Lock v Australian Securities and Investments Commission

[2016] FCA 31

FEDERAL COURT OF AUSTRALIA

Lock v Australian Securities and Investments Commission [2016] FCA 31

File number:

NSD 1307 of 2014

Judge:

GLEESON J

Date of judgment:

4 February 2016

Catchwords:

NEGLIGENCE – duty of care – whether defendant owed plaintiffs duty of care to avoid causing economic harm to plaintiffs – where pleaded duty of care is affirmative duty on statutory authority – where claim for damages for pure economic loss – where pleaded duty is to control third party’s conduct – where pleaded duty is duty to warn – where no direct relationship between plaintiffs and defendant – where defendant statutory authority with broad and multi-faceted functions and objects – whether duty inconsistent with defendant’s function – whether salient facts support imposition of duty of care – whether defendant’s control of risk sufficient to support imposition of duty of care – whether plaintiffs vulnerable – where no known dependence or assumption of responsibility – duty of care not so unarguable as to be struck out on that basis

PRACTICE AND PROCEDURE – strike out application – whether pleadings would establish cause of action relied on – where causation not identified with sufficient clarity – further amended statement of claim struck out in its entirety – Federal Court Rules 2011 (Cth), r 16.21

PRACTICE AND PROCEDURE – strike out application – where further amended statement of claim pleads existence of duty of care

TORTS – misfeasance in public office – whether certain decisions of the defendant constitute misfeasance in public office – whether defendant failed to take into account mandatory considerations – whether defendant failed to make decisions consistently with purposes for which powers were granted – whether any decision caused loss to plaintiffs –further amended statement of claim does not disclose reasonable cause of action based on the tort of misfeasance in public office  

TORTS – misfeasance in public office – whether further amended statement of claim pleads malice sufficiently – whether defendant’s officers motivated by improper and unlawful motive – whether decisions made in bad faith – whether defendant failed to make a real attempt to comply with its obligations – whether defendant knew or suspected decisions would harm plaintiffs – whether defendant’s later actions impeach its earlier inaction – further amended statement of claim does not plead malice sufficiently

Legislation:

Australian Securities and Investments Commission Act 2001 (Cth), ss 1, 11, 12A, 12DA, 12DB, 13, 19(2), 30(1), 93AA(1)

Corporations Act 2001 (Cth), ss 5B, 739(1), 760A, 761A, 761G, 766B, 912A, 912C(1), 914A(1), 915C(1), 923A, 945A, 1041H

Federal Court of Australia Act 1976 (Cth), Pt IVA

Federal Court Rules 2011 (Cth) , r 16.21(1)

Cases cited:

Agar v Hyde [2000] HCA 41; 201 CLR 552

Armitage v Nurse [1998] Ch 241

ASIC, in the matter of Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) v Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 269

Board of Fire Commissioners (NSW) v Ardouin [1961] HCA 71; (1961) 109 CLR 105

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36; (2014) 254 CLR 185

Commissioner of State Revenue (Vic) v Royal Insurance [1994] HCA 61; (1994) 182 CLR 51

Crimmins v Stevedoring Industry Finance Committee [1999] HCA 59; (1999) 200 CLR 1

Danthanarayana v Commonwealth [2014] FCA 552

Davis v Radcliffe [1990] 1 WLR 821

Federal Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; (2008) 237 CLR 146

Foster v Minister for Customsand Justice [2000] HCA 38; (2000) 200 CLR 442

Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1572; (2000) 104 FCR 564

Leerdam v Noori [2009] NSWCA 90; (2009) 227 FLR 210

Leinenga v Logan City Council [2006] QSC 294

Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24

Minister for Youth and Community Services v Health and Research Employees Association (1987) 10 NSWLR 543

Murphy v Brentwood District Council [1991] 1 AC 398
Graham Barclay Oysters v Ryan [2002] HCA 54; (2002) 211 CLR 540

NAAG of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 713; (2002) 195 ALR 207

NAAP v Minister for Immigration and Multicultural and IndigenousAffairs [2002] FCA 805

NAAVv Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCAFC 228; (2002) 123 FCR 298

New South Wales v Paige [2002] NSWCA 235; (2002) 60 NSWLR 371

New South Wales v Spearpoint [2009] NSWCA 233

Northern Territory v Mengel [1995] HCA 65; (1995) 185 CLR 307

NRMA Insurance v Flanagan [1982] 1 NSWLR 585

Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180

Pharm-a-Care Laboratories Pty Ltd v Commonwealth (No 3) [2010] FCA 361; (2010) 267 ALR 494

Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97; (2012) 203 FCR 325

Porter v OAMPS Ltd [2005] FCA 232; (2005) 215 ALR 327

Precision Products (NSW) Pty Ltd v Hawkesbury City Council [2008] NSWCA 278; (2008) 74 NSWLR 102

Puntoriero v Water Administration Ministerial Corporation [1999] HCA 45; (1999) 199 CLR 575

Pyrenees Shire Council v Day [1998] HCA 3; (1998) 192 CLR 330

Rajski v Bainton (1990) 22 NSWLR 125

Rich v Australian Securities and Investments Commission [2004] HCA 42; 220 CLR 129

SAAG v Minister for Immigration and Multicultural andIndigenous Affairs [2002] FCA 547

Sanders v Snell [1998] HCA 64; (1998) 196 CLR 329

SBAP v Refugee Review Tribunal [2002] FCA 590

SBAU v Minister for Immigration and Multicultural and Indigenous Affairs [2007] FCA 1076; (2007) 70 ALD 72

SBBS v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCAFC 361; (2002) 194 ALR 749

SCAA v Minister forImmigration and Multicultural and Indigenous Affairs [2002] FCA 668

SCAZ vMinister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 1377

Sean Investments Pty Ltd v Mackellar [1981] FCA 191; (1981) 38 ALR 363

Spiteri v Nine Network Australia Pty Ltd [2008] FCA 905

Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 278 ALR 291

Stuart v Kirkland-Veenstra [2009] HCA 15; (2009) 237 CLR 215

Sullivan v Moody [2001] HCA 59; (2001) 207 CLR 562

TC v State of New South Wales [1999] NSWSC 31

Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2003] 2 AC 1

Trade Practices Commission v David Jones (Australia) Pty Ltd (1983) 7 FCR 109

West v New South Wales [2007] ACTSC 43

Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515

Wride v Schulze [2004] FCAFC 216

Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537

Yuen Kun Yeu v Attorney General of Hong Kong [1988] AC 175

Date of hearing:

6, 18 August 2015

Registry:

Sydney

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

277

Counsel for the Plaintiffs:

Mr AS Martin SC with Mr M Robinson SC, Ms J Lucy and Mr T Bagley

Solicitor for the Plaintiffs:

Levitt Robinson Solicitors

Counsel for the Defendant:

Mr JC Giles with Mr MJ Smith

Solicitor for the Defendant:

Norton Rose Fulbright Australia

Table of Corrections

14 June 2016

In the Table of Contents the paragraph numbers for the last six headings have been amended to read:

Control  [246]
Vulnerability  [251]
Assumption of responsibility or reliance               [257]
Reasoning by analogy  [260]
Conclusion  [267]

CONCLUSIONS ON STRIKE OUT APPLICATION  [268]

14 June 2016

At the end of the second paragraph in the quoted extract in paragraph 136 the words “Mengel at 547” have been replaced with the words “the Mengel case 69 ALJR 527, 547”.

ORDERS

NSD 1307 of 2014

BETWEEN:

JEFFREY ADAM LOCK
First Plaintiff

WILLIAM THOMAS WESTHEAD
Second Plaintiff

VIRGIL NEDIUM SMITH
Third Plaintiff

AND:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Defendant

JUDGE:	GLEESON J
DATE OF ORDER:	4 FEBRUARY 2016

THE COURT ORDERS THAT:

1.The further amended statement of claim filed on 28 July 2015 be struck out.

2.The plaintiffs pay the costs of the defendants’ interlocutory application dated 28 April 2015.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

PLAINTIFFS AND GROUP MEMBERS	[4]
PRINCIPLES TO BE APPLIED ON A STRIKE OUT APPLICATION	[7]
PLEADED FACTS	[12]
Storm	[13]
The Storm Model	[16]
Collapse of Storm	[19]
Losses suffered by the plaintiffs and group members	[25]
The causal relationship between ASIC’s conduct and the alleged losses	[29]
ASIC’s dealings with Storm	[41]
Regional surveillance investigation	[44]
Regional Surveillance Decision	[52]
Prospectus and the prospectus investigation	[63]
Trailing commissions investigation	[75]
Breach reports and enforceable undertaking	[78]
ASIC AND THE STATUTORY CONTEXT FOR THE CLAIMS	[82]
Objects of the ASIC Act	[83]
ASIC’s functions under the ASIC Act	[84]
ASIC’s function under the Corporations Act	[86]
Chapter 7 of the Corporations Act	[87]
Provisions governing the conduct of Australian financial services licensees	[89]
ASIC’s statutory powers	[93]
MISFEASANCE IN PUBLIC OFFICE	[99]
The alleged invalid or unauthorised conduct	[99]
Regional Surveillance Decision	[100]
Prospectus Investigation Decision	[106]
Breach of Prospectus Investigation Duty	[110]
Breach of Alternative Prospectus Investigation Duty	[115]
Section 42 of FASC: “In the event that a duty of care is necessary to establish misfeasance”	[118]
Legal principles	[121]
Bad faith	[127]
Elements of the tort of misfeasance in public office	[128]
Invalid or unauthorised omissions	[131]
Unlawfulness by reason of invalid exercise of power	[133]
Can an omission be unlawful where there is no duty to act?	[136]
Malice	[139]
Is the relevant conduct capable of being found to be unlawful conduct which caused loss to the plaintiffs?	[142]
Regional surveillance and prospectus investigation decisions	[142]
Breaches of the Prospectus Investigation Duty and alternative prospectus investigation duty	[150]
Conclusion	[154]
Does FASOC plead malice sufficiently?	[155]
Allegations of improper and unlawful motive	[157]
Allegations of bad faith	[164]
Regional Surveillance Decision	[165]
Prospectus Investigation decision and breaches of Prospectus Investigation Duty and Alternative Prospectus Investigation Duty	[171]
Allegation that ASIC did not make a real attempt to comply with its obligations	[173]
ASIC’s alleged bad faith as to the risks of harm	[178]
Allegation that ASIC’s actions in 2008 impeach its inaction in 2007	[186]
Conclusion on claims of tort of misfeasance in public office	[188]
NEGLIGENCE	[189]
The alleged negligence	[189]
The alleged duties of care	[192]
ASIC’s contention: no duty of care	[194]
Considering duty of care on a strike out application	[195]
Affirmative duty of care on a statutory authority	[201]
Claim for damages for pure economic loss	[210]
Duty to control a third party’s conduct	[213]
Duty to warn	[214]
Absence of direct relationship between ASIC and the plaintiffs and group members	[217]
ASIC’s role	[219]
ASIC’s first argument: alleged duty is inconsistent with ASIC’s functions and objects	[232]
ASIC’s second argument: salient facts do not support imposition of duty of care	[242]
Foreseeability	[242]
Control	[246]
Vulnerability	[251]
Assumption of responsibility or reliance	[257]
Reasoning by analogy	[260]
Conclusion	[267]
CONCLUSIONS ON STRIKE OUT APPLICATION	[268]

GLEESON J:

1. By application dated 28 April 2015, the defendant (“ASIC”) seeks an order pursuant to rule 16.21(1) of the Federal Court Rules 2011 (Cth) that the plaintiffs’ amended statement of claim be struck out.

