ASIC v IP Product Management Group Pty Ltd [2002] VSC 255

Supreme Court of Victoria|2002-06-28|Before: Byrne J

CORPORATIONS - "managed investment scheme" - "securities" - operation of scheme -winding up of schemes and companies involved. Corporations Law ss. 1018, 780, 461, 601ED, 995.

By originating motion filed on 11 April 2000, the Australian Securities and Investments Commission ("ASIC") sued two persons and two companies who were involved in a scheme or schemes for the manufacturer and distribution of collaborative music audio CDs and ancillary products ("music schemes"). In general, it was envisaged that a theme based CD might be manufactured as a compilation of the works on a selected theme provided by different musical artists. The CD would be marketed aggressively "by using the media of television documentary and film as a centrepiece of the total marketing methodology".

In broad terms, the potential investors were invited to contribute sums of money to these projects as a speculative investment with the expectation of earning a profit. An incidental, but by no means unimportant, by-product of this investment was that investors expected to derive a significant tax deduction in the year of investment.

ASIC, in its amended points of claim filed on 22 December 2000 ("points of claim"), alleges that the defendants or some of them are in breach of various provisions of the Corporations Law ("the Law") as it stood at the relevant time with respect to managed investment schemes, were guilty of misleading and deceptive conduct in marketing the scheme or schemes and implemented the schemes in an unlawful way. It seeks declaratory relief to this effect, injunctive relief to prevent further breaches and orders winding up the schemes and the corporate defendants.

This proceeding is concerned with the 26 music schemes for which investments totalling $8,787,424 were to be obtained in the year ending 30 June 1999. In fact they were variations on the Infomercial schemes which were promoted by the thirdnamed defendant, Peter Leslie Ambrosy, and the fourthnamed defendant, Donald Stuart MacGregor, in the preceding years and which are the subject of my judgment in Proceedings No. 5009 of 2000 and No 5010 of 2000 which were heard together with this proceeding.

As presented in the explanatory memorandum, the music schemes had the following features. Each project for a music collaboration was to be funded by payments totalling $5,505,375. There were to be two sources of these funds:

(a) investors who were to provide in the aggregate $1,150,000, representing 95% of what was called ordinary project capital; and

(b) the project manager who was to provide $4,355,375 of which $60,375 represented the remaining 5% of the ordinary project capital and a further $4,295,000 which was called preferred project capital.

The vehicle for the implementation of the project was to be an unincorporated venture between a project manager and each of the investors (13 projects) or, in the case of twelve projects, by a partnership between them. There was no evidence with respect to the remaining scheme. The execution of the project was to be the task of the project manager. There is in evidence a joint venture agreement with respect to the project "The Sound Factory Project" dated 30 June 1999 and a partnership agreement for the project "The Festive Music Project" dated 30 June 1999. These were in standard forms which were adopted for all projects in that year. The project manager for the 25 projects for which documentation was available was the firstnamed defendant IP Product Management Group Pty Ltd ("IPP").

In the case of each project, the project capital of $5,505,375 was to be applied by payment of $7,895 to the licensor of the product pursuant to a licensing agreement, and $5,497,480 to Melke Entertainment Pty Ltd pursuant to a marketing agreement for the production and marketing of the product and for the administration and management of the project. Clause 3.3 of the Explanatory Memorandum emphasises the fact that the project manager's contribution of $4,355,375 would be paid only for the balance of the budget and that it would be paid to or at the direction of Melke Entertainment.

The profit after rollout to be earned from the exploitation of the licence was to be applied as follows. From one half of the product net income, the project manager would receive its preferred capital contribution of $4,295,000. From the balance, the profits and losses were to be shared by the project manager and the investors in the proportions of their respect contributions to ordinary project capital, namely 5 percent: 95 percent.

The scheme also offered to investors the prospect of a tax deduction equal to 4.5 times their investment contribution. This was because all of the expenses of each of the projects was paid in advance in the tax year 1999 and no income was earned in that year. This, it was thought, meant that the project suffered a trading loss in that tax year. Putting to one side the $7,895 licence fee which was treated as capital, this loss was, $5,497,480 which loss was to be borne by the joint venturers in proportion to their contribution to ordinary project capital. The share of the investors was 95%, representing $5,222,606 or about 4.5 times their aggregate investment of $1,150,000.

