Australian Securities and Investments Commission v Hobbs
[2012] NSWSC 1276
•24 October 2012
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Idylic Solutions Pty Ltd - Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 Hearing dates: 4-6, 9-13, 16, 17, 19, 23-27 & 30 July, 3, 8-10, 14-16, 21-24 & 29 August, 5-6, 10,12 September 2012 Decision date: 24 October 2012 Jurisdiction: Equity Division - Corporations List Before: Ward J Decision: Judgment for plaintiff against first, third, fourth and eighth defendants on some or all of the claims made against them. Orders to be made following hearing as to penalty.
Catchwords: CORPORATIONS - whether various defendants acted as de facto or shadow directors in relation to various of impugned corporations - directors and officers duties - duty of care and diligence - duty to act in good faith and for a proper purpose - duty not to make improper use of position - whether officers were 'involved' in contraventions by others - Corporations Act 2001 (Cth) ss 79, 180(1), 181 and 182
AGENCY - whether illegal acts were within scope of agency - whether independent contractors were acting as agents - consideration of the scope of authority - whether scope of authority limited to the express terms of a contractual document
CORPORATIONS - financial services and product - whether business confined to provision of financial education or extended to provision of a financial product or financial product advice - whether business required a financial services licence - Corporations Act 2001 (Cth) s 911A
CORPORATIONS - managed investment scheme - whether there was contribution of money or money's worth in consideration for an interest in the benefits produced by the scheme - whether scheme was required to be registered - Corporations Act 2001(Cth) s 601ED(5)
MISLEADING AND DECEPTIVE CONDUCT AND FALSE STATEMENT - by directors and officers - by various of the corporate administrators of the various investment funds - whether would lead recipient into error - relevance of contemporaneous disclaimers - Corporations Act 2001 (Cth) ss 1041E, 1041G and 1041H - Australian Securities and Investments Commission Act 2001 (Cth) ss 12DA, 12DB and 12DF
EVIDENCE - civil penalty proceedings - whether Jones v Dunkel inferences can be drawn where defendant fails to call particular witness in a civil penalty proceedingLegislation Cited: Australian Securities and Investments Commission Act 2001 (Cth)
Civil Procedure Act 2005 (NSW)
Corporations Act 2001 (Cth)
Evidence Act 1995 (NSW)
Foreign Evidence Act 1994 (Cth)
Securities Act 1978 (NZ)
Superannuation Industry (Supervision) Act 1993 (Cth)
Supreme Court Act 1970 (NSW)
Trade Practices Act 1974 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)Cases Cited: Adler v Australian Securities and Investments Commission (2003) 179 FLR 1; 46 ACSR 504; [2003] NSWCA 131
Aqua-Marine Marketing Pty Ltd v Pacific Reef Fisheries (Australia) Pty Ltd (No 4) [2011] FCA 578
Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337
Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liq) (1978) 141 CLR 335
Australian Agricultural Co v Oatmont Pty Ltd (1992) 8 ACSR 255
Australian Brokerage Ltd v Australian and New Zealand Banking Corp Ltd (1934) 52 CLR 430
Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472
Australian Competition and Consumer Commission v Michigan Group Pty Ltd [2002] FCA 1439
Australian Competition and Consumer Commission v Universal Sports Challenge Pty Ltd [2002] FCA 1276
Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd (Unreported, Court of Appeal of Queensland, 9 December 1997)
Australian Securities and Investments Commission v ABC Fund Managers Ltd (No 2) (2001) 39 ACSR 443; [2001] VSC 383
Australian Securities and Investments Commission v AS Nominees Ltd (1995) 62 FCR 504
Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778
Australian Securities and Investments Commission v Cyclone Magnetic Engines Inc (2009) 71 ACSR 1
Australian Securities and Investments Commission v Edwards (2004) 22 ACLC 1469
Australian Securities and Investments Commission v Edwards (No 3) [2006] NSWSC 376; (2006) 57 ACSR 209
Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2005) 55 ACSR 411
Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2005) 55 ACSR 544
Australian Securities and Investment Commission v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403
Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd [2006] FCA 1415
Australian Securities and Investments Commission v Great Northern Developments Pty Ltd [2010] NSWSC 1087
Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003; (2011) 284 ALR 734
Australian Securities and Investments Commission v Hellicar [2012] HCA 17
Australian Securities and Investments Commission v IP Product Management Group Pty Ltd (2002) 42 ACSR 343
Australian Securities and Investments Commission v Infomercial Management Group Pty Ltd [2002] VSC 262
Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339
Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287
Australian Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714
Australian Securities and Investments Commission v McDougall (2006) 229 ALR 158; [2006] FCA 427
Australian Securities and Investments Commission v McNamara (2002) 42 ACSR 488; [2002] FCA 1005
Australian Securities and Investments Commission v Matthews (1999) 17 ACLC 528
Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373
Australian Securities and Investments Commission v Narain (2008) 169 FCR 211
Australian Securities and Investments Commission v Online Investors Advantage Inc (2005) 194 FLR 449; 23 ACLC 1929; [2005] QSC 324
Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561
Australian Securities and Investments Commission v Plymin (No 2) [2003] VSC 230
Australian Securities and Investments Commission v Primelife Corporation Ltd (2005) 54 ACSR 536; [2005] FCA 1229
Australian Securities and Investment Commission v Rich [2005] NSWSC 417
Australian Securities and Investment Commission v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224
Australian Securities and Investments Commission v Takaran (2002) 170 FLR 388; [2002] NSWSC 834
Australian Securities and Investments Commission v Vines (2005) 55 ACSR 617; [NSWSC] 738
Australian Securities and Investments Commission v Woods and Johnson Developments Pty Ltd (1991) 6 ACSR 191
Australian Securities and Investments Commission v Young (2003) 173 FLR 441
Australian Softwood Forests Pty Ltd v A-G (NSW) (1981) 148 CLR 121
Azzopardi v The Queen (2001) 205 CLR 50
Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279; 92 ALR 53; [1990] HCA 11
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Belhaven & Stanton Peerage (1875) 1 App Cas 278
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239
Benlist Pty Ltd v Olivetti Australia Pty Ltd (1990) ATPR ¶41-043
Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
Blythe v Northwood [2005] NSWCA 221
Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1
Breen v Williams (1996) 186 CLR 71
Bridge v Campbell Discount Co Ltd [1962] AC 600
Briginshaw v Briginshaw (1938) 60 CLR 336
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541
Brisconnections Management Co Ltd v Australian Style Investments Pty Ltd (2009) 23 VR 253; [2009] VSC 128
Brooke v Bool [1928] 2 KB 578
Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; [2009] FCAFC 147
Burton v Arcus (2006) WAR 366; [2006] WASCA 71
Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592
C H Real Estate Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37
Cairnsmore Holdings Pty Ltd v Barsden Holdings Pty Ltd [2007] FCA 1822
Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45
Circle Petroleum (Qld) Pty Ltd v Greensdale (1998) 16 ACLC 1577
City Bank of Sydney v McLaughlin (1909) 9 CLR 615
Chamberlain v R (No 2) (1984) 153 CLR 521
Chan v Zacharia (1984) 154 CLR 178
Chapman v Luminis Pty Ltd (No 5) [2002] ATPR Digest 46-214; [2001] FCA 1106
Chew v The Queen (1992) 173 CLR 626
Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41
Compaq Computer Australia Ltd v Merry (1998) 157 ALR 1
Dalton v Lawson Hills Estate Pty Ltd [2005] FCAFC 169
Darwin Bakery v Sully (1981) 36 ALR 371
Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565
Diakyne Pty Ltd v Ralph (2009) 72 ACSR 450; [2009] FCA 721
Dialog Pty Limited v Addease Pty Limited [2003] FCA 1359
Dilose v Latec Finance Pty Ltd (1966) 84 WN (Pt1)(NSW) 557
Director of Public Prosecutions v Boardman [1975] AC 421
Doney v R (1990) 171 CLR 207
Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18
Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199
Equuscrop Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
Evergreen Tours Pty Ltd v McLaren [2010] NSWSC 1362
Ex parte Colonial Petroleum Oil Pty Ltd (1944) 44 SR (NSW) 306
Fairmede Pty Ltd v Von Pein [2004] QSC 220
Fame Decorator Agencies Pty Ltd v Jeffries (1998) 28 ACSR 58
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
First Chicago Australia Limited v Yango Pastoral Co Pty Ltd [1977] 2 NSWLR 177
Firth v John Mowlem & Co Ltd [1978] 1 WLR 1184
Fraser v NRMA Holdings (1995) 55 FCR 452
Freeman v Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Forkserve Pty Ltd v Jack (2000) 19 ACLR 299
Forrest v Australian Securities and Investments Commission [2012] HCA 39
Garsec v His Majesty The Sultan of Brunei [2007] NSWSC 882
Gianni Versace SpA v Monte (2002) 119 FCR 349; [2002] FCA 190
Giorgianni v R (1985) 156 CLR 473
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; (2012) 287 ALR 22
Grove v Flavel (1986) 43 SASR 410
H C Buckman and Son Pty Ltd v Flanagan (1974) 133 CLR 244
H P Mercantile Pty Ltd v Tumut River Orchard Management Limited (In Liq) [2011] FCA 200
Hall v Poolman [2007] NSWSC 1330
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546
Hollis v Vabu Pty Ltd (2001) 207 CLR 21
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Ibrahim v Pham [2005] NSWSC 246
Ingot Capital Investments Pty Limited v Macquarie Equity Capital Markets Limited [2008] NSWCA 206
International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644
J F & B E Palmer Pty Ltd v Blowers and Lowe Pty Ltd (1987) 75 ALR 509
James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85
John G Glass Real Estate Pty Ltd v Karawai Constructions Pty Ltd [1993] ATPR ¶41-249
Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564
Jones v Dunkel (1959) 101 CLR 298
Joye v Beach Petroleum NL (1996) 67 FCR 275
Kenna & Brown Pty Ltd (in liq) v Kenna (1999) 32 ACSR 430
Kirkpatrick v Kotis [2004] NSWSC 1265
Kwok v The Queen (2007) 64 ACSR 307
Leferve v White [1990] 1 Lloyd's Rep 569
Lyons v Commonwealth Bank of Australia 28 FCR 597
Lysaught Bros & Co Ltd v Falk (1905) 2 CLR 421
Macdonald v Australian Securities and Investments Commission [2007] NSWCA 304
Macquarie Developments Pty Limited and Anor v Forrester and Anor [2005] NSWSC 674
McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230
Mills v Mills (1938) 60 CLR 150
Morgan v Babcock & Wilcox Ltd (1929) 43 CLR 163
Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620
Mullens v Miller (1882) 22 Ch D 194
National Australia Bank v Norman (2009) 180 FCR 243
National Exchange Pty Ltd v Australian Securities Investment Commission (2004) 49 ACSR 369
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170
New Zealand Netherlands Society "Oranje" Incv Kuys [1973] 2 All ER 1222
Nguyen v Cosmopolitan Homes [2008] NSWCA 246
Orix Australia Corporations Limited v Moody Kiddell & Partners Pty Limited [2006] NSWCA 257
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Palmer v Dolman [2005] NSWCA 361
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Peter Cox Investments Pty Ltd (In liq) v International Air Transport Association (1991) 161 ALR 105
Petersen v Moloney (1951) 84 CLR 91
Pilmer v Duke Group Ltd (in liq) [2001] HCA 31 (2001) 207 CLR 165
Powercor Australia Ltd v Pacific Power [1999] VSC 110
Premier Building and Consulting Pty Ltd (recs apptd) v Spotless Group Ltd [2007] VSC 377; (2007) 64 ACSR 114
Quinlivan v Australian Competition and Consumer Commission [2004] FCAFC 175; [2004] ATPR 42-010
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Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72 ; [2002] NSWSC 171
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Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449
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P Watts and F M B Reynolds, Bowstead and Reynolds on Agency (19th edn, Sweet & Maxwell, 2010)Category: Principal judgment Parties: Australian Securities and Investments Commission (Plaintiff)
David John Hobbs (First Defendant)
Min Hua Li (Second Defendant)
David John Collard (Third Defendant)
Huimin Wu (Fourth Defendant)
Con Koutsoukos (Fifth Defendant)
Brian John Wood (Sixth Defendant)
Jimmy Truong (Seventh Defendant)
Jacqueline Hobbs (Eighth Defendant)
Idylic Solutions Pty Ltd ACN 121 960 754 (Ninth Defendant)
888 Management Inc (Tenth Defendant)
Geneva Financial Ltd (Eleventh Defendant)
Barclaywest Ltd (Twelfth Defendant)
Preserved Investment Group Ltd (Thirteenth Defendant)
North Wave Ltd (Fourteenth Defendant)
G P Global Ltd (Fifteenth Defendant)Representation: J A Halley SC with J R Clarke, A Kuklik (Plaintiff)
Ms G Hayden, Solicitor for Australian Securities and Investments Commission (Plaintiff)
File Number(s): 07/258119
Judgment
HER HONOUR: This matter, which was listed before me for hearing in the Corporations List commencing on 4 July 2012, relates to various investment schemes through which funds were pooled for the purpose of investment into the offshore wholesale market. In total, more than AU$50,000,000 was invested in these investment schemes.
