Ali v Hartley Poynton Limited [2002] VSC 113

Ali v Hartley Poynton Limited [2002] VSC 113 - VSC 2002 case summary — Zoe

[120]

Martin's account was put to Barba and he denied it. In particular, he denied that he told Martin that Hartley Poynton and Phillips Fox were out to get him and hang him out to dry, and that Hartley Poynton were saying that it was all Martin's fault and was saying that they were not vicariously liable for him. He denied saying that Hartley Poynton were trying to pin it on Martin for fraud and have him sent to jail for ten years. He acknowledged, however, that he had made a comment that Hartley Poynton were renowned for ensuring that their brokers got nailed. He said this, he said, on the basis of what had happened in the past with Hartley Poynton and their brokers. He denied that he told Martin that Hartley Poynton and Phillips Fox were trying to sack the judge because the defence case was falling apart and the judge was going in the plaintiff's favour. Barba commented that most of the things were the other way. He said that Martin had said that the defence was out to ensure that the judge was removed from the case and he said that Martin had said that they would pursue Mr Ali for fraud, they would burn all his money and they were out to get him for defamation. Barba agreed that he had said in conversation to Cameron Richardson that he hoped the thing would go away really quickly. He said he was very concerned at the time about Martin and his situation and referred to the fact that he was getting married and having a child. He denied saying that Martin should be careful in working with people at Phillips Fox. He repeated, however, that he did say he was concerned what Hartley Poynton might do to him. He also said that he asked Martin what his evidence was going to be about his letters documenting his alleged failure to follow instructions. He asked Martin whether or not he told the solicitors for the defendant that the letters were "bullshit". He replied that Martin had said "he was going to get himself on the stand and lie through his back teeth to say they were bullshit". He denied saying to Martin " be smart, they are going to screw you so don't tell them too much".

[204]

Discussion returned to the issue of the 15% to 20% return. Both Liyakat Ali and Barba were uncertain about that and thought it seemed unrealistic. They didn't understand how such a return could be achieved. Barba in his oral evidence on this aspect altered his witness statement, which otherwise had generally mirrored his notes. The notes recorded that Martin said that as one of the top brokers he had a gearing facility with the defendant and as a result would be able to offer gearing against the stock held, he gave by way of example, according to the notes, that on $100,000 invested, an additional $200,000 would be made available via the gearing facility. In his sworn evidence, however, Barba said that reference to $100,000 was wrong that it should have been $50,000. He gave a frank explanation as to how he came to the conclusion that the figure was wrong. The explanation is clearly pointed to a reconstruction. It is based on a recollection that Martin had spoken of a ratio of 1 to 4, a recollection reinforced by the borrowing he, Barba, had achieved at a later date with Telstra, on a 1 to 4 ratio. While I accept that Martin may well have talked about ratios of 4 to 1, in relation to margin lending, the notes are, I suggest, likely to be the more reliable evidence as to the credit facility available and provide the evidence that should be used. Thus, on that basis, Martin was talking about an initial investment of $100,000 with a gearing facility from the defendant of $200,000 making a total available for investment of $300,000. Barba has, I suggest, confused margin lending ratios with the interest free credit then under discussion. As to the "gearing" amounts, Barba in cross-examination was referred to further and better particulars of the statement of claim dated 25 May 1999 and asked whether he gave instructions to Slater and Gordon that Martin told him that he had authority to gear up against the plaintiff's cash contributions by allowing the plaintiff to borrow a further $200,000. His response was that that was what Martin had said in relation to his gearing facility he imagined. He said "I can't recall the amounts, but I can only imagine that was the gearing facility through the trading account." He could not recall giving those instructions to Slater and Gordon.

[365]

(a) Pre-retainer representations. He relies on the "general representations" already referred to which were also alleged to be negligently made. In particular, they related to returns and lack of risk. (para 10). I refer to my analysis above.

He also pleads that in or about 15 September, 14 October and late October 1997 the defendant represented that it would acquire 100,000 Telstra shares on behalf of the plaintiff and would retain such shares as a long term investment in accordance with the instructions of the plaintiff (the "Telstra representations").

It is pleaded that relying upon the general representations and the Telstra representations, the plaintiff entered into the retainer with the defendant and paid the sums referred to above (para 12). It is further pleaded that each of the representations above mentioned were false and untrue and, in so far as the general representations involve future matters, the defendant did not have reasonable grounds for making them (para 20).

(b) Demonstration. The plaintiff also relies upon representations allegedly made during and as a result of the demonstration in September and October of 1997. It is pleaded that the defendant through Martin represented that he could generate average profits of 15% - 20% compounding per week by share trading and represented that to prove that he would invest a sum of $20,000.00 on behalf of the plaintiff in share trading for a period of a fortnight and demonstrate his ability to achieve a minimum profit of 15% to 20% per week with ease, and return to the plaintiff's agent after a fortnight producing evidence that he had generated 32.08% compounded over a two week period.

It is pleaded that induced by the demonstration, the general representation and the Telstra representation, the plaintiff entered into the retainer and paid the sums above mentioned. The plaintiff alleges that the demonstration, in particular, was false and misleading in that there was no basis upon which the defendant could predict that it could consistently replicate the results of the demonstration, a proposition that was falsely and imprudently suggested by the demonstration.

(c). March representations. The plaintiff further pleads that in or about March 1998 further representations were made by the defendant that it could invest the plaintiff's funds and derive average profits in the order of 25% to 30% compounding per month during the operation of the account, would achieve weekly average minimum returns of $10,000.00 to $15,000.00 and produce returns of up to $25,000.00 per week and implement strategies which would help to achieve returns in the order of 25% to 30% on a regular basis.

These "continuing representations", it is said, were relied upon by the plaintiff and induced the plaintiff to continue to retain the defendant. It is pleaded that they were false and untrue.

