Australian Securities Commission v Dempster, D

[1992] FCA 445

Re: AUSTRALIAN SECURITIES COMMISSION
And: DUNCAN DEMPSTER
No. WA G3002 of 1992
FED No. 445
Corporations

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

GENERAL DIVISION

French J.(1)

CATCHWORDS

Corporations - futures contracts and options - futures advice business - commodity price advice to farmers - instruction in monitoring price movements - newsletter associated with private home education service - advice in relation to futures contracts and options - advice part of business - contravention made out - injunctive relief granted - necessity to limit injunctive relief to prevent interference with legitimate conduct.

Corporations Law s.1324, s.1143

HEARING

PERTH

#DATE 24:6:1992

Counsel for the Applicant: Mr M. Howard

Solicitors for the Applicant: Kulandra Ratneser, Regional General

Counsel for Western Australia Australia Securities Commission

Counsel for the Respondent: Mr G. Lacerenza

Solicitors for the Respondent: G.A. Lacerenza and Associates

ORDER

THE COURT ORDERS THAT:

1. The respondent be and is hereby restrained from distributing to any other person as part of a business any written prediction or opinion relating to any futures contracts or options.

2. The respondent be and is hereby restrained from, as part of a business, advising, expressing an opinion or making a prediction on the:

(a) purchase or sale of futures contracts or options;

(b) likely or possible movements of prices of any futures contracts or options.

3. There be liberty to the parties to apply within seven (7) days to vary the wording of the above orders.

4. The respondent pay the applicant's costs of the application.

5. There be liberty to the respondent to apply on the question of the costs of the witness, Deborah Horne.

Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

Introduction

This is an application by the Australian Securities Commission for an injunction under s.1324 of the Corporations Law restraining the respondent from various activities said to constitute carrying on a futures advice business contrary to s.1143 of the Corporations Law.

Factual Background

1. Duncan Dempster of Abeona Farm at Bakers Hill in Western Australia describes himself as a Chartist and Commodity Price Monitor. By the term "Chartist" he means a person who charts commodity price movements with a view to predicting future trends. He has a particular interest in wool and wheat prices and has charts recording wool prices back to 1893 and wheat prices on international markets for every day since January 1920. Mr Dempster has been following commodity prices since 1961 and for many years has supplied charts "spasmodically" to farmers free of charge. In May 1984 he travelled to Sydney and Melbourne looking for information to help him build up his library of wheat, wool and beef price trends. He had in mind at the time "to put something together as a learning exercise for farmers to learn how to monitor price commodities". He eventually found what he wanted through an Adelaide firm called Commodity Technical Trading. He described that firm as "futures traders" who appeared to have "a great interest in small people and farmers".

2. The history of Mr Dempster's subsequent attempts to interest Western Australian wheat farmers in charting commodity prices does not emerge with clarity from the evidence. From testimony given by him to an Australian Securities Commission inquiry on 24 February 1992, however, it appears that from 1984 to 1990 he was given a substantial amount of information by Commodity Technical Trading particularly with respect to wheat and wool prices and the availability of futures options. He began trying to interest Wheatbelt farmers in price monitoring in 1988 without great success. Subsequently he developed a form of presentation about the advantages of monitoring. As he told the Australian Securities Commission, he would explain to farmers a "commodities trend and price monitoring service". This was designed to introduce them to a technique which he described as "the farmer owned and operated floor price insurance scheme". He wanted to persuade farmers of the merits of placing what he called a "price insurance or floor price for the forthcoming harvest". By "price insurance" he meant put and call options on commodities. He would tell farmers of these options and added that "if they knew the trend of the commodity and they believe the commodity is at a high level they would be speculators if they didn't go and put a floor price in". In context this appears to have been advice to farmers to use the purchase of options on the futures market to "insure" or hedge against future adverse commodity price movements.

