Nolan and Australian Securities and Investments Commission
[2006] AATA 778
•11 September 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 778
ADMINISTRATIVE APPEALS TRIBUNAL № V2004/1354
GENERAL ADMINISTRATIVE DIVISION
Re: RAYDN NOLAN
Applicant
And: AUSTRALIAN SECURITIES AND
INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal: The Hon Howard Olney AM QC, Deputy President
Date:11 September 2006
Place:Melbourne
Decision:The Tribunal decides that the reviewable decision should be varied by substituting for it an order that the banning order apply for a period of 3 years from 19 November 2004.
(sgd) Howard Olney
Deputy President
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION – provision of financial services ‑ period of banning order – whether excessive – decision under review varied.
Corporations Act 2001
Rich v Australian Securities and Investments Commission (2004) 78 ALJR 1354; [2004] HCA 42
REASONS FOR DECISION
11 September 2006 The Hon Howard Olney AM QC, Deputy President
THE APPLICATION
1. The applicant seeks review of a decision of a delegate of the respondent (ASIC) made on 19 November 2004 pursuant to s 920A and s 920B of the Corporations Act 2001 (the Act) prohibiting the applicant from providing financial services in relation to securities for a period of 5 years (the banning order).
2.The relevant provisions of s 920A and s 920B of the Act are:
920A(1) ASIC may make a banning order against a person, by giving written notice to the person, if:
…
(f)ASIC has reason to believe that the person will not comply with a financial services law.
(2)However, ASIC may only make a banning order against a person after giving the person an opportunity:
(a)to appear, or be represented, at a hearing before ASIC that takes place in private; and
(b)to make submissions to ASIC on the matter.
(the term “financial services law” is defined in s 761A of the Act).
920B(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.
(3)A banning order may include a provision allowing the person against whom it was made, subject to any specified conditions:
(a)to do specified acts; or
(b)to do specified acts in specified circumstances;
that the order would otherwise prohibit them from doing.
(Section 766A of the Act sets out the circumstances in which a person provides a financial service).
3. On 7 June 2004 ASIC gave the applicant written notice that it was concerned that it:
may have reason to believe that (he) will not comply with a financial services law (paragraph 920A(1)(f) of the Corporations Act 2001 (“the Act”).
Attached to the written notice was a document (Attachment A) headed Attachment A Areas of Concern Relating to Raydn Patrick Nolan. The attachment is prefaced by the statement:
As a delegate of ASIC I am concerned that as a result of the conduct of Raydn Patrick Nolan (“Nolan”) between 1 October 1993 and 1 October 2002 ASIC may have reason to believe that Nolan will not comply with a financial services law.
and contains 87 numbered paragraphs in which the areas of concern are detailed. The applicant exercised his right to appear at a hearing before the delegate on 27 October 2004 and made submissions to the delegate on the matter. On 19 November 2004 the delegate gave written reasons for making the banning order.
4. The application was heard on 19, 20, 21 June and 17 July 2006. Both parties were represented by experienced counsel. The documents lodged with the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 extended to 18 lever arch folders (the T documents). The first day of the hearing was occupied by argument concerning the admissibility of a number of documents for which the applicant claimed legal professional privilege. The applicant gave evidence and was cross-examined at considerable length. The applicant also called two witnesses Mr Scott Murray Fraser Clayton, a consultant who provides compliance support and related services to financial services businesses, predominantly stockbroking businesses, and Mr Nicholas Grant Alexander, an investment manager. Both witnesses were cross-examined. A total of 43 exhibits were tendered, many of them comprising multiple documents. One exhibit (exhibit 41) is comprised of a total of 48 written statements in support of the applicant’s good character. The exhibit was tendered without objection from the respondent and without any request for any of the persons concerned to be made available for cross‑examination. ASIC did not call any witnesses. Both parties relied upon the T documents. At the conclusion of proceedings on 17 July 2006 the Tribunal reserved its decision.
