Australian Securities and Investments Commission v Axis International... [2012] NSWSC 1643 | Case summary

Judgment 1By Application made under, inter alia, ss 206E and 1101B of the Corporations Act 2001 (Cth), the Plaintiff, the Australian Securities and Investments Commission ("ASIC") seeks declarations of improper conduct by Ms Scott, in her own right and as the sole director, employee and servant and agent of Roach Graham Scott Pty Limited ("RGS"), and by RGS, while providing financial services as authorised representative of another entity, in contravention of s 1041G of the Corporations Act between 9 September 2004 and 27 April 2012. ASIC also seeks orders under s 1101B of the Corporations Act that both Ms Scott and RGS, by themselves, their servants, agents and employees, be permanently restrained from carrying on a financial services business and providing a financial services business, on their own behalf or on behalf of another person; and under s 206E of the Corporations Act that Ms Scott be disqualified from managing corporations for 25 years, or for such other period as the Court considers appropriate. 2ASIC relies, in support of the orders sought, on affidavits of Mr Jonathan Tiddy dated 11 May 2012, Mr Philip Peck dated 2 December 2012, and Ms Scott dated 3 December 2012. Ms Scott gave evidence by affidavit indicating that she and RGS consented to the orders sought, having received independent legal advice as to the consequences of consenting to the order and providing that affidavit. 3I made the orders sought by ASIC, which were not contested by Ms Scott or RGS, on 3 December 2012, and gave brief oral reasons for making those orders. I indicated that I would deliver a written judgment setting out my reasons for those orders in greater detail. These are my reasons for making those orders. The factual background 4Ms Scott was a director of RGS since 25 January 1989 and a director of the Third Defendant, Roach Scott Pty Limited, which acts as trustee of Ms Scott's family trust, since 9 August 2011. 5Between 1986 and 1992, Ms Scott conducted business on her own account. Between April 1992 and September 1992, she conducted business as a securities representative of an entity that specialised in the sale of insurance to its clients. Between 1992 and 1996, she conducted business as a securities representative of a second entity which advised its clients about general financial planning. 6On 18 June 1996, Ms Scott was banned by ASIC from acting as a representative of a securities dealer or investment adviser for a period of 10 years. The banning order proceedings in 1996 involved allegations of forgery and misappropriation of client monies and Ms Scott consented to the relevant order. After that order was made, Ms Scott provided superannuation and risk advice and recommenced insurance products to clients, which were then not within the scope of regulation under Chapter 7 of the Corporations Act and not prohibited by the banning order. 7That banning order was varied by an order dated 31 October 2003 to permit Ms Scott to provide specified financial services, following submissions from Ms Scott that, if the banning order was not varied, the implementation of the Financial Services Reform Act 2001 (Cth) would have resulted in expanding the scope of the banning order to include conduct that was not included within its original scope. Ms Scott also made submissions to ASIC at that time that, since the banning order, she had conducted her business in an exemplary fashion. The variation of the banning order permitted Ms Scott to act as representative of a holder of a dealer's licence in respect of interests in regulated superannuation funds and pooled superannuation funds only and as a representative of the holder of an Australian financial services licence to provide financial services in respect of contracts of insurance only. 8Ms Scott and RGS were subsequently appointed as an authorised representative and corporate authorised representative respectively of Millennium 3 Financial Services Pty Limited ("Millennium 3"). Ms Scott's evidence was that she initially intended to conduct investment product business herself and insurance and superannuation product business through RGS, but had not always strictly followed that division, and clients may have believed that she, and not RGS, was their financial adviser. 9Ms Scott's affidavit filed in these proceedings made apparently comprehensive admissions as to her conduct. In particular, she admitted that, between 2 August 1989 and 8 February 2004, she received monies totalling in excess of $2.2 million from 128 clients upon terms requiring her to invest those monies on behalf of those clients as her agent, and fraudulently misappropriated those monies in violation of the terms upon which she received them. 10Ms Scott also acknowledged that between 9 February 2004 and 12 December 2010 she engaged in dishonest conduct in relation to financial products or financial services, in obtaining $2,086,626 from 52 clients on terms requiring her to invest the funds on behalf of those clients, but failing to invest those funds in accordance with those instructions and using those funds for her own personal benefit without