that he wasn't alive. He asked, rhetorically, if he was a ghost standing before the court. He complained about tricky questions. He said that the defendant had promised a lot of things and that they gave a lot of trust. He referred to papers his son had shown him about the profit and said that his son didn't understand those things. He referred to their promise and said that now they came up with all these questions and he reiterated that the money was his money.

Other attacks were made on his credibility concerning his evidence on the Telstra aspects. I will deal with those attacks when dealing with those aspects. For reasons set out below, they were not made out.

Analysis

Rahmat Ali is an elderly, unsophisticated man. He apparently lives in the village of Navau in Fiji. He gave his occupation as taxi proprietor and sugar cane farmer. His English is not fluent and this created difficulties at times for him in understanding questions and conveying his answers. He gave his evidence with dignity and patience.

His statement of his feelings did not so much show a concern to win but genuine anger. Bearing in mind the direct evidence (see below) presented for the plaintiff as to the defendant’s knowledge of the identity of the client and the fact that Hartley Poynton had traded on behalf of “Rahmat Ali” for over 12 months, on extensive credit with a turn-over of about $39 million, had received nearly $300,000.00 in funds and received commission of approximately $140,000 from “Rahmat Ali”, one can understand his anger and his outburst. The defence was, and is, really saying that he and his son and Barba have fabricated a case that it was he, Rahmat Ali, who was the client.

He presented as a litigant who, while plainly having a strong interest in the outcome of the proceedings and being extremely angry with the defendant, was aware of his obligations and remarkably calm and philosophical about the proceedings. I found him an impressive witness.

One other matter should be mentioned. I have formed the view that the case for the plaintiff, as pleaded and presented, claims grossly exaggerated damages. It might be said that that conclusion supports the defendants challenge to the credit of the plaintiff. In my view, however, if it reflects on anyone, it reflects on Liyakat Ali who, as I have indicated, I am satisfied has been the powerful driving force behind this litigation, not the plaintiff.

Credibility of Barba
Barba’s role

Barba is and was an accountant. He also held at the relevant time a limited financial adviser licence enabling him to give advice about investment funds.

His actual role varied from time to time. Initially, in August 1997, he introduced Liyakat Ali and Martin and actively supported Liyakat Ali in assessing Martin’s initial proposals and assisted in negotiating the initial demonstration and its terms. Then, in Liyakat Ali’s absence in Fiji, in September 1997, he monitored the early period of the demonstration and continued doing so after Liyakat Ali’s return for a short period. He gave clerical assistance in the applications and transfers of the Telstra shares. After the initial activity, he played an occasionally significant role – particularly in corresponding for the plaintiff with Martin. In addition, he was always available to Liyakat Ali if he had concerns about what Martin was or was not doing and acted as a conveyor of messages and instructions to Martin. His office also received and filed all documents such as contract notes and holding statements . On occasions he personally recorded the receipt of documents, but that task, and the filing of the documents, was generally handled by other staff. Barba, however, did not give share trading advice as such and I accept that when he did attempt to intervene and give direction to Martin, particularly in the early period, it was on the basis of what Martin had undertaken to do and what he understood Liyakat Ali wanted and with a view to ensuring Martin carried out the agreement as he, Barba, understood it and also to ensure Martin acted consistently with views he had previously expressed. I am satisfied that he sought to assist Liyakat Ali because he could see potential benefits for his own business in assisting Liyakat Ali. There was an element of friendship as well.

As to his role, I accept that, while he had knowledge of more than the investment fund market, for which he was licensed, he did not have a detailed knowledge of the stock market for much if not most of the relevant period and regarded Martin as the expert to whom he deferred. He did claim in his dealings with Martin and Hartley Poynton on at least two occasions, a controlling role which was inaccurate. He did so to try to add to the pressure he was trying to bring to bear on Martin.