3. Towards the end of 1990 Mr Dempster became a bankrupt and found that he needed to secure some form of employment. He developed the idea of providing each of 200 or so farmers with information about wheat, wool and lupin prices and for an annual charge of $365 visiting each farmer at home on some regular and pre-arranged basis. The home visits were part of what he called a "home education service". As it has developed, the home education service provides for persons who subscribe to it charts, photocopy extracts from textbooks and copies of a newsletter produced by Mr Dempster and called "The Trend". Although he endeavoured in his evidence to separate out The Trend as something which was given to many people free of charge and was not really an essential element of the service, I am satisfied that the newsletter was an integral part of it. I am satisfied also on the balance of probabilities, that those who subscribed for the service received and were intended to receive the newsletter as part of the educational material for which they paid.

4. There were before the Court in these proceedings two copies of The Trend, one entitled "The Trend August 91 Charts", the second entitled "The Trend February 92 Charts". The August 91 edition contained the following text on two typed pages:
   

"Friday 31st August 91 closing prices: Aust Dollar $.7851

Sept/Spot Wheat closed US$3.10 per bushel (A$146 per tonne) Dec 2 mth Del Wheat closed US$3.21 per bushel (A$151.28 per tonne) March Wheat closed US$3.24 per bushel (A$153 per tonne) May Wheat closed US$3.16 per bushel (A$148.69 per tonne) Lower May prices support the expected 50% retracement from $3.40 It would appear Premier Carmen has little to worry about. On the 20th of Sept - Sept/Spot Wheat closes out Dec becomes Spot March becomes 2 mths del On the 19th Dec - Dec Spot closes out March becomes Spot May becomes 2 mths del The ?$161 box on the 2 mth del weekly closing prices long term chart becomes a little more realistic. The chart shows a marvellous 50 cents per bushel rise in the last 8 weeks. A substantial correction or retracement is due. Note the seasonal base line drawn since last month, now having the last five weekly closing prices top side.

February Charts suggested wheat would not break through the $3 barrier until early July at the earliest. It was also suggested that wheat would make three attempts at the $3 barrier. If the third attempt failed the wheat grower would be in deep trouble and my $161 box would have been a pie in the sky. Spot Wheat made it's first attempt on Tues 12th June (Dec call options 23 pts) and retraced savagely to $2.51 on Mon 8th July (options fell to 3 pts). It made it's second attempt on Tues 13th Aug and again retraced substantially to $2.78 on Tues 20th August Supposedly due to the Russian unrest. Then on Mon 26th Aug. Spot Wheat broke through the $3 barrier. For you the grower Mon 26th of August is the most important day so far this year. The breaking through of the $3 barrier by Spot Wheat now indicates it will meet Dec wheat on the 20th September with clear sky to $3.40. All that remains is, when it will reach this next and very strong barrier.

Those of you who have this week purchased call options should look towards a 23pt rise (A$10 per tonne). Then on the retracement put options could be expected to gain 15pts (A$7 per tonne).

That $161 box, a mathematical formula put in place a date potential from late September to mid December. This was worked out early last December. With fortune supporting the brave (refer to the Daily Chart of last month and place it along side this months Daily chart) a miracle presented itself when on Friday 3rd May I was able to draw a 2 point seasonal base trend line.

The first point at $2.61 on Fri 22nd February, the second point at $2.80 on Mon 29th April. This seasonal base line now has a third point on Mon 17th June. A continuation of this base line appears to hit the $161 box midships. What is even more amazing is that this daily Dec Wheat Chart is now riding along the top side and should draw Spot Wheat up come the 20th September. If Spot had not broke the $3 barrier this expectation would have been impossible. In charting terms a strong wheat market with potential to $3.40 (A$161 per tonne) followed by a substantial retracement that could still be in affect as late as April/May 92."

Attached to the newsletter were two charts, one entitled "WHEAT...C.B.O.T.", the other headed "WHEAT ... Daily closing prices". The first chart plotted prices per bushel on a vertical axis against dates on a horizontal axis from at least 1990 until December 1992. Under the heading "Wheat", it bore the words "futures 2 Mths del WEEKLY closing prices". The letters "C.B.O.T." referred to the Chicago Board of Trade. The second chart, evidently relating to spot prices, also plotted price against date up to January 1992. Each of the charts was liberally endorsed with Mr Dempster's handwritten comments.

