Coakley and Australian Securities and Investments Commission

[2008] AATA 247

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 247

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No N2004/1265

GENERAL ADMINISTRATIVE DIVISION        )

Re             Lloyd Antony COAKLEY

Applicant

AndAustralian Securities and Investments Commission

Respondent

DECISION

TribunalProfessor GD Walker, Deputy President

Date28 March 2008

PlaceSydney

DecisionThe decision under review is affirmed.

.................[sgd].............................

Professor GD Walker
  Deputy President

CATCHWORDS – Corporations law – applicant sought review of a banning order – applicant prohibited from providing financial services for a period of four years – applicant failed to comply with financial services laws – seriousness of the breaches and the fact that they did not form part of an isolated instance, prima facie make a banning order appropriate - no finding made by the tribunal on whether the applicant will not comply with a financial services law in the future – four year ban imposed was appropriate – tribunal will not alter the commencement date of the ban or its expiration date of 7 September 2008 – decision under review affirmed.

…

RELEVANT ACT/S:

Corporations Act 2001:, ss 727, 911C, 913, 920A, 1041E, 1430(1), 1431, 1432, 1436

…

CITATIONS:

ASIC v Maxwell & Ors [2006] NSWSC 1052; (2006) 59 ACSR 373

Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd (No. 2) [2005] NSWSC 267: (2005) 53 ACSR 305

ASIC v Elm Financial Services Pty Limited [2005] NSWSC 1065

Re Hayes and Australian Securities and Investments Commission [2006] AATA 1506

Farley v Australian Securities Commission (1998) 16 ACLC 1502

Rich v Australian Securities and Investments Commission (2004) 220 CLR 129

Story v National Companies and Securities Commission (1988) 6 ACLC 560

Re HIH Insurance Limited (In Prov Liq) and HIH Casualty and General Insurance Limited (In Prov Liq); Australian Securities and Investments Commission v Adler & Ors (2002) 42 ACSR 80

OTHER REFERENCES:

Regulatory Guide 98 – Licensing: Administrative action against financial services providers

REASONS FOR DECISION

28 March 2008	Professor GD Walker, Deputy President
THE APPLICATION

1. The applicant Mr Lloyd Antony Coakley has sought review of a banning order made by a delegate of the respondent (“the delegate”) on 6 September 2004 (T48) pursuant to s 920A of the Corporations Act 2001 (“the Act”). That banning order prohibits the applicant from providing any financial services for a period of four years. On 27 October 2004, the respondent lodged its Statement of Reasons in respect to the banning order decision (T2).

2. In summary, the grounds upon which the decision was based were: that the applicant, by virtue of his conduct, had not complied with financial services laws, namely, sections 727(1), 1041E and 911C of the Act (see s 920A(1)(e) of Act); and the respondent “had reason to believe” that the applicant would not comply with “a financial services law” (see s 920A(1)(f) of the Act). The factual circumstances on which the decision was based related to the applicant’s conduct, during 2002, as the authorised representative of Coakley Associates Pty Ltd [ACN 050 516 482] (“CAPL”), a licensed dealer. That conduct related to the offer of securities in two separate entities, ProCorp Investments (Gosford) Pty Ltd [ACN 091 254 634] (“ProCorp Gosford”) and ProCorp Investments Pty Ltd [ACN 100 323 644] (“ProCorp”). In both cases an offer of securities was made to raise capital for various property developments by entities controlled by Malcolm Fortune and others.

3.      On 27 May 2005 the tribunal granted a stay, subject to conditions, of the delegate’s decision.  The applicant had applied for a stay as he was also defending proceedings commenced by the respondent in the Supreme Court against him, CAPL and numerous other defendants involved in the promotion of the ProCorp offers and offers in another group of companies, in which the applicant and CAPL had no involvement (see ASIC v Maxwell & ors [2006] NSWSC 1052).

4.      On 10 October 2006, Brereton J of Supreme Court of New South Wales made orders disqualifying the applicant from managing corporations for a period 2 years (see Maxwell (supra) at [213] and Schedule E). Those orders reflected the lesser involvement of the applicant and CAPL in the matters before the court. Other defendants such as Donald Maxwell and Malcolm Fortune who had a greater involvement were the subject of permanent disqualification orders.

APPLICABLE LEGISLATION

Banning order

5. The provisions of the Act that are relevant to the power to make a banning order in this case are:

SECTION 920A ASIC’S POWER TO MAKE A BANNING ORDER

920A (1) [Requirements]  ASIC may make a banning order against a person by giving written notice to the person, if:

…

(e)the person has not complied with a financial services law, or

(f)ASIC has reason to believe that the person will not comply with a financial services law.

6. Sub-section 920A(2) provides that the respondent may only make a banning order where it has given the person the subject of the order an opportunity to appear and to make submissions. There is no dispute that such an opportunity was provided and the applicant appeared, with counsel, and made submissions at the hearing (T39).

7. The term “financial services law” is defined in s 761A of the Act to mean:

…

financial services law means:

(a)a provision of this Chapter or of Chapter 5C, 6, 6A, 6B, 6C or 6D; or

(b)a provision of Chapter 9 as it applies in relation to a provision referred to in paragraph (a); or

(c)a provision of Division 2 of Part 2 of the ASIC Act; or

(d)any other Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial services (whether or not it also covers other conduct), but only in so far as it covers conduct relating to the provision of financial services.

…

8. For the purposes of this application, the relevant chapters are Chapter 6D (fundraising, in particular ss 708 and 727), Chapter 7 (this Chapter) (financial services and markets, in particular licensing of providers of financial services, in particular s 911 and prohibited conduct relating to financial products and financial services, in particular s 1041E).

Relevant financial services law provisions

9.      On 11 March 2002, pursuant to Financial Services Reform Act 2001, the provisions of the new Financial Services Regime (FSR) came into force. That means that for the purpose of this application the conduct of CAPL and the applicant must be considered both in the context of the Act as it applied after 11 March 2002 (“the new Act” or “the Act”) and also as it applied prior thereto (ie, “the old Act”). The reason for this is that the FSR brought into effect a new licensing regime for persons providing financial services to members of the public in respect to the purchase and sale of securities under the Act. This regime provided for a new form of licence, being an “Australian financial services licence”: see s 911A of the Act.

10. The transitional provisions of the FSR also made provision for persons, such as CAPL, who were current holders of a licence under the licensing regime that applied immediately before the FSR came into force: see Part 10.2 of the Act. The effect of those transitional provisions, which are set out below, was that persons such as CAPL continued to be licensed under the old regime for a period of two years, from the date on which the FSR came into effect, unless, such licensed persons previously became licensed under the new regime: see ss 1430(1), 1431, 1432 and 1436(2)(b) of the Act.

Licensing regime

The old Act

11. Division 1 of Part 7.3 of the old Act provided for three forms of licence for those who participated in the security industry, relevant to this application were the dealer’s license and investment adviser license.

12.     Section 780(1) of the old Act prohibited a person from carrying on a “security business” or holding out that the person carries on such a business unless he/she/it is the holder of a dealer’s licence.  The term “security business” was defined in s 93(1) of the old Act to mean a business of dealing in securities.

13.     Section 781 of the old Act contained a similar prohibition in respect of a person carrying on an “investment advice business” or holding out that the person carries on such a business unless the person is the holder of an investment advisers licence.  The term “investment advice business” was defined in s 77(1) of the old Act to mean a business of advising other persons about securities, or a business in the course of which the person publishes security reports.

14.     At the relevant time CAPL was the holder of a dealer’s licence and the applicant was its authorised representative.

The new Act

15. Section 913B of the new Act provides for the issue of an Australian financial services licence and s 911C prohibits a person from holding out that he/she is the holder of such a licence. That section provides as follows:

…

S.911C A person must not hold out:

(a)that the person has an Australian financial services licence; or

(b)that a financial service provided by the person or by someone else is exempt from the requirement to hold an Australian financial services licence; or

(c)that, in providing a financial service, the person acts on behalf of another person; or

(d)that conduct, or proposed conduct, of the person is within authority (within the meaning of Division 6) in relation to a particular financial services licensee;

if that is not the case.

Note:    Failure to comply with this section is an offence (see subsection 1311(1)).”

…

16. The phrase “Financial services licensee” is defined in s 761A of the Act to mean “a person who holds an Australian financial services licence” and an Australian financial services licence is also defined in s 761A to mean a licence that has been issued under s 913B of the Act which authorises the person to carry on a financial service business to provide financial services.

Transitional provisions

17. Section 1431(1) of the new Act provided, as is relevant to this application, as follows:

…

S.1431(1)

Subject to subsections (2) and (3), Parts 7.6 (other than Subdivision A and B of Division 4, and Division 5), 7.7 and 7.8 (other than section 992A) of the amended Corporations Act (the relevant new legislation) do not apply to a regulated principal and their regulated activities during the period (the transition period) starting on the FSR commencement and ending  when the first of the following events occurs:

(a)the period of 2 years starting on the FSR commencement ends;

(b)the regulated principal is granted a licence under s 913B of the amended Corporations Act that covers their regulated activities;

(c)the regulated principal starts to be covered by an exemption under subsection 911A(2) of the amended Corporations Act (or would start to be covered if that subsection applied) in respect of their regulated activities;

(d)the regulated principal ceases (for whatever reason) to have the status that made them a regulated principal.

…

18. The term “regulated principal” was defined in s 1430(1) of the new Act to include the holder of a dealer’s licence.

19. Section 1432 of the new Act provided as follows:

…

s.1432(1)

Subject to subsection (2), during the transition period for a regulated principal, the relevant old legislation (if any) continues to apply, despite its repeal:

(a)to, and in relation to, the regulated principal and their regulated activities; and

(b)to any other person to whom it is expressed to apply, but only in relation to matters related to the regulated principal and their regulated activities.

1423(2)

If, because of subsection 1431(2), the relevant new legislation (within the meaning of subsection 1431(1)) starts to apply to part of a person’s regulated activities from a particular time, the relevant old legislation (if any) stops applying, from that time, in relation to that part of those activities.

…

20.     By reason of these transitional provisions, CAPL continued to be bound by the provisions of the old Act in so far as it related to its licensing activities as the holder of a dealers licence and the applicant remained the authorised person in respect to that licence. 

Fundraising

21. Section 727(1) of the Act provides:

s.727 (1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC.

