11.1 APRA's case - background facts
528 APRA said that having identified the Pursuit failure, IIML needed to determine how it would compensate the trust fund and consequently superannuation beneficiaries for the losses suffered. It said that no provision of the IPS Super trust deed negated the existence of IIML's duty to get in and protect the trust property. In APRA's words:
To the contrary, a range of provisions supported such a duty on the part of the trustee, namely:
(a) Cl 5.1 (CB 4/37, p. 675) requiring the Trustee to receive all moneys, rights and other property which are paid or receivable as income of the Fund;
(b) Cl 14 (CB 4/37, pp. 693-694) providing that the Trustee has power to deal with assets of the fund (cl 14.1) and general powers that included (cl 14.2) power:
14.2.2 to prosecute and as it may think fit to defend, answer, discontinue, compromise or settle any claims, actions, suits, or proceedings whatsoever and to refer and submit to arbitration any dispute or matter concerning any part of the Fund or relating to the trusts of this document;
14.2.5 to take and act upon the opinion or advice of any accountant, auditor, banker, lawyer, valuer or other expert or professional person or body and upon any information or documents received from a person on whom it is reasonable to rely (in any case, whether or not a shareholder or director of the Trustee)…
Cl 14.2.9 to compromise, compound, abandon, release, forgive, submit to arbitration or otherwise settle any debt, claim or thing whatsoever relating to the Fund or owing to the Trustee on any account whatsoever.
529 APRA repeated its submission, which I have not accepted above, that the decision to prosecute or compromise or abandon any claim against third parties was not a mere discretionary decision but was more akin to the kind of decision as to entitlement considered in Finch v Telstra. To the contrary, however, and as already explained, the decision whether to bring or not to make a claim against a third party or to bring proceedings necessarily involves an evaluative process about which reasonable minds may differ. It is not the kind of decision where there is one answer which may be categorised as right and another which may be characterised as wrong. The exposition in Finch v Telstra is dealing with a different kind of decision, being the formation of an opinion as to an entitlement for payment out of the trust fund on the basis of facts. The decision whether or not to pursue a claim for liability is of a different character. For the same reasons APRA's proposition that when exercising its powers IIML was bound to seek relevant information does not have any particular significance for the circumstances of this case. The submission assumes the existence of reasonably arguable causes of action against IIML and IOOF Service Co when neither fact has been proved. Indeed, the submission goes further and assumes the existence of rights of recovery against IIML and IOOF Service Co when no such rights have been proved by APRA. Accordingly, APRA's submission that it is "extremely important to beneficiaries of superannuation trusts that where the fund has rights against third parties to replenish losses suffered, that the exercise of those rights be properly considered and if possible, compensation recovered, from third parties rather than that the assets of the fund be diminished and its assets depleted" is of no assistance to it.
530 APRA contended that in 2014 when the issue of rectification and compensation arose in respect of the Pursuit Failures, IIML also had a statutory obligation to "give effect to" its risk management strategy in respect of loss and damage caused to the assets of the fund: s 52(8). In 2014, IIML's risk management strategy was version 1.7 of that policy: CB 3/23E, p. 403_0044. That provided the following:
(CB p.403_0048): "The objectives of this Risk Management Strategy (RMS) are to:
• Document the measures and procedures which have been adopted and implemented by IIML to identify, monitor and manage material risks relating to IIML's activities as an RSE Licensee"
(CB p. 403_0053):
"The IIML Board of Directors can rely on the resources of the IOOF Group at their disposal for risk and compliance services, as a signatory to a Group Resources Deed.
The Deed governs the supply of human and technical resources to Group entities, including IIML.
IIML is able to enforce its rights under the Deed to a supply of resources if required by APRA. Further the Deed envisages that signatories such as IIML are bound to comply with superannuation regulations (which include adequate resources) and the Service Company agrees to support meeting such obligations".
531 APRA said, and I accept, that the "Group Resources Deed" can only be a reference to the Services arrangements with IOOF Service Co.
532 The risk management strategy was updated in April 2016: CB 11B/254A. In the section dealing with "Operational Risk" it provided (CB 11B/254A, p. 3577_0012):
The management of operational risk covers all activities undertaken by IIML, including the activities performed by IOOF Service Co pursuant to the Services and Resources Support Deed. This arrangement has been classified as a material outsourced arrangement and is managed in accordance with IOOF Group's Vendor Management & Outsourcing Policy.
