Jungstedt and Australian Securities & Investments Commission

CATCHWORDS – CORPORATIONS LAW – banning order – whether applicant breached securities law – whether applicant made securities recommendation – whether recommendation made to a person who may reasonable be expected to rely on that recommendation - whether applicant had reasonable basis for making recommendation - whether reasons to believe that applicant has not performed, or will not perform efficiently, honestly and fairly the duties of an investment adviser or a representative of an investment adviser - whether applicant engaged in discretionary trading and exceeded his authority to act – decision affirmed.

Corporations Law ss. 9, 77, 88, 92, 93, 781, 806, 807, 809, 824, 825, 825A, 826, 827, 828, 829, 830, 831, 832, 833, 836, 837 and 851; Chapter 7; Divisions 1, 2, 3, 4 and 5

Corporations Act 2001 ss. 1371, 1400 and 1401
Freedom of Information Act 1982 ss. 40 and 43

Sales Tax Assessment Act (No 1) 1930 s. 18

Social Security Act 1947 s. 6AD

Hadid v Lenfest Communications Inc [1999] FCA 1798

Stuart v Clemons and Others [1951] Tas S.R. 28
Attorney-General’s Department v Cockcroft (1986) 64 ALR 97
Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1987) 80 ALR 314
Department of Social Security v Copping (1973) 73 ALR 343
Re Buchan and Dairy Adjustment Authority [2002] AATA 644
Taylor v White (1963) 110 CLR 129
Edgelow v MacElwee [1918] 1 KB 205
Hyde v Sullivan (1956) 56 SR (NSW) 113
Story v National Companies and Securities Commission (1988) 6 ACLC 560
Australian Securities Commission v Kippe and Another (1996) 67 FCR 499
New South Wales Bar Association v Hamman [1999] NSWCA 404
New South Wales Bar Association v Evatt (1968) 117 CLR 177
Hardcastle v Commissioner of Police (1984) 53 ALR 593

Pillai v Messiter [No.2] (1989) 16 NSWLR 197

Re Wolstencroft and Companies Auditors and Liquidators Disciplinary Board (1998) 54 ALD 773
Re Donald and Australian Securities and Investment Commission [2001] AATA 366
Australian Securities and Investment Commission v Donald (2002) 69 ALD 187
Re Codey and Australian Securities Commission (1995) 18 ACSR 209

DECISION AND REASONS FOR DECISION [2003] AATA 159

ADMINISTRATIVE APPEALS TRIBUNAL     )
  )          V2000/345
GENERAL ADMINISTRATIVE DIVISION     )

Re JAN JUNGSTEDT

Applicant

AndAUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Respondent

DECISION

Tribunal:                   Miss S A Forgie (Deputy President)
Date:  14 February, 2003
Place:  Melbourne

Decision:The Tribunal affirms the decision of the respondent dated 29 February, 2000.

S A FORGIE
Deputy President

REASONS FOR DECISION

On 27 March, 2000, the applicant, Jan Jungstedt, applied for review of a decision of a delegate of the respondent, the Australian Securities and Industries Commission (“Commission”) dated 29 February, 2000 to prohibit him from doing an act as a representative of a securities dealer or of an investment adviser for a period of five years. That decision, known as a “banning order” was made pursuant to ss. 829 and 830 of the Corporations Law (“the Law”) as it was then in force.

At the hearing, Mr Jungstedt was represented by Mr Rinaldi of counsel and the Commission by Mr Elliott of counsel. The documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (“T documents”) were admitted in evidence together with the following:
affidavits of Ms Eve Mary Corbett, Ms Dorothy Anne Blackwood, Mr Murray John Roberts, Mr John Percy Jones and Mr Colin Boltman;
extracts from a report by Ms Christine Boltman;
terms of settlement between Circle Jay Pty Ltd (“Circle Jay”) and Mr Jones as plaintiffs and Epic Securities Limited (“Epic”) and others as defendants dated 31 May, 1999;
Business Rules of the Australian Stock Exchange (“ASX”) (“ASX Rules”) effective 13 December, 1995 and 2 December, 1996;
brochure issued by the ASX entitled “Understanding Options Trading” and dated November, 1993;
letter dated 10 December, 1999 from the Commission to Mr Jungstedt together with annexure;
bundle of correspondence between Mr Jungstedt and Mr Barry Murray together with notes of meetings between the Commission and Mr Murray;
contract liquidation note for Circle Jay in standard form dated 16 December, 1996;
letter from Mr Boltman to Mr Baring-Gould dated 30 October, 1987;
members’ open position report dated 27 September, 1996
contract liquidation note dated 25 September, 1995;
brochure entitled “Understanding Options Strategies” published in August, 1997;
Extract from a book “Equity Options Valuation, Trading and Practical Strategies” by H. Denning;
statement of Mr Jungstedt dated 24 October, 2000 and supplementary statement dated 4 July, 2001;
lodgement of securities by Mr Jones dated 25 September, 1996 and 20 August, 1997; and
graph of results of options trading of Mr Jones from October, 1995 to 7 October, 1997 prepared by Mr Jungstedt.
Oral evidence was given by Mr Jungstedt in support of his case. In support of the case presented by the Commission, oral evidence was given by Mr Roberts, Ms Tinny, Ms Corbett, Mr Boltman, Mr Jones, Mr Mullally and Mr Murray.

THE ISSUES

There are two main issues in this case. The first, is whether a banning order may be made against Mr Jungstedt. In the context of this case, resolution of that issue requires determination of whether Mr Jungstedt was in breach of a securities law or whether there is reason to believe that Mr Jungstedt has not performed, or will not perform, efficiently, honestly and fairly the duties of a representative of an investment adviser. If the Commission may make a banning order, the next issue is whether a banning order should be made against Mr Jungstedt.

LEGISLATIVE BACKGROUND

Legislative changes

Since the Commission’s decision was made and Mr Jungstedt lodged his application for review, the Law has been repealed and the Corporations Act 2001 (“the Act”) enacted. Section 1400 of the Act applies in relation to a right or liability, whether civil or criminal, that was acquired, accrued or incurred under a provision of the Law and that was in existence immediately before the existence of the Act. This is called the “pre-commencement right or liability”. It does not extend to a right or liability made under a court order. On the commencement of the Act, the person acquires, accrues or incurs a right or liability, known as a “substituted right or liability”, equivalent to the pre-commencement right or liability. He or she does so under the corresponding provision of the new Corporations legislation which includes the Act (s. 1371(1)). Where the pre-commencement right or liability was acquired, accrued or incurred under a provision of the Law that has been repealed but the right or liability was in existence immediately before the commencement of the Act, the Act is taken to include the provision of among others, the Law (s. 1401). The referrals in these reasons will, therefore, be to the provisions of the Law as in force at the time the decision was made.

Regulation of participants in the securities industry

Chapter 7 of the Law deals with securities. It is divided into various parts, each of which deals with a separate aspect of the securities industry. Part 7.3 deals with the participants in the securities industry. So, for example, it requires that those who carry on a securities business (i.e. a dealer (s. 9)) or an investment advice business (i.e. an investment adviser (s. 9)) must be licensed as such.

A “securities business” is defined in s. 93 (s. 9) to mean “… a business dealing in securities”. What is meant by “securities” is defined in s. 92 (s. 9) to mean:

“(a) debentures, stocks or bonds issued or proposed to be issued by a government; or
(b)shares in, or debentures of, a body; or
(c)interests in a managed investment scheme; or
(ca)in Parts 7.3 to 7.6 (inclusive)—interests that would be interests in a managed investment scheme but for paragraph (h) of the definition of managed investment scheme in section 9; or
(d)units of such shares; or
(e)an option contract within the meaning of Chapter 7;

but does not include a futures contract or an excluded security.”

An “option contract within the meaning of Chapter 7” means:

“(a) a contract under which a party acquires from another party an option or right, exercisable at or before a specified time, to buy from, or to sell to, that other party a number of specified securities, or of a specified class of securities, being securities of a kind referred to in paragraph 92(1)(a), (b), (c) or (d), at a price specified in, or to be determined in accordance with, the contract; or
(b)a contract entered into on a stock market of a securities exchange or on an exempt stock market, being a contract under which a party to the contract acquires from another party to the contract an option or right, exercisable at or before a specified time:
(i)to buy from, or to sell to, that other party an amount of a specified foreign currency, or a quantity of a specified commodity, at a price specified in, or to be determined in accordance with, the contract; or
(ii)to be paid by that other party an amount of money to be determined by reference to the amount by which a specified number is greater or less than the number of a specified index, being the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index, as at the time when the option or right is exercised.” (s. 9)

The expression, “investment advice business”, when used in relation to a person includes a reference to “a business of advising other persons about securities” (ss. 9 and 77(1)).

Chapter 7 sets out the obligations that licensing brings and the rights of those who deal with unlicensed dealers and investment advisers (Part 7.3, Divisions 1 and 2). A dealers licence and an investment advisers licence may both be referred to as a “securities licence” and a “securities licensee” as a person who holds one or other or both of the licences (s. 9).

Division 3 regulates representatives of dealers and investment advisers. A body corporate may not act as a representative (s. 809). A person may act as a representative of a dealer but only if the dealer holds a dealer’s licence and the representative holds a proper authority from the dealer (s. 806). He or she may act as a representative of an investment adviser but only if the investment adviser is either a dealer holding a dealer’s licence or holds an investment adviser’s licence and the representative holds a proper authority from the investment adviser (s. 807). A “proper authority” from the dealer or the investment adviser (i.e. the securities licensee) is a reference to a copy of the dealer or investment adviser’s licence on which is endorsed a statement certifying the copy to be a true copy, stating that the representative is employed by, or acts for or by arrangement with, the securities licensee and signed by the securities licensee (s. 88). Division 3 of the Law sets out the obligations of the licensed dealer or investment adviser in relation to those holding his or her proper authority and those of the representative.