[374]

(a) Warrants

In about the middle of November 1997, a very short time prior to the Telstra float, Martin forwarded an ASX warrant agreement to Barba for signature by the client. He was concerned, he told Barba, to be in a position to take advantage of the Telstra float. He thought there would be big opportunities in warrant trading. He said that warrants were the best way to go. Martin told him that warrants were very cost affective because there was no stamp duty and they were very liquid. He told him that the percentage returns were very high and that they created fantastic opportunities and would bring excellent results. He said that trading call and put warrants was a sure way of making money, in particular when large quantities of warrants were traded. This conversation occurred with only 1 ½ hours to run before the Telstra shares came on the market and Barba complained about the rush. The warrant trading agreement was executed. I am satisfied that Martin expressed similar sentiments to Liyakat Ali about warrants and options on about 12 January 1998. When asked about safety he said they were "safe as blue chips, only better".

It is to be noted that Barba asked him to forward the explanatory booklet and Martin undertook that he would do that, later saying it could not be faxed (CB 431). I am satisfied that it was not sent.

Barba in his evidence elaborated that Martin had said that they were better than shares because of their liquidity and the leverage you can generate out of a warrant. Martin also said you can go to a warrant maker at any time and purchase your warrants directly, that you don't have to go to the market. Barba said that he knew that they were derivatives of stock and so they moved in line with the stock. Martin told him that they "are as good as gold". I am satisfied that Martin again created the impression that trading was not risky - this time in warrants. He also managed for some time to appear to back that up with apparently good results.

(b) Short Selling

A similar attitude was revealed in relation to short selling. Martin had explained to Barba that a short was the opposite of a buy - that you would sell the stock and then cover it with a lower price which meant that you would buy it back and that that was where you made your profit. He said that Martin said that it was basically trading on the stock moving downwards. You would sell and then buy it back on the market. He said it wasn't necessary to have any funds to participate in the short sale. He said all you needed to do was have twenty percent security value in the form of stock in the account to ensure that you can cover the short sale. He said there was no time limit whatsoever.

This sort of conversation bears a striking resemblance to that which, according to Liyakat Ali, occurred between him and Martin - although it went further and expressly dealt with risk.

He said that Martin explained to him the way short selling worked was that if they were at their peak price or above it you would sell the stock and then when it went down to a certain price you would buy it back and whatever was the difference was the profit. Martin had said to him that that was why the stock market was so safe. He said to Liyakat Ali that you make money when the stock is going up and you make money when the stock is going down. Martin assured him that losing money would not occur with the stock going up because of the reasons he would have for shorting the stock. He said that Martin assured him there was nothing to lose to the point that he was ready to sell his own properties to invest money in it, that that was how convinced he was.

Liyakat Ali said he did not realise then that if you short sold stock that you could make a loss. He denied that he was joking when he said that. He said that he asked Martin why someone would give you the stock for nothing and you sell it and he gets nothing. Martin told him that he didn't understand and he shouldn't worry about it, that the stock market was safe and that what you do is sell it at the highest price and then you buy it back. He also told Liyakat Ali there was no time limit at which it had to be bought back so he didn't have to fear it had to be bought back within a month or two. He could be out for two to three years, and there was nothing outlaid. He said that you have sold it and the money would be put aside and you cannot lose.

[430]

Jasch argued that you should maximise your profits by staying in a stock while a market is moving favourably for the stock. On his analysis, 84 instances, or 25% of all trades, were trades where quick profits were taken on shares that were moving in a favourable direction. He said that shares were sold at a relatively small profit while the price continued on in the correct direction for days to weeks or months after closing. Those conclusions were based on an analysis of the charts. He said that there is no rational or professional basis to believe that a net profit can result when almost one quarter of the trades are closed after only a few days when the trade is moving in your favour, particularly when at the same time there is a failure to execute appropriate stop loss strategies. He calculated that the total of the profits of the above 84 instances was $215,495 but a much larger profit would have resulted if what he called a "reasonable and sensible exit at profit" strategy was followed. He said it is imperative to hold correct trades so that a good profit can be taken since there are losses to be made up even if proper techniques are used to minimise those losses. He thought it dangerous, however, to put an actual figure on the cost of early exits because such an estimation has the benefit of hindsight. He said that if the situation was one where the broker acting as a discretionary trader had a consistent and rational trading method that he followed, then it would be possible to work out the loss but he could not identify a rational basis. He said that the trading records revealed no consistent or rational exit method. The only consistent theme he could identify from an examination of the trades themselves was that there was a tendency to close profitable trades after one or two days. He thought the most likely reasons were the T+5 or T+3 settlement requirement, excessive trade sizing and the amount of capital being tied up in losing positions. I note that the evidence supports the conclusion that all three factors were operating at least by the middle of 1998 - some earlier.

[530]

(a) Prior History of non-compliance. The defendants records reveal that in 1997 a fine of $9,000 was imposed upon Martin as a "Compliance Penalty".

(b) The No. 2 Account. In December 1997, Karlson, then deputy to the office manager, queried with Martin the opening of the No.2 Account and directed that it be closed because Martin failed to give a satisfactory explanation. Nothing more was done. Martin removed the trades but did not close the account.

(c) Debtors Committee History. In addition, it is put that the problems experienced by the defendant's officers on the Debtors Committee in dealing with Martin's activities raised questions about his honesty, failure to comply with the law and the defendant's requirements and his willingness to comply with instructions and should have prompted careful supervision and control of Martin's activities generally. I note the following. In some instances there are more details in Annexure A.

(i) On 6 April 1998, he was required to bring the plaintiff's account within the 30 day payment requirement. He protested and was told to attend to the matter promptly.

(ii) In a memorandum of 21 April 1998 the Committee recorded concerns about the operation of some 12 accounts by Martin and his attitude to "not seemingly wanting to fix these problems" and not wanting to comply with instruction from Malloch and Newton. It listed the complaints generally as Martin

* allowing new clients to open accounts and trade without deposits, (in particular the M A Khan Account where the first trade was a warrant),

* allowing too much credit on individual transactions, and

* trading outside T+5 (including the plaintiff's trading account) which showed a "lack of discipline", and

* too much warrant trading.

He was directed in several instances, including the plaintiff's account, to cease further buying and organise selling until those accounts were current. He was given one week to attend to the instructions.

