Blazejczyk and Australian Securities and Investments Commission
[2020] AATA 3199
•26 August 2020
Blazejczyk and Australian Securities and Investments Commission [2020] AATA 3199 (26 August 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2020/0222
Re:Wayne Blazejczyk
APPLICANT
AndAustralian Securities and Investments Commission
RESPONDENT
Tribunal:Senior Member R Olding and Member P Ranson
Date:26 August 2020
Place:Perth
DIRECTIONS
1.Each party must provide to the Tribunal and serve on the other party any further written submissions regarding the appropriate scope and period of prohibition from providing financial services by 9 September 2020.
2.Each party must provide to the Tribunal and serve on the other party any written submissions in reply by 16 September 2020.
3.For the purposes of Direction 1, the expression “scope” includes whether the banning order should be limited or permissive for all or part of the prohibition period and/or subject to conditions.
4.Unless either party advises the Tribunal and the other party in writing by 23 September 2020 that the party wishes to make oral submissions, the review will be decided on the papers without a further oral hearing.
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Senior Member R Olding
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Member P Ranson
Catchwords
PROFESSIONAL SERVICES - financial services – banning order – where applicant prohibited from provision of any financial services for five years – where applicant accepted banning and prohibition period but sought order limited to “personal advice” to “retail clients” – held Tribunal’s duty to make correct or preferable decision required consideration of both scope and period of prohibition – parties directed to make further written submissions on scope and period of banning order
Legislation
Australian Securities and Investments Commission Act 2001 (Cth) s 1(2)Corporations Act 2001 (Cth) ss 760A, 761A, 920A, 920A(1)(e), 920A(1)(f), 920B(1)(a), 920B(1)(b), 920B(3), 947C(2), 961B, 961J, ch 7
Cases
Australian Securities and Investments Commission v Adler [2002] NSWSC 483
Australian Securities and Investment Commission v McCormack [2017] FCA 672
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577
Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24
Musemeci and Australian Securities and Investments Commission [2009] AATA 1021
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Tarrant and Australian Securities and Investments Commission [2013] AATA 926
Tarrant v Australian Securities and Investments Commission [2015] FCAFC 8
Van Dieren and Australian Securities and Investments Commission [2019] AATA 4777Secondary materials
Australian Securities and Investments Commission, ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders (Regulatory Guide 98, 20 September 2018)
FOR DECISION
Senior Member R Olding and Member P Ranson
The applicant, Mr Blazejczyk, has applied to the Tribunal for review of the decision of the Australian Securities and Investments Commission (“ASIC”) under ss 920A(1) and 920B(2) of the Corporations Act 2001 (Cth) (“the Corporations Act”)[1] to make a “banning order” prohibiting him from providing any “financial services” for a period of five years (“the Order”).
[1] All legislative references are to the Corporations Act 2001 (Cth) unless otherwise indicated.
Mr Blazejczyk accepts he breached a “financial services law” and in consequence ASIC’s power to make a banning order was enlivened. Further, he does not challenge the five-year period of the Order.
Rather, Mr Blazejczyk asks the Tribunal to vary the decision so it would prohibit him from providing specific financial services for five years; namely, “personal advice” to “retail clients”. This would leave Mr Blazejczyk free to provide advice to “wholesale clients”.[2]
[2] The expressions are defined in the Corporations Act s 761A.
THE BREACHES – IN SUMMARY
The uncontested breaches are that Mr Blazejczyk, in providing advice to clients failed to comply with these Corporations Act requirements:
(a)section 961B – to act in the best interests of the client in relation to the advice;
(b)section 961J – to give priority to the client’s interests when giving advice; and
(c)sections 947C(2)(e) and 947C(2)(f) – to include in Statements of Advice (“SoA”) information about remuneration from and interests in associated entities.
FACTS
While he sought to provide evidence of the “context” of events leading to the findings, Mr Blazejczyk does not contest the primary factual findings on which ASIC’s conclusions are based.
