Mackinnon as plaintiff representative of 153 plaintiff group members v Partnership of Larter, Jones, Miraleste Pty Ltd t/as USG Partner and Johnson, t/as “STC Sports Trading Club” (No 7)

[2019] NSWSC 103

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Mackinnon as plaintiff representative of 153 plaintiff group members v Partnership of Larter, Jones, Miraleste Pty Ltd t/as USG Partner and Johnson, t/as "STC Sports Trading Club" (No 7) [2019] NSWSC 103

Hearing dates:

5 - 9 February, 14 March, 13 - 15 June, 12 - 13 and 26 - 27 July and 10 September 2018

Decision date:

18 February 2019

Jurisdiction:

Equity - Commercial List

Before:

Stevenson J

Decision:

Proceedings may not continue against second defendant.
Misleading or deceptive conduct established in relation to fifth and twelfth defendants.

Catchwords:

CONSUMER LAW – misleading or deceptive conduct – whether fifth and twelfth defendants made representations about scheme which were misleading or deceptive – whether those defendants liable to investors on that or other bases

 

BANKRUPTCY – jurisdiction and powers of court – no leave obtained under s 58(3)(b) of Bankruptcy Act 1966 – whether claims made in proceedings are for a provable debt

 

BANKRUPTCY – procedure – whether continued prosecution of proceedings involves taking a fresh step in the proceedings

 

PARTNERSHIP – generally – what constitutes partnership – whether partnership is limited when partnership agreement not registered

  PARTNERSHIP – actions by and against partners – actions and proceedings against firms and individual partners – partnership conducting sports trading business – scheme said to be fraudulent, masterminded by twelfth defendant – second and fifth defendants named as partners – investment of group members lost

Legislation Cited:

Australian Consumer Law
Bankruptcy Act 1966 (Cth)
Civil Procedure Act 2005 (NSW)
Corporations Act 2001 (Cth)
Partnership Act 1892 (NSW)
Trade Practices Act 1974 (Cth)

Cases Cited:

Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (No 3) [2013] FCA 984
Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (in liq) [2003] FCA 180; (2003) 127 FCR 418
Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (in liq) [2005] FCA 1212
Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (No 6) [2013] FCA 1112; (2013) 223 FCR 426
Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 3) [2012] FCA 939
Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 5) [2014] FCA 340
Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 7) [2016] FCA 484
Australian Competition and Consumer Commission v The Bio Enviro Plan Pty Ltd [2004] FCA 415
Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234; [2005] HCA 67
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Foster v Australian Competition and Consumer Commission [2006] FCAFC 21; (2006) 149 FCR 135
Foster v Australian Competition and Consumer Commission [2012] FCA 953
Gertig v Davies (2003) 85 SASR 226; [2003] SASC 86
HML v The Queen (2008) 235 CLR 334; [2008] HCA 16
Jack v Kipping (1882) 9 QBD 113
Kimberley NZI Finance Limited v Torero Pty Ltd (1989) ATPR (Digest) 46-054
Mackinnon as plaintiff representative of 153 plaintiff group members v The partnership of Larter, Jones, Miraleste Pty Ltd t/as USG Partner and Johnson, t/as "STC Sports Trading Club" (No 3) [2018] NSWSC 86
Mackinnon as plaintiff representative of 153 plaintiff group members v Partnership of Larter, Jones, Miraleste Pty Ltd t/as USG Partner and Johnson, t/as "STC Sports Trading Club" (No 4) [2018] NSWSC 147
R v Foster [2008] QCA 90; (2008) 183 A Crim R 437
Rafferty v Madgwicks (2012) 203 FCR 1; [2012] FCAFC 37
Rose v Federal Commissioner of Taxation (1951) 84 CLR 118; [1951] HCA 68
Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288
Warner v Elders Rural Finance Ltd (1993) 41 FCR 399
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97

Category:

Principal judgment

Parties:

Ian Henry Mackinnon as plaintiff representative of 153 plaintiff group members (Plaintiff)
The partnership of Anne Patricia Larter, Alan Jones, Miraleste Pty Ltd trading as USG Partner and Leigh Johnson, trading as "STC Sports Trading Club" (First Defendant)
Anne Patricia Larter (Second Defendant)
Alan Jones (Third Defendant)
Miraleste Pty Ltd trading as USG Partner (Fourth Defendant)
Leigh Johnson (Fifth Defendant)
Sports Trading Club Limited (a company incorporated in Hong Kong) (Sixth Defendant)
Bella Development Limited (a company incorporated in Hong Kong) (Seventh Defendant)
East Ocean Capital Limited (a company incorporated in Hong Kong) (Eighth Defendant)
Arabella Racing Pty Ltd (Ninth Defendant)
Banksia Holdings (Tenth Defendant)
Arabella Louise Foster (Eleventh Defendant)
Peter Foster (Twelfth Defendant)

Representation:

Counsel:
T J Dixon (Plaintiff)

  Solicitors:
Nelson McKinnon Lawyers (Plaintiff)
P N Argy (Fifth Defendant)

File Number(s):

SC 2015/332497

TABLE OF CONTENTS

Judgment

Overall conclusions

The parties – only one active defendant

Mr Foster

The loan agreements

Two partnerships

Bankruptcy of Ms Larter and Mr Foster

Mr Foster

Fraudulent misrepresentation

Conspiracy

Conversion

Constructive trust

Ms Larter

The Further Amended Commercial List Statement

The involvement of Ms Johnson

Ms Johnson’s affidavit

Ms Johnson’s introduction to STC

Ms Johnson’s “seed capital”

Ms Johnson’s understanding of the source of STC’s rights

The scheme

STC’s marketing campaign

The Proposal

The fraud

The involvement of Pieter de Klerk

Mr de Klerk’s decision to invest $250,000 into STC as an Associate Member

Mr de Klerk’s possible acquisition of the “rights” to STC South Africa

Meeting at STC Market Street office on 13 March 2013

Meeting at the Catalina restaurant on 14 March 2013

Mr de Klerk’s affidavit accounts of the meeting

Apologies for “Mark Hughes’s” absence

Statements about “Mark’s” role

“Personal matters”

The Proposal

Questions about Ms Larter

“Howard Robin

Prof Snyder and the “savants”

Mr de Klerk’s final tranche - clearing up “grey areas”

Further events in March 2013

Mr de Klerk views the “trading room”

Pikes & Verekers’ letter of 5 April 2013

Further negotiations with Mr de Klerk

Mr de Klerk’s 30 May 2013 visit to Sydney

Mr de Klerk invests US$1 million in “STC South Africa”

Mr Foster’s email of 16 July 2013

Ms Johnson’s alleged assertions of dishonesty

Mr Foster’s assertion that the STC business was bona fide

Ms Johnson’s role at STC

Ms Johnson’s loan

Ms Johnson’s response to Mr Foster’s 16 July 2013 email

Ms Johnson’s conversation with Mr Glen Radica

Ms Johnson’s 30 August 2013 conversation with Ms Larter and Mr Foster

Ms Johnson’s SMS messages to Mr de Klerk – Peter Foster revealed

Mr de Klerk’s response to the Peter Foster revelation

Mr Foster’s email of 1 September 2013

Compliance with the 16 July 2013 “offer”

Ms Johnson’s alleged assertions of dishonesty

Mr McMullen’s resignation

Richard Holmes’s resignation

Mr Foster now doing all the trading

Mr Foster’s assertion that the STC business was bona fide

Ms Johnson’s evidence about her dealings with Mr Holmes

Ms Johnson’s email of 10 September 2013 to Mr Foster and Ms Larter

Ms Johnson’s understanding of the nature of the STC business

Mr Foster now in total control

Mr McMullen’s accusations and Ms Johnson’s “concerns”

Concern about denial of access to accounts and bank statements

Location of the Associate Member contracts

Money

Withdrawal of Ms Johnson’s consent to being involved in STC?

Ms Johnson’s 23 September 2013 email to Ms Larter

Ms Johnson’s 23 September 2013 email to Mr Foster

Logan J’s judgment in Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (No 3)

Ms Johnson’s 28 September 2013 emails to Ms Larter

Ms Johnson’s 29 September 2013 email to Ms Larter

Pikes & Verekers’ letter to The Courier Mail

Ms Johnson’s dealings with The Courier Mail

More letters from Pikes & Verekers to The Courier Mail

Mr Mackinnon’s investment

The circumstances leading to Ms Johnson’s resignation as a partner

Ms Johnson’s withdrawal of funds from STC’s bank account

Mr Foster’s email of 30 December 2013

Ms Johnson’s reply of 13 January 2014

Ms Johnson’s resignation as partner of STC on 21 January 2014

Findings concerning Ms Johnson’s decision to resign as partner

A new partnership

Email exchanges with Mr Foster

Mr Seng correspondence

Ms Johnson’s 3 November 2014 telephone conversation with Mrs Mackinnon

Did Ms Johnson seek to alert any third parties of her concerns about the STC business?

The credit of Ms Johnson and Mr de Klerk

Credit of Mr de Klerk

Credit of Ms Johnson

The pleaded case

Representations by Mr Foster or persons employed or instructed by Mr Foster

By Mr Foster

By persons “employed or instructed” by Mr Foster – Ms Johnson

20(c) – that Mark Hughes was the National Sales Manager of STC

20(c)(i) – by silence or omission, that Mr Foster was not involved in STC

20(d) – that Tom Nolan was the National Sales Assistant of STC

20(e) – the loans by Mr Mackinnon and Group Members would be guaranteed and repayable at the end of a nominated period

20(f) – the “first defendant” had assets of $10 million

Representations to Mr Mackinnon and Group Members in the Proposal

By Mr Foster

By Ms Johnson

Section 34 of the Partnership Act

Breach of contract

Other relief sought

Other issues

Conclusion

Judgment

1. Mr Peter Foster, the twelfth defendant in these proceedings, is a notorious confidence trickster.

2. Mr Foster has been found to have been involved in fraudulent schemes in the United Kingdom, the United States of America, in Australia and elsewhere over the past 30 years. He has been convicted, fined and imprisoned on many occasions here and abroad arising from these and other activities.

3. Mr Foster was instrumental in establishing and operating a purported “sports trading” scheme involving a partnership styled “The Sports Trading Club Partnership”. Mr Foster was not a member of that partnership. The partners were the second defendant, Ms Anne Larter, and a solicitor, the fifth defendant, Ms Leigh Johnson. Mr Foster acted as “National Sales Manager” using the name “Mark Hughes”.

4. Mr Ian Mackinnon brings these proceedings against Mr Foster, Ms Larter, Ms Johnson and others under Pt 10 of the CivilProcedure Act 2005 (NSW) as a representative of 153 named Group Members, including Mr Mackinnon, each of whom made an investment by way of loans to that partnership.

5. Mr Mackinnon and his wife, Mrs Belinda Mackinnon, made their investment on 31 October 2013 and 4 November 2013, after they executed documents entitled “Loan & Profit Sharing Agreement” on 28 October 2013 and 4 November 2013. According to those documents, their investments were to be traded on sports and prediction markets.

6. Mr Mackinnon alleges that The Sports Trading Club Partnership was a fraudulent scheme masterminded by Mr Foster and that none of the funds invested was used for sports trading. Instead, he alleges the funds were misappropriated by Mr Foster and transferred to his associates and family members, as well as to offshore companies and bank accounts associated with him and his niece, the eleventh defendant, Ms Arabella Foster.

7. The total amount invested by Group Members was a little over $12.3 million.

8. Other parties, who are not Group Members, invested a further $17.3 million. The total amount paid into the Westpac Banking Corporation account operated by The Sports Trading Club Partnership, including by the Group Members, was in the order of $29.6 million.

9. Some $6.4 million of the $12.3 million invested by Group Members has been recovered. The shortfall is some $5.9 million. Mr Mackinnon, on behalf of the Group Members, seeks to recover that amount, plus interest and costs in these proceedings.

