Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023
•26 August 2016
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Cassimatis (No 8)
[2016] FCA 1023
File number: QUD 574 of 2010 Judge: EDELMAN J Date of judgment: 26 August 2016 Catchwords: CORPORATIONS – whether directors can be liable for contravention of s 180(1) of the Corporations Act 2001 (Cth) where they are the only shareholders of a solvent company – nature and history of duty in s 180(1) – whether duty is a private duty owed only to corporation or whether it is also a public duty – circumstances in which directors can be liable for corporation’s breach of Corporations Act – “stepping stone” approach to liability of directors
CORPORATIONS – whether provision of financial advice by corporation contravened s 945A and s 1041E of the Corporations Act – elements which must be proved for a criminal offence by breach of s 945A or s 1041E of the Corporations Act – meaning of “subject matter of the advice” in s 945A – meaning of “likely to induce” in s 1041E – relevance of the absence of evidence of any actual inducement
CORPORATIONS – meaning of a “retail client” – whether investments by jointly advised clients can be aggregated for purposes of determining whether they are retail clients
CORPORATIONS – s 1317S of the Corporations Act – whether conduct of directors was honest and “ought fairly to be excused” – history and meaning of the expression “ought fairly to be excused”
Legislation: Acts Interpretation Act 1901 (Cth) s 13
Companies Act 1981 (Cth) ss 229(2), 535
Corporate Law Economic Reform Program Act 1999 (Cth) s 180
Corporate Law Reform Act 1992 (Cth) s 11
Corporations Act 1989 (Cth)
Corporations Act 2001 (Cth) Chs 2, 7; Divs 2, 3; Pts 7.5, 7.7, 7.9; ss 79, 179, 179(1), 180, 180(1), 180(2), 185, 206C, 206E, 206E(1), 206E(1)(a)(i), 588M, 588W, 727, 734, 761A, 761G, 761G(7), 761G(7)(a), 761G(10), 761GA, 763A(1)(a), 764A(1)(j), 766A(1)(a), 766B, 766B(1), 766B(3), 766B(4), 911A, 911B, 912A, 912A(1)(a), 912A(1)(c) 915C, 915C(1)(a), 916A, 916B, 916F, 920A, 920C(1), 941D, 944A, 944A(b), 945A, 945A(1), 945A(1)(a), 945A(1)(b), 945A(1)(c), 952E, 952G, 961M, 1012H, 1017G, 1021FA, 1021FB, 1021NB, 1021NC, 1041B, 1041E, 1041E(1),1041E(1)(a), 1041E(1)(b), 1041E(1)(c), 1041E(2), 1101B(1)(a)(i), 1308A, 1311, 1316HB, 1317E(1), 1317G, 1317GA, 1317H, 1317HA, 1317S, 1317S(1), 1317S(1)(a), 1317S(2), 1317S(3), 1324(1), 1324(6), 1318
Corporations Law (Cth) ss 232, 232(4), 232(6B), 1317DA, 1317DB, 1317EA(3), 1317EB, 1317FA, 1317JA, 1318
Evidence Act 1995 (Cth) ss 140(1), 140(2)
Financial Services Reform Act 2001 (Cth)
Financial Transaction Reports Act 1988 (Cth) s 31(1)
Trade Practices Act 1974 (Cth) s 52
Criminal Code 1995 (Cth) Ch 2; Divs 4, 5, 6; ss 2.1, 3.1, 3.2, 4.1, 5.1, 5.2, 5.3, 5.4, 5.4(4), 5.6(1), 5.6(2)
Corporations Regulations 2001 (Cth) regs 7.1.17B, 7.1.18, 7.1.18(1), 7.1.18(3), 7.1.18(3)(a), 7.1.18(5), 7.1.19, 7.1.19(1), 7.1.19(3)(b), 7.1.19(5), 7.1.19(7), 7.1.19(8)
Explanatory Memorandum, Companies Bill (Cth) 1981
Explanatory Memorandum, Corporate Law Economic Reform Program Bill (Cth) 1998
Explanatory Memorandum, Corporate Law Reform Bill (Cth) 1992
Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice Measures) Bill (Cth) 2011
Explanatory Memorandum, Corporations Bill (Cth) 1988
Explanatory Memorandum, Corporations Bill (Cth) 2001
Explanatory Memorandum, Financial Services Reform Bill (Cth) 2001
Companies and Securities Law Review Committee, Company Directors and Officers: Indemnification, Relief and Insurance, Discussion Paper No 9, April 1989
Companies Act 1936 (NSW) s 361
Companies Act 1896 (Vic) s 116(2)
Companies Act 1910 (Vic) s 288
Companies Act 1915 (Vic) s 288
Companies Act 1928 (Vic) s 288
Companies Act 1958 (Vic) ss 107, 107(1), 107(3), 107(4), 144(6), 254
Companies Act 1961 (Vic) ss 124, 124(1)
Companies (South Australia) Code 1961 (SA) ss 229(2), 229(4)
Companies (Western Australia) Code 1961 (WA) s 229(2)
Victoria, Parliamentary Debates, Legislative Assembly, 10 November 1910, 2197
Victoria, Parliamentary Debates, Legislative Assembly, 30 November 1910, 3754
Victoria, Parliamentary Debates, Legislative Assembly, 4 August 1910, 479
Victoria, Parliamentary Debates, Legislative Assembly, 9 September 1958, 331
Canada Business Corporations Act 1977 ss 122(1)(a), 122(1)(b), 122(2)
Companies (Consolidation) Act 1908 (UK) s 215
Companies Act 1900 (UK)
Companies Act 1907 (UK) s 32
Judicial Trustees Act 1896 (UK) ss 3, 3(1)(a)
United Kingdom, Parliamentary Debates, House of Commons, 21 August 1907, vol CLXXXI Fourth Series, 892
Board of Trade, United Kingdom, Report of the Departmental Committee Appointed by the Board of Trade to Inquire What Amendments Are Necessary in the Acts Relating to Stock Companies Incorporated with Limited Liability under the Companies Acts, 1862 to 1890, Command Paper 7779
Loreburn Report (1906) Cd 3052: Report of the Company Law Amendment Committee, London, HMSO, 1906, 5 [16(3)]
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Australian Securities and Investments Commission v Cassimatis (No 6) [2016] FCA 622
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Australian Securities Commission v Nomura International Plc (1998) 89 FCR 301
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Derry v Peek (1889) LR 14 App Cas 337
Diakyne Pty Ltd v Ralph [2009] FCA 721; (2009) 72 ACSR 450
Dimond Manufacturing Co Ltd v Hamilton [1969] NZLR 609
Edwards v Attorney General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667
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Date of hearing: 30-31 May, 6-7, 9-10, 13-16, 29 June 2016 Date of last submissions: 30 June 2016 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 838 Counsel for the Applicant: Mr P Davis QC with Mr S Cooper and Ms S Robb Solicitor for the Applicant: Australian Securities and Investments Commission Counsel for the Respondents: Mr P Franco QC Solicitor for the Respondents: Russells Table of Corrections 31 August 2016 In paragraph 18, “Storm’s case” has been replaced with “ASIC’s case”. 31 August 2016 In paragraph 25, “thanks that from” has been replaced with “thanks from”. 31 August 2016 In paragraph 506, “said” has been inserted after “Keane CJ”. 31 August 2016 In paragraph 562, “an element” has been replaced with “a fault element”; “in the first” has been replaced with “that ultimately arises in the s 945A(1)(c)”; and “in the second” has been replaced with “that would ultimately arise in the s 945A(1)(b) offence”. 31 August 2016 In paragraph 564, “New South Wales Court of Appeal” has been replaced with “New South Wales Court of Criminal Appeal”. 31 August 2016 In paragraph 569, “the exception in” has been deleted from the second sentence. 31 August 2016 In paragraphs 572 and 574, “761GA” has been replaced with “761G(7)(a)”. 31 August 2016 In paragraph 611, “Future of Financial Advice” has been replaced with “Further Future of Financial Advice Measures”. 31 August 2016 In paragraph 681, “to investors” has been replaced with “in relation to investors”. ORDERS
QUD 574 of 2010 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Applicant
AND: EMMANUEL GEORGE CASSIMATIS
First Respondent
JULIE GLADYS CASSIMATIS
Second Respondent
JUDGE:
EDELMAN J
DATE OF ORDER:
26 AUGUST 2016
THE COURT ORDERS THAT:
1.The matter be listed for directions for a hearing on penalties and other relief.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
EDELMAN J:
TABLE OF ABBREVIATIONS
[1]
INTRODUCTION AND BRIEF SUMMARY OF REASONS
[1]
THE ALLEGED BREACHES AND THE RELIEF SOUGHT
[26]
The alleged contraventions by Storm
[26]
The alleged contraventions by Mr and Mrs Cassimatis
[29]
The relief sought
[36]
The nature of the allegations
[38]
THE STORM MODEL
[41]
The stages of the Storm investment process
[45]
1. Preliminary appointment or “primer” meeting
[47]
2. Education workshop
[48]
3. Confidential Financial Profile meeting and preparation of cash flow
[57]
Confidential Financial Profile meeting
[57]
Preparation of the cash flows
[66]
The three types of cash flows
[73]
4. Review of the cash flow with the prospective client and subsequent steps including preparation of the SOA
[77]
The SOA and cash reserve advice
[81]
5. Presentation of the SOA
[86]
6. Client signs loan documents and investment documentation, and investment is processed
[88]
7. Further investment “steps”
[90]
“Bulk steps”
[93]
8. No exit plan
[98]
THE WITNESSES
[99]
(1) The Storm advisers and employees
[102]
A summary of the Storm adviser and employee witnesses
[104]
The themes in the evidence of the Storm advisers and employees
[112]
(1) The control that Mr and Mrs Cassimatis had over Storm
[113]
(2) The operation of the cash flow worksheets
[137]
(3) The limited circumstances in which clients were not directed to invest using the Storm model
[145]
(4) The retention of clients and increase in client investments
[153]
(2) The relevant Part E investors and the relevant Schedule investors
[157]
Which investors were proved to be planning for retirement?
