Klusman and Australian Securities and Investments Commission
[2011] AATA 150
•8 March 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 150
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2010/3857
GENERAL ADMINISTRATIVE DIVISION ) Re WILLIAM FREDERICK KLUSMAN Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Ms G Ettinger, Senior Member Date8 March 2011
PlaceSydney
Decision The Tribunal affirms the decision under review, and decides that the period of the banning order for three years is taken to have commenced from the date of service of ASIC’s decision of 7 September 2010.
.................[sgd]............................
Ms G Ettinger
Senior Member
CATCHWORDS
CORPORATIONS – Financial services provider – share broker – misleading statement – misleading conduct – market manipulation - decision under review affirmed – disqualification for three years affirmed from date of ASIC’s decision.
Corporations Act 2001 (Cth) ss 920A, 920B, 1041A, 1041B, 1041H
ASIC Regulatory Guide 98 Licensing: Administrative action against financial services providers
Australian Securities and Investments Commission v Soust [2010] FCA 68; (2010) 183 FCR 21
Commissioner of Taxation (New South Wales) v Stevenson (1937) 59 CLR 80
North v Marra Developments Ltd (1981) 148 CLR 42
Parkdale Custom Built Furniture Proprietary Limited v Puxu Proprietary Limited (1982) 149 CLR 191
Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Limited (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80
Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602
Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124
Re Lelliott and Australian Securities and Investments Commission [2009] AATA 110
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
REASONS FOR DECISION
8 March 2011 Ms G Ettinger, Senior Member SUMMARY
1. Mr William Frederick Klusman was at 7 September 2010, the head of institutional dealing at Aequs Securities Pty Limited (Aequs), (then Anziex Limited, and InvestorfirstSecurities Ltd). He has appealed to this Tribunal against the decision of the Australian Securities and Investments Commission (ASIC), which, on that date, issued a banning order prohibiting him, pursuant to sections 920A and 920B of the Corporations Act2001 (the ‘Act’) from providing any financial services for a period of 3 years.
2. The banning order was on the basis:
· that by making a statement concerning Macquarie Group Limited (Macquarie) on the morning of 17 September 2008, Mr Klusman engaged in conduct in relation to a financial product that was misleading or deceptive, or was likely to mislead or deceive, and therefore failed to comply with section 1041H(1) of the Act; and
· that by causing shares of Regional Express Holdings Limited (REX) to be purchased on account of his brother-in-law, Mr DC, and his daughter, Ms TP, and sold to REX as part of an on-market share buy-back, on 1 December, 2 December, 16 December, 17 December and 18 December 2008, Mr Klusman failed to comply with sections 1041A, 1041B and 1041H of the Act.
3. The parties came before President Downes of the Tribunal who made an interlocutory order staying the decision of ASIC with the following conditions, on 10 September 2010:
1.ORDERS that until the determination of these proceedings or further order, pursuant to section 41(2) of the Administrative Appeals Tribunal Act 1975, the Tribunal stays the decision under review subject to the following conditions:
a.The applicant is not to provide financial services for or on behalf of any Australian financial services licensee save Anziex Limited (A.C.N. 073 633 664) or its corporate authorised representatives;
b.The applicant is not personally to place an order for the sale or the purchase of a financial product onto a trading platform operated by a financial market operator; and
c.No order for the sale or the purchase of a financial product is to be placed at the applicant’s request onto a trading platform operated by a financial market operator unless first approved in writing by a director, the head of compliance or a designated trading representative of Investorfirst Securities Limited (A.C.N. 135 332 240).
4. I have heard the substantive case, and taking into account all the evidence and submissions, and the relevant case law, I have decided that Mr Klusman has, in his activities, contravened sections 1041A, 1041B and 1041H of the Corporations Act2001 at the relevant times in 2008.
5. Accordingly, taking into account the protection of the public, the integrity of the market, deterrence, and other relevant considerations, I find that the correct or preferable decision is to affirm the decision of ASIC in making a banning order prohibiting Mr Klusman pursuant to sections 920A and 920B of the Act from providing any financial services for a three year period. I direct that the banning order for the period of three years can be held to have commenced from the date of ASIC’s decision of 7 September 2010. My reasons follow.
LEGISLATIVE ENVIRONMENT
6. The relevant legislation is the Corporations Act 2001 (Cth).
7. Sections 920A and 920B of the Act contains power for ASIC to ban a person from holding a financial services provider’s licence, and provide relevantly as follows:
920A ASIC’s power to make a banning order
(1)ASIC may make a banning order against a person, by giving written notice to the person, if:
(a)ASIC suspends or cancels an Australian financial services licence held by the person; or
….
(e)the person has not complied with a financial services law; or
(f)ASIC has reason to believe that the person will not comply with a financial services law.
920B What is a banning order?
(1)A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities.
(2)The order may prohibit the person against whom it is made from providing a financial service:
(a)permanently; or
(b)for a specified period, unless ASIC has reason to believe that the person is not of good fame or character.
8. Sections 1041A, 1041B and 1041H of the Act are also relevant.
9. Section 1041H(1) of the Act follows as relevant:
1041H Misleading or deceptive conduct (civil liability only)
(1)A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
Note 1: Failure to comply with this subsection is not an offence.
Note 2:Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4.
(2)The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:
(a)dealing in a financial product;
…
10. Section 1041A of the Act concerns involvement in transactions which have, or are likely to have, the effect of creating an artificial price for trading in financial products on a financial market in Australia. It provides as follows:
A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere):
(a)a transaction that has or is likely to have; or
(b)2 or more transactions that have or are likely to have;
the effect of:
(c)creating an artificial price for trading in financial products on a financial market operated in this jurisdiction; or
(d)maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction.
11. Section 1041B of the Act proscribes acts or omissions which have, or are likely to have, the effect of creating a false or misleading appearance of active trading. Subsection (1) provides:
A person must not do, or omit to do, an act (whether in this jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of a false or misleading appearance:
(a)of active trading in financial products on a financial market operated in this jurisdiction; or
(b)with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction.
12. Provisions similar to sections 1041A and 1041B have long been in force. In North v Marra Developments Ltd (1981) 148 CLR 42, Mason J, as his Honour then was, said of a statutory predecessor of section 1041B, namely section 70 of the Securities Industry Act 1970 (NSW), that its object was to protect the market for securities against activities which will result in artificial or managed manipulation. His Honour continued at 59:
The section seeks to ensure that the market reflects the forces of genuine supply and demand. By “genuine supply and demand” I exclude buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price. It is in the interests of the community that the market for securities should be real and genuine, free from manipulation. The section is a legislative measure to ensure such a market and it should be interpreted accordingly.
13. His Honour considered that there was a breach of the section when purchases have been made of shares in a company at or about a particular level for the purpose of setting and maintaining a market price for those shares. Such purchases were, in his Honour’s opinion, calculated to create a false market or a false price; the false or misleading appearance created thereby is that the market, in the absence of any disclosure that a market support operation is on foot, appears to be real or genuine, there being no overt sign of market support or manipulation.
