Kofkin and Australian Securities and Investments Commission
[2009] AATA 660
•1 September 2009
Administrative Appeals Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2008/5148
GENERAL ADMINISTRATIVE DIVISION )
Re Anthony Kofkin
Applicant
And
Australian Securities and Investments Commission
Respondent
DECISION
Tribunal Mr G L McDonald, Deputy President Date17 September 2009
PlaceMelbourne
CORRIGENDUM TO DECISION [2009] AATA 660
Pursuant to s 43AA of the Administrative Appeals Tribunal Act 1975 the Tribunal directs the Registrar to amend the decision dated 1 September 2009 as follows:
(a)the decision on the first page delete the words 'applying for or holding authority to act as an authorised representative' in the fourth line and substitute in their place 'otherwise providing financial services' so that sentence in the decision now reads:
The decision under review is affirmed in as far as the delegate’s decision banning the applicant from applying for or holding a financial services licence for a period of 10 years but in as far as it applies to the applicant otherwise providing financial services the decision is varied and the ban is reduced from 10 years to three years.
(b)in paragraph 100 at page 49 delete the words ‘applying for or holding authority to act as an authorised representative' and substitute in their place 'otherwise providing financial services' so that the sentence now reads:
The decision under review is affirmed in as far as the delegate’s decision banning the applicant from applying for or holding a financial services licence for a period of 10 years but in as far as it applies to the applicant otherwise providing financial services the decision is varied and the ban is reduced from 10 years to three years.
................................................................
G. L. McDonald
Deputy President
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 660
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2008/5148
GENERAL ADMINISTRATIVE DIVISION ) Re
Anthony Kofkin
Applicant
And
Australian Securities and Investments Commission
Respondent
DECISION
Tribunal Mr G L McDonald, Deputy President Date1 September 2009
PlaceMelbourne
Decision
The decision under review is affirmed in as far as the delegate’s decision banning the applicant from applying for or holding a financial services licence for a period of 10 years but in as far as it applies to the applicant applying for or holding authority to act as an authorised representative the decision is varied and the ban is reduced from 10 years to three years. Additionally, the s 35, Administrative Appeals Tribunal Act 1975 (confidentiality) orders made on 31 October 2008 and 6 and 20 November 2008 and 20 July 2009 are discharged.
……(sgd G L McDonald).....
Deputy President
CATCHWORDS – CORPORATIONS LAW – applicant recommended Westpoint products to clients – Westpoint collapsed – applicant did not understand the Westpoint products he recommended to his clients – insufficient due diligence carried out on the Westpoint products – financial services licence – whether the applicant complied with financial services law – whether the Tribunal should impose an enforceable undertaking or a banning order – decision under review varied – applicant banned from applying for a financial services licence for 10 years – applicant banned from applying for or holding authority to act as an authorised representative for three years
Administrative Appeals Tribunal Act 1975 ss 35 and 37
Australian Securities and Investments Act 2001 s 93AA
Corporations Act 2001 ss 9, 761G, 766A, 766B, 780, 786, 806, 851, 910A, 911A, 912A, 920A, 920B, 945A, 946B, 1041H, Chapters 5C and 7
Financial Services Reform Act 2002
Australian Securities & Investments Commission v Emu Brewery Mezzanine Ltd (2004) 187 FLR 270
Rich v ASIC (2004) 220 CLR 129
REASONS FOR DECISION
1 September 2009 Mr G L McDonald, Deputy President
The Application
1. The applicant is applying for the review of a decision of a delegate of the respondent who issued a banning order pursuant to s 920A of the Corporations Act 2001 (“the Act”) prohibiting the applicant from providing financial services for a period of 10 years.[1] Pending the determination of the application an order staying the banning order was in force. The circumstances that led the applicant into regulatory difficulty were his recommendations to some of his clients that they invest in Westpoint mezzanine financial products[2] (“the Westpoint products”) and in the Gilead Trust,[3] a separate investment which also involved mezzanine funding,[4] in the years between 2002 and 2005. The products failed and the investors have lost a large proportion of their funds with little likelihood of recovery from the liquidation of the Westpoint companies.
[1] T documents, T2, page 26, the order is dated 30 October 2008. It has effect from the date of service on the applicant (6 November 2008).
[2] This includes promissory and mezzanine notes and interests in Westpoint Corporation Pty Ltd.
[3] This includes interests in Kebbel Development Capital Fund No 2.
[4] Transcript, page 516.
2. The applicant was represented by Mr James Elliott SC and Mr David Bennett and the respondent by Mr Richard Knowles. The Tribunal has before it the documents filed for purposes of s 37 of the Administrative Appeals Tribunal Act 1975 (“T documents”) and various supplementary documents including a statement from the applicant with attachments,[5] documentation in the proceeding before the delegate, witness statements, exhibits tendered by the parties during the hearing and a report and extensive associated documents from Adjunct Professor Wesley McMaster, who was accepted as being an expert in the rules and practices connected with the giving of financial advice. Written and oral evidence was given in support of the respondent’s case by five of the applicant’s former clients (Messrs Herbert Lesser, Joseph Goodman, Bryan Samuels, Heinz Wolff, Ian McLeod and Mrs Betty Breitung) and a partner in the accounting firm which undertook business in conjunction with the applicant’s financial services business (Mr Robert Lissauer). Three character witnesses gave oral evidence in support of the applicant (Messrs Maxwell Davenport, Gabriel Carey and Andrew Havers) and Mr Darren Marx provided a written reference. Evidence was given by Mr Shaun Graham, from the licensee firm for whom the applicant now works, as to the supervision which could be offered should the Tribunal’s decision involve the applicant being placed on an Enforceable Undertaking (“EU”). Both parties also submitted written closing submissions.
[5] T documents, T4.
3. The legislative and regulatory provisions changed during the period of 2002-2005 so that the applicant’s conduct must be considered having regard to the pre and post changes made to the Act. Following the introduction of the Financial Services Reform Act 2002 (“the FSRA”) on 11 March 2002, a person carrying on a financial services business must have an Australian financial services licence.[6] However, a transition period of two years to 1 March 2004 was permitted. During the transition the pre-FRSA Corporations Act 2001 provisions continued to apply to those who had not brought themselves under the FSRA provisions.
[6] Section 911A of the Act.
Pre 1 March 2004 Applicable Corporations Act and Regulatory Provisions
4. Glenhurst Corporation Pty Ltd (“Glenhurst”) was required to have a dealers licence.[7] The licence was issued subject to conditions and prescriptions.[8] A licensee was responsible for representatives employed by it.[9] A representative must hold a proper authority from the licence holder.[10] Section 851 was replaced by s 945A of the current Act. Section 851, prior to the FSRA, was relevantly in the following terms:
[7] Section 780 of the Act, pre FSRA.
[8] Section 786(1)(a) of the Act, pre FSRA.
[9] Section 786(2)(f) of the Act, pre FSRA.
[10] Section 806 of the Act, pre FSRA.
(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.
5. Additionally, Policy Statement 122: Investment advisory services: the conduct of business rules (“PS 122”) was issued for guidance.
6. Part IV of PS 122 dealt with the s 851 obligations and clause 122.104 provided as follows:
ASIC considers that the following information would generally be needed when making a full needs analysis of a retail client …
(a)the client’s needs and objectives for income, capital growth, security, retirement income, liquidity, and the time period the client is planning for;
(b)the client’s personal financial circumstances such as liabilities and potential liabilities, nature of any assets held and any retirement benefits expected (including that of a partner, when relevant);
(c)the client’s individual investment preferences and aversion or tolerance to risk; and
(d)any other relevant client information such as employment security, family commitments and expected retirement age.
7. Clause 122.107 provided that securities advisers must take steps to warn clients who do not provide complete personal information of the limitation which may apply to investment recommendations.
8. Clause 122.108(b) notes the ability of a securities adviser to properly advise depends on “adequate product knowledge gained through reasonable investigations of the securities recommended.”
9. Clause 122.109 sets out that “adequate knowledge” is acquired through examination of annual reports, fund manager information releases, ascertainment of underlying investments and assets, and reports and analyses by specialists and advisers and by having some knowledge of comparable products.
10. Clause 122.110 provides if external research is to be relied on then reasonable steps should be taken to ensure it is reliable and adequate.
11. Clause 122.127 advises that a security adviser cannot satisfy the requirements of s 851 unless “adequate product research is conducted in light of the client’s investment objectives, financial situation and particular needs.”
Post 1 March 2004 Corporations Act and Regulatory Provisions
12. Section 911A requires a person who carries on a financial services business to hold an Australian financial services licence. There are a number of exceptions set out in s 911A(2), including a person who is a representative of licensee. ‘Representative’ is defined in s 910A as including an authorised representative and, in the case of the licensee being a company, a director of the company. In this case Glenhurst was the licensee and the applicant, being a director of that company at all material times, an authorised representative. Section 920A of the Act sets out the circumstances in which a discretion to make a banning order against a person arises. It is noted that the power to ban is discretionary. Section 920B provides that a banning order may be permanent or for a period, unless in the latter case the respondent has reason to believe that the person is not of good fame and character. It is not suggested in this case that the applicant is not of good fame and character. A banning order cannot be made unless the person against whom the order is proposed has been given the opportunity to appear and make submissions.[11]
[11] Section 920A(2) of the Act.
13. Section 766A(1) of the Act provides that a person provides a financial service if he/she provides financial product advice. It is undisputed that the applicant, in respect of the Westpoint products, provided financial product advice.[12] It is not disputed that the advice given by the applicant to clients nominated in Exhibit R7 was advice given to retail clients.[13] All of the applicant’s then clients who gave evidence in this case were retail clients.
[12] As defined in s 766B of the Act.
[13] As that term is defined in s 761G of the Act.
14. Section 945A(1) provides
The providing entity must only provide the advice to the client if:
(a)the providing entity:
(i)determines the relevant personal circumstances in relation to giving the advice; and
(ii)makes reasonable inquiries in relation to those personal circumstances; and
(b)having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances, and
(c)the advice is appropriate to the client, having regard to that consideration and investigation.
15. The respondent issued, on 26 June 2003, Policy Statement 175: Licensing: Financial product advisers – Conduct and disclosure (“PS 175”). PS 175 was updated on 23 September 2003[14] and replaced PS 122. Clause 175.71 provides that, among other things, advice must be given in a “clear, precise and effective manner.”
[14] Unless otherwise stated, the Tribunal will refer to PS 175 as updated on 23 September 2003. That version is used because it was in force at the relevant time.
16. Additionally, advice given must be “up-to-date as at the time it is given” (Clause 175.74). Clause 175.80 requires when giving advice to a retail client:
Under the “suitability” or “reasonable basis for advice” rule, where a providing entity provides personal advice to a retail client:
(a)the providing entity must make reasonable inquiries about the client’s relevant personal circumstances;
(b)the providing entity must give such consideration to, and conduct such investigation of, the subject matter of the advice as is reasonable in all the circumstances; and
(c)the advice must be “appropriate” for the client: s945A.
