ASIC v Matthews

1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3497/99 AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION v MATTHEWS

Outline 1 The plaintiff, the Australian Securities and Investment Commission (ASIC), seeks orders that the defendant, Mr Stephen Matthews be found guilty of and be punished for contempt of the orders made by O'Connor J on 19 February 1999. It is alleged that Mr Matthews allowed reports about securities to be published on the Internet at a website known as "The Chimes" at http://www.chimes.co.nz, in breach of the orders made by O'Connor J. Background 2 On 16 February 1999, ASIC commenced proceedings in the Federal Court of Australia alleging that the defendant had contravened s781 of the Corporations law by carrying on an investment advice business or by holding himself out as an investment adviser, without the requisite licence or being exempt from the licensing requirement. 3 On 19 February 1999, O'Connor J made interim orders pursuant to s1324 of the Corporations Law. The conduct which gave rise to the orders was that Matthews owned and operated the website known as "The Chimes" at http://www.chimes.com.au, which operated an Internet chat room called "The Chimes Investor Forum". A chat room operates much like a bulletin board, whereby any Internet user can make postings onto the site which can then be accessed and read by other Internet users, who in turn can either respond to the posting or contribute one of their own. O'Connor J found some of these postings to be in contravention of the Corporation Law. As a result her Honour made the following orders: 1. Until further order, the Respondent, Stephen Lewis Matthews, be restrained from advising, either directly or indirectly, other persons about securities.

2. Until further order, the Respondent, Stephen Lewis Matthews, be restrained from publishing, either directly or indirectly, reports about securities.

3. Until further order, the Respondent, Stephen Lewis Matthews, be restrained from advising other persons about securities on the Internet, including, but not limited to, the Internet site known as "The Chimes" and situated at http://www.chimes.com.au .

4. Until further order, the Respondent, Stephen Lewis Matthews, be restrained from publishing reports, or allowing to be published reports, about securities on the Internet, including, but not limited to, the Internet site known as "The Chimes" and situated at http://www.chimes.com.au .

4 On 16 June 1999, Sackville J found Matthews to be in contempt of those orders as he allowed certain securities reports to be published on the web site known as "The Chimes" and situated at http://www.chimes.com.au. Although the specific facts of that charge are not relevant to the present proceedings, in its amended notice of motion ASIC seeks the execution of the orders made by Sackville J on 16 June 1999 in those proceedings. A two month term of imprisonment was ordered but suspended provided that Matthews did not further contravene any of the orders made by O'Connor J for a period of 12 months. This order will become an issue if Matthews is found to be guilty of contempt in these proceedings. 5 Soon after Sackville J delivered his judgment, the High Court delivered its judgment in Re Wakim; ex parte McNally (1999) 73 ALJR 839 determining that under the Commonwealth Constitution the Federal Court of Australia cannot exercise jurisdiction in a matter brought solely under the Corporations law of a state. On 15 July 1999 Sackville J held that in view of the judgment in Re Wakim, the Federal Court had no jurisdiction to hear the proceedings and stood the matter over generally. ASIC sought orders transferring the Federal Court proceedings to this Court pursuant to the Federal Courts (State Jurisdiction) Act 1999 (NSW) and on 26 July 1999 Austin J made the following orders: The Court:

1. Orders that the proceeding of Australian Securities and Investments Commission v Stephen Lewis Matthews N3017 of 1999 in the Federal Court of Australia ("the Proceeding") be treated as a proceeding in the Supreme Court of New South Wales.

2. Directs that the Registrar of the Supreme Court arrange with the Registrar of the Federal Court of Australia for the transfer of the file of the Proceeding.

3. Declares that the rights and liabilities of the parties to the Proceeding are, and always have been, the same as if the judgment of O'Connor J on 19 February in the Proceeding had been valid judgment of the Supreme Court in the Equity Division, constituted by a Judge of the Supreme Court.

