PECUNIARY PENALTIES
33 The central purpose of a pecuniary penalty has the two dimensions of general deterrence and specific deterrence, although as I have said it is the former that is the focus in the present context. As I said in Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) (2018) 131 ACSR 585; [2018] FCA 1701 at [117] to [119]:
It is well established that deterrence is the primary objective for the imposition of civil penalties (Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2017] FCAFC 159 at [385] per Middleton, Beach and Moshinsky JJ; see also Australian Securities and Investments Commission v Commonwealth Bank of Australia (2018) 128 ACSR 289 at [62]). In Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482; 326 ALR 476; [2015] HCA 46 at [55], the High Court approved of French J's observation in Trade Practices Commission v CSR Ltd [1991] ATPR 41-076 at 52,152:
The principal, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.
In ASIC v CBA, I observed (at [62]) that the penalty:
must be fixed to ensure that the penalty is not to be regarded as an acceptable cost of doing business. As I have said, both specific and general deterrence are important. The need for specific deterrence is informed by the attitude of the contravener to the contraventions, both during the course of the contravening conduct and in the course of the proceedings. And the need for general deterrence is particularly important when imposing a penalty for a contravention which is difficult to detect.
The High Court considered civil penalty provisions in Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 351 ALR 190; [2018] HCA 3 (ABCC v CFMEU). Kiefel CJ referred to "the deterrent effect which is the very point of the penalty" and "the purpose for which the power is given" (at [44]). Keane, Nettle and Gordon JJ reiterated (at [87]) that:
the principal consideration in the imposition of penalties for contravention of civil remedy provisions is deterrence, both specific and general; more particularly, the objective is to put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene.
34 Now given that each of the defendants are being wound up, and in all likelihood are insolvent, any penalty fixed by me cannot be proved in the liquidation of those companies. Section 553B of the Corporations Act provides:
(1) Subject to subsection (2), penalties or fines imposed by a court in respect of an offence against a law are not admissible to proof against an insolvent company.
(2) An amount payable under a pecuniary penalty order, or an interstate pecuniary penalty order, within the meaning of the Proceeds of Crime Act 1987, is admissible to proof against an insolvent company.
35 But the fixing of a pecuniary penalty in such cases can be justified in circumstances where to do so will serve the purpose of general deterrence. I said in Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (in liquidation) (No 3) [2017] FCA 1018 at [78] to [80]:
Penalties are not provable in a liquidation and it is most unlikely that GQA will pay any penalty that is imposed upon it. But in my view general deterrence considerations warrant making an order that GQA pay a significant pecuniary penalty. Now although it may not always be appropriate to order that a company in liquidation pay a pecuniary penalty, the Court should not be dissuaded from imposing a penalty on a company in liquidation if to do so will serve the purpose of deterring others from engaging in the same or similar conduct (Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (2007) 161 FCR 513 (ACCC v Dataline.Net.Au); Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd (in liquidation) [2005] FCA 1212; Australian Competition and Consumer Commission v Fila Sport Oceania Pty Ltd (administrators appointed) [2004] ATPR 41-983; [2004] FCA 376; Australian Competition and Consumer Commission v SIP Australia Pty Ltd [2003] ATPR 41-937 (ACCC v SIP); [2003] FCA 336; Australian Competition and Consumer Commission v The Vales Wine Company Pty Ltd [1996] ATPR 41-528; [1996] FCA 854).
In ACCC v Dataline.Net.Au, the Full Court said at [20]:
… a court may impose a penalty on a company in liquidation if to do so would clearly and unambiguously signify to, for example, companies or traders in a discrete industry that a penalty of a particular magnitude was appropriate (and was of a magnitude which might be imposed in the future) if others in the industry sector engaged in the same or similar conduct.
See also Australian Competition and Consumer Commission v EDirect Pty Ltd (in liq) (2012) 206 FCR 160; Australian Competition and Consumer Commission v Homeopathy Plus! Australia Pty Ltd (No 2) [2015] FCA 1090; Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liq) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) (No 2) [2015] ATPR 42-492; [2015] FCA 257.
In ACCC v SIP Goldberg J said at [59]:
If general deterrence is to have any meaning, a company in liquidation which has contravened the Act must be ordered to pay an appropriate pecuniary penalty as a deterrent to others who might be tempted to engage in similar conduct.
36 Let me turn to the next question.
37 The maximum penalty for each contravention of:
(a) sections 12CB or 12DB of the ASIC Act is $2.1 million, being 10,000 penalty units (s 12GBA(3)), the value of each of which was $210 since 1 July 2017 up until 1 July 2020; and
(b) sections 961K, 961Q and 961L of the Corporations Act is $1 million (s 1317G(1F)(b)).
38 The number of contraventions in which the defendant has engaged and the theoretical maximum penalty for those contraventions are relevant considerations in determining the appropriate penalty.
39 In Australian Securities and Investments Commission v Commonwealth Bank of Australia [2020] FCA 790 I said at [65]:
Now the process to be used in setting a civil penalty for contravention of statutory provisions is similar to that used in criminal sentencing. The maximum penalty must be given due attention because it has been legislated for, it invites comparison between the worst possible case and the case before the Court at the relevant time, and it provides a form of yardstick. But it may be an arid exercise in cases such as the present to engage in a mere arithmetical calculation multiplying the maximum penalty by the number of contraventions to get a theoretical maximum for all offending even if one could theoretically quantify that latter number (see Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (2015) 327 ALR 540 at [17], [18], [84] and [85] per Allsop CJ). But I do accept that some estimate of the number of contraventions is to be taken into account in getting some sense of the overall maximum. Now in the present case, I am theoretically considering orders of magnitude above a single contravention. But it is not productive to quantify this further. Moreover, it is not appropriate to quantify a theoretical maximum for the purpose of then ratcheting down, which is an impermissible exercise.
