Australian Securities and Investments Commission v Cassimatis

INTRODUCTION AND BRIEF SUMMARY OF REASONS 1 This litigation was brought by ASIC against Mr and Mrs Cassimatis for alleged breaches of their duties of care and diligence as directors of Storm Financial Limited (Storm). Shortly before the intense period of the Global Financial Crisis in the second half of 2008, Storm was a highly profitable company with $77 million of annual revenue and $120 million of consolidated gross assets. 2 Mr and Mrs Cassimatis submitted that this case is unique in Australian corporate history. As far as I am aware, it is unique in its combination of three factors. First, the allegations of breach against the directors rely upon a single provision of the Corporations Act 2001 (Cth). That provision is s 180(1), which imposes a duty (in broad shorthand) to exercise their powers and discharge their duties with "care and diligence". Secondly, the directors' breaches of care and diligence are alleged to have occurred while Storm was a solvent company and while Mr and Mrs Cassimatis, as directors, were also the only shareholders. Thirdly, there is no dispute that Mr and Mrs Cassimatis managed Storm in good faith and in accordance with the informed wishes of all the shareholders (themselves). 3 Mr and Mrs Cassimatis submitted that a director who is the sole shareholder of a solvent corporation could not breach s 180(1) by a course of conduct which was highly likely to contravene provisions of the Corporations Act, or even if he or she intentionally acted in contravention of the Corporations Act. Mr and Mrs Cassimatis relied upon the principle that "where the directors and the shareholders are one and the same, ratification is implicit". For the reasons set out later in this judgment, I do not accept that this principle will always preclude a finding of contravention of s 180(1) by a director. 4 In one respect, ASIC set a high bar for itself to establish liability. ASIC's case included an allegation that Mr and Mrs Cassimatis were in breach because they had acted unreasonably within the meaning of s 180(1), and placed Storm in a situation in which it had actually breached the Corporations Act. Part of ASIC's case therefore required it to prove that Storm had actually breached the Corporations Act. To borrow the expression of Keane CJ in Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364, 370 [10], ASIC relied upon an actual breach by Storm as a "stepping stone" for a finding that Mr and Mrs Cassimatis contravened the Corporations Act. 5 I have serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1) by an officer. For instance, suppose a director unreasonably (within the terms of s 180(1)) and intentionally commits acts which are extremely likely to involve a serious breach of the Corporations Act perhaps even threatening the very existence of the corporation. As I explain later in these reasons, it might be seriously doubted whether the director could escape liability simply because, by some good fortune, no actual breach eventuates. Loss is not a required element of an action for contravention of s 180(1) of the Corporations Act. 6 Although it may not have been necessary for ASIC to establish any actual breach by Storm, ASIC's case was presented in that way. For that reason, and because the parties conducted their case and called evidence on this basis, I have proceeded on the basis that actual breach must also be established. 7 On the other hand, I do not accept ASIC's submission that an actual breach by Storm is sufficient to establish liability under s 180(1) of the Corporations Act. ASIC submitted that directors could be liable for a contravention of s 180(1) where the directors had failed to ensure that the corporation was not in breach of its duties under the Corporations Act. In very broad summary, I do not accept this submission because a duty to "ensure" is a duty of strict liability. Section 180(1) is not a duty of strict liability. 8 The remainder of this introduction summarises, in broad outline, the reasons why Mr and Mrs Cassimatis contravened s 180(1) of the Corporations Act. The reasons in this outline are discussed in far greater detail later in these reasons. It suffices in this outline to provide a broad sketch of the essential features of this case and the Storm model. These essential features of the Storm model are relevant because one of the most significant matters in dispute between the parties was the foreseeability, and likelihood, of the breaches of the Corporations Act which occurred. 9 The Storm model generally involved investors being initiated into Storm by a preliminary appointment or "primer" meeting followed by an "education workshop". After the workshop there were meetings with an adviser. Storm would centrally produce a cash flow for the investor based on information provided by the investor to the adviser. Storm would also centrally produce a Statement of Advice (SOA). Much of the SOA was in standard, or template, form although particular amounts and ratios were tailored to the investor and some other sentences and paragraphs would be included for that particular investor. Almost 90% of Storm's clients were advised to adopt a strategy described by one witness (Mr Cashel) as "double gearing". This advice involved (i) borrowing against the security of their homes; (ii) obtaining a margin loan; and (iii) using the funds from these loans to invest in index funds, establishing a cash reserve, and paying Storm's fees. 10 The investment by a Storm client did not usually conclude after this first occasion of investment. Consistently with the Storm model, Storm would send Statements of Additional Advice (SOAAs) to advisers for investors, or sometimes directly to investors, to make additional "step" investments if the market rose or fell by a certain amount, or if the client's circumstances changed significantly. One of the non-executive directors (Mr Nelson) observed that in one month in 2007 Storm automatically generated a record 1600 SOAAs for clients. 