Defence Criticism - Analysis

He was criticised by defence counsel for holding a strong and clear view that a grave injustice had been done to the plaintiff and that the defendant had tried to stretch out the case and burn more money. I accept that that is his view. It is a view that is arguable. He frankly volunteered it. I am satisfied that he was well aware of it and did not allow his views to affect the honesty or accuracy of his answers. He is not Liyakat Ali’s front man. As will be seen, for example, he could , if he was partisan, have given much stronger evidence of the terms of the retainer than he did. I refer also to his evidence about the meeting on 14 October 1997 relating to the Telstra float. He could, if dishonest and partisan, have claimed a greater knowledge than that to which he deposed.

On 13 August 1998, Liyakat Ali recorded some thoughts in his diary about Martin. He noted that he appreciated Martin cancelling his flight to go to Perth on their matter. He expressed the hope that Martin found direction and enjoyed himself and told him that he hoped that. He noted;

“I am sure he needs it. Too much pressure. I know he is trying his best”.

These entries are again testimony to Martin’s persuasiveness and Liyakat Ali’s willingness to put his trust in Martin in spite of all that had happened. Of course, by this time, Martin probably seemed his only hope and the choices available to him were not happy ones. Martin still maintained that he would achieve the agreed target.

On 13 August 1998, Martin purported to sell 70,000 ANZ call warrants (ANZWDC) in the plaintiff’s No 2 Account, warrants that had been bought in the trading account. The statement of the No 2 Account records a reversal of that entry on 19 August 1998, a repeat of the entry dated again 13 August 1998, and another reversal of the entry on 26 August 1998 (D28). Martin claimed that this was done to get cash for Liyakat Ali. In doing so he acted contrary to Karlson’s instructions in December 1997 not to operate the account.

The next events of relevance to the issue of the terms of the retainer, in particular, the issue of credit arrangements and discretion, occurred in the absence of Martin on leave after Stefan Whiting took over the handling of the accounts.

The statement of account for the trading account reveals that at 12 August 1998 the account debit balance was $148,925.92. Trading occurred on the day which took it over and then back under the $150,000 limit. The statement of account recorded that at the end of trading on 13 August 1998 the outstanding balance in the account was $148,646.67. It was in fact, $12,885.00 less – a sale made on 13 August 1998 was not entered in the account until 25 August 1998.

It appears that Whiting began trading on 14 August 1998. At the end of trading on 14 August 1998, the balance recorded was $190,739.17. It was thus over the $150,000.00 limit.

Whiting rang Barba on 14 August 1998 and made enquiries about the type of person that Liyakat Ali was. Barba told Whiting that Liyakat Ali was a very good man, that his expectations were high because the account was his father’s and he was extremely protective of his father’s assets. He said Liyakat Ali would also get you to commit to what you could do and hold you to that commitment. He said that you were always free to change your mind as long as you advised Liyakat Ali before doing so. He said Liyakat Ali wanted people who were committed. He told him that Liyakat Ali was very particular about the way he did business and the instructions that he gave. He said he must keep Liyakat Ali informed at all times. He told him that Martin did not work in this way consistently enough and complained that Martin was always committing the account to losses with little or no communication. In response to a question from Barba as to why Whiting wanted to know, Stefan Whiting said that he had over purchased on the account according to officials from the defendant’s office. Barba asked Whiting to clarify what he meant. He noted in his file note 100,000 BHP calls and Western Mining and Oil Search calls. Barba also noted in his file notes that Martin had obviously not filled Whiting in on the account and its operation. The file note records that he told Whiting that Martin had told both him and Liyakat Ali that Whiting could buy up to $200,000 of stocks whilst he, Martin was away. Whiting said he would get in touch with Martin to clarify the matter. In any subsequent discussions, I am satisfied that Liyakat Ali and Barba maintained that Martin had told them that they could purchase $200,000 of stock whilst he was away and that no one attempted to disillusion them. I am satisfied that Liyakat Ali and Barba were not told then or later of the actual credit limit. Martin remained in contact – both with Liyakat Ali and with his colleagues. At the same time Whiting worked the account debt back to approximately $150,000 by 24 August 1998.

The issue was an awkward and embarrassing one for Whiting. I would have expected Whiting, in the circumstances, to try to avoid the issue and simply “mind the store” for Martin and the defendant – and, so far as he could, avoid contentious issues for Martin. Whiting in fact conceded this, describing his role as a “maintenance role” until Martin returned.