The allegations and claims of ASIC in respect of the 1999 music schemes contained in its points of claim are that the schemes were unregistered managed investments within the meaning of Part 5C.1 of the Law, so that the conduct of the defendants in promoting and implementing them was a contravention of s. 601ED(5). Further, it is said that the interests in the joint venture or partnerships in the music schemes were "securities" within the meaning of Part 7.3 of the Law, so that the defendants as unlicensed dealers were in breach of s. 780. There is a further allegation of misleading and deceptive conduct contrary to s. 995.

Mr MacGregor has not entered an appearance and has taken no part in the proceeding. Each of the other defendants has filed a defence and has defended the proceeding through its interlocutory stages.

On 29 April 2002, some days before the trial was originally fixed to commence before me, the solicitors for Mr Ambrosy and IPP sought and obtained leave to withdraw as practitioner for those parties. The parties did not appear at trial. At this time, too, I directed that notice be given to the individual investors so that they may consider whether they should seek to participate at the trial or otherwise take steps to protect their interests. This was done. Eventually, none sought to do so. The trial, therefore, proceeded as an undefended matter.

The trial was conducted upon affidavit. All of the affidavits filed by ASIC were taken as read. As an undefended matter, no deponent was called to be cross-examined. During the interlocutory stages, the defendants also filed affidavits. By order of Mandie J on 23 June 2000 Mr Ambrosy was permitted to give evidence in chief orally and did not make and file an affidavit. Upon my enquiry whether I should have regard to the affidavits and pleadings filed on behalf of the absent defendants, counsel for ASIC informed me that, as a regulator, their client considered it proper that I should have regard to them and I have done so.

This said, it should be noted that the court books for this proceeding and for associated proceedings No 5009 of 2000 and No 5010 of 2000 numbered nearly 80 volumes. Counsel for ASIC in presenting its case appeared to take me to those parts of this mass of material which were important and I have been content, in general, to be lead by them through it.

It is convenient at this stage to introduce the principal participants in the 1999 music schemes.

Mr Ambrosy is a qualified lawyer who was in 1996 to 1998 no longer practising as a solicitor. It was he who devised the scheme in conjunction with a solicitor, Warwick Mowbray. At all relevant times he was a director and secretary of IPP and its subsidiaries.

According to the company search conducted on 30 April 2002, the secondnamed defendant, Berimah International Pty Ltd, was registered in January 1980. Its directors at all relevant times were the fourth defendant, Donald Stuart MacGregor to 6 October 1997, James Stuart MacGregor to 24 June 1997 and Malcolm Stephen Christie from 6 October 1997. Berimah promoted the 1997 and the 1998 schemes and received funds for these schemes totalling $3,128,142.07 and $17,249,205 respectively. I find that Mr MacGregor continued as a de-facto director in the financial years 1998 and 1999.

According to the company search conducted on 30 April 2002, the firstnamed defendant, IP Product Management Group Pty Ltd, was incorporated on 9 November 1998 on which date Mr Ambrosy was appointed its director and secretary. He remained so until his resignation from these offices on 5 April 2002. There is now no director or secretary of the company. Its issued share capital of twelve shares was and is held beneficially by Mr Ambrosy. It was incorporated for the sole purpose of acting as project manager for the music schemes and so acted for all of them.

Mr MacGregor was the director of Berimah until 6 October 1997. On 15 October 1997, a four year disqualification order pursuant to s. 600 of the Law became effective. The evidence shows that he and Mr Ambrosy actively promoted and marketed the infomercial schemes in 1996, 1997 and 1998. I infer that, notwithstanding his disqualification, he continued in the management of Berimah in the financial years 1998 and even in 1999 during which period he was active in the promotion of the music schemes.

Central to the case of ASIC was its assertion that each of the music schemes was a managed investment scheme. This allegation is denied in the points of defence filed on behalf of IPP, Berimah and Mr Ambrosy.

In s. 9 of the Law, "managed investment scheme" is defined to cover a wide range of commercial ventures including:

"(a) a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not) (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders) (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); ..."

It is clear enough that each of the music schemes as described in the explanatory memorandum has features (i) and (ii). As to feature (iii), the day-to-day management of the scheme is entrusted by the management agreement to the project manager which is itself a joint venturer or partner, as the case may be, with the investors in each scheme.

There is in evidence a letter of advice from Messrs Mowbray, solicitor, addressed to Mr MacGregor and to Berimah dated 20 June 1999 which considers this aspect of the definition. What is put in this letter is that, although the project manager certainly has the day-to-day control of the operation of each scheme, this does not dispose of the question. Mr Mowbray argues that it is doubtful that the requirement of paragraph (iii) is that each member have that control. The paragraph should accommodate the position where, as a matter of choice and convenience, some members elect not to participate in the day-to-day control. The opinion then includes as follows:

"It is more reasonable therefore to take the view that it is necessary to look at the body of members as distinct from a third party such as a trustee or an external manager."