Division 4 regulates the liability of licensed dealers and investment advisers for the conduct of their representatives while Division 5 provides for the exclusion of persons from the securities industry. Sections 824, 825, 825A and 826 of Division 5 provide for those circumstances in which the Commission may revoke a licence held by a dealer or an investment adviser. Subject to s. 837, the Commission may suspend a licence (s. 827(1)). In certain circumstances, the Commission may also issue a banning order under s. 828 if the dealer or investment adviser is a natural person.

Section 829 provides for those circumstances in which the Commission may make a banning order against a natural person who is not a licensed dealer or investment adviser but is a representative of a licensed dealer or of an investment adviser. Subject to s. 837 to which I will return, the Commission may make a banning order if:

“(a) he or she becomes an insolvent under administration;
(b)he or she is convicted of serious fraud;
(c)he or she becomes incapable, through mental or physical incapacity, of managing his or her affairs;
(d)he or she contravenes a securities law;
(e)the Commission has reason to believe that he or she is not of good fame and character;
(f)the Commission 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)the Commission 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.” (s. 829)

In relation to s. 829(d), the word “contravene” is defined in s. 9 to include “… fail to comply with”. The expression “securities law” is defined to mean a provision of, among others, Chapter 7. The securities laws which are in question in this case are ss. 781 and 851 and both come within Chapter 7. At the time the banning order was made, s. 781 provided:

“ A person must not:
(a)carry on an investment advice business; or
(b)hold out that the person is an investment adviser;

unless the person is a licensee or an exempt investment adviser.”

Section 851 provided:

“(1) A securities adviser who:
(a)makes a securities recommendation to a person who may reasonably be expected to rely on it; and
(b)does not have a reasonable basis for making the recommendation to the person;

contravenes this section.
(2)For the purposes of subsection (1), a securities adviser does not have a reasonable basis for making a securities recommendation to a person unless:
(a)in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person's investment objectives, financial situation and particular needs, the securities adviser has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and
(b)the recommendation is based on that consideration and investigation.
(3)A person who contravenes subsection (1) is not guilty of an offence.”

The expression “securities recommendation” is defined in s. 9 to mean “… a recommendation with respect to securities or a class of securities, whether made expressly or by implication”.

Where the Commission decides to issue a banning order, it must do so by a written order. It may:
“… prohibit the person:
(a)in any case – permanently; or
(b)except where the Commission 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.” (s. 830(1))

Whether the banning order is made permanently or for a specified period, it may include a provision that:

“… permits the person, subject to such conditions (if any) as are specified, to do, or to do in specified circumstances, specified acts that the order would otherwise prohibit the person from doing.” (s. 831(1))

Subject to s. 837, the Commission may, at any time, vary a banning order against a person by, among other matters, adding a provision permitting a person to undertake specified acts as set out in s. 831(1) (s. 831(2)).

The only other way in which the Commission may vary or revoke a banning order is in accordance with ss. 832 and 833 (s. 830(2)). It may not grant a dealer’s licence or an investment adviser’s licence to a person if a banning order prohibits that person from doing an act as a representative of a dealer or of an investment adviser (s. 836).

Section 837 requires the Commission to comply with certain procedures before it may make orders or take steps specified in s. 837(1). Of relevance in this case is the requirement that:

“The Commission shall not:
…
(e)make, otherwise than by virtue of paragraph … 829(a), (b) or (c), an order under section 830 against a person;

…
unless the Commission complies with subsection (2) of this section.” (s. 837(1)(e))

Section 837(2) provides that:

“The Commission shall give the applicant, licensee or person, as the case may be, an opportunity:
(a)to appear at a hearing before the Commission that takes place in private; and
(b)to make submissions and give evidence to the Commission in relation to the matter.”

FACTUAL BACKGROUND

The findings set out in the following paragraphs are, in the main, drawn from the booklets entitled “Understanding Options Trading” (Exhibit 12) and “Understanding Options Strategies” (Exhibit G) and the extract from the book entitled “Equity Options; Valuation, Trading and Practical Strategies” by Hugh Denning Ph. D (Exhibit H) as well as from the oral evidence of Mr Jungstedt and Mr Murray. They set out a very basic outline of option contracts and option strategies in relation to shares.

Options contracts

In general terms, an option is an agreement giving a person (“the optionee”) the right, for a limited time, to accept an offer. That offer may, for example, be to buy or sell property. The optionee gains the right by giving the person giving the option (“the optionor”) some form of consideration. The optionee is not bound to exercise the option.

When transposed to the share market, an option is the same. It is a contract giving the optionee the right to buy or sell a parcel of shares for a specified price and within a certain time if he or she chooses to do so. The optionee gives consideration to the optionor. Options are promoted as a form investment available to individuals. They are promoted as providing shareholders with protection for the share portfolio and the opportunity to make a profit and income. At the same time, options involve risk for investors.

Trading of options in shares occurs on the Australian Options Market (“AOM”), which is a wholly owned subsidiary of the ASX, and is governed by the ASX Rules. A person wishing to invest in options must abide by those ASX Rules but he or she is not a party to the option contract. Certain members of the ASX have been cleared as Clearing Members under the ASX Rules. Clearing Members enter into option contracts on behalf of their clients and accept responsibilities as principals under the contract as well as to the Options Clearing House Pty Limited (“OCH”), which is a wholly owned subsidiary of the ASX.

The ASX Rules have certain requirements that must be met in relation to share options and those engaged in them have developed a language of their own. In the context of share options, for example, the optionee is more generally known as a “taker” in the sense that the optionee is the person taking up the right given by the option contract. The optionor is more generally known as the “writer” because he or she is the person underwriting the obligation that must be fulfilled should the optionee choose to exercise the option i.e. the obligation either to deliver the shares if the option is to purchase shares or to accept shares if the option is to sell. If an option gives the taker the choice of buying shares, it is called a “call option” or a “call”. If it gives the taker the choice of selling shares, it is called a “put option” or a “put”. If an option gives the taker the choice of either buying or selling shares, it is called a “straddle”.

An option contract may be entered whether or not the shares are owned by one of the parties to the contract. If they are not owned, then the option is described as either a “naked call option” or a “naked put option”. Where there is a naked call option or a naked put option, the writer in the case of the call option and the taker in the case of the naked put option will be obliged to cover the option with the equivalent amount in cash or another acceptable cover. Cash or cover is known as “margins”. If the underlying shares are owned, the option is described as being “scrip-covered”.

Whether a call or a put, an option may be bought or sold. If it is bought, an investor is said to be “long an instrument” and so have either a “long call” or a “long put” depending on whether he or she has sold an option to buy or an option to sell. If it is sold, an investor is said to be “short an instrument” and so has either a “short call” or a “short put” as the case may be.

Although shares that are the subject of options contracts must be listed on the ASX and must meet with its reporting requirements, only those shares that are selected by OCH may be the subject of options. The companies issuing shares do not participate in their selection. If shares are to be selected, there must be a large base of ownership in those shares and they must be actively traded. Once selected, they are known as “underlying securities” or “underlying shares”. I will refer to them generically as underlying shares. An options contract must relate to a parcel of shares and, according to the ASX Rules must comprise a minimum of 1,000 shares.

The exercise price is also known as the strike price. It is a price pre-determined by the OCH as the buying or selling price for the underlying shares should the taker exercise his or her option. Generally, the OCH sets an exercise price at or about the then prevailing price at which the underlying share is being traded and another two above and another two below that prevailing price. The exercise prices are set at 10, 25 and 50 cent intervals for shares with a prevailing price up to $1.00 and between $1.01 and $5.00 and $5.01 and $10.00 respectively and at $1.00 intervals for those shares priced $10.01 and above. Those persons entering an options contract may choose one of these prices as the exercise price best meeting their expectations of how the share price will move during the term of the option contract. As the OCH sets the exercise price at fixed intervals, it may be adjusted during the life of the option as the underlying share price varies or if there is a bonus or rights issue.

Options contracts are for a fixed period of time but the length of that time may vary. The date on which all unexercised options in a particular option expire is known as the “expiry date”. The expiry date for all stock options is the last Friday of the expiry month, provided that it is a business day. That expiry month may occur at the end of a quarterly cycle or, in relation to some stocks, at the end of a three year period. In relation to some stocks, the current month is available. Options must be exercised by 5.00pm on the last trading day but can be exercised at any time from the purchase until the date of the expiry. Trading in each series of stock options ceases at the close of trading on the last business day prior to the expiry date.

The standardisation of the size of each parcel of shares, the exercise price and the expiry date all facilitate the trading of options. The only variable in relation to each option contract is the price paid by each taker to each writer in exchange for the right to choose to exercise his or her option and so to choose to buy or sell shares according to whether it is a call option or a put option. The price is known as the “premium”. Its amount is negotiated between the taker and the writer. The taker pays the premium to the writer who keeps it whether the taker decides to exercise his or her option or not. The taker’s maximum risk is the amount of the premium should he or she decide not to exercise the option. The writer’s potential maximum income will be the premium.

The amount of the premium is influenced by a range of factors including the price of the underlying share and the time left until the expiration of the option. Consequently, the premium changes during the life of the option as the price of the underlying shares moves and/or as the time remaining in the life of the option reduces. The premium can be regarded as being comprised of what is called its “intrinsic value” and its “time value”. The intrinsic value is the difference between the exercise price of the option and the then prevailing market price of the underlying shares.