Whiting maintained in his evidence, however, that he was “100% sure” that the credit limit was conveyed to the client. He also said that he used the Khan account at Liyakat Ali’s suggestion to conduct trades when he could not in the plaintiff’s account because of the credit limit but the Khan statement of account does not support this assertion. Under cross-examination, Whiting became increasingly vague saying that while he was sure the credit limit was discussed, the figure was a grey area.

My assessment of Whiting was that he was concerned to protect the interests of the defendant. His evidence was a reconstruction made by him to assist the defendant. He claimed that before he began trading he was told of the credit limits and he was at pains to comply with them, and yet, on his first day of trading he went over those limits and was still over the limit on 17 August 1998 and remained so. His initial evidence that Liyakat Ali was told of the actual credit limit, became vague and uncertain with a range of $150,000.00 to $250,000.00 being possibly mentioned. His initial evidence that Liyakat Ali was told of the actual credit limit is inconsistent with his evidence that during this period Liyakat Ali was trying to trade frequently and getting frustrated when he could not do so. If Liyakat Ali had been told of the actual credit limit he would not have persisted in giving instructions that could not be carried out. There would also have been a major confrontation. On the other hand, his evidence of Liyakat Ali’s constant and repeated frustration should be contrasted with Liyakat Ali’s glowing praise in the e-mail of 20 August 1998 (see below).

Liyakat Ali asked Whiting to provide information about the account balance – a figure that had not been supplied to Ali since the statement of 17 April 1998. Whiting gave figures for the account balance and the realised profits relating to the Rahmat Ali trading account in a document dated 17 August 1998 (CB 1968). He advised that the realised amount of profit in the trading account was $71,000.45 and that the balance owing on the account at that point was $188,309.15 (in fact it should have been $12,885 less). In assessing Whiting’s evidence, it is significant that the account was still over its credit limit and that he chose not to record that fact in the memo. Figures are not available for the unrealised losses as at 17 August 1998 but on 7 August 1998 they were $202,996.00 and on 11 September 1998, $222,857.00.

Liyakat Ali acknowledges that he did some calculations on this document. In relation to the balance owing he wrote “$200,000 HPL loan equals $11,700 still not used”. He then added $300,000 “initial funds” to the realised amount of profit figure to produce what he called “cash position” of $371,000. The reference to a $200,000 HPL loan supports the view that at all times the gearing said to be available from Hartley Poynton by Martin was not more than $200,000. It also supports the conclusion, however, that Liyakat Ali and Barba had not been told about the credit restrictions that had been imposed. The reference to the initial funds does not necessarily mean that Liyakat Ali was aware that the Telstra monies had been used for trading. It may simply be a reference to all monies that had been deposited with Hartley Poynton and which would inevitably need to be taken into account in any wind up of the account. As previously indicated, however, I am satisfied that he was aware that it had been so used, at least to a substantial extent.

On about 20 August 1998 Liyakat Ali sent an e-mail to Karlson praising the work of Whiting. It referred to his professional diligence, personalised customer attention and total commitment and referred to Whiting as being “a breath of fresh air”. It seems that Whiting had listened to Liyakat Ali and had carried out a number of his instructions and acted in a way that appeared very different from the way that Martin had conducted himself. It is further evidence that Liyakat Ali and Barba were correct and Martin wrong in saying that he, Martin, with the exception of a few cases, had always acted on the client’s instructions. Karlson responded saying that it was refreshing to have someone complimenting them rather than caning them.

Whiting was still operating the account on 24 August 1998. Martin appears to have returned shortly afterwards and resumed trading. In Martin’s absence, no weekly reports appear to have been forwarded.

It is significant that there was no further mention of the issue of credit limits. There was no satisfactory evidence from Karlson or Whiting as to what transpired in relation to the credit limit question. I am satisfied that both sides were aware there was a credit limit, but what was critical was its extent and that issue was not resolved by Karlson or Whiting telling Liyakat Ali or Barba that there was a credit limit of $150,000 on the Rahmat Ali trading account or, for that matter, that there were no extended settlement terms available. They were left with the impression that their understanding was correct. It should also be noted that Martin on his return took up active trading, taking the account during a days trading well over the credit limit, and thereby giving an impression that he was not limited by credit limits, but usually ensuring that, by the end of the day, the unpaid balance was close to $150,000.