22. Section 708 sets out the circumstances in which an offer of securities for issue do not require a disclosure. This section, so far as it is relevant to this application, provides as follows:

OFFERS THAT DO NOT NEED DISCLOSURE

708(1) Small scale offerings (20 issues or sales in 12 months)

Personal offers of a body's securities by a person do not need disclosure to investors under this part if:

(a)none of the offers results in a breach of the 20 investors ceiling (see sub-sections (3) and (4)); and

(b)none of the offers results in a breach of the $2million ceiling (see sub-sections (3) and (4)).

This sub-section does not apply to an offer for sale to which sub-section 707(3) (sale amounting to indirect issue) or (5) (sale amounting to indirect sale by controller) applies.

708(2) [personal offer]  For the purposes of sub-section (1) a personal offer is one that:

(a)may only be accepted by a person to whom it is made; and

(b)is made to a person who is likely to be interested in the offer, having regard to:

(i)previous contact between the person making the offer and that person; or

(ii)some professional other connection between the person making the offer and that person; or

(iii)statements or actions by that person that indicate that they are interested in offers of that kind.

708(3) [Breach of ceiling for issue of securities] An offer by a body to issue securities:

(a)results in a breach of the 20 investors ceiling if it results in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period; and

(b)results in a breach of the $2million ceiling if it results in the amount raised by the body by issuing securities exceeding $2million in any 12 month period.

708(4) [Breach of ceiling for transfer of securities] An offer by a person to transfer a body’s securities:

(a)results in a breach of the 20 investors ceiling if it results in the number of people to whom the person sells securities of the body exceeding 20 in any 12 month period; and

(b)results in a breach of the $2million ceiling if it results in the amount raised by the person from selling the body’s securities exceeding $2million in any 12 month period.

708(5) [Exceptions] In counting issues and sales of the body securities, and the amount raised from issues and sales, for the purposes of sub-section (1), disregard issues and sales that result from offers that:

(a)do not need a disclosure document because of any other sub-section of this section; or

(b)are not received in Australia; or

(c)are made under a disclosure document.

708(10) [Disclosure not necessary for some offers] An offer of a body’s securities does not need disclosure to investors under this Part if:

(a)the offer is made through a financial services licensee; and

(b)the licensee is satisfied on reasonable grounds that the person to whom the offer is made has previous experience in investing in securities that allows them to assess:

(i)the merits of the offer; and

(ii)the value of the securities; and

(iii)the risks involved in accepting the offer; and

(iv)their own information needs; and

(v)the adequacy of the information given by the person making the offer; and

(c)the licensee gives the person before, or at the time when, the offer is made, a written statement of the licensee’s reasons for being satisfied as to those matters; and

(d)the person to whom the offer is made signs a written acknowledgment before, or at the time when, the offer is made that the licensee has not given the person a disclosure document under this Part in relation to the offer.

708(15) Issues or sales for no consideration

An offer for securities (other than options) does not need disclosure to investors under this Part if no consideration is to be provided for the issue or transfer of the securities.

23. While s 708(10)(a) in the new Act makes reference to “financial services licensee”, the old Act referred to a “dealer licensee” and in light of the transitional provisions, offers of security could continue to be made through CAPL.

The old Act – conditions on a licence

24.     Section 786 of the old Act made provision for conditions to be placed on a dealer or investment adviser licence.  These conditions included those set out in the Corporations Regulations (“the Regulations”).  In this regard reg. 7.3.02B of the Regulations as they applied at the relevant time to the holder of a dealer’s licence provided as follows:

Regulation 7.3.02B

(1)For the purposes of subsection 786(1) of the Corporations Law, a licence is subject to the condition that, if the licensee gives investment advice to a retail investor, the licensee must meet the requirements of subregulations (2), (4) and (5).

(2)Subject to subregulation (3), the licensee must give to a retail investor an Advisory Services Guide:

(a)in the case of investment advice given in person – not later than when that advice is given; or

(b)in the case of an execution-related telephone advice…; or

(c)in any other case – at the earliest practicable opportunity after the licensee (or a representative of the licensee) gives investment advice.

(3)Subregulation (2) does not apply if:

(a)the licensee has given an Advisory Services Guide to the retail investor in relation to investment advice previously given to the investor; or

(b)…

(c)the investment advice given is general securities advice given, in accordance with regulation 7.3.02D, to persons generally in a non-personal context (for example, at an investment seminar, by means of brochures or newsletters or through advertisements).

…

(6)For subregulation (2), the Advisory Services Guide must contain information that a retail investor reasonably requires to:

(a)clearly understand the nature of the investment advice being offered; and

(b)compare the services offered by the licensee with similar services offered by other licensees; and

(c)clearly identify:

(i)    the licensee; and

(ii)   the individual representative (if any) of the licensee responsible for the investment advice to be given to the investor; and

(d)clearly understand the nature of, and method of calculating, in relation to the service:

(iii)   all charges payable to the licensee by the investor; or

(iv)   any other amount payable to the licensee, including a commission payable by a third party; and

(e)clearly understand the basic rights of the investor in relation to the licensee, and any representative of the licensee, giving investment advice to the retail investor; and

(f)use available complaints procedures if dissatisfied with a service received from the licensee.”

25.     Reg. 7.3.02C(1) of the Regulations also contained the following conditions for the purposes of subsection 786(1) of the old Act.  That condition was in the following terms:

Regulation 7.3.02C

(1)For the purposes of subsection 786(1) of the Corporations Law, a licence is subject to the condition that, if the licensee gives a personal securities recommendation to a retail investor and the retail investor fails to give to the licensee relevant personal information, the licensee must give to the investor a clear warning that:

(a)state that the licensee has not been able to undertake a comprehensive analysis of the investment objectives, financial situation and particular needs of the investor; and

(b)sets out the limitations on the appropriateness of the recommendation because of the lack of relevant personal information about the investor; and

(c)state that the investor needs to consider whether the recommendation is appropriate in light of the particular investment needs, objectives and financial circumstances of the investor.

26.     Section 787 of the old Act required a licensee to lodge with the respondent written notice of any event that constituted a breach of a condition of the licensee’s licence.  That section provided as follows:

s.787(1) Within 1 day after the happening of an event constituting a contravention of a condition of a s 787 licence, the licensee must lodge a written notice setting out particulars of the event.

s.787(2) It is a defence to a charge arising under subsection (1) if it is proved that:

(a)when the licensee was required to lodge the notice, the licensee was unaware of the fact or occurrence that gave rise to the requirement; and

(b)in the case where the licensee has since become aware of that fact or occurrence – the licensee lodged the notice as soon a practicable after becoming so aware.

False and misleading statements

27. Section 1041E of the new Act provides as follows:

s.1041E

(1)A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if:

(a)the statement or information is false in a material particular or is materially misleading; and

(b)the statement or information is likely:

(i)    to induce persons in this jurisdiction to apply for financial products; or

(ii)   to induce persons in this jurisdiction to dispose of or acquire financial products; or

(iii)   to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and

(c)when the person makes the statement, or disseminates the information:

(i)    the person does not care whether the statement or information is true or false; or

(ii)   the person knows, or ought reasonably to have known that the statement or information is false in a material particular or is materially misleading.

Old Act - securities recommendation without a reasonable basis for making it

28.     Section 851 of the old Act provided as follows:

s.851

(1)A securities adviser who:

(a)makes a securities recommendation to a person who may reasonably be expected to rely on it; and

(b)does not have a reasonable basis for making the recommendation to the person;

contravenes this section.

(2)For the purposes of subsection (1), a securities adviser does not have a reasonable basis for making a securities recommendation to a person unless:

(a)in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person’s investment objectives, financial situation and particular needs, the securities adviser has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and

(b)the recommendation is based on that consideration and investigation.

(3)A person who contravenes subsection (1) is not guilty of an offence.”

29. A “securities adviser” was defined in s 9 of the old act to mean a dealer, an investment adviser or a securities representative of a dealer or of an investment adviser.

ISSUES

30.     The parties agree that there are primarily 8 issues for determination by the tribunal;

(a)whether the ProCorp Gosford share offer fell outside the disclosure requirements of Division 1 of Part 6D.2 of the Act (ie, fell within s 708 of the Act), and if it did not fall outside these provisions, whether the applicant, as the authorised representative of CAPL, breached s 727 of that Act (“issue 1”);

(b)whether the ProCorp offer of a “debenture” fell outside the disclosure requirements of Division 1 of Part 6D.2 of the Act (ie fell within s 708 of the Act), and if it did not fall outside these provisions, whether the applicant, as the representative of CAPL, breached s 727 of that Act (“issue 2”);

(c)whether in the circumstance of the offers made to investors in the ProCorp Gosford and ProCorp offers, the applicant, as the authorised representative of CAPL had in fact met the requirements of s 708(10) of the Act in that he had satisfied himself on reasonable grounds that a particular offeree had previous experience in investing in securities which allowed that offeree to assess the merits of the offer, the value of the securities being offered and the risks etc.(“ issue 3”);

(d)whether CAPL, through the conduct of the applicant, breached a condition of CAPL’s dealer’s licence in that it gave investment advice to a retail investor without giving the investor an Advisory Services Guide as prescribed by reg. 7.3.02C of the Regulation under the Act as it applied prior to 11 March 2002 and during the transitional period to 10 March 2004 (the old Act) and failed to immediately notify the respondent of this breach as required under s 787 of the old Act (“issue 4”);

(e)whether the ‘Statement of Reasons”, completed and signed by the applicant, and forwarded to offerees in the ProCorp Gosford and ProCorp offers of security constituted “a security recommendation”  and if it did whether the recommendation was made in breach of  s 851 of the old Act (“issue 5”);

(f)whether the applicant, as the authorised representative of CAPL, in disseminating the ProCorp Information Memorandum, disseminated information containing a statement that was false in a material particular or materially misleading contrary to s 1041E of the Act. The statement in question concerns the deposit of the money loaned into a Cash Management Fund (“CMF”) of which the licensee was a signatory (“issue 6”);

(g)whether, contrary to s 911C of the Act, the applicant, as the authorised representative of CAPL, held out that CAPL was the holder of an Australian financial services (“AFS”) licence when it was not the holder of such a licence (“issue 7”); and

(h)whether, on the basis of the tribunal’s findings in respect to the above issues, the reviewable decision is the correct and preferred decision in that:

(i)there is reason to believe that the applicant will not comply with a financial services law; and

(ii)in the circumstances a ban for a period of 4 years is appropriate

(“issue 8”).

