Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (No 3)
[2020] FCA 208
•26 February 2020
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) (No 3) [2020] FCA 208
File number: VID 126 of 2018 Judge: BEACH J Date of judgment: 26 February 2020 Catchwords: CORPORATIONS – offer of derivative products – contracts for difference – margin foreign exchange contracts – offering to retail investors in Australia – financial product advice – financial services – personal product advice – general product advice – scope and application of ss 766B (1) to (4) of the Corporations Act 2001 (Cth) – obligation to act in best interests of client – scope and application of s 961B – obligation to provide advice appropriate to the client – application of s 961G – obligation to avoid conflict of interest – application of s 961J – warning concerning general advice – application of s 949A – Australian financial services licence – scope and application of s 912A(1) – failure to supervise authorised representatives – application of s 961L – agency – application of s 961K – misleading or deceptive conduct – misrepresentations – s 1041H of Corporations Act and ss 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (Cth) – statutory unconscionable conduct – scope and application of s 12CB of the ASIC Act – individual instances of unconscionable conduct – various contraventions established Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12BB, 12CA, 12CB, 12CC, 12DA, 12DB
Corporations Act 2001 (Cth) ss 760A, 761D, 761G, 763A, 764A, 766B, 766C, 910A, 911A, 911B, 912A, 915C, 916B, 916F, 923C, 941A, 946A, 949A, 961, 961B, 961D, 961E, 961G, 961J, 961K, 961L, 961Q, 1013A, 1015C, 1041H, 1311, 1317E
Cases cited: Australian Competition and Consumer Commission v Medibank Private Ltd (2018) 267 FCR 544
Australian Securities and Investments Commission v AGM Markets Pty Ltd (2018) 129 ACSR 335; [2018] FCA 1119
Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206
Australian Securities and Investments Commission v Kobelt (2019) 368 ALR 1
Australian Securities and Investments Commission v One Tech Media Ltd [2020] FCA 46
Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147
Australian Securities and Investments Commission v Westpac Securities Administration Ltd (2019) 373 ALR 455
Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392
Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199
Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525
Thorne v Kennedy (2017) 263 CLR 85
Unique International College Pty Ltd v Australian Competition and Consumer Commission (2018) 362 ALR 66
Date of hearing: 1, 2, 7 and 11 October 2019 Date of last submissions: 24 October 2019 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 535 Counsel for the Applicant: Mr JP Moore QC and Mr T Chalke Solicitor for the Applicant: Norton Rose Fulbright Counsel for the First Defendant: The First Defendant did not appear Counsel for the Third Defendant: Mr MGR Gronow QC, Ms L Collaris and Mr A Christopherson Solicitor for the Third Defendant: Piper Alderman Counsel for the Fifth Defendant: Mr JL Evans QC and Mr P Miller Solicitor for the Fifth Defendant: O’Loughlin Westhoff Counsel for the Sixth Defendant: The Sixth Defendant did not appear ORDERS
VID 126 of 2018 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Applicant
AND: AGM MARKETS PTY LTD (ACN 158 706 766) (IN LIQUIDATION)
First Defendant
OT MARKETS PTY LTD (ACN 621 714 181) (IN LIQUIDATION)
Third Defendant
OZIFIN TECH PTY LTD (ACN 618 038 396) (IN LIQUIDATION) (and another named in the Schedule)
Fifth Defendant
JUDGE:
BEACH J
DATE OF ORDER:
26 FEBRUARY 2020
THE COURT ORDERS THAT:
1.Within 21 days of the date of these orders, each party file and serve proposed minutes of orders and short submissions (limited to 3 pages each) to give effect to these reasons.
2.Costs reserved.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BEACH J:
The present proceeding concerns the activities of the first defendant (AGM), the third defendant (OT) and the fifth defendant (Ozifin) and the promotion of derivative instruments. From the latter part of 2017 until the middle of 2018, each of the three defendants operated separate businesses in Australia that offered over-the-counter (OTC) derivative products being contracts for difference (CFDs) including margin foreign exchange contracts (FX contracts) to retail investors in Australia. They provided retail investors an online platform on which to invest in those products and also provided financial product advice to them by telephone and email (the financial services). That advice was provided by account managers (AMs) who were engaged on behalf of the defendants, but who were based overseas. The AMs engaged on behalf of AGM were based in Israel. The AMs engaged on behalf of OT were based in Cyprus and later the Philippines. And the AMs engaged on behalf of Ozifin were based in Cyprus.
ASIC alleges that by the interactions between the AMs and those retail investors, each of the defendants contravened various provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). And it has sought against each defendant, inter-alia:
(a)declarations of contravention;
(b)orders that the defendants:
(i)pay pecuniary penalties to the Commonwealth; and
(ii)make payments to those retail investors being their clients who suffered losses arising from the contraventions by way of non-party redress; and
(c)orders that the defendants be wound up on the just and equitable ground.
The trial before me proceeded on the issue of liability only. Moreover, and as I will explain later, it is now not necessary to make any orders concerning the imposition of any external administration.
The specific allegations that ASIC maintains against the three defendants can be separated into two broad categories of contraventions.
The first set of contraventions are said to arise from the interactions between AMs engaged by or on behalf of each of the three defendants and 17 investors on whose affidavit evidence ASIC has relied (witness investors) and 24 additional investors (additional investors); in relation to the latter, ASIC has relied on the transcripts of conversations between AMs and the additional investors. The witness investors are:
(a)four investors who were clients of AGM’s “Alphatrade” business;
(b)six investors who were clients of OT’s “OT Capital” business; and
(c)seven investors who were clients of Ozifin’s “TradeFinancial” business.
ASIC’s case concerning these contraventions is that each defendant with respect to their relevant investors:
(a)provided personal advice within the meaning of s 766B(3) of the Corporations Act to each of those investors when they were not licensed or otherwise entitled to do so;
(b)made representations to those investors about the operation of and risks associated with the CFDs and FX contracts that were false, misleading or deceptive; and
(c)engaged in conduct in relation to each witness investor as well as additional investors that was, in all the circumstances, unconscionable in contravention of s 12CB of the ASIC Act.
ASIC also says that the AMs who provided the personal advice to each of the investors failed to take the steps that a reasonable person in the situation of those AMs would have taken to ensure that they acted in the best interests of the investors and did so when it would not have been reasonable to conclude that the advice was appropriate to each such investor.
In addition, ASIC says that the conduct by OT and Ozifin that constituted such contraventions was conduct undertaken on behalf of AGM. Further, ASIC says that AGM was knowingly involved in the contraventions by OT and Ozifin that arose from the said conduct.
Further, it is said that each of the defendants contravened other provisions of the Corporations Act that applied to their provision of the financial services. In particular, it is said that if the advice statements identified in ASIC’s further amended points of claim (FAPOC) each constituted financial product advice, but did not constitute personal financial advice and therefore constituted general advice, then at no stage did any of the defendants provide a general advice warning as required by s 949A(2).
Further, it is said that the defendants each engaged in a system of conduct or pattern of behaviour that was in all the circumstances unconscionable.
The second set of contraventions concern what I would describe as compliance contraventions. ASIC says that AGM as the holder of an Australian Financial Services Licence (AFSL) failed to take the steps necessary to ensure that the financial services provided by OT and Ozifin as its authorised representatives and the AMs engaged by or on behalf of the defendants were provided in accordance with the requirements of the financial services laws. ASIC says that AGM’s compliance systems and their implementation were insufficient to meet its obligations to properly supervise the conduct of its representatives. It is said that the scale of the misconduct revealed by the AMs’ interactions with the investors establishes the insufficiency of AGM’s compliance systems.
Now as I have already said, ASIC has relied on 17 affidavits relating to the conduct of the defendants towards the 17 witness investors including transcripts of telephone calls and emails between the witness investors and the AMs. ASIC has also relied on further documentary evidence of communications between those investors and the AMs, including extracts from the defendants’ customer relationship management databases. In addition, ASIC has also relied on the transcripts of conversations between AMs engaged by or on behalf of the defendants and 24 additional investors. Of those additional investors, 11 were clients of AGM, eight were clients of OT, four were clients of Ozifin and one was a client of both OT and Ozifin.
Further, ASIC has relied on the evidence of two former employees of IBD Marketing Inc (IBD). IBD was engaged by OT to provide introductory and customer services, and what have been described as “retention” services. In particular, Mr Bryan Cecilio was employed by IBD during the relevant period, first in a role described by OT as an “opening agent”, and later as an AM in a department described by IBD as “retention”. Mr Cecilio provided evidence of the operation of AM services by IBD on behalf of OT and by extension AGM. He said that the purposes pursued by the AMs engaged by IBD were to maximise the deposits that clients made to their OT trading accounts, and to have the clients of OT open multiple CFD and/or FX contract positions. Mr Cecilio’s evidence was that those purposes were communicated to the AMs engaged by IBD in training conducted by IBD, and by the team leaders and senior AMs to whom the AMs engaged by IBD on behalf of OT were subordinate. The other employee witness was Mr Carlos Nabata, who was employed by IBD in customer service.
In addition, ASIC has also relied on two expert reports of Mr John Blundell, an expert in the derivatives in question. Mr Blundell provided evidence regarding the operation of the CFDs and FX contracts that were issued to the clients of the defendants. He also gave evidence that the AMs who provided what ASIC says was personal advice to a sample of the witness investors did not take all steps that they ought to have taken to ensure that they acted in the best interests of those clients; further, they provided advice that it was not reasonable to conclude was appropriate to those clients. Further, he gave evidence of the steps that AGM ought to have taken but did not take to ensure that its representatives complied with the requirements of the Corporations Act and the ASIC Act.
In summary, I have largely accepted ASIC’s case. But in order to explain why I have done so, it is necessary to descend into the detail of the defendants’ activities to give them their proper characterisation. Further, in assessing their consequences I have only needed to resort to the applicable statutory language construed in context. No resort to meta-themes has been necessary. Any commercial judge tempted to engage in overly nuanced intellectualisation in this area should heed what Francis Bacon warned about philosophers: “their discourses are as the stars, which give little light because they are so high.” But “delusive exactness”, to use Oliver Wendell Holmes’ robust phrase, is also to be avoided.
FACTUAL BACKGROUND
Let me begin with the defendants and the structure of their operations.
(a) Structural and operational aspects
From 2 October 2012 until 31 December 2018, AGM was the holder of an AFSL. The AFSL permitted AGM to:
(a)provide general financial product advice in derivatives and foreign exchange products, but not personal advice;
(b)deal in derivatives and foreign exchange products; and
(c)make a market in derivatives and foreign exchange products to wholesale and retail clients.
On 5 November 2018, ASIC made a decision to cancel the AFSL pursuant to s 915C(1) of the Corporations Act, although the cancellation only took effect on 31 December 2018. The stay of the cancellation was intended to allow the continued operation of AGM’s dispute resolution process and any compensation arrangements, and to allow clients with existing positions to close them.