533 The IOOF Group's Vendor Management & Outsourcing Policy required that at a "minimum" the contract with IOOF Service Co "contain liability and indemnity provisions": CB 8/138, p. 2142.
534 APRA would have it, contrary to my conclusions, that there were two obvious sources of compensation available for the Pursuit Failures: IIML as operator of the Pursuit platform or IOOF Service Co as the entity actually responsible for providing the services and resources to process distributions. As I have said, on any meaningful analysis, neither was an obvious source of compensation.
535 APRA noted the following matters in the chronology of events, which have been taken from APRA's submissions.
536 In its Pursuit Breach Notice, IIML had identified to APRA: "[T]he loss to IIML will be the compensation amount that it provides to affected clients": CB 5/61, p.1360.
537 In that same document, Mr Riordan and IIML told APRA that the "IT, Finance and Operations departments" were at that time working to determine the appropriate methodology for determining any compensation "that will be in the best interests of members". A similar statement was made to the IOOF Group Risk and Compliance Committee on 15 September 2014 by Mr Riordan's team with the advice that the process "is expected to be complete by mid-October 2014": CB 5/63, p.1368.
538 IIML's Group Legal, Risk and Compliance Report to the board of IIML dated 17 October 2014 also contained a report on the Pursuit Failure. It was signed by five senior managers of that Group. They stated "we have determined that breach 1225 is significant": CB 5/70A, p.1565_0003. They indicated that a compensation plan was being developed and expected to be completed by November. On 27 October 2014, at a meeting of the board of IIML at which Mr Kelaher and Mr Venardos were present, that report was noted: CB 5/70B, p. 1565_0009.
539 APRA said that these documents support a finding that IIML, Mr Kelaher, Mr Venardos and Mr Riordan knew by at least October 2014 that IIML had contravened its s 52(2)(b) covenant of due care and diligence and was exposed to liability to compensate for the losses. I disagree. The documents say nothing of this kind. Again, APRA's reliance on internal IOOF documents as proving its case is misplaced for the reasons given above.
540 APRA continued with its chronology of events and related submissions in the following terms.
On 22 September 2014, 18 November 2014 and 3 December 2014, APRA was chasing IIML, Riordan (and later also Vine) for further information about the breach and compensation because of an absence of a substantive response: CB 5/71.
By October 2014, IIML had notified its insurer of a claim. The available inference is that Vine and Riordan were aware of that claim, given their responsibilities for Risk and Compliance, and that they are subsequently referred to in the insurance documents as intimately involved with the calculation of potential liability for the insurer: CB 6/129A, p. 2026_0024.
On 4 December 2014, Riordan's assistant emailed APRA, copying in Vine, attaching a letter from Riordan regarding the "Pursuit Reinvestment Distribution Breach" (emphasis added) and remediation measures: CB 5/73 That letter advised IIML's "compensation solution" (p. 1574) involved the following (p. 1576):
2.3 Payment mechanism
We will be using the Operational Risk and Financial Reserve (ORFR) for superannuation accounts and IOOF Holdings Limited (IFL) will compensate the IDPS accounts. Using the 2.2% cash interest rate, total compensation would be $300,023, of which $51,400 would be funded by IFL and the remaining $248,623 would be funded through the ORFR.
541 The fact that Mr Riordan characterised the Pursuit failures as a "breach" does not prove APRA's case for it. The existence of a breach was for APRA to prove by reference to facts. The fact that Mr Riordan held an opinion that the circumstances constituted a breach is an insufficient evidentiary foundation for APRA's case in the circumstances identified above.
542 APRA's chronology of relevant events continued in these terms:
On 9 December 2014, APRA responded to Riordan, copying Vine. APRA asked IIML to describe "the independent review process of the compensation methodology and outcome", to explain the justification for why the ORFR reserve might be used when the issue pre-dated the introduction of the Prudential Standard SPS 114 which had introduced the ORFR such that "the IOOF Group is arguably responsible to compensate the superannuation accounts", and raising the topic on which IIML's letter had been entirely silent: IOOF Service Co's exposure to liability to compensate the loss (6/83, p. 1693):
APRA understands IIML outsources the administration and processing services to IOOF Service Co through a service agreement. Your letter is silent on whether IIML is considering any action against IOOF Service Co for compensation consistent with the provisions of the service agreement and having regard to the trustee covenants of s 52(2) of the SIS Act.