31.     It is also common ground that the case really turns on issues 1 to 3 and, depending on the outcome, issue 8.

THE HEARING

32.     No oral evidence was adduced at the hearing.  The parties relied on the T documents (Exhibit R1), including the delegate’s decision (T48) and on other documents tendered at the hearing.  The respondent objected to a number of parts of Exhibit A1, mainly on the ground of relevance, and I uphold those objections.

33.     The respondent also relied on the findings and consent orders of Brereton J in ASIC v Maxwell & Ors (2006) 59 ACSR 373. One of the applicant’s co-defendants defended the proceedings and the main issues were fully canvassed. I do not accept the applicant’s submission that his Honour’s findings should not be treated as binding for the purposes of this application and that the tribunal should re-examine them.

34.     The applicant was not represented at the tribunal hearing, and that had certain consequences for the conduct of the proceedings.  The applicant did not appear to understand fully the nature of merits review, and made numerous criticisms of the decision under review, including charging it with being “selectively biased”, quoting material out of context, making denigrating personal attacks on him and relying on “disingenuous constructions”.  In a number of instances, the applicant did not observe the distinction between evidence and submissions.  Many of the evidentiary points he did raise had little or no relevance to the current proceedings.  Many of his submissions were of little assistance in resolving the issues.  None of that is a reflection on the applicant personally; it is simply a result of a litigant in person endeavouring to conduct technical and complex proceedings.  At the same time, it is appropriate to refer in these reasons only to the matters of probative or persuasive value, or to points upon which the applicant strongly relied.

FACTS

35.     The basic facts of the case are not in dispute.  In 1991, following a 25 year career in banking, the applicant decided to form his own company for the purpose of engaging in financial consulting.  That company, CAPL was formed in February 1991 and the applicant has been a director of that company since 26 February 1991 (T32).

36.     On 26 February 1996, the Australian Securities Commission (“ASC”) issued an investment advisor’s license to CAPL, which it held until 30 January 2002.  At all times the applicant was CAPL’s authorised representative in relation to that licence (T32).

37.     Owing to a change in CAPL’s customer base from financial institutions to individual investors, the applicant, on behalf of CAPL, applied for a dealer’s licence in the latter part of 2001.  That licence was issued on 24 December 2001 and the applicant was the authorised representative (T7) and (T32).  A condition of that licence included the following (T7):

1.The licensee must establish and maintain adequate training, supervision and compliance procedures designed to ensure, as far as is reasonably possible, that the licensee’s representatives do not contravene, in their conduct on behalf of the licensee, or in connection with the securities business carried out by the licensee:

(a)any provisions of a Securities Law; or

(b)another condition of this licence.

…

38.     On 1 March 2003, the applicant became the Financial Services Representative of Insurance & Finance Managers of Australia Pty Ltd [ACN 006 230 842].

Applicant’s fundraising activities before ProCorp Gosford

39.     Towards the end of 1999 the applicant was involved in raising $300,000.00 from his clients for a development known as the “Targo Road” project.  Malcolm Fortune, a director of the development company responsible for the project had introduced the applicant to it.  This was followed in 2000 to 2001 with the raising funds of about $500,000.00 from CAPL’s clients for another development project of Malcolm Fortune in Chatswood (T40).  This development did not proceed but Malcolm Fortune arranged for the funds that had been invested by CAPL client’s to be re-invested in his Sussex Inlet development project.  In each case the funds invested were by way of an unsecured loan.

40.     During 2001, the applicant introduced Malcolm Fortune to Karl Burnett, solicitor, a client of CAPL.

41.     In the latter part of 2001, the applicant arranged for himself and three of CAPL’s clients to invest in Mansions on Mann Pty Ltd (“Mansions”), which was the fundraiser for another development project of Malcolm Fortune.  This project involved the construction of a residential and commercial building on Mann Street, Gosford (“the Gosford project”) (T40) and (T39).

42. On 24 August 2001, the applicant met with Malcolm Fortune, Dominic Millgate and Karl Burnett concerning the property development projects of Bell Developments Pty Ltd. The purpose of this meeting was to discuss ways in which “seed capital” could be raised for Malcolm Fortune’s future property developments without breaching the “20/12 rule” in s 708(1) of the Act. At the time, Malcolm Fortune had property developments under way or planned at Chatswood, Homebush, Gosford and Sussex Inlet.. The minutes of the meeting (T4) recorded the following as being discussed:

§The further capital raising for other project sites raises issues in respect to the fund raising provisions of the Act.

§MF indicates that he wishes to establish a structure where he could raise both seed capital and equity capital to fund property development projects.

§KB outlined the fundraising provisions of the Act, where the 20 investor in the 12 months rule is exceeded or capital raised exceeds $2m. Unless other specified exemptions are satisfied under the Act, a disclosure document is required.

§KB outlined that under s 740 of the Act, ASIC had power to aggregate closely related transactions between different bodies to determine whether the fundraising provisions have been breached.

§In view of the Sussex Inlet development KB indicated that any further offers made to investors could result in a breach of the 20 investors in 12 months rule or the $2m ceiling.

§KB therefore indicated that an Offer Information Statement (OIS) could be issued enabling an unlimited number of offers subject to a $5m capital raise ceiling.

43.     The following was also recorded in minutes of the meeting:

…

(i)it was indicated for the purposes of giving advice and marketing any shares under the OIS that a proper authority was required from the licence security dealer.  LC indicated that he was in the process of making an application for a dealer’s licence and would expect same by the end of September 2001.

(j)MF indicated that two projects were on foot i.e. Gosford and Chatswood.  Gosford was the priority project and the contract was likely to be exchanged in the next fourteen (14) days.

…

44. At the time of the meeting the applicant was fully aware of the “20/12” rule in the Act.

45.     On or about 12 December 2001, the applicant again met with Malcolm Fortune and Karl Burnett over the Gosford project where Malcolm Fortune instructed Karl Burnett to work with the applicant to prepare an “excluded offer” for the Gosford project, which was to be “put out” by CAPL when it obtained its dealers licence.

ProCorp Gosford fundraising

46.     On 20 February 2002, CAPL entered into a written agreement with Malcolm Fortune and Belle Development Group Pty Ltd (“Belle Development”) in which CAPL agreed to act as ‘Securities Dealer, Lead Dealer and or Issue Manager” for capital risings for various property developments projects undertaken by Belle Development, Malcolm Fortune and other entities in the Fortune group.  Belle Development was subsequently re-named on 30 August 2002 as Oceanwalk Projects Pty Ltd (“Oceanwalk Projects”).

47.     On or about 8 April 2002, Karl Burnett had completed the documentation for an excluded offer of shares in ProCorp Gosford for the purpose of raising seed funding for the Gosford project.  Included in this documentation was a 22 page information memorandum (T8) and a 6 page pro forma letter of offer to invest in ProCorp Gosford (T19).

48.     The Information Memorandum for ProCorp Gosford stated the following:

This Information Memorandum has been prepared by ProCorp and is not a prospectus. It has been prepared for excluded offers or invitations that do not require a prospectus or a disclosure document under Chapter 6D of the Corporations Act 2001. The Information Memorandum is not required to be lodged with the Australian Securities and Investment Commission.

An investment in ProCorp is only available to the specific party to whom an Offer is made.  The specific party to whom an Offer is made is set out in the accompanying Letter of Offer.  If you do not have a Letter of Offer addressed specifically to you, you can not participate in this investment opportunity.  No other offers are made pursuant to the Letter of Offer and the accompanying Information Memorandum.

…

49.     The Information Memorandum went on to state that offerees were being given “the opportunity to apply for ordinary shares in ProCorp for a minimum investment of $25,000 (for 25,000 ordinary shares).  The Information Memorandum went on to state the following in respect to a “funding agreement” with Mansions:

…

1.2Funding Agreement:  ProCorp has entered into a Funding Agreement with an associate company, Mansions, to progressively advance up to $1.6m to Mansions as seed capital for the Gosford Project.  The Term of the Funding Agreement is 12 months and is repayable by Mansions at any time prior to expiration of the term at no additional penalty.  Interest Payable to ProCorp under the Funding Agreement is 40% per annum calculated on a daily basis.  Mansions” Use of the Funding is limited to applying the funds towards the Gosford Project and not towards any other person or purpose.  More specifically, Mansions may only utilise the moneys advanced by ProCorp for the following purposes:  to complete the purchase and acquisition of a property located at 17 Mann Street, Gosford; to pay consultant fees associated with the construction and development of the proposed 38 luxury apartments; to facilitate approvals; to commence off the plan marketing; and otherwise pay costs of Mansions to enable it to raise primary funding to complete the Gosford project.  The terms as to the restrictions placed on the use of funds are found in the Funding Agreement which is available for inspection…

50.     The last page of the ProCorp Gosford Information Memorandum contained a pro forma share application form for ProCorp Gosford.   That application form gave CAPL as the person to whom the completed application was to be returned to.

51.     The pro form Letter of Offer to invest in ProCorp Gosford contained the following introductory paragraphs:

ProCorp Investments (Gosford) Pty Ltd ACN 091 254 634 (“ProCorp”), a member of the Belle Development Group, is a newly established company formed to provide seed capital to secure the acquisition of land and commence development operations by an associate company Mansions on Mann Ltd ACN 097 993 836 (“Mansions”).

ProCorp is a vehicle which allows seed capital investors for the Gosford Project to obtain a projected pre-tax rate of return equivalent to 40% per annum in a term less than 12 months...”

52.     The pro forma Letter of Offer also provided an explanation of the term “an excluded offer” and who was able to invest in such an offer.  So far as is relevant, the pro forma Letter stated the following:

Excluded Offer – Who May Invest?

An Excluded Offer simply means that no prospectus or disclosure document is required for the offer or invitation for the securities.

Accompanying this letter is a document prepared by ProCorp that provides background information on the proposed financing of the Gosford Project and details of the expected financial performance of both ProCorp and the development being undertaken by the company Mansions. It is not a prospectus or a disclosure document under the Corporations Act 2001.

The investment offer is being offered to a limited number of parties in accordance with S.708 of the Corporations Act 2001.

