Felden and Australian Securities and Investments Commission
[2003] AATA 301
•1 April 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 301
ADMINISTRATIVE APPEALS TRIBUNAL )
) No. N2000/332
GENERAL ADMINISTRATIVE DIVISION
)
Re HANS ROBERT JOHN FELDEN Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal MR. A L LIMBURY
Member
Date1 April 2003
PlaceSydney
Decision The decision under review is affirmed. [Sgd] Mr A L Limbury
Member
CATCHWORDS
CORPORATIONS - securities - applicant a representative of a dealer – permanent banning order made against applicant - whether grounds for making banning order - whether applicant contravened a securities law - whether applicant contravened sections 851 and 955 of the Corporations Law – whether reason to believe applicant has not and will not perform "efficiently, honestly and fairly" the duties of a representative of a dealer - whether appropriate to make banning order - appropriate duration of banning order
Corporations Law sections 66, 829, 830, 1017, 1317B
Corporations Act 2001, Part. 7.3 Divisions 3 and 5, Part. 7.4, sections 9, 92, 94, 829, 830, 832, 851, 920A, 920D, 955, 1317B, 1399
Financial Services Reform Act 2001
Corporations Regulations 10.2.92
Administrative Appeals Tribunal Act 1975, sections 37, 43(1)
Bankruptcy Act 1966, section 143
Securities Industry (New South Wales) Code 1980, section 68E
Trade Practices Act 1974, section 52
Wilkinson & Ors v Feldworth Financial Services Pty Limited & Ors [1998] NSWSC 775
Heydon v NRMA [2000] NSW CA 374
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Campbell and Australian Securities and Investments Commission [2001] AATA 205
Weitmann v Katies Ltd (1977) 29 FLR 336
Taco Company of Australia Inc and Anor v Taco Bell Pty Ltd & Ors (1982) 42 ALR 177
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347
Rogers v Kabriel [1999] NSWSC 368
SWF Hoists and Industrial Equipment Pty Ltd v State Government Insurance Commission (1990) ATPR 41-045
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97
Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82
Bateman v Slatyer (1987) 71 ALR 553
Story v National Companies and Securities Commission (1988) 13 NSWLR 661
Re Kippe and Australian Securities Commission (1997) 16 ACLC 190
Australian Securities Commission v Kippe (1996) 67 FCR 499
Nisic v Corporate Affairs Commission (1988) 8 ACLC 514
Farley v Australian Securities Commission [1998] AATA 495
R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93
Gardam v George Wills and Co Ltd (1988) 82 ALR 415
Jungstedt v ASIC [2003] AATA 159
Hadid v Lenfest Communications Inc [1999] FCA 1798
REASONS FOR DECISION
1 April 2003 MR. A L LIMBURY
Member
1. By application made to the Tribunal on 2 March 2000 under section 1317B of the Corporations Law (“the Corporations Law”), the Applicant seeks review of a decision made on 4 February 2000 by a delegate of the Respondent that an order be made under sections 829 and 830 of the Corporations Law banning the Applicant permanently from doing an act as a representative of a dealer or an investment adviser.
jurisdiction
2. On 15 July 2001 the Corporations Law was repealed and replaced by the Corporations Act 2001 (Commonwealth) (“the Corporations Act”), which contained in Part 7.3 Division 5, Part 7.4 and section 1317B provisions corresponding in identical terms to the repealed provisions under which the Applicant’s conduct was considered by the delegate and the application to the Tribunal was made. At that time the application to the Tribunal had not been decided and the banning order continued to have effect. Consequently, by operation of section 1399 of the Corporations Act, both the application and the order have effect and may be dealt with as if they were made under the corresponding provisions of the Corporations Act.
3. On 11 March 2002 the Corporations Act was amended by the Financial Services Reform Act 2001 (“the Financial Services Reform Act”). Section 1317B of the Corporations Act was not amended. The provisions of Part 7.3 Divisions 3 and 5 and Part 7.4 of the Corporations Act were repealed and were replaced by different provisions. However, pursuant to Regulation 10.2.92 of the Corporations Regulations 2001, a banning order made before the commencement of the Financial Services Reform Act (such as the banning order here in question) is taken to have been made under (repealed) Part 7.3 Division. 5 of the Corporations Act which, together with its associated provisions, continues to apply to the extent necessary to allow the banning order to continue in force. Such a banning order is also taken to have been made under section 920A of the Corporations Act as amended by the Financial Services Reform Act.
4. The Financial Services Reform Act does not therefore alter the position under section 1399 of the Corporations Act, whereby the conduct of the Applicant giving rise to the banning order is to be considered, for the purposes of this review, under the provisions of the Corporations Act.
5. Section 43(1) of the Administrative Appeals Tribunal Act 1975 (“the Administrative Appeals Tribunal Act”) provides that the Tribunal may affirm, vary or set aside the decision under review. The Respondent submitted that, in this case, the banning decision cannot be set aside because the Applicant, on his own petition presented on 31 March 2000, was declared bankrupt that day and, in the absence of objection to his discharge, would remain a bankrupt until 31 March 2003 (section 143 Bankruptcy Act 1966). In support of this proposition the Respondent relies on paragraph 829(a) of the Corporations Act and paragraph 920A(1)(bb) of that Act as amended by the Financial Services Reform Act. Both of these provisions permit the Respondent to make a banning order against a person who becomes insolvent under administration, after affording the person an opportunity to appear at a hearing held in private and to make submissions.
6. The Respondent’s submission cannot be accepted. The banning order under review in these proceedings was made before the Applicant became insolvent under administration and was not (nor could it have been) based on that ground. The Applicant was not afforded an opportunity of a hearing to determine whether the Respondent should make a banning order on the ground of insolvency. The possibility that the Respondent might have made a banning order on that ground prior to the Applicant’s discharge from bankruptcy does not limit the power of the Tribunal to set aside the banning order that was actually made.
Applicable law
7. Paragraphs (d), (f) and (g) of sections 829 and 830 of the Corporations Act provide:--
“829 Power to make banning order where licence revoked or suspended
Subject to section 837, ASIC may make a banning order against a natural person (other than a licensee) if:
…
(d) he or she contravenes a securities law;
…
(f) ASIC has reason to believe that he or she has not performed efficiently, honestly and fairly the duties of:
(i) a representative of a dealer; or
(ii) a representative of an investment adviser; or
(g) ASIC has reason to believe that he or she will not perform efficiently, honestly and fairly the duties of:
(i) a representative of a dealer; or
(ii) a representative of an investment adviser.
830Nature of banning order
(1)Where this Division empowers ASIC to make a banning order against a person, ASIC may, by written order, prohibit the person:
(a) in any case - permanently; or
(b)except where ASIC is empowered by virtue of paragraph 828(c) or 829 (e) to make the order - for a specified period;
from doing an act as:
(c) a representative of a dealer;
(d) a representative of an investment adviser; or
(e) a representative of a dealer or of an investment adviser; whichever the order specifies.
(2)ASIC must not vary or revoke a banning order except under section 831, 832, or 833."
8. “Representative” means, in Chapter 7 – a “securities representative” (section 9), defined in section 94 to include a person who holds a proper authority from a “securities licensee”, i.e. a person who holds a dealers licence or an investment advisers licence (section 9). It is common ground that at all relevant times the Applicant held a proper authority from a securities licensee, namely Feldworth Financial Services Pty Ltd ("Feldworth”) of which the Applicant was the sole principal.