17. Clause 175.85 lists the following relevant factors when considering whether the requirements of s 945A(1)(a) of the Act have been met:
·potential impact of inappropriate advice on the client;
·complexity of the advice; and
·financial literacy of the client.
18. Clause 175.104 sets out inclusive requirements for ascertaining the clients’ personal circumstances where there is an investment component contained in the advice as follows:
(a)need for regular income (eg retirement income);
(b)need for capital growth;
(c)desire to minimise fees and costs;
(d)tolerance of the risk of capital loss, especially where this is a significant possibility if the advice is followed;
(e)tolerance of the risk that the advice (if followed) will not produce the expected benefits;
(f)existing investment portfolio;
(g)need to be able to readily cash-in the investment;
(h)capacity to service any loan provided in relation to a financial product; and
(i)tax position, social security entitlements, family commitments, employment security and expected retirement age.
19. It will be seen that there is little material difference for the purposes of this case between the pre and post FSRA provisions including the policy statements and regulatory guides. There was no issue made in the written or oral submissions of the parties that the different provisions would have a material effect on the outcome of this case. The Tribunal has proceeded to determine the case on that basis. Before proceeding with considering the evidence there was a matter raised on behalf of the applicant which should be addressed at the outset.
Preliminary Issue
20. On behalf of the applicant several criticisms were made concerning the standard of preparation of the respondent’s witness statements and the presentation of the case. Some criticisms were justified. Several examples were drawn to the Tribunal’s attention. The Tribunal will refer to two of them. In Mr Goodman’s written witness statement the witness quotes from correspondence written to him by the applicant. While at points he was equivocal as to how much of the written material sent to him by the applicant he had read, the Tribunal accepts that Mr Goodman stated that he rarely read anything provided to him in writing from the applicant. The impression generated by the reference to the quote in his statement was that the written material had been relied on by Mr Goodman in deciding whether or not to make the investment. The only conclusion that the Tribunal can reach is that the statement contains material which is not solely based on what the witness recalls, observed or relied on in making decisions at the time but that, in part, some at least of the information in the statement was prompted at the time of compilation.
21. Mr Samuels specifically referred to written advice he received from the applicant, dated 9 February 2005, without noticing a number of pages were missing from the copy which was presented as the copy to which he referred when preparing his first witness statement.[15] Mr Samuels’ witness statement contained references to material from the missing pages.[16] This may simply have been an administrative error in the compilation of the material but it could suggest that the statement was not prepared or even read by the witness. While the Tribunal does not draw that conclusion in the case of Mr Samuels’ statement it leaves it open for such a conclusion to be drawn.
[15] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 839, paragraph 5 and pages 853 to 863 which sets out the applicant’s letter of advice dated 9 February 2005 to Mr and Mrs Samuels where the following pages of the advice are missing: pages 2, 4, 5, 7, 9, 11, 14, 16, 18 and 20.
[16] For example, ASIC Delegate’s Brief, Folder 3 of 3, Tab 23, page 840, paragraph 9 refers to information contained on page 7 of the advice - a page which is not contained in the copy of the advice referred on which his statement is said to be based. The statement of advice including the missing pages is contained in Exhibit A18.
22. Clearly when preparing a witness statement there is no harm in contemporaneous written material being used to remind a witness of dates and/or details when the witness relied on that written material as part of his/her decision making process. However, it is another matter, and it is unsatisfactory, when that material is represented as constituting information on which the witness relied at the time of making a decision or undertaking action when, in fact, it was not used for that purpose. This and some other criticisms raised on behalf of the applicant are noted. It is a respondent’s duty to assist the Tribunal in undertaking administrative review of a decision. The Tribunal is not a court where a respondent may be intent on presenting a case in an adversarial manner. The Tribunal is not assisted by respondents preparing witness statements which, to put it in the least contentious manner, ‘gild the lily’. Consequences concerning the credibility of witnesses can follow such a course. However, having been brought to the Tribunal’s attention the criticisms have not, in this case, resulted in the Tribunal forming adverse opinions about the witnesses’ credibility, despite the witnesses’ assurances contained in the their statements and affirmed when giving their oral evidence that the statements had been carefully read and had been expressly approved by them.
Applicant’s Background
23. The applicant is aged 39 years and has been engaged in the financial services industry all of his working life. Between 1998 and November 2007 the applicant operated a financial planning business through Glenhurst, of which he was the sole director and 65% shareholder. Initially he was engaged as an insurance and superannuation adviser for a nationally operating life insurance company before gaining experience in a multi insurance agency over a two year period. He then held an interest in a franchised financial planning business, also for a nationally operating insurer, with four other directors. In the franchised business he specialised in corporate and small business superannuation, buy/sell agreement insurances and estate planning. After several years in that partnership the applicant established Glenhurst.
24. Since 1 March 2004 Glenhurst has held an Australian Financial Services Licence and prior to that from 7 June 2000 it held a Security Dealers Licence. The applicant was a representative[17] by both being authorised and in his capacity as being a director of Glenhurst. The applicant told the Tribunal that Glenhurst had been rated in the top 10 financial advisory practices in Australia – the only company to achieve that rating in two successive years.[18] Glenhurst went into administration on 14 December 2007 and subsequently into liquidation on 19 January 2008. The Tribunal accepts what Professor McMaster said he understood anecdotally, that Glenhurst operated as small scale licensee.[19] Glenhurst’s liquidation followed the failure of products on its Approved Product List (“APL”) associated with the Westpoint group of companies. Since November 2007 the applicant has worked as an authorised representative of Churchill Morgan Global (“CMG”), which is, in turn, a corporate authorised representative of IFA Securities.[20]
[17] Or proper authority holder.
[18] Transcript, page 368.
[19] Transcript, page 1080.
[20] T documents, T4, page 56, paragraph 6.
25. Like other financial services licensees, Glenhurst maintained an APL of financial products which its representatives were authorised to recommend to clients. The Glenhurst APL was determined by a committee of which the applicant was the Chairman. Professor McMaster outlined the research obligations of a licensee in determining whether a product ought be included on the an APL as follows:
(1)Due diligence on the manager of the financial product;
(2)Analysis of the PDS, prospectus or investment offer;
(3)Analysis of the assets, liabilities and investment methodology;
(4)Analysis of risks associated with the investment;
(5)Analysis of past performance (measurement of risk and return) versus objectives and relevant indices;
(6)Analysis of fees;
(7)Analysis of the effect of tax on net return; and
(8)Analysis of research on the product published by a research house.[21]
[21] Exhibit R20, paragraph 7.2.
26. On behalf of the applicant the following admissions were made at the outset of the hearing:
(a)the applicant accepts that he was mistaken in recommending Westpoint promissory notes to any clients regardless of their appetite for risk;[22] and
(b)the advice he gave clients in relation to the Westpoint promissory notes was inappropriate for the level of risk for each of his clients;[23] and
(c)79 or 80 clients made a total of 107 investments totalling $8,692,000 in Westpoint products (including in Kebbel Funds Management Ltd’s (“Kebbel”) Gilead Trust) based on his advice[24] and that a substantial amount of those funds have been lost (it was subsequently agreed between the parties that 48 clients made 80 initial investments totalling $6.696 million and 28 of those clients made rollover investments totalling $1.507 million);[25] and
(d)upon the collapse of Westpoint in December 2005 the applicant took remedial action by engaging an independent advisor to examine how Glenhurst’s procedures could be improved.[26]
[22] Transcript, page 4.
[23] Transcript, page 4.
[24] Transcript, page 5.
[25] Respondent’s closing submissions, filed 22 May 2009, paragraphs 2.1.3 to 2.1.5.
[26] T documents, T4, page 71, paragraphs 59 to 60.
The applicant’s admissions, outlined in (a) to (c) above, were amply demonstrated by the evidence.
27. The Tribunal accepts that upon the collapse of Westpoint that the applicant took remedial action by engaging an independent advisor to examine how Glenhurst’s procedures could be improved. The applicant also decided never to recommend any mezzanine investment products or products where no prospectus or disclosure statement had been issued.[27] The Tribunal also notes that a research policy was introduced which involved the completion of a product research form.[28] These measures did not save Glenhurst which was liquidated on 19 January 2008.
[27] T documents, T4, page 71, paragraph 59.
[28] T documents, T4, page 71, paragraph 60 and CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 10.
28. It was maintained that the advice given by the applicant to his clients concerning Westpoint products did not involve dishonesty, impropriety (for example in an attempt to ‘churn’ investments or in other ways to secure high fees) or an intention to engage in misconduct but arose through a lack of understanding of the product and/or the risks involved. It is perhaps debateable whether in approving a financial product for inclusion on Glenhurst’s APL and recommending it to clients, which he did not understand, amounts to ‘impropriety’ but, in view of the admissions made, there is little to be gained by arguing over semantics.
Submissions On Enforceable Undertaking And Banning Order
29. On behalf of the applicant an EU is sought rather than a banning order.[29] Alternatively, if a banning order is to be maintained then it is submitted on behalf of the applicant that the time of the ban ought to be reduced below 10 years. Regulatory Guide 100: Enforceable undertakings (“RG 100”) issued in March 2007 (as amended in February 2008) assists in consideration of whether to impose an EU. RG 100 is not binding on the Tribunal. Clause 2.8 lists the four critical considerations, to be taken into account where the respondent has first determined that an EU is a more effective regulatory outcome than other possible courses of action, as:
(a)the position of consumers and investors whose interests have been or may be harmed by the suspected conduct;
(b)the effect on the regulated person’s future conduct;
(c)the effect on the regulated population as a whole; and
(d)the community benefit in regulatory outcomes being achieved as quickly and cost-effectively as possible.
[29] Section 93AA of the Australian Securities and Investments Act 2001 empowers the respondent to accept a written undertaking given by a person in connection with a matter in respect of which the respondent has a function under the Act.
30. Clause 2.10 refers to the following non exhaustive list of factors which will be considered by the respondent:
(a)Is the person prepared to publicly acknowledge ASIC’s concerns about the conduct and the necessity for protective or corrective action?
(b)Was the misconduct that ASIC considers to be a breach inadvertent?
(c)Was the conduct that ASIC considers to be a breach a result of the conduct of one or more individual officers or employees of the company?
(d)What was the seniority and level of experience of the individual(s) involved in the breach?
(e)Has the person co-operated with ASIC, including providing us with complete information about the underlying breaches and any remedial efforts?
(f)Will it achieve an effective outcome for those who have been adversely affected by the conduct or compliance failure?
(g)Is the person likely to comply with the enforceable undertaking?
(h)Has the person been the subject of complaints or previous ASIC enforcement action?
(i)What are the prospects for a speedy resolution of the matter?
31. While in clause 2.14 the respondent states it will not generally accept an EU once proceedings before a delegate have been commenced for possible disqualification or suspension, which the Tribunal accepts includes banning, this clearly cannot be a disqualifying factor in the Tribunal’s consideration of whether to impose an EU.
