Joffe v The Queen; Stromer v The Queen

[2013] HCATrans 109

[2013] HCATrans 109

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S6 of 2013

B e t w e e n -

DANIEL SHAYNE JOFFE

Applicant

and

THE QUEEN

Respondent

Office of the Registry
  Sydney   No S14 of 2013

B e t w e e n -

NATHAN STROMER

Applicant

and

THE QUEEN

Respondent

Applications for special leave to appeal

HAYNE J
BELL J
GAGELER J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 MAY 2013, AT 9.29 AM

Copyright in the High Court of Australia

____________________

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR J.A.C. POTTS, for Mr Joffe in the first of those matters.  (instructed by Speed and Stracey Lawyers)

MR M.A. WIGNEY, SC:   May it please the Court, I appear for Mr Stromer.  (instructed by Johnson Winter & Slattery Lawyers)

MR C.R.C. NEWLINDS, SC:   If the Court please, I appear with
MR J.C. GILES for the respondent in both applications.  (instructed by Commonwealth Director of Public Prosecutions)

HAYNE J:   Yes.  Have counsel for the applicants come to any arrangement about how time or argument should be divided?

MR WALKER:   Not explicitly.  No, your Honour.  My understanding is that I would start.

HAYNE J:   My question is obviously directed rather ‑ ‑ ‑

MR WALKER:   When do I finish?  Yes.  I fear we have not got past this position but I predict that I probably will not take a full 20, but I must say I had not turned to the next question which was, does my learned friend, Mr Wigney, intend to take another 20?  I would imagine that there is a great deal in common in our positions, your Honours.

HAYNE J:   I would have thought there was a great deal in common.  Is there any reason why argument for the applicants should extend in total beyond, shall we say, 30 minutes?

MR WALKER:   Not from my point of view, but I ‑ ‑ ‑

MR WIGNEY:   Will be very short and largely adopt Mr Walker’s submissions. 

HAYNE J:   We might ‑ perhaps 20 to begin with and see where we have got to.  Let us work on the normal timing and see where we get to.

MR WALKER:   I am obliged to your Honour.  Thank you.

HAYNE J:   Yes, Mr Walker.

MR WALKER:   Your Honours, it does not seem a long time ago that the Court handed down ILP v Chameleon why matters that were covered in that case are now brought back by us for a grant of special leave.  The first answer is an obvious one concerning the different nature of the cases.  This time, the critical aspects of the definition of financial product is one which maps out the area in which conduct is proscribed so as to produce criminal consequences.

In Chameleon, of course, there was an invalidity of civil transaction which was in question.  But the really important and substantive reason why this deserves a grant of special leave concerns the application in the Court of Criminal Appeal in this case of the holding by this Court in Chameleon concerning the critical expression “financial accommodation”.

In our submission, the case is one fit for special leave in order to reconcile what we would describe as the technicality leading to narrowness of the approach taken in the Court of Criminal Appeal in this case compared to the ordinary contextual English leading to breadth which characterises the approach to exactly the same expression and exactly the same provisions in Chameleon.

May I take your Honours by way of rapid reminder to the way in which the legislation, including the delegated legislation, defines these critical provisions.  Conveniently, it is contained in the application book by quotation in the President’s reasons.  At page 116 one starts, as your Honours will recall, with the definition in the regulation 7.1.06(1) for the purposes of 765A of the Act of the expression “credit facility” which in turn, of course, is one of the carve outs from the class of financial products which are derivatives, otherwise applicable to the facts of this case.

One sees that the critical expression in “credit facility” definition is “the provision of credit” and then with those six positive and negative qualities which I will not read in paragraph (a)(i).

HAYNE J:   How was there a provision of credit under these arrangements?

MR WALKER:   By dint of the contract arrangement or understanding fitting within what regulation 7.1.06(3) defined credit to be, and in particular (3)(b) quoted on page 118 of the application book being the provision of any form of financial accommodation and it is by that means that whether counter intuitively or not with the colloquial meaning of the word “credit” the arrangements in this case are plainly, in our submission, within that extremely general expression, “any form of financial accommodation”.

HAYNE J:   Why?