1. Deborah Catherine Horne, a chartered accountant employed as the General Manager, Compliance and Surveillance, by the Sydney Futures Exchange Ltd, gave evidence on affidavit and was cross-examined in these proceedings. She noted that the closing prices set out on the first page of The Trend were the same as the official Chicago Board of Trade closing prices for wheat futures contracts on the dates mentioned. She offered the opinion that the written comments appearing throughout the two pages comprising the text of the newsletter were made in relation to futures contracts, the prices for which, as traded on the Chicago Board of Trade, were set out in the charts. She accepted that reference was also made to the physical commodity price of wheat.

2. In receiving Miss Horne's evidence, which was tendered without objection, I do not accept it as concluding the ultimate issue of whether Mr Dempster, in publishing The Trend was providing advice or reports on futures contracts. I do, however, accept it as evidence of the commercial significance and meaning of the content of the newsletters to a person familiar with the futures market. The question whether or not that significance and meaning brings the publication of the newsletter within the statutory prohibition which is in issue in this case involves a question of law which it is for the Court to decide.

3. Miss Horne referred to a paragraph in The Trend August 1991 newsletter which said that:
   

"The chart shows a marvellous 50 cents per bushel rise in the last 8 weeks. A substantial correction or retracement is due."

Miss Horne said that this paragraph reported on the wheat futures contract price and predicted that the price of futures contracts would drop. Further, in saying as he did in the newsletter that, "The breaking through of the $3 barrier by Spot Wheat now indicates it will meet Dec wheat on the 20th September with clear sky to $3.40", Mr Dempster, in her opinion, was predicting that the price of wheat futures contracts would go to $3.40 per bushel at some time after 20 September.

1. The third paragraph on the second page of the newsletter said:
   

"Those of you who have this week purchased call options should look towards a 23pt rise (A$10 per tonne). Then on the retracement put options could be expected to gain 15pts (A$7 per tonne)."

This was characterised by Miss Horne as advice on profits to be gained by the purchase of put options when the price of wheat futures contracts drop. The last two paragraphs of the text were also said to involve a statement of the writer's opinion about likely movements in the price of wheat futures contracts. Similar observations were made about some of the comments on the charts annexed to the newsletter. One such was in the following terms:

"The next call option buy sign due shortly, should set in place a 30 point rise."

This was seen as advice concerning the time at which it would be profitable to purchase a call option.

1. The general format of The Trend for February 1992 was similar to that for August 1991 although the charts annexed to it were considerably more sparing with comment than their predecessors. In the text of the February Trend however, the following appeared:
   

"Any suggestion that wheat growers go out and borrow money to purchase July, Sept. and Dec. wheat put options is irresponsible and fraught with disaster. We are in the sixth uptrend in wheat prices since

1920. These uptrends are so clearly clarified that any suggestion that the uptrend has broken is suspect. The 1992 $195 expected pool price negates the need for floor price insurance in the foreseeable future. The 1993 season will want to be a good one to make best use of the very high wheat price should the uptrend continue as expected."

Miss Horne gave evidence that the closing prices cited in the February Trend were in most cases within half a cent of the closing prices of future contracts of the quoted commodities on the Chicago Board of Trade and the Chicago Mercantile Exchange. She also made the observation that in connection with futures contracts and options, it is common for the expressions "floor" and "insurance" to be used to refer to an investor who wishes to sell a physical commodity at some time in the future, buying a put option so as to guarantee or "lock-in" a particular price for the commodity. Again, she read the newsletter as proffering advice against the purchase of wheat put options on the basis that there would be increasing prices for futures contracts.

1. Subject to the qualification which I have already made about the use to which her evidence may be put, I accept it as accurate so far as it relates to the equivalence of prices cited in The Trend and those on the Chicago Board of Trade and so far as it relates to the commercial effect of the statements made in the newsletters. I also accept Miss Horne's explanation that in common parlance in relation to the futures market a "put option" gives the purchaser of that option the right to acquire a sold futures contract. The seller of such an option is regarded on futures markets as obliged to provide the purchaser, if the option is exercised, with a futures contract for the sale of the relevant commodity. An option which gives the right to acquire a sold futures contract is designated a "call option". Miss Horne also explained that the Chicago Board of Trade, from which Mr Dempster acquired his 2 month delivery price records, does not trade commodities at their current prices, but futures contracts.