THE STATUTORY SCHEME
5. To the extent relevant in the present proceedings the Act provided two principal sets of controls applied in relation to dealing in securities. First, a person other than an exempt dealer was prohibited from carrying on a securities business or holding himself or herself out as carrying on such a business, unless the person held a dealer’s licence (s 780(1)). Second, a natural person must not do an act as a representative of a dealer (other than an exempt dealer) unless the dealer holds a dealer’s licence and the person holds a proper authority from the dealer (s 806). A body corporate may not act as a representative of a dealer or of an investment adviser (s 809). Other statutory provisions of relevance are s 912A of the Act which provides that a financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly, and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (the ASIC Act) which provides that a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
BACKGROUND
6.The following facts are not in dispute:
a)From October 1991 until 1 October 2002 the applicant conducted a business of managing investment portfolios on a discretionary basis on behalf of clients.
b)Initially the business was conducted by the applicant in his own right but from October 1993 it was conducted by a company, Global Portfolios Pty Ltd, (Global Portfolios) of which the applicant was at all relevant times a director, and from November 1997 its sole director.
c)Over the relevant period the applicant held proper authorities from the following licensed securities dealers:
·Quantum Securities (Inter-national) Pty Ltd (Quantum) from 1986 until 23 May 1994;
·Financial Facts Pty Ltd (Financial Facts) from 1985 until 30 May 1995; and
·Nicholas Grant Alexander (Alexander) from 4 June 1996 until 21 December 1998 and from 13 January 2000 until 25 February 2000.
The applicant did not hold a proper authority from any licensee from 31 May 1995 until 3 July 1996, from 22 December 1998 until 12 January 2002 and from 26 February 2000 until after October 2002.
d)In 1997 Global Portfolios applied for a securities dealer’s licence. The application was refused. Global Portfolios sought an internal hearing to review this decision but in February 1998, prior to the scheduled hearing, the application was withdrawn.
e)In December 1998 ASIC agreed to discontinue banning proceedings it had commenced against the applicant in respect of concerns relating, inter alia, to the business of Global Portfolios being conducted without holding a dealer’s licence. ASIC agreed to withdraw the proceedings upon acceptance of the applicant’s undertaking that he would not deal or advise in securities from 21 December 1998 until 31 December 1999.
f)On 1 February 2001 Global Portfolios again applied for a dealer’s licence. The application was refused on 4 July 2001. Global Portfolios made application to the Tribunal to review the decision to refuse to grant a licence.
g)On 7 May 2002, pursuant to an agreement reached between Global Portfolios and ASIC, the Tribunal set aside ASIC’s decision of 4 July 2001 and granted Global Portfolios a Restricted General Advice Licence in terms annexed to the Tribunal’s order. The relevant licence was issued by ASIC on 17 May 2002 with effect from 4 July 2001.
h)On 1 October 2002 Global Portfolios appointed Gregory Andrews as its administrator and on 28 October 2002 the company was placed in liquidation.
7. The portfolio management business conducted by Global Portfolios was described in the delegate’s reasons for decision at paragraphs 18 to 21. The applicant does not take issue with the delegate’s description which is as follows:
18.1Global Portfolios assessed and classified ASX listed stocks according to 4 defined parameters, which reflected an increasing level of risk. The 4 parameters were blue chip, large emerging, small emerging and speculative.
18.2These 4 stock parameters were discussed with a prospective client, who then decided what proportion, as a percentage, of their investment portfolio would be made up of stocks falling within some or each of the parameters.
18.3The amount of money a client wanted to invest, according to the agreed investment parameters, was deposited into a cash management account in the client’s name.
18.4Global Portfolios then managed the client’s portfolio by selecting which stocks to purchase, the amount and at what price. Global Portfolios also decided when to sell particular stocks and at what price.
18.5The cost of purchasing stock on behalf of a client was debited to the client’s cash management account, on Global Portfolios’ order, and the proceeds of the sale of stocks was credited to that account.
18.6Global Portfolios managed its client’s investment portfolios on a discretionary basis within the investment parameters selected by the individual clients and according to how much they have available to invest in their cash management accounts at any particular time.
18.7In practice, the decision as to what stocks to purchase and at what price was made on the basis of the market opportunity that particular stocks presented. Global Portfolios maintained a spreadsheet of the balances in its clients’ cash management accounts. How much of a particular stock to purchase and how it was to be allocated to clients was determined by the cash balances in clients’ accounts and their investment parameters. Before stocks purchased were allocated to particular clients, Global Portfolios staff checked the clients’ investment parameters to ensure that any allocations were within the agreed parameters.
18.8The decision as to what stocks to buy or sell, at what price and in what quantities was made by Mr Nolan. He also decided, or was responsible for, how stocks purchased on behalf of clients were allocated.