The offer may therefore be made by ProCorp in any one of the following situations:-

1.You receive a Personal Offer From the Company

For you to receive a Personal Offer from ProCorp You will find the relevant box marked in the Statement of Reasons accompanying this Offer.  A Personal Offer may be utilised by ProCorp in respect to no more than 20 investors in a 12 month period who together invest less than $2million.

2.You are a Sophisticated Investor

…

3.The Dealer is Satisfied as To Your Capacity To Invest

The offer may be made to You through Coakley Associates Pty Ltd (the “Dealer”) without a prospectus where the Dealer is satisfied that You have previous experience in investing in securities which allows You to assess:-

-The merits of the offer;

-The value of the securities being offered;

-The risks involved in accepting the offer;

-Your information needs in respect to the offer; and

-The adequacy of information given by the person making the offer.

If the Dealer determines that above items have been satisfied, the Dealer will give to You before, or at the time when, the offer is made a written statement of the Dealer’s reasons for being satisfied as to those matters; and

You will also be required to sign written acknowledgment before, or at the time when, the offer is made that the Dealer has not given to You a disclosure document under the Corporations Act 2001 in relation to the offer.

…

53.     The pro forma Letter of Offer also invited the recipients of the Letter to contact the applicant in the event they required further information or wished to discuss their participation in the offer.  Offerees were also requested to return the completed Share Application and cheque by post to CAPL.

54. The final page of the pro forma Letter of Offer contained a pro forma ‘Statement of Reasons”. This pro forma document was designed for CAPL, in its capacity as the holder of security dealer’s licence, to complete by indicating the grounds on which it had satisfied itself that an offeree met the requirements of s 708(10)(b) of the Act. These requirements were listed on the form together with a tick box against each requirement so that the applicant could indicate which requirement applied to each offeree.

55.     At the bottom half of the pro forma Statement of Reasons, under the heading “Investment Recommendation”, was the following statement:

…

Based on your financial circumstances, experience, and the level and nature of Your investment portfolio, I recommend that You should consider an application for shares in ProCorp of:

Shares  Amount

The entire amount is payable on submission of Your application For Shares

…

56.     There were empty boxes against the words ‘Shares” and “Amount” which were to be completed by the applicant.

57.     The applicant prepared all the letters of offer, including the ‘Statement of Reasons” (see T18) for each offeree.  In relation to those offerees who were clients of CAPL, the applicant used information he held about these clients.  In relation to those offerees who were not CAPL clients, eg those persons who were existing investors in Mansions and who had been introduced by Belle Developments or its agents, the applicant sought information from Malcolm Fortune.  The applicant then completed the ‘Statement of Reasons” on the basis that those offerees had participated in similar offers previously and that they had would be informed of the offer through the Information Memorandum of ProCorp Gosford.  On completing these letters and ‘Statements of Reasons” the applicant forwarded these to Malcolm Fortune to send to the offerees named in the letters etc he had prepared.

58.     According to the completed ‘Statement of Reasons” the applicant only spoke to one investor, Mr Long Trihn, prior to completing the form (T18).

59.     Twenty four people accepted the offers of shares in ProCorp Gosford (T22).  Of the 24 investors in ProCorp Gosford, 19 were introduced by CAPL.  Furthermore, of the 24 investors, nine were existing investors in Mansions, four of whom (including CAPL) had been introduced by CAPL.  The other five existing investors in Mansions had been introduced by Bell Development or its agents.

60.     On 3 March 2004, ProCorp Gosford was placed under administration by the appointment of a liquidator by the Court.

61.     On 29 March 2004, Clarissa Wilson, an investor in ProCorp Gosford and a client of CAPL wrote to the respondent stating that she had relied on the advice of the applicant as set out in the Information Memorandum and the Statement of Reasons (T30).  Ms Wilson subsequently made a successful claim on the security that had been lodged with the respondent as a condition of its licence.  In the Reasons of the Decision of the delegate of the respondent who determined that claim found that, in respect of the advice given to Clarissa Wilson to invest in ProCorp Gosford, the applicant had failed to carry on business under the licence of CAPL adequately and properly.

ProCorp fundraising

62.     By mid-2002, the development projects of the Fortune group of companies had increased in number.  As the fundraising for each development was carried out by a different corporate entity, the number of those entities increased.  In view of the increasing number of development projects of the Fortune group of companies, Malcolm Fortune, Karl Burnett and the applicant discussed the possibility of consolidating the fundraising for these projects into one company rather than making separate excluded offers for each company involved in a development project.  An existing entity ProCorp Investments (Five Dock) Pty Ltd was re-named ProCorp Investments Pty Ltd and used as the entity to make offers of securities for existing and future projects.  At the time, other than the Gosford project, there were the following projects:

(a)73 Underwood Road, Homebush, a 10 townhouse project;

(b)Mill Road, Liverpool, a 29 home unit development;

(c)134 Great North Road, Five Dock, a 29 home unit and 6 retail shop development;

(d)45 Ocean Avenue, Newport, comprising 12 townhouses; and

(e)360 Ocean View Road, Ettalong Beach, 4 townhouses.

63.     As was mentioned above, separate fundraising entities were established for each of these projects, which were being promoted through Donald Maxwell and his company and as well as others in the Fortune group of companies.

64.     On or about 28 August 2002, Karl Burnett completed the preparation of the documentation for the offers of securities in ProCorp.  That documentation included an Information Memorandum (T11), a pro forma draft Letter of Offer to lend moneys to ProCorp (T20) and a draft loan agreement.

65.     The ProCorp Information Memorandum described CAPL as being the “Financial Services Licensee” (FSL).  The introductory paragraph to the Information Memorandum stated as follows:

This Information Memorandum has been prepared by ProCorp and is not a prospectus. It has been prepared for excluded offers or invitations which do not require a prospectus or a disclosure document under Chapter 6D of the Corporations Act 2001. It is not required to be lodged or registered with the Australian Securities and Investment Commission.

A loan to ProCorp may only be made by the specific party to whom an Offer is made.  The specific party to whom an Offer is made is set out in the accompanying Letter of Offer.  If you do not have a Letter of Offer addressed specifically to you, you cannot participate in this investment opportunity.  No other offers are made pursuant to the Letter of Offer and accompanying Information Memorandum.

…

1.The Proposed Investment and Event Structure

1.1The offer is an “excluded offer” being made by ProCorp through a financial services licensee, Coakley Associates Pty Ltd (the “FSL”).  An “excluded offer” simply means that no prospectus or disclosure document is required for the offer or invitation for the securities.

1.2Pursuant to S.708(10) of the Corporations Act 2001, the financial services licensee must be satisfied on reasonable grounds that you have previous experience in investing in securities which allows you to assess:-

-the merits of the offer;

-the value of the securities being offered;

-the risks involved in accepting the offer;

-your information needs in respect to the offer; and

-the adequacy of information given by the person making the offer.

If the FSL determines that the above items have been satisfied, they will give to you before, or at the time when, the offer is made a written statement as to their reasons for being satisfied as to those matters.  The Statement of Reasons will be found at the conclusion of the Letter of Offer accompanying this Information Memorandum.

1.3All moneys lent by you to ProCorp will be initially placed in a cash management trust (CMT).  The CMT account will be opened in the name of ProCorp Investments Pty Ltd, and provide you with further assurance, the FSL will be the co-signatory on the CMT account.

1.4The FSL upon being satisfied that the loan moneys will be applied in accordance with the purposes of your loan will advance moneys progressively to ProCorp’s Approved Development Borrower(s).

1.5…

66.     Attached to the ProCorp Information Memorandum was a Loan Agreement Execution Deed, the terms of which were set out at pages 11 to 17 of the Information Memorandum.  These terms stated that there were 3 parties to the agreement, the lender, the borrower and the guarantor.

67.     The six page pro forma draft Letter of Offer to lend moneys to ProCorp stated the following introductory paragraph:

ProCorp Investments Pty Ltd ACN 100 323 644 (“ProCorp”) has been recently formed as a cash box company to enter into loans with investors and then on-lend such monies to Approved Development Borrowers.  The Approved Development Borrowers will be limited by using the monies for the purposes described in the Loan Agreement.  The purposes may include:  securing the acquisition of land and commencing development of various or specific commercial and residential development projects operated by companies related to Troy Fortune and George Nahed.

ProCorp is essentially seeking to provide a more uniform loan offering to investors through Coakley Associates Pty Ltd as financial services licensee in satisfaction of the requirements of S.708(10) of the Corporations Act 2001. Making the offer through a financial services licensee ensures that ProCorp or related companies of ProCorp do not breach the maximum number of offers that may be made under S.708(1) of the Corporations Act 2001: being no more than 20 investors in a 12 month period who together invest less than $2million.

…

68.     The pro forma draft Letter of Offer also contained a description of “Excluded Offers – Who May Invest?” in similar terms to that contained in the pro forma Letter of Offer in the ProCorp Gosford project.

69.     The last page of the pro forma draft Letter of Offer to lend moneys to ProCorp was a pro forma ‘Statement of Reasons” in similar terms to that contained on the last page of the pro forma draft Letter of Offer to invest in ProCorp Gosford.

70.     In order to prepare specific Letters of Offer and a Statement of Reasons, the applicant requested, from Malcolm Fortune, a list of the names of existing investors in projects, other than the Gosford project, together with the amount invested.  Malcolm Fortune provided that list in early September 2002, which he subsequently supplemented with additional names.  The total number of existing investors in development projects other than the Gosford project totalled 69 in number.

71.     On receiving the list of names from Malcolm Fortune, the applicant prepared a Letter of Offer and ‘Statement of Reasons” for each investor on the list and in doing so he used the information that was on the list.   That information appears to have been limited to the name and address of the investor, the amount invested and which project the invested amount was to be used for.  In regard to those investors who had been introduced by CAPL to the specific projects, the applicant relied on information held by CAPL.  Having completed these documents, the applicant provided them to ProCorp to send out.

72.     According to the applicant’s register of investors in ProCorp there were 54 investors, 5 of whom were clients of CAPL who had already invested in the Homebush and Liverpool projects (T21).  The applicant also asserts that of those who invested there was only one new investor, Mr Nicholls (who had obtained legal advice in respect to the documentation (T14). 

73.     It is noted that from the 70 ‘Statement of Reasons” completed by the applicant in respect to this offer, the overwhelming majority were signed and dated 9 or 24 September 2002 (T17).

