Morgan Stanley Wealth Management Australia Pty Ltd v Detata [No 3]
[2018] WASC 32
•1 FEBRUARY 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: MORGAN STANLEY WEALTH MANAGEMENT AUSTRALIA PTY LTD -v- DETATA [No 3] [2018] WASC 32
CORAM: BANKS-SMITH J
HEARD: 8 - 9 AUGUST & 6 - 9 DECEMBER 2016 & FINAL CLOSING SUBMISSIONS FILED 10 MARCH 2017
DELIVERED : 1 FEBRUARY 2018
FILE NO/S: CIV 2461 of 2013
BETWEEN: MORGAN STANLEY WEALTH MANAGEMENT AUSTRALIA PTY LTD
Plaintiff
AND
LOUIS DETATA
Defendant
Catchwords:
Contract - Employment contract - Stockbroker - Whether instructions to cease trading in identified manner unlawful
Equity - Where depression and financial pressure - Whether settlement deed voidable for economic duress or unconscionable conduct - Whether special disadvantage - Whether unconscionable advantage taken of special disadvantage
Penalties - Whether regime in employment contract for repayment of incentives a penalty - Whether repayment requirement in settlement deed a penalty
Legislation:
Nil
Result:
Judgment for the plaintiff
Counterclaim dismissed
Category: A
Representation:
Counsel:
Plaintiff: Mr A J Power
Defendant: Mr R G Bain QC
Solicitors:
Plaintiff: King & Wood Mallesons
Defendant: Chalmers Legal Studio
Case(s) referred to in judgment(s):
Alder v Moore [1961] 2 QB 57
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205
Arlesheim Ltd v Werner [1958] SASR 136
Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344; (2005) 64 NSWLR 149
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51
Auzcare Pty Ltd v Idameneo (No 123) Pty Ltd [2015] NSWCA 412; (2015) 91 NSWLR 581
Birdanco Nominees Pty Ltd v Money [2012] VSCA 64; (2012) 36 VR 341
Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362
Boase v Seven Network (Operations) Ltd [2005] WASC 269
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457
Butt v M'Donald (1896) 7 QLJ 68
Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259; (2010) 29 VR 462
Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108
Cavendish Square Holdings BV v Makdessi [2015] UKSC 67; [2016] AC 1172
Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447
Cory v Cory (1747) 1 Ves Sen 19; [27 ER 864]
Director General, Department of Education v United Voice WA [2013] WASCA 287
Doggett v Commonwealth Bank of Australia [2015] VSCA 351; (2015) 47 VR 302
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79
Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2013] WASCA 36
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50
Gregory v Philip Morris Ltd (1988) 80 ALR 455
GWC Property Group Pty Ltd v Higginson [2014] QSC 264
Harriton v Stephens [2004] NSWCA 93; (2004) 59 NSWLR 694
Hart v O'Connor [1985] AC 1000
Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd [2008] NSWCA 310; (2008) 257 ALR 292
Kakavas v Crown Melbourne Ltd [2013] HCA 25; (2013) 250 CLR 392
Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621
Love v Brien [2012] WASC 457
Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127; (2015) 237 FCR 534
Morgan Stanley Wealth Management Australia Pty Ltd v Detata [No 2] [2016] WASC 340
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2016) 258 CLR 525
Pigram v Attorney‑General (NSW) [1975] HCA 13; (1975) 132 CLR 216
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10
R v Her Majesty's Attorney‑General for England and Wales (NZ) [2003] UKPC 22; [2004] 2 NZLR 577
Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656
Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889
Secured Income Real Estate (Australia) Ltd v St Martins Investment Pty Ltd [1979] HCA 51; (1979) 144 CLR 596
Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd [No 2] [2012] WASCA 53
Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164; (2014) 48 WAR 261
Thorne v Kennedy [2017] HCA 49
Tillett v Varnell Holdings Pty Ltd [2009] NSWSC 1040
Transpacific Industries Pty Ltd v Whelan [2008] VSC 403
Tullett Prebon (Australia) Pty Ltd v Purcell [2009] NSWSC 1079
Tullett Prebon Plc v BGC Brokers LP [2010] EWHC 484 (QB)
Vantage Navigation Corporation v Suhail & Saud Bahwan Building Materials LLC (The Alev) [1989] 1 Lloyd's Rep 138
Westpac Banking Corporation v Wittenberg [2016] FCAFC 33; (2016) 242 FCR 505
Table of Contents
Part A - Preliminary.................................................................................................................... 7
Summary of claim.................................................................................................................. 7
The course of the litigation..................................................................................................... 8
Some abbreviations................................................................................................................ 8
Part B - Express terms of agreements and policies.................................................................... 8
Employment Contract............................................................................................................. 8
Compliance Manual................................................................................................................ 9
Settlement Deed...................................................................................................................... 9
Morgan Stanley entitled to rely on Compliance Manual and policies................................... 9
Part C - The regulatory regime................................................................................................. 11
External regulation............................................................................................................... 11
Compliance overview........................................................................................................... 11
Part D - The facts...................................................................................................................... 12
Mr Detata approached to join Morgan Stanley.................................................................... 12
The first meeting - 22 July 2010 in Subiaco........................................................................ 13
The second meeting - 28 July 2010 in Innaloo..................................................................... 15
Pleaded case - what Mr Detata says he told Mr Chapman................................................... 17
Determination - credibility and findings about July 2010 meetings.................................... 17
The third meeting - August 2010 in Trigg............................................................................ 19
Employment commences...................................................................................................... 19
Mr Detata is paid the Retention Payment............................................................................. 20
Compliance matters raised in 2011...................................................................................... 20
Wash trade........................................................................................................................ 20
Transfer of INT Account.................................................................................................. 21
Leveraged Equities' inquiries and closure of margin lending accounts........................... 21
Other compliance questions during this period................................................................ 25
Events in 2012...................................................................................................................... 26
Compliance report June 2012........................................................................................... 26
Incentive Payment made.................................................................................................. 30
Further Compliance report - trading strategy and wash trades........................................ 30
The first interview (11 September 2012) and the First Instruction.................................. 32
A further analysis is instigated......................................................................................... 34
The second interview (15 October 2012) and the Second Instruction............................. 35
The results of the trading pattern investigation................................................................ 37
The third interview (9 November 2012)........................................................................... 38
November 2012 request to be released, investigation finalised....................................... 41
Events in 2013...................................................................................................................... 49
Communications about settlement continue..................................................................... 49
Settlement Deed signed 12 February 2013....................................................................... 54
Defendant recommences work......................................................................................... 55
Failure to pay and proposed variation.............................................................................. 55
Credibility of witnesses........................................................................................................ 56
Criticism of witness statements............................................................................................ 57
Part E - The economic duress claim......................................................................................... 58
The pleaded case................................................................................................................... 58
Principles.............................................................................................................................. 58
The alleged implied terms.................................................................................................... 60
Principles for implication of terms....................................................................................... 61
(1) Mr Detata's duty to trade in listed shares using Forward Settling............................ 61
Alleged permission rather than duty................................................................................. 62
Construction of the Employment Contract - meaning of Financial Advisor................... 63
'Forward Settling' and balance sheet trading.................................................................... 63
(2) Mr Detata's clients to remain his clients post termination........................................ 65
(3) Mr Detata's remuneration......................................................................................... 66
(4) Morgan Stanley's duty to cooperate......................................................................... 66
Determination - pleaded case not established...................................................................... 67
First Instruction not unlawful............................................................................................... 68
Second Instruction not unlawful........................................................................................... 70
Illegitimate pressure............................................................................................................. 73
Part F - The unconscionable conduct claim............................................................................. 73
The pleaded case................................................................................................................... 73
Principles.............................................................................................................................. 74
Salient matters drawn from dealings between the parties.................................................... 75
Knowledge of financial position.......................................................................................... 82
Knowledge of mental state................................................................................................... 83
Psychiatric evidence............................................................................................................. 84
What distinguishes the conclusions...................................................................................... 86
No special disadvantage that seriously affects judgment..................................................... 95
No exploitation of Mr Detata's position............................................................................... 96
Transaction fair, just and reasonable in any event............................................................... 98
Return to the issue of illegitimate pressure had there been lawful act duress...................... 98
Part G - Penalties.................................................................................................................... 100
Principles............................................................................................................................ 100
Penalties and employment cases........................................................................................ 102
Other cases on incentives as penalties................................................................................ 103
Penalties and settlement agreements.................................................................................. 104
The Employment Contract................................................................................................. 104
The Settlement Deed.......................................................................................................... 108
Part H - The counterclaim...................................................................................................... 110
Counterclaim dismissed...................................................................................................... 110
Provisional assessment of damages.................................................................................... 110
Mr Detata's income post Morgan Stanley.......................................................................... 114
Uncertainties....................................................................................................................... 115
Damages............................................................................................................................. 118
Conclusion.............................................................................................................................. 119
Extracts from Employment Contract...................................................................................... 120
Extracts from Settlement Deed............................................................................................... 128
Extracts from Compliance Manual......................................................................................... 130
BANKS-SMITH J:
Part A - Preliminary
Summary of claim
The plaintiff, Morgan Stanley, employed the defendant, Louis Detata, as a financial advisor between October 2010 and February 2013 under a written contract of employment (Employment Contract). In that role he traded in shares in companies listed on the Australian Stock Exchange (ASX) on behalf of clients.
Mr Detata was offered significant retention and incentive payments as part of his package with Morgan Stanley. During the period of his employment Mr Detata was paid $837,121.32 gross by way of a retention payment (Retention Payment) and $848,739.73 gross by way of a long term incentive award (Incentive Payment).[1] During that period he was also paid $1,557,374.53 by way of commission and other income.
[1] According to the statement of agreed facts [13], this was later adjusted to a net payment of $619,580. This was apparently after withholding tax payable of $229,159.73 was taken into account: exhibit 2 [32].
The Employment Contract provided that if he left Morgan Stanley, the Retention Payment and Incentive Payment were repayable in reducing amounts, depending upon the period of employment.
Assuming the Employment Contract was otherwise enforceable, if Mr Detata resigned in February 2013 he was obliged to repay 60% of the Retention Payment, being $502,272.80, and $100% of the Incentive Payment, being $848, 739.73 (together $1,351,012.53).
In February 2013, the parties entered into a deed (Settlement Deed) whereby they agreed Mr Detata's employment would terminate, and he agreed to pay the sum of $300,000 in instalment payments. In the event of default in payments, he was obliged to repay (in effect) the sum of $1,351,012.53.
Mr Detata did not make any of the instalment payments. Morgan Stanley instituted these proceedings for breach of the Settlement Deed and seeks payment of $1,351,012.52. Mr Detata contends that the Settlement Deed is impugned by the operation of the vitiating factors of economic duress or unconscionable conduct; alternatively that its terms requiring repayment of the Retention Payment and Incentive Payment comprise penalties. He also contends that the terms of the Employment Contract requiring those repayments comprise penalties. He brings a counterclaim for loss and damage.
