Australian Securities and Investments Commission v Cassimatis

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 574 of 2010

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGE: EDELMAN J DATE: 4 MAY 2015 PLACE: BRISBANE

The interlocutory issue 1 This interlocutory issue concerns the manner in which a potential dispute about legal professional privilege should be determined. The parties take different views about the course that should be taken to avoid me, as the trial judge, considering documents before trial including those involving legal advice that might be privileged from discovery and would not be tendered in evidence at the trial. The Australian Securities and Investments Commission (ASIC) seeks orders for the appointment of an independent barrister to determine any claim for privilege, with the fees for the barrister to be borne equally by the parties. In contrast, Mr and Mrs Cassimatis say that the legal professional privilege application should be determined by a different judge or, if determined by an independent barrister, they say that ASIC should pay all the fees of that barrister. 2 I accept the submission of senior counsel for ASIC that this Court has power to refer questions of legal professional privilege to determination by an independent barrister. I would have serious concern about the use of that power if it would have the likely effect of putting Mr and Mrs Cassimatis to a significantly greater expense than the cost they would otherwise incur to have their disputes determined by a judge. In this case, I do not consider that this result is likely. The manner in which the litigation has been conducted so far is a strong indication that a less formal dispute resolution process will be cheaper and more efficient for both parties. The efficient regime proposed by ASIC, with minor amendments made by Mr and Mrs Cassimatis, will also assist to streamline the litigation process. Finally, although the size of the litigation might initially appear large by reference to its history and the number of prospective witnesses, the central issues can be briefly summarised for the purposes of a legal professional privilege application. These reasons aim to assist in that process as part of the material to be supplied to the independent barrister. 3 The reasons which follow set out (i) a summary of the proceedings, (ii) the manner in which the proceedings have been conducted, (iii) the power of this Court to order that an independent party make a determination of questions of legal professional privilege, and (iv) the reasons why that power should be exercised in this case and the need for this matter to move rapidly to trial.

