De Souza and Australian Securities and Investments Commission
[2009] AATA 725
•22 September 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 725
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/1560
GENERAL ADMINISTRATIVE DIVISION ) Re DERRICK DE SOUZA Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Mr S E Frost, Member Date22 September 2009
PlaceSydney
Decision The decision under review is set aside. Instead the Tribunal decides that Mr De Souza is not prohibited from providing financial services.
....................[Sgd].......................
Mr S E Frost
Member
CATCHWORDS
CORPORATIONS – Finance – Australian financial services license – Whether Australian Securities and Investments Commission decision to issue banning order was correct or preferable – Whether there is reason to believe that the Applicant will not comply with a financial services law – The decision under review is set aside.
RELEVANT ACT
Corporations Act 2001 – sections 9, 727, 734, 911C, 912A, 916A, 920A, 1041H
CASE LAW
Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543
Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602
REASONS FOR DECISION
22 September 2009 Mr S E Frost, Member Introduction
1. On 30 March 2007 a delegate of the Australian Securities and Investments Commission (ASIC) made a banning order against Derrick De Souza under s 920A(1)(f) of the the Corporations Act 2001 (the Act). The banning order prohibited Mr De Souza from providing any financial services for a period of two years.
2. On 27 April 2007 Mr De Souza applied to the Tribunal to have the decision of the delegate reviewed.
3. I have decided that the decision under review should be set aside. For the reasons that follow, I consider that it is not appropriate that Mr De Souza should be prohibited from providing financial services. The effect of this decision is that no banning order has been made against Mr De Souza.
Issues
4. The central issues before the Tribunal in this case are:
· whether an order, pursuant to section 920A(1)(f) of the Act, prohibiting Mr De Souza from providing financial services is the correct or preferable decision; and
· if an order prohibiting Mr De Souza from providing financial services is justified, for what period of time should he be prohibited.
The parties’ contentions
5. ASIC bases the banning order on its having “reason to believe” that Mr De Souza will not comply with a financial services law. That “reason to believe” is, in turn, based on certain irregularities in the activities of FPA and CCS, and on what ASIC says are Mr De Souza’s responsibilities in relation to the activities of those companies. In summary, ASIC says that:
(a) Mr De Souza was at all material times “a director and/or responsible officer and/or compliance officer of [FPA] and/or [CCS]”;
(b) FPA did not comply with s 912A(1)(ca) of the Act;
(c) CCS did not comply with ss 727(2), 734(2) and (6), and 1041H of the Act; and
(d) Mr De Souza failed to take sufficiently seriously the need to comply with the relevant financial services laws.
6. Mr De Souza accepts paragraph (b) (TS 12.3) and he conducted his case on the basis that paragraph (c) may also be accepted. At the heart of his case, though, are the contentions that:
(a) he has not personally failed to comply with a financial services law;
(b) he was not responsible, or at most he had a shared responsibility, for FPA’s and CCS’s compliance with the financial services laws; and
(c) in any event, there is no reason to believe that he will not comply with a financial services law.
7. In summary, Mr De Souza submits that there is no justification for a banning order under s 920A(1)(f) of the Act.
Relevant legislation
8. Section 920A(1) of the Act says:
(1)ASIC may make a banning order against a person, by giving written notice to the person, if:
(a)ASIC suspends or cancels an Australian financial services licence held by the person; or
(b)the person has not complied with their obligations under section 912A; or
(ba)ASIC has reason to believe that the person will not comply with their obligations under section 912A; or
(bb)the person becomes an insolvent under administration; or
(c)the person is convicted of fraud; or
(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.
9. Section 920A is found in Chapter 7 of the Act, dealing with “Financial services and markets”, and specifically in Part 7.6, which is headed “Licensing of providers of financial services”. Mr De Souza has never personally held an Australian financial services licence (“AFSL”). However, from 2 October 2003, he was a director of a company, Financial Professionals Alliance Pty Ltd (“FPA”), which had an AFSL. He was also a director of another company, Corporate Capital Securities Pty Ltd (“CCS”), which was an “authorised representative” of FPA.
Who were FPA and CCS?
10. Mr De Souza was a director of FPA from 2 October 2003 and he held all the shares in the company. On 12 September 2005, a second person, Terence Chilvers, became a director of FPA.
