McDermott v King
[2013] FCCA 2348
•10 September 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MCDERMOTT v KING & ANOR | [2013] FCCA 2348 |
| Catchwords: TRADE PRACTICES – Misleading or deceptive conduct – Trade Practices Act 1974 (Cth) – unconscionable conduct – accessorial liability – breach of warranty of authority – application allowed in part – damages awarded. CONSUMER LAW – Misleading or deceptive conduct – Australian Consumer Law – Competition and Consumer Act 2010 (Cth). |
| Legislation: Trade Practices Act 1974 (Cth), ss.51AB, 52, 75B |
| Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) [2012] FCA 414 Blomley v Ryan (1956) 99 CLR 362 Hadley v Baxendale (1854) 156 ER 145 Hungerfords v Walker (1989) 171 CLR 125 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 |
| Applicant: | BRIANT PATRICK MCDERMOTT |
| First Respondent: | NEIL WILLIAM KING |
| Second Respondent: | DONNA KING |
| File Number: | BRG 357 of 2013 |
| Judgment of: | Judge Burnett |
| Hearing date: | 10 September 2013 |
| Date of Last Submission: | 10 September 2013 |
| Delivered at: | Brisbane |
| Delivered on: | 10 September 2013 |
REPRESENTATION
The applicant appeared on his own behalf.
The first respondent appeared on his own behalf by telephone link.
The second respondent appeared on her own behalf.
ORDERS
That there be judgment for the Applicant as against the First Respondent and that the applicant do recover against the First Respondent within 21 days of this order the sum of $127,246.81 for damages and the sum of $45,474.18 for interest.
That the application as against the Second Respondent be dismissed.
| FEDERAL CIRCUIT COURT AT BRISBANE |
BRG 357 of 2013
| BRAIN PATRICK MCDERMOTT |
Applicant
And
| NEIL WILLIAM KING |
First Respondent
| DONNA KING |
Second Respondent
REASONS FOR JUDGMENT
(Ex Tempore)
The applicant claims for a number of remedies, the principal of which is described as a remedy under s.18 of the Australian Consumer Law.[1] At the time of these events the Australian Consumer Law had not been enacted, but, in any event, the relevant provision that he seeks to prosecute his claim under is merely a replication of s.52 of the former Trade Practices Act 1974 (Cth) (“TPA”). In addition, he claims relief under s.1041H Corporations Act 2001 (Cth), which is in terms similar to s.52 but deals with securities matters. Even so, that is an application brought under the Corporations Act 2001 in a court which does not have jurisdiction in respect of those matters, so I cannot determine that application except to dismiss it.
[1] Schedule 2 of the Competition and Consumer Act 2010 (Cth).
Additionally, the applicant has filed affidavits which support his claim and plainly gives rise to two additional claims. The first is a claim under s.51AB TPA that the defendants engaged in unconscionable conduct in contravention of the TPA, and also that the first respondent engaged in a breach of contract and/or breach of warranty of authority in relation to events that occurred in October 2008.
The applicant seeks relief against the first respondent, Mr Neil William King, who was essentially the operative mind behind a corporation the subject of earlier proceedings, Camelot Derivatives Pty Ltd. He is also seeking to prosecute a claim against the second respondent, Donna King, who is the first respondent’s wife and who describes herself as an administrative officer of the corporation. I note that she was accepted as such by Foster J in Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) [2012] FCA 414 (“ASIC v Camelot”). I make those points for these reasons: although the action is pleaded against the two respondents, it is apparent that the action against the second respondent must fail.
I shall deal first with the action under s.52 TPA, which is that Camelot Derivatives engaged in conduct which was misleading or deceptive, or likely to mislead or deceive. Section 52 provides:
“(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive.
(2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of sub-section (1).”
In this instance the respondents are alleged to be liable by reason of accessorial liability provided for in s.75B TPA, which provides:
“(1) A reference in this Part to a person involved in a contravention of a provision of Part … V … shall be read as a reference to a person who:
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.”