74.     There is also evidence that those who received and accepted the ProCorp offer and who had already invested in existing fundraising entities, other than ProCorp Gosford, were given new loan agreements to execute.  These loan agreements were backdated to the date on which the original agreement with the initial fundraising entity was entered into.  Support for this is also found in an analysis of loan agreements by the respondent’s investigator, Philip James Thompson (T28).  This analysis also shows that loans were entered into after the applicant had signed and dated the relevant ‘Statement of Reasons”.  It also shows that the total amount loaned in a 12 month period, from September 2002 to September 2003, was $8,110,000.00

75.     On 3 March 2004, ProCorp Gosford was placed under administration by the appointment of a liquidator by the Court.

ISSUES 1 to 3

76.     As issue 3 is an element of issues 1 and 2, it is convenient to deal with the first three issues together.

77.     The parties made extensive written submissions in relation to those issues.  The respondent prepared a summary of them which the applicant accepted as showing the main arguments of both sides, although he did not accept the validity of most of the respondent’s contentions.  The following outline of the parties submissions on the first three issues draws on that summary.  The references to paragraph numbers relate to paragraphs in the delegate’s decision (T38), the reviewable decision in this case.

Submissions

78.     Issue 1 (paras 39 to 56 inclusive).

The applicant submits that “The delegate erred in finding that the applicant breached ss 727 and 708 in regard to the ProCorp Gosford offer”.

79.     As to para 49:

The applicant contends that he did not breach s 708(1) in respect of the 24 investors in ProCorp Gosford:

- 9 were existing development company investors in Mansions on Mann Pty Ltd (this number coming within s 708(1))

- 15 were existing clients of CAPL and were offers made under s 708(10) and should not be counted for the purpose of s 708(1)

The respondent contends that the fact that investors in ProCorp Gosford had been investors in Mansions is not relevant.

As pointed out in paragraph [54] of the respondent’s submissions, for the purpose of determining whether an offer of securities falls within the terms of s 708(1) regard is to be had to the offers that were made, whether they were personal offers and how many of the offers resulted in the issue of a security in the entity in question. The undisputed evidence is that between April and September 2002, 24 offerees (all had been given a personal offer) invested in ProCorp Gosford (see: T22 the investor register prepared by the applicant).

Prima facie that was a breach of s 708(1). If, as contended by the applicant, the existing Mansions” investors are to be treated as s 708(1) investors, then the question is whether some or all of the remaining 15 investors are not to be counted for the purpose of s 708(1) as the offers made to these offerees were excluded offers under s 708(10) of the Act. It is the respondent’s contention that the evidence establishes that they were not: see [26] to [57] of the respondent’s submissions in reply.

80.     As to para 53.2:

The applicant submits that the respondent has failed to provide evidence that the s 708(10) offers to investors were invalid.

The respondent first contends that, in this merits review application, there is no onus on the respondent to prove that the offers in question were not an excluded offer under s 708(10). However, the tribunal is required to determine, on the balance of probabilities, whether in fact the offers were so excluded.

In this regard, the evidence of the applicant at the hearing before the delegate was that for the sake of uniformity, each of the 24 investors were given the same documentation (T24 at 18, 7-17; at 20, 19-28 and at 25, 14-19). That is, the applicant completed a Statement of Reasons for all investors and with one exception, Mr Trinh (T18), he has no record of having made any enquiry of offerees in regard to the matters CAPL was required to be satisfied of in order for the s 708(10) exclusion to apply (see: T30 letter from investor Ms Wilson). He also completed Statements of Reasons for 5 non-CAPL investors who he never met. The inference drawn by the delegate from this evidence was correct: see paragraph [29] to [33] of the respondent’s submissions in reply and the applicant has failed to point to any evidence from which a contrary inference could be drawn.

81.     As to paras 53.3 and 80:

The findings of the delegate … that the applicant attempted to bring the offer within s 708(10), but in doing so completed Statements of Reasons for 5 persons who were not his client was based on a false premise as these were s 708(15) parties.

The respondent contends that the applicant has ignored the delegate’s findings that notwithstanding the oral evidence of the applicant at the hearing (T24 at 18, 2-5), the offers to existing investors in Mansions were not excluded offers under s 708(15). That finding, the respondent contends is correct: see paragraphs [39] to [51] of the respondent’s submissions in reply.

Furthermore, the findings of the delegate that the applicant attempted to bring the offer within s 708(10) was the only available conclusion on the evidence. The wording of the offer to investors was in the terms of s 708(10). There was no mention of s 708(15) and the applicant’s argument seems to have only arisen after the respondent commenced its investigations.

82.     As to paras 55 and 81:

The applicant submits that the delegate erred in that he did not take into account the evidence of the investigator, Mr Thompson (T25) and Mr Burnett (D3) that the loans of existing development company investors in Mansions were not “rescinded” when they invested in ProCorp Gosford. It is this evidence the applicant contends establishes that the offer to these investors was on the basis of no consideration pursuant to s 708(15).

The respondent contends that the status of the existing loans of the investors in Mansions at the time the applicant made its offers for the issue of shares ProCorp Gosford is not a relevant consideration in regard to whether these offers were an excluded offer under s 708(15) of the Act: see paragraphs [49] to [51] of the respondent’s submissions in reply.

What is relevant are the terms of the offer when it was made: see paragraph [45] of the respondent’s submissions in reply.

Furthermore, the applicant’s use of the concept “rescind” in the circumstances of this application are entirely misconceived.

83.     Issue 2 (paras 57 to 75 inclusive).

The applicant submits that “The delegate erred in finding that the applicant breached ss 727 and 708 in regard to the ProCorp offer”.

84.     As to paras 70 and 71:

The applicant submits there were four categories of parties who received ProCorp offer documents, namely:

(i)49 non CAPL client development company existing lenders, who received 64 ProCorp loan agreements (these offers were processed under s 708(15) in that they did not transfer their existing securities and there was no consideration);

(ii)5 CAPL client development company existing lenders, who received 6 ProCorp loan agreements (these offers were also processed under s 708(15));

(iii)1 new investor (offer made pursuant to s 708(10)); and

(iv)remaining investors (48) were not as a result of offers made through CAPL.

The respondent does not take issue with the categories of offerees as set out by the applicant.  However, in respect to the fourth category, it would appear that some of these investors were given a copy of the Information Memorandum.

For the reasons set out in paragraphs [75] to [77] of the respondent’s submissions in reply the respondent contends that offers made to existing development company entities, construed in the context they were made, were not an excluded offer under s 708(15).

It should be noted that in his evidence Mr Maxwell stated that all investors were given the same documentation, namely the Information memorandum and the letter of offer (T25 at 59, 13-21).

85.     As to paras 72 and 73:

The applicant asserts that in para 73 of his reasons the delegate confirmed that the 54 offers in categories (i) & (ii) were offers made under s 708(15).

The respondent states that this misreads the paragraph.  The delegate is merely making an observation about the applicant’s argument, which he does not accept.  For the reasons set out in paragraphs [75] to [77] of the respondent’s submissions in reply the respondent submits that the tribunal should also reject the applicant’s argument

The applicant further submits that, the alleged loan agreements with ProCorp were not “debentures” as defined in s 9 of the Act as there was “no undertaking by a body to repay money deposited with or lent to the body. No monies were deposited or lent to ProCorp.”

The respondent contends that the applicant’s application is utterly misconceived: see paragraph [64] of the respondent’s submission in reply.

The applicant further submits that, “The ProCorp Gosford shares and ProCorp investment loan agreements are additional not replacement securities issued which do not confer additional benefits to the related development company lenders.”

The applicant also sets out reasons why a new offer to existing development company lenders were not made and their existing agreements not “terminated”.  In this regard he refers to the letter of 3 September 2002 that was sent to development company existing lenders.

The respondent replies that this contention of the applicant is a “nonsense”. Nor does the letter of 3 September 2002 from Mr Maxwell to existing development company lenders support what is claimed by the applicant. The evidence is that this letter preceded receipt of the ProCorp offer. Furthermore, the letter expressly foreshadowed a new system of investing by use of an excluded offer under s 708(10). As set out in paragraphs [29] to [33], [40] to [46] and [70] to [72] and [75] of the respondent’s submissions in reply, for the purpose of determining whether an offer is an excluded offer within the terms of ss 708(10) or (15) regard is had to the nature of the offer when it is made.

Although not relevant it is noted that existing development company investors who accepted the offer of a security in ProCorp, did in fact execute a new loan agreement, with ProCorp being named as the borrower (see T25 at 66, 12-17 and T50 at exhibit DC7 to affidavit of David Richard Murray Coombes, T51 at exhibit MCH 13, 14 and 15 of the affidavit of Miled Chris Habib and T52 at exhibit ICM tab 21 of the affidavit of Ian Crawford McGregor).  The status of the existing loan agreements and the new loan agreements is not a matter for determination by the tribunal.

86.     As to paras 62 to 64:

The applicant argues that the delegate was disingenuous and selective of the evidence in stating at para 62 that the applicant indicated that the ProCorp offer was a “trial to familiarize investors with the proposed future fundraising method”.  There was nothing “queer” in the offer letters being personalised as stated by the delegate at para 63.

The delegate was selectively biased in his consideration of the evidence of Mr Maxwell when making his findings at para 64 and 87 (whether non CAPL investors in ProCorp received statements of reasons).

The respondent submits that the assertions of the applicant are made without any foundation.  In all other respects the findings of the delegate were available on the material before him.

87.     As to para 73:

The applicant submits that Mr Nicholas and his wife were the one new investor referred to CAPL by Oceanwalk and to whom an offer was made pursuant to s 708(10).

The respondent replies that the evidence in regard to Mr Nicholas is not disputed.

The applicant further submits that, the delegate failed to take into account that the category (iv) lenders were not investors to whom CAPL issued a letter of offer with attached Statements of Reasons.

The respondent replies that the material relied on by the applicant does not support his assertion that the category (iv) lenders were not given the letter of offer and Statement of Reasons.

What the evidence does disclose is that 119 ProCorp loan agreements were executed (T53).  Of these the applicant acknowledges that he prepared the documentation for 71 of these (T21 and para 67 of the delegates statement of reasons).  Yet the remaining loan agreements were in the same terms as those that formed part of the ProCorp Information Memorandum (T11).  The inference to be drawn from this is that these investors were at least given a copy of the Information Memorandum.  The respondent contends that this is sufficient to constitute an offer, particularly as it was acted upon by the offeree.