the clients' consent or knowledge; falsely representing to 13 of those clients that she had in fact invested the funds in accordance with their instructions and that the funds were earning returns; and sending account statements to one client that contained false representations about the value of their investments. Ms Scott acknowledged that that conduct was contrary to ss 1041G and 1311(1) of the Corporations Act. 11Ms Scott also acknowledged that between 13 December 2010 and 27 April 2012 she engaged in dishonest conduct in relation to financial products or financial services, in obtaining $1,546,133 from five clients on terms requiring her to invest the funds on behalf of those clients, but again acting dishonestly by failing to invest those funds in accordance with those instructions and using them for her own personal benefit without the clients' consent or knowledge, and falsely representing to two clients that she had in fact invested the funds in accordance with their instructions and the funds were earning returns. She acknowledged that that conduct was contrary to ss 1041G and 1311 of the Corporations Act. 12Ms Scott acknowledged that she had defrauded in excess of $5.8 million from 165 clients on 302 separate occasions from 2 August 1989 to 27 April 2012, and had misappropriated in excess of $3.6 million from 56 different clients in the period 9 February 2004 to 27 April 2012. She suggested that approximately $180,000 represented amounts relating to investment products where she was dealing with clients personally and in excess of $3.45 million represented amounts given by 54 different clients which she, through RGS, was supposed to have invested in insurance or superannuation products. She acknowledged that the monies were applied into one of her personal bank accounts and she used the monies for personal purposes such as purchasing or renovating property, paying for family holidays, her children's school fees and other lifestyle expenditure, as well as repaying funds to clients who requested repayment of investments. Ms Scott's evidence is that she had paid in excess of $2.5 million to clients between 2 August 1989 and 11 May 2012 from whom she had misappropriated money purportedly by way of returns on their investments or returns of capital. I interpolate that, as ASIC points out, the use of one client's funds to repay another is conduct characteristic of the fraudulent activity described as a Ponzi scheme. 13Ms Scott's evidence was that the majority of her financial services business involved providing superannuation and retirement advice to clients, recommending allocated pension products to clients who had reached retirement age, and setting up retail superannuation accounts for those clients still working and accumulating superannuation. As ASIC points out, it is apparent from that evidence that Ms Scott dealt largely with retail clients and with clients who were approaching retirement age or were seeking to prepare for retirement. Those clients were particularly vulnerable to conduct of the kind undertaken by Ms Scott and to losses suffered as a result of that conduct. Declarations of improper conduct 14ASIC seeks declarations of improper conduct by Ms Scott, in her own right and as the sole director, employee and servant and agent of RGS, and by RGS, while providing financial services as an authorised representative of another entity, in contravention of s 1041G of the Corporations Act between 9 September 2004 and 27 April 2012. 15Section 1041G of the Corporations Act prohibits a person, in the course of carrying on a financial services business in the jurisdiction, from engaging in dishonest conduct in relation to a financial product or financial service. That section is directed to reinforcing the requirement for integrity in the financial services industry: Braun v R [2008] NSWCCA 269; (2008) 68 ACSR 539 at [74]. The reference to "dishonest" in this section is defined in s 1041G(2) as dishonest according to the standards of ordinary people, and known by the person to be dishonest according to those standards. That standard reflects the general law meaning of that concept: R v Ghosh [1982] QB 1053; [1982] 2 All ER 689; [1982] 3 WLR 110; see also Peters v R (1998) 192 CLR 493; 151 ALR 51. 16The misappropriation of client funds paid to Ms Scott and RGS for investment in financial products on behalf of clients and the use of those monies for Ms Scott's personal benefit, which have been admitted by Ms Scott and RGS, plainly involved dishonesty according to the standards of ordinary people. That misappropriation and dishonesty occurred on a substantial scale, by reference to the number of clients affected, the number of occasions on which monies were misappropriated and the amount involved. The application of the monies intended to fund, in many cases, the retirement of Ms Scott's and RGS's clients to Ms Scott's personal expenses and consumption, including holidays, school fees and other expenditures, involved a significant disregard of her clients' interests. The element of dishonesty is emphasised by the use of monies of later investors to pay earlier investors in a manner characteristic of a Ponzi scheme. Ms Scott admits that she and RGS acted dishonestly and that finding should plainly be made on the relevant facts. 