2. On 23 July 2015, the plaintiffs served a proposed further amended statement of claim (“FASOC”) which was filed, with minor amendments, on 28 July 2015. The strike out application is now directed to the FASOC.

3. The FASOC attempts to plead a claim against ASIC based on the torts of misfeasance in public office and negligence in connection with ASIC’s regulation of Storm Financial Ltd (“Storm”), which held an Australian financial services licence (“AFS licence”) issued under the Corporations Act 2001 (Cth) (“Corporations Act”). There is no allegation that ASIC had any direct dealings with any of the plaintiffs or the group members. In summary, the case is that ASIC’s conduct in regulating or failing to regulate Storm resulted in clients of Storm suffering financial loss. In particular, the plaintiffs complain of ASIC’s failure in late 2007 to impose conditions on Storm’s licence and/or to inform the market of its concerns regarding Storm.

   PLAINTIFFS AND GROUP MEMBERS

4. The proceeding is a representative action brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”). The plaintiffs and the persons whom the first and second plaintiffs represent in the proceeding are persons who:

   (1)received financial planning and advice services from Storm;

   (2)pursuant to advice from Storm, used loans to acquire financial products; and

   (3)at some time between 1 November 2007 and 31 January 2009, held investments in unit funds bearing Storm’s brand or otherwise endorsed by Storm to its clients, which funds were index funds indexed to a particular sector of the Australian stock market (“Storm Index Funds”).

5. The group members received advice from Storm over a period between about 1995 and December 2008, which advice they accepted in whole or in part.

6. The third plaintiff represents a sub-class of the group members, comprising Storm clients who held units in the Storm Index Funds of which the responsible entity was Colonial First State Investments Ltd (“Colonial FS”) in the immediate lead up to the termination of those funds.

   PRINCIPLES TO BE APPLIED ON A STRIKE OUT APPLICATION

7. Rule 16.21(1) provides relevantly that a party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading fails to disclose a reasonable cause of action, or is likely to cause embarrassment in the proceeding.

8. It must be apparent on the face of the statement of claim that the facts pleaded, if proved, would establish the cause of action relied upon by the relevant plaintiff or plaintiffs. In Wride v Schulze [2004] FCAFC 216 at [25], a Full Court said:

   …the pleadings must disclose a reasonable cause of action against the party against whom the cause of action is brought and must state all material facts necessary to establish that cause of action and the relief sought. A “reasonable cause of action” for this purpose means one which has some chance of success if regard is had only to the allegations and the pleadings relied on by the applicant.

9. The power to strike out a pleading because it discloses no reasonable cause of action will be exercised only in a plain and obvious case: Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97; (2012) 203 FCR 325 at [43] and [44].

10. A pleading may be struck out as embarrassing if it simply asserts a conclusion to be drawn from facts not stated: Trade Practices Commission v David Jones (Australia) Pty Ltd (1983) 7 FCR 109 at 114. In Spiteri v Nine Network Australia Pty Ltd [2008] FCA 905, Edmonds J said, concerning the predecessor rule to r 16.21:

    22.      Embarrassment … ‘carries the connotation of a pleading which is susceptible to various meanings, or contains inconsistent allegations or in which alternatives are confusingly intermixed or in which irrelevant allegations are made tending to increase expense. The list is not intended to be exhaustive’: Bartlett v Swan Television and Radio Broadcasters Pty Ltd (1995) ATPR 41-434.

    23.      A pleading which is internally inconsistent is embarrassing: Vasyli v AOL International Pty Ltd (NG 219/96) Lehane J, 19 August 1996, unreported. A pleading should assert the basic and constituent facts, not the evidence upon which those facts will or may be proved at trial. A pleading is defective if it simply asserts a conclusion to be drawn from the facts not stated: Trade Practices Commission v David Jones (Australia) Pty Ltd (1985) 7 FCR 109 at 114 – 115; and is not saved by using the words ‘[i]n the premises’ to introduce the conclusion: Davids Holdings Pty Ltd v Coles Myer Ltd (1993) ATPR 41-227.

    24.      The pleading should enable the respondent to know, with sufficient clarity, the case which it is required to meet: Dare v Pulham (1982) 148 CLR 658 at 664.

11. For the purposes of the strike out application, the Court assumes that the facts as alleged in the FASOC can be established at trial: Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537 at [6].

    PLEADED FACTS

12. Apart from preliminary matters, the FASOC is organised into chapters under the following headings:

    (1)Storm;

    (2)First plaintiff’s involvement with Storm;

    (3)Second plaintiff’s involvement with Storm;

    (4)Third plaintiff’s involvement with Storm;

    (5)Group members’ involvement with Storm;

    (6)Collapse of Storm;

    (7)ASIC’s relationship with Storm;

    (8)Misfeasance in public office;

    (9)Negligence.

    Storm

13. Storm’s business was regulated under Division 3 of Part 7.7 of Chapter 7 of the Corporations Act. The business included providing to “retail clients” within the meaning of s 761G of the Act “financial product advice” and “personal advice” within the meaning of s 766B, “financial products” as defined in Division 3 of Part 7.1 of the Act and “financial services” as defined in Division 4 of Part 7.1 of the Act.

14. At all relevant times Emmanuel and Julie Cassimatis were the joint executive directors and sole beneficial shareholders of Storm.

15. Storm was placed into liquidation on about 26 March 2009: ASIC, in the matter of Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) v Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 269.

    The Storm Model

16. The “Storm Model” of financial advice was developed over the period between about 1994 and 2004. The plaintiffs summarised their case about their dealings with Storm as follows:

    Once accepted as a client, each group member was provided with substantially the same advice (known as the ‘Storm Model’: FaSOC [7.1] and [10.1]). Particular aspects of the Storm Model are relevant to the plaintiffs’ claims:

    (a)It required clients to commit to Storm’s Philosophy and invest a substantial amount of time and money in investing with Storm: FASoC [6.2] and [10.4];

    (b)It required clients to pay significant upfront fees to participate in the model (for example, the First Plaintiff had an annual income of $49,000 and paid an upfront fee of $25,699 in August 2007 and $13,921 in November 2007: FASoC [11.2), [11.8] and [12.2]);

    (c)It created a conflict of interest between Storm and its clients. Storm’s clients paid upfront fees of 7% for each unit in a Storm index fund and 0.5% trailing commissions each year: FASoC [9.1]. As such, Storm was incentivised to advise clients to borrow more to invest in its funds and only move money out of one fund if it went into another Storm fund (whereby the client would have to pay a further upfront fee): FASoC [9.2] and [9.3];

    (d)The initial advice was prepared centrally, and did not properly take into account the individual circumstances of the investor. Essentially, each investor was provided with initial advice to use all available equity, and as much leverage as the investor could obtain, to invest in index funds that Storm branded or endorsed: FASoC [6.5(d)], [6.5(e)] and [6.6]; and

    (e)Following the initial advice, Storm would provide further investment advice to clients. This additional advice was generated automatically and almost entirely based on how changes in the value of the Storm index funds had affected a client's loan to value ratio (with the loan to value ratio being monitored by a software program called ‘Phormula’): FASoC [8.1]. So, if the market went up, Storm's investors would borrow to purchase more units in Storm funds: FASoC [6.5(e)] and [7.2]. But, if the market fell, Storm’s investors were also automatically advised to also borrow to purchase more units in Storm funds: e.g. FASoC [6.5(e)] and [13.2].

    The substantial upfront fees meant that the Storm Model only produced positive returns for its clients while the market was rapidly growing: FASoC [6.7], [6.8]. The high fees, high leverage, and centralised advice to increase their leverage and exposure to the market during periods of market stress, created a substantial risk of loss if the market fell or grew at a low rate.

    For example, the First Plaintiff received investment advice from Storm in November 2007 to borrow $157,000 against his home loan and $105,000 in a margin loan to invest in Storm index funds (as well as borrowing to pay Storm’s fees in paragraph 3(b) above): FASoC [11.12] and [12.2]. In December 2007, following an 8.18% fall in the ASX, the First Plaintiff was advised by Storm to increase his margin lending facility from $105,000 to $121,114 and invest those funds (minus Storm’s fees) in Storm index funds: FASoC [13.2] and [13.13]. In April 2008, following a further 7% fall in the ASX, the First Plaintiff was advised to increase his margin loan account from $122,982 to $ 181,718 and invest those funds (minus Storm’s fees) in Storm index funds: FASoC [14.3]. In other words, the First Plaintiff was advised by Storm’s automatic financial advice system to borrow the equivalent of his annual income to invest in a market that had fallen 15% over the previous five months.

    Although not expressly alleged in the FASoC, the plaintiffs and group members expect to lead evidence at trial that by the time the First Plaintiff redeemed his units on 1 January 2009 the equity value of the First Plaintiff’s investments had fallen from $148,154.57 (as at 31 March 2007) to approximately $17,000 (i.e. he had lost approximately 88.5% of his investment after paying back the debt), in circumstances where, pursuant to Storm’s advice, the initial equity contribution had been raised by mortgaging his home.

1. The plaintiffs allege that, in designing the Storm Model, Storm failed to consider the potential impact on its clients of a protracted flat market or of a sharp or prolonged market downturn, during which the costs incurred by the clients’ loans, together with the fees associated with their investments, would be higher than the level of growth in the market.

2. It is also alleged that Storm’s institutional policy was to provide advice solely in accordance with the Storm Model.

   Collapse of Storm

3. As a consequence of the “Global Financial Crisis”, from late 2007 and over the course of 2008, the stock market in Australia went through a prolonged and sustained decline in value. Accordingly, the values of units in Storm Index Funds also went through a prolonged and sustained decline over that period.

4. In early October 2008, Storm sent a letter of advice to all its geared clients recommending that they switch either up to 50% or up to 100% of their entire Storm portfolios into cash and requesting that clients provide to Emmanuel Cassimatis authority to effect that switch at its discretion. This advice is referred to as the “October letter”.

5. It is alleged, in particular, that the October letter was sent in breach of Storm’s AFS licence, which provided that Storm was not permitted to operate a discretionary portfolio account.

6. The plaintiffs and the majority of the group members provided the consent requested in the October letter. As it turned out, the investments of the plaintiffs and the majority of the group members were not switched to cash in October 2008.

7. In early December 2008, the Commonwealth Bank of Australia (“CBA”) lowered the loan to value ratios applicable to the Storm Index Funds managed by Colonial FS and Challenger Managed Investments Ltd. This led to CBA peremptorily redeeming the group members’ remaining holdings in those funds and selling all equities secured by their CBA margin loans.