10. The course I propose to follow is to:

1. briefly outline my overall conclusions;

2. describe the parties to the proceedings and the role they played at the hearing;

3. describe Mr Foster’s background;

4. describe the relevant loan agreements;

5. deal with issues which arise in relation to the bankruptcy of Mr Foster and Ms Larter, some partnership issues and the pleadings;

6. make findings as to what happened leading up to the formation of The Sports Trading Club Partnership and during that partnership’s operation from late 2012 to early 2014, and to determine the merits of Mr Mackinnon’s principal claims against each of the relevant defendants; and

7. invite submissions as to whether it is necessary to deal with Mr Mackinnon’s remaining claims, as to some further matters where I require assistance, and as to what further steps are necessary to resolve the proceedings.

Overall conclusions

11. The “Sports Trading Club” was a fraudulent scheme devised, masterminded and controlled by Mr Foster. The moneys advanced by the Group Members were misappropriated at Mr Foster’s instigation and direction.

12. The bankruptcy of Mr Foster and Ms Larter does not affect Mr Mackinnon’s ability to continue these proceedings against Mr Foster (because the claim against him is not for a provable debt) but does prevent Mr Mackinnon from proceeding against Ms Larter (because the claim against her is for a provable debt).

13. The Group Members are entitled to judgment against Mr Foster for the unrecovered balance of the amounts advanced.

14. Ms Johnson knew Mr Foster’s involvement in the Sports Trading Club could not be publicity revealed. She knew Mr Foster was using the alias “Mark Hughes”. She knew of the contents of the “Proposal” used to solicit investment in the venture and must have known it to contain false statements. By mid-2013 Ms Johnson knew Mr Foster was in control of the Sports Trading Club’s activities. By September 2013, she strongly suspected that investors’ funds were being misappropriated. She engaged in misleading or deceptive conduct by remaining silent, notwithstanding having those suspicions.

15. Whether Group Members are entitled to judgment or other relief against Ms Johnson will depend on matters in respect of which I will need further submissions.

The parties – only one active defendant

16. The pleading at the commencement of the hearing was the Amended Commercial List Statement. It named a partnership as the first defendant.

17. That partnership was described as “The partnership of Anne Patricia Larter, Alan Jones [the third defendant], Miraleste Pty Limited trading as USG Partner [the fourth defendant] and Leigh Johnson [the fifth defendant], trading as ‘STC Sports Trading Club’”.

18. The nomination of a partnership as a defendant was inapt. A partnership is not a legal person: Rose v Federal Commissioner of Taxation (1951) 84 CLR 118; [1951] HCA 68 at 124.

19. Further, there was never a partnership with the membership alleged; and Ms Johnson was never a member of a partnership called “STC Sports Trading Club”.

20. Mr Dixon, who appeared for Mr Mackinnon, sought to deal with this difficulty by seeking to amend the claim on the second day of the proceedings. I return to this below.

21. Ms Larter, the second defendant, entered a submitting appearance.

22. Subject to the Court’s approval under s 173 of the Civil Procedure Act, Mr Mackinnon has settled the claim against the third and fourth defendants, Mr Alan Jones and Miraleste Pty Limited.

23. The sixth to eleventh defendants, to or through whom it is alleged that the investors’ funds passed, have either not appeared, consented to judgment, are the subject of default judgment, or have been deregistered. Mr Mackinnon sought no relief against those parties in the hearing before me.

24. Mr Foster, the twelfth defendant, was recently released from a custodial sentence imposed by Logan J in proceedings in the Federal Court of Australia. I will refer to these proceeding later in these reasons. He is awaiting trial for matters arising from events related to those the subject of these proceedings. He entered an appearance and participated in some interlocutory skirmishes. He did not, however, participate in the hearing. Shortly before the hearing, through his solicitor, he stated he did not propose to appear nor seek an adjournment of these proceedings pending the outcome of the criminal charges against him.

25. Only the fifth defendant, Ms Johnson defended the proceedings.

26. The 17 hearing days of this matter were concerned almost entirely with the question of whether Ms Johnson is liable to Mr Mackinnon and the other Group Members for the loss they have suffered as a result of their investment in The Sports Trading Club Partnership.

Mr Foster

27. Details of Mr Foster’s history are set out in the judgment of Spender J in Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (in liq) [2003] FCA 180; (2003) 127 FCR 418 at [42] to [56]. In that case Spender J referred to Mr Foster’s past conduct as “a sad and lengthy history of dishonesty, deception and evasion” including “direct involvement in marketing schemes which have resulted in the misappropriation of assets” (at [42] and [57]). A history of Mr Foster’s criminal offending from 1987 until 2008 is detailed by McMurdo P in R v Foster [2008] QCA 90; (2008) 183 A Crim R 437 at [2]–[5].

28. The Chaste Corporation case involved the sale of distributorships in respect of a purported weight loss pill called “TRIMit”.

29. On 2 September 2005 Lander J found Mr Foster and Chaste Corporation guilty of price fixing, misleading and deceptive conduct in contravention of the Trade Practices Act 1974 (Cth) in relation to the TRIMit product: Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (in liq) [2005] FCA 1212. Lander J fined Mr Foster $150,000 and made orders prohibiting him from being involved in any business relating to weight loss or to the cosmetic or health industries for a period of five years (at [303]). That prohibition was upheld by the Full Court of the Federal Court: Foster v Australian Competition and Consumer Commission [2006] FCAFC 21; (2006) 149 FCR 135.

30. On 27 September 2013 Logan J found that Mr Foster to be in breach of those orders and thereby in contempt of Court by reason of his involvement in a company called SensaSlim Australia Pty Ltd which marketed a diet nasal spray: Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (No 3) [2013] FCA 984.

31. Logan J’s decision assumes significance in this case for the reasons that I set out below.

32. On 24 October 2013 Logan J ordered that Mr Foster be sentenced to three years imprisonment: Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (No 6) [2013] FCA 1112; (2013) 223 FCR 426 at [58].

33. On sentencing Mr Foster, Logan J stated that it was difficult to “envisage a more flagrant and deliberate breach of injunctive orders” (at [40]) and that Mr Foster was “directly culpable and, further, utterly without remorse or contrition” (at [41]).

34. Mr Foster failed to surrender himself to the authorities. A warrant was issued for his arrest. He was arrested on 28 October 2014, having then been on the run for a year.

35. In the meantime, in September and October 2012, Yates J heard proceedings brought against SensaSlim Australia Pty Ltd by the Australian Competition and Consumer Commission. Yates J delivered judgment in 2014: Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 5) [2014] FCA 340.

36. In a later judgment, Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 7) [2016] FCA 484, Yates J made the following findings concerning Mr Foster’s conduct in relation to that matter:

1. “…it was essential that Mr Foster not be publicly associated with SensaSlim or its business. Mr Foster’s self-assessment was that his name was ‘mud’ and that he could not be seen to be connected to a weight loss product…” (at [73]);

2. “the mask” of Mr Foster’s involvement was provided by others, each of whom was no more than a “front man” for Mr Foster’s alter egos, who “only had…roles calculated to create a façade  of respectability for that business” (at [42], [72], [76]-[77] and [79]);

1. “SensaSlim’s conduct was deliberate, covert and fraudulent to a high degree. It was clearly directed to obtaining money by deceit. Its objective was to conceal the activities of an avowed and notorious conman, Mr Foster” (at [79]);

2. “…fabricating and disseminating a report which had the appearance of a genuine scientific report…and engaging in deceptive correspondence using false identities when answering inquiries from prospective franchisees” (at [82]);

3. “…Mr Foster and, at his behest, members of his family, were the principal beneficiaries of the funds obtained from Area Managers in respect of their franchises” (at [102]); and

4. “[t]the level of deception” was “breathtaking” in that it involved the concoction of a worldwide clinical trial, fabrication and dissemination of a scientific report, the engagement of actors to make advertisements containing false claims, the fabrication of a scientific report and engagement “in deceptive correspondence using false identities” (at [82]).

37. The facts of this case bear a striking resemblance to those of the case before Yates J.

The loan agreements

38. Each Group Member executed a document in the same form as the Loan Agreement executed by Mr and Mrs Mackinnon.

39. The Loan Agreements recited that “The Sports Trading Club Partnership” was “a limited liability partnership”.

40. The Loan Agreements recorded that “the Lender shall forthwith lend to the Partnership and the Partnership shall borrow from the Lender” a specified sum and that:

1. the loan would be “applied by the Partnership for trading on financial markets including but not limited to sports and prediction markets through The [sic] Sports Trading Club Limited [the sixth defendant] at its sole discretion”;

2. “instead of interest being assessed, [the] Borrower agrees to repay this Loan in full and distribute all profits made as an Associate Member of the Sports Trading Club as outlined in the Sports Trading Club Associate Member Proposal”.

41. Sports Trading Club Limited, the sixth defendant, is a Hong Kong company. At the relevant time, its sole shareholder was Bella Development Limited (the seventh defendant), whose sole shareholder at the relevant time was Mr Foster’s niece, Ms Arabella Foster (the eleventh defendant).

42. The Loan Agreements provided that the principal amount would be repayable at the end of a fixed term; in the case of Mr and Mrs Mackinnon, three years for the 28 October 2013 agreement and one year for the 4 November 2013 agreement.

43. The Loan Agreements further provided that statements made in the “Sports Trading Club Associate Member Proposal” (“the Proposal”) and the “Terms of Associate Membership” would apply as if incorporated into the Loan Agreements. I will return to the Proposal below. A copy of the Proposal was accessible through a website at

44. The “Terms of Associate Membership” incorporated into Mr and Mrs Mackinnon’s contract included that:

1. the minimum amount that could be loaned was $50,000 and the maximum was $250,000;

2. “profits” could be withdrawn on a monthly basis with the minimum withdrawal being $1,000 and the maximum being “20% of that current month[’s] profits up to an annual…maximum of 100% of the value of your principal loan”; and

3. each lender would be given a username and password “to the websites where an account is created specific to their loan”.

45. In the Loan Agreements, investors in STC were described as “Associate Members”. I shall use the same expression.

46. The distinction between the publically accessible website and the “member website”, accessible only by username and password is significant for the reasons I discuss below.

47. I will refer to the website as the “Public STC Website” and to the website as the “Members’ STC Website”.

Two partnerships

48. Two partnerships are referred to in the evidence. It is important to distinguish between the two.

49. On 30 December 2012 the second defendant, Ms Anne Larter, and the fifth defendant, Ms Leigh Johnson, executed a “Limited Partnership Agreement”.

50. The Limited Partnership Agreement recorded that:

1. Ms Larter and Ms Johnson wished to form a “limited” partnership for the purposes of the Partnership Act 1892 (NSW);

2. the partnership was to be known as “The Sports Trading Club Partnership”;

3. Ms Larter was to be the General Partner and to have “unlimited liability for the obligations, debts and liabilities of the Partnership”; and

4. Ms Johnson was to be a Limited Partner, have liability “limited… to the amount of [her] invested capital” and would not:

1. participate in the management of the Partnership;

2. execute any document binding the Partnership; nor

3. act in any way purporting to have authority in the business of the Partnership.

51. Section 50A of the Partnership Act provides that:

“50A   Limited partnership or incorporate limited partnership is formed on registration

A limited partnership is formed by and on registration of the partnership under [Pt 3 of the Act] as limited partnership”.

52. Section 60 of the Partnership Act provides that the liability of a limited partner to contribute to the liabilities of the limited partnership is:

“…not to exceed the amount shown in relation to the limited partner in the Register as the extent to which the limited partner is liable to contribute”.

53. Ms Larter and Ms Johnson intended to register their “Limited Partnership Agreement” so that Ms Johnson’s liability would be as a “Limited Partner”.

54. However, evidently by oversight, the document was not registered. This fact emerged shortly before the commencement of the hearing as a result of enquiries made by Mr Argy, the solicitor who appeared for Ms Johnson.

55. Thus, contrary to Ms Johnson’s and Ms Larter’s intention, and to the statement made in the Limited Partnership Agreement, the partnership between Ms Larter and Ms Johnson was not a limited partnership. The late stage at which that fact emerged gave rise to a pleading issue to which I return below.

56. It is now common ground that Ms Johnson resigned as a partner of The Sports Trading Club Partnership on 21 January 2014.

57. At around that time, what is now accepted to be a new partnership, known as “STC Sports Trading Club”, was formed. An application to register that business name was made on 15 January 2014.

