Nguyen and Australian Securities and Investments Commission
[2012] AATA 156
•14 March 2012
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2012] AATA 156
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2011/1165
GENERAL ADMINISTRATIVE DIVISION ) Re DON NGUYEN Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Ms G Ettinger, Senior Member Date14 March 2012
PlaceSydney
Decision The Tribunal affirms the decision under review, and decides that the period of the banning order of seven years commences from 10 March 2011, the date on which Mr Don Nguyen was given ASIC’s decision.
.......................[sgd].......................
Ms G Ettinger
Senior Member
CATCHWORDS
CORPORATIONS – financial services provider – breach of various sections of the Corporations Act 2001 – instructions inaccurately recorded - advice to clients inappropriate - documents not provided to clients - decision under review varied - disqualification for six years affirmed from date of service of ASIC’s decision.
Corporations Act 2001 (Cth) ss 920A(1)(e), 920A(1)(f), 920B, 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F, 1041H.
ASIC Regulatory Guide 98 Licensing: Administrative action against financial services providers
ASIC Regulatory Guide 175 Licensing: Financial product advisers – Conduct and disclosure
Parkdale Custom Built Furniture Proprietary Limited v Puxu Proprietary Limited (1982) 149 CLR 191
Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Limited (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80
Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602
Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
REASONS FOR DECISION
14 March 2012 Ms G Ettinger, Senior Member SUMMARY
1. Mr Don Nguyen commenced employment with the Commonwealth Bank of Australia (Commonwealth Bank) in 1999, and was promoted to Financial Planner in Commonwealth Financial Planning (CFP), in 2003. There were checks of Mr Nguyen’s work carried out by the Commonwealth Bank over the years, in which various problems with his work emerged. They were addressed in part by the Commonwealth Bank, although Mr Nguyen’s view is he should have been further alerted, and should have been given more education in those matters.
2. Following complaints from clients of CFP, the Australian Securities and Investments Commission (ASIC) investigated, and then on 3 March 2011, made a decision that Mr Nguyen had not complied with a financial services law pursuant to section 920A(1)(e) of the Corporations Act 2001 (the Act), and that it had reason to believe Mr Nguyen would not comply with a financial services law (section 920A(1)(f)). ASIC also held that Mr Nguyen had not complied with the requirements of sections 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F and 1041H of the Act. On 3 March 2011, ASIC issued a banning order prohibiting Mr Nguyen from providing any financial services for a period of seven years.
3. Mr Nguyen, who resigned his position on 6 July 2009, and thus ceased to be an authorised representative of CFP, and holder of an Australian Financial Services Licence, appealed to this Tribunal against the decision of ASIC.
4. I heard Mr Nguyen’s evidence, and that of the witnesses, and considered the submissions before me. In coming to a decision, I was then required to take into account the protection of the public, deterrence, maintenance of public confidence in the profession, and other relevant considerations. I am satisfied that the correct or preferable decision is to affirm the decision of ASIC in making a banning order prohibiting Mr Nguyen from providing any financial services for a seven year period. I direct that the banning order for the period of seven years can be held to have commenced from the date of service of ASIC’s decision on 10 March 2011. My reasons follow.
LEGISLATIVE ENVIRONMENT
5. The relevant legislation is the Corporations Act 2001, (the Act).
6. The relevant Regulatory Guides are ASIC Regulatory Guide 98 Licensing: Administrative action against financial services providers, and ASIC Regulatory Guide 175: Licencing: Financial product advisors – Conduct and disclosure.
7. Sections 920A and 920B of the Act are sources of power for ASIC, and the Tribunal standing in its shoes, to ban a person from holding a financial services provider’s licence. The relevant sections of the legislation, being sections 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F and 1041H of the Act, are provided as an appendix to this decision.
ISSUES BEFORE THE TRIBUNAL
8. The issues are whether the Tribunal is satisfied:
(a)Mr Nguyen engaged in conduct during the relevant times between 2006 and 2008 which indicated he had not complied with the requirements of sections 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F and 1041H of the Act;
(b)it has reason to believe that Mr Nguyen would not comply with a financial services law (section 920A(1)(f));
(c)a banning order is the correct or preferable decision for this Tribunal to make; and if so, what the period of the banning order should be.
9. The Delegate made the Order under sections 920A and 920B of the Act which confers power to make a banning order. The Delegate relied upon:
(a)section 920A(1)(e): Mr Nguyen had not complied with a financial services law; and
(b)section 920A(1)(f): ASIC had reason to believe that Mr Nguyen would not comply with a financial services law.
10. The jurisdiction to make a banning order in enlivened if either of the requirements of sections 920A(1)(e) or 920A(1)(f) are satisfied.
11. In so far as section 920A(1)(f) is concerned, it is not necessary that either ASIC, or therefore the Tribunal, be satisfied that the person will, in the future, breach a financial services law. For the purposes of section 920A(1)(f) of the Act, it is sufficient that the relevant decision maker have reason to believe that he will do so.
BACKGROUND & MR NGUYEN’S EVIDENCE
12. Mr Nguyen told me that he worked for CFP for approximately nine and a half years, during which time he had not received any complaints from his clients. He told me that he was responsible for 1,300 clients, that he worked long hours, and that he was very diligent.
13. Mr Nguyen called Ms M Jiang of CFP to give evidence of a number of matters, including her thoughts about whether he had failed to comply with any financial services law (which is of course a matter not for the witness, but for this Tribunal). Ms Jiang who has a degree in Commerce, and a Diploma of Financial Services, and has almost completed studies to become a Certified Practising Accountant (CPA), clearly was not able to comment on the law. Further, she was not able to be of much assistance to me in regard to the decision I have to make in this matter, because she had only worked with Mr Nguyen for approximately two weeks. She also stated that she did not sit in with him at all times when he interviewed clients; she said that it was for about 10% of the time.
14. Mr Nguyen attributed the complaints which led to the banning order as being the result of the Global Financial Crisis (GFC) and the downturn in the share market. Mr Nguyen also insisted that he did not have adequate supervision or training provided by the Commonwealth Bank or CFP in order to do his job properly.
15. In a document Mr Nguyen provided which was a combination of a written statement and a submission, (Exhibit A5), Mr Nguyen indicated that he did not accept responsibility for his actions, which caused various clients to lose substantial sums of money. He submitted that he had received no additional financial reward for the various investments into which he directed their money. In support of his argument, he tendered a copy of the adviser fee schedule, (Exhibit A2), a PAYG payment summary for the year ending 30 June 2008, (Exhibit A3), and his employment separation certificate (Exhibit A4).
16. However, when he gave his oral evidence at the hearing, Mr Nguyen expressed deep regret in relation to the clients who had lost money, and acknowledged he had some shortcomings. He did not acknowledge that he could have failed to comply with any financial services legislation.
17. In cross-examination, Mr Nguyen was unable to answer certain questions, and said that all the matters before the Tribunal occurred some seven years previously, and that he did not have a good recollection of them.
18. Mr Nguyen told me that during November 2008 he was suspended for a month by CFP while allegations of improper fees were investigated, but that he was cleared, promoted to Senior Financial Planner, and provided with a second assistant. He said that he was concerned about the security of files at CFP because files were more accessible to staff than he felt was necessary. He also attempted to elicit that evidence from Ms Jiang. However, as the issue of whether files went missing did not form part of the matter before me, Mr Nguyen’s concerns about the files had little relevance to the decision I must make.
19. Mr Nguyen told me that he has been ill and unable to work since he left CFP in 2009. Mr Nguyen also said that he has suffered because he had been vilified by media reports about him.
20. The Supplementary T-Documents record that there were 25 of Mr Nguyen’s clients who made complaints about the services he provided to them as a representative of CFP between 2006 and 2008. Mr Lo Surdo SC, counsel for ASIC, referred to several of those when questioning Mr Nguyen. However, ASIC had selected Mrs N Kulakowski, and her company Carinia Pty Ltd, and Mr R and Mrs J Gescheit, and their company Acomos Pty Ltd, for closer scrutiny. On investigation of their complaints, ASIC held that Mr Nguyen had, in his dealings with them, failed to comply with various sections of the Act (section 920A(1)(e) of the Act), and had reason to believe that he would not comply with a financial services law (section 920A(1)(f)) .
21. Mr Lo Surdo submitted that the Tribunal should affirm the decision of ASIC. He noted that in considering the length of a banning order, argument was sometimes put regarding loss of income to the person concerned, but submitted that this was not a consideration in Mr Nguyen’s case, because he had not been working since 2009.
22. I am mindful that ASIC’s, and therefore the Tribunal’s, power to make a banning order against a person if the person has not complied with a financial services law is provided for in sections 920A(1) and 920B of the Act.
23. I note for the sake of completeness that Mr Nguyen chose to appear unrepresented at the AAT hearing, which he was entitled to do.
24. I moved then to consider the issues before the Tribunal.
Whether Mr NGuyen Engaged in Conduct Between 2006 and 2008 Indicating He had Not Complied with Various Sections of the Act
25. My task is to consider from the evidence, submissions, the legislation and Regulatory Guide 98, whether during the relevant times between 2006 and 2008 Mr Nguyen engaged in conduct, in particular in relation to Mrs Kulakowski & Carinia, and Mr and Mrs Gescheit, & Acomos, which demonstrated that he had failed to comply with sections 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F and 1041H of the Act.