8. Between about 10 December 2008 and 31 January 2009, the Storm Index Funds managed by Colonial FS and Challenger Managed Investments Ltd were terminated by the relevant responsible entities.

   Losses suffered by the plaintiffs and group members

9. The particulars to paragraph 43.5 of the FASOC identify the losses suffered as a result of the alleged misfeasance in public office as:

   (a)The difference between the respective financial positions of the plaintiffs and the group members had ASIC required an enforceable undertaking from Storm and its promoters to restrain them from providing financial product advice, personal advice, financial services, or the provision of financial products, on or before 31 January 2008, and their current respective financial positions; and

   (b)The respective financial position of the third plaintiff and the members of the sub-class had ASIC begun an investigation into Colonial FS under Part 3 of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) on or about 29 October 2008, and their current respective financial positions.

10. The FASOC states that further particulars of the claims of the plaintiffs and the group members will be provided in due course.

11. By paragraph 47.1 of the FASOC, the same loss is said to have resulted from ASIC’s negligence.

12. As to paragraph 43.5(a), ASIC’s statutory powers do not include a power to require the provision of an enforceable undertaking: see s 93AA(1) of the ASIC Act. The plaintiffs do not contend that ASIC had such a power. It follows that the case for the losses based on ASIC’s failure to require an enforceable undertaking must fail: no loss could have been suffered by reason of ASIC’s failure to do something which it had no power to do. Accordingly, I would strike out particular (a) of paragraph 43.5.

    The causal relationship between ASIC’s conduct and the alleged losses

13. Paragraph 43.4 of the FASOC alleges that, as a result of ASIC’s “failure to exercise its Powers and/or Additional Powers lawfully and in good faith”:

    (a)the plaintiffs and group members did not arrange their affairs in accordance with prudent financial advice tailored to their individual circumstances, and instead arranged their affairs in accordance with financial advice provided by Storm; and

    (b)the first and second plaintiffs, and group members, became liable to receive margin calls and had their units in Storm Index Funds peremptorily redeemed when the ASX was close to its nadir; and

    (c)the third plaintiff, and other group members whose units were not redeemed, were compelled to sell down their investments at a time when the ASX was close to its nadir.

14. Thus, the case is not that ASIC’s conduct was the direct and immediate cause of the plaintiffs’ and group members’ losses. Rather, the case is that ASIC’s conduct led the plaintiffs and group members to experience certain events, or failed to protect them from experiencing certain events which occurred, by which events losses were suffered.

15. Paragraphs 43.2 and 43.3 of the FASOC plead:

    43.2Had ASIC exercised its Powers and/or Additional Powers lawfully and in good faith, the Plaintiffs and Group Members would, in or prior to late 2007, have:

    (a)been made aware of the risks of investing according to the Storm Model;

    (b)addressed those risks through seeking prudent financial advice tailored to their individual circumstances; and

    (c)been advised to sell down their units in the Storm Index Funds in order to repay some or all of their loans.

    43.3Had ASIC exercised its Powers and/or Additional Powers lawfully and in good faith, the Plaintiffs and Group Members would, in the course of late 2007 and/or early 2008:

    (a)the plaintiffs and group members would have arranged their affairs in accordance with prudent financial advice tailored to their individual circumstances, rather than in accordance with the financial advice provided by Storm; and

    (b)accordingly, the first and second plaintiffs, and group members, would have avoided becoming liable to receive margin calls and having their units in the Storm Index Funds redeemed,

    in which case the Colonial FS-managed Storm Index Funds would not have been terminated during a time when the market was at a record low, and the unit holdings of the Third Plaintiff and the members of the Sub-Class would not have been forcibly redeemed.

16. It is not clear whether it is alleged that some or all of the plaintiffs and group members would not have acquired units in Storm Index Funds and borrowed money to acquire those units, had ASIC acted lawfully. Paragraph 43.2 (particularly paragraph 43.2(c)) suggests that this is not the case put against ASIC. Rather, the complaint appears to be that the plaintiffs and group members did not receive advice (from a financial adviser or, perhaps, from ASIC) to “sell down” their units in the Storm Index Funds in order to reduce or repay their borrowings. However, there is no stated basis for a case that ASIC’s failure to exercise its statutory powers prevented the plaintiffs and group members from obtaining such advice from a financial adviser.

17. Paragraph 43.3 does not identify the prudent financial advice which would have enabled the plaintiffs and group members to have avoided becoming liable to receive margin calls and having their units in the Storm Index Funds redeemed. Would it have been advice not to acquire units in the Storm Index Funds, not to borrow money to acquire units, to sell units or some other advice? Nor does paragraph 43.3 state facts by which ASIC’s exercise of statutory powers would have caused the plaintiffs and group members to obtain prudent financial advice. The case might be that, if ASIC had exercised its statutory powers, the plaintiffs and group members would have sought and obtained prudent financial advice because Storm would have been prevented from giving advice or because the plaintiffs and group members would have realised that they should obtain advice from someone other than Storm.

18. The “Powers and/or Additional Powers” referred to in paragraphs 43.2 to 43.4 comprise eight statutory powers, described at paragraphs 94 and 95 below. In paragraph 43.1 of the FASOC, there are four positive actions that, it is alleged, ASIC would have taken in about late 2007 if it had exercised its relevant powers according to law, being:

    (a)The imposition on Storm of an enforceable undertaking similar in substance to an undertaking proposed on 20 December 2008, described below;

    (b)The imposition on Storm of conditions on its AFS licence similar in substance to the proposed enforceable undertaking of 20 December 2008;

    (c)Making its concerns regarding Storm known to the public, by way of media release or otherwise;

    (d)Taking other reasonable action in order to protect the interests of Storm’s clients.

19. Paragraph 35.16 of the FASOC sets out clause 5.1(a) and (b) of the proposed enforceable undertaking of 20 December 2008, as follows:

    (a)Storm will not, before [31 December 2009], engage with (except in compliance with clause 5.1(c), (d) and (e) of this Enforceable Undertaking) and/or provide financial services to any of Storm’s clients in relation to or in connection with:

    (i)        any existing margin loan; or

    (ii)the use of debt directly or indirectly in order to acquire financial products; or

    (iii)the management of any financial products in connection with a geared portfolio.

    (b)Storm will not, before [31 December 2009], engage with (except in compliance with clause 5.1(c) of this Enforceable Undertaking) and/or provide financial services to any new clients in relation to or in connection with:

    (i)the use of debt directly or indirectly in order to acquire financial products; or

    (ii)the management of any financial products in connection with a geared portfolio.

20. Clauses 5.1(c), (d) and (e) of the proposed enforceable undertaking are not pleaded.

21. As noted above, ASIC had no power to impose on Storm an enforceable undertaking. Accordingly, there is no basis for the allegation in paragraph 43.1(a) and I would strike out that sub-paragraph.

22. Paragraph 43.1(d) is so vague that it is liable to be struck out. In order to properly articulate a case based on a failure to act, the plaintiffs must identify what particular acts it is alleged that ASIC was obliged to have done. Accordingly, I would also strike out sub-paragraph 43.1(d).

23. Once these subparagraphs are struck out, the remaining case is that, if ASIC had acted lawfully, it would have imposed conditions on Storm’s financial services licence and/or made its concerns regarding Storm known to the public.

24. These allegations suggest that the case may be that ASIC:

    (1)failed to prevent Storm from providing financial services which services the plaintiffs and group members would not otherwise have received, and as a result, they altered their financial situation to their detriment by, for example, acquiring units in Storm Index Funds and borrowing money to finance those acquisitions;

    (2)failed to prevent Storm from providing financial services which services the plaintiffs and group members would not otherwise have received, and as a result, they failed to alter their financial situation by, for example, not selling units in Storm Index Funds and using the sale proceeds to reduce or repay the borrowing which had financed the acquisition of the units, to their detriment;

    (3)failed to warn the public of matters concerning Storm which, if known, would have caused the plaintiffs and group members to refrain from taking financial services from Storm.

    ASIC’s dealings with Storm

25. Section 30 of the FASOC (“Relationship prior to November 2007”) pleads facts concerning ASIC and its predecessor’s dealings with Emmanuel Cassimatis prior to November 2007 and the AFS licences granted to predecessor entities to Storm.

26. There was correspondence between the Australian Securities Commission (the predecessor to ASIC) (“ASC”) and Mr Cassimatis in October 1993, that is, before the development of the Storm Model.

27. In November 1995, following an inspection of Storm, ASC officers wrote to Mr Cassimatis stating, among other things, that Storm was in breach of disclosure obligations and had not adequately disclosed to its clients the risks involved with investing in the securities that Storm was then recommending. After receiving a response from Mr Cassimatis, the ASC decided not to take, and did not take, any further action.

    Regional surveillance investigation

28. Section 31 of the FASOC (entitled “The Regional Surveillance Investigation”) pleads facts concerning an investigation in 2005, during which ASIC sought and obtained documents from Storm in order, inter alia, to review Storm’s compliance with its AFS licence conditions, and detect and address misconduct and systemic issues. In March 2005, two officers of ASIC (Mr Holiday and Mr Armstrong) met with Storm personnel to discuss the audit and, in the course of that meeting, the ASIC officers had the Storm Model explained to them in detail by Mr and Mrs Cassimatis.

29. After receiving documents from Storm, ASIC conducted an audit of the documents.

30. The plaintiffs allege that, following the March 2005 meeting ASIC, through Mr Holiday and Mr Armstrong, knew or ought to have known the following matters:

    (1)That Storm “did not as a matter of practice, or probably did not as a matter of practice, give such consideration to, or conduct such investigation of, the subject matter of the advice as was reasonable in all of the circumstances, within s 945A(1)(b) of the Corporations Act”. Having regard to the language of s 945A(1)(b), set out in full at paragraph 49 below, the “advice” was “personal advice” given to a person as a “retail client”: s 944A. “Personal advice” is defined by s 766B(3) to mean financial product advice given or directed to a person in circumstances where the provider of the advice has considered one or more of the person’s objectives, financial situation and needs or a reasonable person might expect the provider to have considered one or more of those matters (FASOC [31.5]);

    (2)That Storm was providing, or was probably providing, advice which was not appropriate to each of its clients, having regard to the consideration it was required to give and the investigation it was required to conduct within s 945A(1)(c) of the Corporations Act (FASOC [31.6]);

    (3)That Storm’s system of providing financial advice to clients resulted, or probably resulted, in Storm consistently contravening s 945A(1) of the Corporations Act when providing financial advice to clients (FASOC [31.7]).

31. These are not clear and unequivocal allegations of actual knowledge. It is not alleged that ASIC had actual knowledge of a contravention of s 945A in relation to any particular client or clients. In Armitage v Nurse [1998] Ch 241 at 257, Millett LJ noted that an allegation that the defendant “knew or ought to have known”:

    …is not treated as making two alternative allegations, i.e. an allegation (i) that the defendant actually knew with an alternative allegation (ii) that he ought to have known; but rather a single allegation that he ought to have known (and may even have known – though it is not necessary to allege this).