The Australian Securities and Investment Commission contends that the fourteen individual investment schemes the subject of these proceedings constituted (either collectively or individually) a financial product within the meaning of Division 3, Part 7.1 of the Corporations Act (2001) (Cth) for the operation of which an Australian financial services licence was required. Neither Mr Hobbs, nor any of the corporate or individual administrators or operators of the respective investment schemes was (and this is not disputed) the holder of an Australian financial services licence.
ASIC contends that the individual investment funds (each of which is said to have utilised, or been derived from, a "white label" or generic managed investment scheme developed by the first defendant, Mr David Hobbs, in about 2002), and everything comprising the operation of those schemes (such as the sale of FTC financial education subscriptions and the OEM/KLM process to which I will shortly refer), collectively formed part of a single managed investment scheme, the operation of which required compliance with s 601EB of the Corporations Act.
ASIC has referred to the generic scheme or product that it contends was developed by Mr Hobbs (and that was able to be adapted or tailored for use by different corporate administrators) as the "Hobbs scheme" or the "Hobbs financial product". Mr Hobbs denies that there is any "Hobbs scheme" or "Hobbs financial product" (but accepts that there was a financial product or scheme of some kind, to which he refers as the "Reisinger product"). Where I use those terms in these reasons it is simply for convenience, as a description of that which ASIC contends amounts to an overall scheme or financial product developed and/or promoted by Mr Hobbs.
Structure of these reasons
The issues in the proceedings cover a range of topics and span activities over a number of years, necessitating a detailed exploration of the facts. For ease of reference, I set out below a table of contents in respect of my reasons for judgment. I have published these reasons in two parts: the first containing an overview, introductory matters and the chronology of events, and my findings as to credibility of Mr Hobbs and the witnesses called by ASIC; the second as to Ms Reisinger's evidence, matters relating to authentication of documents, the submissions made by Mr and Mrs Hobbs on financial matters and my factual findings and findings as to the issues for determination.
CONTENTS
Structure of these reasons
[5]
Overview
[6]
Proceedings
[50]
Defendants
[58]
Schemes
[122]
Dramatis Personae
[130]
Cadent accounts
[239]
Manner in which communications were sent
[247]
DVD Seminar
[253]
OEM/KLM Process
[287]
Examples of scheme documents
[318]
Summary as to the position of the Defendants
[360]
Mr and Mrs Hobbs
[361]
Ms Wu
[405]
Mr Collard
[409]
Status of Wu and Collard Submissions
[422]
Summary of findings
[423]
Chronology
[442]
Pre 1998-1999
[433]
Events in 2000
[454]
Events in 2001
[481]
Events in 2002
[500]
Events in 2003
[557]
Events in 2004
[605]
Events in 2005
[646]
Events in 2006
[679]
Events in 2007
[752]
Events in 2008
[821]
Credibility of Witnesses
[830]
Mr Hobbs
[831]
Witnesses Called by ASIC
[944]
(i) Scheme Administrator
[946]
Mr Koutsoukos
[967]
Mr Wood
[1008]
Mr Truong
[1020]
Ms Bi Hong Dong
[1024]
(ii) FTC Executives - Mr Diaz
[1033]
(iii) Investors
[1059]
Mr Richard Blow
[1064]
Mr Nicholas Stavropoulos
[1066]
Mr Gideon Russell
[1086]
Ms Lei Huang
[1087]
(iv) Friends/Relatives/Hobbs office personnel
[1111]
Mr Craig Dent
[1111]
Mrs Emma Burnard
[1117]
Mrs Suzanne Watson
[1124]
Mr Pierre Mitchell
[1127]
Mrs Brenda Hobbs
[1129]
Mr Grant Clements
[1133]
Mr Robert Fitzgerald
[1159]
(v) Mr Parsons
[1163]
(vi) Ms Reisinger
[1195]
Authenticity of New World Holdings documents
[1258]
Financial/Accounting Submissions
[1279]
Legal Principles
[1334]
De facto/shadow directors
[1335]
Agency
[1344]
Financial services contraventions
[1375]
Section 911A contraventions
[1376]
Section 601ED(5) contraventions
[1386]
Misrepresentation contraventions
[1423]
Directors' duties
[1476]
Breach of fiduciary duties
[1497]
Aiding and abetting
[1509]
Matters raised by Mr Hobbs - relief from liability
[1514]
Evidentiary Principles
Onus
[1526]
Jones v Dunkel inferences
[1535]
Authentication of business records
[1551]
Issues for Determination - Findings
[1556]
Findings - the Hobbs companies
[1568]
Findings - FTC/OEM/KLM
[1661]
Findings - allegations as to the roles of particular individual defendants
[1690]
Findings - Individual schemes
[1706]
Principal Issues for Determination
[1907]
"Hobbs scheme" issues
[1908]
Misrepresentation issues
[2140]
Direct contraventions
[2316]
Breach of directors' or other duties
[2347]
Aiding and Abetting Breaches of Directors' Duties
[2407]
Breach of fiduciary duties
[2418]
Defences/matters pleaded in answer to the claim
Limitations defence
[2432]
Invocation of s 1317S and s 189 Corporations Act
[2443]
Conclusion
[2477]
Declarations and Orders sought by ASIC
[2490]
Annexure A - ASIC's List of Dramatis Personae
Annexure B - ASIC's Chronology
Annexure C - Aide-memoire re Summary of Schemes (Cadent)
Annexure D - ASIC's Summary of Principal Issues for Determination
Overview
Investments in most of the individual schemes were typically made in the name of international business corporations (IBCs) registered in offshore jurisdictions (jurisdictions that Mr Hobbs has himself described, in a seminar he presented in about 2003 and to which I will refer throughout as the DVD Seminar, as "privacy havens", and which were referred to in a Master Fund power point presentation as "privacy heavens"), including Anguilla, Vanuatu and the British Virgin Islands. ASIC contends that for most (though not all) of the individual schemes falling under the umbrella of the Hobbs scheme the incorporation of an IBC was a prerequisite to investment therein (though even where this requirement applied to a scheme it seems not always to have been complied with in practice - as, for example, with the investment by Mr Earl Conroy in his individual capacity of funds in the Smart Money Scheme, on the contract for which Mr Hobbs signed as introducer or broker).
While ASIC does not dispute the fact that moneys were contributed to the respective funds by way of investment, it contends that the identity of the particular investor (as an IBC) was a sham and that the relevant investments were in truth made not by the IBCs but, rather, by the individuals (who were retail, not wholesale, investors) on whose application the IBC in question was incorporated. In that regard, ASIC points to the fact that the moneys contributed by scheme members to the individual schemes were (with limited exceptions) not paid from an account in the name of the particular IBCs and that, in general, the scheme agreements were completed and executed in a manner and form that demonstrated that the 'investor' or 'scheme member' was the individual rather than the IBC associated with that individual. (In the alternative, ASIC contends that the particular IBCs were the alter egos of the individual investors and/or that the investment by the IBC was in each case as the relevant individual's agent).
Two of the schemes (the Super Save Superannuation Fund and the 888 (Super Save) Fund) were promoted for investment of superannuation funds by trustees of self-managed superannuation funds (SMSFs). In connection with those funds, a process was put in place (through an entity incorporated in New Zealand, Diligence Discovery Ltd) to monitor the investment of the funds and to confirm to investors both the receipt of funds and the acquisition with those funds (once pooled with other investor funds) of US Treasury Bills or Notes. (I interpose to note that this exercise seems to have been largely, if not wholly, an administrative one; limited to relaying to the investors information received respectively from the relevant scheme administrators and/or from the US clearing house reporting on the acquisition of the US Treasury Notes or T Bills, rather than the independent verification of that information.) Despite the assurances of Mr Hobbs to the contrary, there is no evidence of any independent external oversight or checking of the investment process.