32. The respondent maintains that the banning order ought to be affirmed having regard to the nature and seriousness of the applicant’s past Westpoint related breaches and also to the length of time during which his conduct extended. The respondent also submitted that the evidence revealed that the applicant did not keep complete records with respect to a specified incident[30] and that his conduct with respect to the Westpoint products involved him in engaging in misleading conduct. The failure to produce a document, or even several documents, relating to transactions undertaken years ago is perhaps hardly surprising. Documents even in the most efficiently operated offices can be misplaced and/or misfiled. The evidence on the applicant’s failure to produce documentation asked of him is such that the Tribunal is unable to safely conclude it amounts to a breach, rather the conclusion is that the loss is attributable to inadvertence.
[30] Contrary the requirement in s 946B(9) of the Act.
33. While the applicant’s conduct in respect of the Westpoint products may constitute ‘misleading conduct’ contrary to the provisions of s 1041H(1) of the Act, the Tribunal has approached considering his breaches in terms of s 945A of the Act as, in essence, also covering any such breaches. It would be unfair and unreasonable to proceed on the basis that the same facts constituted multiple breaches of the Act and that the applicant’s conduct should be considered separately, when determining what administrative penalty, if any, should be imposed to protect the public. Even if the facts differed this was not the main issue agitated before the Tribunal and, in comparison with what was agitated, even if successful, it would not make any difference to the determination reached by the Tribunal.
Consideration Of The Evidence
34. It is convenient, as a first step, to consider the process which Glenhurst had in place to assess which products should be placed on the APL. The applicant told the Tribunal that Glenhurst selected products only after completing a due diligence process. In order to be considered for due diligence in the first place a product had to meet two criteria:
(a)the product must have favourable attributes, including a reliable management philosophy and proven past performance; and
(b)independent research must highlight positive feedback in relation to the product.[31]
[31] T documents, T4, pages 57 to 58, paragraph 12.
35. Having passed these initial two criteria the following due diligence process was to be applied:
(a)all available information relating to the product was obtained and read thoroughly by either the Glenhurst technical and compliance manager or the Glenhurst research analyst. Information was to be obtained concerning the product type, the size of the company, the experience of the managers, the risks involved and the way the risks were to be managed; and
(b)once that information was prepared the investment committee determined whether the product would be approved or rejected, or whether further information may be required.[32]
[32] T documents, T4, pages 58, paragraph 13.
36. Additionally, Glenhurst had in place a detailed ‘Compliance Procedures Manual’ dated 18 December 2002 which, among other things, set out the standard requirements of financial advisers including the need to accurately establish the client’s risk tolerance according to their specific needs. However, the manual was primarily prepared for the guidance of representatives and highlighted their responsibilities to Glenhurst.[33]
[33] Exhibit A4.
37. The applicant’s admission that he did not properly understand the nature of the Westpoint products or the risks involved for his clients to invest in those products leaves the Tribunal satisfied that Glenhurst’s due diligence processes failed in essential important respects. The first is if the Chairman of the committee, who determines the products to be listed, does not understand the nature of the product then the representatives, who are responsible for advising clients to invest in the product, are placed in a position where they are advising clients to purchase a product where the associated risks have not properly been assessed by the licensee. While there is a responsibility on the representative to understand a product and to undertake research, the prime responsibility rests with the licensee which recommends the product to its representatives by placing it on the APL. The applicant’s conduct as both a representative and as the Chairman of the committee which determined the APL falls for consideration in this case.
38. While considerable time was taken in cross examination of the applicant to demonstrate his lack of understanding of aspects of the Westpoint products he recommended to his clients, the Tribunal, in view of the applicant’s admissions, has not found it necessary to detail each one. It is, however, necessary to give a general overview of the Westpoint operation and approach.
39. The Westpoint group of companies, based in Perth, was primarily involved in undertaking large Australian based inner city building projects, consisting of a combination of retail and residential units. A separate propriety limited company was incorporated to undertake each particular development. The development would be financed by a principal backer, usually a bank, which would take a first mortgage over the property, and additional secondary funding would be secured through mezzanine lending provided by individual investors. Professor McMaster described the characteristics of mezzanine finance in the following terms:
Mezzanine Finance is a generic term used to describe an investment, usually in a property development, that provides the secondary tier of financing to the developer, usually secured by a second mortgage and/or a charge over the assets of the developer. This level of security was always likely to be of little value in a situation where the primary lender would hold a first mortgage and where the Mezzanine charge over the assets of the developer was also subordinate to the charge of the primary lender. The fact that the company was lending money to developers where the primary lenders had already lent to the level that they judged was prudent relative to the risk profile of the project is a strong indicator that investing in mezzanine finance is high risk.[34]
[34] Exhibit R20, pages 9 to 10, paragraph 5.1.2.
40. It was accepted that the Westpoint associated companies raised over $300 million in mezzanine finance in the years 2002 to 2005.[35] The applicant recommended the following mezzanine products:
[35] Transcript, page 1084.
(a)Bayshore: invested in by clients from August to September 2002 and then from July to September 2005;
(b)York Street: invested in by clients in November 2002 and then June to July 2004;
(c)Market Street: invested in by clients from February to June 2003;
(d)Ann Street: invested in by clients from May 2003 to April 2005;
(e)Bayview: invested in by clients from August 2003 to February 2004;
(f)North Sydney: invested in by clients from December 2004 to September 2005;
(g)Market Street No. 2: invested in by one client in January 2005;
(h)Mount Street: invested in by one client in January 2005; and
(i)Gilead Trust: invested in by clients from April to June 2005.
41. The mezzanine holders initially were to hold a first mortgage securing the purchase price of the property and pre-construction costs. The first mortgage would then, by some unexplained means, convert to a second mortgage when a principal lender had been attracted.[36] There were some variations, for example, in respect of the Mount Street project, the mezzanine investors were offered a third ranking fixed and floating charge rather than a second mortgage.[37]
[36] CWCC’s Submissions to ASIC, Folder 2 of 3,Tab 3, page 14.
[37] ASIC Delegate’s Brief, Folder 1 of 3, Tab 13, page 164. In the Vantage Analysis Research Paper the mezzanine investors are informed that they would hold a second mortgage: CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 3, page 22.
42. The principal lender would thereafter ‘drip feed’ the construction, maintaining a 65% loan to value ratio – the latter being said to reduce the risk to the mezzanine investors. The applicant seemed uncertain stating that the ‘drip feed’ for construction costs was coming from the mezzanine investors,[38] saying later that it came from both the senior financier and the mezzanine investors.[39] He understood that senior debt had not been arranged at the time mezzanine investment was being sought[40] but did not appreciate how that may result in an adverse outcome for the mezzanine investors, that is, depending on the amount provided by, and the terms of, the first mortgage. In all, six of the Westpoint projects did not have senior finance arranged at the time mezzanine funding was being raised.[41]
[38] Transcript, page 286.
[39] Transcript, page 287.
[40] Transcript, page 300.
[41] Market Street, Bayview, Ann Street, Market Street No 2, Mount Street and North Sydney.
43. The secondary finance was to be secured through the issue of mezzanine notes by the promoter, rather than the issue of a prospectus.[42] It was thought unnecessary by the promoters to issue a prospectus for investors providing the mezzanine finance because of the nature of the capital raising involved. This transpired to be mistaken as decided in Australian Securities & Investments Commission v Emu Brewery Mezzanine Ltd[43] where the Court held that the Westpoint schemes were managed investments for the purposes of s 9 and Chapter 5C of the Act. The applicant was unaware of the court’s findings in 2005[44] and stated that he thought the outcome had been in Westpoint’s favour.[45] The mezzanine investor was informed of the terms of the proposed investment through the issue of one or more information memoranda (“IM”). With respect to some developments there were several IMs prepared, for example, in the case of the Bayshore project, Professor McMaster discovered five IMs[46] but not all were necessarily issued by the promoter. However, for some projects more than one IM was issued. Where additional IMs were issued, the object was to bring investors up to date with the progress of the project and to notify any changes which may be proposed with respect to the development (for example, with respect to Bayshore the number of units increased from 294 as advised in the 2002 IM to 307 as advised in 2005). It appears that Glenhurst had only one IM for each product and that it continued to use it without seeking any updated IMs. A lack of up to date information may expose the investor to potential increased risk, something which would be a concern to prudent licensees and advisers.[47] The Tribunal does not accept it as being a sufficient discharge of the applicant’s responsibilities that any updates received were provided orally by the promoters and is satisfied that care was not exercised to obtain up to date IMs where these were available.
[42] This happened in all cases considered by the Tribunal except for the North Sydney development where a prospectus was also issued. It is also noted that the North Sydney project did not involve the offer of a guarantee.
[43] (2004) 187 FLR 270 per Symonds J.
[44] Transcript, pages 318 to 319.
[45] T documents, T4, page 65, paragraph 33(1).
[46] Exhibit R20, page 9, paragraph 5.1.1.
[47] Exhibit R20, page 9, paragraph 5.1.1.
44. A guarantee was said to be offered as part of the security to mezzanine investors. There seemed some confusion over whether the guarantee was to cover both capital and interest or capital alone. In the end this does not matter because what was guaranteed was the liability of the company undertaking the project. While the applicant appreciated that individual investors did not receive guarantees he thought that their investments were guaranteed. The applicant did not, nor did any of the Glenhurst researchers, request or receive a copy of the guarantee and so could not properly check its terms. Professor McMaster outlined the due diligence steps a licensee should take with respect to guarantees as:
(a)check the existence of the guarantee; and
(b)check the audited financial statements of the guarantor to ensure that there were sufficient funds to meet the guarantee if it is called upon.[48]
[48] Transcript, page 1081 and Exhibit R20, page 11, paragraph 5.1.8.
These checks were not made.
45. Notes, sent to mezzanine investors acknowledging their investment, were said not to be transferable. However, where financing between vendors and new incoming investors could be matched, transfers occurred. The purchase of the notes was promoted through, among others, financial planners and accountants to their clients. The financial planners received a commission of 5% or 5½% paid by the promoter. Interest was to be paid to the noteholders annually at the rate of 12%. Most often the investments were accompanied by the promise of a once off 2% bonus to be paid on the successful conclusion of the development.
46. A further product offered in 2004 to some Glenhurst clients, including Mr and Mrs Goodman, who invested a total of $70,000 in two amounts,[49] was the Gilead Trust, which was a managed investment scheme promoted by an entity related[50] to Westpoint vis Kebbel. Richard Beck was a director of Kebbel as well as Westpoint Management. Kebbel directors, including Mr Beck and Mr Burnard, participated in the promotion of Westpoint products along with Mr Norm Carey, the Managing Director of Westpoint.[51] Gilead Trust was established to invest in the development of aged care facilities utilising mezzanine financing in a manner similar to that used in the Westpoint products. The product was promoted through a product disclosure statement (“PDS”). The project sought to raise $15 million (or more) and the PDS revealed that part of the money raised was to be used to refinance existing debt.[52] The initial investment period was two years (although the time for the full development on the proposed site was seven to 10 years[53]). Investors were to be paid at 12% interest annually and a further but not guaranteed benefit of 20% of the capital was to be paid if the project was profitable.[54] A guarantee was to be given to investors by the parent company supported by a guarantee from one of the directors.