2. Mr Dempster in his evidence, agreed that he quoted futures contracts prices from the Chicago Board of Trade, but maintained that he used those prices as indications of where wheat prices would be at some time in the future. He said, "we're merely using the futures from Chicago Board of Trade as an indication of where our wheat price will be come harvest time December". He was asked whether the prices quoted in Trend were in fact futures contract prices and answered:
   

"They are the real prices in the future year, yes".

He went further and equated the trading of futures contracts with trading in the commodity. Asked about Miss Horne's evidence that the Chicago Board of Trade did not trade physical commodities, he said:

"Well, what is a futures contract if its not real? Its a futures contract of a ton of wheat for so many months ahead - it's a commodity"

He disagreed with Miss Horne's evidence that the text of The Trend for August 1991 related to futures contract prices for wheat as traded on the Chicago Board of Trade. He said:

"To me it is the physical price of wheat some time into the future and the comments are accordingly in which direction we believe the physical price of wheat is going."

He claimed that he was merely using the Chicago Board of Trade as a guide.

1. In relation to The Trend of February 1992, Mr Dempster was asked whether it was the fact that it was concerned with wheat futures contract prices as traded on the Chicago Board of Trade and, for the second two graphs, soya bean futures contracts. He agreed, but said:
   

"At the time of drawing them I put them down as the prices of wheat, whether it be wheat futures, prices of wheat."

1. He was also asked if the Farmers Owned and Operated Floor Price Insurance Scheme worked by the purchase of futures options and said:
   

"If they do it, yes, certainly."

He maintained however, that the decision whether or not to buy put or call options was for the farmer concerned based upon advice from his banker or farming consultant. The "Scheme" did not require the purchase of put or call options.

1. On all the evidence I am satisfied that in publishing The Trend Mr Dempster was following his longstanding enthusiasm for charting and extrapolating commodity price movements, that he was referring to futures contract price movements in so doing and that there were elements in the newsletters, being those identified by Miss Horne, which constituted or implied advice or opinion about the desirability of acquiring put options and the movement of futures contract prices. Further, I am satisfied that although The Trend grew out of a hobby it has become, in part, an element of a business which involves conveying to farmers information about prices coupled with predictions about their movements and advice, some of which amounts to advice in relation to futures contracts and the futures market. In so concluding, I have no doubt that Mr Dempster acted in good faith at all times to provide a service which he believes in and without any consciousness of contravening any law. Further, it seems, that he has a following of members of the farming community who are no doubt influenced by the evident genuineness of his belief in the service which he offers to them. The present proceedings, it seems, stem not from any disgruntled consumer but, as appears from the evidence of the Commission investigator, derive from a complaint made by a broker to whom Mr Dempster used to refer clients who wished to invest in the futures market. It appears that their relationship terminated in October or November 1991 and that the complaint followed.
   The Present Application

2. By the present application, the Australian Securities Commission seeks orders pursuant to s.1324 of the Corporations Law that Mr Dempster be restrained from distributing to any other person:
   

"(a) "The Trend";

(b) a chart which sets out or records the price of any futures contracts or options on the Chicago Board of Trade Market, or any other market; or

(c) any written analysis or prediction or other statement of opinion in writing relating to any futures contract or option on the Chicago Board of Trade Market or any other market

as part of a business."

An order is also sought restraining him from advising, expressing an opinion, or making a prediction on the:

(a) Desirability or otherwise of purchasing or selling a futures contract or option, or

(b) Likely or possible movements of the price of any futures contract or option on the Chicago Board of Trade Market, or any other market.

Statutory Framework

1. Where a person has engaged or is engaging in conduct that constitutes or could constitute a contravention of the Corporations Law, s.1324 provides that the Court may on the application of the Commission or an interested person grant an injunction restraining the person from engaging in such conduct. In this case the Commission contends that Mr Dempster's conduct is in contravention of s.1143 of the Corporations Law which provides:
   

"A person must not:

(a) carry on a futures advice business; or

(b) hold out that the person is a futures adviser; unless the person is a licensee or an exempt futures adviser."

A "futures advice business" is defined in s.71 of the Corporations Law:

"71(1) A reference to a futures advice business, in relation to a person, is a reference to:

(a) a business of advising other persons about futures contracts; or

(b) a business in the course of which the person publishes futures reports."