Did Mr Nguyen comply with sections 945A and 945B of the Act in his dealings with Mrs Kulakowski & Carinia Pty Ltd, and Mr and Mrs Gescheit & Acomos Pty Ltd between 2006 & 2008?
Background
26. Sections 945A and 945B of the Act are related in that pursuant to section 945A of the Act, Mr Nguyen had a duty to formulate and provide advice to his retail clients such as Mrs Kulakowski & Carinia, and Mr and Mrs Gescheit & Acomos, which was appropriate to their circumstances by determining their relevant personal circumstances, objectives, and needs. In so doing, the Act requires that Mr Nguyen make reasonable inquiries. Mr Nguyen was then obliged to ensure that his advice was appropriate to Mrs Kulakowski, Mr and Mrs Gescheit, and the other clients’ circumstances.
27. I am mindful that ASIC Regulatory Guide 175 provides (at paragraph RG 175.117) that: To comply with the Corporations Act, personal advice does not need to be ideal, perfect or best, but must satisfy each of the three elements set out in RG 175.113 (which mirrors the requirements of section 945A(1) of the Act). I am mindful of the Respondent’s submissions that comparisons may be drawn with the common law test applicable to the provision of advice by, or opinions of professional advisers — they do not warrant the correctness of the opinion, only that they have exercised a reasonable degree of care and skill in giving the advice.
28. Mr Nguyen was at pains to emphasise that neither of the clients, Mrs Kulakowski nor the Gescheits, wanted to disclose all their information to him, and that he annotated the ‘Confidential Fact Finder and Financial Needs Analysis’ (FNA) accordingly in each case. However, he had no actual recall of asking either client all the questions in the FNA, although he stated it was his practice to do so. He submitted that he had 1,300 clients, so could not be expected to remember each occasion when he communicated with them.
29. The proviso in section 945B of the Act is that advice given in circumstances where the advice is based on incomplete information in regard to the client’s objectives, financial situation and needs, a warning must be given to the clients. The evidence indicates no warning that Mr Nguyen was acting on incomplete advice was given to either Mrs Kulakowski or the Gescheits, and Mr Nguyen has maintained that he had sufficient information elicited from those clients in order to give them the appropriate advice.
30. Mr Nguyen also continued to blame the GFC, and to maintain that Mrs Kulakowski was very experienced as an investor, and that she had Mr Barlow as her advisor. Mr Nguyen also said that he relied on the fact he was only dealing with a part of Mrs Kulakowski’s wealth, that is, he was dealing with $1,000,000 of her $10,000,000 portfolio.
31. Mr Nguyen also emphasised it was his understanding that Mr and Mrs Gescheit were experienced in property investment. He said that he knew they bought and sold real estate, and that the money available to him to invest for them was also only a part of their total portfolio. He appears to have relied on those assumptions.
32. In the paragraphs below I have considered the evidence in the application of sections 945A and 945B of the Act.
Mr Nguyen’s Handling of Mrs Kulakowski’s & Carinia’s Investments
Background
33. Mrs Kulakowski, who is now aged 92, was unable to attend the hearing due to ill health. However, she had filed a statement in 2010, which was before me in the T-Documents. Her interests were represented at the hearing by Mr C Barlow, aged 92, who had also filed a statement. Mr Barlow described himself as a friend and informal financial advisor to Mrs Kulakowski. He had been General Manager of Carinia Pty Ltd (Carinia), a record company owned by Mr and Mrs Kulakowski. Mrs Kulakowski stated that after her husband’s death in 1978, she closed the record business in 1988, but kept the company on as an investment vehicle. She also stated that she began buying and selling blue chip shares in 1959, and investing in term deposits, because in those my funds were secure.
34. Mrs Kulakowski stated further that: My two financial objectives were the preservation of my capital and obtaining income. In her statement she corroborated Mr Barlow’s evidence that he had been assisting her with her financial arrangements following the death of her husband in 1978. Mr Barlow, who is a qualified accountant, added that the arrangement to assist and advise Mrs Kulakowski became semi-formal in approximately 1988.
35. Mr Barlow corroborated Mrs Kulakowski’s evidence that her aim was to invest knowing that her funds were secure, and so that she could obtain a cash flow for her living expenses, and to give money to charities, and to her family.
36. Mrs Kulakowski’s evidence was that she trusted the Commonwealth Bank at Chatswood, where she had been banking since 1954. She stated that previously she had handled all her own investments, but that in 2002, aged 83, she decided to invest using the Commonwealth Bank’s services. During that year, she banked $500,000 in her own name, and $583,063.97 in the name of Carinia into CFS Wholesale Income, using the services of a Commonwealth Bank employee. That investment attracted a five or six percent return. I am satisfied from the documentation that that fund invested in low risk, low volatility assets to provide a consistent monthly income, while minimising the risk of capital loss.
Mr Nguyen’s May 2006 Meeting with Mrs Kulakowski & Mr Barlow
37. In her statement, Mrs Kulakowski indicated that her first contact with Mr Nguyen was in May 2006 when he approached her at the Chatswood branch. She stated that she trusted Mr Nguyen whom she understood was at CFP, because she understood CFP was part of the Commonwealth Bank, which she trusted. She stated that when she and Mr Barlow went to see Mr Nguyen in early May 2006, he recommended an investment which he said would be good for her. She recalls signing two handwritten documents which were authority to switch both her investment, and that of Carinia, into other funds. Mrs Kulakowski states that the only writing on both pages instructing Colonial First State to switch her funds was her signature. She stated that she did not recall receiving any Product Disclosure Statement (PDS) in regard to the two products into which she was switched.
38. The first switch, documented in a page which Mr Nguyen accepts he filled in, and was dated 4 May 2006, involved all moneys to be taken out of Mrs Kulakowski’s existing CFS Wholesale Income Fund to be reinvested as follows: $148,000 into CFS Colliers International Property, and the balance into First Choice Wholesale Property Securities.
39. The second switch, also on 4 May 2006, and similarly documented, ordered that all moneys out of the existing CFS Wholesale Income Fund be reinvested as follows: $300,000 into CFS Wholesale Colliers International Property and the balance into First Choice Wholesale Property Securities. Both these securities are property securities, and were higher risk and more volatile than fixed interest assets. I am mindful of the evidence before me which indicates Mr Nguyen did not warn Mrs Kulakowski of the additional risks in the switched investments. This was confirmed by Mr Barlow in his oral evidence.
40. I accept from Mrs Kulakowski and Mr Nguyen’s evidence that none of the writing on those switch documents was hers apart from her signature. Mr Nguyen’s evidence was that he wrote the switch documents out for Mrs Kulakowski to assist her. He said that he could not recall if he had completed a FNA before switching Mrs Kulakowski’s funds. He said that sometimes clients just came in and requested certain transactions, and as an astute investor, she may have done that. He said that unless that was the case, he always completed a FNA followed by a Statement of Advice (SOA). He said that he could not recall Mrs Kulakowski’s situation exactly. I have noted that there is no FNA or SOA in connection with the 2006 transactions before the Tribunal. I am satisfied it is more likely than not, that none was prepared.
41. Mr Barlow indicated in his statement that Mr Nguyen told Mrs Kulakowski that she should invest in listed property trusts, half in Australian and half in overseas trusts, and told her: This would be a wonderful investment which would return about 12%. Mr Barlow stated that Mr Nguyen did not ask Mrs Kulakowski questions about her financial position, and he assumed Mr Nguyen could access that information through the Bank. He also said that Mrs Kulakowski would have accepted the advice about the switch because she had been offered a better return on her money. He emphasised however, that her aims were still that she wanted the income, and also security of her capital.
42. Mr Nguyen’s evidence was that Mrs Kulakowski’s present insistence that she only wanted investments which produced income and were low risk, that is, that she was a conservative investor, were incorrect. He told me that he understood her to be a self-made millionaire with a high level of business acumen, and that she was being assisted by Mr Barlow. The Applicant said that he based that opinion on his knowledge that the $1,000,000 Mrs Kulakowski invested with CFP was only a portion of her total portfolio, which included commercial and other properties, and which, he estimated, in 2006, was worth up to $10,000,000.
43. The Applicant said that when he met Mrs Kulakowski, both she and Carinia were paying the highest marginal tax rate, and that he felt he could assist her to do better. He said that he was aware Mrs Kulakowski had more cash than she required for her daily needs, and that she had excess capacity which she could invest to lower her tax rate.
44. Mr Nguyen said that Mrs Kulakowski did not want to disclose all her financial situation to him, but that he had obtained sufficient information from her to give her reasonable advice. Mrs Kulakowski’s evidence was that she did not refuse to answer questions Mr Nguyen asked her about her financial situation. Mr Nguyen’s evidence was that although he had no recall of the individual situations such as Mrs Kulakowski’s, he asked all his clients all the questions on the forms he filled in as part of his position, and completed the forms with the replies he received.
