Re Hres and Australian Securities and Investments Commission
[2008] AATA 707
•12 August 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 707
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N 2006/1574
GENERAL ADMINISTRATIVE DIVISION ) Re STEPHEN HRES Applicant
And
AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Mr P W Taylor SC , Senior Member Date12 August 2008
PlaceSydney
Decision The decision under review is affirmed.
....................[sgd].....................
Mr P W Taylor SC
Senior Member
CATCHWORDS
CORPORATIONS – financial services – duty to perform “efficiently, honestly and fairly” – prohibition on misleading or deceptive conduct – securities adviser banned by ASIC from providing any financial services for a three year period – unsecured lenders referred to non-approved competing investment products – misleading ‘exclusive offer’ emails – managed funds and property development – deeds of loan entered into by lenders contained no guarantee – protection provided by a caveatable interest over listed properties was illusory – absence of reasonable basis for applicant to make a recommendation in connection with a securities dealing – reasonable expectation that lenders relied upon recommendation – contravention and failure to perform duties – the decision under review is affirmed.
Corporations Act 2001 – ss 9, 92, 94, 829, 830, 849, 851, 920A, 995, 1405, 1444
Real Property Act 1919 (NSW) – s 74F
Financial Services Reform Act 2001
Corporations Regulations 2001 – cl 10.2.93, 7.3.02B(3), 7.3.02B(10), 7.3.02D, 10.2.94,
Income Tax Assessment Act 1936
Troncone v Aliparti (1994) 6 BPR 13,291
Redglove Projects Pty Ltd v Ngunnawal Local Aboriginal Land Council (2004) 12 BPR 22,319
Commissioner for Superannuation v Miller (1985) 8 FCR 153
Our Town FM Pty Ltd v Australian Broadcasting Tribunal [No 1] (1987) 16 FCR 465
Drayton v Martin (1996) 137 ALR 145
Nanaimo Community Hotel Ltd v Board of Referees [1945] 3 DLR 225
Perlman v Perlman (1984) 155 CLR 474
R v Ross-Jones; Ex parte Green (1984) 156 CLR 185
O'Grady v Northern Queensland Co Ltd (1989) 169 CLR 356
Fountain v Alexander (1982) 150 CLR 615
R & W Technical Services Ltd v Commodity Futures Trading Commission 205 F 3d 165
Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82
National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369
Weitmann v Katies Ltd (1977) 29 FLR 336
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd 149 CLR 191
Rupert Co Ltd v Imperial One Ltd (2003) 45 ACSR 18
Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233
Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177; (1982) ATPR 40-303
In Industrial Equity Ltd v North Broken Hill Holdings Ltd (1986) 9 FCR 385; 64 ALR 292
NRMA Holdings Ltd v Fraser (1995) 55 FCR 452; 15 ACSR 590; 13 ACLC 132
Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45
Paul Hogan v Pacific Dunlop Ltd (1988) 83 ALR 403
Surge Licensing Inc v Pearson (1991) ATPR 41-119
National Exchange Pty Ltd v ASIC (2004) 49ACSR 369
Siddons Pty Ltd v Stanley Works Pty Ltd (1991) 29 FCR 14
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216
Heydon v NRMA Ltd (2000) 51 NSWLR 1
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 79 ALR 83
James v ANZ Banking Group Ltd (1986) 64 ALR 347
Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd (1997) 148 ALR 271
Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Jungstedt v ASIC (2003) 73 ALD 105; [2003] AATA 159
Campbell v ASIC (2001) 37 ACSR 238
Felden v ASIC (2003) 45 ACSR 111; 73 ALD 149
RJ Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93
Foster v ASIC (1999) 57 ALD 779
Storey v National Companies and Securities Commission (1988) 13 NSWLR 661
Farley v Australian Securities Commission (1998) 16 ACLC 1502
Smith v New South Wales Bar Association (1992) 176 CLR 256
Wentworth v New South Wales Bar Association (1992) 176 CLR 239
Health Care Complaints Commission v Lichfield (1997) 41 NSWLR 630
Dahia v Tax Agents Board of Victoria (1997) 36 ATR 1124
Toohey v Tax Agents Board of Victoria [2007] FCA 431
Kamha v APRA (2005) 147 FCR 516
Albarran v Members of the Companies Auditors & Liquidators Disciplinary Board [2006] FCAFC 69; (2006) 151 FCR 466
ASIC v Adler (2002) 42 ACSR 80
Rich v ASIC (2004) 220 CLR 129
Howarth v ASIC [2008] AATA 278
Re One Tel Ltd (in liq): ASIC v Rich (2003) 44 ACSR 682
REASONS FOR DECISION
12 August 2008 Mr P W Taylor SC, Senior Member ADVISER BANNED FOLLOWING DEVELOPER’S INSOLVENCY
1.In 1999 Mr Hres trained with AMP Financial Planning Pty Ltd and completed the first two modules of a Diploma in Financial Planning. In September 1999 he began working as an AMP adviser. His accountant, who was also a business associate, introduced him to one of her other clients, a Mr Robert Orehek. Mr Orehek was the principal director and shareholder of Norton Investments Pty Ltd, a property development company. Mr Orehek offered to pay Mr Hres a 3% commission on loan funds provided by any lenders referred by Mr Hres.
2.In March 2000 Mr Hres obtained a Proper Authority from AMP Financial Planning Pty Ltd and became a securities adviser. In that role he was limited to advising in relation to AMP managed funds and precluded from advising about competing products. Despite those limitations, and up until about mid 2002, Mr Hres referred about 36 lenders to Mr Orehek. Their loans totalled about $3.64 million, of which about $1.2 million represented loans and accumulated interest that had been “rolled over” after the original 12 month loan term. Mr Hres was paid about $100,000, and claimed an additional $46,000, in commission and interest in relation to these loans.
3.The Orehek companies did not repay their loans. The companies were placed in liquidation in November 2003. Mr Orehek was made bankrupt on 9 December 2003. His January 2004 statement of affairs disclosed a net asset deficiency of $19.7 million. His liabilities included $19.5 million as a guarantor of his companies’ liabilities to 183 unsecured creditors. Those unsecured creditors included all of the lenders referred by Mr Hres.
4.Some of the people Mr Hres referred to Mr Orehek complained about his conduct. They claimed to have consulted him in his capacity as an AMP financial planner. They said he had misled them about loans to the Orehek companies being AMP approved investment products and about the security of their loans. The first result of those complaints was that AMP Financial Planning suspended Mr Hres’ Proper Authority in October 2003, and apparently terminated it in January 2004. The ultimate result of the complaints was ASIC’s 20 October 2006 banning order. That order, purportedly made under s 920A of the Corporations Act 2001, banned Mr Hres from providing any financial services for a period of three years.
THE LENDERS AND THE DEEDS OF LOAN
5.ASIC’s 20 October 2006 decision was based on findings about Mr Hres’ conduct concerning seven of the lenders Mr Hres referred to Mr Orehek and Norton Investments. The basic findings were that Mr Hres had misled them, or failed to advise them properly, about their loans and had misled them about AMP’s connection with the Orehek loans.
6.Mr Hres agrees that most of the seven lenders did consult him for financial planning advice. He also agrees that, in most instances, he referred them to Orehek and claimed commission in relation to their loans. However he denies having referred all of the lenders, he denies having given them any personal advice, and he denies any misrepresentation that the Orehek loans had any connection with AMP. He says that the evidence of two of the lenders, Messrs Lucero and Reid, actually corroborates his position.
7.The names of the seven lenders and the amounts of their loans are set out in the following schedule. It lists the lenders according to the date of the original Deeds of Loan and includes (with the lender’s name indented) any additional loan or reinvestment. Where the lender claims to have consulted Mr Hres in relation to the loan, and he provided them with either an Advisory Services Guide or a Financial Analysis, that date is also shown in the table. The final column in the table indicates whether Mr Hres claimed commission in relation to the loan.
Schedule of Lenders
Lender Date Amount Commission ASG / meeting FA / meeting Deed Harvey 16-Feb-00 1-Apr-00 25-May-00 150,000 Yes Partridge June / October 00 na 01-Nov-00 50,000 Yes Lucero na na 27-Dec-00 25,000 Yes Harvey na na 25-May-01 194,646 Yes Partridge na na 02-Jul-01 100,000 Yes Fenner 27-Feb-01 na 12-Jul-01 60,000 Yes Els June/July-01 na 09-Aug-01 25,000 Yes Reid na na 24-Oct-01 6000 Yes Partridge na na 24-May-02 100,000 Yes Els na na 09-Aug-02 55,000 Yes Harvey na na 13-Aug-02 40,356 Yes Hernando 24-Aug-00 30-Oct-00 08-Nov-02 130,000 No
8.All of the lenders entered into Deeds of Loan with one or more of the Orehek companies. The borrowers under all of the Deeds of Loan dated before August 2001 were Mr Orehek and Norton Investments. The borrowers in some of the later Deeds were other Orehek companies. Despite those differences in the parties, all of the Deeds were substantially the same. They were very brief and typically had these features:
8.1Each Deed recited that the loan was required for the purpose of assisting in the development of various listed properties.
8.2The borrower parties varied according to the ownership of the properties listed. (The borrowers and properties for all the complainant lender’s initial loans, other than in the case of Mr Hernando, were in fact the same: Mr Orehek and Norton Investments Pty Ltd.)
8.3None of the Deeds contained any reference to any AMP company, product, endorsement or approval.
8.4The loan term was 12 months. Thereafter the borrowers promised to repay 28 days after written demand.
8.5The borrowers promised to pay simple interest on demand at a rate which was typically about 30% per annum. (There were two significant exceptions to this generality. The 13 August 2002 Deed relating to Mr Harvey stipulated a fixed interest amount for a one month loan. Mr Hernando’s 8 November 2002 Deed, stipulated an interest rate of 30% for a three month loan. In both cases the effective annual interest rate was 120%.)
8.6The borrowers were entitled to repay within the 12 month loan term.
8.7The Deeds did not contain any guarantee, although there was at least one instance where the property owners were included as guarantors, rather than as borrowers.
8.8The Deed acknowledged that the Lender had a caveatable interest over the listed properties.
8.9The Lender waived any right to lodge a caveat until after the expiry of the loan term. (Some Deeds, notably those of Mr Harvey and Mr Hernando, permitted the lenders to lodge a caveat during the loan term.)
8.10The borrowers were not precluded from selling any of the listed properties. Neither were they obliged to repay the loan from any proceeds of sale.
8.11Loans were commonly “rolled over” at the end of the initial term, at a higher interest rate (often 35% or 40%) and the accrued interest was added to the loan amount.
9.The fact that the Deeds of Loan contingently permitted lenders to lodge a caveat over the listed properties gave rise to a property interest that could sustain the registration of a caveat under s 74F of the Real Property Act 1919 (NSW). Such a registered interest operates as an equitable charge and, in that way, the Deeds of Loan gave the lenders an element of security: see Troncone v Aliparti (1994) 6 BPR 13,291; Redglove Projects Pty Ltd v Ngunnawal Local Aboriginal Land Council (2004) 12 BPR 22,319 at [20]-[21]. But the practical utility of such a caveat depended on the actual underlying equity the borrower parties had in the development properties. Until a caveat was lodged none of the Lenders had even the formal appearance of security for their loans. Even when they lodged a caveat, the extent of their actual security depended on the priority of other lenders and the then state of the borrowers’ affairs.