Less than a week later, Vine asked internally for a copy of the agreement between "Service Co and the other IOOF entities": CB 5/75A, p. 1594_0001. The available inference is that at least Vine had not considered the possibility of IOOF Service Co being liable to compensate the trust and beneficiaries for the Pursuit losses until APRA raised it on 9 December 2014. However, from on or about the date of receiving it, he must have been aware of its contents, including its provisions for dispute resolution, the service standards required of IOOF Service Co, the requirements that IOOF Service Co have professional indemnity insurance such as to raise the possibility there would or may be monies available from an insurance claim were IOOF Service Co to make it, and the indemnity provided by Service Co in respect of loss and damage suffered by IIML in its capacity as licensee of IPS Super. In any event, having regard to the contents of IIML's risk management strategy at this point which expressly dealt with the treatment that was to be applied when IOOF Service Co was exposed to liability or "APRA required it" (see CB3/23E, p. 403_0053), IIML may be taken to have knowledge of its own contractual arrangements.
On 19 December 2014, Riordan responded to APRA on the points APRA had raised, copying in Vine: CB 6/83, p. 1691-1692. He confirmed there had been no independent review of the compensation outcome and IIML had relied on "experts in the Operation division" and discussion between the General Manager of Operations, the CFO (Coulter), Vine and Riordan who were "satisfied that the final approach is appropriate". All of those persons were employees of IOOF Service Co. At least three of them were also officers of it. They were in an impossible position of conflict in making a decision on behalf of Questor [sic IIML] not to take steps to attempt to recover compensation from IOOF Service Co in respect of the losses.
543 I have indicated above that APRA's assertions of conflict of interest are insufficient to found the existence of an actual conflict of interest, let alone one capable of having a significant impact on the relevant respondents' capacities to prioritise the interests of the beneficiaries. In the present case, given the mutuality of the obligations of IOOF Service Co and IIML, and their common objective of ensuring that IIML satisfied its obligations under the SIS Act, I do not agree that the officers were subject to an impossible conflict of interest.
544 APRA's chronology continued:
Riordan's justification for using the ORFR which followed as the next item (6) in the email, recited the obligations of a trustee exercising a discretion whether to do so, but failed to apply those principles. None of the considerations involved the consideration that it was in the best interests of members that the assets of the fund, including the reserves, be preserved and the trustee first seek to vindicate the rights it held on trust against third parties or against the trustee personally (and to which an insurance policy responded): CB 6/83, p. 1692. It cannot be that Riordan and Vine did not know about such possibilities. APRA had asked about the possibility of a claim against IOOF Service Co and Vine had sought and obtained a copy of the contracts that might govern it. In addition, IIML had by this point already made a claim on its professional indemnity insurance policy: CB 5/70H, p. 1565_0063.
545 APRA has assumed its case without proving the facts necessary to establish that it was in the best interests of beneficiaries for claims to be made against IOOF Service Co and IIML.
546 APRA said:
Riordan stated in his response that the compensation proposal that had been developed by him, Vine and others and notified to APRA was the "final approach": CB 5/83, p. 1692. The conduct in developing it, and in considering the way in which the trustee would perform its duties and exercise its powers with respect to compensating the trust and its members, or exercising any power to access the general reserves for the purposes of "compensating" an event of trustee and service provider negligence or arguable negligence, fell far short of the standard required of superannuation trustees to act in the best interests of members, or to prioritise the interests of beneficiaries and ensure their interests were prioritised and the duties to them fulfilled despite the obvious conflict of interest involved between IIML's desire not to use a professional indemnity insurance claim to compensate beneficiaries, or to recover compensation from IOOF Service Co.
Riordan's answer as to whether IIML was considering any action against IOOF Service Co was equally problematic. Said Riordan (CB 6/83, p. 1692):
IIML is not currently considering any such action for a number of reasons, including the complex historical background involving ORION and product changes, legitimate use of the ORFR and the commercial reality of running a large group of companies where issues may not necessarily be realistically actionable or indeed require action in order for compensation to be made.