40 Where I have determined that the defendants have each engaged in a large number of contraventions, as I have here, it might not be productive to quantify the number of contraventions beyond saying that they are large in number (Get Qualified (No 3) at [32]). But it is instructive to take account of the theoretical maximums so that consideration can be given to the egregiousness of the conduct in question.
41 In the present case, I have made declarations that each of the defendants has engaged in thousands of separate contraventions of the Corporations Act and the ASIC Act that satisfy the statutory preconditions for the imposition of a pecuniary penalty. Putting to one side the contraventions of s 961L of the Corporations Act in which AGM engaged, the established contraventions arose for the most part from telephone conversations and emails between representatives of the defendants and identified clients of each defendant. Single statements or single phone calls gave rise in many instances to multiple contraventions that provide the basis for the imposition of a pecuniary penalty. In particular, each time a representative of a defendant made an advice statement (as defined in my principal reasons):
(a) in the case of AGM, for those advice statements made by people engaged by the third party account managers, Falcon and IBD, it contravened s 961K of the Corporations Act because the account manager did not comply with what I would describe as personal advice obligations to:
(i) act in the best interests of the relevant client as required by s 961B;
(ii) provide advice that was appropriate to the client as required by s 961G; and
(iii) give priority to the interests of the clients to whom those people provided advice as required by s 961J;
(b) in the case of OTM and Ozifin, for those advice statements made by people acting on their behalf, contravened s 961Q because the account managers did not comply with the personal advice obligations; and
(c) the defendant who had engaged that representative made what I have previously defined in my principal reasons as a best interests representation and an appropriate advice representation, in contravention of ss 12DB(1)(e) and 12DB(1)(h) of the ASIC Act, and a personal advice representation, in contravention of ss 12DB(1)(e), 12DB(1)(f) and 12DB(1)(h) (together, the implied representations).
42 Further, in this case I determined that what I have previously defined in my principal reasons as each of the investment representations, except the revenue representations, and the regulation representations (together, the express representations) made by each of the defendants contravened multiple parts of s 12DB(1).
43 Let me turn to another matter.
44 At the time of the contraventions in this case, s 12GBA(2) of the ASIC Act stated that in determining the appropriate pecuniary penalty I must have regard to all relevant matters and set out certain mandatory considerations to which I must have regard in determining an appropriate pecuniary penalty for contraventions of ss 12CB and 12DB of the ASIC Act, namely:
(a) the nature and extent of the act or omission that constitutes the relevant contravention, and of any loss or damage suffered as a result of the act or omission;
(b) the circumstances in which the act or omission took place; and
(c) whether the person who has been determined to have engaged in the contravention has previously been found in proceedings under Div 2, Subdiv G of the ASIC Act to have engaged in similar conduct.
45 At the time of the contraventions in this case, there was no equivalent list of mandatory considerations for civil penalties fixed under the applicable version of s 1317G(1E) of the Corporations Act for contraventions of ss 961K, 961L or 961Q.
46 As to the non-mandatory factors, I said in Westpac (No 3) at [49] and [50]:
The fixing of a pecuniary penalty involves the identification and balancing of all the factors relevant to the contravention and the circumstances of the defendant, and the making of a value judgment as to what is the appropriate penalty in light of the purposes and objects of a pecuniary penalty that I have just explained. Relevant factors include the following:
(a) the extent to which the contravention was the result of deliberate or reckless conduct by the corporation, as opposed to negligence or carelessness;
(b) the number of contraventions, the length of the period over which the contraventions occurred, and whether the contraventions comprised isolated conduct or were systematic;
(c) the seniority of officers responsible for the contravention;
(d) the capacity of the defendant to pay, but only in the sense that whilst the size of a corporation does not of itself justify a higher penalty than might otherwise be imposed, it may be relevant in determining the size of the pecuniary penalty that would operate as an effective specific deterrent;
(e) the existence within the corporation of compliance systems, including provisions for and evidence of education and internal enforcement of such systems;
(f) remedial and disciplinary steps taken after the contravention and directed to putting in place a compliance system or improving existing systems and disciplining officers responsible for the contravention;
(g) whether the directors of the corporation were aware of the relevant facts and, if not, what processes were in place at the time or put in place after the contravention to ensure their awareness of such facts in the future;
(h) any change in the composition of the board or senior managers since the contravention;
(i) the degree of the corporation's cooperation with the regulator, including any admission of an actual or attempted contravention;
(j) the impact or consequences of the contravention on the market or innocent third parties;
(k) the extent of any profit or benefit derived as a result of the contravention; and
(l) whether the corporation has been found to have engaged in similar conduct in the past.
Moreover and importantly, attention must be given to the maximum penalty for the contravention. But if contravening conduct is not so grave as to warrant the imposition of the maximum penalty, I am bound to consider where the facts of the particular conduct lie on the spectrum that extends from the least serious instances of the offence to the worst category.
47 Clearly, in considering and weighing all relevant factors I need to engage in intuitive synthesis, which requires a weighing together of all relevant factors, rather than an arithmetical algorithmic process that starts from some pre-determined figure and then makes incremental additions or subtractions for each factor according to a set of predetermined rules. And it is also important to note that intuitive synthesis conducted in criminal sentencing does not have the same boundaries and content as intuitive synthesis in the context that I am considering. In criminal sentencing, the synthesis involves not only the facts and circumstances of the offending, but also conflicting sentencing considerations such as retribution and rehabilitation, and differing sentencing options along a broader spectrum than the civil context from a donation to the poor box through to imprisonment.