45. I have not been provided with any evidence which would satisfy me that Mrs Kulakowski or Mr Barlow were anything but witnesses of truth. From the evidence before me, it is more likely that Mr Nguyen failed to ask all the clients each question as he asserted. That is demonstrated in his documentation in regard to later documents related to Mrs Kulakowski, Mr and Mrs Gescheit and other clients who made complaints.
46. In coming to a decision regarding Mr Nguyen’s advice to Mrs Kulakowski in 2006, I am mindful there is no FNA or SOA before me in that regard. Pursuant to section 945A of the Act, Mr Nguyen had a duty to formulate and provide advice to his retail clients such as Mrs Kulakowski and Carinia, which was appropriate to their circumstances by determining their relevant personal circumstances, objectives, and needs. In so doing, the Act requires that Mr Nguyen make reasonable inquiries. Mr Nguyen was then obliged to ensure that his advice was appropriate to Mrs Kulakowski and Carinia. I am satisfied from the evidence that Mr Nguyen did not adequately formulate the advice to Mrs Kulakowski which was appropriate to her circumstances. There is no evidence before me that he had adequately determined her relevant personal circumstances, objectives, and needs. He appears to have assumed that because Mrs Kulakowski’s assets were approximately $10,000,000, he could deal with the $1,000,000 with which he was concerned, in a cavalier way. The evidence indicates Mr Nguyen made assumptions about Mrs Kulakowski’s requirements for cash, did not take her advanced age into account, and did not make reasonable inquiries in order to ascertain her actual personal circumstances, objectives, and needs before recommending the switches to which Mrs Kulakowski agreed by signing the relevant handwritten documents. He has accordingly not complied with section 945A of the Act.
47. In considering Mr Nguyen’s actions in relation to section 945B of the Act, I note he was satisfied that notwithstanding his understanding that Mrs Kulakowski did not want to disclose all her financial situation to him, he had obtained sufficient information from her to give her reasonable advice. There is no evidence before me which would satisfy me that Mr Nguyen had sufficient information in order to advise Mrs Kulakowski as he did. He gave her no warning as he would be required to do when giving advice on incomplete information of her financial circumstances. In that regard he has therefore not complied with section 945B of the Act.
2008 Dealings with Mrs Kulakowski & Mr Barlow
48. The first FNA which Mr Nguyen appears to have prepared for Mrs Kulakowski was dated 12 March 2008. Mrs Kulakowski agreed that her signature appears on page 29 of the document, but both she and Mr Barlow, whose evidence corroborated hers throughout, stated that they did not have a meeting with Mr Nguyen on or about that date. Mrs Kulakowski stated that the only part of the document which is in her handwriting is the signature. She did not recall being asked many of the questions which Mr Nguyen has annotated with replies, neither that she refused to give answers to many of the questions which Mr Nguyen has indicated she refused to answer. Mrs Kulakowski and Mr Barlow said that neither had received a copy of the FNA dated 12 March 2008, and both disagreed strongly with Mr Nguyen’s record of Mrs Kulakowski’s profile as recorded in the document.
49. I noted that Mrs Kulakowski’s profile as recorded by Mr Nguyen in the 2008 FNA indicated amongst other things that:
(a)Generation of more income was not important for her;
(b)Security of capital was not important;
(c)Investing in tax advantaged investments was very important;
(d)Her time line for investments was seven years; access to funds five years plus;
(e)She was prepared to take on higher volatility for the opportunity of greater returns; and
(f)She was prepared to achieve steady capital growth with less emphasis on income.
50. Mr Nguyen stated amongst other things that:
(a)He correctly recorded what Mrs Kulakowski described as her risk profile; she was not conservative and wanted income as well as growth in her assets;
(b)Clients at CFP did not review their FNAs, which were completed by their advisors with replies to questions asked of them;
(c)Clients signed once they had confirmed their replies had been noted, and could in any case read across the table as the advisor wrote the answers if they wished;
(d)Mrs Kulakowski did not want to provide her full financial information as she was only investing approximately $1,000,000 of her $10,000,000 through CFP; the FNA was annotated accordingly; and
(e)In reply to Mrs Kulakowski saying that tax was not her primary concern, Mr Nguyen disagreed saying that paying excessive tax was a problem for Mrs Kulakowski.
51. Mrs Kulakowski and Mr Barlow stated that they disagreed with the above noted statements. I have not reproduced all the concerns about the FNA expressed in Mrs Kulakowski’s statement. However, there appear to have been serious misstatements of what Mrs Kulakowski intended, and what her profile was in 2008. She stated that she did not recall Mr Nguyen asking her whether generating more income was important to her, but that it was because she was retired and used the income from investments for her living expenses. She said that she always considered security of capital as paramount. I noted that was self-evident from the low risk investments Mrs Kulakowski had made before meeting Mr Nguyen. She said Mr Nguyen got it wrong in emphasising taxation was a primary issue for her, and, given her age, in using a timeline of five or seven years for her investments. Mrs Kulakowski said that she was prepared to invest in shares, but only in blue chip Australian companies.
Mrs Kulakowski’s Statement of Advice
52. The records indicate that Mrs Kulakowski and Mr Barlow met with Mr Nguyen in June 2008. She stated that by then her investments had declined in value, but that she was prepared to accept Mr Nguyen’s advice. She stated that she has since been shown a 47 page document comprising the SOA dated 3 May 2008, with her signature appearing on page 32.
53. Mrs Kulakowski stated that:
(a)She did not recall receiving a copy of the SOA;
(b)The SOA does not address her requirements, being to generate more income and preserve the security of capital;
(c)She does not agree with what Mr Nguyen has written in the document regarding long term investment (irrelevant at her age), and a tax effective environment;
(d)She stated that the options for investment noted on page 20 which included investing in existing investment funds, term deposits, or managed funds were not discussed with her;
(e)She stated that in relation to the ongoing service offer; she did not say she was not wanting to take that up, and had in fact come to the Commonwealth Bank for advice;
(f)She stated in regard to page 22, that Mr Nguyen did not tell her $30,421, or 3.30% of her investment of $921,855 would be paid to CFP, and that Mr Nguyen would be paid $16,732 commission for changing her investment to ING;
(g)She was not given PDSs or brochures; and,
(h)Her signature appears in relation to two documents being two Tax Effective Investment Bonds; she says that she was not shown or given those documents.
54. In summary, Mrs Kulakowski stated that, assisted by Mr Barlow, she wrote a letter of complaint to CBA, because the advice Mr Nguyen gave her was inappropriate, she was not given a SOA, and the commission she paid was totally excessive.
55. In his statement, Mr Barlow corroborated the points Mrs Kulakowski made, adding that Mr Nguyen did not ask her about inflation, although he had noted in the SOA that this was important to her. Mr Barlow emphasised that tax minimisation was not a primary concern for Mrs Kulakowski. He also stated that neither he nor Mrs Kulakowski were given copies of the SOA, FNA or PDS, and that they were not told about the commissions.
56. Mr Nguyen stated, that in regard to the SOA:
(a)It was prepared, not by him, but by CFP staff, and based on the information in the FNA;
(b)The SOA was signed by Mrs Kulakowski, and is therefore a binding contract;
(c)An astute business person like Mrs Kulakowski whose assets amounted to some $10,000,000, and who was assisted by Mr Barlow, would not invest $900,000 without understanding what it was about;
(d)Her assets generated more income than she required; and
(e)She was not a typical retired conservative investor.
57. What Mr Nguyen did in June 2008, presumably based on his assessment of Mrs Kulakowski’s circumstances, objectives, and needs, was to advise investment of $297,358.14 into ING Tax Effective Investment Bonds (ING Bonds), with an asset allocation of ING Australian Shares. They were a high growth asset, and said to suit people focused on maximisation of long term returns who would accept the possibility of greater volatility and short term capital losses.
58. On consideration of Mrs Kulakowski and Mr Barlow’s statements about her requirements, I cannot be satisfied that Mr Nguyen recorded those accurately in the FNA, SOA, or by the advice given to purchase ING Bonds. I am satisfied that Mrs Kulakowski’s advanced age, and wishes not to be concerned with saving for future goals, but rather with the generation of income for her use, for her to provide to charities and her family, and being a conservative investor were not taken into account by Mr Nguyen. Neither, it seems, did Mr Nguyen provide documentation which showed what the commissions to CFP and to himself would entail from the ING investment.
59. I am mindful that pursuant to section 945A of the Act Mr Nguyen had a duty to formulate and provide advice to Mrs Kulakowski and Carinia, which was appropriate to her circumstances by determining her relevant personal circumstances, objectives, and needs. The Act requires that Mr Nguyen make reasonable inquiries in that regard. Mr Nguyen was then obliged to ensure that his advice was appropriate to Mrs Kulakowski’s, circumstances, which I am satisfied he did not, in relation to the ING investment. I am satisfied that he has not complied with section 945A in that he did not provide advice to Mrs Kulakowski and Carinia which was appropriate to her circumstances and objectives, and did not make the relevant inquiries or document them.