ASIC contends that Mr Hobbs promoted and offered the Hobbs financial product to unsophisticated retail investors in Australia on the basis that it was an offshore investment into the wholesale market that would enable those investors to obtain investment benefits (at a high rate of return) otherwise available only to wholesale or sophisticated investors and that Mr Hobbs did so through financial education seminars and investor meetings (held in various locations in Australia, including commercial premises in New South Wales, South Australia and Victoria, and at private homes in New South Wales) conducted by himself with one or more others (FTC executives) and/or by word of mouth through his agents (the said FTC executives). The FTC executives were persons appointed or approved by Mr Hobbs (in his stated capacity as International Sales Manager of Future Trading Corporation Limited, an IBC incorporated in Vanuatu).
ASIC contends that Mr Hobbs recruited the FTC executives (a number of whom were his relatives or friends) not only to market the sale of financial education packages but also to introduce potential investors in Australia and New Zealand to the investment opportunities available through particular schemes or funds (information as to which was provided, nominally at least, by a separate entity known as KLM or KLM Enterprises Ltd).
The FTC executives who gave evidence in these proceedings appear to have had little or no formal financial qualifications or training. ASIC contends that at all material times each of the FTC executives acted as an agent of Mr Hobbs in conducting the FTC business (including the promotion of investments) in Australia. Mr Hobbs denies that the FTC executives were his agents (but in his defence he makes the positive assertion that they were agents of FTC for the purposes of selling financial education material [24]).
Broadly speaking, ASIC contends that the process by which individuals in Australia and New Zealand were able to gain access to the opportunity for offshore investment through the various investment funds the subject of these proceedings involved one or more of the steps set out below (not all of which applied, or were followed, strictly in each particular case). (I set out later extracts from the text of the standard communications sent as part of the OEM/KLM process, which illustrate the formulaic nature of the said process.)
For the most of the individual schemes, the first step was the subscription by a potential investor to an FTC financial education package (most commonly through a "gold" level subscription at a cost of AU$4,000, although there were other levels of subscription - silver and platinum), for which the subscriber received a series of 18 booklets (issued over a 3 year period) on various topics (including "The Art of Arbitrage", "The ABC of IBCs", "Is Your Money Really in the Bank", "Debt Restructuring", "Budgeting") as well as various newsletters and "newsflashes" (in relation to matters such as international investment frauds or scams, including warnings as to "prime bank" scams, Nigerian e-mail scams and, somewhat ironically, "Ponzi" schemes).
Some, at least, of the booklets (which were not particularly sophisticated in form or content) were written by Mr and Mrs Hobbs. (Mr Hobbs nevertheless contends that a number of booklets were provided to him by a US attorney, Mr Howard (Kip) Becker). The booklets were printed by Mrs Hobbs' sister (Mrs Ngaire Dent) and her husband (Mr Craig Dent) at, and sent to the FTC subscribers from, their home in Queensland.
At least in relation to the 888 (Super Save) Fund, it seems that the requirement for subscription to FTC may not have been applicable (Ms Bi Hong Dong's affidavit at [110] and [115]).
The second step was the establishment by an FTC subscriber (and potential investor) (at a cost of around $3,000) of an IBC in an offshore jurisdiction (information as to how to do so having been provided either following a request made by the potential investor by facsimile to an entity known as OEM Limited or in some cases by the FTC executive to the potential investor directly. (In the case of the Super Save and 888 (Super Save) Funds, investors were required to set up an SMSF for the purposes of making the investment.)
Third, for those schemes to which the OEM/KLM process applied, there was the issue of a letter on OEM letterhead to the "administrator" of the IBC (the administrator usually being the individual who had subscribed to the FTC educational package and who had made application for the IBC) acknowledging receipt of a request for information as to investment funds and advising of the referral of that request to another entity (KLM). The issue of letters on OEM/KLM letterhead generally took place from Mr Hobbs' office in New Zealand (though in relation to one of the funds, Integrity Plus, the scheme administrators in New South Wales at one stage issued the letters themselves). In New Zealand, the OEM/KLM process was administered by Mr Hobbs' personal assistant (Mrs Suzanne Watson) and her daughter (Mrs Emma Burnard), each of whom gave evidence in the proceedings of her understanding of the OEM/KLM process (from which it was apparent that they were doing little more than following instructions that had been given to them).
Broadly, it seems that, before (in some undisclosed fashion) "referring" to KLM the "request" for information as to investment funds, Mrs Watson and/or her daughter had to be satisfied that the investor "qualified" for the investment (ie, that an IBC had been incorporated in an "appropriate" offshore jurisdiction and that there had been an appropriate response to any information sought from the FTC subscriber in that regard - including that the purpose of the IBC was "educational").
There is no documentation evidencing any referral, as such, of such a request to KLM. Seemingly, what happened was simply a change of letterhead for the next step in the process. Although the fax number for OEM/KLM (which was the same number) had a UK prefix, facsimile transmissions to those numbers were diverted by an internet-based fax service provided by a US company (J2) to Mrs Burnard at her email address in New Zealand (the cost of the J2 service being paid by a company operating from Mr Hobbs' office - Tasman Business Consultants). Of the funds the subject of these proceedings, only potential investors in Master Fund, First Secured Bond Unit Trust, Covered Strategies, Smart Money, Elite Premier and Elite Premier Option Two Unit Trust went through the initial OEM fax process.
The fourth step was that, potential investors were provided, by a letter on KLM letterhead (again generally issued by Mrs Watson/Mrs Burnard in New Zealand), with a list (that varied from time to time) of the funds into which investment could be made (including a brief description of those funds and a risk profile in respect of each fund, with a rating from 010 as to the investment risk associated with that fund). At least in one instance, where the potential investor sought to invest in a fund other than those nominated in the KLM list of funds provided to her, this was permitted.
Once investors selected a particular investment fund, generally documentation was issued for the acquisition (in the name of the relevant IBC or the SMSF, as the case may be) of units in the particular unit trust (the documentation so issued being a private placement memorandum for the relevant scheme, watermarked or embossed with the particular IBC name and an investor number, and a pro forma agreement to be entered into between the IBC and the corporate administrator of the particular investment scheme). In some of the funds, investment was effected (in some or all instances) through the acquisition of shares in the corporate administrator of the scheme (the Enhanced Fund and the Good Value Fund).
The material terms of each scheme memorandum and scheme agreement were in strikingly similar form. (I set out later in these reasons extracts from the text of a typical memorandum and agreement.) ASIC contends that the documents were drafted by Mr Hobbs or otherwise supplied by him (or his assistant, Mrs Watson) to the scheme administrators. Mr Hobbs denies that he drafted or supplied memoranda or fund documents to scheme administrators. (I interpose to note that it defies commonsense to suggest that disparate scheme administrators, and particularly scheme administrators with no previous experience in operating investment funds, would independently have created documents in such similar terms and format (even down to adopting the same process of watermarking the memoranda) without some common denominator. The evidence points overwhelmingly to Mr Hobbs as being the relevant common denominator between the various schemes.) Mr Hobbs says that the template for the scheme memorandum for Smart Money, the initial fund administered by Geneva Financial, was provided to his wife by Mr Becker. This is not consistent with the chronology of events.
For the period from 2001 to around 2007, much of the scheme documentation was printed and dispatched by Mr and Mrs Dent from their home in Queensland but at a later point (in about 2007), the printing and dispatch of such documentation was carried out by an IBC called Swiss First Security (or Swiss First Securities) from Tonga (or one of the Pacific Islands). In some instances potential investors would be provided with the scheme memorandum and agreement by the scheme administrators themselves (such as, for example, by Mr Koutsoukos, Mr Wood or Mr Truong with respect to investments in Integrity Plus and Super Save).
In one of the funds (the Good Value Fund), investment through the fund was limited to shareholders of the corporate administrator (North Wave Ltd). However, for most of the individual schemes funds were solicited more broadly.
Unit certificates (and/or letters confirming the investment) were issued in respect of the investments. Those certificates were in the name of the IBCs, but usually sent to the address (in Australia or New Zealand) of the person on whose behalf or at whose request the IBC had been established. (On the scheme agreement investors nominated the relevant address for correspondence and bank account details for payment of returns. The nomination of those details care of the individuals is one of the factors relied upon for ASIC's sham argument.)
Each scheme was administered by a corporate administrator, which (with one exception for a short period) was an offshore incorporated IBC. The corporate administrators were operated or managed by individuals (usually FTC executives) who variously described themselves as administrators, principals, directors, beneficial owners or consultants of the corporate administrator. ASIC contends that each of the individual scheme administrators was a de facto director or officer of the respective corporate scheme administrators and that none had any relevant experience or qualifications to offer interests in, or to operate, managed investment schemes in Australia.
(In these reasons where I refer to scheme administrators, I am referring to the individuals, as opposed to the corporate entities named in the scheme agreements as administrator of the relevant funds to whom I refer as corporate administrators. References to the "fund administrators' are non-specific - largely because, where I so refer to them, this is using the term given to them by Mr Hobbs.)
It is contended that Mr Hobbs directed or otherwise procured the corporate administrators of particular individual schemes (with the exception of 888 Turks & Caicos, Geneva Financial, Preserved Investments and ISPL) to open (non interest-bearing) bank accounts with Technocash Pty Limited, a company incorporated in New South Wales that provides multi-currency facilities. ASIC contends that the corporate administrators of the relevant schemes used the Technocash accounts to accept the deposits of funds sent to the account by telegraphic transfer in various currencies; to pay funds by telegraphic transfer to other accounts in any of those currencies; and to transfer funds within the account from one currency to another.
For some (but not all) of the individual schemes some (but by no means all) of the investment moneys were transferred (through a broker in the United States - mostly, Ms Lisa Reisinger, the branch manager of a company in Illinois called New World Holdings LLC) to investment accounts held with a futures commission merchant in the United States (Cadent Financial Services LLC) for trading on the US wholesale market by particular commodity traders (or CTAs) with whom the corporate administrators had entered into trading agreements.
In the period between December 2004 and March 2007, the scheme administrators of each of the Super Save Fund, Master Fund, Pinnacle Fund, 888 (Super Save) Fund, Enhanced Fund, Prestige Unit Trust, Elite Premier Option Two Unit Trust, Good Value Fund and Best Fund, opened and operated derivatives trading accounts with Cadent in the names of the respective corporate administrators of those funds. ASIC contends that this was at the direction of Mr Hobbs and that he (either personally or by his agents, Ms Li and Mr Collard) introduced various of the scheme administrators to Ms Reisinger for that purpose. Ms Reisinger had formerly been an employee of an entity known as Refco (Refco being described by Mr Hobbs at the DVD Seminar as an "international clearing house", in terms that conveyed the clear impression that he had previously had dealings with or through Refco).