(iii) In a memo of 5 May 1998, the Committee suggested that he re-read the memo of 21 April 1998 and respond to the questions asked and complete the tasks requested. Concern was expressed about his purchase of 50,000 EEC in the plaintiff's account which it said was in breach of its instructions and comment made on his failure to respond to the criticisms relating to the M A Khan account. Another complaint was his failure to respond to a request to make Martin and Rojul Nominees accounts, accounts associated with Martin, current. Martin replied on 6 May 1998, attempting to explain, making promises of compliance but denying that he was taking any risks.

(iv) Concerns were raised on 14/5/98 about Martin's handling of debts and handling of Committee requests (P44).

(v) On 21/5/98, concerns were expressed in the Committee about the manner of Martin's dealings, the potential for serious debt, his lack of response and his ignoring of directions of the Committee. Guidelines were set.

(vi) The Committee sent a memo to Martin the following day, 22 May 1998, which listed a number of alleged short comings on behalf of Martin namely:

* Contrary to HPL policy, allowing new clients excess credit in their accounts without first obtaining funds.

* Clients not settling their trades on T+5.

* Allowing clients to purchase shares when their accounts are unsettled after T+5.

* Associated accounts not settling on T+5.

* General unco-operative attitude to providing information and satisfactory answers to the Debtors Committee and the credit manager.

* Placing orders for clients whose accounts contain net unpaid losses" (P45).

The memorandum also advised him of a resolution of the Committee that from 1 June 1998 to 31 August 1998 certain conditions were to apply to his client debtors, namely a credit limit of $100,000 whether current or T plus five, associated accounts to be settled on a T plus five basis and he was required to comply with all current compliance and debtor's policies.

The plaintiff submitted that the defendant, supervising Martin with reasonable care, would not have stopped there and would have, on the Debtors Committee experience from at least 21 April 1998 onwards, examined his dealings to ensure that their clients had not been failed by Martin and to ensure that the law and relevant rules were complied with.

(vii) On 18 June 1998, the Committee recorded its concerns about the way Martin had traded in AMP.

(viii) On 14 July 1998, the, Compliance Committee wrote to Martin complaining of breaches on 9 and 10 July 1998 involving the short sale of a warrant. It stated that he had breached Compliance Policy No. 8 - Short Selling Procedures, by not having a short selling authority form signed by the client prior to the sale, not having sufficient margin cover and failing to transact the sale in the short sale account. The Committee then stated that this was his fifth breach of the Policy over the previous three months. His penalty was the loss of the brokerage - $232.00 (CB 1635). The memo was marked to be sent to Martin with copies to Newton, Malloch and Karlson. Martin was invited to respond with any mitigating circumstances to Donna Brennand or David Craig.

(ix) On 16 July 1998, there are again references to Martin disregarding the restrictions of the Debtors Committee and of there being risks to the defendant because of his dealing practises (P65).

The subsequent history is set out in Annexure A.

(d) Events of August 1998. The plaintiff also submitted that the events in August 1998, arising in Martin's absence on leave, should have alerted the defendant to the need to supervise and control Martin.

(i) To the knowledge of Karlson and Whiting, Liyakat Ali and Barba appeared to have a view of the credit arrangements available to the client which was at odds with limits imposed by the Defendant and claimed that their understanding was based on what Martin had told them.

(ii) In conversation with Whiting on 14 August 1998, Barba made complaints about Martin's performance.

(iii) The e-mail sent by Liyakat Ali to the Defendant praising Whiting's performance, commented unfavourably on Martin's performance - in particular complaining that he was not following instructions.

(d) The discretionary account agreement. The plaintiff argues that another matter that should have triggered supervision and control was the execution in August of 1998 of the discretionary account agreement.

As background fact, I note that a new compliance policy (No 3 - Discretionary Accounts (P51) was issued on 30 July 1998. It required, inter alia, new discretionary account agreements to be used immediately. It required the "adviser" to be "fully conversant with investment parameters" and to have "a good understanding of the client's requirements". As noted above, it set out monitoring procedures. It laid down that client reports be reviewed to determine if inappropriate stocks were acquired and if monetary limits were being adhered to by "advisers". Thus, the monitoring then laid down was designed to provide some protection to the client as well as the defendant.

On 5 August 1998, Martin forwarded the new agreement forms to Liyakat Ali. Counsel referred to the fact that the agreement lodged with the defendant contained no personal details relating to the client, that part of the form having been crossed out. Bearing in mind the particular importance of "know your client" in relation to discretionary accounts, it was put that the defendant, if adequately supervising its staff, should have been aware that this had occurred and followed the matter up - particularly in light of the new policy. I note, also, that the Discretionary Accounts Register (CB1990) printed out on 19 November 1999 recorded that the account 1523977 was opened on 17 September 1997 and a discretionary account agreement executed on 11 August 1998 with no restrictions. It also records that the same account was opened presumably as a discretionary account on 11 August 1998 with an agreement dated 27 August 1998 which contained within it restrictions of no tobacco, gaming or bank stocks. It also appears that the paper work passed through the hands of the compliance staff, notably Donna Brennand the compliance officer. It seems unlikely that she read it because she wrote to the plaintiff asking him to retain it as a record of investment categories, investment objectives and investment requirements to which he agreed at the time of signing. There were none recorded on the documents. She was not called to give evidence.

[605]

(a) Failure to terminate_._ The defendant argued that the plaintiff did not terminate the retainer at the time of the sale because the plaintiff had in fact gone along with the sale of the Telstra shares in the first place. I accept the evidence referred to above, however, that that was not what occurred. The explanation for the willingness of the plaintiff and his son to continue lies in a combination of factors. There were factors that would have ameliorated Liyakat Ali's anger and so caused him not to terminate the retainer. They included the fact that the plaintiff was considerably in the debt of Martin in that he had organised a very generous allocation of Telstra shares and shares in the float of Great Southern. Further, from the first day of trading in Telstra shares, Martin applied enormous pressure to Barba and Liyakat Ali to try to get the latter's agreement to the sale of the shares. He spoke confidently of a decline in the price of Telstra and the enormous potential profit that would be lost if they were not sold and emphasised the expertise that he had and that Barba and Liyakat Ali lacked. After the sale, he maintained strongly that what he had done was done to further the long term best interests of the plaintiff and a profit of more than $50,000.00 was realised. At the time, Liyakat Ali had no grounds for doubting the bona fides of Martin's position. Martin was not alone in his views about Telstra. Then there was Martin's promise to buy back and cover any adverse difference in price. Later, when obviously Liyakat Ali was still unhappy, Martin provided, on the face of it, 30,000 Innovax shares out of his own holdings for nothing and maintained that the plaintiff would do better out of them, and the other Innovax shares purchased, than he would have done with the Telstra shares.