4. Declares that the rights and liabilities of the parties to the Proceeding are, and always have been, the same as if the judgment of Sackville J on 16 June 1999 in the Proceeding had been a valid judgment of the Supreme Court in the Equity Division, constituted by a Judge of the Supreme Court.

thereby making the orders of O'Connor J and Sackville J orders of the Supreme Court of NSW. The specific facts which led to the charge of contempt 6 Matthews was the owner and operator of the website known as "The Chimes" situated at http://www.chimes.com.au. This was admitted by Matthews in paragraph 1 of his defence. Matthews was also the owner of the registered business name "The Chimes News" and operated the Internet chatroom known as "The Chimes Investor Forum" on the abovementioned site. 7 At some time in late June 1999 Matthews established the web site situated at http://www.chimes.co.nz. On 14 July 1999 Matthews closed the Investor Forum or "chat room" on the Australian site http://www.chimes.com.au. The next day he established Chimes.co.nz Ltd and became an original shareholder of that company. On 21 July 1999 Matthews sold the http://www.chimes.co.nz and the business, the "Chimes News" including the "Chimes Investor Forum" to the company pursuant to a Purchase and Sale Agreement which will be referred to later. 8 The amended statement of charge alleges that on various dates in July and August 1999 Matthews breached orders 2 and 4 of O'Connor J. However the amended notice of motion alleges only that Matthews allowed publication of certain securities reports on the website known as the Chimes and situated at www.chimes.co.nz in breach of order 4 of O'Connor J. Application of the Federal Courts (State Jurisdiction) Act 1999 9 Before considering the specific charges and ascertaining whether they have been made out, it is necessary to mention the submission made by counsel for the defendant on the operation of the Federal Courts (State Jurisdiction) Act 1999. It was argued that this Act does not apply to the present case to bring the proceedings within the jurisdiction of the Supreme Court of New South Wales. The matter of jurisdiction and the application of the Federal Courts (State Jurisdiction) Act was dealt with in the judgment of Austin J, and it would not be the appropriate course for another judge of first instance to reconsider the issue. This matter was raised on the first day of hearing this case and I commented on this in a decision I gave on 30 August 1999 as follows: I am of the view that the appropriate course is not to attempt to revisit the jurisdiction matter before another judge of first instance, but if it is desired to do this then it must be by application to the Court of Appeal whether by leave or not.

10 I relisted the matter in December 1999 to draw to counsel's attention certain problems I perceived could arise. I handed to counsel a document in the following terms: I have relisted this matter to bring to the attention of the parties some of the concerns I have had while preparing my judgment. The matters of concern do not deal with the orders made under s11 of the Federal Courts (State Jurisdiction) Act, but rather the orders made pursuant to s6 of that Act.

The orders of O'Connor J have not been set aside or declared to be void. They remain as orders of a superior court. It might follow that proceedings for contempt of court for breach of those orders remain properly within the jurisdiction of the Federal Court. It might also follow, the order of Austin J having been made, that Mr Matthews could be liable to contempt proceedings in both the Federal Court and this Court. It might therefore be thought that as a matter of comity, the orders of Austin J under s6 should not have been made if one of the purposes of making them or the only purpose was to enable contempt proceedings to be brought in this Court. As I understand it, Mr Matthews was not represented before Austin J and this point was not the subject of any argument.

So far as the orders of Sackville J are concerned there must, at least be an argument that they are not an ineffective judgment as defined by the Federal Courts (State Jurisdiction) Act in which event order 4 of the orders of Austin J may have been in error or there may have been an argument that it was an error.