On 31 August 1998, after another conversation with Liyakat Ali, Barba again spoke with Martin about the state of the account. On the same day Martin sent Liyakat Ali an e-mail addressed “G-day big fella”. It stated that he hoped Liyakat Ali’s cold would get better and suggested he stop smoking. He then acknowledged that the account had been a terrible burden on his shoulders and had made him look bad in front of “your club members and more importantly your father”. He stressed that he wanted to strive to do his very best to get the account profitable. He hoped for good news on BHP and ANZ and undertook to keep day trading to make a minimum of $2,000 per day to keep the “Telstra and Ali account” ticking over. He urged him to have a good sleep and get some medicine and hoped that the next day would be a great day, he signed off “bye mate Chris”.

On that same day there was the first of several lengthy discussion between Martin and Barba, at Liyakat Ali’s request, in which they discussed the portfolio holdings and Barba requested explanations as to the stocks then held. I note that in a number of instances Martin supported his position on the basis of contacts and privileged information. In addition in several instances, Barba recorded his thoughts about warrants, treating them as “blue chip”. Martin, of course, had said they were better than blue chip shares. It is a tribute to Martin’s skills that, at the end of that discussion, Barba recorded that Martin’s reasoning for holding the stocks appeared sound and logical and that his holiday appeared to have focused him and that he was really working and thinking very hard about how to successfully generate the results they were looking for and he undertook to advise Ali of his commitment and how much time he was spending on it. He describes the discussions as being very useful. The figures for anticipated profits added up to something of the order of $1.3m. These discussions are a classic example of Martin’s salesmanship. In spite of everything that had happened, he managed to impress and persuade Barba. Either Barba or Martin, or both, spoke to Liyakat Ali giving similar details about the portfolio. Liyakat Ali totalled the anticipated profit at $1.3 m.

Operation of Accounts – September 1998

The retainer continued to be operated by the participants in the same way. For example on 1 September 1998 Barba spoke to Martin conveying Liyakat Ali’s dissatisfaction that Martin would not purchase Rio calls. A few days later Martin forwarded a letter dated 1 September 1998 (CB2075) confirming that there had been discussion of buying Rio calls (500,000 at 13 to 15 cents) and explaining the reasons why they had not been purchased by referring to selling pressure on the “All Ords”, not wanting to expose the account to a volatile world markets and, after talking to the defendants analysts, “we have decided against entering the transactions.” He referred to September and October being volatile months and the short term outlook not being pleasant. He commented that the Dow could be under more pressure that night after US market comments. He asked that Barba console Liyakat Ali and convey his apologies but wrote that they could buy them cheaper short term if markets continued to fall.

It should be noted that the simple explanation was that the account was $24,366.84 over the credit limit, and that he could not buy the calls because it would have involved an outlay of between $65,000 to $75,000. He did not, of course, tell Liyakat Ali because that would have created major problems for him. Liyakat Ali’s request and frustration with Martin’s failure to comply with the request support the conclusion that he believed that a transaction of that size could be carried out. He had not been told of the credit changes. Another example of non-compliance with instructions concerned a TAH short (CB2132)on 11 September 1998.

Martin sent a weekly report as at 11 September 1998 (CB 2139) which showed unrealised losses of $222,857.00 exceeding net realised profits of $73,878.00 by $148,979.00.

On 15 September 1998 Barba and Liyakat Ali had a conversation about Martin’s failure to comply with instructions in relation to some TAB stocks. Martin had been asked to confirm in writing why he did not do as requested (CB2152) It is interesting to note that Barba said to Liyakat Ali that they needed to keep Martin working with them and that perhaps by getting him to write his reasons as to why he did or did not do it they would help Martin realise that they are only trying to help him. He commented to Liyakat Ali that at least it would mean he was doing them the courtesy of explaining what he had done. On 17 September 1998 Barba and Ali had a conversation in which Liyakat Ali complained about Martin not listening to him about covering the TAH short and said he had requested to Martin to confirm the instruction in writing.