32. The particulars provided to support the allegations as to ASIC’s state of knowledge set out above comprise the following facts allegedly learned at the March 2005 meeting:

    (1)Storm’s advisers had no authority to prepare advice for clients;

    (2)All advice was prepared by a central committee;

    (3)Storm’s advice required rigid discipline;

    (4)Storm’s typical advice was that clients use debts to purchase units in Storm-badged Index Funds;

    (5)Storm encouraged clients first to borrow against their property and then take out margin loans in order to purchase units in the funds; and

    (6)Storm advised additional investment through borrowing in response to changes in clients’ loan to value ratios resulting from movements in the market.

33. At the relevant time, s 945A(1) provided:

    (1)       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.

34. The six particulars are not inconsistent with compliance with s 945A. For example, it is not alleged that ASIC knew or ought to have known that Storm had not determined the relevant personal circumstances in relation to giving any particular advice, or that it did not, as a matter of practice, make such a determination. Nor is it alleged that ASIC knew or ought to have known that Storm had not made reasonable inquiries in relation to personal circumstances in connection with any particular advice, or that it did not, as a matter of practice, do so.

35. At paragraph 31.4 of the FASOC it is alleged that, during the March 2005 meeting, one of the ASIC officers in attendance “raised a concern that, as reviews of client circumstances were driven by movements in the market, and Storm’s clients were being processed en masse, Storm would face challenges in complying with the regulations regarding provision of financial advice”. It is not alleged that the relevant ASIC officer was acting dishonestly or otherwise than in good faith in raising this matter as a “concern”.

    Regional Surveillance Decision

36. The plaintiffs allege that, on about 29 March 2005, following the conclusion of the regional surveillance investigation, ASIC through Mr Holiday and another ASIC officer, Mr Eastment, identified particular breaches of the Corporations Act for ASIC to request that Storm address (which did not include a breach of s 945A(1)), but otherwise decided to take no further action. It is not alleged that any ASIC officer identified any breach of s 945A but deliberately failed to request that Storm address any such breach.

37. In the chapter of the pleading entitled “Misfeasance in public office”, there is a further allegation that ASIC, through Mr Holiday and Mr Eastment, “considered whether to, and decided to not, exercise its Powers and/or Additional Powers to take any further regulatory or enforcement action in relation to the risks identified at paragraph 36.2(a)” of the FASOC. Paragraph 36.2(a) is set out at paragraph 58 below. It is this decision which is described in the FASOC as the “Regional Surveillance Decision”.

38. On 29 March 2005, ASIC wrote to Storm, advising it of the outcomes of the audit, including findings that Storm had breached various obligations. Storm responded by advising ASIC that it would ensure that it addressed most of the breaches raised. After receiving Storm’s response, ASIC through officers including Messrs Holiday, Eastment and Armstrong decided not to take, and did not in fact take, any further action with respect to the “concerns raised” during the regional surveillance investigation.

39. Paragraph 36.2(a) of the FASOC pleads relevantly that, at the conclusion of the regional surveillance investigation, ASIC through officers including the “Regional Surveillance Officers” and the “Prospectus Investigation Officers” knew of “the risk that Storm’s conduct posed to the plaintiffs and group members”. The definitions section of the FASOC refers the reader to paragraph 36.2(b) for “Regional Surveillance Officers” and 36.2(a) for “Prospectus Investigation Officers” but neither of these paragraphs identifies the relevant officers. The “Regional Surveillance Officers” are defined, at paragraph 31.11, to include Mr Holiday, Mr Eastment and Mr Armstrong. At paragraph 33.18, five ASIC officers are named as officers involved in the “Prospectus Investigation”.

1. It is not alleged that ASIC’s officers had any particular knowledge of any of the plaintiffs or the group members. At the time of the conclusion of the regional surveillance investigation, the first and third plaintiffs were not yet clients of Storm. Presumably, the group members comprise a mix of persons who were current and future clients of Storm at the time of the conclusion of the regional surveillance investigation.

2. The nature of the risk posed by Storm’s conduct is not specified in the FASOC. Clearly, it is a risk of financial loss but the precise hazard or hazards are not identified. Paragraph 36.2(a) pleads that by no later than the conclusion of the regional surveillance investigation, the “Regional Surveillance Officers” knew of “the risks posed” by the following matters:

   (i)Storm’s advisers had no authority to prepare advice for clients and all advice was prepared by a central committee;

   (ii)Storm’s clients were encouraged to borrow against their property and also to take out margin loans in order to fund their investments;

   (iii)Storm advised clients to make additional, leveraged, investments in response to changes in clients’ loan to value ratios as a result of market movements;

   (iv)As a result of (i) to (iii) above, Storm was unable to properly comply with the law regarding the provision of financial advice, including s 945A of the Corporations Act;

   (v)Storm had failed to adequately disclose to its clients the risks inherent in its advice and had a history of failing to disclose the risks involved in investing in financial products;

   (vi)Storm failed to comply with statutory requirements regarding its holding itself out as an “independent” financial planner;

   (vii)Storm had a record of representing to its clients that it was an “independent” financial adviser despite not meeting the requirements for the use of that terms under s 923A of the Corporations Act by virtue of receiving trailing commissions from financial institutions;

   (viii)Storm had a record of failing to address possible breaches of its obligations when notified of ASIC’s suspicions of those breaches;

   (ix)In the premises of (i) to (viii), Storm systematically made misrepresentations to its clients, in breach of s 12DA of the ASIC Act and/or s 1041H(1) of the Corporations Act.

3. Paragraph 36.2(a)(iv) does not follow, as a matter of inference, from (i) to (iii). Putting aside the ambiguity of the words “unable to properly comply”, in order to allege that Storm had not complied with, or did not comply with, s 945A, it is necessary to allege that Storm had provided advice without complying with the elements of s 945A. Paragraphs 36.2(a)(i) to (iii) do not, without more, demonstrate non-compliance with any particular requirement of s 945A.

4. Paragraph 36.2(a)(ix) also does not follow, as a matter of inference, from (i) to (viii). In order to make an allegation that Storm systematically made misrepresentations, it is necessary to identify the representation or representations systematically made and the falsity of that representation or those representations. The only sub-paragraph which might satisfy these requirements is (vii), although it is not clear what is meant by the words “had a record” in that sub-paragraph.

5. The particulars set out below paragraph 36.2(a) “repeat the matters pleaded in” sections 30, 31 and 36.1 of the FASOC. Section 30 (“Relationship prior to November 2007”) and section 31 (“Regional surveillance investigation”) are summarised above. The matters in those sections do not support the allegation of knowledge in paragraph 36.2(a). In particular, knowledge cannot be inferred from matters that ought to have been known. As noted above, the allegations of state of mind in section 31 are not distinct allegations of knowledge.

6. Paragraph 36.1 alleges that the knowledge that ASIC’s officers obtained during their investigations is attributed to ASIC.

7. These particulars do not assist to identify the risk that Storm’s conduct posed to the plaintiffs and group members of which ASIC is alleged to have been aware. It could not be suggested that the plaintiffs and group members made investments in Storm Index Funds in the belief that the investments were risk-free. Based on paragraph 43.2(c) of the FASOC, the risk intended to be alleged may be a risk that the plaintiffs and group members would not decide to sell an investment in a Storm Index Fund that they would have sold had they been sufficiently informed of the risks entailed in retaining the investment.

   Prospectus and the prospectus investigation

8. Section 32 of the FASOC pleads facts in connection with Storm’s lodgement of a prospectus with ASIC in November 2007 for the offer of shares to the public. The alleged facts include that various ASIC officers were aware of the contents of the prospectus as a result of its lodgement.

9. Section 33 of the FASOC is entitled “Prospectus investigation”. Relevantly, it is alleged:

   (1)In about mid-2007, an ASIC officer profiled Storm and noticed some matters which he considered to be highly unusual being:

   (a)Storm claimed no further service was provided to earn trail commissions, but it referred to extensive ongoing “servicing” provided to clients; and

   (b)Revenues of $44 million were generated by 34 advisers;

   (2)On 7 November 2007, an ASIC officer assessed the recently lodged prospectus as being “high risk” and referred the matter for full surveillance;

   (3)On 12 November 2007, ASIC advised Storm that it would visit Storm’s offices to better understand Storm’s advice model and its “Phormula” system described in the prospectus;

   (4)Three ASIC officers, Ms Korpi, Ms Jong and Ms Koromilas, visited Storm’s office on 13 November 2007, at which they were told certain things set out in the FASOC and received a typical Storm Statement of Advice under s 761A of the Corporations Act;

   (5)After the meeting, one of the ASIC officers determined that Storm’s business model was “innovative” and therefore Storm’s representation to that effect was not misleading or deceptive.

10. Section 761A defines a “Statement of Advice” to mean a Statement of Advice required by s 946A to be given in accordance with Subdivisions C and D of Division 3 of Part 7.7.

11. At paragraphs 33.15 to 33.17, the plaintiffs allege that, following the 13 November 2007 meeting, ASIC through Ms Korpi, Ms Jong and Ms Koromilas, knew or ought to have known the following matters:

    (1)That Storm “did not as a matter of practice, or probably did not as a matter of practice, give such consideration to, or conduct such investigation of, the subject matter of the advice as was reasonable in all of the circumstances, within s 945A(1)(b) of the Corporations Act”;

    (2)That Storm was providing, or was probably providing, advice which was not appropriate to each of its clients, having regard to the consideration it was required to give and the investigation it was required to conduct, within s 945A(1)(c) of the Corporations Act;

    (3)That Storm’s system of providing financial advice to clients resulted, or probably resulted, in Storm consistently contravening s 945A(1) of the Corporations Act when providing financial advice to clients.

12. This language repeats the language of paragraphs 31.5 to 31.7 of the FASOC.

13. The particulars provided to support the allegations as to the ASIC officers’ states of mind following the 13 November 2007 meeting comprise the following facts allegedly learned at the meeting:

    (1)Storm’s process for issuing a statement of advice being:

    (a)First, the client meets with a “para planner”, who gathers information about the client and its financial circumstances;

    (b)Second, the information gathered is referred to a central panel in Storm’s head office in Townsville;

    (c)Third, the information is used to prepare a draft statement of advice in the central office;

    (d)Fourth, the central panel signs off on the statement of advice;

    (e)Fifth, the statement of advice is provided to the adviser; and

    (f)Sixth, the adviser meets with the client to discuss the statement of advice;

    (2)Storm’s process for issuing a statement of advice was calculated to “ensure consistency of advice and remove any bias of the individual adviser”;

    (3)Storm’s client education process was specifically designed to filter out potential clients who were not “long term, disciplined and [did not] have the same attitude as Storm”;

    (4)Storm did not divide its clients into categories, as other financial advisory firms did; and

    (5)Storm’s provision of financial advice to clients was automated in order to free up time for advisers to spend with clients instead of preparing advice for clients.