18.9Global Portfolios charged clients a performance fee and, from about February 1997, a management fee as well. The fees were calculated on a quarterly basis and paid to Global Portfolios by debiting the clients’ cash management accounts.
19.From time to time Global Portfolios held funds and stocks in its own name on behalf of clients. In December 1997 Global Portfolios Nominees Pty Ltd (“Global Nominees”) was incorporated on the advice of an external compliance consultant, to separate clients’ assets from Global Portfolios’ own assets. Thereafter, in certain circumstances, shares purchased on behalf of Global Portfolios’ clients were purchased in the name of Global Nominees and held by that company as nominee for the respective clients. Global Nominees also held funds for or on account of clients of Global Portfolios. At all relevant times Mr Nolan was the sole director of Global Nominees.
20.In December 1998 Mr Nolan gave ASIC an undertaking not to deal in or give investment advice in relation to securities. The undertaking was for a period from 21 December 1998 until 31 December 1999. As a consequence of this undertaking, on 21 December 1999 Mr Alexander withdrew Mr Nolan’s proper authority.
21.During this period Mr Alexander was retained by Global Portfolios on a fee for service basis to supervise the management of clients’ portfolios. Mr Alexander, together with Mr Nolan, attended meetings with clients. Mr Nolan held weekly meetings with Mr Alexander at which decisions were made as to what stocks should be bought and sold and at what price. Mr Nolan continued to have input into these decisions, subject to Mr Alexander having the final say. Decisions as to how much of particular stock to purchase and to which clients it was allocated continued to be made by Mr Nolan, without Mr Alexander’s involvement. Mr Nolan also continued to have the general management of Global Portfolios’ business.
ASIC’S AREAS OF CONCERN
8. Attachment A identifies specific issues said to be of concern to the delegate. Each of the areas of concern is summarised below. (The paragraph numbers are those shown in the relevant parts of Attachment A):
a)Conducting a securities business without holding a dealer’s licence and contrary to proper authorities granted to the applicant (paras 10-21);
b)Conducting the securities business of Global Portfolios contrary to the condition of its dealer’s licence (paras 22-24);
c)Breaching an agreement with ASIC not to deal in or advise in securities (paras 25-28);
d)Conducting the securities business of Global Portfolios in an improper manner (paras 29-72);
e)Misleading ASIC as to Global Portfolios’ net assets (paras 72-79);
f)Failure to inform ASIC of a breach of condition of Global Portfolio’s licence (paras 80-84);
9. ASIC’s concerns as expressed in paras 10-21 of Attachment A relate only to the period from October 1993 to October 2002, that is during the period that the business was conducted in the name of Global Portfolios. It is beyond question that during the relevant period the business was Global Portfolios’ business (and not that of any of the licensees from whom the applicant held a proper authority) and that the business was carried on as a securities business for which Global Portfolios was required by s 780(1) of the Act to hold a dealer’s licence. Throughout this period Global Portfolios’ business was conducted by the applicant in his capacity as the company’s director.
10. The fact that the applicant from time to time held proper authorities from licensed securities dealers is of no relevance. The business of Global Portfolios was not conducted on behalf of the licensees from whom the applicant held the proper authorities. Furthermore, the business of Global Portfolios was conducted contrary to the proper authorities held by the applicant. For example, Quantum’s dealer’s licence precluded it from taking possession of client’s securities, cash or cheques other than cheques drawn in favour of third parties whereas in the case of Financial Facts and Alexander (in respect of the period from 4 July 1996 to 21 December 1998) the respective licences prohibited licensee from holding money in trust for clients or accepting, receiving, holding or taking possession custody or control of securities or money of or belonging to clients. These restrictions were quite incompatible with the method of operating Global Portfolios’ business involving as it did having discretionary control over the management of clients’ portfolios (albeit within agreed parameters) thereby giving Global Portfolios and the applicant possession, custody and control over dealers’ securities and funds. In addition, Global Portfolios and Global Nominees held securities and funds in their own names which they dealt with on behalf of clients.
11. In the period during which Global Portfolios held a dealer’s licence, that is from 17 May 2002 until the company ceased business on 1 October 2002 the applicant conducted the business of Global Portfolios without holding a proper authority from the company. His explanation for this was that he had assumed that as the principal of the company that held the licence he did not need to have a proper authority.