9. For the purposes of par. 829(d), the provisions of Chapter 7 are each a securities law (see definition of “securities law” in section 9).
10. Section 851 provides in relevant part:
“851 Adviser must have reasonable basis for recommendation
(1)A securities adviser who:
(a) makes a securities recommendation to a person who may reasonably be expected to rely on it; and
(b) does not have a reasonable basis for making the recommendation to the person;
contravenes this section.
(2)For the purposes of subsection (1), a securities adviser does not have a reasonable basis for making a securities recommendation to a person unless:
(a) in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person's investment objectives, financial situation and particular needs, the securities adviser has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and
(b) the recommendation is based on that consideration and investigation."
11. “Securities” are defined in section 92 to include shares in a “body”, which includes a body corporate (section 9). A “securities recommendation” means a recommendation with respect to securities or a class of securities, whether made expressly or by implication (section 9).
12. Section 995(2) provides in relevant part:
“995 Misleading or deceptive conduct
(2)A person must not, in or in connection with:
(a) any dealing in securities; or
…
engage in conduct that is misleading or deceptive or that is likely to mislead or deceive”.
Scope of the evidence
13. The Respondent relies before the Tribunal upon the Applicant's dealings with eleven clients in relation to one or more of three securities, namely EC Consolidated Capital Ltd (“ECCCL”) A Class redeemable preference shares, Lateral Trading Ltd ("Lateral") preference shares and Media Asia-Pacific Ltd ("MAP") shares and options. Two further securities are mentioned in the evidence, namely Eurocapital Secured Investments Limited and Prime Property Partnerships (also known as Mildura Centre Plaza) but during the course of the hearing the Respondent withdrew any reliance on them. The Applicant’s dealings with a twelfth client, Mrs Jean Murray, were the subject of consideration by the delegate and were initially relied upon by the Respondent before the Tribunal. On 18 March 2002 the Respondent withdrew the tender of her statement when it became apparent that she was overseas and that no firm date for her attendance for cross-examination could be determined.
No onus of proof
14. As Deputy President McMahon noted in Farley v Australian Securities Commission [1998] AATA 495, there is no onus of proof in an administrative enquiry and it is therefore not necessary to consider whether the Respondent has discharged any onus no matter what standard is adopted. The Tribunal is obliged to make an assessment at the conclusion of the proceedings on the basis of the evidence before it. Having regard to the gravity of the consequences, it is appropriate to adopt the standard of being reasonably comfortable, rather than to make findings on the balance of probabilities.
Course of proceedings
15. At the hearing the Applicant appeared in person and the Respondent was represented by Mr. T. Lynch of counsel, instructed by Ms. S. Williams of the office of the Respondent’s Regional General Counsel for New South Wales. At the commencement of the hearing in October 2001 it was agreed that, since the Respondent was the party seeking to sustain a banning order, it should present its evidence first so the Applicant would know the case he had to meet. By the time it became apparent that certain misunderstandings had arisen, the Respondent had closed its case and counsel for the Respondent was in the course of cross-examining the Applicant.
16. Shortly before the hearing, the Applicant had indicated that he no longer required all persons who had provided statements to the delegate on which the Respondent relied to attend before the Tribunal so that the Applicant might cross-examine them. On the fifth day of the hearing it became apparent that, in so doing, the Applicant had not appreciated the risk to him that the untested statements of those persons might be accepted in preference to his own evidence. In order to ensure fairness to the Applicant, his cross-examination was terminated, the hearing was adjourned and the Tribunal directed the Respondent to produce for cross-examination (by way of re-opening its case) those persons who had not by then given evidence, namely Mrs. Hunter, Mrs. Richardson, Mrs. Grace, Ms. Crichton, Mrs. Murray (no longer relied upon) and Mr. Ryan. The Respondent submitted that the Tribunal had no jurisdiction to make that last direction but nevertheless agreed to comply with it and did so (save as regards Mrs. Murray).
Materials before the Tribunal
17. The Tribunal had before it the documents lodged by the Respondent pursuant to section 37 of the Administrative Appeals Tribunal Act (“T documents”) – comprising T1-T32, Volumes 1-8, 9A, 9B, 10-12, 13A, 13B, 14-18, 19A and 19B, pages 1-6069, which became Exhibit R1, and the following further documentary exhibits tendered by the Applicant (marked “A”) and by the Respondent (marked “R”).
A-1 Applicant’s statement to the Tribunal.
A-2 Applicant’s Statement of Facts and Contentions.A-3 Portfolio Review Report to Mrs. Murray dated 8 August 1995 (admitted without admission as to provenance).
A-4Portfolio Review report to Mrs. Murray dated 15 February 1995 (admitted without admission as to provenance).
A-5Letter dated 15 December 1995 with attached Compliance Review working documents.
A-6Letter undated, faxed on 30 July 2001 from the Respondent to the Applicant re Lateral Trading.
A-7Page 1 of letter dated 2 July 1997 from the Applicant to Ms. Elizabeth Crichton.
A-8Proposed Investment Plan for Mrs. Elizabeth Hunter dated 15 March 1995.
A-9 Statement by Mrs. Kylie Munnoch dated 24 November 2001.
A-10 Respondent’s press release dated 6 July 2001 regarding Lateral Trading directors.
R-2 Respondent’s Statement of Facts and Contentions.
R-3Subscription Agreement for “A” Class Preference Shares in ECCCL.
R-44 pages of Portfolio Review Report as at 6 March 1997 from Feldworth to Mr. Wilkinson.
R-5 NCSC Practice Note Release 352 Issue 1.
R-6 Superseded Practice Note 41.
R-7 Superseded NCSC Practice Note release 352.R-8Chapter 6 from Handbook for Financial Planners, November 1994: “The six-step financial planning process”.
18. On behalf of the Applicant, oral evidence was given to the Tribunal by the Applicant himself and by Mrs.. Kylie Munnoch. On behalf of the Respondent, oral evidence was given to the Tribunal by the following witnesses, with references to their statements - in the case of the expert, Mr. Clinton, to his report - in the T documents:
Phillip Lorimer Clinton T24 Ex. R1, Volume 16
Duncan William Budd T11 Ex. R1, Volume 3
Elizabeth Hunter T12 Ex. R1, Volume 4
Ronald Jeffs T13 Ex. R1, Volume 5
Patricia Grace T15 Ex. R1, Volume 7
Terance Tranter T16 Ex. R1, Volume 8
Margery Richardson T17 Ex. R1, Volumes 9A and 9B
Elizabeth Crichton T18 Ex. R1, Volume 10
John Keith Ryan T19 Ex. R1, Volume 11
Michael Wilkinson T20 Ex. R1, Volume 12
The Applicant’s background
19. Prior to becoming a dealer's representative, the Applicant gained a Bachelor of Economics degree from the University of Sydney (majoring in Accountancy) and had extensive experience in property development. He also acted as a company analyst with the Ford Motor Company. In 1984 he was licensed to Harold Boddimar and Associates as a dealer’s representative. In 1985 he became a Foundation Member of the International Association of Financial Planners (Australia), which amalgamated with the Financial Planning Association in the early 1990s. In around 1994/5, the Applicant obtained the highest qualification available in financial planning, namely Certified Financial Planner.