If, for example, the exercise price of a call option is 25 cents below the prevailing market price of a share, it has an intrinsic value of 25 cents because the taker has the right to purchase shares at a price 25 cents below the price he or she would otherwise have to pay on the market. The option is said to be “in-the-money” because, if the taker were to exercise the option and then sell the shares at the prevailing market price, he or she would make a profit less the premium paid for the option. If the exercise price of a call option is 25 cents above the market price, the option has no intrinsic value and is said to be “out-of-the money”. If the exercise price and the market price are the same, the option is said to be “at-the-money”.

A put option works in the opposite way to a call option. If the exercise price of a put option is above the prevailing market price, it is said to be “in-the-money” and has an intrinsic value. That is because the taker of the option may sell the shares for a price higher than that which he or she could obtain on the market at the time. A put option is “out-of-the money” when the exercise price is below the market price as the taker of the option will not choose to exercise the option to sell at the exercise price when he or she could choose to sell for a higher price on the market.

The time value represents what a person is prepared to pay for the potential for profit in the future, should the market move in his or her favour. Factors that affect the time value include the share price, the option strike price, the time left until the expiration of the option contract, volatility of the market in relation to the share price, interest rates expected during the life of the option, dividend payments and how the person views the future activity of the market. In so far as time is concerned, the greater the time left until expiry, then the greater will be the chance that the option will become profitable through a favourable move in the share price. That translates into the option’s having a greater time value and so its premium will be greater. As the length of time until the expiration of the option decreases, the opportunities for it to become valuable decrease and so its time value decreases. Time value does not decrease at a constant rate throughout the life of an option as the rate of decrease increases as the expiration date draws closer.

In so far as the volatility of the market is concerned, the greater the volatility, the higher will be the premiums. That follows from the fact that the greater the volatility, the greater the probability that the writer will be exposed to incurring a loss and the writer will want to compensate for that greater risk with a higher premium. Interest rates will have a greater effect on long term options than shorter terms. In general terms, if interest rates are higher that factor tends to increase the premium paid for a call option and to decrease that paid for a put option. The payment of dividends tends to lower call option premiums because, once a dividend is paid, the price of shares tend to fall in price. The same reason means that put option premiums are raised once a dividend is paid. Market expectations relate to supply and demand and the stronger the demand, the higher the premium while the weaker the demand the lower the premium.

Once a taker and a writer have reached an agreement and entered an option contract, that contract is registered with the OCH, which is responsible for registering all options traded on the AOM. Entering an option contract is known as “opening a position”. A person opens a position by placing an order with a Member Organisation of an Exchange who has been admitted as a Clearing Member in accordance with the ASX’s Stock Option Trading Rules (“a Clearing Member”). The investor who opens a position pays a commission to the Clearing Member and the amount of that commission is subject to negotiation between the two of them. He or she also pays a registration fee to the OCH.

If a taker wishes to exercise his or her option, he or she notifies the Clearing Member to that effect. The Clearing Member then informs OCH of the taker’s intention to exercise the option. The OCH selects a writer in the same series of options and does so at random. The writer so selected must meet the obligation.

A taker may choose not to exercise the option at all but may choose to let the option lapse. He or she does that by letting the exercise date pass without exercising the option. A taker can “close out the option” by writing an option in the same series of options and instructing the Clearing Member to “close out” the position. So, for example, if a person took a call option as an opening transaction, he or she could close out his or her right to exercise that option by writing an identical call option to another person. That is to say, the taker has matched his or her existing position by opening the opposite position.

If an option is not exercised, a writer of an option has no obligation either to sell or buy shares as the option contract may require. A writer may also “close out” an option prior to its being exercised. He or she may do so by taking the identical option contract with another party. The practical effect of closing out is to cancel the open positions.

Documentation

When a trade is completed, the Clearing Member provides a contract note to the investor. That contract note sets out details of the transaction, such as the type of trade and whether it is an opening or a closing transaction, and its costs. An investor must pay any amount that is due on his or her transaction to the Clearing Member and must do so within the time limits set by the ASX Rules. Therefore, a cash covered writer must do so within 24 hours and an option taker must do so within 48 hours.

Each month, the Clearing Member generally sends each client a document outlining that client’s transactions and other items entered on his or her account during a calendar month. If requested by the client, the Clearing Member sends him or her a monthly report detailing all contracts then open and their market value at that time. If an investor is inactive, the document, known as an “Open Position Statement”, is sent quarterly.

Two weeks before the expiry of an option, the Clearing Member sends his or her client a statement setting out that option’s details.

Options strategies

There are a number of ways, or strategies, in which options may be used in an attempt to maximise the profit and income that may be derived from trading in options. Those strategies take into account such factors as the time remaining until the expiry of the option, the expected movement, if any, in the share price of the underlying shares, whether that movement is likely to be up or down and the level of risk that is acceptable to the particular investor engaging in the strategy. Each strategy comprises two or more “legs” i.e. either buying or selling a call(s) and/or a put(s). If an investor decides to separate the legs and enter them at different times rather than at the same time in a single trade, he or she is said to “leg into the strategy”. If an investor decides to reverse a strategy, he or she is said to “unwind” it. He or she does that by buying what he or she has previously sold and selling what he or she has previously bought.

The following are examples of strategies that are used in options trading:

Long straddle
A long straddle comprises a long call and a long put, both of which have the same strike price. No margins are required to be paid as the investor may only have an obligation to meet if he or she chooses to exercise one or other of the options or both of them.
The strategy is used when an investor expects a sharp movement in the share price of the underlying shares but the direction of that movement is uncertain.
The optimum time to establish the strategy is when the strike price is at or near the prevailing market price.
An investor will break even at expiry if the share price moves to a level either strike price plus the premium paid for the long call and the long put or the strike price less that premium i.e. the “break-even price”. That comes about because the gain that can be made on one leg will cancel out the loss made on the other at that point.
If the share price moves below or above that break-even price, the potential profit that can be made by an investor increases accordingly. If the share price has risen, that profit may be realised by exercising the long call and selling the purchased shares at the higher price. If it has fallen, it may be realised by selling the shares already held at the strike price that is higher than the then market price. If the profit from one leg is realised, the other leg could be held open to expiry date in case the share price should move in the opposite direction.
The potential loss that can be incurred by an investor is limited to the cost of the premium.
Considerations that should be taken into account in purchasing a long straddle or in leaving it in place include:
the longer that a long straddle is left in place, the greater is the loss due to time delay; and
the cost of the strategy must be balanced against the time needed to give the market the greatest opportunity to move as the investor expects. The more distant the expiry month of the option, the greater will be its purchase price.

Short straddle
A short straddle comprises a short call and a short price, both of which have the same strike price. Unless the underlying shares are already held, margins must be paid as an investor will be required to sell the underlying shares should the short call be exercised. They must also be paid in relation to the short put for an investor would be required to purchase shares should short put be exercised.
The strategy is used when an investor expects that there will be little movement in the share price of the underlying shares.
The optimum time to establish the strategy is when the strike price is at or near the prevailing market price.
An investor will break even at the expiry of the strategy if the share price moves to a level equivalent to the strike price plus or minus the amount of the premium received by the investor when selling the call and the put.
The maximum profit that an investor can make from the strategy occurs if the market price remains at the strike price and that profit is the premium he or she received for the sale of the call and the put. The amount of the profit reduces as the market price rises or falls to the strike price plus or minus the premium.
The loss that can be incurred by an investor is potentially unlimited if the share price moves beyond the break even points.
Considerations that should be taken into account in purchasing a short straddle or in leaving it in place include:
time decay assists the strategy;
unless the market price remains at the strike price precisely, there is a risk that one or other of the options will be exercised before their expiry. That risk follows from the fact that, if there is any movement from that strike price, one or other of the options will be in-the-money and the person purchasing that option may want to take advantage of it. If, for example, the market price rises above the strike price, the short call will be in-the-money and may be exercised. At the same time, the short put will be out-of-the-money; and
an investor may choose to limit his or her potential losses by taking a put and call option with out-of-the-money strike prices. If there is an adverse movement in the market price of the underlying shares, an investor may choose to close out one or both legs of the straddle.

Short strangle
A short strangle comprises a short call at strike price y and a short put at strike price x where x is lower than y. Margins must be paid.
The strategy is used when an investor expects that there will be little movement in the share price of the underlying shares and the investor considers that options are overpriced.
The optimum time to establish the strategy is when the strike price is between the two strike prices.
An investor will break even at the expiry of the strategy if the share price either moves to a level equivalent to strike price y plus the amount of the premium received by the investor when selling the call or the strike price x minus the amount of the premium received when selling the put.
The maximum profit that an investor can make from the strategy occurs if the market price remains between the two strike prices and that profit is the premium he or she received for the sale of the call and the put. The amount of the profit reduces as the market price rises or falls to the strike price plus or minus the premium.
The loss that can be incurred by an investor is potentially unlimited if the share price moves beyond the break even points.
Considerations that should be taken into account in purchasing a short strangle or in leaving it in place include:
time decay assists the strategy;
unless the market price remains between the two strike prices, there is a risk that one or other of the options will be exercised before their expiry. That risk follows from the fact that, if there is any movement from that range, one or other of the options will be in-the-money and the person purchasing that option may want to take advantage of it. If, for example, the market price rises above the strike price, the short call will be in-the-money and may be exercised. At the same time, the short put will be out-of-the-money. There is, however, a lower risk of exercise than in the case of a short straddle; and
an investor may choose to limit his or her potential losses by taking a put and call option with strike prices that are further out-of-the-money than the original. If there is an adverse movement in the market price of the underlying shares, an investor may choose to close out one or both legs of the short strangle.

