Smith v Leveraged Equities Ltd [No 3]
[2018] WASC 84
•3 DECEMBER 2021
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SMITH -v- LEVERAGED EQUITIES LTD [No 3] [2018] WASC 84
CORAM: ALLANSON J
HEARD: 1 FEBRUARY - 3 MARCH 2016 & ON THE PAPERS
DELIVERED : 29 MARCH 2018
FILE NO/S: CIV 3124 of 2009
BETWEEN: EDWIN GEORGE SMITH
Plaintiff
AND
LEVERAGED EQUITIES LTD
First Defendant
TODD MICHAEL KING
Second Defendant
ACN 118 453 679 PTY LTD
Third Defendant
AUSTRALIAN STOCKBROKING AND ADVISORY SERVICES LTD
Fourth Defendant
GLENICE BERYL KING
Fifth Defendant
Catchwords:
Contract - Where plaintiff agreed to provide guarantee and shares as security for loan agreement in name of fifth defendant - Where second defendant agreed that shares would be returned in six weeks - Where second defendant agreed to not trade on account while shares were held as security - Whether second defendant breached agreement by trading and by failure to return shares
Equity - Fiduciary duties - Where second defendant is broker for the plaintiff - Where plaintiff and second defendant entered personal agreement for shares to be provided as security on account of fifth defendant - Whether second defendant in breach of fiduciary duty to plaintiff
Misleading and deceptive conduct - Where second defendant made false representations to the plaintiff regarding agreement to provide guarantee and shares as security - Where plaintiff pleads multiple alternative statutory causes of action
Equity - Where plaintiff provided guarantee for margin lending account of fifth defendant with first defendant - Where first defendant knew guarantee arranged by second defendant - Whether first defendant received guarantee and security knowing of breach of fiduciary duty
Misleading and deceptive conduct - Where first defendant entered guarantee and mortgage with plaintiff in relation to fifth defendant's margin lending account - Whether implied representation regarding absence of unusual features of account
Unconscionable conduct - Where first defendant entered guarantee and mortgage with plaintiff in relation to fifth defendant's margin lending account - Whether unconscionable for first defendant to accept guarantee and shares as security without disclosing features of operation of account
Misleading and deceptive conduct - Where plaintiff entered guarantee and mortgage by reason of second defendant's misleading and deceptive conduct - Where second defendant later transferred further shares into account by forged authorities - Whether losses caused by later transfer - Whether losses by reason of the misleading and deceptive conduct
Unjust enrichment - Where second defendant transferred shares as security for account of fifth defendant with first defendant - Where authority to transfer forged - Where first defendant became aware authorities forged - Where return of shares would result in margin call and sale of other shares held as security - Where plaintiff discharges fifth defendant's debt for return of shares - Whether first defendant unjustly enriched
Corporations Act - Financial services - Where second defendant authorised representative of fourth defendant - Whether conduct of second defendant related to provision of financial services
Subrogation - Where plaintiff discharged debt of fifth defendant to first defendant
Turns on own facts
Legislation:
Australian Consumer Law, sch 2
Australian Securities and Investment Commission Act 2001 (Cth), s 12DA, s 12DB, s 12CB, s 12CC
Competition and Consumer Act 2010 (Cth), s 18, s 21
Corporations Act 2001 (Cth), s 917A, s 917C, s 917E, s 917F, s 917D, s 1041E, s 1041H
Fair Trading Act 1987 (WA), s 10, s 12
Trade Practices Act 1974 (Cth), s 52
Result:
Judgment for the plaintiff against the second and fifth defendants
Claims against the first and fourth defendants are dismissed
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr D H Solomon & Mr C S Williams |
| First Defendant | : | Mr J A Thomson SC & Mr T J Porter |
| Second Defendant | : | In person |
| Third Defendant | : | No appearance |
| Fourth Defendant | : | No appearance |
| Fifth Defendant | : | No appearance |
Solicitors:
| Plaintiff | : | Solomon Brothers |
| First Defendant | : | HWL Ebsworth Lawyers |
| Second Defendant | : | In person |
| Third Defendant | : | No appearance |
| Fourth Defendant | : | No appearance |
| Fifth Defendant | : | No appearance |
Case(s) referred to in decision(s):
Aklia Holdings Pty Ltd v The Carter Group Pty Ltd (in liq) [2017] QSC 75
Australian Competition and Consumer Commission v Keshow [2005] FCA 558
Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472
Australian Competition and Consumer Commission v Unique International College [2017] FCA 727
Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337
Commonwealth Bank of Australia v Kojic [2016] FCAFC 186; (2016) 249 FCR 421
Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371
Fabre v Arenales (1992) 27 NSWLR 437
Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732
Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486
Foxeden v IOOF Building Society Ltd [2003] VSC 356
Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395
Goodwin v National Bank of Australasia Ltd [1968] HCA 30; (1968) 117 CLR 173
Great Investments Ltd v Warner [2016] FCAFC 85; (2016) 335 ALR 542
Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230
Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41
Howard v Commissioner of Taxation [2014] HCA 21; (2014) 253 CLR 83
Hunter BNZ Finance v C G Maloney Pty Ltd (1988) 18 NSWLR 420
Jenyns v Public Curator (Qld) (1953) 90 CLR 113
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Joye v Beach Petroleum NL (1996) 67 FCR 275
Kakavas v Crown Melbourne Ltd [2013] HCA 25; (2013) 250 CLR 392
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357
Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221
Pilmer v Duke Group Ltd [2001] HCA 31; (2001) 207 CLR 165
The Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447
Thorne v Kennedy [2017] HCA 49
Watson v Foxman (1995) 49 NSWLR 315
Yu v Kwok [1999] NSWSC 992
Table of Contents
The parties
The evidence
The witnesses
Persons not called
Documents
Defined terms used in the pleadings
Summary of the plaintiff's claims against each defendant
Leveraged Equities
Mr King
ASASL
Mrs King
Facts
Mr Smith's trading history
Stripe Capital, ASASL and Leveraged Equities
Mr King's trading
The events of 30 July 2007 and the first agreement between Mr King and Mr Smith
Leverage Equities rings Mr Smith
The processing of the application to add a guarantor
The need for original signatures
Ms Jones
The Margin Loan Facility Agreements
Application form
The Loan Agreement
Nominee and Sponsorship Agreements
Guarantee
General provisions
The mortgage
How accounts were administered in fact
The conduct of Mrs King's account between 30 July and 15 September 2007
Events after 15 September 2007
Further dealing on Mrs King's account
The second and third transfers of shares
Transfers between accounts
Mr Smith returns from Europe
Mr Smith's dealings with Leveraged Equities
The 2008 agreement between Mr King and Mr Smith
The margin calls
Further dealings with Leveraged Equities
The transfer of shares to Leveraged Equities
The claims
Mr King
The engagement of Stripe Capital and Mr King
The fiduciary duty and its scope
The claim for breach of duty of care
Breach of the contract between Mr Smith and Stripe Capital
Causes of action arising out of the 2007 Agreement
The representations made to Mr Smith
Misleading or Deceptive Conduct by Stripe Capital and Mr King
Fair Trading Act 1987 s 10
Fair Trading Act s 12
Corporations Act s 1041H
Corporations Act s 1041E
Australian Securities and Investment Commission Act s 12DA
Australian Securities and Investment Commission Act s 12DB
The further contravention
Breach of the 30 July 2007 agreement
Unauthorised transfer of further shares
The case against the first defendant
Misleading or deceptive conduct
Unconscionable conduct
Australian Securities and Investment Commission Act s 12 CB
Fair Trading Act s 11 and s 11A
Trade Practices Act s 51AB and s 51AC
Unconscionable conduct under the unwritten law
Unconscionable conduct under statute
Knowing receipt of property transferred in breach of fiduciary duty
Unjust Enrichment
The initial transfer of shares
The rights issue
The second and third transfers
Conversion
ASASL
The claim for relief
Mr King
Mrs King
Conclusion
ALLANSON J:
In 2007, Edwin George Smith provided valuable shares as collateral security for a margin lending account with Leveraged Equities. The account was in the name of Glenice Beryl King, but was used for trading by her son, Todd Michael King. In January and March 2008, more shares owned by Mr Smith were added to the security for the loan. Those later transfers were not authorised by Mr Smith, but were made without his knowledge and by the use of false documents prepared by Mr King. Further shares were credited to the account as a result of rights issues.
During 2008, Leveraged Equities sold part of the shares it held as security. Mr Smith made payments to Leveraged Equities to prevent the sale of further shares. Eventually, the remaining shares were returned to him.
Mr Smith sued five defendants for the losses he suffered. Two are in liquidation. Only two of them - Leveraged Equities and Mr King ‑ appeared at the trial.
The parties
Mr Smith is a retired teacher and school principal. From 1987, he has been active in trading on the stock exchange. He has owned shares in his own name, jointly with his wife Gwyn Smith, and through a company, Howatharra Investments Pty Ltd (as the trustee of a self‑managed superannuation fund). He has traded through brokers, and also on his own account.
The first defendant, Leveraged Equities, is a subsidiary of Bendigo and Adelaide Bank, and conducts business as a margin lender.
The second defendant, Todd Michael King was a licensed stock broker. He was Mr Smith's broker from about 2001, including during 2007 and 2008 when the relevant events occurred. He is no longer a broker.
Mr King was a director of the third defendant from 2006 to 2008. The third defendant was then known as Stripe Capital Pty Ltd.
The fourth defendant, Australian Stockbroking and Advisory Services Ltd (ASASL), held an Australian Financial Services Licence issued in accordance with pt 7.6 of the Corporations Act 2001 (Cth). Mr King and Stripe Capital were authorised representatives of ASASL pursuant to pt 7.6.
Stripe Capital and ASASL are both in liquidation. Mr Smith has leave to proceed against ASASL, but has not applied for leave to proceed against Stripe Capital. ASASL filed a defence, but did not appear at the trial.
The fifth defendant, Mrs King, is the mother of the second defendant. She filed an appearance and a defence in this matter only the last working day before trial. Mr Smith had not attempted to proceed against her in default before then. Mr King's use of an account with Leveraged Equities in his mother's name lies at the heart of these proceedings. Her defence was, in essence, a denial of all matters alleged against her.