Summary of the proceedings 4 The following matters are a summary of the allegations in the pleadings and pleaded matters clarified during the directions hearing before me. 5 Storm Financial Ltd (Storm) was a company engaged in the business of providing financial services, financial product advice, and financial products. At relevant times, Mr and Mrs Cassimatis were the only executive directors of Storm. They held all of the shares in Storm. They developed the 'Storm Model' of investment advice. 6 The Storm Model of investment advice involved: (1) advice to investors to take out a bank loan secured by a mortgage over their home so that they could use the equity in their home to invest in indexed funds recommended by Storm which were comprised of shares in the Australian Stock Exchange; (2) advice to investors to take out a margin loan in order to have further funds to invest in the same way; and (3) subsequent advice to take what was described as 'steps' to borrow more money by increasing their margin loan or increasing their home loan, to invest in the same way. 7 ASIC seeks declarations against each of Mr and Mrs Cassimatis that they committed numerous contraventions of s 180(1) of the Corporations Act 2001 (Cth). That section is a civil penalty section. It requires that a director must exercise powers and discharge duties with the degree of care and diligence that a reasonable person would exercise if the reasonable person (a) were a director of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director. 8 Each of ASIC's alleged contraventions is based on allegations that Mr and Mrs Cassimatis 'caused' or 'permitted' Storm to provide financial advice to different investors (individuals or couples). 9 Broadly, in the case of each investor, ASIC says that Mr and Mrs Cassimatis exposed Storm to a foreseeable risk of harm, of a degree greater than that to which a reasonable person in the position of Mr and Mrs Cassimatis would permit the company to be exposed. The risk of harm is said to involve (i) conviction of an offence under s 1311 of the Corporations Act, (ii) cancellation or suspension of Storm's Australian Financial Services Licence, (iii) a banning order consequent upon action by ASIC under s 920A of the Corporations Act, (iv) court orders, consequent upon an action by ASIC under s 110B of the Corporations Act, and (v) civil proceedings by the investors. ASIC says that the risk of this type of harm arose because Mr and Mrs Cassimatis 'caused and/or permitted' Storm to provide advice to the investors in accordance with the Storm Model in a manner which caused Storm to contravene three different provisions of the Corporations Act: (i) s 945A(1)(b) and/or s 945A(1)(c); (ii) s 1041E(1); (iii) s 912A(1)(a). 10 ASIC has pleaded the circumstances of 59 different people in its statement of claim and schedule. However, during the directions hearing before me on 1 May 2015, ASIC undertook to call no more than nine of these 59 people. These are the nine people pleaded in detail in ASIC's statement of claim as the Part E investors. The nine people are four couples and one individual, so they are described as five investors. The five investors are said to share the characteristics that they: (1) were over 50 years old; (2) were retired or approaching and planning for retirement; (3) had little or limited income; (4) had few assets, generally comprised of their home, limited superannuation, limited savings; and (5) had little or no prospect of rebuilding their financial position in the event of suffering significant loss. 11 Senior counsel for ASIC suggested that in light of matters that emerge in examination and cross-examination, ASIC's case may not require all nine of these individuals to be called. In that event ASIC will ensure that other witnesses are available to allow the trial to proceed smoothly. 12 Apart from the declarations that I have mentioned, ASIC also seeks the following remedies against Mr and Mrs Cassimatis: (i) civil penalties, (ii) disqualification from managing corporations for a period, (iii) prohibition on holding an Australian financial services licence for a period, and (iv) prohibition on providing financial services under an Australian financial services licence for a period. In relation to the claim for a civil penalty, ASIC says that the contraventions by Mr and Mrs Cassimatis (i) materially prejudiced the interests of Storm, or (ii) were serious. 13 Mr and Mr Cassimatis raise a number of factual and legal points in their defence, the first two of which were broadly, and succinctly, summarised by Mr Franco QC during the directions hearing before me. I summarise those and others arising from the defence below. 14 First, Mr and Mrs Cassimatis plead that as a matter of law they cannot be liable because s 180 of the Corporations Act is concerned with obligations owed by the directors (here, Mr and Mrs Cassimatis) to the company (Storm). They say that at the relevant times Storm was a solvent company and Mr and Mrs Cassimatis (who owned all of the shares in Storm) are entitled to be considered as the company: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, 730 (Street CJ). The submission is essentially that Mr and Mrs Cassimatis did not breach any duty, as directors, by acting in accordance with the informed wishes of themselves as shareholders. 15 Secondly, Mr and Mrs Cassimatis plead that the risks alleged by ASIC were not reasonably foreseeable in light of matters such as (i) the many other financial advisers who were implementing the Storm Model, (ii) the prospectus that Storm had circulated including to ASIC, (iii) independent auditors that Storm had engaged, and (iv) the expertise of independent directors. Mr and Mrs Cassimatis' defence also focuses in detail on pleas such as (i) the alleged clarity of Storm's procedures, (ii) the safety of the indexed funds, (iii) the consistency between Storm's assumptions and ASIC's website, (iv) the thousands of other investors who invested successfully with Storm in rising and falling markets, (v) the lack of concern by banks or regulators and the support of and independent expert academics, (vi) the lack of complaints by investors, and (vii) the insurance that Storm had taken out. Mr and Mrs Cassimatis also plead that none of the risks alleged by ASIC has 'come to fruition', although ASIC says that it is irrelevant that none of the risks has come to fruition because Storm was placed into voluntary administration on 8 January 2009 and wound up on 26 March 2009. 16 Thirdly, Mr and Mrs Cassimatis plead that the 'true causes' of the investors' losses was the Global Financial Crisis and the conduct of a particular bank. It is not clear whether this reference to 'true cause' is an alternative plea intending to use those words in the sense in which they were used by Mason CJ in March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, 517 to describe what his Honour called a new intervening act that breaks the chain of causation of loss. If so, it is also not clear how that would disprove a breach of s 180(1) of the Corporations Act, or whether Mr and Mrs Cassimatis contend that s 180(1) requires proof of loss: cf Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 [249]. 17 Fourthly, Mr and Mrs Cassimatis rely upon the business judgment rule in s 180(2) of the Corporations Act. 18 Fifthly, Mr and Mrs Cassimatis plead that if they breaches s 180(1) then they ought fairly to be excused from any contravention under s 1317S(2) of the Corporations Act.

