Eric Preston Pty Ltd v Euroz Securities Limited
[2010] FCA 97
•19 February 2010
FEDERAL COURT OF AUSTRALIA
Eric Preston Pty Ltd v Euroz Securities Limited [2010] FCA 97
| Citation: | Eric Preston Pty Ltd v Euroz Securities Limited [2010] FCA 97 | |
| Parties: | ERIC PRESTON PTY LTD (ACN 008 753 348) v EUROZ SECURITIES LIMITED (ACN 089 314 983); EUROZ SECURITIES LIMITED (ACN 089 314 983) v ERIC PRESTON PTY LTD (ACN 008 753 348) | |
| File number: | VID 356 of 2008 | |
| Judge: | SIOPIS J | |
| Date of judgment: | 19 February 2010 | |
| Catchwords: | CONTRACT - whether a term was incorporated into the retainer by reason of a prior course of dealings - whether a term could be inferred by reference to post-contractual conduct - whether loss caused by the breach of the retainer. MISLEADING OR DECEPTIVE CONDUCT - whether representation was passed on by respondent - whether representation was adopted - whether loss was caused by impugned conduct. | |
| Legislation: | Corporations Act 2001 (Cth) ss 942B, 942B(2), 1041H, 1041H(1), 1041I(1), 1041I(1B) Federal Court Rules O11 r 8 | |
Cases cited: | Jones v Dunkel (1959) 101 CLR 298 DJ Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749 Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 Browne v Dunn (1893) 6 R 67 Suvaal v Cessnock City Council (2003) 200 ALR 1 Clambake Pty Ltd v Tipperary Projects Pty Ltd (No 3) [2009] WASC 52 Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2009) 252 ALR 659 Orix Australia Corporation Ltd v Moody Kiddle and Partners Pty Ltd [2006] NSWCA 257 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 Breen v Williams (1996) 186 CLR 71 Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] 160 FCR 35 Aequitas v Sparad No 100 Ltd (formerly Australian European Finance Corp Ltd) (2001) 19 ACLC 1,006 | |
| Date of hearing: | 16-20, 23-27, 31 March, 25 September 2009 | |
| Date of last order: | 11 November 2009 | |
| Date of last submissions: | 16 November 2009 | |
| Place: | Perth | |
| Division: | GENERAL DIVISION | |
| Category: | Catchwords | |
| Number of paragraphs: | 500 | |
| Counsel for the Applicant: | Mr P Bick QC with Mr D Farrands | |
| Solicitor for the Applicant: | Slater & Gordon | |
| Counsel for the Respondent: | Mr G Donaldson SC with Ms W Buckley | |
| Solicitor for the Respondent: | Fairweather & Lemonis | |
| Counsel for the Cross‑Claimant: | Mr G Donaldson SC with Ms W Buckley | |
| Solicitor for the Cross‑Claimant: | Fairweather & Lemonis | |
| Counsel for the Cross‑Respondent: | Mr P Bick QC with Mr D Farrands | |
| Solicitor for the Cross‑Respondent: | Slater & Gordon | |
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 356 of 2008 |
| BETWEEN: | ERIC PRESTON PTY LTD (ACN 008 753 348) EUROZ SECURITIES LIMITED (ACN 089 314 983) |
| AND: | EUROZ SECURITIES LIMITED (ACN 089 314 983) ERIC PRESTON PTY LTD (ACN 008 753 348) |
JUDGE: | SIOPIS J |
DATE OF ORDER: | 19 FEBRUARY 2010 |
WHERE MADE: | PERTH |
THE COURT ORDERS THAT:
The applicant’s application filed on 20 May 2008 is dismissed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
| IN THE FEDERAL COURT OF AUSTRALIA | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 356 of 2008 |
| BETWEEN: | ERIC PRESTON PTY LTD (ACN 008 753 348) EUROZ SECURITIES LIMITED (ACN 089 314 983) |
| AND: | EUROZ SECURITIES LIMITED (ACN 089 314 983) ERIC PRESTON PTY LTD (ACN 008 753 348) |
JUDGE: | SIOPIS J |
DATE: | 19 FEBRUARY 2010 |
PLACE: | PERTH |
TABLE OF CONTENTS
| BACKGROUND........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... | [9] |
| ERIC PRESTON’S CLAIM AGAINST EUROZ SECURITIES........ ........ ........ ...... | [119] |
| THE WITNESSES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . | [122] |
| Eric Preston’s witnesses........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... | [122] |
| Mr Bruce Scott Drummond........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... | [123] |
| Mrs Judith Maree Drummond........ ........ ........ ........ ........ ........ ........ ........ ........ ....... | [133] |
| Mr Graham Douglas Anderson........ ........ ........ ........ ........ ........ ........ ........ ........ ...... | [134] |
| Mr Gregory Errol Blashki........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... | [141] |
| Mr Russell Allan McKimm........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [142] |
| Euroz Securities’ witnesses........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... | [157] |
| Mr Richard Armstrong Caldow........ ........ ........ ........ ........ ........ ........ ........ ........ ...... | [158] |
| Mr Anthony Mark Brittain........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [167] |
| Mr Kenneth David Pendergast........ ........ ........ ........ ........ ........ ........ ........ ........ ....... | [170] |
| THE CLAIM BASED ON THE BREACH OF CONTRACT........ ........ ........ ........ ... | [172] |
| Eric Preston’s pleaded claim in contract........ ........ ........ ........ ........ ........ ........ ........ . | [173] |
| Euroz Securities’ defence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. | [186] |
| Did Euroz Securities agree to act as financial advisor to Eric Preston as part of its retainer?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . | [194] |
| The advice in relation to Eric Preston entering into the Leveraged Equities facility........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. | [226] |
| Did Mr Caldow advise in May 2007 that the Opes Prime facility was the same as the Leveraged Equities facility?........ ........ ........ ........ ........ ........ ........ ........ ........ ... | [254] |
| Can Eric Preston rely on a case founded on the allegation that Euroz Securities failed to advise as to the characteristics of the Opes Prime facility?........ ........ .... | [291] |
| Would Eric Preston have entered into the Opes Prime facility even if it had been advised as to its characteristics and attendant risks?........ ........ ........ ........ ........ .... | [300] |
| The pleaded breaches relating to events of February 2008........ ........ ........ ........ ... | [314] |
| The 1 February 2008 advice came too late........ ........ ........ ........ ........ ........ ........ .... | [320] |
| Failure to advise Eric Preston to terminate the Opes Prime facility........ ........ .... | [327] |
| Failure to advise that Euroz Securities could not comment on the financial position of Opes Prime........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... | [330] |
| Advice that the share portfolio was safe........ ........ ........ ........ ........ ........ ........ ........ | [333] |
| THE CLAIM IN TORT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ | [336] |
| THE CLAIM THAT EUROZ SECURITIES ENGAGED IN MISLEADING OR DECEPTIVE CONDUCT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [347] |
| The first representation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [355] |
| The second representation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ | [367] |
| Did Euroz Securities engage in misleading or deceptive conduct in relation to the second representation?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [405] |
| BREACH OF FIDUCIARY DUTY........ ........ ........ ........ ........ ........ ........ ........ ........ ...... | [420] |
| The trading commission and the trailing commission........ ........ ........ ........ ........ ... | [433] |
| CAUSATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . | [444] |
| THE CLAIM THAT ERIC PRESTON CONTRIBUTED TO ITS LOSS........ ....... | [464] |
| THE CLAIM THAT MR ANDERSON IS PROPORTIONATELY LIABLE FOR ERIC PRESTON’S LOSS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [467] |
| Advice in relation to Eric Preston entering into the Opes Prime facility........ ..... | [469] |
| Substantial Shareholder Advice........ ........ ........ ........ ........ ........ ........ ........ ........ ....... | [480] |
| Advice in relation to 1 February 2008 email........ ........ ........ ........ ........ ........ ........ ... | [485] |
| THE CLAIM THAT OPES PRIME IS PROPORTIONATELY LIABLE FOR ERIC PRESTON’S LOSS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [486] |
| DAMAGES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... | [493] |
REASONS FOR JUDGMENT
1 Eric Preston Pty Ltd, the applicant, is a private company. Mr Bruce Drummond and his wife, Mrs Judith Drummond, are its directors. The respondent, Euroz Securities Limited, is a subsidiary of Euroz Limited, a publicly listed company. Euroz Securities provides stockbroking services. Mr Richard Caldow is a stockbroker and is one of the directors of Euroz Securities. Mr Drummond first dealt with Mr Caldow as a stockbroker in about 1995, when Mr Caldow was employed by Paterson Ord Minnett Ltd, and Mr Drummond was, in his personal capacity, a stockbroking client of that company. Over the ensuing years they established a close business relationship. When Mr Caldow moved from Paterson Ord Minnett to Euroz Securities in 2000, Mr Drummond opened a share trading account with Euroz Securities.
2 In 2003, Mr Drummond received advice that there would be taxation advantages if a corporate entity under his control, carried on the share trading activity which until then, Mr Drummond had carried on on his own account. Mr Drummond acted on that advice and decided that Eric Preston should be the company to conduct that share trading activity. Since 2004, Eric Preston has been engaged in the business of share trading. Mr Drummond has been solely responsible for carrying on this business and for making the investment decisions on behalf of Eric Preston. He has carried on this business on a full-time basis since April 2007. During the period January 2004 to May 2007, Eric Preston was a party to a margin loan facility with Leveraged Equities Limited and used that facility in relation to its share trading activities. Eric Preston traded in shares at the riskier end of the market and Leveraged Equities did not offer a margin on many of the shares in Eric Preston’s portfolio. At all material times, Eric Preston, through Mr Drummond, used Euroz Securities as its stockbroker.
3 In May 2007, Eric Preston terminated its margin loan facility with Leveraged Equities and entered into a securities lending and borrowing agreement with Opes Prime Stockbroking Ltd as a means of obtaining funds to use in purchasing shares for its portfolio. The Opes Prime facility offered margins on shares which Leveraged Equities did not.
4 In very general terms, under this agreement, Opes Prime agreed to advance funds to Eric Preston for share trading purposes and Eric Preston agreed to “lend” its shareholding to Opes Prime by transferring its legal and beneficial ownership in its shareholding to Opes Prime. Eric Preston had a contractual right to call on Opes Prime to deliver shares it had “lent” to Opes Prime, by repaying Opes Prime, and was a creditor of Opes Prime for the difference between the value of the shares in its portfolio and the amount of the advance.
5 On entering into the Opes Prime facility, Eric Preston transferred the legal and beneficial ownership in its share portfolio to Opes Prime or its nominee. After May 2007, Eric Preston used the Opes Prime facility extensively to finance the purchase of shares for its portfolio. On 1 February 2008, Euroz Securities sent Mr Drummond an email pointing out that the securities lending facility with Opes Prime was different to, and risker than, a conventional margin loan. The email stated, in effect, that one of the risks associated with the Opes Prime facility was that if Opes Prime was to become insolvent, Eric Preston would rank as an unsecured creditor for the difference between the value of its share portfolio and the amount outstanding to Opes Prime under the facility. Eric Preston did not terminate the Opes Prime facility and continued to trade shares and use the Opes Prime facility.
6 On 27 March 2008, administrators were appointed to Opes Prime. At that time Eric Preston’s portfolio of shares was worth $7,822,957.15 and it owed Opes Prime $3,075,142.91 under the facility. On 15 October 2008, liquidators were appointed to Opes Prime. Eric Preston has filed a proof of debt in the liquidation of Opes Prime in the sum of $5,389,251.09.