[157]
The evidence of the relevant Part E investors and the pleading concerning the relevant Schedule investors
[166]
Mr and Mrs Dodson
[167]
Mr and Mrs Herd (Part E investors)
[183]
Mr and Mrs Higgs (Part E investors)
[202]
Ms Knight, Mr and Mrs Madden, and Mr and Mrs Walker (Schedule investors)
[224]
(3) The experts
[230]
The expertise of the two experts
[230]
The credibility and reliability of the two experts
[231]
The two essential issues upon which expert evidence was given
[245]
(1) Consideration and investigation of the subject matter of Storm’s advice
[247]
(2) The inappropriateness of the advice to the relevant Part E investors and Schedule investors
[291]
The investors’ risk profiles
[293]
The family home was inappropriately treated as an asset in the investment portfolio
[316]
The advice was inappropriate in any event
[328]
The irrelevance of whether the client accepts the advice
[336]
(4) The employees of ASIC
[337]
The witnesses
[337]
The themes in the evidence of the ASIC employee witnesses
[344]
The March 2005 review by Mr Holiday and Mr Armstrong
[345]
The 13 November 2007 meeting
[352]
(5) Storm’s non-executive directors
[363]
(6) Storm’s compliance auditors
[376]
(7) Storm’s IPO advisers
[393]
(8) The Aon employees
[404]
THE RELEVANT LEGAL PRINCIPLES IN RELATION TO BREACHES BY MR AND MRS CASSIMATIS
[413]
The history and nature of the directors’ duties in s 180
[413]
The historical antecedents to the modern statutory duties of directors
[416]
The legislative imposition of private and public duties
[429]
The parties’ submissions about the nature of s 180 as a public or private wrong
[446]
A contravention of s 180(1) might involve both a public and a private wrong
[449]
The nature of public wrongs and private wrongs
[449]
Contraventions of s 180(1) involve both a public and a private wrong
[454]
Authority considering the operation of s 180(1) as a public wrong
[461]
Summary of conclusions on the nature of s 180(1) when enforced as a public wrong
[469]
The content of the duty to the company in s 180(1)
[479]
The submission that s 180(1) does not apply where the directors are the sole shareholders of a solvent company
[496]
Inconsistency of the submission with the text of s 180(1)
[499]
Inconsistency of the submission with the history and context of s 180(1)
[503]
The submission is unprincipled
[504]
The submission is not supported by authority
[507]
The submission that s 180 cannot be used to create “back door” accessory liability
[526]
The Maxwell decision
[533]
THE BREACHES BY STORM
[544]
The alleged breaches of s 945A
[544]
The elements which must be proved for a civil contravention of s 945A
[544]
The concepts used in s 945A
[544]
Section 945A
[549]
The elements which must be proved for a criminal contravention of s 945A
[552]
The interaction between s 945A and the Criminal Code 1995 (Cth)
[552]
Characterising the elements of an offence under s 945A(1)(b)
[557]
No criminal offence by Storm was proved
[567]
Which investors were retail clients?
[568]
Is the relevant amount for a retail client the amount advised or the amount actually invested?
[576]
The “step” investments in the SOAAs
[582]
Can the investors be aggregated?
[587]
Is the total amount of the joint investment the amount invested by each investor?
[594]
Conclusions on which investors are retail investors
[598]
The first limb of s 945A(1): investigation into relevant personal circumstances
[599]
The second limb of s 945A(1): reasonable consideration and investigation of the subject matter of the advice
[601]
The subject matter of the advice
[603]
Was the consideration and investigation of the subject matter of the advice reasonable?
[613]
The third limb of s 945A(1): appropriate advice
[618]
The alleged breaches of s 1041E
[621]
The elements of a contravention of s 1041E
[621]
The allegations of contravention of s 1041E
[623]
Whether the statements were likely to induce persons to acquire financial products
[631]
The persons whom the statements must be “likely to induce”
[631]
The meaning of “likely to induce”
[632]
Were the statements likely to induce the investors to purchase?
[636]
The statements were not false in a material particular nor were they materially misleading
[648]
The Financial Services Guide statement
[649]
The SOA statements
[656]
The falsity or misleading nature ought reasonably to have been known by Storm
[665]
Conclusions on s 1041E
[668]
The alleged breaches of s 912A consequent upon the breaches of s 945A
[669]
THE CONTRAVENTION BY EACH OF MR AND MRS CASSIMATIS
[675]
Application of the test for contravention of s 180(1)
[675]
The reasonable foreseeability and likelihood of contraventions of the Corporations Act
[679]
Storm’s insurers, law firms and the Financial Planning Association
[701]
Paragem
[711]
The absence of any attempt to conceal any facts and the knowledge of lenders and advisers
[719]
The ASIC reviews and correspondence
[736]
The non-executive directors
[759]
The IPO advisers
[764]
Borrowing to invest a popular strategy and the unrepresentative nature of investors
[769]
The consequences of contravention and the burden of alleviating action
[772]
THE RELIEF FROM LIABILITY DEFENCE
[785]
Section 1317S of the Corporations Act
[785]
The history of s 1317S
[789]
The omission of the requirement for “reasonableness”
[808]
Whether Mr and Mrs Cassimatis acted honestly and ought fairly to be excused
[814]
ASIC’s ALTERNATIVE CLAIM FOR DISQUALIFICATION BASED ON SECTION 206E
[825]
CONCLUSION
[833]
TABLE OF ABBREVIATIONS
AFSL
Australian Financial Services Licence.
Aon
Aon Risk Services Australia Ltd. Storm’s insurance broker.
ASC
Australian Securities Commission, the predecessor to ASIC. Referred to as ASIC in these reasons other than when quoting from extracts.
ASIC
Australian Securities and Investments Commission.
Authorised Representative
A person authorised in accordance with s 916A or s 916B of the Corporations Act 2001 (Cth) to provide a Financial Service on behalf of Storm as a holder of an AFSL.
CBA
Commonwealth Bank of Australia, including the business described as Colonial Margin Lending.
Employee Representative
A person employed by Storm who collected personal and financial information from a client and who also generally presented Storm’s advice to that client. Employee Representatives had slightly more control over the content of Storm’s advice than Authorised Representatives.
FPA
Financial Planning Association of Australia Limited.
GFC
Global Financial Crisis.
index funds
Managed Investment Schemes that attempt to match closely the investment returns of a specific group of listed shares, bonds or securities, usually represented by a recognised benchmark such as the ASX All Ordinaries Index.
IPO
Initial Public Offering.
LVR
Loan to Value ratio. The proportion of the loan to the value of the property which secures it.
MSJ
Mallesons Stephen Jaques (solicitors).
Paragem
Paragem Partners Pty Ltd, a company providing compliance services to financial services businesses. Paragem acquired Tribeca Compliance which had acquired Integratec.
PwC
PriceWaterhouse Coopers (accountants).
PwC Securities
A firm providing services relating to securities transactions, which holds an AFSL and has a number of Authorised Representatives.
retail client
A client of Storm’s who satisfies the definition of retail client in s 761G of the Corporations Act which, in this case, depended upon whether the price for the investment in Storm index funds and cash management trust reserves was equal to or exceeded $500,000.
Part E investors
The nine investors (four couples and an individual) who invested using the Storm model and whose circumstances were pleaded in Part E of ASIC’s statement of claim.
relevant investors
The Part E and Schedule investors in relation to whom Storm contravened s 945A of the Corporations Act: (i) Mr and Mrs Dodson (Part E investors); (ii) Mr and Mrs Herd (Part E investors); (iii) Mr and Mrs Higgs (Part E investors); (iv) Ms Knight (Schedule investor); (v) Mr and Mrs Madden (Schedule investors); and (vi) Mr and Mrs Walker (Schedule investors).
Schedule investors
The investors who invested using the Storm model and whose circumstances were pleaded in summary form in a schedule to ASIC’s statement of claim.
SOA
Statement of Advice provided by Storm to a client.
SOAA
Statement of Additional Advice, being further advice to the Statement of Advice provided by Storm to a Storm client including advice to invest more funds in the Storm model.
Storm
Storm Financial Limited, at previous times also described as Storm Financial Pty Ltd, ozdaq Securities Pty Ltd and Cassimatis Securities Pty Ltd.
Tribeca
Tribeca Compliance or Tribeca Learning Ltd (a compliance corporation which became a subsidiary of Paragem).
INTRODUCTION AND BRIEF SUMMARY OF REASONS
This litigation was brought by ASIC against Mr and Mrs Cassimatis for alleged breaches of their duties of care and diligence as directors of Storm Financial Limited (Storm). Shortly before the intense period of the Global Financial Crisis in the second half of 2008, Storm was a highly profitable company with $77 million of annual revenue and $120 million of consolidated gross assets.
Mr and Mrs Cassimatis submitted that this case is unique in Australian corporate history. As far as I am aware, it is unique in its combination of three factors. First, the allegations of breach against the directors rely upon a single provision of the Corporations Act 2001 (Cth). That provision is s 180(1), which imposes a duty (in broad shorthand) to exercise their powers and discharge their duties with “care and diligence”. Secondly, the directors’ breaches of care and diligence are alleged to have occurred while Storm was a solvent company and while Mr and Mrs Cassimatis, as directors, were also the only shareholders. Thirdly, there is no dispute that Mr and Mrs Cassimatis managed Storm in good faith and in accordance with the informed wishes of all the shareholders (themselves).