The course of the litigation
The trial originally commenced in August 2016. It was adjourned part heard to December 2016 as a significant number of objections to evidence threatened the efficient running of the trial.[2] The great majority of those objections were ultimately resolved between the parties. Detailed written closing submissions were filed by both parties in February 2017 and March 2017.
Some abbreviations
[2] Morgan Stanley Wealth Management Australia Pty Ltd v Detata [No 2] [2016] WASC 340.
I have chosen to anonymise references to certain clients and the shares in which they were trading. Clients are generally referred to by an acronym comprising two or three capital letters. In the case of shares, I have referred to the relevant companies as companies A to F. There are also references to two broking houses which I will refer to as Broking House 1 and Broking House 2.
Part B - Express terms of agreements and policies
Due to their length, I have collected the relevant contractual terms of the Employment Contract and Settlement Deed in the schedule to these reasons. I have also collected in the schedule the relevant extracts from the Morgan Stanley Australian Compliance Manual. I will provide only a brief summary here for context.
Employment Contract
Clause 3 of the Employment Contract deals with the entitlement to a retention payment and the circumstances in which it must be repaid.
Clause 8 states the terms upon which a long-term incentive payment may be made and the terms upon which it is to be repaid if the employment is terminated or notice of termination is given within a five year period.
Clause 6 requires compliance with Morgan Stanley policies, although it provides that the policies are not part of the Employment Contract itself. Non‑compliance may lead to suspension or termination of employment. Clause 17 also provides that Mr Detata must comply with the applicable trading policies.
Compliance Manual
The parties agree that Morgan Stanley's Australian Compliance Manual version 1.1 (Compliance Manual) was in force at all relevant times during Mr Detata's employment with Morgan Stanley.[3] The Compliance Manual provides that it contains policies and procedures applicable to all Morgan Stanley employees, and is designed to maintain compliance with the applicable securities laws and regulations, including those of the Australian Securities and Investments Commission (ASIC) and the ASX. The Compliance Manual records that it can be updated periodically to incorporate changes that will be published to the firm by way of compliance notices.
[3] Statement of agreed facts [15].
Importantly, the Compliance Manual notes that Morgan Stanley has implemented some policies and procedures that exceed minimum legal or regulatory requirements in order to apply what it considers to be best practices.
Relevantly, cl 8.12 of the Compliance Manual sets out prohibited practices. Those include manipulative trades (dealt with further below) such as wash trades, cross‑transactions with no change of beneficial ownership, and balance sheet trading.
It should also be noted that under the terms of business between Morgan Stanley and its clients, it was open to either party to terminate an agreement on not less than seven days notice.[4]
Settlement Deed
[4] TB 41, cl 29(b).
Clause 3 of the Settlement Deed sets out the amount of the payment to be made by Mr Detata, when it is to be paid and the effect of failure to pay, including that upon breach the employment is treated as terminated by reason of resignation and the terms of the Employment Contract relating to repayment of the Retention Payment and Incentive Payment on termination apply.
Morgan Stanley entitled to rely on Compliance Manual and policies
Mr Detata contends Morgan Stanley cannot rely on the Compliance Manual and policies set out in it because they 'destroy the mutuality of the contract' and suffer from the vice of 'rendering the obligations of the employee unlimitedly variable' but then also asserts that the policies do not form part of the Employment Contract (referring to cl 6.1). This issue was not raised other than briefly in Mr Detata's closing submissions. It was not pleaded and the trial proceeded on the basis that the policies were central to Morgan Stanley's conduct. I do not consider it appropriate that the issue be raised only in closing submissions and Mr Detata must be confined to his pleaded case. Accordingly, the contention is rejected. In any event, I consider Mr Detata was obliged to comply with the policies in the Compliance Manual.
I assume Mr Detata's contention is based on the line of cases considered in Westpac Banking Corporation v Wittenberg.[5]
[5] Westpac Banking Corporation v Wittenberg [2016] FCAFC 33; (2016) 242 FCR 505 [69] ‑ [112].
Clause 6.1 provides that Mr Detata must comply with the policies. Clause 6.1 also expressly provides that the policies do not form part of the Employment Contract.
Clause 4.2 provides that Mr Detata has a general duty to follow lawful and reasonable directions given to him by Morgan Stanley.
There is no suggestion that the policies in fact changed during the relevant time.
In my view, as a matter of construction of the Employment Contract, the policies are not incorporated into the Employment Contract. Clause 6 provides to the contrary. However, even if despite cl 6 the policies are taken to have been incorporated into the Employment Contract, the fact that it is open to Morgan Stanley to vary such policies does not of itself deny the operation of the Employment Contract. There were in fact no relevant amendments to the policies.[6]
[6] Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889; see also the discussion in Boase v Seven Network (Operations) Ltd [2005] WASC 269 [13] ‑ [16].
In my view, in the context of the particular contractual terms of the Employment Contract and noting that the relevant policies address the particular manner of broking by an employee, a breach of a term of the policies in the Compliance Manual is more properly construed as a breach of the express obligation to follow the lawful and reasonable directions given by Morgan Stanley.[7] Therefore, taking into account cl 4.2, there is an obligation on the part of Mr Detata under the Employment Contract to conduct his trading in accordance with the matters contained in the Compliance Manual. Clause 6.2 is also consistent with this approach (disciplinary consequences of failure to comply with policies).
[7] Westpac Banking Corporation v Wittenberg [77], [108] (Buchanan J) (obiter); [336] (McKerracher J) (obiter).
Mr Detata's evidence was that he understood he was obliged to comply with the policies in the Compliance Manual.
Part C - The regulatory regime
It is important to bear in mind the regulatory regime under which broking firms such as Morgan Stanley operate.
External regulation
By way of general summary, ASIC has responsibility for supervision of real‑time trading on the ASX. It is responsible for enforcement of the laws against misconduct in Australia's financial markets. It supervises Australian financial services licence holders. It publishes and maintains the ASIC Market Integrity Rules.[8]
[8] See generally Corporations Act 2001 (Cth), ch 7, 'Financial Services and Markets': including pt 7.10 as to 'Market Misconduct and Other Prohibited Conduct Relating to Financial Products and Financial Services'.
The ASX publishes and maintains both Listing Rules and Operating Rules. It is not in issue that Mr Detata required access to the ASX in order to perform certain duties as a financial advisor at Morgan Stanley.[9]
Compliance overview
[9] Statement of agreed facts [10].
Francis Araullo, who was a Compliance Manager at Morgan Stanley between July 2010 and July 2013, gave evidence as to the software systems utilised by Morgan Stanley to assist with detecting potential breaches of the ASIC Market Integrity Rules and the ASX Operating Rules. Mr Araullo was a surveillance analyst at the ASX before joining Morgan Stanley.
Mr Araullo explained that Morgan Stanley used SMARTS Broker (SMARTS), a third party software programme commonly used by market participants and ASIC at that time to assist with detecting potential breaches of the ASIC Market Integrity Rules and the ASX Operating Rules. Mr Araullo had also used SMARTS when he was formerly employed by the ASX and was very familiar with that system.
Mr Araullo said that financial advisors at Morgan Stanley could place orders through two systems called IRESS and EBOS. IRESS is a third‑party software used by the stockbroking industry to place orders and access market related data. EBOS is a Morgan Stanley proprietary system which provides for order entry, customer relationship management, bookings and other market participant tools. IRESS and EBOS feed to and from the ASX and contain an order entry screen that allows financial advisors to place orders on the ASX.
The settlement period for ASX trades during the relevant period was T+3. That is, if a trade took place on day one (T), the cash or security would be required for settlement three business days later. Consistent with the approach of the parties, I will use the expression T+3 from time to time in these reasons.
SMARTS would issue real time alerts. Alerts were generated for a range of indicators and filters including large buying and selling prior to company announcements or significant price movements at market open or close. Mr Araullo used the alerts to identify possible insider trading or market manipulation.
Mr Araullo would log in almost every day to review and investigate real time alerts generated for Morgan Stanley financial advisors in Australia. He was able to identify the financial advisors by unique advisor codes. If an alert was issued, he would assess it and consider if further investigation was required.
Part D - The facts
Mr Detata approached to join Morgan Stanley
In June 2010, Morgan Stanley was recruiting financial advisors. It engaged an external consultant, Sarah Wilson. It was Ms Wilson who initially identified and contacted Mr Detata.
At the time, Mr Detata was employed by Patersons Securities Pty Ltd (Patersons) as an accredited derivatives advisor. After an initial approach, Ms Wilson provided some limited information to Mr Detata and on 20 July 2010 he provided her with copies of his Patersons commission statements. A meeting was arranged for 22 July 2010 between Ms Wilson, Mr Detata and Stephen Chapman. Mr Chapman was the State Manager for Morgan Stanley.
The day before the proposed meeting, Ms Wilson sent Mr Chapman pro‑forma documents relating to Morgan Stanley's client platform and systems, documents which she said incoming advisors needed in order to assess whether they could sell a move to Morgan Stanley to their clients. She asked him to print them.
The first meeting - 22 July 2010 in Subiaco
Mr Detata met with Mr Chapman and Ms Wilson around lunch time at the Dome Cafe in Subiaco. There are no notes of the meeting.
According to Ms Wilson (who was not cross‑examined), at the meeting she gave Mr Detata an explanation of EBOS. The documents she had asked Mr Chapman to print were given to Mr Detata. Mr Chapman went through some due diligence questions and asked Mr Detata about his client base. There was some discussion about the fact Mr Detata had a very transactional client base, rather than having a focus on fund management. There was no discussion about Mr Detata's financials, or the types of trading he did. Mr Detata appeared to be primarily interested in how much he would be paid but Mr Chapman did not discuss the terms of any offer of employment at that time. Ms Wilson said that Mr Chapman had previously told her he wanted to avoid conversations about how much Mr Detata might earn until he had taken the advisor through the full due diligence checklist as he did not want advisors joining purely on the basis of how much money they might earn. She said she was not privy to sign‑on information. She knew from earlier discussions with Morgan Stanley that recruiters were not involved in that aspect. She did not know what Mr Detata's final deal was and had no involvement in how his remuneration was structured.
According to Mr Chapman, the purpose of the meeting was to inform Mr Detata about Morgan Stanley and to get some understanding of Mr Detata and what he was looking for in a role at Morgan Stanley. The discussion was very high level. There was no discussion of Mr Detata's business or potential deal terms. He did not wish to discuss specifics of a deal in front of Ms Wilson.
Mr Detata challenged the accounts of Ms Wilson and Mr Chapman about the 22 July 2010 meeting. In his witness statement he said as follows:
Stephen said to me words to the effect:
'What's the makeup of your client base. How much is in cash management how much is on CHESS, what is your turn over in these?'
I replied with words to the effect:
'I'm not your typical advisor, I'm not your 9 to 5 suit and tie man. I'm in the office when the market opens and leave when it closes to work from home. I'm a high volume trader. I have three to four clients who I have traded for years. One is my [relative]. Some days shares are bought and sold several times. I keep trading the target shares until I think they have reached their value. They are then sold and no longer traded. At the latest shares are sold three days after their purchase to avoid having to pay for them from the client's margin lending account. By doing this I can trade in multiples of my client's margin lending accounts. About 90% to 95% of my commission is made this way. Because of the high number of trades I need an assistant to do the leg work to carry out the trades. Adam my assistant at Patersons may want to leave.'