In the case of Integrity Plus, it invested funds with Cadent through accounts opened in the name of ISPL (the only corporate scheme administrator that was incorporated in Australia), which was for a short time one of the administrators of the Super Save Fund.
ASIC contends that it was pursuant to the instructions or advice of Mr Hobbs (or his agents, New World Holdings and Ms Reisinger) that various of the corporate administrators entered into the Cadent trading agreements (or sub-accounts) for the investment of the funds deposited to their Cadent accounts (and allocated an amount for each of the Cadent traders appointed by them and the leverage, if any, to be applied to that account).
The earlier funds - First Secured Bond Unit Trust, Smart Money, Elite Premier (ie the first Elite Premier Fund) and Covered Strategies did not invest funds with Cadent (though there was an application pending for a Cadent account to be opened by the corporate administrator of the Covered Strategies Fund in 2007, when the ASIC investigation that led to these proceedings, came to Cadent's attention and thereafter that application did not proceed). In due course, the respective Cadent accounts were frozen.
As part of the investment of funds through Cadent, the corporate administrators of various of the funds that had opened or operated Cadent accounts (other than Secured Bond, GP Global and North Wave) gave instructions for the purchase of United States Treasury securities or STRIPS ("Separate Trading of Registered Interest and Principal of Securities") using investors' funds from the relevant Cadent account. Those US Treasuries were credited to the Cadent account from which the funds for their purchase had originated (and, in the case of Preserved Investments, were utilised for the purpose of bond trading). Those securities (together with funds held in cash in the respective Cadent accounts) were utilised as security to meet margin calls on derivatives trading conducted by the Cadent traders appointed to the particular Cadent account. ASIC contends that this was, again, something that was done pursuant to the instructions or advice of Mr Hobbs (or his agents, New World Holdings and Ms Reisinger).
(US Treasury STRIPS were purchased for Integrity Plus (Ex A Table 171), Super Save (Ex A Table 171), Pinnacle Fund and 888 (Super Save) (Ex A Tables 172/173), Enhanced Fund (Ex A Table 176), Best Fund and Prestige Fund (Ex A Tables 174 and 175) and the Elite Premier Option Two Unit Trust (Ex A Table 177).)
Apart from the investment of funds with Cadent, ASIC contends that Mr Hobbs directed or otherwise procured various of the scheme administrators: to disburse investor funds in a broad range of speculative and unsecured investments (many of which generated no returns) and to cause corporate administrators to transfer funds to other individual schemes or to the scheme administrators themselves (or to related parties, other scheme administrators and companies or entities controlled by Mr Hobbs), none of which was authorised under the respective scheme memoranda (or disclosed to investors in the various schemes).
The "cross-pollination" of funds from different schemes is one of the factors from which ASIC submits it can be inferred that the individual schemes formed part of one collective scheme. ASIC further submits that this demonstrates the extent to which Mr Hobbs was directing or controlling the operation of these investment schemes.
As to the commissions or other amounts paid or payable at various stages of the investment process, they were as follows:
- the FTC executives (who, in reality, seem to have been little more than salespersons and regarded as such by Mr Hobbs) received a 10% commission for each subscription received for FTC financial education packages (paid out of the Tasman Business Consultants' account);
- the person identified as the introducer or "broker" in the scheme agreements entered into by investors with the corporate administrators for the respective schemes (commonly being the FTC executive who had sold the FTC subscription packages in the first place, though in the case of agreements where Mr Hobbs was the named broker or introducer it is not clear whether there was a prior FTC sale) obtained commissions from the introduction of the investors to the fund (generally a 12% commission out of the "profit" or return from the scheme, according to Mr Koutsoukos);
- scheme administrators themselves seem to have charged a higher percentage (20%) commission (and in the case of scheme administrators who introduced clients to the investments they received the 12% commission plus the introducer's or broker's commission); where the scheme administrator himself or herself had personally invested in the fund or done so through an IBC controlled by him or her there was still an administrators' and an introducers' fee taken out before the distribution of "profit" to that investor, as I understand it. (In the case of Mr Clements and Mr Fitzgerald, they understood that a portion of their commission as scheme administrators (namely 20% of the 20%) was payable to Mr Hobbs as "rent" for the space they occupied in Mr Hobbs' Nelson office);
- various agreements or arrangements were also entered into pursuant to which Mr Hobbs (or his wife) was entitled to (and ASIC contends, though this is disputed, was paid) commissions, fees or other amounts of money in connection with: the operation of the Cadent accounts; the purchase, sale, marketing and/or management of US Treasuries for the corporate administrators of the individual schemes; the provision (or purported provision) of research reports to corporate administrators; as well as a share of the commission paid to New World Holdings (as its broker's fee in relation to the Cadent accounts). Mr Hobbs also received payments referable to the investment by one or more of the schemes with an entity known as NCCN (through a US attorney, Mr Donald Caffray).
In all, ASIC claims that Mr Hobbs had a financial interest in the various investment management schemes in five ways: first, through the sale of the FTC subscriptions (on the basis that moneys received by FTC were treated by Mr Hobbs as his own moneys); second, by receipt of commissions payable as an introducer or broker for some of the investors (in particular, two of the investors in the Smart Money Fund of which Mrs Hobbs was a co-scheme administrator); third, by the receipt of commissions and other amounts with respect to the investment of the funds with Cadent (including a share of each of the: incentive or profitability fees payable to CTAs, management fees charged by CTAs; round turn commission on the trades in each account; and float, namely the interest paid to Cadent on the cash held in the Cadent accounts) as well as sums referable to the commission for the purchase of the US Treasuries (from MLN), a share of the ROF consulting fees; a share of the payment for 'research reports' provided to scheme administrators; and a share of the New World Holdings' commission from Cadent (none of which payments being disclosed, it is said, to investors) (ASIC has calculated the payments received into the Hobbs bank accounts pursuant to these arrangements as totalling in excess of NZ $450,000); fourth, by the sale to particular FTC executives (namely, Mr Koutsoukos, Mr Wood and Mr Truong, to whom, from time to time, I refer collectively as the J&B Financial officers) of intellectual property in a 'white label fund' (or worldwide contacts he had in relation thereto); and, fifth, through the use of investors' funds in the acquisition of assets by or for the benefit of Mr Hobbs (or those associated with him) (such as the property in which Mr Hobbs presently has an office).
Mr Koutsoukos has deposed to the making of a statement by Mr Hobbs in about mid December 2007 (when ASIC's investigations into the Super Save and/or Integrity Plus schemes were underway) to the effect that this was putting at risk "$50,000 a month income from all of the funds that [he] had introduced to Cadent". I have not sought to calculate the average total of the monthly commissions and other payments received by or to the benefit of Mr Hobbs (since precise quantification of this amount is not necessary for present purposes). I note, however, that it is contended by ASIC that sums totalling some US$867,840.04; AU$50,481.47 and NZ$1,569,028.99 were paid to Mr Hobbs and the Hobbs interests out of the fourteen individual managed investment scheme funds. This is disputed by Mr Hobbs, who contends that he received no commissions in respect of any of the investment schemes the subject of these proceedings and that his income was derived from FTC and from commissions received on a separate Global Funeral Services investment. (Mr Hobbs contends that the amounts paid to him are far less than those to which he was entitled from the Global Funerals transaction.)
For certain of the funds (Integrity Plus, Super Save, Master Fund and Enhanced Fund), ASIC contends that corporate administrators withdrew amounts from Cadent accounts (on the instructions or advice of Mr Hobbs, or his agents New World and Ms Reisinger) and paid all or part of those amounts to scheme members by way of purported profit or returns on investment but that these payments were in fact out of capital not profits (as demonstrated by Tables 162, 163, 164 and 165, which were admitted in evidence as summaries pursuant to s 50 of the Evidence Act 1995 (NSW)).
In respect of the three largest schemes (Integrity Plus, Super Save and Master Fund), ASIC contends that, over the relevant period, returns (including substantial amounts paid out of capital invested by other scheme members) were paid to investors: in the Integrity Plus Fund totalling A$8,177,132.57, US$2,379,170.68, NZ$69,211.14 and £17,004.54 (and commissions were paid to FTC executives out of the Integrity Plus Fund totalling US$152,639.38 and A$727,568.57); in the Super Save scheme totalling US$97,164.05 and A$855,594.98 (and commissions were paid to FTC executives totalling US$6,922.43 and A$70,151); and in the Master Fund scheme totalling US$69,984.93, A$71,317.75 and NZ$3,625 (with commissions to FTC executives totalling US$7,930.68 and A$13,451.57).
ASIC contends that each of Mr Hobbs, FTC and the respective scheme and corporate administrators for Integrity Plus, Super Save, Master Fund and First Secured Bond Unit Trust made various representations to potential investors in the Hobbs scheme (or alternatively in each of the individual schemes) that were false and misleading: namely, representations to the effect that the Hobbs scheme could lawfully provide investors with access to offshore investment products and opportunities; that the principal advanced by the investors would be secured or otherwise protected; that investors could expect to receive returns in the vicinity of 3 to 4% per month; that, with respect to Integrity Plus, Super Save, Master Fund and First Secured Bond Unit Trust, funds would be invested in AA+ or A+ securities; that, with respect to Integrity Plus and Super Save, investors would be able to redeem or withdraw their capital upon giving 60 days notice from the first anniversary of their investment; and that each of Integrity Plus, Super Save and Master Fund was generating profits or sufficient profits to enable returns to be paid to investors in each fund.
ASIC also contends that Mr Hobbs and Mr Collard made false and misleading representations to potential investors in Barclaywest (or the Enhanced Fund) concerning a project in China and to potential investors in the 888 (Super Save) Fund concerning an alleged commercial bond investment of $207 million.
Mr Hobbs was not himself the titular administrator of any of the individual schemes nor was he formally appointed as a director or officer of any of the corporate administrators (though he signed at least one document as the duly elected secretary of one of the corporate administrators, Geneva Financial, when an application for a Cadent account was lodged by that company). However, ASIC contends that Mr Hobbs was a de facto director and officer of FTC and a de facto, or alternatively shadow, director and officer of each of the corporate administrators (as a de facto director/officer on the basis that he acted in the position of a director or officer of both FTC and each of the corporate administrators; as a shadow director/officer on the basis that the scheme administrators (themselves being said to be de facto directors of each corporate administrator) were accustomed at all material times to act in accordance with the instructions or directions of Mr Hobbs). (In the event that the individual scheme administrators are found not to be de facto directors (and are simply officers, agents or employees) of the respective corporate administrators, it is said that Mr Hobbs must be the de facto director, as there is no one else who could fit that role.)