14. The statements of Mason J in Marra have subsequently been applied in construing both section 1041A, in particular the meaning of artificial price, and section 1041B. Although Marra was concerned with an earlier form of section 1041B, as Goldberg J stated in Australian Securities and Investments Commission v Soust [2010] FCA 68; (2010) 183 FCR 21, his Honour’s analysis as to the creation of a false or misleading appearance of active trading and the creation of a false or misleading appearance with respect to the market for, or the price of, securities, is equally applicable to the creation of an artificial price for trading in securities.
15. The intention of the person engaging in the conduct which is found to contravene section 1041H is not a necessary element of the contravention. I am mindful that whilst section 52 of the Trade Practices Act 1974, and the respective State and Territory Fair Trading Acts do not apply in corporation law matters, the principles that apply to a breach of section 52 of the Trade Practices Act, apply with equal force in section 1041H matters.
ISSUES BEFORE THE TRIBUNAL
16. The issues before the Tribunal are:
· whether Mr Klusman engaged in behaviour on 17 September 2008 which constituted a breach of section 1041H of the Act;
· whether Mr Klusman engaged in behaviour on 1, 2, 16, 17 and 18 December 2008 which constituted breaches of sections of section 1041A, 1041B and 1041H of the Act; if so
· whether a banning order is the correct or preferable decision for this Tribunal to make; and if so
· what the period of the banning order should be.
BACKGROUND FACTS
17. Aequs held a financial services licence at the relevant time in 2008. Mr Klusman was at the relevant time head of institutional dealing at Aequs. He had both institutional and retail clients, including REX, and his brother-in-law, Mr DC, a medical researcher, who resided overseas at the time, as well as his daughter from his first marriage, Ms TP, who was aged approximately 25. She worked as a receptionist, and resided interstate.
18. Mr Klusman is currently married a second time, and has three young children, one of whom has been seriously ill over a period of time. That has taken family time and involvement, and Mr Klusman claims financial hardship as a result of the child’s illness and the Tribunal’s conditions which have been imposed on the way he must carry out his work.
19. ASIC’s, and therefore the Tribunal’s, power to make a banning order against a person if the person has not complied with a financial services law is provided for in section 920A(1) of the Act.
20. Macquarie is a public listed company whose shares, being a financial product, are traded on the ASX Ltd (ASX).
21. REX is, and was, during the relevant period, a public listed company with its shares traded on the ASX. On 17 April 2008, REX announced an on-market share buy-back of up to 12,000,000 REX shares over an unlimited period. Aequs was engaged in May 2008 to conduct the share buy-back, and Mr Klusman was the person appointed to conduct the transactions for REX. Mr Irwin Kuan Joo Tan, General Manager, Corporate Affairs of REX made a statement which confirmed that the acquisition was to take place over an unlimited period.
22. Mr Klusman attended at ASIC, and was interviewed on several occasions in connection with issues now the subject of his banning order. He has raised before me the fact that at one or more of those interviews, he appeared unrepresented. I am satisfied from the evidence of Mr Klusman and the submissions of Mr R Lancaster SC of counsel, who appeared for ASIC at the hearing, that Mr Klusman was entitled to be represented by a legal representative of his choice at each of those interviews. In fact he did so, on at least two occasions when he was represented by Mr Sarvaas of Sarvaas Ciappara Lawyers.
23. I note for the sake of completeness that Mr Klusman chose to appear unrepresented at the AAT hearing, which he was entitled to do. I note further that many of the documents upon which he has relied at the hearing were prepared with the assistance of Mr Sarvaas.
24. I moved then to consider the issues before the Tribunal.
WHETHER MR KLUSMAN ENGAGED IN BEHAVIOUR ON 17 SEPTEMBER 2008 WHICH CONSTITUTED A BREACH OF SECTION 1041H OF THE ACT
25. The subject of the finding that Mr Klusman had breached section 1041H of the Act on the morning of 17 September 2008, concerned what was held by ASIC to be a misleading statement he made about Macquarie on that morning. The delegate in his decision of 7 September 2010 stated at [10]:
On the morning of Wednesday 17 September 2008, Mr Klusman was at work at the institutional desk at Aequs in Sydney. At some time that morning he stood up at the institutional desk and made a statement to the Aequs staff present about a rights issue by Macquarie Group Ltd.
26. ASIC relied on what it considered was the contemporaneous evidence of Ms KD, an Aequs employee, who heard Mr Klusman make a statement concerning Macquarie on 17 September 2008. Ms KD was at the time Mr Klusman made the statement communicating via email with Mr MH, who was employed at Aequs as a client advisor, and who was not physically present in the office. In an email sent to Mr MH which appeared to be at 11.20am (but may actually have been closer to 10.20 am, I am told), on 17 September 2008, Ms KD wrote:
Ric (Mr Klusman) just yelled out to everybody that if you have Macquarie Bank shares to get rid of them ASAP because there is supposed to be an announcement this afternoon. Apparently UBS is going to do a rights issue or something like that.
27. It seems that Mr MH further disseminated to several people that which Ms KD had emailed him.
28. I noted that ASIC found Mr Klusman had no reasonable basis for making the statement attributed to him, as there had been no rumour to that effect on the radio that morning, nor had he heard or read about the rumour on any radio, television or in the print media. ASIC also referred me to a press release by Macquarie Bank released later that day on 17 September 2008, confirming that no rights issue was under actual consideration by Macquarie Group at that time.
29. At the hearing, I had before me six volumes of T-documents, and documents tendered by Mr Klusman in support of his case. In his evidence, Mr Klusman gave detailed information about the GFC at the relevant time, which I do not need to reproduce here except to say that it was a time when, amongst other things, Lehmann Bros was in trouble, and the housing market in the USA had collapsed. That is not in dispute, and was no doubt of great interest at the time, to stock brokers like Mr Klusman.
30. Mr Klusman provided his evidence about what had occurred on the morning of 17 September 2008, and commented on the email Ms KD had written on several occasions, including at the ASIC interviews, in his written statements, and in oral evidence before the Tribunal.
31. Mr Klusman gave several different versions of what occurred on 17 September 2008 in regard to Macquarie, which in a way is not unusual, given he was first made aware of the email Ms KD had written when he was interviewed by ASIC on 30 January 2009, some four months after the incident.
32. I noted also that Mr Klusman said 17 September 2008 was not an unusual trading day, and not one he would have remembered as being remarkable. He did not have any independent recollection of the events of 17 September 2008, including with regard to what he said about Macquarie. Mr Klusman sought to excuse what he understood were the various versions he gave regarding what actually happened on 17 September 2008 by referring to the family distractions, lack of sleep and impaired concentration occurring then as a result of his son’s serious illness.
33. I noted that at the ASIC interview of 30 January 2009, Mr Klusman was asked:
Interviewer: Did you, on 17 September, or you know, the evening or afternoon beforehand, become aware of any rumours about Macquarie?