Bull spread
A bull spread comprises a long call at one strike price (x) and a short call at another strike price (y). Strike price x is lower than strike price y. No margins are required to be paid.
The strategy is used when an investor expects the share price to rise moderately.
The strategy is undertaken when the market price is in the vicinity of the lower strike price x.
An investor will break even at the expiry of the strategy if the market price is at a point equal to the lower strike price plus the cost of the strategy.
The maximum profit that an investor can make is the difference between the two strike prices less the premium paid for the strategy. That occurs when the market price is at or above the strike price of the sold option at expiry.
If the market price falls to or below the lower strike price, an investor loses the premium he or she paid for the strategy and that represents his or her maximum loss.
Considerations that should be taken into account in purchasing a bull spread or in leaving it in place include:
if the market price of the underlying share rises quickly and reaches a point above the strike price of the short call, the strategy is often unwound to avoid the risk of an early exercise of that short call; and
the bull spread is a cheaper strategy than buying a call option but the commission costs on entering it are greater than for a call option.
Bull put spread

A bull spread may be constructed in the same way as a bull spread but with a long put at the lower strike price (x) and a short put at the higher strike price (y). Margins are required as the potential obligation incurred by an investor if the short put is exercised at the higher strike price y is not covered if he or she were to exercise the long put at the lower strike price x.

The strategy is used when an investor considers that options are overpriced.
The strategy is undertaken when the strike price for the short put is at or near the market price.
The maximum profit is the premium received when the strategy is established.
The maximum loss is the difference between the two strike prices less the premium received.
Considerations that should be taken into account in purchasing a bull put spread or in leaving it in place include:
the risk of exercise on the short put is great if the market price falls below strike price y.

Bear spread
A bear spread comprises a short put at one strike price (x) and a long put at another strike price (y). Strike price x is lower than strike price y. No margins are required to be paid.
The strategy is used when an investor expects a moderate fall in the market but is not prepared to pay to take a put outright.
The strategy is established when the market price is at or near the upper strike price y.
An investor will break even when the share price moves to a level that is equivalent to the upper strike price less the cost of the strategy.
The maximum profit that can be earned is the difference between the two strike prices less the premium paid for the strategy. It is earned when the share price falls to the strike price of the short put or below.
The potential loss is limited to the cost of the strategy. The maximum loss occurs if the market price is at or exceeds the strike price y of the long put.
Considerations that should be taken into account in purchasing a bear spread or in leaving it in place include:
the strategy costs less than the purchase of a put option but care must be taken to ensure that the cost of the strategy together with the commission paid on entering and exiting it is justified by the potential profit; and
if the stock falls sharply and beyond the lower strike price x, it is advisable to exit it in order to avoid the exercise of short put.

Bear call spread
The bear spread may be constructed using calls instead of puts. The strategy is constructed with a short call at the lower strike price (x) and a higher strike price (y). Margins are payable as with a bull put spread.
The strategy is used when options are regarded as overpriced.
The strategy is generally established when the market price is at or near the strike price of the short call. As the long call has a strike price above that of the short call, an investor’s losses are limited to the difference between the two strike prices less the premium he or she received.
Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:
there is an increased risk of exercise as the short call is at the lower strike price and is usually written at the money.

Covered write
A covered write is adopted in a situation in which an investor owns the underlying shares and sells a call at a strike price usually around the prevailing market price. No margins are payable as the investor can meet his or her obligation from the shares already owned should the call option be exercised.
The strategy is used when an investor expects that the market price of the underlying shares will remain flat. It is used to generate income while providing some protection should the market price unexpectedly fall.
The break even point occurs if the market price of the underlying shares at the expiry of the option equates to their market price at the time the option is written less the premium earned on the sale of the option.
The maximum profit that can be made is the premium earned on the sale of the call.
The potential to incur a loss is unlimited whether the market price of the underlying share rises above the strike price or below. In the case of the former, a rise in the market price above the strike price would lead to the likely exercise of the option. The investor must fulfil his or her obligation to sell the shares and may not choose to sell them on the market at the prevailing higher market price. His or her loss is a loss of what could potentially have been earned. If the market price falls below the strike price, an investor incurs the same potential loss that he or she would incur regardless of whether or not he or she had sold a call. The loss is not realised unless, like any investor, the investor chooses to sell the underlying shares on a falling market. When he or she has sold a call, the premium he or she received provides some buffer against the loss.
Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:
an investor must remember that the option may be exercised at any time and so must be content to sell the underlying shares at the strike price;
the premium to be received must be balanced against the possibility that the option will be exercised. If the option is in-the-money at the time they are written, the investor will receive a higher premium but will be at a greater risk of the option’s being exercised. The strike price must be chosen carefully taking into account the investor’s assessment of whether the market price of the underlying share is likely to rise, fall or remain stable; and
if the expiry of the option is approaching and there is concern that it will be exercised, an investor who does not want to sell the underlying shares may choose to close out the position and roll it out to the next expiry date.

Calendar spread

A calendar spread comprises a short call, which is near expiry, and a long call with a far expiry. Both have the same strike price. Margins are not payable.
The strategy is used when the outlook is neutral both in relation to the market and the price of the underlying share.
The optimum time to establish the strategy is when the market price of the underlying share is around the strike price.
The break even points cannot be determined in advance as it is not possible to value the long option precisely at entry; it may only be estimated.
The maximum profit will be realised if the share price is at the strike price of the options at the first expiry. At that time, the short call will not be exercised against the investor and the long call will have the most time value remaining.
The maximum loss possible is the cost of the strategy and that will be incurred if the long call has very little time value left at expiry i.e. the market price of the underlying share has either risen or fallen greatly.
Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:
if the market price of the underlying shares rises, both legs come into-the-money and this will mean that there is a risk that the short call will be exercised. The long leg acts as a hedge but a decision must be made as to whether it should be used in that way or whether the position should be closed out to avoid exercise;
if an investor expects the market to rise but only after the expiry of the short call, the calendar spread effectively gives an investor a long call but at a cheaper price than if he or she had taken a call outright in the first place; and
if the market price of the underlying shares falls unexpectedly, the investor may choose to close the strategy before the long call loses all time value or to leave it in place in the hope that the market price increases and the long call improves in value.

Long butterfly
A long butterfly comprises a long call at strike price (x), two short calls at strike price (y) and a long call at strike price (z). Strike price x is the lowest and strike price z the highest. Margins are payable to meet the investor’s obligations should the short calls be exercised.
The strategy is used when an investor believes that the market is stagnating but does not want to expose him or her self to an unexpected rise or fall in the market.
The optimum time to establish the strategy when the market price of the underlying shares is at or near the central strike price (y).
The break even points occur when the market price of the underlying share equates with the strike price x plus the cost of the strategy and when it equates with the strike price z less the cost of the strategy.
The maximum profit that can be made is the central strike price (y) less the lower strike price (x) and the cost of the strategy.
The loss potential is limited to the cost of the strategy.
Considerations that should be taken into account in purchasing a bear call spread or in leaving it in place include:
the long butterfly can be difficult to place in all but the most liquid shares. This arises from the fact that the long calls are made at the lowest and highest strike prices and will be out-of-the-money. There will be few on offer and, if available, can be costly. For the same reasons, they may be costly to trade out of;
if the share price remains steady, the strategy may be left open until close to expiry;
if the market price of the underlying share moves sharply up, an investor may consider liquidating the strategy in order to avoid the short calls’ being exercised; and
if the market price of the underlying share moves sharply down, an investor may close out in order to salvage some time value from the taken legs of the strategy.

Synthetic strategies
There may be alternate ways to establish any strategy and to achieve the same results. These are known as synthetic strategies.
Factors that must be taken into account include the transaction charges when entering and exiting the strategy, the costs and benefits of share ownership and the availability of options in the series.
The six basic synthetic strategies are:
long stock, long put = long call;
long stock, short call = short put;
short stock, short put = short call;
short put, long call = long stock;
long call, short stock = long put; and
short call, long put = short stock.
Examples of synthetic alternatives to a long butterfly are:
long put x, short two puts y, long put z;
long put x, short put y, short call y, long call z; and
long call x, short call y, short put y, long put z.

Aspects of the ASX Rules

The ASX’s Rules cover a range of matters relating to the transaction of business on the ASX and are updated from time to time. They include rules governing aspects of the relationship between a broker and his or her client. Among them is a rule headed “Suitability of transaction for clients”, which relates to trading in options. It has been amended during the period covered by the various transactions under consideration in this case. With effect from 13 February, 1995, the rule was numbered 7.1.19 and read:

“(a) No Clearing Member, officer or employee thereof shall recommend to any client that the Clearing Member should enter into an Exchange Transaction on behalf of the client unless that person has reasonable grounds to believe that the entire recommended transaction is not unsuitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client’s investment objectives, financial situation and needs, and any other information known by such Clearing Member, officer or employee.
(b)Without limiting the generality of paragraph (a), in forming a belief as to whether an Exchange Transaction is not unsuitable for the client, the Clearing Member shall have regard to whether the client, at the time of the transaction, is capable of evaluating the risks of such transactions and has the financial capability to meet foreseeable margin calls in respect of the Option.”

With effect from 2 December, 1996, ASX Rule 7.1.19 was re-numbered as Rule 7.3.1A. and re-written as follows:

“7.3.1A.1 Recommendation about Exchange Transactions

A Participant must not recommend an Exchange Transaction to a person who may reasonably be expected to rely on it if the Participant does not have a reasonable basis for making the recommendation to that person.

7.3.1A.2 Reasonable basis

For the purposes of Rule 7.3.1A.1, a Participant does not have a reasonable basis for recommending an Exchange Transaction to a person unless:
(a)the Participant has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances to ascertain that the recommendation is appropriate having regard to the information the Participant has about the person’s investment objectives, financial situation and particular needs; and
(b)the recommendation is based on that consideration and investigation.”

