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Appeal court unravels Rubicon


Friday 7th November 2003

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A few champagne corks must have popped down at Phillips Fox on Tuesday night. The law firm's litigators, with a little help from QC Alan Galbraith, had just persuaded a five-member Court of Appeal bench to overturn a judgment that would have cost their client Perry Corporation more than $8 million.

The atmosphere across Queen St at GPG law firm Lowndes Jordan would have been less festive. But, hell, the bills get paid anyway.

The appeal court's ruling clears a whole heap of black marks against the names of those involved in the Perry case.

Rubicon chief executive Luke Moriarty might have allowed himself a celebratory Coke. While not exactly calling him a liar, Justice Judith Potter made "adverse credibility findings" against his evidence, somewhat confusedly, the Appeal Court found.

Although they weren't represented in either court hearing, the bigwigs at investment banks UBS Warburg and Deutsche Bank must also have been relieved.

Both are global brands that trade among other things on their integrity and their intimate knowledge of, and compliance with, the legal and regulatory requirements of the jurisdictions in which they operate.

Justice Potter also made adverse credibility findings against the Deutsche and UBS staff who gave evidence in the High Court.

Her ruling that "on the balance of probability" an arrangement or understanding existed between the banks and Perry that Rubicon shares held in swaps would be sold back to Perry at its request implicitly charged the banks, or at least some of their staff, with knowingly breaching New Zealand law.

The Appeal Court didn't examine why the regulatory authorities didn't pick up on the implication. The banks for their part were no doubt sufficiently confident Perry would win in the Appeal Court not to feel any need to get involved.

The higher court's ruling makes sobering readering for John Grisham fans, High Court judges and the odd excitable sharebroker who are all too eager to believe investment banks are seething hotbeds of intrigue and conspiracy.

The Appeal Court's deliberations considered nine points on which Justice Potter relied to find an illegal arrangement existed. It found she should not have relied on eight of them.

The most important from the banks' point of view was her treatment as "neutral" [neither pointing to nor away from the existence of an arrangement] of evidence given by Roger Cohen, a director of equities at Deutsche's Australian office, and by David Gray, the grandly-titled head of prime broking business and hedge funds services at UBS Australia.

The Appeal Court found Cohen's evidence in particular was "central" to the whole case and was "very important evidence pointing to the non-existence of an arrangement."

Perry, conspiracy theorists note, has master agreements with UBS and Deutsche for all of its swaps. These use the standard International Swap Dealers' Association documentation.

The details of individual swap deals ­ duration, settlement terms and prices, etc ­ are then ticked off in the appropriate boxes, so to speak. Both Cohen and Gray gave evidence that their banks have policies forbidding staff to discuss these terms with swaps "counterparties" such as Perry.

Justice Potter's treatment of the bank executives' evidence as neutral was founded on what she saw as their distance from the frontline.

Both men explained how their banks divide the functions of the salesmen who deal directly with clients and take their orders, the dealers who execute those orders, and the managers who exercise control over shares held under swap arrangements.

Of Cohen, the Appeal Court said; "He might have been distant in the sense that he was not the one talking directly to the client but, given the division of functions, he was in charge of the hedge and after all it is the hedge with which we are concerned.

"It is thus difficult to see how his evidence could be described as neutral. We regard his evidence as being of central importance."

Gray's evidence was that any arrangement would have been totally inconsistent with the standard ISDA documentation governing UBS' swaps.

The UBS salespeople who must implicitly have entered into the "arrangement" with Perry could not have done so because only the traders, who have no direct contact with clients, can price swaps or deal with the shares held in hedges.

The Appeal Court did concede an overzealous salesman, knowing market reality was that the shares would be available to an uncertain client anyway, might seek to close the deal by communicating the situation in such a way as to create an "arrangement" in the legal sense, regardless of whether the salesman actually had any control over the shares' fate.

But the judges pointed out Perry was no swaps virgin and would have known exactly what it was doing. It took the deal to the banks, not the other way around, so it was hard to see why the banks would feel the need to enter an arrangement that was contrary to their policy.

Lovers of a conspiracy will be cheered to note the Appeal Court didn't think the bank's evidence was strong enough to rule out an arrangement.

The court simply thought the onus was on GPG to show "on the balance of probability" that an illegal arrangement existed.

Bluntly put, it's not impossible that half the witnesses Justice Potter heard were lying their heads off. But the law still says if you're going to allege that, you've got to be able to prove it.

The impression is that Justice Potter was simply sucked in by the web of conspiracy GPG's lawyers wove and that she ignored or treated as neutral powerful contrary evidence.

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