Mr Klusman: I can’t recall the specific date, but I did stand up on the institutional desk prior to the start of trade on a day and said, ‘there is a rumour that Macquarie Bank are going to do a rights issue. That might explain the weakness in the stock price’.
…
There were a lot of rumours in the market. My source for that rumour was the radio in the car in the morning.
34. At the time of the interview, Mr Klusman could not recall which radio station it might have been, but said that he listened to four different ones. At the hearing, he said he now accepted that the information he gave at the interview was incorrect. I noted that in another interview with ASIC, Mr Klusman did not mention any rumour.
35. Mr Klusman admitted at the hearing that, although he had not searched media reports, he accepted from ASIC’s research that the words he said in the dealing room on 17 September 2008 did not emanate from any media source.
36. Nevertheless Mr Klusman included with his documents, an article headed “Macquarie in the spotlight amid $5bn refinancing fears” by journalist Adele Ferguson, published in the Australian on 17 September 2008. When he was first referred to the article in an ASIC interview on 12 November 2009, he claimed not to have previously seen it, and said that he did not read papers, but later has said, that he might have skimmed it.
37. At the Tribunal, Mr Klusman referred to the Adele Ferguson article dated 17 September 2008, which he admitted did not mention a rights issue, but submitted that what the journalist intended was that Macquarie would have to do an equity issue, which he considered to be another refinancing tool.
38. Mr Lancaster SC went to some length to point out subtle differences in what Mr Klusman said in the ASIC interviews of January 2009 and November 2009. I have noted those, but given the effluxion of time, and the fact I am satisfied Mr Klusman had no independent recollection of the events of 17 September 2008, I do not put any great weight on those differences. I am also satisfied from the evidence that Mr Klusman had not read the Adele Ferguson article on the morning of 17 September 2008 before making the statement about Macquarie.
39. In regard to Macquarie, I have noted statements in Volume 6 of the documents before the Tribunal made by two employees of Macquarie, including the Head of Investor Relations, that there was concern arising out of the Adele Ferguson article. Macquarie accordingly made a press release in response, on 17 September 2008. The press release gave figures on funding, and stated that Macquarie remains well-funded and well-capitalised with liquid assets of more than $A20 billion as at 30 June 2008, which is twice the level of a year ago.
40. Referring to Ms KD’s email, Mr Klusman argued that she sat some seven or eight metres from where he was speaking, (different distances were given in the various interviews), that she was a settlements officer, and had no knowledge of the market. He accepted that by nature he had a loud voice, but that he was not yelling, and in any case Ms KD may not have heard him correctly. He stated that she had no authority to send such an email, further that he did not send such an email to anyone, nor talk to any institutions. He added that he had no clients in Macquarie. Mr Klusman also added that in order to avoid any situations of conflict, the settlements area and the dealing room are presently no longer co-located.
41. In further support of his contention that he did not disseminate false or misleading information at all, or widely, Mr Klusman produced a diagram indicating where the various people in the open plan office sat at the relevant time. One version of what he said on the morning of 17 September 2008 was that he was answering another trader’s query in regard to the weakness Macquarie shares were exhibiting on that day. In that connection he stated that because a group of several dealers sat in close proximity with each other in the open plan office, they all overheard him. Another version he gave was that he stood up and intended to only address his immediate group.
42. Regardless of what Mr Klusman intended at the time; I am satisfied Mr Klusman stood up in his open plan office, and in his loud voice which I heard over a period of days at the Tribunal, made a statement about Macquarie shares on 17 September 2008.
43. I do not accept Mr Klusman’s submissions that Ms KD may have misheard or misunderstood him. I do not believe anyone had to be a share trader to record what Ms KD did, and what Mr Klusman is very likely to have said. I am satisfied that the contemporaneously made email which is the email Ms KD sent at some time after 10 am on that morning to Mr MH, which was sent on to other persons, accurately recorded what Mr Klusman said.
44. Mr Klusman also told me that he did not know how UBS came to be mentioned, because he did not mention UBS. I have already noted above that Mr Klusman has no independent recollection of the events of 17 September 2008. I am also satisfied it is more than likely that not, that without specific qualifications as a trader, Ms KD would have simply recorded/repeated what she heard Mr Klusman say about UBS. None of the evidence before me satisfies me that Ms KD fabricated the contents of the email or the reference to UBS, or was qualified to make that statement of her own accord.
45. Accordingly I prefer the submissions of the Respondent that what Mr Klusman said about Macquarie was accurately recorded in Ms KD’s email.
46. Thus, by making the statement about Macquarie, which was heard by his colleagues and disseminated to other persons, Mr Klusman engaged in conduct in relation to a financial product that was misleading or deceptive, or was likely to mislead or deceive, because the assertion regarding a rights issue was without any basis, nor the subject of any rumour, and was untrue.
47. I have already noted that due to the GFC, general financial unrest, and the fact that Macquarie may have heard what had been disseminated, it issued a press release on the same day, 17 September 2008, confirming that no rights issue was under actual consideration by Macquarie Group at that time. I am satisfied from the inquiries ASIC made, and Mr Klusman’s acceptance of that research, that there had been no rumour in the media regarding a rights issue proposed by Macquarie as contended by Mr Klusman in his January 2009 interview with ASIC, and that accordingly, Mr Klusman had no reasonable basis to make the statement which I am satisfied he did. I am also satisfied that Mr Klusman had no reasonable basis for asserting that UBS had been engaged to undertake a rights issue or any other form of capital raising for Macquarie Group Limited at the relevant time, and that this was a statement which was likely to mislead or deceive, particularly in the volatile market which existed at the time.
48. I am mindful that pursuant to section 1041H and the applicable case law, such as Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 and Parkdale Custom Built Furniture Proprietary Limited v Puxu Proprietary Limited (1982) 149 CLR 191 whether conduct is, or is likely to be misleading or deceptive is determined objectively. It is unnecessary to prove that the person intended to mislead or deceive, or whether the incorrect information was disseminated, and whether anyone was actually misled or deceived. Clearly there was a body of persons such as investors who could have been misled or deceived, but no proof of any actual deception of those persons is necessary for a breach of section 1041H to be established.
49. Based on the above I find that Mr Klusman breached section 1041H of the Act. I have discussed penalty further on in these Reasons for Decision in connection with this, and the further matters for decision.
WHETHER MR KLUSMAN ENGAGED IN BEHAVIOUR ON 1, 2, 16, 17 AND 18 DECEMBER 2008 WHICH CONSTITUTED BREACHES OF SECTIONS 1041A, 1041B AND 1041H OF THE ACT
50. Before considering in detail whether Mr Klusman engaged in behaviour on the designated dates in December 2008 which constituted breaches of the Act, I have first made some general comments which follow here.
51. I have noted ASIC held that by causing shares of REX to be purchased on account of his brother-in-law, Mr DC, and his daughter, Ms TP, and sold to REX as part of an on-market share buy-back on 1 December, 2 December, 16 December, 17 December and 18 December 2008, Mr Klusman failed to comply with sections 1041A, 1041B and 1041H of the Act.