The manner in which the parties have proceeded with this litigation 19 Although the litigation is clearly of great importance to the parties, and although there are some factual matters of complexity, the summary above is intended to demonstrate that the underlying issues are not overly complex even if there will be some complexity in the detail. However, these proceedings appear to have been conducted at great expense so far. 20 The proceedings were commenced in December 2010. ASIC's initial pleading relied on 10 investors and 2756 'unidentified' investors. Subsequently ASIC amended its pleading to replace the 2756 unidentified investors with 40 named investors. Mr and Mrs Cassimatis then brought a strike out application which was largely successful. That strike out application was followed by a dispute about the costs orders from that application. Costs were ordered to be taxed forthwith (Australian Securities and Investments Commission v Cassimatis [2011] FCA 796). Mr and Mrs Cassimatis also brought a summary judgment application which failed (Australian Securities and Investments Commission v Cassimatis (2013) 94 ACSR 623; [2013] FCA 641). They then appealed from the summary judgment application to the Full Court of the Federal Court. It appears that ASIC subsequently accepted the need to amend its statement of claim. Subsequently, another strike out application was brought by Mr and Mrs Cassimatis. Although parts of ASIC's statement of claim were struck out, Reeves J was critical of many of the objections brought by Mr and Mrs Cassimatis, and emphasised the need for the just, quick, inexpensive and efficient resolution of the proceedings (Australian Securities and Investments Commission v Cassimatis (No 2) (2013) 96 ACSR 272; [2013] FCA 1008 [100]). 21 There may be doubt whether the minatory words of Reeves J were heeded, as they should have been. This matter came before me as an application by Mr and Mrs Cassimatis for non-standard discovery orders under Rule 20.15 of the Federal Court Rules 2011 (Cth). The parties filed six affidavits in relation to that application. One other affidavit served by ASIC was 166MB involving 3,300 pages. Numerous matters were initially in dispute. Substantial submissions were filed. However, the submissions by counsel at two directions hearings brought an admirably sharp focus upon the issues in the case. During the course of the two directions hearings, senior counsel for the parties narrowed their dispute to (i) discovery of a single document (which was determined with short oral reasons), and (ii) the current issue concerning the manner in which questions of legal professional privilege should be determined. 22 This matter has now dragged on for four years. It must now be brought rapidly to trial. Further delays and interlocutory applications will delay the ultimate determination of these proceedings with all of the associated, and growing, concerns about the interests of justice. Further delay will also multiply the cost of these proceedings for the parties. This is an important factor in my assessment of the manner in which disputed issues concerning privilege should be determined. In particular, the overarching purpose of civil practice and procedure includes the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute: Federal Court of Australia Act 1976 (Cth) s 37M(2)(e).

Power to refer questions of legal professional privilege to an independent barrister 23 After the directions hearing and interlocutory application on 1 May 2015, senior counsel for ASIC provided short written submissions concerning the power to refer questions of privilege over discovered documents to an independent barrister with sufficient experience to act as an arbitrator to resolve disputes about those claims. Senior counsel for Mr and Mrs Cassimatis was provided with these submissions but did not wish to be heard on the issue. 24 I accept that the Court has power in the circumstances of this case to refer this issue to an independent barrister with sufficient experience. In particular, there are both general and particular sources of this power in this case. 25 General sources of the power include (i) Rule 1.32 that the Court may make any order that it considers appropriate in the interests of justice; and (ii) Rule 5.04(1) which provides that at any hearing the Court may make directions for the management, conduct and hearing of a proceeding. 26 A particular source of power is Rule 5.04(3), item 31, which provides that the Court may make a direction '[r]eferring the proceeding, or a matter arising out of the proceeding, to an arbitrator, a mediator or a suitable person for resolution by an ADR process'. 27 The unusual nature of the exercise of power in this case is that it involves the referral to an independent party of (i) a question of law, (ii) for a binding determination, and (iii) in circumstances in which the referral is not consensual. However, there are features of this case which soften each of these unusual features. First, in this case it is proposed by ASIC and not disputed by Mr and Mrs Cassimatis, that the determination should be binding if the matter is referred to an independent barrister; that proposed order is not contentious. Secondly, although the referral is not by consent of both parties, it is proposed by ASIC and the basis for opposition by Mr and Mrs Cassimatis is only concerned with cost (which I address below in relation to whether the power should be exercised). Further, the process before the independent barrister will remain one of alternative dispute resolution. The decision of the independent barrister will not be embodied in an order of the court. The court retains ultimate supervision over the matter.