7 On 4 August 2009, Opes Prime entered into a scheme of arrangement with its creditors.
8 In this proceeding, Eric Preston alleges that Euroz Securities acted in breach of its contractual, tortious and fiduciary duties that it owed to Eric Preston in relation to the Opes Prime facility. It also claims that Euroz Securities breached statutory duties. Eric Preston claims that but for the breaches of duty it would not have entered into the Opes Prime facility but would have stayed with Leveraged Equities and, therefore, would not have lost the value of the shares it held in its portfolio at the date of the appointment of the administrators. It claims damages from Euroz Securities.
BACKGROUND
9 Until 2007, Mr Drummond was, through various private companies, actively involved in the management and operation of major motor vehicle dealerships in the Perth metropolitan area.
10 In 1979, at the age of 28 years, Mr Drummond acquired a 30% interest in a motor vehicle dealership, Midland Nissan, operated by Midland Datsun Pty Ltd. Eric Preston owned the site on which the Midland Nissan dealership was located. In 1982, Mr Drummond acquired all the shares in Eric Preston, and bought out his partner’s interest in Midland Datsun. Mr Drummond borrowed the sum of $500,000 to do so from Australian Guarantee Corporation.
11 In 1998, Mr Drummond was the controlling shareholder and director of Goldeast Corporation Pty Ltd (Goldeast). In that year, Goldeast purchased the business of Metro Motors, a major Holden and Subaru dealership in Perth.
12 In 1998, at the time when Goldeast purchased the Metro Motors business, Midland Nissan employed approximately 50 persons and Metro Motors employed over 100 persons. Mr Drummond, through Midland Datsun, continued to own the Midland Nissan dealership until 2001.
13 Metro Motors was the third largest dealership in Western Australia and in the top 20 dealerships in Australia for Holden motor vehicles. At one point, its annual turnover was in excess of $70 million.
14 Eric Preston owned the site of the Midland Nissan dealership and in the period up to 1998 purchased two adjoining properties. It also acquired the Metro Motors property holding. Eric Preston borrowed $5 million in order to complete the purchase.
15 As well as his interest in carrying on the business of his motor dealerships, Mr Drummond had an interest in share trading.
16 In around 1995, Mr Drummond first made contact with Mr Richard Caldow, who was then employed as a stockbroker by Paterson Ord Minnett. Mr Caldow had commenced employment with Paterson Ord Minnett as an assistant sharebroker in July 1992. Mr Caldow first had dealings with Mr Drummond when Mr Drummond telephoned Paterson Ord Minnett looking to speak to another broker who had, unbeknown to Mr Drummond, left that firm. Mr Drummond was put through to Mr Caldow. Mr Drummond placed an order to buy one million Golden Valley shares at 2.5 cents. Thereafter, Mr Drummond continued to deal with Mr Caldow as his stockbroker at Paterson Ord Minnett.
17 In about June 1997, Mr Caldow moved to Busselton to establish an office of Paterson Ord Minnett with Mr Simon Yeo, who was then also employed by Paterson Ord Minnett. During the period that Mr Caldow worked in the Paterson Ord Minnett office in Busselton, Mr Drummond continued to use him as his stockbroker. By then Mr Drummond had become one of Mr Caldow’s major clients.
18 In July 2000, Mr Drummond entered into a margin loan agreement with Leveraged Equities Limited – a company associated with Adelaide Bank Limited. This occurred after he had been sent an application form to apply for a Leveraged Equities margin loan by Mr Caldow. Thereafter, Mr Drummond used the Leveraged Equities margin loan in his share trading activities.
19 In November 2000, Mr Jay Hughes, Mr Peter Diamond and Mr Andrew McKenzie, all directors of Paterson Ord Minnett, resigned and established Euroz Limited and Euroz Securities Limited, as a wholly owned subsidiary company, to conduct a stockbroking business. Mr Diamond offered Mr Caldow a position as Executive Director of Euroz Securities and a shareholding in Euroz Limited. Mr Yeo was also offered a position at Euroz Securities. Each of them accepted the offer and resigned from Paterson Ord Minnett.
20 Euroz Securities has an Australian Financial Services Licence which entitles it to carry on a stockbroking business and to use the description of stockbroker or sharebroker whilst it complies with the conditions of the licence. Euroz Securities is not licensed to provide general financial advice. In accordance with its licence, it was entitled to make recommendations in relation to the buying and selling of shares. Euroz Securities had a research department which specialised in researching low capitalisation emerging mining and exploration stocks. Euroz Securities regularly published materials that made buy and sell recommendations in respect of these stocks. Further, Euroz Securities is, and was at the material times, a party to a wholesale securities lending agreement with ACS Broker Services Limited. It made use of the facilities under this agreement in the conduct of its business.
21 As well as being an executive director of Euroz Securities, Mr Caldow is and, was at the material times, a member of the private client team which is headed by Mr Yeo. Mr Caldow’s desk at work at Euroz Securities was, at all material times, located in close proximity to that of Mr Yeo. Mr Anthony Brittain was, at the material times the chief operating officer and financial officer of Euroz Securities. Mr Anthony Hewett was, at the material times, the head of Risk and Compliance.
22 Shortly after Mr Caldow moved to Euroz Securities in 2000, Mr Drummond became a client of Euroz Securities. At that time, the total value of Mr Drummond’s share portfolio was around $100,000. Mr Drummond “followed” Mr Caldow to Euroz Securities.
23 In 2003, Mr Graham Anderson and Ms Lena Hilton advised Mr Drummond that the share trading activities he was then carrying on should be carried on by a corporation so as to attract lower corporate tax rates on profits. Mr Anderson is an accountant who advised Mr Drummond and his associated companies on his business affairs. Ms Hilton provided tax advice to Mr Drummond and his business entities.
24 Mr Anderson completed “sophisticated investor” certificates in respect of Eric Preston for the financial years 2003, 2004, 2005 and 2006. These certificates certified that Eric Preston had net assets of at least $2.5 million and a gross income for each of the preceding two years of at least $250,000.
25 Mr Anderson was also an officer of a number of publicly listed companies. These companies were mainly, but not exclusively, mining exploration companies. These companies included: Gallery Gold Limited, Falcon Minerals Limited, Echo Resources Limited and Apex Minerals NL. Mr Drummond bought shares in these companies from time to time.
26 Mr Drummond and Mr Anderson had a close working relationship. They communicated by email on almost a daily basis and on many occasions they exchanged several emails during the course of the day. The emails were directed mainly to the various business interests of Mr Drummond and his associated companies, but also included comment on sporting events, and evidenced a personal, as well as business, relationship.
27 Mr Anderson gave evidence in this case and I will say more about him, and the claims made affecting him, later in these reasons.
28 In late 2003, Mr Drummond told Mr Caldow that Mr Anderson had advised him that Eric Preston would be the new vehicle for future share trading activities.
29 On 6 January 2004, Eric Preston opened a share trading account with Euroz Securities. On that date, Mr Drummond and Mrs Drummond, as directors of Eric Preston, signed a form supplied to them by Euroz Securities for the purposes of opening the account for Eric Preston. The form included the following question:
FCorporations Law Requirement
Euroz Securities Limited has an obligation to ask you for particulars of your investment objectives, financial situation and specific needs in order to make recommendations appropriate to you. Please be advised that if you do not want to provide this information it may inhibit your advisors ability to recommend appropriate investments in relation to your financial situation.
Do you wish to disclose this information to Euroz Securities Limited?
YES NO
30 The word “NO” was circled and signatures of Mr and Mrs Drummond were affixed.
31 After Eric Preston opened the share trading account with Euroz Securities, Mr Drummond inquired of Mr Caldow whether a private company could have a margin loan. Mr Caldow told Mr Drummond that a private company could have a margin loan and sent Mr Drummond Leveraged Equities’ application form for Eric Preston to complete.
32 There is controversy in the evidence as to the circumstances surrounding the entry by Eric Preston into the Leveraged Equities margin loan agreement. I will deal with that controversy later in these reasons. However, Mr and Mrs Drummond signed and submitted the completed application form to Leveraged Equities and a Leveraged Equities margin loan account was opened by Eric Preston.
33 Mr Drummond transferred the shares that were then held in his name into Eric Preston’s Leveraged Equities account. At that time the total value of the shares was “several hundred thousand dollars”.
34 Until January 2004, when Eric Preston commenced its share trading activities, Mr Drummond carried on his share trading activities from his office at the Metro Motors premises. From January 2004 until April 2007, Mr Drummond continued to carry on the share trading activities on behalf of Eric Preston, from the same premises.
35 Mr Drummond took the share trading activities that he conducted on behalf of Eric Preston seriously. Mr Drummond subscribed to the online sharebroker, CommSec, and by that means was able daily to follow the movements in the stock market on his computer through CommSec’s website. Mr Drummond used his CommSec account to maintain a watch list of shares. He also used his computer to follow on a daily basis the share price movements and announcements made to the Australian Stock Exchange (ASX). The watch list included shares which were in companies not researched by Euroz Securities. Further, Mr Drummond systematically maintained research files which he compiled from information obtained from the financial press and also research materials sent to him by Euroz Securities. Mr Drummond also read the Australian Financial Review every day and from about mid‑2007 he subscribed to Personal Investor magazine and Business Spectator magazine. The research material that was sent to Mr Drummond included Euroz Securities’ weekly newsletter which was often up to 40 pages in length.
36 On Friday, 21 January 2005, Mr Drummond instructed Mr Caldow to purchase a large number of shares in Falcon Minerals. Mr Drummond purchased 640,000 shares for $531,327. On the following Monday, the next trading day, an announcement was made to the ASX in relation to the acquisition by Jubilee Mines NL of a strategic interest in Falcon Minerals and the share price of Falcon Minerals went up. On that Monday morning, Mr Drummond telephoned Mr Caldow and directed him to sell the 640,000 shares in Falcon Minerals which were sold for $589,198, for a profit of $57,871.
37 This was the largest trade that Eric Preston had done up to that time. This trade was done without the recommendation of Mr Caldow.
38 In April 2005, Euroz Securities was the broker to the initial public offering on the ASX of shares in a company, Sundance Energy Australia Limited. The ASX code for this company’s shares is SEA. Eric Preston took up a parcel of shares on the initial public offering. Eric Preston also entered into sub-underwriting arrangements with Euroz Securities in relation to a placement of Sundance Energy shares. Eric Preston over time acquired a very large holding in Sundance Energy shares. Each of Mr Caldow and Mr Drummond held and continued to hold, a positive view about Sundance Energy shares.
39 On 10 November 2005, Mr Drummond telephoned Mr Caldow and asked Mr Caldow to purchase two million shares in Gallery Gold Limited for Eric Preston. Approximately four weeks later, a takeover bid was made for Gallery Gold. Eric Preston sold its shares after the bid at a price of 43 cents per share and made a profit of $247,955.
40 In late 2005, Eric Preston participated as a sub-underwriter of a placement of shares in Babcock & Brown Environmental Investments Limited, which was underwritten by Euroz Securities. There was a disagreement between Mr Drummond and Mr Caldow as to the timing of the payment of the fee due to Eric Preston in respect of that sub-underwriting undertaken by Eric Preston. Mr Drummond telephoned Mr Caldow and complained to him that Eric Preston had not been paid the fee due to Eric Preston. I will say more about this telephone conversation later in these reasons.
41 In 2006, there was a considerable increase in Eric Preston’s trading activities. From 2006, Mr Drummond spoke to Mr Caldow by telephone four or five times a day. Euroz Securities continued to send Mr Drummond research material and “buy” and “sell” recommendations. Euroz Securities offered Eric Preston positions in more than a dozen initial public offering placements.