52. Mr Klusman gave evidence about his activities in the share market, and tendered documents in support of his case.
Mr Klusman’s evidence in relation to the share buy-back
53. Mr Klusman’s evidence was, as noted above, that he was the broker nominated to deal with the REX share buy-back of an anticipated 12,000,000 shares, and commenced the transactions in May 2008. That continued until June 2009, and was not completed at that date.
54. I have noted that REX was relatively illiquid stock, and that before the buy-back, the stock had been trending down. It was not in dispute that Mr Klusman conducted the majority of trades on each occasion during the whole period of the REX share buy-back. By way of completeness, I note that in November 2008, Mr Klusman was in the market for REX at least three or four days a week, and conducted approximately 83 percent of the transactions. I am, of course, only concerned in particular with the relevant days 1, 2, 16, 17 and 18 December 2008 when Mr Klusman was responsible for the majority of the trades in REX shares. On one particular day, 18 December 2008, Mr Klusman was responsible for the only trades, that is, 100 percent of the transactions.
55. Mr Klusman was at pains in his statements and in his oral evidence to justify his actions in relation to the share buy-back. He told me that he did not breach REX’s instructions as he received instructions each day on which he was to buy shares for REX from Mr Tan, and/or Mr Ben Ng of REX, or occasionally from REX Chairman Mr Lim Kim Hai. He said that the instructions often came in the morning, but that they might also come in later in the day. He said that the instructions depended on REX’s cash flow of the day, and specified an amount of shares the company wished to have purchased on that day, and an upper limit on price, perhaps 97 cents, but close to $1. His evidence, which I accept, was that he did not keep a written record of the instructions, and that they were often given to him by telephone. I was mindful that ASIC, in formulating its decision, obtained various telephone records which were incomplete. I have not found it necessary to pursue that for purposes of the decision which I have to make.
56. Mr Klusman characterised REX as an aggressive client, wanting to achieve a certain number of share purchases as instructed to him on any given day. It was not in dispute that Mr Klusman followed those instructions, and there was no allegation he ever breached them. Further, he reported his activities daily to the ASX and to the relevant REX executives by telephone or email.
57. The transcripts of interviews at ASIC indicate Mr Klusman told ASIC that he had informed Mr Tan that REX was buying shares in the afternoon, sold by Mr Klusman’s other clients, who had bought them for less earlier in the day. At the Tribunal Mr Klusman added that he would not have mentioned that the clients were relatives because that would have breached privacy. I am satisfied from Mr Klusman’s evidence which was quite equivocal, and that of Mr Tan, that Mr Klusman did not disclose to Mr Tan or anyone else at REX that he was buying shares for REX on days on which he had bought earlier in the day for his relatives at a lower price, and that the shares were then sold to REX for a profit.
58. Mr Klusman told me that he held full written authority to act on behalf of Mr DC and Ms TP, although he told me that he and Mr DC spoke about the share trades from time to time, including during the relevant period.
59. Mr Klusman accepted that the IRESS data as reproduced in Ms Nassar’s statement for each of the trading days was correct. Mr Klusman stated that he always traded within the market, further that REX was not a VWAP (Volume Weighted Average Price) investor. That average measure was however used by Professor Aitken whom Mr Klusman called to give evidence at the Tribunal, and is mentioned by Ms Nassar in her report.
60. Mr Klusman accepted that as a broker his duty was to buy shares for REX at the lowest available price, although he qualified that by saying that it was to be the lowest price to obtain the stock on the day (my emphasis). Mr Klusman was at pains to explain that just sitting there on the market might not assist, as REX might not have been able to obtain the shares it wanted, and it had requested him with each instruction, to obtain a certain number on a particular day. That was how Mr Klusman insisted on justifying his actions when in fact he has been shown not to have purchased at the lowest available price, (Ms Nassar’s report), and at times when he was the only trader so that there was no risk he might not have been able to purchase the required quantity of shares for REX.
61. One can only conclude from considering the transactions reproduced in Ms Nassar’s report, which was accepted as being accurate by both parties, that Mr Klusman was responsible for the bids and the asks, and determined the price on many occasions in relation to REX shares. I am satisfied from the evidence that Mr Klusman was also in a position to know that Mr Lim, Mr Tan or Mr Ng would give him an order on most days in November and December 2008, and that having bought for his relatives early in the day, he could expect to sell the respective shares to REX at a profit for his relatives later on the same day.
62. Mr Klusman relied on Mr Tan’s statement in which he indicated that REX was satisfied M Klusman did not ever purchase shares for REX on the share buy-back without obtaining prior approval. Further, that REX had no complaint against him in respect of any of the prices paid by REX on the share buy-back even against the background of the recent knowledge that Mr Klusman had traded in REX shares for his relatives. He also sought to rely on Mr Tan’s statement that REX would consider briefing him again in future.
63. Mr Klusman admitted that it was imprudent to have traded for his brother-in-law and his daughter in the share buy-back, but did not accept that any conflict of interest had arisen. He told me he had full authority to trade for both, he characterised them as non-aggressive clients, and noted that he discussed the trades with his brother-in-law on some occasions. Mr Klusman saw the small profit he made for each, particularly for his daughter, as her pocket money. Mr Klusman was at pains to point out he did not personally profit from any of the REX transactions, and earned only the appropriate brokerage fees involved.
Professor Michael Aitken
64. Mr Klusman called Professor Michael Aitken, who produced a written report, and who gave oral evidence at the hearing. I noted that Professor Aitken holds degrees in Accounting and Finance from Massey University in New Zealand, and a PhD in Finance from the AGSM, at the University of NSW, and has held academic posts as well as acting as a consultant and independent expert in a range of proceedings involving insider trading and market manipulation.
65. Professor Aitken obtained data for his report from the ASX. He had data from the SMARTS REPLAY module in his report, and gave evidence about how it works. In the section of Professor Aitken’s report headed “9. Opinion”, he commented on ASIC’s reliance on the fact that Mr Klusman, in executing buy-back transactions, did not trade at the lowest possible price for REX. He commented that he did not have access to REX’s instructions, which were of course before the Tribunal, and that it appeared to him that Mr Klusman had an amount of price discretion, which is correct.
66. Professor Aitken commented further that the nature of buy-backs is that they usually involve regular purchases of significant quantities of shares which makes differentiating between appropriate and inappropriate behaviours difficult. His reason for that was that the buy-back maintains, if not creates, an artificial price for the period of the buy-back due to the fact it establishes a temporary demand which is not normally present. He noted this was particularly so in the case of low liquidity securities such as REX. Professor Aitken also assumed the position that Mr Klusman had three genuine clients at the relevant times, being REX, Mr DC and Ms TP.