Mr Mowbray then observes, as is the fact, that the project manager is not a third party in this sense since it is itself a member. Moreover, it conducts the management of the operation as agent and attorney of the partners pursuant to the management agreement.

It will be recalled that under paragraph (iii), the existence of a right in a member to be consulted or to give directions as to the operation of the scheme does not necessarily lead to the conclusion that that member has day-to-day control over its operation. The Law contemplates, therefore, some greater involvement. Under the documentation establishing the music schemes the members have no choice as to the identity of the project manager; they are obliged to enter into the management agreement with the project manager[1]. Furthermore, the partners covenant that "The whole of the management and control of the Partnership will be vested in the Project Manager to the extent defined in the Management Agreement and will be exercisable by the Project Manager"[2]. Other provisions in the contractual documentation confirm this[3] as do the terms of the Partnership Agreement itself. As a matter of legal right, it is clear that the members have no day-to-day control over the operation of the scheme. The evidence shows, too, that they exercised no such control as a matter of fact. For the most part, the operation of the scheme was conducted in places distance from the residence of the investors and there is no evidence that, having paid their money, they took any interest in the detail of its operation. I conclude that each of the music schemes satisfied the three requirements of the definition and is therefore a managed investment scheme.

In s. 92(1)(e), "securities" is defined to include "interests in a managed investment scheme". The music schemes are not futures contracts or excluded securities[4] and therefore do not thereby escape the definition of securities. I conclude that the interests which the investors acquired in the music schemes are securities for the purposes of the Law.

The provisions of the Law which are said to have been contravened are ss. 601ED(5), 1018(1) and 780.

It is alleged in paragraph 15 of the points of claim that the defendants operated management investment schemes in contravention of s. 601ED(5) or were persons involved in such a contravention contrary to s. 79. Section 601ED(5) provides:

"A person must not operate a managed investment scheme that this section requires to be registered under s. 601EB unless the scheme is so registered."

Given my conclusion that each of the music schemes was a managed investment scheme and the evident fact that none of them was registered, the issue here is whether the schemes were required to be registered and whether the defendants operated them.

Section 601ED1(a) and (b) requires that a managed investment scheme be registered where -

"(a) it has more than 20 members; or (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes;..."

As with the infomercial schemes referred to in my judgment in the two other proceedings heard at the same time as this proceeding, it is possible to analyse the music schemes as one conglomerate scheme or as a series of independent schemes. If the sole scheme analysis is correct, then the requirement for registration arises from the fact that there were more than 20 members. If, as I would prefer, the schemes are to be viewed as 26 separate schemes, the requirement for registration arises from the fact that their promoters, Mr Ambrosy and Mr MacGregor, were in the business of promoting such schemes. Accordingly, the music schemes were each required to be registered.

As to the final component of the ASIC case on this point, it is clear that IPP, as project manager, operated each of the music schemes. Mr Ambrosy as director and secretary of IPP was an associate of that company, even if he is not himself an operator of the schemes. In any event, I am satisfied that the activities of Mr Ambrosy and those of Mr MacGregor in promoting and implementing the schemes lead to the conclusion that they too operated the schemes. The contraventions of s. 601ED(5) by each of these defendants is established.

The involvement of Berimah in these activities is more difficult to identify. In their outline of argument, counsel for ASIC assert that Berimah, with IPP, "played a key role in these investments" and more, but not very much more, specifically that "Berimah was a corporate vehicle involved in the 1999 music schemes". The evidence shows that Berimah was the addressee of the Mowbray letter of advice of 20 June 1999 to which I have referred and that some investor cheques payable to IAS were sent to Mr MacGregor care of Berimah. It was put that since Berimah was Mr MacGregor's company, even after he ceased to hold office as its director and secretary, it was implicated in his contraventions in promoting and implementing the music schemes so as to be itself in contravention of the Law. This does not follow. I am unable to conclude that Berimah operated any of the music schemes or that it was an associate of any of the operators or was involved in the contraventions by the other defendants of s. 601ED(5).

"1018(1) A person shall not offer for subscription, or issue invitations to subscribe for, securities of a corporation unless: (a) a prospectus in relation to the securities has been lodged; (b) the prospectus complies with the requirements of this Division; and (c) if the prospectus is a registrable prospectus - the prospectus has been registered by the Commission under section 1020A."