(b) Use of proceeds. Another issue raised is whether Liyakat Ali was aware that the proceeds of the Telstra receipts had been used to purchase speculative stocks that were acquired shortly afterwards by Martin. This was inconsistent with the plaintiff's alleged plans for that money. The defendant argued that Liyakat Ali was aware of the use and accepted it because the plaintiff did not in fact have separate plans for the Telstra shares and their use and saw them simply as part of the plan to trade on the market to make a targeted return of 15% to 20% per week compounding.

[607]

I am satisfied, however, that while Barba did not, Liyakat Ali did closely monitor what was occurring and studied the weekly reports. In doing so, he would have become aware that the Telstra funds were being used in these share trading activities. The weekly report as at 19 December 1997, listed portfolio holdings with a market value of $428,250.00. It showed a balance outstanding on the Number 1 account of $82,890.00. Assuming that only approximately $102,000.00 had been invested by the plaintiff to acquire that portfolio, the plaintiff was approximately $233,000.00 ($428,250.00 - $184,890.00) ahead at that point. On an investment of $102,000.00 that was a 238% return -a very satisfactory result. On the other hand, one would expect Liyakat Ali to be concerned if those figures represented a portfolio holding for which the Telstra money had also been used. In that situation, the monies invested to acquire those shares was of the order of $300,00.00 and the profit, therefore, only a little over $45,000.00. On that basis, the $50,000.00 profit made on Telstra had already been whittled away. A similar analysis of the portfolio holding weekly report as at 9 January 1998 shows a worsening of the position with the value of the portfolio $479,425.00 but $161,986.00 owing on the account. Again, however, if it is analysed on the basis that only $102,000.00 of the plaintiff's money's was involved in acquiring the portfolio, the plaintiff was at that stage ahead by $216,000.00, a 211% return on his $102,000.00. On the assumption that the Telstra moneys were also used to acquire the portfolio, the profit had been whittled back to approximately $20,000.00. It is that lack of performance, together with the speculative nature of the stock held, which explains Liyakat Ali's concerns leading up to meetings in January 1998 and his concerns leading up to exchanges of correspondence in March and in June and July of that year. I will refer in more detail later to these events, particularly in Annexure A.

[651]

(a) Internal inconsistency. Defence counsel argued that there were inconsistencies in the case and the evidence advanced for the plaintiff. It is put, in particular, that there is an inconsistency between the plaintiff's evidence and Liyakat Ali's evidence about the intention of using Telstra as a nest egg for the plaintiff's retirement and the case that the applications in the 13 names were for those 13 people - the latter thwarted or compromised the former. The defendant also argued that the evidence of the alleged conversations between Liyakat Ali and his father discussing how family members might benefit from the purchase of Telstra with money from Liyakat Ali made little sense unless it was a reconstruction. It was put that they could not have taken place before 28 and 29 October and are inconsistent again with the evidence adduced that the Telstra allocation was to be utilised as a nest egg for Rahmat Ali's retirement.

There are problems with this simplistic argument. The evidence points to the nest egg intention as being the initial intention and to it being put on hold, but remaining a possibility at least to some extent, when it was found that the 8,000 share limit applied to applications. When it emerged that the 13 could not go ahead with the applications, the nest egg plan was revived, transfers signed and the number 2 account was opened - all on about 14 November 1997. The time sequence of which evidence was given was possible.

(b) Challenges to evidence of Rahmat Ali. The defendant challenged the credibility of Rahmat Ali's evidence on a number of grounds. I refer to my earlier consideration of such arguments above in analysing the arguments about the Telstra aspect terms.

(c) Alleged improbability. Next it is submitted that the account should be rejected because it was improbable and it involved money totalling $195,000 being paid with no guarantee that it would be repaid or any firm plan for repayment of the funds. The argument ignores the evidence that there were close ties between the plaintiff and the 13 people and that the possibility remained that some of the 13 might not be able to organise the where-with-all to repay Rahmat Ali, in which case the option remained for the plaintiff to acquire them.

(d) Liyakat Ali's role. Next, the defendant sought to make much of Liyakat Ali's role in the whole process and his control over it and that of Barba's office. My attention has been drawn to the execution of the various documents and the sequence of events in obtaining SRN numbers. I have difficulty attaching any great significance to these matters. In particular, as to Liyakat Ali's actions, if he was acting as agent for all parties, he did what was to be expected of an agent for all parties. The applications were to be made here and the office of Barba was supplying the clerical assistance required including obtaining information.

(e) Liyakat Ali's evidence. The defence also sought to attack the plaintiff's explanation on the basis of its general and specific attacks on the evidence of Liyakat Ali. I have already expressed my views on his credibility. His evidence, however, was consistent in this instance with that of the plaintiff.

Conclusion

[709]

(i) Failure to complete application forms. I am satisfied that it was negligent of the plaintiff, through his agent, not to complete the form. It would have been prudent to do so. I am satisfied, however, that as far as Martin was concerned he would have ignored the details - as he did the oral detail. In addition, the defendant is unable to establish that any such negligence of the plaintiff was a cause of any loss. There is no evidence that anybody at the defendant monitored these documents or perused them. On the other hand, if anyone at the defendant had adequately supervised and controlled Martin, and in doing so, monitored the documents, they would, in exercising reasonable care, have asked the plaintiff to complete them. If asked, the plaintiff would have done so. The monitoring would then have extended to comparing the actual trading with the objectives and Martin's trading would have been stopped.

(ii) Failure to seek a copy of the ASX booklet for warrants. The booklet was not supplied by the defendant and it was sought on the plaintiff's behalf by Barba. It was not pursued then, but at that point, Liyakat Ali and Barba had no reason to distrust Martin and he purported to explain warrants to both men. As a result, it was not negligent to fail to pursue the booklet. In any event, if it had been supplied and they had queried Martin, he would have relied on his superior skills, alleged privileged information and alleged risk strategies to persuade them that they could disregard the risks referred to in the booklet.