Mr Blazejczyk accepts this summary of the primary facts:
(a)Mr Blazejczyk has been a financial adviser for approximately 30 years, with a focus on self-managed superannuation funds (“SMSF”).
(b)At the relevant times, Mr Blazejczyk was the owner (through holding companies) of a group of companies (“the Ballast Group”) that included:
(i)Ballast Financial Management Pty Ltd (“BFM”), which is an Australian financial services licensee;[3]
(ii)Ballast Financial Planning Pty Ltd (“BFP”), which was a corporate authorised representative of BFM;
(iii)Ballast Superannuation Management Pty Ltd (“BSM”), which provided superannuation administration services to SMSFs for a fee; and
(iv)Bateau Asset Management Pty Ltd (“BAM”), which is the investment manager of the Bateau Global Opportunities Fund (“the Bateau Fund”) and receives commissions on investments in the Bateau Fund.
(c)At the relevant times, Mr Blazejczyk was a director and responsible manager and an authorised representative of BFM.
[3] Mr Blazejczyk sold his interest in BFM in May 2019.
The Bateau Fund
The Bateau Fund was established by Mr Blazejczyk to facilitate investment in international shares by his clients.
The vast majority of the fund (95%) consists of an investment in the Ddraig Equity Fund (“the Ddraig Fund”).
Mr Blazejczyk owns 40% of Ddraig Partners Pte Ltd (“Ddraig Partners”), which owns the Ddraig Fund.
Compliance history
In 2005, ASIC raised concerns about advice Mr Blazejczyk provided which recommended the establishment of a SMSF with a low starting balance of $55,000, contrary to an ASIC guideline calling for a minimum balance of $200,000 for SMSFs. As a result, BFM directed Mr Blazejczyk to adhere to the ASIC guideline.
Aside from this issue, and the breaches identified by ASIC, there is no evidence of other non-compliance by Mr Blazejczyk with requirements of financial services laws.
Advice provided by Mr Blazejczyk
Mr Blazejczyk provided advice to retail clients from 2016 recommending:
(a)establishment of SMSFs with starting balances of less than $200,000 contrary to the ASIC guideline;
(b)investment in the Bateau Fund through the SMSFs; and
(c)engagement of BSM to administer the SMSFs.
ASIC’s findings in relation to the advice
ASIC found and Mr Blazejczyk accepts he failed to:
(a)conduct reasonable investigation into alternatives to SMSFs as a means to achieve the clients’ objectives and needs;
(b)conduct reasonable investigation into alternative products to an investment in the Bateau Fund as a means to achieve their objectives and needs;
(c)raise and compare such alternatives in the advice provided;
(d)base the advice on the client’s circumstances, such as the relatively low starting balance the SMSF would have;
(e)disclose his interest in BAM, BSM or Ddraig Partners in SoAs provided to the clients;
(f)disclose in the SoAs the remuneration or benefits he would receive from the clients’ investments in the Bateau Fund; and
(g)adequately identify the client’s needs and objectives.
Finally in this regard, we note there is no finding, allegation or evidence that Mr Blazejczyk acted dishonestly or with intent to defraud.
Evidence of effect of banning order
Mr Blazejczyk’s financial position is affected by the Order but he admits not to the extent that he has difficulty being able to financially support his family.[4]
[4] Exhibit 2, Witness statement of Mr Blazejczyk, page 22; Transcript, page 63.
The Order has had other effects on Mr Blazejczyk, such as cancellation of key professional memberships and difficulties in obtaining insurance and financing, and in recruitment. He is prevented from serving on the investment committee of the Bateau Fund, engaging in business development for that Fund and being the director of financial services companies.[5]
[5] Exhibit 2, Witness statement of Mr Blazejczyk, pages 22-25.
THE BREACHES IN CONTEXT
Except where otherwise clear from the context, the findings which follow are based on ASIC’s findings and the unchallenged affidavit and oral evidence of Mr Blazejczyk.