Mr and Mrs Cassimatis submitted that a director who is the sole shareholder of a solvent corporation could not breach s 180(1) by a course of conduct which was highly likely to contravene provisions of the Corporations Act, or even if he or she intentionally acted in contravention of the Corporations Act. Mr and Mrs Cassimatis relied upon the principle that “where the directors and the shareholders are one and the same, ratification is implicit”. For the reasons set out later in this judgment, I do not accept that this principle will always preclude a finding of contravention of s 180(1) by a director.
In one respect, ASIC set a high bar for itself to establish liability. ASIC’s case included an allegation that Mr and Mrs Cassimatis were in breach because they had acted unreasonably within the meaning of s 180(1), and placed Storm in a situation in which it had actually breached the Corporations Act. Part of ASIC’s case therefore required it to prove that Storm had actually breached the Corporations Act. To borrow the expression of Keane CJ in Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364, 370 [10], ASIC relied upon an actual breach by Storm as a “stepping stone” for a finding that Mr and Mrs Cassimatis contravened the Corporations Act.
I have serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1) by an officer. For instance, suppose a director unreasonably (within the terms of s 180(1)) and intentionally commits acts which are extremely likely to involve a serious breach of the Corporations Act perhaps even threatening the very existence of the corporation. As I explain later in these reasons, it might be seriously doubted whether the director could escape liability simply because, by some good fortune, no actual breach eventuates. Loss is not a required element of an action for contravention of s 180(1) of the Corporations Act.
Although it may not have been necessary for ASIC to establish any actual breach by Storm, ASIC’s case was presented in that way. For that reason, and because the parties conducted their case and called evidence on this basis, I have proceeded on the basis that actual breach must also be established.
On the other hand, I do not accept ASIC’s submission that an actual breach by Storm is sufficient to establish liability under s 180(1) of the Corporations Act. ASIC submitted that directors could be liable for a contravention of s 180(1) where the directors had failed to ensure that the corporation was not in breach of its duties under the Corporations Act. In very broad summary, I do not accept this submission because a duty to “ensure” is a duty of strict liability. Section 180(1) is not a duty of strict liability.
The remainder of this introduction summarises, in broad outline, the reasons why Mr and Mrs Cassimatis contravened s 180(1) of the Corporations Act. The reasons in this outline are discussed in far greater detail later in these reasons. It suffices in this outline to provide a broad sketch of the essential features of this case and the Storm model. These essential features of the Storm model are relevant because one of the most significant matters in dispute between the parties was the foreseeability, and likelihood, of the breaches of the Corporations Act which occurred.
The Storm model generally involved investors being initiated into Storm by a preliminary appointment or “primer” meeting followed by an “education workshop”. After the workshop there were meetings with an adviser. Storm would centrally produce a cash flow for the investor based on information provided by the investor to the adviser. Storm would also centrally produce a Statement of Advice (SOA). Much of the SOA was in standard, or template, form although particular amounts and ratios were tailored to the investor and some other sentences and paragraphs would be included for that particular investor. Almost 90% of Storm’s clients were advised to adopt a strategy described by one witness (Mr Cashel) as “double gearing”. This advice involved (i) borrowing against the security of their homes; (ii) obtaining a margin loan; and (iii) using the funds from these loans to invest in index funds, establishing a cash reserve, and paying Storm’s fees.
The investment by a Storm client did not usually conclude after this first occasion of investment. Consistently with the Storm model, Storm would send Statements of Additional Advice (SOAAs) to advisers for investors, or sometimes directly to investors, to make additional “step” investments if the market rose or fell by a certain amount, or if the client’s circumstances changed significantly. One of the non-executive directors (Mr Nelson) observed that in one month in 2007 Storm automatically generated a record 1600 SOAAs for clients.
The investors upon whom ASIC focused as typical examples of its case were Mr and Mrs Dodson. Like other investors, Mr and Mrs Dodson attended an education workshop run by Storm. The education workshop generally emphasised the reliability and low risk involved in the Storm model and the need for people to take on debt. One of the typical slides shown at that presentation said that volatility or “manageable risk” is “investing in an asset whose value can rise and fall but in such a way that over a longer time frame there is certainty that the value will rise”. A hypothetical question was asked of the attendees about which person of several persons they would want to be. The “correct answer” was that the prospective client should “want to be” the person who owes $2 billion.
In November 2007, Mr and Mrs Dodson obtained financial advice from a representative of Storm. Storm understood that the Dodsons were “preparing for retirement in a few years”. At the time that Mr and Mrs Dodson approached Storm, Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum. They were the guardians of a girl whose parents had died. They owned their own home. They had superannuation savings and around $10,000 surplus income each year. Mr Dodson was working night shifts. He had a heart condition.
Storm provided Mr and Mrs Dodson with a 138-page SOA. The SOA followed the Storm model of advice. Mr and Mrs Dodson took Storm’s advice. They borrowed funds against the security of a mortgage over the unencumbered home in which they had lived for 27 years. They used the borrowed money to invest in index funds. They borrowed again for a margin loan from Colonial Margin Lending. Some of the remaining borrowings were used to create a “cash dam” to pay for expenses including interest. Mr and Mrs Dodson also had to use the borrowed money to pay $26,960 to Storm for its fees.
After the GFC in 2008, Mr and Mrs Dodson liquidated their investments. They now have a home loan on their house of $287,000 (with an offset of $197,000) and line of credit drawn to $32,000. A $65,000 investment that they had prior to investing with Storm has been lost. Neither has been able to retire.
A similar pattern occurred for a number of other investors pleaded by ASIC. Some of them, such as Mr and Mrs Higgs, were advised to make up to seven additional “step” investments, increasing their borrowing and investment in the index funds on all those occasions. Mr and Mrs Higgs were retired with $79,000 collectively in income before tax (including a disability pension for Mr Higgs). They had few assets other than their home. They commenced investing with Storm by borrowing against their home and investing around $300,000. They accepted Storm’s advice on each of the seven subsequent occasions, borrowing additional amounts and investing those amounts of between $20,000 and $100,000. Their last investment was in January 2008 shortly before the GFC. They lost around $420,450. Mr Higgs has been forced back to work despite his disability.
Although ASIC’s case involved detailed pleading and evidence concerning nine investors, and a pleaded schedule involving many others, the case was not proved in relation to many of the pleaded investors. This is because (i) some of the pleaded investors were not “retail investors”; (ii) there was no evidence that some of the pleaded investors were retired or approaching retirement; and (iii) ASIC did not prove a breach of s 1041E of the Corporations Act.
Following sensible admissions that were made concerning the Schedule investors, there was little evidence or submissions led in relation to them. The submissions concerning the Part E investors were also, quite properly and economically, focused upon Mr and Mrs Dodson as a paradigm case. Ultimately, I have concluded that ASIC established civil contraventions by Storm of s 945A(1)(b) and s 945A(1)(c) of the Corporations Act in relation to Mr and Mrs Dodson as well as nine other investors. In total, the contraventions concerned 11 investors or six instances if couples, who were jointly advised, are treated jointly. My reasons generally focus upon these investors to whom I refer to as the “relevant investors”.
Each of these relevant investors had five matters in common. These five matters were as follows: (i) they were over 50 years old; (ii) they were retired or approaching and planning for retirement; (iii) they had little or limited income; (iv) they had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) they had little or no prospect of rebuilding their financial position in the event of suffering significant loss. In these reasons I will often refer to these matters in summary form as investors who were retired or near retirement with few assets and limited income. Although there were other investors who had these five pleaded characteristics, ASIC’s case has only been proved in relation to the relevant 11 investors.
Mr and Mrs Cassimatis’ case was heavily based upon submissions that the Storm model was viable and that contraventions were not reasonably foreseeable. The many submissions that they made on this point included that Storm had advised many professionals including lawyers and financial planners. They submitted that Storm had been reviewed by compliance professionals, by ASIC, and by its non-executive directors. They argued that there was no evidence of any concern about the Storm model by any of these people. Mr and Mrs Cassimatis also relied on evidence that the share market index had not fallen during any ten year period in history. They submitted that the only reason the Storm model failed was because of a “Black Swan” event, namely the GFC.
It is essential to observe at the outset that the viability of the Storm model was not in dispute in this case. In opening submissions (at [16]), and closing submissions (at [32]), ASIC iterated and reiterated that although Storm’s strategy might have been considered aggressive, ASIC did not allege that the Storm model was flawed or inappropriate for all investors. The allegations of contravention were concerned with the Storm model only to the extent to which it involved investors who fell within a particular class. As I have explained at [18] above, that class covered all pleaded investors who had the five characteristics which I have described in shorthand as retired (or near retired) investors with few assets and limited income.
Mr and Mrs Cassimatis had an extraordinary degree of control over Storm. They used their powers as directors to create an environment in which (as they were aware) it was almost inevitable that the Storm model would be applied to people with a high degree of financial vulnerability within this class. There is no magic in the manner in which ASIC defined the class. The characteristics illustrate, however, a class of people who were, or were amongst, the most vulnerable of Storm’s clients. Mr and Mrs Cassimatis would reasonably have been aware that the Storm model was applied to financially vulnerable clients including those in the class pleaded by ASIC.
For the reasons explained in detail later, a reasonable director with Mr and Mrs Cassimatis’ responsibilities, and in Storm’s circumstances, would have realised that the application of the model to people in the pleaded circumstances was likely to involve inappropriate advice. The reasonable director would have taken some alleviating precautions to prevent the giving of that advice. I reach this conclusion for the detailed reasons given later, but with a strong awareness that it is made in the context that a director’s powers to act are, of the very nature of corporations, ones which often require risks to be taken.
Mr and Mrs Cassimatis should have been reasonably aware that the application of the Storm model would be likely to (and did) cause contraventions of s 945A(1)(b) and s 945A(1)(c). The contraventions of s 945A(1)(b) occurred because Storm did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances. The contraventions of s 945A(1)(c) occurred because Storm provided financial advice which was not appropriate to the investors having regard to the consideration and investigation of the subject matter of the advice that ought to have been undertaken. Those contraventions were not merely likely to occur. They were contraventions which could have (and did have) devastating consequences for many investors in that class and the discovery of those breaches would have threatened the continuation of Storm’s Australian Financial Services Licence (AFSL) licence and Storm’s very existence.