(iii) Refusal to sell securities. The defendant, in developing the argument on this point submitted that the loss on several of the securities was well over 10% and that Liyakat Ali instructed Martin, directly through Barba, that simply selling and crystallising the losses was not acceptable. Counsel submitted that it is common sense to sell stocks which have caused loss of capital when the primary purpose of the investment was to trade in shares. I note that, if that proposition is accepted, the proposition that it was negligent on the part of Martin not to sell such stocks must also be accepted. It was then put that Liyakat Ali's refusal to allow Martin to sell and absorb the losses and move on "ultimately caused Liyakat to lose his original investment and the gains made on the way through".

Counsel relied on the evidence of Martin. He also relied on two documents to establish that Liyakat Ali was not prepared to sell the securities. The main document relied upon was the letter written by Barba of 23 March 1998. Relevant statements are, first,

"Anything short of recovering in full, those losses on hand at the present time will not be well received by the client. This I do not need to explain this to you (sic)".

Later it was also stated in the letter:

"Recently you have suggested we sell off all the bad stock and cop the losses.

The disappointment in your strategy of selling all these stocks at significant losses makes it easy to wipe your hands of decisions that you have made. Sure markets have not entirely worked in our favour however if you took on a varied approach, your results I'm sure would have been closer to the mark. I want something better than this from you than taking the easy way out."

Then a little later Barba wrote:

[827]

"....acceptance of the principle enunciated in Malec requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s.52(1), should be ascertained by reference to the court's assessment of the prospects of success of that opportunity had it been pursued. The principle recognised in Malec was based on the consideration of the peculiar difficulties associated with the proof and evaluation of future possibilities and past hypothetical fact situations, as contrasted with proof of historical facts. Once that is accepted, there is no secure foundation for confining the principle to cases of any particular kind. On the other hand, the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence, the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in the case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities, because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable. The conclusion which we have reached on this question finds support in other considerations. The approach results in fair compensation, whereas the all or nothing outcome produced by the civil standard of proof would result in the vast majority of cases in over-compensation or under-compensation to an applicant who has been deprived of a commercial opportunity. Furthermore, it is an approach which conforms to the long-standing practice of taking into account contingencies in the assessment of damages".

[875]

(a) No margin lending through defendant. Counsel submitted that Martin never on behalf of the defendant agreed to provide margin lending. As to that, I accept the evidence of Barba and Liyakat Ali that Martin did so offer and it may well have been available, although one must approach with caution anything offered by Martin in those early months as an inducement to the plaintiff and his agent. Any margin lending proposal, however, would have run into the problem that it realistically could not have been put in place until mid-December 1997, (see below).

(b) Margin lending not possible. Counsel for the defendant submitted that the plaintiff would not have been able to obtain margin lending. He referred to the evidence of Johnson, from Colonial State Bank, who gave evidence for the plaintiff on margin lending. Counsel said that he gave no evidence that Colonial State Bank would have lent. That is true - he was not asked. He was asked questions, however, which were relevant to the question and his answers shed some light on the probabilities of margin lending being available.

The defence called Hardman, also an expert in the field. The defendant's counsel submitted on the basis of Hardman's evidence, that it was most unlikely that a margin facility of up to 70% of the value of the Telstra shares would have been made available to the plaintiff from any margin lender and that, in fact, the plaintiff would have been rejected as a borrower. I turn to his evidence

(i) No 70% margin loan. Hardman gave evidence that in his experience he had not seen margin lending of the nature set out in Francis's annexures. He said that whether a margin lender would allow a borrower to invest the whole of the loan in shares in one company would depend upon the ability to finance the loan and the spread of investments. He said that a high wealth customer with significant other assets might be permitted to take a single large exposure. On the other hand, he said that an investor with no other assets was extremely unlikely to be allowed to borrow a large amount such as $600,000 against a single security. That assessment was affected by the liquidity of the stock. He accepted that Telstra was very liquid stock in 1997 and 1998. He said that margin lenders encourage clients to spread risk and that the lending ratio is based on the margin lender's assessment of the risk. He said some companies such as BT may reduce the ratio for a single stock - in BT's case always 10% against the loan to value ratio. Others, such as Merrill Lynch, recommend diversification and would also reduce the ratio where the portfolio contained less than three stocks. He agreed that if the plan was to invest initially in Telstra up to a certain level and then to diversify into blue chip stocks that would affect matters because it would spread the risk on equities themselves and the margin lender would look at other aspects of the proposed transaction. To spread the risk over a number of blue chip stocks would be more acceptable to the margin lender**.** He said, however, that as the exposure against one person continued to increase, the margin lender would look very carefully at the ability to meet the obligations. He said it was a question of prudence. He said there was nothing to stop a margin lender lending on one stock which had great hopes for the future. He said it was a question of their prudence. He agreed that a 70% ratio is to allow for a 30% fall in the value of the stock.

(ii) Borrowing on increases in equity. As to increasing margin loans by utilising increases in equity, Hardman said that the margin lender will in appropriate circumstances allow the borrower to increase his loan, it would be subject to the same criteria as the original margin loan but treated as an increased drawing against it. Some margin lenders may insist on a formal application for an increase. In his experience, in that situation, the lender will encourage the borrower to diversify. The percentage allowed will depend on the nominated percentage fixed by the margin lender. If a nominated share has a ratio of 50% that will be the margin initially. Mr Hardman in his statement concluded;

"I believe it very unlikely Mr R. Ali would have been able to obtain a margin loan for $600,000.00".

In cross-examination, however, Hardman confirmed that suitable guarantees might assist but nothing specific was put to him or said by him by way of example.

One must also bear in mid that what was being used for margin lending was the Telstra share holding --a stock to be used for security about which any margin lender was likely to be confident.