ASIC’S FINDINGS AND CONTENTIONS
10.The Schedule of Lenders indicates that all of the lenders either made their first loan, or had their relevant contact with Mr Hres, well before March 2002. That conduct therefore preceded the commencement of the Financial Services Reform Act 2001 on 11 March 2002. That Act repealed and substituted a new Chapter 7 of the Corporations Act 2001. The main relevant effect of the Chapter 7 provisions was to substitute a differently worded banning power in s 920A of the Corporations Act. The section made the exercise of the banning power, for the purpose of the present proceedings, conditional on default in relation to specified provisions in the new legislation. As a matter of literal construction, therefore, the new s 920A did not appear to apply to conduct that occurred before the 11 March 2002 amendments and did not appear to authorise the banning order that had been made in the decision under review.
11.However, s 1444 of the Corporations Act permits regulations providing for the transitional operation of provisions applying to conduct that occurred before 11 March 2002. In relation to conduct of that kind, clauses 10.2.93 and 10.2.94 of the Corporations Regulations 2001 contain transitional provisions that apply to banning orders. They contemplate the concurrent operation of the banning powers in both the pre and post 11 March 2002 versions of the Corporations Act 2001. Clause 10.2.93 provides for the continued operation of the repealed provisions of Part 7.3 of the Corporations Act “to the extent necessary to allow a banning order to be made or enforced”. Clause 10.2.94 permits a banning order to be made under the new s 920A “to the extent that the relevant old legislation would have permitted the making of an order in similar terms”. The practical effect of these provisions is to require the factual grounds for the exercise of the banning power to be established by reference to the criteria in the pre 11 March 2002 form of the Corporations Act 2001. ASIC conceded this was the practical effect of the transitional provisions. However, the actual form of the order may follow the form contemplated by the new wording of s 920A, and is not confined to the form of order that would have been made under the earlier provision - s 830 of the Corporations Act 2001.
12.Another transitional complication is that, as the Schedule of Lenders also indicates, with the possible exception of Ms Els, all of the lenders’ relevant contact with Mr Hres occurred before the commencement of the Corporations Act 2001 on 15 July 2001. However, s 1405 of the Corporations Act is another relevant transitional provision. It provides for references in the Corporations Act to be taken, in relation to events that occurred before 15 July 2001, to include corresponding provisions in the “old legislation” - that is, to the uniform “Corporations Law” of the various States and Territories. In the end result, therefore, the review proceedings involved the exercise of the power conferred by s 829 of the Corporations Act 2001, having regard to the Applicant’s conduct in relation to the relevant provisions of the Corporations Law.
The Principally Relevant Legislative Provisions
13.Despite the conceptual (and jurisdictional) differences between the Corporations Law and the Corporations Act 2001, ASIC’s contentions proceeded on the basis that, in relation to the present matter, there was no material contextual differences. It is therefore convenient, and sufficiently accurate, to refer exclusively in these reasons to the relevant provisions of the Corporations Law. The provisions of the Corporations Law on which ASIC relied can conveniently be summarised as:
13.1 s 829(d) - which made a “securities law” contravention a ground for a banning order;
13.2 s 829(f)(i) - which made reason to believe that a representative of a dealer or investment adviser had not performed their duties “efficiently, honestly and fairly” a ground for a banning order;
13.3 s 829(g)(i) - which made reason to believe that such a representative “will not perform” their duties “efficiently, honestly and fairly”, another ground for a banning order;
13.4 s 995(2) - which prohibited misleading and deceptive conduct “in or in connection with” any “dealing in securities” and was, by virtue of the definition in s 9, a “securities law”;
13.5 s 830 which permitted a banning order to be made either for a specified period or permanently.
14.All of the Deeds of Loan were entered into with at least one corporation as a borrower. All of them evidenced the lender’s right to demand repayment of the loan and, at least impliedly, their potential charge over corporation property. They were debentures within the definition in section 9 of the Corporations Law. As such, they came within the definition of “securities” in section 92 of the Corporations Law.
15.The concept of “in dealing in securities”, to which section 995 refers, invoked the definition of “deal” in section 9 of the Corporations Law. It included not only entering into but also inducing, or attempting to induce, a security agreement. This can be seen from the relevant parts of the definition, which provided that to deal in relation to securities meant to:
... acquire, dispose of, subscribe for or underwrite the securities, or make or offer to make, or induce or attempt to induce a person to make or to offer to make, an agreement:
(i) for or with respect to acquiring, disposing of, subscribing for or underwriting the securities; or
(ii) the purpose or purported purpose of which is to secure a profit or gained to a person who acquires, disposes of, subscribes for or underwrites the securities or to any of the parties to the agreement in relation to the securities
16.Mr Hres was a representative of AMP Financial Planning Pty Ltd and was a “securities adviser” - for the purposes of section 9 and 94 of the Corporations Law. As a securities adviser he was subject to various obligations where he made any “securities recommendation” (that is any express or implied “recommendation with respect to securities”) to a person who might reasonably be expected to rely on the recommendation: Corporations Law ss 9, 849, 851. Those obligations included:
16.1 disclosing particulars of
(a) any commission or advantage the adviser may receive in connection with the recommendation, or in connection with any consequential dealing in securities by the person to whom the adviser made the recommendation: Corporations Law s 849(2)(c).
(b) any other interest “that may reasonably be expected to be capable of influencing the securities adviser” in making the recommendation: Corporations Law s s 849(2)(d).
16.2 having a reasonable basis for making the recommendation: Corporations Law s 851(2).
17.The concept of having a “reasonable basis for making a securities recommendation to a person” was dealt with in section 851(2) of the Corporations Law. It provided that a person did not have a reasonable basis unless:
(a) in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person’s investment objectives, financial situation and particular needs, the securities adviser has given such consideration to and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and
(b) the recommendation is based on that consideration and investigation.
THE IMPUGNED CONDUCT AND ITS CHARACTERISATION
18.The decision under review involved three principal findings in relation to Mr Hres’ conduct and two additional findings in relation to his more general competence and likely future compliance. These findings were that Mr Hres:
18.1 had misused his position as an AMP representative to solicit loans to the Orehek companies - (this finding was expressed in relation to Els, Hernando, Fenner, Partridge and Reid, although the reference to the latter is likely to have been a mistake for Harvey).
18.2 had misled clients by telling some of them (Els, Hernando, Fenner and Harvey) that the loans to the Orehek companies were secure and by failing to explain the risky nature of those loans.
18.3 had represented that loans to the Orehek companies involved substantially the same level of risk as other managed fund and property investments and thereby falsely represented the standard or quality of the loans.
18.4 did not understand the magnitude of the risk involved in the loans to the Orehek companies.
18.5 was not cognisant of relevant provisions of the Corporations Act and the ASIC Act.
18.6 because of his failure properly to assess the risk involved in the Orehek loans and to comply with his obligations to the lenders, could not demonstrate that he was likely to comply with the relevant laws in the future.
19.Despite finding Mr Hres had misrepresented loans to the Orehek companies as secure, the decision under review expressly refrained from including in that finding any relevant misrepresentation about the effect of the Deeds of Loan and, in particular about the significance of the caveat for which the Deeds provided. The delegate who made the decision was uncertain when Mr Hres became aware of either the terms, or the effect, of the Deeds of Loan.
20.In the review proceedings ASIC expressed three concerns:
20.1 that Mr Hres had made statements to clients that were misleading or deceptive contrary to section 995(2) of the Corporations Law and that this constituted a failure to comply with a securities law.
20.2 that Mr Hres had falsely represented the loans to the Orehek companies were of a particular standard or quality, and had a sponsorship or affiliation with AMP, contrary to section 995(2) of the Corporations Law.
20.3 that, as a result of his conduct relating to those who invested with Orehek, Mr Hres had not performed the duties of a representative of an investment adviser honestly and fairly, and would not do so in the future - as required by sections 829(f) and (g) of the Corporations Law.
21.The specific respects in which ASIC contended that Mr Hres’ conduct was misleading and deceptive were that:
21.1 he represented the Orehek investments were a secure form of investment, without having any reasonable basis for that representation.
21.2 he conveyed a representation that the Orehek investments were a suitable alternative to an investment in managed funds.
21.3 he failed to explain the risks associated with Orehek investments, thereby representing that there was no significant risk.
21.4 he conveyed a representation that the Orehek investments were related to AMP.
22.The latter two of ASIC’s contentions about the misleading quality of Mr Hres’ conduct were based on his alleged omissions. This is particularly the case in relation to the alleged representation of a connection between AMP and the Orehek loans. Although Ms Fenner (and she alone) gave evidence of an express representation, ASIC’s principal contention was that AMP’s represented association with the Orehek loans AMP was conveyed by Mr Hres’ status as an AMP adviser and his alleged failure to disavow AMP’s connection with the Orehek companies, or at least to do so with sufficient clarity. The misrepresentations about the security of, and the absence of significant risk involved in, the Orehek loans were alleged to have been conveyed by various statements. These included express statements to the effect that:
22.1 everything was “set up right” (Mr Hres orally to Ms Els).
22.2 the investment was not high risk (Mr Hres orally to Ms Fenner).
22.3 you can't go wrong (Mr Hres orally to Mr Hernando).
22.4 the lender would guarantee a return of between 30 and 40% per annum depending on the amount of money invested (Mr Hres orally and in writing to Mr Hernando).
22.5 the investments were secure or that the Deeds of Loan would give security (Mr Hres orally to Mr Harvey, Ms Fenner & Ms Els);
22.6 Norton Investments was in incredible shape (Mr Hres orally to Ms Fenner).
22.7 Norton Investments had considerably more assets than liabilities (Mr Hres orally to Mr Partridge).
23.ASIC’s contention that Mr Hres had not performed his duties “efficiently, honestly and fairly” was based on his alleged contraventions of s 995(2) of the Corporations Law. Related to those alleged contraventions was a further complaint that Mr Hres had not carried out an appropriate investigation of Mr Orehek and his companies in relation to the proposed loans. In addition, and apparently as an alternative to its complaint of misleading and deceptive conduct, ASIC expressed its concern that Mr Hres “may have been holding out that he was providing financial services on behalf of AMP”.
MEMORY, GENERAL PRACTICE, DOCUMENTS AND INFERENCE
24.ASIC’s concerns relied substantially on the content of conversations between Mr Hres and the various Lenders. Those conversations all occurred in the period between February 2000 and July 2001. With one partial exception (in the case of Ms Els) and one contentious exception (in the case of Ms Fenner) none of the conversations was the subject of any relevant contemporaneous notes. Furthermore, in the context of the present case it is relevant that at least some of the complainant lenders knew of, or had even met, Mr Orehek before they consulted Mr Hres. All of them met with Mr Orehek, and had detailed discussions with him after their initial meeting with Mr Hres. In only one case (that of Mr Hernando) is there any acceptable evidence Mr Hres was present at those meetings with Orehek. There is an obvious risk of conflating these different conversations as the occasion of particular statements. Unaided recollections of the complainant lender’s conversations with Mr Hres are inherently likely to be imprecise and impressionistic, rather than clear and actual memories.
25.ASIC’s submissions recognised the reality of the difficulties posed by the lapse of time, and the absence of clear contemporaneous notes of the relevant conversations. ASIC submitted that, in evaluating the evidence, significant regard should be had to the objective evidence and to reasonable inference from established or conceded events.