The evidence
The witnesses
The action was tried over 12 days. Oral evidence was given by five witnesses. Each of them made one or more witness statements or affidavits which were received as exhibits and relied on as evidence‑in‑chief.
Mr Smith gave evidence in his case and was the only witness called by the plaintiff.
Four current or former employees of Leverage Equities gave evidence:
1.Nicholas Green - Senior Manager, Business Change and Improvement, Leveraged Equities.
2.Lily Elliott - the Head of Client Service and Customer Experience at Leveraged Equities; no longer employed at Leveraged Equities.
3.Errin McDowall - Ms McDowall was employed by Leveraged Equities from 2002 until December 2008. In October 2007, she became a Team Leader in Client Services (Stockbroking) Division. Ms McDowall became involved in these events in about mid-2008, although before then she supervised the account manager, Ms Jones.
4.Danielle Jones - the account manager for accounts on which Stripe Capital and Mr King were the adviser and authorised representative.
Mr King did not give evidence.
Mrs King did not appear at the trial or give evidence.
Persons not called
Mrs Smith was not called to give evidence. There were some relevant conversations where Mr Smith said his wife was present and would support his recollection. She was not, however, directly involved in any of the relevant events. The most important occasion when she was present was when Mr Smith and Mr King made their first agreement (discussed below). With Mr King not giving evidence, Mr Smith's recollection is unchallenged. The plaintiff's decision not to call Mrs Smith is of no consequence.
Mr King participated in the trial, filing a defence, and cross‑examining Mr Smith, but did not give evidence. He had filed a witness statement but it was not received in evidence. The court should properly draw the inference that the evidence of Mr King would not assist his case; and inferences available on the evidence, unfavourable to Mr King, may be drawn with greater confidence: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, 308. I will deal with these inferences separately when they arise.
Because Mr King did not give evidence, his credibility is not in issue. His honesty, however, is relevant. The evidence shows that Mr King was seriously dishonest on several occasions.
First, as set out in detail below, in July 2007 Mr King had over‑reached in his trading, and was unable to complete trades he had booked on his mother's account. He approached Mr Smith and asked him to provide shares to be held as collateral security for an account in the name of Mr King's mother. He lied to Mr Smith about why he needed the shares and how they would be returned.
Second, after Mr Smith provided the shares, Mr King persistently and dishonestly deflected Mr Smith when he inquired about recovering his shares.
Third, when Mr King needed further security in 2008, he forged two authorities to enable a further 40,000 shares to be transferred as security for Mrs King's account.
The plaintiff asked the court to draw Jones v Dunkel inferences from the failure of Leveraged Equities to call Mr King, when it had cross‑examined Mr Smith in part on the basis of what Mr King was expected to say, based on his pleading and witness statement. I do not believe that such inferences should be drawn. First, Mr King is not a witness one would have expected Leveraged Equities to call. Leveraged Equities had issued a notice of contribution against Mr King, and a third party notice against his mother. Second, while Mr King had filed a witness statement, he chose not to give evidence. Leveraged Equities would have needed leave to adduce evidence from Mr King outside the terms of his witness statement. There is no reason to believe that it was aware of what Mr King would say, or that he would give evidence in accordance with the statement filed: see Fabre v Arenales (1992) 27 NSWLR 437, 449 ‑ 450. Third, on what was known to the parties or reasonably to be inferred from the matters before the court, no party could have been confident that Mr King would be a truthful witness.
Mr King's failure to give evidence left the evidence of Mr Smith regarding his dealings with Mr King uncontradicted.
The plaintiff also submitted that Jones v Dunkel reasoning should be applied to the failure of Leveraged Equities to call Melissa Mallinson, a team leader at Leveraged Equities and Ms Jones' team leader in July 2007 and in 2008 when Mr Smith's complaints were first raised. I have, however, not identified any factual issue where the failure to call Ms Mallinson is of any consequence.
No witnesses were called from Stripe Capital or ASASL. I do not believe that there are issues where the failure of any party to call those witnesses affects the findings I should make.
Documents
The parties filed extensive documentary evidence, with 11 volumes and five supplementary volumes of trial documents, although not all of the supplementary volumes were eventually tendered.
Defined terms used in the pleadings
Some of the documents abbreviate the name of the fourth defendant to Asandas, others to ASASL. I will follow the usage in the Authorised Representative Agreement with Stripe Capital and use the acronym ASASL.
It is often convenient to follow the parties' use of defined terms in their pleadings. In this case, however, it is potentially confusing, where the plaintiff defines statements made by Mr King to Mr Smith on 30 July 2007 as the 'Collateral Statements' and, in particular, defines an agreement made that day as the 'Collateral Contract'. It is a contract about collateral securities, not a 'collateral contract' as that term is commonly understood. Except where I quote directly from the pleadings, I will refer to it as the 2007 Agreement.
The defendant parties plead two further agreements. One of them ‑ said to be made in September 2007 ‑ is disputed. The other, which included a deed and mortgage, was made in 2008. It is not necessary to use a defined term in order to make clear which agreement is being referred to at any particular time.
When he made the 2007 Agreement, Mr Smith signed documents which are defined as an Application Form and Authority Letter. I will use those terms.
There were three transfers of Wesfarmers shares to Leveraged Equities ‑ the First Share Transfer, on 1 August 2007, was of 85,000 shares and immediately followed on the 2007 Agreement. The Second Share Transfer was of 25,000 shares in January 2008 and the Third Share Transfer was of 15,000 shares in March 2008.
Summary of the plaintiff's claims against each defendant
Leveraged Equities
Mr Smith pursues claims in law and equity against Leveraged Equities for:
(1)misrepresentation and misleading or deceptive conduct in relation to the First Share Transfer of 85,000 Wesfarmers Shares on 1 August 2007;
(2)unconscionable conduct in relation to the First Share Transfer;
(3) receipt of property which it knew was procured by the breach of fiduciary duty by either or both of Stripe Capital and Mr King;
(4)unjust enrichment (for shares transferred in the Second Share Transfer and the Third Share Transfer under two forged transfers, for shares issued as a rights issue on shares then held by Leveraged Equities, and for payments made by Mr Smith);
(5)unlawful detention and conversion of shares and benefits received or receivable and rights that accrued to such shares held by Leveraged Equities after demand for their release.
He also claims for breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), the Australian Consumer Law, and the Fair Trading Act 1987 (WA).
Mr King
Mr Smith pursues claims against Mr King in
(1)breach of fiduciary duties;
(2)breach of duty of care; and
(3)breach of contract.
He also pursues claims under statute for losses caused by conduct that was misleading or deceptive in breach of the Fair Trading Act, the Corporations Act 2001 (Cth) and the Australian Securities Industry Act 1980 (Cth).
ASASL
Mr Smith claims that ASASL is responsible pursuant to s 917A to s 917C, s 917E and s 917F of the Corporations Act for the conduct of Stripe Capital and Mr King, as its authorised representatives, related to the provision of a financial service.
Mrs King
The claim against Mrs King is for losses resulting from Mr Smith's provision of security to Leveraged Equities in support of the indebtedness she incurred, or which was incurred in her name.
Facts
Mr Smith's trading history
Mr Smith started building up his share portfolio in about 1987. He retired from employment in about 1994, and from then traded more actively. Between 1994 and 2007, Mr Smith used the services of a broker, and also traded on his own account through Comsec. He traded in shares and in other securities, including units in property trusts and some derivatives. By 2007, Mr Smith had been an active trader, and a relatively successful one, for many years. His portfolio, including shares held jointly with his wife and shares held by Howatharra Investments, was valued at about $8 million. A major component of his portfolio, by value, was shares in Wesfarmers Limited.
In about 2001, Mr Smith's then broker retired and Mr Smith took over managing the whole of his own portfolio (ts 301). In 2001, Mr King was employed by Macquarie Equities Ltd. A friend recommended Mr King to Mr Smith, and from about 2001, Mr Smith used Mr King as a stockbroker and advisor in some of his trading.
In about April 2003, Mr Smith opened an account with Leveraged Equities for the purpose of a particular transaction, the details of which I need not describe. The transaction was unsuccessful, resulting in a significant loss. Mr King advised in that transaction, and advised Mr Smith about entering a margin lending facility with Leveraged Equities. Despite the loss, Mr Smith continued to repose confidence in Mr King's acumen.
It was Mr King who recommended that Mr Smith set up Howatharra Investments.
In 2006, Mr King left Macquarie and was employed as a director by Stripe Capital. In about May 2006, Mr Smith engaged Stripe Capital as a stockbroker and Mr King continued to act as his broker. The plaintiff identifies an engagement in writing constituted by a bundle of documents titled 'Account Opening Documentation', comprising a document titled 'Application Form', a document titled 'Direct Debit Service Agreement', an untitled document regarding the account with E*Trade, and a document titled 'Financial Services Guide' dated April 2006.
The application form primarily recorded details of the applicant, and included authorisations to Stripe Capital with regard to the withdrawal of funds and direct debits. It provided for transfer of CHESS sponsorship from the previous broker (if preferred). The applicants authorised E*Trade, as their execution and settlement agent, to open a bank account on their behalf for the purpose of settling share transactions on their account, and authorised Stripe Capital to give effect to their instructions regarding execution and settlement of their securities transactions.
The Direct Debit Service Agreement set out the terms on which the applicants authorised E*Trade to arrange for amounts owing to E*Trade to be deducted from the applicants' account. This allowed E*Trade to arrange payment to it of the amounts payable to E*Trade or the sponsoring broker.
The next document set out the terms and conditions to which the applicant agreed in opening an account with E*Trade through ASASL.
The relationship between ASASL and Stripe Capital and its clients was set out in a Financial Services Guide. Relevantly, it provided that Stripe Capital was authorised to provide the following services on behalf of ASASL:
•Provide financial product advice and deal in the following financial products:
•Basic deposit products;
•Derivatives;
•Foreign exchange contracts;
•Debentures, stocks or bonds;
•Interests in managed investment schemes including Investor Directed Portfolio Services;
•Securities;
•Miscellaneous financial investment products limited to managed investment warrants; and
•Underwrite interests in managed investment schemes, or issues of securities (v 10, 2897N).
The documents included a separate Financial Services Guide for Stripe Capital. It set out, in the same terms, the services that Stripe Capital was licensed to provide.
Stripe Capital offered portfolio management services to its clients.