48 Let me deal with another matter. Because discrete conduct on the part of the defendants gave rise to multiple contraventions, there are three further principles that are relevant to consider in the present context.
49 First, there is a statutory restriction in the applicable form of s 12GBA(4) that operates to preclude more than one pecuniary penalty being fixed under s 12GBA(1) if the same conduct contravenes two or more provisions of the relevant subdivisions of the ASIC Act. Accordingly, the conduct that gave rise to each of the implied representations and the express representations can be subject to only one pecuniary penalty under s 12GBA(1). I should note that there was at the time of the contraventions by the defendants no equivalent provision in the Corporations Act, but I will nevertheless adopt the same approach.
50 Second, where there is an interrelationship between the factual and legal elements of two or more contraventions, consideration may be given to whether it is appropriate to impose a single overall penalty for that course of conduct. Now as I said in Australian Competition and Consumer Commission v Murray Goulburn Co-Operative Co Limited [2018] FCA 1964 at [29]:
It is therefore necessary to say something on the "course of conduct" question. Separate contraventions arising from separate acts should ordinarily attract separate penalties. But a different principle may apply where separate acts, giving rise to separate contraventions, are so inextricably interwoven that they should be viewed as one multi-faceted 'course of conduct' such that a single penalty should be imposed for all contraventions. This provides one way of avoiding double-punishment for those parts of the legally distinct contraventions that involve overlap in wrongdoing; the other way is to apply the totality principle. But the question of whether multiple contraventions should be treated as being a single course of conduct is a factual inquiry to be made having regard to all of the circumstances. It is a 'tool of analysis' which can, but need not, be used in any given case. And its application and utility must be tailored to the circumstances (Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698 at [25]). But to apply such an approach is not to downplay the wrongdoing. This does not convert the many separate contraventions into only one contravention, and nor does it constrain the available maximum penalty let alone necessarily constrain it to the maximum penalty for one contravention. And notwithstanding a grouping into a course(s) of conduct, one must ensure that any penalty imposed is of appropriate deterrent value, whether specific or general.
51 Third, the totality principle requires me to review the aggregate penalty to ensure that it is just and appropriate and not out of proportion to the contravening conduct considered as a whole. It involves a final consideration of the sum of the penalties determined by consideration of all the relevant factors, and requires me to make a final check of the penalties to be imposed on a wrongdoer, considered as a whole. In cases where I consider that the cumulative total of the penalties to be imposed would be too high, I can alter the final penalties to ensure that they are just and appropriate and in proportion to the nature, quality and circumstances of the conduct involved.
52 Let me now turn to the application of these principles.
53 ASIC has sought to justify the fixing of a pecuniary penalty for:
(a) AGM of $40 million;
(b) OTM of $30 million; and
(c) Ozifin of $30 million.
54 But as I have indicated, in my view the penalty for AGM should be $35 million. And for OTM and Ozifin, they should separately pay a penalty of $20 million each. Let me explain my reasons.
55 Putting to one side AGM's contravention of s 961L, the contravening conduct by each of the defendants that has enlivened my power to fix civil penalties arose out of the provision by the defendants' representatives of unlicensed personal financial advice to identified clients in situations involving conflicts of interest, the making of various express or implied representations to identified clients that were false or misleading, and conduct that was intended to engender trust from clients and to advance the defendants' purpose of having clients deposit additional funds and therefore to expose them to a greater risk of loss.
56 I determined that the conduct towards identified clients of the defendants was unconscionable, and that each of the defendants engaged in a system of conduct that was unconscionable.
57 In addition to those contraventions that enlivened my power to fix a civil penalty, I also determined that each of the defendants engaged in contraventions of at the time non-civil penalty provisions, including:
(a) the provision by each defendant of unlicensed financial services in contravention of s 911A, namely, the provision of personal financial advice;
(b) conduct that was misleading or deceptive in contravention of s 1041H of the Corporations Act and s 12DA of the ASIC Act, including by making the express representations, implied representations, revenue representations and location representations as referred to in my principal reasons;
(c) AGM's failure to comply with its compliance obligations in s 912A(1); and
(d) AGM's non-compliance with ss 991A and 946A, OTM's non-compliance with s 916B(2A) and Ozifin's non-compliance with s 923C.
58 As to the contraventions for which a pecuniary penalty can be imposed, I should observe the following:
(a) The s 12DB contraventions occurred when the representatives made statements to the relevant clients that were false or misleading, or provided personal financial advice to the identified clients carrying implied representations that were false or misleading.
(b) The s 12CB unconscionable conduct contraventions were directed towards the 21 clients identified in my declarations. Each constituted a separate contravention. Further, the nominal number of contraventions that arose from the unconscionable system of conduct in which each defendant engaged can be determined by ascertaining the number of clients of each defendant. I am prepared to infer that each of those clients was subject to the unconscionable system of conduct.
(c) The ss 961K and 961Q contraventions occurred on each occasion that the representatives made advice statements, which contravened the personal advice obligations.
(d) The s 961L contraventions arose from the failure by AGM to take reasonable steps to ensure that the people engaged by Falcon and IBD complied with the personal advice obligations. Those contraventions are distinct from the contraventions of s 961K. Whereas the contraventions of s 961L arose from AGM's failure to take reasonable steps to ensure that its representatives complied with the personal advice obligations, s 961K allows me to look through the conduct of the representatives to impose liability on the licensee for engaging in a breach of those obligations.