Stephen replied with words to the effect:
'That's fine. We have a lot of financial planners and portfolio managers, it would be good to have a trader to diversify the revenue stream. Morgan Stanley would fully support you, what matters is that you are writing the revenue numbers. If he wants Adam can come with you. You will have your own car bay.'
Under cross‑examination the following exchange occurred:
You didn't raise the matter of forward settling, as you call it, Mr Chapman, at that meeting, did you?---We talked extensively about my trading.
So when you were having this extensive discussion about your trading do you say you spoke about forward settling in that?---Not specific forward settling, but I most certainly mentioned my use of leveraged equity accounts.
---
I just want to know what you said to him. --- I told him about my manner of trading with leveraged equities.
Did you tell him that you would buy shares and then sell them before T plus three?---I said I was trading shares all the time. Buying and selling. The same shares over and over again.
Please answer my question?---Yes. Correct.
You did tell him that?---I told him I was buying and selling shares over and over again.
So if you said that - no. Just answer my question. Did you tell him that you would, on behalf of your clients, obviously, buy shares and sell them again before T plus three?---Of course. I was buying and selling shares all the time.
Listen to my question. And please give me a direct answer. I've asked - - -?---Yes. I did. I - - -
Right. And you said this to Mr Chapman in the presence of Ms Wilson, didn't you?---Yes.
The second meeting - 28 July 2010 in Innaloo
On 27 July 2010, Mr Detata sent Mr Chapman copies of his CV, accreditations and qualifications. The next morning Mr Chapman asked him by email to provide a rough idea of assets under management, and Mr Detata replied, saying that it was very roughly $35 ‑ $40 million. Mr Chapman met with Mr Detata later that day at the St George Hotel in Innaloo.
Mr Detata did not refer to this second meeting in his initial witness statement. He first referred to it in a responsive witness statement, but said it was a 'social get together'; it was 'social chit‑chat'. He denied Mr Chapman took notes, although he accepted he had a notebook with him. He denied Mr Chapman went through a due diligence form.
According to Mr Chapman, at the second meeting Mr Detata gave him a high level overview of his business, the way in which he traded and his client base and potential deal terms. He described himself as a high transactional trader, a matter which Mr Chapman said was not of itself a problem. He said he was a high volume trader. He said that 90% of his revenue was transactional and that because of issues during the global financial crisis when clients lost money, he preferred to have a smaller number of sophisticated clients.
Mr Chapman said he completed Morgan Stanley's document checklist and due diligence form with Mr Detata. That document prompted their conversation. There were no questions on the due diligence form about how an advisor trades or when trades are settled. Mr Chapman took notes at the meeting.
Mr Chapman said he had some experience with dealing with people who undertook transactional trading, for example when he worked previously for Goldman Sachs.
Mr Chapman was familiar with the basis upon which financial advisors were generally retained by Morgan Stanley. For example, he knew about what he called sign‑on and back‑end payments and that the purpose was to encourage the financial advisor to stay with Morgan Stanley. Mr Chapman said he told Mr Detata about repayment obligations at the 28 July 2010 meeting.
Under cross‑examination, it was put to Mr Chapman that at the 22 July 2010 meeting Mr Detata said that:
The [listed] shares are sold three days after they're purchased, to avoid having to pay for them from the client's margin lending account.
Mr Chapman said that was never said at any meeting.
He was asked if he remembered that Mr Detata said:
By doing this, I can trade in multiples of my client's margin lending accounts. About 90 to 95% of my commission is made this way.
Mr Chapman said he did not remember that. His answers to these questions were given firmly and impartially. He accepted that other statements put to him by counsel were made (although not at the 22 July 2010 meeting).
Mr Chapman was cross‑examined at length about the due diligence form. Mr Chapman readily conceded under cross‑examination that although in his witness statement he said Mr Detata gave him copies of his commission statements at the meeting, he had in fact received them earlier, based on the email exchanges. He said that he obviously made a mistake in his statement. However, he was readily able to identify under cross‑examination the information included in the completed due diligence form that was known to him prior to the 28 July 2010 meeting and the information that was not. For example, he referred to a question about revenue that was generated in 2009 and 2008 and said such information was not provided beforehand and he had to ask Mr Detata about it on the day. He identified other information he had not learned prior to the meeting: questions about the number of households, the number of accounts and the product mix in terms of derivatives and cash percentages. He obtained that information at the meeting and included it in the due diligence form.
Mr Chapman was challenged about his file notes. He referred to information in the notes and identified that they reflected things he was told at the meeting: names of other brokers, a note about a question Mr Detata asked about the front and back-end split of the incentive (50/50 or 40/60) and whether the incentive could go to a family trust. There were two file notes: Mr Chapman denied that they were made after the meeting of 22 July 2010 or after the meeting of 28 July 2010.
Pleaded case - what Mr Detata says he told Mr Chapman
The pleaded case, and the case the subject of Mr Detata's closing submissions, is that at a meeting of 22 July 2010 Mr Detata told Mr Chapman that:
(a)he was a high volume trader of listed shares at Patersons;
(b)his high‑volume trading involved selling listed shares on the third day following their acquisition in order to meet the cost of their acquisition (known as Forward Settling) with the brokerage fee and any shortfall in the purchase price being paid for by the client out of the client's margin lending account;
(c)by that process, listed shares to a value of five times the amount of the client's margin lending account could be traded; and
(d)if employed by Morgan Stanley he would bring with him the clients for whom he high volume traded when he commenced his employment with Patersons.
The parties agree that the first and fourth statements were made, although on Mr Detata's case they were made at the 22 July 2010 meeting and on Morgan Stanley's case, they were made at the 28 July 2010 meeting.[10] Otherwise, what happened at the meetings is in dispute. Mr Detata does not rely on anything that was said at the 28 July 2010 meeting.
Determination - credibility and findings about July 2010 meetings
[10] Statement of agreed facts [5].
Counsel for Mr Detata submits that Mr Chapman's evidence about the 22 and 28 July 2010 meetings is unreliable because he could not recall who convened the 28 July 2010 meeting; because he said initially that Mr Detata brought all relevant information with him to the 28 July 2010 meeting when in fact some had been provided ahead of the meeting; and because it would make no sense that Ms Wilson be flown over to attend the 22 July 2010 meeting if all that was to be discussed was at a high level.
I do not find those arguments convincing. It is not surprising that Mr Chapman did not recall who convened the second meeting. Such an organisational detail was unlikely to be of any great moment. It is what happened at the meeting that was important to the parties.
Mr Chapman readily conceded on being shown the relevant emails that he was mistaken when he said Mr Detata brought the commission records and other information to the 28 July 2010 meeting, as in fact he had provided some prior to the meeting.
I do not find it surprising that at a first meeting of the parties and in the presence of a recruitment agent the conversation was at a high level. That was in fact Ms Wilson's own evidence. There is no evidence Ms Wilson was flown to Perth solely for the meeting. The evidence of Ms Wilson and Mr Chapman was consistent as to the absence of any discussion about the nature of Mr Detata's trading at the 22 June 2010 meeting.
I do not accept that the 28 July 2010 meeting was only a 'social get together'. Mr Chapman accepted it was partly social. But at that stage it would be odd if there were no follow up or further discussion about matters raised at the 22 July 2010 meeting or in subsequent correspondence. I find Mr Chapman's evidence as to there being two meetings and the events of those meetings to be inherently credible.
I accept his evidence that the discussion at the 22 July 2010 meeting was high level. That evidence is consistent with the evidence of Ms Wilson. It does not matter that there might be slight differences between their evidence. In fact, so much is to be expected of witnesses recalling a meeting some years beforehand. However, their overall evidence as to the nature and substance of the meeting was consistent. I accept Mr Chapman's evidence that there was a more detailed conversation during the meeting of 28 July 2010.
His notes and evidence about the questionnaire are consistent with that. Why there were two file notes is not clear but regardless, I am not satisfied they were created prior to the meeting of 28 July 2010. I accept that Mr Chapman took notes at that meeting.
Mr Chapman was able to isolate quite readily under cross‑examination the information in the due diligence form that he did not have prior to the meeting. Such evidence was consistent with his acceptance that he had received some but not all information beforehand. His evidence is consistent with that of Ms Wilson, who said Mr Chapman did not wish to discuss earnings until after he had completed the due diligence form and that there was no discussion of earnings at the 22 July 2010 meeting.
It seems to me that Mr Detata's memory of the two meetings was not reliable: he conflated the discussions into one meeting (which he alleges was the 22 July 2010 meeting) and against that backdrop his assertion that he had a clear recollection of what was said is open to doubt.
I am not satisfied that Mr Detata said at either meeting that he would buy shares and sell them again before T+3. His reluctance to provide a direct answer on that point until after repeated questioning, taken with the unreliability to which I have referred, left me with the impression that his answer was not credible. I am not satisfied that during the conversation he had with Mr Chapman, either in Ms Wilson's presence on 22 July 2010 or at the 28 July 2010 meeting, Mr Detata disclosed that his manner of trading was that listed shares are sold three days after their purchase to avoid having to pay for them from the client's margin lending account.
There is other evidence that is consistent with that of Mr Chapman and Ms Wilson and inconsistent with that of Mr Detata. For example, later I deal with interviews of 9 November 2012. One of the plaintiff's witnesses, Paul Szalajko, gave evidence that at the interview with Mr Detata, Mr Detata said he explained his method of trading to Mr Araullo when Mr Araullo called and asked him some questions, and that he (Mr Detata) had not talked to anyone else before that conversation. Mr Araullo's evidence discloses that was a conversation in September 2012. Mr Chapman's evidence is also consistent with information he gave to Morgan Stanley when interviewed on 9 November 2012, well before these proceedings were instituted.
In my view, Mr Detata has reconstructed his evidence about the conversation which he says occurred on 22 July 2010 to fit the case advanced by him and I prefer the evidence as to those matters of Mr Chapman as supported by Ms Wilson.
The third meeting - August 2010 in Trigg
On 7 or 8 August 2010, Mr Chapman met Mr Detata at the Yelo coffee shop in Trigg. Mr Chapman gave Mr Detata an employment pack which contained the Employment Contract and other human resources forms. Neither party suggest that anything of further relevance arose at that meeting.
Employment commences
Mr Detata signed the Employment Contract on 13 August 2010. He commenced employment on 4 October 2010. He undertook induction and compliance training. He thought he undertook a compliance session on the Compliance Manual maybe once.
Mr Detata accepted that before he signed his Employment Contract he knew he was obliged to comply with Morgan Stanley's policies. He accepted that if policies were not followed they could have serious consequences for Morgan Stanley; that if he was given a direction for the purpose of avoiding damage to its reputation then it was a direction he should follow; that it was essential that he follow policies to the letter; that the Compliance Manual was available for access on Morgan Stanley's intranet; that he was familiar with the Compliance Manual; that Morgan Stanley expected the highest level of conduct from him in dealings to protect, among other things, the reputation of Morgan Stanley's business; that the Compliance Manual restricted 'balance sheet trading' and that was an obligation with which he must comply; that he was obliged to comply with the Compliance Manual unless he had written approval otherwise; and that he did not at any relevant time have written approval to depart from the policies in the Compliance Manual.