These were the reasons that were often repeated by IIML and its officers over the coming years. They display a fundamental misunderstanding of what the trustee's best interests and conflicts covenants required. The first reason might be a justification for the allocation of responsibility as between IIML and its service provider, and hence between IIML's professional indemnity insurer and an entity related to it. The best interests covenant might have been satisfied by a range of possible approaches by IIML to seeking to maximise the recovery of compensation from those two sources, but it was not satisfied by a course of conduct that took the view that members' capital (in the form of the reserve) might be used as a first port of call instead of pursuing recovery from the service provider and the professional indemnity insurer. Further, Riordan's assertion that the "legitimate use of the ORFR" included use of it as a first port of call, for the same reasons, did not satisfy IIML's best interests covenant. Given the circumstances of conflict in which Riordan and Vine were in in respect of assessing any plan as to whether or not a claim ought be made against IOOF Service Co (of which they were employees and officers), Riordan's justification was also not sufficient to discharge IIML's duties with respect to the conflicts covenant either. And finally, the last justification - the "commercial reality of running a large group of companies when issues may not necessarily be realistically actionable or indeed require action in order for compensation to be made" was presumably based on the notion that no action was "required" because the compensation could be "paid" out of members' reserves and the bill not footed by IIML's insurer or the related entity IOOF Service Co. The justification itself raised the very conflict that infected the decision-making and its merits, whilst wholly failing to avoid the conflict or manage it in a way consistent with IIML's conflicts covenant. To the extent the last justification was alluding to the potential costs of protracted litigation against a related entity, that was not a genuine consideration having regard to cl 17 of the service agreement and what it provided for in the event of dispute.
547 I do not accept these submissions. First, the use of Orion did involve a complex historical background which included the original development of the system, the involvement of the deregistered old Service Co, and the merger and the introduction of the new IOOF Service Co as service provider. Second, I do not accept that Mr Riordan was conveying what APRA seems to think. Mr Riordan was saying that if an entity within the group was considered to be liable for a loss then it would not be necessary for there to be litigation for the entity to reimburse beneficiaries. Third, and in any event, the ORFR was established for errors such as that in the Pursuit failure. APRA has not explained why its use in the circumstances was other than legitimate.
548 APRA continued:
From this point on until 2018, the persons through whom IIML acted continued to fail to discharge IIML's obligations pursuant to its best interests and conflicts covenant.
On 2 March 2015, APRA met with Riordan and Vine about these matters: CB 6/102A (Vine's notes), CB 6/105, p. 1771 (APRA's notes, as reviewed by the participants at the meeting: CB 6/103-104). The speaking notes prepared by Vine for Riordan for the meeting appear at CB 6/100A, 100AA. The commentary given for use of the ORFR in the row "Compensation source" indicates that IIML's senior legal, risk and compliance officers were myopically focussed on justifying its use by reference to the terms of the ORFR policy and failed to analyse the issue by reference to the best interests of members properly assessed. To the question "Members' best interests" (see final page), the note records "We follow the policy". The analysis fails to grapple with the obligations of a trustee in respect of seeking compensation from third parties, and instead wrongly presents the question as to whether a trustee "can", within the terms of the policy, use the ORFR to "bring [members] back to a position had the operational event not occurred". The obvious point that the ORFR is also an asset to which beneficiaries have an interest and forms part of the assets of the fund was not appreciated, or if it was, was ignored.
Vine's own notes of the 2 March 2015 meeting record that APRA communicated to him and Riordan the view that IIML had not given proper consideration to the other sources of compensation that might be available - including from IIML personally and IOOF Service Co, and that there was a "conflict b/w t/ee + service provider": CB 6/102A, p. 1768_0002. See also CB 6/105, p.1773.
As APRA's record of the meeting makes clear, it also communicated that the operational risk reserve could be used to mitigate timing difficulties between making a claim on a service provider and receipt of compensation monies from it, but could not be the first port of call (6/105, p. 1772, emphasis added):
APRA acknowledged that where compensation was sought from a service provider, it may be in members' best interest to first make the payment to members from the ORFR whilst it pursues its service provider.
The logic of that explanation is the unremarkable proposition that having regard to what comprises the best interests of members of a superannuation fund (see the discussion of Cowan v Scargill and Finch v Telstra…above), it could only be in members' best interests to use funds standing to the credit of the risk reserve where avenues existed to seek compensation from a service provider or insurer, if such avenues were first pursued and the ORFR monies used, in effect, as an advance on the proceeds of recovery from the wrongdoer. This was not IIML's intention: IIML's intention was to pay from the ORFR "in the first instance and that it would then consider options available to it in terms of seeking reimbursement": CB 6/105, p. 1773. The problem, as APRA alerted Riordan and Vine to at that meeting, was that that course gave rise to obvious circumstances of conflict which would need to be managed carefully and appropriately.
They were not.