59 Now ASIC provided me with a table setting out the number of instances and maximum penalties applicable to the contraventions the subject of my principal findings and declarations. No party took issue with its accuracy; for convenience it is a schedule to my reasons. But there are four matters that I should discuss at this point.
60 First, each advice statement constituted a contravention of s 12DB because the advice carried with it the implied best interests representation, appropriate advice representation and personal advice representation, each of which I determined was false or misleading. Further, in the case of the advice provided by Falcon or IBD, s 961K was contravened by AGM. Further, in the case of advice provided by OTM or Ozifin, s 961Q was contravened by OTM or Ozifin. This is because the providers of that advice failed to comply with the personal advice obligations.
61 The calculation of the number of unique instances that has been undertaken by ASIC and with which I agree ensures that particular conduct that constituted multiple contraventions of s 12DB has only been counted once. Further, the calculation has been done on the basis that on each occasion that an advice statement was made, there were contraventions of each of ss 961B, 961G and 961J, which has in each case been counted as a unique instance of conduct that contravened ss 961K or 961Q.
62 Second, and consistent with the approach adopted by me in Get Qualified (No 3), in assessing the appropriate penalties for the unconscionable systems of conduct in which each defendant engaged, I am not limited to imposing a penalty equivalent to the maximum penalty for one contravention of s 12CB. That is particularly so in a case such as the present. As I explained in my principal reasons, I was satisfied that the approach adopted by the account managers engaged by the three defendants was consistent across clients of all defendants. Further, the conduct of the account managers towards the 21 individual investors identified in my declarations was representative of the conduct towards all clients of the defendants. Moreover, it seemed to me that systems put in place were designed to identify and interact with investors in the way exemplified by the 21 specific instances of individual unconscionable conduct. Accordingly, I am satisfied that the conduct by each defendant that constituted the system of conduct determined to have been unconscionable was directed to each of the many thousands of clients of the defendants.
63 Third, AGM engaged in nine contraventions of s 961L. The number of contraventions has been appropriately calculated by multiplying the three groups of representatives who provided personal financial advice on AGM's behalf, that is, those who were engaged by AGM, OTM and Ozifin, by the three personal advice obligations that those representatives contravened, namely, as contained in ss 961B, 961G and 961J.
64 Fourth and more generally, each of the defendants engaged in many thousands of individual instances of conduct that contravened the relevant statutory provisions. And the theoretical maximum penalty derived from that number of contraventions is enormous. So in the case of AGM, it is approximately $27 billion. In the case of OTM, it is approximately $13 billion. And in the case of Ozifin, it is approximately $13 billion. I have had regard to such theoretical maximums although there is an air of unreality to them given that they are at least two orders of magnitude above what I consider to be the realistic range for the penalties that I propose to impose.
65 Let me now say something about general deterrence although I have already touched on this.
66 Each of the civil penalty provisions that the defendants contravened was a provision intended for the protection of consumers of financial services generally, and consumers receiving financial product advice in particular. The advice provided and the representations made by the defendants concerned high risk and complex financial products.
67 Moreover, the conduct arose in circumstances where retail clients were exposed to the risk of losses that exceeded the amount that clients had deposited to their trading accounts.
68 Further, apart from a small number of clients whose positions AGM had hedged directly, the defendants each stood to generate revenue directly from any loss suffered by a client, putting the defendants in a direct conflict of interest with their clients.
69 Further, the risk that retail participants in the market for CFDs and margin FX contracts will be misled if similar conduct occurs in the future, the risk of those participants suffering significant losses, and the commensurate prospect of gain to the issuer of those products or their authorised representatives supports the imposition of a significant penalty to deter licensees and their representatives from engaging in the type of conduct exposed in the present case.
70 Further, the size of the market for retail OTC derivatives in Australia, and the risk of loss to clients exposed to the sort of conduct engaged in by the defendants that I found to be established, supports the fixing of a significant pecuniary penalty to advance the purpose of general deterrence. Since December 2019, there have been at least 60 holders of an AFSL who have been entitled to hold and have in fact held money on behalf of people who have invested in retail OTC derivatives. I have set out some details earlier in my reasons.
71 Further, in addition to the Australian market, providers of OTC derivatives offer comparable products to investors in various jurisdictions. Jurisdictions such as the UK and Europe have seen an increase in recent years of the number of providers of derivatives, as well as the number of retail investors for those products, and continued consumer complaints to regulatory authorities by those retail investors. And various regulatory agencies in those jurisdictions have taken enforcement action against some providers as the result of conduct or contraventions equivalent to that in which the present defendants have engaged. Further, since 2017 at least 16 of the AFSL holders who have offered retail OTC derivatives in Australia have been or are the subsidiary or associate of an offshore company that has been the subject of enforcement action in an overseas jurisdiction. Those 16 AFSL holders as at May 2020 held about $1.34 billion in retail client funds. What all these matters reveal is, first, the prevalence of such providers in overseas jurisdictions, second, conduct on the part of some of those providers that is equivalent to the conduct at issue in this proceeding and, third, links between those that carried out that conduct and AFSL holders. The quantum of the civil penalty to be fixed in the present proceeding should also be sufficient to deter overseas providers of OTC derivatives from engaging in equivalent conduct in this jurisdiction.
72 In summary, general deterrence is of paramount importance in the present case and all of the above considerations justify a high penalty. But where I differ from ASIC is that in my view total penalties of $75 million rather than $100 million adequately satisfy the objective of general deterrence.