60. Mr Nguyen did not warn Mrs Kulakowski pursuant to section 945B of the Act that he was advising on incomplete or inaccurate information; he has not acknowledged to the Tribunal that he did so. He has accordingly failed to comply with the requirements of section 945B in recommending Mrs Kulakowski invest in ING Bonds.
Mr Nguyen’s Handling of Mr & Mrs Gescheit’s & Acomos’ Investments
Background
61. Mr Gescheit gave evidence before the Tribunal and had a statement in the T-Documents dated 8 July 2010. He holds a real estate licence, but said that he has not practised in that field since 1995. He stated that he and his wife bought and sold real estate through their company, Acomos Pty Ltd, which they established in 1987. He stated that they had little or no experience in other investments.
62. Mr Gescheit said that he first met Mr Nguyen in May 2005. When the couple then met with Mr Nguyen in June 2005, Mr Nguyen asked about their objectives. Mr Gescheit said that he indicated as follows:
The main purpose of our investment is to increase our cash flows. We want to generate a better income from our investments. The total return on our investment property over the last few years has been around 13%, so we will want at least to make it worthwhile. This was made up of about 8% capital appreciation and 5% rental return. We would really like a 14% return. We want to minimise the amount of taxation we pay but am not particularly concerned about inflation. The number one priority is to increase our cash flows.
Mr Gescheit’s 2005 Meeting with Mr Nguyen
63. In his statement, Mr Gescheit recounted further a conversation with Mr Nguyen being:
Mr Nguyen: What type of investors do you consider you are?
Mr Gescheit: Very conservative. We have all our investments in real estate which we own. We do not know anything about investing in shares.
Mr Nguyen: What you have done is actually very aggressive because you have all your investments in one basket. If you were a conservative investor you would diversify your investments.
64. Mr Gescheit said that a week after the meeting in June 2005, he received a SOA by mail, which he read only briefly, and then signed when the couple met with Mr Nguyen in late June 2005. Mr Gescheit said that Mr Nguyen told him that the signing was a confirmation of what they had been talking about. He said that a year later, he read the document more closely, and contacted Mr Nguyen, saying that he noticed the document recorded that he did not want to access his funds in the next five years. He says Mr Nguyen explained that the five years referred to the capital, not the return. He also explained that the phrase minimal income, which Mr Gescheit said did not reflect their wishes, was according to the Gescheits’ risk profile.
65. Mr Gescheit also said that in July 2005, he and his wife signed a copy of a document which Mr Nguyen folded over and did not show them, saying that this confirmed their investment. Mr Gescheit stated that he has since seen the whole document which had not been shown to him previously. Mr Gescheit noted that they did not receive a PDS in relation to Colonial First State First Choice managed investments into which Mr Nguyen had invested $350,000 of their money. He also said that he did not ask Mr Nguyen questions about the types of investments as he did not have knowledge of investments and relied upon Mr Nguyen. He added: Neither I nor my wife requested any particular type of asset allocation. I trusted that Nguyen’s advice and recommendations fit with my objectives and circumstances.
66. I am concerned that a person like Mr Gescheit did not read the SOA he received in June 2005 a week or so after the meeting with Mr Nguyen, carefully, until a year or so after he received it. Further, that as noted above when investing $350,000, neither he nor his wife asked about the investment vehicle. That of course does not absolve Mr Nguyen from completing the documents accurately and providing copies to the clients.
Acomos Margin Loan in 2006
67. Mr Gescheit stated that in early 2006 he had a conversation with Mr Nguyen during which Mr Nguyen encouraged him to increase his return by using borrowed funds through an Acomos margin loan. Mr Gescheit said that he was at first not sure he wanted to do that, because he was not interested in debt. Mr Nguyen told him this was good debt, and would make him money. Mr Gescheit said it was not until some months later in October 2006 that the couple decided to have a meeting with Mr Nguyen about it. Mr Gescheit said that Mr Nguyen put it to him that the return from the investment including the loan would more than cover the interest on the loan. Mr Nguyen showed them charts, and was suggesting as follows, he said:
… your equity invested at the moment is $336,000. Add to that, $400,000 from a loan, then you got $736,000, which even if the return is only 5% makes you $36,800 per year. The interest on a loan of $400,000 at 8.1% would be $32,400, which would more than cover the interest …
68. Mr Gescheit stated that during the meeting, Mr Nguyen was asking questions about their financial affairs, and filling in a form. He said that he did not refuse to answer any questions (as is now documented on the FNA) and that both he and his wife signed a page which was blank except for showing that a fee of $300 was due. Mr Gescheit says that he did not receive a copy of the ‘form’. That appears to have been the 2006 FNA.
69. Mr Gescheit said that he has since seen the 2006 FNA in full, and that it does not reflect what the couple wanted:
(a)Mr Gescheit said that the objectives in the FNA show them as considering generation of more income as slightly important whereas in October 2006 this was their first priority;
(b)He said that Mr Nguyen did not ask them about whether security of capital was important to them, and noted that the FNA did not record that security of capital was very important to them;
(c)He also stated that the FNA recorded that they wanted access to their funds in five years' time, whereas their view was that they wanted to have access to their funds within a year;
(d)He also stated that he was recorded as having knowledge of all investment sectors, and understanding factors which may influence performance. Mr Gescheit stated that he strongly disagreed with that statement, and that Mr Nguyen did not ask him about the extent of his knowledge;
(e)He said that the FNA showed them as interested in aggressive growth strategies, whereas this was not their interest at all; this flowed through to questions about achieving high capital growth and minimal income which was not discussed with Mr Nguyen, and which, Mr Gescheit said, he simply recorded erroneously;
(f)Mr Gescheit stated that Mr Nguyen recorded them as being extremely concerned about inflation which did not reflect their views at the time;
(g)Mr Gescheit said that he was recorded as having tax minimisation as a main objective, and that he was prepared to accept capital fluctuation to achieve this; he said that Mr Nguyen did not ask him about that, and, that, that which was recorded, was inaccurate; and
(h)Mr Gescheit also stated that Mr Nguyen recorded they wanted at least 50% of their assets in listed property trusts (LPTs). He says that he did not instruct Mr Nguyen about allocation of investments, and at the time, did not know the meaning of the acronym LPT.
70. The Gescheits stated that on or around 28 November 2006, they met with Mr Nguyen, to tell him they wanted to borrow only $300,000 (in connection with the margin loan). He said that he has now seen a 50 page document which is a SOA for Acomos dated 18 November 2006, which he did not previously see, and which was not provided to them.
71. Once again, in regard to the SOA, Mr Gescheit stated that it did not correctly state their objective of security of capital. Instead, Mr Nguyen had recorded that they wanted to invest in tax advantaged investments, and invest to minimise the impact of inflation which were not their primary objectives, and which Mr Nguyen did not discuss with them in October 2006.
72. Mr Gescheit also complained that contrary to the notation in the SOA, Mr Nguyen did not send them any PDSs, or warn them about gearing risk. Mr Gescheit said that Mr Nguyen did not give him the 2006 SOA, and he did not see it until 2009. Neither did Mr Nguyen tell them, according to Mr Gescheit, that when you borrow to invest, you compound the investment risk of the underlying investment, and that you stand to lose your total investment capital and assets and still have to continue to service the loan. Mr Gescheit says that if they had been told about the risks, they would not have borrowed the money they did. Mr Gescheit states that Mr Nguyen did not give them a copy of the Acomos Margin Loan Agreement although he did tell them that the loan was with Colonial Geared Investments, that the interest rate was fixed at 8.2%, and that the term was three years.
73. Mr Nguyen stated that he did not have precise recall of his conversations with the Gescheits, but that he would have prepared a cash flow chart in regard to the margin loan, that he perhaps did not understand that Mr Gescheit had limited experience in investments, and assumed he had some experience. He also indicated that his staff prepared the SOA from the FNA, the content of which was inaccurate according to what Mr Gescheit has now seen of it, and told me.
74. Mr Nguyen did not accept that what was recorded in the SOA for the Gescheits where they were shown as aggressive investors was inaccurate. He did not agree with Mr Lo Surdo that an aggressive investment approach was inconsistent with obtaining immediate income and cash flow, and expressed the view that it was possible to have income as well as capital growth. Mr Nguyen said that in any case, the Gescheits were not conservative investors; he classed them as aggressive because they bought and sold property, and said that Mr Gescheit had been a developer. Mr Gescheit clarified this by saying he had once developed a property in the 1980s.
75. Mr Nguyen also submitted that even though they now said they did not receive it, the Gescheits had signed for receipt of the PDS and that this was a legally binding document. He submitted that as educated professionals with a large investment portfolio, they would not have signed the application form without receiving a PDS.
Mr Gescheit’s Communication with Mr Nguyen about Losses in 2007/2008
76. Mr Gescheit said that he had been communicating with Mr Nguyen about the (margin loan) investment, and that in approximately July 2007, he had a conversation with Mr Nguyen about the fall in value of the Acomos account. He says that Mr Nguyen told him in reply to his question:
Mr Gescheit: Can we do something about our investment? Why don’t we park the money?
Mr Nguyen: You’re in a good position. Hold on tight or you might miss the swing back up. Don’t worry. Something is happening in China and the market will come good and you need to be in position to take advantage of that.