[49] ASIC Delegate’s Brief, Folder 2 of 3, Tab 20, pages 402 to 403, paragraph 18 and Transcript, page 516.
[50] Used in this context in its ordinary meaning not in the defined way as set out in s 9 of the Act.
[51] CWCC’s Submissions to ASIC, Folder 2 of 3,Tabs 5 to 8 inclusive.
[52] ASIC Delegate’s Brief, Folder 3 of 3, Tab 35, page 1436.
[53] ASIC Delegate’s Brief, Folder 3 of 3, Tab 35, page 1440.
[54] ASIC Delegate’s Brief, Folder 3 of 3, Tab 35, page 1436 and Transcript, pages 521 to 522.
47. The applicant admitted that he did not know the details surrounding the Gilead Trust debt which was to be refinanced.[55] He also agreed that he had advised Mr and Mrs Goodman that only their investment would be secured by a mortgage, not mentioning that the mortgage was subject to a first mortgage to secure the principal financier’s interest.[56] The applicant also conceded that his written advice to the Goodmans did not contain any comment on risk – although he thought that may have been addressed in a pamphlet provided by the promoters.[57] As with the Westpoint products the applicant did not request or obtain a copy of the guarantee[58] and was unaware of which company was the ‘parent company’ which was promoted as giving a guarantee. Professor McMaster concluded that the Gilead Trust represented a high risk investment, that Glenhurst had not obtained an independent expert opinion on the viability of the project,[59] that no due diligence had been carried out in respect of Kebbel (the promoter) or the Gilead Trust, and that the PDS had not included information in the IM that was essential to evaluate the product.[60]
[55] Transcript, pages 519 to 520.
[56] ASIC Delegate’s Brief, Folder 2 of 3, Tab 20, page 557. The Tribunal notes that the disclosure statement mentions the subordinated nature of the mezzanine investors security (ASIC Delegate’s Brief, Folder 3 of 3, Tab 35, page 1436) but notes that there was some uncertainty as when this was provided to the Goodmans at the same time as the letter from the applicant: Transcript, page 517.
[57] Transcript, page 524.
[58] Transcript, page 526.
[59] Something which the Professor noted was common in respect of such development projects.
[60] Exhibit R20, page 31, paragraphs 5.10.4 to 5.10.6.
48. Westpoint also introduced a product described as the Westpoint Income Fund (“the Fund”). It was proposed the Fund would use pooled funds for investment in some of Westpoint’s future developments. While the applicant recommended this product to several of his clients, including Mr Lesser, no investments were made because the Westpoint group collapsed before the product came onto the market.[61]
[61] Transcript, page 530.
49. The applicant was introduced to the Westpoint products after Mr Rory Deutsch, Glenhurst’s compliance and technical manager, attended a presentation arranged by a firm located next to the building occupied by Glenhurst. Mr Deutsch was enthusiastic about the product and brought it to the applicant’s attention.[62] A presentation occurred in Glenhurst’s boardroom and was attended by members of a firm of accountants trading as SLA Partners Pty Ltd (“SLA”) (subsequently Sothertons) and by Mr Mark Norton of Norton Capital. Mr John Christopoulos and Messrs David and Robert Lissauer were partners of SLA. SLA and an office of Norton Capital were located in the same building as Glenhurst. The Tribunal is satisfied that SLA and Glenhurst had a working relationship and shared some common clients including Mr and Mrs Goodman,[63] Mrs Breitung,[64] and Mr Lesser.[65] Mr Lesser, in particular, relied on Mr Christopolous’ involvement and advice when considering the making of his investments.[66] The Tribunal noted that the applicant maintained that copies of all letters of advice sent to clients introduced by SLA were also sent to SLA.[67] It is also noted that Mr Robert Lissauer maintained that SLA undertook accounting functions and did not give financial advice, and that that was why the arrangement described in the next paragraph with Glenhurst was entered into.[68]
[62] Transcript, page 106.
[63] Mr and Mrs Goodman were introduced to the applicant by Mr David Lissauer: see ASIC Delegate’s Brief, Folder 2 of 3, Tab 20, page 397, paragraph 4 and Transcript, page 23.
[64] Mrs Breitung was introduced to the applicant by Mr David Lissauer: see ASIC Delegate’s Brief, Folder 3 of 3, Tab 24, page 1057, paragraph 4 and Transcript, page 22.
[65] Mr Lesser was introduced by Mr John Christopolous: see ASIC Delegate’s Brief, Folder 2 of 3, Tab 22, page 723, paragraph 5 and Transcript, page 22.
[66] Transcript, page 726.
[67] Exhibit A1, page 36, paragraph 123(a).
[68] Exhibit R19, page 3, page 3, paragraph 9.
50. There was a written agreement between Glenhurst and a company controlled by SLA[69] whereby Glenhurst was to pay SLA 35% of commissions earned from investments made by clients recommended to it by SLA. Mr Robert Lissauer estimated that approximately $100,000 per year was paid by Glenhurst to SLA as the result of the arrangement.[70] The applicant stated that after the collapse of Westpoint the relationship soured and he asserted that it was in the interests of SLA to see him banned by ASIC in order to recommend his clients to another financial planner with whom they had a commission agreement.[71] SLA terminated the agreement with Glenhurst in 2007. It is not a matter for concern in this hearing that SLA may have been paid a commission by Glenhurst and whether or not that commission or the relationship between Glenhurst and SLA was disclosed to its clients, for example, whether Mr Christopolous advised Mr Lesser that SLA was or was not receiving part of the commission as the result of recommending that Mr Lesser proceed with investing in Westpoint products.[72] Those matters do not reflect on the applicant in his dealings with mutual clients of the two firms.
[69] The applicant maintained the agreement was dated 1998: T documents, T4, page 65, paragraphs 34 to 36. However, Mr Robert Lissauer maintained the referral arrangement commenced in 2002 and he exhibited a written agreement dated 28 January 2005 to his witness statement: Exhibit R19, page 2, paragraphs 5 to 6.
[70] Exhibit R19, page 2, paragraph 7.
[71] T documents, T4, page 67, paragraph 42.
[72] Transcript, page 790.
51. In affidavit evidence to the delegate the applicant maintained that the abovementioned due diligence criteria were applied to the Westpoint products[73] although he conceded that this may not have been so in the case of every such product.[74] There being no history of mismanagement or project failures on behalf of Westpoint products over the period of approximately 20 years preceding 2001 and because of the potential success of the developments arising from their locations, the products passed the first stage of the due diligence criteria. The applicant confirmed that neither Glenhurst’s technical and compliance manager nor the research analyst undertook any independent research with respect to the Westpoint products prior to the committee considering them for entry onto the APL. In addition to the information provided in the IMs the applicant maintained, as an additional security measure, at least initially he would not recommend Westpoint products unless and until the presales had reached at least 60%. The aim was to ensure that presales were sufficient to cover the principal and mezzanine debt subject to the construction being completed.[75] This, however, may have been the intention at the outset, but as time passed the applicant and Glenhurst became too comfortable with the promoters’ oral assurances and they failed to adhere to the standards of due diligence which they had set for themselves.
[73] T documents, T4, page 57, paragraph 9.
[74] T documents, T4, page 60, paragraph 22.
[75] T documents, T4, page 61, paragraph 25.
52. Professor McMaster refers to published research into the Westpoint products as being carried out by Norton Capital in February 2003 in respect of the Market Street product.[76] The applicant conceded that he was aware that Norton Capital was also being paid a fee to promote Westpoint products.[77] Curiously, the potential conflict of interest between undertaking research into the product and the sale of that product did not apparently present any concerns to Glenhurst’s due diligence process. Professor McMaster queried the conclusion contained in the Norton Capital report that the Market Street project offered an “acceptable level of risk”[78] to mezzanine investors stating that a reading of the IM would have led an experienced financial adviser to conclude that there was insufficient information provided to make it a “credible” report to a reasonably competent adviser.[79]
[76] T documents, T4, page 60, paragraphs 20(2) and 23(5) and CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 2.
[77] Transcript, page 108.
[78] CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 2, page 5.
[79] Exhibit R20, page 34, paragraph 7.4.3.
53. A report prepared by another researcher, Vantage Analysis, in September 2003[80] was also criticised by the Professor as not being independent and as not providing information about the financial position of the Westpoint companies. The Tribunal notes that the report concerns Westpoint products generally, without specific mention of any one product, and that it specifically states on the front page that the information relied on in the research has been provided by the promoter and that the information has not been audited or verified by the researcher.[81] The Professor considered it was common practice to obtain research information which was paid for by the promoter provided that the research was carried out by a researcher recognised by the industry as being independent. In his oral evidence the Professor stated that while he regarded Property Investment Research (“PIR”) as independent, he did not regard either Vantage Analysis or Norton Capital as independent research houses.[82] The Professor conceded that if the applicant was permitted a licence to be a financial adviser, as distinct from a licensee, he would be entitled to rely on research information provided by the licensee.[83]
[80] CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 3.
[81] CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 3.
[82] Transcript, page 1108.
[83] Transcript, page 1096.
54. In addition to the research noted by Professor McMaster in his report the Tribunal notes that there was further research published in August 2005 by PIR. The research was paid for by the promoter but PIR was not involved in the selling or promotion of the product.[84] PIR rated the Westpoint products as having three stars out of a possible five star rating. However, PIR expressly stated that it relied on the factual information provided by the promoter as being accurate.[85] It is reasonable to assume as in the case of the Vantage research that PIR did not undertake any checking of the factual information provided by Westpoint. The reservation published in the material produced by Vantage and PIR ought to have been a matter which a reasonably prudent licensee may have considered prior to recommending a product. Aside from obtaining a copy of the audited financial reports of Westpoint, the applicant did not apparently appreciate that the researchers were not regarded as independent (other than PIR). Sometimes recommendations were made for Westpoint products without any independent research being obtained.[86] He did not read the qualifications in the reports which ought to have led to him seeking, at least, further written confirmation from the promoter, or led him to research the material further. Additionally, he did not appreciate the potential for conflict in Norton Capital researching as well as promoting the product. These are all matters of concern as to his suitability to hold a licence and in his capacity as a representative to recommend the product to his clients.
[84] CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 4, page 51.
[85] CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 4, pages 38 and 50.
[86] For example, the York Street project: Transcript, page 398 and the North Sydney project: Transcript, page 506.