Until 16 April 2018, each of OT and Ozifin was a corporate authorised representative of AGM. OT was a party to a corporate authorised representative agreement (CAR agreement) with AGM dated 18 September 2017. AGM cancelled OT’s authorisation on 16 April 2018. Ozifin was a party to a CAR agreement with AGM dated 13 June 2017. AGM cancelled Ozifin’s authorisation on 16 April 2018.
The defendants provided financial services to retail investors in Australia: (a) in the case of AGM, under the business name “Alpha Trade”; (b) in the case of OT, under the business name “OT Capital”; and (c) in the case of Ozifin, under the business name “TradeFinancial”.
As I have indicated, each of the defendants operated businesses dealing in financial products, being FX contracts and CFDs. They provided advice to retail clients in Australia in relation to those products.
A CFD is an agreement to exchange, at the closing of the contract, the difference between the opening and closing price of the underlying asset, multiplied by the number of units of that asset detailed in the contract. A CFD essentially allows a person to bet on whether the value of the underlying asset will increase or decrease over time. An FX contract is a form of CFD that allows a person to take a position on the change in value over time of one currency relative to another.
The precise terms of the contract that represents a CFD or FX contract are determined by the disclosure documents provided by the issuer of the product. Nevertheless, under both CFDs and FX contracts, investors are exposed to movements in the value of the underlying asset, without having to purchase the asset itself. CFDs and FX contracts are highly leveraged. They require the investor initially to pay only a fraction of the price of the value of the underlying asset or currency to open the position. The investor is exposed, however, to the total of the movement in the price of the underlying asset or currency. Whilst those products can thereby be used to magnify profits relative to the initial investment, they have a commensurate potential to magnify losses.
As I have indicated, AGM carried on the business of dealing in FX contracts and CFDs pursuant to its AFSL. OT and Ozifin carried on the business of dealing in FX contracts and CFDs pursuant to the CAR agreements. The defendants dealt in FX contracts and CFDs because they issued those products to their clients, and because they arranged for a person including each of the investors to acquire those products.
There is an issue in this proceeding as to which of the defendants issued the FX contracts and CFDs to the clients of OT and Ozifin, and in particular whether OT and Ozifin issued those products to their clients on OT’s and Ozifin’s own behalf or on behalf of AGM. To some extent, the question of which entity issued the CFDs offered to clients of OT and Ozifin is resolved by considering the terms of the relevant product disclosure statements (PDSs) and their terms and conditions, as well as the terms of the CAR agreements between AGM and OT, and AGM and Ozifin. On the evidence I am prepared to accept the following.
From at least 22 December 2016 until ASIC cancelled its AFSL, AGM, under its Alpha Trade business name, issued CFDs and FX contracts to retail clients in Australia pursuant to a PDS and account terms and conditions dated 22 December 2016.
From sometime in October 2017 until 16 April 2018, when AGM cancelled the CAR agreement with it, OT operated a business of issuing CFDs and FX contracts to retail clients in Australia under its OT Capital business name and pursuant to:
(a)PDSs dated October 2017 (the first OT PDS) and December 2017 (the second OT PDS); and
(b)account terms dated 9 October 2017 (the first OT terms) and 22 December 2017 (the second OT terms).
Now according to the first OT PDS and first OT terms, OT issued the FX contracts and CFDs to the clients of OT. But according to the second OT PDS and second OT terms, AGM issued those products to the clients of OT. I am prepared to accept the reality of that division.
From sometime in October 2017 until 16 April 2018, when AGM cancelled the CAR agreement with it, Ozifin operated a business of issuing CFDs and FX contracts to retail clients in Australia under its TradeFinancial business name and pursuant to:
(a)PDSs dated October 2017 (the first Ozifin PDS) and November 2017 (the second Ozifin PDS); and
(b)two sets of undated account terms (the first Ozifin terms and the second Ozifin terms).
Now whilst there is some internal inconsistency in the documents and so some uncertainty, according to the first Ozifin PDS and first Ozifin terms, Ozifin purported to issue the FX contracts and CFDs to the clients of Ozifin. But according to the second Ozifin PDS and second Ozifin terms, AGM issued those products. Again I am prepared to accept the reality of that division.
Now it is questionable whether I treat the arrangements for issuing as if they were formally reflected in the documents or whether I treat all CFDs and FX contracts as having been issued by AGM whether directly or on its behalf by Ozifin and OT. I note that on one view and given the AFSL authorisation, it would seem that only AGM had the right to issue. But I will proceed on the basis that the documents reflected the true position such that each of AGM, OT and Ozifin can from time to time be taken to have issued CFDs and FX contracts.
Let me deal with another matter. The terms of the CAR agreements determine the proportion of the revenue generated by positions opened by the clients of OT and Ozifin to which AGM was entitled, and that to which OT or Ozifin were entitled. By the OT CAR agreement, AGM was entitled to between 5% and 7% of the monthly “Client P&L” generated by OT. By the Ozifin CAR agreement, AGM was entitled to 7% of the monthly “CAR Client P&L” generated by Ozifin.
Now neither of the CAR agreements defined the term “Client P&L”. But in my view, the term “Client P&L” should be understood to mean the total of client funds deposited and lost via trading, net of any profits realised by clients from their trading.
Further, whilst the CAR agreements do not say so explicitly, OT and Ozifin were each entitled by the terms of their respective CAR agreements to so much of the Client P&L to which AGM was not entitled.
In the result:
(a)OT was entitled to between 93% and 95% of the monthly Client P&L from positions opened by its clients; and
(b)Ozifin was entitled to 93% of the monthly Client P&L from positions opened by its clients.
In summary, until December 2017 and November 2017 respectively, OT and Ozifin, and after those dates, AGM, issued the CFDs and FX contracts to, and was therefore the counterparty to the contracts with, the clients of OT and Ozifin respectively.
Further, at all relevant times:
(a)AGM was entitled to between 5% and 7% of the revenue generated by reason of clients of OT and Ozifin experiencing crystallised losses; and
(b)OT and Ozifin were entitled to the balance of the revenue so generated.
Further, AGM was the counterparty to CFDs and FX contracts issued to clients of its ‘Alphatrade’ business. Therefore, and subject to the steps undertaken by AGM to hedge positions opened by its clients, AGM generated revenue when its clients suffered losses on positions that they had opened.
Further, I should make another point. On the evidence, I am not clear as to whether the defendants gave the PDSs and other disclosure documents published by the defendants to their clients as required by s 1015C in the case of the PDSs, and as required by s 941A in the case of the financial services guide. But they were nevertheless available on the relevant defendants’ websites. Further, I am prepared to accept that as a matter of contract, they governed the issue of CFDs and FX contracts to clients.
Let me now further elaborate on some specific matters.
First, let me say something about trading platforms.
Each of AGM, OT and Ozifin provided a web-based trading platform that clients used to open and close margin FX contracts and CFD positions. AGM, OT and Ozifin used various means to attract clients, including web sites and advertising on the internet and social media.
After making an initial deposit with the relevant company, clients were contacted by an AM engaged on behalf of the relevant defendant.
Each of Ozifin, OT and AGM offered their clients “bonuses” in the form of an increase to the balance of the client’s account. The increase in the clients’ account balance effected by the bonuses improved the client’s margin position, and could therefore be used to avoid having to close existing positions that had moved against a client or could be used to open additional and/or larger positions. AMs engaged by Ozifin and/or AGM represented to clients that the AM could arrange for a bonus to be paid to the client’s account. But the terms upon which Ozifin and AGM offered those bonuses meant that clients could not withdraw the bonus funds until they had opened a certain number of positions or a certain period of time had elapsed.
AMs engaged by OT and Ozifin were based in overseas call centres. As I have said, in the case of OT the AMs were based in Cyprus and the Philippines. In the case of Ozifin they were based in Cyprus.
People working in those overseas call centres contacted retail clients in Australia. In addition to assisting clients to download trading software and to operate that software, call centre staff provided financial product advice to retail clients in Australia in relation to FX contracts and CFDs, including giving personal advice. Further, they encouraged or persuaded retail clients to deposit further funds into the trading accounts that they had established with the relevant company. Further, in some instances, they encouraged the clients to provide remote access to the client’s computer, and asked the client to open their online banking system so that the AM could assess the funds available to retail clients.
As I say, each of the defendants provided to their clients an online trading platform that those clients used to open, monitor and close CFDs and FX contracts, and by which the clients could monitor the balance, equity, margin and free margin in their accounts. AGM clients used the MetaTrader 4 platform, which could be used to open and close CFD or FX contract positions. OT clients also used the MetaTrader 4 platform, which included for each product on the platform a candle chart. Ozifin’s trading platform was on the TradeFinancial website. The TradeFinancial website included a feature whereby Trading Central signals would appear in a message that scrolled across the top of the website.
Second, AGM and OT used software to view and access clients’ computers. Indeed, they instructed clients to download that software during early discussions with them. The software, typically a program called TeamViewer, allowed the defendants’ representatives to view the client’s computer screen remotely, and move a cursor around on each client’s screen. For AGM, it was also used to control clients’ computers.
The defendants used this software not only to view what clients were doing on the trading platforms, but also to:
(a)view the clients’ personal financial information on their online banking accounts and use that information to persuade clients to deposit more funds with the defendant;
(b)direct the client to effect transfers of funds from the client’s online banking system to the client’s trading account; and
(c)direct clients as to what CFD and FX contracts to open, and how to open those positions.
Third, AGM engaged Falcon IC&T Limited (Falcon) to provide financial services to customers of AGM. The AMs who spoke with retail clients of AGM in Australia were engaged by or on behalf of Falcon.
Now AGM has sought to avoid responsibility for any conduct that amounts to a contravention undertaken by an AM engaged by Falcon. It says that its agreement with Falcon prohibited Falcon from giving personal advice or otherwise acting contrary to law. So, according to AGM, if AMs engaged by Falcon did give personal advice or otherwise acted contrary to law when dealing with AGM’s customers, AGM cannot be made liable for that misconduct. But in my view any mere prohibition in the agreement between AGM and Falcon against conduct that may contravene the law does not of itself relieve AGM of responsibility for conduct undertaken on AGM’s behalf by Falcon.
Fourth, on 1 November 2017, OT entered into an agreement with IBD by which IBD agreed to provide “marketing” services to OT. But regardless of the specific services described in that agreement, AMs engaged by IBD provided financial services to clients of OT. Indeed, in my view OT appointed IBD to provide, inter-alia, account management and customer relations services to customers of OT. Moreover, the evidence of the interactions between AMs engaged by IBD in the Philippines and the customers of OT reveals that those AMs provided financial product advice to clients in Australia, including personal advice. Indeed, it would seem from the evidence before me that the conduct of the AMs engaged by IBD, and who contacted clients of OT in Australia, was calculated to increase the quantum of deposits that clients of OT made to their OT trading accounts.
Fifth, let me say something briefly at this point concerning AGM’s compliance systems.