Again, given my conclusion that the interests involved in the schemes were securities and the fact that no prospectus had been lodged or registered, this contravention has been established in respect of each of the schemes. Furthermore, the parties guilty of these contraventions are each of the defendants other than Berimah.

"780 A person must not: (a) carry on a securities business; or (b) hold out that the person carries on a securities business; unless the person holds a dealers licence or is an exempt dealer."

In s. 93(1) if is provided that a securities business is a business of dealing in securities. I have concluded that the interests in the 1999 music schemes offered to investors are securities. The promotion and marketing of the schemes falls within paragraph (b) of the definition of dealing in s. 9. The evidence shows that neither Mr Ambrosy nor Mr MacGregor was at any relevant time the holder of a dealer's licence nor an exempt dealer.

The allegation of ASIC contained in paragraph 32 of its points of claim that Mr Ambrosy and Mr MacGregor contravened s. 780 is established.

Next, ASIC alleges in paragraph 23A of its points of claim that each of the defendants engaged in conduct that was misleading and deceptive or was likely to mislead or deceive in their promotion and implementation of the music schemes, contrary to s. 995 of the Law and, in the case of the corporate defendants, contrary to s. 52 of the Trade Practices Act 1974. The terms of this s. 995 follow those of the familiar s. 52 and I shall not set them out. In this case, the conduct relied upon was representations made to investors to the explanatory memorandum as to the operations of the schemes in the future. There is in s. 765 of the Law a provision with respect to representations as to future matters which follows s. 51A of the Trade Practices Act. This means that there lies on the representor as to future matters the burden of providing evidence that they had reasonable grounds for making the representation. This, I need hardly add, is a provision of some significance in an undefended case.

It is put that the representations were made by each of the defendants. It is clear that Mr Ambrosy and Mr MacGregor used the explanatory memorandum to attract investors. Notwithstanding Mr MacGregor continued to manage Berimah at this time, I do not conclude that it was itself a promoter or that it made any of the representations. I do not conclude that IPP as project manager concerned with the implementation of the music schemes is guilty of the misleading and deceptive conduct.

The representations relied on were contained in a standard form explanatory memorandum prepared as part of the promotion of the scheme and distributed to likely investors or to their accountants and financial advisors. There were four in number and I shall deal with each of them in turn.

(a) The project manager would provide venture capital for each music scheme as outlined in the explanatory memorandum. This was in fact not done. Putting to one side the defendants' burden of proof to which I have referred, there is evidence which I accept that the promoters did not at the time have the resources or the expectation of having the resources to fulfil this representation. The first representation was misleading and deceptive.

(b) The project manager would in the case of each scheme provide 100% of the preferred project capital, namely $4,295,000. For the same reasons this representation was misleading and deceptive.

(c) The project manager would in the case of each scheme provide 5% of the ordinary project capital, being $60,375. For the same reason this representation was misleading and deceptive.

(d) The venture capital for each scheme, namely $5,497,480, would be paid to Melke Entertainment Pty Ltd "for an Approved Marketing and Media Plan which includes provision for product evaluation and refinement, any market material testing, distribution and initial project administration service fee". The evidence shows that no more than a sum of approximately $300,000 was paid to Melke Entertainment in respect of the music schemes. The balance of the investors' ordinary capital contributions appears to have been sent offshore to companies associated with Mr Ambrosy or Mr MacGregor. The evidence shows that Mr Ambrosy, as the moving spirit behind the schemes, and the other active defendants and Mr MacGregor had no intention of fulfilling this representation. This representation was misleading and deceptive.

Unlawful implementation of the Schemes

Next, and associated with this, ASIC alleges in paragraph 25 of its points of claim that the defendants implemented the schemes unlawfully in that they applied or disbursed the investors' money through various foreign corporations and offshore banking entities otherwise than in the manner promoted in the explanatory memorandum or agreed to by the investors.

The evidence offered in support of this allegation was very complicated. In support of the defendants' defence that they were not guilty of the alleged conduct, an affidavit was sworn by Walter William Strauss on 14 February 2001. Mr Strauss was the solicitor for the defendants other than Berimah. In this affidavit Mr Strauss merely exhibits a large volume of accounting and other records of his clients with respect to the schemes. These documents were subjected to an analysis by Kevin William Neville, an accountant retained by ASIC. In his affidavit sworn 2 May 2001 Mr Neville concludes that, from an accounting point of view, the Strauss documents are insufficient to confirm:

[diamond] that payments by the investors of their share of the ordinary project capital were received in the bank account of the project manager; and

[diamond] the payments by the project manager of its 5% of ordinary project capital and its preferred project capital were made in the manner set out in the Explanatory Memorandum.