26.Much the same point was made on Mr Hres’ behalf. This was put in two different ways. The first was that since Mr Hres conceded some discussion with the complainant lenders about the Orehek loans, particular caution was needed in drawing from the fact such a conversation occurred, an inference that the content included a relevant recommendation with respect to securities. The second way in which the submission was put was to draw attention to the activities of a Mr Carpenter. He was another disappointed lender to the Orehek companies. He was also a person in respect of whose loan Mr Hres claimed commission. It appears from some of the documents put into evidence that Mr Carpenter has been the prime mover in some of the lenders instituting proceedings against AMP. The aim of those proceedings would appear to be to make AMP liable for the perceived shortcomings in Mr Hres’ conduct. Some of the material provides scope to apprehend a risk of suggestion to, and the suggestibility of, the lenders about the content of their complaints against Mr Hres.
27.Although the Applicant’s submissions endeavoured to make much of Mr Carpenter’s role, or apprehended role, it is to my mind, simply another reminder of the need for caution in evaluating the evidence about conversations that occurred long ago. With the passage of time and changed circumstances different interests, emphases and understandings emerge and tend to influence belief and colour recollection. But, in relation to the specific matter of connection with AMP, as I have said, Ms Fenner was the only one of the complainant lenders who made a positive allegation of misrepresentation by Mr Hres about AMP’s connection with the Orehek loans. In her case, as I later explain, there are more cogent reasons than the ephemeral involvement of Mr Carpenter, to reject the accuracy of that aspect of her recollection.
28.In evaluating the evidence, both of the complainant lenders and of Mr Hres, it is useful to identify the matters that are relatively uncontentious. The first of these involves Mr Hres general practice in relation to his role as a financial planner, albeit a rather fledgling one, from 2000 to 2002.
MR HRES’ GENERAL PRACTICE
29.When he arranged an initial client meeting, whether it was to occur at his office or elsewhere, Mr Hres would often send a short covering note outlining the services he was able to provide. The note would include a list of the type of financial information clients should be prepared to detail at the meeting. Often Mr Hres would provide with the covering note an Advisory Services Guide. This was a standard form document, prepared by AMP Financial Planning Pty Ltd. It was in two parts. The first part was generic to the company. It identified that company as a licensed securities dealer, briefly listed a range of available services and gave a short description of the advice process. That description indicated that clients should provide their financial details, that any advice would depend on the extent of the client disclosure, and that the advice would include explanation of any significant risks.
30.The second part of the Advisory Services Guide (which I will often refer to simply as the ASG) contained information specific to Mr Hres. It identified him as an adviser for three AMP companies - AMP Financial Planning Pty Ltd, AMP Life Limited and AMP General Insurance Ltd. It specifically described Mr Hres as a “Tier 1" adviser who was not permitted to advise on products from competing organisations and could not be considered to be an independent financial adviser. The ASG disclosed that Mr Hres was paid commission in relation to any client investments with AMP products.
31.Mr Hres said that his practice at any initial client meeting was to go through the Advisory Services Guide in detail. In the course of so doing he would explain the general categories of investment and the concepts of risk and rates of return. He would discuss with clients their general financial and investment objectives. He would explain, by reference to the contents of the Advisory Services Guide, that he could only make specific recommendations after considering the clients’ objectives and circumstances. He paid particular attention to the second part of the Advisory Services Guide, which dealt with the extent of his authority and his commission entitlement. He would explain that he could only offer advice in relation to AMP products, and that, as a consequence, he could not be classified as an independent financial adviser.
32.In relation to the Orehek loans Mr Hres said that if the people he met actually enquired about Orehek, as some did, or if they expressed a particular interest in similar property development or investment, not involving AMP products, Mr Hres would provide them with contact details for Mr Orehek and, at least sometimes, another developer named Mr Justin Low. (In fact, the complainant lenders in the present matter appear only to have been referred to Mr Orehek.) In so doing, there was almost inevitably some discussion of the “investment” terms Mr Orehek was offering. But Mr Hres says he never actually recommended the Orehek loans to any of the people who consulted him. Whenever he referred people to Orehek he says he told them that he was not qualified to provide advice in relation to non AMP products, that the Orehek “investment” was not related to AMP and that he was not making any recommendation in relation to it. He says he told everyone he referred to Mr Orehek that they would have to make their own enquiries in relation to any such investment. He understood that he was encouraging people to go and speak to Orehek about his proffered loan terms, but he was not actually recommending those loans to the referees. Mr Hres says he did disclose to referees the fact that he was paid a commission by Norton Investments.
33.Mr Hres said that in relation to the first referrals he made, he simply telephoned Mr Orehek, gave him the name of the referee and told him they might make contact to discuss a loan investment. Later, and apparently by about October 2000, Mr Orehek asked Mr Hres to attend the referees’ first meeting with him and facilitate their discussion. Mr Orehek explained to Mr Hres that he thought that this would overcome some awkwardness he had felt in previous meetings with the referees. Mr Hres complied with this request (although apparently not in relation to most of the complainant lenders in the present case). He says he took no active part in the meetings, and gave no advice in relation to the loan proposal.
34.The complainant lenders’ evidence provided a measure of corroboration for Mr Hres’ evidence. In particular:
34.1 most of them did acknowledge receiving an ASG from Mr Hres.
34.2 most of them did recall a general discussion about financial goals and investment risk.
34.3 some of them either agree that Mr Hres disclosed, or they assumed, that he would be paid commission by Orehek.
34.4 only one of them (Ms Fenner) alleged any actual misrepresentation about AMP.
34.5 all of them met Orehek and negotiated direct with him.
34.6 Mssrs Harvey and Hernando were the only complainant lenders who said Mr Hres attended their meeting with Mr Orehek (a claim Mr Hres credibly denied in the case of Mr Harvey).
MR HRES’, KNOWLEDGE OF, AND CONFIDENCE IN, THE OREHEK LOANS
35.The extent of Mr Hres’ knowledge of the Orehek companies, and his own confidence about “investment” loans to them, is important to consider for two reasons. First it provides a background against which to assess the likelihood of the statements the complainant lenders attribute to him. The second is that it reveals the extent to which he had a reasonable basis for any advice he gave or representation he made.
Mr Hres’ introduction to, and relationship with, Orehek
36.Ms Fitzgibbon, Mr Hres’ accountant and a person associated with him as a director of FMC Group Pty Ltd, introduced him to Mr Orehek in about September 1999. This was the first time Mr Hres met Mr Orehek. The three of them sat down around a table and Mr Orehek basically explained the nature and extent of Norton Investments’ property development business. He showed some brochures and spreadsheets giving details of the business.
37.The discussion with Mr Orehek included his description of the sort of profits he had made in the past and an explanation of the way he financed his company’s development operations. The initial funding for a project was obtained from a bank, with a loan amount up to 60% or 70% of the property value, and secured by mortgage. Additional funding required to complete the development could be obtained in various ways. There was the possibility of obtaining development finance from solicitors who managed trust account funds. These loan funds were at a lesser rate of interest than Mr Orehek was proposing, but he explained that he did not favour these types of loans. They were strictly controlled. The loan drawdowns could only be made against progress claims and they required periodic repayments, rather than being left until the final completion of a project. Mr Orehek considered them costly. They offered less flexibility and were more demanding to administer. In order to avoid these restrictions and difficulties he was happy to offer significantly higher rates of interest to investors, 30% to 40%, on simplified terms.
38.Mr Hres explained that another possible option that Mr Orehek discussed at the meeting was that of lenders taking ownership of part of the property in the completed development project, rather than being repaid the amount of their loan advance. This possibility, which was not in fact implemented in any of the loan transactions that were the subject of evidence, would perhaps have justified characterisation of Mr Orehek’s operation as involving “mezzanine finance”. That expression was frequently used in the submissions made on Mr Hres’ behalf. Indeed the submission was made that the Orehek loans were intended to confer an ownership interest in the development properties and were not, therefore securities for the purposes of the Corporations Law. That contention is untenable. The actual loans, as recorded in the Deeds of Loan were merely unsecured borrowings from a miscellany of private lenders.
39.In the course of this initial meeting that Mr Orehek offered to pay Mr Hres a commission of 3% for every referral that resulted in loan funds being provided to his companies. The precise terms of this offer were not put into writing. Indeed nothing initially came of the proposal until early February 2000. At about that time Mr Hres attended a property development seminar. There was some mention of a 30% interest rate. Mr Hres says he thought himself that it was a high interest rate but he got the impression from talking to other people that it was not unusual. After this Mr Hres revisited the commission idea and determined to make some further enquiries about what Mr Orehek’s referral proposal would involve. He understood, from what Ms Fitzgibbon had told him, that the Orehek loan and commission proposal was legitimate and that the companies had been properly set up to implement it. He arranged a couple of meetings with Mr Orehek to discuss the matter further, to establish the extent of any work that might be required of him, and to satisfy himself that the proposed referrals were appropriate.
40.By some time in early 2000 Mr Hres had seen a copy of the standard Deed of Loan offered by Norton Investments. He spoke to the solicitor who had prepared the draft and was told that Mr Orehek had been using private loans of that type for some time. Mr Hres’ reference to that evidence did not suggest any detailed discussion about the terms or effect of the Deeds. But he was aware that it provided for lenders being able to lodge a caveat over the properties. He understood that the caveat would be secondary to a prior mortgage. Because that mortgage was only supposed to be for an amount up to 70% of the project cost, Mr Hres claimed he believed that the caveat provided for something in the nature of a guarantee of the security of the loan.
41.Mr Hres says that in the period from early to about mid 2000, in addition to meeting Mr Orehek he read a feasibility report about Norton Investments Pty Ltd. He also visited some of its development properties. He spoke to Mr Orehek’s new accountants and was assured that the companies had a history of profitable trading, although the accountants did not show him any financial statements. Mr Hres claims he also saw a 200 page independent report that Orehek had commissioned and discussed with him. He did not make any notes about, or retain a copy of this report, but recalled that it included equity statements for the individual development projects and a company balance sheet and trading statements.
42.Mr Hres also said that Mr Partridge, who is a mortgage broker and one of the complainant lenders, was also looking into Mr Orehek’s companies. Mr Hres said that Mr Partridge kept him informed of the results of his enquiries. But the specific evidence of the contact between Mr Hres and Mr Partridge, to which I refer later, suggests that it occurred in the latter part of 2000, after Mr Hres made his first referrals. And, in any event, Mr Hres did not suggest that Mr Partridge ever gave him any specific information.
43.Mr Hres ultimately explained that his decision to be involved in referring people to Mr Orehek was the result of a combination of factors. First all his enquires had led him to conclude that Mr Orehek was reputedly operating profitably and had been doing so for some years. Second, Mr Orehek’s reputed profitability accorded with the general impression Mr Hres had gained, from enquiry of other property developers, of the range of profits that were potentially achievable. Finally, Mr Orehek was well and favourably known within Mr Hres’s church community. These factors led Mr Hres to believe that Mr Orehek was genuine and successful.
44.Mr Hres says he began to refer lenders to Mr Orehek by about April 2000. He was even contemplating investing his own funds. His first commission was paid at the end of May 2000. By December 2000 about ten people Mr Hres referred had made loans and he had an accrued commission entitlement. By that stage he did regard himself as having invested in the Orehek companies. (He actually referred to himself as an investor in his evidence at the hearing for the decision under review.) He had draft Deeds of Loan prepared. They provided for a 40% per annum interest rate on his accrued commissions. Mr Hres said he could not recall why these Deeds were not executed. He claimed that although he did not have anything in writing to evidence his commission arrangement, he never had any reason to doubt Mr Orehek’s honesty.
the ambiguous purpose of Mr Hres’ enquiries about the Orehek loans
45.Mr Hres’ enquiries of Mr Orehek, his accountants and solicitors show that he made some attempt to inform himself about the apparent profitability and reputation of the Orehek companies. There is, however, a fundamental ambiguity about the purpose and extent of these enquiries. Mr Hres explained his renewed contact with Mr Orehek in about February 2000 as an attempt to see whether he would be happy making the contemplated referrals. The level of enquiry and investigation was directed at general reputation and appearances. It was concerned with achieving a degree of subjective satisfaction, rather than reasoned objective analysis of specific and reliable financial information.