14. Again, these particulars do not support the allegations that the ASIC officers knew or ought to have known that Storm was acting in contravention of s 945A, in the absence of any allegation that they knew or ought to have known of one or more facts from which it could be inferred Storm had failed to comply with one or more of the requirements of s 945A.

15. Paragraph 33.18 alleges that, after the 13 November 2007 meeting with Storm, the relevant ASIC officers decided:

    (a)To launch the “trailing commissions investigation”;

    (b)To make a s 739 order to prevent the initial public offering of Storm’s stock to the public, pending the resolution of the trailing commissions “issue”;

    (c)Not to take any further steps with respect to the matters raised in and issues identified during the prospectus investigation.

16. Paragraph 39.9 of the FASOC alleges that, by 16 November 2007, ASIC through the “Prospectus Investigation Officers” (including at least Ms Korpi and Ms Jong) “considered whether to, and decided to not, exercise ASIC’s Powers and/or Additional Powers to take any further regulatory or enforcement action in relation to the risks identified at paragraph 36.2” of the FASOC.

17. Paragraph 36.2(b) of the FASOC pleads that, at the conclusion of the prospectus investigation, ASIC through the “Prospectus Investigation Officers” knew the following matters:

    (i)Storm did not divide its clients into categories for the purpose of providing them with financial advice;

    (ii)The Storm Model was based on the provision of centralised advice that was prepared automatically;

    (iii)The automatically generated advice failed to take into account the individual needs of investors;

    (iv)The Storm Model was highly leveraged, and the “Additional Step Investments” would cause clients to increase their leverage during periods of market downturn (by making “Recovery Steps”);

    (v)As a result of matters set out at (i) to (iv) above, the Storm Model posed significant risk to investors during periods of negative changes in market conditions;

    (vi)Storm’s clients would not receive financial advice appropriate to their individual circumstances as, to the knowledge of the “Prospectus Investigation Officers”:

    A.each of Storm’s financial advisers handled approximately 400 clients, which ASIC, and in particular Deborah Koromilas, knew to be far more clients than most financial advisers handled;

    B.Storm’s financial advisers spent substantially less time planning advice for their clients than did most financial advisers;

    C.the financial advice provided by Storm to its clients was commoditised, and devised in Storm’s central office and not by the financial advisers assigned to the clients; and

    D.Storm’s central office was catering to far more clients than it had previously due to a number of recent acquisitions.

    (vii)In the premises of sub-paragraph (v) above, Storm’s system for providing financial advice to clients meant that it contravened, or was likely to contravene, s 945A(1) of the Corporations Act when providing advice to clients;

    (viii)Storm would, as a result of a conflict with its clients’ interests encourage its clients to incur more debt than a prudent financial planner would do, in view of its clients’ individual circumstances as, to the knowledge of the “Prospectus Investigation Officers”:

    A.the Storm Model created an incentive for Storm to encourage its clients to heavily gear their assets in order to invest in Storm Index Funds, whether or not doing so would be in the best interests of the clients; and

    B.Storm had a practice of encouraging its clients to heavily gear their assets in order to invest in Storm Index Funds regardless of the movement of the markets, in such a way as would bring substantial income to Storm.

    (ix)Storm’s Financial Services Guide represented to Storm’s investors that Storm would only recommend an investment to an investor after considering its suitability for that investor’s individual investment needs, objectives and financial circumstances. In the premise of sub-paragraphs (i) and (ii) Storm systematically made misrepresentations to its clients, in breach of s 12D(1) of the ASIC Act and/or s 1041H(1) of the Corporations Act.

    (x)about the matters known to “Regional Surveillance Officers” about Storm as a result of the regional surveillance investigation, because that information was held by ASIC at all relevant times and, in carrying out their duties, the “Prospectus Investigations Officers” consulted, or had an obligation, or an opportunity to consult, the ASIC file concerning Storm and in particular ASIC’s records concerning the regional surveillance investigation.

18. The particulars set out below paragraph 36.2(b) “repeat the matters pleaded in” sections 32 and 33 and paragraph 36.1 of the FASOC.  Sections 32 and 33 are summarised in paragraphs 64 and 65 above.  As noted earlier, paragraph 36.1 makes allegations that knowledge of particular ASIC officers is attributable to ASIC.  These particulars do not support the allegations of knowledge in paragraph 36.2(b).

19. I accept that (ii) and (iii) provide a basis for the allegation (in (vii)) of knowledge of a contravention of s 945A. I accept that (ii) and (iii) also provide a basis for the allegation in (ix). However, to the extent that the allegations depend upon the matters pleaded in sections 32 and 33 (as they appear to, from the particulars), those matters in those sections do not support the allegation of knowledge in paragraph 36.2(b).

    Trailing commissions investigation

20. The trailing commissions issue is identified in paragraph 34.1 of the FASOC as a concern “about an anomaly in Storm’s accounting practices whereby Storm had treated as financial assets future trailing commissions earned from the managers of Storm’s Index Funds in relation to Storm’s clients’ investments in those funds”.

21. Paragraph 34.3 pleads that, over the course of several months, ASIC and Storm negotiated a resolution to the trailing commissions issue. Paragraph 34.4 alleges that, on or about 26 March 2008, ASIC determined to approve Storm’s proposed resolution to the trailing commissions issue.

22. It is not clear how this investigation is relevant to the case made against ASIC because, as appears from paragraph 31 above, the complaint is that the plaintiffs’ and group members’ losses resulted from their alleged inability to take action in or prior to late 2007.

    Breach reports and enforceable undertaking

23. Section 35 of the FASOC sets out events between October 2008 and December 2008. Again, it is not clear how this investigation is relevant to the case made against ASIC.

24. Paragraph 35.11 alleges that, on about 12 December 2008, ASIC commenced an investigation into Storm in relation to suspected breaches of its obligations as an AFS licence holder under s 912A of the Corporations Act and ss 12DA(1) and 12DB(1)(g) of the ASIC Act. Shortly thereafter, notices were issued under s 19(2) of the ASIC Act to Emmanuel and Julie Cassimatis to appear before ASIC for examination under oath.

25. Paragraph 35.14 pleads that on about 20 December 2008, ASIC provided to Storm a proposed enforceable undertaking which it “strongly encouraged” Storm to provide. This is the proposed undertaking referred to in paragraph 43.1 of the FASOC, and mentioned earlier. The proposed undertaking is alleged to have recorded that ASIC held the following “concerns”:

    A.Storm does not have in place the resources and/or the infrastructure to be in a position to provide financial services to the geared clients and/or comply with the Licence, as required by the Corporations Act.

    B.During the falling market, Storm provided financial services to the geared clients without full consideration of their personal circumstances and on a discretionary basis, in breach of Clause 18 of their [AFS licence], s 912A and s 945A of the Corporations Act.

    C.During the falling market, Storm represented to and/or agreed with some of the geared clients, that it would provide financial accommodation, for those clients, to assist those clients to meet their margin calls. Notwithstanding such representation(s)/agreement(s), Storm did not in fact extend such financial accommodation for those clients and/or did not advise those clients that it had not extended such financial accommodation. These actions may amount to a breach or breaches of one or more of the provisions of Part 2 Division 2 of the ASIC Act.

    D.Storm provided financial product advice to geared clients in margin call, that they request from the margin lender a 14 day period to consider their position. In doing so Storm may have mislead (sic) clients by failing to advise them of the consequences of such action. These actions may amount to a breach or breaches of one or more of the provisions of Part 2 Division 2 of the ASIC Act.

26. It is not pleaded that there was any dishonesty or lack of good faith on the part of any ASIC officer in proposing an enforceable undertaking recording those matters as “concerns” held by ASIC.

    ASIC AND THE STATUTORY CONTEXT FOR THE CLAIMS

27. ASIC is a body corporate created under the ASIC Act.

    Objects of the ASIC Act

28. Section 1 of the ASIC Act provides:

    Objects

    (1)       The objects of this Act are:

    (a)to provide for the Australian Securities and Investments Commission (ASIC) which will administer such laws of the Commonwealth, a State or a Territory as confer functions and powers under those laws on ASIC; and

    (b)       to provide for ASIC's functions, powers and business; and

    (c)to establish a Corporations and Markets Advisory Committee to provide informed and expert advice to the Minister about the content, operation and administration of the corporations legislation (other than the excluded provisions), about corporations and about financial products and financial markets; and

    (d) to establish a Takeovers Panel, a Companies Auditors and Liquidators Disciplinary Board, a Financial Reporting Council, an Australian Accounting Standards Board, an Auditing and Assurance Standards Board and a Parliamentary Joint Committee on Corporations and Financial Services.

    (2)       In performing its functions and exercising its powers, ASIC must strive to:

    (a) maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and

    (b)promote the confident and informed participation of investors and consumers in the financial system; and

    (d)administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and

    (e)receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it; and

    (f)ensure that information is available as soon as practicable for access by the public; and

    (g)take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it.

    (3)       This Act has effect, and is to be interpreted, accordingly.

    ASIC’s functions under the ASIC Act

1. Section 11 of the ASIC Act confers on ASIC a multiplicity of functions. It provides relevantly:

   Corporations legislation functions and powers and other functions and powers

   (1)ASIC has such functions and powers as are conferred on it by or under the corporations legislation (other than the excluded provisions).

   (2)ASIC also has the following functions:

   (a)to provide such staff and support facilities to the Panel, the Disciplinary Board and the Review Board as are necessary or desirable for the performance and exercise by the Panel, the Disciplinary Board and the Review Board of their respective functions and powers;

   (b)to advise the Minister about any changes to the corporations legislation (other than the excluded provisions) that, in ASIC's opinion, are needed to overcome, or would assist in overcoming, any problems that ASIC has encountered in the course of performing or exercising any of its functions and powers.

   (3)ASIC may, on its own initiative or when requested by the Minister, advise the Minister, and make to the Minister such recommendations as it thinks fit, about any matter of a kind referred to in section 148.

   (4)ASIC has power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions.

   (6)       Subject to this Act, ASIC has the general administration of this Act.

   (8)ASIC may, with the consent of the Minister, enter into an agreement or arrangement with a State or Territory for the performance of functions or the exercise of powers by ASIC as an agent of the State or Territory.

   (9)ASIC has such functions and powers as are referred to in such an agreement or arrangement. However, ASIC is not under a duty to perform such functions or exercise such powers.

   (9A)ASIC may have functions or powers conferred on it by or under a law of a State or Territory if:

   (a)that law provides for, or relates to, the repeal, amendment or termination (however described) of the operation of, any of the replaced legislation within the meaning of item 22 of Schedule 8 to the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999; and

   (b)       the conferral of the powers or functions is in accordance with:

   (i)provisions of an agreement entered into by the Commonwealth and the State or Territory, being provisions approved by the Minister for the purposes of this subsection; (ii)   an approval given by the Minister for the purposes of this subsection.

   ASIC has the functions and powers so conferred by that law. However, ASIC is not under a duty to perform such functions or exercise such powers.

   (10)ASIC may, with the written consent of the Minister, enter into an agreement or arrangement with a regulatory body of a foreign country under which ASIC undertakes to assist that regulatory body to ascertain whether Australian auditors comply with audit requirements that are:

   (a) imposed by or under laws of that foreign country; or

   (b) adopted as professional standards in that foreign country.