Mr Duncan did attempt to raise the issues or like issues before me during the hearing and at the time I said that if they were to be raised then would have to be done by challenge to the orders of Austin J on appeal in the absence of which the orders must be treated by me as effective. I will, of course, continue to do that but it seemed to me that it was appropriate that I draw to the parties attention the matters to which I have referred so as to give to Mr Matthews a further short time to consider whether or not he wishes to appeal or apply for leave to appeal against the orders or some of the orders of Austin J. In addition counsel for Mr Matthews might seek to argue that I should not proceed to deal with Mr Matthews for contempt or to consider whether the charges are made out, if there remains jurisdiction in the Federal Court on this question. The result of this would be that I will not be able to give my judgment until the first week of the law term next year, but I would intend to give it then, or as soon as possible thereafter unless Mr Matthews has commenced appeal proceedings and it is apparent that he is pursuing them with as much speed as he can. Nothing further has happened in this Court, although there have been proceedings in the Federal Court. Defect in the wording of the charge 11 Counsel for the Defendant submitted that there is a defect in the wording of the Amended Statement of Charge. Paragraph 1 of the Amended Statement of charge reads as follows: 1. The Defendant, Stephen Lewis Matthews, is guilty of contempt of this Court in that in breach of the Orders made by Justice O'Connor in the Federal Court of Australia on 19 February 1999 and confirmed as Orders of this Court by Justice Austin in the Supreme Court of New South Wales on 26 July 1999, whereby the Defendant was restrained from publishing, either directly or indirectly, reports about securities, the Defendant did … 12 It is argued that the charge should be framed as a breach of Orders of the Supreme Court of New South Wales not orders of the Federal Court and confirmed by the Supreme Court. While the word "confirmed" may not be the most appropriate word that does not make the charge bad, as it is clearly understood in its task of setting out the circumstances of breach of orders alleged against the defendant. Contempt 13 Contempt proceedings can be characterised as either civil contempt or criminal contempt. Civil contempt involves disobedience to a court order or breach of an undertaking in civil proceedings. Criminal contempt is committed either when there is a contempt in the face of the court or there is an interference with the course of justice. However recent leading cases, such as Witham v Holloway (1995) 183 CLR 525 have held that proceedings for the punishment of contempt of any kind are "essentially criminal in nature". In Witham v Holloway, the majority stated at 534 that: The differences upon which the distinction between civil and criminal contempt is based are, in significant respects illusory.

McHugh J in that case went further to say at 548 that: It follows in my view that this court should now declare that in all proceedings for contempt of court, the moving party must prove the contempt beyond reasonable doubt.