77. Mr Gescheit says Mr Nguyen later told him again to sit tight.
78. Mr Gescheit says that by mid-December 2007, he was very concerned about his exposure to property, and spoke with Mr Nguyen who told him to sit tight, because he would not be able to achieve the desirable value if he sold. Mr Gescheit complained that at that time, Mr Nguyen did not ask him for his personal details, or to elaborate his concerns, or suggest other options. He said that he emailed and telephoned Mr Nguyen without obtaining satisfactory or timely advice, and that by January 2008 he did not think he could redress the situation because they had sustained large losses on the Acomos account, and had lost most, if not all their equity. He said that Mr Nguyen’s advice was always sit tight.
79. Mr Gescheit also said that they sold their home in March 2007, and wanted to invest approximately $500,000. He said that he met with Mr Nguyen on 5 October 2007, and has now become aware of a FNA dated 5 October 2007. He had not previously received that document, he said. Mr Gescheit said that he did not proceed with that investment.
80. Mr Gescheit says that on or around 26 June 2008 when he met with Mr Nguyen, he was told that he was close to a margin call, and that he needed to pay $70,000 into his account. Mr Gescheit said that that was later changed to $10,000.
81. Mr Gescheit’s next step was then to contact CFP to speak to a different advisor. He said that did not proceed with that, because Mr Nguyen convinced him, in October 2008, to merge his account with that of his father-in-law, also a CFP client. Mr Gescheit recounted a meeting at the home of his wife’s father, during which Mr Nguyen admitted he was on holidays and not permitted to give advice in that way. He also said that he had other clients where he had advised merging accounts. Notwithstanding that action, Mr and Mrs Gescheit said they lost considerable amounts of money in the transactions advised and implemented by Mr Nguyen.
82. Mr Gescheit said that at the end of July 2009, he met with another CFP planner who asked him questions, and prepared a FNA which rated him as conservative.
83. The Gescheits’ main complaints about Mr Nguyen are:
(a)Mr Nguyen made the Acomos Margin Loan recommendation on outdated or no financial circumstances analysis of the Gescheits’ situation; he did not warn the Gescheits about the potential problems of margin lending; they lost a large amount of money in the process;
(b)The Gescheits were not given copies of documents, (FNA, PDS), including the 2007 SOA;
(c)The SOA was based on an incorrect assessment of the Gescheits’ financial objectives; and
(d)Mr Nguyen did not recommend an alternative strategy in the period December 2007 to November 2008.
84. I am satisfied from the evidence that Mr Nguyen did not comply with the requirements of sections 945A of the Act in relation to his dealings with Mr and Mrs Gescheit in that he did not fully explore and record their relevant personal circumstances, objectives, and needs. I accept the evidence of Mr Gescheit which I have summarised in dot points above, that not only were the Gescheits not given the 2006 FNA, nor the SOA, nor any PDS, but that the FNA and SOA recorded their personal circumstances and objectives incorrectly.
85. I am satisfied that Mr Gescheit told Mr Nguyen that their first priority was generation of more income, whereas Mr Nguyen recorded that as slightly important; that security of capital was important to the Gescheits, and that they wanted access to their funds within a year, and not five years, as recorded by Mr Nguyen.
86. I prefer Mr Gescheit’s assessment of his experience and skills being that they were restricted to real estate investments rather than other forms of investment, over the view Mr Nguyen took, which was that because Mr Gescheit had undertaken a development, and was experienced in real estate, the couple were knowledgeable about all investment sectors, and that they had an understanding of factors which may influence performance. Mr Gescheit clarified the ‘development’ as having been a single project, undertaken in the 1980s, and sold off in 2010. I also accepted Mr Gescheit’s evidence, which was that his interests were not in aggressive growth strategies and tax minimisation, the acceptance of capital fluctuation, and the investment into listed property trusts as shown in the FNA, and accept his evidence that many of the questions to be answered were not raised by Mr Nguyen.
87. I am also satisfied that Mr Nguyen did not fully explain the risky implications of the Gescheits’ involvement into margin loans which ultimately led to large losses. I accept from the evidence before me that the 2006 SOA did not reflect the Gescheit’s instructions to Mr Nguyen regarding security of their capital. I also accept from the evidence that Mr Nguyen did not respond adequately and prudently to Mr Gescheit’s concerns as raised in his telephone calls and emails, and find that the repeated advice to sit tight was not appropriate advice at the time.
88. I am satisfied from the findings I have made above in accepting Mr Gescheit’s evidence about Mr Nguyen’s conduct in advising him and investing on his behalf, that in relation to his handling of the Gescheits finances, Mr Nguyen did not comply with section 945A of the Act.
89. In considering section 945B of the Act, I am mindful that as in relation to other clients to whom I refer in these Reasons for Decision, Mr Nguyen simply marked documents indicating the clients did not wish to disclose certain information rather than asking them all the questions in order to complete the relevant FNA and SOA. Mr Nguyen has not complied with section 945B of the Act in not warning Mr and Mrs Gescheit that he may not have had sufficient information about their affairs and circumstances in order to provide them with the appropriate advice.
Did Mr Nguyen Comply with sections 946A and 946C(2) of the Act?
90. Section 946A of the Act provides that a financial advisor must give the client a SOA which may be the means by which the advice is provided, or a separate record of the advice. I am mindful that there is prescribed timing for the provision of the written advice (section 946C), and that there are circumstances where a SOA need not be provided such as in small investments, as defined (section 946AA), noting that that exclusion does not apply to either Mrs Kulakowski or the Gescheits because the sums they were investing could by no means be characterised as small investments.
91. I have noted Mr Nguyen’s evidence that he did not provide the FNAs unless specifically requested.
92. I am satisfied from the evidence before me that in 2006, Mr Nguyen did not prepare a FNA or SOA in relation to Mrs Kulakowski or Carinia, and his advice to her regarding a switch in her investments in May 2006. Accordingly he gave advice regarding the re-investments of in excess of $300,000 which could not be termed a small investment (section 946AA), without either preparing or giving a copy of a FNA, SOA or separate record of advice to Mrs Kulakowski. I do not accept Mr Nguyen’s evidence that being an astute investor Mrs Kulakowski may have simply requested the switch of her funds rather than relying on his advice. I have already stated that I do not accept that speculation by Mr Nguyen, and find that he did not advise her about the additional risk of the switch. In advising her to switch without having made the necessary inquiries from her, and preparing the relevant documents to give Mrs Kulakowski, Nr Nguyen did not comply with sections 946A and 946C(2) of the Act.
93. I am satisfied from the evidence that Mr Nguyen prepared a FNA and SOA for Mrs Kulakowski in 2008. Her evidence and that of Mr Barlow was however, that they did not receive copies of the documents until substantially later after complaints had been made. In that regard, Mr Nguyen accordingly did not comply with sections 946A and 946C(2) of the Act.
94. I am satisfied from the evidence before me in regard to Mr and Mrs Gescheit and Acomos, that Mr Nguyen prepared a FNA in 2006, 2007, and 2009, and a SOA dated 2005 (which was given to Mr Gescheit but which he said that he did not read properly until a year later), and SOAs in 2006 and 2007. I prefer the evidence of the Gescheits, which was that they did not receive copies of the 2006 and 2007 SOAs over the evidence of Mr Nguyen, because I have no reason to doubt the evidence of the Gescheits, and there was a consistent pattern of behaviour by Mr Nguyen in that he did not complete documents accurately, and did not give them to the clients. There is the further factor which is the similarity in the evidence given by Mrs Kulakowski, Mr Barlow and the Gescheits, that Mr Nguyen simply folded the page of a document over, and they signed without receiving copies of the documents then, or at other times. Mr Gescheit told me that he received the relevant documents only after the complaints had been commenced.
95. I am satisfied that in not providing copies of the relevant SOAs or equivalent advice within the required time, as discussed above, Mr Nguyen has not complied with the requirements of sections 946A and 946C(2) of the Act.
Did Mr Nguyen Comply with section 1012D of the Act?
96. Section 1012D deals with the situation where an advisor is exempted from providing a PDS. In summary, that exemption arises if the client has already received a PDS that contains all of the information that the PDS would be required to contain, or the advisor believes on reasonable grounds that the client has already received that information, or the client already holds a financial product of the same kind.
97. I have already noted above that Mr Nguyen submitted that the clients signed off on having received the PDSs, and that educated business people such as the Gescheits would not proceed if they did not receive one.
98. The evidence of Mrs Kulakowski, Mr Barlow and Mr Gescheit is that that they did not receive the relevant PDSs. There was no evidence before me to satisfy me that they had already received those documents, or that Mr Nguyen believed on reasonable grounds that they had.
99. I am satisfied from the evidence that Mr Nguyen did not comply with section 1012D of the Act in relation to the provision of appropriate PDSs in his dealings with the above named clients between 2006 and 2008.
Did Mr Nguyen Comply with section 947D of the Act?