73 In this regard, general deterrence is not just served by the quantum of the pecuniary penalties. It is also served by my declarations and also by the orders that I have previously made shutting down the defendants' operations and ultimately resulting in the liquidation of each of the defendants. All of that has a general deterrence effect.
74 Further, as I discussed earlier in my reasons, the regulatory changes proposed are likely to result in a reduced risk of similar conduct being repeated in the future by other market participants or at least significantly ameliorate its scope or effect.
75 Further, on any view, the quantum of penalties to be set by me at $75 million well wipes out any profits made by the defendants.
76 Let me turn to another matter. The deliberateness of the conduct of each defendant supports imposing significant penalties. I should address four specific matters.
77 First, the purpose advanced by each of the defendants in their interactions with their clients was to have the clients increase the amount of money that they deposited to their trading accounts, to have the clients open multiple CFD or FX contract positions, and for the consequence of those steps to be that the clients lost the money they deposited. For example, the account managers engaged on behalf of OTM were instructed to "kill your customers", which was a reference to the purpose of the defendants to encourage deposits and trades and ultimately for those clients to lose their funds. And in advancing such a purpose, the account managers engaged by or on behalf of the defendants explicitly sought to and did win the trust of vulnerable investors. And at least in the case of those account managers engaged on behalf of AGM and OTM, they were paid significant commissions based on the quantum of deposits that they were able to secure from clients. So, the account managers were incentivised to induce clients to expose themselves to increasing losses.
78 Second, the approach of each defendant to assessing the appropriateness of the services offered to their clients was inadequate, perhaps non-existent. Moreover, the failure by the defendants to apply the appropriate benchmarks to determine the appropriateness of the products for potential clients was a determinant in my conclusion that the conduct towards the identified investors was unconscionable.
79 Third, each of the defendants was aware from early in the relevant period that clients had raised concerns with the defendants in relation to their conduct. Further, at least AGM and OTM were aware that ASIC had concerns about certain aspects of OTM's conduct from December 2017 in relation to representations on its website regarding the segregated nature of client funds and OTM being a regulated broker and the issuer of the securities. Further, all three defendants were aware of the breadth of ASIC's concerns against each of them by February 2018 at the latest. Further, the defendants knew that the Australian Financial Complaints Authority, or its predecessor the Financial Ombudsman Service, had received complaints from their clients by:
(a) in the case of AGM, no later than 21 November 2017;
(b) in the case of OTM, no later than 8 January 2018; and
(c) in the case of Ozifin, no later than November 2017.
80 Fourth, the defendants were in a position of conflict of interest with their clients. Indeed, the purpose advanced by the defendants increased the prospects of losses to the clients and commensurate gains to the defendants.
81 Let me now deal with the question of the clients' losses and the defendants' gain.
82 As a result of the contravening conduct, clients of each of the three defendants lost significant amounts of money. And as a direct consequence, each of the three defendants earned significant profits.
83 Now ASIC has not received from the defendants or their liquidators a reconciliation of the total amounts lost by clients, or the profit earned by the defendants, in the period that they each were operating.
84 But it would seem on the figures available, which I am prepared to accept, that considering only those clients who suffered overall losses from their trading, their total trading losses were:
(a) in the case of AGM, approximately $1.21 million up to September 2018;
(b) in the case of OTM, approximately $19.64 million up to September 2018; and
(c) in the case of Ozifin, approximately $11.36 million in the period between October 2017 and January 2019.
85 Further, I am satisfied that such trading losses translated on the other side to revenue earned by the defendants.
86 Further, the share of the revenue received by each defendant is also to be adjusted by the commission arrangements between AGM and each of OTM and Ozifin set out in the corporate authorised representative (CAR) agreements that I discussed in my principal reasons. Under the OTM CAR agreement, AGM was entitled to a percentage of OTM investor losses varying on a marginal basis starting from 7% and decreasing incrementally to 5% based on the quantum of gross monthly client P&L. Given difficulties in ascertaining those monthly values, a range has been calculated, with 5% used at the bottom end of the range and 7% at the top end. Under the Ozifin CAR agreement, AGM was entitled to 7% of Ozifin investor losses.
87 Taking into account the percentage of revenue from clients of OTM and Ozifin to which AGM was entitled under the terms of the CAR agreements, AGM earned approximately $2.96 to $3.34 million up to September 2018, including commissions paid by Ozifin to AGM in respect of that period during the following months up to January 2019. Further, OTM earned approximately $18.30 to $18.68 million up to September 2018. And Ozifin earned approximately $10.56 million in the period between October 2017 and January 2019.
88 Further, in the case of Ozifin, its liquidators have provided an updated estimate of the total client losses of approximately $13.93 million for the period 15 February 2018 to 29 September 2019.
89 Let me make a more general point. I have determined that each of the defendants engaged in a system of conduct that was unconscionable, that the conduct by the defendants towards the 21 investors identified in my principal reasons was representative of that system of conduct, and that the system was designed to identify and interact with investors in the way exemplified by the specific instances. Accordingly, I am satisfied that the revenue earned by the defendants was the result of the unconscionable system employed by the defendants.
90 Further, in addition to the direct financial losses suffered by clients, which constituted revenue earned by the defendants, clients of those defendants suffered significant indirect financial losses caused by conduct of the defendants. Various clients were unable to meet existing financial obligations.
91 More generally, I am not in doubt that the penalties should provide sufficient sting, and to ensure that other participants in the OTC derivatives market do not look upon the pecuniary penalties fixed in this case simply as a cost of doing business. The penalties that I intend to impose significantly exceed the revenue earned by each of the defendants. Such a level serves the purpose of general deterrence.