Although I conclude that Mr and Mrs Cassimatis breached their duties as directors, their breaches involved only one contravention each. This was conceded by ASIC in closing submissions. ASIC’s concession should be accepted. If a security guard at a storage facility carelessly failed to notice that the lock on the back door was broken, he would commit a single breach. The breach would not be multiplied even if it turned out that his conduct had contributed to the loss of the belongings of a different customer for every day of the month during which the guard was responsible for the facility.
The pleaded conduct by ASIC was that Mr and Mrs Cassimatis created a scenario which caused or permitted advice to be given to particular investors to invest in accordance with the Storm model. That involved a single contravention of their duties. It did not involve a separate breach in relation to each of the 45 investors upon whom ASIC relied. For instance, apart from a letter of thanks from Mr and Mrs Sondergeld, it was never alleged, and it was not proved, that Mr or Mrs Cassimatis had met, spoken to, or had any dealings with any of those 45 investors. It was not alleged that Mr or Mrs Cassimatis had prepared or read any cash flow or any advice that was provided to any of the 45 investors. It was not alleged that Mr or Mrs Cassimatis knew that any particular advice was provided to any of those 45 investors, as opposed to advice of that general nature being given to persons within the same class as many of the 45 investors.
THE ALLEGED BREACHES AND THE RELIEF SOUGHT
The alleged contraventions by Storm
ASIC’s case against Mr and Mrs Cassimatis begins with allegations of contraventions by Storm. The case against Mr and Mrs Cassimatis is dependent upon proof of one or more of these contraventions.
The primary contraventions allegedly committed by Storm are as follows:
(1)s 945A(1)(b) of the Corporations Act because it did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances;
(2)s 945A(1)(c) of the Corporations Act because it provided financial advice which was not appropriate to the investors having regard to the consideration and investigation that Storm ought to have undertaken, but did not undertake, of the subject matter of the advice; and, or alternatively
(3)s 1041E(1) of the Corporations Act by making statements to the investor about the consideration which had been given to the investor’s personal circumstances in creating the advice, which statements were misleading and deceptive.
These three breaches are also relied upon to establish further breaches of (i) s 912A(1)(a) of the Corporations Act by providing the financial advice to the investor and failing to do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly; and (ii) s 912A(1)(c) of the Corporations Act by failing to comply with the financial services laws in providing the financial advice to the investor.
The alleged contraventions by Mr and Mrs Cassimatis
ASIC alleged that Mr and Mrs Cassimatis contravened s 180(1) of the Corporations Act in two different ways.
First, ASIC pleaded at [2301] of its statement of claim that Mr and Mrs Cassimatis breached their duties of care and diligence by “causing and/or permitting Storm to provide advice to the Investors in accordance with the Storm Model in a manner which caused Storm to contravene [ss 912A(1)(a), 912A(1)(c), 945A(1)(b), 945A(1)(c) and 1041E(1) of the Corporations Act]”.
The particulars of the alleged failure to exercise their powers with the required degree of care and diligence were that a reasonable person would not have caused or permitted Storm to give advice to clients or prospective clients who were: (i) over 50 years old; (ii) retired or approaching and planning for retirement; (iii) had little or limited income; (iv) had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) had little or no prospect of rebuilding their financial position in the event of suffering significant loss.
It is important to emphasise that there is no magic in the precise definition of this class of investor relied upon by ASIC or the precise definition of the five characteristics of the class pleaded by ASIC. For instance, it might be strongly arguable that the class would include persons such as a 45 year old with the same additional characteristics (although not over 50 years old), who had retired or who was near retirement because of permanent injury or illness. The fundamentals of the pleaded class were that it involved those persons who were retired, or approaching retirement, and who were particularly vulnerable to losses. Some of the expert evidence focused upon the characteristic of the pleaded investors as retired or approaching retirement but it was implicit (and sometimes explicit) in that expert evidence that the Storm model might not be inappropriate for retirees who were wealthy and therefore not financially vulnerable (ts 276).
Secondly, ASIC pleaded at [2301A] that in causing or permitting that advice to be provided in a manner which caused Storm to contravene the Corporations Act, Mr and Mrs Cassimatis exposed Storm to a foreseeable risk of harm of: (i) being found guilty of an offence under s 1311 of the Corporations Act; (ii) cancellation or suspension of Storm’s AFSL by action under s 915C(1)(a) of the Corporations Act; (iii) a banning order by action under s 920A of the Corporations Act; (iv) court orders under s 1101B(1)(a)(i) of the Corporations Act; and (v) civil proceedings by the Investors. ASIC says that this degree of exposure to risk was greater than that to which a director, acting with the required degree of care and diligence, would permit Storm to be exposed.
As I explain later in these reasons, it is notable that neither of these pleaded manners of contravention involved any allegation that Mr and Mrs Cassimatis acted in any particular way which was directed toward any particular investor. ASIC properly conceded that the conduct of Mr and Mrs Cassimatis which founds their liability under s 180(1) consisted of a single, continuing course of conduct and (if proved) amounted to a single contravention of s 180(1) by each of them (ASIC closing, [37]).
Following various concessions, there were 45 individuals, or 27 individuals or couples, upon whom ASIC relied in closing submissions. The reference to Part E investors is a reference to those investors where the facts are pleaded in detail in Part E of the statement of claim. The Schedule investors are those investors whose details are pleaded in a very summary form in a schedule to the statement of claim:
(1)Mr and Mrs Dodson (Part E investors);
(2)Mr and Mrs Herd (Part E investors);
(3)Ms Longmore (Part E investor);
(4)Mr and Mrs Sondergeld (Part E investors);
(5)Mr and Mrs Higgs (Part E investors);
(6)Ms Allom (Schedule investor);
(7)Mr and Mrs Harvey (Schedule investors);
(8)Ms Somossy (Schedule investor);
(9)Mr and Mrs Betts (Schedule investors);
(10)Mr Bleakley (Schedule investor);
(11)Mr and Mrs Dillon (Schedule investors);
(12)Mr and Mrs Galley (Schedule investors);
(13)Mr and Mrs Gordon (Schedule investors);
(14)Mr and Mrs Hainsworth (Schedule investors);
(15)Mr and Mrs Harper (Schedule investors);
(16)Mr and Mrs Johnson (Schedule investors);
(17)Mr Kilgallon and Ms Harman (Schedule investors);
(18)Ms Knight (Schedule investor);
(19)Mr and Mrs Madden (Schedule investors);
(20)Mr Perkins (Schedule investor);
(21)Ms Quinton (Schedule investor);
(22)Ms Roberts (Schedule investor);
(23)Mr and Mrs Schuler (Schedule investors);
(24)Ms Tulloch (Schedule investor);
(25)Mr and Mrs Walker (Schedule investors);
(26)Mr and Mrs Williams (Schedule investors); and
(27)Mr and Mrs Wilson (Schedule investors).
The relief sought
ASIC seeks the following primary relief:
(1)by s 1317E(1) of the Corporations Act, declarations that Mr and Mrs Cassimatis each contravened their obligations as directors of Storm under s 180(1) of the Corporations Act;
(2)by s 1317G of the Corporations Act, civil penalties in respect of each of those contraventions;
(3)by s 206C or alternatively s 206E(1)(a)(i) of the Corporations Act, orders that Mr and Mrs Cassimatis each be disqualified from managing corporations; and
(4)by s 1324(1) and s 1324(6) of the Corporations Act, orders that Mr and Mrs Cassimatis each be restrained from holding an AFSL or from providing financial services under any AFSL.
By consent of the parties, and on the basis of the assumption upon which they had proceeded for several years, the trial of liability was held separately from questions of appropriate remedies. With one exception, all of the orders sought by ASIC are dependent upon proof that Mr or Mrs Cassimatis contravened s 180(1) of the Corporations Act. The exception is in relation to the orders sought under s 206E(1)(a)(i). Under that subsection, the orders sought by ASIC require proof of contraventions by Storm and failure by Mr or Mrs Cassimatis to take reasonable steps to prevent each contravention.
The nature of the allegations
Section 140(1) of the Evidence Act 1995 (Cth) provides that in a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities. Section 140(2) then provides that:
Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account:
(a) the nature of the cause of action or defence; and
(b) the nature of the subject-matter of the proceeding; and
(c) the gravity of the matters alleged.
This provision includes the common law approach, from Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336. Part of that principle is the consideration of the ordinary experience of people that the more grave the allegation, the less likely it might be expected to be (all other things being equal) that a respondent would, on the balance of probabilities, have committed the act. An assessment of the gravity of the allegations will include consideration of the likely consequences if the allegations are made out. As Mansfield and Gilmour JJ said in Ashby v Slipper [2015] FCAFC 15; (2014) 219 FCR 322, 345 [69], the more grave the allegations and their potential consequences, “the stronger is the evidence required to conclude that the allegations have been established which will give rise to those consequences”.
In this case, the allegations against Mr and Mrs Cassimatis involve a weighty subject matter and allegations of substantial gravity, including conduct which is the subject of potential penalties and potential banning orders. My findings in this case are made in light of these considerations in s 140 of the Evidence Act 1995 including the gravity of the allegations.
THE STORM MODEL
Before I turn to discuss the evidence of the witnesses, it is necessary to explain the operation of the Storm model which sets the scene for their evidence. The evidence of the operation of the Storm model was given in the most comprehensive detail in Mr McCulloch’s evidence. It is necessary to say something about Mr McCulloch’s evidence because of its importance. Apart from Mr and Mrs Cassimatis, he was one of the people who were the most familiar with Storm’s operations.