Liability on the part of Mr Hobbs for the misleading and deceptive conduct contraventions is alleged both in his own right and, as principal, for the conduct of those who it is alleged acted as his agents in relation to the schemes.
As to Mrs Hobbs, Mr Collard and Ms Wu (each of whom is also joined as an individual defendant to the proceedings) ASIC contends that Mrs Hobbs and Mr Collard were at all material times de facto directors or alternatively officers of one or more of the corporate administrators (being someone who acted in a position of a director of the said company or companies; made or participated in the making of decisions that affected the whole or a substantial part of the business thereof; and a person who had the capacity to affect significantly the financial standing thereof), and that Ms Wu was solely an officer of the particular corporate administrators with which she as associated.
In summary, the contraventions contended to have been committed by the respective defendants fall within the following categories:
(i)financial services contraventions: of s 601ED(5) of the Corporations Act (operating an unregistered managed investment scheme in Australia): by FTC, the corporate administrators and by each of Mr Hobbs, Mr Collard, Mrs Hobbs and Ms Wu (in respect of the Hobbs scheme) or, alternatively, by those involved in the Integrity Plus, Super Save and Master Fund schemes (if there is not found to be one overall "Hobbs" scheme); and of s 911A of the Corporations Act (carrying on an unlicensed financial services business in Australia by each of those entities and individuals);
(ii)misleading and deceptive conduct contraventions (variously, by Mr Hobbs and one or more of the corporate and scheme administrators) of s 1041E of the Corporations Act, (making statements or disseminating false or misleading information); s 1041G of the Corporations Act (engaging in dishonest conduct in relation to a financial product or service); s 1041H of the Corporations Act (engaging in misleading or deceptive conduct in relation to a financial product or a financial service); s 12DA of the ASIC Act (engaging in misleading or deceptive conduct in relation to financial services); s 12DB of the ASIC Act (falsely representing that financial services were of a particular standard) and s 12DF of the ASIC Act (misleading the public as to the characteristics or suitability for purpose of financial services).
(iii)breaches of directors' (and/or officers') duties:
(a)owed by Mr Hobbs (as a de facto or shadow director or officer of FTC, PJCB, ISL and Secured Bond) involving contraventions of both s 180(1) of the Corporations Act (failure to exercise care and due diligence) and s 181 of the Corporations Act (failure to act in good faith) arising from the financial services contraventions by each of FTC, PJCB, ISL and Secured Bond;
(b)owed by Mr Hobbs (as a de facto or shadow director or officer of each of the corporate administrators to PJCB, ISL, ISPL, Secured Bond, 888 Vanuatu, Geneva Financial, Preserved Investments, Ultimate Investments, Barclaywest and GP Global) by causing the respective companies to make payments that led to him gaining an advantage for himself or others and causing detriment to each corporation (in contravention of s 182 of the Corporations Act); and
(c)owed by Mr Collard (in respect of Secured Bond, Barclaywest and 888 Vanuatu), Mrs Hobbs (in respect of Geneva Financial) and Ms Wu (as an officer only) (in respect of Barclaywest and 888 Vanuatu) (in contravention of ss 181 and or 182 of the Corporations Act respectively).
(iv)as an alternative to the principal contraventions, aiding and abetting claims: against Mr Hobbs in respect of contraventions by Messrs Wood, Truong and Koutsoukos, Ms Li and Ms Wu of ss 181 and 182 of the Corporations Act; and against each of Geneva Financial and Mrs Hobbs in respect of the contraventions of s 182 alleged against Messrs Wood, Truong and Koutsoukos and in respect of the contraventions of ss 181 and 182 alleged against Mr Hobbs.
(v)(if they are not found to have been acting as directors/officers of the respective entities) breaches by each of Mr Hobbs, Mr Collard and Ms Wu of fiduciary duties allegedly owed to investors in the "Hobbs scheme" or one or more of the individual schemes (by placing himself or herself in a position where there was a real and substantial risk that his or her interest would conflict with those of investors; by obtaining an advantage for himself or herself by reason of their position or from an opportunity gained by reason of that position; and by failing to account to investors in the said scheme for benefits and gains obtained by him or her in breach of his or her duties).
Contraventions of directors' and officers' duties are alleged against Messrs Wood, Koutsoukos, Truong and Ms Li only for the purpose of establishing the aiding and abetting claims against Mr Hobbs (and in one instance Mrs Hobbs). (Similarly, contraventions are alleged against various of the now de-registered IBCs for the purpose of establishing the breach of directors' duty allegations against Mr Hobbs and others.)
Proceedings
The present proceedings are a consolidation (by order made by Palmer J on 27 August 2010) of three separate sets of proceedings each brought by ASIC in relation to a particular investment scheme (the Super Save, Integrity Plus and Master Fund schemes respectively).
The first two sets of proceedings were commenced in late 2007 (the first, being 5864/07, was commenced on 5 December 2007 in relation to the Super Save scheme, and the second, being 6021/07, was commenced on 14 December 2007 in relation to the Integrity Plus Unit Trust or the Integrity Plus scheme), after ASIC had conducted compulsory (s 19) interviews with various of the persons associated those schemes. In 2008, ASIC commenced the third set of proceedings (4532/08), in relation to the Master Fund scheme.
ASIC sought and obtained asset preservation orders under s 1323 of the Corporations Act in relation to the Super Save and Integrity Plus schemes (orders being made on an ex parte basis on 2, 14 and 18 December 2007, respectively). On 5 February 2008, freezing orders were made restraining additional defendants (including Mrs Hobbs) from removing assets from Australia and orders were made for the remission to this Court of the outstanding balance then held in the Cadent accounts. (Amounts totalling AU$19,383,475.20 and US$1,580,593.02 have been paid into Court representing sums then held in various of the Technocash and Cadent accounts as well as moneys held by various of the corporate administrators. Following various payments authorised to be made out of some of those moneys, there presently remain the sums of AU$738,484.36 and US$616,759.28 held by the Court.)
In mid 2009, ASIC conducted compulsory interviews of various persons resident in New Zealand (including Mr Hobbs, although his interview was not completed due to health issues at the time) pursuant to requests made by ASIC to the Financial Markets Authority of New Zealand under the May 2002 International Organization of Securities Commissions Multilateral Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information (MMoU). Those interviews (referred to in these reasons as the s 10 interviews) were conducted pursuant to s 10 of the Securities Act 1978 (NZ) following the issue of summonses to the respective witnesses.
In January 2010, again following a request under the MMoU, ASIC (in conjunction with the Commodity Futures Trading Commission in the United States), conducted a compulsory examination of Ms Grace Elizabeth (Lisa) Reisinger. (I refer to this as the CFTC examination.) In May this year, I granted leave to ASIC (over the objection of Mr and Mrs Hobbs, then represented by Counsel, and having heard submissions also by the solicitor then appearing for Mr Collard) to adduce as evidence in the proceedings (and to be admitted if so adduced) the transcript of that examination pursuant to Part 4 of the Foreign Evidence Act 1994 (Cth). (I note that the application was also made under Part 5 of the Supreme Court Act 1970 (NSW) and s 63, or alternatively s 64, of the Evidence Act 1995 (NSW).) The leave so granted was subject to any objection that might be taken by the defendants at the hearing as to relevance or form and subject to weight. (At the hearing, the transcript and exhibits of Ms Reisinger's CFTC examination were admitted, subject to weight, as Ex AO.)
In the period from commencement of the respective proceedings in 2007/08 to their consolidation by Palmer J in 2010, there were various changes to the parties joined as defendants thereto. By the time that the hearing of the consolidated proceedings commenced on 4 July 2012, there had been further changes to the constitution of the proceedings. In particular, shortly before the commencement of the hearing I granted ASIC leave to discontinue proceedings against three of the named defendants in the consolidated proceedings (the fifth to seventh defendants), on the basis that it had then commenced a criminal prosecution against them. (Those three defendants swore affidavits that were read in ASIC's case and each was in due course cross-examined by Mr Hobbs.)
The proceedings against the second defendant, Ms Li, were the subject of a stay ordered by Barrett J (as his Honour then was) on 11 June 2010 until further order. In addition, various of the corporate defendants had been deregistered prior to the commencement of the proceedings (and there has been no application for the revival of those companies).
As a result of the above (and the stance that at that stage had been taken by the third and fourth defendants, to which I will shortly refer), as at 4 July 2012, when the hearing before me commenced, the position was that the proceedings were actively contested only by the first defendant (Mr David Hobbs, to whom I will refer throughout as Mr Hobbs, as distinct from his brother, Mr Robert Hobbs) and the eighth defendant (Mr Hobbs' wife, Jacky, to whom I will refer throughout as Mrs Hobbs, as distinct from Mrs Brenda Hobbs, her sister-in-law). To some extent this position changed late in the course of the proceedings when both the third defendant (Mr David Collard) and the fourth defendant (Ms Huimin Wu) sought to take an active role in the proceedings. I refer to this below, when outlining the position in relation to each of the respective defendants.
Defendants
Mr Hobbs is the first defendant in the consolidated proceedings. (He was not initially joined as a defendant to either of the first two sets of proceedings but was joined as the twelfth defendant to the 5864/07 proceedings and as the seventeenth defendant in the 6021/07 proceedings by orders made by Austin J on 11 July 2008.)
Mr Hobbs represented himself in the hearing before me. He has, however, had the benefit of legal representation and advice at various times both before and during the course of these proceedings (including when he attended his s 10 interview in New Zealand in May 2009; at the time of the filing of his defence in these proceedings (at least to the extent that such an inference can be drawn from the fact it was then witnessed by the solicitor in New Zealand who had acted for him for some time, Mr Phillip Bellamy); in April 2012, when various interlocutory applications brought by ASIC came before the Court for hearing; and shortly prior to the commencement of the hearing, when I was informed that both a semi-retired barrister and a law student in New Zealand were providing some assistance to Mr and Mrs Hobbs). Prior to the commencement of the hearing there was also some evidence (on which reliance was placed for the Hobbs' interests in resisting an interlocutory application by ASIC for leave to issue a subpoena to Mr Bellamy) that Mr Hobbs had had the benefit of legal advice from Mr Bellamy in the period from 2007-2011 in relation to the matters the subject of the proceedings (and I infer that Mr Bellamy's familiarity with the matter was not a passing one, since it was put to me that it would take him a considerable time to pass on his knowledge to other lawyers).
No defence was filed by Mr Hobbs to the Second (or Third) Further Amended Statement of Claim (the former being the version of ASIC's pleading as at the commencement of the hearing before me; the latter being the final version which I gave leave to be filed at the close of the evidence in these proceedings in order to incorporate certain errata that had been noted by ASIC in the pleading as it then was and to enable alternative allegations to be made as to the place of incorporation of two of the corporate entities referred to in the proceedings, OEM and KLM, to accord with the evidence that had emerged in the proceedings of possible multiple entities with those names).
