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SCMP Reporter

FORMER ChinTung Futures Ltd (CTFL) director Arthur Lai Cheuk-kwan, now chairman of Chesterfield and MKI Corp, was hit with an $83.9 million bill yesterday after being found liable for negligence by the High Court.

  While Mr Justice Bokhary stressed that there were no allegations of dishonesty on Mr Lai's part, he found Mr Lai to be in breach of his duties to CTFL when he opened and operated an account for a faceless Thai general, buying futures contracts on his behalf even as the market collapsed on Black Monday, October 19, 1987.

  Summing up, the judge said: ''The customer was accepted on the basis he would trade heavily, but without guarantee, without meaningful knowledge of him and at heavily discounted margin rates.

 ''From the outset the safeguards duty was flouted by Mr Lai. The account was opened practically without any safeguards, and permitted to remain open.

  ''On the brink of the crash Mr Lai's conduct must be considered very rash indeed.''   The judge further ruled that a stock market crash such as that which occurred on Black Monday should have been foreseeable.

  ''A crash of Doomsday proportions is beyond law, but disastrous crashes have a long history and this one was not unforeseeable simply because it set record losses for one day.

  ''Moreover, in the futures market the inability to close up positions quickly has always been accepted.''   He noted that on March 26, 1973 the index fell by 188.7 points, losing 13.3 per cent of its value in a single day. In 1987, that would have equated to a fall of some 500 points.

  ''The extent of the loss was reasonably foreseeable,'' Mr Justice Bokhary said. ''The market is an inherently volatile one. There is no basis on which a brokerage could assume it would never have a greater fall than in the past.''   He also cited witnesses, who had testified that no broker could safely ignore the possibility of a crash such as Black Monday.

  Mr Lai, who had been beneficially interested in 100 per cent of the collapsed futures firm since the summer of 1987, was sued by liquidator Mr Ian Robinson of accountant Ernst and Young for the $83.9 million bad debt, plus interest and costs.

  A further hearing is to be set to determine these amounts.

  The case, which came to the court during the most recent nose-dive of the Hang Seng Index, stems from a time when ChinTung was a major player in the securities market and was itself close to seeking a listing.

  On May 6, 1986 - the day futures made their debut on the Hongkong market - Mr Lai opened an account for a Thai person called Sukhum, who wanted to trade in futures for an unnamed Thai general through a Liberian company.

  The account was held through ChinTung Investment Services Ltd.

  This account fell heavily into the red on a number of occasions and, although Mr Lai sporadically clawed back profits and held the money against future losses, the court found that he neglected to take adequate margin deposits - thus exposing the companyto potential losses.

  Mr Justice Bokhary described futures trading as unpredictable, volatile and extremely risky, and demanding a careful approach. He said the Thai account was traded optimistically - even on Black Monday itself.

  Trading during the bull run before the crash put the Thai account into overall profit.

  ''But then came the crash,'' Mr Justice Bokhary said. On Black Monday the Hang Seng Index shed 420.86 points. Both exchanges were closed for the four days that followed. ''When the market re-opened, it closed 1,120.65 points down.''     The account was finally liquidated in November 1987, when the last of the long positions closed up. It left the account $83.9 million in deficit.

  Mr Justice Bokhary said: ''The loss of the account became the loss of the broker. CTFL was left holding the baby in the shape of a $83.9 million loss.''  He added that CTFL directors owed a duty of care and had breached this by allowing the account to be opened without safeguards. It had operated on an over-exposed basis and with insufficient margins.

  ''Mr Lai said there was great competition among brokerages for customers. He said these customers would have taken their business elsewhere if they had been asked to come up with a guarantee,'' Mr Justice Bokhary said.

  ''I have no doubt that with what happened, he wished this customer had gone elsewhere.

    ''A broker needs to know a good deal about his customer. In the present case the broker did not even know his name . . . All he knew was that he was a Thai general.''   Mr Justice Bokhary noted that the long-running saga stemmed back to a time when CTFL commanded an average 12.17 per cent slice of the entire futures market, although it was not a large company.

  The Thai account, which was not the group's biggest, represented on average 11.45 per cent of CTFL's futures business.

  On the 11 days between May and November 1987, the Thai account represented more than 10 per cent of the market. On certain days it exceeded 13 per cent.

  The judge quoted one of the witnesses, summoned for his expertise on the futures market, as saying: ''Prudent brokers were rather thin on the ground at that time.''   However, the judge said Mr Lai had a duty to earn commission and further his business, adding that a broker was not his customer's keeper - his role was to execute orders, not question their wisdom.

  Of the Thai general's bullish stance in buying up futures even on Black Monday morning, Mr Justice Bokhary said there were investors in Hongkong who were attributing the drop on Wall Street to poor US trade figures.

  As for the territory, the bulls set store by good fundamentals, while rumours of a Hongkong Bank takeover added to the buoyancy.

  Mr Justice Bokhary said: ''The Thai customer certainly seemed to think this. One proviso is that it was not for CTFL to question customers' wisdom, but it had to consider sustaining losses leaving a default.

  ''For its own safety each futures brokerage needs to have in place reasonable safeguards against customer default. And this rests on its directors. They are its guardians and must take reasonable steps to see such are in place. It might be called the safeguards duty.''         The judge declined to apportion the damages.

  A representative for the plaintiff's legal team said: ''We are delighted with the decision and we will be going on to seek both costs and interest from the defendant.'' 



Court hits trader with $83m bill