Mr McCulloch was an impressive and careful witness with great knowledge of Storm’s activities. His affidavit evidence was comprehensive. In his oral evidence he answered questions directly with careful consideration. On many occasions he considered a question at length before responding sometimes with a simple “yes”. His recollection was very good. But it was not perfect. For instance, he was mistaken about the year when he started providing financial advice. He frankly admitted that the documentary evidence related to this was likely to be more reliable than his memory.
Mr McCulloch had great familiarity with the Storm model. For more than a decade before 1998 his role as an employee of the Commonwealth Bank was to manage the bank’s relationship with Mr and Mrs Cassimatis. In late 1998, he began working for Storm in the Townsville office with 10 to 12 other people. Mr McCulloch was Storm’s group accountant (a senior management position). He prepared monthly and quarterly reports, and liaised with the banks. In 2002 he also took on the role of a senior adviser (ts 167). By 2007 his predominant role was an adviser although sometimes he also prepared loan application requests, Confidential Financial Profiles, and presented cash flows.
Mr McCulloch participated in staff, client and Storm Executive Committee meetings. He attended numerous client education workshops and briefings to financial institutions. From 2005 to 2008, he presented many of Storm’s education workshops. He learned directly from, and reported to, Mr and Mrs Cassimatis. Mr McCulloch explained that although Storm’s business grew and was refined over time, the underlying elements of the business did not change.
The stages of the Storm investment process
Mr McCulloch had a comprehensive understanding of the process usually adopted by Storm when advising clients. As he explained, that process had various stages. The stages were as follows:
(1)a preliminary appointment or “primer” meeting;
(2)an education workshop;
(3)a Confidential Financial Profile meeting and preparation of cash flow;
(4)a review or reviews of the recommended cash flow with the prospective client and subsequent steps including the preparation of the SOA;
(5)a presentation of the SOA;
(6)the signing by the client of the loan documents and investment documentation, and the investment processing;
(7)further investment “steps”; and
(8)no exit plan.
The investment process rarely took fewer than three months to complete.
1. Preliminary appointment or “primer” meeting
The first meeting with a prospective client generally went for half an hour to an hour. Mr McCulloch said that during these meetings, prospective clients were told words to the effect that Storm had a unique style of advice and was not a traditional financial planner. They were told that Storm was a specialist organisation that used “debt as a cornerstone” of its advice. There would be a preliminary conversation with prospective clients about their current financial situation and their reasons for seeking financial advice. Prospective clients who were still interested after the preliminary appointment were invited to attend an education workshop.
2. Education workshop
Storm’s education workshops were generally presented by Mr Cassimatis or employees who were chosen by Mr Cassimatis. Mr McCulloch and Mr Benson said that Storm had a strict rule that every client was required to attend an education workshop before they were given any advice. Storm’s Procedural and Compliance Manuals described it as part of the “Client Process”.
The education workshops typically lasted between several hours and one day. They were held approximately every fortnight at Storm’s offices and by videoconference if necessary for remote clients. There were usually between 20 and 25 people in attendance, and up to 50 people watching by videoconference.
Mr McCulloch said that he recalled Mr Cassimatis saying to him words to the effect that the purposes of the education seminars were to “outline the Storm style of investment advice and to weed out people who would be unlikely to invest with Storm because they only wanted to invest in real estate” or were “complete nervous Nellys who would not want to mortgage their home”. Mr McCulloch recalled Mr Cassimatis saying words to the effect that he did not want to “waste Storm’s resources on prospective clients who were never going to invest”.
Mr McCulloch said that during the education workshops, the presenter would explain:
(1)the types of assets that could be invested in;
(2)that Storm recommended clients build wealth by using home loans and margin loans to borrow funds to invest in index funds;
(3)that Storm was not a traditional financial planner and specialised in one area of client advice, that being advice about investing in indexed share funds; and
(4)that volatility in the share market was used to trigger further investments. Mr McCulloch said that attendees were told that Storm’s philosophy was that if the share market fell in value by 10% or more from the date of the initial investment, a further investment should be made using cash reserves to fund the further investment and lower the average cost of the investment; and if the share market rose in value by 10% or more from the date of the initial investment, a further investment should be made by increasing the margin loan and returning the LVR to its level at the time of the initial investment.
The same PowerPoint presentation was used during each education workshop as a visual aid, although Mr and Mrs Cassimatis expanded and modified the presentation over time. The PowerPoint presentation initially involved 20 to 30 slides. Over time it increased to approximately 350 slides, although not all of the slides were presented at each workshop. The content of the workshop could be changed only after approval by the compliance team (ts 178).
The format of the workshop was standardised by the slides and the phrases which were used. Mr McCulloch learned from Mr Cassimatis to say particular phrases when particular slides from the PowerPoint presentation were displayed and he used those phrases when presenting (ts 179).
A central theme of the workshop, whoever presented it, was that clients should embrace debt rather than be scared of debt. For instance, one slide of the PowerPoint presentation depicted three people, owing $2 billion, $200,000 and $0 respectively. The audience was invited to choose which person they would rather be. If their answer was the person owing no money, Mr McCulloch would explain that this was a “herd” mentality, and that the audience had to think differently about the concept of wealth. If the audience’s answer was $200,000, Mr McCulloch was trained to say that this was the “worst position to be in”, and that it was indicative of “Mum and Dad, growing up in the suburbs, trying to put their kids through school, paying off the mortgage, living life stressed out.” The “correct” answer was the person owing $2 billion. Mr McCulloch would say, “If you owe nothing in retirement, that means you own nothing. If you owe $2 billion in retirement, what does that mean you own? It means you must own at least $4 billion to $5 billion”.
When Mr McCulloch presented the workshop, he would compare two types of investors. Both investors had a surplus income of $500 per month. The first, “Tom”, invested that $500. The second, “Helen”, approached Storm for advice, and, following that advice, bought a debt of $500 per month, and then bought an expensive asset. Mr McCulloch was trained to explain how Helen would end up with a capital base worth $2.12 million, which was considerably better than Tom’s investment. Using this example, Mr McCulloch would explain that “the more you borrow, the higher the return on your equity”. Graphs would be shown to the audience, and Mr McCulloch would explain that a 10% debt ratio was too low to be effective for the purpose of creating wealth, and that the debt ratio “optimum range” was between 40-60%.
The workshop also compared different types of investments. With reference to comparative tables, Mr McCulloch would explain that, historically, shares performed better than both cash and property. He said that Mr Cassimatis trained him to talk about a unit in an index fund as a “supershare”, because it is a “truly diversified fund”, and “actually owns every share available on the ASX”. Mr McCulloch said that he was trained to say words to the effect of:
So what Storm recommends is that you guarantee yourself the big stacks of coins by investing your money in one of these supershares. So how do you buy one of these supershares. You do it by pooling your money with hundreds or thousands of other investors’ money and putting it in a unit trust. That unit trust in turn will buy shares in every company that makes up the All Ords in the same proportion that its held within the All Ords… This is how we guarantee you the big stacks of coins, which is the average return….
3. Confidential Financial Profile meeting and preparation of cash flow
Confidential Financial Profile meeting
After the education workshop, prospective clients who still wished to invest would generally have a one-on-one meeting with an adviser or adviser’s assistant. This was known as the Confidential Financial Profile meeting. At this meeting, the prospective client would be given a Financial Services Guide, and would be asked to complete a Confidential Financial Profile.
The Confidential Financial Profile meeting involved obtaining from the prospective client a significant amount of financial information and documentation (including pay slips, bank statements, loan statements, superannuation statements and insurance documentation). Mr McCulloch would spend up to two hours completing a Confidential Financial Profile which recorded the client’s personal details, employment details, income, living and other expenses, and assets and liabilities.
Mr McCulloch said that he was trained to say at the start of the meeting words to the effect of:
Remember Storm isn’t here for everybody. The type of advice we’re going to give may make you feel uncomfortable, and we need to talk about what we talked about during the workshop. During the workshop, we showed you certain slides to deal with change, and remember we’re trying to get you to think logically, not emotionally. If you think emotionally, you’ll never put up with volatility. If you think logically, you’ll realise that people who make more money tend to put up with assets that can increase and decrease in value over time. In relation to risk and volatility, we talked about risk during the workshop and we talked about the fact that there are different types of risks, one being default risk, one being asset selection risk….
You may still think that to get a high return you need to take a higher risk. That’s not Storm’s point of view. Storm’s point of view is that you need a higher volatile asset that gives you high returns without the risk of default.
Prospective clients were asked to read and put their initials on the “volatility and risk statements” in the Confidential Financial Profile. That statement repeated the information provided to the client during the education workshop by drawing a distinction between two types of risk:
(1)“real risk” was described as the possibility of irrecoverably losing some or all of the client’s capital; and
(2)“manageable risk” was described as investing in an asset that has value which can rise and fall (volatility) but in such a way that there is certainty that over a longer time frame the value will rise.
Prospective clients were then asked to sign the box that applied to them. There were four boxes:
(1)“I am prepared to entertain speculative ventures of a risky nature and am prepared to lose my asset totally if necessary in an attempt to make high profits”;
(2)“I am prepared to accept short to medium term volatility and am also prepared to accept a level of real risk where some of my asset may be irrecoverably lost”;
(3)“I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated”; and
(4)“I am not prepared to accept any level of volatility and realise that this selection will result in low growth and substantial exposure to inflation risk”.
Mr McCulloch said that before prospective clients ticked a box, he was trained to say words to the following effect:
[Storm is] going to recommend that you invest in a volatile asset, but a safe volatile asset, and that’s why we invest in ‘supershares’.
And that’s what this third statement is all about. We’re asking you to take on the risk of a volatile asset but a safe volatile asset. And that’s the risk we’re asking you to accept.
The first box isn’t a Storm client. That’s a person who is prepared to take on extreme risk and put all their money in one stock. And we all know what happened to HIH, OneTel and Alan Bond.