549 The distinctions that APRA draws here, between first using the ORFR and then pursuing other sources of compensation if available, and then using the ORFR, are unclear. It is apparent that Mr Vine and Mr Riordan had not ruled out compensation by IIML or IOOF Service Co if the view was taken that they were liable for the loss. They knew this was APRA's position and there is no reason to infer that they proposed to do anything other than what they believed was consistent with APRA's position. Again, APRA has not explained the "obvious" actual conflicts of interest it asserts existed. As employees of IOOF Service Co, Mr Riordan and Mr Vine were bound to assist IIML to act in the best interests of beneficiaries. In any event, APRA continued:
In fact, Riordan and Vine subsequently prepared speaking notes for the then Chairman of the IOOF Group to convey to APRA that APRA's concern and questioning of "how the trustee had [made a decision on compensation] without considering other possible sources of recovery" was, in Riordan and Vine's view (CB 7/130A):
"an unrealistic assessment of how things work in our business - our view is that our approach of internal management consideration then presentation to the trustee board is appropriate"
550 Again, I infer that the point that was being made was that no such thing as a formal claim would be necessary if the view was taken that any company in the group was liable for the loss.
551 APRA said:
On 25 March 2015, the Board of IIML met (each of Kelaher and Venardos were present) and discussed the Pursuit Failure: CB 7/118, p. 1875. The Legal, Compliance & Risk Report under consideration had informed the Board that APRA had requested on 2 March 2015 that IIML "further consider any potential alternative compensation sources": CB 7/118B, item 2(a).
On 29 April 2015, the IOOF Risk and Compliance Committee (of which Venardos was a member, and which meeting was attended by Riordan and Vine as guests) noted a report tabled by Vine and his oral report that identified "Focus areas include APRA interaction on the ORFR and remediation of the Pursuit distribution breach (to be presented to the May Board)": CB 7/126, p. 1997.
IIML's Compensation Plan approved by the Board in May 2015 did not seek to fund compensation from either its own funds (indemnified by its insurer) or IOOF Service Co: CB 8/141, p. 2269_006. The plan approved provided for beneficiaries affected by the Pursuit Failure to be compensated from IPS Super's operational risk financial requirement reserve (ORFR) (the Pursuit Compensation Plan). This plan was endorsed by Vine and Riordan on 13 May 2015 (CN 8/138, pp. 2116-2120) and approved by the Board (including Kelaher and Venardos) on 27 May 2015: CB 8/141 pp.2263-2268. IIML, Questor, Vine and Riordan now each admit that the ORFR was trust property and that they, and Kelaher and Venardos, knew or ought to have known this at the time: Defences, [125(a)], [131(a)]. They each deny, however, that the Pursuit Compensation Plan was not in the best interests of beneficiaries: ASOC, [119]; Defences [119].
552 APRA explained its case in these terms:
APRA's case is the that the Pursuit Compensation Plan was not in the best interests of beneficiaries and failed to prioritise their interests or meet the requirements of the conflicts covenants because (ASOC [118] - [121], in circumstances where there was conflict between the duties owed to and interests of the beneficiaries of IPS Super and the interests of the IOOF Group and other non-super investors as to the source of any compensation:
(a) IIML's conduct and the plan itself did not recognise the conflict that existed in the formulation and adoption of the plan. The Board paper went to the Board acting in IIML's capacity both as trustee of IPS Super and Operator of the Pursuit Investment services: CB 7/131, p. 2030. The conflict inherent between IIML's interests in those two different capacities and the conflict between the members of the IDPS fund and the beneficiaries of IPS Super as to the use of any funds supplied by IIML (or its insurer) was manifest, and yet entirely overlooked by the members of the board and IIML's senior officers proposing the plan;
(b) IIML's conduct and the plan itself did not give adequate or genuine consideration to the sources of compensation other than the beneficiaries' own reserves, including because it did not give adequate or genuine consideration to the prospects of pursuing IIML, or IIML's professional indemnity insurer, or IOOF Service Co, to fund compensation;
(c) IIML's conduct and the plan itself did not give adequate or genuine consideration to the appropriateness of a differential treatment of super beneficiaries and non-super beneficiaries;
(d) IIML's conduct and the plan itself did not recognise, or give adequate or genuine consideration to the fact that the reserves were capital of IPS Super, and that use of the reserves to "compensate" IPS Super for the losses caused to its capital was in truth not "compensation" of the trust at all;
(e) IIML's conduct and the plan itself did not give adequate or genuine consideration to IIML's liability for the losses, the availability of insurance proceeds from a claim on IIML's professional indemnity insurer for its liability for the losses caused to the assets of IPS Super and individual members' accounts, or recognise the position of conflict in which IIML and the Board sat in making any decision not to pursue such a claim for the benefit of beneficiaries of IPS Super;