An Amended Defence had, however, earlier been filed by Mr Hobbs (to the then Further Amended Statement of Claim) on 30 May 2011 (to which on 15 June 2011, ASIC had filed a Reply). That pleading was verified by Mr Hobbs, whose attestation of the affidavit was witnessed by Mr Bellamy. (I note in passing that the affidavit verifying the defence bears a computer footer that reads, relevantly, "clients/4296 [tasman business consultants limited]/002 (australian litigation)", which on its face suggests that at least at that stage Mr Bellamy had some retainer in relation to the Australian litigation (Tasman Business Consultants being an entity associated with Mr Hobbs and his wife and in whose name one or more client files had been opened in the firm by which Mr Bellamy was then employed, Fletcher Vautier Moore).
As to the amendment to the pleaded allegations in relation to the date and place of incorporation of each of OEM and KLM, I had in mind that it has been recognised as appropriate (where no issue of procedural fairness is involved) for leave to be given to amend the pleadings to accord with evidence that has emerged during the trial. In Ingot Capital Investments Pty Limited v Macquarie Equity Capital Markets Limited [2008] NSWCA 206 Ipp JA (considering the authorities and principles relevant to the question whether a party would be allowed at trial to depart from its pleaded case) noted that at trial "there may be a departure from the pleadings where adherence to them would be unjust or unfair" citing Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279; 92 ALR 53; [1990] HCA 11 per Mason CJ and Gaudron J at CLR 286-7; ALR 58-9). In Banque Commerciale, Dawson J had observed that:
But modern pleadings have never imposed so rigid a framework that if evidence which raises fresh issues is admitted without objection at trial, the case is to be decided upon a basis which does not embrace the real controversy between the parties. Special procedures apart, cases are determined on the evidence, not the pleadings.
In the present case, evidence as to the existence (or likely existence) of at least two different OEM/KLM entities was put before the Court during the hearing (to which I will refer in due course) without objection. Mr Hobbs had neither denied nor admitted the allegations as to the incorporation of OEM/KLM as had then been pleaded, thus putting ASIC to proof thereof. There was (and remains in my view) uncertainty as to which was the particular corporate entity (if any) on behalf of which Mrs Watson and Mrs Burnard sent correspondence when implementing the "OEM/KLM" process (a process of which Mr Hobbs had previously purported, at the very least at the 2003 DVD Seminar, to have knowledge).
Those matters, coupled with the fact that no allegations were made in the proceedings of any breach of duty in relation to the OEM/KLM entities, led me to conclude that it was appropriate to allow this particular amendment. (On ASIC's case, as I understand it, little if anything turns on whether the steps carried out in the names of OEM and KLM were on behalf of companies incorporated in any particular one of the possible jurisdictions.) I indicated that I would give Mr Hobbs leave to adduce any further evidence he might wish to call in relation to the place of incorporation of the respective companies but no such evidence was forthcoming.
I understand that Mr Hobbs raises the same matters in defence to the final version of the pleading against him as are pleaded in his filed defence to the earlier version of that pleading (other than that he now invites me to accept ASIC's alternative case against the fund administrators as correct). (Similarly, I understand that Mrs Hobbs in substance maintains her earlier defence to the now revised pleading.)
By way of general summary as to Mr Hobbs' background, Mr Hobbs has worked for a number of years in the finance industry, though he has no formal degree qualifications (at the DVD Seminar he is recorded as saying that he "honoured in financial planning" and at least one witness referred to Mr Hobbs having said he had studied financial planning at Harvard - Mr Blow). In his affidavit of 3 August 2012, Mr Hobbs deposes (at [2]) to having "a background in life insurance and financial planning in New Zealand" and to having worked at various times for NZI, Colonial Mutual and Norwich Union (during which time Mr Hobbs says that he became aware of the wholesale investment market - [3]).
In correspondence over the period from 2000/2001 onwards, Mr Hobbs has described himself variously as a Certified International Financier (CIF) and as a member of the International Society of Financiers (ISF). As I understand it, the former is in the nature of an honorific title and the latter an indication of membership of the society in question (which membership Mr Hobbs no longer holds, having not renewed it at some unidentified time). It was not suggested that membership of the ISF was restricted to those with any particular academic qualifications.
Mr Hobbs has described himself in a number of different capacities for entities associated with one or more of the schemes: as authorised officer of FZF Vanuatu (when he signed a proxy on 4 August 2012 for use in an investors meeting in the liquidation of the Master Fund scheme to be held on 8 August 2012); in various correspondence as consultant, and on at least one occasion as a "director", of FZF Anguilla. He admits that he occupied the position as International Sales Manager of FTC. On at least one occasion he signed a letter as "director" of FTC. He has also signed documents as administrator of Trans Management Corporation (the IBC named in the private placement memorandum as the outside trustee for various of the schemes) (Ex AU 3921) and as the secretary of Geneva Financial.
The second defendant is Ms Min Hua Li (referred to by various of the witnesses as Lili). Ms Li was described by Mr Hobbs (at the DVD Seminar) as a surgeon from China (which makes Mr Hobbs' derision during the hearing, of Mr Parsons' reference to Ms Li as a doctor or brain surgeon somewhat remarkable). I was informed at various interlocutory hearings, and again at the commencement of the hearing, that Ms Li is presently incarcerated in China. There has been no order lifting the operation of the stay ordered by Barrett J on 11 June 2010 of the proceedings against her. ASIC therefore seeks no relief against Ms Li (though findings as to her conduct will be of relevance to various claims made against the other defendants).
Ms Li is identified by ASIC as the scheme administrator or co-scheme administrator of a number of the schemes the subject of these proceedings (those being the Master Fund, First Secured Bond Unit Trust, Pinnacle Fund, 888 (Super Save) Fund, Enhanced Fund and Best Fund schemes).
After the commencement of the hearing, a bundle of material was forwarded by facsimile transmission to the Court Registry comprising a handwritten letter in English, purportedly (though I have no reason to doubt this) signed by Ms Li, together with a number of pages of handwritten Chinese characters (that I cannot read and that no party has sought to have translated). That material was forwarded to me in chambers and I made arrangements for my staff to provide copies of that material to Mr Hobbs, to Mr Collard and to ASIC. That material is not in evidence but has been retained on the Court file. On the morning of 5 September 2012, my chambers received from the Registry a further bundle of correspondence (an original handwritten letter and a photocopy of another letter) again purportedly signed by Ms Li. Copies of that material were provided to the parties. Again, the material has been retained on the Court file but it is not in evidence and has not been read.
The third defendant is Mr David Collard. Mr Collard is identified by ASIC as the scheme administrator or co-scheme administrator of each of the Master Fund, First Secured Bond Unit Trust, Pinnacle Fund, 888 (Super Save) Fund, Good Value Fund and Enhanced Fund (those schemes being grouped together, for descriptive purposes, by ASIC as the "Li/Collard" schemes, and referred to on one occasion in opening as the "Li/Collard/Wu" schemes). The reason for that collective description is that it is contended that one or both of Ms Li and Mr Collard was associated with each of those schemes (and that Ms Wu was associated, as an officer of the relevant corporate administrators, with a couple of those schemes - the 888 (Super Save) and Enhanced Fund schemes).
Although Mr Collard initially filed a defence in these proceedings (in November 2010, at which time he was unrepresented), in April 2012 an unconditional submitting appearance was filed on his behalf (at which time he was represented in the proceedings by Mr Hartnell of Atanaskovic Hartnell). Mr Collard was in attendance in Court throughout most of the hearing (and communications to Mr and Mrs Hobbs through the course of the hearing were made via Mr Collard's email address). Other than as set out below, Mr Collard played no active role in the hearing.
On no less than four occasions during the course of the hearing before me Mr Collard sought to intervene and to take a more active role (leaving aside the occasions on which Mr Collard intervened from time to time (always politely) to make observations or comments on matters of evidence or the like).
On the first occasion (on 30 July 2012, the seventeenth day of the hearing), Mr Hobbs indicated that Mr Collard wished to address me. When I sought to clarify with Mr Collard the precise nature of the statement he wished to make (having explained - from T 1152.20 - that the consequence of the filing of an unconditional submitting appearance was that he had elected to abide by the decision of the Court and not to take an active role in the proceedings), Mr Collard's response was to the effect that he wished to address me as to the impact these proceedings had had on him over the past four years (not as to the evidence in the proceedings as such nor as to the question of what findings should be made on the allegations that had been made against him). I indicated that he would have an opportunity, if the occasion arose for a hearing on penalty, to make such submissions at that later stage of the proceedings.
On the second occasion, after the close of evidence from both ASIC and Mr Hobbs, but before the commencement of ASIC's oral closing submissions, Mr Collard handed up to me a defence that he had filed in the Registry (without leave) on 15 August 2012. (Any application for leave to file the defence would, at least implicitly, have encompassed an application for leave to withdraw the unconditional submitting appearance that had been filed on Mr Collard's behalf in April this year.)
Mr Collard's then stated position was that, having been in Court for some six weeks during the course of the hearing to that date, he had heard things he believed that were not correct and he said that he was seeking an opportunity to correct some of those matters. He informed me that the defence he had filed in the Registry the day before had been prepared after discussion with Mr and Mrs Hobbs (and that it had been typed by Mrs Hobbs). That defence was a mixture of broad denials and assertions (including commentary as to the perceived oddity that a particular company had not been joined as a defendant and the statement that "I am now of the understanding that by poor legal advice I do not have the right of natural justice").
In its form, the proposed new defence was in my view liable to be struck out as an embarrassing pleading within the meaning of that expression as used in Part 14 of the Uniform Civil Procedure Rules 2005 (NSW). It did not purport to respond to particular allegations of fact or law contained in ASIC's pleading (unlike the defence that had been filed by Mr Collard dated 18 November 2010, which had pleaded to each of the paragraphs of the then Further Amended Statement of Claim - in the most part either denying or not admitting the respective allegations, though in some instances admitting particular allegations).
In support of his (informal) application to rely on the latest filed defence, Mr Collard invoked in general terms the principle of natural justice. He filed no evidence in support of that application.
With a view to the expeditious conduct of the proceedings, I did not require the filing by Mr Collard of a formal motion for leave to withdraw the submitting appearance and to file (out of time) the defence that had been handed up to me. For the reasons that I briefly outlined at the time, as recorded on the transcript, I dismissed that application. As I did not publish written reasons at the time, I set out briefly below the basis on which I was not prepared to accede to Mr Collard's application at that stage of the proceedings.
