The COVID-19 pandemic had a serious negative impact on markets, which in turn led to a number of investments performing worse than had been expected.
In a recent case, two prominent businessmen sought to recover some of their losses by advancing a case of fraud against the wealth manager that advised them of the investments. The claims included: (i) deceit, (ii) breach of fiduciary duties and dishonest assistance, and (iii) unlawful means conspiracy.
Ultimately the claims failed, and it was suggested that there was an element of “reverse engineering” of the claim, to advance a case based on the result to be achieved, rather than on the basis of the actual facts.
The case is GI Globinvestment Ltd & Ors v XY ERS UK Limited & Ors [2025] EWHC 740 (Comm).
Brief facts
The facts are detailed and extensive, which is one of the reasons why the judgment runs to over 1400 paragraphs.
By way of very brief summary, the claimants, Matteo Cordero di Montexemolo and Luca Cordero Di Montezemolo, invested a sum exceeding €100 million in the Skew Base Fund. Luca Cordero Di Montezemolo is a prominent Italian businessman and was the Chairman of Ferrari for over 20 years.
When the Covid-19 pandemic hit in 2020, the financial markets suffered severe falls and the claimants lost around €50 million as a result of their investments collapsing.
The claimants contended that these loss-making investments were made on the advice of the first defendant, XY ERS UK Ltd (XY), a wealth management company.
They alleged that they were the victims of a substantial fraud perpetrated by XY, Mr Migani and a colleague with whom he worked closely, Mr Federico Faleschini. Mr Migani owned the corporate group to which XY belonged.
Outline of the claim in deceit
The case on deceit depended upon six representations, which the claimants say were made to them, which they say were false. One of the allegedly false representations was that there was no real risk of capital losses.
The claimants said that the defendants were aware of their investment objectives, which were to: (i) preserve capital, (ii) invest in highly liquid products, and (iii) generate modest periodic returns.
However, the defendants countered that the claimants’ true objectives were markedly less cautious than they sought to portray at trial, and they were more than willing to take significant risks as a means to pursue higher return. Overall, they contended that none of the claims based on the investment representations had any merit.
The case was “improbable”
In cases of fraud, the judge will have regard to the overall probability in the case. In this matter, Judge Richard Jacobs said that:
“When one stands back from the detail of the case based on the allegations of fraudulent investment representations, there are a number of features which in my view make the case an improbable one.”
The reasons included that:
- the claimants were provided with a lengthy document which set out in detail the investment policy that was to be applied to the assets in which they were proposing to invest. Very detailed information was provided in the Offering Memoranda, explaining the risks of the proposed investments.
- There was no evidence that XY or Mr Migani or anyone connected with him had received any kickbacks from counterparties in relation to those investments. Whilst it is true that motive is not a necessary ingredient of a claim for fraudulent misrepresentation, a party does not usually commit a fraud without a good reason to do so.
- If the Covid pandemic had not hit, with its significant impact on financial markets, the claimants would no doubt have continued to enjoy the strong returns that their investments were capable of achieving.
The claimants’ pleaded case was that there was a representation that “there was no real risk of capital losses”. Mr Justice Jacobs did not accept that this representation was in fact made. This was not the way in which XY presented the risk, and it was inconsistent with the Offering Memoranda.
Was the wealth manager ‘independent’, and did the claimants rely on that understanding?
One of the claimants’ allegations in deceit centred around the issue of the independence of XY and Mr Migani. They contended that the defendants represented that (i) XY was an independent financial advisor; and (ii) XY was in a position to and would provide unbiased advice in relation to investments.
The claimants said that but for the deceit, the claimants would never have retained XY in the first place.
Mr Justice Jacobs found that the defendants’ representations in this regard were not false. There was no evidence which indicated that, at that time, XY was in fact carrying on business other than in the way described on the website. There was no evidence that XY was in receipt of commissions or “retrocessions” from counterparties in relation to products it proposed to its clients.
Judge Jacobs said that he was “far from persuaded that the Claimants ever attached as much significance, as they now seek to do, to the importance of XY being independent, conflict-free and unbiased.” In his view, the claimants were interested in making investments which they considered to be sound and in accordance with the overall objectives as discussed with XY in the meetings. They were not averse to investing in “in-house” funds.
Fiduciary duty and dishonest assistance
The claimants submitted that XY owed fiduciary duties to them, and that these were breached by the defendants’ failure to disclose the various connections between Mr Migani and his companies and the Skew Base Fund.
It is possible for non-disclosure of “matters which ought to be revealed” to amount to fraud, when there is a fiduciary relationship.
However, in this case, there was sufficient disclosure of what really mattered. The claimants knew that that Mr Migani was the man behind the fund and the owner of the general partner. That was sufficient to mean that the claimants gave informed consent to his connections to the Skew Base Fund and there was no breach of fiduciary duty. It followed that the claim for dishonest assistance also failed.
Does a client’s relationship with a financial advisor give rise to a fiduciary duty?
An interesting point on this topic is whether a client’s relationship with a financial advisor is a fiduciary one. It is not one of the settled categories of relationship where fiduciary duties are presumed by law.
However, Cockerill J said in FM Capital Partners v Marino [2018] EWHC 1988 (Comm) that financial advisors “can (and in practice often do) occupy a fiduciary position vis-à-vis their clients”.
Mr Justice Jacobs followed that guidance in this case. Where the relationship doesn’t fall within the settled categories, the circumstances may still justify the imposition of such duties, as it did here. The claim failed not because of the lack of a fiduciary relationship, but because the fiduciary duties had not been breached.
Comment
The success of investments is of course never guaranteed, and various geopolitical and economic factors will have impacted investments over the course of the last 5 years. Those factors include the Covid-19 pandemic, spikes in oil prices, and the war in Ukraine to name a few. However, while there is a low possibility of certain risks, the risk is never zero, and sophisticated investors are deemed to understand this.
Seeking to recover losses based on an allegation of fraud is likely to be an uphill battle. The court will consider the motives of the defendants and the overall probabilities of the likelihood of fraud based on the facts. If the defendants had received kickbacks or other remuneration, then the case on motive is stronger against the defendants.
But the court will also consider the disincentives to participating in a fraud, such as potential damage to reputation, which is usually significant, particularly in circumstances where the requirement for trust is high such as when a person invests large sums of money.
The decision in this case is a welcome one for independent financial advisors and wealth managers.