The applicant further submits that, the evidence is that CAPL was only responsible for ProCorp section 708(10) new investors and it was not open to the delegate to find that:

(a)the applicant was responsible for new investor funds to be placed in the CMT and released in accordance with the investors stated purpose;

(b)the applicant ought to have been aware of ProCorp’s fund raising activities and that it raised funds from more than 20 persons in 12 months.

The respondent contends that there can be no dispute that the ProCorp Information Memorandum, forwarded to offerees, contained a representation that the money loaned would be placed in a CMT and that CAPL was a signatory to that account and that monies would not be released from that account unless CAPL was satisfied that it was to be used for the purpose the lender had intended (T11 at page 3).  The question is whether that representation was misleading.  It is the respondent’s contention that on the applicant’s own evidence this representation was false as there was no intention to place the investment of offerees who were existing development company investors into this fund.

For the reasons set out in paragraphs [81] and [82] of the respondent’s submissions in reply, the respondent submits that there can be only one conclusion from the evidence before the tribunal; namely that the applicant was at all times aware that the ProCorp offer did not fall within the terms of s 708(1) of the Act.

88.     Issue 3 (paras 76 to 110 inclusive).

The applicant submitted that “The delegate erred in finding that the applicant had failed to meet the requirements of s 708(10)”.

89.     As to para 82:

The applicant submits that the delegate erred in rejecting the letters CAPL provided to Clarissa Wilson, Werner Gruenbauer and Beverly and Gerard Evans for the purpose of demonstrating that the applicant had satisfied the requirements of s 708(10) when he completed their respective Statement of reasons.

The respondent contends that the delegate did not err in rejecting the letters as they all predated the offer and related to earlier investments (1999) made by these investors.

The applicant further submits that it is incorrect to say that the applicant only spoke to one investor in ProCorp Gosford, Mr Trinhn, when completing the Statements of Reasons.  The applicant had provided an analysis of 21 of CAPL clients (T40 Annexure M) and affidavits from Mr Murphy and Mr Nash (T40) which provided to the contrary.

The respondent contends that the analysis referred to by the applicant is not attached to his statement that is at T40. In any event any analysis that was made by the applicant was historical in form and did not satisfy the requirements of s 708(10)(b): see paragraphs [29] to [30] of the respondent’s submissions in reply.

The respondent also notes that in their affidavits, as provided by the applicant, Mr Murphy and Mr Ash make no mention of enquiries having been made of them, by the applicant, at the relevant time when the ProCorp offer was made to them.

90.     As to paras 88 and 89:

The applicant submits that during the hearing before the delegate the applicant gave evidence of having sufficient knowledge about CAPL clients to complete the s 708(10) Statement of Reasons (T39, at 90, 22-28 and at 91, 1-2).

The applicant further submits that with respect to existing development company lenders they would not be the subject of s 708(10) until they reinvested or made new investments.

As stated above, the respondent contends that the historical information about clients is not sufficient to meet the requirements of s 708(10).

The respondent further contends that the applicant has once again misconceived the operation of s 708(10) of the Act. As set out in paragraphs [26] to [32] of the respondent’s submissions in reply the time at which an offer under s 708(10) is to be considered is the time when the offer was in fact made. In this application that was when the applicant forwarded the offers to the respective offerees or when the offers prepared by the applicant were forwarded to offerees on his behalf (T51, 52 and 53).

91.     As to paras 91 and 92:

The applicant submits that delegate erred in finding that the applicant advised ProCorp and ProCorp Gosford to utilize s 708(10) & (15) to “circumvent” the 20/12 restrictions in subsection 708(1). These exclusions are legitimate exclusions.

The respondent contends that this a misreading of the delegate’s findings. What the delegate is saying is that the applicant cannot rely on ss 708(10) and (15) as the requirements for those provisions were not met.

The applicant further submits that, “The delegate is claiming that CAPL became a licensed securities dealer purely so that it could undertake section 708(10) issues for the ProCorp entities. This is incorrect.”

The respondent again contends that this is a misreading of the delegate’s decision.

92.     As to paras 93 to 99:

The applicant submits that the delegate erred in finding that the applicant relied on the Investor Fact Finding he completed for Mr Nicholas when completing the Statement of Reasons.

Again to the extent that the applicant’s submissions contain evidence these are objected to by the respondent.

The respondent further contends that otherwise the findings of the delegate were open on the evidence, and even if incorrect, they do not impact on the overall finding that the applicant did not make relevant enquiries of the remaining investors for the purpose of s 708(10)(b): see paragraph [71] of the respondent’s submissions in reply.

93.     As to paras 105 to 107:

The applicant again submits that existing development company investor’s security was not affected by the ProCorp offer and that they would only become affected if they re-invested their money subsequently.

Again, the respondent contends, the status of investor’s security in existing development companies when subsequent offers were made to these investors for the issue of a security in ProCorp is not a matter for determination by the tribunal.  What the tribunal is required to determine is the nature of the ProCorp offer at the time it was made and in any event the respondent does not concede that the agreements that were entered into by these investors had the effect contended for by the applicant.

94.     As to para 108:

The applicant contends that the delegate’s findings that he did not have reasonable grounds to be satisfied that the persons to whom the offers were made or for whom he prepared and signed a Statement of Reasons had the requisite previous experience to enable them to assess those particular offers was incorrect.

The respondent contends that the findings were available on the evidence.  In regard to CAPL clients, the evidence is that in general the applicant only relied on historical information.  In regard to non-CAPL clients, the applicant acknowledged that he had no information other than what was provided by others: see paragraphs [29] to [33] and [71] and [72] of the respondent’s submissions in reply.

95.     As to para 109:

The applicant submits that the delegate erred in finding that the ProCorp Gosford Information Memorandum did not contain the s 708(10)(d) written acknowledgment by the offeree that the dealer has not given him/ her a disclosure document.

The respondent replies that the applicant’s submission is misconceived and the respondent relies on paragraphs [35] and [36] of its submissions in reply. In this regard, it is submitted that the acknowledgement in the body of the Information Memorandum (T19 page 5 of 6) fails to meet the requirements of s 708(10)(d) as this was not the document that the offeree would sign.

ProCorp Gosford Share Issue

96. The applicant describes this issue as “the key” to the case (Exhibit A2, p3), no doubt rightly. The necessary elements of a contravention of s 727 of the Act in regard to the ProCorp Gosford offer are, in the context of this case:

(a)did the applicant, as the authorised representative of CAPL:

(i)make an offer to potential investors for the issue of shares in ProCorp Gosford?  Or

(ii)distribute an application form for the issue of shares in ProCorp Gosford?

(b)was a disclosure document in regard to the offer lodged with the respondent?

(c)was a disclosure document not required as the offer came within the terms of s 708 of the Act? In this application the relevant provisions are s 708(1) (a small scale offering), s 708(10) (an excluded offer in that it was an offer through a licensed dealer) and s 708(15) (an excluded offer in that it was an offer for no consideration).

97.     As is pointed out in Australian Securities & Investments Commission v Australian Investors Forum Pty Ltd (No. 2) [2005] NSWSC 267 at [97] to [101] and Australian Securities & Investments Commission v Australian Investor’s Forum Pty Ltd & Ors (No.2) (2005) 53 ACSR 305 at [98], for s 727 of the Act to operate there must be an “offer” and it must be “made”. Those are both questions of fact to be determined on the circumstances of each case.

98.     As to the first element, it is not disputed that the 24 investors listed on the ProCorp Gosford investor register (T22), prepared by the applicant, were each forwarded a copy of the ProCorp Gosford Information Memorandum (T8) and a personalised letter of offer (T19), which had attached to it a pro forma Statement of Reasons that had been completed and signed by the applicant (T18). 

99. The express terms of the Information Memorandum and letter of offer can only be construed as being an offer of shares in ProCorp Gosford that was being made through CAPL. That is, it was these documents that constituted the “offer of securities” for the purpose of s 727(1) of the Act. Furthermore, each “offer of security” was “made”, for the purpose of s 727 of the Act, when these documents were forwarded by the applicant, as the authorised representative of CAPL.

100. The first essential factual ingredient of a breach of s 727(1) of the Act by the applicant in respect to the ProCorp Gosford offer has thus been satisfied.

101. In relation to the second element, there is also no dispute that no prospectus was lodged with the respondent in respect to the offer of shares in ProCorp Gosford and on this basis the tribunal must find that the second essential factual ingredient of a breach of s 727(1) of the Act by the applicant has been made out.

102.   That leaves the third element, namely whether the offer did not require a disclosure document by reason of one or more of the offers being a “small scale offering” (s.708(1)), or an “excluded” offer (s.708(10) or (11)).  For the reasons set out below I have found that the evidence fails to establish that the offers were a “small scale offering”, or an “excluded” offer.  As an “excluded” offer is not to be counted for the purposes of a “small scale offering” it is convenient to deal with that aspect first.

S.708(10) – was the offer an excluded offer by reason of it being made through CAPL, a licensed dealer?

103. Whether the offer of an issue of shares in ProCorp Gosford was an excluded offer under s 708(10) of the Act turns on the following questions:

(a)was the offer of shares in ProCorp Gosford being made through a licensed dealer (the applicant) (s 708(10)(a))?

(b)did the licensed dealer (the applicant), before the making of an offer, satisfy itself on reasonable grounds that the person to whom the offer was to be made had previous experience in investing in securities that allowed that person to assess the merits of the offer, the value of the securities, the risks involved in accepting the offer, their own information needs and the adequacy of the information given by the applicant (s 708(10)(b))?

(c)did the licensed dealer (the applicant) give the offeree before, or at the time in which the offer was made, a written statement of its reasons for being satisfied of the matters in para 103(b) above (s 708(10)(c))?  and

(d)did the offeree sign a written acknowledgement before, or at the time the offer was made that the licensed dealer (the applicant) had not given the offeree a disclosure document in relation to the offer (s 708(10)(d))?

104. In order for an offer to be an excluded offer under s 708(10) of the Act, each of the abovementioned requirements must be satisfied. If the evidence fails to satisfy one essential factual ingredient, the offer in question will not qualify as an excluded offer under s 708(10) of the Act.

