Lelliott and Australian Securities and Investments Commission

[2009] AATA 110

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 110

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2008/5339  

GENERAL ADMINISTRATIVE DIVISION		)
Re		DARREN LELLIOTT

Applicant

And AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal Deputy President P E Hack SC, Senior Member Bernard J McCabe

Date18 February 2009

PlaceBrisbane

Decision The Tribunal varies the decision under review by reducing the period of the banning order to 9 months from 12 November 2008.

..............Signed................

Deputy President

CATCHWORDS

SECURITIES AND INVESTMENTS – banning order imposed for two years on a holder of a financial services licence – licence holder made representations that where misleading and deceptive or likely to mislead or deceive – contest length of banning order – appropriate period of disqualification is informed by the nature of the impugned conduct and its objective seriousness – general deterrence also a factor - relevant instances in the lower category of seriousness – naivety – contrition – no loss to clients – decision varied – banning order reduced to nine months.

Corporations Act 2001 (Cth) ss 920A, 1041H(1)

ASIC v Beekink (2007) 61 ACSR 305

Re HIH Insurance; ASIC v Adler (2002) 42 ACSR 80

Re Hres and ASIC (2008) 105 ALD 124

REASONS FOR DECISION

18 February 2009   Deputy President P E Hack SC, Senior Member Bernard J McCabe                  

Introduction

1.On 6 November 2008 a delegate of the respondent, the Australian Securities and Investments Commission, determined to make a “banning order” pursuant to s 920A of the Corporations Act 2001 (Cth) prohibiting the applicant, Mr Darren Lelliott, from providing any financial services for a period of two years.

2.Mr Lelliott accepts that it was open to the Commission to make such an order and he does not dispute the facts on which the Commission relies. But he says that a prohibition for two years is too long in the circumstances of his case.

Background

3.Mr Lelliott was, at all material times, a director of two companies, Lellco Investments Pty Ltd (Lellco) and CPT Corporate Advisory Pty Ltd (CPT). Lellco has been the holder of a financial services licence for some years. Between September 2006 and December 2007 CPT was an authorised representative of Lellco.

4.In February 2007 Mr Lelliott, in his capacity as managing director of CPT, sent emails to three people. The emails were headed “Hippodrome Information Memorandum” and referred to an opportunity for the recipients to invest in a company called Hippodrome Pty Ltd (Hippodrome) which proposed to enter a joint venture with a Lithuanian entity in order to undertake horse racing and gaming activities in Lithuania. Each email said, in part:

“Since first making the investment known to you I am happy to advise that my clients have continued to make extraordinary advances in their activities. They have secured all private title land for the leisure precinct (site of the 30,000 patron thoroughbred racing track, hotel, theme park, related industry) and will settle on this land in the coming weeks. All other land is government owned and has been allocated (by the equivalent to our own state government) status of ‘Project of National Significance’.” (emphasis added)

and

“This project will be requiring development funding in the next 12 months of over $500M. Offers to fund at this level have already been made to the company, including funding by debt, equity (IPO via either Hong Kong or London exchange) or a combination of both.” (emphasis added)

5.Contrary to the representations which have been emphasised:

(a) the private title land had not been secured;

(b) there was no basis upon which it could be said that settlement could occur within “the coming weeks”;

(c) no offers to fund had been made whether at the level stated or at all. At the highest, discussions regarding funding had been undertaken with potential funders but nothing had eventuated.

6.In the circumstances, the representations were false and, given that they were made in relation to a financial product i.e. shares in Hippodrome, Mr Lelliott accepts that he breached s 1041H(1) of the Corporations Act by making the representations. That section prohibits a person from engaging in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

7.Subsequent to the sending of the emails Mr Lelliott became a director of Hippodrome. He was primarily responsible for putting together a document described as an Information Memorandum, dated 28 April 2007, which offered to prospective investors the opportunity to acquire convertible notes in Hippodrome. The Information Memorandum is a very detailed document comprising in excess of 60 pages of text together with other attachments. The first substantive part of the Information Memorandum, between pages 4 and 7, sets out what are described as the “Key Features” of the investment being offered. Within that section the following appeared:

“Whilst there are further costs to be incurred before conferral of the land the only issue unconfirmed is the time it will take to complete the process to have the land conferred (the reason why up to 2.5 years has been allowed).” (emphasis added)

8.Again, Mr Lelliott accepts that the statement was false as there were other issues affecting the conferral of the land at that time. Mr Lelliott was primarily responsible for the compilation of the Information Memorandum. In his capacity as a director of Hippodrome he was responsible for its publication.