Mr King's role as broker for Mr Smith was limited. He would at times offer advice or suggestions, but could execute trades only on Mr Smith's direct instructions.
Mr Smith pleads that Mr King acted as his 'general financial advisor', and that Mr Smith had 'relatively limited knowledge of the market for, opportunities and risks of available financial products'. It is likely that Mr King had superior knowledge of some of the available financial products. Mr Smith, however, was far from being an unsophisticated or unknowledgeable investor. Even in relatively early days in his trading activities, he had pitted himself against his then advisor, and achieved comparable or better results in his own trading over the trades recommended and carried out by his broker. During the period when he used Mr King's services, Mr Smith continued to conduct trades on his own account and based on his own research. Mr Smith managed his own portfolio.
By 2007, Mr Smith had been active in the market for 20 years. He was experienced in the use of short, medium and long term averages as a tool to analyse price movements and inform his decisions in trading. In evidence, he demonstrated an understanding of trading in warrants and options.
Mr Smith said that he was a conservative investor, looking for shares that carried a 'decent' dividend stream. When investing in other financial products, such as options, he would not buy speculative positions but continued an essentially conservative strategy. Leveraged Equities referred to the Client Profile Assessment, filled in for Mr Smith on his engagement of Stripe Capital, which describes Howatharra Investments 'risk profile' as high risk. I do not believe the profile is an accurate statement. The Client Profile Assessment was completed by Mr King, and the selection of a high risk profile was for a very limited purpose.
I believe that Mr Smith was a conservative investor in the way he described. He used Mr King's services where that suited his purposes, but maintained autonomy as a trader. Mr Smith said that Mr King was a 'trusted advisor'. When asked in what sense Mr King had been a trusted advisor, apart from providing some information and recommendations, Mr Smith replied:
Well, I had no reason to distrust him. My dealings with him had been quite straightforward. He seemed a pretty upfront sort of bloke. I ‑ you know, you - you develop a trust of people on your contact with them.
Stripe Capital, ASASL and Leveraged Equities
Mr King was a licensed stock broker. He had been employed by Macquarie until 2006, and from 2006 to 2008 was a director of Stripe Capital.
In May 2007, ASASL, Stripe Capital and seven directors of Stripe Capital (as Guarantors), executed an Authorised Representative Agreement under which Stripe Capital agreed to provide services to ASASL, and Stripe Capital was authorised to use the E*Trade Trading System for the execution of ASX transactions. Mr King executed the Agreement as a director and a guarantor under the agreement.
ASASL appointed Stripe Capital and some of its personnel as its authorised representatives. Stripe Capital was obliged to conduct that part of its business operated by way of the E*Trade system 'with due care and skill and in an honest and professional manner which complies with all Applicable Laws': cl 5.1. Stripe Capital was to provide services including advising and broking services, and offers and sales of Financial Products to the public: cl 5.2.
By cl 6, each Guarantor unconditionally and irrevocably guaranteed the settlement of all trades Stripe Capital executed using the E*Trade system, whether on its own account or on behalf of clients.
Stripe Capital was the adviser named for about 30 accounts at Leveraged Equities at 29 October 2008 (the number is not consistent over various documents). All of them were clients of Mr King.
Mr King's trading
As well as advising clients, Mr King had been trading on his own behalf for some time.
Mr King traded on an account in the name of Komplexity Capital Pty Ltd. The Komplexity account was opened in October 2003. The documents opening the account were signed by Ms Pauleen Maree Guy as sole director and secretary. Mr King (then at Macquarie) was nominated as authorised representative. The plaintiff pressed that the Leveraged Equities account manager, Ms Jones, knew the Komplexity account was also for Mr King's personal trading. There is no evidence that she would have known if Mr King had not told her. She denied that she had ever discussed the matter with Mr King, and there is no evidence that he did. I accept her evidence.
Mr King was nominated by Komplexity to be an 'authorised person' within the meaning of Margin Loan Agreement between Leveraged Equities and Komplexity. Leveraged Equities admits that it accepted Mr King to be the authorised person who could give instructions without reference to the named client on the Komplexity account. Nothing has been shown to be unusual in that. Mr King was nominated as the authorised person by Ms Guy in the documents establishing the account. He was the authorised representative on many other accounts.
Mr Smith pleads that features of the trading on the Komplexity account were an 'Unusual Feature' of the account in the name of Mrs King. In summary, he sought to establish a relationship between the trading undertaken on the Komplexity account and the trading on Mrs King's account. In particular, in March 2007, high volume trading on the Komplexity account abruptly ceased, and trading on the account in the name of Mr King's mother commenced. That trading was of a similar magnitude to that previously conducted on the Komplexity account. The plaintiff also relied on three transfers from the account of Mrs King to the account of Komplexity in the period 28 August 2007 to 4 September 2007, totalling $575,000 (although by 21 September 2007 the whole amount had been transferred back).
Mr King opened the account with Leveraged Equities in his mother's name in August 2006. Mr King and Stripe Capital were the named advisors and Mr King the authorised representative. The plaintiff opened on the basis that the account was 'plainly' Mr King's. I am satisfied that the account was for Mr King's personal trading. I believe that Mr King used an account in his mother's name to mask the extent of his personal trading activity from his fellow directors at Stripe Capital and from ASASL.
The first transaction on Mrs King's account was in October 2006, with the refinancing of an existing loan. There were few trades between November 2006 and January 2007, with the loan fluctuating between about $250,000 and $310,000. In late February 2007, however, Mr King began to trade heavily through the account, with the loan regularly exceeding $1 million. As alleged by the plaintiff, Mr King appears to have transferred his activity from the Komplexity account to the account in the name of his mother.
Each party presented a spreadsheet said to collate the transactions and other information for Mrs King's account between 20 October 2006 and 31 March 2008 (including security value rates, securities held, and low value and closing value of shares on relevant dates). In his affidavit, Mr Green provided values which he had corrected for some of the information recorded in the plaintiff's spreadsheet. I accept that his is the correct version.
The information cannot be summarised. The following conclusions can, however, be drawn. First, there were many occasions when the ratio between the Total Amount Owing and the Security Value was greater than 110%. Most often this was during the course of the day and not at the end of trading. Second, there were two occasions before 30 July 2007 when the buffer of 10% was exceeded at the close of the day's trading. The account was in margin call at the close of business on Friday 16 March 2007, as a result of the settlement of a purchase of 75,000 AWCIMF shares, and still in margin call on the following Monday, 19 March 2007. On the Tuesday, the AWCIMF shares purchased the week before, and another 75,000 AWCIMF shares, were sold as a total parcel. The effect was to take the account out of margin call.
Mr King acted as the broker in the trading. The trading was conducted through E*Trade. It was admitted between the plaintiff and Leveraged Equities that E*Trade was required to discharge Mrs King's obligations to purchase or sell shares, whether or not Mrs King delivered the purchase price or shares (as the case may be); and that ASASL was required to indemnify E*Trade for any losses it suffered in consequence of performing trades at the request of ASASL or Stripe Capital. Mr King and his fellow directors in Stripe Capital were, in turn, obliged to indemnify ASASL as guarantors under the Authorised Representative Agreement between Stripe Capital and ASASL. The result is that, while the exposure for failed trades may initially have fallen on Komplexity or Mrs King, the ultimate liability lay with Mr King and Stripe Capital.
Mr King was not a conservative investor. He traded in high volumes and borrowed heavily to do so. On occasions relevant to this action, he took positions in the market that left him very exposed when share values fell.
The end of July 2007 was one such occasion, but not the last.
Mrs King's margin loan for the month of July 2007 had an opening balance of $91,563.23 and a closing balance of $205,859.38. Mr King traded consistently through the month, with the balance at the close of trade being as high as $1.5 million on two occasions, but falling to $11,050.99 at the close of trade on 23 July 2007. Mr King appears to have traded profitably until then.
Between 23 July and 26 July 2007, Mr King entered contracts to purchase securities on his mother's account. Three of the purchases were shares in Paladin Resources Ltd, the others were instalment warrants. Settlement (which was then three days after the trade) was required on 26, 27, 30 and 31 July 2007 (28 and 29 July being a weekend). The total payable on the purchases was $3,061,687. On 27 July 2007, Mr King had also placed four sale orders for the sale of securities. But even with the funds available from those sales at settlement, the funds in Mrs King's account were not sufficient to settle the purchases. Leveraged Equities would not advance settlement funds on the value of current securities held ‑ some of which were assigned little or no security value.
On 24 July 2007, Giri Sathasivan, a Leveraged Equities account manager, spoke to Mr King by telephone and advised him that there was a failed trade for 25 July 2007. Mr King said he would sell warrants the following day.
If Leveraged Equities did not fund the trades, they would still settle. ASASL would be required to indemnify E*Trade for any losses it suffered in consequence of performing the trades. As guarantors under the Authorised Representative Agreement, Mr King and his fellow directors at Stripe Capital would be required to indemnify ASASL.
To avoid personal liability and perhaps to conceal his personal trading from his fellow directors, Mr King needed to find cash or lodge security of sufficient value that Leveraged Equities would lend the funds required against the value of the security. Mr King knew that Mr Smith had sufficient Wesfarmers shares to provide collateral for the pending trades.
The events of 30 July 2007 and the first agreement between Mr King and Mr Smith
Early on 30 July 2007, Mr King sent several emails to Leveraged Equities. The first was addressed to Erin Quilter and received by Leveraged Equities at 9.43 am EST. This email may have been sent by Mr King before he spoke to Mr Smith that day. Mr King said he wished to establish a third party (a guarantor) to an existing account. Ms Quilter had been the account manager for the accounts where Stripe Capital was the advisor, including Mrs King's account, but had been replaced by Ms Jones. Ms Quilter forwarded the email to Ms Jones.
Ms Jones emailed Mr King asking him to identify the account and the third party's name. Because Mr King was the authorised person on many accounts, I find there was nothing unusual in Ms Jones sending that request. Mr King then advised Ms Jones by email, identifying Mrs King's account and Mr Smith as the guarantor, and requesting the forms to be emailed so they could be signed and posted back. Ms Jones forwarded that email to the Leveraged Equities' new business area at 10.54 am EST.
Ms Jones agreed that it was quite possible that Mr King asked her to email the forms to him because, as a result of the failing trades, it was urgent that those documents be signed and returned as quickly as possible so that settlement could proceed. It is the most likely explanation for Mr King's conduct.