11. Mr De Souza agreed that he was the responsible officer of FPA. The expression “responsible officer” is defined in s 9 of the Act as:
responsible officer, in relation to a body corporate that applies for an Australian financial services licence, means an officer of the body who would perform duties in connection with the holding of the licence.
12. Mr Chilvers had come onto the scene some time in March 2005. He was the sole director and sole shareholder of CCS. He suggested to Mr De Souza that FPA issue an authorisation to CCS to provide financial services on behalf of FPA. Presumably Mr De Souza was amenable to that suggestion, and on 8 July 2005, CCS became an authorised representative of FPA, under s 916A of the Act. From that time until about February 2006, CCS did very little, although Mr Chilvers and a Mr Luvara (who had been taken on either as an employee or as a contractor) were apparently working on a newsletter, to be called The Active Investor, and which, it was planned, would be distributed to its clients.
13. In connection with FPA securing an AFSL, Mr De Souza had produced a Compliance and Procedures Manual (“FPA’s Manual”), which contained FPA’s compliance procedures. Section 4 of FPA’s Manual dealt with the responsibilities of authorised representatives, and Mr De Souza provided this section to Mr Chilvers and Mr Luvara for incorporation onto the CCS website.
Who was responsible for FPA’s and CCS’s compliance with the financial services laws?
14. The organisation chart of FPA (T47) stated that Mr De Souza was responsible for:
Monitoring ongoing compliance with AFS Licence obligations, and reporting lines.
Managing and overseeing the compliance framework, including training, breach rectification, complaints handling, conflicts of interest, etc
15. It also said that Mr Chilvers’ responsibility extended to:
Strategic direction of the company, business plans, financial resources for the company, business relationships, etc.
AFSL licence conditions compliance, corporate governance issues, financial reporting, etc
Oversee the compliance framework, liaison with external auditors.
16. In cross-examination Mr De Souza denied that he was the compliance officer of FPA. He said that there was another compliance officer, whom he named as Mr Rintoule, reporting to him. On further questioning, Mr De Souza agreed that Mr Rintoule’s role was to perform general back-office and administrative functions for FPA, and to assist the directors and responsible officers on maintaining the compliance framework. Eventually Mr De Souza accepted that he and Mr Chilvers had joint responsibility for compliance.
17. Mr Chilvers, however, saw it differently. He said, unequivocally, that Mr De Souza was the compliance officer of FPA (TS,111.17). That meant – “absolutely”. He said that it was Mr De Souza’s responsibility to ensure that there was compliance with financial services laws.
18. Now, in relation to compliance roles within CCS, this exchange took place (TS 78.39-79.8):
MR FROST: What did you mean [when] you said that Chilvers had a higher responsibility than you did?--- Privilege. What I meant was as a director and CEO of CCS, the authorised rep company, he was responsible for that compliance. My role as a director of the FPA, the licensee company, right, I had, by legislation, the Corporations Act, right, there is that – there is that responsibility overall for compliance on all the authorised reps.
So in circumstances when – you were – you were referring earlier to, and I may get the language wrong, but I hope you understand the thrust of what I’m saying. If Chilvers had problems or issues in relation to a compliance matter, he should raise it with you. I think you said something to that effect, is that right?---Privilege. Yes.
He should raise it with you not because of any role that you had specifically in relation to CCS, but because of a role that you had with FPA. Is that – is that the way you see it?---Yes.
19. He then went on to confirm with Ms Allars that he had no compliance responsibilities as a director or in any other capacity within CCS.
20. Mr Chilvers had something to say about Mr De Souza’s responsibilities. When Ms Allars asked him whether the “compliance officer or compliance director” of CCS was Mr De Souza, he said (TS 112.7-112.10):
Yes, it was understood that he would be in charge of all compliance, because that was his main function that he presented himself to me as, and I know that he was the compliance officer in terms of management and directorship on several companies.
21. The distinction that Mr De Souza was trying to draw in his oral testimony ([18] above) was not so evident in his contemporaneous notes and emails. For example, when an Active Investor newsletter issued on 19 May 2006 without his approval (see [25] below), he sent two emails, dated 26 May 2006, to John Christian (who had an IT role with CCS). The first one said (T55-800):
Just a short note to clarify that any proposed newsletter for the Active Investor should not be sent out without my compliance review and OK like the April newsletter.
