THE MARKETING AND SALE OF UNITS BY NAPC & Investlend
60 The use of a system of marketing involving many of the steps pleaded by the Commission as the NAPC scheme was admitted by Mr Bilborough, although he referred to it as 'the Coral Reef system'. It is also clear from the evidence of the Gleesons, and from the evidence of other purchasers of NAPC-marketed properties called by the Commission, that the steps were generally those outlined by the Commission. I did not understand the respondents to dispute this. Transcripts of the evidence given by Mr Bilborough, Mr Quinlivan and Mr Pointon pursuant to under s 155 of the Act, particularly that relating to Mr Bilborough, also confirm aspects of the scheme. The Commission's evidence includes records of some sixty meetings between 4 July 1996 and 1 December 1998 at which one or both of Mr Bilborough and Mr Quinlivan were usually present. They extend to some hundreds of pages. There are some references amongst them which are relevant to confirm the operation of the scheme and how it was managed by NAPC and Investlend and which provide some detail of aspects of it which assume some importance in these proceedings. The scripts used by NAPC representatives for the seminar and the in-home consultation fall into the latter category.
61 Neither Mr Bilborough nor Mr Quinlivan gave evidence at the trial. In his s 155 examination Mr Bilborough explained that the system of marketing commenced in about 1994 or 1995 and that about 1,000 properties were sold by NAPC in its best year. It was a large operation with about 300 people engaged in it at its height.
62 It also appears that Coral Reef maintained stock lists. There are numerous references in the meetings to 'stock' in connexion with properties and to 'runners' and others undertaking 'stock runs' which, I infer, is a process whereby they were to familiarise themselves with particular developments which were to be marketed. Mr Bilborough said that a property stock list was maintained within NAPC and it was from this list that properties to be shown to prospective purchasers were drawn. Coral Reef was the main company which dealt with the developers. Coral Reef and Coastal Reef, the name under which NAPC traded, operated as part of the one group. He said that developers set the price which was put into the stock list. This may be in contention. By 1997 the 'marketing fee' was close to $30,000, and on average about $28,000 on each property.
63 As to the marketing arrangements alleged, there is evidence that Coral Reef entered into three other agreements apart from that with Redwind. They are dated 20 November 1996, 23 October 1997 and 9 September 1998. They are relevantly in the same terms as Redwind's and include reference to a net price payable to the developer. The marketing fee is the amount by which the purchase price obtained by Coral Reef exceeds that price. Clause 5.2 is in the same terms in each case. Pursuant to it the developer agreed to sign an irrevocable authority in the form attached to the Deed for payment of the marketing fee 'which shall be the amount that the purchase price exceeds the nett price as identified in the Second Schedule'. There are, in the records of meetings, some few references to marketing fees of $30,000 or more. There are references to NAPC, but not the developers, taking 'the risk' which I take to refer to the developers being guaranteed payment at the price agreed. In particular at the meeting of 4 June 1998 (at which Mr Bilborough was present) there is discussion of two prices - one for which the developer brings the unit 'to the market', and another, higher, figure which is referred to as the selling price. On that occasion the difference was some $15-$25,000, although the discussion refers to paying the costs of marketing to obtain $30-$45,000, and of $30,000 going to the group as the 'marketer'. Clearly these amounts exceeded what would usually be paid to a real estate agent in Queensland under the Property Agents and Motor Dealers Act 2000 (Qld). It is not however suggested that the fee agreed to be paid by a developer to a marketer was unlawful and it is obvious that this system of marketing would be likely to involve greater expense than more conventional methods.
64 In late August or early September 1998 NAPC received a facsimile message from 'Forrester Kurts Properties'. It attached what were said to be valuations 'on all Gold Coast properties you are to sell under our agreements'. The valuation lists in fact identified purchase price, valuation and shortfall. This might be evidence of an occasion when the purchase price was set between Coral Reef and a client. It is not apparent what 'the agreements' were. No one was called to prove the valuation figures. It was not obvious that the author of the message was a valuer or just another property agent. The 'shortfall' of, some $17,000, was not of the order of Coral Reef's other marketing fees to which evidence has been directed. It may be advice of what will be necessary by way of bank accommodation.