67. Professor Aitken commented on whether Mr Klusman had created and/or maintained an artificial price, or created the impression of active trading or an artificial market and/or price in REX shares. He thought that a reasonable test of whether artificial prices had been created and maintained was to consider the market in the absence of Mr Klusman’s orders and trades. Professor Aitken commented that:
… given Mr Klusman had discretion over when he could trade for his [sic] some of his clients, the position pursued by the delegate seems to be that immediately when Mr Klusman had an order from REX he should have abandoned clients activities over which he had discretion. While this may indeed have been the prudent thing to do given that the discretionary clients were his relatives, the question is whether in not doing so Mr Klusman disadvantaged one client over the other as a result.
68. Professor Aitken thought it possible to meet the objectives of two clients simultaneously. He also stated that buying at the lowest possible price is not a universal maxim, one might also look to the rules on ‘best execution’. Adoption of a ‘principles’ based approach to best execution could well mean that trading the maximum volume becomes a more important criteria than price on some occasions. “Best execution”, he said, did not necessarily represent buying at the lowest price which he said, could, at times, operate to disadvantage a client. When asked about a broker’s fiduciary duties, Professor Aitken said that the principles of “best execution” did not conflict with the aim of purchasing at the lowest price, and selling at the highest price for a client.
69. In his oral evidence, Professor Aitken also discussed VWAC, and the fact a broker would attempt to achieve the lowest average price for his client, that is, considering the total, rather than individual purchases.
70. After checking that other brokers traded at the same price or better prices on all but one of the five trading days, (1, 2, 16, 17 and 18 December 2008), Professor Aitken concluded in his report that Mr Klusman could not be described as either establishing or maintaining an artificial price or market in REX shares. In his oral evidence Professor Aitken said that brokers other than Mr Klusman were trading at similar prices, so that although he accepted that Mr Klusman’s trades were influential in moving prices, they did not establish prices which were unusual.
71. When asked what caused the widening of the spread, Professor Aitken said he had not been asked to consider that. He did agree however, that Mr Klusman was the dominant player in the market for REX shares at that time, and that, on the relevant days, he was setting the asks, and also the bids.
72. Professor Aitken opined that buy-backs were a form of legal manipulative pressure on stock to move it upwards, noting that prior to the buy-back, REX stocks had been trending down. Professor Aitken did not consider that Mr Klusman was creating or maintaining an artificial price. He acknowledged that Mr Klusman was the key player in the REX transactions in the relevant period, but that did not change his view. Professor Aitken understood that Mr Klusman had discretion from REX to buy up to $1, and that he selected the price at which to trade, and created the market. Professor Aitken relied on the fact that:
· Mr Klusman had a wide discretion for all his clients;
· Share buy-backs were a form of legal manipulative pressure on stock to move it upwards;
· When considering manipulation, one considers the VWAP; prices paid for REX shares were not materially above VWAP, so suspicion of market manipulation in contravention of legislation would not arise;
· Mr Klusman did not influence the market anymore than anyone else who is involved in a share buy-back;
· Mr Klusman created or maintained the market for REX; it was a small spread between 91 or 92 cents, and 96 or 97 cents;
· That Mr Klusman had clients on each side of the transaction;
· That the stock was relatively illiquid.
Mr Irwin Kuan Joo Tan
73. I also had statements of Mr Irwin Kuan Joo Tan, General Manager, Corporate Services of REX before me.
74. In his statement of 25 November 2009 Mr Tan stated that:
I considered anything under $1 to be a ‘good price’ to buy the REX shares as REX listed on the market for $1 a share. The cheaper the REX shares, the better it was for conducting the Share buy-back.
…
Up until the interviews with ASIC staff, I was not aware that Mr Klusman conducted trades in REX on behalf of his relatives.
I also was not aware that Mr Klusman was purchasing REX shares for his relatives at a cheaper price only to sell the shares he purchased to REX at a higher price.
75. Mr Tan also made a supplementary statement in which he said:
At no time did Mr Klusman ever purchase shares for REX on the Share buy-back without obtaining prior approval;
…
I have no complaint against Mr Klusman in respect of any of the prices paid by REX on the Share buy-back, and this is the case including my current knowledge that Mr Klusman did sell some shares to REX on behalf [of] relatives at a higher price than the relatives had previously paid for those shares.
76. In a section headed ‘Crossings’, Mr Tan stated:
I was not aware that Mr Klusman had traded in REX on behalf of his relatives (paragraphs 41 to 43 of my previous statement) and I do not recall the word “relatives” ever being used. However it may be the case that Mr Klusman did inform me on some occasions prior to purchasing shares for REX on the Share buy-back that he would be selling or crossing shares previously purchased by his other clients. … I did not care what prices other clients may have been purchasing or selling at, my only concern was the price that REX was prepared to pay on a particular day, and I generally regarded any price under $1.00 to be a good buy.
…
I have always found Mr Klusman to be an efficient, professional and honest broker. In the event that Mr Klusman is not subject to a banning order I would be happy to instruct him to act for REX.
Ms TP, Mr Klusman’s daughter
77. Ms TP made a statement saying she is 26 years old, and is employed as a receptionist. She stated that she had been frightened when contacted by ASIC to be interviewed in November 2009, but that she had not sought legal advice. She made a statement in late 2009, in which she said:
About five years ago I signed various documents so that my father could trade shares for me. I don’t know anything about the stock market but my father knows all about shares … I did understand that I was signing documents that would let my father buy and sell shares for me. I was and am happy for my father to buy and sell shares on my behalf without speaking to me specifically about the trades at the time.
…
I remember that money for odd amounts would appear in my bank account after my father telling me that he had made a little bit of money for me on shares. … I believe I told ASIC that I treated this money just like pocket money.
Mr Klusman’s trading in REX shares on the relevant dates
78. Mr Lancaster SC produced submissions and documentation, including a statement of Ms Diana Nassar, a Market Analyst in the Market and Participant Stockbrokers division of ASIC. I am mindful that both parties accepted Ms Nassar’s printouts of Aequs transactions which were based on reports from ASX Compliance Pty Ltd in relation to trading in REX shares for the relevant dates. Details of Mr Klusman’s transactions were also in Professor Aitken’s report and also appended to the reviewable decision.
79. I moved then to consider Mr Klusman’s activities on the relevant dates in December 2008.
80. Notwithstanding Mr Klusman’s claim that REX was not a VWAP client, VWAP is relevant in that it is an average price. Professor Aitken told me that Mr Klusman’s transactions did not constitute a significant departure from VWAP, and that this would therefore not have alerted him or led to a conclusion that Mr Klusman was manipulating the market. That the variation was minor is correct, but it is worth noting also that Mr Klusman’s purchase of shares for REX exceeded VWAP on each of the relevant days. The circumstances of Mr Klusman’s trading did come to the attention of regulators, and now to this Tribunal. For the sake of completeness, I have noted VWAP for the relevant period as follows.
· 1 December 2008 94.3599 cents
· 2 December 2008 95.833 or 95.5 cents (a timing issue)
· 16 December 2008 94.0592 cents
· 17 December 2008 92.2969 cents
· 18 December 2008 94.129 cents
81. There was no disagreement that Ms Nassar’s reproduction of the IRESS data which was Exhibit R2 before the Tribunal, and which was raised in cross-examination of Mr Klusman, and with Professor Aitken, was correct. I am satisfied that I can rely on it for the purposes of making my decisions.