AGM, OT and Ozifin purported to provide financial services to their clients in Australia pursuant to AGM’s AFSL. As the holder of the AFSL, AGM was required to meet the general obligations set out in s 912A of the Corporations Act. Those obligations included ensuring that the financial services covered by that licence were provided efficiently, honestly and fairly (s 912A(1)(a)), and an obligation on the part of AGM to take reasonable steps to ensure that its representatives complied with the financial services laws (s 912A(1)(ca)). Indeed, it was a condition of the AFSL that AGM establish and maintain compliance measures that ensured, as far as was reasonably practicable, that AGM complied with the provisions of the financial services laws. Now in what purported to be compliance with that obligation, AGM had in place a written compliance plan, and various associated documents. Further, apart from providing various policy documents to OT and Ozifin, AGM took some steps to discharge its compliance obligations. Various employees of AGM were tasked with listening to recordings of between 5 and 10 calls each week between AMs engaged by or on behalf of each defendant, and the clients of those defendants. Further, from January 2018, AGM prepared daily compliance reports, and sent some correspondence to Ozifin regarding a limited number of deficiencies that the compliance officers identified in the calls between the AMs and clients. Further, some of the deficiencies identified by the compliance officers engaged by AGM related to the description provided to clients of the risks associated with investment in the relevant products.
I would say now, although I will return to this later, that AGM’s compliance systems and their implementation were insufficient to satisfy its statutory obligations under s 912A.
Let me now say something further about derivatives and how they operated in the present context.
(b) Operation of derivatives
When a client opened any position in a CFD or FX contract, all of the funds in that client’s account were exposed to adverse price movements in the referenced underlying asset. The loss was not limited to the initial margin payment that the client made to open the position. In addition, the risk was also not limited solely to the amount the client had deposited. A client could lose more than they deposited.
A client’s trading account could enter a negative balance when one or more of the client’s open positions moved quickly against them. If the price of the underlying reference asset was rising or falling rapidly, the relevant defendant may not have been able to close the positions quickly enough. This was because in rapidly moving markets, prices moved quickly and could often ‘gap’ up or down, which was where prices could jump from one level to the next, for example from $10 down to $9, and miss the price levels in between. The price at which the position was closed may have used up all of the margin posted against the position and then some or all of the available funds that were also deposited in the account. This could then place the account into a negative balance. The client would normally then be obliged to cover any negative balance on the account by making further deposits.
The CFD and FX contracts provided by the defendants were leveraged products. Only a small proportion of the value of the underlying asset needed to be paid to gain exposure to that asset. For example, a leverage of 1:100 means that for every $1 used to open a position, the client will have a $100 exposure to that asset. If the client wanted to have $1000 exposure to the asset, then they would pay (or post as margin) $10 to open the position.
In the present case, the client was required to hold a minimum amount of margin available as a deposit within the trading account to maintain the position that they had opened. The margin was posted against the open position to ensure any fluctuations in price, particularly negative fluctuations, could be met by the funds posted as margin. How much needed to be maintained depended upon the underlying asset and the terms of the entity providing the product.
The following description sets out a short sequence of events that could occur when a client opened a losing CFD position:
(a)Assume a client opened a trading account.
(b)The client then placed an opening CFD trade.
(c)The position moved against the client, which started to reduce the amount of available margin in the account.
(d)The position continued to move against the client. Assume the available funds were now below the 100% required margin level to maintain the position. The client could then either close the position and accept the loss, or put additional funds into the account to increase the amount of available margin in the account to keep the position open.
(e)Assume the client deposited additional funds, but the position moved quickly against the client again. The margin level may then have reached the trigger point for a margin call to be made (e.g. 80% of the required margin level).
(f)The entity could then make a margin call and move to close the position, liquidating the loss for the client.
(g)Indeed, the position could have moved so quickly against the client that by the time the margin call was made, all of the available funds in the account could have been used and the account could then have a negative balance.
The process of making a margin call is designed to limit the potential losses of clients to those funds deposited in the account. However, in fast moving markets the losses may have accumulated so quickly that the account moves in to a negative balance. As I say, the price movement against the client positions first erodes the margin posted, then moves on to use up any other funds in the account and finally could move into a negative position if the position is not closed in time.
Now by depositing extra funds, the client may be able to maintain the open positions for longer if the prices move against them. The client will have a larger amount of available margin to cover any losses on the positions. But the provision of extra funds does not change the risk being taken by the client to hold that position. If the client ‘tops up’ their account due to a low margin level, the client is also placing those additional funds at risk against the open position(s). There is no reduction in the level of risk taken by the client. If anything the risk has become greater as a larger amount of funds have been put at stake.
Let me turn to the position of the issuer.
An issuer of CFD and FX contracts may earn revenue by one of four means, namely, spreads, commissions, fees and by not completely hedging the clients’ open positions but managing the issuer’s risk on a ‘B book’ strategy.
First, an issuer can earn revenue using the spreads that it offers for its products. For example, if a price is provided by a liquidity provider to buy/sell BHP shares at 20.00/20.03, the issuer could adjust this price to 19.99/20.04 for its clients. The issuer will therefore make money from the extra cents provided when widening the spread of the price to the clients.
Second, an issuer can earn revenue from commissions or a one-off charge per transaction. For example, some issuers may charge $5 per transaction commission on each individual equity CFD position taken.
Third, an issuer can also earn revenue from the various fees and charges it can impose on clients for general account maintenance. For AGM, such fees and charges included roll-over fees (the charge for carrying positions overnight), finance charges and withdrawal fees.
Fourth, an issuer can also earn revenue from its hedging strategy. As was explained in the evidence, there are two types of strategies, namely, an A Book strategy and a B Book strategy. The A book strategy hedges exactly all of its client open positions. This may be done by hedging each and every position, or by aggregating all client positions in an asset, netting down and then hedging the net position. A B Book strategy involves placing some or all client positions into a separate ledger and then either hedging all or part of those clients’ positions. Now it may be the case that the B Book is naturally balanced, and little hedging is required to manage the risk to the issuer. The issuer may intentionally not hedge the positions or only hedge positions when certain risk tolerances have been met. A naturally balanced B Book is where all of the long (buy) positions aggregated together, match all of the short (sold) positions aggregated together; for this scenario the buy positions roughly match the sell positions of the clients.
There are three possible combinations when using these strategies; a sole A Book strategy, a sole B Book strategy or a combined A and B Book strategy.
A sole A Book strategy will automatically hedge all of its clients’ open positions and represent, to a certain degree, a risk-free strategy for the issuer regarding client exposure to market fluctuations.
A sole B Book strategy does not automatically hedge its clients’ open positions. It places all positions into the B Book and then decisions are made by the issuer on how to best manage those positions, by either hedging or not depending upon its risk appetite. If it does not hedge the open positions, then the issuer will have direct exposure to market price fluctuations. When this is the case, if the clients’ positions earn money then the issuer will lose funds, but if the client loses then the issuer gains funds.
A combination A and B Book strategy uses both methods to varying degrees. An issuer may automatically hedge the positions of clients that it deems to be high risk and as such place those positions into its A Book. But for other clients it could place positions into its B Book and actively manage the risk of that exposure to market fluctuations. Further, it may be that certain stipulated risk levels are put in place to prevent the issuer from being too exposed to the market, e.g. only 10% of the B Book is allowed to be unhedged, with the rest being hedged.
On the evidence before me it would seem that AGM utilised a combined A and B Book strategy. As I have said, this would allow AGM to fully hedge certain client positions in its A Book, and partially hedge other client positions in its B Book. Those client positions that remained unhedged would cause a loss to AGM should the client make a profit on the position; alternatively, should a client have lost on an unhedged position, then AGM would have generated revenue from it.
It follows from what I have said that if AGM did not hedge any of its open client positions, then it would be 100% exposed to fluctuations in market prices but in the opposite direction to its clients. If prices moved in favour of the clients, this would be at a cost to AGM, and vice versa. Clearly, this would be a high-risk strategy for any CFD and FX contract issuer to undertake to be completely unhedged including with no natural hedge.
Now the terms upon which AGM, OT and Ozifin dealt in CFDs and FX contracts provided that each was entitled to hedge client transactions by opening a similar transaction in the name of the relevant defendant with a hedge counterparty. Moreover, in the case of OT and Ozifin, funds deposited by clients could be used for that purpose.
Now the terms and conditions on which AGM, OT and Ozifin provided financial services did not provide for clients to pay any form of commission. That being the case, AGM, OT and Ozifin were able to generate revenue in two ways.
First, if the relevant entity did not hedge positions opened by clients, they could generate revenue by the position moving against the client. This was because in the present case the relevant defendant was the counterparty to the positions opened by their clients.
Second, if the relevant entity did hedge positions opened by clients, they could generate revenue on the spread between the position opened by the client and the hedge position opened by the relevant defendant.
But despite all of this, clients of AGM, OT and Ozifin were often told that it was only if the client made money that AGM, OT and Ozifin also made money or that the income of AGM, OT and Ozifin depended on the volume of trades placed by the clients.
(c) Events in the course of these proceedings
Let me now say something about the present proceedings.
On 9 February 2018, ASIC filed an originating process seeking ex parte orders freezing certain bank accounts of AGM, OT and Ozifin, and restraining travel by directors of AGM and OT.
On 12 February 2018 at an ex parte hearing, I made orders:
(a)freezing funds standing to the credit of two Commonwealth Bank of Australia accounts held by AGM being an OT client money account held by AGM and an Ozifin client money account held by AGM; and
(b)imposing travel restrictions on the then second defendant Mr Yossef Ashkenazi, at that time a director and the CEO of AGM, and the then fourth defendant Mr Guy Stein, at that time a director of OT.
On 20 February 2018 in respect of AGM and OT and on 23 February 2018 in respect of Ozifin, I made orders varying the terms of the freezing orders with respect to the use of funds from the said accounts.
On 7 March 2018, ASIC filed an interlocutory process seeking the appointment of a receiver and manager to each of AGM, OT and Ozifin. This interlocutory process was later amended to include an application for the appointment of a provisional liquidator. I subsequently declined to make such orders (see Australian Securities and Investments Commission v AGM Markets Pty Ltd (2018) 129 ACSR 335; [2018] FCA 1119).
On 3 April 2018, Mr Paul Tsangaris became a director of AGM and Mr Ashkenazi ceased as a director of AGM. By that time Falcon had ceased to provide call centre services to the Alphatrade business operated by AGM. At around the same time, Mr Tsangaris became the CEO of AGM. Whilst Mr Ashkenazi did not at that time formally resign as CEO, he did not have any functional role as CEO after Mr Tsangaris’s appointment.
Later, ASIC filed and served an amended originating process which sought orders that each of AGM, OT and Ozifin be wound up on the “just and equitable” ground.
It is not necessary beyond this point to detail the further procedural steps that were taken up to trial.
As at the date of trial at which, I might add, AGM did not appear:
(a)the current sole director of AGM was Gary Tseytlin; and
(b)Yogi Wealth Pty Ltd was the sole shareholder of AGM.
As at the date of trial:
(a)the current sole director of OT was Guy Stein; and
(b)X.O Milestones Holdings Ltd (X.O) based in London, United Kingdom was the sole shareholder.