65 Telemarketing was the first step in the process. Prospective purchasers, or 'prospects' as they are referred to in the marketing materials, were recruited from areas away from the Gold Coast. Mr Bilborough said that, from a marketer's point of view, people coming from a distant area are more likely to make a decision straight away. This may be in part because they do not have the option of putting off a decision by saying that they will return if they remain interested. There may also be a question whether this was the only reason for selecting them.
66 In the publicity attending this trial it was asserted that the system was 'two tier' in prices. This refers to there being a lower price for people who lived at the Gold Coast and another, higher, figure which marketers obtained from persons living distant from it and who were not familiar with the local market. As I later observe in these reasons, in connexion with the evidence as to market value, if this was in fact the case it has not been established by the Commission.
67 NAPC ran both the telemarketing and the seminars. The script generally used by NAPC was utilised with respect to the Chevron Palm Units development. There was a standard speech to be delivered at the seminar. Mr Bilborough identified the training manual and the seminar script which would have been used in 1998. It is consistent in some respects with the recollection of the Gleesons as to what was said. He said that seminar presenters were expected to follow the script and were required to learn it. This is apparent from the script itself and from discussions recorded at some of the sales and management meetings which Mr Bilborough and Mr Quinlivan attended. Indeed Mr Bilborough acknowledged, as the records of some meetings show, what was sought to be achieved was a standardised approach throughout.
68 Mr Sivright would appear to have had the most input into the text of the seminar script. At various meetings, including those of 13 March 1997, 2 October 1997, 5 and 6 November 1997 and 1 December 1997, changes to the 'script' are proposed. There are a number of references to the 'script' the 'speakers' and 'doing the speak'. At a meeting on 5 September 1996 Mr Bilborough suggests that at all levels of contact the seminar speakers, the in-home consultant and the financial advisers should be saying exactly the same thing. This would appear to have been effected in some important respects. On 6 November 1997 (at a meeting at which the fifth and sixth respondents were not present) Mr Sivright stressed the importance of adhering to the original seminar script 'word for word'. He said that seminar speakers would receive a copy of the video tape of their 'speak' along with an analysis of their performance. The 'speak' needed to be 'perfect' if they were to continue as speakers. Mr Eggenhuizen was an in-home consultant and not a seminar presenter. He did however attend many seminars and confirmed that the presentation was always the same.
69 The seminar script did not mention sponsorship by Gold Coast developers. The Gleesons' recollection was that the presenter in answer to an enquiry, about 'what was in it for you' or as to whether NAPC were real estate agents, said that they were not agents and they were sponsored by a group of developers to promote the Gold Coast. The script did mention sponsorship by Australian developers and NAPC. NAPC was said to have provided assistance to Australians to provide security for their future through investment. Its 'clients' were said to have invested in over 443 properties. There does not appear to be any further reference to NAPC's role. It is the subject of further explanation at the in-home consultation.
70 Pursuant to the script the audience is told that they are probably paying too much tax and that they could legitimately reduce their tax, as some wealthy people do. None of the witnesses recalled this. The emphasis was however clearly upon real estate as being the best investment. The examples given of negative gearing suggest that a property at the Gold Coast purchased for $165,000 would cost relatively little, when the tax benefits are taken into account. Some of the witnesses recalled being told that they could negatively gear their purchase and that investment properties would then cost relatively little. Only Mr Gleeson appears to have recalled the figure of $165,000 being used in the example, as I accept it was. It may generally be observed that none of these other witnesses recalled events in anything like the detail of Mr and Mrs Gleeson, but they were not as focussed and their statements were not taken until much later. I will not detail the example as it is not suggested to be erroneous. The seminar audience are told that an approach to investment should be conservative. There are further examples of the benefits provided. One refers to 'clients' who will be likely to sell the property on retirement at a price reflecting an 11 per cent average annual capital growth since purchase.