82. I need not, in order to discuss Mr Klusman’s activities, reproduce the IRESS tables from Ms Nassar’s report in full. I have chosen to comment on the most significant bids, asks and crossings below, which have led me to my conclusions. There is far more detail about Mr Klusman’s share trading in Ms Nassar’s report, and appended to the reviewable decision. However the trend was very clear.
83. Amongst the conclusions I can draw from the evidence, and demonstrated below, are the figures which are shown in the bids and asks and crossings, and based on the timing of Mr Klusman’s instructions from REX.
84. I have already noted that Mr Klusman had complete discretion in share purchases he could make for Mr DC and Ms TP. Mr Klusman knew that the instructions from REX would come on most days in December 2008, and that they would be by telephone or email, and not generally by way of a formal written record. He had no independent recall of each day’s instructions, and said that he did not keep detailed note of those. However, he was mindful the instructions were limited only to the specific day. Mr Klusman also had in mind that REX was an aggressive purchaser, as he characterised it, and that the desired number of share purchases and the maximum price, (which rarely if ever exceeded $1), was advised daily, and depended on the REX cash flow.
85. By way of example, I note from Mr Klusman’s evidence that his justification for buying shares for his relatives at 92.5 cents in the morning, which he sold, and were bought by REX in a crossing after 11 am for 96 cents, was that at the time of purchasing for his relatives, he had not yet received an order from REX to purchase. I am satisfied that Mr Klusman knew in December 2008, and on the relevant days, that the instructions from REX would come either in the morning, or often in the afternoon, and that he would be able to time his transactions in order to create a profit for his relatives, accordingly. In saying that, I am not implying that Mr Klusman breached REX’s instructions, which I am satisfied he did not. However, that is not the issue to be decided in this matter.
86. I am satisfied from the IRESS data that accordingly, he could deal with his relatives’ purchases early in the day, and plan to sell their shares to REX once its instructions had been received. The relatives made a consistent and modest profit on each of the relevant days.
87. In coming to that conclusion I reject Mr Klusman’s excuse that awaiting the best price might mean he would forfeit the opportunity to purchase for REX, mainly because he was the dominant, and sometimes the only player in the market for the REX shares. I find from analysis of the IRESS documents as provided in Exhibit R2, that Mr Klusman, as the dominant or sole trader in REX shares in the relevant period, selected the prices, and manipulated the market.
88. I also reject as unhelpful and irrelevant, Mr Klusman’s insistence that the market for shares is a spread rather than a specific price. I have dealt with that below in relation to rule 7.33.
89. I have drawn attention below, to particular bids and asks and crossings on the relevant days. These represent a sample of the transactions Mr Klusman undertook on the relevant days.
Monday 1 December 2008
90. Mr Klusman bought 38,500 shares at 92.5 cents for his relatives in the morning which he sold, and were bought by REX in a crossing at 11 am for 96 cents. The gain, which I have not calculated for each transaction where Mr Klusman’s family member made financial gain, was in this case, approximately $1,348, less brokerage charges and GST.
91. Further buys for REX on 1 December 2008 cost the company 96.5 cents while Mr Klusman had bought the 20,000 shares for his daughter at 92.5 cents earlier in the day. He also sold others of his relatives’ shares to REX for 97 cents on 1 December 2008.
92. The prices at which Mr Klusman bought shares for REX on 1 December 2008 were materially above the previous market transaction.
93. The VWAP for 1 December 2008 was 94.3599 cents.
94. Mr Klusman was involved in buying and/or selling 10 of the 12 executed trades in REX shares on 1 December 2008. On 1 December 2008 Mr Klusman traded 88 percent of the market for REX shares by volume. He could nominate the ask and bid prices as he saw fit, and did so.
Tuesday 2 December 2008
95. IRESS records indicate that on 2 December 2008, Mr Klusman was in the market, and executed two of the four trades on that day. He bought 10,000 shares at 94 for his relatives at 10.06 am, which were sold to REX for 96.5 cents in a crossing, a price Mr Klusman selected at 11.37.40 on that day. He had clearly manipulated the market for REX shares on 2 December 2008 by creating and maintaining the market artificially.
96. The VWAP for 2 December 2008 was 95.833 or 95.5 cents (a timing issue).
97. On 2 December 2008 Mr Klusman traded 65 percent of the market for REX shares by volume. He could nominate the ask and bid prices as he saw fit, and did so.
Tuesday 16 December 2008
98. IRESS records indicate that at 3.26 pm, Mr Klusman had a crossing, and sold 34,064 shares to REX for 95 cents which he could have purchased for REX earlier in the day at 91, 93 or 94 cents (as indicated on transactions 5, 10, 12 and 17 of Ms Nassar’s record of trades from IRESS for 16 December 2008).
99. I am satisfied that once again Mr Klusman caused REX to purchase shares at an artificially inflated price, and in a situation where Mr Klusman’s relatives made a profit. Mr Klusman had chosen to make a profit for his relatives over the interests of REX.
100. The VWAP for 16 December 2008 was 94.0592 cents.
101. Mr Klusman was involved in buying and/or selling six of the seven executed trades in REX shares on 16 December 2008. On 16 December 2008 Mr Klusman traded 96 percent of the market for REX shares by volume. He could nominate the ask and bid prices as he saw fit, and did so.
Wednesday 17 December 2008
102. There was a number of transactions on 17 December 2008. In summary, typically Mr Klusman bought for his relatives in the morning, this time at 90.5 cents and 91 cents. He bought approximately 75,000 shares from them which he sold to REX at 2.55 pm for 94.5 and 95 cents. I am satisfied that Mr Klusman, with his crossings, selected the price and created the market.
103. The VWAP for 17 December 2008 was 92.2969 cents.
104. Mr Klusman was involved in buying and/or selling 14 of 17 executed trades in REX shares on 17 December 2008. On 17 December 2008 Mr Klusman traded 93 percent of the market for REX shares by volume. He could nominate the ask and bid prices as he saw fit, and did so.
Thursday 18 December 2008
105. Mr Klusman bought REX shares for his relatives at 91 cents on 18 December 2008. He sold those shares to REX for 96 cents in a crossing at 3.37 pm on that day. Mr Klusman chose that price to sell to REX and created the market.
106. The VWAP for 18 December 2008 was 94.129 cents.
107. Mr Klusman was involved in buying and/or selling 9 of the 10 executed trades in REX shares on 18 December 2008. On 18 December 2008 Mr Klusman traded 100 percent of the market for REX shares by volume. He could nominate the ask and bid prices as he saw fit, and did so.