On 27 September 2019, pursuant to s 436A of the Corporations Act, Mr Mathew Gollant of Courtney Jones & Associates was appointed as voluntary administrator to OT. The voluntary administrator was represented before me at trial.
As at the date of trial:
(a)the current sole director of Ozifin was Brendan Gunn; and
(b)Corfenix Limited based in Hong Kong was the sole shareholder of Ozifin.
On 29 September 2019, the sole shareholder of Ozifin resolved to appoint Richard Albarran, Brent Kijurina and Richard Lawrence of Hall Chadwick as liquidators of Ozifin. These liquidators were represented before me at trial.
At trial, ASIC sought orders seeking to have the one set of liquidators appointed to all three defendants. ASIC was concerned that there were a number of “behind the scenes” connections between AGM, OT and Ozifin. ASIC was concerned to ensure that there was a thorough investigation into the affairs of the defendants and their respective officers. ASIC anticipated that investigations would need to be conducted to determine:
(a)whether there had been any breaches of directors’ duties;
(b)whether there were any voidable transactions that could be recovered; and
(c)whether the funds paid by current or former clients of some or all of the defendants were held on constructive trust for those clients.
ASIC sought orders to the effect that John Ross Lindholm and George Georges of KPMG, both official and registered liquidators, be appointed to each of AGM, OT and Ozifin.
I did not accede to this application for the reasons I gave orally at the hearing; it is unnecessary to detail these reasons at this point. Rather, I made the following orders which had the effect of imposing liquidation on each of AGM, OT and Ozifin, but with separate sets of liquidators:
1.Pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth), AGM Markets Pty Ltd be wound up.
2.Pursuant to s 472(1) of the Corporations Act, John Ross Lindholm and George Georges, official liquidators, be appointed as joint and several liquidators of AGM Markets Pty Ltd.
3.Pursuant to s 447A of the Corporations Act and s90-15 of the Insolvency Practice Schedule (Corporations), the administration of OT Markets Pty Ltd (administrator appointed) end forthwith.
4.Pursuant to s 461(1)(k) of the Corporations Act, OT Markets Pty Ltd be wound up.
5.Pursuant to s 472(1) of the Corporations Act, Matthew Gollant, an official liquidator, be appointed liquidator of OT Markets Pty Ltd.
6.Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), the voluntary liquidation of Ozifin Tech Pty Ltd (in liquidation) is terminated.
7.Pursuant to s 461(1)(k) of the Corporations Act, Ozifin Tech Pty Ltd be wound up.
8.Pursuant to s 472(1) of the Corporations Act, Richard Albarran, Brent Kijurina and Richard Lawrence, each an official liquidator, be appointed as joint and several liquidators of Ozifin Tech Pty Ltd.
9.ASIC be granted leave to proceed in proceeding VID126/2018 in accordance with s 471B of the Corporations Act.
I should say that I have taken steps designed to ensure that there is co-operation between the different sets of liquidators in terms of information flows and investigations, costs being efficiently incurred, and trust questions and any conflicts questions between the different sets of interests being first made the subject of applications for advice or directions from this Court, with notice to ASIC. I should also note that on 17 February 2020 I discharged various freezing orders.
Let me now turn to ASIC’s case and deal with the first set of contraventions.
INVESTOR CONTRAVENTIONS
The conduct that ASIC says gives rise to the investor contraventions arises from interactions between AMs of each of the defendants and each of the investors including what the AMs said to the investors.
There is apparently no dispute between the parties that the AMs said to the investors the things that have been summarised by ASIC, with some exceptions. Instead, determination of whether those things amount to the contraventions alleged by ASIC depends on the characterisation of what was said by the AMs to those clients.
There are, relevantly, four categories of contraventions.
First, it is said that the defendants, by the AMs, gave or directed personal advice to the investors within the meaning of s 766B(3) of the Corporations Act. The statements that constituted such advice can be divided into statements made to each of the investors to the effect that those clients should:
(a)take CFD or FX contract positions, whether by making statements to the effect that the clients should open, close or maintain:
(i)specific positions identified by the AMs (position statements); or
(ii)positions in accordance with indicators that were sourced from, in the case of:
A.AGM and OT, a third party website known as Investing.com; and
B.Ozifin, a third party organisation known as Trading Central, (signal provider statements);
(b)deposit further funds to their trading account (deposit statement); or
(c)adopt a particular trading strategy (trading strategy statement).
I will refer to the position statements, signal provider statements, deposit statements and trading strategy statements collectively as advice statements.
ASIC says that the investors made investments in CFDs and FX contracts on the basis of the advice provided to them by the AMs and that such advice was personal advice. It says that the AMs knew sufficient details of the investors’ resources, needs and objectives to engender a reasonable expectation that those matters would be taken into account. But none of the defendants were licensed to give personal advice. Further, ASIC says that even if the advice was merely general advice, the AMs failed to give the statutorily mandated warning each time the advice was given. The warning was not given by the AMs at all during any telephone call. Further, the fine print disclosure in some documents and emails sent to the clients was insufficient, so ASIC says, to meet the statutory requirement to give the warning each time advice was given.
Second, ASIC says that the AMs who made the advice statements:
(a)were providers of personal advice to the investors constituted by each of those statements within the meaning of s 961(2);
(b)failed to take the steps necessary to ensure that the advice that they provided to the investors was in each of the investor’s best interest, in contravention of s 961B; and
(c)provided advice to the investors that it was not reasonable to conclude was appropriate to those clients, in contravention of s 961G.
Moreover, it is said that the AMs who made the advice statements did so as representatives of AGM within the meaning of s 910A. Accordingly, it is said that AGM contravened s 961K.
Third, ASIC says that the AMs made statements to various investors that constituted representations concerning:
(a)in the case of AGM and Ozifin, the relative risk of investing in the products offered by the defendants compared with an equivalent investment in equities (equities risk representation);
(b)the risks associated with depositing additional funds to the clients’ trading accounts (money risk representation);
(c)in the case of Ozifin, the veracity of positions recommended to a client as being based on indicators (analysis representation);
(d)the circumstances in which the defendants would earn revenue from positions opened by the client (revenue representation);
(e)the prospect of earning particular profits from trading (profit representation);
(f)the operation of the accounts opened by the clients (client account representation);
(g)the formulation by the AMs of investment plans for investors (plan representation); and
(h)the prospect that positions that had moved against a client would recover (loss recovery representation).
ASIC says that each of these representations (investment representations) was a representation as to future matters, and there was no reasonable basis for such investment representations.
It is said that the investment representations were false, misleading or deceptive, because the financial products and financial services offered by the defendants operated in a manner contrary to those representations.
Further, ASIC says that the defendants made representations to their clients regarding:
(a)in the case of AGM and OT, where the AMs engaged by the defendants were located (location representation); and
(b)in the case of OT and Ozifin, the regulation of those entities (regulation representation),
which ASIC says were misleading or deceptive.
Further, ASIC says that by making the advice statements, the defendants represented to their clients that:
(a)it was in the clients’ best interests to invest in the products recommended by the AMs (best interests representation);
(b)the advice provided to the investors was appropriate for those investors (appropriate advice representation); and
(c)the defendants were entitled to or approved to provide personal advice to those clients (personal advice representation).
It is said in relation to the best interests representations, appropriate advice representations and personal advice representations that those representations were implied and were misleading because the AMs did not do all things required to act in the best interests of those clients, the advice provided by the AMs was not appropriate to those clients, and the defendants, by making the advice statements, provided personal advice when they were not entitled to do so.
Fourth, ASIC says that the defendants engaged in unconscionable conduct towards the witness investors and four of the additional investors by reason of the vulnerability of each of those clients, the defendants engaging in misleading or deceptive conduct or making false or misleading representations, and the defendants engaging in other forms of unfair conduct towards those defendants. It also puts a system of conduct case that I will detail later. ASIC says that the derivative financial products the AMs persuaded the witness investors to acquire, and make greater and greater payments towards, were highly complex and risky. It says that the witness investors were plainly not suited to such investments. That was so both in terms of the witness investors’ lack of investment experience, being either none, or very limited, and in no case in relation to CFDs or FX contracts, and financial resources which were very limited, which the AMs knew. Moreover, the level of risk to which the witness investors were exposed was not explained at all by the AMs. Instead, the AMs persuaded the witness investors to invest more and more money, on the basis of representations that were either demonstrably misleading or untrue.
(a) Personal advice – the evidence
Now ASIC’s case depends on the proper characterisation of the various statements that the AMs made to the investors. But in context, there are several characteristics of the interactions between the AMs and the investors that bore common characteristics, and which are relevant to the allegation that the AMs gave personal advice to the clients.
From the evidence before me, the following common features can be distilled.
Each of the witness investors was introduced to the defendants by clicking on a web based advertisement, which in the case of clients of OT was often an advertisement concerning Bitcoin, or responding to a text message or email, or otherwise coming to the relevant defendant’s website after conducting a search for investment opportunities.
The advertisements, particularly those which led the witness investors to OT, would typically ask the investors to enter certain personal information. After they had entered the information, they were contacted by a representative of the defendant, by telephone or email, and then steps were taken to set up their trading account with the relevant defendant.
After the trading account had been set up, the witness investors were then contacted by an AM engaged on behalf of the relevant defendant, who typically:
(a)in the case of AMs engaged by or on behalf of AGM and OT, asked the client to download TeamViewer, or equivalent software, that allowed the AM to connect to and remotely view the witness investor’s computer screen;
(b)made enquiries of the investor’s financial situation including by asking the client to open their online banking whilst the AM was connected to the client’s computer by TeamViewer or an equivalent program; and
(c)advised the client to deposit funds to their trading account or, if the client had deposited funds at the time that they had registered, advised the client to deposit further funds.
Following that process, the AM would contact the witness investors frequently by telephone and email.
The evidence of Mr Cecilio, an AM engaged by IBD and who was allocated to clients of OT, was to the effect that:
(a)the goal of AMs engaged by OT was to increase the deposits that clients of OT made to their OT trading accounts, and to encourage the clients to open multiple positions and thereby increase the prospects of clients losing money;
(b)that goal was advanced by IBD in part by giving AMs cash incentives if they were able to secure deposits from clients;
(c)the purpose of asking clients of OT to open their online banking whilst connected to TeamViewer was so that the AM could determine the amount of money that a client had, so that the AMs “could encourage them to deposit that money into their [OT] trading account”.
ASIC says that by making each statement summarised or otherwise identified in annexures to its FAPOC, the AMs provided financial product advice that was personal advice within the meaning of s 766B(3) to the investor to whom that statement was made.
Now ASIC alleges that the many hundreds of statements on which it relies each constituted the separate provision of financial product advice. But the similarities between the statements in each category justify them conveniently being considered together.
Now clearly CFDs and FX contracts are derivatives within the meaning of s 761D and therefore financial products (s 764A(1)(c)). Further, there is little doubt that the relevant investors of AGM, OT and Ozifin were each retail clients (s 761G). Accordingly, the real issues that I need to consider are the following.