71 The audience is steered towards the Gold Coast and it is put forward as an ideal location for an investment, although it is not expressed as having 'unique benefits in terms of capital growth'. The script clearly however places some emphasis upon the rate of capital growth which might be expected. None of the witnesses recalled it being said that investment opportunities on the Gold Coast offered unique benefits in terms of capital growth, but the purchasers Mr Fletcher and Mrs Hanson recalled something being said about increases in value or rates in Queensland and Mr Webber thought the Gold Coast was said to be the highest growth area in Queensland. As I later observe, the reference to a unique opportunity is likely to have been made during the in home consultation.
72 There is some emphasis placed, in the script, upon an explanation of real estate cycles, and to prices for which a unit at the Gold Coast could have been bought at the low point in the cycle ($45,000 - $50,000) and what it sold for at its peak ($150,000 - $175,000).
73 On being shown a slide projection of the words 'Prices to Double' the audience is taken to the importance of 'Average Annual Capital Growth Rate' in a long term investment. It is explained at the outset that 'when we talk about negative gearing real estate, we are talking about a medium to long term investment. Usually seven to ten years or more'. The average annual growth rate is said to be derived by looking at values over fifty years. One then averages out 'the highs and lows of the cycle' to obtain the average annual capital growth rate. This is said to help to measure the return on investment. The script then goes on:
'Australia-wide over the past 55-60 years, average annual growth has been about 9.4%. That means that in most places in Australia, if you bought a property it usually doubled in value about every 10 ˝ years. During that same period in Southeast Qld, the average annual capital growth rate has been 11.2%, which means that properties on the Gold Coast, for example, doubled about every 7 years during this period. Some areas of the Gold Coast, Sydney and Melbourne, have experienced growth of close to 20% a year.
When we look at average annual capital growth rate, many areas compare favourably. The Gold Coast and Sydney have both enjoyed growth rates in some areas in excess of 20%. The difference, until recently, has been that to get good growth in Sydney, an investor had to look mainly in the Eastern suburbs, where property values started at around $500,000. You could get the same growth rate in the Gold Coast region for $150-200,000. In fact, most of our clients in the past have invested in the Gold Coast region'.
74 The Gleesons' evidence of what was said is consistent with the references in the script to 11 per cent and 20 per cent. The script then provides for the audience to be told that they need to determine what is the right property, one that will be easy to rent at the right price and one which offers them tax advantages. Financial assessments should be individual and a free personal assessment is to be offered. It is said to include 'a negative gearing exercise based on a sample property and your financial details'. So far as concerns the person undertaking it, it is said that 'the people who do the assessments are not licensed agents, which means that you can't buy anything from them'. This may be what Mrs Gleeson recalls as advice that the in-home consultants are not qualified. Clearly the suggestion was that they would not be pressured to buy anything at that point. To qualify for an assessment they are told they need to have a taxable income of around $30,000 a year and equity in a property of $40,000 or an equal amount of cash. Mrs Gleeson recalled a reference to income of about $40,000.
75 There is evidence concerning the choice made by NAPC personnel concerning the rate for capital growth which appears in the script. Mr Sivright, at the meeting of 13 March 1997 (which both the fifth and sixth respondents attended), discussed the use of either 11.2 per cent or 11 per cent and said he thought that they should use 8 per cent. The context of the discussion was changes to the seminar script. Mr Bilborough suggested a reference to growth over the past 20 years and that at the Gold Coast it had been 12 per cent, 13 per cent and 8 per cent. There is discussion about whether to refer to it at the seminar or leave it to the in-home consultant, who would be in a position to deal with anticipated statements of disbelief. Mr Sivright suggested that when the 'runners' come to Investlend, Mr Quinlivan and others associated with Investlend would want to be in a position to speak of '10 years based on X per cent growth'. Mr Bilborough proposed the statement that it 'should be worth conservatively 8 per cent' and to stress that that is what it should be worth. They voted to retain a reference to 11 per cent. At later points in the sale process it will be observed that the lower figure of 8 per cent is used.