Period and number of breaches in context of overall level of services provided
ASIC based the banning order only on Mr Blazejczyk committing the identified breaches. It does not say this is a case where ASIC has reason to believe Mr Blazejczyk is likely to commit future breaches of a financial services law.[6]
[6] Corporations Act s 920A(1)(f).
That being so, we note the following background to the breaches:
(a)ASIC identified only eight clients over the three-year period from 1 January 2016 to 14 December 2018 for whom Mr Blazejczyk recommended SMSFs.
(b)At the time the banning order was made, there were 243[7] SMSFs to whom Mr Blazejczyk or his entities provided services.
[7] T3, page 47, paragraph 15.
SMSFs with a starting balance of less than $200,000
While Mr Blazejczyk accepts that he should not have recommended the establishment of the eight SMSFs with starting balances of less than $200,000, he does note some context to the provision of that advice.
In some cases, Mr Blazejczyk’s testimony seemed to suggest he inappropriately bowed to the client’s expressed wishes. Additionally, he provided some details of the circumstances in which the advice was given that supported an expectation the $200,000 minimum would be reached within a reasonable time of the establishment of the SMSF. For example:
·In 2010, a Ms Pettorino was advised to establish a SMSF with an opening balance of $100,000 but with the understanding she had a further $90,000 in another superannuaton fund that could be located and rolled into the SMSF. She also advised she was on a salary of $220,000 p.a.[8], which means the minimum employer contribution would be $14,461pa.[9] On that basis, the Tribunal estimates her SMSF balance was expected to exceed $200,000 within one year.
·In 2017, a Mr Coombs was advised to establish a SMSF with an opening balance of $121,210. His salary had risen to $250,000 p.a.[10], which means the minimum employer contribution would be $19,616[11]. On that basis, the Tribunal estimates his SMSF balance was expected to exceed $200,000 within four years.
[8] T11.21 SOA of Ms S Pettorino dated 1 July 2010.
[9] Based on the maximum superannuation contributions base (see for 2009/2010 of $40,170/quarter and minimum superannuation requirements (“SGC”) at 9.0%.
[10] T1.3 Statement of Reasons paragraph 40(b).
[11] Based on the maximum superannuation contributions base (see for 2016/2017 of $51,620/quarter and SGC at 9.5%.
Additionally, we note that ASIC’s stipulation of a minimum starting balance of $200,000 is a guideline, not an absolute requirement.
Failure to disclose interests
Mr Blazejczyk accepts the conflict of interest arising out of his 40% interest in Ddraig Partners and thus substantial interest in the Bateau Fund into which he recommended clients invest should have been, but was not, disclosed in the SoAs.
The interest was disclosed in the Product Disclosure Statement (“PDS”)[12] provided to these clients, in these terms under the heading ‘Relationships’:
[Mr Blazejczyk] (or entities he controls) also owns 40% of Ddraig Partners Pte Ltd., a Singapore company (registration number 201210567N) that provides investment management services to Swiss Asia Financial Services Pte. Ltd., which is the investment manager appointed to the Ddraig Equity Fund, so he may receive indirect remuneration by the fund investing in the Ddraig Fund.’[13]
[12] T11.19.
[13] T11.19, page 1891.
Performance of the Bateau Fund
There is no evidence that clients suffered loss because of the recommended investments. In fact, the Bateau Fund performed relatively well during the period.[14] Further, as Mr Blazejczyk explained, the Ddraig Fund had the significant advantage to clients of a guarantee or insurance against losses.[15]
[14] Exhibit 2, Witness statement of Mr Blazejczyk, paragraph 152.1.
[15] Exhibit 2, Witness statement of Mr Blazejczyk, paragraphs 144 - 152.
The hockey club connection
Mr Blazejczyk was actively involved in a hockey club over the relevant period. The clients in respect of whom the breaches occurred were mainly friends or relatives of existing clients or referred by hockey club members.
The Ballast group also sponsored the club in return for which it benefited from banners and other advertising. We accept Mr Blazejczyk’s evidence that his hockey club friends were aware of his profession as a financial adviser and his involvement in the Ballast group entities.