First, did the advice statements constitute a recommendation or statement of opinion to the investors to whom it was made within the meaning of s 766B(1)?
Second, were the advice statements:
(a)intended to influence the investor in deciding whether to:
(i)in the case of the position statements or signal provider statements, take a particular CFD or FX contract position?;
(ii)in the case of the deposit statements, deposit further funds to the clients’ trading account?; or
(iii)in the case of the trading strategy statements, adopt a particular trading strategy?; or
(b)could reasonably be regarded as being intended to have such an influence?
Third, did the personal matters about each investor that they revealed to the relevant AM constitute one or more of that investor’s objectives, financial situation or needs within the meaning of s 766B(3)?
Fourth, were some or all of those advice statements provided in circumstances where:
(a)it could be inferred that the AM who made the particular advice statement considered one or more of the investor’s objectives, financial situation or needs?; or
(b)a reasonable person might expect the AM to have considered one or more of the investor’s objectives, financial situation or needs?
In summary, in my view an affirmative answer should be given to each of these questions.
As I have said, ASIC has helpfully prepared a detailed summary of the statements made by the AMs that ASIC says constituted the provision of personal advice, including by reference to those parts of the transcripts of the conversations between the AMs and the investors in which those statements appear. Save for some matters that I will address later, that summary is accurate, subject to some transcription errors that I have corrected. Let me discuss in some detail what the evidence reveals.
Position statements and signal provider statements
The conduct of the AMs that constituted the position statements and signal provider statements was commonly characterised by the AM providing advice to open a particular position. Typically the AM would either identify a currency pair or affirm the client’s selection of a currency pair. In the case of the signal provider statements, such conduct occurred by reference to information from a third party information provider. In the case of AGM and OT, that information provider was commonly the free website “Investing.com”. In the case of Ozifin, the third party information provider was “Trading Central”. The AM described to the client the volume of the position that they should open, or commented on the volume that that client had suggested.
In instances in which the AMs gave advice to leave open or close a position, that conduct was typically characterised by the AMs mentioning a particular open position after either identifying it themselves or being directed to it by the client, and saying what the client should do in relation to that position, being either to leave open or close.
In my view the advice statements considered in all the circumstances of the relationship between the various AMs and the investors, amounted to an implicit, and often explicit, recommendation that the investors adopt a particular course. That conclusion, and the conclusion that the recommendations were intended to influence the investors to adopt that course, is clear from statements made by the AMs to the investors. The statements of the sort set out in the evidence show that the AMs guided or directed the investors in their trading with the relevant defendant, suggested to the client that following the guidance would increase the prospects that the investors would generate a profit, and in the case of the signal provider statements recommended that the investors use the third party signal provider to further those aims.
The evidence shows that there were at least 677 position statements made, comprising 133 statements to 10 clients of AGM, 132 statements to 14 clients of OT and 412 statements to 11 clients of Ozifin. Before proceeding further to detail some of the evidence, I should note that I have sought to anonymise particular investors/clients by using only the relevant entity’s acronym and a number; for example, AGM5 is investor no. 5 who dealt directly with AGM and its AMs; the numbers assigned merely reflect ASIC’s ascription, with the actual persons identified in the evidence.
Examples of the position statements are as follows:
(a)to investor AGM5: “Now, don’t be stressed from the minus, it’s a normal fluctuation, but if I was you, I’d add more money to be able to hold those fluctuations, okay?”
(b)to investor OT10:
Account Manager: “We can actually start opening now. Click ‘Okay’. Perfect. Now click here. Perfect. Click ‘Okay’. Okay. Perfect. So, here US Dollar is going up. Right click. New order. Perfect. So, here the US Dollar is going up, it means that the Great British Pound is going down now. Okay. So, what will be the position; sell or buy?”
Investor OT10: “Sell.”
Account Manager: “Perfect. Click it. Click ‘Okay’. Click ‘Okay’. Perfect. Here. Right click. New Order. Perfect. So, same as GBP, US Dollar is going up. Perfect. Click ‘Okay’. Now here, US Dollar versus Japanese Yen. The US Dollar is our major currency, it’s going up. Right click. New order. Perfect. Perfect.”
(c)to investor OF4:
Account Manager: “Okay. Okay. We’ve got Euro/USD, from Trading Central, the sell position….”
Investor OF4: “Yeah. I just leave everything at 50,000 - am I trading in units, or - - -”
Account Manager: “Well, most of my clients will do it from 500,000.”
…
Investor OF4: “So, I’ve got the 500,000, and did you say it was sell?”
Account Manager: “Yes. Yours - USD from Trading Central at the sell position.”
Investor OF4: “Okay. Done.”
Account Manager: “Okay. USD/JPY from Trading Central at the buy position.”
…
Account Manager: “Okay. USD/JPY, sell position from Trading Central.”
Investor OF4: “Yes. Yes.”
Account Manager: “And, I've got British Pound - - -”
Investor OF4: “Yes.”
Account Manager: “- - - British Bound [sic] vs JPY - - -”
Investor OF4: “Yes.”
Account Manager: “- - - that’s also a sell position from Trading Central.”
Investor OF4: “Done.”
Account Manager: “I’m going to refresh. Okay. So, you have three positions open?”
Investor OF4: “Yep.”
Further, the evidence shows that there were at least 314 signal provider statements made, comprising 40 statements to 10 clients of AGM, 44 statements to 9 clients of OT and 230 statements to 11 clients of Ozifin.
Examples of the signal provider statements are as follows:
(a)to investor AGM5 in relation to a NZD/CHF position: “The trend is a down trend. It’s 100 percent a down trend. … It is a strong, this is a investing.com recommendation, a strong sell.”
(b)to investor OT7 (in relation to an AUD/USD position):
Account Manager: “Go to investing.com. I’ll help you to open trades. … Go to the technical summary … What exactly do you see is it buy or sell.”
Investor OT7: “It says ‘strong buy’. Strong Buy.”
Account Manager: “Okay. Now, go back to the MetaTrader and look for AUD/USD. … You can open up to 100 volumes.”
Investor OT7: “100?”
Account Manager: “Exactly.”
Investor OT7: “Wow. A lot on the run.”
Account Manager: “Exactly. … We can do it gradually. I want you to do it on the small volume but it doesn’t work, you can see that all the trades you opened is not working. ... Okay. Now, don’t be afraid, you can open up the 100 volume
s.”Investor OT7: “Okay.”
Account Manager: “As I have told you, I have analysed it properly for you before I tell you information. All right. Now, go ahead if you want to trade for AUD USD. Are you buyer, or you sell?”
Investor OT7: “It says to buy.”
Account Manager: “Okay. Buy by the market. Have you already clicked, ‘Buy by the market’?”
Investor OT7: “Yeah. Yeah. Processing at the moment. Okay. Now it’s gone through.”
(c)to investor OF4:
“I’m passing you these trades from trading central
USD/JPY SELL
GBP/JPY BUY
GBP/USD BUY”.
Deposit Statements
Further, the evidence discloses that the AMs made statements to the investors in telephone calls that amounted to a recommendation or statement of opinion that those clients should deposit more money to their trading accounts. In almost every instance in which the AMs made a deposit statement, the AMs described to the investors the reasons why the client should follow the course suggested by the AMs. Those reasons generally included:
(a)to avoid the need for investors to close existing positions;
(b)to remove or reduce the risk that the investors would lose money; or
(c)to increase the investors’ free margin to allow them to open additional positions.
It is apparent on the face of these deposit statements that they amounted to a recommendation or statement of opinion and were intended to influence the investors to deposit further money to their trading account.
Moreover, the operation of the investors’ trading accounts, and the use to which the money in those accounts could be put, meant that the statements were made in relation to the financial products or financial services offered by the defendants. The expression “in relation to” in s 766B(1)(a) is to be construed broadly. It is enough that there is some apparent connection or relationship between the recommendation that the investor deposit further funds, and the financial products in which the AM otherwise recommended that he invest in. The deposit of funds to an investor’s trading account was a necessary step to the investor opening any CFD or FX contract position or, in some cases, leaving open existing positions. Further, because any funds that a client did invest were exposed to adverse movements in the client’s open positions, by depositing further funds the client was effectively investing further funds in those positions. That was particularly the case if the funds were deposited at a time when the client had an actual margin exposure.
The evidence shows that there were at least 276 deposit statements made, comprising 83 statements to 14 clients of AGM, 95 statements to 15 clients of OT and 98 statements to 12 clients of Ozifin.
Examples of the deposit statements are as follows:
(a)to investor AGM1: “Now, I know you hate it and I hate it too, but I think it’s going to be the best for you to add more money into the account.”
(b)to investor OT12:
Account Manager: “So you need to maintain 100 per cent level for you to wait for the market to correct itself, okay?”
Investor OT12: “All right.”
Account Manager: “By doing that, okay, you need to have - oh - you need to deposit more - a little bit more, okay?”
(c)to investor OF4 (after telling investor OF4 that Amazon was launching in Australia):
Account Manager: “I was thinking for you, I had a proposal if we do something for Friday. Well, actually today, invest in Amazon. This is what I’m getting from Trading Central also, I’m readying myself too, a lot of articles here. And, everything is positive about Amazon. So, what you can do is invest on the Friday, leave it there and then maybe next week withdraw the funds…”
Investor OF4: “… Yeah. Yeah.”
Account Manager: “Okay. But, what’s available? What can you do? And, I don’t want to give you a – I don’t want to give you a bonus runner because there’s currently conditions on that … but, with the stock Amazon what are you thinking? How much more can you invest on that?”
Investor OF4: “You want more funds?”
Account Manager: “Do you have any – can you do anything or - - -”
Investor OF4: “No. Well, no.”
Trading Strategy Statements
The trading strategy statements were an explicit or implicit recommendation that the investors should adopt a particular trading strategy. Of the various strategies identified in the evidence, the strategies of most significance recommended by the AMs were that the investors should:
(a)leave open positions that had moved adversely to a client, and particularly those in relation to which the client had suffered an unrealised loss, with the intention of waiting (in reality, hoping) for them to turn positive;
(b)close positions that had achieved a small profit;
(c)open multiple positions simultaneously, which referenced various currency pairs;
(d)adopt some variation of the “Martingale strategy”, which involved:
(i)identifying a position that had moved against the investor;
(ii)opening an equivalent position, with twice the volume of the original position; and
(iii)when both the positions moved to the benefit of the client, closing both at the point where the loss on the first position was set off or exceeded by the profit on the second position.
Now it is evident that the trading strategy statements amounted to recommendations. They were plainly intended to influence the investors to make a decision in relation to the products offered by the defendants.
The evidence establishes that at least 224 trading strategy statements were made, comprising 84 statements to 10 clients of AGM, 87 statements to 12 clients of OT and 53 statements to 11 clients of Ozifin.
Examples of the trading strategy statements are as follows:
(a)to investor AGM5, the AM made a recommendation or provided statements of opinion to the effect that she should adopt a strategy of opening multiple positions:
“But you know what you can do, because you are working um, just before you’re going to sleep or when you’re coming back from work just set up like five, six different trades, do take profit and leave … the computer, leave it.”