105. There is no dispute that at the relevant time CAPL was a licensed dealer and that the applicant was its authorised representative and that the applicant engaged in the relevant conduct in respect to the offer. Accordingly, the first ingredient, s 708(10)(a), is satisfied.

106.   The applicant stressed that there are no statutory criteria explaining the phrase “reasonable grounds”.  That is true, but in ASIC v Elm Financial Services Pty Limited [2005] NSWSC 1065 at [10] to [11] Barrett J made the following observations about the stringent requirements of s 708(10)(b), the second essential factual ingredient that must be satisfied:

… s 708(10) casts particular responsibility upon a financial services licensee.  The requirement that the licensee be “satisfied on reasonable grounds” as to the matters stated in s 708(10)(b) is one that must be approached with diligence and care.  The licensee has a statutory duty to make enquiry about all matters relevant to the opinion it must form and then, of course, to consider whether, in the factual circumstances, there exists the reasonable grounds for it to be satisfied as to the matters stated.  Woolly thinking about some general concept of “sophisticated investor” is entirely misplaced.

…

107.   In relation to the second factual ingredient, the evidence establishes the following:

§for each offeree (24) the applicant completed a pro forma Statement of Reasons which enabled the applicant to tick a box against one or more of the specified reasons, which included a box for any other reason (T18);

§of the 24 Statements of Reasons he completed, 5 were for investors who were not his clients (T22).  He did not speak to those investors but relied on information provided to him by others (T24 at [21] to [27]); and

§in respect of the remaining investors with one exception, Mr Trinh, the applicant completed the Statement of Reasons from his own historical records of the investments that had been made by his clients (T46 at [1] to [3] and T25 at [55] to[61]).

108.   The evidence establishes that the applicant failed to approach his statutory responsibilities with the requisite diligence and care.  With one exception, he relied on historical records retained by him or provided to him by Mr Fortune.  While the applicant contended that he spoke to some clients, he has drawn to the tribunal’s attention no contemporaneous record of having spoken to any one of these clients about this specific offer or that he made any enquiry about their financial position at the time.  The evidence is to the contrary (see: (T30 letter from Wilson).

In respect to future seed capital investments for other projects, we are introducing a new system of loan contracts for all seed capital investors.  The new excluded offer is proposed to be made through a financial services licensee in accordance with s 708(10) of the Corporation Act 2001, and the offer material will comprise three documents:-

1A letter of offer from the financial services licensee, offering a loan investment opportunity to lend monies to a new investment company ProCorp Investments Pty Ltd, as well as a Statement of Reasons as to why you may qualify for the offering, and an investment Recommendation from the financial services licensee

2An Information Memorandum which provides further information on the loan offering and the loan Agreement Terms

3A Loan Agreement Execution Deed which incorporates the Loan Agreement Terms for signing

The purpose of this new system is to allow us to move past the 20 investor limit and to ensure that we comply with the fundraising provisions of the Corporations Act 2001 in raising monies for our other property development projects. I or Don Maxwell may personally contact you to show you how this works and to answer any questions that you may have. We expect that the new excluded offering will operate on a 6 monthly turnaround schedule which will give investors a fixed exit strategy as well as a rollover opportunity should the investor wish to reinvest.

I look forward to communicating with you again shortly.

Best regards

Malcolm Fortune

General Project Adviser

152.   The applicant submitted that the letter, containing no reference to consideration, supported his proposition that there was no consideration involved.  But most of the ProCorp offers were made before the date of the letter.  All except the last four were made before it.  Compliance as at the date on which the offer was made is critical.

153.   However, the fact that it makes no reference to consideration does not go far in establishing that there was in fact no consideration.  That would be a matter of such importance that one would expect to see it specifically mentioned.  The references to “loan contracts” and “loan investment opportunities” suggest normal contractual arrangements of which consideration could be expected to form part.

154.   Furthermore, for the reasons set out in paragraph 127 above, the status of the loan agreements of existing development company investors is of no relevance to the matters for determination by the tribunal.

155. I therefore conclude that the ProCorp offer was not an excluded offer under s 708(15) of the Act, as the second ingredient is not supported by the evidence.

156.   The same factual ingredients as set out in paragraph 129 above must be made out if the tribunal is to find that the ProCorp offer resulted in a “small scale offering” under s 708(1) of the Act. They are:

(a)the offers were personal offers; and

(b)the offers must not have resulted in:

(i)the issue of securities to no more than 20 investors in a 12 month period; and

(ii)the amount raised by the body in issuing the securities exceeding $2 million

157.   There is no dispute that the offers made by the applicant were personal offers and that they resulted in 71 loan agreements being entered into between investors and ProCorp (T21).  Again, of those 71 investors in ProCorp, all but one investor had already invested in another property development entity in the Fortune group of companies.  Further, the evidence is that the offers and subsequent acceptances thereof were all made within a 12-month period and that the amount raised from those investors was $4.927 million.  

158. If the tribunal finds that the ProCorp offers were not excluded offers under s 708(10) or 708(15) then it must find that the offers resulted in the issue of 71 securities in ProCorp within 12 months and that the amount raised from those investors exceeded $2 million. On that basis the offers in ProCorp were not a small scale offering coming within s 708(1) of the Act.

159. For the reasons set out above, I find that in regard to the ProCorp offer (issue 2), the evidence establishes that the applicant contravened s 727 of the Act, as:

(a)the applicant, as the authorised representative of CAPL, made an offer of debentures in ProCorp and distributed a form for such an offer; and

(b)the offer made by the applicant needed a disclosure document as it was not an offer that came within the terms of s 708(1), (10) or (15) of the Act; and

(i)no disclosure document was lodged with the respondent for that offer.

160.   The findings in relation to issues 1 to 3 make it unnecessary to deal with issues 4 to 7 inclusive.

ISSUE 8 – THE BANNING ORDER

161. The power to make a banning order rests in this case, as was noted above, on s 920A(1)(e) and (f). Also relevant is ASIC regulatory guide 98, Licensing: Administrative Action Against Financial Services Providers (April 2006).

Submissions

162.   The applicant made the following submissions on this topic (Exhibit A2, pp51-52):

…

Overall Conclusion

I hope I have shown throughout this presentation that I acted without any intention to contravene any sections of the Acts and that I acted in good faith and with legal advice which appeared to me to be reasonable and compliant with the law.

As expressed at the beginning of this submission I am not only upset that my own clients lost money but also for other non CAPL lenders.  As also stated at the beginning it is even sadder to know that lenders would have recovered their loan amounts, if not in total then a large portion of, but for the actions of the Procorp and development company directors who, contrary to IM provisions, allowed cross collateralisation to a development Lender across the other development companies.  This is confirmed by Mr Burnett in the Hearing Transcript (T49 page 206).

I also disclosed at the outset that neither I personally nor CAPL took any fees or commissions from Oceanwalk, the procorp companies or any affiliated parties nor any lenders including CAPL clients.  I declined to take any fees from non CAPL clients as confirmed by Mr Fortune in his Examination Transcript (T26\SBA178986 page 39\D39).  I did no consider I had provided any investment advice to these development company existing lenders and the provision of the Procorp Gosford and Procorp offer documents to these parties was an administrative not an investment matter.  In respect to my own clients I took the view that fees should not be deducted from the amount they invested and that I should only receive a fee when they ere repaid (T24\SBA058812\D39 pages 35 to 37 and 62 & 63 of my Examination Transcript).

As noted by the Delegate in Concern 158 I have been involved in the finance sector for just on 40 years and have occupied senior management positions in major financial organisations before establishing my own financial advisory business just over 10 years ago.  What I have found most rewarding about practising as a financial adviser is the opportunity to reconnect with individuals and small business owners and to assist them achieve their financial objectives.  This matter is the first time in 40 years I have fallen foul of the regulatory authorities and is not something I intend to experience again.  It has been a very salutary and chastening experience but one I can put to the benefit of clients if permitted to resume practising as a financial adviser.

As at the 22^nd of August the period of time I have been banned from practising as a financial adviser will total 19 months.  In addition I have had a further 16.5 months within which I was only able to provide advice to existing clients.  That is, a total 35.5 months where I have been either totally baned [sic] or resticted [sic] to advising my existing clients.  This matter started in August 2003 when I was examined the ASIC.  Over this 4 year time period I have had to devote the majority of my time to related matters such as the Equity Court proceedings and the two hearings conducted by ASIC as well as this appeal.  It has not only been an unpleasant experience for me personally but made worse by the effect on my wife and two daughters.

A four year ban for a person aged 62 (now 64) at the date of the the banning is a lifetime ban effectively eliminating me from being able to practice as a financial adviser.  I hope I have provided sufficient arguments to prove that the Delegates [sic] findings, if not in total, then to a considerable degree are unfounded and the 4 year banning irrespective of age is harsh and unconscionable.  I have no wish to provide financial advice other than to existing clients who still wish for me to be able to resume advising them as witnessed by the letters of support provided by a sample of clients (AM21).  The only other advice work I would contemplate would be for person’s [sic] referred by existing clients and for two accountancy practices who in the past have sought my assistance.  I have no desire to ever be involved in promoting fundraisings[.]

In conclusion I ask this body to take into consideration the 4 years of hell including the 35.5 months of total ban and resticted capability to advise are enough and that I now be able to resume providing financial advice on the above suggested basis with a total release from any restrictions in 12 months' time other than a permanent restriction on any active promotion of fundraisings.

163. The respondent submitted that if there has been a breach of the Act, a period of banning is the appropriate regulatory outcome. The appropriate question is the period of the banning order (see Re Hayes and Australian Securities and Investments Commission [2006] AATA 1506, DP Purvis). The tribunal should find both that the applicant has not complied with a financial services law within the meaning of s 920A(1)(e) and that there is reason to believe that the applicant will not comply with the financial services law, as provided in s 920A(1)(f).

164. The applicant's conduct, the respondent submitted, was such as to warrant the making of a banning order. It amounted to a fundamental breach of the disclosure requirements under the Act and of CAPL’s license. The main purpose of those requirements and conditions is to protect the public, so that they are able to make properly informed decisions when investing in the market. The applicant, as the authorised representative of CAPL, a licensed dealer, was in a privileged position and offerees were entitled to be confident that he fully understood and appreciated the relevant statutory requirements and that the offers were made in accordance with them. Throughout the proceedings, the applicant has continued to demonstrate a lack of understanding of the breaches and the consequences flowing from them. The two-year disqualification order made by Brereton J in Maxwell must be viewed in the context in which it was made, and a longer banning period is warranted by the subject matter of the present application.  Anything less would fail to give due regard to the seriousness of the offending conduct.