92 Let me now deal with the factor concerning the conduct of senior management.
93 The sole director of AGM, Mr Yossef Ashkenazi, was responsible for the management of AGM, including having ultimate responsibility for the design and implementation of its compliance systems. In addition, Mr Ashkenazi was responsible for the training of the account managers engaged on behalf of the defendants. I am satisfied that the approach adopted by the account managers was consistent partly because Mr Ashkenazi was responsible for conducting their training.
94 Indeed, for the purposes of setting the appropriate penalty for AGM, it is relevant that the system of conduct in which each of the defendants engaged was consistent with the content of the training provided by Mr Ashkenazi. In the case of OTM and Ozifin the conduct that constituted the contraventions, except for Ozifin's contraventions of s 923C(1)(c) by using the term "financial advisor", was undertaken on behalf of AGM. Moreover the conduct was consistent with training provided by Mr Ashkenazi in his role as a director of AGM. So, AGM's vicarious liability for the conduct of OTM and Ozifin did not arise simply from a passive relationship between the holder of an AFSL and its corporate authorised representatives.
95 Further, Mr Ashkenazi had overall responsibility for AGM's compliance with its statutory and licence obligations. And the nine contraventions by AGM of its obligations under s 961L were contraventions that have enlivened my power to fix a pecuniary penalty against AGM, and represent a compliance failure by AGM. Further, Mr Ashkenazi's ultimate responsibility for AGM's compliance obligations as the holder of an AFSL, and his contribution to the contraventions by OTM and Ozifin in particular are aggravating factors.
96 Let me say something separate about OTM and Ozifin. During the period in which the contravening conduct occurred:
(a) the sole director of OTM was Mr Guy Stein; and
(b) the directors of Ozifin resident in Australia were Ms Hagar Lipa and Mr Amadom Nagash.
97 Now neither Mr Stein in relation to OTM nor Ms Lipa or Mr Nagash in relation to Ozifin played any meaningful role in the management of those companies. Instead, effective control of those companies during the relevant period was exercised by overseas interests. I infer that the system of conduct undertaken by OTM and Ozifin was implemented or sanctioned by the controlling minds of OTM and Ozifin, who were located overseas, whether or not that system was based at least in part on the training and other guidance provided by Mr Ashkenazi. In my view, the control exerted over the operations of OTM and Ozifin by overseas interests fortifies the need for pecuniary penalties to be fixed for OTM and Ozifin at a level that deters other participants in the OTC derivatives market, and that might be controlled by overseas interests, from engaging in such conduct.
98 Let me now deal with the defendants' culture of non-compliance.
99 In my view, AGM disregarded its compliance obligations, particularly as the holder of an AFSL. In addition to the nine contraventions of s 961L, I have determined that AGM failed to comply with various compliance obligations that fell on it by reason of its being a holder of an AFSL. In particular, it failed to:
(a) do all those things necessary to ensure that the financial services covered by its AFSL were provided efficiently, honestly and fairly, in contravention of s 912A(1)(a);
(b) have in place adequate arrangements for the management of conflicts of interest that arise in relation to activities undertaken by it and its representation in the provision of the financial services as part of its financial services business, and those of its representatives, in contravention of s 912A(1)(aa);
(c) take reasonable steps to ensure that its representatives complied with the financial services laws, in contravention of s 912A(1)(ca);
(d) have available adequate resources to provide the financial services covered by its AFSL and to carry out supervisory arrangements, in contravention of s 912A(1)(d); and
(e) ensure that its representatives were adequately trained and were competent to provide financial services under its AFSL, in contravention of s 912A(1)(f).
100 There was a failure by Mr Ashkenazi, as the person charged with responsibility for AGM's compliance with the financial services laws, to understand what was required of AGM and its representatives to discharge its obligations as the providers of financial advice to retail clients.
101 Now in my principal reasons I identified various matters that revealed numerous systemic deficiencies in the operations of AGM, OTM and Ozifin which separately or cumulatively well justified my finding of a breach by AGM of s 912A(1). But at the time they occurred, AGM's various contraventions of s 912A(1) did not enliven my power to order it to pay a pecuniary penalty. Nevertheless, AGM's systemic compliance deficiencies support the fixing of a significant penalty for the large number of unique instances of contravening conduct in which AGM engaged so as to deter other AFSL holders who deal in OTC derivatives from failing to meet their statutory obligations, including their obligations properly to supervise the conduct of their authorised representatives. Indeed, the protection that the consumers of financial services might expect from compliance with those obligations is particularly important in the market for OTC derivatives. Derivatives are complex instruments and risky investments.
102 Further, each of OTM and Ozifin were incorporated shortly before they commenced providing financial services in Australia. And as I have said, the directors of those companies exercised minimal, if any, control over the operation of those companies, which in and of itself represents a shortcoming in their culture of compliance. Moreover, there is no evidence that those controlling OTM or Ozifin exercised any independent judgment as to whether their conduct complied with the statutory requirements. And to the extent that there was any monitoring of the conduct of the account managers engaged on behalf of those companies, it was outsourced to AGM. But AGM's monitoring was self-evidently inadequate. The failure by OTM and Ozifin to exercise any independent control over their account managers supports a significant pecuniary penalty.
103 Let me make a separate point. None of the defendants displayed any meaningful disposition to cooperate in the conduct of this proceeding until the start of the main trial late last year.
104 Finally, before I discuss the arithmetic I should say something on questions relating to duplication and also the course of conduct. I will deal with the totality question later.