100. Section 947D of the Act instructs as to procedures when switching products as occurred with Mrs Kulakowski, and stipulates that there are: additional requirements when advice recommends replacement of one product with another. In summary, the additional information required is any charges the client will or may incur, any pecuniary benefits the client may or will lose as a result of taking the recommended action, and any other information about significant consequences for the client which the advisor knows or ought reasonably to know.
101. The only evidence available in regard to the May 2006 switching of Mrs Kulakowski’s funds was as follows:
CFS Wholesale Income Fund to be reinvested as follows: $148,000 into CFS Colliers International Property, and the balance into First Choice Wholesale Property Securities …
… all monies out of the existing CFS Wholesale Income Fund and reinvest $300,000 into CFS W’sale Colliers International Property and the balance to be reinvested into First Choice W’sale Property Securities.
102. Mr Nguyen said that he could not recall specifically whether he had prepared a FNA in regard to Mrs Kulakowski’s switches, because some clients who knew what investments they required simply came to him to carry out the transactions, and he did not therefore, in that situation, have to prepare a FNA. He thought Mrs Kulakowski may have been in that category.
103. Mrs Kulakowski complained that Mr Nguyen did not inform her about what fees her investment in ING would incur in payment to CFP, and to Mr Nguyen. He indicated that section 4 of the 2008 SOA detailed those. I am however satisfied from the evidence that Mr Nguyen did not provide that document to Mrs Kulakowski, and that neither she nor Mr Barlow had seen it until much more recently.
104. As to the Gescheits; I have accepted their evidence in regard to non-receipt of the 2006 and 2007 SOAs over the evidence of Mr Nguyen. I am also satisfied that the risks and possible extra expenses associated with the margin loan were not fully explained or documented to the Gescheits.
105. Accordingly I am satisfied that Mr Nguyen did not comply with section 947D of the Act in relation to the provision of appropriate written advice in his dealings with the above named clients between 2006 and 2008.
Did Mr Nguyen Comply with sections 1041E and 1041F of the Act?
106. In summary, in the context of this matter, section 1041E of the Act prohibits the making of a statement that is false in a material particular if it is likely to induce persons (such as Mrs Kulakowski, the Gescheits, and the other clients of CFP), to apply for, dispose of, or otherwise deal in financial products.
107. In summary, section 1041F of the Act prohibits a person from inducing another to deal by one of the acts prohibited by the section.
108. In considering whether Mr Nguyen complied with section 1041E and 1041F of the Act in regard to his dealings with Mrs Kulakowski, I was concerned in particular with his recommendation in June 2008 that she withdraw funds from FCWI Units and invest in ING Bonds. Mr Nguyen stated that he relied on the 2008 FNA and 2008 SOA which he provided to Mrs Kulakowski along with the PDS. I was satisfied from the evidence, and have already decided in the paragraphs above, that the documents were not provided to Mrs Kulakowski at the relevant time in 2008.
109. I am also satisfied that Mr Nguyen represented to Mrs Kulakowski and Mr Barlow that the ING Bonds would provide a return of 12% and that the investments would only be in the top 10 Australian companies. Mr Nguyen suggested that persons such as Mrs Kulakowski and Mr Barlow would have known that a 12% return could not be guaranteed. I do not accept that is necessarily so, due to both their advanced age, and due to the fact Mrs Kulakowski had only invested in fixed interest conservative products in the past. I am mindful also, that investors are entitled to rely on the advice of their advisors, and Mrs Kulakowski repeatedly stated that she trusted CFP because it was part of the Commonwealth Bank which she trusted, and with whom she had banked since 1954.
110. Mr Nguyen denied he had misled Mrs Kulakowski. However, I am satisfied that at the time of recommending to Mrs Kulakowski that she invest in ING bonds, Mr Nguyen ought reasonably to have known that the statements he made about the product were false in a material particular, in particular in regard to the return rate. I find he was recklessly indifferent to the accuracy of the statements he made to Mrs Kulakowski in that regard.
111. I am satisfied that by reason of the issues I have discussed above under this heading, Mr Nguyen failed to comply with section 1041E and section 1041F of the Act in that he induced Mrs Kulakowski, as a result of his representations, to invest in the ING Bonds which were risky, and caused her to make losses.
112. As to Mr Gescheit; I am satisfied from his evidence which I have accepted, that in early 2006 Mr Nguyen made representations to Mr and Mrs Gescheit (and Acomos) regarding the financial gains to be made from a margin loan. I accept the evidence of the Gescheits that they were hesitant to borrow funds, and hesitant to accept that Mr Nguyen characterised it as good debt.
113. Mr Nguyen was aware when he questioned the Gescheits about their investing, and that they characterised themselves as follows:
Very conservative. We have all our investments in real estate which we own. We do not know anything about investing in shares.
114. I am mindful from the evidence which I have accepted, that it was not until some months later in October 2006, that the couple decided to have a meeting with Mr Nguyen about the margin loan situation. Mr Gescheit said that Mr Nguyen put it to him that the return from the investment, including the loan, would more than cover the interest on the loan. Mr Nguyen showed them charts, and was suggesting as follows, he said:
… your equity invested at the moment is $336,000. Add to that, $400,000 from a loan, then you got $736,000, which even if the return is only 5% makes you $36,800 per year. The interest on a loan of $400,000 at 8.1% would be $32,400, which would more than cover the interest …
115. The statement upon which the Gescheits relied, and which induced them to proceed, Mr Gescheit said, was the promise that the return received would more than cover the interest.
116. I have already noted above that Mr Nguyen stated that he warned the Gescheits of the risks involved in margin loans; that he indicated there was no financial motive for him in recommending the loan; that he documented all the relevant background to the Gescheits and the advice he gave; and that he gave them copies of all the appropriate documentation.
117. I am satisfied that although Mr Nguyen was seen to write some notes as he spoke to the Gescheits, he typically asked them to sign the last page, and did not give them a copy of the document. Mr and Mrs Gescheit have since received copies of the FNA and SOA, and as noted earlier in these Reasons for Decision, disagreed with some of the content.
118. I am satisfied that the information given by Mr Nguyen about the margin loans was false in a material particular or materially misleading as the returns from the investment were unknown, and certainly not guaranteed. He knew or ought reasonably to have known that. I am satisfied that Mr Nguyen’s representations induced the Gescheits and Acomos to invest, and that the representations were made recklessly.
119. I am satisfied that by reason of the issues I have discussed above under this heading, Mr Nguyen failed to comply with sections 1041E and 1041F of the Act in regard to Mr and Mrs Gescheit and Acomos.
120. I am satisfied accordingly that Mr Nguyen did not comply with sections 1041E and 1041F of the Act in regard to the Gescheits.
Did Mr Nguyen Comply with section 1041H of the Act?
121. In summary, section 1041H of the Act concerns misleading or deceptive conduct (civil liability only) in relation to a financial product or financial service. I am mindful that there is no allegation that Mr Nguyen engaged in dishonest conduct.
122. I am mindful that pursuant to section 1041H and the applicable case law, such as Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 and Parkdale Custom Built Furniture Proprietary Limited v Puxu Proprietary Limited (1982) 149 CLR 191 whether conduct is, or is likely to be misleading or deceptive is determined objectively. It is unnecessary to prove that the person intended to mislead or deceive, or whether the incorrect information was disseminated, and whether anyone was actually misled or deceived.
123. I have already detailed in the paragraphs above, that Mrs Kulakowski and Mr Barlow agreed that no FNA or SOA was prepared by Mr Nguyen when he recommended Mrs Kulakowski switch to a more risky fund in 2006. Mr Barlow’s evidence was that he thought Mr Nguyen had access to information about Mrs Kulakowski through the Commonwealth Bank. I accept that for reasons of her advanced age, and because she was not an aggressive investor, Mrs Kulakowski’s interests, as corroborated by Mr Barlow, were to generate income and preserve capital.
124. Mrs Kulakowski and Mr Barlow also disputed Mr Nguyen’s take on Mrs Kulakowski’s situation in the 2008 FNA and SOA, to which they finally had access in recent times. Mrs Kulakowski disagreed with the way she was characterised in those documents, and emphasised that what Mr Nguyen had recorded was contrary to her interests, which were to generate income and preserve capital. She also disputed the large number of annotations indicating she had refused to provide information.
125. I am satisfied that Mr Nguyen misrepresented Mrs Kulakowski’s situation in his documentation, and thus engaged in conduct which was likely to mislead a person reading it and forming a view about Mrs Kulakowski, and that his conduct in recommending investments to her, was based on that misleading information.
126. Based on the above, I find that Mr Nguyen failed to comply with section 1041H of the Act in regard to the completion of Mrs Kulakowski’s 2008 FNA and SOA.
127. In considering whether Mr Nguyen failed to comply with section 1041H of the Act in regard to Mr and Mrs Gescheit and Acomos, I revisited their comments made in regard to the information in the 2006 FNA which I dealt with earlier in these Reasons for Decision. As noted there, Mr Gescheit told me that the objectives in the FNA showed them as considering generation of more income as slightly important whereas in October 2006, this was their first priority. Mr Gescheit said that the FNA did not record that security of capital was very important to them, and the FNA recorded that the Gescheits wanted access to their funds in five years' time; whereas their intention was that they wanted to have access to their funds within a year. Mr Gescheit also stated that Mr Nguyen recorded they wanted at least 50% of their assets in LPTs. He says that he did not instruct Mr Nguyen about allocation of investments, and at the time, did not know the meaning of the acronym LPT. Mr Gescheit told me that he did not see the FNA when it was completed, and signed just a page which had been turned over, but that when he finally did, he saw it contained inaccuracies.