   (11)The Minister may, in writing, vary or revoke the Minister’s consent mentioned in subsection (10).

   …

   (14)     ASIC has the following functions:

   (a)to assist a regulatory body with which it has entered into an agreement or arrangement under subsection (10) to examine the policies and working practices of an Australian auditor, so as to help the regulatory body to ascertain compliance with audit requirements to which the agreement or arrangement relates;

   (b) to disclose to a regulatory body with which it has entered into an agreement or arrangement under subsection (10) the information that ASIC has obtained in assisting in such an examination.

   (15)In performing the function referred to in paragraph (14)(a), ASIC may examine policies and working practices of an auditor in general or in their application to particular audits or in both of those respects.

   (16)ASIC is not under a duty to perform a function referred to in subsection (14) or to exercise a power in relation to such a function.

   (17)     ASIC is not subject to any directions of the Minister in relation to:

   (a)entering into an agreement or arrangement under subsection (8) or (10); or

   (b)performing functions or exercising powers referred to in subsection (9); or

   (c)performing functions conferred under subsection (9A) or (14) or exercising any related powers.

2. Additionally, s 12A confers additional functions on ASIC, as follows:

   (1)ASIC has the functions and powers that are conferred on it by or under Division 2 of Part 2 of this Act and by or under the following Acts:

   (c)       the Insurance Contracts Act 1984 ;

   (d)       the Superannuation (Resolution of Complaints) Act 1993;

   (e)       the Life Insurance Act 1995;

   (f)       the Retirement Savings Accounts Act 1997;

   (g)       the Superannuation Industry (Supervision) Act 1993.

   (2)ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system.

   (3)ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the payments system by:

   (a)promoting the adoption of approved industry standards and codes of practice; and

   (b)       promoting the protection of consumer interests; and

   (c)       promoting community awareness of payments system issues; and

   (d)       promoting sound customer-banker relationships, including through:

   (i)monitoring the operation of industry standards and codes of practice; and

   (ii)       monitoring compliance with such standards and codes.

   (4)Subsections (2) and (3) confer functions and powers to the extent to which they are not in excess of the legislative power of the Commonwealth.

   (5)       ASIC may:

   (a)advise the Minister about any changes to a law listed in subsection (1) that ASIC thinks are needed to help overcome any problems that ASIC has encountered in the course of performing its functions or exercising any of its powers under that law; and

   (b)advise the Minister and make such recommendations as it thinks fit about any matter relating to its functions in subsections (2) and (3).

   (6)ASIC has power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions.

   ASIC’s function under the Corporations Act

3. By s 5B of the Corporations Act, subject to the ASIC Act, ASIC has the general administration of that Act.

   Chapter 7 of the Corporations Act

4. Chapter 7 is entitled “Financial services and markets”. The main object of Chapter 7 is set out in s 760A, being to promote:

   (a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

   (b)fairness, honesty and professionalism by those who provide financial services; and

   (c)       fair, orderly and transparent markets for financial products; and

   (d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

5. Part 7.6 of Chapter 7 establishes a licensing regime for providers of financial services, by the issue of AFS licences.

   Provisions governing the conduct of Australian financial services licensees

6. Section 912A sets out general obligations imposed on the holder of an AFS licence.

7. Section 945A of the Corporations Act is set out at paragraph 49 above.

8. Section 1041H of the Corporations Act provides that a person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

9. Section 12DA(1) of the ASIC Act provides that a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

   ASIC’s statutory powers

10. The expressions “Powers” and “Additional Powers” are defined in section 38 of the FASOC.

11. The “Powers” are:

    (1)The general powers of investigation under s 13 of the ASIC Act, where ASIC has reason to suspect:

    (a)a contravention of the corporations legislation (other than the excluded provisions); or

    (b)a contravention of a law of the Commonwealth, or of a State or Territory in this jurisdiction, being a contravention that:

    (i)concerns the management or affairs of a body corporate or managed investment scheme;

    (ii)or involves fraud or dishonesty and relates to a body corporate or managed investment scheme or to financial products.

    (2)The general power of administration over the Corporations Act under s 5B of that Act, particularly as it relates to the enforcement and administration of Part 7.7 of the Act; To give a written notice requiring the production to a specified member or staff member, at a specified place and time, of specified books relating to affairs of a body corporate, under s 30(1) of the ASIC Act;

    (3)To direct a financial services licensee to give to ASIC a written statement containing the specified information about the financial services provided by the licensee or its representatives; or the financial services business carried on by the licensee, under s 912C(1) of the Corporations Act;

    (4)To make an order under s 739(1) of the Corporations Act (“stop order”).

12. The “Additional Powers” are:

    (1)To impose additional conditions on an AFS licence under s 914A(1) of the Corporations Act;

    (2)To show cause, at a hearing, why its AFS licence should not be suspected (and to suspect or cancel that licence following that hearing) under s 915C(1) of the Corporations Act;

    (3)To accept a written undertaking given by a person in connection with a matter in relation to which ASIC has a function or power under the ASIC Act, in accordance with s 93AA(1) of the ASIC Act;

    (4)To do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions, under s 11(4) of the ASIC Act.

13. As noted in paragraph 34 above, the allegations of what ASIC should have done, if it had acted lawfully, are in paragraph 43.1 of the FASOC. If paragraphs 43.1(a) and (d) are struck out, the remaining allegations are that ASIC should have done the things in paragraphs 43.1(b) and (c). However, even though paragraph 43.1 is premised on the situation “[h]ad ASIC exercised its Powers and/or Alternative Powers”, those powers are not all powers to do the things in paragraphs 43.1(b) and (c). The potentially relevant powers are:

    (1)The power to impose additional conditions on an AFS licence under s 914A(1) of the Corporations Act; and

    (2)The power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions, under s 11(4) of the ASIC Act.

14. The relevance of the other “Powers” and the other “Alternative Powers” to the case as pleaded is not clear.

15. The plaintiffs accepted that each of the “Powers” and “Additional Powers” is a discretionary power.

    MISFEASANCE IN PUBLIC OFFICE

    The alleged invalid or unauthorised conduct

16. The plaintiffs plead four relevant acts or omissions, said to amount to torts of misfeasance in public office. They are:

    (1)The Regional Surveillance Decision (see paragraph 39.7 of FASOC);

    (2)The Prospectus Investigation Decision (see paragraph 39.12 of FASOC);

    (3)Alternatively to (2), “at the conclusion of the prospectus investigation (that is, around 16 November 2007), ASIC was under a duty to decide whether to take regulatory or enforcement action in relation to specified known risks and failed to do so because it failed to act reasonably and lawfully when considering whether to exercise that duty (“breach of the Prospectus Investigation Duty”) (paragraph 39.13(d) of FASOC);

    (4)Alternatively to (2) and (3), “at the conclusion of the prospectus investigation, having regard to known risks caused by Storm’s conduct, the circumstances called for the exercise by ASIC of certain powers, ASIC therefore had a duty to exercise them and erred by failing to do so” (“breach of the Alternative Prospectus Investigation Duty”) (paragraph 39.14(e) of FASOC).

    Regional Surveillance Decision

17. The alleged decision, pleaded in paragraph 39.4 of the FASOC, is a decision, by ASIC, through its officers Jeremy Holiday and Paul Eastment, not to exercise ASIC’s “Powers and/or Additional Powers [to] take any further regulatory action in relation to the risks identified at paragraph 36.2(a)” of the FASOC.

18. The particulars below paragraph 39.4 refer to paragraph 31.8 and its particulars.

19. Paragraph 31.8 states:

    On about 29 March 2005, following the conclusion of the Regional Surveillance Investigation, ASIC, through Jeremy Holiday and Paul Eastment identified particular breaches for ASIC to request that Storm address (which did not include a breach of s 945A(1) of the Corporations Act), but otherwise decided to take no further action.

    Particulars

    Document titled “Licensee Interim Surveillance Report – Storm Financial Limited’ signed off by Jeremy Holiday on 29 March 2005 at 10:59 am and reviewed by Paul Eastment on 29 March 2005 at 11.33 am. In particular, the report marked ‘no’ next to ‘is there a reasonable prospect that enforcement may result or are you considering a referral to enforcement’.

20. Without referring to paragraph 31.8, paragraph 39.4 may imply that Jeremy Holiday and Paul Eastment gave consideration as to whether to exercise each of the eight powers that comprise the “Powers and/or Additional Powers”. However, read with paragraph 31.8, the impugned decision appears to be a decision “otherwise…to take no further action”.

21. The matters said to render the regional surveillance decision unlawful are set out at paragraph 39.6 of the FASOC, namely:

    (a)Failure to take into account matters said to be mandatory considerations;

    (b)Failure to act reasonably and rationally; and/or

    (c)Failure to make a decision consistently with the purposes for which the “Powers and Additional Powers were granted” (collectively the “three administrative law errors”).

22. The alleged mandatory considerations are set out at paragraph 39.2 of the FASOC. They comprise matters which ASIC must strive to achieve or promote by s 1(2)(b) and (f) of the ASIC Act, ASIC’s functions under s 12A(2) and (3)(b) of the ASIC Act, the objects of Chapter 7 of the Corporations Act set out in s 760A(a) and (b) of that Act and the risks of injury and financial harm to persons in the position of the plaintiffs and group members arising from the matters in paragraphs 36.2(a) and (b) of the FASOC (set out at paragraphs 57 and 72 above).

    Prospectus Investigation Decision

23. The alleged prospectus investigation decision is similar to the regional surveillance decision. That is, it is an alleged decision that relevant ASIC officers considered whether to, and decided to not, exercise ASIC’s “Powers and/or Additional Powers to take regulatory or enforcement action in relation to the risks identified at paragraph 36.2” of the FASOC.

24. The particulars below paragraph 39.9, describing the decision, refer to paragraph 33.18 and its particulars.

25. Paragraph 33.18 alleges, relevantly:

    After the meeting with Storm on 13 November 2007, ASIC (through the officers involved in the Prospectus Investigation, including Christopher Anderson, Deborah Koromilas, Elizabeth Korpi, Belisa Jong, and Mary Chan), decided:

    …

    (c)Not to take any further steps with respect to the matters raised in, and issues identified during, the Prospectus Investigation.

    Particulars

    In relation to the decision in sub-paragraph (c), document titled ‘Prospectus – Equities – Unquoted’ for Storm Financial Limited as updated on 16 November 2007. In particular, the Result is ‘no further action required’ and the Summary of Action notes ‘NFA required’.

26. The matters said to render the prospectus investigation decision unlawful are the three administrative law errors.

    Breach of Prospectus Investigation Duty

27. Paragraph 39.13 of the FASOC pleads that, at the conclusion of the prospectus investigation, ASIC was under a duty “to decide to take regulatory or enforcement action in relation to the risks identified in paragraph 36.2(a) and (b) of the FASOC” (referred to in the pleading as the “Prospectus Investigation Duty”).