Mr Detata is paid the Retention Payment
By 13 November 2010 Mr Detata had been paid the Retention Payment.
Compliance matters raised in 2011
Although Morgan Stanley's instructions to Mr Detata that he claims were unlawful and ground his claims in economic duress and unconscionable conduct were given in 2012, Morgan Stanley says a background of compliance issues since 2011 form part of the context.[11] I accept that is so in light of the requirement to scrutinise the facts and the relations between the parties in the application of equitable principles.
Wash trade
[11] Plaintiff's closing submissions [149].
On 15 February 2011, Mr Detata was involved in a wash trade that occurred on an account involving FF, considered by Morgan Stanley to be contrary to s 1041B(2) of the Corporations Act 2001 (Cth). The trade resulted in no transfer of beneficial ownership. Morgan Stanley's Compliance team (generally referred to as Compliance) investigated the sale but accepted that the trade was inadvertent, was immediately reversed, did not cause any significant price or volume impact and did not consider the breach to be significant. The event was noted on Morgan Stanley's internal breach register. A report signed by Mr Detata noted that he was reminded of the importance of ensuring wash trades do not occur. The FF account was the account of a relative of Mr Detata.
Transfer of INT Account
On 31 March 2011, Morgan Stanley transferred an account from another financial advisor it had employed to Mr Detata. A relative of that advisor was the account holder. I will refer to that account as the INT Account. The INT Account comprised four separate accounts.
Leveraged Equities' inquiries and closure of margin lending accounts
Leveraged Equities Ltd provided margin lending accounts to some of Mr Detata's clients. Between March 2011 and November 2011, Leveraged Equities raised various issues about the conduct of Mr Detata's clients' margin lending accounts. In November 2011, it terminated the accounts for four of Mr Detata's clients.
On 11 March 2011, Bianca Hogan (Risk Manager for Morgan Stanley) asked Danielle Jones (Senior Account Manager at Leveraged Equities) to provide margin lending statements for Mr Detata's clients' accounts, and they were provided. However, issues were first squarely raised by Leveraged Equities in about June and July 2011. It is fair to say that during his evidence Mr Detata was intent on painting Morgan Stanley as having precipitated issues with Leveraged Equities in some way (volunteering some three times that a particular meeting was initiated by Morgan Stanley and repeating on various occasions that Morgan Stanley brought concerns to Leveraged Equities), but regardless of the catalyst for investigation, the documentary evidence shows quite clearly that Leveraged Equities looked at Mr Detata's accounts and identified issues with them.
For example, Chris Fox (Manager of Business Assessment and Risk at Leveraged Equities) sent Ms Hogan a summary of accounts indicating that a number of Mr Detata's clients had been purchasing stock in excess of the loan facilities and outside the lending ratio based on the value of the securities held.
Following various conversations, Mr Fox informed Mr Chapman and Mr Detata that his clients either had to settle their trades or meet margin calls or the accounts would be closed. Mr Detata accepted he had telephone conversations with Mr Fox about his accounts. He accepted that if a trade was not funded by the margin lender the risk would then fall to Morgan Stanley.
Internally, Morgan Stanley had also identified in July 2011 what it considered to be balance sheet trading by one of Mr Detata's clients (SD), that similar issues were occurring with other Leveraged Equities client accounts and that Leveraged Equities had declined to accept several trade orders. Mr Chapman was informed of these matters. In August 2011, Ms Hogan informed Mr Chapman that there were outstanding payments (which Mr Chapman understood to be balance sheet trading) on FF's account.
On 9 August 2011, Mr Detata informed Leveraged Equities of his plans to reduce the shortfall for the account of one of his clients, JI. One of his relatives had an interest in JI. He was clearly on notice of Leveraged Equities' concern about that account. Under cross‑examination he denied that concerns had been expressed to him about the trading of the client, evidence that is not inherently credible in light of the contemporaneous evidence.
Leveraged Equities' concerns are best understood by noting the content of an email from Mr Fox to Mr Chapman of 10 August 2011. The email records the following:
(a)Leveraged Equities had notified Mr Detata that any further requests for buy contract notes for the JI account would be declined;
(b)there had been unacceptable on market transactions;
(c)Mr Detata's investment strategy does not address settlement risk, as previously raised;
(d)to be acceptable to Leveraged Equities, at the point of purchase there must be sufficient borrowing capacity to meet in full the settlement of any buy transaction at the time contract notes are received;
(e)in assessing the borrowing capacity, the lending ratio of the security being purchased must be considered; all activity on the margin account must be included and future sales must not be included in the calculations;
(f)Mr Detata's current strategy assumes that future sale proceeds will be available and sufficient to meet commitments of buy transactions;
(g)if there is insufficient net equity to absorb a market decline between a purchase and a subsequent sale then Leveraged Equities will decline to settle the transactions on the margin lending facility;
(h)the net equity position of the JI account had declined by approximately two thirds in the preceding two month period, thereby increasing the settlement risk;
(i)Leveraged Equities had apparently been told by Mr Detata that his strategy was to 'trade shares intraday to reduce holding costs but maintain the original position (at a hopefully reduced price) and once there is bounce back to offload': Leveraged Equities posed the question as to what would occur in the event that the price does not rebound and instead continues to deteriorate or there was insufficient liquidity in a stock to sell the required shares;
(j)the use of four of Mr Detata's accounts (including JI) was unacceptable to Leveraged Equities with insufficient capacity to fund the settlement of many buy transactions; and
(k)future sales (that is those that have not been executed prior to the purchase) must not be included in the calculations.
On 12 August 2011, Melissa Mallinson, (Manager of Customer Care and Governance at Leveraged Equities) wrote to Mr Detata as follows:
As discussed your use of Leveraged Equities Margin Loan accounts is unacceptable to Leveraged Equities, with insufficient capacity to fund the settlement of many Buy Transactions at the time contract notes are received by it.
Leveraged Equities, in consultation with the compliance department of Morgan Stanley, has agreed to provide a period of 10 business days to allow you to reduce the exposure to a position that is acceptable to the Lender. That is for all of the accounts on which you are the Nominated Financial Adviser; the Total Amount Owing is to be less than the Lending Value of the Secured Portfolio. During that period Leveraged Equities will settle buy contract notes provided that at settlement there is sufficient equity on an account taking into consideration the future settlement of sell contract notes.
Please note that Leveraged Equities will provide LVO online access to the Morgan Stanley compliance department to give them oversight capacity of the Margin Loan Accounts.
Acceptable Borrowing Request
Leveraged Equities requires you to acknowledgement [sic] that for borrowing requests (in the form of a Buy contract note) submitted after this 10 day period, you will ensure:
At the point of purchase there is sufficient borrowing capacity to meet, in full, the settlement of that buy transaction. In assessing the borrowing capacity:
•The lending ratio of the security being purchased must be considered;
•All activity on the margin loan, including the trading activity that has been completed on-market prior to a buy transaction being placed, must be included;
•Future sales (ie. those that have not been executed prior to the purchase) must not be included.
Our Client Service team is available to provide assistance in respect to the amount of available funds on a margin lending facility. Please note that Leveraged Equities do not guarantee the settlement of any transaction completed on-market. Leveraged Equities will make an assessment of a borrower's capacity prior to the settlement date of a transaction.
If the above conditions are not met to the Lenders satisfaction, Leveraged Equities reserves the right as the Lender, to provide notice to a borrower that it is terminating the Loan Agreement.
Please provide an acknowledgement of these conditions and an undertaking to reduce the exposure of the Margin Loan Accounts as outlined above.
On 16 August 2011, Mr Detata provided Leveraged Equities with a proposal to reduce the exposure on the JI accounts, a proposal that involved greater time to exit certain shareholding positions. Leveraged Equities agreed to that extension on terms.
On 21 November 2011, after accounts apparently were not brought into line, Ms Mallinson informed Mr Detata that Leveraged Equities was terminating the margin loan accounts for four of Mr Detata's clients, including JI.
As a result, Mr Detata was required to arrange for those clients' margin lending accounts to be moved to the ANZ Bank. Mr Detata said that Morgan Stanley assisted with that process (the extent of the alleged assistance was never made clear).
Mr Detata said that he understood that Morgan Stanley was engaged in the various communications with Leveraged Equities because if Leveraged Equities did not pick up any exposure on a purchase then it would fall to Morgan Stanley to do so.
Other compliance questions during this period
On 8 August 2011, Mr Araullo requested that Ms Hogan investigate two crossings between INT and a client of another broker. Mr Araullo requested Ms Hogan speak to Mr Detata and the other broker to determine the strategy and commercial reasons for the trades. Mr Detata and the broker told Ms Hogan that the buy and sell orders were supposed to have a spread of approximately half a cent to take profits from a small price movement, but they were erroneously entered in the market at the same price.
Morgan Stanley also raised what appeared to be balance sheet trading on three occasions:
(a)Mr Chapman said that on 10 August 2011, as a result of the risk department forming the view that the SD account was balance sheet trading, he told Mr Detata in person that he was not permitted to place any further buy trades for the SD account;
(b)on 27 October 2011, Ms Hogan informed Mr Detata by email about concerns she had about an appearance of balance sheet trading on the INT Account, and set out the prohibition against such trading from the Compliance Manual; and
(c)on 2 December 2011, Ms Hogan told Mr Detata that the balance sheet trading which was occurring on the FF account was not in line with Morgan Stanley's policies (an email from Ms Hogan to Mr Chapman and others refers to the conversation but Mr Detata said he did not recall it).
On 5 December 2011, there was a telephone call between Helen Gavan (Vice President, Morgan Stanley), Mr Detata and Mr Chapman when Ms Gavan told Mr Detata he could not continue to engage in balance sheet trading. According to Mr Chapman, Mr Detata said he would take a month off until the ANZ margin lending accounts were set up. I accept Mr Chapman's evidence in this regard.
Events in 2012
The Morgan Stanley Risk department continued to hold concerns about the manner of Mr Detata's trading and Morgan Stanley's exposure into 2012. Mr Araullo gave evidence to this effect.
In early May 2012, Mr Detata proposed some steps to Mr Chapman as to how he wished to trade for his clients going forward, including as to collateral to be lodged and limits of order size. Mr Chapman took up those matters with Simon Walker (the Market Risk Manager at the time) by email and noted that they were still a long way apart on balance sheet trading. Mr Chapman told Mr Walker he thought Mr Detata understood the need to find a happy medium in order to move forward. A discussion with Mr Walker was proposed.