55. Additionally, the Professor noted that the research which was available to the applicant was undertaken in 2003, excluding the general but qualified report from PIR, but the recommendation of clients to invest in some of the products continued until 2005[87] by which time the research was out of date. There was no attempt by the applicant to request a written update from the promoter or undertake up to date research for particular Westpoint products offered. The Tribunal also notes that the first approval by the Glenhurst APL committee was preceded by the product promoter (either Mr Beck from Kebbel or Mr Norton, the principal of Norton Capital[88]) explaining and promoting the product. Additionally, there were approximately monthly meetings between Mr Burnard and the applicant.[89] The applicant placed considerable reliance on the oral information provided by the promoters[90] without undertaking any follow up checking to ensure that the information provided was accurate. All of this confirms an over reliance by Glenhurst and the applicant in accepting oral assurances and sales promotion material as providing adequate information about the products for recommendation to Glenhurst’s clients. As stated earlier the applicant accepted that over time oral assurances were more and more relied upon as constituting the source of information about the Westpoint products. This, as the applicant recognised, was clearly an unsatisfactory approach to take to due diligence assessment. For example, in his admission that had he been aware of the “correct position” relating to the level of security offered he would never have recommended the product to his clients.[91]
[87] For example, Mr Goodman was being advised to invest in Market Street No 2 in November 2004 and January 2005.
[88] Transcript, page 109.
[89] Transcript, page 680.
[90] T documents, T4, page 62, paragraphs 27 and 28 and Transcript, pages 111 and 112. It was the applicant’s evidence that Mr Beck also gave oral assurances concerning the volume of pre sales of units: Transcript, page 114.
[91] T documents, T4, page 63, paragraph 29.
56. The applicant said on the basis of the Glenhurst due diligence criteria being satisfied, the Bayshore product was accepted for inclusion on the APL in August 2002. No minutes of the meetings of the investment committee and no record of any report(s) considered or of the issues discussed by the committee in deciding whether or not to accept or reject any products, including Westpoint products, were made. Therefore, in apparent contradiction of what is contemplated by its policy, there is no record of the proceedings of the committee. In respect of those Westpoint products which may have been scrutinised by the relevant Glenhurst due diligence officers, it could not be said that there was a ‘thorough’ reading. What reading was undertaken must have been at best cursory, because issues which could be expected to have been uncovered by a careful reading were not uncovered and brought to the applicant’s notice. The evidence of the applicant confirmed, with respect to Westpoint products, that the due diligence assessment over time became cursory at best and non existent at worst.
57. There was evidence concerning the interest rate paid to Westpoint investors, that is, whether it was exceptionally high or not. Clearly the higher the interest rate the greater the risk. Setting aside the added inducement of the 2% at the successful completion of the development, a 12% per annum interest was reasonably high but not so high, compared to the rate which could be achieved in the marketplace between 2002 and 2005, that an investor would be likely to consider it as being excessively high. Certainly Mr Goodman did not think it a high return compared to other market investments[92] and Mr McLeod stated it “seemed good to me but not exceptional.”[93] The applicant appreciated the higher interest rate was an indication of higher risk.[94] While the applicant said he regarded the rate as high he maintained it was in line with other similar investments available at the time.[95] The evidence is such that the Tribunal is unable to determine that the interest rate offered by Westpoint to mezzanine investors is so far out of the ordinary for the time that it was indicative of an exceptionally high risk investment.
[92] Transcript, page 865.
[93] Exhibit R16, page 4, paragraph 10.
[94] Transcript, page 330 and 331.
[95] Transcript, page 330.
58. What Mr Knowles sought to establish from the evidence was the extent to which the applicant failed to understand the product or the descriptions contained in the documentation relied upon to promote the product and the nature, and hence the value, of the guarantee and securities offered. It was claimed that these failures resulted in a consequent lack of satisfactory advice provided to the applicant’s clients, that is, clients were not placed in a position where they could make an informed choice, in particular an informed choice about the associated risks when investing in Westpoint products.
59. Aside from other risks associated with the products it was also asserted that the applicant did not properly assess the level of risk prepared to be taken by his clients in investing. Before discussing the evidence of the applicant’s clients, reference should be made to the evidence proffered by Professor McMaster. The Professor pointed out that risk profiling was a general categorisation and did not take account of the unique requirements of individuals. Different people determine what amounts that they are prepared to risk in investing in different ways. Some more astute investors will be specific about the risks that they are prepared to take and they will be more discerning in choosing risks. Others, the Professor said, will be more return oriented and have less regard for risk. This was reflected in the evidence. For example, Mr Lesser felt comfortable with investments in land and buildings but not in the share market, which he regarded as too risky. Other witnesses acknowledged risk in any form of investing but felt comfortable with what they described as ‘blue chip’ investments.[96] The importance different investors attribute to different forms of investment accounts for the requirement that financial advisers carefully determine the level of risk for each individual they advise. It is conceded that the applicant did not properly assess the risk factors for the clients to whom he recommended investment in Westpoint products. The Tribunal is satisfied, as is the applicant in hindsight, that this occurred because the applicant did not appreciate the risks involved in investing in the Westpoint products, rather than it arising from a lack of care in examination of his client’s financial and other circumstances.
[96] For example, Mr Goodman.
60. Aside from issues associated with the extent of cover (if any) the guarantees gave to mezzanine investors, the applicant accepts that he did not properly assess the value of the guarantees. He did not sufficiently take into account that many guarantees were in operation at the one time, which in total exceeded the liquid net asset position of the guarantors. The applicant stated that he would never have anticipated that all of the guarantees would have been called upon at the one time. In his standard written advices to clients he stated that the guarantees were only worth as much as the company giving the guarantee. This is a self evident motherhood statement which serves only to state the obvious. It does not present any assessment of the net value of the guarantee. There was an assessment made by the applicant that it would be unlikely that all of the guarantees would be called upon at the one time. This was not conveyed to his clients so they may at least have some opportunity for themselves to determine whether they wanted to proceed on that basis.
61. Guarantees are provided to mitigate risk. Risk is not mitigated if the guarantor does not have sufficient net assets to meet the specific guarantee called upon. Professor McMaster pointed out that the total assets in Westpoint related companies were, in round figures, $18.5 million in 2003 and $22 million in 2004 as against contingent liabilities and related party loans of $190 million in 2003 and $354 million in 2004.[97] The applicant pointed out that the value of the properties increased as the building progressed. He maintained that the value to be ascribed to pre sales would make it difficult to determine the value at any one time of the guarantee. The value of the guarantee does not depend on these factors which relate to the value of the project. The value of the guarantee is independent of the project value and is based on a worst case scenario of the project failing. It is reasonable to conclude, and the Tribunal is satisfied that, as the Professor found, the guarantees could not be relied on and that the mezzanine investors were directly exposed to the property development risks. It is clear from the accepted fact that investors did not apparently recover any of the value of their investment when the Westpoint group failed in 2005 from the guarantee, that the guarantees were not an effective form of security.
[97] Exhibit R20, page 11, paragraph 5.1.8.
62. In addition to the high level of risk associated with the lack of worth attaching to the guarantees there were a number of other risk factors not properly addressed by the applicant when advising his clients. There was no investigation of the terms attaching to the pre sale of units and no contracts were ever examined. A telephone call to the promoter’s solicitors confirming that the pre sale contracts they prepared were “watertight”[98] does not disclose the terms of those contracts. Several IMs were issued in relation to some of the products but Glenhurst saw only one IM per product and did not appreciate the significance of past or future issues. The applicant relied upon the word of Mr Beck and Mr Burnard from Kebbel and did not request confirmatory documentation of what he was assured orally, before passing those assurances onto his clients. He conceded that in the end he was relying solely on what information the promoter was orally providing without any attempt to confirm or otherwise cross check what he was being told. All of these matters are of concern and indicate a lack of professional care in assessing the risk to which he was exposing his clients in advising them to invest in the Westpoint products.
[98] Transcript, page 125.
63. It is evident, from what all of the applicant’s former clients said about their relationship to the applicant, that a high degree of trust in the applicant’s advice was involved. This is exhibited in the clients’ ready acceptance of the applicant’s investment recommendations, without themselves taking the trouble to examine the product details. Their trust in his recommendations, as witnesses observed, was why they consulted him. They trusted that he knew what he was doing. Clearly, and as the legislation contemplates by its protective provisions, there is a high degree of care required when recommending investments on behalf of other individuals. However, the Tribunal takes into account, that exercising care is not a one way street. It is strange that not any of the investors who gave evidence to the Tribunal took the trouble to read material presented by the applicant to them or, as in the case of Mr Samuels, it was scanned or, in the case of Mr Lesser, that he may have “glanced over” a letter sent by the applicant,[99] and that no clarification was asked for those parts which were not understood. Yet all of the witnesses described themselves as being ‘conservative investors’. Of the applicant’s former clients from whom the Tribunal heard, only Mr Lesser[100] queried the risk assessment made of them. However, even Mr Lesser accepted, in respect of the two investments made in the Heine Prime Property Syndicate Fund No 3 (“Heine”) on the recommendation of the applicant, what was described as an “entrepreneurial”[101] investment (the categories listed on the document were: quit, aggressive, entrepreneurial, moderate and conservative). Mr Lesser explained because it was an investment in property, while others may have regarded it as entrepreneurial, he regarded it as conservative.[102] The applicant’s clients took what appears to be laisse-faire approach and that extended even to those otherwise experienced in undertaking financial transactions. Mr Goodman described it as a lifestyle decision that he trusted his financial adviser and would take the advice tendered without reading any of the material forwarded which explained the product and the risks associated. It is difficult to conceive that Messrs Lesser and Goodman, who are obviously successful businessmen, would approach investing substantial funds in such a casual manner. The evidence from those of the applicant’s clients who were called to the Tribunal is discussed later in these reasons.
[99] Transcript, page 768.
[100] ASIC Delegate’s brief, Folder 2 of 3, Tab 22, page 723, paragraph 7.
[101] CWCC’s Submissions to ASIC, Folder 1 of 3, Tab 2, pages 12 and 19.
[102] Transcript, pages 782 and 793.
64. The applicant stated that commissions received for the sale of Westpoint investments were generally 5%, exclusive of GST. The initial commission may have been lower for the North Sydney project and 2% to 3% for rollovers of funds (possibly with a 1% additional marketing allowance for the Market Street project[103]). There were no asset (trailing) commissions involved.[104] The applicant agreed that he regarded the commissions paid as being at the higher end of commissions paid for fixed interest loans.[105] Professor McMaster could find no empirical evidence to support what commission rates were being paid for mezzanine finance projects in the years 2002 to 2005. He stated, in his report, that he thought a commission of 5% to 5.5%, which he understood was the range paid by Westpoint, was “high.”[106] His assessment was based on his experience and of the anecdotal evidence relating to the general rate of payment of commissions.[107] There is no evidence of the applicant being provided with a commission rate which exceeds that paid to other financial planners for recommending Westpoint products or that he embarked on a course of conduct involving excessive rolling over of clients’ money into Westpoint products in order to secure a higher amount of commission. While there may be a few instances where fees were not disclosed in written advices sent to his clients, the Tribunal is satisfied that this arose through inadvertence and not through any desire to hide information as the fees being paid to financial advisers by Westpoint for attracting mezzanine investors. Additionally, if the fees were at the high end of the scale there is no evidence to support a conclusion that they were so high as to be exceptional and/or raise doubts as to the efficacy of financial planners recommending the product to investors. Further, there is no evidence to suggest that the applicant was recommending the product to the exclusion of other available products so as to secure the payment of a higher commission.