However, it does not follow, and we would not accept the clients would, through that connection, have had sufficient knowledge of the remuneration arrangements and associations relating to the Ddraig Fund to ensure fully-informed decision making.
EXERCISING THE DISCRETION TO MAKE A BANNING ORDER
The legal framework
The power to make a banning order is conferred by s 920A of the Corporations Act. ASIC relies on s 920A(1)(e) which allows for a banning order against a person who has not complied with a “financial services law” which includes the sections of the Corporations Act breached by Mr Blazejczyk.
It is common ground that:
(a)Mr Blazejczyk has failed to comply with a financial services law;
(b)the power to make a banning order is therefore enlivened; and
(c)the question of whether a banning order should be made is a matter of discretion.
The discretion required to be exercised extends to:
(a)whether a banning order should be made; and if so:
(b)whether to prohibit the person the subject of the banning order from providing “any financial services or specified financial services in specified circumstances or capacities”;[16] and
(c)whether the prohibition should be permanent or for a specified period and, if the latter, what period.
[16] Corporations Act ss 920B(1)(a) and 920B(1)(b).
ASIC refers to a banning order that does not prohibit a person from providing any financial services, but rather is limited to specified financial services in specified circumstances or capacities, as a “limited banning order”.
A banning order may also allow the person to do specified acts, or specified acts in specified circumstances, subject to specified conditions.[17] ASIC refers to an order of this kind as a “permissive banning order”.
[17] Corporations Act s 920B(3).
Relevant considerations
The Corporations Act does not specify considerations to which the decision-maker must or may have regard in exercising the discretion to make a banning order. Thus, such factors must be discerned from the subject matter, scope and purpose of the legislation.[18]
[18] Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24.
Section 920A appears in Chapter 7 of the Corporations Act. The objects of Chapter 7 are stated in s 760A, as follows:
The main object of this Chapter is to promote:
(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
Accordingly, in the context of this matter, we consider it is necessary to exercise the discretion to make a banning order in a way that promotes these objects; in particular, but not limited to, promoting informed decision making by consumers and professionalism of financial advisers.
It has also been held that the exercise of the discretion should have regard to ASIC’s obligation, under s 1(2)(b) of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”), to “promote the confident and informed participation of investors and consumers in the financial system”. [19]
[19] Australian Securities and Investment Commission v McCormack [2017] FCA 672, [65].
In Tarrant and Australian Securities and Investments Commission,[20] a Tribunal constituted by the then President and a Senior Member, in exercising the discretion in relation to the banning of a financial adviser, had regard to 12 factors:[21]
[20] [2013] AATA 926.
[21] These 12 factors were drawn from a list of 15 factors referred to in the decision of Santow J in Australian Securities and Investments Commission v Adler [2002] NSWSC 483, [50], a case involving the banning of a person from acting as a director of a corporation.
(i)Banning orders are designed to protect the public from the harm, which includes the protection of investors;
(ii)The banning order is protective against present and future breach;
(iii)A banning order has a motive of personal deterrence, though it is not punitive;
(iv)The objects of general deterrence are also sought to be achieved;
(v)In assessing the fitness of a person to be permitted to provide financial advice, they have an understanding of their role and obligations;
(vi)In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public;
(vii)Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty;
(viii)It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct;
(ix)A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming;
(x)It is necessary to assess matters such as the character of the person, the nature of the breaches, risks to others from the continuation of the person as an authorised representative of a licensed person and the honesty and competence of the person;
(xi)Factors which lead to the imposition of the longest periods of disqualification include large financial losses, high propensity for the person to engage in similar conduct and lack of contrition or remorse; and
(xii)Factors which lead to the conclusion that these cases were serious though not “worst cases” resulting in disqualification from 7 to 12 years, include serious incompetence and irresponsibility, substantial loss or deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty.[22]
[22] [2013] AATA 926, [385].