On 18 September 1998 (CB2158) Martin was still in trouble with the Debtors Committee. Newton wrote to Craig giving him details of the state of various accounts of Martin as at the previous night, 17 September 1998. He noted that the balance of the Rahmat Ali account $144,341 was under the allowed limit but $56,312 was overdue over 30 days. He suggested, that as the account had plenty of stock, Martin be instructed to sell sufficient to “clear the overdues or be banned from trading”. As to the short sale account he commented that the sale price of open positions was $229,616 and that exceeded the allowed limit of $150,000. As to the MA Khan account, he said that the equity in the account was largely eroded and he agreed with Craig that the account should be closed if funds were not received. Other accounts were listed for action including Rojul Nominees Pty.Ltd. On about the same day, this memo was forwarded by Craig to Martin and to Karlson, the manager of the Melbourne office. Craig indicated to them that he agreed with Newton’s recommendations and asked that Martin, with Karlson’s assistance, attend to the accounts as proposed.

Martin responded seeking dispensations in respect of the Khan account (CB2161). He pointed to a surplus of $12,000.00. He wanted some Index puts to be held overnight because the client was not wanting to lose $4,000 just by selling those Index puts that day. He asked for consideration in that other clients were trading with no security in their accounts. He sought permission not to comply with the short sale account requirement on the basis that, with $150,000 equity in the account, one could normally short $750,000 of stock and that “there is not any financial risk to the firm and he has given over $100K brok (sic), so can we accommodate this”. He undertook to fix up the other accounts. Craig replied curtly that the Khan account was to be sold up unless $30,000.00 cash was deposited, the short sale account was to be under $150,000.00 by close of business and everything else in Newton’s memo was to be completed.

The statements of account indicate that he did not immediately comply with Craig’s requests in relation to the Rahmat Ali accounts. As to the Khan account, he sold $26,035.00 of stock on 18 September 1998 and deposited $10,000,00 in the account on 21 September 1998. He continued trading in the account.

On 24 September 1998 Martin allowed BHP calls to expire resulting in a loss of $39,000 (see CB2170). The weekly report dated 23 September 1998, recorded unrealised losses of $195,850.80, realised profits of $48,193.00 and a net deficit of $156,007.80.

Operation of Accounts – October 1998

On 2 October 1998 Martin had another lengthy conversations with Dominic Barba and also with Liyakat Ali reviewing the account. On this occasion Martin was less specific about likely profits but plainly impressed Barba again in that Barba recorded in his file notes that he was happy with the reasoning in most cases and that he just wished that some of the stocks would come out and profits would generate a lot quicker. He noted that patience is a must as was discussed with Martin and that Martin seemed to be focused. He said that as discussed with Martin the reason behind the stocks being held were sound and logical. It should be noted that Martin again spoke, in a number of instances, of having sources of information not available to the market generally. The notes are briefer but on at least one occasion Barba treated a call warrant as a “blue chip” security. Martin’s persuasive skills were still very effective.

The tension over the giving of instructions continued in October. For example, there was an issue over NCP calls on about 9 October 1998, with Liyakat Ali advising Martin to buy 500,000 NCP calls and Martin not wishing to do so. Barba took this up with Martin. Martin explained that he thought that the NCP calls would go to zero. Barba told Martin that he must buy them if that was what Liyakat Ali wanted him to do. He explained to Martin that Ali wanted him to follow his instructions despite his view on stocks and that he felt frustrated that his instructions were not followed. He said to Martin that he was beginning to feel a bit like a marriage counsellor and reminded Martin to explain his stand in writing. Martin said he was aware of that and would do so. There was a further issue of the same kind on about 15 October 1998 relating to XOA calls.

On 16 October 1998 (CB2223) Martin wrote a detailed document addressed “to whom it may concern” referring to “new strategies” that had been adopted over the previous two months. He stated that, with the introduction of the “second trading account” and “new strategies”, at the end of business that day they had achieved $65,000 of trading profits plus $25,000 of cash holdings giving a total of $90,000, 10% below the “clubs expectations”.