Sub-section 71(3) applies the remaining provisions of the section for the purposes of determining whether or not a person carries on a futures advice business and what constitutes a futures advice business carried on by a person and whether or not a person holds himself, herself or itself out to be a futures adviser. Among the sub-sections that follow is sub-s.71(5) which, in the relevant parts, provides:

"71(5) The fact that the person advises other persons about futures contracts, or publishes futures reports, in some or all of the following circumstances shall be disregarded:

(a) in a newspaper or periodical:

(i) of which the person is the proprietor or publisher; and

(ii) that is generally available to the public otherwise than only on subscription;"

This is to be read subject to sub-s.71(6) which excludes the operation of sub-s.(5) in relation to a newspaper or periodical whose sole or principal purpose is to advise other persons about futures contracts or to publish futures reports.

1. Futures contracts are defined in s.72 in terms of some complexity, the relevant parts of which for present purposes are:
   

"72(1) A futures contract is:

(a) a Chapter 8 agreement that is, or has at any time been, an eligible commodity agreement or adjustment agreement;

(b) a futures option;..."

Paragraph (c) and certain exclusions in (d) and (e) are not material for present purposes. An "eligible commodity agreement" is defined in s.9 as is the term "futures option". It is not necessary to set out the former definition in full to conclude that it applies to futures contracts of the kind traded on the Chicago Board of Trade and referred to in the evidence of Miss Horne. The term "futures option" means:

"An option or Chapter 8 right to assume, at a specified price or value and within a specified period, a bought position, or a sold position, in relation to an eligible commodity agreement or in relation to an adjustment agreement."

A Chapter 8 agreement means, inter alia, a "relevant agreement" which means in turn an agreement, arrangement or undertaking, whether formal or informal, written or oral, or some combination of each and whether or not having legal or equitable force or based upon legal or equitable rights. And s.55 provides:

"55(1) A Chapter 8 obligation, or a Chapter 8 right, is an obligation or right, as the case may be, whether or not enforceable at law or in equity.

(2) A reference to a Chapter 8 obligation of a particular kind includes a reference to alternative Chapter 8 obligations one of which is a Chapter 8 obligation of that kind."

Whether Mr Dempster Has Contravened Section 1143

1. On the facts which I have already found, Mr Dempster has, in my opinion, carried on a business which involved, although as only one element of his activities, advising people about futures contracts and particularly futures options. The clearest evidence of this was that relating to The Trend newsletter to which reference has been made previously. While that publication is made available from time to time to a substantial number of farmers who do not subscribe to Mr Dempster's Home Education Service, the evidence does not suggest that it is so widely distributed as to be "a newspaper or periodical generally available to the public otherwise than only on subscription". It is, however, disseminated as part of a business and involves, as I have found, the proffering of advice about futures contracts. It is common ground that Mr Dempster is neither a licensee nor an exempt futures adviser. In this case, notwithstanding the complexities of the interlocking definitions referred to in the statutory framework, the contracts including options on which he has commented in the newsletter and his conduct in offering opinions and advice in relation to them falls within the mainstream of the conduct prohibited by s.1143 of the Corporations Law. The question that remains is what, if any, orders should be made in relation to the contravention of that prohibition.

2. While I am satisfied that some injunctive relief should be granted, it should, in my opinion, be closely confined so as not to prevent Mr Dempster from pursuing his interest in monitoring commodity prices or from sharing his information and opinions in this respect with others whether gratuitously or for reward. In my opinion the relief presently claimed is too wide. In order to achieve the limited result which I think is appropriate to this case, I propose to make orders in the following terms subject to liberty to the parties to apply to vary the precise wording:
   

1. The respondent be and is hereby restrained from distributing to any other person as part of a business any written prediction or opinion relating to any futures contracts or options.

2. The respondent be and is hereby restrained from, as part of a business, advising, expressing an opinion or making a prediction on the:

(a) purchase or sale of futures contracts or options;

(b) likely or possible movements of prices of any futures contracts or options.

3. There be liberty to the parties to apply within seven (7) days to vary the wording of the above orders.

4. The respondent pay the applicant's costs of the application.