11 The investors upon whom ASIC focused as typical examples of its case were Mr and Mrs Dodson. Like other investors, Mr and Mrs Dodson attended an education workshop run by Storm. The education workshop generally emphasised the reliability and low risk involved in the Storm model and the need for people to take on debt. One of the typical slides shown at that presentation said that volatility or "manageable risk" is "investing in an asset whose value can rise and fall but in such a way that over a longer time frame there is certainty that the value will rise". A hypothetical question was asked of the attendees about which person of several persons they would want to be. The "correct answer" was that the prospective client should "want to be" the person who owes $2 billion. 12 In November 2007, Mr and Mrs Dodson obtained financial advice from a representative of Storm. Storm understood that the Dodsons were "preparing for retirement in a few years". At the time that Mr and Mrs Dodson approached Storm, Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum. They were the guardians of a girl whose parents had died. They owned their own home. They had superannuation savings and around $10,000 surplus income each year. Mr Dodson was working night shifts. He had a heart condition. 13 Storm provided Mr and Mrs Dodson with a 138-page SOA. The SOA followed the Storm model of advice. Mr and Mrs Dodson took Storm's advice. They borrowed funds against the security of a mortgage over the unencumbered home in which they had lived for 27 years. They used the borrowed money to invest in index funds. They borrowed again for a margin loan from Colonial Margin Lending. Some of the remaining borrowings were used to create a "cash dam" to pay for expenses including interest. Mr and Mrs Dodson also had to use the borrowed money to pay $26,960 to Storm for its fees. 14 After the GFC in 2008, Mr and Mrs Dodson liquidated their investments. They now have a home loan on their house of $287,000 (with an offset of $197,000) and line of credit drawn to $32,000. A $65,000 investment that they had prior to investing with Storm has been lost. Neither has been able to retire. 15 A similar pattern occurred for a number of other investors pleaded by ASIC. Some of them, such as Mr and Mrs Higgs, were advised to make up to seven additional "step" investments, increasing their borrowing and investment in the index funds on all those occasions. Mr and Mrs Higgs were retired with $79,000 collectively in income before tax (including a disability pension for Mr Higgs). They had few assets other than their home. They commenced investing with Storm by borrowing against their home and investing around $300,000. They accepted Storm's advice on each of the seven subsequent occasions, borrowing additional amounts and investing those amounts of between $20,000 and $100,000. Their last investment was in January 2008 shortly before the GFC. They lost around $420,450. Mr Higgs has been forced back to work despite his disability. 16 Although ASIC's case involved detailed pleading and evidence concerning nine investors, and a pleaded schedule involving many others, the case was not proved in relation to many of the pleaded investors. This is because (i) some of the pleaded investors were not "retail investors"; (ii) there was no evidence that some of the pleaded investors were retired or approaching retirement; and (iii) ASIC did not prove a breach of s 1041E of the Corporations Act. 17 Following sensible admissions that were made concerning the Schedule investors, there was little evidence or submissions led in relation to them. The submissions concerning the Part E investors were also, quite properly and economically, focused upon Mr and Mrs Dodson as a paradigm case. Ultimately, I have concluded that ASIC established civil contraventions by Storm of s 945A(1)(b) and s 945A(1)(c) of the Corporations Act in relation to Mr and Mrs Dodson as well as nine other investors. In total, the contraventions concerned 11 investors or six instances if couples, who were jointly advised, are treated jointly. My reasons generally focus upon these investors to whom I refer to as the "relevant investors". 18 Each of these relevant investors had five matters in common. These five matters were as follows: (i) they were over 50 years old; (ii) they were retired or approaching and planning for retirement; (iii) they had little or limited income; (iv) they had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) they had little or no prospect of rebuilding their financial position in the event of suffering significant loss. In these reasons I will often refer to these matters in summary form as investors who were retired or near retirement with few assets and limited income. Although there were other investors who had these five pleaded characteristics, ASIC's case has only been proved in relation to the relevant 11 investors. 