However, the majority expressly stated at 534 that: To say that proceedings for contempt are essentially criminal in nature is not to equate them with the trial of a criminal charge. There are clear procedural differences. Thus the plaintiff must prove beyond reasonable doubt that Matthews is in breach of the orders made by O'Connor J, but the proceedings are not criminal proceedings. A breach constituting contempt was described by the majority of the High Court in Australasian Meat Industry Employers Union v Mudginberri Station Pty Ltd (1986) 161 CLR 98 at 113 as involving wilful disobedience to a court order. They then went on to say that: A deliberate commission or omission which is in breach of an injunctive order or an undertaking will constitute such wilful disobedience unless it be casual, accidental or unintentional. 14 It follows that the court must be satisfied that the defendant knew or was aware of the orders and that he knew that his actions were in breach of those orders. The evidence clearly demonstrates that Matthews knew and understood the meaning of the orders made by O'Connor J; for example it is recorded that Matthews said whilst answering contempt charges before Sackville J that : …well, if we look at the earlier statement 'Until further order the respondent be restrained from publishing reports or allowing to be published reports about securities on the Internet'…Now, the import of that statement to me is that I am not allowed - to allow any report about any securities on the Internet. Those are the judge's words. Charges 15 ASIC alleges in its amended statement of charge that Matthews has breached orders 2 and 4 by publishing or allowing to be published certain securities reports on the website www.chimes.co.nz. Matthews established that website in late June 1999 and on 15 July 1999 incorporated chimes.co.nz Ltd, a company to which he sold the site, the business name and the Investment Forum pursuant to a Purchase and Sale Agreement dated 21 July 1999 which it is useful to reproduce in full: Purchase & Sale Agreement On 21 July 1999 Stephen Lewis Matthews of 8 Patterson Avenue, Pymble, NSW ("Matthews") And chimes.co.nz Limited of Unit 3E, 406 Remuera Road, Remuera, Auckland (the "purchaser") RECORD that 1a.Matthews is the sole legal and beneficial owner of the registered business "The Chimes News" T3379239 (the "business). b.The Chimes News operates internet site www.chimes.com.au whose principal present activity is an internet stockmarket chat room "The Chimes Investor Forum" (the "chimes forum"). Matthews is a principal contributor to the chimes forum under the pseudonym "the publisher" c.Matthews has previous entered into agreements with four separate investors by which the investors participate pro rata in the proceeds of sale of the business d.Matthews is the registered owner of internet domain name www.chimes.co.nz (the "kiwi domain name") 2a.Matthews has agreed to sell, and the purchaser to buy, the business. b.Matthews has agreed to sell, and the purchaser to buy, the kiwi domain name. c.the purchaser has agreed to retain Matthews as the publisher of the chimes forum AND AGREE that - 1.Definitions In this agreement - Accountant means a natural person who is a member of either the Institute of Chartered Accountants in Australia or New Zealand or the Society of Certified Practising Accountants of Australia or New Zealand. Business means the business The Chimes News described in this agreement and in the Schedule Disclosure Statement means the disclosure of facts and circumstances by Matthews as detailed in the Schedule initial public offering means the capital offering, under a prospectus registered at the Securities Commission of New Zealand for an issue of ordinary shares in the purchaser.The minimum number of shares to be offered will be 20 million and the minimum issue price will be NZ$0.10 per share investors means the four parties which have an interest in the business and to which the purchaser will make an allotment of its capital in consideration for the sale of the business minimum Capital raising means the receipt by the purchaser of a minimum of NZ$2,000 in paid up ordinary capital nzse means the new zealand stock exchange post means a message which is published from to time in "the Chimes Investor Forum" Principal Executive Officer means the New Zealand resident person hired by the purchaser Quarterly accounts means financial reports being a statement of Profit & Loss and a Balance Sheet of the purchaser, prepared by the Accountant for each Quarter ending in September, December, March and June and provided within one month of the end of that quarter. seed capital issues means the issues of ordinary capital - for a minimum aggregate of NZ$100,000 by the purchaser, for cash, to fund the making of the purchaser's initial public offering onto the nzse and the expenses of recruitment of the Principal Executive Officer 2.Sale a. Matthews now sells and the purchaser now buys the business b. The consideration for the sale is the allotment of 50 million fully paid ordinary shares in the capital of the purchaser to the investors. c. Matthews now transfers his interest in the kiwi domain name to the purchaser for consideration of NZ$1.00 3.Appointment as Publisher Matthews is hereby appointed as the publisher of all chimes publications including all internet sites under the ownership