Compliance report June 2012
On 11 May 2012 and as part of preparation for the intended discussion with Mr Walker and Mr Chapman, Mr Araullo provided to them a summary of Compliance's stance:
All crossings between [FF] accounts and [INT] accounts to be prohibited. Rare exceptions may be granted but will be subject to risk and compliance approval. The high volume and regularity of large crossings between [FF] and [INT] accounts in stocks such as D, C and E places the firm at risk by creating the perception of artificial trading in the eyes of the regulator. Occasions of orders for specific volumes of stock, for example a crossing of 7,317 C between [FF] and [INT], also has the potential to create a perception of collusion between account holders, or discretionary trading by the advisor. Our order records for the trades placed by [INT] or [FF] accounts show execution only instructions. The numerous occasions where large crossings would take place between the 2 parties may create the impression that the parties are not independent of one another.
In this regard, section 1041B(2)(b) of the Corporations Act classifies a person to have created a false or misleading appearance of active trading if the person makes an offer to acquire or sell financial products when that person is aware of an associate who is willing or has made an offer to acquire or sell the same (or substantially the same) number of those financial products at the same price. Crossings which are materialized due to 2 clients placing orders through a broker with knowledge of one another's orders can be deemed artificial trading and is a breach of the Corporations Act. Breaches of the Corporations Act can be a criminal offence.
ASIC MIR 5.7 around manipulative trading is also relevant. An important aspect of this rule is that the parties on the buy and sell side must be independent. As mentioned above the history of large crossings between these 2 parties may not create the perception of independence. The maximum penalty for breaching MIR 5.7 for an organization is $1m.
By email later that day, Mr Walker proposed the following to Mr Chapman with respect to Mr Detata's clients:
Cross Trades (XT) - All crossings between the [FF] and [INT] accounts to be prohibited. Buy/Sells for each client must be placed separately in the market to ensure they are clearly independent of each other.
In House Assets - Any client utilising a trading strategy, e.g. E buy/sell, specifically [INT] and [FF]are required to have 50% of the amount of cleared equity in their MSSB account prior to the order being placed. i.e. 1MM of cleared equity would allow up to 2MM of additional securities to be purchased. Only securities that have been paid and settled are classified as equity to facilitate additional purchases.
Settlement - All clients must have cleared funds available on settlement date. i.e. where client buys today and sells tomorrow (or T+2 or 3), they must arrange for sufficient cleared funds to be in the account on T+3. Sale proceeds to be received at a date later than the BUY settlement date are not permitted as a means to settle. Further, if this is breached or in the event where a BPAY/cheque is noted as the means of settlement that does not occur, this will be viewed as a delaying tactic and further restrictions will be implemented.
Separately, on 24 May 2012, Mr Chapman told Mr Detata that Morgan Stanley had decided to place certain trading restrictions on one of his clients' accounts, the BL account, because the account had recently been placed on a bad debtor list and with only small cash deposits it appeared settlement of purchases was reliant on future trades. Morgan Stanley required collateral for the account and that there be cleared funds on settlement date, and that proceeds to be received at a date later than the buy settlement date would not be permitted as a means to settle.
Mr Chapman wrote:
Louis, unfortunately there is no way round this as the bad debtors flag has created this knock on effect - all clients, no matter who the advisor, would be subject to the same rules if a similar situation occurred.
At the end of the day I need to have a high degree of comfort that the client has the means and capacity to settle any and all trades they do, in this current environment where we are subject to quite erratic and large moves in the market it is prudent and necessary for us to be sure clients do not place us in a very awkward and damaging position.
Mr Detata did not deny the manner of trading by BL. He replied saying:
As I said on the phone to you I have dealt with him for a long time and we have a history of trading, he has never not paid…but what he likes to do is buy stock and then sell it 3 days later and pay in the difference. I am disappointed [Morgan Stanley] has taken this view as this is another client that will potentially cease trading with me due to [Morgan Stanley] policy.
My business continually feels marginalized by these rules and regulations that seem to pop up at especially bad times where clients are already feeling the pinch.
Mr Chapman said the matters addressed in Mr Walker's email of 11 May 2012 were discussed with Mr Detata in a meeting on 29 May 2012. They informed him of the prohibitions and requirements that the Compliance team had recommended. On the same day (Mr Detata said it was after the meeting), Mr Detata emailed Mr Chapman as follows:
Over the last few days it has been somewhat confusing that my trading which has not deviated since I started in October of 2010 has now become a target of change.
...
I was completely upfront with the kind of trading I carry out before I had joined MSSB and have traded the same way since I got here. I am happy to work within parameters but need to know those parameters and the last I knew we were waiting for Simon to respond to our earlier meeting based on our recommendations to him.
So far MSSB is forcing my two biggest clients to look to trade elsewhere ([INT] and [JI]) and I am still awaiting a response from you re one of my regular smaller clients [LL]. To ruin 10 year relationships (which I have had through GFC in much much worse conditions than current) and potentially my livelihood on the whim of a risk manager who gets nervous when the market pulls back 8% is incomprehensible.
Keep in mind that none of these clients have ever defaulted on me or MSSB...and whenever we trade cash is always put in for any shortfall that occurs on t+3.
As to the 29 May 2012 meeting, Mr Detata claimed that although there is no limitation referred to in Mr Walker's email, they must have been referring only to non‑margin lending accounts: I do not accept such limitation should be read into the terms of the email, taking into account the context of the discussion and the reference to JI and INT in Mr Detata's email of the same day.
Internally, Morgan Stanley continued to investigate the manner of trading and compliance risk. The matter was being considered at senior levels within Morgan Stanley Australia. Mr Araullo reported directly to Eric Haggstrom (then Head of Compliance for Morgan Stanley Wealth Management in Australia) and informally to Paul Szalajko (Head of Compliance Morgan Stanley Australia).
In June 2012, the Compliance team prepared a report which summarised the findings of their investigation into the trading on the INT Account and the FF account, the regulatory and credit risks that resulted and their recommendation to mitigate those results in the future. The report stated that as part of its surveillance, Compliance had identified some 22 crossings. They were considered high volume. Compliance also considered there was balance sheet trading and facilitation between those clients. Compliance considered this activity could be considered matched orders, which is a form of artificial trading.
The summary of the report was as follows:
As part of its surveillance, Compliance has identified a pattern of trading within several accounts managed by Louis Detata. Most prominent are FF accounts (a/c 1417613 and 1417616) and [INT] accounts (a/c 1421527 and 1227373). These accounts have exhibited large and frequent crossings between one another which Compliance believes is a risk to the firm.
The regulatory risks are the following:
•The trading by these accounts may be considered as creating a false and misleading appearance of active trading in certain stocks. This is a potential breach of Corporations Act s1041B(2)(b) - False Trading and Market Rigging.
•The trading also gives the appearance of collusion between the [FF] accounts … and [INT] accounts ('[INT]'). This is a potential breach of Corporations Act s1041B(2)(b) - False Trading and Market Rigging
•The balance sheet trading associated with these accounts is allowing them to take larger positions than they would otherwise be able to increasing the risk of regulatory scrutiny.
We believe the regulatory risk of continued trading in this manner is high given the potential reputational and monetary impact.
As a result, Compliance believes that in order to manage/mitigate the risk going forward:
•all crossings between [FF] and [INT] should be prohibited.
•All balance sheet trading should be stopped given its potential impact on trading volumes.
•Louis's trading should be monitored on an ongoing basis to prevent similar potential issues occurring.
On 10 August 2012, Mr Chapman informed Mr Detata (and, relevantly, another Morgan Stanley financial advisor) that Morgan Stanley had decided that it would not allow firm funded balance sheet trading to continue and that all clients must have cleared funds available on the date of settlement (by T+3). Inter‑day trading would be permitted provided the client had 50% collateral on the account and only settled stock was to be classified as equity.
Incentive Payment made
On 15 August 2012, Morgan Stanley paid Mr Detata the Long Term Incentive Payment under the Employment Contract (adjusted to $619,580 net of withholding tax). The group certificate issued by Morgan Stanley to Mr Detata for the year ended 30 June 2013 was not required to include the payment and withholding tax deduction.[12]
Further Compliance report - trading strategy and wash trades
[12] Statement of agreed facts [14].
In August 2012, Mr Araullo was notified by a SMARTS alert of further patterns of potential matched trades that had been placed in respect of three of Mr Detata's clients. Mr Araullo and Mr Haggstrom decided a more detailed investigation into Mr Detata's trading was required.
On 4 September 2012, Ms Gavan informed various members of the Compliance and Risk teams that Mr Detata had failed to comply with a direction to take steps to bring the FF account into line.
On 5 September 2012, Mr Araullo spoke to Mr Detata about his trading strategy and particular trading patterns that Compliance had identified between two accounts, SW and MT. Mr Araullo said:
This was the first time I had discussed this trading with Mr Detata. Mr Detata told me that his clients [MT] and [SW] had margin lending accounts with ANZ. He told me both clients had a fully paid holding in [A] and [B] and a trading position in [C], which Mr Detata said meant a position for which payment had not been made. He also told me that both clients wanted to purchase further stock in [C], but were waiting for the stock price to improve. He said that in the meantime, [MT] and [SW] were exiting and re-entering the [C] position to avoid funding settlement. To cover the shortfall, namely any difference between the cost base price of [C] and the current price of [C], he told me the clients would sell their holdings in [A] and [B], and ANZ would credit the margin lending account for the sale of [A] and [B] at T, and thereby provide the funds needed for the purchase of [C] at T+3. They would then immediately buy back their position in [A] and [B].
...
I had never encountered a strategy like the one described to me by Mr Detata. I did not completely understand the commercial purpose of it at the time of the telephone call. As a result of never having encountered a strategy like this one before, I wanted to get some further information about the strategy, so I requested that Mr Detata send me a working example of it. Later on 5 September 2012, Mr Detata emailed me a working example of his trading strategy.
I find that this was the first occasion on which Mr Detata explained this type of trading pattern to anyone from Morgan Stanley (Mr Detata disputed that he used the words 'to avoid funding settlement' and said that the buying and selling was 'to have settlement occur': that does not seem to be a real distinction and I accept Mr Araullo's version).
Also in early September, Mr Araullo received an alert in the SMARTS broker system about a potential wash trade placed on the INT Account.
Morgan Stanley then commenced an investigation into Mr Detata's trading led by Hester Leung, Vice President of Morgan Stanley's Legal and Compliance team.
On 7 September 2012, Morgan Stanley reviewed statements provided by ANZ for the margin lending accounts held by INT. It identified that INT held another account with a broker, Broking House 1, which was linked to INT's ANZ margin loan account. The account statements indicated that trades had been placed for both buy and sell transactions for shares in two companies by Broking House 1 and Morgan Stanley at the same time for the same price and volume.
The first interview (11 September 2012) and the First Instruction
On 11 September 2012, Morgan Stanley received a further statement from ANZ for INT's margin loan account. At this time, Morgan Stanley formed a suspicion that INT may have executed market transactions through it and through another broker which resulted in no change in beneficial ownership of listed shares.
On 11 September 2012, Mr Detata was interviewed by Ms Leung, Mr Haggstrom, Mr Chapman and Mr Araullo. Mr Haggstrom went through the trades on the ANZ INT Account statements with Mr Detata and in particular the transactions in which his clients had bought and sold shares in D on 3 and 4 September 2012 using two brokers.