46.Mr Hres also said that his interest in the Orehek companies was also partly kindled by his own investment goals. In particular, he had been interested in the possibility of purchasing a property “off the plan” in one of the Orehek development projects. It is consistent with this interest that his knowledge of the Orehek companies’ financial position was restricted to the generalities of the assurances he was able to obtain. These were that (i) Mr Orehek had been offering these types of high interest rate loans for some years (ii) his operations were reputedly profitable and (iii) an allegedly supportive investigation had been carried out by some other organisation Norton Investments had commissioned.
conceded limitation and inadequacy of enquiries
47.Despite the apparent generality of his own enquiries, Mr Hres said that he thought he had the ability, in early 2000, to make a meaningful assessment of the risks involved in any Deed of Loan transaction with the Orehek companies. Indeed, when he was asked to outline the factors that would influence the risk assessment he did address many of the relevant factors. These included the level of other borrowings, the cost of the particular property, its actual and projected market value, the cost and delay in getting necessary approvals, the cost of the development work, the quality of the work, and the progress of the work during the loan currency. Mr Hres conceded, however that a reasoned and informed analysis of these various factors would likely have been well beyond at least some of the lenders he referred to Mr Orehek.
48.Nothing in his evidence suggested that Mr Hres had himself attempted to make any informed assessment of the real profitability of the Orehek companies, or of the real risks involved in the Deed of Loan transactions with them. Neither had he satisfied himself that anyone else had undertaken an assessment of the state of individual development projects for the purpose of making an informed judgment about the likely performance and security of any loans. Indeed, despite the evidence he proffered to describe the extent of his enquiries about Mr Orehek and his companies, Mr Hres always maintained that he did not provide any advice to any of the complainant lenders in relation to their loans. Given that stance, and the objectively limited scope of the information he did obtain, he ultimately conceded that his enquiries were not in fact directed towards providing any advice about the apparent or likely profitability of the proposed loans. He conceded that they were not adequate for that purpose.
the ultimate nature of Mr Hres’ belief about the Orehek loans
49.In paragraph [31] of the statements of reasons for the decision under review the delegate recorded asking Mr Hres whether the promised return of about 30% being offered by Mr Orehek rang any warning bells for him. He had responded that he did not and that he did not consider the loans offered as being any more risky than other property investments. The delegate went on to conclude that Mr Hres had not understood the magnitude of the risk involved in the Orehek loans and consequently, had failed to communicate that risky nature adequately to the lenders he referred.
50.In the light of Mr Hres’ evidence to the Tribunal about the extent of his enquiries, his position was, as it seems to me, rather more complicated than that found by the delegate in the decision under review. It is very clear that 30% interest was a very high rate of return. At an instinctive and intellectual level, Mr Hres well realised that fact. It was a realisation that really provoked enquiry. Indeed it was at least part of the reason he made the enquiries he did make. He well understood that rates of return were related to perceived risk. He also understood, because of what Orehek had told him, the nature of Orehek’s operations and his preferred method of funding. He was aware of the basic effect of the Deeds of Loan. Because of all that information he knew there was little objective data from which any really informed assessment of the investment risk could be made. Furthermore, although the delegate gave Mr Hres the benefit of the doubt in relation to the extent of his knowledge about the terms of the Deeds of Loan, and the effect of a caveat, Mr Hres’ evidence to the Tribunal really removes any doubt. By early 2000 he knew the substance of the Deeds of Loan, he knew what a caveat was and he knew that all the properties were subject to prior mortgages.
51.In the totality of the circumstances one is driven to the conclusion that Mr Hres did in fact well understand the inherent risk involved in the Orehek loans. What he had done was to come to a subjective belief that the risk was worth accepting. That belief was partly based on Mr Orehek’s reputedly successful history. It was also partly based on what Mr Hres thought was the general plausibility of Orehek’s claimed level of profitability. Finally it was also partly based on his belief in an intangible element of apparent approval of Mr Orehek, and belief in his success, by people Mr Hres knew, particularly within their common church community.
MR HRES’ “REFERRAL ONLY - NO ADVICE” CONTENTION
52.As a result of his enquiries Mr Hres had formed a very positive view about loans to the Orehek companies. But his basic stance in relation to the lenders’ complaints, and in response to the findings in the decision under review, is that all he ever did was merely refer people to Orehek, and facilitate their contact with him. He claims he told all the people he referred that he could only provide advice in relation to AMP products. The Orehek loans were not AMP products and he was not recommending them as investments.
53.Mr Hres’ “referral only - no advice” contention, if it was meant to convey the impression that he consistently and conscientiously refrained from any endorsement of the Orehek loans, is difficult to reconcile with a number of matters. They are as follows.
53.1 In October and November 2000 Mr Hres sent to at least some prospective lenders standard form email, containing an “Exclusive Offer” and asserting a guaranteed minimum return, relating to the Orehek loans.
53.2 From about October 2000 onwards, and at Orehek’s request, Mr Hres arranged and attended some of the referees’ initial meetings with Orehek.
53.3 On 15 November 2000 he prepared, and submitted to Mr Orehek for approval, a standard form email in which he proposed to “highly recommend” Mr Orehek in relation to “all your property development investment options”.
53.4 Mr Hres distributed at least some “Reports to Investors” that were apparently printed under the letterhead of his company FMC Group Pty Ltd.
53.5 In 2001 Mr Hres wrote to lenders providing them with details of the Norton Investments Pty Ltd web site, and account and password information to access their online account details.
53.6 Mr Hres wrote to at least one lender, in March 2001 describing her Deed of Loan as providing security for her loan.
53.7 On 19 August 2002 Mr Hres wrote to lenders warning them about aspects of their loans to the Orehek companies.
53.8 On 31 January 2003 Mr Hres sent a further letter providing another warning to lenders about their loans.
53.9 A further circular letter Mr Hres sent to lenders on 14 February 2003, informed them that his warnings about the Orehek loans were his personal views and had no connection with AMP.
the “Exclusive Offer” emails
54.The October / November “Exclusive Offer” standard form emails Mr Hres sent had two main sub headings - MANAGED FUNDS and PROPERTY DEVELOPMENTS. Under the first sub heading Mr Hres summarised details of a range of approved managed fund products. The summary said that some funds showed returns of more than 50% but there was no guarantee on returns and the recommended investment period was three years or more. Under the PROPERTY DEVELOPMENT heading Mr Hres listed three investment bands from $10,000 to over $500,000. The email stated “will guarantee” returns from 30% to 40% per annum, depending on the amount invested. The email explained that the “guarantee” involved a contract which specified a caveatable interest over the particular development properties.
55.The standard form email included four “possible scenarios”. Three of these contrasted the returns available after allowing for the cost of borrowing funds for the property development investment. It compared borrowing costs of between 8% and 10% with the 30% return. The scenarios modelled demonstrated arithmetically that even after allowing for the cost of borrowed funds, investors were “guaranteed” returns of over 20% per annum. After setting out these exercises, with their apparently compelling arithmetical demonstration of the effect of the “guaranteed” return, the Exclusive Offer email beguilingly informed recipients that the choice, between Managed Funds and the Property Development investment, was “yours”. In order to learn more about these opportunities the email recipient was invited to contact Mr Hres to arrange a time to discuss “options specific to your situation”.
56.The “Exclusive Offer” emails did not identify Mr Orehek or his companies and the invitation, in two places, to contact Mr Hres for a meeting, perhaps suggests an intended general readership. But Mr Hres said he sent the email only to people who had already enquired about property investment. He at least implied that the actual recipients were already aware of Mr Orehek before he sent them the email. Whether or not that was always the case, the email was certainly calculated to encourage the recipients to favour the proposed “property development” investment, and it did in fact relate to the Orehek companies.
57.Three notable features of the “Exclusive Offer” email are relevant to Mr Hres’ claim that he merely “referred” proposed lenders to Mr Orehek. They are as follows.
57.1 The email was not itself a referral. There was no information to identify the property developer. Mr Hres was the only nominated contact.
57.2 The characterisation of the “property development” investment returns of up to 40% as “guaranteed” was calculated to convey a measure of assurance that was simply not justified. It was not justified by any information contained in the email itself. Nor was it justified by any other information available to Mr Hres.
57.3 The email was worded as a deliberate attempt to persuade readers of the unanswerable arithmetical logic of the “property development” offer, and its comparative advantages, specifically the guaranteed return, over investment in a managed fund.
58.On 18 October 2000 Mr Hres sent the “Exclusive Offer” email to Mr Hernando, one of the complainant lenders. He said Mr Hernando had asked for further information about the Orehek investments. He also said the contents of the email, in so far as they dealt with the property development proposal, was simply information Mr Orehek had provided to Mr Hres and which he had passed on in response to Mr Hernando’s request. Later however it became clear that Mr Hres had composed the email as a standard form that he sent out to other referees though, he said, only if they had expressed an interest in property development.
59.The extent to which the “Exclusive Offer” email was used as a means of actively promoting investment with Mr Orehek’s companies was disputed by Mr Hres. He contended the exclusive element of the offer related to his elimination of entry fees for the Managed Fund. He said that this was achieved by foregoing part of his own commission and that his willingness to include that feature in the email indicted that he was genuinely presenting alternatives for proper consideration. This evidence is difficult to accept. It is really contradicted by the “guaranteed” return described and modelled in the email. Furthermore, the suggestion that Mr Hres was presenting alternatives for consideration is actually rather damaging to Mr Hres’ “no advice” contention. The standard form email simply cannot be characterised as any kind of referral, let alone a mere referral. The form in which he presented the property development alternative was particularly encouraging, and indeed irresistible - if one accepted the reality of the “guaranteed” rate of return.
60.At one stage it was submitted for Mr Hres that the email description of the investment returns of 30% to 40% as “guaranteed” was acceptable because the contents of the email themselves explained that the “guarantee” consisted of the right to lodge a caveat. This submission, and the argument on which it sought to rely, both misreads the “Exclusive Offer” email and seeks to give Mr Hres the benefit of a naivety, about the precise meaning of the concept of a guarantee and the effect of a caveat, to which he was not entitled. I have referred earlier in these reasons to Mr Hres’ knowledge of the terms of the Deeds of Loan and its reference to a caveat. In addition, Mr Hres gave evidence in cross examination to the effect that he regarded the Orehek loans as high risk loans that were effectively unsecured unless the caveat was lodged. Furthermore the October email did not explicitly equate the guarantee and the caveat. It said merely that the guarantee “involves a contract between the investor, and developer, which specifies a caveatable interest”. Given this evidence it is proper to conclude that Mr Hres understood the difference between unsecured and secured loans and also that the description of a “guaranteed” rate of return used in the “exclusive offer” email was intended to convey more than just a fixed rate of return and the existence of security. I do not accept that Mr Hres genuinely believed the “Exclusive Offer” email was accurate when it characterised the rate of return as guaranteed.
61.Mr Hres sent the 18 October 2000 “exclusive offer” email to Mr Hernando whilst he was still in the course of preparing a detailed Financial Analysis for Mr and Mrs Hernando. The terms of the email suggest that Mr Hernando had not then expressed any real inclination to pursue such a proposed property development investment. The email’s terms convey a real attempt to persuade. This impression is reinforced by emails Mr Hres and Mr Hernando exchanged shortly afterwards. On 20 October 2000 Mr Hres sent Mr Hernando an email enquiring about his interest in the “Exclusive Offer”. This email said that “we” are taking investors at the current rates, but those rates were about to be reduced. Mr Hernando responded that Mr Hres was a “good salesman” - an impression amply justified by his persistent espousal of the “Exclusive Offer” relating to property development.