58. Ms Larter and others, but not Ms Johnson, became members of that partnership.

59. It is now common ground that Ms Johnson has no liability to Mr Mackinnon or any other Group Member as a partner after 21 January 2014.

60. For simplicity, I will refer to The Sports Trading Club Partnership, the partnership of which Ms Johnson and Ms Larter were members, as “the Partnership” or “STC”.

61. However, the existence of the two partnerships, with confusingly similar names, should be borne in mind.

Bankruptcy of Ms Larter and Mr Foster

62. Both Ms Larter and Mr Foster have been declared bankrupt. Sequestration orders were made in respect of the estate of Mr Foster on 14 December 2017, shortly before the hearing before me commenced, and of Ms Larter on 6 March 2018, a month after the hearing commenced.

63. Section 58(3)(b) of the Bankruptcy Act 1966 (Cth) provides that it is not competent for a creditor to “commence any legal proceedings in respect of provable debt or take any fresh step in such a proceeding” after a debtor has become a bankrupt, unless such creditor obtains “leave of the Court and on such terms as the Court thinks fit”.

64. The “Court” from whom such leave must be given is the Federal Court of Australia: Bankruptcy Act, s 27(1). No such leave has been sought.

65. “Provable debt” is defined in s 82 of the Bankruptcy Act. Section 82(2) provides:

“82   Debts provable in bankruptcy

(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy”.

66. Thus, Mr Mackinnon could not take “any fresh step” in these proceedings against Mr Foster or Ms Larter unless his claims, and those of the Group Members he represents, arose otherwise than by reason of contract.

Mr Foster

67. Mr Mackinnon and the Group Members claim damages from Mr Foster in respect of misrepresentations which are said to constitute misleading or deceptive conduct and deceit. Damages are also claimed for conversion and conspiracy.

Fraudulent misrepresentation

68. Claims for unliquidated damages for a fraudulent misrepresentation that induced the party misled to make a contract with a third party (a “tripartite case”) are not provable in bankruptcy: Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234; [2005] HCA 67 at [5] and [48]. That is because such claims are said to arise “otherwise than by reason of a contract”. They are to be contrasted with a claim for unliquidated damages for fraudulent misrepresentation that induced the party misled to make a contract with the bankrupt (a “bilateral case”). The latter has been held to be a provable debt: Jack v Kipping (1882) 9 QBD 113 at 117 (Mathew and Cave JJ).

69. The claims against Mr Foster for misleading or deceptive conduct in this case is a tripartite case. His fraudulent misrepresentations are said to have induced the Group Members to enter into loan agreements with a third party: STC. Applying their Honours’ conclusions in Coventry, those claims arise otherwise than “by reason of a contract” and are not “provable debts” for which leave is required.

Conspiracy

70. Mr Foster is alleged to have conspired with certain other defendants with the intention of causing damage to the Group Members by transferring their loan amounts under the fraudulent scheme. I am satisfied this claim for unliquidated damages also arises “otherwise than by reason of a contract, promise or breach of trust”.

Conversion

71. By the conversion claim, Mr Foster is said to have taken possession and dealt with Group Members’ loan amounts when he had no entitlement to do so. I am satisfied that this claim (assuming it is maintainable: I doubt that a fungible such as money can be converted) arises “otherwise than by reason of a contract, promise or breach of trust” such that it is not a “provable debt” for which leave is required.

Constructive trust

72. The Further Amended Commercial List Statement also contains a claim that Mr Foster acted as constructive trustee and is liable to account for such amounts as he currently holds. The remedy sought for this is described simply as a “proprietary” remedy. That claim does seem to me to be for a provable debt. The point is moot, as there is no evidence that Mr Foster holds any of the funds he is said to have misappropriated.

73. Thus, relevantly to the manner in which I propose to resolve this claim against Mr Foster, it is competent for Mr Mackinnon to proceed against Mr Foster.

Ms Larter

74. Ms Larter became bankrupt after the hearing of these proceedings commenced.

75. One of the claims made against Ms Larter is in contract. She was a party to each of the Loan Agreements. Each of the other claims made against Ms Larter, damages for misleading or deceptive conduct, in deceit, for conversion and for conspiracy, arises by reason of Ms Larter being a party to that contract.

76. All of these claims are thus for “provable debts”.

77. Mr Dixon submitted that Mr Mackinnon, by continuing to prosecute the proceedings against Ms Larter after the date on which she became bankrupt was not taking a “fresh step” in the proceedings.

78. I do not agree.

79. The continued prosecution of the hearing the proceedings against Ms Larter after her bankruptcy does constitute taking “fresh steps” against Ms Larter in the proceedings: Gertig v Davies (2003) 85 SASR 226; [2003] SASC 86 at [63]-[64] per Doyle CJ and Mullighan J; Australian Competition and Consumer Commission v The Bio Enviro Plan Pty Ltd [2004] FCA 415 at [7]-[9] (RD Nicholson J).

80. Therefore it was not competent for Mr Mackinnon to take such “fresh steps” against Ms Larter without leave of the Federal Court.

81. Accordingly it is not competent for me to deal with Mr Mackinnon’s claim against Ms Larter.

The Further Amended Commercial List Statement

82. On the second day of the hearing, I granted Mr Mackinnon leave to file a Further Amended Commercial List Statement for the reasons I gave that day: Mackinnon as plaintiff representative of 153 plaintiff group members v The partnership of Larter, Jones, Miraleste Pty Ltd t/as USG Partner and Johnson, t/as "STC Sports Trading Club"(No 3) [2018] NSWSC 86.

83. So far as concerns the allegation of partnership, the amendments did a number of things.

84. First, the allegation concerning the first defendant was amended to read (showing revision mode):

“At all material times, the first defendant, a partnership of Anne Patricia Larter, Alan Jones, Miraleste Pty Ltd (trading as USG Partner) and, until 21 January 2014, Leigh Johnson, trading as ‘The Sports Trading Club Partnership’ until on or about 21 January 2014 and thereafter as the ‘STC Sports Trading Club’…:

a.   was, and is a limited partnership as defined by the Partnership Act 1892 (NSW) and liable to be sued in its own name and style; and

b.   held itself out as having a licence from the sixth defendant, Sports Trading Club Limited (Hong Kong) to run a sports betting business in Australia referred to as the ‘Sports Trading Club’.”

85. As can be seen, the allegation that the partnership was “limited” was altered to an allegation that the partnership was, in effect, unlimited.

86. I granted leave to make that amendment upon the basis that it did not permit Mr Mackinnon to:

1. advance a cause of action against Ms Johnson beyond those already pleaded;

2. allege, separately to the causes of action already pleaded, that Ms Johnson was jointly and severally liable for the debts of the Partnership by reason of her alleged status as a general or unlimited partner.

87. As can also be seen, the allegation made in this paragraph is that there was one partnership that traded as “The Sports Trading Club Partnership” until 21 January 2014, when Ms Johnson resigned, and thereafter as “STC Sports Trading Club”.

88. As I have mentioned, it is now common ground that there were two separate partnerships and that Ms Johnson was not a member of the second.

89. Second, in an attempt to overcome the infelicity of nominating a partnership as first defendant, the following allegation was added, omitting an irrelevant reference:

“References in these Contentions to the first defendant include inter alios the second defendant [Ms Larter]…and (until 21 January 2014) the fifth defendant [Ms Johnson]”.

90. This mechanism was a somewhat inelegant way of dealing with the incorrect nomination of a partnership as a party. However, I concluded that it made clear enough that the pleadings were to be read as if references to “the first defendant” were to be read as referring to Ms Larter and Ms Johnson, as members of the Partnership.

91. The key allegations in the Further Amended Commercial List Statement are that:

1. Ms Larter and Ms Johnson as “persons employed or directed by” Mr Foster, and Mr Foster himself, represented to Mr Mackinnon and the other Group Members that:

1. STC was a legitimate sports betting business capable of generating significant profits on traded sports bets;

2. Mr Mackinnon and the Group Members could invest in the business by making loans of between $50,000 and $250,000 to STC in exchange for which STC would pay 50% of any profits earned on sports betting trades up to the amount loaned;

3. “Mark Hughes” (in reality, Mr Foster) was the National Sales Manager of STC;

4. Mr Foster was not involved with STC (a representation said to have been made by silence or omission);

5. the loans made by Mr Mackinnon and the Group Members would be guaranteed and repayable at the end of a nominated loan period; and

6. STC had assets of $10 million.

2. Mr Foster, Ms Larter and Ms Johnson represented that various statements in the Proposal were true, including statements that:

1. STC offered members an alternative to the stock or property markets and traditional investment channels;

2. the sports trading market was recession proof and offered unique tax free returns that could not be replicated in any mainstream investment product currently on offer;

3. STC was a sophisticated operation with trading desks in Sydney, Hong Kong and London;

4. trade decisions were made by “Account Managers”, under the supervision of a “Senior Analyst” and “Chief Investment Officer”;

5. each Account Manager had extensive experience in trading on sporting events and a track record of discipline and intelligent decision making;

6. Account Managers expertly analysed and traded on the betting markets;

7. Account Managers were a team of analysts with experience in sports and investment, and with professional qualifications in quantitative disciplines such as science, accounting and mathematics;

8. STC had created “the Insight Project, a world first with a study of savants in sports trading”;

9. the scientific director of STC was Prof Allan Snyder who, for some 20 years, had conducted ground breaking research on savants at both the Australian National University and the University of Sydney;

10. STC had the expertise and knowledge to trade on sporting events worldwide;

11. STC had obtained rights from Sports Trading Club Limited (Hong Kong) to operate the STC business in Australia;

12. STC was registered in NSW and had offices and a trading desk in Sydney;

13. STC had borrowed $10 million to enable it to maximise the profits to be earned from sporting trades; and

14. investors were always legally entitled to a return in full of the principal of their loan.

3. Those representations were false and or misleading or fraudulent because:

1. “Mark Hughes” was really Mr Foster who was a fraudster who had been charged, convicted or served sentences in respect of fraud related matters in Australia, the United Kingdom, the United States of America and Vanuatu;

2. STC did not have trading offices but operated from a residence in Byron Bay;

3. Prof Snyder was not a scientific director of STC;

4. STC did not have a team of analysts or traders with professional qualifications in the disciplines alleged;

5. STC was not a legitimate sports betting or trading business but a fraudulent scheme in which loans from Mr Mackinnon and Group Members were:

1. transferred to the benefit of entities controlled by Mr Foster, his niece and his associates;

2. used as part of a Ponzi scheme under which Mr Mackinnon and the Group Members were being paid purported profits on fictitious sports betting trades.

4. Mr Foster, Ms Larter and Ms Johnson:

1. made the representations with “the knowledge that they were false or were reckless as to whether they were false or not” and “had no hones belief in the truth of what was represented”;

2. deliberately concealed the matters in [91(3)] with the knowledge that this would create a false impression, or with reckless disregard as to whether this would create a false impression;

3. intended that the representations would be relied on by Mr Mackinnon and Group Members;

thereby engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law; thereby acted fraudulently; and thereby intended to cause the Group Members harm by participating in the fraud and misapplying the loans.

92. Arising out of those matters, the Further Amended Commercial List Statement contains allegations of breach of contract, misleading or deceptive conduct, deceit, conversion and conspiracy. Mr Mackinnon on his own behalf and the Group Members claims damages, the imposition of a constructive trust, and restitution of the loan amounts.

93. I will return to these allegations after I have analysed what happened.

The involvement of Ms Johnson

Ms Johnson’s affidavit

94. Ms Johnson swore an affidavit in the proceedings on 3 August 2017.

95. It is 466 pages long and contains almost 1,000 paragraphs. It was prepared at a time when Ms Johnson did not have legal representation. Ms Johnson said it was prepared with the assistance of her clerk, Mr Leo Wassercug. Mr Wassercug was present in Court throughout the hearing and appeared to play the role of clerk to or instructor of Mr Argy.

94. The affidavit purported to be comprehensive and precise.

95. In the affidavit Ms Johnson said she was admitted to practice as a solicitor in 1984 and has specialised in criminal law.

96. She said that her role as a limited partner in STC, between December 2012 and January 2014, was her “only foray into the business world”.

97. The length, and apparently comprehensive nature of the affidavit, suggests that it includes all that Ms Johnson then thought could be said in defence of the claims made against her.