76 The in-home consultation was also conducted by NAPC representatives according to some scripted material and a booklet or collection of papers entitled 'Investment Property and Negative Gearing' and 'Personal Assessment' and which contains some pages which are blank save for a topic. No doubt it was intended that the in-home consultant was to write some notes upon them as the explanations of each of those topics was provided. Another booklet provided to the Gleesons detailed the principles and application of negative gearing. Many of the purchasers who dealt with NAPC, in addition to the Gleesons, retained the personal assessment booklet. They are in the same form.
77 The first page to be completed by the consultant provides for a calculation of how much money the couple would need to enable them to retire on a nominated income. In the case of the Gleesons the 'annual income required' was $50,000 and the sum of $1M nominated as necessary. No complex analysis as to how that sum could be achieved was entered into. Rather a simple calculation was undertaken by which $1M was divided by the number of years for which Mr Gleeson intended to work, 17 years. It was then said, in 'summary' that this required $58,823 per annum or $1131 per week. This would have suggested to the Gleesons that the provision they needed to make for their future was substantial, as apparently it did. The next topic in the booklet provided for a discussion of the five step process that the couple were involved in - from seminar to decision. Comparisons were made of the 'Ways to Wealth', which included references to banks, superannuation, speculation and lastly, real estate. The next two pages are entitled 'Property Values' and 'Factors in Choosing a Property'. The following, entitled 'Types of Properties' has three ranges of prices. They are scored as to whether they contain the three attributes of being easy to rent, easy to sell and having tax advantages. In the case of the Gleesons only the mid-range is nominated as positive on all three - that of $125,000 - $350,000. This range was also nominated in the booklets produced by the other NAPC purchasers. It is not difficult to infer that that was the price range of properties which NAPC marketed.
78 A sheet is provided for the consultant to take financial information. A 'personal negative gearing sheet' is then to be filled in. It estimates how much the investment in a unit will cost after taking into account rental income and tax benefits. The cost to the Gleesons was said to be $27 per week. The sheets prepared for the other purchasers all suggested only a small weekly sum as necessary.
79 Amongst the material prepared by Mr Eggenhuizen for the Gleesons is a page which has columns headed '1 y', '5 y' and '10 YR' which I take to be his calculation of the value of such a property at those points of time subsequent to purchase. In this respect however the information provided to the Gleesons appears to differ from that provided to the other purchasers. No sheet containing these calculations appears amongst the material provided to them. As I later observe, there is nothing to suggest that these calculations were intended by NAPC to be undertaken by the consultants. Neither the script nor the printed material allows for it. I should add that the booklets produced by the other purchasers does not contain a completed worksheet on the first mentioned topic, of the money necessary to be accumulated for retirement. It was however provided for as a topic and it would seem likely that it was to be dealt with, to some extent. An NAPC 'newsletter' dated May 1998 was also provided to the Gleesons. Mr Eggenhuizen said it was his practice to give the newsletter to his clients. I take it that he was instructed to do so. In it NAPC is described as a 'group of entities who operate primarily as property marketers, offering a complete service to investors in residential and commercial real estate'. The other purchasers were given similar information. During 1996 it is said that NAPC 'Sold over 400 properties' and that 'Our clients saved $5.6 million in tax'. Elsewhere in it NAPC is described as a team working as professional marketers and consultants. Under the heading 'Protection for One and All' all properties 'marketed' through NAPC are said to be protected by a building authority. Investors are also said to be 'protected by the use of independent solicitors' who are, it is said, 'compelled to act in the best interests of their clients'. It is said that NAPC 'recommends the use of accredited investment financial advisors who … arrange finance'. The reference by the NAPC consultant at this point to 'financial advisors' is confirmed by the majority of the purchasers who gave evidence. There is nothing to suggest that Investlend representatives in fact had qualifications. I infer that they did not and were simply trained by Investlend in the manner directed by Mr Quinlivan.