17Section 1101B of the Corporations Act and the Court's inherent powers allow it to make a declaration of contravention of the Corporations Act in these circumstances: Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd [2006] VSC 192; (2006) 57 ACSR 553 at [338]. The Court will not make declarations of contravention unless it is satisfied that there is sufficient evidence to support those declarations, to the standard set out in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 361 - 362; Australian Securities & Investments Commission v Lindberg [2012] VSC 332 at [6]. I am comfortably satisfied of that matter and I make the declarations sought by ASIC, and not opposed by Ms Scott and RGS, in that regard. Order restraining Ms Scott and RGS from carrying out financial services 18ASIC also seeks an order under s 1101B of the Corporations Act that both Ms Scott and RGS, by themselves, their servants, agents and employees, be permanently restrained from carrying on a financial services business and providing a financial services business, on their own behalf or on behalf of another person. The Court may make an order under this section on ASIC's application where it appears to the court that, inter alia, a person has contravened a provision of Chapter 7 of the Corporations Act or any other law relating to dealings in financial products or providing financial services. The orders which may be made under this section include, in the case of persistent or continuing contraventions of Chapter 7 or a provision of any other law relating to dealing in financial products or providing financial services, an order restraining a person from carrying on business, or doing an act or classes of acts, in relation to financial products or financial services: s 1101B(4)(a) and see, for example, Australian Securities and Investments Commission v McDougall [2006] FCA 427; (2006) 229 ALR 158; 57 ACSR 175; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd above. The Court will make such an order for a period agreed between the ASIC, Ms Scott and RGS, unless that period is outside an appropriate range: Australian Securities and Investments Commission v Vizard [2005] FCA 1037; 145 FCR 57; 54 ACSR 394 at [45]. 19The Court may draw upon the factors in cases dealing with disqualification from managing a corporation to provide guidance as to the circumstances in which a permanent restraining order should be made under this section. In Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 at 525; 6 ACLC 90, Franklyn J observed that: "there is a public need to ensure that only suitable persons act as directors, secretaries and otherwise in a managerial capacity so that compliance with the statutory requirements can be assured and that persons so acting in fact so comply." The court there identified eight factors which were relevant to the exercise of its power of disqualification, namely the character of the offender; the nature of the breach; the structure of the relevant company and the nature of its business; the interests of shareholders, creditors and employees; risks to others from the continuation of the offender as a director; the honesty and competence of the offender or otherwise; hardship to the offender and his or her personal and commercial interests; and the offender's appreciation that future breaches could result in future proceedings. 20The factors relevant to a disqualification order were summarised by Santow J in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 at 97-99, in a passage which has frequently been quoted and applied, as follows: "The cases on disqualification gave orders ranging from life disqualification to 3 years. The propositions that may be derived from these cases include: (i) Disqualification orders are designed to protect the pubic from the harmful use of the corporate structure or from use that is contrary to proper commercial standards. (ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office. (iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors. (iv) The banning order is protective against present and future misuse of the corporate structure. (v) The order has a motive of personal deterrence, though it is not punitive. (vi) The objects of general deterrence are also sought to be achieved. (vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company. (viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty. (ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public. (x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct. (xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming. (xii) The eight criteria to govern the exercise of the court's powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess: · character of the offenders; · nature of the breaches; · structure of the companies and the nature of their business; · interests of shareholders, creditors and employees; · risks to others from the continuation of offenders as company directors; · honesty and competence of offenders; · hardship to offenders and their personal and commercial interests; and · offenders' appreciation that future breaches could result in future