Leave to withdraw an appearance may be appropriate in circumstances where the appearance has been entered by mistake or where a solicitor has acted without proper instructions in entering the appearance (I refer in this context to the authorities cited at [12.5.5] of Ritchie's Commentary on the Uniform Civil Procedure Rules - Firth v John Mowlem & Co Ltd [1978] 1 WLR 1184; Evergreen Tours Pty Ltd v McLaren [2010] NSWSC 1362), though not limited to such circumstances (Rothmans of Pall Mall (Overseas) Ltd v Saudi Arabian Airlines Corp [1981] QB 368). However, it was not apparent that Mr Collard's position fell within the category of case in which it has been seen as appropriate to permit the withdrawal of an appearance.
Although (as Senior Counsel for ASIC, Mr Halley SC, pointed out) there was no evidence in support of the application by which Mr Collard's assertions from the bar table could be tested, I considered it relevant that, even taking into account those assertions, Mr Collard did not go so far as to suggest that there had been any mistake at the time the submitting appearance was entered on his behalf. At that time (as I understand had also been the case when ASIC sought s 1323 relief in relation to the funds with which Mr Collard was involved) Mr Collard had had the benefit of legal assistance from Mr Hartnell (a lawyer presumably not unfamiliar with at least some of the background to the issues in the proceedings, given the reliance placed by Mr Hobbs on the giving of advice by Mr Hartnell in 2002 relation to matters related to the sale of FTC educational material and offshore investment, to which I will later refer).
As Mr Halley points out, no particular advice from Mr Becker was identified. I have assumed that to the extent that Mr Hobbs' evidence is that Mr Becker told him that investment needed to be through IBCs for the purposes of investment requirements in the United States then that might be relevant advice (and perhaps any advice comprised by the provision of templates for the investment documents, assuming for present purposes that I could accept Mr Hobbs' evidence that the initial template for those documents was prepared or provided by Mr Becker, also included some advice). There is certainly no written advice from Mr Becker in evidence and even if there had been oral advice in relation to the above matters, it does not extend to (nor could it reasonably have been understood to extend to) the lawfulness in Australia of the activities that were undertaken in relation to the schemes.
As to the advice from Mr Miles referred to in paragraph [9] of Mr Hobbs' affidavit, this was oral advice the content of which is elucidated no further than the statement that "as far as I am aware this is perfectly legal" and the advice that FTC should appoint executives rather than brokers or consultants.
It is impossible to make any assessment as to the reasonableness of reliance on advice the content of which is not clear and (more importantly perhaps) the instructions or assumptions on which it is based are not identified. That becomes even more apparent when the advice of Mr Hartnell is considered. I have set out earlier the relevant parts of Mr Hartnell's June 2002 advice.
Mr Hobbs has deposed, at [18]:
I always understood based on that advice there was nothing contravening any New Zealand, Australian or American law in an Australian making investments of this kind as long as it was done in accordance with the advice from Mr Hartnell." (my emphasis)
Mr Halley points out that Mr Hobbs goes on to say:
I was aware that people were establishing these schemes but did not give them much consideration as I had no financial interest.
(The financial interest Mr Hobbs had in the scheme has been identified earlier. Moreover, the proposition that he did not give much consideration to the establishment of the schemes seems perilously close to suggesting that there was no real reliance on the advice itself (if, as Mr Hobbs suggests, he did not think it relevant to his own personal situation).
As to the Hartnell advice, as already noted the request for advice raised two questions: the first, concerning FTC (the activities of which are described as being limited to the sale of financial information worldwide); the second, as to the legality of offshore investments.
As to the assumptions on which the advice was based, Mr Halley notes that there was no suggestion in the letter that Mr Hobbs or FTC was conducting seminars or meetings in Australia (at which statements were made as to how access could be gained to wholesale funds offshore or as to the performance of various funds, the returns that had been received in the past by particular funds and what returns might be received in the future). Nor was there any reference to the dispatch of lists of funds in which investment could be made (in response to faxes sent to offshore companies).
As to the conclusion that that "financial information of the kind provided by you is not a financial product in itself", that must be understood in the context that the financial information to which Mr Hartnell's advice referred (insofar as it was based on what was said in the letter requesting the advice) was information contained in a series of booklets as to generic topics such as budgeting, succession planning, debt restructuring, mortgages, an ABC of IBCs and introduction to financial statements (and newsletters warning of investment scams or the like). Mr Halley notes that there was no reference to explanations given to potential investors of opportunities available for investment overseas, the types of funds that might be accessible and the types of returns that might be expected to be achieved.
Mr Hartnell's advice in this regard can only be read as limited to the proposition that the sale and distribution of magazines and newsletters on generic topics of kind referred to above (without more) would not amount to the provision of a financial product or financial service requiring the provider to be licensed.
As to the second part of the advice, Mr Halley notes that even if it is accepted that (and ASIC does not accept this) the true nature of the investment was that it was by the IBC and that the IBC had a relevant discrete existence to the investor, nevertheless the request for information was made on-shore to an offshore number and the offer (and issue of the product) was made by the sending of material to the potential investors on-shore. The private placement memoranda and the agreements were sent or provided to persons or addresses in Australia (or New Zealand as the case may be). The unit certificates were issued in the name of IBCs and, in most cases, sent to addresses in Australia or New Zealand. The money was generally paid into Technocash accounts (whether by the IBC or by the administrator of the IBC) in Australia and returns (whether of capital or profit - though ASIC has shown that there were only little returns made out of profits) were generally paid into bank accounts in Australia.
Mr Halley submits that the obvious inference is that Mr Hartnell was not asked to consider the relevant facts as to the actual operation of the investment process (since it is submitted that had the relevant facts been drawn to Mr Hartnell's attention is it inconceivable that Mr Hartnell would have given the advice he did, having regard not only to the provisions of the Corporations Act but to the authorities that had considered very similar factual circumstances to those that apply in the present case). Having regard to the Chase Capital case, I consider this submission to be irresistible. The suggestion that someone of Mr Hartnell's experience (to which Mr Hobbs himself points as warranting a finding that reliance on the Hartnell advice was reasonable) would not have, at the very least, have qualified his advice by reference to the then recent authorities on this area would be extraordinary.
Mr Halley submits, and I accept, that the letter makes it clear to Mr Hobbs that there is an express prohibition on operating a managed investment scheme in Australia if the scheme is required to be registered but is not in fact registered. He submits that the reference in [3.5] to the fact that the exemption from the prohibition on operating an unregistered foreign scheme in Australia applies even if the foreign schemes make offers and issues to investors in Australia provided that all such Australian investors are wholesale client, should have made it clear that where investment offers were being made in Australia in relation to foreign schemes the relevant exemption was for wholesale clients (not an exemption for investments through an IBC). (Mr Hartnell's letter makes clear what the qualification for a wholesale client was under the legislation.)
Mr Halley submits further that the statement in the letter that "separate to the question of registration of a foreign fund the product disclosure regime contained in the Corporations Act provides there is no requirement to give the investor a disclosure statement where no offers or issues of foreign products are made or received in Australia" emphasises the significance of the making or the receipt of the offers in Australia.
Mr Hobbs, in his affidavit and cross-examination, explained what he understood by the advice and emphasised that he was not a lawyer. Nevertheless, Mr Halley submits that reliance on this advice as an imprimatur for the activities being conducted was not reasonable particularly given the use by Mr Hobbs of this advice in emphasising the lawfulness of what was being done. (Indeed, the statements made at the DVD seminar seem to me to make it clear that Mr Hobbs well understood that it was not lawful to offer investments of this kind to persons in Australia without compliance with the requirements under the relevant legislation - hence the emphasis on the requirement for incorporation of an offshore IBC. The difficulty for Mr Hobbs is that, being as charitable as one can be in this regard, at best he seems to have assumed that once there was an investment in the name of an offshore IBC, it did not matter what else was done in relation to the investment within the jurisdiction - as indicated by his answers in cross-examination at T 1300 - and any such assumption was fundamentally misconceived.)
At T 1290.13ff, Mr Hobbs accepted that he had not asked Mr Hartnell whether it was legal to conduct seminars in Australia to potential subscribers and that his question to Mr Hartnell was limited to the sale of manuals and distribution of newsletters. At T 1292.35, he was asked:
Q. And you would agree that Mr Hartnell's advice concerning registration as a foreign company therefore proceeded on the assumption that the only link to Australia was a newsletter sold to Australian subscribers?
A. I probably didn't read it as that at the time.
Not surprisingly, he was then asked at T 1293.20:
Q. When do you say you first appreciated that Mr Hartnell's advice concerning whether FTC had to register as a foreign company in Australia proceeded on the assumption that the only link that FTC had with Australia was the sale of a newsletter to Australian subscribers through retailers or possibly directly?
A. I mean just as you are explaining it now. I didn't read into that anything else.
The suggestion by Mr Hobbs that he did not understand that Mr Hartnell's advice was based on the activities Mr Hartnell had been told were engaged in by FTC is frankly difficult to accept. The value of any legal advice (and the reliance that a client could place upon it) must be heavily influenced by the content (and accuracy) of the instructions on which it is based. At T 1293.44, Mr Hobbs suggests that as he was not a lawyer, he simply took the advice on its face value. Mr Halley submits that the only meaning that could be attributed to the first part of the advice (by a lay person or otherwise) on its face value would be that it related to what Mr Hobbs had indicated, namely the sale through other people of financial booklets of a very general nature and some newsletters. I agree.
As to the second part of the advice, at T 1300, Mr Hobbs agreed that when he had received and read this advice he understood that what Mr Hartnell was saying was that provided everything was offshore, it was outside the reach of the Corporations Act. (He deposes to this same understanding in his affidavit at [18]). At T 1300.28 there was the following exchange:
Q. So what I want to suggest to you Mr Hobbs is that when you read this advice you must have appreciated that what Mr Hartnell was saying would not constitute a contravention, was an investment where everything with respect to that investment, the application, the request, the offer, was all done offshore, that's how you understood it at the time you read it, wasn't it?
A. I believe so.
Q. And that advice would not cover a situation where somebody in Australia made a request for information concerning an offshore investment, would it?
A. I am sorry, I don't know.
Q. And it would not cover a situation where an offshore entity sent private placement memorandums and investor agreements to investors in Australia, would it?
A. I am sorry I don't, I don't know. If it was an offshore company I don't see any reason why not. (my emphasis)
...
Q. I am talking Mr Hobbs, so we are not as crosspurposes, about the dispatch of a private placement memorandum and an investor agreement from offshore to an investor in Australia, you understood that Mr Hartnell's advice didn't cover that situation, did it?