(f) IIML's conduct and the plan itself did not appreciate, or give any adequate or genuine consideration to the fact that the proponents of the Pursuit Compensation Plan were themselves in a position of conflict, having regard to their role as officers and employees of IOOF Service Co. Nor did the Board of IIML, or Kelaher himself, identify his particular conflict as a director of IOOF Service Co, in making any decision in his capacity as responsible officer of IPS Super not to seek to vindicate IIML's rights as against IOOF Service Co;
(g) IIML's conduct and the plan itself did not involve IIML, in its capacity as trustee of IPS Super, seeking independent legal advice on its rights as against IIML in its personal capacity for failure to exercise due care and skill etc, or as against IOOF Service Co, or as to the proper use of the reserves to "fund" compensation to members out of the fund's assets as a first port of call;
553 According to APRA:
While, in this instance, the board paper did include some commentary on why no action was being taken against IOOF Service Co (as the "fund administrator") this consideration can only be described as perfunctory and not "genuine consideration" of the kind which the authorities require. Vine and Riordan recommended that no action be taken against IOOF Service Co because:
(a) the "complex historical background" of the breach means that it was "difficult to attribute a breach of contract or negligence to the administrator";
(b) the "commercial reality of running a large group of companies means that issues may not necessarily be realistically actionable or indeed require action in order for compensation to be made"; and
(c) "[l]egal action between the related bodies corporate would likely be contested" and would require IIML to take steps to manage conflicts (including "appropriate internal Chinese walls") which Vine and Riordan considered may be "unnecessarily burdensome".
For the same reasons these explanations were inadequate when proffered to APRA on 19 December 2014 and in person on 2 March 2015, they remained inadequate in May 2015. They demonstrate that the issue was considered from the perspective of the IOOF Group as a whole, rather than by IIML in its capacity as trustee of IPS Super and the obligations it owed to beneficiaries. This should have been obvious to each of Kelaher, Venardos, Vine and Riordan. They also failed to give any consideration to the terms of the IOOF Service Co contractual arrangements, or the requirements of IIML's risk management strategy where IOOF Service Co was exposed to liability. The first reason is not supported by the documents tendered in evidence in any event: whilst they might show some complexity in attributing responsibility to IOOF Service Co in respect of the initial design of the Pursuit processing systems, they indicate that from July 2009, IIML was responsible for the ongoing operation of that system, including its error detection processes. The Breach Notice IIML had submitted to APRA, the contents of which Riordan and Vine can be taken to have been well aware, included a detailed internal assessment by the Compliance team that the failure to detect the error for years and years was itself a contravention of IIML's s 52(2)(b) covenant.
554 I have already explained above APRA's reliance on internal IOOF documents, created for different purposes and often expressed at a high level of generality, is misplaced. The documents do not found the existence of contraventions of the SIS Act. The fact that a compliance officer believed there were such contraventions does not make APRA's case for it.
555 APRA continued:
The "commercial reality of running a large group of companies" or the need to implement conflicts management procedures are not determinative considerations for a trustee required to act in the best interests of beneficiaries and to prioritise their interests above all others. The inherent conflict involved for Kelaher and Venardos, given their multiple roles in the IOOF Group, to be involved in making decisions as to whether IIML in its capacity as trustee ought to pursue related entities in that group without independent legal advice or some other risk treatment mechanism, ought to have been obvious to Kelaher and Venardos. They chose to rely on the internal advice of officers who were in a position of conflict that they themselves must have known existed. The unreasonableness of that reliance, and its inconsistency with IIML's conflicts covenant and their own conflicts covenant and compliance covenants, ought to have been obvious to them. This answers the point made at Kelaher OS [18].
As with the CMT breaches addressed above, none of the explanations now given by the respondents in their defences for not pursuing IOOF Service Co appear in the materials before the Board in 2015, the minutes of that meeting, or in any other contemporaneous documents. Nor is there any evidence (in the board paper or otherwise) that consideration was given to the liability of IIML as the administrator of the Pursuit platform or trustee of IPS Super (despite the notification to APRA that IIML had breached s 52(2)(b)).
