Stockbrokers being sued by credit union do not have to hand over investigation reports

A stockbroking firm being sued by a credit union over the way €5.3m was invested will not have to hand over reports of an Irish Stock Exchange investigation, the Court of Appeal has ruled.

Waterford Credit Union is suing J & E Davy over the investment in certain bonds, between January 2005 and August 2006, which it says did not guarantee the capital sum and provided no maturity date.

The Credit Union claims it would not have invested in these bonds had Davy not advised it to do so. It claims, among other things, misrepresentation, breach of contract, that Davy made a secret profit, and failed to disclose it was acting as a principal in the sale of the bonds.

Davy denies the claims.

The legal action followed an investigation by the Irish Stock Exchange which in 2009 found breaches of business rules by Davy stockbrokers.

The Irish Stock Exchange stated publicly that the investigation related to the sale of a number of perpetual Constant Maturity Swap bonds to some of its credit union clients.

It found the breaches related to the completeness of disclosure of certain information to the credit unions about the bonds and in relation to ensuring the bonds were in full compliance with the Trustee (Authorised Investment) Order, 1998.

As a result, Davy commenced a process with the credit unions involved in which most of the credit unions accepted a negotiated settlement to deal with loss of value of the bonds.

It cost Davy more than €35m, the Irish Stock Exchange said in its statement following the investigation.

Waterford Credit Union brought proceedings after it claimed it discovered the bonds it had invested in did not comply with the Trustee (Authorised Investments) Order of 1998.

In February last year, the High Court made orders that both sides make discovery of certain documentation in advance of the trial.

That included two Irish Stock Exchange reports of its investigation which Davy claimed were not relevant to the issues in this case.

Davy appealed arguing the High Court erred in his application of well-known discovery principles.

It also said the High Court did not take appropriate account of the fact that solicitors for the Credit Union had allegedly breached an implied undertaking as to confidentiality in relation to discovery of Davy documents in other proceedings.

Today, Mr Justice Michael Peart, on behalf of the three-judge Court of Appeal, said he agreed with the High Court the two Irish Stock Exchange reports were relevant to the issues in the case.

However, he could not agree with the High Court's findings in relation to the alleged breach of the solicitors' undertaking. The Court of Appeal can and should ensure that information so gained in discovery is not put to use which advances the interests of the offending party.

The Court of Appeal must as a matter of discretion refuse to order discovery of the reports, he said. This is in order to ensure Davy does not suffer litigious disadvantage and "to mark in a meaningful way the serious breach of an undertaking that occurred".