No evidence has been given by the defendant of a trading account fitting this precise description. What purpose the letter served is unclear. The letter noted, however, that the branch manager had required that all trades be cleared in the short selling account. This is the first mention of internal controls interfering with trading.

Counsel have not been able to identify the “second trading account”. The defendant submitted that if there was a demonstration account it must have been the Khan account and that the demonstration commenced in about July 1998 (1502). But the Khan account was not introduced “two months” earlier – as described in the above e-mail of 16 October 1998. It was opened in April 1998. Further, the profit and cash figures mentioned in the e-mail do not, as defence counsel conceded, match the figures in that account (D24). Further, as at 16 October 1998, there was a debit balance of $39,0730.90 in the statement of account for the Khan account. As for profits, the account showed a credit balance of $2439.24 on 13 August 1998. No cash funds appear to have been withdrawn but $10,000.00 was paid into the account on 21 September 1998.

Liyakat Ali asserted in his evidence that a new account was opened for the demonstration and that it was a “friendly account”. Liyakat Ali said that it held a substantial profit.

It seems that if the letter is true, and Martin asserted it was, there must have been such an account. While one cannot safely conclude that Martin was telling the truth in this document, it was a remarkable document for him to write if he was not.

A candidate for the demonstration account is one of Martin’s “friendly “ accounts, but no documents have been produced by the defendant relating to such. Another possibility is an account referred to in other e-mails from Martin as the “Telstra” account. But there is evidence suggesting that these e-mails refer to the Khan account although why it should have been described as the “Telstra” account has not been satisfactorily explained. Martin claimed that Liyakat Ali gave it that nick name but could not say why. If it was set up to build up funds to repurchase Telstra shares, it is difficult to understand why Liyakat Ali would not have agreed in his evidence with Martin’s partial explanation.

The precise status of the Khan account and the demonstration account is unclear. In the end, the evidence of both Martin and Liyakat Ali is extremely unsatisfactory on this issue. Both have been less than frank.

On 19 October 1998 there was a further issue of Martin being instructed to sell stock (Index puts) and refusing to do so, holding them for insurance. Barba again advised Liyakat Ali (CB2228) to get an explanation in writing as at least it helped him to understand why. Martin had apparently been saying that the market would fall. There was more discussion on 20 October 1998 (CB2230) about attempts by Liyakat Ali to get Martin to do what he wanted him to do and again Barba’s advice was to get his report in writing and Liyakat Ali agreed. By a letter dated 21 October 1998 Martin gave an acknowledgment that he had received clear instructions and advice to purchase 200,000 Lend Lease warrants and 150,000 All Ordinary warrants but had overlooked purchasing those warrants. In doing so he said he purported to rely on advice from their analysts along with forecasters predicting further downward pressure on world markets. He noted that the short sale account margin had been reduced from 20% of the available security to a maximum limit of $150,000 which would give them limited opportunity to profit on positions they wished to take in the future. He apologised for not being able to carry out the instructions but he described himself as working within the guidelines set by the firm and their analysts. This appears to be the first time Martin mentioned any restriction on trading limits.

At the end of trading on 21 October 1998 the outstanding balance in the account was $123,519.79. The 200,000 Lend lease warrants would have cost approximately $100,000 and the 150,000 All Ordinary warrants would have cost approximately $80,000. Those trades could not have been carried out in the trading account, except possibly on a day trade basis, but this would not have been Liyakat Ali’s intention. Martin again could have told Liyakat Ali that trading was T+5 and the credit limit was $150,000. He did not. An obvious reason was that he had not informed Liyakat Ali of the changes which had been in place for some months and would have feared that to tell him would bring the retainer to an end and leave him answerable to the defendant for any outstanding balance. His letter of 16 October 1998 would also have been contradicted. At the same time Liyakat Ali’s instructions on this and the other occasions support the view that Liyakat Ali held the belief that there were no credit constraints that were relevant.