20. In 1985 the Applicant formed Feldworth with Edgar Shuttleworth. Feldworth was licensed to FPI Limited, a wholly owned subsidiary of Norwich Union Insurance Limited. In 1986 Feldworth was granted its own unrestricted dealers licence and thereafter relied upon the research of IPAC and FPI for its investment recommendations. In 1987 the Applicant became the sole principal of Feldworth when he purchased Edgar Shuttleworth's interest.
Section 851
21. In order to determine under section 851 whether or not the Applicant had a reasonable basis for making any investment recommendations he made, it is necessary to consider:
· the nature of “the products”, ie. ECCCL, Lateral and MAP;
· the consideration and investigation he made of them;
· the information he had about the investment objectives, financial situation and particular needs of those to whom he made or is alleged to have made investment recommendations;
· the investment recommendations he made (it is common ground that he made investment recommendations in relation to ECCCL and Lateral but there is an issue as to whether he did so in relation to MAP); and
· whether the investment recommendations made were made in circumstances in which his clients could reasonably have been expected to rely on them.
ECCCL
The nature of the ECCCL investment
22. On 14 May 1993 ECCCL issued an information memorandum concerning an “International Money Market Preference Share Issue”, described as “Capital Redemption ‘AAA’ Bank Secured”.. Investors were offered the opportunity to subscribe for ten million “A” class preference shares having a par value of $0.01 each for a subscription price of $100 each. That memorandum had been preceded by earlier versions dated June 1992 and 1 September 1992.
23. In the version dated 1 September 1992, ECCCL said of its objectives:
“It is intended that the Company will invest in cash or securities (such as government bonds) denominated in both foreign and domestic currencies in the international capital markets. It is also intended that the Company will invest in Commodity Contracts on major international markets. The company will be engaged from time to time in the borrowing of money in both domestic and foreign currencies utilizing various hedging techniques such as options, forward contracts, swaps, etc. with the objective to minimize the exchange risks and to maximize profitable arbitrage positions.
These borrowings will be undertaken with the objective to increase the level of profitable investments the Company can make in the international capital markets by increasing the size of the investment pool. However, investment policies or strategies will vary from time to time reflecting changes in economic and commercial circumstances.” (Ex. R1, Vol. 13A, p. 3956)
“The foreign currency borrowings will be managed and hedged by various techniques with the objective to minimize the risks inherent in foreign exchange exposure.” (Ex. R1, Vol. 13A, p. 3959)
24. The Applicant's attention was first drawn to ECCCL in about late 1992 by Mr Ian Jeffery of Letcher & Jeffery, chartered accountants of South Australia, who informed the Applicant that the ECCCL investment provided a security facility and had the potential of making substantial returns. Mr. Jeffrey said he had checked the investment out and had placed $500,000 of his clients’ money into it (Ex. A1, para. 1.10). In May 1993, Mr Jeffery wrote to the Applicant, at the Applicant's request, to confirm that an investment trust established by Mr Jeffery’s office which invested $500,000 in ECCCL preference shares on 7 December 1992 had a balance of $609,787 as at 18 March 1993, representing “an annualized return of 72.53% daily compounded on the original subscription of $500,000” (Ex. A1, para. 1.29.4 and Tab 8).
25. During 1989-1991 a property and share market crash saw managed funds suffer steady decline, if not collapse. Many investors were unable to redeem their investments in managed property funds and many retirees and investors, including some of the Applicant's own clients, discovered that what they thought were safe and secure investments left them suffering substantial losses. It was in light of his experience during that property and share market crash that the Applicant came to recommend ECCCL to some of his clients. The Applicant was attracted to ECCCL because he considered it had features for which he had been searching since the share market and property trust collapse of 1989-91 (Ex. A1, paras. 1.6-1.8, 1.18).
26. Following the initial comment by Mr Jeffery, the Applicant contacted a person he understood to be an officer of ECCCL, Mr Tony Senese, received some literature about ECCCL from him and subsequently arranged for Mr Senese to give a presentation to clients, accountants and lawyers at the Feldworth office. Many of those present said how impressed they were with Mr Senese’s presentation. The only negative comment made was that ECCCL had a minimum subscription of $500,000. The following week the Applicant attended a meeting in Melbourne at which Mr Senese addressed representatives of Norwich Union Insurance Limited. The Norwich investment managers questioned Mr Senese extensively about ECCCL (Ex. A1, paras. 1.10-1.13).
27. The minimum subscription requirement of $500,000 meant that it was not necessary for ECCCL to issue a prospectus: Corporations Law, section 1017 and section 66(2)(a).
28. Around this time, the Applicant became aware of the Excelsior Master Trust Fund, which had been established by Bird Cameron, Chartered Accountants. Mr. George Masters, Senior Representative of the Excelsior Master Trust, explained its workings to the Applicant. One feature of the Trust was that where a client wished to make an investment in a fund, such as BT, the investment would be placed with the Trust and not directly with the fund. The Trustee (Perpetual Trustees) would pool the money of individual investors, purchase units in the fund and hold those units on trust for the clients. Clients saved money because they benefited from the wholesale rates available to the Trust by virtue of the size of its pool of funds and did not have to pay fees in order to switch funds. Another advantage was that, instead of receiving separate reports from every fund manager, they received one monthly statement from the Trust detailing the performance of all the investments in their portfolio (Ex. A1, para. 1.14).
29. The Applicant arranged (Transcript 22 March 2002, p. 39) a meeting at his office on 24 February 1993 with George Masters and Tony Senese. During the meeting Mr. Masters said words to the following effect: -
"ECCCL requires a minimum subscription of $500,000. You could use the Excelsior Master Trust as a vehicle by which your clients could invest in ECCCL. What we could do is that as clients invest in ECCCL we could pool their money in the Trust until we obtain $500,000 or more. We could then place the investment with ECCCL and we could administer the allocation of clients through our own accounts" (Ex. A1, para. 1.15).
30. On 5 May 1993 the Applicant attended another meeting in Melbourne at which Mr. Senese was questioned extensively by representatives of Norwich including the Head of Investments, who was said to be suitably impressed and contemplating including ECCCL in the Norwich secured superannuation fund. On 7 July 1993 the Applicant attended a meeting in Perth at which Mr. Senese made a presentation about ECCCL to senior staff of Bird Cameron, following which a senior officer of Bird Cameron informed the Applicant that Bird Cameron had decided to place $2 million in ECCCL (Ex. A1, paras. 1.16-7).
31. The features of ECCCL were set out in four key documents provided to the Applicant in 1993 by Mr. Senese. These were:
· Information Memorandum, "Preference Share Issue” (Ex. A1, Tab 1. This Tab contains the front cover and two pages of the 1 September 1992 memorandum and a complete copy of the 14 May, 1993 memorandum)
· Subscription Agreement for "A" Class Preference Shares (Ex. A1, Tab 2 and Ex. R3)
· Investment Summary–Projections dated 31 March 1993 (Ex.A1, Tab 3)
· Minutes of Directors Meeting of ECCCL held on 23rd February 1993 (Ex A1, Tab 4).