22. In the second one (T55-799) he reinforced the message:
… all newsletters, marketing materials, etc that go out to the public need a compliance signoff from me as long as the newsletter says that the Active Investor newsletter is issued under CCS’s corporate authorised representative authorisation or directly under Finance Professionals authorisation.
CCS breaches the Act
23. Despite the safeguards set out in Section 4 of FPA’s Manual, by about March 2006 CCS had done some things that would cause some disquiet within ASIC and which would eventually lead ASIC to make the banning order against Mr De Souza. Various newsletters and emails distributed by CCS were found to be in breach of s 727 and s 734 of the Act (dealing, broadly, with the requirement that offers of shares, or advertisements or publications referring to share offers, must generally be accompanied by a disclosure document). The most significant breaches were:
(a) the issue of an Active Investor newsletter dated 15 February 2006 in which its clients had been offered securities in Australian Mining Investments Limited (“AUM”) but had not been provided with a copy of the AUM prospectus. The securities offering had been notified under the heading “URGENT NEWS RELEASE – Private Placement – Exclusive to subscribers of The Active Investor”, although the company secretary of AUM has stated, and Mr De Souza accepts, that AUM was not involved in any private placement of its shares with Active Investor subscribers, with CCS or with FPA. The newsletter also indicated that AUM was offering one option to every two shares subscribed, when in fact the offer involved the attachment of one option for every share subscribed;
(b) the distribution of a newsletter dated 17 March 2006 and an email dated 15 March 2006, in which CCS advertised or publicised a share offer for Gladiator Resources Limited (“Gladiator”) without the required disclosure document;
(c) the distribution of an email dated 16 March 2006, in which CCS advertised or publicised a share offer for Pryme Oil & Gas Limited (“Pryme”) without the required disclosure document.
24. There were also other concerns, including:
(a) CCS’s breach of s 911C of the Act by departing from FPA’s procedures and promoting the AUM, Gladiator and Pryme share offers, products that were not on the FPA approved product list; and
(b) CCS’s breach of s 1041H of the Act by making certain misrepresentations, including that Mr De Souza himself, rather than FPA, was the holder of an AFSL.
What was Mr De Souza doing while these breaches were occurring?
25. Mr De Souza testified that:
(a) In relation to the 15 February 2006 newsletter – he was not aware, at the time, that it had been sent out to clients (TS 95.6);
(b) In relation to the 17 March 2006 newsletter – he could not recall whether he had approved it before issue (TS 95.34);
(c) In relation to the 27 April 2006 newsletter – he had “probably not” approved it before issue (TS 96.1) but, in fact, his first email to John Christian dated 26 May 2006 says otherwise (see [21] above); and
(d) In relation to the 19 May 2006 newsletter – he had “definitely not” approved it before issue (TS 96.11).
26. He said that the proper sign-off procedure for newsletters was (TS 101.37-101.40):
… that if newsletters are going to be drafted – right – the correct agreed procedure was that Mr Chilvers, who undertook that responsibility to write it, right, was meant to give me a draft newsletter to approve before he approved that to go on the website.
27. That statement, at least, is consistent with his emails dated 26 May 2006 ([21] and [22] above).
The substance of the case for ASIC
28. Originally the complaint against Mr De Souza was that he may have been “involved” in these breaches. However, the case against Mr De Souza has since been formulated in more neutral language, with ASIC relying not so much on his “involvement” in the breaches (in the sense of his having been more or less directly a participant in them) as on his very status as the “responsible officer” and so-called “key person” of FPA and the responsibility that he had, because of that status, to ensure that breaches did not occur. As the representative officer, he oversaw and was responsible for FPA’s activities, and by extension also those of CCS, and, to the extent that there have been any shortcomings in the behaviour of either of those entities, they are the result of Mr De Souza’s incomplete or unsatisfactory supervision of them. It follows, so ASIC’s argument goes, that ASIC has, and so should the Tribunal have, reason to believe that Mr De Souza will not comply with a financial services law.
Do I have reason to believe that Mr De Souza will not comply with a financial services law?
29. Section 920A(1)(f) of the Act, on which ASIC relies, contains the expression “reason to believe that [Mr De Souza] will not comply with a financial services law”. That expression is, as noted in several cases, including Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602, different from the expression “reason to believe that [he] may not comply …”.
30. The distinction between a reason to believe that a person will do something and a reason to believe that a person may do something was referred to in Re Howarth, at [136], in this way:
A state of mind in which a person has a reason to believe that another person may do something may well be reached before and on less convincing material than is required for a state of mind that the person will do something.