Ms Johnson’s introduction to STC

100. In her affidavit Ms Johnson said she met Mr Foster through Ms Larter in or around August 2012 while on a holiday to the Gold Coast. Ms Larter introduced her to Mr Foster’s sister who invited Ms Johnson to her home where she met Mr Foster.

101. In her affidavit Ms Johnson said Ms Larter told her:

“He [Mr Foster] is a really nice person. He’s not what they say he is”.

102. Ms Johnson said that during her visit to Mr Foster’s sister’s home, Mr Foster mentioned the then pending SensaSlim matter and, on her return to Sydney, telephoned her “and persuaded me to act for him to seek an adjournment”.

103. The hearing of the SensaSlim matter was scheduled to commence before Yates J on 3 September 2012.

104. On 29 August 2012 Ms Johnson appeared for Mr Foster before Yates J to seek an adjournment. Yates J refused the adjournment (Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 3) [2012] FCA 939) and noted (at [1]) that:

“Ms Johnson, who appears for [Mr Foster] on this application, has made clear in both oral and written submissions (through her affidavit) that she appears only for [Mr Foster] for the purpose of making this application. She is not presently instructed to appear on behalf of [Mr Foster] at the principal hearing.”

105. Ms Johnson then appeared before Perram J, sitting as duty judge, on 2 September 2012 on an application for leave to appeal from Yates J’s decision. Perram J refused to grant leave (Foster v Australian Competition and Consumer Commission [2012] FCA 953).

106. Those proceedings were ultimately resolved by the judgment of Yates J to which I referred at [35] above.

107. Ms Johnson gave this evidence in her affidavit as to what occurred after the unsuccessful adjournment application:

“469.   After the two interlocutory matters [in the SensaSlim litigation] Peter Foster asked me to contact him again.

470.   Peter Foster told me about sports trading. He stressed that he wouldn’t involve himself in any more scams and said that he had wasted too much of his life getting into trouble and that the business would be a legitimate business.

471.   We also talked about our mutual love of animals. I have been a passionate animal lover all my life. I had a long-term goal to help animals by establishing and running animal shelters.

472.   Peter Foster proposed that I become the limited partner of the new business.

473.   Although I have no interest in sport and do not gamble – the only gambling that I do is to occasionally buy a lottery ticket - I thought that the proposed business model of the new business sounded good and likely to be profitable. I had been charmed by Peter Foster and hence I agreed to become the limited partner of the new business for several reasons, all of which reassured me that everything would be above board:

(a)   The fact that the proposed business had nothing to do with diets or the weight loss industry.

(b)   My good friend Anne Larter was to be the limited partnership’s general partner and would manage and operate the business from day to day which was to include, as far as I was aware, doing all the banking and having control of all moneys… As to this, I confirm that, as far as I was aware, Anne Larter did all the banking for the partnership. Peter Foster said he wouldn’t allow his longstanding friend, Anne Larter, to be involved in anything improper. This made sense to me, particularly as I did not imagine that Anne Larter would engage in any improper or dishonest conduct or that she would betray a good friend like me.

(c)   I was to be the limited partnership’s limited partner with no managerial responsibility and limited liability…allowing me to continue practising as a solicitor.

(d)   Peter Foster stressed that he would not be involved at all in the management or operation of the proposed new business but would only be involved in setting up and operating the business’s website and similar technological aspects which were in any event beyond the capabilities of both Anne Larter or myself. …

(e)   Richard Holmes who had been a professional sports trader for decades, would be doing [STC’s] sports trading.

(f)   The clincher for me was that Peter Foster promised that once the new business was up and running [STC] would have a charitable arm running animal shelters and that I would run this charity”. (Emphasis added.)

108. In cross-examination before me Ms Johnson gave this evidence about her knowledge of Mr Foster’s history:

“Q. You weren't aware of what the allegations were against Mr Foster whatsoever?

A. Vaguely.

Q. Were you aware that in those proceedings that it was alleged that Mr Foster had assumed identities of other people involved?

A. No.

Q. Were you aware that Mr Foster was selling franchises to investors and taking their money and moving it overseas?

A. No.

Q. Were you aware that Mr Foster had assumed an identity by the name of Peter O'Brien in those proceedings?

A. No.

Q. Were you aware that Mr Foster was accused of having a long history of fraud and deception?

A. At the time that I applied for the adjournment?

Q. Yes?

A. I was aware that he had had another case before that case.

Q. Were you aware of his general notoriety as a confidence man, as a fraudster?

A. I was aware of some things that had been in the media. There was something about the UK, him doing something for Cherie Blair or something.

Q. Were you aware of his general reputation as someone who had committed frauds in the past?

A. I don't know that I can answer that that clearly. I mean, I had seen him get knocked out wearing a swimsuit in Fiji, but I wasn't really aware of what it was about.”

109. A short time later Ms Johnson gave this evidence:

“Q. When you went into this venture did you understand that Foster had been accused of fraud?

A. That he had been accused of selling diet products that didn't work.”

110. The passages in Ms Johnson’s affidavit that I have emphasised at [107] reveal that she knew more about Mr Foster than she was prepared to accept in cross-examination.

111. In her affidavit, Ms Johnson said that Mr Foster stressed to her that he would not “involve himself in any more scams”. That is, he accepted, and indeed had asserted to Ms Johnson, that he had been involved in “scams”.

112. Ms Johnson said that Mr Foster told her that “he had wasted too much of his life getting into trouble” and the STC business “would be a legitimate business”; from which Ms Johnson must have understood Mr Foster to be accepting that he had “got into trouble” by reason of businesses that were not “legitimate”.

113. Ms Johnson said that she was reassured by Mr Foster’s statement that STC “had nothing to do with diets and the weight loss industry”. Ms Johnson had, only a short time earlier, appeared for Mr Foster before Yates and Perram JJ unsuccessfully seeking an adjournment of the SensaSlim matter. The fact that Ms Johnson was so reassured shows that she must have had a deeper understanding of the allegations made in the SensaSlim case, and the “case before that case” that she was prepared to accept in cross-examination (see [108]).

114. Further, Ms Johnson must have understood from the fact that Mr Foster assured her that he would not involve Ms Larter “in anything improper” that he was acknowledging that his earlier activities were, or had been alleged to have been, improper.

115. Ms Johnson’s evidence before me that she was only “vaguely” aware of Mr Foster’s antecedents, when compared to the detailed explanation in her affidavit of how it was that Mr Foster persuaded her to become partner in STC is an example of a persistent tendency in Ms Johnson’s evidence. That tendency was to assert the improbable, and deny the obvious on any occasion when she thought it might assist her deal with her perception of the problem posed by the question at hand. I will say more about this later in these reasons.

116. In cross-examination Ms Johnson gave this evidence as to why Mr Foster was not to be a partner in STC:

“Q. You then entered into the partnership agreement with Ms Larter. Is there any reason why Mr Foster wasn't on the partnership deed, given that it was his business proposal?

A. Well, it wasn't really his. He had the opportunity of getting the licence rights, of this trading, and he didn't want to do it anymore. So he was, Anne was going to do it, and they suggested that I would be, that I should be a partner in it.

Q. When you say, ‘he didn't want to do it anymore’, he'd only just got the licence rights, you said. So this would have been a new venture for him?

A. Well, I don't think he had the licence rights, but he had the opportunity of it, or he knew about the licence rights. Or he knew about the company where he could get the licence rights.

Q. So what was the reason given why he wasn't party to the partnership agreement at the time?

A. I think he was, I think he was going to go to gaol.

Q. What was that in respect of?

A. I don't know, a case in Brisbane. There was a case in Brisbane that he was involved in.

Q. So your evidence is that the reason why Mr Foster wasn't on the partnership agreement, was that he was about to go to gaol?

A. No, it's not my evidence. I don't know. I don't know, but he, I mean, he was sentenced, eventually, to go to gaol.”

117. A matter that Ms Johnson emphasised in her evidence was Mr Foster’s early insistence that he would not participate in the management or operation of the STC business but would only be involved in “setting up and operating the business’s website and similar technological aspects”.

118. In cross-examination Ms Johnson gave this evidence about that matter:

“Q. Given that Mr Foster brought the idea to you, did you insist on him being on the partnership agreement at any stage?

A. Actually, I would insist that he would not be.

Q. Why's that?

A. Well, I didn't want him, one of the things that I really liked about it was that there were two people in charge of the money. There was one who was Richard Holmes, who's a really experienced trader of over 40 years, I think – maybe even 45 years – who would have access to the money, and Anne. So, you know, I liked that idea.

Q. That meant that you wanted to keep Mr Foster away from the money?

A. I would not have been interested in doing something with Mr Foster having access to the money.

Q. I think your evidence is that you understood that Mr Foster would take a back seat role, but be involved in the initial set up of the business, do you recall that?

A. He was going to set up the website, or, you know, the computer side of it. I'm not really, like, tech savvy, so when I say, ‘website’ don't hold me to that, but all of the computer side of it. He was setting up, cause Anne's not really that tech savvy either.”

119. Later Ms Johnson said:

“A. …[Mr Foster] was setting up all of the online stuff. He had a company doing it, I couldn't have done it and Anne couldn't have done it and that's what he said. He said I'll set it up for you girls and, you know, it's your company, it's your business.”

120. As the following account reveals, it became clear to Ms Johnson at least by mid-2013 that Mr Foster was not confining his activities to setting up or operating the STC website but was involved in “posting” the “trades” allegedly conducted by STC and, ultimately, conducting the “trading activity” itself.

121. In any event, it appears that, at the outset, Ms Johnson was concerned about Mr Foster having any role in the business, including one confined to setting up the website.

122. Thus, at one point in her cross-examination, Ms Johnson said in an answer which was not responsive to the question:

“I understood him to be involved in setting up the internet side of things and managing the internet side of things. It was one of the things that I said to Anne [Larter], you know, ‘Get rid of him. I’ll help you. You’ve just got to – there’s got to be someone who can manage that internet side of things’…that was one of the things I said to her, ‘Look, he’s not indispensable. We can get somebody else to do that’.”

123. Thus Ms Johnson offered the inconsistent position of being comforted by Mr Foster’s assurance he would only be involved in setting up the STC website and performing technical functions, and yet was exhorting Ms Larter to “get somebody else” to perform those functions.

124. In cross-examination Ms Johnson said that she understood that the reason Mr Foster was not involved in STC was because he had been offered an opportunity to work in the purported “parent company” of STC. For reasons I will explain, I do not accept this evidence.

Ms Johnson’s “seed capital”

125. On 30 December 2012 Ms Johnson executed the Limited Partnership Agreement with Ms Larter.

126. At around this time Ms Johnson advanced $182,500 in cash to the Partnership. Ms Johnson described this as her “seed money”.

127. Only Ms Johnson and the Associate Members (including Mr Mackinnon and the other Group Members) advanced money to the Partnership. Ms Larter advanced no funds. Mr Foster advanced no funds.

128. Ms Johnson said that:

1. she borrowed all of the $182,500 in cash from “friends”;

2. the arrangement (with whom is not revealed in the evidence; it must have been with Ms Larter and or Mr Foster) was that she would be paid 100% interest on her advance;

3. the money would be repaid within months (in an email Ms Johnson sent Ms Larter and Mr Foster on 10 September 2013, Ms Johnson said the loan plus interest was to be repaid by February 2013); and

4. there was a document recording the arrangement but that she had been unable to locate it.

129. Ms Johnson said she undertook no due diligence before advancing funds to STC. She said she did not ask Ms Larter how Ms Larter secured the rights STC was supposed to have, nor their value. She said she made no enquiries as to “who would be doing what” in the business.

130. In her 10 September 2013 email to Mr Foster and Ms Larter, Ms Johnson said:

“The seed money loan was for $182,500 to be repaid by end of Feb 2013 by payment of $182,500 of principal plus $182,500 as interest.

Without the $182,500 loaned STC could not have got started. Neither of you was able to provide one cent of seed capital. Peter [Foster] had no objections to this loan at the time when he needed the money”.

131. I will return to this email. It has wide significance in the case. In the passage I have set out Ms Johnson asserted that Mr Foster “needed the money” to establish STC. Ms Johnson must have understood from this that from the outset that Mr Foster was to be closely involved in the establishment of STC.