32. In March 1993 Mr. Senese informed the Applicant that ECCCL would not trade in commodities, as foreshadowed in the September 1992 Information Memorandum, but would limit its trades to international securities and assets. The Applicant received a letter dated 23 February 1993 from ECCCL which contained varied terms and conditions of the preference share issue (Ex. A1, Tab 5).
33. In the Information Memorandum dated 14 May 1993 ECCCL described its principal objective as the conduct of: “a long term investment programme consisting of managed, structured and fully hedged investments in the International Money Market.” (Ex. R1, Vol 13A, p.3992). The Memorandum said (inter alia):
“An important feature of the investment strategy is the geared nature of the IMM investment pool. A substantially greater pool of IMM assets is to be purchased by the Company than would be represented by the aggregate value of the Company’s capital base.
Subsequently [sic], the Company can derive a net margin or yield (net of interest costs) on an appreciably larger asset pool and thereby has the potential to deliver higher returns in relation to the capital employed.
…
The risks inherent in dealing in securities and other asset classes may result in the Company sustaining losses as well as gains.
…
The Company’s objective is to ensure that any investment entered into is at the outset sufficiently secured or hedged to nullify speculative risk. To achieve this objective the Company will create and use a variety of financial and bank instruments such as hedges, options, swaps, insurance, collateral securities and other similar instruments and derivatives. This process will be applied to each and any investment prior to market entry to a degree that will substantially preserve any transaction’s profit margin and nullify the speculative risk
…As Investors will be issued fully paid redeemable Preference Shares, they will not be called upon at any time to provide additional funds. Therefore, the Investors have no personal exposures to foreign exchange debt or other losses or liabilities (contingent or otherwise) by the Company
…
Investors should note that the Company has resolved that it will conduct its IMM investments on a strict non-speculative basis. The Company, however, does not give any guarantee of financial performance or returns in relation to an investment in the Preference Shares. Accordingly, an investment in preference shares should be viewed as speculative. Investors should consult their own independent adviser, accountant or solicitor in relation to their investment” (ibid, p.4012).
34. The 1993 Information Memorandum also said: “Investors should note that the projections referred to … are not based on any trading history of the Company” (ibid, p.3989). The Applicant agreed he had no trading history of the company or the system (i.e. its trading strategies, how they went about their business) to assess. (Transcript 21 March 2002, pp.59-60).
35. The financial year ended 30 June 1993 was the company’s first year of trading (Ex A1, Tab 9). The Investment Projections of 31 March 1993 were said to be “notional only” (Ex. A1, Tab 3; Ex. R1, Vol 13A, p.4010). According to the Subscription Agreement, the Subscription Monies were to be applied first to procure the provision of a “Deposit Certificate” (which was to cost almost half the money subscribed); second to paying expenses and commissions and third to the working capital requirements of the company:
“[t]o be used among other matters, for example, providing margin funds to lenders concerning the Company’s proposed borrowing of foreign currencies (physical or synthetic), funding purchases and investments in securities (such as bonds, bills of exchange etc) in International Money Markets (physical or synthetic), for the paying of option fees concerning the Company’s proposed dealing in paper and non paper currencies such as precious metals and for working capital reserves, overhead costs and operating needs generally”.
36. The “Deposit Certificate” was the mechanism whereby the repayment after ten years of investors’ subscription monies was to be secured, irrespective of the outcome of the company’s international money market trading.
37. The key documents are complicated and this was a disadvantage recognised by the Applicant in contemplating explaining the intricacies of the ECCCL investment to his clients. One description of the objects of the investment and of ECCCL's plans is set out in handwritten notes made by Mr. Senese for one of his presentations, a copy of which the Applicant procured (Ex. A1, Tab 6) of which a transcript appears at Ex. A1, Tab 7:
“A market exists which hasn't to date been available to the majority of investors -- with turnover measured in trillions of $US per day. These are the International Money Markets (IMM), access to which has traditionally been kept by the banks for the banks. We've developed a product which gives the wider community of investors access to the profits which can be made in these markets, with regular dividends and capital growth, in a way which fully protects the investors' funds against loss.
Put simply, our trading in these IMM markets is similar to the treasury operations of a bank, which are generally regarded as the most profitable parts of banking activity (accounting for 25% of most banks' operating profits). We buy and sell prime government and bank backed securities and negotiable instruments, between banks only, in any or all OECD markets to provide Australian investors with global investment opportunities, and derive profits from the trading.
EXAMPLE – froggy bonds in yen etc. A trade may consist of one or several of these component transactions etc etc.There is a profit margin or "spill" in each compound transaction, however each transaction may expose the capital employed to some risk (adverse movements in currencies, interest rates etc.)…..invested funds, by hedging each transaction 100% before we enter the market. When a trade is identified, we cover all positions 100%, so the total profit margin is identified and fully secured before market entry.
These hedging measures carry a cost, which erodes the margins in each transaction, so to increase the earnings from each trade, and only when a trade is fully hedged, we gear up the trade to boost the earnings by (usually) a factor of 15 (legal limit in Australia is 25 x).
The idea of gearing usually rings warning bells with investors. There are inherent safeguards in assembling a trade, which ensure that the invested capital is not at risk. Our own internal systems check and double check that a trade is fully covered. The gearing itself requires funds provided via lines of credit with major banks, which in turn must check and double check each trade before advancing the funds, and before market entry.
Therefore, because all transactions are on a bank to bank basis, risk is reduced to bank risk only. The nature of the trade itself provides a very high degree of security on the investors' capital.
To provide a further degree of security for the investor' s capital, we secure the investors' funds by procuring a certificate of deposit from Dresdner Bank AG -- one of three AAA rated banks in the world -- with a value at its maturity at least equal to the investors' subscription funds. This security is held by a paying agent (National Registries) for the benefit of the investor, and as such is completely independent of ECCCL. Nothing that happens to ECCCL can have any effect on this security -- the only risk that the investor is exposed to is opportunity cost - at the very worst, the investor gets all his money back in ten years time.
…
Dividend Policy
180 days Bank Bill Rate plus 2% minimum p.a. of client account balance. Further, preference shareholders are entitled to coupon rate of 180 Bank Bill Rate plus 1% subscription moneys, which entitlement is cumulative and has priority over all other distributions.
Early access to funds
Although designed for a 10 - year term, investors may redeem all their Preference shares after a qualifying period of the first 12 months, provided they give 30 days notice. This carries a penalty of 20% of the income value component only of the Client Account Balance.
In summary
The investor gets access to the profit potential of the world's most lucrative markets, with the opportunity to ensure regular dividends and capital growth on his funds, with no real risk to his capital.
Adviser fee
0.75% p.a. to accountant/adviser on account balance, payable at six monthly rests.”
38. Mr Senese elaborated in the many presentations he gave as follows:
“The treasury departments of international banks are able to make substantial profits from IMM trades in securities and instruments. We have established a fund that now gives Australian investors the opportunity to participate in the profits of the IMM market.
A simple explanation as to how profits can be made is to take the example of bonds. It may be that we can take a position to buy French bonds that are written in francs. Due to factors such as exchange rate fluctuations, changes in interest rates etc. it would be possible sell these bonds for a profit. It may be that the margin we make on this trade is very small but as we have the ability to gear up 15 times the face value of the bonds we increase substantially the total profit that we can make from the purchase and sale of the bonds.