[103] Exhibit R13 and Transcript, page 176.
[104] Transcript, page 1088
[105] Transcript, page 176.
[106] Exhibit R20, page 10, paragraph 5.1.4.
[107] Transcript, page 1087.
The Applicant Participating In Licensee Decisions
65. The Tribunal has examined and commented upon the guarantees and the unlikelihood of them providing any, or any substantive, security for the mezzanine investors. There are a number of other instances where the applicant and Glenhurst did not meet the standards which may be expected of a prudent licensee in particular when assessing a product for inclusion on the APL. Some of these have been addressed earlier in these reasons and include:
(a)a failure to examine any of the presales contracts to understand their terms, or undertake any independent checking to ensure the number of presales were as represented other than a telephone check with the Westpoint solicitor who prepared the contracts;[108]
(b)the applicant did not seek all of the IMs issued or ascertain the dates on which they were issued (curiously most are undated) in respect of a development and therefore was unable to check progress or reasons why changes in the construction phase may have occurred;[109]
(c)the applicant did not compare information in the IM with the information provided in the research papers to see if the two were the same;
(d)a failure to pick up documentary inconsistencies, for example, in respect of the York Street project there were two capital raisings, one in 2002 and one in 2004. By the time of the second capital raising construction was said to be 70% completed. Yet the IM issued for the additional finance stated that the funds were to be used to purchase the property and undertake preconstruction development.[110] Another example is contained in the Norton Capital research paper into the Market Street project issued in 2002 which describes the fund raising to be both by way of prospectus and an IM whereas there was no prospectus.[111] A further example is found in a discrepancy of the gross realisation figures quoted for the Mount Street project where the prospectus at one point discloses the figure as $226 million and at another as $266 million.[112] The applicant did not notice that in respect of the Mount Street IM that the risks were not listed as had been the case with the other IMs;[113]
(e)while the applicant obtained audited reports for the major Westpoint company, this only occurred after the first product (the Bayshore product) had been approved and update information was not obtained;
(f)a failure to pursue written updated information even when advising investment in projects over a lengthy period of time – up to two years in the case of the Ann Street project.[114] The applicant did not seek updated information or enquire whether a further IM had issued or query if the amount being sort exceeded the $25 million originally advised when, in fact, it had more than doubled to $53 million;[115]
(g)much reliance was placed on information provided by the promoters of the products without carrying out proper research or checking, for example the amount of senior debt secured was only ever conveyed orally[116] the applicant said that oral information was accepted by 2005 from Westpoint because of the level of comfort reached by the performance over the past three years;[117]
(h)the applicant was unaware of where the funds to pay the interest to the mezzanine investors was coming from (he thought from the developer or from a Westpoint company) or where the funding to pay for the construction was coming from (he thought it may be from a Westpoint company[118]); and
(i)the applicant agreed that the advice prepared by Glenhurst could have better presented the risks involved in the Westpoint products and at least on one occasion the advice contained in the module was inaccurate.[119]
[108] Transcript, pages 340 and 366.
[109] Transcript, pages 319 and 323. For example, the extension of the number of units to be built in the Bayshore project rose from 294 to 306.
[110] ASIC Delegate’s brief, Folder 1 of 3, Tab 8, page 82 and Transcript, page 409.
[111] CWCC’s Submissions to ASIC, Folder 2 of 3, Tab 2, page 5 and Transcript, pages 430 to 432.
[112] ASIC Delegate’s Brief, Folder 1 of 3, Tab 13, pages 170 and 172 respectively and Transcript, page 498.
[113] Transcript, page 500.
[114] From between May 2003 and April 2005: Exhibit R7.
[115] Transcript, page 461.
[116] Transcript, page 303.
[117] Transcript, page 335.
[118] Transcript, pages 286 to 287.
[119] In respect of the Bayshore project and in the case of the advice to Mr Lesser, the module stated that a second mortgage existed to secure the mezzanine investors debt whereas no mortgage existed: Transcript, page 382.
66. The applicant was unaware that IMs were not regulated by the disclosure requirements under the Act (until apparently 2004 or 2005)[120] and hence advised clients (apparently only when providing a limited statement of advice) that the investment was governed by the terms of the Act.[121] The applicant thought the difference between an IM and a prospectus was that the former required a minimum investment of $50,000 – even although he had recommended investment of smaller amounts[122] and he did not clarify the situation.[123] The applicant, while aware that IMs did not require the extent of disclosure required in prospectuses, did not think that a greater degree of due diligence enquiries may be advisable before making investment recommendation based on information contain in IMs.[124]
[120] Transcript, pages 274 and 311.
[121] Transcript, page 325.
[122] Seven such investments appear in Exhibit R7, page 7 in Market Street project in February to June 2003.
[123] Transcript, page 313.
[124] Transcript, page 313.
67. The mezzanine investments were stated in the IMs not to be transferable. Yet transfers were permitted by the promoters. According to the applicant clients of another financial planner were permitted to redeem $20 million of clients’ investments in the York Street project prior to the expiry date and then the promoter misled the applicant into thinking that additional funding was needed because the repayments were due because of the expiry of the investment period.[125] The manner in which transfers were permitted was irregular. The applicant did not apparently ever seek to clarify why or the extent to which this would be permitted. This has led to Glenhurst and the applicant recommending transfers on behalf of clients, not really knowing or understanding the risks involved.
[125] Transcript, pages 370 to 371 and 399.
68. It is now convenient to turn to the applicant’s role in advising those clients called to give oral evidence to invest in Westpoint products.
Herbert Lesser
69. Mr Lesser was introduced to the applicant by Mr Christopoulos, Mr Lesser’s accountant and a partner at SLA accounting. Mr Lesser describes himself as being semi-retired. He is now aged 70 years. Mr Lesser provided two witness statements, both of which were prepared with the assistance of the respondent. The Tribunal accepts that Mr Lesser regarded investment in real estate as being a conservative and risk acceptable investment, as opposed to investments in shares or other non real estate based investments. Mr Lesser made two investments in Heine on the recommendation of the applicant in 1999.[126] He then invested $500,000 in the York Street project and a further $500,000 in Bayshore. Mr Lesser, in his capacity of chairman of the Temple Shalom board, also arranged through the applicant to invest $100,000 into the Bayshore project on behalf of the board in the latter half of 2005 with the expectation that the investment would mature by June 2006.
[126] ASIC Delegate’s Brief, Folder 2 of 3, Tab 22, page 723, paragraphs 10 to 11 and ASIC Statement of Facts and Contentions; Statements of Evidence, Folder 1 of 8, Tab 4, page 3, paragraphs 8 to 9..
70. It is fair to conclude that, although doing his best to recall the details of the advice given to him by the applicant, Mr Lesser was, in the main, unable to accurately recall the detail. He stated to the Tribunal that he was at a stage in his life where he was relying on others to invest on his behalf. However, there were several things about the two investments made in Westpoint about which he was certain. In respect of the York Street investment he recalled being informed that the investment was “capital guaranteed” and that “they [that is, the Westpoint companies] had $80 million in reserve”[127] and that there had been high pre sales of the units.[128] Mr Lesser said he had not intended to invest more than $500,000 with the one developer. Initially he was not proposing to invest in Bayshore No 2 until the previously invested money in York Street had been redeemed. However, he was convinced in a telephone call from the applicant made in August 2005, on the basis that the $500,000 invested in York Street would be redeemed in a couple of months, to make the additional investment.
[127] Transcript, page 767.
[128] He said he recalled that 80% or 90% of the units had been pre sold – whereas the figure informed in the applicant’s letter to him of 15 June 2004 was 109%: ASIC Delegate’s Brief, Folder 2 of 3, tab 22, page 800.
71. It is not disputed that Mr Lesser had received a copy of the York Street IM prior to him making the investment. He said he would have glanced through it but not studied the detail. Similarly, he seemed content to have glanced through a letter of advice provided by the applicant without troubling to note the detail. He stated that he relied on the applicant’s assurances – particularly that the projects were guaranteed and that there had been high pre completion sales.
72. Mr Lesser stated that most of the face to face contact he had with the applicant was in the presence of Mr Christopoulos. Mr Lesser told the Tribunal that he had asked Mr Christopolous to “vet” recommendations made to him by the applicant.[129] All the advice given by Mr Christopolous was oral and Mr Lesser maintained that it was not until a later date that he came to know, through seeing correspondence, that Mr Christopolous had been receiving a part commission from the sale of Westpoint products as the result of a commission in exchange for a referral agreement existing between Glenhurst and Mr Christopolous’ accounting firm, SLA.[130]
[129] Transcript, page 790.
[130] Transcript, page 791.
73. There is no doubt and it is accepted on behalf of the applicant that the advice given to Mr Lesser by the applicant was not accurate in all respects. It is also accepted that the applicant did not understand the detail of the Westpoint products. Nevertheless, it is not possible for the Tribunal to conclude that the applicant bears full responsibility for the investment losses made by Mr Lesser in Westpoint. Mr Lesser did not trouble to read the detail of the material sent to him and relied not only on the applicant, but his accountant Mr Christopolous, to orally advise him of the risks. Equally the fact that Mr Christopolous was also involved in giving Mr Lesser advice on the proposed investments does not absolve the applicant from responsibility of the advice he (the applicant) gave. The applicant must, as is accepted on his behalf, bear some of the responsibility for the provision of inaccurate advice to Mr Lesser.
Joseph Goodman
74. Mr Goodman was introduced to the applicant by his accountant, Mr David Lissaur, either in December 2002 or January 2003. Mr Goodman, through his self managed superannuation fund, had approximately $1.7 million to invest and transferred his portfolio from another financial adviser to Glenhurst. In the period 2003 to 2005 Mr Goodman invested in Westpoint products with $950,000 invested at the time of Westpoint’s collapse.
75. Mr Goodman’s evidence was difficult to assess as his evidence was at points contradictory and/or unclear and/or heavily qualified and/or his use of terms was unusual. There were several meetings and written advices given by the applicant to Mr Goodman. Mr Goodman said he looked at the figures and either did not read the advice or did so only occasionally. He said he had never read written confirmatory advice when the applicant had also presented the information orally, and he did not read any of the written advices relating to the Westpoint investments or the Gilead Trust in which he also invested. According to Mr Goodman he did not understand in 2002 or 2003 some of the concepts which were discussed. An example of his lack of understanding related to the term ‘guarantee’ used with respect to Westpoint products. Mr Goodman said he thought the guarantee was constituted by a combination of pre sales, the second mortgage and the fact that KPMG was the auditor of Westpoint companies. He claimed that the applicant did not ever advise that the guarantee was to be given by associated Westpoint companies. Since he emphasises that the applicant constantly reassured him that his capital in the Westpoint products was guaranteed, it seems unlikely that he lacked understanding as to what this meant. Even if he did not understand the term he did not ever ask the applicant to explain it. A second example was that he did not understand what was meant by the term ‘assertive investor’ and he thought someone with a moderate investor profile was equivalent to a conservative profile. Mr Goodman said that he considered himself a conservative investor who only wanted to invest in ‘blue chip’ investments. By ‘blue chip’ he meant the top 50 companies on the Australian stock exchange.[131] At no time during the period the applicant was recommending investments to him did Mr Goodman tell the applicant that the strategy outlined in the financial plan prepared by the applicant was not in accord with what he expected.