12. The area of concern detailed in paragraphs 22 to 24 of Attachment A has to do with condition 9 of the restricted general securities advice licence granted to Global Portfolios following the consent order made by the Tribunal on 7 May 2002. Condition 9 precluded Global Portfolios from holding money in trust for its clients or accepting, receiving, holding or taking possession, custody or control of securities or money of or belonging to clients. The licence did not authorise the management on a discretionary basis of share portfolios on behalf of clients, the holding of securities by Global Portfolios and Global Nominees on behalf of clients, the holding of money in trust for or on account of clients or having control over their funds.
13. The applicant does not now deny that after the granting of the restricted general securities advice licence to Global Portfolios he operated the securities business of the company contrary to the provisions of condition 9 of the licence.
14. At paragraphs 25 to 28 of Annexure A it is asserted that the applicant did not comply with the undertaking he gave to ASIC in December 1998 not deal in or give investment advice in relation to securities for a period from 21 December 1998 until 31 December 1999. The terms of the undertaking were:
·Raydn Nolan agrees to withdraw from dealing or advising in securities until 31 December 1999.
·Raydn Nolan and Global Portfolios Pty Ltd will not deal or advise in securities for the period of the withdrawal.
·Global Portfolios which is an administrative entity will continue to undertake administrative tasks only, associated with the portfolios of Mr Nolan’s current clients.
·Nicholas Alexander a licensed dealer will advise those clients and manage their portfolios.
The applicant disputes that his activities during this period amounted to dealing in securities. He maintains that his involvement in the purchase and sale of stocks on behalf of clients was merely giving effect to decisions made by Alexander.
15. The allegations contained in Attachment A in relation to ASIC’s concern that the applicant had conducted the securities business of Global Portfolios in an improper manner (paragraphs 29 to 72) refer to four specific unrelated matters each of which is described in the following paragraphs. The matters in question relate to:
·The short selling of units in Macquarie Office Trust (paragraphs 29-46);
·The breach of a client’s investment parameters (paragraphs 47-57);
·The failure on 2 occasions to ensure that sufficient funds were kept to cover liabilities to clients (paragraphs 58-64; and 65-72).
16. In early 2000 Global Portfolios short sold 100,000 units in the Macquarie Office Trust (also known as the Macquarie Office Fund) (MOF) on its own account and for its own benefit. (Short selling is where a person sells shares they do not own in the hope that the share price will fall so they can be bought at a lower price, thereby resulting in a profit). The applicant bought 9570 MOF units at a lower price, netting a profit, however the price then rose. To cover the remaining short sale, the applicant “borrowed” 90,430 MOF units held by Global Nominees on behalf of clients. He did not subsequently purchase MOF units to replace those he had “borrowed” because the unit price remained above the short sale price.
17. On 6 July 2001 Donald Jeffrey (Jeffrey) on behalf of Primelite Pty Ltd (Primelite) and the applicant on behalf of Global Portfolios agreed that the applicant would arrange an investment portfolio for Primelite of approximately $330,000 on a discretionary basis. It was agreed that Global Portfolios’ investment discretion would be limited by specified parameters, one of which was that holding in speculative stocks be limited to a maximum of 12.5% of Primelite’s entire investment portfolio. In the period from September 2001 to April 2002 speculative stocks in the Primelite portfolio exceeded the agreed parameter by between 20.8% and 44.4%. In May 2002 Jeffrey raised this matter with the applicant who acknowledged the breach of the speculative investment parameter and agreed to correct the over-exposure to speculative stocks by 30 June 2002 and to reimburse Jeffrey for 69.375% of the losses to the portfolio from the speculative sector. On 28 June 2002 the applicant gave instructions to a member of Global Portfolios’ staff to record in the books of Global Portfolios the transfer of Primelite’s holding of RMG shares (at the original cost of $38,704) to Global Venture Capital Pty Ltd (Global Venture Capital) and to credit Primelite’s account with 38,704 units in Global Venture Capital (at a given value of $38,704). The RMG shares were then to be held by Global Venture Capital. The applicant was at all relevant times the sole director and secretary of Global Venture Capital.