Conclusions re share trading
108. There was no disagreement, and I accepted from the evidence, including that of Professor Aitken and Ms Nassar that Mr Klusman was the main, significant and dominant player in the market for REX shares on the relevant days in 2008. I am satisfied from the IRESS printout of share trading for the relevant days as shown in Ms Nassar’s report that Mr Klusman was the main player in the market for REX shares at the relevant time. Because the shares were relatively illiquid, Mr Klusman was able to choose both the bids and asks, and decide at what price to purchase shares. He traded to make a (modest) profit for his relatives, and was able to select a price to buy for REX, not the best possible price, but at a price below $1 which he selected to still remain within the ambit of REX’s instructions. That was of course to REX’s disadvantage, pricewise. One cannot escape the conclusion that Mr Klusman created an artificial price for trading REX shares, and that he manipulated the market (section 1041A of the Act). He created a false impression of the market, and misled and/or deceived REX about the price at which it could obtain its shares (section 1041B of the Act). He engaged in behaviour which was likely to mislead or deceive (section 1041H of the Act).
Rule 7.33
109. Mr Klusman sought to argue that market price for shares was a range or, a bid/ask spread. I do not think this subject requires a lot of discussion except to say that my understanding of the market price for a share is the amount of the last genuine market transaction of the shares (Commissioner of Taxation (New South Wales) v Stevenson (1937) 59 CLR 80). Mr Lancaster SC submitted that this was supported by the use of the term in rule 7.33 and Chapter 19 of the ASX Listing Rules, with which I agree.
WHETHER THE CORRECT OR PREFERABLE DECISION FOR THE TRIBUNAL IS TO MAKE A BANNING ORDER
The Macquarie statement
110. I have found in the paragraphs above, that Mr Klusman breached section 1041H of the Act in relation to the statement he made about Macquarie on 17 September 2008, because he made a misleading and deceptive statement which was without a reasonable basis.
111. That is because I am satisfied Mr Klusman made the statement as recorded by Ms KD in her email mid-morning on 17 September 2008. I accept Ms KD recorded what Mr Klusman said virtually contemporaneously with him making the statement. I did not accept Mr Klusman’s submissions to the effect that because Ms KD was some eight or nine metres from him, and because she is not a dealer, she did not hear him or record it accurately.
112. I am also not concerned whether the statement was disseminated to one person or a particular group of people in Mr Klusman’s office, or outside that office because I am satisfied from the evidence that several people heard Mr Klusman. His intentions at the time, or whether anyone was misled are also not relevant (Taco Company of Australia Inc v Taco Bell Pty Ltd and Parkdale Custom Built Furniture Proprietary Limited v Puxu Proprietary Limited).
113. Mr Klusman has agreed that there was no rumour, nor any mention in the press or other media about Macquarie in connection with a rights issue. It is not in dispute that the GFC and bank failures were in the news on that day, and at that time, but to construe Adele Ferguson’s article as Macquarie considering a rights issue is pure speculation.
114. There was no basis for Mr Klusman’s statement, and I find it was misleading or deceptive, and find Mr Klusman in breach of section 1041H of the Act.
115. I am satisfied that a share trader who is in breach of section 1041H of the Act may be the subject of a banning order, and so find.
The REX share buy-back
116. ASIC held that Mr Klusman had, in regard to the REX share buy-back, breached sections 1041A, 1041B and 1041H of the Act on 1, 2, 16, 17, and 18 December 2008.
117. As indicated above, the IRESS printouts clearly indicate that on those days Mr Klusman was the main, if not the only trader in REX shares. I am satisfied the evidence indicates he was instructed on a day by day basis, almost every trading day in December 2008, to buy a certain quantity of REX shares, and was given a ceiling price which he did not exceed.
118. Mr Klusman had complete discretion to trade shares for his brother-in-law and his daughter. I am satisfied that he did not disclose to REX that they were his other clients, or indeed relatives, in the transactions on the relevant days.
119. I am also satisfied from the IRESS data that on the relevant days, Mr Klusman purchased REX shares at a price ranging at approximately 91/92 cents for his relatives and later in the day sold them to REX who bought them for 95/96 cents, and even 97 cents. I am satisfied that the relatives made a modest profit, but that a conflict of interest situation arose as a result of the transactions, and further that Mr Klusman, as the sole or main trader, selected the buy and sell prices, and manipulated the market.
120. In making that finding I am mindful of Professor Aitken’s opinion which is that the amounts were small, did not exceed VWAP much, and did not therefore signal market manipulation. I am mindful that the IRESS reports indicate that the share prices which REX paid on each of the relevant days were in excess of VWAP. I have also noted Professor Aitken’s opinion that a share buy-back is a form of legal manipulation of a share price, and that Mr Klusman was not creating or maintaining an artificial price, an opinion I reject. On the contrary, I find that Mr Klusman by buying shares for his relatives at a lower price, and selling them to REX at a higher price the same day without adequate, or indeed any disclosure, acted in a misleading and deceptive manner. As the main and dominant trader in the market, he selected the asks and bids, and manipulated the price of REX shares in the relevant period. I am satisfied that Mr Klusman misled REX, and that his manipulation of the market gave a misleading picture of the value of REX shares in the market.
121. Accordingly, for the reasons given above, I am satisfied that Mr Klusman breached sections breached sections 1041A, 1041B and 1041H of the Act in relation to the REX share buy-back on 1, 2, 16, 17, and 18 December 2008, and that he should be subject to a banning order.
122. I must then consider the duration of the banning order.
THE DURATION OF THE BANNING ORDER
123. In coming to a decision that Mr Klusman should be prohibited from providing any financial services pursuant to section 920A(1) of the Act, I have relied on my findings made above, that Mr Klusman has breached section 1041H in relation to the Macquarie statement, and sections 1041A, 1041B and 1041H in relation to the REX share buy-back on the relevant days in 2008. I note Mr Lancaster’s submissions that there were eleven serious breaches of the Act over the relevant period.
124. I note that Mr Klusman has been subject to a stay order of the Tribunal made on 10 September 2010 imposing conditions on his trading activities.
125. I must consider the appropriate penalty having regard to the protection of the public, specific and general deterrence, and maintaining public confidence in the profession, and having regard to the range of factors identified by Santow J in Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Limited (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 and Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602, and as reflected in Regulatory Guide 98 published by ASIC.
126. General deterrence is also a factor to be taken into account in deciding whether, and for what period, a banning order ought to be made (Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Limited (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80). I am mindful that his Honour’s reasons were intended to be indicative rather than a fixed and comprehensive code.
127. It is necessary to bear in mind, of course, that banning may cause hardship, and Mr Klusman’s statement, Exhibit A2, has detailed the hardship a banning order would cause him. However, although a banning order appears punitive, it is for the purpose of the protection of the public.
128. In coming to a decision regarding penalty, I take into account that Mr Klusman continues to maintain that Adele Ferguson expressed in her article of 17 September 2008 her opinion that Macquarie was considering an equity issue, (which Mr Klusman considered to be a refinancing tool). I reject Mr Klusman’s interpretation of the content of the article, and am satisfied from the evidence and submissions that he did not see the article at the relevant time, and certainly had not read it before he made the statement of 17 September 2008.