Camelot Derivatives Pty Ltd, of which the first respondent was a director (and for whom it was an alter ego), was an investment company that engaged in the business of trading as the holder of an Australian Financial Services Licence (“AFSL”). Mr King was designated as the responsible person for the purposes of the company’s AFSL. Camelot Derivatives was authorised to provide financial product advice for certain classes of financial products including derivatives, and it did this between March 2008 and October 2010.
The details of Camelot Derivatives’ conduct are summarised in the judgment of Foster J to which I have referred. It is unnecessary for me to expand upon that matter, except to state this: it was accepted by Mr King that many of the matters detailed by Foster J, particularly in the summary of the statement of agreed facts, are the subject of express complaints by the applicant in his first affidavit in the application.
Mr McDermott does not articulate his complaints as eloquently as they were expressed in Foster J’s judgment. He is a self-represented individual and has done his best to put together his recollection of events. On the other hand, statements of agreed facts, particularly those that come from the Australian Securities and Investments Commission (“ASIC”) which were negotiated with the respondent are documents which are torturously crafted after careful and deliberate consideration, and informed by very detailed investigation.
The matters detailed by Foster J provide a true and accurate representation of the outcome of ASIC’s investigation. This will, of course, render much greater detail than the superficial observations of Mr McDermott who, while doing his best, can only state what could be described as the obvious, without an appreciation of all that went on behind the scenes. Nonetheless, there is more than a passing similarity between the complaints made by Mr McDermott and the facts that were presented to Foster J as agreed facts.
Having considered the agreed facts, his Honour then proceeded to make these findings. They are important, and bind me as a matter of res judicata. Commencing at [46], his Honour said:
“[46] The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. It is an objective question that the court must determine for itself. Conduct is misleading or deceptive if it leads a person into error or if it induces or is capable of inducing error or leads to an erroneous assumption or misconception. Conduct is misleading or deceptive if it causes, or is likely to cause, a person to misinterpret, or be deluded as to, the relevant facts. Conduct is likely to mislead or deceive if there is a real but not remote possibility of it doing so. For the purposes of establishing liability under [s.52 TPA], it is not necessary for [the applicant] to prove that the conduct in question actually deceived or misled anyone.
[47] In determining whether a contravention of [s.52 TPA] has occurred, the task of the court is to examine the relevant course of conduct as a whole. The context in which the alleged conduct occurred is to be determined in light of the relevant surrounding facts and circumstances. It includes the contents of the representations that were in fact made and, in the context of a document, the whole of the contents of the document and includes any other statements made that might impact on the relevant representations.
[48] Although the relevant test is objective, the attributes of the target audience are relevant. Once the relevant section or sections of the public, by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested, is identified, then the matter is to be considered by reference to all who come within it, including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, and men and women of various ages pursuing a variety of vocations.”
As his Honour noted at [49], Mr King effectively admitted that ASIC had made good those contentions, and they are in effect the same contentions made by the applicant in this case. Having regard to those representations, at [50] his Honour continued:
“[50] … I am satisfied that clients of Camelot were induced to become clients of Camelot by representations to the effect that they would make significant profits by options trading taking the advice proffered by Camelot and using its so-called Condor strategies. These representations were designed to procure clients to actively trade in an options trading market thereby providing regular opportunities for Camelot to earn brokerage commissions in respect of those trades. For Camelot, the substance of the exercise was to procure clients who would actively trade in an options trading market, irrespective of the risk and irrespective of the likely true returns, in order to derive brokerage commissions for Camelot.
[51] These inducements and blandishments were misleading or deceptive or likely to mislead or deceive because they did not adequately explain the risks involved and did not make clear to prospective clients the potential for Camelot to make significant profits while the clients made significant losses.”
Prima facie, the applicant’s claim must succeed at least as against the corporation because of the decision of Foster J. However, the action is not against the corporation, but Mr King personally. On that note, Foster J also considered the accessorial provisions provided for in the Corporations Act 2001. This application involves parallel provisions in the TPA; they are materially identical, and it follows that, subject to my reference to the provisions of the TPA in lieu of the Corporations Act 2001, I can rely upon what his Honour said commencing at [55]:
“[55] For the purposes of s.1324(1)(c) of the Corporations Act, the words “aid, abet, counsel or procure” are instances of one general idea being that the accessory is in some way linked in purpose with the person actually contravening the relevant provision and is by his or her words or conduct doing something to bring about, or rendering more likely, such contravention (Giorgianni v R (1985) 156 CLR 473 at 492).