Reasons why the issue should be referred to an independent barrister 28 After some conferral, and amendments, the parties were not in dispute about the form of the orders referring any dispute about legal professional privilege to an independent barrister. Those orders are set out in the conclusion to these reasons. The dispute concerned whether the referral should be made at all and, if so, the manner in which the independent barrister should be paid. 29 It is in the interests of justice that the orders sought by ASIC be made for three reasons. 30 First, the proposed orders will probably be cheaper for both of the parties. In light of the history of these proceedings and the size and number of interlocutory disputes between the parties it is very likely that the preparation of submissions and any appearance by the parties (both of whom are represented by Queen's Counsel) before another judge would not be cheap. In contrast, the less formal approach proposed by ASIC will be likely to be more cost efficient. It may even be cheaper than the cost of the hearing to a party who would have received an order for payment of that party's taxed costs. The informal procedure will simply involve provision to the independent barrister of the documents containing the disputed communication and a summary of the position of the parties. The summary should be short. It may contain these reasons as background to the issue. 31 Secondly, the proposed orders provide Mr and Mrs Cassimatis with some control over the relevant costs. They can find out the rates for the three barristers that they propose and they can choose barristers who, in their opinion (as advised) would work most efficiently and most cost effectively. 32 Thirdly, a referral of this issue to an independent barrister will not occupy the parties in any concurrent court proceedings and will allow this matter to proceed according to the timetable I have directed, with any dispute about privilege being assessed concurrently with any further directions I make to move this matter to trial as soon as possible. 33 The remaining matter is the manner in which the independent barrister's fee should be paid. ASIC submits that the fee should be divided equally between ASIC, on the one hand, and Mr and Mrs Cassimatis, on the other. Mr and Mrs Cassimatis want ASIC to pay all of the fee. Neither party suggested any intermediate option such as the independent barrister making a determination of the party to pay his fee. In any event, I consider that an even division of fee is the most reasonable order so the potential difficulties with the intermediate option need not be explored. An even division of the fee is the most reasonable course in light of the shared benefit to both parties that this informal resolution will bring in terms of efficiency and cost effectiveness.

Conclusion 34 In addition to the orders made at the directions hearing on 1 May 2015, the following orders should be made (although numbered in the continuing sequence from the directions hearing). Other than the division of cost in order 6 below, Mr and Mrs Cassimatis did not dispute the terms of these orders if an independent barrister were to be appointed: (1) The applicant is to give discovery of the categories of documents set out in the Annexure at the times set out in the Annexure. (2) Within 14 days of receiving the last of the lists of documents over which the applicant claims privilege, the respondents will provide the applicant with: (a) Notice in writing of the documents in those lists in relation to which the respondents dispute the claim of privilege (Disputed Documents); and (b) A list of three independent Queen's Counsel or other barristers of not fewer than ten years standing at the Brisbane bar (or other barrister of not fewer than 10 years standing) (Candidates) for the purposes of the applicants choosing one to decide the privilege claims over the disputed documents. (3) Within 14 days of receiving the list of Candidates, the applicant will: (a) Provide notice to the respondents in writing of the chosen Candidate (Appointee); (b) deliver copies of the Disputed Documents to the Appointee; and (c) deliver any supporting material to the Appointee. (4) Within 7 days of Order 3 being complied with, the respondents will deliver any supporting material to the Appointee. (5) The decision of the Appointee on the privilege claims will be binding on both parties. (6) The Appointee's fee will be borne as to 50% by the applicant and 50% by the respondents. I certify that the preceding thirty four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.