“I would have opened… five different trade at for example 0.50 and then I would take … set up sum, take profit on maybe $200 which means going to take a long … time to get there, a very long time.”
“But if for example I have five trades look, I would have done it even with 10. You have a space of making 10 trades of 0.50. … And then for example you have five closing on a plus and five closing on a minus it’s still going to be on more gain than a loss.”
“[Y]ou can do a stop-loss and take profit calculated and this is going to be at least a third higher than the, the profit is going to be at least a third higher than the minus.”
“[L]et’s say that one is going to be on a profit of let’s say even 150 and then other one going to be on a minus of 75 and you’re going to do on each one of them plus 150 and every trade going to be, going to close on a minus of 75 and every trade going to close on a plus of 150 you would find yourself um, like, even if half going to be good and half going to be wrong you’re still going to be on more profit than loss.”
“[I]n the end the worst chances that can be is 50/50. Why? Because you have a buy and a sell.”
“[G]aining seven trades out of 10 it would be, like it’s going to be amazing. So you have, going to have a lot of profit. And then it’s setting up every time so you can do maybe um, 200 profit and maybe 125 loss.”
“[I]f you’re setting up take profit and stop-loss just take the profit is going to be much higher than, not much but like at least a third higher than the stop-loss.”
(b)to investor OT6:
Account Manager: “And then when there’s a big event we can easily predict what will happen to the market because what, what, what will happen to the market. If you know what will happen, you can easily make profit okay?”
Investor OT6: “Right.”
Account Manager: “Of course when we know what will happen we’re going to trade with the maximum volume and, and support that.”
(c)to investor OF4:
Account Manager: “To release the bonus as well, it’s - how do I say it? Because - let me see here your account. I need to refresh it. Because you want to do more trading volume and open up bigger positions to accumulate the turnover - okay. You have 26 - 25,000 available margin with the 38,000 - - -”
Investor OF4: “Yeah. Well, I can close - well, tomorrow - I'll have a look ‘cause I want to get through tonight with Amazon ‘cause it’s gone up over the weekend. Tomorrow what if I close some of those Amazon positions so that I’ve got more margin available to do the Forex trading?”
Account Manager: “That’s what I was going to say. Why you don’t close everything. We can open up big positions. It’s totally up to you but if you – that’s what I was trying to say. And then- - -”
Investor OF4: “Okay.”
Account Manager: “- - - put 10,000 - - -”
Investor OF4: “Yep.”
Account Manager: “Make the deposit of ten, open up Amazon – strictly Amazon – and then target in the next week, two weeks, see it go up potentially and then withdraw from your cash balance and use the other 130 to accumulate points and hopefully in the next month, two months you can also – that’s also withdraw-able if you release it.”
(b) Personal advice – principles and application
Section 766B(1) to (4) provided at the relevant time as follows:
766B Meaning of financial product advice
(1)For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a)is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b)could reasonably be regarded as being intended to have such an influence.
(1A)However, subject to subsection (1B), the provision or giving of an exempt document or statement does not constitute the provision of financial product advice.
(1B)Subsection (1A) does not apply for the purpose of determining whether a recommendation or statement of opinion made by an outside expert, or a report of such a recommendation or statement of opinion, that is included in an exempt document or statement is financial product advice provided by the outside expert.
(2)There are 2 types of financial product advice: personal advice and general advice.
(3)For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:
(a)the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or
(b)a reasonable person might expect the provider to have considered one or more of those matters.
(4)For the purposes of this Chapter, general advice is financial product advice that is not personal advice.
Section 766B(1) defines financial product advice as a recommendation or a statement of opinion or a report of either of those things that:
(a)is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in such a product or class of products; or
(b)could reasonably be regarded as being intended to have such an influence.
Section 766B(2) states that there are two types of financial product advice: personal advice and general advice.
Section 766B(3) defines personal advice as financial product advice that is given or directed to a person in circumstances where:
(a)the provider of the advice has considered one or more of the person's objectives, financial situation and needs; or
(b)a reasonable person might expect the provider to have considered one or more of those matters.
General financial product advice is defined negatively (s 766B(4)). It is financial advice that is not personal financial advice.
Section 766B forms part of a legislative scheme that sets out a range of requirements for the holder of an AFSL. It has as its broad purpose the protection of consumers of financial services.
More generally, Chapter 7 draws a distinction between the statutory regulation of those who provide general advice on the one hand, and personal advice on the other.
Division 2 of Part 7.7 establishes minimum disclosure obligations on providers of financial product advice, whether general advice or personal advice, when financial services are being provided to “retail clients” as defined in s 761G. In the present case there is no doubt that the investors were retail clients.
Division 3 of Part 7.7 provides for additional obligations on those who provide personal advice, including:
(a)to provide a statement of advice to the client (s 946A);
(b)to act in the best interests of the client (s 961B(1));
(c)that the advice provided must be appropriate to the client (s 961G); and
(d)that the provider of personal advice must address conflicts of interest by giving priority to the client’s interests when giving advice (s 961J).
Further, a provider of general advice only who provides general advice to retail clients must warn the client, at the same time as providing the advice and by the same means as the advice is provided, that the advice has been prepared without taking account of the client’s objectives, financial situation or needs, and because that is the case that the client should consider the appropriateness of the advice having regard to those same considerations (s 949A). Further, an authorised representative of an AFSL holder who provides oral general advice can meet its obligations under s 949A by providing the modified warning stipulated in ASIC Corporations (General Advice Warning) Instrument 2015/540, namely, an oral warning that the advice is general advice and the advice may not be appropriate for the client.
Putting aside the personal advice question, I would say now that if the defendants provided only general advice to clients, then the defendants contravened s 949A. If only general advice was given, there were hundreds of s 949A contraventions.
At this point, let me elaborate further on the proper construction of the personal advice definition.
There are relevantly two sub-sections of s 766B to be interpreted in the context of this case:
(a)first, s 766B(1), which determines the circumstances in which a person will be taken to be providing “advice”; and
(b)second, s 766B(3), which determines the circumstances in which such advice will be personal advice.
Three questions emerge in the present case. First, did each advice statement made by the AMs amount to a recommendation or statement of opinion, or a report of either of those things? Second, was that recommendation, statement or report intended to influence the investors to invest in, dispose of, or retain an investment in, a particular financial product, or class of financial products (in this case, CFDs and FX contracts), or could the recommendation, statement or report reasonably be regarded as being intended to have such an influence? Third, in providing the advice, did the advisor actually take account of one or more of the person’s objectives, financial situation or needs or might a reasonable person have expected the advisor to have taken account of one or more of those matters?
Seventh, it says that there is no probative evidence to establish that the relevant clients, as a class, suffered from a relevant disadvantage. In particular, there is no evidence of any scripts used by any Ozifin AMs (or other employees) in dealing with the relevant clients. Nor is there any evidence from any AM (or other employee) engaged by Ozifin to deal with the relevant clients. In those circumstances, it says that the features alleged by ASIC are insufficient to support a finding that Ozifin employed an unconscionable system in respect to all relevant clients. Accordingly it says that ASIC’s systems case against Ozifin must fail.
I would reject Ozifin’s submissions.
First, Ozifin submits that the evidence adduced by ASIC does not establish a system of conduct, on the basis that I am in no position to infer that the 12 Ozifin investors chosen by ASIC were in any way representative of the balance or a not-insignificant proportion of Ozifin’s other investors. In that respect, it points to ASIC’s failure to adduce evidence of the basis upon which those 12 investors were chosen. But in my view such an exercise is not necessary in a case such as this where ASIC does not rely on any particular attribute of the people to whom the system of conduct was directed. The targeting of disadvantaged people does not form part of the system of conduct which ASIC alleges. Indeed, the evidence establishes that AGM, OT and Ozifin were entirely undiscriminating as to who they accepted as their clients. That lack of discrimination was itself an aspect of the system of conduct engaged in that was in all the circumstances unconscionable.
Second, Ozifin says that given that ASIC has had the benefit of the transcripts of all calls between the relevant clients and Ozifin, investors OF1 to OF12 may represent the totality of the investors that ASIC was able to identify who displayed a relevant vulnerability, and who communicated that vulnerability to Ozifin. But first, there is no evidence in support of the assertion that ASIC has had the benefit of the transcripts of all calls between the relevant clients and Ozifin. Apparently it has not. Further, whilst ASIC has had access to a large proportion of the recordings of calls between Ozifin and the relevant clients, the process of extracting and transcribing all the calls to which it has had access would have been unreasonably costly and time consuming. Only a limited number of calls were therefore transcribed by ASIC.
Third, the evidence adduced by ASIC has not been adduced as tendency evidence as such.
Fourth, Ozifin says that none of the features of the system alleged by ASIC constitute an allegation that the clients of Ozifin suffered any vulnerability or disadvantage. But ASIC is not required to establish that the clients of Ozifin, or any of them, suffered from any special disadvantage. So much is made express by s 12CB(4)(a) of the ASIC Act. ASIC is not required to establish that any investor suffered from a special disadvantage, although in other cases ASIC may have suggested or conceded as much. It is not the case that ASIC is required to establish that an identified person or class of people suffered from a special disadvantage which meant that they were incapable of making a judgment as to their own best interests and unfair or unconscientious advantage was taken of the opportunity created by that disadvantage. Moreover, in my view, none of the decisions cited by Ozifin support the proposition that ASIC must, in order to establish that the pleaded system of conduct was unconscionable, identify a person to whom the system of conduct was directed and who suffered any vulnerability or disadvantage. Of course, in other cases ASIC may have sought to so prove. But the statute does not so dictate in all cases.
Finally, OT has made similar points which I would also reject.
In summary, ASIC has made out its system of conduct case and pattern of behaviour case against each of AGM, OT and Ozifin. The necessary extrapolation from the sample set of investors is well justified. The underlying systems and approach used by each defendant had common elements across all defendants and had common features across investors of and for each particular defendant.
(h) Liability of AGM for conduct of OT and Ozifin
In my view the conduct undertaken by OT and Ozifin that constitutes the investor contraventions that I have discussed earlier can also be considered to be conduct undertaken by those defendants on behalf of AGM. But I would not accept ASIC’s case that AGM was knowingly involved in, or aided, abetted, counselled or procured, the investor contraventions by OT and Ozifin.
Let me address the agency question.
Agency allegations
Sections 769B(1)(a) and (b) of the Corporations Act and s 12GH(2)(a) and (b) of the ASIC Act establish the relevant agency. Those provisions provide that conduct engaged in by an agent of a body corporate within the scope of the person’s actual or apparent authority or by any other person with the consent or agreement (whether express or implied) of a director or employee of the body, whether the giving of the consent or agreement is within the scope of the actual or apparent authority of the director, is taken for the purposes of the provisions of Chapter 7 of the Corporations Act and Part 2, Division 2 of the ASIC Act, to have been engaged in also by the body corporate. Both limbs of those deeming provisions are applicable. OT and Ozifin when engaging in the conduct that gave rise to the investor contraventions were acting as agents of AGM and within their apparent authority.