Mr Haggstrom informed Mr Detata that as the trades involved no change in beneficial ownership they were potential wash trades. Mr Detata said that he was not aware of the trades placed by the other broker and did not know why these trades had occurred. Mr Detata accepted in cross‑examination that he was shown ANZ statements and that he understood that the matter of potential wash trades was being taken seriously by Morgan Stanley because it created significant regulatory risk, although he sought to qualify that evidence by saying it was a risk 'if it was proven to be so'.[13]
[13] ts 304 (8 December 2016).
According to Mr Chapman, Mr Haggstrom informed Mr Detata at the end of the meeting that the INT Account might be closed as a result of those trades.
Mr Chapman said Mr Haggstrom told him on 12 September 2012 that the account had been closed and that Mr Haggstrom called Mr Detata direct. Mr Chapman spoke to the client representative, MF. It is not in dispute that the INT Account was in fact closed on 12 September 2012.
There is some dispute about what Mr Detata was told at the meeting. In his witness statement, Mr Detata did not refer to the meeting of 11 September 2012. He said that he had no information on what trades led to the closure of the INT Account. He said that on 12 September 2012 Mr Haggstrom telephoned him five minutes before the opening of the ASX and said to him words to the effect that:
The [INT Account] has been closed. [MF] has been wash trading. It's systematic. You are not to trade for her anymore nor talk to her.
Mr Detata said he was 'stunned'.
Under cross‑examination, Mr Detata's evidence was different. He insisted that he was told those matters by Mr Haggstrom at the meeting of 11 September 2012. He denied that he received a call from Mr Haggstrom on 12 September 2012.
This is another example where the reliability and credibility of Mr Detata's evidence is questionable. Faced with a conflict between the evidence of Mr Chapman and Mr Detata, I prefer the evidence of Mr Chapman. This is because it is agreed that the INT Account was closed on 12 September 2012. It was pleaded that the conversation occurred on 12 September 2012 and that was Mr Detata's original evidence. It would be odd for Mr Haggstrom to have said it was closed on 11 September 2012 if that were not the case. It would be odd for him to then say to Mr Chapman on 12 September 2012 that the account was closed if he had already given him that information on 11 September 2012. That Morgan Stanley asked questions of Mr Detata and showed him documents about the suspected wash trades is consistent with a decision still being formed, rather than made. Mr Chapman's evidence is chronologically sensible.
Under cross‑examination, Mr Detata accepted he had been given information about the wash trades as indicated in the ANZ accounts and discussed at the meeting. I therefore do not accept his evidence that he had no information on what trades led to the closure of the INT Account. Such evidence also conflicts with his own email of 12 September 2012 to Mr Chapman, in which Mr Detata refers to Mr Haggstrom's claims about the wash trades and refers to INT Account's representative, MF, as having potentially made a mistake. He also says in the email that the decision will have serious ramifications for him.
I find that the conversation informing Mr Detata that the account was closed occurred on 12 September 2012 and that the risk it might be closed had been foreshadowed at the meeting of 11 September 2012.
Mr Detata pleads that:
On 12 September 2012 [Mr Haggstrom] instructed Mr Detata ('the Plaintiff's First Instruction') to cease trading for a client who without the knowledge of Mr Detata had through the engagement of another stock broker purchased listed shares the client was selling.
The evidence does not reveal that an instruction in those precise terms was given. However, Morgan Stanley admits that on 12 September 2012 it closed the INT Account and that through Mr Haggstrom it instructed Mr Detata that Morgan Stanley would not be accepting any other orders for the INT Account.
Therefore, I accept that an instruction was given by Morgan Stanley to Mr Detata on 12 September 2012 that there was to be no more trading on the INT Account (First Instruction).
A further analysis is instigated
On 19 September 2012 Mr Detata had written to Mr Chapman. He wanted to go above Mr Haggstrom to Harry Parkinson (then CEO of Wealth Management in Australia). He objected to the INT Account being shut down without any proof of the client's wrongdoing, saying the person involved was 'not a criminal danger to the ASX' but made an error of judgment. He clearly considered Mr Haggstrom to be in the wrong, referring to his 'so‑called investigation' and describing the decision as one made by 'one over‑exuberant compliance officer'. He wrote:
Steve I am stressed and depressed here due to the actions of Eric I have ongoing mortgage commitments and a family to feed with now a small fraction of my income that I had due to Eric's heavy handedness.
I firmly believe that Eric's actions have constituted a breach of my contract and I want some answers!!!! … I am in the situation of having no earnings and if I honour my contract I face impending financial crisis which will undoubtedly lead me to bankruptcy.
I want an answer Steve I want this escalated. The actions of one, over exuberant compliance officer …. [have] significantly diminished my ability to continue at this organization in a capacity which will enable me to earn a reasonable income to honour my personal financial obligations.
As it stands now as I told you on the phone today I am suffering from depression and extremely high stress levels re this issue and no one at MSSB has addressed this issue with me.
Pls treat this matter with the urgency it warrants.
On 25 September 2012, Mr Detata wrote to Mr Chapman seeking a catch‑up. Mr Chapman at that time was undergoing medical treatment for a serious illness. Mr Chapman could not meet then but said he was chasing Mr Parkinson about a meeting. Mr Detata said he would be away for a week but reiterated that he wanted to know why he had 'a million dollar client shut down without any guilt proven'.
Mr Detata made similar comments and complained of stress in two further emails following up Mr Chapman during October 2012. In one, he said:
Please help me to get a solution here. I am going out of my mind in fear for me and my family's future.
Mr Szalajko became involved from 15 October 2012. Mr Haggstrom had been dealing with the Compliance investigations prior to that. Mr Szalajko said he had been told by Mr Haggstrom that as a result of various wash trades that had been investigated in September, Legal and Compliance had decided a full investigation of Mr Detata's trading was required. Mr Szalajko had previously worked for the police force, ASIC (in investigation and enforcement) and at Merrill Lynch and Goldman Sachs JBWere in institutional compliance. Part of his role as Head of Compliance was to give advice to Morgan Stanley about whether certain trading activity constitutes a compliance issue.
In mid‑October 2012, the Compliance team commenced the detailed analysis of Mr Detata's trading over six months from 2 April 2012 to 16 October 2012 (trading pattern investigation). Although he had previously identified particular potential compliance issues, Mr Araullo said this was the first review of Mr Detata's trading over a longer period.
Mr Araullo and Jim Goodman (Legal and Compliance) undertook the analysis. Mr Goodman was senior in ranking to Mr Araullo and Mr Haggstrom. Mr Goodman had previously provided an internal write up of the review of the INT Account.
Mr Szalajko said that on 15 October 2012, Morgan Stanley sought external legal advice about issues arising from Mr Detata's trading. He participated in the call, along with Ms Leung.
The second interview (15 October 2012) and the Second Instruction
On 15 October 2012, Mr Detata was interviewed a second time by Mr Chapman, Mr Haggstrom and Ms Leung. According to Mr Chapman, Ms Leung told Mr Detata that Compliance had conducted a further review of Mr Detata's trading and had some further questions.
Mr Haggstrom said that Compliance had identified a pattern of triangle trading between three of his clients, being FF, SW and MT (Mr Chapman explained in his evidence that triangle trading referred to trading between three clients where each client was buying and selling the same stocks and effectively just moving the same shares between them).
Under cross‑examination, Mr Detata agreed that Mr Haggstrom had said that to him during the meeting. Mr Detata said he responded by saying that all three clients traded in the same stock and he was just facilitating forward settlement of trades for those clients.
Mr Detata said under cross‑examination that the meeting's conclusion was that Mr Haggstrom said he (Mr Detata) was not to trade with those three clients.
I note that Mr Detata pleads that on or about 15 October 2012 he met with Mr Chapman and was told that Mr Haggstrom was investigating Forward Settling by his clients.
No reason for the drop in income for the years ended June 2016 and June 2017 is provided. Mr Detata provided no explanation and nor does Ms Broadhurst. It is a significant drop and in terms of mitigation, it is not clear the extent to which Mr Detata was working during the six month period on which the assessment is based or whether he had changed some aspect of his business. Further, for these two years Ms Broadhurst has taken into account that Mr Detata chose to pay himself a salary of $70,000 from the ICM Securities Trust. There is therefore some inconsistency in the manner of assessment for the years ending June 2016 and June 2017.
Uncertainties
According to evidence given by Sandra Dugandzic of Morgan Stanley, Mr Detata had other clients whilst in its employment and received commission from them. Prima facie, the Instructions did not affect the ability of Mr Detata to continue trading for those clients and receive commissions. However, neither Morgan Stanley nor Mr Detata referred to Ms Dugandzic's evidence in their closing submissions and regardless, it seems that the large majority of his trading was done for the four clients the subject of the Instructions. Accordingly, I do not consider it necessary to adjust the assessment because of that evidence, particularly as the assessment in this case cannot be a precise mathematical calculation in any event, as discussed further below.
Ms Broadhurst accepted that tax benefits not related to personal exertion as a broker would affect her calculations. Her calculations were aimed at assessing a comparison of net income from personal exertion as a broker. Although the potential for distortion because of the treatment of tax losses was accepted by Ms Broadhurst, there was no attempt by either party to assess the scope or effect of any such distortion or whether there was a more appropriate manner in which the various tax losses should have been taken into account. I also take into account that the zero reduction for tax in the years 2013, 2014 and 2015 on its face operates to the benefit of Morgan Stanley by reducing the variable in those years.
Mr Detata did not seek to be employed by another broking firm after termination of the Employment Contract. He set himself up to operate on his own account through a trust structure. Virtually nothing is known about his business after March 2013, save that he said that as at the date of his witness statement (September 2015) he no longer traded in high volumes, in contrast to his manner of trading at Morgan Stanley. He described himself as a financial advisor. Mr Detata also gave evidence that he had disposed of his interest in most of the investment properties prior to trial.
According to Ms Broadhurst, there were additional costs of his own business that he would not have incurred as an employee. It is by no means simple to compare the situation where income is received from a third party employer with that where income is received by a person who operates their own business through a corporate and trust structure without more sophisticated evidence. There are inevitable differences. There were also capital gains tax issues introduced in some of the later assessments. However, in my view Ms Broadhurst did attempt to pay some regard to such matters. I accept that there should be some discount to allow for uncertainty introduced by the issue of tax losses and the different employment structures.
I am satisfied that Mr Detata attempted to mitigate his loss. There was no evidence about income earned by other brokers at Morgan Stanley during the relevant period. Nor was there any evidence as to the remuneration of Mr Detata's peers in the market generally.
I cannot safely assume that Mr Detata would have remained in the employment of Morgan Stanley until June 2017. There were difficulties with the relationship as evidenced by the various compliance issues addressed during the years 2011 and 2012 (even before the Instructions). Whilst I am to assume that the Instructions were not given, I do not assume that Morgan Stanley would have remained satisfied from a risk and reputational perspective with Mr Detata's approach to trading throughout a further four years. It had the ability to terminate his employment at any time on four or five weeks notice under cl 13.1 of the Employment Contract, and in circumstances that did not require incentive repayments by Mr Detata.