18. Although the applicant claims that the parameter breach was inadvertent (and there is no reason to conclude to the contrary), the means adopted to remedy the breach are open to question. In effect he merely substituted Primelite’s direct holding of the speculative RMG shares with an indirect holding of the same shares through the Global Venture Capital units. At the time, and until Global Portfolios went into administration the value of Global Venture Capital units was somewhat doubtful, and indeed, the applicant has conceded that over that period Global Venture Capital could not have redeemed all of the units it had on issue.
19. The RMG shares had originally been acquired at 18 cents and 21 cents; by early May 2002 the price had fallen to 9 cents per share; and by 4 July 2002 it was at 7.7 cents. By substituting Global Venture Capital shares on a cost basis the applicant was able to avoid paying the investor the capital loss that would have accrued had the shares been sold on the market.
20. Attachment A paragraphs 58 to 64 deal with ASIC’s concern in relation to the applicant’s dealings with a client, G. J. Taggart Pty Ltd (Taggart). The primary facts are not in dispute.
21. In July 1997 Taggart provided Global Portfolios with $29,000 for the purchase of shares on its behalf. The share trading was done on the client’s instructions, it was not a discretionary account. Taggart did not set up a cash management account as was the usual practice with Global Portfolios’ clients; rather, the cash funds belonging to the account were held by Global Portfolios on behalf of the client. In May 2002 Dr G. J. Taggart (the principal of Taggart) claimed that he was owed approximately $18,000 from the sale of securities which had not been forwarded to him. Initially Global Portfolio acknowledged that the amount was owing to Taggart and Dr Taggart indicated that he was happy for Global Portfolios to hold the money for the purchase of other shares. When Global Portfolios was placed in administration the applicant acknowledged that $18,013.46 was still owing to Taggart but subsequently it was claimed that some part of the money had been applied to purchase other shares. The available evidence is not adequate to establish exactly how much was owing to Taggart when Global Portfolios went into administration.
22. ASIC’s concern is that in the absence of a separate cash management account having been established in Taggart’s name, the applicant should have ensured that Global Portfolios at all times retained a sufficient balance in its bank account to cover funds held on Taggart’s behalf.
23. Paragraphs 65 to 72 of Attachment A deal with ASIC’s concern in relation to Global Portfolios’ dealings with a client O’Mara Management Pty Ltd (O’Mara Management). In January and March 2000 Global Portfolios sold 23,875 shares in World Water Incorporated (a US registered company) (World Water) on behalf of O’Mara Management for $34,783.16. On 18 April 2000 a cheque was drawn on Global Portfolios’ bank account for $34,783.16 in favour of O’Mara Management. The cheque butt indicates that the payment was in relation to “World Water”. The cheque was however never forwarded to O’Mara Management and was never presented for payment notwithstanding that Global Portfolios’ bank reconciliation reports for the period from 28 April 2000 until 30 September 2002 show that the cheque as outstanding the amount was never remitted. When Global Portfolios was placed in liquidation the applicant acknowledged that the amount was still owing to O’Mara Management.
24. The applicant’s explanation to the Administrator of Global Portfolios was that various other expenses, settlements etc were paid before I realised there wasn’t sufficient funds left to pay the outstanding $34,783.16 owed to O’Mara Management.
25. The concerns referred to in paragraphs 73 to 79 of Attachment A relating to the allegation that the applicant had misled ASIC as to Global Portfolios’ net assets were not pressed. These matters were not taken into account by the delegate nor has any consideration been given to them in this application.
26. The final concern identified in Attachment A (paragraphs 80-84) relates to a breach of condition 8 of the licence issued to Global Portfolios by ASIC on 17 May 2002. Condition 8 provided:
The licensee must ensure that the licensee’s net tangible assets (as defined in the attached Schedule) must not at any time be less than whichever is the greater of $25,000 or 5.0% of the licensee’s adjusted liabilities.
The Schedule referred to in condition 8 required that any liability of the company to the applicant had to be included in calculating the company’s net tangible assets.
27. In a report as to the affairs of Global Portfolios as at 1 October 2002 the applicant estimated the deficiency of the company to be $1,668,509.45 and that he personally was an unsecured creditor in the amount of $1,373,109.46. The applicant says that he had discharged company liabilities from his personal funds, thereby becoming a creditor of the company. A Global Portfolios’ general ledger indicates that the $1,373,109.46 reflected in the report as to affairs was owing to the applicant from 30 June 2002.