MR WALKER:   Because subclause (3)(b) deliberately extends credit beyond that which answers the usual legal colloquial meaning, that is (a)(i) that you see quoted at the foot of page 117, deferral of debt, deliberately an example – a very striking example of the style of draftsmanship that the Court noted in paragraph 5 of Chameleon and which was noted again by their Honours in the Court of Criminal Appeal whereby one has a definition, in some cases in this statute more or less answering a colloquial contextual understanding of the English words.  Then one has inclusions, as it were, procrustean in style, that is crammed in, whether or not they would otherwise fit; and then one has exceptions taken out, whether or not they would have fitted; and then one has delegated legislation and other instruments by which there can be additions or subtractions along the way.

That led to the consequence that the plurality noted in paragraph 5 of Chameleon, namely, “the creation of rights and liabilities by means of criteria which reflect fluid market and economic usage”, hence any form of financial accommodation rather than any ascertainable and stable meaning of the law but meaning must be give, particularly in a penal context.  And it is for those reasons that one would then turn – one is driven as a matter of authority – to the way in which this Court dealt with that critical expression in Chameleon.

HAYNE J:   Just before we come to that, the arrangement that was made between the relevant parties in this matter was one which provided that on the happening of certain events an amount of money would be paid by one party to the other party, is that right?

MR WALKER:   Yes.

HAYNE J:   The amount that was to be paid by the paying party was computed by a formula that could be understood as attempting to mimic the amount that would have been paid if there had been a loan.

MR WALKER:   Yes.  Your Honour uses a word in the judgment, “reflect” is another word, and it is plain that one of what I will call the selling points, indeed one would have thought the business rationale, if there be one, was to do precisely that, to use the jargon, to gain the exposure to a certain equities or securities market without whatever is supposed to have been the difficulty or, one might say, without actually having to outlay the money of acquiring the securities.

HAYNE J:   And does not the argument on your side of the record come down to the proposition that the mimicry is so effective that the arrangement is to be equated with that which it seeks to mimic?

MR WALKER:   No, it does not come down to that.  That is, of course, a staging post.  That is an unavoidable, indeed, a very obvious aspect of the deal and I pick the word “deal” because it has been put against us.  We rather submit that the nature of this deal which is quintessentially financial, it is very difficult to see anything else but money here, precisely because we do not have the delivery of anything, no apples, no oranges, no scrip, no nothing, no chose in action.  It is all financial.  It is all about money.

The next question is, what is within this notion of accommodation and one stresses that the Parliament has chosen, for reasons of its own – we know that these are provisions that serve multiple purpose, defining areas – in this case it happens to be an area which sets out a zone of proscribed conduct.  For the reasons that seemed good as a matter of policy, the broadest form, the broadest meaning must be given to this expression.

May I just briefly remind your Honours from the plurality and concurring reasons in Chameleon of just how emphatically the Court has so recently pronounced that breadth.  One sees in paragraph 28, in particular in the plurality, “considerable width of denotation” is the description the plurality gave it, and a very evocative immediate example, namely, the “bill of exchange”.  At that point one can say there does not need here to be, in formal terms, deferral of a debt, there are future events which will render that accommodation, something which requires the bank to, as it were, pay out funds or not, and then, an even more evocative example which is the “overdraft facility”.

HAYNE J:   Under both of which arrangements someone actually gets the money.

MR WALKER:   No.

HAYNE J:   No?  The bill ‑ ‑ ‑

MR WALKER:   No, the example here is even before the money is drawn, and one sees the reference to “the presently undrawn portion of the overdraft”.  It is the existence of the “undrawn portion of the overdraft” which represents the accommodation.  That is the critical thing, bearing in mind that an overdraft – of the fact that it is repayable on demand is not to the point, it does not defeat this being accommodation.

The accommodation is the fact that unless and until in future something happens – in our case it is a closing out by CMC – unless and until something happens you may proceed.  In the case of the undrawn portion of your overdraft you may proceed until the lights flash and the bells ring to draw cheques.  In the case of these trading you will proceed by your choices made by consulting whatever entrails inform you as to what shares you wish to be notionally exposed to by this overnight, automatic, ongoing for five years, closing out of your positions.

BELL J:   Under the contractual arrangements, at the end of the day the parties’ rights were adjusted.

MR WALKER:   Unquestionably, just as ‑ ‑ ‑

BELL J:   What was the accommodation?

MR WALKER:   Just as at the end of the day when an overdraft is called up the parties’ rights are adjusted in exactly the same way.

HAYNE J:   What is called up is what has been lent.