proceedings. (xiii) Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were: · large financial losses; · high propensity that defendants may engage in similar activities or conduct; · activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy; · lack of contrition or remorse; · disregard for law and compliance with corporate regulations. · dishonesty and intent to defraud; · previous convictions and contraventions for similar activities. (xiv) In cases in which the period of disqualification ranged from 7-12 years, the factors evident and which lead to the conclusion that these cases were serious though not "worst cases", included: · serious incompetence and irresponsibility; · substantial loss; · defendants had engaged in deliberate courses of conduct to enrich themselves at others' expense, but with lesser degrees of dishonesty; · continued, knowing and wilful contraventions of the law and disregard for legal obligations; · lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform. ... (xv) The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were: · although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated; · the defendants had no immediate or discernible future intention to hold a position as manager of a company; · in Donovan's case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings. [Citations omitted]" 21In Australian Securities and Investments Commission v Vines [2006] NSWSC 760; (2006) 58 ACSR 298 at [35]-[36], Austin J considered the impact of the decision of the High Court in Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 220 CLR 129 on these propositions and noted that: "... The High Court's decision, that proceedings in which an application is made for a disqualification order are proceedings for the imposition of a penalty, for the purposes of the privilege against exposure to a penalty, has very little effect on the propositions. It directly affects only proposition (v), to the extent that a disqualification order should now be regarded as involving the imposition of a penalty. The majority judges in the High Court did not directly consider the principles to be applied by the court when considering whether to make a disqualification order, and if so, the period of disqualification. However, McHugh J considered that topic at some length. His general thesis, expounded at [41], was that although judges frequently said that the purpose of the disqualification provisions is protective, what they did in practice was little different from what judges do in determining what orders or penalty should be made for offences against the criminal law." 22Austin J there identified factors that the courts take into account in determining the period of disqualification that should be imposed (at [43]) as including, inter alia, whether the defendant is now or in future will be a fit and proper person to manage corporations; the size of any losses suffered by the corporation, its creditors and consumers; legislative objectives of personal and general deterrence; contrition on the part of the defendant; the gravity of the misconduct; the defendant's previous good character; prejudice to the defendant's business interests; personal hardship; and the defendant's willingness to render assistance to statutory authorities and administrators. 23The Full Court of the Federal Court similarly had regard to the factors identified in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler above in making disqualification orders in respect of directors in Australian Securities and Investments Commission v Beekink [2007] FCAFC 7; (2007) 238 ALR 595; 61 ACSR 305 at [80]-[114]. Those factors were applied in the same context in Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) [2010] FCA 292; (2010) 268 ALR 303; 77 ACSR 392 at [17]ff and in Australian Securities and Investments Commission v Axis International Management Pty Ltd (No 6); [2011] FCA 811; (2011) 84 ACSR 703. 24In the present case, Ms Scott's and RGS's conduct, particularly where it occurred after a banning order had previously been made in respect of Ms Scott, demonstrates the need to secure the protection of the public from their activities. The need for protection of the public is greater where improper conduct of a financial adviser has the capacity to cause significant harm to members of the public, a matter that is reflected in the detailed regime for regulation of authorised representatives under Part 7.6 of the Corporations Act. Such an order is also necessary in order to achieve personal and general deterrence. Given the seriousness of the conduct and the degree of dishonesty involved, personal hardship of Ms Scott arising from such an order has little weight in these circumstances. Absent restraint, there is every risk of repetition of similar conduct, where that conduct extended over a long period, both before and after the earlier banning order. 