Now a relationship said to give rise to an agency must be considered and characterised in its commercial context. Whilst the relationship here is one established by contract, the question whether a particular relationship is one of agency, and in particular whether the parties have consented to such a relationship, is to be determined objectively. Moreover, it is not determinative of the question that the parties to the relevant agreement said to give rise to the relationship of agency have so described it, or indeed whether they have sought to disclaim it.
Consideration must be given to the scope of the actual or apparent authority granted to the agent. AGM denies responsibility for any personal financial advice given by AMs engaged by or on behalf of Falcon, OT or Ozifin on the basis that AGM did not authorise such conduct.
Now mere prohibition of misconduct does not relieve the principal of responsibility. Further, in determining whether a particular act falls within the authority of an agent, it is not necessary that the particular act should have been authorised.
Further, whether the particular act of the agent fell within the scope of its actual or apparent authority depends on whether the principal put the agent in the principal’s place to do a class of acts in the principal’s absence. The consequences of that characterisation are that the agent is necessarily left to determine, according to the circumstances that arise, when an act of that class is to be done, and is trusted to determine the manner in which it is to be done. And the principal is therefore answerable for the wrong of the agent, provided that act was done, not from any caprice of the agent, but in the course of the agency.
In Australasian Brokerage Ltd v Australian and New Zealand Banking Corporation Limited (1934) 52 CLR 430 at 451 to 452 per Dixon, Evatt and McTiernan JJ, the High Court cited with approval the well known advice of the Privy Council (Mackay v Commercial Bank of New Brunswick (1874) LR 5 PC 394 at 410):
It is seldom possible to prove that the fraudulent act complained of was committed by the express authority of the principal, or that he gave his agent general authority to commit wrongs or frauds. Indeed it may be generally assumed that, in mercantile transactions, principals do not authorize their agents to act wrongfully, and consequently that frauds are beyond ‘the scope of the agent’s authority’ in the narrowest sense of which the expression admits. But so narrow a sense would have the effect of enabling principals largely to avail themselves of the frauds of their agents, without suffering losses or incurring liabilities on account of them, and would be opposed as much to justice as to authority. A wider construction has been put upon the words. Principals have been held liable for frauds when it has not been proved that they authorised the particular fraud complained of or gave a general authority to commit frauds…
Accordingly, expressions such as “acting within the scope of an agency” should be construed liberally. And more particularly is that so in the context of investor protection legislation that renders it sufficient that the act complained of falls within the agent’s apparent authority.
Further, whether an agent is determined to be acting within its apparent authority is to be determined from the perspective of the third party who engages with that agent.
In my view, when undertaking the conduct that constituted the investor contraventions, OT and Ozifin were acting as the agents of AGM within the meaning of s 769B(1)(a) and (b) of the Corporations Act and s 12GH(2)(a) and (b) of the ASIC Act.
In summary, it seems well apparent to me that:
(a)AGM and OT and Ozifin who were authorised representatives consented to an agency relationship;
(b)AGM had provided authority to them to act on its behalf; and
(c)the conduct of OT and Ozifin that constituted the investor contraventions was within the actual or apparent authority of AGM.
First, each of the CAR agreements stated explicitly that AGM was appointing OT and Ozifin as its authorised representatives pursuant to s 916A. Section 916A(1) states that a financial services licensee, which AGM was at the time that it entered the CAR agreements, may give a person a written notice “authorising the person, for the purposes of [Chapter 7 of the Corporations Act], to provide a specific financial service or services on behalf of the licensee.” (emphasis added.)
The CAR agreements constituted notices appointing OT and Ozifin for the purposes of s916A(1). In order to be effective, those notices are to be construed as appointing them to provide financial services on behalf of AGM. Were it otherwise, those notices would be of no effect, and OT and Ozifin would not have been entitled to provide any financial services in Australia. Once appointed, the entitlement of OT and Ozifin to provide financial services in Australia arose under s 911B(1)(b).
Second, apart from a brief period following the execution of the CAR agreements, the CFDs and FX contracts issued to the clients of OT and Ozifin were issued by AGM. This is apparent from consideration of the PDSs that were available on the websites of OT and Ozifin, which in addition to identifying AGM as the issuer of the products, identified OT and Ozifin as representatives of the AGM.
Third, both the conduct of OT and Ozifin and the consistent terms of the PDSs published by OT and Ozifin entail that the statements in the CAR agreements that those agreements did not give rise to an agency relationship should be given little weight. They did not reflect the reality or substance of the relationship.
Generally, the conduct of OT and Ozifin that gave rise to the investor contraventions was conduct that occurred within the scope of the authority afforded to OT and Ozifin by AGM. Properly understood, the class of acts that AGM was putting OT and Ozifin in a position to undertake was the act of dealing in financial products on behalf of AGM, and the giving of financial product advice in relation to those products.
Moreover, the conduct that constituted the investor contraventions was within the actual authority of OT and Ozifin. Alternatively, the conduct occurred within their apparent authority.
In my view there is little doubt that ASIC’s agency case is made out.
Knowing involvement allegations
It is necessary to establish actual and not constructive knowledge of the essential elements of the relevant contravention. But actual knowledge can be inferred in circumstances where the combination of suspicious circumstances and a failure to make enquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter. But whether such an inference is open will depend on the circumstances in which the person failed to make the necessary enquiries. That includes consideration of whether the person, by reason of their position, or the system in which they operated had some responsibility for the supervision of those undertaking the contravening conduct or had some form of reporting obligation or to answer enquiries regarding that conduct.
On balance I am not prepared to infer that AGM had actual knowledge of the essential elements of each of the investor contraventions.
Now ASIC has submitted that in the case of conduct by the AMs engaged by Ozifin, AGM was aware as early as 15 November 2017 from its review of several conversations between AMs engaged by Ozifin and its clients that those AMs:
(a)failed to provide any balance in the conversations with clients between risk warning and potential profit;
(b)were suggesting trading and advising clients to close trades; and
(c)were dealing with clients of Ozifin who did not understand the operation of the products in relation to which the AMs were providing advice.
The limited remedial action that AGM apparently took having become aware particularly of some of the conduct concerning trading was to insist that Ozifin AMs should state that the information provided to the client was coming from Trading Central, and that the AM was going to tell the client what was in that report. AGM apparently considered that by providing that disclaimer, Ozifin would not be providing personal advice. But that view, communicated to Ozifin, reflected a misunderstanding of the difference between general and personal advice.
Further, by February 2018, compliance officers engaged by AGM had expressed concerns to Ozifin that its AMs did not provide sufficient balance in their conversations as they barely mentioned risks when they talked to clients unless clients asked about risk.
ASIC says that despite those concerns, there is no evidence that AGM increased the number of Ozifin calls that it monitored, or that it took any additional steps to determine whether Ozifin continued to engage in the conduct about which AGM had previously identified, and expressed concern.
Now in the circumstances, I am prepared to infer that the review by AGM of a limited number of telephone calls made by Ozifin AMs made AGM aware to some extent of the misconduct of those managers. Moreover, AGM’s review must have raised suspicions as to the misconduct, yet it made the decision not to make inquiries to remove those suspicions despite having an obligation to ensure that its representatives complied with the financial services laws. But I do not consider that in such circumstances, AGM had actual knowledge of the constituent elements of the investor contraventions referable to Ozifin’s conduct. I have also reached the same conclusion in respect of OT’s conduct.
COMPLIANCE CONTRAVENTIONS
ASIC says that AGM failed to take the steps necessary to discharge its obligations under s 912A(1)(a) to do all things necessary to ensure that the financial services it provided under its AFSL were provided efficiently, honestly and fairly, and under various other provisions of ss 912A(1) and 961L to do those things necessary to properly supervise its representatives, which included both Ozifin and OT and the AMs engaged by AGM, Ozifin and OT.
ASIC has made out its case on this aspect. In my view the evidence discloses the following.
First, the training provided to AMs was inadequate, including in relation to the operation of CFDs and FX contracts. Whilst there was apparently some initial effort on the part of AGM to ensure that AMs engaged on behalf of OT and Ozifin received the sort of training that Mr Blundell identified would have been adequate, there is no evidence that:
(a)AMs engaged on behalf of OT or Ozifin received any such training; or
(b)AGM took any steps to follow up its initial admonition that such training should occur.
Second, AGM ought to have ensured that the AMs engaged by or on behalf of OT and Ozifin had no, or limited access to personal information of their clients, so as to reduce the prospect of providing personal financial advice.
Third, AGM ought to have reviewed at least 2% of the calls made by AMs to clients of AGM, OT and Ozifin. Now there is no direct evidence of the total number of telephone calls made to clients of AGM, OT and Ozifin in the period that they were operating, but I can be satisfied that it was a very substantial volume.
But in any event, the conduct of AGM’s AMs, and its earlier defence of this proceeding, reveals that AGM did not regard the conduct its AMs engaged in to have involved any misconduct. Therefore, even if an employee or officer of AGM had listened to every call made by its representatives, it would likely have done nothing in response to their misconduct. Indeed, so much is evident from the response of AGM’s compliance staff to the early conduct of Ozifin’s AMs. AGM expressed no concern that Ozifin AMs were passing on and recommending “signals” to their clients, but simply that they were not identifying the source of those “reports”. That approach manifests the deficiencies in AGM’s compliance system, and in particular the training provided to the compliance staff tasked with listening to the calls made by AMs.
Fourth, AGM outsourced to the AMs certain key functions for providing financial product advice to AGM clients. But the responsibility for ensuring that the advice was provided in a fair, honest and efficient manner remained with AGM. AGM could outsource the function but not its responsibility under its AFSL. Moreover, prior to the provision of any services by Ozifin, OT or the AMs on AGM’s behalf, AGM should have undertaken due diligence on all of the entities that provided the AMs. The due diligence should have confirmed that Ozifin and OT and all of the AMs had sufficient resources to provide the outsourced functions, had the requisite knowledge of Australian financial services laws and understood the obligations they were being given as a representative of an AFSL holder. AGM should have been confident that OT, Ozifin and all AMs could have provided the services fairly, honestly and efficiently, in accordance with AGM’s obligations under its AFSL, prior to any services being provided.
AGM should have ensured that prior to any services being provided by the AMs, adequate training had been undertaken by all AMs. AGM should have ensured the training was completed to meet the obligations of its AFSL. The AMs should have completed relevant training courses for the provision of general advice to retail clients. At a minimum, OT, Ozifin and all AMs should have completed a course regarding their general obligations for providing financial product advice and a course regarding the provision of derivative products. If they were also providing advice on FX products, then a course regarding FX ought to have been completed. AGM should have ensured that OT, Ozifin and all AMs had completed the courses prior to engaging them to provide services to AGM clients.
