Negligent Investment Advice Victim Wins Bank Pay-out

Posted: 12th September 2012

An investor who lost a substantial sum when Lehman Brothers collapsed has been awarded compensation after being negligently advised by a bank employee that an investment in the financial markets was as safe as a cash deposit.

Adrian Rubenstein invested £1.25 million from the sale of his home in AIG's Enhanced Variable Rate Fund (EVRF) after an HSBC financial adviser told him that the only risk he was taking was that of the giant insurer defaulting and that that was ‘no risk at all’.

What the adviser didn't tell Mr Rubenstein was that his investment would be subject to market fluctuations and, when Lehman Brothers folded in September 2008, he made a capital loss of about £180,000.

Mr Rubenstein, who had told the adviser that he wanted an investment with zero risk to the capital sum, was informed that his investment was viewed by HSBC ‘as the same as cash deposited in one of our accounts’. He was also given ‘wrong and misleading’ advice that the standard ‘fall as well as rise’ warning on paperwork related to the risk of default, not the risk of market movement.

He has now triumphed in his fight for recompense from HSBC. The Court of Appeal allowed his appeal against an earlier ruling that his losses were the unforeseeable result of unprecedented market turmoil and too remote from the negligent advice he had received to justify a substantial award of compensation.

Lord Justice Rix said: ‘What connected the erroneous advice and the loss was the combination of putting Mr Rubenstein into a fund which was subject to market losses while at the same time misleading him by telling him that his investment was the same as a cash deposit, when it was not’.

The judge, sitting with Lords Justice Lloyd and Moore-Bick ruled that the advice given to Mr Rubenstein breached the Conduct of Business Rules laid down by the Financial Services Authority and was negligent.

Ordering HSBC to pay Mr Rubenstein £112,543 in compensation - along with more than £600,000 in legal costs - the judge said: ‘It was the bank's duty to protect Mr Rubenstein from exposure to market forces when he made clear that he wanted an investment which was without any risk and when the bank told him that his investment was the same as a cash deposit.’

The bank had argued that Mr Rubenstein's losses were due to ‘extraordinary and unprecedented financial turmoil’ and ‘market hysteria’ surrounding the Lehman Brothers collapse. His risk was considered minimal when he made the investment in 2005 and his losses were not reasonably foreseeable, it was submitted.

However, Lord Justice Rix said that the underlying causes of the turmoil went far beyond the demise of Lehman Brothers, stretching to a general loss of confidence in marketable securities. ‘What is new about that?’ he observed.