80 Mr Eggenhuizen also said that as part of his presentation he would ask the clients to identify how much they would need for their retirement. In each case the figure of $1M was arrived at. He said 'I believe that figure was around $1 million dollars (that would give the clients approx $50,000 x 20 yrs in retirement)'. It is not apparent from their evidence whether the other purchasers were given the same figure, or one close to it. He would work out an example of negative gearing supplied by NAPC using a property priced at about $167,000 and demonstrate that using an 8 per cent bank interest rate and after taking into account the tax advantages they would only have to contribute about $27.00 per week. He said 'This was rote learned as part of my training and depending on peoples individual incomes the figure $27.00 could change either way'. He also recalled being trained to refer to investing in property as a medium to long-term investment 'usually 7 to 10 years and people should look for an area that will achieve capital growth'.
81 The topics in the personal assessment booklet are aligned to those in the script with which Mr Eggenhuizen was provided when he was trained as an in-home consultant. He says that it was not substantially altered in the time he was with NAPC which was between January 1998 and August 2000. It forms part of the NAPC training manual. I take it that the scripts remained in much the same form throughout the operation of this system of marketing, which appears to have predated the period in question. It would appear that the consultants were, like the seminar presenters, required to speak word-for-word from the script. Mr Eggenhuizen was instructed to do so and he memorised it.
82 In accordance with the script to be used the prospective purchasers were to be told that there were three different groups within NAPC: the seminar team which did the seminars and personal assessments; the finance group 'which is an independent company, which talks to our clients about finance and acts as a broker in most cases'; and a real estate division. The NAPC representatives were to explain that a decision to buy a property follows a five stage process. The seminar is the first stage, the personal assessment the second, the third involves talking to 'our finance people'. If the potential purchaser thinks negative gearing is something worth pursuing, then the finance and real estate people will target properties for them, depending on the finances and the goals they are trying to reach. Inspection of properties is the fourth step. If they choose to buy a property they will pay a deposit and go through the necessary paperwork. Real estate is described in the script to offer the greatest return on actual investment. The Gold Coast is said to represent a 'unique opportunity in investment property' because of its geographical limitations upon expansion. There was low supply and high demand on the Gold Coast. Real estate was to be said to go through definite cycles, occurring usually every 7 years. The script provided for a 'graphic representation of these cycles'. An illustration was also to be provided by the representatives of unit prices on the Gold Coast averaging $45-50,000 at the low part of the last cycle. At the high end of that cycle, around 1988 and 1989, the same units are to be said to have sold for $150-175,000, a gain of $100,000 in five years. The cycle's low point is said to have occurred around 1991. Real estate prices were said to have begun to improve and that it was the time to invest: 'According to the experts, based on past cycles, property values should double in the next three to five years'. An explanation of negative gearing was then to be gone into and the factors necessary to be considered as advantageous. In the range of prices for properties those at between $125,000 and $300,000 were to be targeted as suitable for negative gearing where 'all the right elements exist'. The Gold Coast's 'unique opportunity for growth' is reiterated in a concluding summary. A worksheet is then to be prepared to show how much a property in the range referred to might cost.
83 At the conclusion of the 'consultation', the evidence shows, prospective purchasers were encouraged to attend at the Gold Coast and in some cases discounted airfares and accommodation were offered. Information about them including a 'personality profile', as it is referred to in the training manual, and about their financial position would then be forwarded to NAPC and Investlend. In the latter respect at a management meeting on 1 May 1997 (at which both Mr Bilborough and Mr Quinlivan were present) Mr Sivright pointed out that it is not the task of the in-home consultants to decide whether prospective purchasers qualify financially. That is said to be Mr Quinlivan's and, I therefore infer, Investlend's job.
84 On arrival at the Gold Coast prospective purchasers were met by the 'runner' from NAPC who would take them to the offices of Investlend and show them a small number of properties, usually three. The evidence of the other purchasers did not provide much detail as to what was said by that person. Most of them however recalled being told that the person to whom they were taken and introduced to at Investlend was a 'financial advisor' or 'financial consultant' or 'financial guru'. Some few recalled that person producing a business card which also described them as a 'financial consultant'. One was given a business card with those words printed on it, but this does not appear to have been a universal practice amongst the Investlend representatives. This evidence may assume more relevance in the Gleesons' case. Mr Bilborough explained that the financial advisor would obtain further details of their financial position and capacity to borrow and undertake a property investment analysis. This refers to computer-generated calculations and projections which were printed out, given to prospective purchasers and discussed by the financial advisors. I shall refer to them as the spreadsheets.