[56] For a person to be “knowingly concerned in” a contravention, he or she must have “knowledge of the essential facts constituting the contravention,” although it need not be proved that the person knew that the matters in question constituted a contravention (Yorke v Lucas (1985) 158 CLR 661 at 670; Smithers v Beveridge (1994) 14 ACSR 197 at 201).
[57] The accessory must be an intentional participant.
[58] The mere making of representations on behalf of a corporation, without knowledge of their false or their misleading or deceptive qualities, could not constitute the necessary involvement for the purposes of accessory liability. Nothing less than actual knowledge of the essential facts constituting the contravention will suffice for a finding of liability against a person alleged to have been involved in the contravention.
[59] What is required is that the accessory knows of the matters that lead to the representations being characterised as false or misleading or deceptive.”
The court found that Mr King had made all the representations at the seminars and presentations about which ASIC had complained, and was directly responsible for the drafting of material accessible at Camelot’s website and contained in its promotional materials. It also noted that Mr King accepted that accessorial liability.
Having regard to those matters, it seems that I am again bound by the decision of Foster J, and, accordingly, the action under s.52 TPA against Mr King must succeed.
I turn now to the matter as against the second respondent. In this case, the only possible basis upon which the second respondent could be seen to be accessorily liable under s.75B is that she was a person who either aided, abetted, counselled or procured the contravention, or was somebody who was, directly or indirectly, knowingly concerned in or a party to the contravention. In each instance, as his Honour noted, the accessory must be an intentional participant. The mere making of representations without knowledge of their false, misleading, or deceptive qualities could not constitute the necessary involvement for the purposes of acts of accessorial liability.
There is no evidence that Mrs King had any knowledge of the false and misleading qualities involved in these matters. She was not present when any of the relevant seminars or conferences were conducted, nor was she involved in any ongoing dealings beyond her conduct in the administration of the company’s ordinary day-to-day affairs; that is, sending out statements to clients and generally liaising as a functionary of the organisation. She was not a director of the company, and it could not be said – and there is no evidence to demonstrate – that she had any guiding influence in the corporation.
While, unquestionably, she was married to the first respondent early in the time of these events, there is no more than that association to link her with knowledge of the events of the corporation. Such a link could only be by inference, which is insufficient to prove accessorial liability. Accordingly, the application as against her is dismissed.
The next limb of this case which I think ought be addressed – and it is one that arose today, but upon which I have sought comment from the first respondent – concerns s.51AB TPA. It provides:
“(1) A corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services to a person, engage in conduct that is, in all the circumstances, unconscionable.”
(2) Without in any limiting the matters to which the Court may have regard for the purpose of determining whether a corporation has contravened subsection (1) in connection with the supply or possible supply of goods or services to a person (in this subsection referred to as the consumer), the Court may have regard to:
(a) the relative strengths of the bargaining positions of the corporation and the consumer;
(b) whether, as a result of conduct engaged in by the corporation, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the corporation;
(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services;
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the corporation or a person acting on behalf of the corporation in relation to the supply or possible supply of the goods or services; and
(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the corporation.
…”
In this instance, questions of unconscionability do arise, and those matters have been addressed inferentially in ASIC v Camelot. I will not again address questions of accessorial liability, but they apply with equal force to this situation. In the matter before Foster J, ASIC also sought relief in respect of alleged contraventions of s.912A Corporations Act 2001. It provides:
“(1) A financial services licensee must:
(a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
(aa) have in place adequate arrangements for the management of conflicts of interest …”
The remaining provisions of that section are not essential to the resolution of this point. The court in ASIC v Camelot was considering the question of ‘churning’ – a matter which has been raised by the applicant. As Foster J noted, it was unnecessary for the court to determine whether, indeed, churning was established, but what ASIC was required to prove was that Mr King did not act in an honest or fair way. The court examined the churning issue and stated:
“[72] At the very least, this stratagem adopted by Camelot and Mr King was not honest, in a commercial sense, and certainly did not constitute the provision of financial services fairly within the meaning of s.912(1)(a) of the Corporations Act.”