62.Shortly after this exchange of emails between Mr Hres and Mr Hernando, Mr Hres composed another standard form email. He intended to send it to proposed lenders. In it Mr Hres said he would highly recommend Mr Robert Orehek “for all your property development options”. Mr Hres sent the draft to Mr Orehek on 15 November 2000 and asked for his approval to send the email to enquirers. When he was asked about this email, Mr Hres said Mr Orehek did not respond to it and he himself had second thoughts. In the end, he said, he did not send it to anyone else. Whilst no such emails were in fact shown to have been sent, the contents of the 15 November 2000 email evidence that Mr Hres held Mr Orehek in very high regard, and was prepared to endorse client contact with him, at that time.
63.I have rejected the submission that Mr Hres believed the “Exclusive Offer” email was accurate in its description of the guarantee. In doing so I took into account Mr Hres’ knowledge that all of the Norton Investment development properties were typically subject to prior mortgages. Mr Hres knew that those mortgages would cover only part of the development costs. He also knew, as a result of the reasons Mr Orehek gave for not using solicitor’s loan funds for the additional costs, that the Orehek development projects were probably not administered in a way that involved matching borrowings with the realisable value of the work done. Finally he also knew, from the standard terms of the Deeds of Loan, that Mr Orehek’s preferred course was to preclude Lenders from being able to lodge any caveat until after the expiry of the loan term. All of these considerations should have conveyed to Mr Hres, that the loans were, for the practical purpose of assessing the risk associated with them, certainly not “guaranteed”.
64.I do not think that Mr Hres entertained any real doubt about that proposition at any time. But any doubt he might have had about the guarantee or the security for the Orehek loans could not reasonably have survived his correspondence with Mr Lucero in November 2000. Mr Lucero also apparently received the “Exclusive Offer” email. He got advice from his solicitor about the offer in the light of the terms and effect of the proposed Deed of Loan. On 28 November 2000 Mr Lucero sent Mr Hres an email outlining the effect of his solicitor’s advice. He asked Mr Hres whether he could clarify five points, or whether he should pursue them with Mr Orehek direct. The points were that, according to Mr Lucero’s solicitors (i) the Deed of Loan only made Norton Investments and Mr Orehek liable as borrowers (ii) the Deed did not establish whether the borrowers were registered proprietors of the listed properties (iii) there was no limit on prior encumbrances (iv) there was no guarantee of the return and (v) the terms of the Deed of Loan offered very little protection to lenders.
65.Mr Hres said that he did not really read this email. He claimed he merely skimmed it and referred it on to Mr Orehek for him to address. If Mr Hres meant to convey by this evidence that he did not appreciate, by the end of November 2000, that the Deeds of Loan did not provide for a guarantee, and that he also did not appreciate the caveat did not itself provide any guarantee, it is not evidence I am prepared to accept. Mr Lucero was Mr Hres’s friend. He told Mr Hres that he had sought legal advice about the Deed. He was communicating the effect of that advice. He was asking for Mr Hres’ opinion about the most appropriate way of resolving the points that had been raised by his solicitor. In those circumstances it is, as Mr Hres effectively concedes, highly likely that he read the email. If he read the email, it is difficult to conceive that Mr Hres did not instantly appreciate both the technical accuracy, and at least the formal significance, of the solicitor’s view that the loan was essentially unsecured and did not in fact contain any effectively “guaranteed” rate of return. As Mr Hres freely conceded, he knew a 30% rate of return was high and itself indicated a correspondingly high level of risk. This impression was simply not conveyed, indeed it was effectively contradicted, by the contents of the “Exclusive Offer” email.
providing follow up information to investors
66.In the Exclusive Offer emails, and again in his 20 October 2000 email to Mr Hernando, Mr Hres used the first person plural in referring to the proposed Orehek investment loan. This in itself both betrayed and conveyed a degree of association with Orehek that went beyond mere referral. So too did Mr Hres’s practice, begun in the latter part of 2000 at Mr Orehek’s request, of attending the first meeting between Mr Orehek and any loan referees.
67.A similar degree of association was suggested by the “Reports to Investors” that have a cover page identifying them as being presented by FMC Group Pty Ltd and Norton Investments Pty Ltd. (FMC Group Pty Ltd was the company name under which Mr Hres traded until about September 2001. He and Ms Fitzgibbon, his accountant, were directors of the company.) Mr Hres gave some evidence to the ASIC delegate as to how this came about. He simply added or substituted an FMC cover page and could not even remember whether he had asked for Orehek’s permission or approval. This cover page described the reports as “presented by FMC Group, Financial and Management Consultants”. These June 2001 reports actually read as having been written by Norton Investments, without any independent evaluation by FMC Group. But by applying the pretentious cover page Mr Hres showed a willingness to provide more than mere referrals to Mr Orehek. He was promoting FMC Group, and himself, as a point of contact for, and thus as a point of information about, the Orehek “investments”.
68.The mere fact that Mr Hres wrote to referees providing them with details of the Norton Investments Pty Ltd web site, and account and password information to access their online account details might not be significant of itself. But in some of the letters he wrote that “we” need you to inform “us” about any missing or incomplete information in the lender’s “investor profile”. The use of the third person “we” and “us” implied a role, obviously greater than mere referral, in relation to the Orehek loans.
volunteering advice when difficulties were envisaged
69.On 19 August 2002 Mr Hres sent an email to referees about renewal of their Deeds of Loan with Orehek and Norton Investments. He suggested to the referees that it “may be in your interest” to remove from any renewal of their loan deeds any provision that postponed their entitlement to lodge a caveat - though he also assured that Norton Investments “would always do their utmost to meet” any repayment request. He went on to point out the wisdom of viewing statements and balance sheets “when dealing with these types of “private equity’ investments”. He also observed that “technically” the loans to Norton Investments were unsecured, that investors had no title and that prior bank mortgages would have priority.
70.The contents of the 19 August 2002 email evidence the kind of knowledge and understanding I consider Mr Hres had, probably from the outset of his dealings with Mr Orehek in early 2000, and certainly by the time he sent the “Exclusive Offer” emails in October and November 2000. The fact that he sent the 19 August 2002 email evidences a commendable concern if his only role in the past had been that of merely “referring” lenders to Mr Orehek. On the other hand it is also consistent with a recognition of some past assumption of responsibility for promoting the loan, and patent shortcomings in the information that had been provided, purportedly in discharging that responsibility. Having regard to the positive encouragement in the “Exclusive Offer” emails, and the use of the third person “we” and “us” in later correspondence, I consider it is proper to conclude that the 19 August 2002 email implicitly recognised a past endorsement of the Orehek loans. The contents of the email, and the inference to which it gives rise, is inconsistent with Mr Hres’ stance that his conduct had been limited to merely referring prospective lenders to Mr Orehek.
71.Mr Hres sent a standard form letter to his Orehek referees on 31 January 2003. The letter recited that the addressee had chosen to invest with the Orehek companies at a “fixed rate of interest rather than invest this money in managed funds through AMP”. Mr Hres went on to volunteer his opinion that referees should seek legal advice and to record his opinion that it might be in referees’ best interests to demand return of their investment. It gave four reasons for that view. These were (i) indicators pointing toward a slowdown in the property market (ii) the Orehek companies’ directors and management had discussed changing their focus to becoming finance providers rather than property developers (iii) available information suggested some investors had been waiting for over six months for a return of interest or capital and (iv) Orehek was not willing “to disclose financials to us unless we enter into a secretive nondisclosure agreement”. The letter recommended the referees make their own enquiries about the current position of their investment funds and matters related to their repayment.
72.Mr Hres sent another letter to referees on 14 February 2003. This letter differed from the 31 January 2003 letter in that it did not bear any AMP logo. It purported to “confirm your understanding” that the views contained in his 31 January 2003 letter were his personal views and had no connection with AMP. The letter informed that the referee’s Orehek loan was “in no way whatsoever related to any product offered by AMP”. The letter repeated Mr Hres’ recommendation that referees seek legal advice in relation to their Orehek loans.
73.These two letters of January and February 2003 seek to portray Mr Hres as a helpful volunteer. But the mere fact that they were written suggests a sensitivity about his previous role in relation to the referee’s investment decision. The 31 January 2003 letter arguably betrays the reason for that sensitivity namely, that the lenders chose to lend to Orehek “rather than invest this money in managed funds through AMP”. That is precisely the choice that Mr Hres had presented in the October / November 2000 “Exclusive Offer” emails. Such a choice would be a matter of sensitivity to Mr Hres if, as the 31 January 2003 letter suggests, it was evident in what he claims were his mere “referral” of lenders to Mr Orehek.
THE EVIDENCE OF THE FIVE COMPLAINANT LENDERS
74.The preceding considerations suggest that, prior to about mid 2002, Mr Hres held a positive view about Mr Orehek and loans to Norton Investments. They also suggest his positive view was evidenced by conduct that constituted more than a merely disinterested referral of lenders to Mr Orehek. These general considerations provide a relevant background to the evaluation of the evidence of Mr Hres’ conduct in his dealings with the complainant lenders.
HARVEY - THE FIRST COMPLAINANT LENDER - FEBRUARY TO MAY 2000
75.Mr Harvey has a masters degree in economics and worked for many years as a senior economist in a major government agency. His first meeting with Mr Hres was in February 2000. Mr Harvey arranged a meeting at his home, as a preliminary step in obtaining general financial planning advice.
76.Before the meeting Mr Harvey had prepared several pages of notes with detailed particulars of his financial circumstances and objectives. Mr Harvey agreed he prepared the notes specifically for the purpose of getting financial advice from Mr Hres and that he in fact gave them to Mr Hres. Although he was unsure about the timing, it is most likely he gave them to Mr Hres at this meeting. Mr Hres had his laptop computer with him at the meeting and recorded relevant details on the computer. Mr Hres was partly preparing what he referred to as a “Fact Finder”, assimilating the information Mr Harvey provided.
77.Mr Harvey agreed that at the meeting, on 16 February 2000, Mr Hres gave him an Advisory Services Guide. Mr Harvey read it either at, or after, the meeting. Mr Hres says that at this meeting he discussed his relationship with AMP, particularly with reference to the second part of the Advisory Services Guide. He said he also discussed in detail the different types of products on which he could provide advice. Mr Harvey agreed that they discussed general investment information in the course of the meeting. The discussion included an explanation by Mr Hres of the relationship between risk and return, and the general proposition that higher returns generally indicated higher risk.
78.Mr Harvey also agreed, as his prior notes suggested, that at the February 2000 meeting he was particularly interested in property development. Because of that interest he specifically asked Mr Hres about property investment. He says it was in response to that question that Mr Hres raised Mr Orehek’s name.
79.Mr Hres said he concluded from the nature of Mr Harvey’s expressed interest in property development that he would not be interested in any AMP investment products. Mr Hres says he referred Mr Harvey back to the ASG and told him he could only advise on products approved by AMP. All he could do was to give Mr Harvey contacts of property of people involved in property development, of whom Mr Harvey could make his own enquiries. Mr Hres says he gave Mr Harvey contact details for both Mr Orehek and another developer. He claims he disclosed the fact that he would get a referral commission from Orehek.