85 The spreadsheets in each case are in the same form as that provided to Mr and Mrs Gleeson. In each of them certain 'assumptions' are listed for the calculation. The 'property value' in each case has a sum which represents the purchase price which was later paid for the unit in question. The capital growth rate utilised is in each case 8 per cent, although another set of calculations at 5 per cent was also done for the Gleesons. Why this was undertaken for them is not apparent. Relevantly, the projections include that for property values at points in a 10 year period, which have clearly been derived by applying 8 per cent for capital growth annually. The spreadsheet produced for the Gleesons with respect to the Chevron Palm Units was in the following terms:
86 The process at the Gold Coast with the runner and the financial advisor was continuous. There was little or no opportunity for private discussion or reflection. The runner remained with them throughout. It involved creating an impression of urgency in relation to securing a unit and substantial pressure then being applied to 'close' the sale. I did not understand the fifth and sixth respondents to suggest to the contrary. Indeed it was conceded by them that aspects of the marketing, and the approach which could be seen to be taken to it in the records of meetings, might be seen as unattractive. The sixth respondent accepted that 'prospects' were led to believe that a property fulfilled their criteria for an investment; that efforts were taken to prevent them from considering other properties; that an impression was created that NAPC properties were selling quickly; that the purchaser needed to act urgently to secure one; and that they were put under a deal of pressure to make a decision on the spot. When the prospective purchaser's agreement had been obtained, the Investlend representative would fill out an application for finance, have them sign a mortgage brokerage agreement and provide a cheque by way of deposit. Pursuant to the brokerage agreement Investlend was said to be entitled to a fee of 1.5 per cent. The runner would then take them to a solicitor who had already been chosen for them.
87 The solicitors were from firms on a list, or 'panel', maintained by NAPC and Investlend. Mr Bilborough accepts there was such a list. Mr Quinlivan dealt with the solicitors. Records of meetings show that by late 1997 three or four firms were spoken of. Mr Johanson's firm had been mentioned at an earlier point. The word 'panel' is sometimes used in discussions. There is nothing to suggest that the solicitors there referred to were to act in some other capacity other than for these purchasers. The discussions clearly refer to runners bringing prospective purchasers to the named solicitors. On 5 September 1996 and 16 July 1997 the need for runners to obtain deposits before attending upon the solicitors is reiterated. Of the purchasers, other than the Gleesons, who were called as witnesses, seven were taken to Mr Pointon and Mr Johanson's firm acted for four of them. In each case it would appear that the solicitor was chosen by either NAPC or Investlend.
88 Some twenty purchasers were called, in addition to the Gleesons, to prove the wider application of the NAPC scheme. The purchases took place over a period from late 1997 to 2000. Eight of the properties were purchased after Mr Quinlivan's association with Mr Bilborough and Investlend apparently ceased, on 9 September 1998. Four of them were not involved with NAPC and Investlend but with a marketer called the 'Epic Group' and an advisor called Greenwich Financial Services, entities later associated with Mr Bilborough. I have not had regard to them. Their evidence as to the rates used for capital growth in the property investment analysis is in any event irrelevant, since different rates were used. Those purchasers who dealt with NAPC and Investlend had little recollection of specific statements made to them, such as are alleged. As elsewhere observed, the scripts provide evidence as to the likelihood that the same information was provided to them. These purchasers were able to confirm the use of the written material by the in-home consultant and in most cases were able to produce the spreadsheet they were given by the Investlend advisor.
89 The substantial body of evidence, from NAPC's records in particular, shows a highly organised operation. Regular and often lengthy meetings were held at which aspects of the scheme were discussed. Many of them were attended by both Mr Quinlivan and Mr Bilborough. Detailed records were kept. Reports from representatives at each point of contact were obtained. Statistics showing the results of seminars were maintained. Reports were filed by the runners. Investlend representatives also filed reports and copies of these were sent to both Mr Quinlivan and Mr Bilborough. There was a substantial focus on training and upon a standard presentation.