Fifth, AGM should have had in place a system for monitoring the activities of Ozifin, OT, all AMs, Falcon and IBD, when providing financial product advice. As I have indicated, this system should have included the regular monitoring and review of telephone conversations, emails, chat messages and any other communications between the AMs and the clients.
Sixth, AGM should have established processes for the escalation by Ozifin, OT and the AMs to AGM of any possible breaches of the law, or if circumstances arose where the services were not being provided in a fair, honest and efficient manner. The processes should have clearly stated to whom within AGM issues should have been escalated by Ozifin, OT, Falcon and IBD. The processes should then have stated to whom at such entities AGM should have gone in order to rectify any issues in a timely manner. The various agreements between AGM, Ozifin, OT, Falcon and IBD providing the AMs should have clearly detailed a process for the AMs to be instructed to stop providing services on behalf of AGM should a matter have arisen where the AMs were not providing advice in a fair, efficient and honest manner.
Seventh, AGM should have reviewed all marketing material that was being distributed by the said entities on their behalf to ensure that there was no false or misleading information contained within the material. Further, there should have been a clear process in place to ensure that all marketing material distributed by Ozifin, OT, Falcon and IBD was passed to AGM for compliance review and approval.
Further, the compliance departments of AGM and Ozifin, OT, Falcon and IBD should have ensured that they had a close working relationship. Regular meetings across all entities should have ensured the timely sharing of information and the timely ability to rectify any issues regarding the provision of the financial advice.
Eighth, steps should have been taken by AGM to ensure that there was not, by reason of the terms upon which Falcon was engaged to provide account management services to the clients of AGM and the people engaged by or on behalf of IBD were compensated, a conflict of interest that arose in relation to the activities of the AMs engaged by Falcon and/or IBD on behalf of AGM in the provision of the financial services on behalf of AGM.
Prior to the commencement of services by Falcon and IBD, AGM should have thoroughly reviewed the terms of the agreement(s) regarding the services, such as the remuneration to be paid by AGM. It should also have reviewed the employment contracts signed by the AMs acting on their behalf. As part of the due diligence process, AGM should have requested to see the conflicts of interest registers of Falcon and IBD to ensure they existed and had been completed.
Further, a key conflict of interest that arose when AMs were providing advice related to the remuneration the AMs received. If an AM was to be remunerated on the basis of how much money a client deposited, how many trades they placed or how often they traded, this could give rise to a conflict of interest. The AM could be encouraging the client to engage in greater activity than the client would have normally wanted to, with the AM knowing that he would earn more money as a result. A review of the AM contracts by AGM would have highlighted this.
Further, AGM should have had access to the personal trading account statements of all AMs, and any proprietary trading accounts held by Falcon, IBD, Ozifin and OT. These statements should then have been reviewed against client trades to ensure that no-one was placing trades ahead of a client, namely, “front-running”, and that the accounts were being managed appropriately.
Further, the terms of various agreements regarding the services to be provided should have been reviewed to ensure that there were no terms that prioritised the interests of Falcon and IBD ahead of clients. For example, it would have been in the interests of Falcon and IBD to have the clients trade more or deposit a certain amount of money to receive additional benefits from AGM.
In summary, in my view the evidence reveals numerous systemic deficiencies in the operations of AGM, Ozifin and OT which separately or cumulatively well justify ASIC’s case of a breach by AGM of s 912A(1).
Now in reaching this conclusion I have applied the following principles concerning s 912A(1)(a) elucidated in Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206 at [69] per Foster J which I restated in Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147 at [2347] to [2350].
First, the words “efficiently, honestly and fairly” are to be read as a compendious indication requiring a licensee to go about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty.
Second, the words “efficiently, honestly and fairly” connote a requirement of competence in providing advice and in complying with relevant statutory obligations. They also connote an element not just of even handedness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client’s affairs. I have emphasised here the notion of connotation rather than denotation to make the obvious point that the boundaries and content of the phrase or its various elements are incapable of clear or exhaustive definition.
Third, the word “efficient” refers to a person who performs his duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate. Inefficiency may be established by demonstrating that the performance of a licensee’s functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect.
Fourth, it is not necessary to establish dishonesty in the criminal sense. The word “honestly” may comprehend conduct which is not criminal but which is morally wrong in a commercial sense.
Fifth, the word “honestly” when used in conjunction with the word “fairly” tends to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound.
These observations are consistent with the express object of Ch 7 of the Corporations Act set out in s 760A as follows:
The main object of this Chapter is to promote:
(a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b)fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
Further, it is also not in doubt that a contravention of the “efficiently, honestly and fairly” standard does not require a contravention or breach of a separately existing legal duty or obligation, whether statutory, fiduciary, common law or otherwise. The statutory standard itself is the source of the obligation.
On the question of the proper construction of s 912A(1)(a), my attention has been drawn to various observations made by the Full Court in Australian Securities and Investments Commission v Westpac Securities Administration Ltd that I discussed earlier in the context of financial product advice. But several points should be noted.
First, before the trial judge, Westpac did not question the statements of principle propounded by ASIC which in essence applied the principles discussed by Foster J.
Second, ASIC’s three appeal grounds in that matter rather concerned s 766B(3); ASIC’s notice of appeal was tendered before me in order to properly identify the s 766B(3) points that had been raised and that I have discussed earlier in my reasons. Further, to the extent that s 912A(1)(a) was raised by Westpac on any cross-appeal, as I say the parties’ positions on construction seem to have been in substance as before the trial judge.
Third, some members of the Full Court queried whether the phrase “efficiently, honestly and fairly” should be read compendiously (O’Bryan J at [422] to [426]). But as this was not decided by at least a majority, I am bound to apply the single judge decisions unless I consider them to be plainly wrong, which I do not.
Fourth, Allsop CJ said (at [172]):
Words such as “efficiently”, “honestly” and “fairly” and a composite or compendious phrase or expression such as “efficiently, honestly and fairly” do not admit of comprehensive definition. Certainly a degree of articulation of instances or examples of conduct failing to satisfy the phrase will be helpful and of guidance, as will an articulation or description of the norms involved.
With respect, I agree with that statement. He then went on to say (at [173]):
The provision is part of the statute’s legislative policy to require social and commercial norms or standards of behaviour to be adhered to. The rule in the section is directed to a social and commercial norm, expressed as an abstraction, but nevertheless an abstraction to be directed to the “infinite variety of human conduct revealed by the evidence in one case after another.” (See Gummow WMC, “The Common Law and Statute” in Change and Continuity: Statute, Equity and Federalism (Oxford University Press, 1999) at 18–19.)
Now neither Jagot J nor O’Bryan J went so far. With respect, I prefer to view s 912A(1)(a) as enshrining a statutory norm to be read conformably with s 760A and the other provisions of the Corporations Act and the ASIC Act, of course to be applied to an infinite variety of corporate delinquency and self-interested commerciality. But to say this is not to deny that it may implicitly pick up some aspects of what some might identify as social and commercial norms, although reasonable minds might differ as to where to ground such an otherwise free-floating concept.
Let me say something about “fairly”. Judges applying s 912A(1)(a) have usually not sought to define “fairly” except to explain its structural setting in the composite phrase. This is unsurprising. And of course no dictionary definition could be adequate for the task given the intrinsic circularity with such definitions. For example, take the Macquarie Dictionary definition. First, the concept of “free from injustice” is question begging and conclusionary. It adds little to elucidate “fairly”. Second, the phase “that which is legitimately sought, pursued, done, given etc.” is also question begging. No content is given to what is legitimate. There is irremediable circularity unless legitimacy simply incorporates other statutory or common law/equitable normative standards of behaviour. Third, the phrase “proper under the rules” is also devoid of content unless “proper” means “in compliance with”. Fourth, if one construes “fair” to include “free from dishonesty”, then this all just suggests that the phrase “efficiently, honestly and fairly” should be read compendiously.
Could you convincingly define “fairly” by what it lacks? To say that fairly means free from bias, free from dishonesty, etc, is to stipulate necessary negative conditions. And to do so may give you some boundary conditions. But no positive conditions are stipulated. No content is given, let alone sufficient conditions. But to stipulate negative conditions may not be unhelpful.
Should “fairly” only be viewed from the perspective of an investor, borrower or other person interacting with the licensee? No. Fairness is to be judged having regard to the interests of both parties. Other statutory provisions may be designed to tilt the scales, but not s 912A(1)(a) and the statutory composite norm it enshrines. Disproportionate emphasis should not be given to what is the third part of a composite phrase in a manner which creates unsatisfactory asymmetry in favour of those with whom the licensee deals. This section is not a back door into an “act in the [best] interests of” obligation. Other specific provisions of the Act nicely fulfil that role. There is nothing to indicate that s 912A(1)(a) was to have that bias.
Finally, it ought not to be forgotten that s 912A(1)(a) is principally a licensee disciplinary command such that a breach thereof might sound in revocation of the AFSL, conditions being imposed on the AFSL or a pecuniary penalty being imposed. But that context gives rise to three points.
First, in such a context one would expect that the normative standard would be suitably vague and flexible. This is common when dealing with the stipulated standard of behaviour expected of licensees or regulated persons in a wide variety of contexts. But that does not invite conceptual inflation.
Second, one is looking at the licensee’s behaviour more generally rather than with regard to any one person. After all, s 912A(1)(a) is expressed:
(1) A financial services licensee must:
(a)do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; …
The language is in the generality of “the financial services covered by the licence”.
Third, and relatedly, one is not at all concerned to ascertain the boundaries and content of a cause of action or an element thereof sounding in damages in favour of an individual (cf claims for misleading or deceptive conduct or statutory unconscionability).
In summary, in my view it is not justifiable to take one word from a composite phrase, artificially elevate its significance and read it in a manner asymmetrically in favour of an investor.
As I say, on the evidence which I have set out earlier, AGM contravened s 912A(1)(a).
Further, in my view ASIC has made out its case against AGM concerning the other compliance contraventions dealing with s 912A(1) and s 961L as it concerns the conduct of the AMs, OT and Ozifin.
CONCLUSION
I am satisfied that the defendants engaged in each of the contraventions alleged by ASIC that I have identified in these reasons. I propose to make the declarations sought by ASIC in relation to each of those contraventions.
First, the questions raised by the declarations are real and not hypothetical or theoretical. Further, each of the proposed declarations discloses the basis upon which the conduct of the defendants has contravened the relevant provisions of the Corporations Act and the ASIC Act.
Second, ASIC had a real interest in raising the questions that are to be the subject of the declarations. As a public regulator, it is in the interests of ASIC to seek the declarations. The declarations will serve to record my disapproval of the contravening conduct and should also assist in achieving the necessary general deterrence.
Third, at least two of the defendants have been proper contradictors.
I will hear further from the parties as to the precise form of the declarations and on the balance of relief including on penalties and non-party compensation orders.
I certify that the preceding five hundred and thirty-five (535) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach. Associate:
Dated: 26 February 2020
SCHEDULE OF PARTIES
VID 126 of 2018 Defendants
Sixth Defendant:
AUTHENTICATE PTY LTD (ACN 600 573 233)
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