(iii) Plaintiff unacceptable as a borrower. Counsel for the defendant also argued that a person in the situation of the plaintiff would have been rejected as a borrower. He relied on Hardman's evidence that the decision whether to margin lend, and the extent of any loan, is affected by the fact that margin lenders often borrow from wholesale lenders pursuant to a facility letter which will set out the criteria as to the persons to whom the margin lender will lend and what stocks may be lent on and the intensity of the concentration of those stocks. His evidence was that typically such facility letters required residency requirements which allow lending to Australian citizens and residents. The facility may allow loans to overseas residents but he said that typically they have to be residents within the OECD and usually only up to in total 5% of the overall loan facility. He mentioned occasions where residents of Papua New Guinea had not been allowed margin loans. His opinion was that a Fijian resident "such as Mr Ali" was "very unlikely" to have been able to obtain finance. In saying this he was also influenced by the fact that it appeared that the plaintiff had no free assets and was otherwise not able to support the loan or meet margin calls. He said that some wholesale lenders see the risk of lending in non-OECD jurisdictions as unattractive because of collectability problems. I note he did not say all.

In cross examination, Hardman was challenged about this evidence. He said that he expressed his opinion on the basis of the information provided to him. It emerged that he had been told that the plaintiff resided in Fiji, was retired, had no other significant assets and was not generating any other income. He was not told of the plaintiff's financial position, the family connections, his religion or the number of children or their financial position. He said that if it emerged in the course of investigating the financial position that the person could not meet interest payments except out of dividends, he would be enquiring as to what other sources of funds the applicant had.

Hardman gave evidence that typically a margin lender would require financial information to make the usual prudential credit check. It will check current income and other funds available to the margin borrower in determining the ability of the borrower to service a debt and margin calls. I note, however, that he agreed that margin lenders varied in the amount of financial information required. Some required very detailed financial information and others did not. Some relied purely on credit references and he said that one margin lender, BT, did not in fact require financial information but introduced other constraints. He also agreed that BT was a prudent margin lender. He agreed that it advertised that it did no credit checks, income and asset liability statements. He said that was the case in 1997 and 1998. He agreed that their marketing documents indicated that approval was generally available within 24 hours. He said that they looked at the size of the loan and their assessment of the client from their own enquiry working through a financial planner or investment adviser who had put the client forward. The margin lender could protect itself by limiting the amount of the loan, choosing not to lend or requiring personal guarantees, additional security, or third party guarantees. Asked to assume the availability of family resources totalling $1 million in assets, he said that would not be relevant unless they were being put forward as guarantors or as additional security. He thought their income was less relevant because the guarantor is there to protect the loan if a margin call occurs.

Johnson presented a slightly more accommodating view of the approach of margin lenders Asked if the financial position of the applicant was relevant to the margin lending, Johnson said that for some industry participants it was, but a number of the longest standing participants did not require any financial data and would usually go to a financial planner or adviser. He said that in 1997, to be told that the applicant was a retired taxi driver living overseas would not have made a big difference. He said it would be an issue of cash flow and assets. Their credit standing would also be relevant. He said there was nothing to stop someone borrowing, say $20,000.00 on the security of the home, during a margin loan's existence and buying CRA shares and lodging them as security. As to the payment of interest, he said that interest would be paid by direct debit facility to the bank account and, if the ratios permitted, could be capitalised to the loan so that it increased over time. Interest would be paid on that capitalised interest.

No lost opportunity - analysis

[911]

(a) No margin lending. Under this scenario, as noted above, if the 100,000 shares in Telstra were held and not used for margin lending, immediately prior to the payment of the second instalment, the shares would have been worth approximately $490,000.00 - a gain of nearly $300,000.00. If they had then been sold the plaintiff would have enjoyed that capital gain. If, however, they were retained beyond the payment of the second instalment, the cost of each share would have gone up to approximately $3.30 per share. Looking at the evidence before me of the movement in the price of Telstra over the succeeding years, it may be said to have ranged between a little below $5.00 and a little under $9.00. Assuming that the plaintiff held the Telstra shares with no margin lending, there were opportunities to the present day to achieve a gross capital gain of between approximately $150,000.00 and $550,000.00 in that period with no margin lending. The funding of the second instalment, however, has to be borne in mind.

(b) Margin Lending Option

(i) Implementation of the proposal but with a reduced loan to value ratio.

If the plaintiff had gone ahead and tried to organise a margin lending proposal along the lines upon which Francis did his calculations, I think it unlikely that a ratio of 70% would have been achievable because of the emphasis on the one stock - without additional security. But I am satisfied, on the evidence, that the plaintiff would have been able to finance a substantial margin lending program which substantially incorporated Telstra. It would have been unusual but ultimately a deal would have been struck. On the evidence, taking a cautious approach, one could explore the value of that opportunity by assuming, for example, that the margin lender would lend the money on the usual terms save and except that the loan to value ratio was to be dropped to say 35%. One can then do a rough calculation by taking Francis' figures other than his very original figures which were erroneous, and adjust the result to reflect a 35% ratio as opposed to a 70% ratio. The result should be approximately half that provided for in his various scenarios and points to an opportunity, even on that cautious basis, to have gathered a net equity in Telstra and blue chip shares in excess of $1 million within the first 12 to 14 months - that is net after deduction of the first instalment. There remained the opportunity thereafter to build up the portfolio but the second instalment has to be borne in mind.

(ii) Blue chip Margin Lending

Let it be assumed that the plaintiff retained the 100,000 Telstra shares and used margin lending not to acquire more Telstra shares but to acquire blue chip shares. Let it also be assumed that $500,000.00 could have been borrowed initially by margin lending to acquire blue chip stocks. This is less than the amounts relied upon by Francis and introduces diversification. If they comprised the 20 Leaders which enjoyed an average gain of 30% as at 31 January 1999, there was the potential to add $150,000.00 to the gain on Telstra shares then trading at $8.80 - a gain of $5.50 over the cost or $550,000.00 - a gross hypothetical total of $700,000.00. Taking the situation forward to 18 August 2000, the 20 Leaders Index had increased another 24% or $120,000.00. If the blue chips were taken from the 100 Leaders, the figures would be less dramatic - approximately $115,000.00 and $105,000.00 respectively. Of course interest and the second instalment have to be borne in mind.