These trades can be made over a short timeframe say 1 - 21 days and can be made many times over a monthly period. We do not commit to a transaction until we are satisfied that a profit can be made. This is borne out by the fact that we have made it clear in the company's articles that we are not about speculating on IMM trades. Furthermore the funds that we have available to gear up our trades are only made available by the institutional lenders when we can satisfy these institutions that a fully hedged profit can be made on the deal.
Part of the subscription money of any investor is applied towards the purchase of a zero coupon bond. The purpose of a zero coupon bond is to provide the investor with a "security arrangement". The zero coupon bond is to be drawn on a "AAA" bank and will have the value of the initial subscription at the maturity date (10 years after the date of the subscription being made). The zero coupon bond is kept safe by being lodged with the custodian, National Registries. The zero coupon bond is held by National Registries for and on behalf of the investors. The benefit for the investor is that the investor knows that they will not lose the value of their subscription money although they may have to wait for a period of 10 years to get their money back. Furthermore, as investors hold preferential shares in the company, in the event that the company collapsed, the holders of the A class preference shares are entitled to receive a distribution before ordinary shareholders but after creditors have been paid” (Ex. A1, paras. 1.25-6).
39. The Investment Projections of 31 March 1993 contemplated an opening client account balance in year one of $500,000 (the subscription monies), less an amount of $231,587 to purchase the Deposit Certificate, plus a gross yield on the remainder (variously described as the “IMM asset Pool”, “IMM capital balances” and “IMM investment capital”) of 8%, plus interest on the same amount of 5% (it being intended to deposit the amount with a bank in order to secure borrowings of 15 times as much with which to engage in IMM trades), less hedging costs and counterparty fees. Of the resultant profit, 50% was shown as the preference shareholders’ entitlement. After deducting from this entitlement projected dividend at the rate of 180-day bank bill rate +2%, the remaining profit was added to the opening client balance to produce an end of year client account balance of $559,461. By this process, the client account balance at the end of year ten was shown as $3,059,481 after payment of dividends over the period totalling $1,058,705 (Ex. A1, Tab 3).
40. Earlier Investment Projections accompanying the letter dated 23 February, 1993 (also described as “notional only”) showed a client account balance at the end of year ten of $3,406,405 (Ex.A1, Tab 5). The Investment Projections (“notional only”) forming part of the Preliminary Information Memorandum dated 1 September 1992 (which had contemplated commodity trading) showed a client account balance at the end of ten years of $5,794,157 (Ex. R1, Vol 13A, p.3978).
41. Footnotes to the projections of 31 March 1993 indicated no adjustments were made with respect to the ordinary shareholders’ entitlement to receive the ‘Agreed Rate’ from time to time nor with respect to expenses or overheads of the company (other than hedging costs and counterparty fees). An “Important Notice” beneath these notes said:
“The above projections are notional only and do not constitute any guarantee of a return nor do they take into account any tax liabilities that might be applicable. Investors should consult their own independent investment adviser, accountant or solicitor in relation to their investment and in relation to any liabilities to taxation”.
42. The Applicant considered that the ECCCL investment was of low risk, had the potential to make a good return and did not involve any deduction from subscription monies of management fees and commission, which were borne by the fund manager. This latter point indicated to the Applicant that ECCCL was confident in the success of the fund (Ex. A1, para. 1.27).
43. The reasons the Applicant regarded the ECCCL investment as of low risk were:
· the zero coupon bond arrangement meant that his clients would not lose their subscription, in the sense that if ECCCL failed the zero coupon bonds could be cashed and the proceeds applied to repay the investors their subscription money. The Applicant recognised that the zero coupon bonds would be cashed at a discount on their face value if sold prior to the expiration of 10 years, but the longer the bonds were held, the less likely there would be any discount;
· the investor was further protected in having preferential status in respect to the payment of dividends and client account balances in the event of liquidation; and
· the zero coupon bonds did not become an asset of ECCCL in the liquidation of the company but were held on behalf of investors and controlled by the investors’ representative, Perpetual Trustees WA Limited (Ex. A1, para 1.27.1).
44. The Applicant nevertheless regarded the ECCCL investment as having drawbacks, namely:-
· it was complex and therefore hard to explain to his clients;
· it was novel and therefore difficult to determine its asset allocation profile. As approximately half the subscription money was to be applied towards the purchase of a zero coupon bond with a AAA grade bank, 50% was shown as "international fixed interest" and the balance as "other international" in the asset allocation model used by Feldworth;
· it was new and the fund manager did not have a long track record although, according to the Applicant, some of the traders and directors of ECCCL had been involved in IMM trades for many years. The Applicant said he made enquiries about Mr Senese and received impressive testimonials about his experience, background and abilities (Ex. A1, para. 1.28).
45. Other factors which the Applicant took into account when considering the ECCCL investment were:
· the absence of a prospectus, a factor which the Applicant regarded as a neutral consideration since many other "wholesale funds" were becoming available via master trusts in which subscriptions could be made without a prospectus;
· the fact that Minter Ellison Morris Fletcher ("Minter Ellison") acted for ECCCL and had drawn the Subscription Agreement and also acted for Perpetual Trustee. The Applicant regarded Minter Ellison as the leaders in the field of prescribed investments;
· the fact that Perpetual Trustees of WA were prepared to act in the role of Representative. The Applicant regarded Perpetual Trustees as one of the leading trustee companies in Australia;
· confirmation that Ian Jeffery’s clients had invested in ECCCL and the returns they were receiving;
· the fact that ECCCL had a paid up share capital of $5 million;
· the Applicant was familiar with IMM investments and had noticed that the Mint Plus Fund had been largely unaffected by the downturn in the world economy in 1989-91;
· the Applicant attended the offices of ECCCL in Melbourne and visited the ECCCL trading floor in Sydney. He had never been invited to the trading floor of any other fund manager and the opportunity to inspect the floor of ECCCL impressed him at the time;
· on the basis that the company had covenanted in the Subscription Agreement to pay 1% above bank bill rate for the first 12 months of the investors’ investment, the Applicant considered the directors’ projections that ECCCL would obtain a return of 2% above bank bill rate to be fair and reasonable and an important consideration for the Applicant’s retiree clients (Ex. A1, para. 1.29).
46. As mentioned, when determining an asset allocation profile for ECCCL when recommending it to his clients, the Applicant treated the 50% to be used to purchase the zero coupon bond as low risk “international fixed interest” and the remainder, to be applied to fund the IMM trades, as “other international investments”. The Applicant carried out the same type of asset allocation analysis in the case of every investment that he recommended to his clients. The Applicant tended to structure the investment portfolio around ECCCL as the core of the investment strategy, allocating additional investments to satisfy specific client needs such as tax effectiveness, growth and cash for living expenses. However, ECCCL remained the core investment of an investment strategy built around “international fixed interest” (Ex. A1, paras. 1.58 and 1.59).
47. Between 4 May 1993 and 7 December 1995, investments made by clients of the Applicant in ECCCL “A” class redeemable preference shares, through a “master trust” mechanism (initially “Excelsior”, later “Flexiplan”), totalled $3,930,900. At 19 May 1997 the books of ECCCL showed those investments as having a value, on paper, of $6,108,825 (Ex. A1, para. 1.30). The Applicant’s clients’ funds constituted about 40% of all the funds received by ECCCL and were its biggest single source of funds (Transcript, 21 March 2002, p. 84).