The legislation

9.By virtue of s 920A of the Corporations Act the Commission may make a banning order, that is, an order prohibiting the person against whom it is made, from providing financial services, where, relevantly, the person has not complied with a financial services law.

10.Section 1041H(1) of the Corporations Act, which Mr Lelliott accepts that he breached by the February 2007 emails and again in the April 2007 Information Memorandum, is a financial services law. Thus the discretion to make a banning order was enlivened. The contest, as we have said, concerned the length of the period of prohibition that ought be made.

Mr Lelliott’s arguments

11.The matters which Mr Lelliott relied upon as demonstrating that some lesser period of prohibition was warranted were these:

(a) in relation to the emails he was not aware of the falsity, he had relied upon matters told to him by others but he had not taken any steps to verify the accuracy of what he conveyed;

(b) he had not pursued any of the recipients of the emails (although he accepted that he ought to have followed them up and withdrawn the representations) and none of them had invested in Hippodrome;

(c) once he had found out about the falsity of the representations in the emails he became involved in Hippodrome to prepare a proper disclosure document,

(d) although he accepts that there was a false representation in the Information Memorandum, that represented a minor flaw in an otherwise detailed document, intended for, and sent to, sophisticated investors only;

(e) there is an element of inconsistent treatment and thus unfairness as the Commission has taken no action against the other directors of Hippodrome who authorised the Information Memorandum;

(f) a two year suspension will create enormous hardship for Mr Lelliott and his family. Financial services is his career and the investigation and its aftermath have been a very great blow to his finances. He is unemployed and is suffering from depression.

The principles involved

12.Ms Bowskill, counsel for the Commission, drew our attention to the discussion by Santow J in Re HIH Insurance; ASIC v Adler[1] of “the propositions, by way of “guiding principles or relevant factors” in relation to the somewhat analogous power, exercised in those cases, to make orders disqualifying a person from managing corporations. His Honour’s discussion seemingly informed the Commission’s policy document, Regulatory Guide 98.

[1] (2002) 42 ACSR 80 at [55].

13.In the present context we consider the observations of Senior Member Taylor SC in Re Hres and ASIC[2] to be apposite. There, the learned Senior Member said:

“The appropriate period of any disqualification is properly informed by the nature of the impugned conduct and its objective seriousness, both in terms of the extent of the departure from appropriate standards and its actual consequences. The considerations that may properly inform the exercise of the power cannot be prescribed exhaustively. They are summarised in ASIC’s regulatory guide 98 table 2. Those matters parallel the criteria indentified by Santow J in his influential judgement in ASIC v Alder at [56]: see Rich. The trust of the considerations suggested by both Santow J and in regulatory guide 98 is that a banning order is appropriate where the person’s impugned conduct involves serious incompetence or misconduct. Within that description are included advice outside the scope of the person’s licence or authority and advice that lacks a reasonable basis. Even lesser compliance defaults may justify a banning order. These include failure to provide relevant disclosures and failure to make adequate enquiries about a client’s individual circumstances. The shortest periods of banning or disqualification are regarded as most appropriate to situations were the person’s impugned conduct has not involved serious incompetence and where there is a real satisfaction of the person’s likely due compliance with their relevant duties and obligations. There is a general suggestion that a 3-year banning period marks a conventional threshold that distinguishes between impugned conduct that has involved serious incompetence and conduct of lesser seriousness.”

[2] (2008) 105 ALD 124 at [247].

14.It is also necessary to bear in mind that general deterrence is a factor to be taken into account in deciding whether, and for what period, a banning order ought be made[3].

[3]        ASIC v Beekink (2007) 61 ACSR 305 at [83].

The application of the principles

15.We start from the base that Mr Lelliott accepts, quite properly in our view, that a banning order ought be made. That seems to us to be a given when a person who deals in financial products professionally is involved in misleading and deceptive conduct in connection with financial products or financial services, all the more so where there are two distinct instances.