128. Mr Nguyen insisted he had prepared the abovenamed document and others pertaining to the Gescheits accurately. I have however preferred the evidence of the Gescheits in the matter of completing documents as Mr Nguyen exhibited a pattern of only showing clients the signature page for purposes of signing, and not supplying the documents to them until after complaints had been made. His investments on their behalf turned out to be inappropriate in terms of the clients’ aims and relevant personal circumstances, in particular the margin loan arrangements, where I am satisfied he engaged in misleading conduct.
129. Based on the above I find that Mr Nguyen failed to comply with section 1041H of the Act in regard to his dealings with Mr and Mrs Gescheit and Acomos.
Additional Complaints
130. Mr Lo Surdo referred to other persons who had been clients of Mr Nguyen, with the intention of demonstrating to the Tribunal, a pattern of conduct which indicated Mr Nguyen may have failed to comply with similar sections of the Act as he had with Mrs Kulakowski and Mr and Mrs Gescheit.
131. I noted a list of 25 names in a document headed Client Files that have been subject of a Complaint in the T-documents. Of those it appears from the records that 12 complained to CFP, essentially regarding issues similar to those which concerned Mrs Kulakowski and the Gescheits. This list is not exhaustive, but included: FNAs with a large number of fields annotated to indicate the clients did not wish to reply to certain questions; inaccurate client risk profiles and shown as aggressive when the persons indicated they were not; Mr Nguyen routinely promoting investment into listed property trusts and a bias towards risky investments; SOAs and PDSs not provided. The risk profiling was perhaps amongst the most serious error, particularly because many of the people involved were elderly, and required income, not necessarily questionable capital growth.
132. An internal review by a division of the Commonwealth Bank of 80 of Mr Nguyen’s files relating to the years 2006 – 2009 found similarly that:
a number sections in the FNAs left incomplete. There was a high level of similarity in the risk profiles. .. A large percentage of clients have been put into an aggressive investment strategy … in many cases these clients are in retirement … There appears to be a tendency to have a tactical focus. For example, in 2006, nearly 50% of assets were placed in LPTs.
133. Mr Lo Surdo also raised in particular, the complaints of Ms Braund, Mr Blanch and Ms Ong. They had all written with complaints about Mr Nguyen having misinterpreted their wishes to invest conservatively, and had all lost money due, they claimed, to his investments in risky enterprises.
134. Mr Nguyen’s explanations in relation to these people were similar to those he gave in the matters of Mrs Kulakowski and the Gescheits namely: that the GFC was at fault, or that his files had been lost (fault of the Bank’s administrative arrangements), or that dissatisfaction with his record keeping should have been brought to his attention by the auditors of his files, and he should have been provided with the relevant feedback and professional development. He also stated that he had been audited for nine years during his time at CFP, and had not been notified of problems in that time.
135. I accept that the matters raised above, although not considered in detail before me, have raised certain issues. They show a pattern of conduct in Mr Nguyen’s manner of dealing with his clients which indicates that he may have breached the Act in the way I have found he did in dealings with Mrs Kulakowski and the Gescheits. I am also concerned that the Commonwealth Bank may have overlooked what was really going on.
WHETHER THE CORRECT OR PREFERABLE DECISION FOR THE TRIBUNAL IS TO MAKE A BANNING ORDER
136. I am satisfied from the evidence that, as noted above, Mr Nguyen engaged in behaviour during the relevant times between 2006 and 2008 which indicated he had not complied with the requirements of sections 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F and 1041H of the Act in relation to Mrs Kulakowski and Carinia, and Mr and Mrs Gescheit and Acomos.
137. Accordingly I am satisfied that a banning order is the correct or preferable decision for this Tribunal to make. Mr Nguyen should be prohibited from providing any financial services pursuant to section 920A(1)(e) of the Act.
138. I am also satisfied that section 920A(1)(f) of the Act applies because I have reason to believe, based on Mr Nguyen’s past conduct in relation to his dealings with, and on behalf of Mrs Kulakowski, the Gescheits, and other clients of CFP, and his present and past attitude, that Mr Nguyen will not comply with the Act.
139. I must then consider the duration of the banning order.
DURATION OF THE BANNING ORDER
140. I note Mr Lo Surdo’s submissions that there were at least a dozen clients of CFP in regard to whom Mr Nguyen committed breaches of the Act over the relevant period. I am also mindful that there is a list of 25 named complainants in the documents before me. I have found that Mr Nguyen did not comply with various sections of the Act as noted above, and decided that a banning order is appropriate.
141. Accordingly, in deciding on the appropriate penalty, I must have regard to the protection of the public, specific and general deterrence, and maintaining public confidence in the profession, and have regard to the range of factors identified by Santow J in Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Limited (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 and Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602, and as reflected in Regulatory Guide 98 published by ASIC.
142. General deterrence is a factor to be taken into account in deciding whether, and for what period, a banning order ought to be made (Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Limited (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80). I am mindful that his Honour’s reasons were intended to be indicative rather than a fixed and comprehensive code. I am mindful that although a banning order appears punitive, it is for the purpose of the protection of the public.
143. It is necessary to bear in mind also, that a banning order is likely to cause hardship, and that the length of the banning order may be made taking into account that potential hardship. Mr Lo Surdo submitted that Mr Nguyen had not been working since he left CFP in 2009, and that he gave evidence that due to the state of his health he could not work. He submitted that there was accordingly no additional hardship in relation to the length of a banning order, and submitted that the seven years imposed by ASIC should be affirmed.
144. In reply to that, Mr Nguyen submitted that it was not just loss of his position, but his health, the bad publicity to which he has been subject, and the emotional penalty he has been paying.
145. Mr Nguyen also maintained that he had not been well instructed by the Commonwealth Bank, and should have had more assistance with education (Response to ASIC’s Concerns (16 December 2010) (Exhibit A5)).
146. In coming to a decision regarding penalty, I take into account that Mr Nguyen continues to maintain that he did not breach any financial law, and that the money lost by his clients was not due to his actions, but rather due to the GFC and the share market crash. He maintained that he had not had any financial motive in the advice he gave to his clients, whereas Mr Lo Surdo submitted that the more turnover Mr Nguyen achieved, the higher his bonus.
147. I noted that when Mr Nguyen made his closing submissions at the Tribunal, he said that he was deeply sorry for his shortcomings. Notwithstanding, I am mindful that he maintained his position regarding his clients, submitting particularly, that he had not breached any legislation; that Mrs Kulakowski was a high net worth person; that she had been paying too much tax, and that his advice had benefited her; that I should give little weight to her evidence because she had been unable to attend the hearing, and that Mr Barlow’s evidence was inadequate and contradictory.
148. As to the Gescheits; Mr Nguyen submitted that they were self-made millionaires, and that whilst they claimed to be conservative investors, their actions indicated that they actually were not conservative.
149. In considering the appropriate length of the banning order, I have taken into account the abovementioned submissions; in particular that Mr Nguyen does not accept that his conduct breached any law.
150. I am mindful that pursuant to Table 2, Regulatory Guide 98 factors and examples are given for guidance to decision makers. I am satisfied that Mr Nguyen can be characterised in the 3 - 10 year banning band, in that:
(a)His conduct was inconsistent with the orderly operation of a financial market;
(b)It had an adverse impact on confidence in or the integrity of a financial market
(c)It was false and misleading;
(d)It caused a significant financial loss to his clients;
(e)He demonstrated a disregard for the law and compliance with regulations and continues to maintain that position;
(f)In his conduct dealing with Mrs Kulakowski and the Gescheits he breached various sections of the Act;
(g)He did not have a reasonable basis for advice provided, such as making inappropriate recommendations for high risk products;
(h)He failed to keep financial records that must be kept;
(i)He failed to comply with disclosure requirements, including not disclosing commissions and other benefits or relevant interests and associations.
151. I take into account the following by way of mitigation:
(a)Mr Nguyen’s statement that he had been with the Commonwealth Bank for nine and a half years without a complaint being made about him, noting that there is no verification of that statement;
(b)The role of the Commonwealth Bank and CFP in not having followed up on audit findings more diligently;
(c)That Mr Nguyen resigned from CFP on 6 July 2009 and told me that he has not been working since that time; and
(d)That Mr Nguyen has been very financially and personally stressed due to illness since he left CFP.