[131] Transcript, page 844.
76. The Tribunal is unable to accept Mr Goodman was as financially naïve as he claimed to be in 2002 to 2003. Some of the claims he made were demonstrably unsustainable. He said at one point that there was no additional risk involved in investing in international equities than there was in investing in the Australian equities market. However, after further questioning he conceded that currency fluctuations added risk to such investments. In the context of him operating a successful import business over a period of at least 15 years he must be taken to be aware of risks associated with currency fluctuations. That he was prepared to state that he could see no such added risk dents his credibility in as far as his understanding of what is involved in making investments in such a market is concerned.
77. While he said he did not read the financial statement of advice or funding strategies recommended by the applicant Mr Goodman was forced to concede that the applicant had more likely than not explained these to him when he was referred to letters written by the applicant confirming the content of face to face meetings where the portfolio makeup was discussed.[132]
[132] CWCC’s Submissions to ASIC, Folder 1 of 3, Tab 4, pages 132 and 134.
78. In the circumstances the Tribunal is unable to attribute any weight to Mr Goodman’s claim that he could not recall the applicant taking him through the statement of advice or funding strategies suggested by the applicant.[133] In any event, he contradicts himself when later in the same witness statement he asserts that he “did not scrutinise what I was told by [the applicant] in great detail because I trusted him and his abilities.”[134] Mr Goodman had investments in the share market and while he stated that he regarded such investments as “risky”[135] he was aware enough to be making enquiries about spreading his risk and investing in non share market investments.[136] The Tribunal is unable to accept Mr Goodman was an ‘unsophisticated investor’ and is satisfied that he must be taken to be more aware of the risks than he was prepared to admit. Nevertheless, the Tribunal accepts the applicant’s admission that the Westpoint products into which he steered his clients was above their risk tolerance levels extends to include Mr Goodman.
[133] ASIC Statement of Facts and Contentions; Statements of Evidence, Folder 1 of 8, Tab 3, page 2 paragraph 10.
[134] ASIC Statement of Facts and Contentions; Statements of Evidence, Folder 1 of 8, Tab 3, page 3, paragraph 14.
[135] ASIC Statement of Facts and Contentions; Statements of Evidence, Folder 1 of 8, Tab 3, page 3, paragraph 11.
[136] Aside from his import and retail businesses and an income producing farm in the Yarra Valley.
Bryan Samuels
79. Mr Samuels was introduced to the applicant by his accountant in December 2004. Mr and Mrs Samuels were proposing to invest through their self managed superannuation fund. A meeting followed in which details concerning Mr Samuels’ investor profile were provided. No investor profile was completed by Mrs Samuel.[137] According to Mr Samuels it struck him, after the collapse of Westpoint that this was “poor” practice.[138] On the other hand neither he, nor apparently Mrs Samuels, took any steps at the time to provide the necessary information or request that the applicant attend to this aspect before they accepted and implemented the applicant’s advice despite meeting with the applicant to discuss the recommended investments. Mr Samuels admitted that he had overstated the position[139] put in his witness statement where he stated “our intention, as we explained to [the applicant] at our meeting, was to avoid any risk to our capital.”[140] Mr Samuels was also forced to admit that he had quoted selectively from the statement of advice when preparing his witness statement.[141] For example, he quotes from the statement of advice dated 9 February 2005 that he was a “prudent investor” wanting a “balanced portfolio to work towards medium to long term financial goals”[142] without, however, also quoting the qualifying sentence in the advice vis “calculated risks will be acceptable to you to achieve good returns.”[143] The advice of 9 February 2005 contains a brief description of the Westpoint North Sydney investment.[144] It was not until July 2005 that Mr and Mrs Samuels were in a position to proceed with implementing the applicant’s advice, including an investment in the North Sydney building. Prior to the Samuels making the investments the applicant sent a prospectus for the North Sydney investment and additional advice.[145] Mr Samuels stated that while he would have scanned through the North Sydney prospectus he doubted that he had read it. The prospectus set out the risk factors of the investment.[146] Despite Mr Samuels equivocation on this issue[147] the Tribunal accepts that as well as the advice contained in the letter of 9 February 2005 that the applicant also provided oral advice concerning risk factors associated with the North Sydney investment. The Tribunal is unable to accept that part of Mr Samuel’s statement that “…we were not told that there were any risks as this was a product which was capital guaranteed.”[148] While Mr Samuels maintained he thought there may be a “short term”[149] or “slight”[150] fall in the capital value of the North Sydney investment he could not explain why this would be so when he understood that the funds were capital guaranteed.[151]
[137] Despite a further request from the applicant in his advice of February 2005: ASIC Delegate’s Brief, Folder 3 of 3, Tab 23, page 864.
[138] Transcript, page 945.
[139] Transcript, page 944.
[140] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 840, paragraph 7.
[141] Transcript, page 964.
[142] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 840, paragraph 9.
[143] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 864.
[144] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 894.
[145] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 1039.
[146] ASIC Delegate’s brief, Folder 3 of 3, Tab 23, page 981 where 17 risk factors are enumerated.
[147] Transcript, page 967.
[148] ASIC Delegate’s Brief, Folder 3 of 3, Tab 23, page 841, paragraph 14.
[149] ASIC Delegate’s Brief, Folder 3 of 3, Tab 23, page 841, paragraph 9.
[150] ASIC Delegate’s Brief, Folder 3 of 3, Tab 23, page 841, paragraph 14.
[151] Transcript, page 968.
80. Mr Samuels clearly had a number of misconceptions and lack of understanding about investments and his confusion was apparent in his evidence. At one stage he said he had never invested in speculative or high risk investments[152] but later admitted a number of share investments he had made prior to the advice given by the applicant were risky.[153]
[152] Transcript, page 959.
[153] Transcript, page 963.
Ian McLeod
81. Mr McLeod became a client of the applicant in 1999 after he retired as an employee and commenced operating his own business. Mr McLeod and his wife had superannuation and other funds to invest in anticipation of retiring completely within a few years of first consulting the applicant. Because of their ages and lack of financial investment sophistication, Mr McLeod, in his witness statement, categorised he and his wife as having a low to moderate risk tolerance.[154] The applicant recommended that their separate superannuation and investment funds totalling approximately $650,000 be rolled over into a self managed superannuation fund. This took some time to implement and in 2003 the applicant recommended a diverse portfolio of investments including $50,000 in the Westpoint Ann Street mezzanine fund. It was Mr McLeod’s evidence that the applicant gave him and his wife “… a brochure which we read, but did not particularly understand …”[155] The Tribunal accepts this as being an IM about the Ann Street mezzanine investment. According to Mr McLeod the applicant reassured them of the security of the investment by reference to the guarantee, the financial strength of the Westpoint group of companies and existence of the second mortgage. In early 2004, acting on the advice of the applicant, the McLeods invested $100,000, being $50,000 in Ann Street and $50,000 in Bayview.[156] Upon maturity in August 2004 the $100,000 was rolled over into Market Street No. 2 and $30,000 was also invested in the Gilead retirement fund. Upon learning of the collapse of the Westpoint companies in late 2005 Mr McLeod requested the applicant redeem his investments, but it was too late.
[154] Exhibit R16, page 2, paragraph 6 and Transcript, page 993.
[155] Exhibit R16, page 3, paragraph 9 and Transcript, page 1001.
[156] ASIC Delegate’s Brief, Folder 2 of 3, Tab 21, pages 697 to 698.
82. In his oral evidence Mr McLeod accepted that there was a risk from investing in the sharemarket even in so called ‘blue chip’ shares.[157] He also accepted that the brochure on the Ann Street mezzanine investment listed the risks associated with the investment, including the possibility of the loss of capital.[158] While he did not understand the information in the brochure Mr McLeod did not suggest anywhere in his evidence that he asked the applicant for an explanation or clarification before authorising the investment in the Ann Street project to proceed. Mr McLeod said that he relied on the applicant’s advice that the investment was guaranteed. There was security for a second mortgage and that the applicant had carefully researched the products.[159]
[157] Transcript, pages 996 to 997.
[158] Transcript, page 1003.
[159] Exhibit R16, pages 3 to 4, paragraphs 9 and 12.
Betty Breitung And Heinz Wolff
83. While Mrs Breitung and Mr Wolff were not associated it is convenient to consider their evidence together. The Tribunal accepts that neither is a sophisticated investor and that each would have been more dependent on the applicant’s advice than the other witnesses who gave evidence. The Tribunal accepts that the recommendations made to each to invest in Westpoint products were inappropriately made having regard to their risk profile, as the applicant properly concedes.
84. The Tribunal has taken into account the evidence of the witnesses along with the applicant’s concessions in reaching its conclusion.
Conclusion
85. There are a number of factors for the Tribunal to consider as enumerated by McHugh J in Rich v ASIC[160] when considering whether any administrative penalty should be imposed and if so the extent of that penalty. In Rich’s case the disqualification of a person from being a company director was being considered, but similar considerations can be adapted when considering the imposition of an administrative penalty under the corporations law vis:
[160] (2004) 220 CLR 129 at 149.
(a)the legislative objectives;
(b)the nature of the conduct involved and the time over which it occurred;
(c)policies of the regulator;
(d)the need to maintain public confidence in the financial sector including in financial advisers;
(e)the protection of the public from a repetition of like conduct;
(f)the present and future fitness of the applicant to be an authorised representative;
(g)the size of the losses suffered by the applicant’s clients as the result of his advice including the consideration of the vulnerability of the clients;
(h)what action the applicant took when Westpoint collapsed to inform and advise his clients after the collapse; and
(i)the personal circumstances of the applicant.
86. The Tribunal is satisfied that from the outset the proper due diligence procedures said to be applicable to Glenhurst’s assessment of financial products to be included on its APL was not complied with in respect of the Westpoint products. There was no proper assessment made of the risks involved and consequently this led to the applicant not ever properly understanding the risks to which he was exposing his clients in recommending that they invest in Westpoint mezzanine notes. To his credit the applicant now accepts this.
87. The losses sustained in the Westpoint company failures have been heavy. Some small investors, like Mr McLeod, have recovered their capital through compensation schemes available or through professional indemnity insurance coverage. There may be some hope of further recovery from civil actions brought by the respondent against various parties associated with Westpoint. However, whatever may ultimately be recovered does not relieve or excuse the applicant from his responsibility in advising his clients to invest in a product which was not reasonably or properly assessed for the risks it presented to his clients. Given the failure of the applicant’s assessment in a number of areas resulting in the flawed advice given he bears a high degree of responsibility for placing his clients in the position in which they find themselves. The Tribunal has referred to a lack of care exhibited in the applicant’s clients’ attitude towards reading, understanding and questioning him on information provided to them as part of the advisory process. The Tribunal has taken account of this in its decision making but it too does not serve to diminish the applicant’s degree of responsibility. The breaches involved are serious and occurred over a three year period in which diminishing care about the recommendations made was evident. The protection of the investing public, the maintenance of high standards in the financial advisory industry and the serious nature of the conduct leave the Tribunal satisfied that there is no alternative other than to exercise the discretion to impose an administrative penalty. The question then is as to what penalty should be imposed.