The plaintiff also referred to the fact that the documents were sent to Mr King, and not directly to Mr Smith. There was no evidence that the process followed in providing the documents to the representative was unusual, where a guarantor was being added to an existing account. The practice of Leveraged Equities was to deal primarily with the brokers.
At about 7.50 am (9.50 am EST), Mr King rang Mr Smith at his home. He said he had a business proposition: he needed to borrow Wesfarmers shares owned by Mr Smith, as collateral, for a period of about six weeks. Mr King said he would put the proposal in writing, and bring it to Mr Smith's home.
Mr Smith's account of the telephone conversation is uncontradicted. It suggests that Mr King was desperate. Initially, he asked to borrow 45,000 shares, and then raised the amount to 85,000. Mr Smith said that Mr King 'seemed to be recalculating something while he was talking'. He offered $50,000 in consideration for the use of the shares, then $100,000 – a sum Mr Smith described as 'silly'. Mr King offered to pay the $50,000 to Mr Smith on 15 September 2007. Mr Smith asked what the risks were. Mr King assured him that there was no risk.
The phone call lasted about 5 minutes and 30 seconds. It was put to Mr Smith that there were other phone calls that morning with Mr King or Stripe Capital. Mr Smith could not recall speaking to Mr King by phone again that morning; Mr Smith did make other calls, but given how short they were (two were only 16 seconds and 23 seconds), they may not have all been answered. There was no evidence to show these calls, if made, are relevant.
At 12.13 pm EST, a New Business Administrator from Leveraged Equities sent an email to Mr King, attaching documents. The documents included: the Application Form, for Mr Smith to be added as a guarantor to Mrs King's account; a Margin Lending brochure, which contained the margin lending terms; a First Option booklet and Master Priority Deed; and a Short Share booklet.
Later that day, Mr King drove to Mr Smith's home in Waikiki. He took some documents with him for Mr Smith to sign. Mr Smith said that Mr King told him this account of why he wanted to borrow the shares:
My stepfather has set up a margin loan account for my mother, Glenice King, at Leveraged Equities, but he has had to go to Canada on business for six weeks before the final arrangements for security could be completed. He's left me scrambling around to cover this. I'll wring his neck for it. He'll be back on 15 September and will provide the collateral. My mother needs some collateral cover for those six weeks. It will only be a short term arrangement. The collateral will only be required for a limited time and will be released on 15 September. If you can provide shares as collateral for that period, we will pay you $50,000.
…
My mother will only hold shares in Westpac Bank, ANZ Bank, and Paladin Resources through the margin loan facility. These shares have been bought through the facility and we just need the collateral cover to enable settlement of the purchase. There will be nothing bought or sold through the facility while your shares are used as collateral, and I will provide you with account statements to show that.
…
The way this will work is that I will shift the Wesfarmers shares to a Leveraged Equities account and there will be a collateral hold on them to my mother's account. All your dividends will flow through to you as normal. There will be no change of beneficial ownership so there will be no capital gains tax.
…
There is no risk in lending the collateral. I am the controlling broker. I would lose my job if I expose you to risk of loss (WS 30‑34).
Mr Smith said that he quickly mentally calculated the rate of return on Mr King's proposal (that is, a $50,000 fee for six weeks) as an annualised rate of 13%.
There are some obvious difficulties with Mr Smith's account. First, there is an element of unreality in the explanation that Mr King was required to organise collateral from a third party, a stranger to Mrs King and her husband, because Mr King's step father was called away on business. Second, Mr Smith accepted that, if the shares purchased were bank shares with a likely security value of about 70% of their market value, on the story Mr King was telling him his mother could have made a purchase order for up to $10 million worth of shares without any prior arrangements for security. Third, Mr Smith made no inquiry about the number or value of the shares that were being purchased. He said that Mr King did not ever reveal either the quantity or the actual nature of the shares ordered. Fourth, Mr Smith's failure to make any inquiries is striking given the value of the collateral Mr King was asking to borrow. Mr Smith's shares were worth more than $3 million, and were about 40%, by value, of the combined portfolio of Mr Smith, his wife, and Howatharra Investments.
More generally, Mr Smith on several occasions insisted that he remembered the actual words said, although he had made no note of the conversations and, in regard to these events, he was recalling statements made in conversation seven years earlier. On this occasion, and others, he appeared to rely on, and repeated, a specific memory of one or more details (for example, that Mr King had said he would 'wring his stepfather's neck'; that he misremembered Mrs King's name as Beryl, not Glenice) as demonstrating accurate and detailed recall of the conversation. I am not satisfied that it does.
There are other occasions in Mr Smith's evidence where he did not claim to have accurate recall because of the passage of time. For example, he could recall very little of the margin loan he held with Leveraged Equities between 2003 and 2006 - saying it was 'lost in the annals of time'.
The comments of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315, 318 ‑ 319 may be accepted as a counsel of caution. In particular:
… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or [sic] self‑interest, as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
But these are civil proceedings, to be decided according to the civil standard of proof. It is not necessary for the plaintiff to prove the precise words spoken on each occasion. The court needs to be satisfied that it is more probable than not that words were spoken that would reasonably have conveyed what the plaintiff alleges. I can reach that satisfaction if I am satisfied that Mr Smith has proved the substance or effect of what was spoken conveyed the misleading representations that have been pleaded.
I must have regard to all of the evidence to the extent that it throws light on what was said and what would have been conveyed in the conversation. Despite my reservations about the extent of Mr Smith's recall, I am satisfied that Mr King did make the statements to the effect of those alleged by Mr Smith.
Mr Smith's evidence was challenged in cross‑examination. The challenge, particularly by Mr King, was not based upon Mr Smith's recollection being faulty. Rather, it was suggested that his account was knowingly false. I have no reason to believe that Mr Smith was giving deliberately false evidence about his agreement with Mr King, or indeed on any other matter. My assessment of Mr Smith overall was that he was honestly trying to give as complete and accurate an account as he could of what had happened.
With Mr King choosing not to testify, there is no evidence to contradict Mr Smith's account. I will not speculate about why Mr King proceeded in this way. But on the only evidence before me, I am reasonably satisfied that the conversations between Mr Smith and Mr King were, in their essential terms, as Mr Smith has recounted them in his witness statement and oral evidence.
In important aspects, Mr Smith's account is supported by the terms of the document recording the arrangement. Some matters Mr Smith relies on are not included. The agreement does not recite the background relating to Mr King's step-father. Mr Smith said that he was told that there were trades or purchases that had been made, but not settled, on Mrs King's account; that also was not recorded. But those matters do not relate to the performance by either party of their agreement. It may be more significant, because it does relate to performance, that the agreement does not include that the shares held would be confined to shares in Westpac, ANZ, and Paladin Resources. But, in a document drawn in these circumstances, omissions are not surprising.
The document is short enough to set out in full:
CONFIDENTIAL CONTRACTUAL AGREEMENT
This contract dated 30 July 2007 between Mr Edwin George Smith of 8 Shelton Street Waikiki WA 6168 and Mr Todd Michael King of 9/61 Troy Terrace Jolimont WA 6104.
Outline of agreement ‑ The following is agreed upon by the undersigned ‑
•Mr Edwin George Smith provides collateral for Mrs Glenice Beryl Kings' Leverage Equities account (537339) in the form of 85,000 Wesfarmers shares (WES.ASX) for the period up to the close of business on 15 September 2007.
•Mr Todd King agrees to pay $50,000 to Mr Edwin Smith for the use of the above listed collateral.
Conditions agreed to
Obligations of Edwin Smith ‑ Lodge 85,000 Wesfarmers shares as collateral against the Leveraged Equities Margin Loan of Mrs Glenice King for a period commencing 30 July 2007 (or as soon as practicable) and not ending prior to 15 September 2007. At the end of this period Mr Edwin Smith will receive a payment of $50,000. This payment will be due to Mr Edwin Smith even if the collateral is not required by Mrs Glenice King for the full period stated.
If Mr Edwin Smith wishes to withdraw the above stated collateral prior to 15 September 2007 he can do so at no obligation to the undersigned however forfeits the agreed $50,000 payment for collateral lodgement.
Obligations of Mr Todd King ‑ Assets may not be purchased by Mrs Glenice King in her Leveraged Equities margin loan under any circumstances during the period in which Mr Edwin Smith has collateral lodged against such loan. As Mr Todd King is the controlling broker it is his contractual responsibility to ensure no purchases are made and will provide a broker statement of trade activity to Mr Edwin Smith as evidence to this. If a purchase is made the contract will be immediately void and Mr Edwin Smith's collateral will be released in full from the said loan within 4 business days.
Under no circumstance is the lodged collateral to be sold. If this was to occur Mr Todd King would be required to make full restitution to Mr Edwin Smith for the tax that would be due on the realised capital gain. This restitution would be required to be paid within 90 days of the sale of the said shares. The amount of tax payable would be determined by an accountant in the employ of Mr Edwin Smith.
Upon release of the above stated collateral from Mrs Glenice King to Leveraged Equities account Mr Todd King will make a payment of $50,000 to Mr Edwin Smith as instructed by Mr Smith within 3 business days of collateral release.
Mr Todd King agrees to release collateral from Mrs Glenice King's Leveraged Equities Margin Loan back to Mr Edwin Smith as soon as the lodged collateral is no longer required and payment of $50,000 will then be made within 3 business days of such release.
The agreement was signed by Mr King and Mr Smith, dated 30 July 2007, and each signature was witnessed by Mrs Smith.
Mr Smith said in evidence that Mrs King was also a party to the agreement. That is not consistent with either the terms of the written document or Mr Smith's account of what was said. In the context of his evidence, I do not believe that he was using the word 'party' in the strict sense of a contractual party. Mr Smith said Mrs King was a party 'by virtue of me providing collateral to her and my understanding of the way this contract was to function'.
Mr Smith also said he believed Stripe Capital and ASASL were parties to the agreement. That belief was based on Mr King saying that Stripe Capital was there to mind the affair if anything happened to him, and Mr Smith's assumption that they were aware of the agreement. Mr Smith does not assert in this action that Stripe Capital or ASASL are liable as parties to the contract. The basis pleaded for their liability is statutory.