The last box means that you’re part of the herd. You are going to be one of those 88 people reliant upon the pension in retirement.
If you tick either the first box or the last box you won’t be a Storm client. You are either too risky or too conservative. Both will result in poor financial outcomes.
So take your time, read the statements and then initial the box that applies to you.
Mr McCulloch said that he was told by Mr and Mrs Cassimatis that if the prospective client did not sign the risk level in the Confidential Financial Profile described as “I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated”, Storm would not provide financial advice to the person. Similar evidence was given by Mr Benson. Mr McCulloch also said that he recalled Mrs Cassimatis saying that there was no point giving the Confidential Financial Profile to her cash flow team unless that box was ticked because she would not process it. However, despite the apparent rigidity in Storm’s expressed position, Mr McCulloch said that Storm would sometimes provide advice to a client who ticked the second box.
Apart from those people who ticked the first or fourth boxes, there were other prospective clients to whom Storm did not provide advice. These were people who had no ability to borrow, and therefore could not engage in the Storm model (ts 207) or people who indicated an investment time horizon of fewer than five years. As Mr Benson explained, clients were required to tick, or agree to, an investment time horizon box in their Confidential Financial Profile of five to seven years or longer. The clients would not be advised if the box of “Up to 1 year” or “1 to 4 years” was ticked.
It was, however, rare for a Storm client not to accept the “condition” of undertaking investment for at least five to seven years. This condition was emphasised in the Storm workshops and would have been reiterated by advisers when clients “educated” in the Storm model sought to invest using that model.
Preparation of the cash flows
Once the Confidential Financial Profile was complete and verified, the Storm data entry team or “input cell” would enter that information into the cash flow spreadsheet. Later, probably in late 2007 once the Phormula database had been developed, the information would be entered into that database. Mr Turvey’s evidence was that it would take a member of the cash flow team approximately four hours to prepare a cash flow and to have it approved.
Initially, only Mr and Mrs Cassimatis had the authority to prepare a cash flow. However, by 2006, cash flows began to be prepared by the cash flow cell (also described as the “cash flow committee”, the “compliance cell” or “SWAT” (Supervision, Workflow, Analysis and Training)). Although the preparation of cash flows had expanded from Mr and Mrs Cassimatis to include a few others in the cash flow cell, the preparation of cash flows was still tightly controlled. As Storm’s Procedural and Compliance Manual explained, no one in Storm was permitted to change a cash flow until the revised cash flow had been resubmitted to the cash flow cell and approved. When the cash flow cell prepared the cash flows, all relevant versions of the cash flows were saved (ts 433).
The cash flow was prepared in an Excel spreadsheet which had been created by Mr Cassimatis with the assistance of one of Storm’s Authorised Representatives, Mr Notaras. It included an input of all of the client’s income and expenditure upon which Storm’s recommendations were based. And the formulas in the spreadsheet modelled a suggested investment plan. Every plan was done over a 17 year period, irrespective of the age of the client. The cash flow also showed how much the client could borrow secured by a home loan and a margin loan, and the amount the client would need to contribute in order to fund the investment.
The cash flows involved many standardised formulas but they did not merely involve inserting a client’s figures into a spreadsheet. Sometimes more information about the client was requested (such as more precise tax calculations: ts 207-208). Different clients also had different provisions made for contributions and cash reserves (ts 198). Different approaches were also taken for different classes of client. As Ms Bock and Mr Turvey said, if a client was not retired an overall debt ratio of 60% or less (with a home loan of 80%) would be used and capital growth was not generally the sole source of funding for the recommended borrowings. However, for a client who was retired or nearing retirement age, the overall debt ratio was 50% or less (assuming a home loan of 60%).
A critical component of the cash flow was a client’s “cash reserves”, sometimes referred to as a “cash dam”. These cash reserves were held in a Cash Management Trust. The cash flow showed these reserves of cash over a 17 year period having regard to: (i) the client’s revenue and expenses flowing from the recommendations; (ii) the client’s contributions and distributions; and (iii) an assumed rate of return. Ms Bock explained that Storm’s practice was to leave a minimum of 12 months of interest servicing in the cash reserves (ts 132).
As Mr McCulloch explained, cash flows would not be approved if the clients’ cash reserves were not predicted by the cash flow to increase over time. If the cash reserves were not shown as increasing with the assumption of no growth then the parameters were changed to allow growth in the investment, such as after a period of between two and five years for retirees. However, these “cash flows” did not factor in any period of negative growth (ie any decline in the value of the index funds). In the extreme case, where “cash reserves”, even after adjusting the parameters, still did not show an increase over time (potentially because the client did not have sufficient capacity to borrow), then the prospective client would not receive a recommendation to invest in accordance with the Storm model.
It will be apparent from this discussion that, as Mr McMaster explained, the “cash flow” was not really a cash flow and that “cash reserves” were not actually cash reserves. The formulas calculated “cash reserves” as a combination of cash and growth in the index funds (ts 306). The index funds were relatively liquid so that clients could generally sell them when they wanted to (at least prior to the GFC) (ts 186) but they were not actually cash. Not only did the spreadsheet treat the growth in index funds together with cash, but it also assumed that the growth would not be liquidated because it was assumed that there would be dividends and further growth; the cash rate would only be applied to the actual cash balance of the cash reserves unless cash reserves became “negative” (because the cash had all been used and the growth had been liquidated) (ts 156).
The three types of cash flows
For many clients, the cash flow cell would prepare three cash flows.
First, a “viability cash flow” or “recommended cash flow” was prepared. That was the cash flow discussed above. It generally formed the basis for the SOA to the client. This cash flow showed the lowest investment returns of the three cash flows prepared. Mr Cassimatis taught Mr McCulloch to say that this type of cash flow showed that a plan could survive under adverse conditions but that the other cash flows were more realistic. Mr McCulloch said that the other cash flows assisted clients to invest by showing the extra wealth that could be generated.
Secondly, a “reality check cash flow” was prepared which was based on the viability cash flow but (i) used the current interest rates rather than the higher interest rates of the viability cash flow, and (ii) used historical average share market growth rather than no growth or a low rate of growth after two to five years.
Thirdly, a “maximum capacity cash flow” was prepared which increased the amount of the margin loan to the maximum allowable under the margin lender’s LVR requirement.
4. Review of the cash flow with the prospective client and subsequent steps including preparation of the SOA
Once the cash flow was prepared and approved, it would be sent to the relevant adviser to be presented to the prospective client. Advisers could, and often did, query the recommendations or make suggestions on any aspect of a proposed cash flow to the cash flow committee. But the final decision lay with the cash flow cell (ts 177). As I explain later in these reasons, Employee Representatives were given spreadsheets without formulae so that they could not amend the cash flows. Authorised Representatives had the formulae but they were unlikely to do any more than insert the client’s provided figures so that the client could see the operation of the spreadsheet.
The cash flows were generally presented to the client in a one-on-one meeting between the client and the Storm adviser. The meetings lasted two to four hours. The adviser would explain the cash flow, the assumptions underlying it, the home loan or margin loan borrowings required, and the amount the prospective client was required to contribute to the plan (although usually this contribution was only where the client was not retired). Mr McCulloch said that at these meetings he was trained to (i) repeat topics from the education workshop; (ii) show clients a projected cash reserve levels graph to “prove” the “viability” of the plan; and (iii) conduct the meeting in a way which would not shock the client by the level of debt.
Mr McCulloch said that if the client wished to modify information previously provided, or if the client was dissatisfied with part of the cash flow, the adviser would send the cash flow back to the cash flow cell which retained control over the cash flow. Once a new cash flow was prepared, another meeting would be held with the prospective client to discuss the revision. That process could be repeated a number of times until the client was satisfied (ts 186).
Once the prospective client was satisfied with the viability cash flow, the following process would take place:
(1)the client would sign various bank application and privacy consent forms which enabled Storm to approach home lenders on the prospective client’s behalf;
(2)the SOA cell commenced preparation of the SOA;
(3)the banking cell issued requests for quotes to various home lenders and, if the client had requested a specific bank, to that bank;
(4)the SOA cell would select a bank and a margin lender;
(5)the cash flow cell would confirm the accuracy of the final viability cash flow, taking into account the amount of funding offered by the bank; and
(6)once the SOA was complete, the cash flow cell checked and approved it. A hard copy was then delivered to the adviser for the adviser to present to the client.
The SOA and cash reserve advice
Each SOA was based on a template document. A substantial part of the template contained generic advice. Over the years, the template evolved from a 20 to 30 page document to a document of 150 pages or more.
For almost 90% of the clients, Storm’s advice was to obtain a loan secured by the client’s home, as well as a margin loan, and to use the funds from these loans to invest in index funds based on the ASX 300. The remaining 10% were generally young people who did not have an asset base such as a family home. Storm’s advice to them was to obtain a margin loan or a personal loan to invest in indexed share funds.
Although the SOA contained much template advice, and was often based upon the same model of borrowing against the home with a margin loan, it also considered some of a client’s particular circumstances. Within the standardised parameters of Storm’s advice, there were variables that changed between clients, such as the LVR, overall debt ratio, the level of cash reserves, and the amount of contributions to the plan (ts 198).
All clients who were advised to invest in the Storm model would have money in the cash reserve based upon an initial starting balance recommended by Storm. There would be additions of cash from the client’s income or tax refunds. The cash reserve (to the extent that it genuinely contained cash) would be used to: (i) finance the client’s debts or living expenses if the index funds did not provide any returns for a period of time; (ii) provide protection against margin calls (by financing them if necessary (ts 177)); (iii) provide a source of funds to allow the client to take further investment “steps”; and (iv) meet expenses of the plan and fund any extraordinary expenses (ts 188).