80.However there was more involved in the discussion about Mr Orehek than merely Mr Hres providing contact details. Mr Harvey said the prospect of a 30% interest rate came up when Mr Orehek was first mentioned. He realised that this was a very high rate. That was why he asked about risk factors in relation to investment with Orehek and about whether it would be secure. Mr Hres himself agreed that Mr Harvey did ask about the security of the investment with the Orehek companies. He did not specifically recall what Mr Harvey asked, other than that it was something to the effect of what Mr Hres knew about the Orehek loans. Mr Hres said that as at February 2000 he had not really started to refer any prospective lenders to Mr Orehek and had only made some preliminary enquiries about him. This claim is at least consistent with the fact that Mr Harvey appears to be the first of Mr Hres’ referees who entered into a Deed of Loan with Mr Orehek. He was one of only three who had done so by November 2000.
81.Mr Harvey remembered that, in response to his question about the risk factors involved in the investment with Mr Orehek, Mr Hres said something about a Deed of Loan being involved and a caveat. This was just basic preliminary information, although Mr Harvey also recalled Mr Hres saying something to the effect that the loan return would far outweigh the amount of any interest on the cost of any funds a lender borrowed for the purpose of the investment. Mr Hres did tell him he would have to meet with Mr Orehek to get more information.
82.Mr Hres’ version of this aspect of the meeting was not significantly different from that of Mr Harvey. By about February 2000 Mr Hres certainly knew that the loans were to be the subject of a formal Deed. He agreed he may have told Mr Harvey that Orehek had shown him a Deed of Loan. He agreed he told Mr Harvey that Mr Orehek was offering a high return of 30%. He says he told Mr Harvey that it was obviously a risky investment, a fact that Mr Harvey could himself conclude. Mr Hres says he told Mr Harvey that he would have to speak to Mr Orehek to get further information.
83.Where Mr Harvey and Mr Hres’ evidence does materially differ is about Mr Hres’s conduct after the meeting. Mr Hres denied that he had any further involvement with Mr Harvey in relation to his dealings with Mr Orehek. Mr Harvey, on the other hand, said Mr Hres subsequently contacted him to arrange a meeting with Orehek. He said that meeting, with both Mr Orehek and Mr Hres, occurred in March 2000. Mr Harvey said the purpose of the meeting was to get further information so he could make his own decision about lending to Orehek He says he asked Mr Orehek specific questions about details of the proposed investment. These included things such as who the other investors were and the nature and security of the investment. He also asked about the Deed of Loan.
84.Mr Harvey said it was at this meeting with Mr Orehek that Mr Hres told him many other investors had profited from investing with Orehek. Mr Harvey said he thought he recalled Mr Hres maybe saying at this meeting that he was himself thinking of investing with Orehek. Mr Hres, as I have already indicated, denied being at this meeting. He denied saying to Mr Harvey at any time that many other people had invested. In fact he knew of only two, although he assumed that there were probably more. Mr Hres also denied saying to Mr Harvey that he was thinking of putting money into one of the developments.
85.Mr Harvey said that after the meeting he received a copy of a February 2000 Norton Investments “Investor report”. He was unsure whether he got this in the mail or by hand. He was also unsure who gave it to him. He thought it was either Mr Hres or Mr Orehek. The document itself was obviously prepared by Norton Investments, and that fact suggests its most logical source. For his part Mr Hres denied knowing that such a document existed until he first saw a copy of it in 2006.
86.Mr Harvey said he read through this report carefully. He noted it included a draft form of Deed of Loan. He must also have noticed that nothing in the report or the draft deed referred to AMP. After going through that report in detail he made his own assessment that he was interested in proceeding and decided to go with the Orehek loan investment. Mr Harvey says he then contacted Mr Hres and told him he wanted to go ahead with Norton Investments. He says he asked Mr Hres to arrange a further meeting with Mr Orehek, though he does not say Mr Hres attended the meeting.
87.This sequence of events, in which Mr Harvey was given the Report to Investors after his meeting with Mr Orehek, and in circumstances he cannot really recall, is unlikely. It is much more likely that the Investors Report was either sent to him before, or given to him at, his first meeting with Orehek. Obtaining and examining such a report, before meeting Orehek is the kind of prudent enquiry that one would expect of a man with Mr Harvey’s qualifications, analytical abilities and experience. Certainly the kind of enquiries he said he made of Orehek at their first meeting would have invited his then being provided with the Report. It is difficult to believe that he was not given a copy of the report at the meeting.
88.Furthermore it is rather clear from Mr Harvey’s evidence that his enquiries were much more extensive than merely reading the Report to Investors. At his first meeting with Orehek Mr Harvey got references from Mr Orehek so that he could investigate the investment proposal further. He pursued these on his own initiative after the meeting. Significantly, Mr Harvey did not suggest that any of his references or enquiries related in any way to AMP. Neither did he suggest that he had even discussed the amount of his proposed investment - the not insignificant sum of $150,000 - with Mr Hres. What Mr Harvey’s enquiries did include was checking with other investors and with Mr Orehek’s accountant. The checks that Mr Harvey carried out continued, as I will shortly detail, well into May 2000.
89.On the other hand, the only significant objective evidence of contact between Mr Hres and Mr Harvey, after their initial meeting, occurred on 1 April 2000, or shortly thereafter. At that time Mr Harvey received a detailed Financial Analysis from Mr Hres. In the first part of his oral evidence Mr Harvey appeared to have forgotten this document. He had said that, before meeting Mr Orehek in March he had telephoned Mr Hres, asked him to organise the meeting with Orehek and told him that he did not want to proceed with any financial analysis advice from Mr Hres. The fact that Mr Hres did go on to provide this financial analysis to Mr Harvey tends to contradict Mr Harvey’s memory in that regard. When he was shown the document, at the end of his oral evidence, Mr Harvey agreed that it contained an analysis of his financial goals and detailed investment recommendations. He agreed he had read it in about April 2000 and that at the time he knew, in particular, that it did not contain any reference to any proposed loan to the Orehek companies. He claimed he noted this aspect of the document and regarded it as an omission that he thought was odd. He did not give any evidence that he queried this supposed omission with Mr Hres.
90.Both the fact that Mr Hres sent the 1 April 2000 document to Mr Harvey, and the fact that Mr Harvey did not query the absence from it of any Orehek recommendation, are significant. Their significance is supplemented by the fact that Mr Harvey did not say he had discussed any proposed loan amount with Mr Hres. Taken together these factors suggest not only that Mr Harvey was still investigating whether to proceed with any loan to Orehek but also that he understood he had his own investigation responsibility. The nature and extent of his own enquiries further encourage that conclusion, and strongly suggest that he relied on the results of those enquiries, rather than on any information given to him by Mr Hres.
91.Mr Harvey said he actually drove around and inspected all of the properties listed in the February 2000 Investors Report he had been given. He also checked with the Department of Fair Trading about Mr Orehek and his companies. In early May 2000 Mr Harvey got legal advice about the Orehek loan proposal. His solicitor advised him there was an element of risk. He had already realised that for himself, because it was apparent from information in the Investors Report, that Norton Investments would have substantial loan liabilities that were secured by first mortgage. Despite this awareness he claimed that he did not fully understand the risk involved. That claim is rather contradicted by the nature and extent of Mr Harvey’s enquiries, and too difficult to accept in the light of those enquiries and the experience and financial ability apparent from his background and qualifications.
92.At least some of Mr Harvey’s enquiries, of the other investors and Mr Orehek’s accountants, were also carried out in May 2000, in the days immediately before Mr Harvey entered into his Deed of Loan on 25 May 2000. The other investors told Mr Harvey that Mr Orehek was beyond reproach. The information he obtained from Orehek’s accountants was that they had known Mr Orehek for eight years and that his companies were stable, apparently profitable and had acceptable debt levels.
227.On the other hand, the reality is that Mr Hres’ discussions with the complainant lenders did not involve the detail of any particular loan transaction. In the case of Mr Harvey, Mr Partridge and Ms Els there was no discussion of the loan amount. In the other cases there was an assumption about the identity of the particular borrower, but no specific discussion of the individual properties to which any caveat might apply. In every case Mr Hres explicitly referred the complainant lenders to Mr Orehek for the purpose of obtaining additional information before they made any investment decision. The information Mr Orehek had to provide necessarily involved identifying the borrower, and the relevant properties. It was critical information for the purpose of any particular client’s Deed of Loan.
WHETHER “A PERSON ... MAY REASONABLY BE EXPECTED TO RELY” ON A
RECOMMENDATION
228.The importance of the loan details Mr Orehek had to provide raises the question whether, for the purpose of Corporations Law s 851, Mr Hres’ securities recommendation to the complainant lenders was made “to a person who may reasonably be expected to rely on it”. That question involves an apparent difficulty, partly because of the referral component in Mr Hres’ recommendation and partly because of the implications of the concept of “general securities advice” for the kind of reliance that is relevant in the application of Corporations Law s 851. The warning that Corporations Regulation 7.3.02D required to accompany “general securities advice” explicitly contemplated an investor’s further consideration of the advice, either with or without the assistance of a securities adviser. The consequence of this explicit contemplation is recognition of possible subsequent concurrent reliance on (i) the original general recommendation and (ii) further consideration confirming its particular aptness the investor’s circumstances. Nevertheless it seems to be implicit in the language of Corporations Law s 851 that it does not apply to concurrent reliance of this kind. The fact that a proposed investor is encouraged by such a warning, and may therefore reasonably be expected to rely on it, in evaluating the suitability of the general advice is not the kind of reliance to which the section is addressed.
229.Mr Hres’ securities recommendation to the complainant lenders was not “general securities advice” - despite Mr Hres’ submission to the contrary. But it did include the express referral to Mr Orehek. The complainant lenders had to contact Mr Orehek in order to make their investment. They could not rely solely on what Mr Hres had told them. They had to get further information from Mr Orehek. Without that additional information they could not complete any investment. Indeed, without specific information about the loan amount, the actual lender, and the properties to which any caveat related, an informed decision about any proposed loan transaction could not be made. Because merely obtaining that information from Orehek, would not appear to involve the kind of reliance (on Mr Hres’ recommendation) to which Corporations Law s 851 refers, there is a superficial plausibility in a contention that the complainant lenders were not, therefore, persons who could reasonably be expected to rely on Mr Hres’ recommendation.
230.It may be accepted that merely making enquiry, and obtaining further advice or information, is not the kind of reasonably expected reliance to which Corporations Law s 851 refers. But it does not follow, even if the further information is objectively critical to any investment decision, that there can be no reasonable expectation of relevant reliance by the recipient on the original securities recommendation that provoked the additional enquiry. Rather, the reasonable expectation of reliance criterion is to be assessed by enquiring whether the original securities recommendation conveys to the recipient any commendation that may reasonably be expected to influence their personal investment decision - in the sense of being a real operating factor in their decision to apply the more general advice to their particular investment decision.
231.A fundamental aspect of Mr Hres’ contentions in the present matter was to dispute that any of the complainant lenders were persons who could reasonably be expected to rely on his statements in relation to the Orehek loans. This dispute involved reliance on a number of different matters. These included (i) the explanation of his limited authority from AMP (ii) his explicit disavowal of any advice in relation to the Orehek loans, (iii) his express referral of lenders to Orehek, (iv) his lack of involvement in the lender’s dealings with Orehek, (v) his ignorance, in some cases, of any proposed loan amount and (vi) his lack of knowledge of the particular loan details. A related aspect of Mr Hres’ contention is that the complainant lenders evidence rather tends to demonstrate their lack of actual reliance on any information he provided. Implicitly that lack of reasonable expectation of reliance is highlighted by the circumstances of Messrs Harvey and Hernando’s loans. The circumstances in which both of those loans were made, having regard to the findings I have made, provide ample scope to doubt that the actual loan transaction was to any degree influenced by any recommendation Mr Hres made. Similar scepticism can be directed at least to Ms Fenner’s investment decision - given the severity of her anxiety about dealing with MrOrehek and the many warnings she apparently received from others.