28. Section 787 of the Act provides:
Section 787 Licensee to notify breach of licence condition
(1)Within 1 day after the happening of an event constituting a contravention of a condition of a licence, the licensee must lodge a written notice setting out particulars of the event.
(2)It is a defence to a charge arising under subsection (1) if it is proved that:
(a)when the licensee was required to lodge the notice, the licensee was unaware of a fact or occurrence that gave rise to the requirement; and
(b)in a case where the licensee has since become aware of that fact or occurrence – the licensee lodged the notice as soon as practicable after becoming so aware.
No written notice was lodged with ASIC by Global Portfolios pursuant to s 787(1) prior to it being placed in administration. In view of the fact that the state of the company’s financial affairs must have been obvious to the applicant at the very latest by 30 June 2002 there was a clear breach of the obligations imposed by s 787.
CONCLUSIONS
29. Having regard to the long history of dealings between the applicant and ASIC (and its predecessor) the Tribunal is of the opinion that it would be inappropriate to take into account any of ASIC’s matters of concern which occurred prior to 7 May 2002. On that day ASIC was apparently satisfied that Global Portfolios, under the control and management of the applicant, was an appropriate entity to hold a dealers licence, albeit a very restricted licence. ASIC was at that time in a position to be fully aware of Global Portfolios’ business and of the applicant’s role in its management but nevertheless was prepared to agree to the company being granted a dealers licence. There is some merit in the applicant’s suspicion that ASIC was well aware that the licence granted in May 2002 was entirely inappropriate to the business as previously carried on and that there was every likelihood that it would be unable to survive; which of course is what occurred.
30. In the circumstances the Tribunal proposes to have regard to the events which have occurred since 7 May 2002 or which have first come to ASIC’s attention since that date. In particular the Tribunal is of the view that the following are matters relevant to the question of whether a banning order should be made:
a)The fact that from 19 May 2002 Global Portfolios, under the sole direction and control of the applicant conducted a securities business contrary to condition 9 of its dealers licence which prohibited it from holding or taking possession, custody or control of securities or money belonging to clients.
b)The fact that in the period 17 May 2002 to 1 October 2002 the applicant conducted the business of Global Portfolios without holding a proper authority from the company.
c)The applicant’s use of clients’ MOF units to cover his own short sell transaction.
d)The manner in which the applicant dealt with the breach of Primelite’s investment parameters.
e)The failure of the applicant to ensure that funds held on behalf of Taggart were kept separate from Global Portfolio’s own funds and available to the client when required.
f)The failure of the applicant to account to O’Mara Management for the sale of World Water shares.
g)Global Portfolios’ breach of condition 8 of its dealers licence and its failure to comply with the requirements of s 787 of the Act.
31. There is some substance in ASIC’s concern that the applicant may in the future not comply with a financial services law. His conduct after 17 May 2002 in relation to the continued carrying on of Global Portfolios’ business in contravention of condition 9 demonstrates a reluctance to have due regard to the legal framework in which the financial services industry is required to operate. The failure of Global Portfolios to issue the applicant with appropriate authority in the period after 17 May 2002 is a minor matter which in the overall context of the matter under consideration is of no real consequence. Similarly, the failure to comply with the requirements of s 787 of the Act in a timely manner is not in the present circumstances a matter of particular moment.
32. The Tribunal is of the opinion that the applicant’s conduct in relation to the short selling of MOF units and his use of clients’ units to cover the potential loss on the transaction, the manner in which he dealt with the breach of Primelite’s investment parameters and his failure to account to Taggart and O’Mara Management for money due to them are all matters of considerable importance which in each case demonstrates a failure to observe the most fundamental requirement of ethical business that a person in a fiduciary relationship with another must not place his own interests above those of his client. In this respect the Tribunal is satisfied that the applicant’s conduct, if carried out by a licensee, would be in breach of s 912A(1) of the Act. Furthermore, the applicant’s conduct as described would appear to be in conflict with the requirement of s 12DA(1) of the ASIC Act with regard to misleading and deceptive conduct.
33. The material that is presently before the Tribunal provides a basis for a belief that the applicant will not comply with a financial services law. In the relatively short period following the granting of a dealers licence to Global Portfolios the applicant conducted the company’s business without proper regard to the legal constraints imposed by the licence and without a proper understanding of the obligations that apply to the fiduciary relationship that existed between himself, as the effective principal of the business, and its clients. Having regard to the applicant’s long history in the financial services industry it is difficult to regard his recent departures from acceptable standards of conduct as mere oversights due to inadvertence.