Mr Smith signed the Application Form, and a Form of Acknowledgement of the Master Deed of Priority between Australian Clearing House Pty Ltd and Leveraged Equities. Mrs Smith also signed the Application Form as a witness.
Some parts of the Application Form are completed with the details typed. Some parts are filled in by hand, in what looks like Mr King's hand. It is likely that Mr King would have had the necessary personal information relating to Mr Smith to complete those sections, including perhaps his passport and drivers licence number, from earlier documents. Leveraged Equities also had some of that information from the account opened by Mr Smith in 2003.
The Application Form refers to the Leveraged Equities margin lending booklet which contains the terms of the agreement with Leveraged Equities. In pt 9 of that Application Form, by completing and signing the form, a guarantor:
•acknowledges and agrees that he or she has read and understood the agreement provided with the Application Form;
•acknowledges that he or she has read and understood the guarantee;
•gives acknowledgements and consents relating to privacy disclosure in section 3 of the booklet;
•makes an offer of mortgage in section 7 of the Application Form;
•executes a power-of-attorney in section 8 of the Application Form; and
•expressly requests Leveraged Equities to not provide an executed copy of the agreement, acknowledging that copies of these documents have been provided for the guarantor and for his or her records.
Mr Smith said that the Application Form had 'sign here' stickers on it and he glanced over it but did not properly read it. He 'scanned only parts of [the Application Form]' before signing it. He took Mr King's word for what it was. He denied that Mr King gave him the Margin Lending brochure.
I believe that Mr King did not take the brochure with him, or, if he did, he did not give it to Mr Smith. Leveraged Equities did not know what had been provided to Mr Smith by Mr King.
Mr Smith did not, however, say that Mr King in some way misrepresented to him the effect of signing as a guarantor, or that he misunderstood the effect of what he was signing. I am satisfied that Mr Smith understood that the effect of the documents he signed was to provide 85,000 Wesfarmers shares as collateral on a margin lending account in the name of Mrs King, and to guarantee Mrs King's liability under the loan. He had previously held a margin loan account with Leveraged Equities. He did not consider that the rate of return Mr King was offering signified that the risk involved in the proposal was 'high or very high', but knew there was a risk. Critically, he relied on the honesty of Mr King, and on the promises he made about how he would operate the account, to minimise the risk.
Mr Smith said in cross‑examination:
And the way that you wanted to prevent the account being used for further purchases was to bind Todd King from making those purchases, wasn't it?‑‑‑That would be a correct interpretation, I think.
Yes. Because you appreciated at all times that Leveraged Equities would be within its rights to take the collateral and use it in any way that was justified by the terms of the guarantee? ‑ Well, I wasn't familiar with the terms of the guarantee so it's a difficult question to ask ‑ to answer. But I do have a vague ‑ I have got a general understanding of how margin loans work.
So that you relied upon this obligation of Mr King not to do further purchases ‑ ‑ -?‑‑‑Yes, I did.
‑ ‑ ‑ as your protection ‑ ‑ ‑?‑‑‑Yes, I did.
‑ ‑ ‑ against Leveraged Equities exercising its rights under the guarantee?‑‑‑Yes, I did. I mean, King assured us that he was the controlling broker; that nothing would happen on the account; it was strictly a temporary arrangement; that it would be terminated on his stepfather's return; and the return of my collateral because his stepfather would put the security up in place (ts 348 - 349).
Mr Smith's evidence that he did not receive the booklet, and signed the form without reading any of it, including the acknowledgements in cl 9, is quite at odds with his otherwise cautious business practices. It is, however, consistent with his evidence about the documents relating to his own margin loan with Leveraged Equities in 2003. Mr Smith said that on that occasion also he probably did not receive and read the booklet, despite acknowledging that he had. His faith in Mr King was not isolated to the one occasion. Indeed, he continued to trust him long after Mr King had failed to fulfil the promises made on 30 July 2007.
Mr Smith also signed a document (the Authority Letter) addressed to Leveraged Equities in these terms:
Please accept this is my authority to transfer 85,000 Wesfarmers shares (WES.ASX) from my HIN as listed below to the Margin Loan account listed below -
Transfer from
MR EDWIN GEORGE SMITH
PID ###
HIN ###
Transfer to
Leveraged Equities Account # 537339
Mrs Glenice King
If you have any queries please call Mr Ed Smith on (###)
(For privacy, I have not disclosed the PID and HIN numbers or Mr Smith's phone number. The Leveraged Equities account number is shown, the account now being closed.)
The Authority Letter was signed by Mr Smith and dated '30/7/2007'.
The Application Form and Authority Letter both appear to be also signed by Mrs King. Mrs King's signature is purportedly witnessed by Mr King. As the form was only forwarded to Mr King by Leveraged Equities that day, and Mrs King was in Queensland, Mr King could not have witnessed her sign it. If Mr King was authorised by his mother to sign documents on her behalf, he did not reveal to Mr Smith, or on the form, that he had done so.
Mr King transmitted the documents to Leveraged Equities. Mr King was in no way acting on behalf of Leveraged Equities, and it is not alleged that he was. Mr Smith entered his agreement with Mr King, and signed all necessary documents for it to be given effect, before Leveraged Equities had taken any action beyond forwarding the forms. On his own case, Mr Smith was induced solely by the conduct of Mr King. To the extent that Mr Smith asserts that he would not have entered the agreement, signed the Application Form and Authority Letter and caused the first share transfer to occur, but for conduct by Leveraged Equities, his claim is not supported by the evidence.
It became a minor issue at trial whether the Authority Letter already bore the signature of Mrs King when Mr Smith signed it. Two copies of the document were in evidence: one signed by Mr Smith only, one with signatures of Mr Smith and Mrs King. Differences in Mr Smith's signature and the way the date is written on each document show that Mr Smith signed two copies of the document.
Counsel for Mr Smith pursued whether the document was sent with only one signature on it, and questioned Ms Jones at length about it. Ms Jones agreed it was possible the document was received with only the signature of Mr Smith, and she arranged to get the borrower's signature as well. She clearly had no recollection of whether that had happened or not. There is no basis to suggest any breach of duty by Leveraged Equities because it informed the advisor for one of its clients that a document required a further signature. The document is not one which requires the two signing parties to do so at the same time and in each other's presence.
In any event, the uncontradicted evidence of Mr Smith was that when Mr King presented the document to him for signing it had Mrs King's name already on it.
I digress briefly to comment on submissions made by the plaintiff in relation to the emails between Mr King and Leveraged Equities on 30 July 2007. Mr King sent his first email at 9.43 am EST (7.43 am in Western Australia), asking for the documents required to add a third party to an existing loan. The email was sent to Erin Quilter at Leveraged Equities. Ms Quilter was not the account manager for the accounts where Mr King was the authorised representative; she had managed the account for a couple of months from, at the latest, around May 2007. She passed the email on to Ms Jones who replied to Mr King at 10.41 am (EST), asking him to identify the loan and the third party name. Mr King replied at 10.47 am, and Ms Jones then requested the guarantor documents from LE New Business ‑ Servicing at 10.54 am.
Counsel for the plaintiff asked Ms Jones whether she had requested Mr King to send the first email to Ms Quilter, 'to create documentary record which would look like this was just a proposal for a guarantee out of the blue' and put to her that the email chain was 'created by agreement between you and Mr King to suggest that this was just a completely new suggestion that hadn't been discussed with you before when, in fact, it had'. Ms Jones denied that she had made such an agreement and the plaintiff could adduce no evidence that she had. Nor does the evidence support an inference that anything of the kind had occurred.
It is even more difficult to find anything in the evidence to show why it would have occurred. Ms Jones had not been account manager for the accounts where Stripe Capital was the adviser for long. She had never met Mr King.
Leverage Equities rings Mr Smith
Part of the process of adding a guarantor to an account was that the account manager would ring the guarantor and complete a file note. Mr Green said:
After the application had been received, after we had gone through and had a look at it and we were comfortable with the various checks that we had gone through, and we were effectively ready to add the guarantor, we would go through the file note to ask those various questions. If the file note was then at a point where we were happy with the responses, we would then actually proceed to add the guarantor (ts 555).
The purpose of the call was to make sure the guarantor understood how the margin loan worked and the risks involved.
On 31 July 2007, Ms Jones rang Mr Smith. Her note of the conversation has the time 1.00pm EST, and the time was not disputed.
In his witness statement Mr Smith said that on 31 July 2007 he received a telephone call, initially answered by his wife. The caller introduced herself as Danielle Jones from Leveraged Equities. She said to Mr Smith words to the effect: 'You're the person who's guaranteeing Mrs King's margin loan. Do you know who Mrs King is?' Mr Smith replied that it was his stockbroker's mother and he had been dealing with his stockbroker for years and had a good relationship with him. He further said, 'I have an agreement with Todd for the provision of collateral'. Ms Jones responded that his arrangement with Mr King was 'of no interest to us'. She then asked him if he knew what a margin loan was. He answered yes and that he had himself used one with Leveraged Equities a few years before. The telephone call concluded shortly after.
In his oral evidence at trial, Mr Smith repeated that conversation almost word for word, except that on the first telling he omitted what Ms Jones said about his arrangements with Mr King being of no interest. Counsel cross‑examining, however, later put to him that Ms Jones did not pursue his statement that he had an arrangement with Mr King. Mr Smith then repeated exactly what was in his witness statement, and said it was Ms Jones' exact words. Mr Smith said that, on Ms Jones' response, he did not persist and say anything further. He did not suggest that he told Ms Jones of the nature or terms of his agreement with Mr King. Mr Smith said that, if it was not of interest to Leveraged Equities, the contractual agreement should have given him all the protection necessary, and he relied on the terms of the contract with Mr King to protect him.
Ms Jones had no independent recollection of that phone call. That is not surprising. She said that she was dealing with thousands of accounts. Her note of the conversation is essentially a check list of questions to ask a new account holder, with boxes to be ticked. Ms Jones said that it was her practice to follow the sequence of the script as set out in the file note.
Ms Jones ticked all of the questions as having been asked, despite the fact that the first two were not required for a guarantee, one was not required because of the answer to an earlier question, and two questions were inconsistent alternatives. Normally a contemporaneous note of this kind, with the witness recalling that she followed the usual procedure, would enable a finding with some confidence about what was said. In this case, the alternatives seem to be that the form is not an accurate note of what was said and Ms Jones did not ask the questions from it; or that the form accurately records the questions she asked, but Ms Jones read the questions off the form with little regard to what she was asking or the answers she was getting.