On appeal, the Full Federal Court expressly held that the Tribunal did not fall into error by considering these 12 factors.[23] Notwithstanding factor (viii) above as specified by the Tribunal and endorsed by the Full Federal Court, ASIC submitted it would not be a proper exercise of the discretion to embark upon a balancing exercise and the primary consideration is protection of the public.[24]
[23] Tarrant v Australian Securities and Investments Commission [2015] FCAFC 8, [114].
[24] Respondent’s Reply to Applicant’s Statement of Issues, Facts and Contentions, paragraphs [10] – [12].
In the end, though, there seemed to be little real distance between the parties in this regard. It seemed to be accepted, and in any case we decide, that a proper exercise of the discretion must promote the objects of Chapter 7 of the Corporations Act and the statutory duty of ASIC (and the Tribunal on review) as specified in s 1(2) of the ASIC Act. In that regard, specific and general deterrence are relevant, and proper consideration must be given to any hardship or financial or other impact experienced by Mr Blazejczyk because of any order that may be contemplated.
The ASIC banning order policy
ASIC has promulgated Regulatory Guide 98 ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders (“RG 98”).[25]
[25] Australian Securities and Investments Commission, ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders (Regulatory Guide 98, 20 September 2018).
RG 98 acknowledges the capacity for limited or permissive banning orders but at paragraph RG 98.63 states:
However, we consider that it is generally not appropriate to impose limited or permissive banning orders.
On behalf of Mr Blazejczyk, it was submitted this statement could lead decision-makers into error by taking an unduly restrictive approach to the consideration of banning orders. The Tribunal need not resolve whether that is so. We take the applicable principle to be that we may and should take into account RG 98 but it cannot dictate our conclusion, which must be reached taking into account all relevant considerations.[26] In fairness, we note that RG 98 does not rule out the possibility of a limited or permissive banning order and goes on to list considerations that ASIC would take into account in deciding whether to make a limited or permissive banning order.
[26] Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634.
RG 98 also sets ranges of prohibition periods that might be imposed under a banning order. Not surprisingly, the longest period – over 10 years or permanent banning – is confined to the most egregious cases, such as misappropriation of clients’ funds, forgery, insider trading and other breaches of the most serious kind. The shortest period – less than three years – is nominated for cases generally involving carelessness or inadvertence with “No loss (or minimal loss) to [the] client”.
ASIC maintains this case falls into the category which would call for a prohibition period in the 3 to 10 year range. The factors listed for this category include conduct of a serious nature, albeit not at the same level as the 10-year-plus category. For instance, the guide nominates “[f]alse, misleading or deceptive, or unconscionable conduct” and “[a] deliberate course of conduct to enrich themselves at others’ expense” as pointing to a prohibition period in the 3 to 10 year range.
WHAT IS THE CORRECT OR PREFERABLE DECISION?
Mr Blazejczyk maintained that a banning order confined to prohibiting personal advice to retail clients would have sufficient deterrent effect to achieve the protective objects of the legislation; in particular, sufficient general deterrence. He also submitted that, since the breaches were all in the context of personal advice to retail clients, a prohibition only against provision of such services was appropriate and the prohibition against providing any financial services is unduly harsh and not the preferable decision as it goes beyond what is necessary to achieve the statutory objects of the financial services regime.
ASIC submitted the breaches could not be compartmentalised in this way and the public protection objects of the legislation could not be achieved by a banning order confined to prohibiting the provision of personal advice to retail clients. ASIC invited the Tribunal to conclude it could not be confident the “concepts or deficiencies” underlying the subject breaches would not be evident more broadly across the provision of other financial services.[27]
[27] Transcript, page 88, line 28 and following.
Having considered the matter further since the hearing, we are concerned with another form of compartmentalisation. Our concern is that it may not be appropriate to consider the factors relevant to the exercise of the discretion to make a banning order by reference to the scope of the order in isolation from consideration of the period of prohibition. For instance, the general deterrence effect of a banning order under contemplation may require consideration of both the scope and period of the proposed order.