25In my view, the permanent restraint on Ms Scott and RGS from carrying on a financial services business or providing a financial service on behalf of another person is well within a permissible range of orders in these circumstances Disqualification from acting as a director 26ASIC also seeks an order under s 206E of the Corporations Act that Ms Scott be disqualified from managing corporations for 25 years, or for such other period as the Court considers appropriate. The court may, on ASIC's application, disqualify a person from managing corporations for the period the court considers appropriate if the person falls within the categories specified in this section and the court is satisfied that the disqualification is justified: s 206E(1). Such an order may be made where a person has at least twice been an officer of a body corporate that has contravened the Corporations Act while they were an officer of the body corporate and each time the person has failed to take reasonable steps to prevent the contravention. It has been established that RGS has contravened s 1041G of the Corporations Act and Ms Scott did not take reasonable steps to prevent that contravention and, indeed, given her capacity as sole director, shareholder and employee of RGS, was the person responsible for its occurrence. Section 206E(1)(a)(i) is satisfied in this situation: compare Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267; (2005) 53 ACSR 305 at [92]. Such an order may also be made where a person has at least twice contravened the Corporations Act while they were an officer of a body corporate. Ms Scott has here contravened the Corporations Act on many occasions as a director of RGS, and was also involved in that company's contraventions of the Act: compare Australian Securities and Investments Commission v Australian Investors Forum at [111]. 27In my view, an order disqualifying Ms Scott from managing corporations for 25 years is also within the permissible range of orders appropriate in the circumstances, given the serious nature of Ms Scott's conduct as set out above. Declarations and orders 28I therefore make the following declarations and orders: A. Declarations

Declares that, during the period 9 February 2004 to 27 April 2012, the First Defendant while: (a) being the sole director, employee, servant and agent of the Second Defendant; and (b) providing financial services in Australia, through the Second Defendant, as an authorised representative of Millennium3 Financial Services Pty Ltd, repeatedly and persistently contravened section 1041G of the Corporations Act 2001 (Cth) ("the Act") by obtaining, together with the Second Defendant, a total of $3,632,759.46 ("the Funds") from 56 separate clients ("the Clients") on terms requiring the Funds to be invested, and by then: (c) failing to invest the Funds in accordance with the Clients' instructions, knowing that such failure was not in accordance with the Clients' instructions; (d) using the Funds for her own personal benefit, without the consent or knowledge of the Clients and knowing that she was not entitled to do so; (e) representing to some Clients that: (i) she or the Second Defendant had invested the Funds in accordance with the Clients' instructions; (ii) the Funds were earning returns, knowing that those representations were false; and (f) causing the Second Defendant to send one of the Clients account statements that contained representations about the value of the Clients' investments, knowing that those representations were false.
Declares that between 9 February 2004 and 27 April 2012, the Second Defendant, whilst providing financial services in Australia as an authorised representative of Millennium3 Financial Services Pty Ltd, repeatedly and persistently contravened section 1041G of the Act, by obtaining, together with the First Defendant, the Funds from the Clients on terms requiring the Funds to be invested, and by then: (a) failing to invest the Funds in accordance with the Clients' instructions, knowing that such failure was not in accordance with the Clients' instructions; (b) using the Funds for the personal benefit of the First Defendant, without the consent or knowledge of the Clients and knowing that it was not entitled to do so; (c) representing to some Clients that: (i) it had invested the Funds in accordance with the Clients' instructions; (ii) the Funds were earning returns, knowing that those representations were false; and (d) sending one of the Clients account statements that contained representations about the value of the Clients' investments, knowing that those representations were false. B. Disqualification from managing corporations
Order under section 206E of the Act that the First Defendant be disqualified from managing corporations for 25 years. C. Financial services banning
Orders under section 1101B(1) of the Act, that the First Defendant, by herself and her servants, agents and employees, be permanently restrained from: (a) carrying on a financial services business; and (b) providing a financial service, on her own behalf or on behalf of another person.
Orders under section 1101B (1) of the Act, that the Second Defendant, by itself and its servants, agents and employees, be permanently restrained from: (a) carrying on a financial services business; and (b) providing a financial service, on its own behalf or on behalf of another person. D. The general orders

Australian Securities and Investments Commission v Axis International Management Pty Ltd

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