In her witness statement, Ms Jones said that neither Mr Smith nor Mr King ever advised her that they had entered into a private agreement. Had Mr Smith done so she would have stopped processing the application to become guarantor because an agreement of the kind Mr Smith made with Mr King was inconsistent with Mr Smith's liability to Leveraged Equities under the guarantee. She assumed that she knew that Mr King was Mr Smith's broker at the time of the phone call with Mr Smith. She said that she would not have told Mr Smith that an arrangement with his broker was of no consequence to Leveraged Equities.
In cross‑examination, Ms Jones denied that she knew that Mr King must have persuaded Mr Smith to give the guarantee and put up the substantial collateral by not revealing to him that they were required for Leveraged Equities to fund completion of failed trades. It is curious that the plaintiff put that proposition, when Mr Smith's own evidence was that he knew, because Mr King told him why he needed the collateral.
Counsel for Mr Smith sought to put a sinister complexion on what had occurred. Counsel put a series of questions to Ms Jones, in effect alleging that she knew of Mr King's personal interest in the provision of the guarantee and collateral, because of his personal liability as broker for failed trades, and deliberately did not tell Mr Smith about the trades:
You made no mention whatsoever to Mr Smith that the reason this guarantee and collateral were required was to enable substantial volume of failed trades to be immediately completed, did you? You didn't mention that to Mr Smith?‑‑‑No, that would be correct. I wouldn't have mentioned that to Mr Smith.
And I put to you that because Mr Smith told you that Todd King had been his stockbroker for years and because you knew that a substantial amount of collateral was being provided by Mr Smith which would enable Mr King to avoid substantial personal losses if the failed trades, as at 31 July, were not funded by Leveraged Equities, you knew when you spoke to Mr Smith on 31 July 2007, there was a serious possibility that Mr King had not informed Mr Smith that the reason the guarantee and collateral were required was to complete those failed trades, didn't you?‑‑‑No, I definitely didn't know that and didn't think along those lines. I was doing my job which was to deal with Mr King and respond to his requests.
You didn't tell him, did you?‑‑‑Didn't tell him about the failing trades?
You didn't tell him ‑ you didn't tell him that he was exposed to immediate substantial risk by giving the guarantee and the collateral to enable failing trades, which were going worse and worse with the market going down, to be completed. You didn't tell him that he was exposed to substantial risks?‑‑‑I completed the file note and discussed that with him.
I know you completed the file note, but you didn't tell Mr Smith that, did you?‑‑‑I don't recall, no.
…
Well, I put to you, Ms Jones, that you knew when you made that call that Mr King must have persuaded Mr Smith to give the guarantee and the substantial collateral by not revealing to him ‑ ‑ ‑?‑‑‑No.
‑ ‑ ‑ that they were required to enable approval to be given for Leveraged Equities to fund completion of all the failed trades?‑‑‑I definitely didn't know that.
And you also knew that it was most likely that the risks that Mr Smith was undertaking by giving the guarantee and the collateral had not been explained to him by Mr King?‑‑‑I didn't ‑ I was dealing with thousands of transactions a day. I didn't sit there and analyse the relationship between Mr King and Mr Smith. I was just merely transacting and doing my job (ts 724 ‑ 726).
…
Ultimately, counsel put to Ms Jones:
So what I would like to put to you, Ms Jones, is that when Mr Smith mentioned to you in the phone call on 31 July 2007 that he had an agreement with Todd for the provision of collateral, as soon as he mentioned that he had an agreement with Todd for the provision of collateral, your response was that the arrangements were of no interest to Leveraged Equities because you strongly suspected that the arrangement mentioned by Mr Smith would have been reached without him knowing the true reason the guarantee and collateral were required or the risks to which he was exposing himself, and you did not want to hear the details?‑‑‑No, that is not correct. Why ‑ that doesn't make sense. I don't understand why I would have thought that. What you're proposing to me makes no sense to me whatsoever.
…
Well, what I put to you is you failed to properly conduct the interview with Mr Smith on 31 July 2007 in accordance with Leveraged Equities procedures and you rushed the activation of Mr Smith's guarantee and provision of 85,000 Wesfarmers collateral on 31 July 2007 through the Leveraged Equities processes to enable Mr Todd King to avoid the risk of substantial personal losses as the broker responsible for the transactions which were all failed trades on 31 July 2007. What do you say to that?‑‑‑I don't agree with that. That can be your opinion, but I don't ‑ it's not mine. (727 - 728) (emphasis added)
In summary, I found the evidence of neither witness convincing about the content of the call. Mr Smith appeared to have learned his witness statement and to profess an exact recall of what had been said eight years earlier. I am not satisfied that Mr Smith's account is accurate. I believe that he has, over time, reconstructed what happened, perhaps influenced by a tendency he showed throughout his evidence to blame others. Ms Jones, on the other hand, had little recall and, to the extent that she relied on the form she was following, she seems to have used it without proper regard to instructions for its use (for example, the instruction to start at question 3 where the 'client' is a guarantor) or the content of the questions in it.
On balance I believe it is more likely that Ms Jones did, in fact, ask Mr Smith the questions on the form, including whether he had received and read a copy of the brochure which discussed the risks involved in gearing. Leveraged Equities' steps to ensure that Mr Smith had an adequate comprehension of the obligations he was undertaking were limited to that brief call. If Mr Smith had failed to understand his obligations and the effect of what he was doing by signing the Application Form and the Authority Letter, the cursory questioning by Ms Jones, following the checklist, was not going to reveal it. This was not because she was deliberately withholding information from Mr Smith, but because the process by which Leveraged Equities satisfied itself that the proposed guarantor understood the obligations being assumed was superficial, and Ms Jones conduct of that process on this occasion was perfunctory.
Leveraged Equities appears to have relied on the proposed guarantor being properly advised by a competent advisor. Mr Smith was being introduced to the account by a licensed broker. I am not satisfied that anyone, at this stage, was aware of what Mr King was doing, and the dishonest means he was prepared to use.
I am also satisfied that Mr Smith did understand the risks, but relied on the promises he had been made by Mr King in their personal agreement.
The processing of the application to add a guarantor
About 2.00 pm EST (that is, about an hour after Ms Jones' conversation with Mr Smith), Mr King sent an email to Ms Jones asking 'on G King - do you think it will settle tomorrow?' Ms Jones forwarded the email to Ms Bourtasova in the new business division three minutes later, asking if the guarantor could be added 'asap in the next hour'.
This was, on the evidence, a fast turnaround. Mr Green said that when completed application forms were received, they would be sent to the new business team to ' go through the assessment and all the checks and various bits and pieces'. The new business team would execute the documents required under the power of attorney given by the proposed guarantor, including a mortgage by the guarantor. Applications by individuals could take up to 24 hours, a company or trust could take longer. Mr Smith had held an account himself so Leveraged Equities already had information about him on file. That may have expedited the process.
Leveraged Equities also sent a letter to E*Trade seeking the matching of the transfer to Leveraged Equities of Mr Smith's shares. The documents were stamped 'urgent', and had the note 'could you pls match my message ASAP'. That note was not written by Ms Jones but by another Leveraged Equities employee. Ms Jones annotated the authority received from Mr Smith to transfer the shares with the words, 'Please add to HIN with LE in Edwin George Smith's name, no change of ownership'.
There is no doubt that Leveraged Equities processed things quickly, probably more quickly than usual. Emails that were to be forwarded to another person or section were forwarded within minutes. People were asked to process things urgently or 'asap'.
This issue of Leveraged Equities' conduct in processing the application for Mr Smith to be a guarantor was raised in opening. Counsel for the plaintiff referred to a document showing the commissions that were payable by Leveraged Equities to Stripe Capital on account of Mr King. Counsel described Mr King as 'a person of real value to Leveraged Equities'. Counsel was asked how this fitted into the pleaded causes of action:
SOLOMON, MR: It fits into it to show that there's such as the equitable claims. They're well aware of breaches of fiduciary duty by Mr King to Mr Smith and receipt of documents in breach of them that ‑ and it is just a relevant fact, ultimately, to lead to an inference that this whole case, which tries to suggest they have no knowledge of why Mr Smith put up the security, what the arrangements were or whatever, right from the start, was designed. Because this is a person of real value to Leveraged Equities.
ALLANSON J: So is it ‑ I didn't ‑ I might have missed it in the pleaded case. Is the pleaded case that this was done by Leveraged Equities, with knowledge, for the purpose of assisting Mr King?
SOLOMON, MR: No, not as such. Not as such (ts 45).
Later, counsel said that the plaintiff relied on these matters being probative, ultimately, of Leveraged Equities' knowledge of a breach of fiduciary duty on the part of Mr King. There was no evidence, however, that the procedures followed on this matter differed from procedures in other cases. Nor was there any evidence that an email of one or two lines, to be forwarded to another branch or section within Leveraged Equities, was forwarded immediately for any ulterior purpose. The imputation that Leveraged Equities knew of Mr King's arrangements with Mr Smith, and in some way participated in a 'design' to assist a broker who was a valuable source of business for the lender, at the expense of his client, lacks support in the evidence and I reject it.
There are two matters I wish to deal with, each a digression from the narrative of events.
The need for original signatures
First, some attention was given in cross‑examination of witnesses from Leveraged Equities to the fact that Leveraged Equities had acted on emailed documents without seeing the signed originals. Mr Green said that, as a general rule, the original was required because that was 'the safest way' of getting a document, and that 'certainly [for] the guarantors, our preference was to obviously get original signatures, but I can't tell you in every case that we got every single one like that'.
On the plaintiff's pleaded case, the issue of acting on scanned documents, and not requiring the signed original, is not alleged to be relevant to the liability of Leveraged Equities.
Ms Jones
Second, I need to say more about the evidence of Ms Jones because of the nature of the challenge to her. In final submissions, the plaintiff's counsel dealt at length with the credibility of Ms Jones, based largely on a passage in the evidence where I had misheard an answer.
I have set out the challenge to her evidence about the phone call on 1 August 2007. That was only part of a more general attack on Ms Jones. Later, it was put to her that, in January 2008 when she received the authority to transfer 25,000 Wesfarmers shares (a document now known to be forged by Mr King) she made no attempt to contact Mr Smith because she knew that she would find that he was completely unaware of the level of risk that he would be undertaking. It was not suggested that she was aware of the forgery.