42 Before December 2006, Mr Anderson had given Mr Drummond advice as to the operation of the escrow provisions of the ASX Listing Rules in respect of an investment in an unlisted company, National Fuel Ltd. On 9 December 2006, before the proposed public listing of Natural Fuel, Mr Drummond received an agreement from a firm of solicitors to sign on behalf of Eric Preston in relation to the operation of the escrow provisions on those shares. On 11 December 2006, Mr Drummond then forwarded the draft agreement to Mr Anderson by email. The email read as follows:
Graham welcome home
Please have a close look at this and ring me a s a p as I have to have this back today. Why don’t I get at least a 50% reprieve seeing I did pay $5.00 a share and the multiple equals $9.00 a share.43Mr Anderson replied as follows:
Yes, the full 1,200,000 will be escrowed. We have discussed this previously.
Eric Preston is classed as a type 10 investor in the attached appendix 9B to the extent of the shares purchased from Distinctive.
Given the amount of shares he holds, he is probably deemed a vendor holding greater than 20% of the issued capital.
44 Mr Drummond examined for himself the ASX Listing Rules after receiving this email response from Mr Anderson. Mr Drummond responded later that day to Mr Anderson by an email which expressed, in particularly colourful and abusive language, his dissatisfaction with previous advice he had received from Mr Anderson.
45 In March 2007, Goldeast sold its motor dealership business to Melville Motors (2006) Pty Ltd. At the same time, Eric Preston sold the property on which the dealership operated and the adjoining property.
46 On 27 March 2007, the contract for the sale of that motor vehicle business was settled.
47 In April 2007, Mr Drummond commenced to conduct the share trading business on behalf of Eric Preston, on a full-time basis. To that end Mr Drummond took an office in the same building as Mr Anderson. The office was one floor up from that of Mr Anderson. This meant that Mr Drummond was less than a minute or two away from Mr Anderson.
48 In late April or early May 2007, Mr Mark Rice of Opes Prime Stockbroking Ltd (Opes Prime) made a presentation to representatives of Euroz Securities, including Mr Yeo, regarding the Opes Prime securities lending and borrowing facility. Mr Mark Rice was, at the time, Head of Sales and Marketing at Opes Prime.
49 Shortly after the presentation on 10 May 2007, Mr Yeo of Euroz Securities sent an email to Mr Rice which stated:
Compliance having a look at how we go about recommending a different margin lender.
Some of the boys have asked about the security of OPES and what the balance sheet is like in terms of the lending you do against smaller cap stocks – what level of security do we have in the event of a major downturn??
50On 10 May 2007, Mr Rice responded to Mr Yeo’s email. He stated:
In answer to your second question about Opes and what happens in a market downturn. The first part of the answer is that we mark to market securities on a daily basis and where the client’s security value declines and they go into a margin call, they have to come up with more cash or securities to cover their loan or they can be potentially sold down to cover the position. So you have exactly the same risk as with any other margin lender.
However, we do operate under a securities lending and borrowing arrangement such that to get the funds to lend to the end client we “on lend” the securities to our funders, primarily ANZ. We maintain ample buffers with our funders so that we don’t get into a position such that both we and the end clients are in margin call at the same time. In the extreme market meltdown situation when this could happen, we also have alternative means of raising cash to meet our obligations with our funders while our clients are meeting their margin calls.
In the absolute highly unlikely worst case scenario, if Opes was to become insolvent, clients would end up as creditors to our funders, which is primarily ANZ, and they would have to repay their loan in exchange for the securities.
There are a number of mitigating factors to ensure this doesn’t happen, which are:
· We have a significantly diversified portfolio of shares with our funders
· We can be naturally hedged with the securities lending side
· We maintain ample buffers with our funders
· We employ a strict margin call process with clients
· Alternative funding facilities are in place for the extreme situation
· Our LVRs for the small cap stocks are low, so the stock has to “overnight” fall very significantly for the client to be in an uncovered position
· General ASX risk management in extreme market downturns
These procedures have been tried and tested, for example in March this year, and proven that our risk management procedures are robust.
Hopefully this gives you some comfort but I am more than happy to provide you with further information about the business.
51 As at May 2007, Eric Preston’s Leveraged Equities account contained shares in Beach Petroleum Limited to which a margin was attached, and about $1.6 million worth of shares in other companies, to which no margin was attached. One share with no margin attached was Sundance Energy. At that time Eric Preston held about four and a half million Sundance Energy shares. Further, the Leveraged Equities statements for Eric Preston’s margin loan account, for each of the preceding months of January 2007 to April 2007, show that Eric Preston was at the commencement of each of those months in a shortfall position, that is, it had exceeded its credit limit.
52 On 14 May 2007, Mr Drummond had a telephone conversation with Mr Caldow. The contents of this telephone conversation are a crucial issue in this case. This is because Eric Preston has pleaded that Mr Drummond relied upon what Mr Caldow told him in the course of that conversation to terminate the Leveraged Equities facility, and to enter into the Opes Prime facility. Euroz Securities strongly contests the version of the conversation contended for by Eric Preston. I deal with that factual dispute at some length below. However, it is common cause that during the course of that conversation Mr Yeo, whose desk was located close to that of Mr Caldow in the Euroz Securities office, said words to the effect that Mr Caldow should tell Mr Drummond about Opes Prime. After the conversation, Mr Caldow sent Mr Drummond an email attaching the Opes Prime Financial Services Guide.
53 On 15 May 2007, Mr Drummond sent an email to Ms Danielle Jones at Leveraged Equities. The email stated:
As you can see I have a large holding in Sundance Energy without any leveraged attached. It is my intention to buy more of this stock and I am enquiring as to whether you are able to help me by allowing a percentage of say 35%.
Please confirm whether you are able to assist.
54 Ms Jones replied by email to Mr Drummond later that day, advising that Leveraged Equities would not provide a margin against the Sundance Energy shares.
55 On 17 May 2007, Mr Drummond telephoned Mr Rice of Opes Prime and discussed with him entry into an Opes Prime facility. Mr Drummond also discussed with Mr Rice the prospect of Eric Preston being able to use shares Mr Drummond held in his own name in Natural Fuel as collateral.
56 On 17 May 2007, Mr Caldow communicated by email with Mr Rice following a query from Mr Drummond. Later that day, Mr Caldow forwarded those emails to Mr Drummond. The emails between Mr Caldow and Mr Rice related mainly to loan to value ratios offered by Opes Prime, interest rates and trailing commissions proposed to be paid by Opes Prime to Euroz Securities.
57 Mr Drummond printed the computer file sent by Mr Caldow, containing the Financial Services Guide and application form on his printer.
58 The front page of the Opes Prime Financial Services Guide has located beneath the Opes Prime logo the following statement:
Securities Lending and Borrowing Financial Services Guide
Monday, 15 May 2006.59The financial services guide contained the following statement:
First, and most importantly, you should note that we do not provide you with “personal advice” as defined by the Act and ASIC. Accordingly, we will not take into account your “objectives, financial situation and needs” (“Objectives”) (as defined by the Act and ASIC) and therefore this FSG has been prepared without taking into account those Objectives. You will not be provided with a Statement of Advice. Accordingly you should carefully consider the appropriateness of our services with regard to your particular circumstances.
60 Under the heading on the next page “About Opes” the following statements appear:
Opes provides these highly specialised services to sophisticated market players. This includes wealthy individuals, boutique fund managers and corporations. Because of the nature of our client base, Opes is not in the business of providing general or personal investment advice. Instead, working very closely with our clients and their advisors, we focus attention to the clients’ requirements in our specialised field.
This can include our equity participation, joint ventures and sharing risk, and with all of our clients, a long term mutual commitment and relationship.
61 The Opes Prime Financial Services Guide also contained a blank application form and the terms of the securities lending and borrowing agreement offered by Opes Prime.
62 On 22 May 2007, Mr and Mrs Drummond, as directors of Eric Preston, signed the completed application form for a securities lending and borrowing agreement with Opes Prime. The application form contained the following wording:
I/We hereby declare that:
1I/We acknowledge and accept that for corporate applicants it is a condition precedent for all the directors to have executed the Deed of Guarantee and Indemnity accompanying this Application Form prior to initiating any trading instructions to Opes Prime;
2
I/We acknowledge and accept that the confirmations despatched electronically are subject to the correction of errors and omissions;
3I/We agree that Opes Prime will not be giving any general or personal advice to me/us in relation to the Facility or any dealing under it and so Opes Prime does not need to give me/us a Statement of Advice;
4I/We have read and understood the FSG and accept the risks of securities lending under this Facility;
5A person who signs an Application Form from an electronic copy of this FSG acknowledges that the person either downloaded and read the entire contents of the FSG or received personally and read the paper copy of the FSG; and
6By signing this Application Form, a Facility with an account for me/us will be established on the terms set out in this FSG.
63 Mr and Mrs Drummond, as directors of Eric Preston, also executed a document entitled “Collateral lodgement from sponsored holding (HIN)” which authorised the transfer of Eric Preston’s share portfolio to “ANZ Nominees PID 2005”.
64 The application form for the securities lending and borrowing agreement with Opes Prime also provided that the directors of Eric Preston provide a guarantee and indemnity of Eric Preston’s liability under the agreement. Mr Graham Anderson witnessed the signatures of Mr and Mrs Drummond attesting to their agreement to the guarantee and indemnity provisions.
65 On 22 May 2007, Mr Drummond faxed a completed application form to Mr Rice at Opes Prime and asked what further information needed to be supplied. Mr Drummond then telephoned Mr Rice and discussed the application. Also, later that day, Mr Rice sent a fax to Mr Drummond advising Mr Drummond that he would have to complete a further application form in his own name and that he and Mrs Drummond would both need to sign the further forms, one such form was the “Refinancing Instruction Form”. Mr Rice forwarded the forms to Mr Drummond.
66 Mr and Mrs Drummond, on behalf of Eric Preston, executed the “Refinancing Instruction Form” to authorise the pay out of the loan owed by Eric Preston to Leveraged Equities and the transfer of the shares held by Leveraged Equities pursuant to its margin loan. Mr Drummond completed and signed the other forms.
67 On 23 May 2007, Mr Drummond faxed the completed application forms to Mr Rice.
68 On 24 May 2007, Mr Caldow, after having spoken to Mr Drummond, spoke to Mr Rice about getting a better interest rate from Opes Prime for Eric Preston.
69 On 24 May 2007, Mr Drummond sent Mr Anderson two emails attaching the Opes Prime Financial Services Guide and a string of emails between Mr Rice and Mr Caldow relating to the loan to value ratio, interest rates and trailing commissions in respect of the Opes Prime facility. There was an issue as to the extent to which Mr Anderson gave Mr Drummond advice about the entry of Eric Preston into the Opes Prime facility agreement. I will deal with this issue later in these reasons.
70 The Securities Lending and Borrowing Agreement (SLBA) between Eric Preston and Opes Prime contained among other clauses, the following clauses. Clause 1.1 of the SLBA provided as follows:
1.1The Lender will lend Securities to the Borrower, and the Borrower will borrow Securities from the Lender, in accordance with the terms of this Agreement, regardless of which party is the Lender. In all cases Opes Prime must have received from the Client and accepted (by whatever means) a Borrowing Request, regardless of which party is the Lender.
Unless otherwise stated in a Confirmation or other correspondence, if Opes Prime is the Borrower of Securities, the Fee initially will be interest on the Cash Collateral at the rata and with such other components as otherwise advised to the Client.
71Clause 2 of the SLBA provided as follows:
2.1The Lender will procure the delivery of Securities to the Borrower or deliver such Securities in accordance with the relevant Borrowing Request together with appropriate instructions for or instruments of transfer (if necessary) duly stamped (if necessary) and such other instruments (if any) as required to vest title absolutely in the Borrower.
2.2Such Securities will be deemed to have been delivered by the Lender to the Borrower on delivery to the Borrower or as it directs of the relevant instruments of transfer and certificates or other documents of title (if any), or in the case of Securities title to which is registered in a computer based system which provides for the recording and transfer of title to the same by way of electronic entries (such as CHESS), on the transfer of title in accordance with the rules and procedures of such system as in force from time to time, or by such other means as may be agreed.