A. No, I am not sure about that. I believe that if it was sent to an IBC in the name of an IBC it didn't constitute anything. (again my emphasis)
Mr Halley submits that Mr Hobbs was either recklessly indifferent to the content of Mr Hartnell's advice or chose deliberately to ignore that it proceeded on a fundamentally false premise as to the scope of the activities that FTC conducted in Australia and the OEM/KLM investment process, namely the premise that the investment process was wholly offshore to offshore with no relevant connection to Australia.
I am not satisfied that s 189 is applicable. In particular, I am not satisfied that Mr Hobbs paid more than lip service to the advices obtained in relation to the scheme. Certainly, I consider that any reliance he did place on the Hartnell advice was not reasonable, there being no suggestion that Mr Hobbs made any independent assessment as to whether the actual operation of the scheme fell within the parameters of what Mr Hartnell had advised would be lawful (or that he fully briefed Mr Hartnell at the time that advice was received). In this regard, Mr Hobbs' conduct when the lawfulness of the scheme was queried by Mr Papaioannou in mid 2007 is instructive. There is no suggestion that Mr Hobbs went back to Mr Hartnell and enquired as to whether the initial advice had been correct or whether there was now some other requirement to be satisfied. Mr Hobbs seems to have done no more than to move some aspects of the operation offshore (the printing of the memoranda) and to have continued on regardless. He did seek further advice in relation to the lawfulness of the scheme (and the superannuation components of the Super Save scheme) but, for whatever reason, this time he chose not to go to the expert in the field but to a relatively junior solicitor (to whom he provided the Hartnell advice and who seems largely to have regurgitated that advice, though adding further detail and responding to the superannuation components).
I am not satisfied that Mr Hobbs gave any independent thought to the applicability of the advices he received so as to satisfy the requirement of s 189. (Moreover, the incomplete information apparently provided in order to procure the advice suggests strongly to me that it was not sought in good faith - in the sense that there is a reasonable inference that Mr Hobbs' instructions were couched in order to bring the fact situation presented to the advisers within one that would enable the provision of the advice he wanted, without any apparent concern as to the completeness or correctness of that information.)
Even if Mr Hobbs could establish that he had relied on the Hartnell advice for the purposes of s 189, I consider that ASIC has proved that such reliance was not reasonable in all the circumstances. Therefore, I do not consider that s 189 affords Mr Hobbs a defence to the contraventions of the civil penalty provisions.
Conclusion
I am satisfied that the white label or generic investment funds promoted for investment through Mr Hobbs, FTC and the FTC executives constituted a financial product for which an Australian financial services licence was required. No such licence was obtained by anyone involved in the promotion of those funds in this jurisdiction. Therefore, there was a breach of s 911A of the Corporations Act by Mr Hobbs, FTC and each of the corporate and scheme administrators by reason of the provision of financial services without an Australian financial services licence in relation to the marketing of the investment funds (through a combination of the sale of FTC subscriptions and what has been termed the OEM/KLM process, leading to the making of offers and issue of unit certificates or confirmation of investments in this jurisdiction).
I further find that there was a breach of s 601ED(5) of the Act by reason of the operation of a unregistered managed investment scheme within this jurisdiction (that being the overall scheme that I have found was comprised by the individual management schemes and the process in which FTC and OEM/KLM were engaged).
I summarise the findings as against each of the defendants, below.
I find the following contraventions against Mr Hobbs have been proven:
- personal contraventions of s 911A and s 601ED(5) (in respect of the collective Hobbs scheme) on the basis that he was involved in the operation of managed investment schemes which were unregistered in this jurisdiction and carried on a financial services business (through the provision of financial services advice and the promotion of a financial product) in this jurisdiction without an Australian financial services licence;
- personal contraventions of ss1041E, 1041G and 1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act; and
- contraventions of ss 180 and 181 as a de facto director of FTC and a shadow director or officer of each of the corporate administrators (by reference to the respective breaches by the corporate administrators of the Corporations Act), as well as contraventions of s 182 of the Act in relation to the benefits gained by himself or others and to the detriment of the following corporations.
The aiding and abetting allegations in respect of the contraventions of Mr Koutsoukos, Mr Wood, Mr Truong, Ms Li and Mr Collard and the breach of fiduciary duties owed to investors by Mr Hobbs do not arise for determination in light of the above. I have made varying findings in relation to those.
I am not satisfied that Mr Hobbs has established what is necessary for relief to be granted under s 1317S or s 189 of the Corporations Act. In particular, I am not satisfied that reliance on the Hartnell advice was reasonable on the basis that it was predicated on a factual scenario that was known not to be the case (ie that all the steps leading up to the investments occurred offshore).
As against Ms Li, the findings are only relevant for the purposes of the liability of others in respect of those contraventions as the proceedings are stayed against Ms Li. I find that contraventions by Ms Li of (ss 911A and 601ED(5) of the Corporations Act, ss 1041E, 1041G and 1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act have been established.
As against Mr Collard, I find that he contravened ss 911 and 601ED(5) of the Corporations Act, ss 1041E, 1041G and 1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act. I find that (to the extent that Secured Bond contravened the Corporations Act), Mr Collard, as a de facto director and officer of Secured Bond, breached his duties under ss 180-181 of that Act. I also find that Mr Collard breached s 182 of that Act by obtaining a benefit by reference to the receipt of funds for his benefit or the transfer of funds for the benefit of others at his direction out of the funds deposited by investors to the funds administered by Secured Bond.
As against Ms Wu, I find that, as an officer of Barclaywest and 888 Vanuatu she contravened s 911 of the Corporations Act and ss 1041E, 1041G and 1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act.
As against each of Messrs Wood, Truong and Koutsoukos I find the contraventions of the Corporations Act and ASIC Act alleged against him (of ss 911 and 601ED(5) of the Corporations Act, ss 1041E, 1041G and 1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act) to have been proven. Those findings are relevant only for the purposes of the liability of other defendants in respect of that conduct as the proceedings have been discontinued against these three defendants.
As against Mrs Hobbs, I find that the contravention of s 182 of the Corporations Act has been established. (Had the question arisen, I would have found that she had aided and abetted the contraventions of Mr Hobbs but not of Messrs Koutsoukos, Wood and Truong as alleged.)
As against each of ISPL, 888 Vanuatu, Geneva Financial, Preserved Investments, North Wave GP Global, I find the contraventions of s 911A of the Corporations Act proven. (I note that only ISPL and North Wave remain currently registered.)
I have considered above the fiduciary duty claims but no findings need be made in that regard, in light of the principal findings.
Declarations and Orders sought by ASIC
By way of relief, ASIC has sought: declarations that Mr Hobbs and each of the defendants, other than the second defendant against whom proceedings are stayed and the fifth to seventh defendants against whom the proceedings have been discontinued (to which I would presume should be added the corporate defendants that have been deregistered) ("the remaining defendants"),has contravened the relevant sections of the Corporations Act and ASIC Act (including declarations of contraventions of civil penalty provisions pursuant to s 1317E of the Corporations Act); disqualification orders pursuant to s 206C or alternatively s 206E of the Corporations Act against each of Mr Hobbs, Mr Collard and Mrs Hobbs; and pecuniary penalty orders pursuant to s 1317G of the Corporations Act in an amount to be determined by the Court against each of Mr Hobbs, Mr Collard and Mrs Hobbs.
ASIC also seeks the following orders pursuant to ss 1101B and 1324(1) of the Corporations Act:
(i)orders that each of the remaining defendants be permanently restrained from operating or promoting the individual schemes, carrying on any business related to, concerning or directed to be part of those individual schemes and being in any way involved in the promotion or establishment of or the carrying on of the individual schemes;
(ii)orders that for a period of years to be determined by the Court each of the remaining defendants be restrained from carrying on any business related to, concerning or directed to be a registered managed investment scheme within the meaning of the Corporations Act and being in any way involved in the promotion, establishment or the carrying of the business of a registered managed investment scheme within the meaning of the Corporations Act;
(iii)orders that each of the remaining defendants be permanently restrained from carrying on any business in relation to financial products or financial services in contravention of s 911A of the Corporations Act;
(iv)orders that each of the remaining defendants be permanently restrained, alternatively be restrained for a period of years to be determined by the Court, from carrying on any business in relation to the financial products or financial services or being involved in the carrying on by another person of financial services business.
(v)ASIC seeks orders for the winding up and appointment of a liquidator to each of the Pinnacle Fund, Smart Money, Prestige, Enhanced Fund, Elite Premier Option Two Unit Trust, Good Value Fund and the Best Fund. (Mr Collard supports such an application and, towards the close of the hearing, handed up Consents to Act by a proposed liquidator for that purpose; as did ASIC at the conclusion of the hearing - ASIC's proposal being for the appointment of Mr Taylor, the liquidator who was appointed to each of the Integrity Plus, Super Save and Master Fund schemes.)
(vi)ASIC also seeks an order pursuant to ss 1323(1)(h) and 1101B of the Corporations Act that a receiver be appointed to Mr Collard and a receiver be appointed over the assets located in each jurisdiction of each of Geneva Financial, Mr Hobbs and Mrs Hobbs.
I note that the Court is required to make a declaration of contravention under s 1317E if satisfied that a person has contravened one of the specified sections; such a declaration must specify the civil penalty provision that was contravened, the person who contravened the provision, the conduct which constituted the contravention and the corporation to which the conduct related (s 1317E(2)). Austin and Black note at [9.1317E] that if multiple contraventions are found it may be appropriate for a separate declaration to be made in respect of each contravention but that the Court must not take account of conduct declared to constitute a contravention more that once since this could penalise the defendant more than once for that conduct (citing Adler v ASIC (2003) 179 FLR 1; 46 ACSR 504; [2003] NSWCA 131; Vines v ASIC (2007) 63 ACSR 505; 25 ACLC 867; [2007] NSWCA 126.)
I also note that, if satisfied that a civil penalty should be imposed, then there should be a separate hearing in relation to penalty in order to allow submissions to be made as to the circumstances of the defendant and the appropriate penalty (ASIC v Adler (2002) 42 ACSR 74; [2002] NSWSC 510). I consider that ASIC has clearly established a basis for civil penalties to be imposed in light of the contraventions that have been found against the various defendants against whom such penalties might be imposed.
In those circumstances, I consider that the appropriate course is to hear submissions on the appropriate declarations of contravention to be made in light of the above findings and for submissions as to penalty. I will list the matter for directions at a convenient time for such a hearing.
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Decision last updated: 25 October 2012
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