48. In the events which occurred, those investors who did not redeem their preference shares lost both their undistributed profits and their subscription moneys when ECCCL went into provisional liquidation on 28 May 1997 and liquidation on 15 July 1997 (Ex. R1, Vol 16, p.4585).
49. The loss of the subscription moneys occurred because Minter Ellison, which acted both for ECCCL and as agent for the Investor, failed to ensure that there were deposited with the Paying Agent “Deposit Certificates” in conformity with the requirements of the Subscription Agreement (being bearer certificates of deposit, guarantee or letters of credit drawn against and with full recourse to the Prime Bank, namely the AAA rated Dresdner Bank AG or one of its wholly owned subsidiaries) (Ex. R1, Vol 16, p.4609)[1]. No recovery on behalf of investors could therefore be made from the Prime Bank. The money which was to be used to purchase the zero coupon bonds was made available to and was used by ECCCL: Wilkinson & Ors v Feldworth Financial Services Pty Limited & Ors [1998] NSWSC 775 (30 November 1998) (Ex.R1, Vol 16, pp. 4580-4867).
[1] The Tribunal member disclosed at the start of the hearing that he was a partner in Minter Ellison at the time of the events in question. Neither party objected to his hearing and determining this matter.
50. It was not suggested before the Tribunal that the Applicant should have anticipated the possibility of loss of the security for the repayment to investors of their subscription moneys (Transcript 30 October 2001 pp.12-13). Accordingly the nature of the ECCCL investment and the question whether the Applicant contravened section 851 in recommending ECCCL “A” class redeemable preference shares as an investment to his clients are to be considered on the assumption that investors’ subscription moneys would in fact have been secured, as intended, by Certificates of Deposit with the Prime Bank.
51. In his written submissions in reply, the Applicant directs considerable criticism to Mr. Clinton’s report and his evidence, challenging Mr. Clinton’s methodology, independence, competency and credit. Mr. Clinton’s report was made in a letter to the Respondent dated 24 June 1999. At that time Mr. Clinton was the General Manager, Estate Planning & Wealth Creation of Chancellor Planning and Investment Pty Limited, a licensed securities dealer under section 784 of the Corporations Law, and a Senior Associate of the Financial Planning Association of Australia Limited. He had been involved in the financial planning industry for the last 20 years and had been a financial adviser for 15 years (Ex. R1, Vol. 16, p. 4488).
52. The Respondent had delivered to Mr. Clinton eleven client files, seven of which contained statements by the clients, and three research files. The products and the clients included but were not confined to those on which the Respondent relies before the Tribunal. Mr. Clinton was required to familiarise himself with the files to a level sufficient to enable him to offer opinions as to the appropriateness of the Applicant’s investigations of the recommended products; as to the types of investors reasonably suited to using those investment products; as to the types of investments reasonably suited to those clients and, for each client, as to the appropriateness of the recommendations made by the Applicant, considering the investment objectives, financial situation and particular needs of the investor (ibid, p. 4486-7).
53. Mr. Clinton’s report makes clear that he was not required by the Respondent to conduct his own research into the products, nor to interview the Applicant as to his reasons for recommending the products to the clients, nor to interview any of the clients as to their dealings with the Applicant. The opinions expressed by Mr. Clinton in his report were based on the documents and client statements provided to him by the Respondent (Transcript 29 October 2001, pp. 21 and 31). The Applicant submitted that, without questioning clients, Mr. Clinton could not assess the Applicant’s recommendation in the context of the clients’ statements (Reply, para. 68).
54. It became clear during the hearing before the Tribunal that the files delivered to Mr. Clinton by the Respondent did not contain certain documents, including most importantly a complete copy of the ECCCL Subscription Agreement. The copy at Ex. R1, Vol.13A, pp. 3853-5 (that volume being entitled “Documents produced by Mr. Felden in response to Notice from ASIC to produce research materials in relation to ECCCL”) is incomplete (Transcript, 29 October 2001, p. 91). Mr Clinton agreed that he did not have all the information available to him to make a proper assessment of that particular investment (ibid, p.101) but said there were sufficient other documents that helped him come to his conclusion in relation to ECCCL (Transcript 30 October 2001, p. 5).
55. The Tribunal has had the advantage of hearing the evidence of the Applicant and of those clients upon whom the Respondent now relies. It also has before it a complete copy of the ECCCL Subscription Agreement (Ex. R3); submissions made to the delegate and other documents which were not before Mr. Clinton. The Tribunal is therefore in a position to form its own view on the issues, including the nature of the ECCCL investment, the adequacy of the Applicant’s research and the appropriateness of his recommendations to his clients. Insofar as the Tribunal has accepted (as set out in these reasons) some of the opinions expressed in Mr. Clinton’s report or in his evidence in relation to ECCCL, Lateral or MAP, they are opinions that were unaffected by deficiencies in the documents which he was asked to consider and in the scope of the task he was asked to perform. The Tribunal does not regard Mr. Clinton as having been partisan, incompetent or lacking in credit. His methodology was clearly stated in his report and was appropriate to the limited task he was asked to perform.
56. The case now relied upon by the Respondent is significantly narrower than was set out in its statement of facts and contentions dated 15 September 2000, a statement that reflected opinions originally expressed in Mr. Clinton’s report (Reply paras. 73-4). However, this does not provide a reason for rejecting Mr. Clinton’s evidence on the issues presently relevant.
57. The Applicant referred to “the danger of the Court or Tribunal making determinations about professional standards without assistance of expert evidence” as having been recently pointed out by Malcolm AJA in Heydon v. NRMA [2000] NSW CA 374 in a different context (the duty of care owed by a barrister to a client). The Applicant referred to paragraph 152 of His Honour’s judgment as expressing the view that expert evidence should have been called on such issues. However, what His Honour there said was:
“152 In the light of these authorities, I consider that expert evidence would have been both relevant and admissible in the present case, but it remains for the Court to determine what is the appropriate standard of care and whether, in the instant case, the relevant advice was given consistently with or in breach of that standard.”
58. Here the relevant standard is contained in section 851 of the Corporations Act. It is clear from the passage just set out and from the authorities to which His Honour there referred that it is for the Tribunal to determine whether the relevant standard has been met. Expert evidence is relevant and admissible (all the more so where, as here, the rules of evidence do not apply) but the opinions of experts are not determinative. The Tribunal must make up its own mind, taking into account all the material before it.
59. Mr. Clinton’s Report of June 1999 stated with respect to ECCCL:
“The principal activity of the company is that of a derivative trader. Derivative trading is considered speculative in nature”. (Ex. R1, Vol 16, p.4496).
60. Mr Clinton was asked in cross examination:
“I note that you made a comment here that:
Derivative trading is considered speculative in nature
? --- It is.
Like share trading is speculative in nature? The same - - -? --- No,
there's - there's a raised level of risk.
Why is that, Mr Clinton? --- Because of all sorts of other factors that
come into it.
Like what? --- Market timing, interest rates, currencies”
….
“Mr Clinton, I look at your statement on ECCL [sic] where you come straight out and say that:
The principal activity of ECCL [sic] is that of a derivative trader.
Then you go:
Derivative trading is considered speculative in nature.
Do you still believe that? --- Yes.
And why Mr Clinton? --- If you asked Orange County they'd tell you.