The ASX Rules also deal with discretionary accounts. In the version that came into effect as at 13 February, 1995, the subject is dealt with in Rule 7.1.20 and read:

“(a) Authorisation and Approval
No Clearing Member and no partner, director, officer or employee of a Clearing Member shall exercise any discretionary power with respect to trading in Options in a client’s account, or accept orders for Options for an account from a person other than the client except and until the following conditions have been complied with:
(i)Written authorisation of the client shall specifically authorise options trading in the account;
(ii)The account shall have been accepted by a partner in or a direction of the Member Organisation who is a Registered Options Principal; and
(iii)The person approving all such orders with respect to Exchange Transactions in such account shall be a Registered Options Principal.

In the case of a branch office such discretionary orders may be approved and initialed (sic) on the Trading Day entered by the branch office manager, provided that such approval shall be confirmed within a reasonable time by a partner in or a director of the Clearing Member who is a Registered Options Principal. The provisions of this paragraph shall not apply to discretion as to the price at which or the time when an order given by a client for the taking or writing of a definite number of Options in specified Underlying Securities shall be executed.
(b)Prohibited Transactions
No Clearing Member and no partner, director, officer or employee of a Clearing Member having discretionary power over a client’s account shall, in the exercise of such discretion, execute or cause to be executed therein any transaction which is excessive in size or frequency in view of the financial resources in such account.
(c)Record of Transactions
A record shall be made of every transaction in Options in respect to which a Clearing Member or a partner, director, officer or employee of a Clearing Member has exercised discretionary authority, clearly reflecting such fact and indicating the name of the client, the designation and number of the Options, the premium and the date and time when such transaction was effected.”

Discretionary accounts were dealt with in Rule 7.3.4 in the ASX Rules that came into effect from 2 December, 1996. Unlike the earlier version of the rules, the expression “discretionary account” was defined to mean:

“… an account established and maintained by a Participant for a client on instructions authorising the Participant to enter into Exchange Transactions without the prior approval of the client (other than an account in respect of which the Participant has instructions authorising the Participant to enter into Exchange Transaction without the prior approval of that client only as to time when, or the price at which, the Exchange Transactions are to be effected, or both).”

It read:

“7.3.4.1 Authorisation and approval
A Participant may only manage or operate a Discretionary Account for a client if:
(a)the client has given the Participant written authorisation to mange or operate a Discretionary Account setting out the terms and conditions under which the Participant must operate that account; and
(b)a Senior Representative of the Participant approves all orders to enter into Exchange Transactions in the account prior to the execution of those orders.

The Participant must maintain a register which complies with Rule 3.4.4.

7.3.4.2Excessive transactions in Discretionary Account
A Participant must not enter into Exchange Transactions on a Discretionary Account in a size or frequency, that may be considered excessive having regard to financial resources of the account and the Market.

7.3.4.3Record of Exchange Transactions
In the register maintained for the purposes of Rule 3.4.4, a Participant must make and retain a record of every Exchange Transaction in respect of which the Participant has exercised discretionary authority. The record must clearly reflect the discretionary nature of the transaction and indicate the name of the Authorised Operator, the name of the client, the number of Options, the Premium and the date and time of the Exchange Transaction.”

Mr Jungstedt

A number of facts forming the background to the issues in dispute were not in dispute between the parties. In view of that and on the basis of the evidence, I have made a number of findings of fact that I will set out in the following paragraphs.

Mr Jungstedt, who is 43 years of age, has been an options broker in Stockholm (1985-1989), London (1989-1991) and Melbourne (1994-1998). As an options broker in Melbourne, Mr Jungstedt has held proper authorities from:
McKinley Wilson Pty Ltd from 21 July, 1994 to 3 February, 1995;
William Noall Limited (“Noalls”) from 6 February, 1995 to 2 July, 1996;
William Noall Private Asset Management Limited from 26 June, 1995 to 2 July, 1996; and
Epic, which is a broking firm, from 21 June, 1996 to 15 January, 1999.
(T documents, pages 1403-1404)
Mr Jungstedt has not worked as a broker since the end of 1998. After a period of six months when he was unemployed, he worked with the ASX as a Senior Market Development Executive – Derivatives. In that position, he did not effect any trading but worked in areas related to public education and the development of better systems for the industry. After leaving that position and leaving Melbourne, Mr Jungstedt has been employed on a casual basis to undertake bookkeeping and associated duties for a landscaping business in Perth. He works for an average of between 10 and 20 hours each week.

While at Noalls, Mr Jungstedt used a strategy that had been developed in that firm and that was known as the Volatility Trading System (“VTS”). VTS was a computer program which calculated potential profits and losses on a sold strangle with protection. Such a strategy is a computer program which calculated potential profits and losses on a sold strangle with protection otherwise known as “a condor”. The two extra legs were bought to contain potential losses from the two sold legs in the event of there being a higher than expected share volatility. The program used data including the current share price and historical share volatility to calculate the potential outcomes based on different possible strike prices and actual premiums for put and call options in the share concerned. Until 1997, the VTS worked very well overall. In the second half of 1997, the stock market experienced increased volatility and the VTS was far less successful in that market.

Epic Securities Limited

Epic was a broking firm which ceased trading in options in December, 1998. Mr Dunphy and Mr Jungstedt both worked for Epic before it ceased trading. Mr Dunphy later worked for Colonial Stockbroking Limited (“Colonial”).

Mr Jungstedt’s clients

Five of Mr Jungstedt’s clients were at the centre of attention in this case: Ms Tinney, Mr Roberts, Mr Jones, Circle Jay and Ms Corbett. Each first became one of his clients when he was with Noalls and remained with him when he went to Epic. The following is a brief summary of the background of each of them:

Mrs Eve Mary Corbett
At the time of the hearing, Mrs Corbett was 62 years of age. For many years, she and her husband, Mr Maxwell Corbett, farmed a property at Gunnedah.

Mr and Mrs Corbett started a business and together they are directors of Agrahire (Gunnedah) Pty Ltd (“Agrahire”). They have been since 14 August, 1990. Agrahire is managed and operated by their son, Mr Jamie Corbett, who also owns one third of the company. Mrs Corbett keeps a list of Agrahire’s debtors and sends them a monthly account as well as a monthly profit and loss statement. Each month, she prepares and sends a set of accounts to Agrahire’s accountant.
Mrs Corbett seeks professional advice for her financial affairs from Mr Scott Hill of R.W. Waghorn & Sons, which is a firm of chartered accountants in Gunnedah.
In 1992, Mrs Corbett inherited shares and a one half share in a residential house situated in South Yarra from her late mother. She bought the remaining half share in the house from her sister and did so in approximately 1993. She arranged for her husband to become a joint owner of the house with her.
In about 1993 or 1994, Mrs Corbett was introduced to Mr Jungstedt through her daughter who was an old school friend of Mr Jungstedt’s wife, Mrs Madeleine Jungstedt. Mrs Corbett understood from various social conversations with Mr Jungstedt, Mrs Jungstedt and with her daughter that Mr Jungstedt was a stockbroker and that he had worked for a stockbroking firm in London.

In 1996, Mrs Corbett owned the house in South Yarra, property in Gunnedah including the matrimonial home that she owned jointly with her husband and her interest in Agrahire. Agrahire owed a debt of approximately $200,000 to a bank or finance company. In addition, she owned shares in the following companies: CSR Limited (“CSR”) (303 shares); MIM Holdings Limited (“MIM”) (995), WMC (2,543); Broken Hill Proprietary Limited (“BHP”) (1,553); CRA (1,049) and Howard Smith (1,466). At that time, the shares were worth in the order of $45,000 (transcript, page 153).

Mr Murray John Roberts

Mr Roberts was 43 years of age when he signed his statement dated 28 July, 1999 (T documents, pages 1306-1326). He completed Year 11 of secondary education and was employed for 21 years as an engineer with Australian Airlines. He took a redundancy package in May, 1993 and gained employment in July, 1997 as a customer service representative with the National Australia Bank (“NAB”).
In order to enhance his income after May, 1993, Mr Roberts traded in options on the advice of a broker, Mr Alan Balding at Johnson Taylor and then FW Holst & Co Pty Ltd. He owned shares in Fosters Brewing, BHP, Qantas Airways Limited (“QAN”), Gold Mines of Kalgoorlie and Poseidon Gold. He sold call options against his shares and sold put options against his cash funds. For each of three years, he made a profit of approximately $20,000 from his options trading.
Mr Roberts had hoped to gain employment with a stockbroking firm.
In August, 1996 when he began trading with Epic, Mr Roberts and his wife jointly owned their home and Mr Roberts had cash totalling $2,731 and the following shares: BHP (5,500 shares); QAN (8,692), WMC (1,000), Poseidon Gold (7,000), Fosters Brewing (12,600) and CML (10,000). He also had approximately $8,000 invested in open option positions. Mr Roberts and his wife each had their own superannuation schemes and together they owned a 15 year old motor vehicle.