The flaw in IIML's decision-making process for (i) the preservation of the trust's property and the vindication of rights attaching to it (ii) the exercise of powers relevant to (i), and (iii) the application of its risk management strategy to the events of Pursuit, is revealed when the approach taken to superannuation beneficiaries is compared to the approach taken to non-superannuation investors affected by the Pursuit Failure. As recorded in the same board paper (CB 8/141), "[m]anagement recommends that the Operator compensates IDPS clients for loss incurred, given that the nature of the IDPS is contractual and there are no reserves maintained". No explanation is given (or could be given) as to why non-superannuation investors had a viable claim against IIML (which it apparently did not intend to defend) but superannuation beneficiaries did not.
APRA understands that it may be some part of the respondents' defence that at a meeting on 2 March 2015 with Vine and Riordan, APRA told IIML that the use of the ORFR was "appropriate". The evidence (including Vine's own notes of this meeting) does not show [sic] that what APRA communicated was that the ORFR may be used in the first instance to compensate beneficiaries, so long as other sources were considered to replenish the ORFR and conflicts appropriately managed. The evidence of Napolitano would give the Court comfort in the accuracy of APRA's notetaking in respect of what was and was not said by APRA at this meeting: Napolitano 1, [12] - [26]. In essence, APRA was asking why IOOF Service Co was not being pursued for its role in failing to detect the error for multiple years and its role in the maintenance of the defective technological processes. Further, it was saying in respect of the ORFR specifically, that it could be used as an advance on third party compensation monies to ensure beneficiaries' individual accounts were promptly compensated while IIML took steps to seek compensation from other sources (such as IOOF Service Co or an insurer). This is not what occurred. Instead, as noted above, on 27 May 2015 the IIML Board approved a plan that recommended the use of the ORFR reserve to compensate beneficiaries and that no further steps be taken to recover compensation from third parties or related entities. No document has been produced by the respondents indicating that this decision was ever revisited by the Board until September 2018.
556 APRA's case continued by reference to some further emails between Mr Riordan and Mr Vine as to the drafting of the board paper for the meeting on 27 May 2015: CB7/130B, 130C, 132A1. According to APRA, these emails disclose that in the drafting of the board paper, Mr Vine and Mr Riordan were acutely conscious of the weakness of the justifications given for not pursuing IOOF Service Co. Mr Riordan noted on the original draft that it:
…looks a little weak in terms of enabling directors and APRA to raise questions so can we amplify a little further without locking us into a deeper issue I just think it needs some further textual work.
557 APRA said it was notable that "what was needed was some 'further textual work', not some independent legal advice as to the best interests of members or the management of the obvious conflicts that applied to advising IIML to adopt such a course, or in IIML adopting it".
558 APRA continued:
After the 27 May 2015 meeting, IIML updated its insurer with the information that "The IIML Board has approved the remediation and rectification plan. Letters being drafted for affected clients. 869 IDPS clients with $120K compensation funded by IOOF. 4639 Super/pension clients with $696K funded through ORFR": CB 7/129A, p. 2026_0025. That update also indicated that "The split of funding of this claim between IOOF and the ORFR is to be reconfirmed once Paul Vine and Gary Riordan have resolved usage with APRA": CB 7/129A, p. 2026_0024. The available inference from the documents is that at all times when proposing the Pursuit Compensation Plan to the Board, and thereafter in attempting to implement it, Vine, Riordan and IIML was aware that another available source of compensation which had not been disclosed to APRA nor included in the board papers for 27 May 2015 was the possibility of insurance proceeds from its professional indemnity insurer.
In the event, following that approval of the plan, IIML delayed paying any compensation from the ORFR for over two years on the basis that the payment (coming, as it did, from beneficiaries' own funds) could be considered by the ATO to constitute a concessional contribution. A private tax ruling was sought and IIML took no steps to compensate beneficiaries until that advice was received: CB 10/193A.
As Vine's notification to APRA on 24 June 2015 of this development indicated, the board approval was still extant and IIML was not taking steps to pursue other sources of compensation in the meantime to fund the losses suffered by the TPS Super fund and its beneficiaries: CB 8/147E, p. 2306_0006. The ruling sought from the ATO was to provide IIML with comfort that its compensation plan would not cause further losses to beneficiaries rather than with an assessment of whether it was in any event a plan in the best interests of beneficiaries for the losses they had already suffered.