19 Mr and Mrs Cassimatis' case was heavily based upon submissions that the Storm model was viable and that contraventions were not reasonably foreseeable. The many submissions that they made on this point included that Storm had advised many professionals including lawyers and financial planners. They submitted that Storm had been reviewed by compliance professionals, by ASIC, and by its non-executive directors. They argued that there was no evidence of any concern about the Storm model by any of these people. Mr and Mrs Cassimatis also relied on evidence that the share market index had not fallen during any ten year period in history. They submitted that the only reason the Storm model failed was because of a "Black Swan" event, namely the GFC. 20 It is essential to observe at the outset that the viability of the Storm model was not in dispute in this case. In opening submissions (at [16]), and closing submissions (at [32]), ASIC iterated and reiterated that although Storm's strategy might have been considered aggressive, ASIC did not allege that the Storm model was flawed or inappropriate for all investors. The allegations of contravention were concerned with the Storm model only to the extent to which it involved investors who fell within a particular class. As I have explained at [18] above, that class covered all pleaded investors who had the five characteristics which I have described in shorthand as retired (or near retired) investors with few assets and limited income. 21 Mr and Mrs Cassimatis had an extraordinary degree of control over Storm. They used their powers as directors to create an environment in which (as they were aware) it was almost inevitable that the Storm model would be applied to people with a high degree of financial vulnerability within this class. There is no magic in the manner in which ASIC defined the class. The characteristics illustrate, however, a class of people who were, or were amongst, the most vulnerable of Storm's clients. Mr and Mrs Cassimatis would reasonably have been aware that the Storm model was applied to financially vulnerable clients including those in the class pleaded by ASIC. 22 For the reasons explained in detail later, a reasonable director with Mr and Mrs Cassimatis' responsibilities, and in Storm's circumstances, would have realised that the application of the model to people in the pleaded circumstances was likely to involve inappropriate advice. The reasonable director would have taken some alleviating precautions to prevent the giving of that advice. I reach this conclusion for the detailed reasons given later, but with a strong awareness that it is made in the context that a director's powers to act are, of the very nature of corporations, ones which often require risks to be taken. 23 Mr and Mrs Cassimatis should have been reasonably aware that the application of the Storm model would be likely to (and did) cause contraventions of s 945A(1)(b) and s 945A(1)(c). The contraventions of s 945A(1)(b) occurred because Storm did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances. The contraventions of s 945A(1)(c) occurred because Storm provided financial advice which was not appropriate to the investors having regard to the consideration and investigation of the subject matter of the advice that ought to have been undertaken. Those contraventions were not merely likely to occur. They were contraventions which could have (and did have) devastating consequences for many investors in that class and the discovery of those breaches would have threatened the continuation of Storm's Australian Financial Services Licence (AFSL) licence and Storm's very existence. 24 Although I conclude that Mr and Mrs Cassimatis breached their duties as directors, their breaches involved only one contravention each. This was conceded by ASIC in closing submissions. ASIC's concession should be accepted. If a security guard at a storage facility carelessly failed to notice that the lock on the back door was broken, he would commit a single breach. The breach would not be multiplied even if it turned out that his conduct had contributed to the loss of the belongings of a different customer for every day of the month during which the guard was responsible for the facility. 25 The pleaded conduct by ASIC was that Mr and Mrs Cassimatis created a scenario which caused or permitted advice to be given to particular investors to invest in accordance with the Storm model. That involved a single contravention of their duties. It did not involve a separate breach in relation to each of the 45 investors upon whom ASIC relied. For instance, apart from a letter of thanks from Mr and Mrs Sondergeld, it was never alleged, and it was not proved, that Mr or Mrs Cassimatis had met, spoken to, or had any dealings with any of those 45 investors. It was not alleged that Mr or Mrs Cassimatis had prepared or read any cash flow or any advice that was provided to any of the 45 investors. It was not alleged that Mr or Mrs Cassimatis knew that any particular advice was provided to any of those 45 investors, as opposed to advice of that general nature being given to persons within the same class as many of the 45 investors.