Storm sometimes suggested action to increase cash reserves. For instance, an investment “step” for a retiree might have meant that the retiree’s cash dam became inadequate to service his or her debt for a two year period if there was no growth in the share market. This was because the “cash” reserve would often include growth as “cash” for retirees, so that a need for real cash required the retiree to sell units to increase real cash reserves. On other occasions, measures were suggested which did not increase cash reserves. For instance, Storm generally recommended dividends be reinvested, rather than placed in the cash dam, and Storm almost always recommended that interest on a margin loan be pre-paid and capitalised to the loan (a practice that was relatively common in the banking and taxation industry: ts 188-189).
5. Presentation of the SOA
Once an SOA had been prepared, an adviser would meet with the prospective client for two to three hours to explain the recommendations contained within it. A hard copy of the SOA would be given to the client together with all relevant Product Disclosure Statements.
Mr McCulloch described how he was trained to reassure prospective clients at this meeting that Storm’s plan implemented measures designed to ensure that the client had no risk of getting a margin call. He would also ask whether the clients’ personal circumstances had changed (ts 196). The typical process also involved insisting that the client take the SOA home to read it, to flag pages that he or she did not understand, and to raise any questions.
6. Client signs loan documents and investment documentation, and investment is processed
Once the prospective client was happy with the SOA, the client would sign the SOA and an Authority to Proceed. Storm advised the client of the selected bank, obtained the documentation, and gave it to the adviser to have it signed by the client.
When the documents were signed, Storm sent them to the lenders. Home loan funds would be provided to Storm. Storm’s fees were typically paid from the home loan borrowings. Storm also sent (i) the margin loan security funds and the documents to the margin lender which funded the margin loan, and (ii) a request to purchase units in the relevant index funds to the responsible entities of those funds.
7. Further investment “steps”
Storm encouraged each client to act on various volatility movements in the share market, described as “trigger points”. A trigger point would trigger a review of whether the client should be advised to make a further investment. When a client acted on a trigger point or increased his or her investment this was described as a “step”. An updated cash flow was prepared and approved by the cash flow cell, an SOAA was prepared by the SOA cell, and the cash flow cell confirmed the SOAA. Clients might see their advisers to discuss the SOAA.
The trigger points were the same for all clients. They applied whether the client was working or retired, young or old. However, the client’s LVR, cash reserves and any large pending expenditure might affect whether Storm recommended the client take a step. A step would generally be recommended when there was a change in the financial market, or a change to the client’s personal circumstances (either where the value of one of their assets increased, or where the client received additional funds like through an inheritance).
There were two types of steps recommended by Storm when there was a change in the financial market. First, there was a “build step”, which encouraged further borrowing and further investment as the markets rose. Secondly, there was a “recovery step”, which encouraged further investment if the market had fallen. A rise or a fall in the market of 10% or more from when the client invested would often trigger a recommendation for a further step investment.
“Bulk steps”
In May 2007, at the request of Mr Cassimatis, a program was written to identify the additional borrowings and investment to take any particular client to a particular LVR. The program could automatically generate “personalised” SOAAs for a large number of clients. Mr and Mrs Cassimatis initially set the LVR at 56%. This figure was subsequently increased to 58%. Then, in January 2008, it was increased again to about 62%. Mr McCulloch said that no one else had, or was invited to have, any input into that LVR figure.
In 1992, s 1318 formed the basis for a new provision in the Australian Corporations Law, namely s 1317JA. Section 1317JA was introduced by the Corporate Law Reform Act 1992 (Cth). The Explanatory Memorandum of the Corporate Law Reform Bill 1992 (Cth) said that s 1317JA was “based on section 1318 enabling the Court to relieve a person from liability arising out of certain contraventions of a civil penalty provision where the person has acted honestly and, having regard to all the circumstances of the case, the person ought fairly be excused for the contravention” (31 [121]).
Section 1317JA was the predecessor to s 1317S of the Corporations Act 2001 (quoted above at the commencement of this section). Section 1317S was introduced as part of the Corporations Act in 2001. There was no detailed discussion of the provision in the Explanatory Memorandum of the Corporations Bill 2001 (Cth). Only minor amendments have been made to s 1317S since it was enacted in 2001. Specifically, in 2001 the list of civil penalty provisions in s 1317S(1)(a) was confined to ss 588M, 588W and 1317H of the Corporations Act. Additional provisions were added to this list in 2004 (s 1317HA) and 2012 (ss 961M, 1317GA and 1316HB of the Corporations Act).
Section 1317S is in similar terms to s 1318 of the Corporations Act 2001, and the criteria to be considered by the court are the same in relation to both provisions.
The omission of the requirement for “reasonableness”
As I have explained, a crucial break in the history of the provisions which led to s 1317S was the 1981 deletion of the requirement that the person seeking to be excused act “reasonably”. The Explanatory Memorandum to the 1981 Bill did not explain the reason for the change. In Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2005) 65 NSWLR 281, 288 [23], Austin J pointed out that the Companies and Securities Law Review Committee’s Discussion Paper No 9 had suggested that the deletion of the word “reasonably” was a response to a comment by North P where his Honour found it “difficult to understand how a negligent officer or auditor could nevertheless be held to have acted ‘reasonably’”: Dimond Manufacturing Co Ltd v Hamilton [1969] NZLR 609, 645; Companies and Securities Law Review Committee, Company Directors and Officers: Indemnification, Relief and Insurance, Discussion Paper No 9, April 1989, [114]-[115]. See also Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith [1989] SASC 1928; (1989) 54 SASR 285, 295 (Olsson J).
Although reasonableness is no longer a requirement before a person can be excused, as Bergin J explained in Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430, 456 [160], the reasonableness of conduct remains a relevant consideration in the exercise of the discretion concerning whether the relevant party ought “fairly” to be excused from liability. And although her Honour referred to the attention of the Court being “primarily” upon whether the director had acted honestly (at 456 [159]), this was simply to contrast the absolute requirement of honesty with the relegation of reasonableness from the status of a requirement to a mere factor to be considered: see Australian Securities and Investments Commission v Vines, 289-290 [32]-[33] (Austin J).
The element of reasonableness is therefore no longer a requirement for the excuse provision to apply, but the breadth of the expression “ought fairly be excused” is capable of incorporating reasonableness as a consideration. This is particularly so since the assessment must take place (i) in “all the circumstances of the case”, and (ii) in light of the express incorporation of what might be seen as reasonableness matters in s 1317S(3). The more unreasonable the action (or, in the language of the older cases, the more “gross” the unreasonableness), the more unlikely that it will be that a person ought fairly to be excused. Indeed, Mr and Mrs Cassimatis did not make any submission to the contrary.
Of course, the extent of the unreasonableness (in the sense of lack of care and diligence in discharge of their duties) of the conduct by Mr and Mrs Cassimatis (as compared with a reasonable director in their circumstances and with their responsibilities) is only one factor to be considered in determining whether they ought fairly to be excused. In Morley v ASIC (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620, the Full Court referred to considerations other than the degree to which the person’s conduct fell short of the statutory standard of care and diligence (at 630 [50]):
the seriousness of the contravention and its potential or actual consequences; impropriety such as deceptiveness or personal gain (which may not survive acting honestly); and contrition. This is by no means exhaustive, and all the circumstances of the case are to be taken into account.
In AWA Ltd v Danielstrading as Deloitte Haskins & Sells (No 2) (1992) 9 ACSR 383, Rogers CJ in Comm Div considered a claim by Mr Hooke, the former chairman and chief executive officer of AWA Ltd, that he had acted honestly and reasonably and ought fairly to be excused under s 1318. Mr Hooke had acted honestly, he had derived no personal gain from the contraventions. But he should have known that something was very wrong. One of the matters relied upon by Rogers CJ in Comm Div (at 402) was that Mr Hooke held the two most important offices in the company. His Honour explained that “[i]t is essential for the purposes of corporate law that the courts rigorously enforce the obligations of those who seek and obtain high corporate office”.
Although this was a decision under s 1318 at a time when reasonableness was a requirement, the point which also applies to s 1317S(2) is that an important factor is the scale of responsibilities of the director and the manner in which the director exercises his or her powers.
Whether Mr and Mrs Cassimatis acted honestly and ought fairly to be excused
I accept that Mr and Mrs Cassimatis acted honestly. They did not attempt to conceal any information about Storm from any regulator or compliance professional. On one occasion, Mr or Mrs Cassimatis informed ASIC that Storm had a “fair share” of clients who were not high net worth clients. Indeed, ASIC did not make any submission of dishonesty or concealment.
I also accept that, as Mr McCulloch described, Mr and Mrs Cassimatis genuinely held the view that capital loss could never occur with index fund investment in the Storm model and that this meant that even retired investors with limited income and assets had no real danger of being exposed to losses if they agreed to Storm’s conditions such as the term of the investment and the level of risk tolerance. Indeed, from the evidence I heard it is likely that these views were (unreasonably) held with great conviction by Mr and Mrs Cassimatis.
I also accept that the pleaded investors were not representative of Storm’s average customer, nor were they selected by ASIC at random. For many other investors no contravention has been proved. For instance, Mr Nelson said that his experience as a client of Storm (rather than a non-executive director) was consistent with advice being tailored to his individual circumstances.
In addition, I accept that if Mr and Mrs Cassimatis had been warned in strong terms either by ASIC or by persons with considerable experience and knowledge then they would have taken alleviating measures to avoid the risk of contraventions by Storm in relation to retired or near-retired investors who had little or limited income, few assets, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. This conclusion can only be drawn by inference because of the absence of direct evidence from Mr and Mrs Cassimatis. But I am satisfied that although they were powerfully committed to the Storm model, they were also conscious of the need for compliance and sought confirmation from a number of others about their compliance. They would have heeded a warning if it were expressed in strong terms from a person with considerable experience and knowledge. For instance, when Mr and Mrs Cassimatis appointed the non-executive directors they informed the non-executive directors that access would be provided to all information that was reasonably considered necessary. Mr and Mrs Cassimatis complied with this undertaking. They also promised the non-executive directors that they would be reimbursed for all reasonable expenses incurred in obtaining any professional advice approved by Mr Cassimatis and made available to the board.