It is to be noted that on 21 October 1998 in discussions between Barba and Liyakat Ali, Barba again was operating, as he describes it, as “the mentor for the big fellow”. He noted that Rahmat Ali, himself, was not happy. Amongst other things Barba urged him to be patient for they had been with it for that long that things would change and it would come their way. He urged Liyakat Ali to keep getting instructions confirmed. Thus they were still accepting Martin’s judgment of the situation – again a tribute to his persuasiveness, no doubt aided at this stage by the losses and their dependency on Martin for rescue.

During the rest of October there were further requests by Liyakat Ali for Martin to buy or sell certain stocks which Martin refused to carry out and again he and Barba agreed that confirmation must be sought and Liyakat Ali sought that confirmation. Martin was still not telling Liyakat Ali or Barba of the true nature of his problems.

Operation of Account – November 1998

On 2 November 1998 Barba had another lengthy discussion about the portfolio position with Martin. Again some call warrants were treated by Barba as or like blue chip stock and Martin relied in part on his privileged information to promote stocks he was holding. Again Martin managed to impress Barba. Barba noted that the reasoning appeared logical and was backed up by graphs, charts and information surrounding the Australian market, the American market and indices. Barba noted for himself that they should see what happens, that Martin was backing himself with a lot of technical data and information that made sense, but patience is a must. He seemed to be focused and the reasoning behind the stocks being held was sound and logical. Martin also spoke to Liyakat Ali giving figures and suggesting potential profits of between $1.2m and$2.5m. I note that some of the stock listed in this and other notes of earlier discussions cannot now be found in those official records produced by the defendant at the hearing, but I accept that the diary and file notes record what Martin said. Delivery of weekly reports, the other source of information became somewhat erratic after July 1998.

The situation as to control continued with Liyakat Ali making requests and Martin doing what he considered to be appropriate. By 6 November 1998 the position of the trading account had deteriorated to the point that the unrealised losses exceeded realised profits by something in excess of $200,000. On 6 November 1998 the defendant, through T. Malloch wrote to Mr Rahmat Ali in respect of the short sale account seeking funds of $9,513 to cover a margin call on stock borrowed for the short sale account. Liyakat Ali cross-examined about that said that he spoke, he believed, with Martin and Whiting and was told that there would not be an issue and that it was resolved and that there would be no more requests. The subsequent documentation appears to support this evidence. I note that Karlson was referred to the statement of account for the short sale account and identified a number of margin calls which had been met using credit facilities available to the defendant. There is no evidence that the plaintiff or his agents were notified of other margin calls and the likelihood is that they were not. Martin would not have wanted that to occur.

Liyakat Ali continued to press Martin for written confirmation of instructions received and not followed and that was forthcoming in a document dated 6 November 1998 (CB 2279) which was subsequently amended in a revised version dated 10 November 1988 to remove references to “the club”. The letter listed eleven securities and there quantities and prices in respect of which Martin said he had received clear instructions on several occasions to buy or sell them. He conveyed his sincere apologies. He wrote that market instability and uncertainty had clouded his judgement and had made him not take Ali’s recommendation on board. He gave his sincere apologies and showed remorse for his actions and confirmed his total commitment and again apologised. He said he would try to improve his performances up to the minimum of the client’s expectations.

It should be noted that the final version of this document was not forwarded prior to 10 November 1998 and would appear to have been received by Liyakat Ali on or about 12 November 1998 (see Liyakat Ali Diary).

On 10 November 1998, the Debtors Committee sought a response from Martin and Karlson about the state of each of Martin’s accounts (some 24), the majority of which had “serious problems” (CB 2299). The exceptions were the plaintiff’s accounts and that of a one Noordlaek. It was concerned with deficiencies in the accounts - the lack of cover for the debt. In this instance, no debt problem was raised as to the Rahmat Ali accounts but it was in relation to the Khan account. On 11 November 1998, Martin responded to the Committee setting out his proposals to deal with the issues raised in the various accounts. He promised to “curb” his trading to clients with adequate funds and cash deposits. As to the Khan account, he said he would get the client to send a cheque for $10,000. He did not do so.