72Clause 3.1 of the SLBA provided as follows:
3.1The Parties must execute and deliver all necessary documents and give all necessary instructions to procure that all right, title and interest in:
1.1.1.1any Securities borrowed pursuant to clause 1;
1.1.1.2any Equivalent Securities redelivered pursuant to clause 6;
1.1.1.3any Collateral delivered pursuant to clause 5;
1.1.1.4any Equivalent Collateral redelivered pursuant to clauses 5 or 6;
will pass absolutely from one Party to the other, free from all liens, charges, equities and encumbrances, on delivery or redelivery of the same in accordance with this Agreement. In the case of Securities, Collateral, Equivalent Securities or Equivalent Collateral title to which is registered in a computer based system which provides for the recording and transfer of title to the same by way of electronic entries, delivery and transfer of title will take place in accordance with the rules and procedures of such system as in force from time to time.
73Clause 6.1 and cl 6.2 of the SLBA provided as follows:
6.1The Borrower undertakes to redeliver Equivalent Securities in accordance with this Agreement and the terms of the relevant Borrowing Request.
6.2Subject to clause 7 and the terms of the relevant Borrowing Request, the Lender may call for the redelivery of all or any Equivalent Securities at any time by giving notice on any Business Day of not less than the Standard Settlement Time for such Equivalent Securities or the equivalent time on the exchange or in the clearing organisation through which the relevant borrowed Securities were originally delivered. The Borrower must redeliver such Equivalent Securities not later than the expiry of such notice in accordance with the Lender’s Instructions.
74Clause 7.1 of the SLBA provided as follows:
7.1On the date and time that Equivalent Securities are required to be redelivered by the Borrower in accordance with the provisions of this Agreement, the Collateral Taker will simultaneously redeliver the Equivalent Collateral and pay any Cash Collateral (in respect of the Equivalent Securities to be redelivered) to the Collateral Provider. Neither Party is obliged to make delivery (or to make a payment as the case may be) to the other unless it is satisfied that the other Party will make such delivery (or make an appropriate payment as the case may be) to it simultaneously. If it is not so satisfied (whether because an Event of Default has occurred in respect of the other Party or otherwise), it will notify the other Party and, unless that other Party has made arrangements which are sufficient to assure full delivery (or the appropriate payment as the case may be) to the notifying Party, the notifying Party will (provided it is itself in a position, and willing, to perform its own obligations) may withhold delivery (or payment, as the case may be) to the other Party.
75 At 1 June 2007, Eric Preston had a share portfolio of a market value of $5,552,375.60. It had a balance outstanding on the margin loan with Leveraged Equities of $1,812,076.27. However, because Leveraged Equities would only lend against some of the stocks in Eric Preston’s share portfolio, the portfolio had a margin value of $1,593,582.61. There was a shortfall in respect of the margin loan in an amount of $218,493.66.
76 On 1 June 2007, Opes Prime paid the balance outstanding on Eric Preston’s Leveraged Equities account to Leveraged Equities.
77 During the period 1 June 2007 to 4 June 2007, the securities held on behalf of Eric Preston by Leveraged Equities were transferred. The Portfolio Statement issued by Opes Prime to Eric Preston for the period 1 June 2007 to 29 June 2007 records that the following shares were transferred by Leveraged Equities:
1,000,000 BPT 100,000 IPM 3,000,000 ITC 250,000 MDL 200,000 OXR 17,950 PBD 2,000,000 SDL 5,236,763 SEA 571,429 SEAO 500,000 TFE 6500 VMG
78 On 30 May 2007, Mr Caldow, on the instructions of Mr Drummond, on behalf of Eric Preston, completed a Euroz Securities’ document opening an account for Eric Preston to trade using the Opes Prime facility, which contained the following question from Euroz Securities as to risk profile:
Euroz Securities Limited has an obligation to ask you for particulars of your investment objectives, financial situation and specific needs in order to make recommendations appropriate to you. Please be advised that if you do not want to provide this information it may inhibit your advisor’s ability to recommend appropriate investments in relation to your financial position.
79 Mr Drummond instructed Mr Caldow to answer that question by stating that he did not wish to disclose the details of Eric Preston’s investment objectives, financial situation and specific needs.
80 Eric Preston commenced trading using the Opes Prime facility on 31 May 2007 with the purchase of a further 239,000 shares in Sundance Energy. Thereafter, until 27 March 2008, Mr Drummond used the Opes Prime facility extensively as a means of financing of the share trading activities of Eric Preston. During that period Eric Preston transacted more than 340 trades.
81 In June 2007, Mr Rice of Opes Prime prepared a brochure in consultation with Mr Yeo of Euroz Securities, setting out the loan to value ratios which Opes Prime would offer in relation to stocks which were on the Euroz Securities research list. The Opes Prime brochure is headed “Equity Financing” and described “equity financing” as “the lodging of securities with Opes Prime to borrow money to invest in other securities”.
82 On 14 August 2007, Mr Caldow attended a meeting of the board of directors of Euroz Securities. Also present was, among others, Mr Yeo. The minutes of that meeting record the following:
Mr Yeo tabled and read to his report on the retail desk…He highlighted:
…
·Clients switching to Opes from LE based on new interest charges for loans under 50k.
83 From August 2007, Mr Drummond started meeting regularly with Mr Caldow and, from September 2007, with Mr Peter Diamond of Euroz Securities for a beer and a chat at the Captain Stirling Hotel in Nedlands at the end of the trading day. These meetings continued until March 2008.
84 As previously mentioned, Mr Drummond was very favourably disposed to Sundance Energy shares. In early 2007, Mr Caldow said words to the following effect to Mr Drummond in relation to Eric Preston’s holding in Sundance Energy shares:
I don’t think you should go to 5% and you realise that if you do you need to put in a substantial shareholder notice.
85 Whilst Mr Caldow was away on holiday during the period 15 September 2007 to 15 October 2007, Mr Drummond purchased another one million shares in Sundance Energy which increased Eric Preston’s holding in Sundance Energy to in excess of five per cent. After Mr Caldow returned from his holiday, Mr Caldow during a telephone conversation advised Mr Drummond that Eric Preston would need to file a “substantial shareholder notice” because it had exceeded a five per cent holding. Mr Drummond said that he had better speak to Mr Anderson about it.
86 Mr Drummond then spoke to Mr Anderson. Thereafter, Mr Drummond telephoned Mr Caldow and reported that he had spoken to Mr Anderson who had said that it was not necessary to lodge a substantial shareholder notice as the shares were held by ANZ and that ANZ held 27 million of these shares.
87 By an email dated 4 October 2007, from Mr Rice to Mr Yeo, Mr Rice advised Mr Yeo that Opes Prime sponsored a V8 Supercar and invited Mr Yeo to nominate some Euroz Securities’ employees to attend the Indy Car Race at the Gold Coast on 19 October 2007, as the guests of Opes Prime. Mr Yeo duly nominated four advisors to attend the Indy Car Race in response to Opes Prime’s invitation.
88 On 19 December 2007, Mr Rice sent Mr Yeo an email inviting four of the Euroz Securities advisors to join Opes Prime at the semi-final of the Australian Open tennis tournament. The invitation was to have dinner and drinks followed by the tennis. Mr Yeo responded by an email saying that there was plenty of interest in the invitation and asking Mr Rice to send him a list of Euroz Securities advisors and “their total loan balances”. Opes Prime then sent Mr Yeo the list he requested. This list named each of the Euroz Securities advisors (who was described as a “referrer”), the clients of Euroz Securities whom each had referred to Opes Prime, and the balance outstanding to Opes Prime on each client’s loan. The list showed that the total number of persons referred by Euroz Securities “referrers” was 53. This included Eric Preston. The balance outstanding on Eric Preston’s loan was $2,990,045.98. The list of persons with Opes Prime facilities also included a number of employees of Euroz Securities, and relatives of employees of Euroz Securities. Among those persons was Mr Caldow’s brother-in-law and sister-in-law.
89 In late January 2008, Ms Nicola Thiel of Leveraged Equities attended a meeting of Euroz Securities brokers at their premises. As mentioned, by that time there were over 50 stockbroking clients of Euroz Securities who had entered into securities lending and borrowing agreements with Opes Prime as a means of financing their respective share trading activities.
90 After that meeting Ms Thiel and Mr Caldow had a conversation. In the course of that conversation, Ms Thiel told Mr Caldow that a client who has an Opes Prime facility transfers ownership in the shares to Opes Prime and Opes Prime on‑transfers ownership in the shares to obtain its funding from banks. This meant that the stocks were not held in the client’s name, but were held by ANZ.
91 After that conversation with Ms Thiel, Mr Caldow raised this issue with Mr Yeo who said that he would check with Opes Prime.
92 On 31 January 2008, Mr Brittain of Euroz Securities read an article in The Australian newspaper which was written by Ms Adele Ferguson entitled “Banks put squeeze on Tricom”. The article included the following statements:
ANZ has given Tricom managing director Lance Rosenberg only days to reduce the broker’s margin loan book.
Tricom yesterday belatedly settled its trades with the Australian Securities Exchange following a crisis that began just over a week ago when the share market lost 5 per cent in one day, triggering margin calls.
Tricom’s main creditors, ANZ, Merrill Lynch and Credit Suisse, then effectively froze Tricom’s accounts.
Tricom, which holds about 29,000 accounts, was forced to sell shares it financed on behalf of clients…
…
The Tricom model is such that clients who take out a securities lending agreement (similar to a margin loan) sign away their beneficial ownership of the shares to Tricom.
This can leave clients as unsecured creditors behind the banks.
The calibre of Tricom’s clients is unknown because they are not required to provide financial details to get a securities lending agreement. They just have to tick a box and agree to collateral of cash or shares.
“When you provide shares as collateral, you transfer them to us absolutely,” the Tricom securities lending agreement booklet says.
So, when a client takes out a securities lending agreement, the shares the client buys are transferred to Tricom, which takes on the beneficial ownership of the shares. This means the client takes on Tricom’s credit risk.
The most likely reason a client goes to Tricom is because Tricom does not require the documentation of other margin lenders, such as ability to prove financial worth or ability to pay.
“Some people who take out loans with Tricom don’t have all the financials required to get a traditional loan,” one broker said.
Tricom’s bankers, ANZ, Merrill Lynch and Credit Suisse, have contracts with Tricom, not with Tricom’s clients. That is how they have the power to freeze Tricom’s accounts and force Tricom to sell shares when there is a margin call.
The common perception among many of Tricom’s clients is that the shares belong to them, but when they take out a securities lending agreement with Tricom they sign the beneficial ownership of those shares to Tricom. It is this that makes Tricom different to most other margin lenders. They don’t own shares on trust for the client.
In most cases margin lenders hold shares in a separate account in the client’s name. In Tricom’s case, the shares get mixed in with Tricom’s and everyone else’s shares, providing securities to the banks that provide margin loans to Tricom.
The exact wording in Tricom’s securities lending explanatory booklet is: “The margin lending facility operates through a securities lending agreement for your competitive advantage. This differs from many of the traditional margin lending facilities. Although we refer to ‘lending’ and ‘borrowing’ securities, the securities are actually transferred absolutely to the other party.”
It continues: “When you lodged securities as margin cover or against the loan we make to you, you are transferring those shares absolutely to Tricom. You do not retain any beneficial ownership in the shares you lend to Tricom. Ordinarily Tricom will on-lend the securities it receives on a loan from you, participating in the extensive securities lending market in Australia. That securities lending market is not specifically regulated and you have no rights relating to the securities loan under any exchange market rules.”