232.There are two important points to make in rejecting Mr Hres’s contention that the complainant lenders were not persons who could reasonably be expected to rely on his securities recommendation. The first is that Corporations Law s 851(1) section imposes an objective criterion of reasonable expectation of reliance. It is not determined by a factual investigation about whether a particular person did actually enter into a recommended transaction, or whether or not they did so in actual reliance on the recommendation. Secondly, the concept of reliance is not one of exclusive, or even dominant, cause. In the context of Corporations Law s 851(2) all that is required is a reasonable expectation that the person may rely on the recommendation as an operative reason to enter into the investment transaction.
233.I have found that each of Mr Harvey, Mr Hernando, Ms Fenner and Ms Els sought Mr Hres’ advice about the Orehek loans. He conveyed to each of them, as a result of the statements he made, either that the interest rate was guaranteed or that the loan was otherwise an appropriately safe investment. Having regard to Mr Hres’ status, the reason why those lenders consulted him, and the specific questions they asked of him, it was reasonably to be expected that they would rely on his recommendation. In making that finding I refer in particular, to the complexity of the factors that would potentially be involved in any thorough and reliable assessment of unsecured loans to the Orehek companies. I summarised these factors, and Mr Hres’ awareness of many of them, when I dealt with his concession about the inadequacy of his own investigation. In that context I noted Mr Hres’ concession that the reasoned and informed analysis required would likely have been beyond the abilities of at least some of the lenders he referred. Indeed, the complexity of the risk evaluation involved is such that the lenders who enquired of Mr Hres could reasonably be expected to have placed a great deal of weight both on the fact that he referred them to Mr Orehek and on his statement that he was, or was at least contemplating becoming, an investor.
234.The significance of the considerations referred to in the preceding paragraph are highlighted by considering the question of reasonably expected reliance at the time of Mr Hres’ actual recommendation. The evidence suggests that Mr Hres’ discussions with the complainant lenders proceeded on the basis that the borrowers would be Mr Orehek or Norton Investments Pty Ltd. There was no evidence of any discussion about borrowings by other Orehek companies. Consistent with that view of the evidence all of the complainant lender’s initial Deeds of Loan named Mr Orehek and Norton Investments Pty Ltd as the borrowers. Other Norton companies did not appear as borrowers until the Deeds they entered into during 2002. It follows that at the time of Mr Hres’ securities recommendations to the relevant complainant lenders the proposed loans were presented as loans to one or other of two specific borrowers. That understanding could reasonably be expected to convey an element of simplicity to the proposed transactions, and to minimise the potential significance of the precise details of the identity of the borrowers and properties involved. Added to that was the significant fact that Mr Hres was encouraging the proposed lenders to deal direct with Mr Orehek, and did not, so far as the evidence reveals, counsel them to obtain further independent advice in relation to their dealings with Orehek. The very fact that Mr Hres was commending contact with Mr Orehek for the purpose of making investment loans, suggested a measure of endorsement. That suggestion could only have been compounded by Mr Hres’ disclosure to the complainant lenders that he was entitled to a commission for the referral - because it was capable of conveying the impression of a considered association between Hres and Orehek in relation to their respective businesses.
235.The final consideration that points to the reasonableness of an expectation that the relevant complainant lenders would rely on Mr Hres’ securities recommendation involves the “Exclusive offer” email. Although Mr Hernando was the only one of the relevant lenders who received this email, it eloquently reveals Mr Hres’ unequivocal endorsement of the Orehek loans. I referred earlier in these reasons to the various investment scenarios modelled in this email. Those scenarios included borrowings to fund the investment. According to the arithmetical logic presented in the email, the case for lending to the Orehek companies was unanswerable. The impression this email deliberately sought to create was that an investor’s personal circumstances were only relevant in determining the amount they should invest. They were irrelevant to any assessment of risk contingency or to an evaluation of the prudence of any proposed loan - because the rate of return was “guaranteed”. Clearly the language of this email gave rise to a reasonable expectation of reliance. The email itself was a standard form Mr Hres compiled for the purpose of providing to potential investors. That background to its creation encourages the view that the confident, but uncritical, optimism Mr Hres displayed in this email, was typical of his recommendations to the complainant lenders in relation to the Orehek loans.
FINDINGS IN RELATION TO CONTRAVENTION AND FAILURE TO PERFORM DUTIES
236.The effect of the findings I have made is that Mr Hres did engage in misleading and deceptive conduct in or in connection with dealings in securities. The specific findings are set out earlier in these reasons under the heading “misleading or deceptive conduct in connection with a securities dealing” paragraph 189. In the light of those findings Mr Hres contravened a securities law. Those contraventions enliven the banning power conferred by Corporations Law s 829(d).
237.I have also found that Mr Hres made securities recommendations to 4 of the complainant lenders, without having a reasonable basis for so doing. The specific factual findings are set out under the heading “Findings in relation to the complainant lenders”. The respects in which those findings involved a securities recommendation, and the absence of a reasonable basis for them, are set out under the headings “Absence of reasonable basis for any securities recommendation” and “Mr Hres made a securities recommendation to lenders” paragraphs 212 and 213. That conduct provides ample basis to be satisfied that Mr Hres has not performed the duties of a representative adviser efficiently and fairly, for the purposes of Corporations Law s 829(f). The requirements of those concepts have been addressed in Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672-673; Felden v ASIC (2003) 45 ACSR 111 at [376] - [377]. They connote a requirement of competence in providing advice and in complying with relevant statutory obligations. They also connote an element not just of even handedness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client’s affairs. The duties to which the criterion refers may extend to a person’s dealings with a licence holder, at least where they involve proper discharge of their responsibilities as a representative of the licensee: Farley v Australian Securities Commission (1998) 16 ACLC 1502 at [151]-[152]. In the present case Mr Hres failed to perform his duties efficiently and fairly because (i) he referred them to Mr Orehek (ii) he purported to disavow any advice in relation to the Orehek loans and simultaneously conveyed to prospective lenders an opinion that amounted to a positive endorsement of the Orehek loans and (iii) he did not disclose that his views about the Orehek loans were not based on any adequate enquiry and investigation. In the case of Mr Hernando, he provided the positively misleading “Exclusive Offer” email.
238.It is appropriate to make clear why I consider the mere fact of Mr Hres’ referring lenders to Mr Orehek involved a failure to which Corporations Law s 829(f) applies. Mr Hres contended that both ASIC (in its Policy Statements) and AMP Financial Planing Pty Ltd (in its manual) permitted referral. They also permitted “general securities advice”. The contention was that the referrals he made to Mr Orehek were within the criteria contemplated by ASIC and AMP. The contention cannot be sustained.
239.There may be cases where a person who is a securities adviser acts exclusively in his personal capacity. But, as is shown by the circumstances addressed in RJ Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 and Foster v ASIC (1999) 57 ALD 779; that hypothetical possibility is likely to be readily confounded where the adviser deals with persons with whom he has an established relationship as an adviser. Where that relationship exists, it would confound the effect of the statutory licensing requirements and conditions, no less than the requirement to have a reasonable basis for recommendations, if the adviser could merely, and with impunity, “refer” clients directly to the investment target. The confounding involved is patent in the present case. Mr Hres recognised that his Proper Authority precluded him from providing any clients with explicit advice about the Orehek loans. As a matter of form, he disclaimed any advice but, as a matter of substance, he nevertheless encouraged people who had consulted him to go and deal directly with Mr Orehek. Even if, as Mr Hres contended, he sometimes referred clients to other developers in addition to Mr Orehek, the propriety of his conduct would have been no better. There is a risk of a fundamental and unacceptable contradiction between disclaiming advice in relation to dealings of a particular kind and, at the same time, referring clients to the particular entities that are likely to promote those same kinds of dealings with the client. That risk can only really be safely and predictably avoided by confining referrals in connection with securities to other appropriately licensed and qualified advisers.
240.ASIC pressed for a finding that Mr Hres had not performed his duties honestly. In that regard ASIC relied on a passage in Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at 110. In that passage Bollen J expressed the view that “honesty” in the present context was not confined to either criminality, intentional misrepresentation or conduct that was motivated by an intention for personal gain. It included any conduct that “was morally wrong in a commercial sense”. The former of these statements is unexceptional. The latter appears to derive from a passage in the judgment of Young J in Story where (at 13 NSWLR 672) the suggestion was made that the combined use of the words “honestly” and “fairly” gave the flavour of a person who is ethically sound. It was implicit in Young J’s interpretation of s 851 that His Honour regarded the expression “efficiently, honestly and fairly” as something in the nature of a hendiadys. Such an interplay between the different expressions well justifies the view that the expression includes some concern with morality in relation to a person’s dealing in relation to their duties as a securities representative. But I am not satisfied that this idea can be taken to the point of characterising as dishonest conduct that is merely lacking in proper judgment. The appropriateness of such a characterisation presumably depends on precisely what qualification or connotation is intended by the use in Elrington of the words “morally wrong in a commercial sense”. That is a matter that is not necessary to explore in the circumstances of the present case.
241.ASIC’s fundamental criticism of Mr Hres was that his recommendations to the lenders were misleading and lacked a reasonable basis, rather than that there were consciously and deliberately dishonest. My own view of Mr Hres’ conduct accords with that criticism. As I set out earlier in these reasons, under the heading “the ultimate nature of Mr Hres’ belief about the Orehek loans”, Mr Hres came to the subjective belief that the risks involved in the Orehek loans were worth accepting. He came to that view substantially because of Mr Orehek’s apparently successful history and the appearance of his good repute. Mr Hres was wrong to refer prospective lenders to Mr Orehek, at least in the manner I have found that he did, but his conduct in that regard does not merit characterisation as dishonest.
242.There is however one aspect of Mr Hres’ conduct that does merit characterisation as dishonest. It is his reference to guaranteed interest in the “Exclusive Offer” email. I referred earlier in these reasons to Mr Hres’ submission that the email explained the term “guarantee” as synonymous with the caveat, and that it should be understood in that way. I also rejected that submission. I concluded that Mr Hres was likely to have well understood the difference between the concepts of (i) a fixed rate of interest (ii) a security interest and (iii) a guarantee. I concluded that in the light of that knowledge he did not genuinely believe that the “Exclusive Offer” email was accurate when it characterised the rate of return on the Orehek loans as “guaranteed”. I also concluded that Mr Hres well knew the contingencies capable of affecting the repayment of the loan. In particular, I concluded that he knew the Orehek loans were probably not administered in a way that involved matching borrowings with the value of the work in progress on any particular project. I also referred to Mr Hres’ letter of 19 August 2002, with its explicit recognition that the Orehek loans were unsecured. I concluded that the recognition reflected in that letter was likely to have accurately reflected Mr Hres’ knowledge and belief from the outset of his dealings with Mr Orehek, and certainly by October 2000. Neither as a matter of literal interpretation, nor by reference to the potential to lodge a caveat, was the loan interest “guaranteed” in any sense. The loans merely offered a fixed interest rate. In the light of those findings Mr Hres was dishonest when he composed the “Exclusive Offer” email and described the interest rate as guaranteed.