Nevertheless, Mr and Mrs Cassimatis’ management of Storm involved an extraordinary degree of control which reduced the likelihood of such a strong warning. As Mr Nelson observed, there was a need for the management below Mr and Mrs Cassimatis to be “more expert and more experienced” (ts 465). ASIC submitted, and I accept, that the conduct of Mr and Mrs Cassimatis in creating and overseeing the operation of the Storm model in a way which caused that model to be applied to clients for whom the advice was not suitable, even if explained as negligence and an honest mistake, involved a high degree of departure from the care and diligence required by s 180(1).
In their final submissions, Mr and Mrs Cassimatis submitted that additional reasons why they should be excused were because: (i) they took genuine steps to cause Storm to comply with the Corporations Act; (ii) they received comfort from the many other individuals and institutions that looked at the Storm model; and (iii) there was an absence of any warnings at the time. I have already addressed each of these matters in the context of considering whether contravention by Storm was likely, although I accept that they are matters that can also be taken into account at the stage of determining whether Mr and Mrs Cassimatis should be excused.
Mr and Mrs Cassimatis also pointed to their conduct in providing assistance to clients. This included: (i) Storm’s provision of unsecured loans to clients who went into margin call in 2002; (ii) Storm’s provision of similar assistance to clients – particularly retirees – in 2008; (iii) Mr Cassimatis’ proposal to Colonial Margin Lending to take over the debts owed by clients in negative equity, although the proposition was not accepted by Colonial (ts 192); and (iv) Storm’s insistence that commissions from banks be passed on to clients in the form of discounted fees and interests rather than being paid to Storm.
Mr and Mrs Cassimatis did provide substantial assistance to clients. During a period in 2002, Mr McCulloch said that approximately 30 to 50 clients (including himself) went into margin call as a result of rectifying an error on the part of Colonial Margin Lending, Colonial Geared Investments (ts 192). On that occasion, Storm supported some of those clients with unsecured loans. By 2005 or 2006 as the share markets recovered, all the moneys had been repaid (ts 192). Storm also lent moneys to retirees who went into margin call in 2008 (ts 192).
Storm also assisted clients in other ways. Mr McCulloch said that Storm refused to accept commissions from the banks that were offered to financial planners for referring loans (ts 193). Instead, Storm persuaded the banks to pass on the money they saved in the forms of discounted fees and interest rates (ts 193).
Finally, Mr and Mrs Cassimatis pointed to a letter sent to them by Mr and Mrs Sondergeld on 15 December 2008 thanking them for financial support and describing how “you and your company’s help and generosity relieves the stress and worry to help us get over these difficult times until the world share market recovers from this slump”.
All of these matters, when considered together, provide a significant argument for relief from liability. But, ultimately, I am not ultimately satisfied that Mr and Mrs Cassimatis should be excused from liability. Their role and responsibilities in Storm were so significant, and the contraventions were sufficiently serious, that their conduct ought not fairly be excused. They were responsible for establishing the Storm model which provided for double gearing for thousands of clients. They exercised an extraordinary level of control and power over the Storm business and should reasonably have known that the consequences of inappropriate advice to any class of client could reasonably be expected to be catastrophic for Storm (to whom their duties were owed). The approach they took was to create and advance a model, and a system for application of the model, to be applied in almost every circumstance where it was possible to borrow enough money for the application of the model to a client who satisfied Storm’s conditions, including using the client’s family home as part of their asset portfolio for the purposes of applying the model. This created a likely danger of inappropriate advice being given to the most vulnerable of clients. As Mr Cassimatis explained to the non-executive directors, his approach was to treat a client as if he or she were a company, in the sense that a company would borrow money to establish a business and then look to repay that loan as the business becomes profitable.
ASIC’S ALTERNATIVE CLAIM FOR DISQUALIFICATION BASED ON SECTION 206E
Almost immediately before trial, ASIC applied to amend its originating application and statement of claim to allege, in the alternative, that Mr and Mrs Cassimatis should be disqualified from managing a corporation for a period that the Court considers appropriate based upon s 206E(1)(a)(i) of the Corporations Act. Those amendments were allowed: Australian Securities and Investments Commission v Cassimatis (No 6) [2016] FCA 622.
It is unnecessary to consider this alternative claim in any detail for two reasons. The first is that I have found that ASIC has established its primary claim. The second is that the parties agreed that any submissions on the fourth element of s 206E(1)(a)(i) should be made at the remedies hearing.
Section 206E(1) of the Corporations Act provides:
206E Court power of disqualification—repeated contraventions of Act
(1)On application by ASIC, the Court may disqualify a person from managing corporations for the period that the Court considers appropriate if:
(a)the person:
(i)has at least twice been an officer of a body corporate that has contravened this Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 while they were an officer of the body corporate and each time the person has failed to take reasonable steps to prevent the contravention; or
(ii)has at least twice contravened this Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 while they were an officer of a body corporate; or
(iii)has been an officer of a body corporate and has done something that would have contravened subsection 180(1) or section 181 if the body corporate had been a corporation; and
(b)the Court is satisfied that the disqualification is justified.
The section involves four elements:
(1)the respondents were officers of a corporation;
(2)the body corporate has at least twice contravened the Corporations Act;
(3)the respondents have failed to take reasonable steps to prevent the contraventions; and
(4)the court is satisfied that the disqualification is justified.
The first element is admitted by Mr and Mrs Cassimatis.
The second element is satisfied by findings I have made concerning the contraventions of s 945A(1)(b) and s 945A(1)(c) in relation to the six relevant investors or pairs of investor.
The third element also follows from the findings that I have made. ASIC pleaded that Mr and Mrs Cassimatis failed to take reasonable steps to prevent the contraventions by Storm (which I have found to be contraventions of s 945A(1)(b) and s 945A(1)(c)) because they failed to take any steps to prevent Storm from providing advice in accordance with the Storm model to the relevant investors. ASIC submitted, and I accept, that the same matters which established the breach by Mr and Mrs Cassimatis of their obligations under s 180(1) also established this failure to take reasonable steps. As ASIC submitted, it was Mr and Mrs Cassimatis’ conduct in creating and overseeing the operation of the Storm model which caused it to be applied to clients for whom it was not suitable; Mr and Mrs Cassimatis took no steps to implement any system that would restrict the cash flow team, those preparing the SOAs, or the advisers, from giving advice to clients in the position of the relevant investors to invest in accordance with the Storm model.
Any submissions concerning the fourth element were deferred to the remedies hearing.
CONCLUSION
My conclusion is that Mr and Mrs Cassimatis each contravened s 180(1) of the Corporations Act by exercising their powers in a way which caused or “permitted” (by omission to prevent) inappropriate advice to be given to the relevant investors. Those relevant investors were members of a class of investor, as pleaded by ASIC, who (in summary terms) were retired or close to retirement, had few assets, little income, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. A reasonable director with the responsibilities of Mr or Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice. The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons.
ASIC brought its case on the basis that one precondition, or “stepping stone”, for a finding of contraventions by Mr and Mrs Cassimatis was that Storm also contravened the Corporations Act. I have serious doubt whether this assumption is correct. But I have proceeded on the basis that it is required because the parties had assumed this to be the case and conducted their case accordingly without submissions to the contrary.
I have found that Storm contravened s 945A(1)(b) and s 945A(1)(c) of the Corporations Act. The relevant investors about whom I conclude that Storm breached its duties were the following 11 investors (six instances if couples are treated together): (i) Mr and Mrs Dodson (Part E investors); (ii) Mr and Mrs Herd (Part E investors); (iii) Mr and Mrs Higgs (Part E investors); (iv) Ms Knight (Schedule investor); (v) Mr and Mrs Madden (Schedule investors); and (vi) Mr and Mrs Walker (Schedule investors).
My findings of contravention by Mr and Mrs Cassimatis are based only upon civil, not criminal, breaches of s 945A. No criminal breach of s 945A or s 1041E was proved. ASIC did not run any alternative case that in the absence of proof of such a criminal breach there was a real likelihood of such a breach. Although Mr and Mrs Cassimatis’ submissions anticipated the possibility of such a case, it is not necessary to address it. It suffices to say that such a case would have had a number of serious obstacles. Indeed, ASIC itself did not bring any prosecution or refer any brief of evidence to the Commonwealth Director of Public Prosecutions to consider a prosecution of Storm.
This trial was concerned only with liability. All issues concerning remedies sought by ASIC against Mr and Mrs Cassimatis were deferred to a separate hearing. These subsequent issues include (i) the form of any declarations to be made; (ii) whether the contraventions were serious or materially prejudiced the interests of Storm (s 1317G) and, if so, the amount of any penalties; (iii) any disqualification orders to be made (including the alternative basis upon which such orders were sought under s 206E); (iv) any orders restraining Mr and Mrs Cassimatis from holding an AFSL or providing financial services; and (v) costs. The parties should now confer in relation to directions for the listing of a hearing in relation to these issues.
Finally, some remarks should be made about the conduct of this trial. This litigation was very large in scale and was aggressively fought. It carried with it potentially very significant consequences for the respondents. As initially framed, it involved hundreds of witnesses and thousands of exhibits. However, the co-operation between counsel ensured that the essential legal and factual issues were not lost in the mass of material. Further, although the size of the electronic database of exhibits was vast, and submissions ran to hundreds of pages, the co-operation and civility of all the legal representatives ensured that the focus remained on the real issues and this case was kept within manageable limits. These reasons, too, have likewise focused primarily upon those matters upon which the parties placed reliance in submissions within the forest of evidence.
I certify that the preceding eight hundred and thirty-eight (838) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman. Associate:
Dated: 26 August 2016
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