It seems artificial and potentially inappropriate to consider such factors in an isolated way rather than by reference to the effect of the proposed order as a whole. A banning order for a longer period may be warranted if the order is of limited scope. Conversely, an order for a shorter period but of broad scope may achieve the public protection objects. Whether specified activities should be permitted and, if so, under what conditions, may also intrude into the consideration of the appropriate banning order. We are concerned that to consider the scope of the banning order in isolation may lead to error.
Our concern is not merely of an academic nature. Ultimately the duty of the Tribunal is to reach what it considers to be the correct or preferable decision. That is, we must make the legally correct decision or, where there can be more than one correct decision, the preferable decision.[28] Without pre-empting our final decision on which we maintain open minds, the evidence before the Tribunal, other cases decided in the Tribunal[29] and even RG 98, together raise for us an issue regarding whether the period of five years may be too harsh, whether or not confined in the way Mr Blazejczyk seeks.
[28] Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577.
[29] For example: Van Dieren and Australian Securities and Investments Commission [2019] AATA 4777; Musemeci and Australian Securities and Investments Commission [2009] AATA 1021; Australian Securities and Investment Commission v McCormack [2017] FCA 672.
In those circumstances, we may not be able to conclude in good faith that it would be the correct or preferable decision to either:
(a)vary the decision under review to confine its scope to a prohibition on provision of personal advice to retail clients while maintaining the five year prohibition period, as Mr Blazejczyk seeks; or
(b)affirm the decision as sought by ASIC.
The issue regarding the length of the prohibition period arises out of the contextual considerations touched upon earlier. These include Mr Blazejczyk’s long experience as a financial adviser without, apart from the 2005 issue concerning starting balances for SMSFs, evidence of any previous history of breaches of financial services laws; the relatively small number of breaches in the context of the number of clients Mr Blazejczyk serviced over the period of ASIC’s review; and the absence of dishonesty. Additionally, while the failures to include details of the Ddraig arrangements in the SoAs are serious breaches, it is relevant that these details were disclosed to clients in the PDS and the connection between the Bateau Fund and the Ddraig Fund is referred to in Part B of the standard SOA.[30]
[30] T11.83, page 5400.
At least where an applicant is, as in this case, legally represented, if a party challenges only part of a decision under review and not another part, the Tribunal ordinarily will confine its consideration to that part of the decision in dispute. However, in the particular circumstances of this case, having regard to the considerations outlined above, we consider that we are duty bound to give consideration to both the scope and period of prohibition.
Because Mr Blazejczyk did not challenge the prohibition period, we have not had the benefit of submissions in relation to its appropriateness. Accordingly, before deciding the application for review, we will give the parties an opportunity to make submissions in that regard. It is our expectation that such submissions would draw attention to the scope and period of prohibition imposed in other relevant cases considered by the Tribunal or the Federal Court.
Additionally, as foreshadowed at the hearing, we invite the parties to make submissions on whether a permissive order may be appropriate. Alternatively, whether an order that is unlimited for a period, and thereafter limited or permissive, with or without conditions, may be appropriate. In that regard, we note Mr Blazejczyk’s evidence of the impact of being prohibited from serving on the investment committee of the Bateau Fund or as a director of a financial services company and his intention not to be further involved in setting up SMSFs.[31]
[31] For example, and only for the purposes of illustration, an unlimited banning for one year and thereafter a further period permitting certain activities or limited to personal advice to retail clients.
In short, we would be assisted by submissions regarding the appropriateness or otherwise of alternative banning orders to the Order under review or the limited order proposed by Mr Blazejczyk.
I certify that the preceding 56 (fifty-six) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding and Member P Ranson.
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Associate
Dated: 26 August 2020
Date of hearing:
17 July 2020
Applicant’s counsel:
Adam Sharpe
Applicant’s solicitors:
Roe Legal
Respondent’s counsel:
Kim Anderson
Respondent’s solicitors:
ASIC in-house legal representatives
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