93 Mr Brittain also discussed the article with Mr Yeo and Mr Hewett. Mr Yeo and Mr Hewett spoke to Mr Rice at Opes Prime about the nature of the Opes Prime facility. Mr Rice sent an email in response to the matters raised by Mr Yeo and Mr Hewett. The email stated:
Further to our discussions, please find following an explanation of our structure and current position.
Opes Prime operates under a securities lending and borrowing structure, such that the legal ownership of stocks passes to Opes Prime and the client retains full economic and beneficial ownership of the shares. The stock will most commonly be registered in the name of ANZ Nominees who are our nominee/custodian.
We source the funding for the book through securities lending and borrowing arrangements with a number of counterparties, including ANZ, Merrill Lynch and Dresdner.
The risk associated with this structure is if Opes Prime was to become insolvent then the clients would become unsecured creditors of Opes Prime for the difference between the market value of their securities and the amount they have borrowed from us.
Please note the following about the structure of Opes Prime Stockbroking:
·We are a full market participant of the ASX and are subject to the ASX Operational and ACH Clearing Rules;
·We have an AFSL and are subject to ASIC rules and regulations;
·These regulations require Opes Prime to maintain various Risk Management and Compliance processes and procedures;
·As an ASX participant we must calculate and report our capital adequacy requirements on a daily basis;
·We are regularly audited by ASX as all participants are;
·We are audited by Ernst & Young;
·A reasonable portion of our total assets under management are held in short positions, which provides a degree of protection in market downturns;
·We receive value from our funders on all stocks which we provide a LVR against and to lower the risk, provide a lower LVR to our client than that we receive from our funders. We are not using excess collateral on large stocks to provide a LVR against lower market cap stocks;
·Our long book is geared conservatively and we have significant buffers available. During the recent market volatility, we have conducted stress testing on our book and are comfortable where we are placed. Our analysis indicated that the market would have to fall by a further 20% or more and none of our clients meet any of their margin calls for us to have an issue. Needless to say, the risk of every single client failing to meet their margin calls is so unlikely as to be negligible;
·In the event of a significant rapid market correction, we have the capacity to raise cash through sources, other than our securities lending and borrowing arrangements with our funders, to meet margin calls with our funders while our clients are meeting their margin calls; and
·Our funders completed significant due diligence before and on an ongoing basis on our operations. For example, both ANZ and Merrill Lynch have been in contact with us in the past few days to expressly state their continued support and their desire that we should continue our business with them. Both expressed that they felt this way based on our past performance, our experience, procedures and prudence, and our evident IT capabilities.
The risk management procedures that we have in place include the following:
·Processes for setting up clients that include credit checking and other verification processes to give us surety around client’s capacity to meet margin calls;
·Use of standard legal agreements;
·We have an Operational Risk team to monitor client positions;
·We monitor and margin client positions on a daily basis; and
·A clear methodology for determining our lending criteria for securities that is based on a number of factors including market capitalisation, liquidity, concentration and diversification of portfolio.
In respect of clients not meeting margin calls in agreed timelines, then we will sell down their portfolio to bring the portfolio back into position, in line with margin lending industry practice.
With these policies and procedures in place, we are confident that the firm is in a strong position and more than capable of managing market volatility.
Our overall value proposition of product, credit, service and price are extremely competitive if not market leading and we will continue to work with all our partners to provide innovative financial solutions to help everyone grow their businesses.
I am more than happy to provide you further information and speak to anyone about concerns they may have.
94 On 31 January 2008, Mr Brittain arranged for an email to be sent from Mr Hewett to all brokers attaching a statement regarding Opes Prime and also Tricom. Mr Yeo then instructed all the retail brokers including Mr Caldow to send out the email to their clients. Mr Caldow did so.
95 On 1 February 2008, Mr Drummond received an email from Mr Caldow. The email stated:
General Margin Lending Comments from Euroz Securities
We refer to recent media articles about the ASX settlement difficulties being experienced by Tricom Equities Limited and the potential exposures of their clients. The problems being experienced by Tricom are largely as a result of the margin lending business that they operate which has been exposed to the significant decline in value of some of their substantial stock positions.
Euroz Securities would like to highlight that we do not operate any margin lending business and have no direct exposure to Tricom or any of their operations.
However, some of our clients have entered into securities lending arrangement and it is worth highlighting the fundamental differences in the borrowing arrangements between a securities lender (eg Tricom, Opes Prime) versus traditional margin lenders (like St George, Leveraged Equities, BT, etc).
Typically securities lenders provide more attractive interest rates than margin lenders, lend on a greater number of stocks than margin lenders and provide a higher loan to value ratio (LVR) for the stocks on which the lend. Importantly the client is not required to provide detailed financial information to get a securities lending agreement. One significant point is that the securities lending model requires legal ownership to pass from the client to the securities lender and often the stock is held in a pooled account rather than segregated by individual client HIN. This means that all the shares for all the clients get mixed in together with the securities lenders and this pool is used as security by the banks that provide the loans to securities lender.
The risk associated with this structure is that if the securities lender was to become insolvent then the clients would become unsecured creditors of the lender for the difference between the market value of their securities and the amount they have borrowed. Please note that the securities lending market is not specifically regulated and there are no rights relating to the securities loan under any stock exchange market rules.
There are obviously some benefits in the securities lending arrangements, however, equally you need to consider the additional risks. In the light of the recent issues, these risks may warrant reassessment.
96 In early February 2008, Mr Brittain prepared a document described as the “Operations Monthly Report for January 2008”. It was distributed by email to Mr Diamond for review on 8 February 2008, and was then included in the board papers for the meeting of directors of Euroz Securities on 19 February 2008. The report contained the following entry under the heading “Risk Management and Compliance”:
·Issue at ASX on 29 January 2008 resulting in delay to the cash settlement process and caused by Tricom being unable to meet their settlement obligation. This has resulted in a review of our securities lending operations with Opes given the higher risk associated with these products.
·Evaluating a further issue the above highlighted with respect to our authority to advise clients regarding their securities lending arrangements and whether this requires a change to our AFSL.
97 Mr Rice of Opes Prime came to Perth and met with representatives of Euroz Securities on 5 February or 6 February 2008. During the course of the meeting, Mr Rice made a number of statements. These statements were to the following effect:
Opes was a participant in the ASX and therefore calculated and reported its capital and equity requirements to the ASX on a daily basis;
Opes was regularly audited by the ASX and ASIC;
Opes had the full support of the ANZ and their other banks;
Opes was audited by Ernst & Young;
For Opes to have an issue the Australian Stock Market would need to fall by 20% in a day; and none of its client’s paid their margin calls.
98 At the meeting, in response to a query from Mr Brittain, Mr Rice confirmed that if Opes Prime went down, the client would be an unsecured creditor of Opes Prime.
99 After the meeting Mr Caldow telephoned Mr Drummond and reported on what Mr Rice had said at the meeting. The content of this telephone conversation is an important issue in this case. I discuss this issue in detail below. However, it is accepted that during that telephone conversation Mr Caldow said that he was passing on information which he had heard from Mr Rice, and that if Mr Drummond wished to discuss the information further that Mr Drummond should telephone Mr Rice.
100 Subsequently, Mr Drummond did telephone Mr Rice and discuss the financial position of Opes Prime with Mr Rice.
101 On 6 February 2008, after he had spoken to Mr Rice, Mr Drummond consulted with Mr Anderson. Mr Anderson advised Mr Drummond that he had worked too hard and too long to take any risk in relation to the Opes Prime facility. Mr Drummond then told Mr Caldow of the conversation that he had had with Mr Anderson. Mr Caldow said to Mr Drummond that he could not agree more with Mr Anderson’s advice. A few days later, Mr Caldow and Mr Drummond had a telephone conversation. Mr Drummond asked how he could get out of Opes Prime. Mr Caldow said he could sell down some stock and pay out the loan, or he could refinance.
102 Shortly thereafter, Mr Caldow emailed Leveraged Equities inquiring as to whether it would refinance the Opes Prime facility by providing a margin loan to Eric Preston. He sent details of Eric Preston’s existing share portfolio.
103 Mr Drummond, on behalf of Eric Preston, continued to use the Opes Prime facility to trade in shares, after receiving the email of 1 February 2008 and the advice from Mr Anderson and Mr Caldow.
104 On 11 February 2008, Mr Caldow received an email from Leveraged Equities saying that it would not refinance the Opes Prime facility of Eric Preston because of the nature of the stocks in Eric Preston’s portfolio. Mr Caldow forwarded this email to Mr Drummond.
105 On 11 February 2008, Mr Drummond also emailed CommSec stating that he was looking at opening a margin loan account and inquiring as to the loan to value ratios CommSec would allow in respect of Cooper Energy, OM Holdings, Sundance Energy and Territory Resources. CommSec replied later that day, in effect, stating that it would not provide a margin loan on the basis of the security comprising shares in those companies.
106 On Monday, 11 February 2008, an article appeared in the Australian Financial Review headed “Opes Prime ‘doing fine’ in volatile market”. The paragraphs of the article read:
Broker Opes Prime last week distanced itself from troubled rival Tricom Equities, which has been forced to reduce the size of its loan book after failing to settle trades on time two weeks ago.
Melbourne-based Opes Prime said there had not been a significant increase in margin calls to its clients in January and early February when the benchmark S&P/ASX 200 Index plunged nearly 11 per cent.
Banks such as Commonwealth Bank of Australia, Macquarie Bank and Westpac Banking Corporation experienced a big rise in margin calls and removed some companies from the margin lists.
Opes Prime executive director Julian Smith attributed the strength of recent trading to the diverse nature of clients’ portfolios. It tends to lend against a portfolio of shares so if the price of one share falls sharply, Opes Prime can often increase the loan against other shares to compensate.
Mr Smith said Opes Prime had margin calls on less than 2 per cent of its book and that figure was decreasing rapidly.
Even at the height of volatility in the market, our total client margin calls did not go beyond 7 per cent…At that sort of amount, we do not have any cause for concern.
Mr Smith said the firm had held extra discussions with its bankers, which include Australia & New Zealand Banking Group and Merrill Lynch, during the past few weeks, and the lenders had expressed their full confidence in the company.
“They all said to us they were very happy and that we should continue to do what we are doing,” he said, and January had been a “very good month” as business inflows picked up.
Plans to float on the ASX via a backdoor listing through quoted shell company Reco were on track, Mr Smith said, but he declined further comment.
The broker has a loan book of $1 billion against $2 billion of assets.
The firm’s large investment in information technology systems was another reason behind its ability to cope with the recent volatile equity markets, and its business model as a stock lender rather than a margin lender gave it more flexibility…
107 On Tuesday, 12 February 2008, there was a board meeting of Euroz Securities. Among those present at the board meeting were Mr Caldow and Mr Yeo. The minutes of that board meeting record the following:
Mr McKenzie tabled and read to Mr Diamonds report on financials…He highlighted:
…
·OPES positions – reduction in positions held with OPES
·A discussion on EZL held in OPES was held
·It was RESOLVED that no staff were to hold their EZL on an OPES account
·A discussion about the market conditions (current and expected) was held.
108 Later in February 2008, Mr Drummond, on behalf of Eric Preston, also applied to the National Australia Bank Limited (NAB) for a margin loan secured against the Eric Preston share portfolio in order to refinance the Opes Prime facility. The NAB advised that it would not refinance the Opes Prime facility on the basis only of the Eric Preston’s portfolio. It would, however, provide a loan secured against Mr and Mrs Drummond’s house. Mr Drummond would not agree to that.
109 On 18 March 2008, there was a meeting of the board of directors of Euroz Securities. Among those present were Mr Yeo and Mr Caldow. The minutes of the meeting record as follows:
Mr McKenzie tabled and read to Mr Diamonds Report on financials…He highlighted:
·OPES positions – reduction in EZL positions held with OPES
Comment: S Yeo commented that he had discussed EZL positions with NAB and OPES and that they had a positive view on how those positions would be managed.