Those observations are particularly pertinent when one takes into account the strength of the relative bargaining positions of the company and its clients, which were highly imbalanced. For example, the applicant is a man in his seventies, who obviously lacked commercial acumen and experience, had no independent advice in relation to these matters and was not informed of the disproportionate fee structure imposed on each trade. Those factors suggest that he lacked any degree of sophistication or financial education, and did not understand the documents relating to the supply of these services. It is quite plain that the conduct had the prima facie characteristic of being unconscionable. That is also consistent with the views expressed at common law, as in Blomley v Ryan (1956) 99 CLR 362, where Fullagar J said at 405:
“The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other.”
As I have noted, in ASIC v Camelot Foster J had little difficulty in concluding that the clients of Camelot Derivatives, which included the applicant, were induced to become clients because of representations that they would make significant returns by taking the advice proffered by the company and using its ‘condor’ strategies. Those representations were designed to procure clients to actively trade in an options trading market, thereby providing regular opportunities for the company to earn brokerage commissions in respect of those trades.
The substance of the exercise was to procure clients who would actively trade, irrespective of the risk and the likely true returns, in order to derive brokerage commissions. In doing so, Camelot Derivatives did not adequately explain the risks involved, and did not make clear to the prospective clients the potential for Camelot to make significant profits while the clients made significant losses. That is, of course, one of the characteristics that Fullagar J addressed in Blomley v Ryan. It follows, in my view, that this also is a case where the corporation can plainly be seen to have engaged in unconscionable conduct in contravention of s.51AB. The conduct of the first respondent was conduct that aided and abetted, and/or he was directly and knowingly concerned in, or a party to, the contravention.
For reasons I have earlier expressed, I can make no such finding against the second respondent. It follows that I find for the applicant against the first respondent in respect of that contravention and dismiss any claim against the second respondent.
The third matter which arose on the material was another not raised in the application, but which has been put to the first respondent today. It is one that I have characterised broadly as a breach of contract or breach of warranty of authority claim. Commencing at paragraph 55 of his statement, the applicant said:
“55. I deposited $100,000 into My First Account on or about 26 September 2008. I deposited a further $200,000 on or about 30 September 2008.
56. On, or about 12th or 13th October 2008, less than two weeks after I opened my first account, the First Respondent rang me, and said words to the effect:
57. He said: “You have made a profit of some 60% to 65% since opening your account.”
58. I asked, “Is that on the one third, or is it on the lot?”
59. The First Respondent replied, “On the lot.”
60. I said: “Wow! How much money is that?”
61. He said: “About $220,000.00.” He further stated, “It will be a million dollars by Christmas.” He then further stated, “I will trade only with the profits from now on and leave your capital untouched.”
62. I replied words to the effect: “Yes, do that.”
63. A day or two after that conversation with the First Respondent, I received a phone call from an employee of Camelot, Mr Michael Lauterstein, during which he asked words to the following effect:
64. “Brian would you mind sending Camelot a congratulatory email regarding your recent profits, so that we may show prospective clients?”
65. At the time, believing him, in my naïveté, I did not see anything wrong with sending such an email on the basis of what both the Respondents and Mr Lautersetin had told me. I subsequently prepared and sent them an email congratulating the staff at Camelot on making a profit of some 60% for the month. At the time I did not have any statements from either Camelot or MF Global to independently verify that what Mr King had said was or was not true.”
Part of that conversation is accepted by Mr King, but significantly he denies two aspects of it:
a)He does not accept that when he was asked how much money was made, he said “about $220,000.00”; and
b)He denies that there was any conversation to the effect that he stated “I will trade only with the profits from now on and leave your capital untouched,” to which Mr McDermott responded “yes, do that.”
Ultimately, whether or not I accept that conversation occurred really falls to be determined by reference to matters of credit. I accept and prefer the evidence of Mr McDermott to the evidence of Mr King. Mr King, I think, is an unreliable witness in respect of these matters.