[957]

(a) Ignoring its public promises to all clients including the plaintiff. I have referred above to the statements in the defendant's published governance documents about its core values which include acting with integrity and ensuring compliance with the spirit and letter of relevant Acts, Rules and Regulations and its policies. I have also referred to the production from time to time of various compliance policy documents. Plainly the officers of the defendant had directed their minds to what would be proper conduct by individual brokers. In part, the intent was to protect the interests of clients. As noted above, however, on the evidence, nothing effective was done to enforce the law or those policies. The only evidence of any action in that area before me is the appointment of a compliance officer, the 1997 fine, the July memorandum depriving Martin of brokerage on a transaction and the ineffectual attempt to review discretionary accounts - that is all. The compliance officer and Committee do not appear to have done anything effective to protect the interests of the clients. To promote itself publicly, in the way the defendant did, and to recognise the need for, and develop, policies which will address the rights and interests of clients but do nothing effective to enforce them, shows a contempt for the rights and interests of all clients.

(b) Ignoring rights and interests of clients including the plaintiff. I refer to the discussion above on the issue of supervision and, in Annexure A, of the directions given by the Debtors Committee to deal with debt in the accounts operated by Martin. From the defendant's point of view it was necessary to address these issues and it should not be criticised for taking that action. But, the focus was entirely on its own interests to the exclusion of the clients' rights and interests. The Committee approached its task on the basis that Martin was a debt problem and controlling Martin was the issue. On the evidence it appeared to give no consideration to the interests and rights of the relevant clients. There appears to have been no consultation with clients before the credit facilities were changed and no warning or notification by the defendant directly to the clients. In particular in the course of changing credit arrangements on 21 May 1998, the Committee imposed the same blanket restrictions on credit for all the accounts of Martin's clients. It so acted to deal with the problem it saw itself as having with Martin's "management" of "your debtors " and his attitude to the Committee. Directions were also given to Martin to sell all the stock held in particular accounts in April and May 1998. No consideration appears to have been given to

* possible agreements clients might have made with the defendant, through Martin, each broker, according to Karlson, having authority to negotiate the terms of retainers with clients,

* the individual financial positions of the clients and the possible impact on clients of the proposed changes to credit arrangements that they may have been relying upon for some time or,

* using alternative options which had regard to the individual clients' needs, resources or objectives.

In some instances the defendant communicated with the client but only to demand payment of the account and threaten legal action. This approach continued. Ultimately on 23 November 1998 the Debtor's Committee gave Martin a blanket direction to clear all the accounts listed and, otherwise, to stop trading in them. The list included the plaintiff's accounts although internal documentary evidence suggests that it was not seen as a problem account as at 10 November 1998 and it is difficult to discern any significant changes in those accounts occurring between that date and 23 November 1998. Again the defendant, while going to some trouble to address its financial interests, ignored whatever rights the clients might have acquired, any difference in the financial positions of the clients and the impact of the blanket direction on individuals. The clients were not individuals with rights and interests. The focus was Martin's handling of debt. It may fairly be said that the committee chose to ignore clients' rights and interests including those of the plaintiff.

(c) Ignoring the rights and interests of the plaintiff. I refer, first, to December 1997 when Karlson directed the closure of the No 2 Account because Martin's explanation for opening it was unsatisfactory. No consideration was then given to the plaintiff's rights and interests. I refer also to the events of August 1998 where Karlson, aware of the problems the Debtors Committee was having with Martin , did nothing to alert the client to Martin's deception about credit limits or require Martin or Whiting to do so. Reference should also be made to the circumstances surrounding the execution of the discretionary account agreement. The compliance officer did not read, or accepted without comment, an agreement signed by the client in which every section where relevant details were to be recorded was deleted. Further, a cursory examination of the relevant documents, including the Register, would have revealed that Martin had been trading on a discretionary basis for months before having any agreement executed (if the register is to be believed) and without details of the client's objectives and financial position recorded. This does not appear to have prompted action, even though, at the same time, the defendant's other officers had been on notice for many months that Martin was a broker who, from the defendant's own point of view, did not follow instructions or keep promises, had deceived the Committee and took a reckless approach to the financing of trading. The other officers had also been aware that Martin had breached the ASX rules and the defendant's policies. On the evidence before me, while it might be said that more and speedier action might have been taken by the defendant against Martin to protect it and its finances, that action was in stark contrast to the lack of action taken to ensure that the client's rights and interests had not been harmed by this particular broker. I refer generally to my analysis of the evidence on the issues of supervision.

(d) Final dealings. I am also satisfied that the defendant in late 1998 stepped in to close the plaintiff's accounts, without consultation and ignoring the rights and interests of the plaintiff, a person who had provided the defendant with brokerage of over $130,000.00 in 12 months. The defendant, of course, was entitled to protect its own financial interests, but I am satisfied on the evidence, that there was no bona fide consideration given to the client's rights that may have been negotiated through Martin or the client's position. No bona fide attempt was made by the defendant to explore the conduct of the account and the complaints raised and foreshadowed by the plaintiff about Martin notwithstanding it was well aware of its own problems with Martin, problems which gave credibility to the plaintiff's complaints. There were also documents on Martin's own file (P80) which, if read, would have given credibility to the plaintiff's complaints. They also gave credibility to Martin's comment in his letter to Karlson of 4 December 1998 that the dispute was a "can of worms" that they should not open.

I accept Barba's evidence that the defendant was not interested in anything said and accept that, when asked to delay the sale of Burns Philp shares until after the profit announcement, Karlson refused expressing the sentiments attributed to him by Liyakat Ali. Those sentiments were consistent with the conduct of the defendant at that time. The defendant ignored the rights and interests of the plaintiff during the retainer and, at the end, merely went through the motions of discussion with the plaintiff. Its sole focus throughout was on the debt and the protection of its own interests to the exclusion of any real consideration of the plaintiff's rights and interests.

[984]

(a) Type of Stock Held - Risk and Control; The first matter raised was a concern that speculative stock amounting to more than half of the entire portfolio had been held for a period of 3 months or more and that this had substantially dragged down the portfolio limiting opportunities for profit elsewhere and put it out of balance. The complaint was made that this was "placing the strategies in serious jeopardy because we are missing opportunity costs....." the direction was given that those positions could only be held for no more than a week or two and that the maximum of the speculative portfolio should be 25% at any one time.