152. In coming to a decision regarding the banning order, I am mindful also of the case of Re Hres and Australian Securities and Investments Commission [2008] AATA 707; (2008) 105 ALD 124. Senior Member Taylor said [247]:
The appropriate period of any disqualification is properly informed by the nature of the impugned conduct and its objective seriousness, both in terms of the extent of the departure from appropriate standards and its actual consequences. The considerations that may properly inform the exercise of the power cannot be prescribed exhaustively. They are summarised in ASIC’s regulatory guide 98 table 2. Those matters parallel the criteria identified by Santow J in his influential judgement in ASIC v Adler at [56]: see Rich. The thrust of the considerations suggested by both Santow J and in regulatory guide 98 is that a banning order is appropriate where the person’s impugned conduct involves serious incompetence or misconduct. Within that description are included advice outside the scope of the scope of the person’s licence or authority and advice that lacks a reasonable basis. Even lesser compliance defaults may justify a banning order. These include failure to provide relevant disclosures and failure to make adequate enquiries about a client’s individual circumstances. The shortest periods of banning or disqualification are regarded as most appropriate to situations where the person’s impugned conduct has not involved serious incompetence and where there is a real satisfaction of the person’s likely due compliance with their relevant duties and obligations. There is a general suggestion that a 3-year banning period marks a conventional threshold that distinguishes between impugned conduct that has involved serious incompetence and conduct of lesser seriousness.
153. I am also mindful that banning for less than three years would be appropriate where there is some carelessness or inadvertence in conduct which has led to problems, and where there is an indication of clear intention to comply with legal obligations in demonstrated behaviour. I cannot see that Mr Nguyen’s behaviour fits into this category as he continued to maintain for example, as noted above, that he had not failed to comply with any financial services law, and continued to blame the GFC and the share market, rather than his advice on investments for the losses his clients incurred.
154. I am satisfied that Mr Nguyen’s conduct, whilst in breach of various sections of the Act, did not involve any misappropriation of client funds, and whilst it constituted systematic failure of, and disregard for, compliance with procedures and documentation, and advice contrary to the personal circumstances of Mrs Kulakowski and the Gescheits, and possibly in regard to at least a dozen other clients, it was not on such a scale such as to attract ten years or permanent banning. The list above, which is not exhaustive, means that Mr Nguyen satisfied nine of the 17 possible negative descriptions of conduct in Table 2 of Regulatory Guide 98 in the band which anticipates three to ten year bans.
155. Accordingly some period in the three to ten year category may be appropriate. In considering the points made in Regulatory Guide 98, and taking into account both Santow J in HIH and Adler and DP Forgie in Howarth, I find that Mr Nguyen failed to comply with sections of the Act as discussed above, and that a seven year ban would be appropriate for the protection of the public, and maintaining public confidence in the profession, and would have the desired deterrent effect.
156. I am mindful that Mr Nguyen’s period of banning commenced with the ASIC decision of 3 March 2011. In all the circumstances, I am satisfied that a seven year ban commencing on 10 March 2011, the date of service of ASIC’s decision is appropriate.
THE TRIBUNAL’S CONCLUSIONS
157. I am satisfied from the evidence and submissions before me that Mr Nguyen failed to comply with sections 945A, 946A, 946C(2), 1012D, 947D, 1041E, 1041F and 1041H of the Act in relation to the advice and transactions he carried out for Mrs Kulakowski and Carinia, and Mr and Mrs Gescheit and Acomos. He has also demonstrated a pattern of conduct in regard to other clients of CFP as discussed above.
158. I am satisfied that section 920A(1)(e) of the Act may be applied because Mr Nguyen breached the above named sections of the Act.
159. In so far as section 920A(1)(f) is concerned, it is not necessary that either ASIC, or therefore the Tribunal, be satisfied that Mr Nguyen will, in the future, breach a financial services law. He has demonstrated a pattern of conduct in regard to other clients of CFP as discussed above. I am satisfied that section 920A(1)(f) of the Act is enlivened in regard to Mr Nguyen.
160. The correct or preferable decision is that Mr Nguyen should be banned from providing financial services for a period of seven years, commencing from the date of service of ASIC’s decision on 10 March 2011.
DECISION
161. The Tribunal affirms the decision under review, and decides that the period of the banning order of seven years commences from 10 March 2011, the date on which Mr Don Nguyen was given ASIC’s decision.
I certify that the 161 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member.
Signed: ............[sgd]....................................................................
AssociateDates of Hearing 6 and 7 February 2012
Date of Decision 14 March 2012
Appearance for the Applicant Self-represented
Counsel for the Respondent Mr A Lo Surdo SCSolicitor for the Respondent Mr N Goodstone, Australian Securities and Investments Commission
APPENDIX I: RELEVANT LEGISLATION
920A ASIC’s power to make a banning order
(1)ASIC may make a banning order against a person, by giving written notice to the person, if:
(a)ASIC suspends or cancels an Australian financial services licence held by the person; or
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(e)the person has not complied with a financial services law; or
(f)ASIC has reason to believe that the person will not comply with a financial services law.
920B What is a banning order?
(1)A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities.
(2)The order may prohibit the person against whom it is made from providing a financial service:
(a)permanently; or
(b)for a specified period, unless ASIC has reason to believe that the person is not of good fame or character.
945A Requirement to have a reasonable basis for the advice
(1) The providing entity must only provide the advice to the client if:
(a) the providing entity:
(i) determines the relevant personal circumstances in relation to giving the advice; and
(ii) makes reasonable inquiries in relation to those personal circumstances; and
(b)having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and
(c)the advice is appropriate to the client, having regard to that consideration and investigation.
946A Obligation to give client a Statement of Advice
(1)The providing entity must give the client a Statement of Advice in accordance with this Subdivision and Subdivision D.
(2) The Statement of Advice may be:
(a) the means by which the advice is provided; or
(b) a separate record of the advice.
(3) This section has effect subject to sections 946AA and 946B.
946C Timing of giving Statement of Advice
General rule
(1)Subject to this section, if the Statement of Advice is not the means by which the advice is provided, the Statement of Advice must be given to the client when, or as soon as practicable after, the advice is provided and, in any event, before the providing entity provides the client with any further financial service that arises out of or is connected with that advice.
Statement of certain information if Statement of Advice not given when advice provided
(2)If the Statement of Advice is not given to the client when the advice is provided, the providing entity must, when the advice is provided, give the client a statement that contains the information that would be required to be in a Statement of Advice by paragraphs 947B(2)(d) and (e), or 947C(2)(e) and (f), as the case requires, and by section 947D, if applicable.
1012D Situations in which Product Disclosure Statement is not required
Recommendation, issue or sale situation—client has already received an up to date Product Disclosure Statement
(1)In a recommendation situation, issue situation or sale situation, the regulated person does not have to give the client a Product Disclosure Statement if:
(a)the client has already received a Product Disclosure Statement that contains all of the information that the first‑mentioned Product Disclosure Statement would be required to contain; or
(b)the regulated person believes on reasonable grounds that paragraph (a) applies.
….
(3)In a recommendation situation or issue situation, the regulated person does not have to give the client a Product Disclosure Statement for the financial product if:
(a) the client already holds a financial product of the same kind; and
(b) either:
(i) in a recommendation situation—the advice that constitutes the relevant conduct relates to an offer made under a distribution reinvestment plan or switching facility; or
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947D Additional requirements when advice recommends replacement of one product with another
(1)This section applies (subject to subsection (4)) if the advice is or includes a recommendation that the client dispose of, or reduce the client’s interest in, all or part of a particular financial product and instead acquire all or part of, or increase the client’s interest in, another financial product.
(2)The following additional information must be included in the Statement of Advice:
(a)information about the following, to the extent that the information is known to, or could reasonably be found out by, the providing entity:
(i) any charges the client will or may incur in respect of the disposal or reduction;
(ii) any charges the client will or may incur in respect of the acquisition or increase;
(iii) any pecuniary or other benefits that the client will or may lose (temporarily or otherwise) as a result of taking the recommended action;
(b)information about any other significant consequences for the client of taking the recommended action that the providing entity knows, or ought reasonably to know, are likely;
(c)any other information required by regulations made for the purposes of this paragraph;
(d)unless in accordance with the regulations, for information to be disclosed in accordance with paragraph (a), any amounts are to be stated in dollars.
(3) If:
(a) the providing entity knows that, or is reckless as to whether:
(i) the client will or may incur charges as mentioned in subparagraph (2)(a)(i) or (ii); or
(ii) the client will or may lose benefits as mentioned in subparagraph (2)(a)(iii); or
(iii) there will or may be consequences for the client as mentioned in paragraph (2)(b); but
(b)the providing entity does not know, and cannot reasonably find out, what those charges, losses or consequences are or will be;
the Statement of Advice must include a statement to the effect that there will or may be such charges, losses or consequences but the providing entity does not know what they are.
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1041E False or misleading statements
(1)A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if:
(a)the statement or information is false in a material particular or is materially misleading; and
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1041F Inducing persons to deal
(1)A person must not, in this jurisdiction, induce another person to deal in financial products:
(a)by making or publishing a statement, promise or forecast if the person knows, or is reckless as to whether, the statement is misleading, false or deceptive; or
(b)by a dishonest concealment of material facts; or
(c)by recording or storing information that the person knows to be false or misleading in a material particular or materially misleading if:
(i) the information is recorded or stored in, or by means of, a mechanical, electronic or other device; and
....
1041H Misleading or deceptive conduct (civil liability only)
(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
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