An examination of the accounting records was carried out by Kon Anastasios Tsiakis, a senior investigation officer with ASIC. In paragraphs 155-171 of his affidavit sworn 11 April 2000 Mr Tsiakis sets out the results of his investigations of the money trail supported by these records. I will not burden this judgment with an extensive account of his conclusions. Relevant for my purposes are the following conclusions which I accept -

(1) The investors' contributions were paid not to IPP, but were deposited in a trust account in the name of International Advisory Services Pty Ltd ("IAS) at the William Street, Melbourne branch of HSBC Bank Australia Ltd. Most of the contributions for all but one of the projects have been reconciled. The reconciliation of these deposits shows that a total of $8,620,355.88 was deposited between February and July 1999. This approximates the total investors' contribution of $8,787,424 to be made in accordance with the explanatory memorandum for the twenty-six schemes. Of this sum, the greater part, $8,609,544, was transferred to an account of IAS in Hong Kong.

(2) None of the project manager's ordinary or preferred capital contributions was paid into the IAS account.

(3) No amount of money in any way approximating the sums specified in the explanatory memorandum was paid to Melke Entertainment. Nor, it seems, was Sue Barbara Melke, the principal of that company, informed that her company was to have such a budget.

While it is true that some CDs were made and that promotional concerts were held, the projects were implemented in a way that meant that there was no prospect of their earning profits for the investors. The fate of the enormous sums of money which they contributed is obscure. The inevitable conclusion is that the music schemes were an elaborate sham and a fraud on the investors, if not on the Australian Tax Office.

In Part VI of its points of claim, ASIC seeks in paragraph 1 of Part VI orders pursuant to s. 601EE winding up the music schemes. Given my findings, this seems an entirely appropriate course for the reasons set out by Warren J in ASIC v ABC Fund Managers Ltd[5]. The continuing operation of these schemes would involve a contravention of s. 601ED(5) and, as will be seen, their project manager is also to be wound up. The proper course is for the affairs of the music schemes to be placed in the hands of a responsible, experienced and reputable person who can, if possible, get in the assets and distribute them to those persons who may be entitled to them.

In paragraph 3 of Part VI, orders are sought winding up IPP. I will make such an order. It has been involved in delinquent and fraudulent conduct in the promotion and operation of the music schemes. It is proper that a liquidator wind up its affairs and assume control of this company which has been abandoned by its director and secretary.

I am not prepared in this proceeding to make a winding up order against Berimah. It has not been shown to have engaged in delinquent conduct with respect to the music schemes.

I will not grant the injunctive relief sought in paragraph 2 of Part VI. The matters sought to be dealt with by these will be safely entrusted to a liquidator.

Declarations as to contraventions of ss. 601ED, 1018, 995 and 780 by certain of the defendants are sought in paragraphs 5, 6 and 6A of Part VI. These contraventions have been established against the defendants other than Berimah. I will make the declarations sought. There is to my mind no utility in granting declarations of contravention of the similar provisions of the Trade Practices Act.

Finally, in paragraph 8(a) ASIC seeks injunctions against IPP restraining it from committing further contraventions of s. 601ED. There is little utility in granting this relief. It can hardly be supposed that, when in liquidation, IPP will offend again or that it will do so if it is released from liquidation into the direction of persons other than Mr Ambrosy or Mr MacGregor. The same injunctions are sought against Mr Ambrosy and Mr MacGregor. Moreover, there is sought in paragraph 8(b) of Part VI an injunction permanently restraining them:

"... from carrying on a securities business including promoting or offering for sale interests of the type offered under the 1999 Scheme in contravention of section 780 of the Law."

The difficulty with these injunctions lies in formulating their terms with sufficient particularity to render them enforceable. If, perchance, these men might be inclined to promote some new scheme, it is unlikely that it will closely resemble those the subject of this proceeding. There is to my mind no purpose to be served in granting this relief.

I will hear counsel further as to the terms of the orders to be made in each proceeding to give effect to these conclusions.

[1] Partnership Agreement cl. 5.1; Joint Venture Agreement cl. 6.1.

[2] Partnership Agreement cl. 5.2. Compare Joint Venture Agreement cl. 6.2.

[3] Partnership Agreement cl. 5.3; Joint Venture Agreement cl. 6.3.

[4] See s. 9 definitions.

At a glance

Court

Decision date

Before

Source

Judgment (69 paragraphs)

Parties

Legislation Cited (1)