165.   The conditions that the applicant seeks to place on the banning order indicate, the respondent submits, in themselves the applicant’s lack of understanding of the requirements.  He seeks to continue providing financial services to a limited number of existing clients during the term of his banning order.  But he could do so only as an authorised representative of an Australian financial services license holder.  At present CAPL does not hold such a license and as a result of the orders in Maxwell, the applicant is currently disqualified from managing a corporation, which prevents him from being a director and applying for a license on behalf of CAPL. He has not provided any evidence of any other prospective license holder. In any event few license holders would be prepared to take on additional responsibilities to ensure the proper conduct and monitoring of an authorised representative who was the subject of additional conditions beyond those imposed by the Act. Those conditions would result in complicated and problematic monitoring and compliance obligations for the license holder.

166.   While conceding that the evidence does not show a fraudulent or dishonest intent in the applicant in committing the breaches, the respondent argued that it does show that they were committed with a measure of reckless indifference.  To rely on the advice of others is not enough to absolve a person of his or her responsibilities.  The applicant could and should have sought independent advice if he was at all concerned about his role.  While the applicant did ultimately become concerned about his role, that concern arose only after the offers had been made through CAPL.

167.   The respondent submitted in conclusion that the delegate’s decision of 6 September 2004 was the correct and preferable one and should be affirmed.  It also contended that the period during which the tribunal stayed the decision of the delegate pending the resolution of the Supreme Court proceedings (about 16 months) should be excluded from the period during which the banning order is to operate.

Evidence tendered after the hearing

168.   Some two weeks after the hearing concluded, the respondent sought leave to file additional evidence, an audit inspection report dated 24 August 2006 addressed to the applicant from Tony Begg (actually Tony Bogan), compliance officer, Professional Investment Services Pty Limited, stating that it had just been provided to the respondent.  The applicant objected to the tender, but I admitted the evidence.

169.   The report was the result of an audit of the applicant’s activities as an authorised representative of an Australian Financial Services licensee on 22 August 2006.  At the time a conditional stay order of ASIC’s decision to ban the applicant from providing any financial services was in force.

170.   The audit report rated the applicant as “a fail”, as there was no evidence that a financial services guide (FSG) had been provided or retained by the applicant in respect of services he provided to his clients.  In addition, Client Data Forms or Review Client Data Forms in relation to all three of the client files randomly selected for audit were not sighted.

171. The respondent argued that the report was such as to give reason to believe that the applicant would not comply with a financial services law, in accordance with s 920A(1)(f) of the Act. It showed that after the conduct of the subject of the reviewable decision, the applicant continued to operate without complying with legislative requirements.

172.   The applicant responded by saying that the FSG is a generic, not a personally addressed, document provided to a client when first met.  At the time of the audit inspection report he was restricted to dealing with existing clients.  All existing clients had received FSGs when first met or when a change in FSG content so required.  As a generic document, FSGs were not filed in individual client folders.

173.   As regards the client data forms, the applicant stated that at the time of the audit, Mr Bogan, the auditor, mentioned that the files he had examined did not contain the forms.  The applicant had informed him that the forms were not in the client’s current files, but were in files which, because of space constraints, he stored on the premises and could be shown to Mr Bogan if he wished to see them.  Mr Bogan had said that was not necessary.

174.   Apart from providing clients with financial advice, the applicant said that he processed client transactions maintaining current portfolio and bank account information, and prepared annual returns, the most recent of which were kept in current files.  This was a substitute for, and provided more comprehensive client information than, that which would be included in any of the usual client data forms.  Investment advisers do not generally process and maintain current portfolio and bank account information, and therefore would need, in the absence of such information, to update client data using client data forms and review data forms.

175.   The applicant had wished to discuss these matters with Mr Bogan after the audit and for that purpose telephoned him to ask if he could contact the applicant to discuss the report.  He also sent a fax to the same effect.  Mr Bogan did not, however, contact him, so he had no opportunity to deal with the matters raised in the report.

176.   The applicant in his response also made certain criticisms of the manner in which the respondent had conducted its side of the proceedings, and specifically of its tendering new evidence after the hearing, but those criticisms lacked substance.

177.   Subsequently, the applicant also tendered August 2006 income and portfolio documents for the clients Miss Stavridis, Mr Beatie, and Mr and Mrs Murphy.  By such means, he submitted, he maintained up-to-date knowledge of his clients.

178.   The respondent replied that the fact that the applicant made no further contact with Mr Bogan, nor did he seek independent advice about the audit findings, showed that he was not prepared to ensure that he became aware of those requirements and complied with them.

179.   In my view, the applicant’s attempts to contact Mr Bogan by telephone and by fax represented a genuine effort on his part to set the record straight, as he saw it, in relation to his compliance with statutory requirements.  Further, the respondent in its reply did not argue that the records he tendered in relation the Stavridis, Murphy and Beatie accounts did not constitute substantial compliance with the legislation scheme.  Nor did it challenge his statements about the FSG or his offer to show the separately stored client data forms to Mr Bogan.

180.   In my view the applicant has adequately explained the adverse audit findings and the new evidence does not take the evaluation of the banning order issue any further.

Consideration

181. As I have already found that the applicant committed breaches of s 927 of the Act in relation to both the ProCorp Gosford and the ProCorp offerings, the requirements of s 920A(1)(e) are met.

182. As regards the requirements of s 920A(1)(f), the respondent’s position is that the applicant’s use of statutory exclusions in order to “circumvent” the disclosure requirements, his failure to consider the ramifications for investors of lending unsecured moneys to ProCorp to be on-lent by that entity to third parties, his willingness to allow his name and license to be used without ensuring that the required safeguards had been observed, and his conduct of the current proceedings themselves showed that he might not in future comply with a financial services law.

183.   I do not think the evidence on this point is clear-cut, however.  While the applicant has attempted to show his past conduct in a more favourable light than can be justified by the evidence, I do not think that means that he would be likely to act in the same way in the future.  It is clear from his submissions, and consistent with his conduct in recent times, that he has experienced the various proceedings and the banning period to date as a life-altering trauma and that he will strive to avoid placing himself in a similar situation again (see Hayes at [69]-[71]. I therefore prefer not to make a finding in terms of s 920A(1)(f).

184.   Nevertheless, the seriousness of the breaches, and the fact that they did not form part of an isolated instance but occurred over a significant time period, prima facie make a banning order appropriate.

185.   The principles to be applied in this context are expressed in several cases and largely reproduced in regulatory guide 98.  In Farley v Australian Securities Commission (1998) 16 ACLC 1502, 1521, the purpose of a banning order was stated to be preventive rather than punitive in nature and having the purpose of removing a possible threat to the public interest and to public confident in the securities industry by excluding that person from participating in it.

186.   The High Court in Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 held that while imposing a disqualification order under the Act was intended to be preventive, its effect once imposed was also punitive (at [37] and [52]).

187.   On the other hand, in Story v National Companies and Securities Commission (1988) 6 ACLC 560, 581, Young J pointed out that there is a public interest that people should be permitted to follow a trade or profession that they are qualified to engage in. But the public also expects that those who fall short of the profession’s minimum standards should be removed from it, at least until the regulatory body can be assured that they are able to perform their functions efficiently.

188.   Santow J in Re HIH Insurance Limited (In Prov Liq) and HIH Casualty and General Insurance Limited (In Prov Liq); Australian Securities and Investments Commission v Adler & Ors (2002) 42 ACSR 80, 97-99, usefully summarised the principles governing banning and disqualification orders and set out the principles applying to the assessment of an appropriate length of prohibition. The scales of responsibility that his Honour identified are paralleled in regulatory guide 98, table 2, although not exactly. For these purposes I think regulatory guide 98 should be treated as the appropriate standard.

189.   On that basis the applicant falls within the middle category, which is stated as warranting banning from three to ten years.  The applicant’s contraventions satisfy two of the four factors in that category, namely “A significant loss” and “Incompetence and irresponsibility but with the possibility that the person may develop requisite skills and abilities”.  The guide does not suggest that all four factors must be present, but the fact that two of them are not met in this case suggests that the applicant’s conduct falls at the lower end of the scale of responsibility.

190.   Table 2 does not mention the concept of reckless indifference in any category, but it appears in table 1 as part of the key factors to be considered by ASIC in deciding to take administrative action.  In that table it is listed at the higher end of the factors relevant to the nature and seriousness of the misconduct.

191.   The legal concept of recklessness usually entails the conscious disregard of a known risk.  The evidence does not support a finding to that effect, although the applicant's conduct in signing statements of reasons in respect of persons who were not his clients on the basis of information obtained from others, and seeking to use statutory exclusions in order to avoid the disclosure requirements, certainly comes close.

192.   On the basis of the principles as enunciated in the cases and in regulatory guide 98, I consider that the four-year ban imposed by the delegate was appropriate in the circumstances.

Effective date

193.   The respondent submitted that the term should not run from the date of the delegate’s decision on 6 September 2004 but should be altered so as to exclude the period during which the tribunal’s conditional stay order was in effect, that is from 27 May 2005 for 16 months.  The applicant opposes that on the basis that for most of the period following the date of the stay order he was fully occupied in defending the equity proceedings and subsequently preparing for, and conducting, the present proceedings.  For most of the time, therefore, he was effectively unable to practise, so that he had for practical purposes been subject to banning for 40 months already.

194.   I note that it has not been suggested that the applicant failed to comply with conditions of the stay or that he committed, or may have committed, any other contraventions of the law during that period, except in relation to the August 2006 audit, which he has adequately explained.  In those circumstances I do not think it appropriate to alter the commencement date of the ban or, consequently, its expiration date of 7 September 2008.

195.   The decision under review is affirmed.

I certify that the 195 preceding paragraphs are a true copy of the reasons for the decision herein of Professor GD Walker, Deputy President

Signed:   .............................[sgd]..............................................
               Renee Wallace, Associate

Date/s of Hearing:  21 & 22 August 2007, 29 January 2008
Date of Decision:  28 March 2008
Solicitor for the Applicant:                  Unrepresented
Solicitor for the Respondent:             Sarah Le Breton, ASIC
Counsel for the Respondent:           Sigrid Higgins