·Brokerage about 4-5 best month this year. However March could see reductions in brokerage due to market conditions.
110 During the period 1 February 2008 to 27 March 2008, Mr Drummond made 68 trades using the Opes Prime facility. There was no diminution in the amount of trading engaged in by Eric Preston during that period compared to the level of trading engaged in by Eric Preston during the period after the Opes Prime facility was entered into and 1 February 2008.
111On 27 March 2008, administrators were appointed to Opes Prime.
112 On 28 March 2008, Mr Yeo rang Mr Caldow at approximately 7 am and said words to the effect that Opes Prime had gone into administration.
113 As at 27 March 2008, Eric Preston held a portfolio worth $7,822,957.15. The portfolio was comprised of the following shares:
6,000 APP 30,000 BHP 850,000 COE 743,685 OMH 11,400,000 SEA
114 On 27 March 2008, the amount outstanding on Eric Preston’s Opes Prime facility was $3,075,143.
115 On 28 March 2008, Mr Russell Kane, a director of Euroz Securities, sent Mr Jay Hughes, the executive director of Euroz Limited, and also a director of Euroz Securities, an email in the following terms:
How the f#$#$K can we have a client with $5-6m exposure to OPES prime.
I am sorry but that is dumb.
116 On 15 October 2008, liquidators were appointed to Opes Prime. Eric Preston has filed a proof of debt in the sum of $5,389,251.09.
117 On 4 August 2009, a scheme of arrangement was entered into between Opes Prime and its creditors. The parties have proceeded on the basis that the indications are that Eric Preston will recover around 37 cents in the dollar from the scheme of arrangement.
118 I make findings in terms of the description of the events and circumstances described in [9]-[117] above.
ERIC PRESTON’S CLAIM AGAINST EUROZ SECURITIES
119 On 20 May 2008, Eric Preston commenced this proceeding. The pleadings were amended during the course of the trial. Eric Preston amended its statement of claim and Euroz Securities amended its defence and counterclaim.
120 Further, on 25 September 2009, each of Eric Preston and Euroz Securities was given leave to reopen their respective cases, to permit Eric Preston to introduce further evidence comprising the Operations Monthly Report for January 2008 prepared by Mr Brittain and to permit the parties to make further submissions in relation to issues arising from that report. Also, by orders made on 11 November 2009, leave was given to Eric Preston to reopen its case to permit it to tender documents relating to the filing of Eric Preston’s proof of debt and the scheme of arrangement, entered into on 4 August 2009. I also sought submissions from the parties as to how I was to treat the fact that there was a prospect that Eric Preston would receive a dividend from the scheme of arrangement in the disposition of this proceeding. I received fulsome submissions on this issue. However, in light of the conclusions to which I have come, it is unnecessary to address those submissions.
121Eric Preston relies upon the following causes of action:
(a)breach of contract,
(b)breach of a duty of care allegedly owed by Euroz Securities to Eric Preston,
(c)damages arising from misleading or deceptive conduct in contravention of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), and
(d)breach of fiduciary duty.
THE WITNESSES
Eric Preston’s witnesses
122 The following persons gave evidence as part of Eric Preston’s case: Mr Drummond, Mrs Drummond, Mr Anderson, Mr Blashki and Mr McKimm.
Mr Bruce Scott Drummond
123 Mr Drummond swore five affidavits. The first affidavit was sworn on 9 September 2008. This is Mr Drummond’s primary affidavit. The second affidavit was sworn on 19 November 2008. Mr Drummond annexed to his second affidavit a copy of statements issued by Euroz Securities setting out Eric Preston’s share trading activity between January 2004 and April 2008. There are also statements from each of Leveraged Equities and Opes Prime, relating to Eric Preston’s share trading using the respective facilities.
124 Mr Drummond’s third affidavit was sworn on 25 February 2009. This affidavit was sworn after Mr Drummond had seen the affidavit of Mr Caldow sworn on 30 December 2008 and the affidavit of Mr Brittain sworn on 5 January 2009. This affidavit responds to statements made in the affidavits of Mr Caldow and Mr Brittain.
125 Mr Drummond’s fourth affidavit was sworn on 15 March 2009, the day before the commencement of the trial. In this affidavit, Mr Drummond refers to, and seeks to supplement or explain statements made in his previous affidavits. Mr Drummond’s fifth affidavit was sworn during the trial on 24 March 2009, and related to the giving of further discovery.
126 Mr Drummond’s evidence was unsatisfactory and must be approached with caution. This is particularly so in relation to the evidence which is contained in his affidavits and which relates to his dealings with Mr Caldow. In my view, significant aspects of Mr Drummond’s evidence, particularly his affidavit evidence, was tailored so as to accommodate the case which he and his lawyers sought to advance.
127 In his first affidavit, in particular, Mr Drummond omitted to refer to a number of matters which would have formed part of an accurate account of the events which occurred, but which had the propensity to undermine the case which he sought to make. As I mention in my reasons below, a significant example of Mr Drummond creating a misleading impression through omission, occurred in relation to his evidence about his existing relationship with Leveraged Equities at the time that he entered into the Opus Prime facility. In his first affidavit, Mr Drummond sought to create the impression that he enjoyed a good relationship with Leveraged Equities and that it was only through the intervention of Mr Caldow that that good relationship was severed. It was only after he learned that Mr Caldow had deposed in his affidavit to the complaints that Mr Drummond had made to him about Leveraged Equities, that Mr Drummond acknowledged in his third affidavit that he had not been content with the facilities which were available to him under the Leveraged Equities facility.
128 A further example of Mr Drummond failing to be frank as to circumstances and events in his first affidavit which had a propensity to undermine the case he sought to advance, was the failure to mention the extent to which he dealt with Mr Rice of Opes Prime, directly, before entering into the Opes Prime facility. Mr Drummond makes no mention of the fact that he telephoned Mr Rice on 17 May 2007, about the Opes Prime facility, nor the fact that he had sought Mr Rice’s assistance with the completion of the application forms.
428 In any event, even if it had been the case that Eric Preston had proved that there was a retainer whereby Euroz Securities undertook to act as Eric Preston’s financial advisor, and fiduciary obligations had arisen pursuant to the obligation to act in that capacity, the fiduciary obligations would not have given rise to the positive duties of investigation and advice as to the nature of the Opes Prime facility, the risks associated with using that facility and the financial state of Opes Prime. This is because the state of the authorities in Australia appears to be that the scope of the fiduciary obligation founded on the obligation to act in another’s interest, is proscriptive and not prescriptive.
429 In Breen v Williams (1996) 186 CLR 71 (Breen), Gaudron and McHugh JJ observed at 113:
In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed. (Footnote omitted.)
430 These observations were cited with approval by McHugh, Gummow, Hayne and Callinan JJ in Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at 197-198, at [74]. (See also, Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 at 78, at [290] per Jacobson J.)
431 The question which then arises is how does one reconcile the observations of Brennan J in Daly (see [424] above), with these observations.
432 This task was undertaken by Austin J in the case of Aequitas v Sparad No 100 Ltd (formerly Australian European Finance Corp Ltd) (2001) 19 ACLC 1,006. Austin J referred to the “discordant” nature of the observations of Brennan J in Daly (see [424] above), and the observations of Gummow and McHugh JJ in Breen. At 1,059, at [286]-[287], Austin J observed:
The reasoning in Breen v Williams is quite a distance away from Brennan J’s dictum in Daly v The Sydney Stock Exchange, and yet Daly v The Sydney Stock Exchange was cited by Gummow J (at 134) without any hint of disapproval. It would be possible to reconcile the cases by orienting each case to its facts, on the basis that the doctor-patient relationship is less comprehensively fiduciary than the financial advisor-client relationship. But that distinction would not give effect to the conceptual analysis which found favour with five of the six judges who decided Breen v Williams. The logic of their analysis is that most of the observations of Brennan J do not relate to the fiduciary character of the advisor’s position.
In my opinion, in light of the reasoning in Breen v Williams, Brennan J’s dictum should be taken to refer, for the most part, to the contractual aspects of the advisor‑client relationship. The duty to provide “best advice” and to disclose knowledge and information arise out of the advisor’s “undertaking”, and are therefore implied terms of the contractual retainer. And disclosure may also relieve the advisor from the fundamental fiduciary duty not to “assume a position where his self-interest might conflict with the honest and impartial giving of advice”.
The trading commission and the trailing commission
433 Eric Preston also included as one of the particulars of its pleaded allegation that Euroz Securities breached its fiduciary duties, that Eric Preston’s entry into the Opes Prime facility permitted Euroz Securities to obtain for itself payment of a trailing commission offered by Opes Prime at a rate of 0.6% of the loan made by Opes Prime to Eric Preston.
434 Further, it was pleaded that Euroz Securities benefited financially by Eric Preston’s entry into the Opes Prime facility because that facility permitted Eric Preston to engage in a greater level of share trading activity than did the Leveraged Equities facility, particularly in relation to stocks researched by Euroz Securities. This, said Eric Preston, meant that Euroz Securities was able to benefit by earning a greater level of commission on Eric Preston’s share trading activities.
435 It is perhaps arguable that a fiduciary obligation not to obtain any unauthorised benefit from the stockbroker-client relationship will have arisen from the appreciation by Mr Caldow in May 2007, that Mr Drummond was contemplating entering into the Opes Prime facility. These circumstances could arguably have given rise to the need by Euroz Securities to disclose to Eric Preston that it would receive a financial benefit in the form of a trailing commission payable by Opes Prime to Euroz Securities, as part of receiving the informed consent of Eric Preston to Euroz Securities obtaining this financial benefit.
436 The evidence showed that Opes Prime paid Euroz Securities a trailing commission in relation to Eric Preston’s Opes Prime facility on a monthly basis.
437 Senior counsel for Eric Preston referred in his opening to the fact that Euroz Securities obtained a trailing commission in respect of the entry by Eric Preston into the Opes Prime facility. Further, Mr Caldow was cross-examined in relation to that matter. Mr Caldow admitted that he had not expressly told Mr Drummond before or after Eric Preston entered into the Opes Prime facility that he or Euroz Securities would earn a trailing commission. However, Eric Preston did not in its statement of claim seek to identify any specific loss which was said to have been caused to it by reason of the failure to disclose the trailing commission; nor was any specific relief claimed in the statement of claim founded upon an allegation that there had been a failure to disclose the trailing commission. Nor was there any allegation that the failure to disclose the trailing commission led to the loss of Eric Preston’s share portfolio – which was the loss which Eric Preston pleaded as having been caused by the breach of Euroz Securities’ fiduciary duty.
438 Also, in its written closing submissions, Eric Preston did not contend for any relief founded on a breach of Euroz Securities’ fiduciary duty arising from its alleged failure to disclose the trailing commission.
439 Further, had Eric Preston properly formulated and pursued a claim that Euroz Securities obtained an unauthorised financial benefit in the form of the trailing commission, the question would have arisen as to whether there was an informed consent by Eric Preston to the financial interest of Euroz Securities in the entry into the Opes Prime facility by Eric Preston. In this regard, it is to be observed that among the string of emails between Mr Caldow and Mr Rice which Mr Caldow forwarded to Mr Drummond prior to Eric Preston’s entry into the Opes Prime facility, was an email that stated Opes Prime would be paying Euroz Securities a trail commission. Mr Drummond, in cross-examination, accepted that he had been made aware that Euroz Securities would be earning a trailing commission (transcript at 306) prior to entry into the Opes Prime facility.