129. I am concerned, and take into account in considering the length of the banning order, in particular that Mr Klusman does not accept that his activities in relation to the REX share buy-back on 1, 2, 16, 17 and 18 December 2008 constituted market manipulation, and created an artificial price for, and a misleading picture of the value of REX shares. Mr Klusman maintained that he was within market even though he sold shares to REX at prices he selected which were materially above the previous transactions for his relatives.
130. I am concerned also that Mr Klusman maintained in his evidence that as a broker, his duty was to obtain the lowest available price to secure the stock on the day. That was not, of course, actually a consideration in the REX share buy-back where Mr Klusman was deciding the prices for both bids and asks, and selecting the time for crossings.
131. Mr Klusman’s evidence regarding disclosure he made to REX that he was trading for other clients and/or relatives was equivocal and inconsistent, and I could not be satisfied that he disclosed to REX that he was trading REX shares for his relatives. I have also noted Mr Tan’s evidence on that issue. Mr Klusman did admit at the hearing that trading for his relatives, and without full disclosure to REX was imprudent, but maintained that it was not illegal, and that he was not in a situation of conflict. I have rejected that proposition.
132. I take into account the following by way of mitigation:
·Mr Klusman’s statement that he has been trading for 32 years without a complaint being made about him;
·That Mr Klusman has been very financially and personally stressed due to the serious illness of one of his children;
·That Mr Klusman told me he has fully complied with the conditions on his stay order;
·The fact REX was not concerned that Mr Klusman had breached any of its instructions; notwithstanding, I note REX has ceased its instructions to Mr Klusman regarding its share buy-back since the banning order;
·Mr Tan’s statement:
I have always found Mr Klusman to be an efficient, professional and honest broker. In the event that Mr Klusman is not subject to a banning order I would be happy to instruct him to act for REX.
·That Mr Klusman’s evidence was he made a small profit on the trading of REX shares on behalf for his relatives, but that he personally did not profit from the transactions apart from his brokerage fees.
133. By way of completeness I note that Mr Klusman provided character references to ASIC. They were all dated July 2010 and preceded the decision of ASIC in this matter. However, they were before me in the T-documents, and I am mindful they include a reference from the Executive Chairman of InvestorfirstSecurities Ltd and other colleagues and friends of Mr Klusman. All the referees speak highly of Mr Klusman, both professionally and personally.
134. In coming to a decision regarding the banning order, I am mindful of the case of Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124. Senior Member Taylor said [at 247]:
The appropriate period of any disqualification is properly informed by the nature of the impugned conduct and its objective seriousness, both in terms of the extent of the departure from appropriate standards and its actual consequences. The considerations that may properly inform the exercise of the power cannot be prescribed exhaustively. They are summarised in ASIC’s regulatory guide 98 table 2. Those matters parallel the criteria identified by Santow J in his influential judgement in ASIC v Adler at [56]: see Rich. The thrust of the considerations suggested by both Santow J and in regulatory guide 98 is that a banning order is appropriate where the person’s impugned conduct involves serious incompetence or misconduct. Within that description are included advice outside the scope of the scope of the person’s licence or authority and advice that lacks a reasonable basis. Even lesser compliance defaults may justify a banning order. These include failure to provide relevant disclosures and failure to make adequate enquiries about a client’s individual circumstances. The shortest periods of banning or disqualification are regarded as most appropriate to situations where the person’s impugned conduct has not involved serious incompetence and where there is a real satisfaction of the person’s likely due compliance with their relevant duties and obligations. There is a general suggestion that a 3-year banning period marks a conventional threshold that distinguishes between impugned conduct that has involved serious incompetence and conduct of lesser seriousness.
135. I was mindful also of the case of Re Lelliott and Australian Securities and Investments Commission [2009] AATA 110, also the case of a financial services provider, where the Tribunal held that persons entrusted with a financial services licence pay if they breach the trust placed in them when granted a licence, and that those who fall short of the standards set must expect that the privilege will be withdrawn. The Tribunal found in the case of Lelliott that a period of two years was excessive having regard to the objective seriousness of the conduct, and its consequences. Mr Lelliott impressed the Tribunal as someone who had learned from his mistakes, and someone who was genuinely contrite about his conduct. The Tribunal regarded a ban of nine months as being appropriate, and representing a proper response to the nature of the conduct, the need for general deterrence, and Mr Lelliott’s circumstances.
136. The Tribunal in Lelliott relied on the fact that Mr Lelliott did not contest ASIC’s case, putting in issue only the length of the banning order. I am mindful that the Applicant in Hres, and Mr Klusman, were of a completely different mindset. Mr Klusman maintained his position that whilst trading for his relatives without disclosing that to REX was imprudent, he did not perceive conflict.
137. In coming to a decision about penalty, I have also considered ASIC’S Regulatory Guide. I am satisfied that Mr Klusman’s actions, whilst in breach of various sections of the Act, did not involve any misappropriate of client funds, and did not constitute systematic failure of, and disregard for, compliance on a large scale such as to attract ten years or permanent banning.
138. I am also mindful that banning for less than three years would be appropriate where there is some carelessness or inadvertence in the broker’s activities which has led to problems, and where there is an indication of clear intention to comply with legal obligations in demonstrated behaviour. I cannot see that Mr Klusman’s behaviour fits into this category as he continued to maintain for example, that the issue of trading for relatives without disclosure in the REX share buy-back may have been imprudent, but was not a situation of conflict.
139. Accordingly some period in the three to ten year category may be appropriate. In considering the points made in the Regulatory Guide, and taking into account both Santow J in HIH and Adler and DP Forgie in Howarth, I find that notwithstanding Mr Klusman’s breaches of the Act were multiple and serious, a three year ban would be appropriate for the protection of the public and maintaining public confidence in the profession, and would have the desired deterrent effect. I intend the three year ban to take into account all the breaches of the Act, both in relation to the Macquarie issue and the REX share buy-back. In that regard I note that Mr Klusman’s period of banning commenced with the ASIC decision of 7 September 2010, and that on 10 September 2010, the decision of ASIC was stayed with conditions under which he has been able to work. In all the circumstances, I am satified the three year ban which I am imposing can be taken to have commenced from the date of ASIC’s decision.
THE TRIBUNAL’S CONCLUSIONS
140. I am satisfied from the evidence and submissions before me that Mr Klusman breached section 1041H of the Act in relation to the Macquarie statement, and sections 1041A, 1041B and 1041H of the Act in relation to the REX share buy-back.
141. The correct or preferable decision is that Mr Klusman should be banned from providing financial services for a period of three years, commencing from the date of ASIC’s disqualification order dated 7 September 2010.
DECISION
142. The Tribunal affirms the decision under review, and decides that the period of the banning order for three years is taken to have commenced from the date of service of ASIC’s decision of 7 September 2010.
I certify that the 142 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member
Signed: ..............[sgd].................................................................
AssociateDates of Hearing 7 – 11 February 2011
Date of Decision 8 March 2011
The ApplicantSelf represented
Counsel for the RespondentMr R Lancaster SC and Mr A Lo Surdo
Solicitor for the RespondentMr N Goodstone, ASIC
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