132. Ms Johnson said she paid the $182,500 in four tranches.

133. The first tranche was $88,000. Ms Johnson paid that amount, in cash, to a Mr Bill Duffy, who she said was “a friend of Mr Foster’s”.

134. In her 10 September 2013 email Ms Johnson said that “$100,000 of the $182,500 seed capital was to be placed into STC’s trading account to be traded by Richard Holmes”. Mr Holmes was a “trader” engaged by STC. I will return to Mr Holmes but note at this stage that there is no suggestion that he was involved in any dishonest conduct.

135. However, in cross-examination Ms Johnson said she deposited the other three tranches ($37,000, $25,000 and $32,500), in cash, into a bank account and that she did not know who controlled the bank account.

136. The Westpac account to which I referred at [8] was in the joint names of Ms Johnson and Ms Larter. It was opened on 28 December 2012. There is no record in the bank statements of that account of those deposits.

137. There is no other evidence of the identity of the account into which Ms Johnson’s funds were deposited. It must have been one associated with Ms Larter or Mr Foster.

138. The “loan” was unsecured. As I describe below, it was repaid with 100% interest by the time Ms Johnson retired from STC in January 2014.

Ms Johnson’s understanding of the source of STC’s rights

139. In cross-examination Ms Johnson said she understood from conversations she had with Ms Larter “that [Ms Larter] had secured the rights for Australia and New Zealand” for STC and that she had acquired them because “she was tipped into them by Peter Foster”.

140. When asked to clarify what that meant, Ms Johnson said that Mr Foster “knew about” the rights, and later that he “had” them or “got” them; but that he did not want to “do them” and so he “gave them to [Ms Larter] to do”. Ms Johnson also said that she understood Mr Foster was “going to do it but then he decided not to” and then offered it “to [Ms Larter] – or to us”.

141. Ms Johnson said she did not know why Mr Foster did not want to “do” the rights in STC. She said that it was “because he was going to be involved…with the head company”. She later elaborated that Mr Foster “was working in the actual business” by “organising the different areas [of STC]…in the world for the business”, “that’s what I was told in the beginning, and that that’s why he wasn’t taking up the licence for Australia and New Zealand”. She said that Mr Foster “was involved with the parent company that was dealing with the licences. I knew that from the start because that’s what he said. That’s why he was giving [Ms Larter] the licence because he was going to do Australia but then he’d been approached by the parent company to work for them”.

142. Ms Johnson also said:

“My understanding, my first conversations about the setting up of the business in Australia was that the licence – was that Peter Foster was going to get the licence for Australia and New Zealand, but he had decided not to because he’d been offered a role to work with the parent company and, so he had offered that licence to Anne Larter, because she’d been through some tough times”.

143. As is the case with much of Ms Johnson’s evidence, it is difficult to reconcile the evidence I have just set out with her evidence that the reason Mr Foster could not be involved in the Australian business of STC was because he was “going to go to gaol” (see [116] above).

The scheme

STC’s marketing campaign

144. In early 2013 STC commenced advertising in a number of major newspapers throughout Australia.

145. For example, the following advertisement was published in The Weekend West Australian on 9 February 2013:

Advertisement - The Weekend West Australian on 9 February 2013 - text version (34.4 KB, rtf)

146. The advertisements invited potential investors to call “Mark Hughes”: an alias used by Mr Foster.

147. Mr Foster obviously understood that his notoriety was such that he could not be seen to be associated with STC.

148. Someone (I would infer Mr Foster or someone at his direction) prepared a “Sales Script” containing instructions for persons who received telephone calls from potential investors.

149. Investors were to be told:

1. “we are financial traders…but we trade on a market that is absolutely totally transparent and substantially more profitable than the stock market, and that is the sports and prediction markets”;

2. “we are not gamblers”;

3. “we are traders with expert analysts from our team of scientists, statisticians, mathematicians and data analysts”;

4. “there is no risk and…your contribution is fully guaranteed”;

5. “your investment can’t go down because it is treated as a profit share loan which means that your investment is always returned to you in full”;

6. “you can’t lose money you can only make money”;

7. “if you go to our website and you click on our newspaper cuttings…there is a photo of our senior partner [i.e. Ms Johnson] with Julia Gillard (but don’t hold that against her) when she [i.e. Ms Johnson] announced that she obtained the rights of $20 million”;

8. “there is a $10 million cash bond security. That money is simply locked up and can’t be touched”; and

1. “it is an important point to understand that this is not a situation where you can lose money”.

150. Investors were directed to the Public STC Website.

151. The Public STC Website had a link to a media release showing Ms Johnson with former Prime Minister the Hon Julia Gillard AC. It stated that Ms Johnson was involved in a $20 million partnership deal.

152. The photograph of Ms Johnson and Ms Gillard was taken in the context unrelated to STC. Contrary to the “sales script”, the photograph was not taken on an occasion where Ms Johnson made any announcement about obtaining any rights connected with STC.

153. There is an issue as to whether Ms Johnson accessed the Public STC Website. She was certainly aware of it. In her 10 September 2013 email, she demanded that “my name and all references to me be removed” from that website; which she named in terms. She agreed she saw the Public STC Website but denied clicking on the link to download the Proposal.

154. As I have mentioned, there was also a Members STC Website, accessible only by Associate Members using a username and password. At that website, Associate Members could see the state of their “account” with STC. Ms Johnson agrees she accessed this website. I will return to this below.

The Proposal

155. The key marketing document used to induce investors into loaning moneys to the STC partnership was the Proposal. It is an extravagant document.

156. A copy of that document is an attached to these reasons (The Proposal (1.62 MB, pdf)).

157. The Proposal was available through a hyperlink on the Public STC Website labelled “click to download proposal”.

158. Mr Kenneth Gamble, an investigator retained on behalf of the Group Members, said that:

“In fact what actually happens is people would fill out the proposal application to receive a proposal and they would then be emailed the proposal, that's my recollection, so it was something that was emailed to them when they displayed an interest in the site.”

159. The Proposal was also mailed to investors after the initial telephone call.

160. There is an issue whether Ms Johnson saw or knew of the contents of the Proposal. On her behalf, Mr Argy submitted that Ms Johnson “categorically” denied ever seeing the Proposal before a copy was adduced in evidence in these proceedings. I will return to this.

161. The Proposal included the Terms of Associate Membership to which I have referred.

162. On the front page of the Proposal, Ms Larter was described as being the “General Partner” and Ms Johnson described as the “Legal Partner” (rather than a “limited” partner, as Ms Johnson thought herself to be).

163. The Proposal included a photograph of Ms Johnson and Ms Larter and made the following statement concerning Ms Johnson:

“Leigh Johnson has carved out a distinguished career over 30 years as a lawyer representing clients from all walks of life, including prominent politicians, actors, physicians, members of law enforcement agencies, large corporations and Aussie battlers.

Her passion for justice and the Aussie ethos of everyone being given a ‘fair go’ is legendary.

Her opinion has been much sought after with countless television appearances on programs such as A Current Affair, Today Tonight, Sunday, as well is [sic] being a regular member of the panel on the highly successful Beauty and the Beast.

She brings to the Partnership unlimited enthusiasm, a fierce intelligence and belief that everyone should share equally in the financial rewards.”

164. Ms Johnson said that this was not an accurate summary of her career. Ms Johnson said she had never acted for “politicians”, “actors”, “physicians” or “large corporations”.

165. The Proposal contained the following statements (some of which are picked up as “representations” in the Further Amended Commercial List Statement):

1. STC had “secured the exclusive rights and been appointed the Club Member for Australia” from the Sports Trading Club Limited;

2. these “highly prized rights” allowed for $20 million to be “traded on sporting events and prediction markets in Australia and overseas”;

3. STC sought to raise “$10 million by way of a loan so as to maximise profits and fully utilise the $20 million allocation”;

4. any loan made to STC would be “100% secured against the value of the Australia rights and by way of personal guarantee by” Ms Larter;

5. instead of paying interest on moneys advanced STC would share one half of the profits it made “as a Member” with “Associate Members”.

6. there were opportunities to make “successful trades” on sporting events by using “intelligence”;

7. the “intelligent trader” maximised profits and minimised losses “through the use of established financial risk management strategies such as stop loss, hedging and the equivalent of short selling” and that “these are just a few of the skills that are second nature to our highly trained Account Managers”;

8. the “actual trade decisions are made by our Account Managers, under the supervision of our Senior Analyst and Chief Investment Officer”;

9. each “Account Manager has extensive experience in trading on sporting events, and a track record of discipline and intelligent decision making”;

10. the Account Managers “expertly analyse and trade the betting markets, taking the emotion out of the betting game and putting quantitative analysis in its place”;

11. the Account Managers “are a team of analysts with experience on sports and investment, and with professional qualifications in quantitative disciplines such as science, accounting and mathematics”;

12. the Account Managers support the Chief Investment Officer “through undertaking extensive statistical and trending analysis coupled with rigorous background research and market intelligence” to “seek attractive risk-reward profile[s]” and “allocate assets” “using sports specific algorithms that are used to identify value at all markets”;

13. the Account Managers “have the invaluable access to information received from our Scientific Research Director, Dr Allan Snyder, from the Sports Trading Club Insight Project at the University of Sydney, harnessing the extraordinary talents of Savants”;

14. STC “has also created the ‘Insight Project’, a world first with the study of savants and sports trading”;

15. STC “have embraced the extraordinary skills of savants to give ourselves a unique advantage. Certain savants unmask patterns that others can’t see and are bewilderingly quick at performing calculations and recalling enormous amounts of data”;

16. those “savants are mysteriously gifted at setting odds and point spreads on games such as football and basketball with extraordinary accuracy”;

17. the “Sports Trading Club Limited has the expertise and knowledge to trade on sporting events worldwide” and “they only appoint one Club Member in each country”; and

18. “the amount of money to be traded in each country is calculated in accordance with the specific size of the country” and other like matters and that “in Australia it was determined that that sum was $20 million and the Australian sole rights were obtained by Leigh Johnson and Anne Larter”.

166. The Proposal concluded:

“In simple terms, we are not for sale.

Leigh Johnson and Anne Larter do not want to sell any equity in The Sports Trading Club Partnership. They believe the rights are just too valuable, and only going to increase in worth in the years ahead.

They are however prepared to share with you, and other lenders, 50% of the profits for a specified period of time.

If you were investing money in a managed investment scheme or the stock market, the value of your investment can potentially increase or decrease. In some cases your investment can be completely wiped out. That’s why there are warnings on those type of investment schemes stating that your investment may go down as well as up.

However as a loan you are always legally entitled to the return in full of the principal of the loan. As it is a loan and not an investment the principal sum we borrowed must be repaid to you in full. The principal sum remains the unchanged.

This gives you security and peace of mind that you are not risking your principal. And you do get to share in the rewards, 50% of all profits made by the Member.

Reward without risk… it may sound too good to be true. It isn’t.

However where there is a plus there normally is a minus. In this this [sic] case, ‘all good things must come to an end’ and there is a time limit on the term of the loan and the period that you will be able to be an Associate Member.

The term of the loan is for either one year, two years or a maximum of three years, depending upon what suits your personal circumstances.

At the end of the term your loan will be repaid to you in full. But you will have had up to three good years of reaping the rewards…without worrying about risking the principal.”

167. The Proposal attached the form of Loan Agreement to which I have referred: see [38].

168. Mr Mackinnon alleges that all the statements in the Proposal were false; that STC had not acquired any rights from Sports Trading Club Limited, or anyone else, to trade on sporting events or “prediction markets”; and that STC did not ever conduct any trading or betting activity of the kind described in the Proposal, or at all.

169. I will return to these allegations and the question of whether Ms Johnson knew of the contents of the Proposal later in these reasons.

The fraud

170. Over 400 “Associate Members”, including Mr Mackinnon invested in STC. As I have mentioned, Associate Members deposited $29.6 million into STC’s Westpac account. The Group Members’ deposits comprised some $12.3 million of that $29.6 million.