28. Sub-paragraph 39.13(b) of the FASOC states:

    In considering whether to make that decision, ASIC was required to:

    (i)        take into account the Mandatory Considerations; and/or

    (ii)       act reasonably and rationally; and/or

    (iii)make a decision consistently with the purposes for which the Powers and Additional Powers were granted.

29. The alleged breach of that duty is pleaded as follows at paragraphs 39.13(c) and (d):

    (c)ASIC’s [sic] failed to act in accordance with the matters raised in sub-paragraph (b) in considering whether to make that decision or in failing to properly consider whether to make such a decision, and thereby failed to comply with the Prospectus Investigation Duty; and

    (d)ASIC’s failure to comply with the Prospectus Investigation Duty was unlawful.

30. As Mr Giles, counsel for ASIC, noted, the FASOC does not identify the source or nature of the Prospectus Investigation Duty.

31. In the plaintiffs’ written submissions, it was argued that ASIC had a “public law duty to act” where a decision not to act lacks an evident and intelligible justification. It was noted that a public authority could be placed under a duty to exercise a discretionary power enforceable by the remedy of mandamus: Commissioner of State Revenue (Vic) v Royal Insurance [1994] HCA 61; (1994) 182 CLR 51 at 88 (Brennan J, Toohey and McHugh JJ agreeing); Pyrenees Shire Council v Day [1998] HCA 3; (1998) 192 CLR 330 (“Pyrenees”) at [24] (Brennan CJ).

    Breach of Alternative Prospectus Investigation Duty

32. Paragraph 39.14 of the FASOC pleads a further alternative case that, at the conclusion of the prospectus investigation, ASIC was under a duty “to exercise the Powers and/or Additional Powers to address the risks identified in paragraph 36.2(a) and (b)” of the FASOC (referred to in the FASOC as the “Alternative Prospectus Investigation Duty”).

33. Paragraph 39.14(e) of the FASOC states:

    By failing to exercise the Powers and/or Additional Powers to protect consumers of Storm’s financial services, including the Plaintiffs and Group Members ASIC breached [the Alternative Prospectus Investigation Duty] and thereby acted unlawfully.

34. The submissions referred to the duty pleaded by paragraph 39.14(d) as a public law duty.

    Section 42 of FASC: “In the event that a duty of care is necessary to establish misfeasance”

35. Section 42 of the FASOC is in the following terms:

    42. In the event that a duty of care is necessary to establish misfeasance

    42.1If, which is denied, a duty of care is necessary to establish ASIC’s misfeasance, the Plaintiffs and Group Members further say that:

    (a)in exercising its Powers during the Investigations, ASIC assumed a duty towards the Plaintiffs and Group Members as part of an identifiable class of investors and potential investors in the Storm Model; and

    (b)in particular, ASIC owed the Plaintiffs and Group Members the duties of care set out at paragraphs 44.11 and 44.12 below.

36. Paragraphs 44.11 and 44.12 allege:

    44.11In the course of, and at the conclusion of, the Regional Surveillance Investigation, ASIC owed a duty towards investors in the Storm Model to avoid causing economic harm to those investors by:

    (a)exercising its Powers and/or Additional Powers with reasonable care to disclose to those investors the risks set out in paragraph 36.2(a) above, and

    (b)exercising its Powers and/or Additional Powers with reasonable care to require Storm to address, minimise or avoid the risks to those investors set out in paragraph 36.2(a) above.

    44.12In the course of the Prospectus Investigation, ASIC owed a duty towards investors in the Storm Model to avoid causing economic harm to those investors by:

    (a)exercising its Powers and/or Additional Powers with reasonable care to disclose to investors in the Storm Model the risks set out in paragraph 36.2 above; or, in the alternative

    (b)considering with reasonable care whether to exercise its Powers and/or Additional Powers to require Storm to disclose to those investors the risks set out in 36.2 above, and

    (c)exercising its Powers and/or Additional Powers with reasonable care to address, minimise or avoid the risks to those investors set out in paragraph 36.2 above; or in the alternative

    (d)considering with reasonable care whether to exercise its Powers and/or Additional Powers to require Storm to address, minimise or avoid the risks to those investors set out in paragraph 36.2 above.

1. Sullivan v Moody was a quite different case from this one, in that the alleged duty of care was directed to a person under investigation. However, the statutory powers under consideration such as the power to impose a licence condition are powers that are to be exercised in the public interest: compare Rich v Australian Securities and Investments Commission [2004] HCA 42; 220 CLR 129 at [49].

2. Another object which tends to be inconsistent with the imposition of the duty of care is the object in s 1(2)(b) of striving to “promote the confident and informed participation of investors and consumers in the financial system”. The language of “promote” is suggestive of a concern with systems, rather than the interests of individual participants. The reference to “investors and consumers in the financial system” suggests a requirement to balance various interests, rather than a duty to a particular class of investors.

3. In itself, the language that ASIC must “strive” is inconsistent with the imposition of a duty towards a class of persons to take reasonable care, because it does not mandate a standard of conduct.

4. Taking these various matters into account, and applying reasoning of the kind in Yuen Kun Yeu, I accept the strength of ASIC’s submission but not that it is so strong as to render the plaintiffs’ claim untenable.

   ASIC’s second argument: salient facts do not support imposition of duty of care

   Foreseeability

5. The FASOC pleads foreseeability as follows:

   44.6     It would have been reasonably foreseeable to a reasonable person in ASIC’s position that a failure by it to exercise its Powers and / or Additional Powers with reasonable care and skill at the conclusion of each Investigation might result in loss or damage to Storm’s clients, including the Plaintiffs and Group Members.

6. ASIC accepted, at least implicitly, that the risk of economic loss to persons in the position of the plaintiffs and the group members as a result of inadequate regulation of Storm was foreseeable.

7. The plaintiffs submitted that “ASIC must also accept its knowledge of harm to group members”. What is pleaded is knowledge of facts from which it is alleged that ASIC had knowledge of a risk of harm “to investors in the Storm model”, with the particular harm that might be suffered being unspecified.

8. The plaintiffs also submitted that the allegations in the FASOC (paragraphs 36.2, 41.2 and 41.3) established ASIC’s knowledge that its inaction “would lead to the group members suffering that harm”. They submitted that, on the plaintiffs’ case, “ASIC knew ... the harm that would flow from [Storm’s] conduct”. These submissions are not correct. There is no allegation of knowledge that group members would suffer harm if ASIC did not act, and nor are there factual allegations from which such knowledge could be inferred.

   Control

9. “The factor of control is of fundamental importance in discerning a common law duty of care on the part of a public authority”: Graham Barclay Oysters (Gummow and Hayne JJ at [150]).

10. The plaintiffs allege that ASIC exercised control over the harm suffered by the plaintiffs, “as a result of its statutory powers, in circumstances where it learnt of the harm after it engaged those powers and exercised its statutory powers to partially address that harm”. But control is a question of degree. Thus, in Agar v Hyde, Gleeson CJ observed that the form of control that the International Rugby Football Board had over a game of football played in a Sydney suburb, or a country town, by reason of their collective capacity to alter the international rules, is a remote form of control.

11. In Graham Barclay Oysters, Gummow and Hayne JJ concluded that the Council’s statutory powers to monitor and, where necessary, to intervene in order to protect, the physical environment of areas under its administration did not give the Council such a significant and special measure of control over the risk of danger that ultimately injured the oyster consumers so as to impose upon it a duty of care to those consumers. Gummow and Hayne JJ said at [150]:

    [The factor of control] assumes particular significance in this appeal. This is because a form of control over the relevant risk of harm, which, as exemplified by Agar v Hyde, is remote, in a legal and practical sense, does not suffice to found a duty of care.

12. I do not accept the submission that power to address a risk of harm together with preliminary steps to address a risk could constitute sufficient “control” for the imposition of a duty of care. In particular, the case law set out above makes it clear that the co-existence of knowledge of a risk of harm and power to avert or to minimise that harm does not, without more, give rise to a duty of care at common law. If steps taken by ASIC created a danger, then the position would be different. However, the mere fact of taking regulatory steps does not involve the kind of “significant and special measure of control” of which Gummow and Hayne JJ spoke in Graham Barclay Oysters.

13. The plaintiffs submitted that ASIC assumed control over the risk of harm to group members by its conduct in the regional surveillance investigation and the prospectus investigation. They asserted that the “test for establishing control is whether, by reason of ASIC’s statutory powers, it had the power to protect a specific class including the plaintiff (rather than the public at large) from the risk of harm”. Again, this submission ignores the fact that control is a matter of degree. It also ignores the limitations on ASIC’s powers arising from administrative law requirements, such as s 914A(3) of the Corporations Act, mentioned earlier. It also ignores the availability of merits and judicial review of the exercise of ASIC’s statutory powers.

    Vulnerability

14. At paragraph 44.3 of the FASOC, the plaintiffs pleaded that they and the group members were in a position of vulnerability in that:

    (a)Storm had rigorous procedures to select clients who were inculcated with the Storm Philosophy and would willingly comply with advice provided by Storm;

    …

    (b)many of Storm’s clients were of modest means and were unsophisticated investors;

    …

    (c)Storm and its accountants considered that Storm controlled its clients’ future investments in the Storm Index Funds, and had devised Storm’s accounting procedures accordingly;

    …

    (d)they were unaware of the totality of the risks identified in paragraph 36.2 above, and, to the extent that they were aware of particular risks identified in that paragraph, that knowledge did not enable them to properly asses the danger posed by the Storm Model;

    (e)they had no power to demand that Storm provide information in relation to these risks or, if they did, it was unlikely that they would exercise such power given the matters pleaded in sub-paragraphs (a), (b) and (d) above;

    (f)they were reliant on Storm to provide them with advice in relation to these risks (and Storm was not in a position to provide them with in­ dependent advice about these matters); and

    (g)by reason of the matters pleaded in (a) to (f) above, they were unable to protect themselves from the risks set out in paragraph 36.2 above.

15. The plaintiffs identified the question as being whether they could reasonably be expected to adequately safeguard themselves from the harm, citing Crimmins at [93] per McHugh J. However, that formulation of the question was stated in the context of a case that a duty of care was owed to take reasonable care to protect a waterside worker from foreseeable risks of personal injury. McHugh J explicitly noted (at [78]) that the principles applicable to cases of economic loss were set out by him in Perre v Apand. In the latter case, at [104], McHugh J said:

    What is likely to be decisive, and always of relevance, in determining whether a duty of care is owed is the answer to the question, “How vulnerable was the plaintiff to incurring loss by reason of the defendant’s conduct?” So also is the actual knowledge of the defendant concerning that risk and its magnitude. If no question of indeterminate liability is present and the defendant, having no legitimate interest to pursue, is aware that his or her conduct will cause economic loss to persons who are not easily able to protect themselves against that loss, it seems to accord with current community standards in most, if not all, cases to require the defendant to have the interests of those persons in mind before he or she embarks on that conduct.

16. At [118], McHugh expressed the view that:

    If the plaintiff has taken, or could have taken steps to protect itself from the defendant’s conduct and was not induced by the defendant’s conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss. 