Mr Colin Boltman

At the time of the hearing, Mr Boltman was 78 years of age. He has been admitted to practice as a barrister and solicitor since 1 October, 1953 and still holds the position of Consultant to his former firm.
In the early 1990s, he commenced share trading with Mr Peter Chapman, the managing director of Noalls.
Mr John Percy Jones

Mr Jones, who was 68 years of age at the time of the hearing, left school after completing his Leaving Certificate (i.e. year 11). He has spent his working life as a farmer on a small property in north eastern Victoria. He is married and has a son studying at University. Mr Jones and his wife are directors of a family company, Circle Jay and Mr Jones is now a semi-retired farmer.
Mr Jones has always relied on professional advice in his day to day business affairs. His business affairs are managed by Mr Stuart Stockdale, a chartered accountant. A bookkeeper prepares Mr Jones’ records for Mr Stockdale.
Mrs Dorothy Anne Blackwood Tinney
Mrs Tinney was 49 years of age when she made a statement to the Commission on 20 July, 1999. She had one partly-dependent daughter, Ms Amber Louise Tinney, who was studying at University. Mrs Tinney is an artist who also holds qualifications as a nurse’s aide and as a masseuse. She left school after completing the Leaving Certificate.
Mrs Tinney was given 25 BHP shares for her 16^th birthday. In the late 1980s, her father gave her an interest free loan. She invested that sum in fixed interest accounts and the interest she received meant that she had no need to work and could care for her ailing parents. In the early 1990s, falling interest rates saw a reduction in her income and she sought advice from Mr Don Werner, her father’s share broker at Noalls, as to whether shares would give her an alternate source of income. Adopting Mr Werner’s advice, she used the loan to purchase shares. At about the same time, her father gave her some shares on the basis of an interest free loan. In 1993, she inherited half of her father’s estate, which included a share portfolio and a margin equity loan with Bankers Trust.
Mrs Tinney would occasionally sell or purchase shares. With Mr Werner’s advice, she also increased the amount of the margin equity loan in order to purchase additional shares.

THE EVIDENCE

In this section, I have summarised the evidence given by each of Mrs Corbett, Mr Roberts, Mr Jones and Mrs Tinney. In doing so, I have put the issues raised by Mr Rinaldi on behalf of Mr Jungstedt to each of them. Although I have not summarised the evidence given by Mr Jungstedt in cross-examination and that given by Mr Mullaly and Mr Murphy, I have had regard to it.

Dealings relating to Mrs Corbett – Mrs Corbett

Mrs Corbett said that Mr Jungstedt raised the topic of shares trading and options trading at a social dinner they attended with their spouses. That dinner took place some time in the middle of 1996. While she had not told him of the shares that she had inherited, she said that she assumed that he was probably aware of them from conversations with her daughter. Mrs Corbett said that Mr Jungstedt told her at the dinner that she could use the blue chip shares that she had inherited to make money through options trading.

Following the dinner, Mrs Corbett said, she discussed share trading and options trading with her daughter and her husband. She did not discuss it with her accountant and did not seek any other advice regarding this type of trading. In cross-examination, she said that she had not talked to her accountant as she had thought that Mr Jungstedt would know more about options than her accountant “would up in the country” (transcript, page 152). After a month or so, she decided to speak again to Mr Jungstedt about options trading. Consequently, she and her husband travelled to Melbourne and met with Mr Jungstedt at Epic’s offices. That meeting occurred in approximately September, 1996.

Mrs Corbett said that she could not recall exactly what was said at the meeting but said that the following were discussed:
Mr Jungstedt said that options trading was his job and that options trading was a way to make more money than trading shares;
Mr Jungstedt tried to explain to Mrs Corbett and her husband what options trading was. He gave some examples of options trading but Mrs Corbett said that she did not understand fully what he was saying;
Mr Jungstedt told her that she would use only shares that she owned for options trading;
Mr Jungstedt told her that if she were to commence to trade in options, she could use a trust account into which the income would be deposited. Both she and he would be able to use the account. He also told her, she continued, that she should always leave some money in the account as some might be needed in the short term to facilitate options trading;
Mr Jungstedt gave her a booklet on options trading. It was entitled “Options Trading: Current Practices” (Exhibit 4, EMC 2); and
In her affidavit, Mrs Corbett said that Mr Jungstedt did not ask her about her financial circumstances and Mrs Corbett said that she did not give him any information about them. In cross-examination, Mrs Corbett confirmed that she did not think that Mr Jungstedt had discussed either the house or the business affairs with her and her husband. When Mr Rinaldi suggested to her that she could be mistaken, she replied that she could be but did not remember it (transcript, page 155).
The Introduction to the booklet stated that it was designed to explain the practices and procedures for investors dealing in ASX traded options on the Options Market:

“Investors are required to receive an updated copy of this booklet whenever there are significant changes to the way the Options Market operates.
This booklet does not attempt to explain the features and risks involved with exchange traded options, which are explained in the ASX Derivatives booklet Understanding Options Trading. This booklet is designed to be read in conjunction with the Understanding Options Trading booklet.” (Exhibit 4, EMC 1, page 2)

Mrs Corbett said that the meeting left her with the understanding that options trading was a way in which she could get a greater return from her shares. She said that she did not really understand how it worked but that she believed from Mr Jungstedt that options trading was safe. In cross-examination, Mrs Corbett said that she did not tell Mr Jungstedt that she either understood or did not understand (transcript, page 155).

On or about 30 September, 1996, Mrs Corbett said that she received a letter on Epic’s letterhead and signed by Mr Jungstedt. The letter, dated 29 September, 1996 began with Mr Jungstedt’s stating that he was writing to confirm the basic strategy suggested in their discussion using NAB shares as an example. He continued:

“Income Generation
By selling a call option against your shares you generate income. Stock options are traded on the Australian Option Market in the same way as shares are traded at the Stock Exchange.
A call option is a right but not an obligation to buy the underlying shares at a certain price within a certain time. You sell the right to buy your shares to someone else and for this right you receive a premium.
Here is an example to illustrate how it works:
The NAB share price today is $13.20 and you decide that if it reaches $14.00 by the end of April 1997 you are prepared to sell at that price but not lower.
One option equals 1,000 shares, so if you hold 5,000 shares you can sell contracts with an exercise price of $14.00 and you will receive approximately 30c per share which equals $1,500 ($0.30 * 1,000 shares * 5 contracts).
Remember, the buyer of your option has a right to buy your shares for $14.00, so as long as the share price stays below $14.00 he or she will prefer buying the equivalent amount of shares at the Stock Exchange at a lower price.
If the share price rallies above $14.00 the buyer of the contract will exercise the right to buy your shares at that price. Because you have already received 30c per share premium your breakeven point is really $14.30. It is not until the share price increase above this point that you sacrifice further gains.
If NAB is below $14.00 at the end of April, the call option will expire worthless and you just keep the $1,500 income the sale generated.
If NAB is above $14.00 in April and you would like to keep your shares (i e avoid selling for $14.00) you just buy back your sold call options in April.
Because time will erode the value of the option, you will be able to buy back your call options for less than you sold them for three to six months earlier (thus making a profit) in a clear majority of cases.
…” (Exhibit 4, EMC 2)

Mr Jungstedt advised Mrs Corbett that she needed to open an option account by signing page 15 in a booklet called “Trade Practices” that he had given her when they had last met. That page would have been a Client Agreement Form acknowledging that she was bound by the ASX Rules. Mrs Corbett said that she also had to sign a document to convert her shares to the computerised CHESS system and a Bulk Scrip Agreement with the OCH to lodge shares as collateral for options trading. He also advised her to open a cash management account with Austrust where her income from options trading would be “parked” and where it would receive a good rate of interest. Epic would be her agent and would be able to withdraw money from that account and place it in her Option Account if that were necessary.

In cross-examination, Mrs Corbett said that she usually tried to read documents before she signed them. In the case of the documents she signed in this instance, she would have read them but she did not suppose that she understood them. Mr Jungstedt wanted them signed so she did. At the time, she thought that options trading was a good idea and she needed to sign them to do that. In signing the Client Agreement Form, Mrs Corbett acknowledged that she had received and read a copy of the Explanatory Booklet issued by the ASX in respect of the Options Market and dealings in Exchange Traded Options (Exhibit 4, EMC 3). She said that she supposed she had read it but it was now a long time ago.

In cross-examination, Mrs Corbett said that she recalled Mr Jungstedt’s telling her that, in order to sell an option, generally a round figure was used whereas she held odd numbers of shares. She could not recall Mr Jungstedt’s telling her that her odd number of shares meant that it was better to trade in an option called a strangle or to include two transactions (usually a call and a put) in one transaction. She did, however, recall a broad discussion along those lines although not the terminology and had no idea what a strangle is. Mrs Corbett said that she accepted his general approach as she felt that she could not “… see how we were in a position to tell Jan what to do, that is all” (transcript, page 161). She did not disagree with him or overrule him. Mrs Corbett agreed with Mr Rinaldi that she had told Mr Jungstedt that he did not need to call her with every transaction before he did it provided that approach was taken. He could decide when to trade and which option to trade and which price to pay or accept. In re-examination, Mrs Corbett said that she had no idea what was meant by buying extra legs for options or buying protection.

Mrs Corbett said that she traded options from early November, 1996 until late December, 1998 and did so with Mr Jungstedt while he was at Epic. She said that, during this time she “… relied on Epic and on Jungstedt as my adviser and I trusted them totally. At all times I believed that Epic and Jungstedt were acting in my best interests which included trading in [a] manner which would not put at risk my shares” (Exhibit 4, paragraph 23). Mrs Corbett said that she had a number of discussions with Mr Jungstedt over this period. She did not speak with him prior to each trade’s being made as she had understood that he would make all decisions regarding trading. She was satisfied with this arrangement as she did not have any knowledge of, or experience in, share or options trading. She said that she considered Epic and Mr Jungstedt to be experts in the area.

