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Note: Mr. Powles, managing partner of the London office of a large Australian legal firm, Allen Allen & Hemsley ("Allens"), maintained a bank account in the company's name, of which the firm was unaware. The partner had, for a time, managed client funds through this secret account, sometimes for his own personal benefit. The partner used this account for a "number of financial transactions, including attempts to purchase a prime bank instrument ("pbi") ... None of the attempts to purchase a pbi was successful and, in some cases, money was lost. Moreover, in the course of those attempts, [the partner] became aware of the existence of fraudsters operating in the pbi market." Although the Bank of England had warned that a market for such securities did not exist, the partner induced a client, Nauru Phosphate Royalties Trust, to entrust US$ 8.7 million to him for the purchase of a standby letter of credit that, after a brief holding period, would be redeemable for its face-value of US$ 10 million. The partner presented a letter of introduction on Allens' letterhead to the client validating the individuals and company through which the partner planned to secure the LC. The partner gave the client the impression that its funds would be held in trust in an account managed by Allens. By secret terms that were concealed from the client, the partner arranged to retain a $150,000 commission for each LC that was purchased by his clients. The partner subsequently arranged for a transfer of US$ 8.55 million of the client's funds (after deducting his secret commission) to secure the LC. The funds were wired through several banks, ultimately passing through the Swiss banking system, where the trail of the funds ceased. The partner did not receive an LC in exchange for the funds; "the 'market' in which this transaction was to be entered into was fictitious". The client recovered US$ 8.7 million from Allens in a settlement of the firms' liability. The firm, in turn, sought to recover US$ 8.55 from its insurer, Switzerland Insurance Australia Limited ("insurer"), under an indemnity policy to indemnify Allens "against all loss ... in respect of any description of civil liability whatsoever incurred in connection with the Practice". The insurer refused to indemnify the loss, claiming that it resulted entirely from the fraud and dishonesty of the firm's managing partner of the London office and was excluded under a provision that "this Insurance shall not indemnify the Assured in respect of any liability... brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured". The firm sued the insurer for payment. The Supreme Court of New South Wales, Hunter J., awarded judgment for Allens, indicating that the illegal acts of the third parties who ultimately stole the funds were the proximate cause of the client's losses, and not the dishonest or fraudulent acts of the partner. By a unanimous decision the New South Wales Court of Appeal reversed. On appeal, the High Court of Australia affirmed the appellate court's decision, ruling that the exclusion clause shielded the insurer from liability. In finding for the insurer, the court noted that Allens' partner had acted fraudulently and dishonestly, failing in his capacity as fiduciary for the. client. In using the client's funds for his own personal gain and failing to exercise prudent management of the funds, the partner engaged in conduct sufficiently culpable to release the insurer from its indemnity obligations. "In the course of the business of practising as a solicitor, [the partner] acted as trustee of [the client's] money and agreed to act as one of its agents in buying an instrument. He therefore owed [the client] fiduciary duties, including a duty not to misuse the property he held in his fiduciary capacity and a duty not to put himself in a position where his interest and duty conflicted. He also owed a duty to use at least such due diligence and care in the management of the funds as those of ordinary prudence and vigilance would use in the management of their own affairs. He owed a duty to segregate the funds of [the client] and to hold them in an account of the kind which the [client] had instructed him to use".

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