31. With respect, I have not found it helpful to consider the distinction in that way. The safer course, in my view, is to concentrate on the language of s 920A(1)(f) itself, and to be guided simply by the requirement that is expressed there. The requirement placed on me is to determine whether I have reason to believe that Mr De Souza will not comply with a financial services law. It is not a question, in my view, of the material being “more convincing” or “less convincing”; the material will either give me reason to believe, or it will not. It may be, as Callinan J said in Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543 at [130], that the expression “reason to believe” poses a “relatively low threshold”, but the threshold still needs to be met.
32. One could readily have reason to believe that Mr De Souza will not comply with a financial services law if Mr De Souza exhibited a cavalier attitude towards compliance, such that he did not care whether he complied with the law or not. Exhibiting such an attitude could ground a “reason to believe that he will not comply”, and this would be so, whether or not he had breached, or failed to comply with, a financial services law in the past. The issue does not turn on whether he has not complied in the past, although instances of actual non-compliance may more readily create in a decision-maker a “reason to believe” that there will be instances of non-compliance in the future. What is required is an assessment of all the evidence, and the formulation of a view, based on that evidence, as to whether there is reason to believe that he will not comply with a financial services law in the future.
33. The evidence before me does not give me reason to believe that Mr De Souza will not comply with a financial services law. That is not to say that I am entirely comfortable with the way Mr De Souza supervised the activities of CCS. There was a troubling reluctance on his part to accept responsibility for CCS’s failure to comply with the financial services laws. To an extent his reluctance was understandable, given that he was not involved in the day-to-day operations of the company. His position was that Mr Chilvers was involved in the day-to-day operations of the company, and it was Mr Chilvers who had the responsibility, and the opportunity, to ensure day-to-day compliance. On the other hand, FPA’s appointment of CCS as an authorised representative had the potential to jeopardise FPA’s AFSL and, ultimately, Mr De Souza’s livelihood, which makes it all the more surprising that he was unwilling to accept formal, unqualified responsibility for what Messrs Chilvers and Luvara were doing and how they were doing it. Ultimately I think he trusted them too much, relying on what he assumed about their professionalism, competence and integrity. That trust was misplaced.
34. However, the fact that I consider Mr De Souza to have been unwise in placing his trust in Messrs Chilvers and Luvara does not give me reason to believe that Mr De Souza will not comply with a financial services law.
35. Mr De Souza certainly found it difficult to explain who was responsible for compliance on the part of each of CCS and FPA, and to what extent. His explanations were finely nuanced, but rambling, and, on the face of it, not entirely consistent with his contemporaneous notes and emails.
36. Even so, in my view the most critical question is: What did Mr De Souza do, in a practical sense, to try to ensure that both FPA, the licensee, and CCS, the authorised representative, complied with the financial services laws? The answer to that question will provide the most reliable indicator of the likelihood of Mr De Souza’s future compliance with those laws. The actions that he took were:
(a) he prepared a Compliance and Procedures Manual;
(b) he sent a copy of the Compliance and Procedures Manual to CCS;
(c) he approved the draft CCS website (TS 76.23-76.24);
(d) he confirmed that the final website complied with his approved draft (TS 76.32-76.33);
(e) he raised concerns when he saw instances of actual or possible non-compliance (T55);
(f) he maintained a register of compliance breaches and took action to correct those breaches (T52-T55);
(g) he ordered amendments to the CCS website (T54);
(h) he shut down the CCS website (T54); and
(i) eventually, he withdrew CCS’s approval as an authorised representative of FPA (T54).
37. These are not the actions of a person who has a cavalier, indifferent attitude to compliance; instead, they demonstrate, in my view, a genuine desire to comply with the financial services laws. They do not give me reason to believe that Mr De Souza will not comply with the financial services laws in the future.
Conclusion
38. The decision under review is set aside.
I certify that the 38 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member
Signed: ................[Sgd]..................................................................
AssociateDates of Hearing 30 April 2009
1 May 2009
Final submissions received 10 July 2009
Date of Decision 22 September 2009
Counsel for the Applicant Mr R Keller
Solicitor for the Applicant Mr R Liebmann, Norton Smith & Co Pty Ltd
Counsel for the Respondent Ms M AllarsSolicitor for the Respondent Ms K Prasad, Australian Securities and Investments Commission
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