88. Section 920A of the Act is in the following terms:
(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
(b)the person has not complied with their obligations under section 912A; or
(ba)ASIC has reason to believe that the person will not comply with their obligations under section 912A; or
(bb) the person becomes an insolvent under administration; or
(c) the person is convicted of fraud; or
(d) (Repealed)
(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.
(2) However, ASIC may only make a banning order against a person after giving the person an opportunity:
(a)to appear, or be represented, at a hearing before ASIC that takes place in private; and
(b) to make submissions to ASIC on the matter.
(3) Subsection (2) does not apply in so far as ASIC’s grounds for making the banning order are or include the following:
(a)that the suspension or cancellation of the relevant licence took place under section 915B;
(b) that the person has been convicted of serious fraud.
89. The applicant does not hold and has never held a financial services licence. The financial services licence was, at all relevant times, held by Glenhurst. Accordingly, s 920A(1)(a) or (b) do not arise for consideration. Section 920A(1)(ba) involves consideration of some future activity of a current licence holder and it has no application to the applicant. Sub-sections (1)(bb) and (c) are not relevant. However, (1)(e) and (f) arise for consideration. It is these latter provisions pursuant to which the delegate addressed his consideration in this case. What constitutes a ‘financial services law’ is not defined in the Act. It is, however, accepted that a representative giving advice to a retail client is relevantly subject to the requirements set out in Chapter 7 Division 3 of the Act, including that the subject matter of any advice given has had reasonable ‘consideration’ and ‘investigation’ in all the circumstances. It is not contested and the Tribunal accepts that it is in this area in which the applicant has principally failed to comply with a financial services law. The Tribunal notes that the provisions in s 920A are expressed to be in the alternative. In the opinion of the Tribunal sub-s (1)(f) does not strictly arise when sub-s (1)(e) is relied on as the provisions are stated to be in the alternative. In considering sub‑s (1)(e), however, the decision maker can look to the past conduct as well as the future likelihood of there being breaches.
90. Section 920B(1) contemplates a banning order may be made against a person from providing “specified financial services in specified … capacities.” It seems open, therefore, to consider a banning order against the applicant from applying for a financial services licence even if the conduct which justifies the imposition of a banning order arose from the person’s conduct as a representative. In this case, the applicant while not the holder of a licence was a major participant in the determinations made by the licensee as to the products which would be accepted onto the APL. On behalf of the applicant it is accepted that a banning order in respect of him applying for a licence is appropriate. His conduct relating to the due diligence processes of Glenhurst are, in the view of the Tribunal, among the more serious, short of those involving dishonesty or fraud. In as far as the composite ban imposed by the respondent applies to banning him from applying for a financial services licence for a 10 year period is concerned, the Tribunal affirms the decision under review. It is then necessary to consider the applicant’s circumstances with respect to his conduct as a representative and whether a banning order or an EU ought to be imposed. Whichever is imposed the question then becomes the period of time in which it ought to operate.
91. There are a number of factors favouring the imposition of an EU that were submitted on behalf of the applicant, including:
(a)there were no complaints from those who gave evidence about the applicant’s recommendations in investment products other than Westpoint. The limited evidence available suggests that his clients were satisfied with his recommendations;
(b)while the applicant’s referees were unaware of his involvement in Westpoint products or of the results arising from the collapse of Westpoint they spoke highly of his integrity in business dealings and of his honesty;
(c)the applicant took remedial action after the collapse of Westpoint which was a genuine attempt to correct and improve Glenhurst’s future performance as a licensee;
(d)the applicant has not had any breaches reported to ASIC other than related to his recommendations relating to Westpoint;
(e)under the terms of the proposed EU the applicant would be restricted to a role as an authorised representative and not a licensee and therefore would not have responsibility for approving financial products for recommendation to authorised representatives;
(f)the applicant took time and made a considerable effort in orally explaining the recommended products to his clients.[161] It is noted that ASIC was seeking to have financial planners shorten their written advices to clients.[162] The Tribunal acknowledges that this was difficult to achieve given the volume of material required to be provided to clients. The Tribunal is satisfied that the applicant developed a rapport with his clients and attempted to service their needs and orally explain the features of the recommended financial product, albeit failing in the case of Westpoint;
(g)the applicant was said to be “once bitten, twice shy” and unlikely to repeat the breaches made in respect of Westpoint.[163] He stated that he would not recommend mezzanine finance products again to clients if he was able to retain his status as an authorised representative; and
(h)the applicant, in his capacity as a representative, would be subject to mentoring and scrutiny under the terms of the proposed EU thereby lessening the chance that any recommendations to clients would be ill advised.
[161] Even if, in the case of Westpoint, the explanations were not properly informed.
[162] Transcript, page 511.
[163] Transcript, page 1086.
92. On the other hand, a number of factors, including the following, support a banning order:
(a)the applicant’s conduct persisted over a number of years between 2002 to 2005 and on the applicant’s own admission the level of due diligence became less and less and the unchecked word of the promoters was more and more relied upon to recommend the Westpoint products;
(b)his conduct involved a large number of his clients, some of whom incurred substantial losses;[164]
(c)while some clients, such as Messrs Lesser and Goodman, may not have suffered as great a proportionate loss as others, for example Mrs Breitung and Mr Wolff, the latter two people exemplified people who were vulnerable because not only of their financial circumstances not being strong but because in the case of both their lack of financial sophistication and in the case Mr Wolff, his age;
(d)the legislature has seen fit to identify conduct which will guide representatives including in respect of financial licensees the matters set out in s 912A of the Act, have extended the liability of licensees to cover advice given to clients by representatives as well as setting detailed requirements about disclosure and the manner and form in which advice must be given to retail clients.[165]
[164] Particularly in the cases of two of the clients from whom the Tribunal heard, Messrs Lesser and Goodman.
[165] Chapter 7, Division 2 of the Act.
93. The applicant, by all accounts, has carried out his work satisfactorily during the period he has been employed as a representative by CMG. His current employer has faith in employing and supporting him knowing of his background with Westpoint. The Tribunal was told, and accepts, that a number of clients have remained with him, despite incurring losses in the Westpoint investments. He has, according to his character witnesses, a good reputation. There is no reason to think that his advice to clients other than in respect of Westpoint products is in any way unsatisfactory. It is acknowledged that he took steps to improve the operations of Glenhurst following the collapse of Westpoint. He was not the only financial planner to be caught by the irregular undertakings given by the promoters of the Westpoint products.
94. Nevertheless, as Mr Knowles pointed out, the breaches are many and serious and there is a public interest in ensuring that the members of the public are protected from representatives who lack care in the advice they give to clients. The public must be reassured that they can have confidence in the advice given by authorised representatives. The Tribunal does not consider that a permanent banning order arises for consideration in the present case.
95. The respondent, in its capacity as the regulator of the financial market place, has developed a policy identifying the circumstances in which it believes a banning order should be applied. Regulatory Guide 98: Licensing: Administrative action against financial services providers (“RG 98”) issued by the respondent in April 2006 provides guidance in the way in which the respondent will react in deciding what administrative remedy should be applied where a breach has occurred. In particular Table 1 sets out the factors which the respondent takes into account in determining to take administrative action and includes:
(a)Nature and seriousness of the suspected misconduct;
(b)Internal controls on the licensee or person;
(c)Conduct of the licensee or person after the misconduct occurs; and
(d)Previous regulator record of the licensee or person.
However, RG 98 sets out “significant loss to client” as a factor for imposing a three to 10 year ban. The significant loss in this case had been brought about by not having “a reasonable basis for advice provided, such as making inappropriate recommendations in high risk schemes.”[166]
[166] RG 98, Table 2.
96. Table 2 sets out the considerations to be taken into account for three periods of banning order vis permanent banning order, a three to 10 year banning order and a banning order under three years. When considering the policy it seems that the time of a banning order depends on the nature and seriousness of the conduct involved.
97. In a case such as this the guideline suggests a banning order of between three to 10 years is indicated. The guideline is not binding on the Tribunal but some consideration should be given to consistency and to unfairness in the system which may arise if the guidelines are not taken into account. The Tribunal has also considered the material it requested the parties to file concerning the imposition of banning orders and/or EUs to other financial representatives in respect of advice given for clients to invest in the Westpoint products. However, the Tribunal accepts that no two cases are exactly alike and achieving consistency is difficult, particularly when consideration involves the career and personal circumstances of an individual. In the end the Tribunal has not placed any weight on the material filed on 15 June 2009.
98. The Tribunal appreciates that the imposition of a ban of any time will result in severe financial and personal hardship not only on the applicant but on his family. The Tribunal concedes that the applicant’s personal circumstances combined with the fact of the applicant’s honesty and the fact there are no other relevant complaints concerning him lodged with the respondent over the period of his career to date suggest consideration be given to the imposition of an EU and the Tribunal has given this serious thought. However, the Tribunal has concluded that to do so would involve it in not discharging its duty in recognising the degree to which the applicant has not complied with his responsibilities to the public, to meeting the legislative imperatives or the regulator’s guiding policies, or indeed be fair to the other members of the industry in which he is involved.
99. The Tribunal is, however, satisfied that banning the applicant from being an authorised representative for 10 years is excessive. Taking into account the matters commented on above, the Tribunal considers that an appropriate term for the ban should be not so long that the applicant’s career in the industry is totally and irrecoverably destroyed which would be the practical result arising from a 10 year ban. In all the circumstances a three year banning order is warranted.
100. For the above reasons the decision under review is affirmed in as far as the delegate’s decision banning the applicant from applying for or holding a financial services licence but in as far as it applies to the applicant applying for or holding authority to act as an authorised representative the decision is varied and the ban is reduced to three years from the date of this decision. Additionally, the s 35, Administrative Appeals Tribunal Act 1975 (confidentiality) orders made on 31 October 2008 and 6 and 20 November 2008 and 20 July 2009 are discharged.
I certify that the 100 preceding paragraphs are a true copy of the reasons for the decision herein of
Mr G L McDonald, Deputy President
Signed: ...(sgd G Horzitski)..................................
Grace Horzitski Associate
Dates of Hearing 19, 20, 23, 24, 26, 27, 30, 31 March 2009 and
14, 15, 18, 19, 25 May 2009
Date of Decision 1 September 2009
Counsel for the Applicant Mr J Elliott SC and Mr D Bennett
Solicitor for the Applicant Ms Z Justice, Baker and McKenzie
Counsel for the Respondent Mr R Knowles
Solicitor for the Respondent Ms C Robinson, Australian Securities and Investments Commission
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