Mrs Corbett said that, some time after the first trade, she received a contract note. She was surprised to see that she had traded in Coles Myer Ltd (“CML”) share options for two reasons. The first was that she did not own any CML shares and the second was that she and Mr Jungstedt had agreed that she would only trade in options of shares that she already owned. Mrs Corbett said that she telephoned Mr Jungstedt regarding the trade and that he had told her words to the effect that “that’s alright, it is best if you have a variety of shares” (Exhibit 4, paragraph 27). She said that she was satisfied with this response as she trusted Mr Jungstedt. In cross-examination, Mrs Corbett said that it was her expectation that she would only deal in shares that she owned. She did not discuss that explicitly with Mr Jungstedt (transcript, page 162). In re-examination, Mrs Corbett said that she did not recall Mr Jungstedt’s telling her that he would trade in shares that she did not own. She noticed on the statements that he had traded in CML and NAB shares. She did not think that there had ever been any suggestion that he would trade in options relating to shares other than those she owned. It was her view that Mr Jungstedt had thought that she owned them and told her that he thought she owned NAB shares.

Mrs Corbett said that she told her accountant that she had commenced options trading some time early in 1997 when she had been trading for two or three months. Her accountant, she said, told her that she should be careful with options trading because she could lose money and her shares. Shortly after this conversation, she met with Mr Jungstedt whom she told of what the accountant had told her. She recalled Mr Jungstedt’s telling her that she would not lose money and he would ensure that she did not lose the shares. Mrs Corbett said that, on the basis of this advice, she trusted Mr Jungstedt and continued to trade in options.

This aspect was examined further in cross-examination when Mrs Corbett agreed that she knew that her shares were lodged as collateral for the options trading. She repeated that Mr Jungstedt had told her that they would not lose their shares. She denied that Mr Jungstedt had said words to the effect that they would do their best not to lose them, did not intend to lose them or that it was unlikely that they would lose them. She thought that it was “a definite, no” because she had gone straight home and told her accountant that (transcript, page 170). If Mr Jungstedt said that he had never said there was no risk of losing her shares, Mrs Corbett said that she would say that was wrong because she and her husband were confident everything would be all right and that Mr Jungstedt would trade his way out of things. When asked whether it was her understanding that, if things went wrong, the OCH would make good any losses from the shares lodged with it as collateral, Mrs Corbett replied: “I never sort of thought about it, but I suppose that is right.” (transcript, page 172

Mrs Corbett said that in late May or early June, 1997, Mr Jungstedt recommended that she sell her Howard Smith shares as there were no options for that company. He recommended that she use the proceeds of the sale to purchase shares in companies in respect of which options were traded. Mrs Corbett believed that her options trading was doing well and she accepted his advice. Mr Jungstedt arranged for the sale of the Howard Smith shares and bought the following shares: Santos Limited (“STO”) (1,500 shares); St George Bank Limited (“SGB”) (600); and CSR Limited (“CSR”) (700).

Mrs Corbett said that, in July, 1997, she asked Mr Jungstedt whether she could use some of the money in her account, which then held approximately $14,800. Mr Jungstedt told her that she could take some money out but that she should leave between $5,000 and $7,000 in it. As a result of this conversation, she withdrew $5,000 on 16 July, 1997 and $8,000 on 15 August, 1997. Approximately $11,500 remained in the account as there had been further deposits since she had spoken to Mr Jungstedt.

Mrs Corbett received a letter dated 29 October, 1997 and signed by Mr Chris Baring-Gould, who was the Victorian State Manager of Epic. He began his letter by stating that the Australian financial markets had experienced very severe volatility over the previous 48 hours. In view of this, Epic had been called upon by the ASX to lodge additional margins on behalf of its options clients. Her outstanding margin/cash deficit, Mr Baring-Gould told Mrs Corbett, was $30,731 as at close of business on 28 October, 1997. He told her that she was required to pay that amount within 24 hours. If that amount was not paid by 4.00pm on 30 October, 1997, Epic would exercise its right to close out such of her open contracts and call upon such security as it held and deemed appropriate in the circumstances. Mrs Corbett would be liable for any deficiency and entitled to any surplus. (Exhibit 4, EMC 5) She then received a second letter dated 30 October, 1997. This letter was signed by the Administration Manager, Ms Cynthia Chan, and advised her that the amount outstanding on her account was $10,683.98. Ms Chan reminded Mrs Corbett that the ASX Rules require all trades between clients and brokers to be settled on the fifth business day after the trade date. She was asked to arrange payment by 10.00am on 4 November, 1997 and told that if she did not, Epic would deal with her shares as it saw fit in accordance with the ASX Rules. (Exhibit 4, ECM 4)

Section 829(f) requires a consideration of whether the Commission has reason to believe that he or she has not performed efficiently, honestly and fairly the duties of, among others, a representative of an investment adviser. What is meant by the words “efficiently, honestly and fairly” was considered by Young J in Story v National Companies and Securities Commission (1988) 6 ACLC 560:

“ Thus I turn to the phrase ‘efficiently, honestly and fairly’. In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, trying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words ‘efficiently, honestly and fairly’ must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty.
To take the contrary view, as the defendant Commission did is to read ‘and’ as ‘or’. That proposition, of course, runs contrary to Blackburn J.'s famous dictum that ‘the proposition that “and” can sometimes mean “or” is true neither in law nor in English usage’. Re The Licensing Ordinance (1968) 13 F.L.R. 143 at p. 147. There are, of course, cases where in a statute one does construe ‘and’ as ‘or’, but I cannot see how, in the instant case, those exceptions apply as there is no absurdity or unintelligibility in reading ‘and’ as ‘and’, or giving the word some dispersive effect. However, in the long run it does not seem to me to much matter whether one reads the words cumulatively or disjunctively, because unless a licence holder possesses the three attributes whether as one package or as three separate parcels, the Commission can revoke his licence.
So far as ‘efficient’ is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate, see e.g. Spotts v. Baltimore & Ohio Railroad Co. (1939) 102 F. (2d) 160 at p. 162. Although that definition comes from a case dealing with handbrakes on railway cars, it seems to me that it can be applied to the word used in the current statute.
I do not think I need dwell on the meaning of the word ‘honestly’ except to remark that it is significant that it is used in conjunction with the word ‘fairly’. Those words tend to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound, indeed, the sort of person reflected in the words of Psalm 15.” (pages 571)”

The duties of a representative of an investment adviser are not set out in the Act but, whatever their extent, they must include acting in accordance with any obligations imposed by legislation or by the ASX Rules that regulate trading on the AOM. I have set out the relevant ASX Rules earlier in these reasons. Rule 7.1.19 or its replacement Rule 7.3.1A reflect the essential features of s. 851. To that extent, therefore, the findings of fact that I have made in relation to that section are equally applicable in this context. In addition, ASX Rules 7.1.20 and 7.3.4 are applicable if Mr Jungstedt was engaged in discretionary trading. The latter rule set out the meaning of a “discretionary account” and that meaning appears equally applicable to the earlier rule.

In relation to Mrs Corbett, I am satisfied that Mr Jungstedt engaged in discretionary trading. She was a person who had little understanding of options trading and whom Mr Jungstedt accepted had little understanding and placed her trust in him (transcript, pages 774). On the basis of Mr Jungstedt’s evidence, I also find that Mr Jungstedt agreed upon a strategy to diversify her options portfolio so that she had not only options in resource shares but also options in companies other than those in which she held shares (transcript, page 777). He did not discuss with her the particular companies but rather was “… looking for a good option to diversify it and I found a bank and I do that …” (transcript, page 777). They had agreed upon the strategy, he said, but not the particular companies. To my mind, this is discretionary trading. Agreement on the general strategy does not take away from the fact that it is Mr Jungstedt’s decision as to the option chosen and his decision as to the time and price at which it is bought or sold. Each of those decisions is a fundamental decision before a trade in an option is undertaken and none of them was a decision made by Mrs Corbett or a decision for which her approval was sought. Instead, each was a decision taken by Mr Jungstedt according to what he judged appropriate to implement the general strategy. The trades, I have concluded, was conducted at his discretion and Mrs Corbett’s account was conducted as a discretionary account.

Mr Jones, I find, also permitted Mr Jungstedt to operate his account as a discretionary account. He did not understand options but left it to Mr Jungstedt to trade as he thought fit. Both Mr Jones and Mrs Corbett were entitled to authorise Mr Jungstedt to act in this way but Mr Jungstedt was in breach of the ASX Rules because, I find, he did not obtain from either of them, or from Circle Jay, their written authorisation specifically authorising options trading in the account.

I also find that Mr Jungstedt was in breach of the ASX Rules in that he exercised his discretionary power to undertake trades that were excessive in size or frequency in view of the financial resources of Mr Jones or Circle Jay. I have already found that the trades conducted on behalf of Mr Jones could not be justified. It exposed him to a level of risk far beyond what could be justified by his asset base. I would go further. It could not be justified on the basis of his financial situation, his income, his objectives. It was excessive at least in size in view of his financial resources.

Moving from the particular findings I have made with regard to discretionary trading and Mr Jungstedt’s breach of his duties in that aspect, I also find that he did not carry out his duties as an investment adviser generally in a manner that was efficient, honest and fair. As I have already found, he either failed to make appropriate enquiries about his clients’ financial situation or made insufficient enquiries. Having done that, I find that he made assumptions about the assets that his clients were prepared to risk in options trading. He assumed, for example, that Mr Roberts would risk his family home. He assumed that Mrs Corbett wanted the assets of Agrahire risked in options trading and that Mr Boltman would risk his house at Brighton. Those assumptions were without foundation and incorrect.

With regard to the risks they faced, I have already found that he failed to advise them of those risks and failed to explain the nature of the trades he was undertaking in a manner that was appropriate to their level of understanding. Options trading is a complicated subject but its very complications imposes a heavier burden on an investment adviser as he or she must take more time and be more careful to explain its intricacies and satisfy him or her self that the client has grasped a sufficient understanding to be able to give instructions.