While it is accepted that both parties have an interest in the outcome, I think that Mr King demonstrated his unreliability and established a basis for caution by his comments regarding two matters. The first was the manner in which he dealt with the question of an earlier perjury charge in the Moorabbin Magistrates Court. The question put to him on this topic was straightforward and the answer did not require any elaboration. He had either been found guilty of perjury or he had not. Rather than answer the question, he sought to prevaricate and divert the attention of the court. Ultimately, when pressed, he did concede that he had been found guilty. However, he first attempted to avoid this issue by discussing the forwarding off of the charge after his plea of guilty to a diversionary program that it operates in Victoria in respect of convictions for offences. His comments were evasive and clearly an attempt to confuse matters surrounding his past.
The second matter which causes me to doubt his general veracity and reliability concerns the October email. Again, the manner in which he addressed his evidence in respect of that matter was entirely disingenuous and it took some effort on the part of the court to adduce an explanation as to how the email came about. This ultimately resolved in a concession that the email was not an email that was forwarded unsolicited by Mr McDermott to him, but rather was an email which was solicited by him in the manner which Mr McDermott says in his statement at paragraphs 63 and 64. That evidence was contrary to its original portrayal. I have formed the impression that Mr King is one who would seek to manipulate the facts to suit himself.
His evidence is entirely unreliable compared to that of Mr McDermott, who, whilst understandably emotional about these matters, has a plan recollection of events which accords with common sense and appears to have a sound foundation in at least some of the objective material, including material which Mr King referred me to when addressing the question of profitability. However I note that I am unable to determine the question of profitability because adequate in evidence on this point was not placed before me.
Further Mr King’s evidence can by tested by looking at the objective material. The monthly statement for October 2008 shows four transactions. While I accept that anything could have happened to generate disproportionate revenues at the beginning of the month and disproportionate losses toward the end to render an overall positive cash movement of about $187,000, the fact remains that those figures sit quite uncomfortably with other material which came from the corporation. In particular, the material which can be found at page 66 of the applicant’s affidavit filed 8 May 2013 tends to suggest that indeed there were no profits over those months.
Whilst it is possible that a profit had been rendered in the first couple of weeks, it does not seem probable having regard to the fact that there was a cumulative loss to carry forward from September, which was not referred to and amounts to something which would have given rise to a misleading or deceptive statement because it did not adequately explain how the $200,000 figure was achieved. It was, in my view, a very doubtful figure. But, as I have stated, it is unnecessary for me to determine it.
What is critical, I think, in this instance is that it follows by reason of this statement that there was a concession on the part of Mr King that the applicant’s fund was intact and that he was authorised only to trade with the profits which were then in excess of the original fund. It is quite evident, given the losses that have been sustained, that he did not comply with that authorisation. In those circumstances, if there was not an express agreement then there was certainly a breach of the authority which he had in terms of his trading authority from the applicant. Consequently the case is also made out on that basis.
Damages
Damages are sought by the applicant in the sum of $282,355.67. There is no admissible evidence about some of these matters. First, there is a claim for legal costs of some $22,500. There is no evidence to demonstrate that any legal costs have been incurred; that matter cannot be allowed.
There is a claim for office and travelling costs of four and a half years in the amount of $23,500. Again, there is no evidence of such an entitlement. This is a most unusual basis for claim having regard to the circumstances of the claimant. This is not a second limb Hadley v Baxendale (1854) 156 ER 145 claim, nor is it compensatory in the sense understood in terms of the decision of the High Court in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514. That claim must also fail.
The next claim includes the opportunity cost over four and a half years, including medical costs of $50,000. That claim must fail. The applicant seeks relief including interest on those amounts calculated at a premium of 5 per cent, compounding per annum (‘Hungerfords damages’).[2] Again, no justification or basis for that claim is demonstrated and so it too must fail.
[2] Hungerfords v Walker (1989) 171 CLR 125.
The only sum to which the applicant has an entitlement is the capital sum lost, which he accepts is approximately $144,000. He ought be given judgment for that sum, however I note that he acknowledges having received $17,136.78 from the receivers, and so it follows that he ought be permitted damages which are quantified at the sum of $144,383.59 less $17,136.78. I will award damages in the sum of $127,246.81.
I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Judge Burnett
Date: 29 January 2014
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