of the purchaser.Matthews retains the use of the words "the publisher".The appointment if for a period of 2 years until 21 July 2001.Matthews shall be paid NZ$2,000 per week and the purchaser shall make the weekly payment into the bank account as Matthews directors.The weekly payment shall accrue from 21 July 1999 and became a debt due and payable upon the quotation of the purchasers shares on the nzse. 4.Undertakings by Matthews a.Matthews hereby undertakes to diligently attend upon "The Chimes Investor Forum" and to ensure that he makes a minimum of 5 posts per week whilst publisher. b.Whilst engaged as publisher Matthews agrees not to compete against any publication of the purchaser including all internet publications featuring the chimes name(s). c.Matthews shall review promptly all written submissions by the Principal Executive Officer to the purchaser's board of directors concerning the development of the business and shall co-operate with the Principal Executive Officer in the implementation of all business plans d.Matthews agrees to be the registered foreign agent of the purchaser until further notice from the purchaser 5.Undertakings by the purchaser a.The purchaser hereby undertakes to make the minimum capital raising by 28 July 1999 b.From the proceeds of the minimum capital raising the purchaser shall lodge display advertisements in "The New Zealand Herald" in the week commencing 2 August 1999 seeking participants in the seed capital issue c.The purchaser shall appoint the accountant within 1 month of completing the seed capital issue d.The purchaser shall appoint the Principal Executive Officer [PEO] within 2 months of completing the seed capital issue. The PEO shall be entitled to a minimum salary of NZ$50,000 per annum and may be allotted up to I million options over unissued ordinary shares in the purchaser with an exercise price not less than the ipo issue price. e.The purchaser shall diligently attend to the business and shall procure the prompt commissioning of internet site www.chimes.co.nz at which site "The Chimes Investor Forum" will be resumed AND ACCORDINGLY the parties have executed this agreement * SIGNED by Stephen Lewis Matthews (signed) 21/7/99 SIGNED by Prue Dickson for the purchaser (signed) *This agreement to be governed by the laws of New Zealand THE SCHEDULE The business is the publication of an internet stockmarket chat room "The Chimes Investor Forum" at internet site www.chimes.com.au which provides for the posting of messages, anonymously, about companies listed on the Australian Stock Exchange, the New Zealand Stock Exchange, Nasdaq Stock market Inc. and other recognised stock and futures exchanges. Disclosure Statement by Stephen Lewis Matthews. 1. The Chimes News was first registered as a business name in May 1996. 2. The business has generated nil revenue since formation. 3. The business has 4 creditors with aggregate claims of A$6,000. 4. I have been involved in extensive proceedings brought by the Australian Securities & Investments Commission (ASIC) in the Federal Court of Australia for alleged breaches of the Corporations Law.The Federal Court has recently declared that it has no jurisdiction in these proceedings. 5. I have been summoned to appear in the Supreme Court of NSW on Monday 26 July 1999 where an application by the ASIC to transfer the above proceedings will be heard. 6. The solicitor for Chifley Investment Services has stated that his client intends to make an application to the Federal Court alleging misleading and deceptive conduct for the use of the chimes web site domain name.He alleges that the Chifley Investment Management and Evaluation service (marketed under the registered trade make "Chimes Plus") could be confused with the "financial advice" activities on the chimes web-site.I have denied the possibility of any confusion. 16 This agreement evidences that Matthews is the Publisher of the site for a period of 2 years until 21 July 2001 and that he undertakes to perform certain tasks as publisher, including contributing to the forum under the pseudonym "the publisher". The information page on the website (which is Annexure D to Mr Lapworth's affidavit of 21 September 1999) stated the Publisher to be Stephen Lewis Matthews. There is no evidence which in any way contradicts this. 17 It is alleged that the breach of the orders occurred on the Investor Forum located on this website. The Investor Forum is a chat room which Mr Lapworth, an employee of ASIC, described as operating in the following way: A web forum allows people to post information, in the form of a file, similar to an email message, to the relevant web forum and the information or message can be viewed and responded to by other persons, who have access to that web forum. In this way a web forum is similar to a bulletin board in real life. 18 It is postings which allegedly took place in the months of July and August on the Chimes Investor Forum which give rise to the charge of contempt. ASIC alleges that these postings are reports about securities and thus in contravention of the orders. Counsel for the Defendant submitted that these postings are no more than gossip or comment and not reports about securities. Provisions of the Corporations Law 19 Section 9 provides that "securities report" means an analysis or report about securities. S92 (1) Subject to this section, "securities" means:

a) debentures, stocks or bonds issued or proposed to be issued by a government; or b) shares in, or debentures of, a body c) interests in a managed investment scheme; or … d) units of such shares; or e) an option contract within the meaning of Chapter 7;

but does not include a futures contract or excluded security.

(a) carry on an investment advice business; or (b) hold out that the person is an investment adviser;

unless the person is a licensee or an exempt investment adviser.

S77(1) A reference to an investment advice business, in relation to a person, is a reference to:

(a) a business of advising other persons about securities; or

(b) a business in the course of which the person publishes securities reports. 20 The interim orders of O'Connor J pursuant to s1324 of the Law were made on the basis of claims that material published by the defendant on the "Chimes Investor Forum" on the Australian site was advice about securities and the orders were made to prevent this from continuing.

Publication of Securities Reports 21 On the assumption the postings are securities reports, the question for determination is whether they breach the orders. Counsel for the defendant relied on evidence given by Mr Lapworth that it is not possible to identify the particular individuals who are participating in the Forum: Q. In relation to that ID and the user name as it appears in Newsgroup, for example, there is a particular form of identification for the person who is connecting to the Newsgroup, is that right?

A. It is not the same, the information is provided to the Internet Service Provider initially. I believe quite often once there they adopt that name and it is not necessarily the one they can use in other places.

Q. Generally, in Internet protocols what is the description that is used to identify a particular individual?

A. The way that you identify an individual is by way of the Zip address which is connected to a message.

A. It identifies an individual computer and generally that will be your dialler memo facility with the Internet Service Provider at which point you rely upon establishing who it was accessing, or what customer was accessing that ISP address at the time within the ISP billing records.

Q. It is the case that even if you were able to identify a particular computer terminal you still would not be able to identify a particular individual?

A. In essence you would not be able to, you cannot identify who is sitting behind the keyboard, as far as an Internet Service Provider is concerned, no. You can just identify the customer account that has been active at that time. 22 This evidence was relied upon to argue that there is no conclusive evidence that Matthews had posted anything onto the site. However by its amended notice of motion seeking orders that Matthews be punished for contempt ASIC relies only on breach of order 4, although the amended statement of charge does charge breach of orders 2 and 4. I propose to deal with the matter on the claims in the amended motion. In those circumstances it is not necessary to go into the questions which arise as to whether any inference should be drawn from the failure of Matthews to give evidence to counter the evidence that postings under the name of the publisher were on their face, postings for which he was responsible. 23 ASIC submits that Matthews as publisher has the power to add, move, modify or delete documents situated on that site, and that he is in breach of the court orders because he has not done so in relation to the securities reports published on the website. Mr Lapworth gave evidence of this in his affidavit of 21 September 1999 in paragraph 21: A publisher of a web-site has the ability to move, modify or delete files contained on their personal computer, if their computer contains the appropriate file management software.

and in paragraph 25: Once files, such as the reports, are posted on a web-site, such as Chimes NZ, the publisher has the ability, through a computer with Internet access…..to move, modify or delete those files. 24 Lapworth also gave evidence that Matthews was in fact the person to make such alterations to the site: Q. So we are looking at the document which was described as "Display domain name details"?

A. Yes, by the New Zealand technical side's registration.

Q. From that document are you able to identify which person, if any, could make alterations to the New Zealand site?

A. This document reflects the person whose registered domain has it, chimes.co.nz, it says that the representative contact for account is Stephen Matthews. From my dealings with registering domains the general representative contact is the person who maintains an account with the Internet Service Provider.

There is nothing to contradict this. If the material the subject of the charges amounts to reports about securities I consider the charges relating to the breach of order 4 are established. 25 I turn to the material the subject of the charge. The question is whether any of the material complained of is a report about securities published. Copies of the material the subject of the charge are annexed to this judgment. As this a contempt charge which must be dealt with very carefully there seems no other way of properly addressing that material. The postings to the site are identified with letters at the top which correspond with the particulars of the charges. 26 I do not consider items A, B, D, E, G, K, L, N and R are reports about securities. While opinions may differ about this I consider these postings could not be regarded as reports. They are more properly described as random gossip. 27 I consider the following postings do fall within the description "reports about securities" C, F, H, I, J, M, O, P and Q. In the light of the evidence about control of the publisher and in the absence any evidence to the contrary I find Mr Matthews was aware all of C, F, H, I J, M, O, P and Q were posted and that in allowing them to remain he allowed them to be published. 28 It is of course difficult to think that people could be so stupid as to take notice of those postings which I consider would fall within the description of report. However, the purpose of the Corporations Law is to protect those who need protection, not those who can treat this material as it ought to be treated. I find the charge made out in respect of the postings I have identified. The charges are those in paragraphs 2 (c), (f), (h), (i), (j), (m), (o), (p), and (q) of the amended notice of motion. It will be necessary to set the matter down for argument on punishment and to deal with the claim as to the warrant for arrest ordered to issue by Sackville J on 16 June 1999.

Last Modified: 01/07/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.