Morgan Stanley indicated it was happy for Mr Detata to remain working for it, but that was on the basis that he traded in a particular manner. Even if the Instructions had not been given and Mr Detata had continued to trade in the manner he had been, I am not satisfied that Morgan Stanley would not have terminated his employment on notice at some point in the future, taking into account its own assessment and tolerance of risk and market manipulation.[79]
[79] See, for example, Gregory v Philip Morris Ltd (1988) 80 ALR 455, 484.
Morgan Stanley submits (in effect) that it is artificial to assume Mr Detata would have continued working for Morgan Stanley until 2017. There are certainly obstacles to Mr Detata's long‑term employment at Morgan Stanley. I take into account that Morgan Stanley is unlikely to have terminated Mr Detata's employment until such time as it considered that it had properly recouped (through its share of commissions received) the amounts paid to Mr Detata by way of the Retention Payment and Incentive Payment. Had it continued to receive commissions similar to those received by Mr Detata in the hypothetical scenario where Mr Detata continued to trade in the same manner and for the same clients, I consider it would have recouped the estimated shortfall as at December 2012 of approximately $600,000 within a further 18 months. Therefore, I do not consider the prospect of Morgan Stanley terminating his employment before June 2014 to be great. After that, I consider the prospect to be high.
Morgan Stanley asserts that due to issues as to the reliability of Ms Broadhurst's evidence, I cannot be satisfied as to any loss and I should make no order as to damages.
That submission ignores the responsibility of the court to estimate costs as best it can in circumstances where damages cannot be determined precisely. Those who seek to deny liability because of damages assessment difficulties stemming from speculative or suppositional offsets and deductions bare an evidentiary onus.[80] Whilst pointing to such difficulties, Morgan Stanley did not adduce evidence to challenge Ms Broadhurst's report or assumptions or her treatment of taxation issues. At one point counsel for Morgan Stanley suggested to Ms Broadhurst that a safer comparison of the income position might be founded on the gross income variables. However, that manner of calculation was not developed with Ms Broadhurst or in the submissions. Therefore, whilst I acknowledge the difficulties discussed and the matters referred to in Morgan Stanley's submissions, it did not point to any quantitative effect of (for example) the treatment of tax losses or other deductions during the respective periods.
[80] Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10 [41], [83]; Harriton v Stephens [2004] NSWCA 93; (2004) 59 NSWLR 694 [104] (unaffected on appeal).
Accordingly, this is a case where in my view the claimant has sought to adduce evidence as to damages, but it cannot be determined precisely. A precise mathematical calculation is not possible, taking into account some of the difficulties referred to above. There is inevitably a requirement for estimation.
As to the years ending June 2013, June 2014 and June 2015, I reduce the damages I would have awarded by 10% to take into account the uncertainties by way of distortion of figures in comparing the two employment scenarios and other uncertainties. For the years ending June 2016 and June 2017 I reduce the damages I would have awarded by 60% to take into account those same matters, but also the unexplained drop in income for those years and the possibility that Mr Detata's employment would have been terminated legitimately under cl 13.1 of the Employment Contract.
I assess damages as follows:
Year Ending 30 June 2013 30 June 2014 30 June 2015 30 June 2016 30 June 2017 Potential earnings $ 557,779 557,779 557,779 557,779 557,779 Actual / anticipated earnings $ 263,281 249,751 442,652 146,802 121,613 Variance $ 294,498 308,028 115,127 410,977 436,166 Percentage reduction 10% 10% 10% 60% 60% Total $ 265,048 277,225 103,614 164,391 174,466
Damages
Accordingly, I provisionally assess damages in the sum of $984,744 together with interest. Under s 32 of the Supreme Court Act1935 (WA), I order that interest accrue on each of the five sums from 30 June of the respective year (for example, so that interest accrues on the sum of $265,048 from 30 June 2013) and on a simple interest basis at the rate of 6% per annum.
Conclusion
In light of my findings it has not been necessary to consider other arguments raised by the parties, including as to abandonment of the Employment Contract, affirmation, avoidance and laches.
Judgment is to be entered for the plaintiff. The counterclaim is dismissed. I will hear the parties as to proposed orders and costs.
SCHEDULE
Extracts from Employment Contract
3Retention payment
3.1Eligibility for retention payment
Subject to you being employed by the Company on the date the payment is made, the Company will pay you a gross retention payment of AUD837,121.32, which is equivalent to 50% of the production generated by you in the course of your employment with your previous employer during the twelve month period ending on 30 June 2010.
Your twelve month production with your previous employer for the period ending 30 June 2010 is AUD1,674,242.63. The retention payment is conditional upon you providing to Human Resources any documents which, in the reasonable opinion of the Company, are required to substantiate your production during that period.
Once the Company is satisfied that you have substantiated the production generated by you in the course of your employment with your previous employer during the twelve month period ending on 30 June 2010, the Company will make the retention payment to you in the following pay period (less applicable tax).
3.2Repayment of retention payment
If at any time in the first 5 years from the date of the retention payment:
(a)you terminate your employment for any reason or you provide the Company with notice that your employment will terminate; or
(b)the Company terminates your employment or provides you with notice that your employment is to terminate for any of the following reasons:
(1)you engage in misconduct or dishonesty or have acted in a way which in the opinion of the Company may adversely or be likely to adversely impact the business or reputation of the Company;
(2)you have committed a material breach of the terms and conditions of your employment;
(3)you have been convicted of a serious criminal offence;
(4)you no longer retain the necessary licence or authorisation required for you to perform your duties; or
(5)you have been negligent in the performance of your duties,
you will be required to immediately repay this retention payment to the Company in accordance with the following scale:
(1)within the first year of employment - 100% of the retention payment;
(2)within the second year of employment - 80% of the retention payment;
(3)within the third year of employment - 60% of the retention payment;
(4)within the fourth year of employment - 40% of the retention payment;
(5)within the fifth year of employment - 20% of the retention payment.
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4.2General duties
You must:
(a)devote all of your time, attention and skill to the performance of your duties both during normal business hours and at other times as reasonably necessary;
(b)perform your duties faithfully and diligently;
(c)maintain all qualifications, licenses, skills, knowledge and competencies relevant to your employment with the Company;
(d)follow lawful and reasonable directions given to you by the Company; and
(e)promote the interests of the Company and any Group Company.
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6Policies
6.1Company policies
The Company has various policies which apply to your employment, including the Morgan Stanley Code of Conduct and the Morgan Stanley Smith Barney Code of Conduct supplement as amended from time to time. It is likely that a number of these policies will be amended later this year for the purpose of integration with the Morgan Stanley Smith Barney policy and benefit framework.
You must familiarise yourself with the Company's policies. Where the policies place obligations on you, you must comply with them. The Company may review, vary, add to or withdraw the policies from time to time in its absolute discretion. To avoid doubt, the policies and any obligations on the Company or any Group Companies set out in them, do not form part of your employment contract and are not binding on the Company or any Group Company.
6.2Breach of Company policies
You acknowledge, understand and agree that, if you fail to comply with any of the Company's policies:
(a)there may be serious consequences for the Company and other Group Companies;
(b)your non-compliance may be taken into account in determining the amount (if any) of any discretionary elements of your Total Reward or any other benefits;
(c)you may be subject to disciplinary action including suspension of your employment, restrictions of your duties, or termination of your employment; and
(d)if, as a result of your non-compliance, the Company or a Group Company incurs losses (including but not limited to complaints, litigation and legal expenses), and such non-compliance would constitute fraud or gross misconduct, you may be liable to the Company or the Group Company to the extent that your non‑compliance has contributed to such loss.
7Total Reward
7.1Total Reward
You will be eligible to receive an annual Total Reward comprising of the following components:
(a)Base Salary;
(b)Superannuation;
(c)Commission payments (if any); and
(d)Incentive payments (if any).
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7.3Base Salary and commission payments
Your Base Salary is AUD45,871.56 per annum.
Subject to the terms of this letter, your Base Salary is intended to compensate you in respect of any benefits that you are entitled to receive pursuant to any industrial instruments that may apply to you (including but not limited to annual leave loading).
In addition to your Base Salary, you will also be entitled to participate in the Morgan Stanley Smith Barney Commission System, details of which will be provided to you separately. The Morgan Stanley Smith Barney Commission System may be amended from time to time and does not form part of your employment contract.
You will also be subject to the Financial Advisor Error and Loss Policy that applies to you as amended from time to time. To the extent that there is any inconsistency between the Financial Advisor Error and Loss Policy and Morgan Stanley Smith Barney Commission System, the Financial Advisor Error and Loss Policy will prevail.
Regardless of anything set out in the Morgan Stanley Smith Barney Commission System, you will receive your Base Salary for the duration of your employment.
The Company will pay your Base Salary on a monthly basis by electronic transfer to your nominated bank account. The Company will pay commission payments (if any) to you one month in arrears by electronic transfer to your nominated bank account
8Incentive arrangements
8.1Long term incentive award
(a)In addition to your Total Reward, the Company will offer you a Long-Term Incentive Award in the form of a cash payment (the Award) calculated as 50% of the production generated by you during the best 12 months in the 5th to 22nd months of your continuous service with the Company. Payment of the Award will be conditional upon a minimum production equivalent to the amount of 70% of your previous 12 months production ending 30 June 2010 (i.e. a minimum production of AUD1,171,969.84) being generated by you within the 5th to 22nd months of your service with the Company. If you do not achieve this minimum production hurdle, you will not be eligible for any Award payment.
(b)The Company will make the cash payment to you (less applicable tax) in the pay period following the 22nd month of your continuous service with the Company.
(c)If at any time in the 5 years from the date of the payment of the Award:
(1)you terminate your employment for any reason or you provide the Company with notice that your employment will terminate; or
(2)the Company terminates your employment or provides you with notice that your employment is to terminate for any of the following reasons:
•you engage in misconduct or dishonesty or have acted in a way which in the opinion of the Company may adversely or be likely to adversely impact the business or reputation of the Company;
•you have committed a material breach of the terms and conditions of your employment;
•you have been convicted of a serious criminal offence;
•you no longer retain the necessary licence or authorisation required for you to perform your duties; or
•you have been negligent in the performance of your duties,
you will be required to immediately repay the Company the Award in accordance with the following scales.
(1)within one year of the payment - 100% of the Award;
(2)within two years of the payment- 80% of the Award;
(3)within three years of the payment - 60% of the Award;
(4)within four years of the payment- 40% of the Award;
(5)within five years of the payment- 20% of the Award.
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10.Compliance issues
Notwithstanding any provision of this letter, the Company reserves the right to modify any aspect of this agreement if the Company reasonably determines that such a modification is necessary to comply with any legal, regulatory and/or compliance standards, rules or regulations. This will be done with a view towards minimising, to the extent reasonably possible, negative economic consequences to you.
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13Ending your employment
13.1Ending your employment with notice
You or the Company may end your employment at any time by giving one month's written notice.
If you are over 45 years old and have completed more than 2 years' continuous service, the Company will provide you with an additional one week of notice if it ends your employment.