MR LIMBURY: Could you tell me? --- Orange County was an American county that went into derivative trading or part of their finances was through derivative trading and they lost the lot”. (Transcript 29 October 2001 pp.47-49).
61. The Applicant was aware that the ECCCL Investment Summary described ECCCL as a “speculative investment”.. He understood that as a reference to the potential for investors to make a profit on the IMM trades, not to the likelihood of investors losing the value of their subscription money, because the Subscription Agreement evidenced the existence of the ‘security facility’ which applied to the subscription money in the form of the zero coupon bonds (Ex. A1, para. 1.32).
62. The use of a Master Trust arrangement enabled the Applicant’s clients’ monies to be pooled so that tranches of $500,000 could be invested by a trustee on their behalf. One consequence of this was that it was not necessary for his clients to see the Subscription Agreement, which provided:
“5. INVESTOR ACKNOWLEDGEMENTS
5.1The Investor acknowledges that its investment in the Company is speculative and that it has received no representation, warranty, assurance or guarantee as to the possibility of any return of capital or income by the Company or any tax advantage applicable to its subscription under this Agreement, except as detailed in clause 6.
5.2Further the Investor agrees and confirms that it has made its own enquiries and investigations in relation to the financial position of the Company and is not relying on any representation or warranty made by the Company or any other person. The Investor also confirms that it has read the Information Memorandum and is aware of the disclosures contained in that document”
6.PROVISIONS FOR REDEMPTION
6.1As a term of the Investor’s subscription for the Preference Shares the Company undertakes to procure that at Completion the Deposit Certificate which satisfies the requirements of clause 3.2 is delivered to the Paying Agent.
6.2On the Redemption Date the holder of Preference Shares may present the Preference Share scrip with proof of identification to the Paying Agent who as the Company’s agent will redeem the Preference Shares from the maturity funds held by the Paying Agent (as a result of the maturity of the Deposit Certificate) and pay to the holder of the Preference Shares $100 for each redeemed share.
6.3On redemption in accordance with clause 6.2 the Paying Agent is to notify the Company of the redemption of the Preference Shares and the Company will pay to the holder of the Preference Shares which are redeemed the Income Value applicable to that holder’s Client Account Balance.
6.4In addition the early redemption of the Preferences may be permitted by the Company in accordance with Article 5 of the Articles” (Ex. A1, Tab 2).
63. In sum, approximately half of each investor’s subscription money was to be used to purchase zero coupon (i.e. no income) bonds from an AAA rated Bank, which, after ten years, would pay the holder of the bonds the face value of the whole of the subscription monies. The bonds were to be held on investors’ behalf by a custodian and thus be beyond the reach of creditors of ECCCL should that company collapse. Meantime ECCCL would use the remaining subscription monies to borrow up to 15 times their amount to trade derivatives internationally, an inherently risky and speculative business, using strategies aimed at maximising profits while minimising speculative risks.
64. ECCCL was to maintain notional accounts (“Client Account Balances”), representing investors’ subscription moneys, with credits and debits representing 50% of profits and losses on IMM trades and debits for any redemptions and dividends. The remaining 50% of any profits or losses were to be attributed to the holders of ‘C’ and ‘D’ class ordinary shares in the company.
65. The Applicant and other members of his family held a small investment (less than 2%) in the capital of a company called AG Consolidated Ltd, which, according to the Applicant, held 90.9% of the “D” class ordinary shares in ECCCL (Ex. A1, p.23), which had no voting rights (Ex. A1 p.27). According to the notes to ECCCL’s audited accounts as at 31 December 1994, AG Consolidated Ltd held 100% of the “D” class ordinary shares, which were the only shares with voting rights. Thus ECCCL was a wholly controlled subsidiary of AG Consolidated Ltd, which was itself controlled by a company related to Mr. Senese (Ex. R1, Vol. 13A, p.3475). The Applicant’s interest was disclosed in his asset register, available for clients to inspect (Ex. A1, p.24). It was not suggested by the Respondent that this holding affected the Applicant’s conduct or was otherwise relevant to these proceedings.
66. The ECCCL ‘A’ class preference shares could not be redeemed without the consent of the company during the first year and thereafter could be redeemed within 30 days after notice, at a discount of 20% of the “Income Value” component of the Client Account Balance (i.e. any excess over the subscription monies). At the end of ten years ECCCL could redeem the shares upon payment of the whole of any balance in that account (Subscription Agreement - Ex. A1, Tab 2, clauses 7.3 and 7.4).
67. Thus the whole of that portion of an investor’s subscription money that was applied to the company’s business of derivatives trading, together with any profits credited to the Client Account Balance and not paid out to the investor, were at risk if things went wrong. The Applicant knew, at the time he began recommending ECCCL, there was nothing in the redemption provisions that guaranteed any amount would necessarily be payable on redemption before year ten (Transcript, 21 March 2002, p. 67).
68. If ECCCL collapsed, that part of the subscription money which was to be used to purchase zero coupon bonds would, after ten years, produce the equivalent of a refund of the total amount originally invested. However, the value of that amount would by then have depreciated to the extent of inflation over that period. Thus, in the worst case scenario that it was reasonable for the Applicant to contemplate (i.e. ignoring the events which led to the loss of the benefit of the zero coupon bonds), investors would not have the same purchasing power at the end of that period and would have lost any undistributed earned income in the interval. The Applicant acknowledged this in his evidence (Transcript, 21 March 2002 p.55).
69. It follows that if the purchasing power of the subscription monies was to be preserved over the ten year period of the investment, it was necessary for sufficient profits to be generated from IMM trades to compensate for the depreciation in value of the subscription moneys attributable to inflation. Accordingly, Mr. Senese’s statement set out in paragraph 38 above:
“The benefit for the investor [of the zero coupon bond] is that the investor knows that they will not lose the value of their subscription money…” [emphasis added],
was wrong. It is a statement that the Applicant made to his own clients.
70. As to dividends and particularly the Applicant’s stated consideration that the directors’ projected return of 2% above bank bill rate was fair and reasonable, on the basis of a “covenant” in the Subscription Agreement (Ex. A1, Tab 2) to pay 1% above bank bill rate for the first 12 months of the investment, the projections themselves were “notional only” and bore the Important Notice already mentioned. Further, the “covenant” merely reflected changes resolved in extraordinary general meeting held on 23 February 1993 (Ex. A1, Tab 4, Item 6) to be made to the Articles (Ex. R1, Vol. 13A, pp.3881-3914).
The immediate and direct effect intended by a banning order is not to impose a penalty or punishment on the person concerned, but to be preventive in that it removes a perceived threat to the public interest and to public confidence in the securities and futures industry by removing that person from participation therein” (at 508) [emphasis in original].
399. Accordingly, the primary consideration to which the Tribunal must have regard in determining whether to impose a banning order and, if so, its duration, is the need to maintain the confidence of investors and to encourage participation in the securities industry by demonstrating that representatives who do not perform their duties efficiently, honestly and fairly can expect to be excluded from the industry for some period.
400. The Respondent contends that the Applicant's conduct demonstrates numerous and grave instances of his failing to meet the standard of performing his duties efficiently, honestly and fairly and that a permanent banning order is justified because, on the material available, the Tribunal is not satisfied that the Applicant would now perform efficiently, honestly and fairly and is not now able to predict when he would hereafter do so.