16.But it is necessary to consider the objective seriousness of the conduct, including its consequences. It is, we think, proper to bear in mind that in each instance the conduct was directed to a small audience and that the audience were sophisticated investors, using that term with its general meaning and also with its statutory meaning. In that context, and perhaps as a consequence, it appears that no investor was detrimentally affected by the conduct.

17.It is an aggravating factor that there were two separate but related instances of misleading or deceptive conduct. Mr Lelliott did not learn sufficiently from the April 2006 incident the importance of scrupulous accuracy in connection with investment offerings.

18.But despite these factors the conduct, in each instance, falls, we think, in the lower category of seriousness. The conduct in connection with the emails, which amounted to an uncritical acceptance and endorsement of information provided by the then controllers of Hippodrome, seems to us to reflect naivety on the part of Mr Lelliott. It is fortunate that no harm was done by this conduct. We accept, as Mr Lelliott submits, that the document subsequently produced in April 2007 is a much more accurate account of the investment opportunity put forward by Hippodrome however we do not think that Mr Lelliott is entitled to any “credit” for that. The legislation proceeds on the footing that potential investors will be accurately informed. It sanctions those who breach its standards rather than rewarding those who meet those standards.

19.The conduct in connection with the April 2007 Information Memorandum is of a different type. Mr Lelliott had the primary responsibility for compiling the Information Memorandum. It was, for the main part, accurate in its detail but through a want of care it put forward, as one of the key facts, a detail that was false. Mr Lelliott did not scrutinize the document with sufficient care.

20.Whilst we can understand Mr Lelliott’s perception of unequal, and thus unfair, treatment when compared to the other directors we do not consider that there is substance in his complaint. That is so because the circumstances of Mr Lelliott and the circumstances of the other directors were not truly comparable. Mr Lelliott had the primary responsibility for the compilation of the Information Memorandum. He was, and the other directors have not been shown to be, a financial services professional. And Mr Lelliott had been involved in similar conduct in connection with the emails of February 2007. Thus, in our view, it is of no consequence that no action was apparently taken against the other directors of Hippodrome.

21.We accept, as Mr Lelliott submits, that the banning order has caused him hardship. But that is the price that persons entrusted with a financial services licence pay if they breach the trust placed in them when granted a licence. The legislature has chosen to regulate the conduct of investment advisors. Those who fall short of the standards set must expect that the privilege will be withdrawn.

22.For what period then should Mr Lelliott be banned? In our view a period of two years is excessive having regard to the objective seriousness of the conduct and its consequences. Mr Lelliott impressed us as someone who had learned from these mistakes and someone who was genuinely contrite about his conduct. Unlike the applicant in Hres he did not contest the Commission’s case, putting in issue only the length of the banning order.

23.Regulatory Guide 98 lists factors and examples of conduct suggestive of a permanent ban, a ban between three and ten years and a ban for under three years. In that latter category the factors listed are:

“• Some loss to client, but as a result of carelessness or inadvertence rather than dishonesty

• Has attempted to remedy the contravention and person has fully cooperated with ASIC

• No previous history of contraventions

• Indications of clear intention to comply with legal obligations by demonstrated behaviour”

24.Each of these factors is present in Mr Lelliott’s case except that there was no loss to clients. Thus, as it seems to us, the matter falls at the lower end of the scale of seriousness of matters in the “up to three years” range. In the circumstances we regard a ban of 9 months as being appropriate and representing a proper response to the nature of the conduct, the need for general deterrence and Mr Lelliott’s circumstances. The months that will run to the end of that period should enable Mr Lelliott to re-gain his health so that he is fit to resume his career as a financial advisor.

25.We would then vary the decision under review by reducing the period of the banning order to 9 months from 12 November 2008, that being the day on which Mr Lelliott was given notice of the decision of 6 November 2008.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC and Senior Member Bernard J McCabe

Signed:         .......Signed…........................................
  Melissa Hamblin Associate

Date of Hearing  6 February 2009
Date of Decision  18 February 2009
Applicant   In person
Counsel for the Respondent     Ms H Bowskill

Solicitors for the Respondent    Australian Securities & Investments    Commission