EXERCISE OF THE BANNING ORDER POWER
243.The banning power conferred by Corporations Law s 829, and many similar statutory powers, are frequently described as being wholly protective in their purpose: Statements to this effect commonly appear in decisions involving legal practitioners: Smith v New South Wales Bar Association (1992) 176 CLR 256 at 270; Wentworth v New South Wales Bar Association (1992) 176 CLR 239 at 250-251; medical practitioners: Health Care Complaints Commission v Lichfield (1997) 41 NSWLR 630 at 637F-638B; tax agents registered under the Income Tax Assessment Act 1936: see Dahia v Tax Agents Board of Victoria (1997) 36 ATR 1124; Toohey v Tax Agents Board of Victoria [2007] FCA 431; company directors and managers: ASIC v Adler (2002) 42 ACSR 80 at [56]; Kamha v APRA (2005) 147 FCR 516 at [73] – [74]; and auditors and liquidators: Albarran v Members of the Companies Auditors & Liquidators Disciplinary Board [2006] FCAFC 69; (2006) 151 FCR 466.
244.The purpose of characterising this class of disqualification powers as protective is essentially to highlight that the personal circumstances of the affected person are of less significance than if the power was purely punitive. That distinction is particularly apt to make where the power depends on the person’s contemporary fitness, and may well have permanent, or at least difficult to reverse, consequences. If the person is not currently fit to retain the relevant status, for example that of a legal practitioner, proper exercise of the statutory power requires removal from the roll of practitioners, irrespective of any punishment that may already have been imposed in relation to the impugned conduct, and irrespective of the nature and extent of any personal hardship that may have already been encountered, or is likely to flow from the exercise of the power. Similarly the power may be exercised despite the affected person’s contrition, attempts at rehabilitation, and where relevant, compensation: see ASIC v Adler (2002) 42 ACSR 80 at [79] - [80].
245.It is doubtful whether the contrast between the protective and punitive effects of disqualification orders can be usefully generalised into concepts that validly inform the proper exercise of any particular statutory power. There are at least two reasons for caution. First of all, as the majority judgment in Rich v ASIC (2004) 220 CLR 129 recognised (at 220 CLR 145) the distinction between “punitive” and “protective” functions and purposes is at best elusive. Elements of personal and general deterrence may properly inform the exercise of even a protective power: Kamha v APRA (2005) 147 FCR 516. This is so even where there is a reasonable basis to be satisfied of the affected person’s current fitness and good character, and even where future similar transgressions are unlikely. Secondly, regard must always be had to the specific statutory criteria that ground the exercise of the particular power in questions. Depending on the particular statutory authority, generalisations appropriate to the exercise of one power may be inapt in relation to another.
246.The second of those cautionary reasons is especially appropriate where the statutory power explicitly contemplates limited periods of disqualification. In some instances limiting the period may be appropriate because it represents an opinion about the person’s current personal unsuitability to retain the relevant status, but satisfaction that they will be suitable at the end of the period. However there is an element of artificiality in the notion of a meaningful prospective assessment of a person’s future personal suitability. Where there is an explicit power to limit the period of disqualification there is some justification for inferring that the power is intended to be exercisable despite the person’s contemporary personal suitability and fitness. That justification is greater where the statutory grounds explicitly include, as disjunctive criteria, a range of events and conditions. In Corporations Law s 829 there was just such a range. It included amongst the disjunctive criteria (i) the person’s lack of good fame and character (ii) proven contraventions of the law (iii) justified belief in relevant past default or (iv) justified belief of the likelihood of future default. The inclusion of latter two of these criteria, past and future default, as disjunctives may reasonably be thought to provide considerable justification for giving particular emphasis to the potential deterrent purpose of the exercise of the power. It reinforces the suspicion that, depending on the particular statutory criteria there may well be limited practical utility in emphasising a dichotomy between protection and punishment, irrespective of whether they are referred to as the purpose or effect of the exercise of the power. Even in the cases where strong preference has been expressed for the view that the purpose of the relevant disqualification power is protective, that preference has not been regarded as excluding the relevance of concepts of deterrence: see Howarth v ASIC [2008] AATA 278 at [135], [161], [162], [173] and [180]. And if deterrence is a permissible consideration regard must be had to not only to the objective aspects of the grounds that justify the order but also to the person’s personal circumstances and the extent to which, if at all, they already involve an element of hardship and punishment that will itself have relevance as a deterrent: Re One Tel Ltd (in liq): ASIC v Rich (2003) 44 ACSR 682.
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 judgment in ASIC v Adler (2002) 42 ACSR 80 at [56]: see Rich v ASIC (2004) 220 CLR 129. 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 three year banning period marks a conventional threshold that distinguishes between impugned conduct that has involved serious incompetence and conduct of lesser seriousness.
248.In the present case Mr Hres referred prospective lenders to Mr Orehek over a long period - from early 2000 until mid 2002. He did so in circumstances where, as I have found, he well knew that the loans were unsecured and high risk. Yet he positively encouraged the client investments. In the instance of the Exclusive offer email his encouragement was quite misleading. The contents of that email tend to show a disturbing failure to appreciate the true extent of his obligations as a securities adviser, and certainly one with a limited authority. In his personal dealings with clients Mr Hres apparently laboured under the misapprehension that his express disavowal of advice to the lenders, relevantly or sufficiently discharged his obligations to them. Yet at the same time he was prepared to encourage client investments in a venture that he knew to be high risk, which he had not adequately evaluated and which, had he thought carefully about it, was probably beyond the ability of the clients to make a properly informed risk assessment. In so doing he displayed a fundamental lack of insight, into the true scope and extent of his obligations as a securities adviser. His willingness to encourage clients to engage in what were in reality unsecured loans with promised interest rates of 30% per annum or more, bespoke a serious lack of sound objective judgment.
249.The particular circumstances that have caused so much difficulty for Mr Hres are unlikely to repeat themselves. So far as appears his conduct was impugned only in relation to his dealings involving Mr Orehek and Norton Investments. Following the difficulties that emerged with Norton Investments, AMP Financial Planning suspended Mr Hres’ proper authority. That occurred on 30 October 2003. He has not worked as a securities adviser since. No doubt the AMP’s cancellation of his Proper Authority, the loss of his former business and the cost and stress involved in the present proceedings will provide a salutary reminder of the importance of complying fully with proper standards of conduct.
250.However, Mr Hres’ conduct in becoming involved in referring lenders to Orehek investments was calculated and sustained. Furthermore, it occurred after he had obtained a reasonable understanding of the nature of Mr Orehek’s business and his preferred method of funding. That information should have conveyed to Mr Hres, and I have found that it did, the essentially unsecured nature of the loans to the Orehek companies. Against the background of that knowledge Mr Hres’ willingness to encourage clients to participate in loans to the Orehek companies, and to apparently rely on the caveat provision in the Deeds of Loan, involved not only serious incompetence but pursuit of self interest. More specifically, his conduct in compiling and distributing the “Exclusive Offer” emails shows more than a merely alarming lack of competence as a securities adviser. He was dishonest when, in the Exclusive Offer email, he described the 30% interest rate as “guaranteed”.
251.Finally it is a matter of significance that Mr Hres had completed his AMP training so recently when he first embarked on the course of referring lenders to Mr Orehek. He had a limited Proper Authority from AMP Financial Planning Pty Ltd (“AMPFP”). He was explicitly prohibited from advising in relation to competing products. The combination of those two matters should have left him exquisitely sensitive to the need to understand exactly what was required of him in order to comply with the limitations of his position.
252.Those matters were addressed in the AMP Manual that was provided to Mr Hres in the course of his training. Pages 38 and 47 of the AMP Manual dealt with the concepts of “mere referral” and “general securities advice”. They summarised ASIC’s views, as set out in Policy Statement 121. Those views emphasised the very limited nature of the activity that would constitute a “mere referral” and fall outside the scope of securities advice. Furthermore, the difficulty of that distinction, and yet the seriousness of observing it was underscored by earlier passages in the AMP Manual. At page 45 the Manual warned that if advisers intended to be engaged outside of AMPFP, in any activity or business for which they do not require a Proper Authority, they had to tell AMPFP in advance because of the risk of AMPFP’s potential liability for their conduct. The Manual warned that (i) advisers must not, expressly or by implication, hold out to any person that they were undertaking any unrelated activities as a representative of AMPFP; (ii) that any person dealing with the adviser in relation to such an activity must understand that it was unrelated to AMPFP and that written disclaimers might be required, and (iii) that advisers were not to implicate AMPFP in any way in unrelated activities, for example by the use of correspondence bearing AMPFP letterhead. Although these warnings were contained within a large Manual, with which Mr Hres may not have been completely familiar at all times, they represented matters of fundamental importance. His claim that he merely “referred” people to Mr Orehek, rather than gave them advice, shows that he had at least a general awareness of the nature of the distinction between “referral” and “securities advice”. His subsequent conduct showed that he did not fully understand the distinction or the importance of scrupulously observing it. I include in that conduct Mr Hres’ stance in the present proceedings. In so doing I acknowledge that Mr Hres was entitled to take any position that was fairly arguable. I also acknowledge that the distinction between “general securities advice”, “personal securities advice” and mere “referral” can be complex and that, at the margins, minds may reasonably differ about some conduct. However even allowing for those matters, it is disquieting that Mr Hres adhered to his “no advice” contention throughout the proceedings and appeared to believe that his conduct in nevertheless referring lenders to Mr Orehek sufficiently complied with his duties as a securities adviser.
253.I referred earlier in these reasons to the Tribunal’s decision in Foster v ASIC (1999) 57 ALD 779. I noted that the circumstances involved in that matter were, in many respects, similar to those involved in the present matter. In Foster the Tribunal reduced the banning order from three years to 18 months. In so doing the Tribunal was influenced by the Applicant’s acknowledgment of his misconduct, the significant hardship that the banning order would impose and its view that Mr Foster’s transgressions were at all times “unintentional and inadvertent, arising as they did from a clouding of judgment” (1999) 57 ALD 779 at [33]. I have considered whether, in the circumstances of the present case it would be proper to take a similar approach and also impose a banning order for a period less than 3 years, especially having regard to the time that has already passed since AMP Financial Planning removed Mr Hres’ Proper Authority. Whilst the interests of consistency in the exercise of the banning power are obviously and inherently desirable, subject to the circumstances of each particular case, that consistency is best achieved by regard to the criteria that inform the exercise of the discretion rather than by a direct comparison of the length of the orders made in any particular matter. Indeed it will often be difficult to be sure of the adequacy of comparison from one matter to another, because the reasons may not always fully reflect all the relevant evidentiary details and their comparative significance. In the present case Mr Hres’ disavowal of advice was a partial recognition of his proper role, but his conduct in referring clients to Orehek, and indeed positively commending the Orehek loans, displayed a fundamental lack of understanding of that proper role. The risks involved in the Orehek loans were patent, and the comfort provided by the caveat provision was illusory. Nevertheless Mrs Hres’ attitude to the Orehek loans seems to have been reflected in the language of the October 2000 “Exclusive Offer” email. That language, and the view it expressed, was neither inadvertent nor the result of merely clouded judgment. Indeed, in characterising the interest rate as “guaranteed” Mr Hres was dishonest.
DECISION
254.The decision under review is affirmed.
I certify that the 254 preceding paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member.
Signed: ............................[sgd]...................................................
Ms G A Tena, AssociateDates of Hearing 1, 2, 5, 6, 8, 9, 12-15, 19-21 May 2008
Date of Decision 12 August 2008
Appearance for the Applicant Ms S Hres
Counsel for the Respondent Mr G P McNally SCSolicitor for the Respondent Ms S Le Breton,
Australian Securities & Investments Commission
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