I accept that on 11 November 1998 Liyakat Ali asked Martin if he had any problem in regard to purchasing power and that Martin advised that in the short to medium term there was no problem and the account was just fine. These assertions were plainly untrue. Liyakat Ali conveyed this information to Barba on the same day.

The control situation continued. On 19 November 1998, Karlson wrote to the plaintiff “outlining the current status of your accounts” listing some transactions requiring settlement. This was a rare approach to the client by other employees of the defendant.

On 23 November 1998, the Debtors Committee delivered an ultimatum to Martin. It said Martin was still unable to run his business to avoid the danger of overdue debts. They were no longer prepared to liaise with him. He was required to clear all the listed accounts which included the Rahmat Ali Accounts and he was prohibited from buying or short selling. On 24 November 1998, he was given until 1 December 1998 to clear the accounts. He was told there were to be no more extensions of time or excuses. The defendant, through other officers such as Karlson, did not alert Liyakat Ali or Barba to this direction. The direction appears to have been a blanket one with no attempt to differentiate between accounts or clients. The focus was on sorting out their problems with Martin without regard for the consequences for the clients.

By a letter dated 25 November 1998 (CB 2407) Martin forwarded another confirmation letter to Liyakat Ali. He explained that he hadn’t taken the instructions to purchase BHP and ANZ warrants (at a cost of approximately $195,000) “due to constraints” and said that he had to sell some ANZ call warrants at a loss to reduce the outstanding balance to comply with management regulations. He expressed regret at not acting on the instructions given but had to comply with guidelines as instructed by the firm. This was the second time he had mentioned internal controls as the explanation for not trading in the trading account but he still gave no details; in particular, he did not say that he was not permitted to buy and was required to sell all stock. Prior to sending the letter he spoke with Liyakat Ali and told him his job was threatened. He did not tell Liyakat Ali that he was in the process of selling the portfolio. In between the commencement of trading on 23 November 1998 and the end of trading on 25 November 1998, on the trading account, the debt was reduced from $163,227.62 to $120,202.42. Among the stocks sold (at a loss ) were 30,000 shares in Tanganyika Gold. They had not appeared in the weekly reports among the shares held after 31 July 1998. I accept that Martin was told by Liyakat Ali at about that time to sell them. They were subsequently mentioned in the 16 October 1998 e-mail by Martin as shares he was intending to sell. They were apparently held from 30 July 1998 to 25 November 1998. They cost $27,140.00 50 and were sold at a loss of $14,025.30 (Note: the original quantity was 150,000 shares and that was reduced in a reconstruction in the latter half of 1998 to 30,000). Perhaps they had been held in the “demonstration” account.

Finally some two days later, on 27 November 1998, Martin hinted to Liyakat Ali about changes to credit arrangements which had been operating for some time. Even then he was not able to tell the truth that as from 23 November 1998 he had been instructed to clear all outstanding amounts in the account.

On 27 November 1998, Martin sent Liyakat Ali an e-mail apologising for the complete disaster and accepting full responsibility and promising to fix up the situation even if it killed him. I referred earlier in my reasons to the passages which point to the friendship between them.

At that stage according to a holding statement unrealised losses totalled $123,883.850, net realised losses totalled $164,622.630 making a total loss position of $288,506.480. An attached statement of trading profits and losses showed total profits from trade of $560,786.64 and total losses of $725,408.27 at that time.

According to Liyakat Ali’s diary, he received two documents on 30 November 1998: one was Martin’s confirmation letter (CB2407) and the other was a statement indicating that there was a surplus in the plaintiff’s trading account between the value of stock held ($128,000.00) and the balance owing ($106,000.00) of $22,000. On 3 December 1998, however, Karlson wrote advising a shortfall in the trading and short selling accounts of Rahmat Ali of $64,36.95 and $29,773 respectively. It referred to the T+5 settlement requirements and required payment by 4 December 1998 or the portfolio would be sold. Discussion then ensued. Martin attempted to keep his job and the retainer alive but he was suspended. He resigned on 18 December 1998. The defendant then proceeded to sell off the remainder of the holdings completing the task by the end of January 1999.

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