171. On 30 October 2014 shortly after Mr Foster’s arrest, Ms Larter sent an email to all “STC Members” headed “STC Statement” as follows:

“STATEMENT

As a result of Channel 9 and the program A Current Affair, I am writing to our members to give them comfort in very muddled times.

There are going to be people who have seen that The Sports Trading Club have [sic] been most transparent in its activities, successful in its activities and now much maligned.

We have confidence in the integrity of our Company and therefore, offer termination. If you choose to arrange a refund, please email Terri with details of your request.

[email protected]”.

172. Only 5 of the 152 Group Members received a partial refund offered by Ms Larter. The total amount refunded was $138,905.

173. Otherwise no Group Member has been repaid the amount advanced to STC. It has all been lost.

174. The Westpac account was opened on 4 January 2013 with a deposit of $50. The next deposit, $150,000.00 was made on 19 February 2013 by a Mr Pieter de Klerk. Mr de Klerk’s evidence is of vital importance in this case. I return to it below.

175. Thereafter, regular deposits were credited to the Westpac account. There were two deposits for $50,000 on 27 February 2013, a deposit of $25,000 on 1 March 2013, deposits of $50,000 on 6 and 8 March 2013, deposits of $100,000 and $50,000 on 11 March 2013, deposits of $50,000, $20,000 and $50,000 on 14 March 2013 and so on. The Westpac statements identify named persons as having made many of these deposits. I infer those named persons were Associate Members. Other deposits do not identify the identity of the depositor but I infer they were from Associate Members. Mr Gamble has identified all of the Group Members’ deposits in the Westpac account.

176. Funds were withdrawn immediately after these deposits were made. The withdrawals are often in round numbers, suggesting that the funds were remitted to other unidentified accounts. For example: $60,500 was withdrawn on 19 February 2013, $6,000 on 19 February 2013, $2,000 on 20 February 2013, $40,000 on 21 February 2013, $25,000 on 22 February 2013 and again on 28 February 2013 and so on.

177. There were also “debit card withdrawals” in odd amounts for apparently private purposes (Woolworths, Taste of Paradise restaurant, Telstra bill payment and the like).

178. All of the money paid into the Westpac account has been paid away.

179. I referred to Mr Gamble’s evidence at [158]. As I have mentioned, Mr Gamble is the investigator retained on behalf of the Plaintiff Group Members. He accepted in cross-examination that he stands to gain from the successful prosecution of these proceedings as he, or an entity with which he is associated, will receive a percentage of any recovery. He thus has an interest in the outcome of these proceedings and is, to that extent, not an objective witness. The conclusions and opinions formed by Mr Gamble were challenged, and I have not accepted them as evidence of their truth. However, the fruits of his investigation as to matters of fact were not challenged. I accept his evidence concerning those findings. They are supported by documentary evidence (such as bank statements and contemporaneous records of the STC website).

180. Mr Gamble’s investigations reveal that almost $8.5 million of the funds paid into the STC Westpac account was transferred to an account with HSBC Bank in the name of the sixth defendant, Sports Trading Club Limited. Funds were then transferred from that account into bank accounts in Hong Kong and Vanuatu in the name of offshore companies associated with Ms Arabella Foster and Mr Duffy (the person to whom Ms Johnson handed cash in December 2012). Thereafter the funds were applied principally for the benefit of Mr Foster and his relatives and associates for purposes unrelated to those stated in the Proposal.

181. Mr Gamble’s investigations have also shown that a further amount of some $5 million was transferred from the STC Westpac account to accounts controlled by Mr Duffy and were then used by Mr Foster for personal expenditure and payments to his relatives and associates. Almost $2 million was also paid directly to Mr Foster’s associates and relatives.

182. Those transfers included:

1. some $353,000 to Mr Foster’s associate, Mr Robin Reichelt who used the alias “Howard Robin” for the purpose of the STC scheme (I refer to this below);

2. $353,000 via Mr Duffy’s ING account, and $355,000 plus US$125,126 directly, to Mr Foster’s mother Ms Luigina Foster;

3. some $132,000 to Mr Foster’s associate, Mr Christian Slinn; and

4. $109,000 via Mr Duffy’s ING account, and $126,000 directly, to Mr Foster’s niece Ms Arabella Foster.

5. $1 million used to purchase a luxury yacht known as “Next Adventure”;

6. $30,420 to Mr “Tom Nolan” (to whom I refer below);

7. More than $975,000 withdrawn in cash from ATMs;

8. $430,510 spent on gold bullion;

9. $280,000 used to purchase a race horse;

10. some $105,000 plus a further US$25,000 spent on Mr Foster’s lawyers in the SensaSlim case;

11. some $260,000 expended on American Express and Western Union accounts.

183. Almost $15 million of the money paid into the Westpac account has not been accounted for.

184. Mr Gamble has analysed the STC Westpac account statements and prepared the following summary. It shows that, for the period set out below, deposits and withdrawals were made from that account as follows:

Date from	Date to	Credits / Deposits (AUD)	Debits / Withdrawals (AUD)	Closing Balance (AUD)
31 December 2012	31 January 2013	$50.00	$0.00	$50.00
31 January 2013	28 February 2013	$250,001.00	$192,269.03	$57,781.97
28 February 2013	28 March 2013	$1,239,967.36	$686,414.34	$611,334.99
28 March 2013	30 April 2013	$360,091.70	$967,083.19	$4,343.50
30 April 2013	31 May 2013	$395,000.41	$395,921.75	$3,422.16
31 May 2013	28 June 2013	$336,199.55	$285,786.87	$53,834.84
28 June 2013	31 July 2013	$796,033.74	$806,481.86	$43,386.72
31 July 2013	30 August 2013	$1,070,011.87	$1,040,211.69	$73,186.90
30 August 2013	30 September 2013	$720,012.03	$791,808.19	$1,390.74
30 September 2013	31 October 2013	$925,035.60	$850,519.91	$75,906.43
31 October 2013	29 November 2013	$422,033.79	$445,373.05	$52,567.17
29 November 2013	31 December 2013	$1,848,750.18	$1,860,764.85	$40,552.50
31 December 2013	31 March 2014	$1,727,030.12	$1,741,670.63	$25,911.99
31 March 2014	30 June 2014	$4,863,178.15	$4,373,641.15	$515,448.99
30 June 2014	30 September 2014	$10,037,790.00	$9,927,894.31	$625,344.71
30 September 2014	3 November 2014	$3,932,025.38	$3,137,684.79	$1,419,685.30
03 November 2014 (Mr Foster was arrested and jailed on 28 Oct 2014)	31 December 2014	$434,612.61	$615,343.52	$1,238,954.39
31 December 2014	31 March 2015	$203,761.77	$697,857.29	$744,858.87
31 March 2015	30 June 2015	$27,628.79	$679,221.06	$93,266.00
30 June 2015	30 September 2015	$1.15	$50,442.75	$42,825.00
Totals:		$29,589,165.20	$29,546,390.23

185. As Mr Gamble observed, the closing balance in the STC Westpac bank account at the end of each month show that large amounts of money were transferred out of the account soon after being deposited.

186. I have mentioned that Mr Gamble has ascertained that almost $8.5 million was transferred from the STC Westpac account to bank accounts in Hong Kong. Most of those transfers took place after the end of August 2013 as follows:

Date of transfer	STC Westpac Account Transaction number	STC Westpac Account Description of transaction	Amount transferred AU$	Transferred to
26 February 2013	5559256	HK	$1,496.79	Not known
19 April 2013	5704853	HK	$652.29	Not known
30 August 2013	6060515	HK TRADE	$101,300.00	Sports Trading Club Ltd
27 September 2013	6141408	HK	$100,000.00	Bella Development Ltd
25 October 2013	6216025	STC HK	$50,000.00	Sports Trading Club Ltd
19 December 2013	6364789	HK	$50,000.00	Sports Trading Club Ltd
30 December 2013	6386422	HK	$75,000.00	Sports Trading Club Ltd
12 February 2014	6491378	HK	$58,105.75	Sports Trading Club Ltd
12 February 2014	6491383	HK AU	$50,000.00	Sports Trading Club Ltd
17 February 2014	6499203	HK	$50,000.00	Sports Trading Club Ltd
9 May 2014	6714226	HK	$250,000.00	Sports Trading Club Ltd
16 May 2014	6729202	STC HK	$250,000.00	Sports Trading Club Ltd
23 May 2014	6750637	HK	$250,000.00	Sports Trading Club Ltd
28 May 2014	6758879	HK	$190,000.00	Bella Development Ltd
2 July 2014	6848294	HK	$250,000.00	Sports Trading Club Ltd
17 July 2014	6884481	HK	$250,000.00	Sports Trading Club Ltd
22 July 2014	6892659	HK	$250,000.00	Sports Trading Club Ltd
25 July 2014	6900485	HK	$250,000.00	Sports Trading Club Ltd
25 July 2014	6902362	HK	$1,070.91	Not known
28 July 2014	6906258	HK	$250,000.00	Not known
31 July 2014	6913721	HK	$250,000.00	Sports Trading Club Ltd
1 August 2014	6916374	HK	$250,000.00	Sports Trading Club Ltd
5 August 2014	6921675	HK	$250,000.00	Sports Trading Club Ltd
7 August 2014	6927582	HK	$250,000.00	Sports Trading Club Ltd
8 August 2014	6930736	HK	$250,000.00	Sports Trading Club Ltd
12 August 2014	6936268	HK	$250,000.00	Sports Trading Club Ltd
15 August 2014	6941750	HK	$250,000.00	Sports Trading Club Ltd
15 August 2014	6943117	HK	$250,000.00	Sports Trading Club Ltd
18 August 2014	6946381	HK	$250,000.00	Sports Trading Club Ltd
19 August 2014	6949334	HK	$250,000.00	Sports Trading Club Ltd
20 August 2014	6951286	HK	$250,000.00	Sports Trading Club Ltd
21 August 2014	6954363	HK	$250,000.00	Sports Trading Club Ltd
25 August 2014	6958000	HK	$250,000.00	Sports Trading Club Ltd
26 August 2014	6962563	HK	$250,000.00	Sports Trading Club Ltd
29 August 2014	6970220	HK	$250,000.00	Sports Trading Club Ltd
1 September 2014	6972608	HK	$250,000.00	Sports Trading Club Ltd
10 September 2014	6988927	HK	$250,000.00	Sports Trading Club Ltd
24 September 2014	4012152	HK	$250,000.00	Sports Trading Club Ltd
26 September 2014	4017193	HK	$250,000.00	Sports Trading Club Ltd
7 October 2014	4030636	HK	$250,000.00	Sports Trading Club Ltd
10 October 2014	4037723	HK	$250,000.00	Sports Trading Club Ltd
21 October 2014	4054569	HK	$250,000.00	Sports Trading Club Ltd
21 October 2014	4055865	HK	$250,000.00	Sports Trading Club Ltd
Total:			$8,477,625.74

f.   The first defendant had assets of A$10m;

g.   The Sports Trading Club had seven traders in its registered Sydney head office and had trading offices in London and Hong Kong;

h.   The traders working for the Sports Trading Club are the best paid in the business. Their junior trader is on $250,000 a year and their senior traders are on $450,000 a year;

i.   The Sports Trading Club was audited by KPMG; and

j.   If members wished to invest in the Sports Trading Club they needed to act quickly as the offer was about to close.”

By Mr Foster

737. There are numerous examples in the evidence of correspondence sent by “Mark Hughes”, describing “Mark Hughes” as the National Sales Manager of STC. One example is the email from “Mark Hughes” to Mr de Klerk of 14 February 2013 (see [207] above). Another is the email that “Mark Hughes” sent Mr and Mrs Mackinnon on 28 October 2013 (see [638] above).

738. I am satisfied that Mr Foster wrote these emails.

739. He also represented himself to Mr Mackinnon (see [637] to [639]) and Mr de Klerk (see [204] to [207]) as being “Mark Hughes”.

740. It is also clear beyond any argument that Mr Foster, by silence and by adopting an alias, represented that he himself was not involved in STC.