105 First, although each of the statements made by the defendants that constituted an express or implied false or misleading representation by the defendants contravened various subsections of s 12DB(1), s 12GBA(4) operates to limit the liability of each defendant to one pecuniary penalty for each such statement.
106 Second, there are some common elements across the contraventions of:
(a) s 12DB(1) that resulted from the defendants making the:
(i) best interest representations; and
(ii) appropriate advice representations; and
(b) s 961K by AGM and s 961Q by OTM and Ozifin by reason of, respectively, the contraventions by the providers of that advice of:
(i) s 961B, in respect of acting in the best interest of the recipient of the advice; and
(ii) s 961G, in respect of providing advice that was appropriate to the client.
107 But there is no overlap in relation to the contravention of s 961J being the obligation to give priority to the client's interests where there is a conflict. None of the representations established in this case included any representation that the providers of the advice had satisfied the obligations in s 961J, or any representation to a similar effect. Therefore, each contravention of ss 961K or 961Q by reason of the contravention of s 961J justifies a penalty.
108 I have set out earlier the principles concerning the course of conduct question. They have been applied in what follows.
109 What should be the quantum of the penalties in the present case?
110 ASIC says that the appropriate pecuniary penalties should be the following, putting to one side the totality question.
111 First, it says that there should be a penalty of $98.97 million for AGM, of which:
(a) $11.98 million relates to the 347 unique instances of conduct that constituted contravening representations, which were made to 15 separate clients;
(b) $6 million relates to the four individual instances of unconscionable conduct;
(c) $5 million relates to the unconscionable system of conduct or pattern of behaviour engaged in;
(d) $30.71 million relates to AGM's liability for OTM's conduct;
(e) $32.30 million relates to AGM's liability for Ozifin's conduct;
(f) $6.98 million relates to the 698 unique instances of conduct that constituted contraventions of s 961K; and
(g) $6 million relates to the breaches of s 961L.
112 Second, it says that there should be a penalty of $65 million for OTM, of which:
(a) $29.42 million relates to the 448 unique instances of conduct that constituted contravening representations, which were made to 15 separate clients;
(b) $12 million relates to the eight individual instances of unconscionable conduct;
(c) $20 million relates to the unconscionable system of conduct or pattern of behaviour engaged in; and
(d) $3.58 million relates to the 358 unique instances of conduct that constituted contraventions of s 961Q.
113 Third, it says that there should be a penalty of $72.52 million for Ozifin, of which:
(a) $31.09 million relates to the 693 unique instances of conduct that constituted contravening representations, which were made to 12 separate clients;
(b) $13.5 million relates to the nine individual instances of unconscionable conduct;
(c) $20 million relates to the unconscionable system of conduct or pattern of behaviour engaged in; and
(d) $7.93 million relates to the 793 unique instances of conduct that constituted contraventions of s 961Q.
114 Let me also record some other matters of detail upon which some of ASIC's figures are based.
115 ASIC says that it is appropriate to fix a penalty of $2.1 million, being the maximum penalty available) for what I have described in my principal reasons as OTM's Shark Tank representation. This representation was made on a public website to an unknown number of people. It purported to be a news article relating to a popular television show. It is evident that the bitcoin trader ad was designed to lure users into signing up with OTM, despite OTM not offering the product that was described in the purported news article. It is said that the presence within the article of false or misleading testimonials as to that non-existent product is an aggravating factor.
116 Further, ASIC says that it is appropriate to fix a penalty of $1.05 million, being half the maximum penalty available, for what I have described in my principal reasons as Ozifin's analysis representation.
117 Further, ASIC says that the appropriate penalty for each of the express representations other than the analysis representation should be $200,000. Each of those representations was made to identified clients, and constituted conduct that was likely to lead those clients into error in making a decision to invest in OTC derivatives that are highly complex and risky products. Those representations constituted features of the system of conduct undertaken by each of the defendants that I determined was unconscionable. The proposed penalty for each such representation, and the discount from the maximum available penalty for each such representation, accounts for the fact that by comparison with the Shark Tank representation or analysis representation, each of the defendants made each of the balance of the express representations on multiple occasions, and to multiple clients. Further, it is open to conclude that each such representation, or the group of representations made to each client, arose from the same legal or factual elements, and therefore the same course of conduct. Further, by comparison with the analysis representation in particular, there is no evidence that the balance of the express representations led directly to client losses. Whilst I was satisfied that those representations formed part of an unconscionable system of conduct, one of the purposes of which was to have clients lose money, there is not the direct causative link between the balance of the express representations and client losses that is present in the case of the analysis representation.
118 Further, the making of each of the investment representations was a feature of the unconscionable system of conduct in which each of the defendants engaged and also a feature of the unconscionable conduct in the supply of financial services to the four AGM clients, eight OTM clients and nine Ozifin clients specifically identified. ASIC proposes that separate pecuniary penalties be fixed for that conduct.
119 Further, ASIC says that the appropriate penalty for each of the implied representations should be $20,000. It says that it is proper to fix a lower penalty for each implied representation than for the express representations because each implied representation arose only by implication from the making of each advice statement or equities risk representation, and therefore did not amount to an express representation with regard to the operation of the financial products in which each of the defendants dealt, or the characteristics of the financial services that they provided.
120 Further, ASIC submits that the appropriate penalty for each instance of unconscionable conduct towards the identified clients of each of the defendants should be $1.5 million. It says that a penalty of $1.5 million for each instance of individual unconscionable conduct reflects the seriousness of each contravention, and in particular the material disadvantage suffered by each of the individual clients due to their lack of understanding of the operation of the complex financial products offered by the defendants, and the risks associated therewith.