401. The Applicant submits that something more than mere negligence would be necessary for there to be reason to believe that a banning order is warranted, for example if the negligence were continuing and protracted, and that it would be difficult to see how in this situation a life ban would be warranted. The Applicant continued:
“It has not been submitted by ASIC that Felden did not genuinely believe that ECCCL, LT and MAP were appropriate investments for his clients. The reasoning by which he came to that view can be criticised. Felden has also been candid with this Tribunal and has made concessions that his research could have been better. What this Tribunal must decide, however, is whether that research is adequate”.
402. The Tribunal has already found that the Applicant genuinely believed that ECCCL was an appropriate investment for his clients, as a consequence of his failure to conduct adequate research. The Tribunal is prepared to make the same finding in relation to Lateral. As to MAP, however, the Tribunal is not prepared to reach the same conclusion. MAP was always a punt, to the Applicant’s knowledge, yet he recommended it to the Wilson estate “in view of your need for security and your objectives to maximise capital growth”. It is impossible for the Tribunal to conclude that he genuinely believed MAP to be an appropriate investment for the estate of Wilson. What the Applicant describes as candour were concessions made only under persistent questioning, concessions which were often heavily qualified and often withdrawn soon after they were made. The Tribunal has already found the Applicant’s research was inadequate.
403. The evidence has revealed failure by the Applicant, an experienced financial planner with the highest qualifications, to conduct adequate research in relation to three separate investments. Each case involved acceptance at face value of statements from persons having an interest in promoting those investments, even where those statements conflicted with the relevant documents, without the Applicant bringing any critical faculty to bear. This was followed by recommendations over a period of years to clients to invest in and subsequently retain those investments, where the investments were inappropriate for those clients, having regard to what the Applicant knew of their investment objectives, financial situation and particular needs. Even now the Applicant only reluctantly and fleetingly accepts that he failed his clients.
404. Given the protective nature of the jurisdiction to impose a banning order, it is unnecessary to determine whether the conduct of the Applicant that has given rise to the Tribunal’s findings under section 829 amounts to negligence. It is, however, necessary to consider whether, having regard to the Applicant’s past and likely future conduct, the public needs to be protected by the exclusion of the Applicant from the industry for a period.
405. The Applicant submitted that in Farley v Australian Securities Commission [1998] AATA 495 a ban of only four years was imposed upon a securities adviser found to have acted “in gross dereliction of duty towards his principal”.. In that case, Deputy President McMahon acknowledged that there is little guidance in the authorities as to the appropriate length of such a banning order and said:
“As the purpose of s 829 is the protection of the public, one can understand the appropriateness of a permanent ban in the case of a person who is not of good fame and character. Having regard to the same purpose, it seems to me that a permanent ban ought not to be otherwise ordered except in the worst case. If permanent banning orders were freely made in cases of less seriousness, their potency and effect would be debased. It is not possible to set out what would constitute a worst case. A myriad of circumstances could constitute such a category. However if, for example, a representative embarked on a systematic course of defrauding vulnerable members of the community, one could imagine that those circumstances could give rise to a permanent banning order” (at para. 158).
406. That case involved a relatively inexperienced securities representative who failed in his duty to his principal.
407. In Jungstedt v. ASIC [2003] AATA 159, Deputy President Forgie, in upholding a five year banning order and rejecting the alternative approach of enforceable undertaking, supervision and education, said:
“Mr Jungstedt’s breaches of the statutory standards are broadly based and effectively extend across the whole range of the client/adviser relationship. They are not limited to a particular area of his expertise and they are not minor breaches or breaches that have the character of isolated occurrences. They are breaches which indicate a continuing pattern of disregard for the standards expected of a representative of an investment adviser” (at para. 337).
408. Those comments can also be applied to the Applicant’s conduct. Indeed the circumstances of that case bear some similarity to the circumstances here. The five year ban imposed on Mr. Jungstedt may be explained by the fact that he held a proper authority from a broker of which he was not a principal. He was held to have “some responsibility” for his clients’ losses (Jungstedt at para. 328), indicating that the learned Deputy President was mindful that some responsibility may also have rested with Mr. Jungstedt’s superiors.
409. Here the Applicant held a proper authority from and was also the sole principal of Feldworth. He alone must therefore bear full responsibility for his conduct. Over a period of four years he consistently failed in his duty to his clients, who trusted and relied on him. He entered the industry in 1984, became the Dealer Principal of Feldworth in 1987 and was aged nearly 43 when he began to recommend ECCCL to his clients. During the period in question, the Applicant obtained in around 1994/5 the highest qualification available in financial planning, namely Certified Financial Planner. He is now aged 52 and expected to emerge from bankruptcy on 31 March 2003.
410. The Applicant having achieved the highest available qualification, education does not appear likely to afford the prospect of investor protection. Since he was sole principal of Feldworth, there is no apparently available suitable supervisor. The Applicant did not offer any proposal for the protection of investors that might be adopted in lieu of a banning order, should the Tribunal find, as it has, that circumstances have been established which permit a banning order to be made.
411. Many of the Applicant’s clients were elderly or retired. One of his clients was the trustee of the inheritance of a twelve year old girl. They were vulnerable in that they trusted the Applicant to give them advice based on adequate research and consideration. He put himself forward as qualified to protect their interests yet repeatedly failed to do so. Time and again he failed to exercise the critical judgment he was required to apply, yet presented his recommendations as based on research that his clients had no reason to believe was inadequate, as it was. In reliance on his advice, the Applicant’s clients lost money, with some put to the trouble and expense of engaging in litigation to recover part of their losses. The Applicant did not intend to defraud his clients but they were left in the same position as if he had. Under these circumstances the Tribunal considers this to constitute a worst case.
412. Notwithstanding the word “permanent” in section 130, a permanent banning order may be revoked or varied at some future time under section 832 of the Corporations Act should the Applicant demonstrate to the Respondent that, in the circumstances then pertaining, there is no reason to believe that he is not of good fame and character and would not perform the duties of a dealer or investment adviser efficiently, honestly and fairly. Any refusal of such an application would be subject to review by this Tribunal, as per section 1317B of the Corporations Act as amended by the Financial Services Reform Act.
413. Having regard to the material before it and to the findings it has made, the Tribunal is unable to determine a specific period after which it could be satisfied that the Applicant would perform the duties of a dealer or investment adviser efficiently, honestly and fairly. The Tribunal is therefore reasonably comfortable in coming to the conclusion that the need to maintain the confidence of investors and to encourage participation in the securities industry requires an order that the Applicant be excluded from the industry until such time, if ever, as he might satisfy the Respondent that the order should be revoked or varied. Accordingly a permanent banning order is appropriate in this case, as was ordered by the delegate on 4 February 2000.
414. The Tribunal concludes, therefore, that the decision under review was the correct or preferable decision.
Decision
415. For the above reasons, the Tribunal affirms the decision under review.
I certify that the 415 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A L Limbury, Member
Signed: L Bonouvrie
AssociateDate/s of Hearing 29, 30, 31 October 2001
1, 2, 5 November 2001
11, 12, 18, 19, 20, 21, 22 March 2002
Date of Decision 1 April 2003
The Applicant in person
Counsel for the Respondent Mr. Terrence Lynch
Solicitor for the Respondent Ms. Jan Redfern
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