741. Otherwise the representations that Mr Foster made were those set forth in the Proposal to which I will return.

By persons “employed or instructed” by Mr Foster – Ms Johnson

742. Ms Johnson was not “employed” by Mr Foster.

743. The question is whether she was “instructed” by Mr Foster.

744. The further question is whether, on its proper construction, the allegation is that Mr Foster “instructed” Ms Johnson to make the representations; or whether the allegation is that Ms Johnson made the representations while “instructed” by Mr Foster in a general sense, albeit not necessarily to make the representations.

745. On one reading of this clause, the words “employed or instructed” are merely adjectival and simply describe the class of persons who made the representations. On another reading, those words convey what the persons were “employed or instructed” to do; make the representations. The use of the word “employed” as well as “instructed” points, albeit not strongly, to the former construction. It is hard to contemplate a person being “employed” to make representations; as opposed to being “instructed” to make representations. But this is not clear. And if the pleading is merely an allegation that Ms Johnson was “instructed” in some way, and in that circumstance made the representations, what nature and frequency of “instruction” is alleged? To attend one meeting? Or two meetings? Or to act generally in a particular way? And if so, what way?

746. This is a further example of the infelicity of the pleading. A pleading should be clear. A party, especially one facing allegations as serious as those directed to Ms Johnson, should not be left in any doubt about the case brought and should not have to parse and analyse a pleading to divine its true meaning.

747. Ms Johnson is entitled to the benefit of the doubt. Resolution of the doubt in Ms Johnson’s favour means that the pleading should be construed as imposing on Mr Mackinnon the burden of showing that Ms Johnson was “instructed” by Mr Foster to make the representations in question.

748. In closing submissions, Mr Dixon confined this aspect of the case against Ms Johnson to the representations alleged in subpars 20(c), (c)(i), (d), (e) and (f) of the Further Amended Commercial List Statement.

749. I shall deal with them in turn.

20(c) – that Mark Hughes was the National Sales Manager of STC

750. A central claim in the Further Amended Commercial List Statement is that “Mark Hughes” was an alias adopted by Mr Foster. This allegation should be understood as an allegation that a person whose real name was “Mark Hughes” held that position.

751. The question is whether Mr Foster instructed Ms Johnson to represent, and whether Ms Johnson did represent, that “Mark Hughes” was the National Sales Manager of STC. Further, the question is whether Ms Johnson knew that there was no person at STC whose real name was “Mark Hughes” and that Mr Foster was using that name as an alias.

752. For the reasons I have set out above (see especially [447] to [459]) my conclusion is that Ms Johnson did know that Mr Foster was using the alias “Mark Hughes”.

753. Ms Johnson twice apologised for the absence of “Mark Hughes” at the 13 and 14 March 2013 meetings at the Market Street office and at the Catalina restaurant (see [237] and [248] to [254] respectively).

754. Mr de Klerk also asked Ms Johnson about the role of “Mark Hughes” and that Ms Johnson replied he was the “head of trading”, that the “marketing side is under his portfolio” and that STC was his “idea”.

755. Ms Johnson also knew that it was “Mark” who had contacted Mr de Klerk on 15 March 2013 to arrange a visit to the “trading room” (see [258] above). She arranged that contact (see [260] to [262]).

756. The fact that Mr Foster asked Ms Johnson to attend the 14 March 2013 and 30 May 2013 meetings with Mr de Klerk, knowing that Mr de Klerk knew him as “Mark Hughes”, is consistent with and indeed confirmatory of the conclusion that Ms Johnson knew the truth about this matter.

757. Ms Johnson agreed that Mr de Klerk had asked her about “Mark Hughes”. She claims that she said to Mr de Klerk that she did not know “Mark Hughes” and that “he must be someone Anne knows” (see [248] above).

758. I do not accept that evidence. I accept Mr de Klerk’s evidence that he addressed Mr Foster as “Mark” at the 30 May 2013 meeting in Ms Johnson’s presence.

759. Ms Johnson thus did know “Mark Hughes”. She knew that “Mark Hughes” was Mr Foster.

760. There is no evidence that Ms Johnson represented to Mr de Klerk that “Mark Hughes” held the precise position of “National Sales Manager”. But Ms Johnson expressly represented to Mr de Klerk that “Mark Hughes” (that is, a person whose real name was “Mark Hughes”) was the “head of trading” at STC and was running the “marketing side” of STC. That representation is to the same effect.

761. There is no direct evidence that Ms Johnson did this on Mr Foster’s instructions. But the inference is overwhelming that she did. There is no other rational reason for Ms Johnson to have behaved this way.

762. My attention has not been directed to any evidence that Ms Johnson expressly represented that “Mark Hughes” was the National Sales Manager of STC to any other Associate Member or Group Member.

763. I will invite submissions as to the significance of this fact after delivery of these reasons.

20(c)(i) – by silence or omission, that Mr Foster was not involved in STC

764. Silence can amount to misleading or deceptive conduct. In Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 Black CJ said:

“Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive.”

765. Silence may constitute misleading or deceptive conduct if there is a reasonable expectation that the silence would be broken. This was the analysis in Rafferty v Madgwicks (2012) 203 FCR 1; [2012] FCAFC 37, where the Full Court of the Federal Court said:

“The authorities recognise that the circumstances in which silence may support a finding of misleading or deceptive conduct are not properly subject to any unifying principle. Nonetheless, the authorities also acknowledge that, if the circumstances of a particular case would give rise to a reasonable expectation that, if a fact existed, it would be disclosed, then the failure to disclose that fact may give rise to an inference that the fact does not exist. In this situation (i.e., where there is such a reasonable expectation), a failure to disclose the existence of that fact could constitute misleading and deceptive conduct. See, e.g., Kimberley NZI Finance Limited v Torero Pty Ltd (1989) ATPR (Digest) 46-054 at 53,195; Demagogue v Ramensky at 32, 41; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 at 114; Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 at 405; and Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288 at 296-298.

Inherent in this analysis is the proposition that the existence of a reasonable expectation depends on all the relevant circumstances of the case, including the relationships between the participants in the relevant conduct.” (At [278] and [279] (Kenny, Stone and Logan JJ).)

766. Ms Johnson knew from the outset that Mr Foster was involved in STC. Ms Johnson also knew that it was vital for the sake of STC’s “business” that Mr Foster’s involvement remained concealed.

767. Her involvement in instructing Mr Tassell to send the Pikes & Verekers letters of 5 April 2013 bespeaks her active representation to the recipients of Mr Tassell’s letter Mr Foster was not involved in STC. This was contrary to what she knew to be the fact.

768. Mr Radica asked Ms Johnson whether “STC was a scam”. Notwithstanding the fact that in July 2013 Ms Johnson was concerned that Mr Foster was operating a Ponzi scheme, she did not reveal Mr Foster’s involvement in STC to Mr Radica at that time.

769. On 30 August 2013 Mr Foster threatened to put a bullet in Ms Johnson’s head if she revealed his involvement in STC. But Ms Johnson was aware well before his threat that his involvement was to remain a secret.

770. As Mr Argy accepted, from 30 August 2013 Ms Johnson was on “high alert” about the state of affairs at STC. She knew that Mr Foster was controlling STC’s activities.

771. Ms Johnson made her concerns clear in her 10 September 2013 email. As I have discussed, that email shows that Ms Johnson was concerned that Associate Members’ funds were at risk (see [513]).

772. When she read Logan J’s judgment in the Chaste Corporation case she was “shocked and sicken[ed]” by the similarity between what she read about Mr Foster’s “methods” and “techniques” in the SensaSlim case and those used in STC.

773. On 4 October 2013 Mr Murray, from The Courier Mail, asked Ms Johnson directly whether Mr Foster had any connection with STC. As I have discussed, Ms Johnson gave inconsistent evidence as to the answers she gave to Mr Murray’s emailed questions. She could have easily told Mr Murray the truth. Instead, on her account of it, she relayed her draft answers (at least one of which was to her knowledge false: see [605] to [606]) to STC in circumstances where, as I have found, she must have known they would be intercepted and, to the extent necessary, changed by Mr Foster to exclude any reference to him.

774. Nonetheless, apart from the steps that Ms Johnson claims she took anonymously (see [686] to [705]), Ms Johnson took no steps to alert existing Associate Members (apart from Mr de Klerk) and prospective investors in STC of Mr Foster’s involvement in STC and of Ms Johnson’s serious misgivings as to the implications for investors of that involvement.

775. The only person to whom Ms Johnson revealed Mr Foster’s involvement was Mr de Klerk on 30 August 2013.

776. And yet Ms Johnson was conscious of the need to speak.

777. That is revealed by the steps she claims to have taken anonymously.

778. It is also revealed by this passage of evidence:

“Q. It is the truth, isn't it, that you did just that, you did shut up about Mr Foster throughout this whole time?

A. I was trying to get this business, which was a great business, onto the right track, all the way through, and even when I resigned, I resigned to try to get it onto the right track. And had I gotten access to all of those associate members, I'm telling you, I would have rung every single one of them and asked them to authorise me to take over. So he was right, when he said I was trying to take over the business, I was. I would have asked every one of them to authorise me to take over and be in charge, and then it would have traded successfully, and no one would have lost anything.

Q. Ms Johnson, in respect of the shutting up, as you put it, it was your understanding, was it not, that all of the investors in Australia would have wanted to know whether or not Mr Foster was involved in STC?

A. I don't know.

Q. Do you consider that the involvement of Mr Foster, who was a convicted fraudster, was material information for people looking to loan from between $50,000 and $250,000 in STC?

A. I would have told every one of them, had I had their information. That's why I wanted their information.

Q. Well the people that you did have the information, did you tell?

A. I did.

Q. You told them immediately that Mr Foster was involved?

A. I told [Pieter] de Klerk.”

779. I do not accept Ms Johnson’s evidence that she did not know whether investors in STC would want to know whether Mr Foster was involved. It must have been obvious to Ms Johnson that Mr Foster’s involvement would be a matter of acute interest to all existing and prospective STC investors.

780. Ms Johnson’s evidence that had she “would have told every one of them” about Mr Foster shows that Ms Johnson was acutely aware of the need for her to speak up about Mr Foster’s involvement in STC.

781. The evidence of Ms Johnson’s communications with Mr Foster and Ms Larter in September 2013 does show that she was trying to obtain some information about Associate Members. But there was no evidence that she persisted to seek this information after September 2013. And otherwise than anonymously, she took no other step to alert Associate Members of what she must have understood to have been the parlous state of their investment.

782. By the end of September 2013 any persons who had already invested in STC and persons, such as Mr and Mrs Mackinnon, were then contemplating investing in STC were entitled reasonably to expect that if Ms Johnson, as a partner in STC, knew of matters which suggested that investment in STC was unsafe, or that funds invested in STC may be “in danger and may be being improperly used” (Ms Johnson’s words in her 10 September 2013 email: excerpted at [509]), those matters should be disclosed to them, or to a person or a body that would cause them to become aware of those matters.

783. Further, such persons were entitled reasonably to expect that if, as Ms Johnson said in her 10 September 2013 email, she was “extremely concerned” that “STC is being improperly managed and operated”, “STC may be being operated as a Ponzi scheme by [Mr Foster] and hence is being illegally and fraudulently managed and operated”, that the Associate Members’ “accounts and records may be being falsified” and that the “Associate Members’ moneys may be at risk and are not being properly accounted for”, those matters would be disclosed to them, or to a person or body that would cause them to become aware of those matters.

784. Ms Johnson disclosed Mr Foster’s involvement to Mr de Klerk.

785. Ms Johnson claims that she made the “anonymous” disclosures to which I have referred (at [686] to [705]).

786. But Ms Johnson did not take any steps to disclose those matters to those most directly affected: the Associate Members.

787. She also did not disclose these matters to Mr Murray from The Courier Mail. She must have known that if she had made those matters known to Mr Murray, Mr Murray would have caused them to be publicised and that Associate Members and prospective investors in STC may very well have become aware of that publicity.

788. Ms Johnson knew that the ACCC was acutely interested in Mr Foster’s activities. She had appeared for Mr Foster on an application to adjourn the ACCC proceedings before Yates J and had read Logan J’s judgment of 24 September 2013. She continued to receive emails in relation to the Federal Court proceedings until at least 27 March 2014.

789. Ms Johnson could have approached the ACCC. It is impossible to imagine that the ACCC would have ignored the detailed intelligence that Ms Johnson would have been able to give them about her concerns about Mr Foster’s involvement in STC.