440 As to the trading commissions, earned by Euroz Securities, no claim was made for any specific relief in relation to the commissions earned by Euroz Securities in respect of the increased number of trades made by Eric Preston using the Opes Prime facility. Nor was it said that the failure by Mr Caldow to state that the use of the Opes Prime facility by Eric Preston would give rise to a higher level of share trading and the attendant payment of a greater amount of money by way of trading commissions, caused the loss of the share portfolio.
441 Had any claim been mde by Eric Preston that there was the receipt of an unauthorised financial benefit by Euroz Securities by way of the increased trading commission, it is likely, that it would have been met by the defence that Eric Preston knew of this financial interest of Euroz Securities and consented to Euroz Securities being paid the increased trading commissions consequent upon the increased trading opportunity offered by the Opes Prime facility. During cross-examination (transcript at 274), Mr Drummond accepted that he understood that Euroz Securities would earn increased commissions on the increased trading which would result from the use of the Opes Prime facility, and he was happy for that to happen.
442 I note that the plea in relation to the undisclosed receipt of the trading and trailing commissions is also referred to in the particulars of breach of the retainer. My comments in the preceding paragraphs on this question of the trading and trailing commissions apply mutatis mutandis to those particulars.
443 Accordingly, to the extent that Eric Preston may have sought to do so (which, in my view, it did not), Eric Preston has not succeeded in establishing any right to relief founded on allegations relating to the receipt by Euroz Securities of trading and trailing commissions.
CAUSATION
444 It was a major contention of Euroz Securities that even if it had breached any of the duties alleged by Eric Preston, any loss which Eric Preston claimed that it had suffered, was not caused by any such breach of duty. This was, said Euroz Securities, because the chain of causation between any breach of duty and Eric Preston’s claimed loss was broken by the disclosure that was made in Euroz Securities’ 1 February 2008 email and subsequent conversations with Mr Caldow about the email. The relevant disclosure being that the Opes Prime facility was a securities lending and borrowing agreement and not a margin loan and that Eric Preston would in the event of the insolvency of Opes Prime, rank as an unsecured creditor for the difference between the value of its portfolio and the amount outstanding to Opes Prime under the facility, and that ANZ owned the shares in Eric Preston’s portfolio.
445 In its reply, Eric Preston contended that the email sent by Euroz Securities on 1 February 2008, was confusing, misleading and inadequate. It was pleaded that a “reader” of the email may believe that the email referred only to the legal ownership passing from the client to the security lender so that a reader of such email who believed that the beneficial ownership of the shares remained with the client, would or might, be misled into a false sense of security.
446 Further, Eric Preston pleaded in its reply, that the email did not disclose that the shares were transferred by the security lender to banks in consideration of loans made to the securities lender. It was also said that the email did not fully disclose all of the risks including risks associated with on-lending of shares by the banks for short-selling or other purposes, insolvency of the banks, and consequences of a significant downturn in the share market and the failure of other clients of the security lender to meet their obligations. Also, pleaded Eric Preston, the email did not disclose that even if the security lender did not become insolvent, the clients were no more than unsecured creditors of the security lender - having no more than a contractual right to call for the replacement of their shares on the repayment of their loans.
447 Further, it was said that Euroz Securities’ email did not advise that the clients had neither legal nor beneficial ownership in their shares and the share portfolio was being held on their behalf by Opes Prime or ANZ. It was also said that the email did not advise that having regard to the fate of Tricom, the only way clients of Euroz Securities who had an Opes Prime facility could ensure they preserve the equity in their share portfolio was to forthwith terminate their Opes Prime facility.
448 I find that pleaded criticisms made in the reply as to the content of the 1 February 2008 email are misconceived. They comprise an instance of the distance between the case the lawyers for Eric Preston sought to make, and Mr Drummond’s evidence. Many of the criticisms in the reply are expressed in objective terms as to how a “reader” might construe the email, as opposed to how Mr Drummond actually did construe the email. Much time was taken up at the trial, including by evidence from Mr McKimm, in addressing these criticisms of the wording of the email. However, in my view, the essential issue was whether the email and the consequential conversations were effective in dispelling the wrong impression that Mr Drummond had as to the material characteristics and attendant risks of the Opes Prime facility, so that he appreciated that Eric Preston would lose its share portfolio if Opes Prime became insolvent.
449 I find that by 6 February 2008, at the latest, Mr Drummond knew and understood that the Opes Prime facility was not the same as a margin lending facility and that Eric Preston did not own the shares in its portfolio which had become “pooled” with other shares and were owned by ANZ. Further, Mr Drummond knew and understood that under the Opes Prime facility, Eric Preston would, in the event of the insolvency of Opes Prime, rank as an unsecured creditor for the difference between the value of its portfolio and the amount outstanding to Opes Prime. I find that, by 6 February 2008, Mr Drummond was fully apprised of the risk under the Opes Prime facility, that in the worse case scenario, Eric Preston would lose all of its portfolio.
450I base that finding on the following considerations.
451 By the email of 1 February 2008, Euroz Securities informed Mr Drummond that the the Opes Prime facility was different from a margin lending facility, that under a securities lending and borrowing facility there was a pooling of the shares of all clients and that those “pooled” shares were used as security by the banks which advanced funds to the securities lender. The email stated that a client was, in the event of Opes Prime becoming insolvent, at risk of ranking as an unsecured creditor of Opes Prime for the difference between the market value of the portfolio and the amount outstanding to Opes Prime.
452 In para 107 of his first affidavit, Mr Drummond acknowledged that the 1 February 2008 email advised that the Opes Prime facility was a share lending arrangement, which was fundamentally different to the traditional margin lending arrangement.
453 Further, during the cross-examination of Mr Drummond on para 3 of his fourth affidavit, Mr Drummond accepted that he appreciated from the information contained in the email, that Eric Preston’s portfolio was at risk of being lost and that he should terminate the Opes Prime facility. The following exchange occurred:
“Had I not been told this” – so, had you not been told that the share market had to fall 20 per cent, no client to make a margin call, and that your portfolio was safe, is that what you’re trying to say, if you hadn’t been told all those three things, it would have been your view that Eric Preston’s share portfolio was at risk under the OP facility and you would have terminated it straight away, is that what you’re trying to say?---Yes.
So if – you’ve just told us that the information about the 20 per cent and the information about the – no Opes client making a margin call, that was conveyed straight on from Mr Rice, by Mr Caldow and you spoke to Mr Rice yourself about that?---Yes.
So if you hadn’t been told that by Mr Rice, you would have got out straight away, is that your evidence?---I would have looked very closely at getting out straight away, yes.
The reason you would have looked very closely at getting out straight away before you were told that is because of the email you received on 1 February, isn’t it?---Yes.
454 Further, Mr Drummond acknowledged in cross-examination (transcript at 325) that Mr Caldow told him in relation to the February 2008 email, that in the worse case scenario Eric Preston would lose all of its stock.
455 It is also apparent from the evidence of Mr Anderson that by 6 February 2008, Mr Drummond understood that the shares in Eric Preston’s portfolio were not owned by Eric Preston but had been pooled together and were owned by ANZ. It follows that I reject Mr Drummond’s evidence in para 5 of his fourth affidavit, insofar as he is deposing therein, that he did not by February 2008, appreciate that the shares in the portfolio were not beneficially owned by Eric Preston. If he did not appreciate that fact, it could only have been because he did not understand the concept of “beneficial ownership” as applied to shares.
456 In its defence, Euroz Securities contended that Eric Preston could have avoided the loss because at all material times after 1 February 2008, Eric Preston had the financial capacity to terminate the Opes Prime facility by selling sufficient shares to pay the balance outstanding on the facility.
457 I have already found that it was from early February 2008, that Mr Drummond had a reasonable opportunity to avoid the loss of the value of the Eric Preston share portfolio by selling sufficient shares in Eric Preston’s portfolio to discharge the debt due to Opes Prime under the facility.
458 Further, during cross-examination, Mr Drummond admitted (transcript at 335) that it would have been open to him, on behalf of Eric Preston, to have terminated the Opes Prime facility by selling a sufficient number of shares to pay the Opes Prime debt. Also, at [323] above, I referred to the conversation between Mr Caldow and Mr Drummond in the course of which Mr Drummond told Mr Caldow that he did not want to sell down the shares, because he intended to use the proceeds of the shares to build a new house. I have accepted the evidence of Mr Caldow as to the content of this conversation.
459 That Mr Drummond did not want to pursue the option of selling down sufficient stock to pay out the Opes Prime facility, is further evidenced by the evidence of Mr Caldow that on 5 February 2008, shares in the company OM Holdings Ltd, a company in which Eric Preston held shares, increased in price. Mr Caldow said to Mr Drummond that he should take a profit on some of the OM Holdings shares to reduce his loan balance but Mr Drummond said that he did not want to do this.
460 Mr Drummond did investigate refinancing with another financial institution on the basis of Eric Preston’s existing share portfolio, as an alternative to selling down some stock. However, even after Mr Drummond had been advised on 10 March 2008, that NAB would not refinance Eric Preston’s Opes Prime loan on the basis only of its existing portfolio, Mr Drummond still did not implement a strategy to sell down sufficient shares in the portfolio, so as to pay out the loan. As mentioned above, after 10 March 2008, Mr Drummond continued to purchase more Sundance Energy shares.
461 Mr Drummond may have made the assessment that it was not urgent for him to terminate the Opes Prime facility, but that does not mean that selling down a sufficient number of shares to pay out the facility was not a course of action which was open to him as a means of terminating the Opes Prime facility and avoiding the loss. I find that Mr Drummond was aware from early February 2008, that there were risks arising from the characteristics of the Opes Prime facility including that Eric Preston’s whole portfolio could be lost, but he was prepared to take those risks. As I have mentioned above, the reason Mr Drummond did not sell down sufficient shares to pay out the Opes Prime facility is because he did not want to do so.
462 I also observe that there was no evidence of Mr Drummond making any complaint blaming Euroz Securities for the loss of Eric Preston’s portfolio, at the time that he was advised of the appointment of the administrator to Opes Prime on 28 March 2008, or shortly thereafter. This is of some significance, in light of the fact that the evidence disclosed that Mr Drummond had certainly not hesitated to express his dissatisfaction with the professional performance of, Mr Anderson, in a situation of substantially less consequence to Mr Drummond in December 2006. The email which Mr Drummond sent to Mr Anderson dated 11 December 2006, was an immediate and vehement expression of Mr Drummond’s dissatisfaction.
463 It follows that, in my view, the chain of causation between any breach of duty complained of, and loss claimed by Eric Preston was broken by the advice that Euroz Securities gave Eric Preston by the email of 1 February 2008, and the subsequent conversation between Mr Drummond and Mr Caldow referred to above.
THE CLAIM THAT ERIC PRESTON CONTRIBUTED TO ITS LOSS
464 Euroz Securities pleaded, as an alternative, that if it was liable for the loss claimed by Eric Preston for misleading or deceptive conduct, that pursuant to s 1041I(1B) of the Corporations Act and s 12GF(1B)(b) of the ASIC Act, Eric Preston was responsible in whole or in part, for its loss and damage. This was because of Eric Preston’s failure to take reasonable care. Euroz Securities alleged that Eric Preston failed to read the terms of the Opes Prime Financial Services Guide, did not take legal advice in relation to the Opes Prime facility, and did not make inquiries as to why, in contrast to the position with the Leveraged Equities facility, it was not necessary to provide security to Opes Prime in respect of the facility. It was also alleged that after 1 February 2008, Eric Preston did not take immediate steps to terminate the Opes Prime facility.
465 In response to the claims in contract and tort, Euroz Securities also alleged that Eric Preston had by its own negligence contributed to any loss it suffered.