The cross‑examination of Ms Jones was long and detailed. I did not at any time form the view that she was non responsive, or attempting to answer other than truthfully. She was, on occasion, defensive but that was an understandable response to the style of questioning.
Under the standard Leveraged Equities agreement, the borrower nominated an authorised representative. The standard agreement provided:
Unless you indicate in writing otherwise, your Authorised Representative will be able to do anything that you can do under the Agreement until you revoke your authorisation in writing. The authorisation will continue to be effective until we confirm in writing to you that we have received your notice of revocation and have terminated a person as an authorised representative under the Agreement. We may share information about your loan(s) and Securities with your Authorised Representative. We may contact your Authorised Representative in the event of a margin call. In the event of a margin call, a person must be able to make decisions to sell your securities, lodge additional securities or provide additional funds. All instructions from an Authorised Representative must be in writing (including by facsimile transmission), bearing the signature of the Authorised Representative, unless we give you a notice that we will accept instructions by some other means.
Ms Jones' evidence was that, as the account manager, she dealt primarily with the brokers/authorised representatives and not the investors. Mr Green described the role of account managers as 'the ones who talked to the customers'.
In about June 2007, Ms Jones took over all of the Stripe Capital accounts. Mr King was the nominated adviser for all of them. The figures for 2007 were not in evidence, but in 2008 Mr King was the nominated adviser on 21 accounts at Leveraged Equities through Stripe Capital. Ms Jones and Mr King had a good working relationship. Their email exchanges were frequent, cordial, and at times informal.
The accounts for which Mr King was authorised representative were just some of the accounts Ms Jones managed. She managed many other accounts, from a range of brokers; in 2007 to 2008 she managed the accounts of about 20 broking firms, 'looking after all the transactions, dealing with all our back office departments, funding, margin calls, transfers, stock, cash transfers, stock transfers; all that'. Over time she had looked after thousands of accounts. When asked about a particular account, she could not say who was behind it.
Ms Jones regarded the representatives or brokers as the client, and saw her role as facilitating the deals they were putting through. So, for example, she agreed that it was possible that Mr King asked her to email documents because it was urgent because of the risk of failing trades, and she did so. That was no special accommodation for Mr King (or the account holder), but simply the way accounts were managed. In cross‑examination, Mr Solomon asked her if she had seen other documents marked urgent, with hand written notes on them, and she answered that she had seen them frequently, adding: 'Usually, with the nature of the industry, things always have to be done quickly'.
Again in cross‑examination, Ms Jones was referred to an email from Mr King that she forwarded to settlements within two minutes. She said:
I'm constantly getting emails. I'm constantly on my email at work. I probably get a few hundred a day, so I'm always looking at them.
I could see nothing extraordinary in Ms Jones' conduct in forwarding emails that needed to be forwarded, rather than delaying what needed to be done. As account manager, her authority was limited. Leveraged Equities had many departments - new business, sponsorship, settlements, risk department. In many instances, her role seemed to be to receive documents and pass them on to the appropriate person or department to deal with.
Around 13 May 2008, Mr King sent a bottle of champagne to Ms Jones. Emails around the time of the gift relate to trading by Mr King on the Komplexity account. Ms Jones said that receiving a gift from a representative was not unheard of and Leveraged Equities had a gift register for when gifts like that were sent. Her evidence in that regard was not contradicted.
Looking at all of the evidence, I am not satisfied there was some relationship between Mr King and Ms Jones that led her to act any differently in relation to the accounts on which he was the authorised representative from how she acted on other accounts. She saw it as her job to facilitate the trading activity of the account holders, and to be cordial to the advisers. There is no evidence that she treated Mr King any differently or more favourably than any other adviser.
Specifically, I am not satisfied that Mr Smith has proved that Ms Jones or anyone in Leveraged Equities was aware of the content or nature of his agreement with Mr King.
Even if Ms Jones had been told by Mr Smith that he had an agreement or arrangement with Mr King for the provision of collateral, that would not affect my conclusion. There must have been an arrangement with someone for Mr Smith to provide security worth $3 million for a third party's loan. But there was nothing in the circumstances to put Ms Jones or Leveraged Equities on notice that the arrangement involved any breach by Mr King of duties attending his role as Mr Smith's broker.
Section 917D provides an exception to the responsibility of the licensee if:
(a)the conduct is not within authority in relation to the licensee (or in relation to any of the licensees, if there were more than one); and
(b)the representative disclosed that fact to the client before the client relied on the conduct; and
(c)the clarity and the prominence of the disclosure was such as a person would reasonably require for the purpose of deciding whether to acquire the relevant financial service.
First, I am satisfied that Mr Smith could reasonably be expected to rely on Mr King's conduct on 30 July 2007; that he entered the agreement with Mr King, signed the Application Form and the Authority Letter in reliance on Mr King's conduct; and that he relied on that conduct in good faith.
Second, I am not satisfied that Mr King's conduct on 30 June 2007 related to the provision of any financial service to Mr Smith. The plaintiff has identified nothing in the telephone conversation, the meeting at Mr Smith's house, or the agreement which related to financial product advice regarding the shares or the Margin Loan Facility. The representations that I have found were made do not relate to advice to Mr Smith about a financial product.
Third, I am not satisfied that Mr King ever provided financial product advice to Mrs King. Mrs King apparently participated in opening the account, and gave Mr King authority to represent her. But the trading on the account was Mrs King's in name only.
Fourth, the conduct of Mr King in relation to his agreement with Mr Smith, and his conduct in forging the transfers of shares, was not within the scope of the authority given by ASASL to Stripe Capital and the individual representatives under the Authorised Representative Agreement executed in May 2007: see cl 5.1, 5.2. In his dealings with Mr Smith on 30 July 2007, Mr King made clear that he was acting on behalf of his family and in a private capacity.
Fifth, I am not satisfied that the conduct in forging the letters of authority for the share transfers is conduct to which div 6 applies. It falls outside at least par (b) and par (c) of s 917A.
I would not uphold the claim against ASASL.
The claim for relief
Mr King
The claim against Mr King, not surprisingly, is complex, with five alternative causes of action. Two of those, for the contravention and 'further contravention' of statute, are not true alternatives but contain multiple alternatives within them. In pars 80 to 82, the plaintiff pleads that, by reason of the breaches of contract, breaches of duty of care and contraventions of statute by Mr King, he has suffered, further or alternatively is likely to suffer, loss and damage, particularised as the loss of the 85,000 Wesfarmers shares, together with dividends not received and opportunities to participate in placements or rights issues between 1 August 2007 and the date of judgment. That is the appropriate measure of part of the relief for the contraventions of statute by misleading and deceptive conduct in relation to the initial transfer of shares.
The consequential losses suffered by reason of the two fraudulent transfers in 2008 must also be assessed. The shares that were the subject of the two fraudulent transfers have been returned.
The plaintiff is entitled to the value of the 15,000 shares, including loss of dividends and other rights, and the $280,000 paid to Leveraged Equities to meet margin calls in September and October 2008. The misrepresentation leading to Mr Smith entering into the guarantee and mortgage are a material cause of those losses.
On a similar basis, the plaintiff has shown that consequential losses (if any) from the 10,625 rights issue shares being held by Leveraged Equities were caused by the misleading and deceptive conduct, although the shares themselves have been returned from Leveraged Equities' control.
The plaintiff also is entitled to the $764,983.20 paid to Leveraged Equities to discharge the balance of Mrs King's loan. Those losses flow directly from his entering into the guarantee and mortgage.
Finally, Mr Smith claims an indemnity for any capital gains tax liability with respect to the transfer or disposal of shares. It has not yet been shown whether he had such a liability.
Mrs King
The plaintiff claims an indemnity from Mrs King for any liability he incurred to Leveraged Equities and discharged as the guarantor to her account.
Mr Smith cannot, in the circumstances, be regarded as a volunteer in discharging Mrs King's liabilities to Leveraged Equities. He was a guarantor of her liabilities to Leveraged Equities, and his property was subject to a mortgage as security for her borrowings. Any payments he made were either required by the agreements he had entered as surety, or were necessary for the protection of his own interests or property. Those circumstances are sufficient for him to be entitled to recoup the amounts he paid on behalf of Mrs King. Judgment should also be entered against Mrs King.
Conclusion
Judgment should be entered for Mr Smith against Mr King and Mrs King. I will hear the plaintiff further as to the proper measure of damages or compensation.
The claim against the first and fourth defendants is dismissed.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
ZW
ASSOCIATE TO ALLANSON J
13 APRIL 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SMITH -v- LEVERAGED EQUITIES LTD [No 3] [2018] WASC 84 (S)
CORAM: ALLANSON J
HEARD: 27 AUGUST 2021
DELIVERED : 3 DECEMBER 2021
PUBLISHED : 3 DECEMBER 2021
FILE NO/S: CIV 3124 of 2009
BETWEEN: EDWIN GEORGE SMITH
Plaintiff
AND
LEVERAGED EQUITIES LTD
First Defendant
TODD MICHAEL KING
Second Defendant
ACN 118 453 679 PTY LTD
Third Defendant
AUSTRALIAN STOCKBROKING AND ADVISORY SERVICES LTD
Fourth Defendant
GLENICE BERYL KING
Fifth Defendant
Catchwords:
Practice and procedure - Application to stay entry of judgment due to delay between publication of reasons and entry of judgment - Where plaintiff pursued appeals against other defendants and did not enter judgment against those found to be liable at trial - Whether such delay that it would be an abuse of process to now enter judgment
Legislation:
Nil
Result:
Application for stay refused
Judgment to be entered for plaintiff in terms of minute of 16 July 2021
Category: B
Representation:
Counsel:
| Plaintiff | : | CS Williams |
| First Defendant | : | No appearance |
| Second Defendant | : | In Person |
| Third Defendant | : | No appearance |
| Fourth Defendant | : | No appearance |
| Fifth Defendant | : | In Person |
Solicitors:
| Plaintiff | : | Solomon Brothers |
| First Defendant | : | HWL Ebsworth Lawyers |
| Second Defendant | : | In Person |
| Third Defendant | : | Gadens Lawyers (WA) |
| Fourth Defendant | : | Tottle Partners |
| Fifth Defendant | : | In Person |
Case(s) referred to in decision(s):
Nil
ALLANSON J:
Introduction
The plaintiff, Edwin George Smith, brought these proceedings against four defendants.