790. Instead, Ms Johnson remained silent; or effectively silent. She remained a partner of STC until 14 January 2014. She helped herself to the $50,000 that she contended was due to her, notwithstanding that she must have understood it was likely to represent the funds of Associate Members. She took no steps to bring about a cessation of Mr Foster’s role in STC despite the fact that, as his 29 December 2013 email made clear, he remained actively involved in, if not in charge of STC’s activities.

791. I find that, in all these circumstances, by her silence, Ms Johnson represented to Associate Members, and to prospective investors in STC, that Mr Foster was not involved in STC.

792. I also find that she did so in accordance with Mr Foster’s instructions. Mr Foster’s 30 August 2013 threat makes this clear. He then directly instructed Ms Johnson not to reveal his involvement. But Ms Johnson’s active concealment of Mr Foster’s role started (a least) in April 2013 by her involvement in the instructions given to Mr Tassell. There is no direct evidence that Mr Foster instructed Ms Johnson to join with Ms Larter in giving these instructions. But I find the inference that he did to be overwhelming. Mr Foster certainly asked Ms Johnson to attend the 14 March 2013 and 30 May 2013 meetings, at which Mr Foster’s involvement was not revealed and indeed concealed.

20(d) – that Tom Nolan was the National Sales Assistant of STC

793. A representation that “Tom Nolan” was the National Sales Assistant of STC is said to be false because the person describing himself as “Tom Nolan” was in fact Peter Thomas Nolan.

794. Mr Dixon did not develop submissions as to how it was that Ms Johnson represented to Group Members that “Tom Nolan” (rather than Peter Nolan) was the National Sales Assistant of STC, nor as to what difference this would have made to any Group Member.

795. I do not think this allegation takes matters any further.

20(e) – the loans by Mr Mackinnon and Group Members would be guaranteed and repayable at the end of a nominated period

796. I accept Mr de Klerk’s evidence that he asked Ms Johnson the identity of the “responsible sureties” at the 14 March 2013 meeting at the Catalina restaurant (excerpted at [278]). Mr de Klerk said he wanted to know how investment in STC “was secured”. Mr de Klerk said, and I accept, that Ms Johnson told him that she and Ms Larter had invested $10 million in STC of which some “would be held as security”. This answer was given in the context of Mr de Klerk’s questions as to how his investment was “secured”.

797. This evidence satisfies me that Ms Johnson did represent to Mr de Klerk that his loan was secure. There is no direct evidence that she did this on Mr Foster’s instruction. But I find the inference to be overwhelming that this was so.

798. My attention has not been drawn to any other evidence, apart from the content of the Proposal, that Ms Johnson made this representation to any other Group Member.

20(f) – the “first defendant” had assets of $10 million

799. For the same reasons, I am satisfied that Ms Johnson represented to Mr de Klerk that STC had assets of $10 million and that she did so on Mr Foster’s instruction.

800. Again, apart from what is said in the Proposal, there is no evidence that Ms Johnson made that representation to any other Group Member.

Representations to Mr Mackinnon and Group Members in the Proposal

801. Mr Mackinnon alleges that the following representations were made in the Proposal:

1. STC “offered Members an alternative to the stock and property markets and typically traditional investment channels”;

2. “The sports trading market is literally recession proof and offers unique tax free returns that cannot be replicated in any of the mainstream investment products currently being offered”;

3. “Trade decisions are made by Account Managers, under the supervision of a Senior Analyst and Chief Investment Officer”;

4. “Each Account Manager has extensive experience in trading on sporting events and a track record of discipline and intelligent decision making”;

1. “The Account Managers expertly analyse and trade the betting markets”;

2. “The Account Managers are a team of analysts with experience in sports and investment, and with professional qualifications in quantitative disciplines such as science, accounting and mathematics”;

3. STC “had created The Insight Project, a world first with the study of savants and sports trading”;

4. “The scientific director of [STC] is Dr Allan Snyder who, for some 20 years, has conducted ground breaking research on savants at both the Australian National University and the University of Sydney”;

5. STC “has the expertise and knowledge to trade on sporting events worldwide”;

6. “The first defendant had obtained rights from the sixth defendant, Sports Trading Club Limited (Hong Kong), to operate the Sports Trading Club business in Australia”;

7. “The first defendant was registered in New South Wales and had offices and a trading desk in Sydney”;

8. “The first defendant had borrowed A$10m to be able to maximise the profits to be earned from sporting trades”; and

9. “The plaintiff and group members are always legally entitled to the return in full of the principal of the loan”.

802. The Further Amended Commercial List Statement does not allege that, in terms, each of these representations was false but alleges that:

1. neither STC or Sports Trading Club Limited had trading offices in Sydney, Hong Kong or London but were operated from a residence in Byron Bay;

2. Prof Snyder was not the scientific director of STC;

3. neither STC nor Sports Trading Club Limited was operating a legitimate sports betting or trading business but was rather a fraudulent scheme in which loans from Mr Mackinnon and other Group Members were misappropriated;

4. neither STC nor Sports Trading Club Limited had a team of analysts or traders with professional qualifications in quantitative disciplines; and

5. STC had no intention of repaying the loans by the Group Members and has failed to repay them notwithstanding an agreement to do so.

803. I am satisfied that STC was a fraudulent scheme and that, in substance, each of the representations in the Proposal was false.

By Mr Foster

804. There is no direct evidence of who composed the Proposal. But it must have been Mr Foster or someone acting at his direction. He must have been instrumental in its composition and circulation.

805. Mr Foster must have known that, in substance, there was no truth to the representations made in the Proposal. The representations were fabricated by Mr Foster to attract investment to STC.

806. The representations set out above were made in the Proposal.

807. I am satisfied that Mr Foster, by causing the Proposal be published to prospective investors, made those representations.

By Ms Johnson

808. Mr Argy did not seek to justify the representations made in the Proposal. Indeed, Mr Argy conducted Ms Johnson’s case upon the basis that STC was a fraudulent scheme and thus the representations in the Proposal about the scheme were also false.

809. Mr Argy’s case was that although the Proposal contained numerous false and indeed absurd claims, Ms Johnson did not know this as she had never seen or read the Proposal during her time at STC.

810. Ms Johnson was adamant that she had not seen the Proposal until after the commencement of these proceedings.

811. Ms Johnson knew her name and references to her appeared on the Public STC Website. In her 10 September 2013 email Ms Johnson made specific reference to the Public STC Website (which she correctly identified as being and demanded that “my name and all references to me be removed”. Ms Johnson told Mrs Mackinnon in November 2014 that she had “asked Ms Larter to take her name off the proposal”.

812. Ms Johnson’s email exchange with Mr Foster on 14 March 2014, and Mr Foster’s further email of 29 April 2014, shows that Ms Johnson then remained concerned about being named in the Proposal.

813. In his 14 March 2014 email (referred to at [674]) Mr Foster said all references to Ms Johnson had been removed from the website and that he would forward “in the next email” a copy of the front page of the Proposal showing that her name “as well as your accountant’s name” had been removed. Mr Foster’s “next email” is not in evidence.

814. Mr Foster also referred to “the front page where it used to have your photo and Anne’s with the headline ‘Meet the Partners’”. Mr Foster’s email reads as if he thought Ms Johnson was familiar with the form of the Proposal. Ms Johnson simply responded “thank you”. Ms Johnson expressed no surprise at Mr Foster’s assertion that the Proposal had included these details.

815. These matters suggest, albeit not decisively, that Ms Johnson was familiar with the form of the Proposal.

816. The matter is however put beyond doubt by Mr de Klerk’s evidence about his discussion with Ms Johnson at the Catalina restaurant on 14 March 2013 about the Proposal (see [273] to [281] above), which evidence I accept. Mr de Klerk’s evidence shows that Ms Johnson’s denial cannot be correct.

817. Mr de Klerk was clear that he asked Ms Johnson detailed questions about various aspects of the Proposal and that Ms Johnson was able to “clarify” the matters of concern to Mr de Klerk (see [278] above).

818. I am satisfied that Ms Johnson knew the contents of the Proposal and that she was sufficiently familiar with it to discuss it in some detail with Mr de Klerk.

819. Ms Johnson must have also known the Proposal was made available to all prospective investors in STC. As one of the partners in STC she must therefore be taken to have represented to investors that its contents were true. The contents of the Proposal were false.

Section 34 of the Partnership Act

820. Mr Argy submitted that, at some point during 2013, the STC Partnership was dissolved by operation of s 34 of the Partnership Act. That section reads:

“34   Dissolution by illegality of partnership

A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on, or for the members of the firm to carry it on in partnership.”

821. By an amendment made to her Commercial List Response pursuant to leave I granted on 13 February 2018, Ms Johnson pleaded:

“Further or in the alternative [Ms Johnson] says that, if any of the plaintiff’s allegations against any other defendant herein are found proven and constitute an event which made it unlawful for the business of a partnership of which [Ms Johnson] is found to have been a member to be carried on, or for the members of that firm to carry it on in partnership, that firm was automatically dissolved by force of s 34 of the Partnership Act…”.

822. Mr Argy did not develop a submission as to whether, and if so when, an event had occurred which made it “unlawful” for the STC business to be carried on.

823. However, assuming that it was “unlawful” for a fraudulent scheme to be carried on, and assuming that STC partnership of which Ms Johnson was a member was, at some point during 2013 dissolved by operation of s 34 of the Partnership Act, I do not see how it could affect Ms Johnson’s liability on the bases that I have found.

824. My conclusion that Ms Johnson made the representations to which I have referred does not depend upon whether a partnership in fact existed.

825. I find the point to be irrelevant.

Breach of contract

826. Mr Mackinnon’s claim in contract is directed primarily to Ms Larter. As Mr Mackinnon does not have leave under s 58(3)(b) of the Bankruptcy Act to proceed against Ms Larter, it is not competent for me to deal with this claim.

827. A claim in contract is not available against Mr Foster. He was not a party to any contract with Mr Mackinnon or the Group Members.

828. The claim in contract is also not available against Ms Johnson because of the terms upon which I granted Mr Mackinnon leave to file the Further Amended Commercial List Statement (see [86]).

Other relief sought

829. Mr Mackinnon also seeks relief against Mr Foster and Ms Johnson on the grounds of deceit, conversion, conspiracy, in equity and on the basis of an allegation that STC was a managed investment scheme for the purposes of Ch 5C of the Corporations Act 2001 (Cth).

830. Mr Dixon developed some submissions in relation to these matters.

831. However, now that I have made findings as to what occurred, I propose to invite Mr Dixon to consider whether it is necessary for Mr Mackinnon and the Group Members to obtain relief in relation to these various other causes of action and, if so, to develop further submissions in relation to them.

Other issues

832. There are a number of issues that remain to be resolved and in respect of which I will require further assistance.

833. One of them is the question of causation.

834. I have found that Mr Foster and Ms Johnson have made representations which were not true. Those representations were thus misleading or deceptive.

835. So far as concerns Mr Foster, I am comfortably satisfied that the representations he made have caused all of the loss which Mr Mackinnon and the Group Members complain. Upon production of evidence to show what that current loss is, I will enter judgment against Mr Foster for that amount.

836. Other questions arise in relation to Ms Johnson.

837. One is the issue Mr Argy has raised as to whether Ms Johnson’s failure to speak out has caused loss in circumstances where from 30 August 2013 Mr de Klerk knew Mr Foster was involved in STC and had been masquerading as “Mark Hughes” and yet did not make public what he knew.

838. There is also the question of precisely when Ms Johnson’s silence about Mr Foster’s involvement should be held to have caused damage to Group Members.

839. Finally, there is the question of what, if any, findings I should make about the involvement in STC of Mr Holmes and Prof Snyder.

Conclusion

840. Once the parties have had an opportunity to consider these reasons, I will invite submissions as to the further steps that should now be taken in these proceedings.

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Amendments

19 February 2019 - [839] - Typographical error corrected

01 October 2019 - [143] Typographical error corrected

02 October 2019 - [10(g)] Typographical error corrected

[168] Typographical error corrected

09 October 2019 - [464] Typographical error corrected

Decision last updated: 09 October 2019