466 In light of my previous findings, it is unnecessary for me to make any further findings in relation to this plea.
THE CLAIM THAT MR ANDERSON IS PROPORTIONATELY LIABLE FOR ERIC PRESTON’S LOSS
467 Euroz Securities pleaded that if it was liable for loss suffered by Eric Preston, Mr Anderson was also liable for such loss as a concurrent wrongdoer in respect of the loss allegedly suffered by Eric Preston within the meaning of s 5AI(1)(a) of the Civil Liability Act 2002 (WA). In light of my finding that Euroz Securities is not liable for the loss claimed by Eric Preston, it is unnecessary to deal with this claim by Euroz Securities. However, I set out below in brief, the factual findings that I would have made on this claim.
468 It was alleged that Mr Anderson acted in breach of his duty of care in relation to the advice that he gave to Eric Preston on three occasions. These occasions were: first, in May 2007, in relation to Eric Preston’s entry into the Opes Prime facility, secondly, in relation to the advice sought by Mr Drummond in October 2007, as to the need for Eric Preston to file a substantial shareholder notice in respect of Eric Preston’s holding of Sundance Energy shares, and thirdly, in relation to the advice sought by Mr Drummond in February 2008, in relation to the 1 February 2008 email that Mr Drummond received from Euroz Securities.
Advice in relation to Eric Preston entering into the Opes Prime facility
469I deal with the first alleged breach of duty.
470 Euroz Securities pleaded that Mr Anderson since 1995, provided to Mr Drummond and his related entities general financial advice and was the “primary source of such advice”.
471 Euroz Securities then pleaded that Mr Anderson had previously provided advice to Mr Drummond that he should conduct his share trading activities through Eric Preston and had provided advice to Eric Preston, in relation to its entry into a margin lending facility with Leveraged Equities, which facility was entered into on the terms that Eric Preston provided a registered charge over its assets in favour of Leveraged Equities.
472 Euroz Securities went on to plead that on 24 May 2007, that Mr Drummond had sent Mr Anderson by email the Opes Prime Financial Services Guide and other documents required to establish an account with Opes Prime. Those documents, it was pleaded, did not include any document which comprised the giving of security by Eric Preston to Opes Prime in respect of any amounts outstanding under the Opes Prime facility.
473 Euroz Securities pleaded that by reason of those facts, Eric Preston reasonably expected Mr Anderson to advise it of any material risks associated with the termination of its facility with Leveraged Equities and the establishment of a new facility with Opes Prime, and that Mr Anderson owed to Eric Preston a duty to provide such advice.
474 It is alleged that in breach of that duty of care, Mr Anderson did not provide advice as to the risks associated with the termination of the facility with Leveraged Equities and the establishment of the new facility with Opes Prime.
475 In his evidence, Mr Anderson deposed that on 24 May 2007, Mr Drummond sent him two emails which contained information relating to the Opes Prime facility. The documents attached to the email comprised the Opes Prime Financial Services Guide, a document containing loan to value ratios and a copy of the refinancing instruction form together with a cross‑margin letter. There were also among the documents transmitted a document containing details of interest rates to be charged by Opes Prime and trailing commissions to be paid by Opes Prime. Mr Anderson gave evidence that, although Mr Drummond sent him the documents, Mr Drummond did not specifically ask him to advise on the documents. Accordingly, said Mr Anderson, he did not give Mr Drummond any advice as to Eric Preston’s entry into the Opes Prime facility.
476 Further, said Mr Anderson, he was not asked to advise on the nature and characteristics of the Opes Prime facility at the time that he witnessed the signatures of Mr and Mrs Drummond on the application form for the Opes Prime facility on 22 May 2007.
477 In cross-examination, Mr Drummond deposed that the reason he sent Mr Anderson the email containing the Opes Prime Financial Services Guide and the other documents relating to the entry into the Opes Prime facility, was so that Mr Anderson would be informed as to the details of the transaction and that he expected Mr Anderson to advise him in relation to the transaction.
478 However, the email sent to Mr Anderson does not call upon Mr Anderson to advise Mr Drummond in relation to the Opes Prime facility. Further, there was no other evidence that Mr Drummond expressly asked Mr Anderson for this advice. Mr Drummond’s expectation that Mr Anderson would advise him, was an unexpressed expectation.
479 I find that Mr Anderson was the primary source of general financial advice to Mr Drummond and his associated entities. However, I find that Mr Anderson was never expressly asked by Mr Drummond to provide advice as to the entry of Eric Preston into the Opes Prime facility, and that Mr Anderson did not give any advice on this matter.
Substantial Shareholder Advice
480I now deal with the second alleged breach of duty of care.
481 In this regard, Euroz Securities alleged that in October 2007, Eric Preston sought advice from Mr Anderson as to whether Eric Preston was required to lodge a substantial shareholder notice in respect of its shareholding in Sundance Energy.
482 Euroz Securities went on to allege that the advice which Mr Anderson gave in October 2007, that ANZ had lodged a substantial shareholder notice for all the shares in Sundance Energy, was advice given in breach of Mr Anderson’s duty of care to Eric Preston, because he should have advised that by lodging the substantial shareholder notice ANZ was contending that it held the legal and beneficial ownership in Sundance Energy.
483 I find that Mr Drummond did not ask for any advice from Mr Anderson, other than to advise whether it was necessary for Eric Preston to file a substantial shareholder notice. However, I recognise that this factual finding may not be determinative of the question of the scope of Mr Anderson’s duty to advise in that circumstance. However, as I have said by reason of the findings I have made, it is unnecessary to determine that question.
484 Further, Euroz Securities did not refer to any evidence as to what Mr Drummond would have done had the advice which Euroz Securities said should have been given, been given.
Advice in relation to 1 February 2008 email
485This claim does not call for the making of any factual findings.
THE CLAIM THAT OPES PRIME IS PROPORTIONATELY LIABLE FOR ERIC PRESTON’S LOSS
486 Euroz Securities also pleaded that if, which it denied, it was liable for the loss and damage suffered by Eric Preston, Opes Prime was a concurrent wrongdoer in respect of such loss within the meaning of s 5AI(1)(a) of the Civil Liability Act 2002 (WA). In support of that claim, Euroz Securities alleged that:
(a) Opes Prime had contravened s 942B of the Corporations Act in that it had not provided the information to Eric Preston required by s 942B(2) of the Corporations Act; and
(b) Opes Prime had breached its duty of care which it owed to Eric Preston.
487 Euroz Securities contended that Opes Prime breached its obligations under s 942B of the Corporations Act because the Opes Prime Financial Services Guide did not contain information of the kinds of financial services that Opes Prime was authorised to provide and the kinds of financial products to which those services related.
488 More specifically, Euroz Securities pleaded that Opes Prime knew that Eric Preston was seeking to refinance with it, from a margin lender. In those circumstances, the Opes Prime Financial Services Guide was required to state that the product being offered was not a margin lending facility. Further, it was said that the Financial Services Guide was required to state that ANZ did not hold the share portfolio to be transferred, pursuant to the Opes Prime facility, as custodian.
489 Euroz Securities then pleaded that, if the Opes Prime Financial Services Guide complied with s 942B of the Corporations Act in the manner pleaded, Eric Preston would not have suffered the loss claimed.
490 In support of the claim that Opes Prime breached its duty of care to Eric Preston, Euroz Securities repeated its claim that by reason of the fact that Opes Prime knew that Eric Preston was contemplating refinancing from a margin lending facility with Leveraged Equities, Opes Prime had a duty to exercise reasonable care to advise Eric Preston as to the nature of the Opes Prime facility and as to its differentiation from a margin lending facility.
491 It is contended that in breach of that duty, Opes Prime did not state that the financial product being offered in the Opes Prime Financial Services Guide was not a margin lending facility. Further, it did not state that ANZ would not hold the shares transferred by Eric Preston pursuant to the Opes Prime facility on behalf of Eric Preston, and did not say that the shares transferred would not be beneficially held for Eric Preston.
492 In view of the fact that it is not necessary, in light of my earlier findngs, to deal with these claims, and because it is conceivable that these issues may become the subject of litigation in other cases, I am of the view that no utility would be served in making further comment in respect of these claims.
DAMAGES
493In light of my previous findings, the question of damages does not arise.
494 However, Eric Preston’s claim for damages gave rise to a disputed question of fact and it is necessary to resolve that question of fact. Eric Preston’s claim for damages is for the difference between the position Eric Preston would have been in had it remained with Leveraged Equities and the position that it was in on 27 March 2008, immediately before the appointment of the Opes Prime administrators. Eric Preston relied upon two alternative measures of damages – one which Eric Preston characterised as the tortious measure and the other which it characterised as the contractual measure of damage. The factual dispute arose in the context of assessing damages by reference to Eric Preston’s contractual measure.
495 Eric Preston’s contention was that it is appropriate to assess loss and damage for breach of contract by reference to the value of the Eric Preston share portfolio as at the end of May 2007, plus the expected gain which Eric Preston would have realised over the period that it would have been expected to retain the portfolio whilst utilising the Leveraged Equities facility, less the actual value of the portfolio on 27 March 2008 - which was treated as nil. In determining the period during which Eric Preston would have been expected to have retained its portfolio for the purposes of assessing the notional gain that the portfolio would have made, Mr Blashki made the assumption that Mr Drummond would have caused Eric Preston to “utilise nearly all of the equity in the portfolio in the short term” in order to pay for a house which Mr and Mrs Drummond intended to build on Wattle Avenue, Dalkeith. In short, Mr Blashki assumed that Mr Drummond would have caused Eric Preston to have liquidated its share portfolio before 27 March 2008. Euroz Securities contended that there was no basis in the evidence to support that assumption. It went on to contend that had Eric Preston been with Leveraged Equities on 27 March 2008, Mr Drummond would on behalf of Eric Preston, continued to trade in shares into the future. The consequence would have been that Eric Preston’s portfolio would have been affected by the very substantial decline in the value of the shares that occurred between March 2008 and the date of the trial.
496 In his second affidavit, Mr Drummond deposed that in the latter half of 2007, he decided to engage architects to design a new house to replace their existing home in Wattle Avenue, Dalkeith. Mr Drummond then deposed that:
The total cost of the house was to be approximately $4m. After Hoffman & Brown produced a satisfactory design, I resolved to fund construction of the new house wholly or substantially out of the equity in EP’s share portfolio, while still trying to retain a significant interest in SEA for medium to long term investment.
497 During his cross-examination, Mr Drummond deposed that, before March 2008, he had received an estimate for the cost of the proposed house of $4 million. The following exchange then occurred:
But you were working on a basis of having some $4 million available?---I was working around the architect’s estimates of about $4 million.
And you had that at 4 March?---I had it 4 March, yes.
And you didn’t, having had it, pull it out and put it over in a cheque account or somewhere else, did you?---No, I didn’t.
And it was your intention, whether you were in Opes or Leveraged Equity, to keep trading on that account for as long as you could?---I was happy to continue to trade.
498 I find that Mr Drummond would not by 27 March 2008, have caused Eric Preston to sell shares in order to generate the sum of $4 million which would have been withdrawn and set aside for the payment of the house which Mr Drummond planned to build in Wattle Avenue. I find that, even if Mr Drummond had continued with Leveraged Equities, Mr Drummond would have caused Eric Preston to have continued to trade beyond 27 March 2008, until such time as the actual costs of the building of the house were ascertained. There is no evidence as to when that was likely to have occurred. It follows, that Eric Preston has failed to establish a crucial assumption which Mr Blashki relied upon in preparing his report in support of Eric Preston’s claim for damages founded upon breach of contract.
499 There was also a cross-claim by Euroz Securities. The disposition of the cross-claim did not receive close attention during the trial. I will hear the parties on the means of dealing with the cross-claim.
500I dismiss the application by Eric Preston.
| I certify that the preceding five hundred (500) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. |
Associate:
Dated: 19 February 2010
2
13
4