(b) Credit Facilities; In the document there was a calculation made using an estimated portfolio value of $400,000.00. This was consistent with a portfolio using $100,000.00 investment, $200,000.00 gearing and extended settlement.

(c) The Agreed Return; The document records;

"Remember the benchmark returns [sic] expected is 20%. This would have been achieve [sic] 10 fold if we were trading on the stock heavily, no [sic] just sitting on them."

This supports the conclusion I have earlier expressed that there was an agreed target return but not a promised return. It also shows that the plaintiff wanted to increase the trading and was disappointed with the performance but remained of the view that the return was readily achievable.

(d) Future Directions - Risk and Control; The direction was given that for future balancing of the portfolio, 25% should be in speculative stock for short term holding positions, 20% for daily trading and 55% for other stocks comprising resource banking and finance and others "as you see fit or as suggested by Ali". Reference was also made to an instruction from Liyakat Ali to sell out Innovax. The document recorded;

"Ali has given clear instructions to sell out of Innovax. This is a nothing stock going nowhere. He has advised that you sell with no loss impact on his portfolio. This I will discuss with you in person".

[990]

(a) Control; The document attempted to require Martin to consult and follow instructions. Amongst other things it was said:

"let Telstra be you guide and notwithstanding you analysts recommendations to sell Telstra against the total wishes of the client and its agent and myself".

A little later, Martin was instructed to take clear and concise instructions and ensure that he consulted with the client or its agent on any purchases he intended to make before making them. It was stressed that it was imperative the he consult the client and/or its agent in all matters relating to the account because of his "total disregard of this request since you have been given the responsibility to act as broker for same". The document attempted to put the onus of proof on him to verify or prove that he was instructed and that he should request instructions in writing if necessary to avoid any confusion or misinterpretation.

(b) Benchmark; The reference to benchmark was shortened and changed to read;

"remember the benchmark returns expected is 20% as promised by you".

The reference to "promised" was new, but points to an agreed benchmark or target not a promised return.

(c) Balance of the Portfolio - Risk and Control; The instruction was given that 15% be in speculative stocks for short term holding only with a stop loss of no more than 5%. 20% was to be used to trade in blue chip options as a hedge on the portfolio and 65% was to be used for trading in blue chip stocks. As to the latter he was also directed to invest 25% in resource stocks, 60% in banking, finance and industrial and 15% in others (changed from the previous percentages). The resource stocks to be traded were listed and his attention was drawn to them as examples of the quality to be selected and he was told that he would be consulted over time as to other stocks.

(d) Innovax - Control; In the reference to Innovax there was added;

"for the record you purchased this stock without any consultation with the client the agent or myself.

You were instructed specifically to sell Innovax on the day you advised the client's agent that you had purchased this stock. At that time this stock had increased by approximately 10% in value".

[991]

I accept Barba's evidence that there was a long discussion with Martin involving Liyakat Ali and himself at the Lion Dance Restaurant on 15 January 1998. Barba made extensive file notes of this meeting. Liyakat Ali's concerns about there being no discussion prior to Martin buying stock was raised, as also was the nature of stocks he was holding, and there was discussion about them. Martin explained the performance by referring to the Asian Meltdown. He said blue chips were overvalued and he justified the holdings in Taipan and Preston Holdings on the basis of information he had. Martin stressed that the nature of the trading was such that they could not assess him on a week to week basis as to whether he would achieve his 15 to 20% and stressed that he was a professional and that he must be given a minimum of 8 to 12 months to achieve it. He maintained that the best traders were those with a knack to pick the least obvious and capitalise on the profits. He said they are the ones who make the dollars. He assured them that he was the best in the game and that was evident by the fact that he had been the number one broker at the defendant. He stated that they were making money at the present time, and a good profit (presumably referring to realised profits), and that by the end of 1998 he would meet his 15 to 20% return per week compounding. He asked them for patience and not to judge on a weekly or a monthly basis. He said that they must have the smarts to "load up and sit and wait. It will come in when you have the right information". He said that a stock worth 10 cents can be worth $10.00 to-morrow (CB649). He also argued that when you are holding stock, the price of which was below the cost, it is a holding cost not lost money. He emphasised the need to buy before the stock runs. Liyakat Ali and Barba insisted that he apply a 5 to 10% stop loss strategy. He assured them of his total commitment to the success of the business relationship and he would continue to give the best service he could deliver. Liyakat Ali told Martin that if he was to take risks in attempting to achieve the return and jeopardise the results then he could resign. At the end of the meeting Barba gave Martin the revised note "Balancing the Portfolio".

[1155]

Whiting rang Barba on 14 August 1998 and made enquiries about the type of person that Liyakat Ali was. Barba told Whiting that Liyakat Ali was a very good man, that his expectations were high because the account was his father's and he was extremely protective of his father's assets. He said Liyakat Ali would also get you to commit to what you could do and hold you to that commitment. He said that you were always free to change your mind as long as you advised Liyakat Ali before doing so. He said Liyakat Ali wanted people who were committed. He told him that Liyakat Ali was very particular about the way he did business and the instructions that he gave. He said he must keep Liyakat Ali informed at all times. He told him that Martin did not work in this way consistently enough and complained that Martin was always committing the account to losses with little or no communication. In response to a question from Barba as to why Whiting wanted to know, Stefan Whiting said that he had over purchased on the account according to officials from the defendant's office. Barba asked Whiting to clarify what he meant. He noted in his file note 100,000 BHP calls and Western Mining and Oil Search calls. Barba also noted in his file notes that Martin had obviously not filled Whiting in on the account and its operation. The file note records that he told Whiting that Martin had told both him and Liyakat Ali that Whiting could buy up to $200,000 of stocks whilst he, Martin was away. Whiting said he would get in touch with Martin to clarify the matter. In any subsequent discussions, I am satisfied that Liyakat Ali and Barba maintained that Martin had told them that they could purchase $200,000 of stock whilst he was away and that no one attempted to disillusion them. I am satisfied that Liyakat Ali and Barba were not told then or later of the actual credit limit. Martin remained in contact - both with Liyakat Ali and with his colleagues. At the same time Whiting worked the account debt back to approximately $150,000 by 24 August 1998.

At a glance

Court

Decision date

Before

Source

Judgment (1199 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (2)