13.2Change to title
If your title changes as a result of the review referred to in clause 1.1, the Company may (by agreement with you) increase the notice period that you and the Company are required to give in order to end your employment and/or change the restrictions which apply to you after your employment ends. Depending on the change to your title (if any), the notice period may increase to a maximum of 90 days.
13.3Deduction of amounts owed
To the extent permitted by law, any outstanding advances or other payments due to the Company by you will be deducted before payment of any amounts under this clause 13 are made to you.
If the amounts owed by you to the Company on the day your employment ends exceed amounts payable to you under this clause 13, you agree to repay such amounts to the Company within 14 days of the day on which your employment ends.
13.4Payment in lieu of notice period
The Company may:
(a)pay you in lieu of your notice period; or
(b)require you to work for all or any part of your notice period and pay you in lieu of any balance of the period.
If your employment ends, the Company will calculate any payments in lieu of notice based on the average actual Base Remuneration and commission you received during the three complete months immediately before the termination of your employment.
13.5Duties during notice period
If you or the Company gives notice ending your employment, the Company may direct you at any time during the notice period:
(a)not to attend work; or
(b)not to perform all or part of your duties or perform alternative duties.
13.6Ending your employment without notice
The Company may end your employment at any time without notice if you:
(a)engage in serious or wilful misconduct;
(b)are seriously negligent in the performance of your duties;
(c)commit a serious or persistent breach of your contract of employment;
(d)commit an act, whether at work or otherwise, which brings the Company into disrepute;
(e)are convicted of an offence punishable by imprisonment; or
(f)have failed to disclose to the Company any of the obligations you may have to your current employer or a previous employer which may in any way interfere or conflict with your duties and responsibilities to the Company
13.7Return of property
Before your employment ends, or as soon as practicable after it ends, you must return all property belonging to the Company or any Group Company that is in your possession or under your control.
...
17Restrictions during your employment
During your employment you must not be engaged, concerned or interested in any other business without the Company's prior written consent.
You must comply with the trading policy that applies to you as amended from time to time.
...
22General
This agreement is governed by the law in force in Western Australia.
This agreement states all the express terms of the agreement between the parties in respect of your employment. It supersedes all prior discussions, negotiations, understandings and agreements between you and the Company.
...
By accepting this offer of employment, you warrant that, except as disclosed in writing to the Company, you are not under any obligation to any person or restriction which would in any way interfere or conflict with your obligations and duties under this agreement.
Please sign and date this letter to indicate your agreement where indicated. Retain one copy for yourself and return the other to [Human Resources].
Extracts from Settlement Deed
RECITALS
AThe Employee commenced employment with the Employer in Australia on 4 October 2010 pursuant to a contract of employment dated 5 August 2010 (the 'Contract') and is currently employed as a Financial Advisor.
BThe Employee's employment with the Employer will terminate on 12 February 2013.
CThe parties have agreed the following terms in respect of the termination of the Employee's employment.
...
3.Payment
The Employee will pay the Employer the sum of AUD 300,000 (the 'Payment'). The Payment shall be paid as follows:
•AUD 100,000 lump sum payment to be paid on or prior to 31 August 2013; and
•the remaining $200,000 to be paid in twelve equal consecutive monthly instalments of AUD 16,666.66. Instalments shall be paid on the 1st day of each month commencing 1 July 2013.
Payment shall be made to:
Account Name: Morgan Stanley Wealth Management
BSB Number: [...]
Account Number: [...]
Conditional upon the Employee (i) signing this Deed; and (ii) complying with his obligations under it (including but not limited to the confidentiality obligation in section 6.3(a)), the Employer agrees to accept the Payment in full and final settlement of any right it may have (whether under the Contract or otherwise) to repayment of the Retention Payment and Long Term Incentive Award.
Employee acknowledges and agrees that if he breaches his obligations under this Deed (including but not limited to his obligations under section 6.3(a)), his employment shall be treated as having terminated by reason of resignation and he shall be required to repay the Retention Payment and Long Term Incentive Award on the terms of sections 3.2(b) and 8.1(c) of the Contract.
By signing this Deed the Employee acknowledges that the consideration provided under it exceeds the Employer's legal obligations. The Employee further acknowledges that the Employer owes the Employee no wages, commission, bonuses, sick pay, personal leave pay, severance pay, vacation pay, or other compensation or payments or form of remuneration of any kind or nature, other than the amounts provided for in this Deed.
...
5.Employee's covenants
...
5.4Employee agrees and undertakes to co-operate fully with the Employer on the transfer of the following client accounts (together the 'Franchise Clients') to a Financial Advisor or Advisors
[identified clients]
5.5Employee further agrees and undertakes that he will not, for a period of six months from the Termination Date, directly or indirectly:
(i)solicit or entice away, or attempt to solicit or entice away any Franchise Client; or
(ii)have business dealings with any Franchise Client.
Nothing in this clause 5.5 shall prevent the Employee from seeking or doing business with a Franchise Client that is not in direct or indirect competition with the business carried on by the Employer.
5.6The obligations in clause 5.5 above shall apply in place of the Non‑solicitation of Franchise Clients obligations in clause 18 of the Contract.
...
9.Bar to proceedings
The parties agree that this Deed may be pleaded by the Company and any other Group Company, together with its or their respective current or former officers, employees or agents as a bar to any actions, suits, claims, demands or legal proceedings instituted by the Employee in respect of any matter arising out of or in connection with the subject matter of this Deed.
Extracts from Compliance Manual
1.2Purpose
This Manual contains policies and procedures designed to maintain compliance with applicable securities laws and regulations, including the rules of the Australian Stock Exchange (the 'ASX') and the Australian Securities and Investments Commission ('ASIC'). In certain cases, the Firm has implemented policies and procedures that exceed minimum legal or regulatory requirements in order to apply what it believes are best practices.
Our clients and counterparties expect the highest degree of ethics, honesty and fairness in all of the Firm's dealings. You represent the Firm and reflect the Firm's reputation; therefore, you must not only adhere to applicable laws and principles of good business practice, but also exercise good judgment, and conduct your business affairs on the highest moral and ethical level. Following the Firm's policies and procedures will help to advance and protect the long-term interests of the Firm and its clients.
1.3Questions and Exceptions
You are encouraged to discuss any questions or concerns about the Firm's policies and procedures or a particular course of action with your Branch Manager or other supervisor. If your Branch Manager (or other supervisor) is unavailable for any reason, you may seek guidance or any necessary approvals from the Legal and Compliance Department (LCD). Please refer to the list of LCD contacts for contact information.
Unless otherwise indicated, any exceptions to the policies and procedures contained in this Manual must be approved in writing by your Branch Manager or other supervisor. The FA should provide all pertinent information and documentation, if any, and be prepared to discuss with the Branch Manager the reason behind the request.
If the exception requires the approval of the Compliance Department, the Branch Manager will then escalate the request.
1.4Other Applicable Policies, Procedures and Laws
1.4.1General Applicability
No single manual can cover every eventuality or situation. This manual addresses certain activities of MSSB employees and, as such, must be viewed in conjunction with other Firm policies and procedures such as the Morgan Stanley Smith Barney Code of Conduct. If you have questions regarding the interpretation of applicable laws, you should contact your Branch Manager and/or the Legal and Compliance Department.
As a general matter, when there is a conflict between this manual and other Firm policies and procedures or between the requirements of jurisdictions in which you conduct business, the more restrictive policy, procedure or requirement will prevail.
This manual contains links to various sites on the Firm's intranet. The information accessed via these links form part of this manual.
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1.5Violations
Compliance with the policies and procedures set forth in this manual is a condition of your employment with the Firm. Failure to adhere to the policies and procedures contained in this manual may result in disciplinary action by the Firm, including the possibility of termination of employment. Violation of certain policies or procedures also may subject you to regulatory sanction, criminal prosecution, and/or penalties imposed by the regulatory authorities in Australia. Penalties may include monetary fines, temporary or permanent restrictions on your ability to engage in the securities business, sanctions and/or imprisonment. Violations may also subject you to civil lawsuits and money damages. The Firm reserves the right to hold any employee personally liable for any loss or costs resulting from his or her failure to comply with the Firm's policies and procedures or applicable requirements of the Firm's regulators. The Firm may also report actual or potential violations of certain policies and procedures to the appropriate regulatory authorities.
...
8.12.3.1Manipulative Trades
Certain transactions are considered to be manipulative, regardless of intent, and are therefore prohibited.
You are prohibited from engaging in or facilitating any of the following activities:
a) Trading to Induce Others to Trade: Transacting (alone or with or through others) any purchase or sale transaction or series of transactions in a security solely for the purpose of inducing purchases or sales of that security by others.
b) Creating False or Misleading Market Appearance: Engaging (alone or with or through others) in any transaction solely for the purpose of creating (i) a false or misleading appearance of supply or demand in a security, (ii) an artificial price or price trend, or (iii) a false or misleading appearance of trading volume, market depth or liquidity.
c) Wash Sales: Trades, considered together, resulting in no change in the beneficial ownership of a security or that 'cancel each other out' and are entered into for the purpose of creating a false or misleading appearance of active trading.
d) Matched Orders: Entering one or more buy (sell) orders with knowledge that one or more sell (buy) orders for the same security in substantially the same size and at substantially the same price have been (or will be) entered at substantially the same time by or for the same or different parties for the purpose of creating a false or misleading appearance of active trading.
e) Prearranged Trades: Trades involving an offer to sell (buy) a security coupled with an offer to buy (sell) back that security at the same or better price without any bona fide trading purpose.
f) Market‑at‑Close Transactions: Trades entered on a frequent or regular basis at or near the close of trading for the purpose of improperly impacting the closing price of a security.
g) Circular Transactions: Pre‑arranged transactions among a series of participants in which the initial seller (buyer) of the security also is the ultimate buyer (seller) so as to create a false or misleading impression of active trading.
h) Parking: Engaging in a transaction for or with, or purchasing or holding securities in, any account to disguise the beneficial or ultimate ownership of the securities.
i) Painting the Tape: Reporting fictitious trades in order to inflate the apparent trading volume of a security or mislead as to price.
j) Manipulative Operations: Directly or indirectly participating in, or having any interest in, the profit of a manipulative operation or knowingly manage or finance a manipulative operation.
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8.12.6Cross Transactions With 'No Change of Beneficial Ownership'
Firm policy prohibits FAs from facilitating an on‑market cross‑trade if there is no change in beneficial ownership of the securities being traded. No change [in] beneficial ownership means that the person has an interest in the securities before and after the transaction. The size of the interest is irrelevant. Although the legal owner may change, it is the beneficial owner that is relevant. A client therefore may not engage in an on‑market cross‑trade with certain closely related parties/accounts including:
•spouses;
•dependent children;
•family company or family trust;
•personal superfund, or
•any other account that the client controls; or
•any other account in which the client has a beneficial interest.
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8.14Balance Sheet Trading
Clients must settle all trades by the due date. Clients who repeatedly settle their obligations by selling the same or other securities may be 'balance sheet trading'. Buying and selling but with no cash deposited or other securities sold on the same day as the purchase is not permitted.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
MV
ASSOCIATE TO THE HONOURABLE CHIEF JUSTICE MARTIN18 MAY 2018
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