The understanding of Mr Jungstedt’s clients was limited, although Mr Roberts knew more than the rest, and he could reasonably have been expected to have known of its limitations. There is something of a tension between the responsibility that clients should bear to inform themselves and the responsibility of the person advising them. Clients cannot deliberately choose to remain ignorant of their investments and then choose to blame the adviser if the investments do not fare as they would wish. At the same time, an adviser must be sensitive to the limits of the clients’ knowledge, experience and, even, naivety. The more limited the client’s knowledge, the greater was Mr Jungstedt’s responsibility to explain the trades before he accepted instructions. Mrs Corbett was such a person. Even in the case of greater knowledge in his clients, he cannot absolve himself of responsibility for their trades. He had a duty to advise of the risks to which trades exposed them and I find that he failed to do so. Mrs Tinney was such a person. I am satisfied that he did not advise her of the level of risk to which her trades were exposing her. Instead, he led her to believe that she could use the money in the Austrust account and that all was well.

In relation to Mr Roberts, I find that Mr Jungstedt’s advice was not to crystallise his losses as he was confident that they could outrun the market. He gave similar advice to Mrs Tinney when he told her that he should continue trading for otherwise he would realise losses. I find that he told none of his clients of the risks to which they were exposed by continuing to trade.

Having regard to all of these matters, I am satisfied that Mr Jungstedt did not perform the duties of a representative of an investment adviser efficiently, honestly and fairly. On the evidence that I have, I am not satisfied that he will do so in the foreseeable future. I have reached that conclusion because I am not satisfied that Mr Jungstedt has reached any proper understanding of how he has erred in carrying out his duties and in conducting himself as a representative of an investment adviser. He considers himself as a person who has technical knowledge and expertise, an ability to explain options trading, an ability to inform clients and who has honesty and integrity. He refers to former colleagues and clients who have provided statements in support of him (T documents, pages 1813-1824). Mr Jungstedt considered that the problems of the five former clients in this case were caused and compounded by a combination of bad investment decisions made and insisted upon by them, Epic’s practice of allowing trading in debit and unfavourable market conditions towards the end of trading.

The personal testimonials certainly speak highly of Mr Jungstedt. Some come from a time before he joined Epic and others from former clients who remained with him until December, 1998. They were not cross-examined but, for all that, I am prepared to accept them at face value. That does not detract from the findings that I have already made in this case. It seems to me that Mr Jungstedt does not understand that he had some responsibility for the losses that the five clients incurred. That responsibility arises for a number of reasons some of which are more applicable to some clients than others. In part, it arises from the assumptions that he made about their financial situation, in part from his inadequate explanations of the trades he was undertaking, in part from his failing to explain the risk and in part by his telling them that he could fix the problems when one or other of them received demands for payment from Epic. The size of his clients’ losses was increased by his belief that he could outrun the market and by his failing to understand that his clients, whom I have found were not aware of the level of risk to which they were exposed, had neither the nerves of steel nor the depth of pocket required to outrun the market and profit from the multitude of trades opened on their behalf. Until Mr Jungstedt understands that he had some measure of responsibility, there is reason to believe that he will not conduct efficiently, honestly and fairly the duties of a representative of an investment adviser.

It follows that I consider that a banning order may be made against Mr Jungstedt by reason of the grounds set out in ss. 829(d), (f) and (g) but the final question to ask is whether it should be made?

Section 829 and the principles governing the exercise of the discretion inherent in that section have been considered in a number of cases. At their heart is the principle that we must bear in mind that we are not imposing a penalty. As the Full Court of the Federal Court said in Australian Securities Commission v Kippe and Another (1996) 67 FCR 499 (Von Doussa, Cooper and Tamberlin JJ) in relation to a banning order made under s. 829 of the Act against a dealers representative:

“The immediate and direct legal 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.” (page 508)

This approach is consistent with the more recent judgement of the New South Wales Court of Appeal in New South Wales Bar Association v Hamman [1999] NSWCA 404, (Unreported, Mason P, Priestley JA and Davies AJA, 29 October 1999). The court considered disciplinary proceedings against a legal practitioner and said:

“… Disciplinary proceedings against a legal practitioner are concerned with the protection of the public (Wentworth v New South Wales Bar Association (1992) 176 CLR 239 at 250-251). The object is not to punish the practitioner but to protect the public and to maintain proper standards in the legal profession. …” (paragraph 21)

Authorities such as New South Wales Bar Association v Evatt (1968) 117 CLR 177 (Barwick CJ, Kitto, Taylor, Menzies and Owen JJ) and Hardcastle v Commissioner of Police (1984) 53 ALR 593 (Bowen CJ, Gallop and Lockhart JJ) acknowledge that, in achieving the objects of public protection and the maintenance of proper professional standards, an order made in disciplinary proceedings may involve great deprivation for the person who is the subject of that order. Despite that, the object of the order is not to punish or to extract retribution.

Cancellation or suspension of a person’s right to engage in his or her chosen profession does not only follow because a person has intentionally committed a wrong-doing. As Kirby P said in Pillai v Messiter [No.2] (1989) 16 NSWLR 197:

“… The public needs to be protected from delinquents and wrong-doers within professions. It also needs to be protected from seriously incompetent professional people who are ignorant of basic rules or indifferent as to rudimentary professional requirements. Such people should be removed from the register or from the relevant roll of practitioners, at least until they can demonstrate that their disqualifying imperfections have been removed. …” (page 201)

How is the public to be protected? In Re Wolstencroft and Companies Auditors and Liquidators Disciplinary Board (1998) 54 ALD 773 (Deputy President Forgie and Mr Way, Member) the Tribunal, which was reviewing a banning order made in respect of an auditor, considered in what respects the public is to be protected. It said:

“It follows from the view taken by the full court of the Federal Court in the Kippe case that our choice of one of those courses must be guided by what is in the public interest in two senses. First, there is a public interest in ensuring that the individual follows the appropriate course of action in the future. Second, there is the public interest in ensuring that the public can be secure, or as secure as is reasonably possible, in the knowledge that those who are entrusted with the auditing of accounts can be properly entrusted with that task. It is particularly important that auditors ensure that the financial information of whom they audit is presented fairly within an identified financial reporting framework. That is so because their reports are relied upon by those who are both related to and unrelated to the subject of the audit. Those people must have confidence that they can rely on the audited accounts.” (page 786)

The imposition of a banning order against a representative of an investment adviser certainly achieves, in respect of at least one member of that profession, the second aspect of public protection for the period in respect of which it is imposed. That is, it ensures that the public can be certain that a particular person, who has been found to have breached a statutory standard applicable to him or her, is no longer entrusted with giving investment advice. At the same time, it informs both other dealers representatives and members of the general public that the behaviour is neither acceptable nor tolerated.

In Re Donald and Australian Securities and Investment Commission [2001] AATA 366, (4 May, 2001) I was a member of a tribunal (with Mr McLean and Mr Elsum, members) that reflected on the benefits and disadvantages of the imposition of a banning order in certain circumstances. As we said in that case, a:

“…period of prohibition may, rather like a retreat or a period of contemplation, lead a person to reflect upon his or her behaviour and to come to an understanding of why that behaviour has been regarded as inappropriate by others and, if it is necessary to do so, to take steps to improve his or her knowledge of what is an appropriate manner of behaviour. On the other hand, a period of prohibition may not result in such reflection or lead to a person’s coming to any greater understanding than he or she had when it was imposed.” (paragraph 117)

Mr Jungstedt has had a period of prohibition already imposed upon him but I do not consider that it has led to his reflecting or to his reflecting to a sufficient degree to understand the reasons why the manner in which he gave investment advice to his five clients who gave evidence was inappropriate for a person acting as a representative of an investment adviser. In Donald, we decided upon another approach which has been the subject of appeal (Australian Securities and Investment Commission v Donald (2002) 69 ALD 187) and is the subject of a further appeal by the Commission. I do not consider that the alternative approach comprising an enforceable undertaking, supervision and education is justified in this case. 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.

In reaching this conclusion, I would distinguish the cases of Story and Re Codey and Australian Securities Commission (1995) 18 ACSR 209 (Deputy President Breen, Senior Member Muller and Captain Keane, Member). In the latter case, Mr Codey had operated false names over a limited period of some five months and no other breaches of standards or of the Code were found. In the former case of Story the conduct was of a much more circumscribed nature. In neither case was there the degree of disregard for legislative provisions and standards which I have found in this case.

Given this purpose, the length of the banning order causes me some concern in this case. As I have said, banning of itself will certainly have the effect of removing Mr Jungstedt from the industry and so protect the investing public during that time. More indirectly, it may protect the public by discouraging other representatives of investment advisers from following his example. Whether or not it plays any part in changing his attitudes or in encouraging him to familiarise himself with the standards and laws he should follow remains to be seen.

Having regard to the nature of the findings I have made and their seriousness and to the length of time, I have concluded that the banning order imposed by the Commission was appropriate.

For the reasons I have given, I affirm the decision of the respondent dated 29 February, 2000.

I certify that the three hundred and forty-one preceding paragraphs are a true copy of the reasons for the decision herein of Miss S A Forgie (Deputy President)

Signed: ...............................................................

P. Paczkowski Associate
Date/s of Hearing 25 June, 2001, 27 to 29 June, 2001,
7 to 9 November, 2001

Date of Decision  14 February, 2003
Counsel for the Applicant             Mr M. Rinaldi
Counsel for the Respondent         Mr J. Elliott
Solicitor for the Respondent         Australian Securities & Investments Commission

[2003] AATA 159

14 February 2003