The first defendant, Leveraged Equities, conducted business as a margin lender.
The second defendant, Todd Michael King, was a licensed stockbroker and a director of the third defendant from 2006 to 2008. He entered an appearance but did not participate in interlocutory processes until quite late in the course of this action.
The third defendant was then known as Stripe Capital Pty Ltd.
The fourth defendant, Australian Stockbroking and Advisory Services Ltd (ASASL), held an Australian Financial Services Licence. Mr King and Stripe Capital were authorised representatives of ASASL. ASASL filed a defence but did not appear at the trial. I had the management of this matter from 2011, and have no record of ASASL appearing on any occasion.
The fifth defendant is Mr King's mother. She filed an appearance and a defence on the last working day before trial, but did not participate in the trial. Mr King's use of an account with Leveraged Equities in his mother's name was at the heart of the proceedings.
From about 2011 to about March 2015, interlocutory processes (including pleading amendments, further and better discovery and interrogatories) related only to the case between Mr Smith and Leveraged Equities and were conducted solely between those parties. Stripe Capital and ASASL were both in liquidation. Mr Smith had obtained leave to proceed against ASASL and it entered a defence, but did not further take part. Mr Smith did not apply for leave to proceed against Stripe Capital. Mrs King had not entered an appearance. Until about November 2015, Mr King was serving a term of imprisonment. It was only when the action was to be listed for trial, and the court raised the position of Mr King, that programming orders included him.
Following trial, I delivered reasons in which I upheld the claim against Mr King and Mrs King, and dismissed the claim against Leveraged Equities and ASASL. The matter was adjourned to a date to be fixed for the making of final orders against Mr King and Mrs King. Questions of costs were also reserved to a date to be fixed.
The appeal
Mr Smith appealed my decision and sought to set aside the dismissal of his claims against Leveraged Equities and ASASL. In substance he sought the appeal to be allowed on claims that:
(a)Leveraged Equities was liable to make restitution to Mr Smith in relation to the Wesfarmers shares that had been transferred to Leveraged Equities, without his knowledge, including by the use of false documents prepared by Mr King.
(b)ASASL was responsible, under the Corporations Act, for the conduct of Mr King and Stripe Capital as ASASL's authorised representatives.
The appeal was allowed in part, with orders made on 5 August 2020. The action was remitted to me as the primary judge for determination of the plaintiff's claim for unjust enrichment in relation to the Wesfarmers Ltd shares which were the subject of the two share transfers effected on or about 25 January 2008 and 10 March 2008. The appeal against the order dismissing the claim against ASASL was dismissed with the appellant to pay ASASL's costs of and incidental to ground of appeal 4, inclusive of the costs of and incidental to ASASL's notice of contention.
Following the decision of the Court of Appeal, the matter was listed before me for directions regarding the claim which had been remitted for determination. It was first listed on 17 December 2020, and then repeatedly adjourned by consent over the following months. The solicitors for Mr Smith advised the court in May that it might no longer be necessary for the parties to seek programming orders with respect to the remitted proceedings.
On 1 July 2021, Mr Smith and Leveraged Equities submitted a minute of consent orders for the claim against Leveraged Equities to be dismissed, with ancillary orders regarding costs between those parties. The order was made by consent on 15 July 2021.
On 16 July 2021, Mr Smith lodged minutes of proposed orders to be entered against Mr King and Mrs King, for judgment in the amount of $2,087,493, with interest and costs.[1]
[1] Excluding costs against the other defendants.
Mr King appeared at the next directions hearing and objected to judgment now being entered on the ground, in substance, that it was an abuse of process. Mrs King provided an email to my associate to the same effect, and also appeared.
In the unusual circumstances where there had been such a pronounced delay between trial and the entry of judgment, I made orders for the parties to file submissions.
The court has also received notice from solicitors acting for ASASL foreshadowing an application for their costs of the proceedings.
Judgment in the action
The court advised the parties on 19 March 2018 that judgment would be delivered the following week.
ASASL had been deregistered in November 2016. The solicitors for Mr Smith advised the court on 16 August 2017. Because the claim against ASAL was dismissed, no application for reinstatement of its registration appears to have been made until September 2018.
The parties were provided with advance reasons and, following receipt of those reasons, the plaintiff advised that he intended to seek an adjournment to a further hearing before which the plaintiff's solicitors would circulate a minute of proposed judgment, including specific quantum and the calculation of that amount.
It was the result of that request that the matter was adjourned without orders being made.
No party applied to the court for the matter to be relisted.
The court enquired, through my associate, when the parties could advise their position. No reply was received, despite three emails, before February 2019 when the solicitors for Mr Smith and Leveraged Equities advised the court that the appeal by the plaintiff against my judgment had been listed for hearing in May or June 2019, and said:
The question of what, if any, further orders should be made at first instance depends in part upon the outcome of the appeal. We therefore anticipate that after the appeal has been determined, one or more of the parties will ask the court to make further orders at first instance. We also suggest that for the time being, the court not list the matter for further orders.
None of the other parties objected to that course or requested that the matter be listed.
Mr King's submissions
Mr King filed written submissions in which he set out the history of matters relating to the judgment (summarised above) and submitted:
(a)Mr Smith or his solicitors had behaved disrespectfully in not responding to the emails sent by the court;
(b)instead of finalising orders against Mr King and Mrs King, Mr Smith had pursued matters relating to ASASL in the hope of recovering against that company or its insurer;
(c)Mr Smith had demonstrated that he had no interest in pursuing judgment against the other defendants.
Mr King submitted that the conduct of Mr Smith and his solicitors amounted to an abuse of process by using the legal process for an improper purpose and occasioning unjustifiable oppression to the defendants. He submitted that the action against them should now be stayed or dismissed for want of prosecution.
Mr King further submitted that had judgment been entered against him in 2018, he would have entered bankruptcy from then.
Mr King filed an affidavit, sworn 8 September 2021, in which he set out the consequences of the delay, including the stress and health impact caused by the additional delay while awaiting judgment.
Mr King referred also to the effect of the action on his mother, portraying her as a victim of Mr Smith. He appears to have difficulty in understanding that the action against his mother was based solely on his conduct.
Mrs King
Mrs King filed written submission in which she adopted those of Mr King.
Mrs King further refers to her attempt to appeal against my judgment in April 2018, with her appeal notice not accepted because final orders had not been made. I was not previously aware of that. She submitted that she was now less financially able to mount an appeal than she was three years ago.
Mr Smith's submissions
Mr Smith submitted:
(a)Having found that judgment is to be entered against the defendants, the entry of judgment must follow. There is no discretion to decline to enter judgment.
(b)The outcome of the appeal - particularly against Leveraged Equities - would have affected the quantification of the judgment against the Kings. Damages recovered against Leveraged Equities would have reduced (or possibly extinguished) the loss suffered.
(c)Neither Mr King nor Mrs King asked for the action to be listed for further orders, or otherwise took issue with it not being listed.
(d)The entry of judgment has occasioned no material prejudice to either defendant where a plaintiff can enforce any judgment without leave for up to 6 years following entry, and with the leave of the court for up to 12 years following entry.[2] Pursuant to Division 3 of Part IV of the Bankruptcy Act 1966, a debtor may present a petition about themselves to the Official Receiver, and thereby make themselves bankrupt. If either the second defendant or the fifth defendant viewed bankruptcy as an inevitability and wanted to 'get on with it' rather than wait, it was open to them to do so.
[2] Civil Judgments Enforcement Act 2004 (WA), s 12, s 13.
Finally, Mr Smith set out the basis upon which judgment was quantified, based on the findings made at [325] - [326], [348] and [354] of the reasons for judgment in the action. The amount claimed has been reduced to exclude claims relating to the shares which were the subject of the unjust enrichment claim which was remitted to this court by the Court of Appeal.
In quantifying the amount for which he seeks judgment, the plaintiff has forgone other losses, including dividends and the opportunity to participate in rights issues relating to the Wesfarmers Shares.
Consideration
I do not accept the primary submission put on behalf of Mr Smith that there is no discretion to not enter judgment. No authority was cited, and my research revealed none, where such a limitation was imposed on the power of the court to stay proceedings if further steps in the proceedings would be an abuse of process. If I was satisfied that the application to enter judgment is oppressive or made for an improper purpose, I am satisfied that the power of the court to stay further proceedings for an abuse of process would be enlivened.
I am not, however, satisfied that the entry of judgment would be an abuse.
First, I accept that Mr Smith's purpose in not proceeding immediately to enter judgment was not vexatious or oppressive. Had Mr Smith succeeded on his appeal against Leverage Equities or ASASL (assuming that it had operative insurance cover), it may have been unnecessary for him to pursue Mr King or Mrs King for the loss he undoubtedly suffered. It would have been preferable for judgment to have been entered immediately. Even then, however, enforcement would almost certainly have been delayed. The hard fact, which was obvious to everyone in this case, was that Mr Smith's only realistic chance of recovering the loss he suffered was by judgment against defendants who had assets or might be insured. The Kings do not fall into either category.
Second, it was open to the Kings to ask for the matter to be listed.
Third, in his affidavit Mr King contended, in effect, that the continuation of the action against his mother was for an improper purpose and amounted to persecution. Mrs King did not appear at trial and did not contest the allegation (on which her liability was found) that Mr Smith was entitled to be indemnified for discharging her liability to Leveraged Equities in circumstances where he was a guarantor of her liabilities and his property was subject to a mortgage as security for her borrowings. There is no basis to conclude that it is an abuse for Mr Smith to enter judgment in accordance with the findings at trial.
Although Mr King submitted that he would, at least potentially, have been better off had judgment been entered on an earlier occasion, he has not shown that that would have been the case. Nor has he shown that he has done anything or altered his position in reliance on an assumption that judgment would not be entered. To the contrary, his submissions and affidavit speak to the stress occasioned by expecting that there would be judgment against him.
The application to enter judgment will not be stayed or refused. Judgment will be entered in terms of the minutes of proposed judgment filed on 16 July 2021.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
MG
Associate to the Honourable Justice Allanson
3 DECEMBER 2021
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