17. In Perre v Apand at [11], Gleeson CJ referred to the influence of “the obvious vulnerability of a specific plaintiff” as an application of the idea that the degree (and nature) of foreseeability may have an important bearing on whether there is a duty of care.

18. In Woolcock, at [23] and [24], the joint judgment said:

    Since Caltex Oil, and most notably in Perre v Apand Pty Ltd (1999) 198 CLR 180, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. “Vulnerability”, in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, “vulnerability” is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant’s negligence in sowing a crop which caused the quarantining of the plaintiffs’ land. In Hill v Van Erp (1997) 188 CLR 159, the intended beneficiary depended entirely upon the solicitor performing the client’s retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 159, the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor’s certification of the accounts of the company.

    In other cases of pure economic loss (Bryan v Maloney [(1995) 192 CLR 609 at 632)] is an example) reference has been made to notions of assumption of responsibility and known reliance. The negligent misstatement cases like Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556; (1970) 122 CLR 628; [1971] AC 793 and Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225 can be seen as cases in which a central plank in the plaintiff's allegation that the defendant owed it a duty of care is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information the defendant provided. And it may be, as Professor Stapleton has suggested (UCLA Law Review (2002), vol 50 531, at pp 558-559), that these cases, too, can be explained by reference to notions of vulnerability. (The reference in Caltex Oil to economic loss being “inherently likely” can also be seen as consistent with the importance of notions of vulnerability.) It is not necessary in this case, however, to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability.

19. The issue is not the plaintiffs’ and group members’ inability to protect themselves from the consequences of Storm’s misconduct.  I accept that an inability on the part of the plaintiff and group members to protect themselves from the consequences of a want of care on the part of ASIC in its regulation of Storm could be characterised as a form of vulnerability.  However, as pleaded, the reasonably foreseeable consequences were possible financial losses rather than inherently likely, or even likely losses.  Thus there is no vulnerability in the sense that the plaintiffs and group members were likely to suffer damage if reasonable care was not taken.  Nor is there any reason to think that the matters pleaded in paragraph 44.3 are the kinds of matters that give rise to an inability on the part of the plaintiffs to protect themselves from the consequences of losses in a way that would cast the consequences of those losses on ASIC.

    Assumption of responsibility or reliance

20. ASIC contends that in the absence of known dependence or assumption of responsibility, there can be no duty of care to prevent the plaintiffs and group members from suffering pure economic loss.

21. I do not agree that the law is as clear as this. Perre v Apand is a case which seems to contradict the proposition. However, the ultimate test is whether the relationship between the parties is sufficiently close to impose a duty of care, and the absence of any relationship prior to making the relevant investments is a telling factor against such a duty, as the Privy Council concluded in Yuen Kun Yeu.

22. The plaintiffs submit that they relied on ASIC to ensure that the advice and disclosures made by Storm complied with the law. However, they also submitted that this reliance is “not something that the plaintiffs need to independently prove to make good their claim”. I consider reliance of this kind to be analogous to the reliance contended for in Yuen Kun Yeu: it would be neither reasonable nor justifiable for investors to have relied upon ASIC’s regulation of Storm as a basis for acting on Storm’s advice.

    Reasoning by analogy

23. The plaintiffs sought to draw particular support from the cases of Pyrenees and Crimmins. However, neither of these involved a claim for pure economic loss. Pyrenees included a claim for property damage, while Crimmins was a personal injury case.

24. In Pyrenees, the relevant risk was identified as a “risk to life and property posed by [a] defective fireplace. It was a serious risk which, if it eventuated, might have seen the destruction of a large part of the township”.

25. The risk in Pyrenees was quite different from the risk in this case. In Pyrenees, unlike this case, the Shire Council was aware of a specific risk (the risk of fire resulting from a defective fireplace at a particular location) to specific individuals.

26. The plaintiffs sought to rely on the following passage from the reasons of Gummow J (at [177]):

    The general rule is that “when statutory powers are conferred they must be exercised with reasonable care, so that if those who exercise them could by reasonable precaution have prevented an injury which has been occasioned, and was likely to be occasioned, by their exercise, damages for negligence may be recovered”: Caledonian Collieries Ltd v Speirs (1957) 97 CLR 202 at 220; Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 436, 458, 484. A public authority which enters upon the exercise of statutory powers with respect to a particular subject-matter may place itself in a relationship to others which imports a common law duty to take care which is to be discharged by the continuation or additional exercise of those powers: Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 459-460. An absence of further exercise of the interconnected statutory powers may be difficult to separate from the exercise which has already occurred and that exercise may then be said to have been performed negligently: cf Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 479; Fellowes v Rother District Council [1983] 1 All ER 513 at 522; X (Minors) v Bedordshire County Council [1995] 2 AC 633 at 763.. These present cases are of that kind. They illustrate the broader proposition that, whatever its further scope, Lord Atkin’s formulation in Donoghue v Stevenson [1982] AC 562 at 580 includes “an omission in the course of positive conduct ... which results in the overall course of conduct being the cause of injury or damage”: Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 501.

27. That passage should be understood in the context of the following factual conclusions by Gummow J:

    (1)The Shire Council has a significant and special measure of control over the safety from fire of persons and property in Neill Street (where the defective fireplace was located);

    (2)The Shire Council’s statutory powers facilitated the existence of a duty of care “but the touchstone of … its duty was the Shire’s measure of control of the situation including its knowledge, not shared by Mr and Mrs Stamatopoulos [the tenants of the property] or by the Days [the owners of the adjoining property], that, if the situation were not remedied, the possibility of fire was great and damage to the whole row of shops might ensue”;

    (3)The Shire Council’s duty of care arose “in circumstances where it was ‘responsible for [the grave danger of harm’s] continued existence and [was] aware of the likelihood of others coming into proximity of the danger and [had] means of preventing it or of averting the danger or of bringing it to their knowledge’”;

    (4)Apart from three other individuals, only the Shire Council officers knew of the latent defect in the physical condition of the property which presented a significant fire risk to it and neighbouring premises;

    (5)The occupants of the property and the adjoining property were ignorant of the “imperative need for something to be done” by reason of the incomplete and inadequate course of action taken by the Shire Council after an earlier fire;

    (6)the Shire Council officers had reached a conclusion that it was “imperative that the fireplaces be not used under any circumstances unless certain work was performed” The powers which they exercised were not likely to prevent a further fire, but those powers engaged the exercise of interrelated and specific powers that could have achieved that result.

28. In Crimmins, the members of the High Court who found a duty of care emphasised the significant degree of control. Kirby J found the relationship between Mr Crimmins and the Authority to be analogous to an employer-employee relationship. Gaudron J noted that “Mr Crimmins was not only vulnerable to injury by reason of the hazardous nature of his employment but he was less able than employees in most other industries to protect his own interests. The casual nature of his employment precluded the development of any longstanding employer-employee relationship in which he might usefully seek to secure his own health and welfare. And his relative powerlessness in that regard was magnified by the Authority’s directions as to when and where he was to work in circumstances in which he was at risk of having his registration as a waterside worker cancelled or suspended if he did not obey”.

29. In my view, it is not possible to reason by analogy from either of these cases to conclude that it is arguable that ASIC owed a duty of care towards the plaintiffs and group members.

    Conclusion

30. Taking into account the matters set out above, I am not satisfied that the plaintiffs have reasonable cause of action in negligence on the facts pleaded.  None of the cases above support a conclusion that it is arguable that ASIC owed a duty of care on the facts pleaded.  The salient features of the case do not reveal a sufficiently close relationship to give rise to a duty of care.  There is nothing to suggest that the nuances of the plaintiffs’ case may improve their position.

    CONCLUSIONS ON STRIKE OUT APPLICATION

31. The claim based on the tort of misfeasance in public office must be struck out on the basis that it fails to disclose a reasonable cause of action.

32. The claim based on negligence is deficient in that the FASOC does not plead facts that could support a finding of a common law duty of care owing to the plaintiffs and the group members.  It is also deficient in that it does not identify with sufficient clarity how it is alleged that ASIC’s alleged negligence caused the plaintiffs’ losses. The allegations as to what would have happened “[h]ad ASIC exercised its Powers and/or Additional Powers” in section 43 are deficient because they do not identify precisely the facts upon which it is alleged that the plaintiffs suffered loss by reason of ASIC’s conduct. In order to demonstrate that they have a reasonably arguable case, the plaintiffs would have to identify what ASIC should have done that would have prevented the loss which was sustained.

1. The allegations of causation are liable to be struck out to the extent that they allege that ASIC should have imposed an enforceable undertaking on Storm, when ASIC had no power to do so. Further, they are liable to be struck out to the extent that they allege that ASIC should have taken “other reasonable action” without identifying what action should have been taken.

2. To the extent that it is alleged that ASIC should have imposed a licence condition upon Storm, the FASOC is deficient in that it does not allege that, had the relevant licence condition been imposed, the plaintiffs would not have suffered financial loss.

3. To the extent that it is alleged that ASIC should have made its “concerns” regarding Storm known to the public in about late 2007, the FASOC is deficient in that it does not allege that, had ASIC done so, the plaintiffs would not have suffered financial loss.

4. The FASOC is also deficient in that it alleges, at paragraph 36.2, that ASIC knew of “the risks” posed by certain matters without specifying what are the alleged risks which ASIC knew. It is also deficient in that it alleges, at paragraphs 45.5 and 46.1, that ASIC breached its duty of care by failing to do certain things to disclose, address, minimise or avoid “the risks …set out in paragraph 36.2(a)” when paragraph 36.2(a) does not set out risks, but rather matters on the basis of which it is alleged that ASIC knew of certain unspecified risks.

5. When all these matters are taken into account, in my view, the FASOC is so deficient that it is liable to be struck out in its entirety, with costs.

6. The plaintiffs have had ample opportunity to plead a reasonable cause of action.  The first directions hearing in this action was held on 4 February 2015.  At that directions hearing the plaintiffs sought an adjournment of three months, with no directions to progress the action.  The adjournment was sought because the plaintiffs had made an application under the Freedom of Information Act 1982 (Cth). Over ASIC’s opposition the plaintiffs were granted the three month adjournment on the basis that, in that three month period, the statement of claim would be put into the form which constituted the plaintiffs’ “final effort”, to which they were “committed”.

7. At the plaintiffs’ request the action was re-listed for further directions on 28 April 2015.  On that day the plaintiffs sought a further three month adjournment to 6 August 2015.  The consequence of the orders made at that directions hearing was that the plaintiffs were given (a) further time to seek information said to be relevant to their claim and (b) leave to amend the ASOC.  ASIC’s strike out application was listed on 6 August 2015, a day which ultimately coincided with the period of time the plaintiffs has sought.

8. There is no reason to believe that the plaintiffs are able to plead additional facts that would support a reasonable cause of action.  Accordingly, I will not grant leave to the plaintiffs to file a second further amended statement of claim.

I certify that the preceding two hundred and seventy-seven (277) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

Associate:  

Dated:        4 February 2016