MR WALKER:   The over – Justice Bell’s question which of course is, with respect, cognate with Justice Hayne’s opening question to me, the accommodation is the capacity to keep trading on a leveraged basis.  It is leveraged.  None of this has to be actual or tangible.  We do not have to have things which are property and which is passing for the leverage to work.  The leverage, as your Honours will recall, is produced graphically by the formula which produces the very calculation upon which when the music does stop there is a final adjust.

The leverage is the multiplication of the quoted price which is more or less the price that – in the actual market for the actual securities is being observed at mid‑market points.  You see the actual multiplication of the number of units which reflects, of course, a notional number of shares or securities being purchased, purchased being in heavy quotes.  That is the whole point of the mimicry or reflection.  That leverage is a financial accommodation because it is permitted to be carried out without anything approaching 100 per cent being required unless and until CMC forms a market judgment that, for example, they will not permit under 12.5 any resort to credit in your account because trading conditions are such that future margin calls may be such as to make it a foolish risk for CMC to give you any of your credit.

That is a classic demonstration that this is an accommodation because CMC takes a risk that there will not be enough money in your account to cover a difference produced, for example, if you are long – produced by a catastrophic fall during a day’s trading.  That is the leverage from the point of view of the so‑called purchaser, that is the credit risk that is extending, increasing the amount without having it in hand that CMC is then going to depend upon the capacity of the customer to pay.  Any dependence by CMC upon the capacity of the customer to pay, which of course is what is being calculated by reference to margins, it is why the deposit is called for and significance lies in the fact that you are not required to put up 100 per cent of the value of your position.  It is that that represents accommodation.

The fact that it is short-term merely meets the “for any period” in the definition and it entirely presents an analogy, commercially and financially, and legally with the overdraft obligation which is to repay on demand, that is immediate.  The accommodation exists beforehand, notwithstanding that when the accommodater becomes less confident of matter the accommodation is either reduced – increase of margin – or abolished altogether, calling up the overdraft, closing out all positions.

That, in our submission, which represented the accommodation, it matches of course the different but equally broad way in which Justice Heydon put the matter in Chameleon.  Perhaps before I go to Justice Heydon, I remind your Honours the plurality in paragraph 31 turned to that analogy with the bank overdraft one sees at the foot of 31 - I will not read it – and in Justice Heydon, paragraphs 43 and 44, the notion of “accommodation” being “anything that supplies a want” is very well adapted, with great respect, to the apparently attractive business which is held out by what is called taking positions.

Now, it does not damage our position, indeed, if anything, it advances it for that to be described by words such as betting, gambling or wagering.  In our submission, the financial accommodation here is that one is permitted to do what is called betting, gambling or wagering without having to put up the whole of the stake.

BELL J:   Accommodation goes both ways because under the contract when at the close of business each day when matters are settled CMC might be the one ‑ ‑ ‑

MR WALKER:   Who has to pay.

BELL J:   Yes.

MR WALKER:   Yes, but again I drew to attention the obligation that you will have seen at – if I could take your Honours to page 130 of the application book.  I referred earlier to 12.5 in the arrangements.  You will see there that what Justice Bell has noted, that is the promising or enticing promise that you will be able to draw on your credit, that is, over the amount which is necessary for deposits and margins, under 12.5, say about line 38 or so on that page, you will see that that too is dependent upon CMC forming a view about risk – market risk. 

So it is an accommodation which may be constrained, it is an accommodation that may be shaped but that, of course, brings it in common with that most obvious form of accommodation, one’s overdraft, which equally may be constrained or truncated by reference to market conditions, with or without any involvement by the customer.

So it is for those reasons, in our submission, that one can see that far from removing this deal from the category of financial accommodation, the notion of mimicry or reflection of leveraged dealing in shares and securities actually shows that in the financial terms the money here is all real, there are real obligations to pay, there are real rights to draw.  In terms of the financial aspect there is of course an accommodation because this leveraged calculation is permitted to be opened – to use the jargon – and at that point, of course, the rights and obligations subject to future contingencies are real – it is a contract – and it is for those reasons that it becomes an accommodation.

It certainly supplies the want of somebody to be exposed to these positions without having to put up all the money and it is for those reasons that, in our submission, there are very serious questions about the extent to which the approach in the Court of Criminal Appeal can be seen to have been a correct application in the very important criminal sphere of these very, very broad and deliberately comprehensive terms of definition.

That leads me to the last point I wish to make which is to go to the culminating descriptions of the reasoning by which we fail in the Court of Criminal Appeal.  The two passages that I want to take you to in Justice Allsop’s reasons and Justice Barrett’s reasons present, we submit this; a description of a state of affairs which by no means obviously shows this is not financial accommodation.