The ATO provided its advice to IIML on 8 February 2017: CB 13/308A. It said that it would not treat payment from the ORFR as a concessional contribution on the basis that it had been informed by IIML that the ORFR would generally be used where the trustee had a right of action against itself or a third party, and would compensate the ORFR from those funds: CB 13/308A. This is the very course of action that APRA had urged IIML to take, but which it had failed to take until this point.
559 APRA said that:
To the extent that the above series of events is relied upon by the respondents to establish that there was no implementation of the Pursuit Compensation Plan, such reliance is misplaced. At all times until at least February 2017, the evidence shows that IIML was single-mindedly focused on using the ORFR to compensate for the Pursuit Failure. This was despite the delay in the availability of the ORFR meaning that the justification given to APRA for the use of the reserves in the first place, namely, the ability to promptly compensate beneficiaries, fell away. Up until mid-2017, beneficiaries remained uncompensated for losses that (at least some of them) had incurred more than ten years earlier.
560 APRA continued:
The policy has been added to the CB[3] at tab 32D1. Relevantly it provided insurance for (cl 1.1) "Breach of professional Duty" in the following terms:
Cl 1.1 Breach of Professional Duty
We agree to indemnify the Insured against any Claim for civil liability arising from a breach of professional duty owed in the conduct of the Professional Business fist made against the Insured during the Period of Insurance.
The limit of indemnity was $20 million.
…
…after the ATO had given its advice on 8 February 2017, IIML changed course. The insurer initially resisted the claim: tab 315A, 315B. After the ATO ruling, IIML was at pains to stress to its insurer its liability to pay compensation for the failure. On 18 April 2017, its broker wrote to the insurer explaining (tab 330A, emphasis added):
8. Clearly, in this case, the definition of Claim has been satisfied:
a. On numerous occasions Ms Stephen verbally relayed concerns she had with her account and demanded that IIML make good any loss caused as a result of errors. Ms Stephen's email to the Insured also required the Insured to investigate a number of errors (and implies that the Insured must make good where there has been loss, as is IIML's legal and fiduciary obligation).
b. The verbal conversations ant the email notice are both acceptable forms of notification under the Policy (see para 7. above).
c. The failure to reinvest distributions constitutes non-performance of financial, trustee and superannuation services; as evidenced by the breach notice lodged with ASIC and APRA as industry regulators.
9. IIML's legal and fiduciary duties are to act fairly and equitably across all accountholders, compelling it to compensate all accountholders for loss, not just Ms Stephen. This is the nexus of its civil liability to accountholders and the very purpose of having civil liability in place.
…
11. IIML expected to be able to source part of the compensation amount from reserves but was preclude from doing so by law and APRA directives.
The response from the insurer was received on 12 July 2017: [CB14] tab 363A. The insurer accepted the Claim on the basis the error (at [26]) "arose out of the provision of 'Professional Services' by IIML (being, relevantly, fund management, asset management and/or superannuation services), and specifically, IIML's administration of the Fund through the use of its computer software systems". The insurer accepted that "on the information provided, IIML does have a legal obligation to compensate affected members by reason of the Error": at [33.2]. The deductible was $250,000, in respect of which the insurer noted (at [36]):
"This means that IIML will be required to bear the first $250,000 towards the compensation paid to affected members"
561 APRA said that the evidence reveals that:
…only after sustained opposition from APRA and the correspondence from the ATO did IIML seriously pursue its claim on its professional indemnity policy with respect to the recovery of compensation for the benefit of beneficiaries of IPS Super. Further, that the claim itself was an admission by IIML that it was personally liable to compensate the fund for losses caused by the Pursuit Failure.
562 The chronology of events continued:
Insurance proceeds were received in around July 2017: CB 18/454. Those insurance proceeds did not cover the entire loss suffered by beneficiaries and in August 2017, IIML ultimately partially compensated beneficiaries from the insurance moneys and partially from the ORFR.
No steps were then taken to replenish the ORFR until October 2018. As noted above, this was only after increased pressure on IOOF from APRA and the Royal Commission, and the resignation of Kelaher from the Board. Despite the respondents' assertion that this compensation was paid by IIML (Defences, [100]), the funds to compensate the ORFR were from IOOF Service Co's account as the "party responsible for the error": Board paper, 22 October 2018: CB, Tab 17/436, pp. 6293-6294; Email from Vine to APRA, 29 October 2018, confirming that IOOF Service Co paid the compensation: CB, 17/437C, p. 6300.
It is noteworthy that there was no resistance from IOOF Service Co at this point in time to paying this compensation and none of the difficulties anticipated in the May 2015 board paper existed.