121 Further, it says that such a penalty reflects that the conduct by the defendants that I determined was unconscionable included the false representations that should be the subject of separate penalties and reflects the separate penalties fixed for the unconscionable system of conduct, of which the individual instances of conduct formed a part.
122 Further, ASIC says that with respect to AGM, $5 million should be fixed for AGM's systemic unconscionable conduct. I am prepared to infer that all of AGM's 294 clients were exposed to the system of conduct that I determined was unconscionable. Further, in addition to the matters described above, the penalty reflects the relatively lower number of clients of AGM compared with OTM and Ozifin, and the consequently relatively lower quantum of revenue generated by AGM from the unconscionable system and also reflects that a separate penalty is to be fixed for AGM to reflect the fact that the unconscionable system of conduct undertaken by OTM and Ozifin was undertaken on behalf of AGM.
123 Further, ASIC says that with respect to OTM and Ozifin, $20 million is the appropriate penalty to fix for the systemic unconscionable conduct of those defendants. The significantly higher penalties reflect the above matters, the relatively higher numbers of clients who were exposed to the system of conduct, as compared with AGM, and the significant revenue generated by OTM and Ozifin, which reflects losses suffered by the clients of those defendants.
124 ASIC also says that it is appropriate that the same penalty be fixed for both OTM and Ozifin for their system of unconscionable conduct. In particular, OTM and Ozifin had approximately the same number of clients, being 5,400 and 5,307 respectively, each of whom I am prepared to infer was subject to their respective systems of unconscionable conduct. Further, each of OTM and Ozifin had approximately the same number of clients who deposited more than $10,000, being 332 and 312 respectively, and it can be inferred that those clients suffered the majority of the significant losses. Further, whilst Ozifin made materially more implied representations, they were made to fewer clients than in the case of OTM. Further, OTM deployed the TeamViewer program in order to remotely view clients' computers, which Ozifin apparently did not do. Further, whilst Ozifin made significant use of bonus funds, there is no evidence that OTM offered bonus funds to its clients. Ultimately, those considerations reveal an equivalence in the conduct of each of OTM and Ozifin.
125 Let me now draw some of the threads together.
126 First, given that I am imposing separate penalties concerning OTM's conduct and Ozifin's conduct, ASIC's submissions that I should quantify a penalty of $30.71 million for AGM's liability for OTM's conduct and $32.30 million for AGM's liability for Ozifin's conduct are excessive. Such amounts should be no more than 50% of those figures in each case.
127 Second, in my view ASIC's quantifications of $20 million each against OTM and Ozifin for the systems case concerning unconscionable conduct should be no more than 50% of these figures in each case.
128 Third, and more generally, subject to those two matters there is little that troubles me about ASIC's quantifications and methodology concerning its figures before the question of totality is considered. Further, for completeness, ASIC's figures encapsulate the appropriate application of the course of conduct principle.
129 Fourth, clearly the penalties that ought to be fixed should be greater than the revenue earned from the application of the system of conduct that I have determined was unconscionable. Such penalties advance the principal purpose of general deterrence as I have already explained because they are to be fixed in an amount that could not be regarded by other participants in the market for OTC derivatives simply as the cost of doing business.
130 Fifth, whilst each of the defendants is now in liquidation, the serious nature of the contraventions and the need to send a clear message to the limited number of licensees who are dealing in OTC derivatives justifies high penalties.
131 Sixth, any penalty to be fixed for AGM should reflect in a proportionate way its responsibility for the conduct of each of OTM and Ozifin. Relatedly, it is appropriate that the overall penalty for AGM be higher than that for OTM and Ozifin, reflecting the failure by AGM to discharge its obligations as the holder of an AFSL. Such a penalty will stand as a deterrent to other AFSL holders, particularly those who are participants in the OTC derivatives market, from failing properly to supervise the conduct of their authorised representatives.
132 Seventh, although ASIC has referred to the parity question and penalties in other cases, I did not find its analysis to be particularly helpful on that point. As I said in ASIC v CBA at [77]:
… it is appropriate to consider the question of parity. But in all but the co-offender scenario or analogues thereof it is conceptually problematic to look at penalties in other cases to calibrate a figure in the present case when all that one has from the other cases are single point determinations produced by opaque intuitive synthesis. Deconvolution analysis of the single point determinations in order to work out the causative contribution of any particular factor is unrealistic. No juridical style Fourier transformation is possible. But unless that can be done, comparisons outside the co-offender or like scenario have little value. Moreover, the comparative value of other single point determinations is even further reduced in cases where they have been substantially influenced by the parties' identification of and then consensus to the relevant figure or range.
133 Let me now address the totality question and its application.
134 ASIC significantly reduced its nominal figures that I have set out earlier to account for the totality principle in suggesting that there be:
(a) a $40 million penalty for AGM;
(b) a $30 million penalty for OTM; and
(c) a $30 million penalty for Ozifin.
135 Given the several adjustments that I would make to ASIC's nominal figures as I have discussed and in any event, I would reduce ASIC's figures after considering the question of totality to:
(a) a $35 million penalty for AGM;
(b) a $20 million penalty for OTM; and
(c) a $20 million penalty for Ozifin.
136 It seems to me that considering the totality of the circumstances applying to the offending and position of each defendant, and then considering the offending and position of the defendants in aggregate, that such penalties more than adequately and proportionately achieve the objective of general deterrence together with the other non-penalty factors that I have mentioned.
137 I should now turn to the redress orders.