We, rather, urge that it shows that there is indeed a form of financial accommodation, precisely the form of capacity to trade in a leveraged manner, without putting up all the money, taking a risk in the hope of reward calculated by an amount far greater than that which may be called for under initial deposit or interim margin.  So, for example, in Justice Allsop’s reasons, if I could take you to 138 of the application book, at paragraph 103, about line 20, there is a summary of argument on our behalf. 

A point to be observed most particularly is that the price is here an ambiguous expression.  There is the quoted price which is a component of a calculation, and then there is the obligation which in theory could be, at maximum, that same price, only if there was a complete collapse of the market.  But, subject to that ambiguity, in our submission, what one sees in 104 is a description of precisely the possibility of that leveraged return and the risk, of course, of a very considerable loss, far in excess of what has been up – far in excess of what has been put up – the taking of which, the giving of which represents an accommodation.  So, the last sentence of 104, in our submission, rather indicates rather than contradicts the existence of accommodation.  The same thing is true in Justice Barrett’s holding at 152 to 153, paragraph 157, in particular, and paragraph 158.

GAGELER J:   What about 159?

MR WALKER:   That is included.  I should have included 159.  His Honour refers to “did not require anyone to pay anything”, significantly followed by the word “although”.  There is no agreement, that is, there is nothing but a bare framework and no money of any kind on any side until a deposit is put up.  You cannot trade without putting up a deposit.  You cannot keep trading without meeting margins.  There is a requirement overnight to adjust, to settle.  If you do not have money in your account, you do have to pay.  If there is money in your account, you do pay by it being debited.

So it is not right that the agreement does not require anyone to pay anything.  When his Honour says “when made”, including by the lodgement of the account opening deposit, he is talking about that preliminary stage before any trade.  As soon as there is a trade – and that is what happened in all cases that were before the Court of Criminal Appeal – there is a requirement on someone to pay something, depending upon outcome, a contractual obligation.  So that, with respect – although it has to be said that his Honour’s antecedent description, careful disposition of the matter,

shows that he did not misunderstand those aspects; that is a generalisation which is, in itself, inaccurate.  If it please your Honours.

HAYNE J:   Thank you, Mr Walker.  Yes, Mr Wigney.

MR WIGNEY:   Your Honours, I should first deal briefly with the application to dispense with the time limit under rule 41.

HAYNE J:   Is that opposed, Mr Newlinds?

MR NEWLINDS:   No, your Honour.

HAYNE J:   Yes, you have that extension.  Yes?

MR WIGNEY:   Your Honours, I just wish to add some very brief submissions in relation to the second question, and that is essentially whether the CFDs were contracts for the future provision of services and therefore not derivatives.  Your Honours, it was common ground in the Court of Criminal Appeal that there were services provided pursuant to the contractual arrangements.  The neatest summary of those services is in Justice Barrett’s judgment at page 154 of the application book, paragraphs 162 and 163.  Those paragraphs are couched in terms of the submissions of the applicants, but his Honour at paragraph 169 of his judgment accepts that those services were provided.  So, in particular in paragraph 163 it is said that:

An important “service” of this kind was, it is said, the making available by CMC of an equivalent but opposite position upon the customer’s request –

et cetera.  The only question, your Honour, as found in the Court of Criminal Appeal, was whether those services that were provided pursuant to the contractual arrangements were collateral or ancillary or incidental to the substance of the contract and, in our respectful submission, the short point is simply this; that those services were essential to the contractual arrangements because without them there was no opportunity or facility to – as has been observed – mimic the market for the underlying securities.  Without the provision of those services there was no opportunity for a customer to either take the risk or endeavour to obtain a profit from these particular facilities.

So, in our respectful submission, far from being collateral or ancillary or incidental to the contractual arrangements, they are very central to it because without those services there was nothing for the customer to participate in or no opportunity to be gained.  So, in our respectful submission, it was simply wrong to characterise and too narrow to

characterise the contracts as simply being a contract to fix the price at the end of the day.  There were far more things that were provided by the provider, relevantly CMC, to facilitate this particular opportunity.  That is the short point that we wish to make.

HAYNE J:   We will not trouble you, Mr Newlinds.

We see no reason to doubt the correctness of the conclusions reached by the Court of Criminal Appeal in this matter.  Special leave to appeal is refused.

AT 9.57 AM THE MATTER WAS CONCLUDED