34. The Tribunal is of the view that it is appropriate that a banning order be made against the applicant.
THE BANNING ORDER
35. A banning order may prohibit the person against whom it is made from providing a financial service either permanently or for a specified period (s 920B(2)(a)(b)). The power to make an order for a specified period is qualified by the proviso that is does not apply if ASIC has reason to believe that the person is not of good fame or character. The very substantial volume of character evidence that has been placed before the Tribunal is indicative of the fact that the applicant is a person of both good fame and character. Further, the conduct that has been found to justify the making of a banning order is not so serious as to warrant an order containing a permanent prohibition. In the circumstances the Tribunal is required to make an assessment of an appropriate period for which the order should apply.
36. The Act does not provide any guidance as to the exercise of the discretion to fix the period for which a banning order is to apply. The current judicial opinion, as expressed by the High Court in Rich v Australian Securities and Investments Commission (2004) 78 ALJR 1354; [2004] HCA 42 is that disqualification orders under the Corporations Act have both a punitive or a protective component. The need to protect the community is obviously a primary objective of s 920A but the section must also be treated as having a punitive element which gives rise to the need to assess the effect of the order on the particular person.
37. In the present case the applicant’s business ultimately failed because Global Portfolios did not have a licence appropriate to the nature of the business it sought to conduct. Following the failure of the business the applicant ultimately secured employment in a field of activity relevant to his training and experience but once the application for the banning order was made by ASIC in June 2004 he was forced to leave that employment. He has subsequently secured other employment in an unrelated field. He will not be able to return to working in the financial services industry for the duration of the banning order. Except to the extent that the banning order will limit his choices as to the nature of any employment he is able to undertake during its operation, the effect of the order will have limited personal impact on him. The major disadvantage that the applicant has suffered is the failure of his business which cannot be attributed to the making of, or even the application for, the banning order.
38. In considering the extent of the period of which the banning order should apply there are some mitigating facts to take into consideration. First, it must be acknowledged that whatever breaches of the financial services law may be alleged against the applicant he has never been prosecuted. Second, and perhaps more relevant, is the fact that over a considerable period ASIC as the regulating authority was well aware of the nature of the applicant’s business but nevertheless when faced with a challenge to the refusal of an appropriate licence, offered an inappropriate licence by way of compromise. Whether or not it was an error of judgement on the applicant’s part to accept the compromise is not a matter which falls for consideration in these proceedings but nevertheless it must have been obvious from the outset that Global Portfolios’ business could not survive under the licence that was granted.
39. The applicant now says that he has no longer any desire to engage in the financial services industry otherwise than as an employee. He does not intend to again operate his own business. It has been suggested that in the event that the Tribunal concludes that a banning order should be made it should nevertheless exercise its power under s 920B(3) to include a proviso that the applicant should be permitted to work in the financial services industry as an employee. Having considered this option the Tribunal is of the view that it would not be appropriate to make such a provision. In practice terms it may well simply permit the applicant to effectively continue to do what he has previously done thus negating the sanction associated with the banning order.
40. Another matter that has exercised the mind of the Tribunal is that whereas Global Portfolios ceased business on 1 October 2002, it was not until 7 June 2004 that ASIC gave notice under s 920A(1) of the Act. By the time ASIC made the banning order now under review on 19 November 2004 the applicant had been out of the industry for over 2 years. This is a factor that should not be overlooked.
41. Having regard to all of the circumstances of the case the Tribunal is of the view that ASIC’s order banning the applicant for 5 years was excessive and should be varied by substituting for it an order that the banning order apply for a period of 3 years from 19 November 2004.
I certify that the forty‑one [41] preceding paragraphs are a true copy of the reasons for the decision herein of
The Hon Howard Olney AM QC, Deputy President
(sgd) Olympia Sarrinikolaou
Clerk
Dates of Hearing: 19 ‑ 21 June 2006 and 17 July 2006
Date of Decision: 11 September 2006
Counsel for the applicant: Mr A.J. Myers QCCounsel for the respondent: Mr R. Niall
Solicitor for respondent: Australian Securities and Investments Commission
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