The alleged contraventions by Storm 26 ASIC's case against Mr and Mrs Cassimatis begins with allegations of contraventions by Storm. The case against Mr and Mrs Cassimatis is dependent upon proof of one or more of these contraventions. 27 The primary contraventions allegedly committed by Storm are as follows: (1) s 945A(1)(b) of the Corporations Act because it did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances; (2) s 945A(1)(c) of the Corporations Act because it provided financial advice which was not appropriate to the investors having regard to the consideration and investigation that Storm ought to have undertaken, but did not undertake, of the subject matter of the advice; and, or alternatively (3) s 1041E(1) of the Corporations Act by making statements to the investor about the consideration which had been given to the investor's personal circumstances in creating the advice, which statements were misleading and deceptive. 28 These three breaches are also relied upon to establish further breaches of (i) s 912A(1)(a) of the Corporations Act by providing the financial advice to the investor and failing to do all things necessary to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly; and (ii) s 912A(1)(c) of the Corporations Act by failing to comply with the financial services laws in providing the financial advice to the investor.

The alleged contraventions by Mr and Mrs Cassimatis 29 ASIC alleged that Mr and Mrs Cassimatis contravened s 180(1) of the Corporations Act in two different ways. 30 First, ASIC pleaded at [2301] of its statement of claim that Mr and Mrs Cassimatis breached their duties of care and diligence by "causing and/or permitting Storm to provide advice to the Investors in accordance with the Storm Model in a manner which caused Storm to contravene [ss 912A(1)(a), 912A(1)(c), 945A(1)(b), 945A(1)(c) and 1041E(1) of the Corporations Act]". 31 The particulars of the alleged failure to exercise their powers with the required degree of care and diligence were that a reasonable person would not have caused or permitted Storm to give advice to clients or prospective clients who were: (i) over 50 years old; (ii) retired or approaching and planning for retirement; (iii) had little or limited income; (iv) had few assets, generally comprised of their home, limited superannuation, and limited savings; and (v) had little or no prospect of rebuilding their financial position in the event of suffering significant loss. 32 It is important to emphasise that there is no magic in the precise definition of this class of investor relied upon by ASIC or the precise definition of the five characteristics of the class pleaded by ASIC. For instance, it might be strongly arguable that the class would include persons such as a 45 year old with the same additional characteristics (although not over 50 years old), who had retired or who was near retirement because of permanent injury or illness. The fundamentals of the pleaded class were that it involved those persons who were retired, or approaching retirement, and who were particularly vulnerable to losses. Some of the expert evidence focused upon the characteristic of the pleaded investors as retired or approaching retirement but it was implicit (and sometimes explicit) in that expert evidence that the Storm model might not be inappropriate for retirees who were wealthy and therefore not financially vulnerable (ts 276). 33 Secondly, ASIC pleaded at [2301A] that in causing or permitting that advice to be provided in a manner which caused Storm to contravene the Corporations Act, Mr and Mrs Cassimatis exposed Storm to a foreseeable risk of harm of: (i) being found guilty of an offence under s 1311 of the Corporations Act; (ii) cancellation or suspension of Storm's AFSL by action under s 915C(1)(a) of the Corporations Act; (iii) a banning order by action under s 920A of the Corporations Act; (iv) court orders under s 1101B(1)(a)(i) of the Corporations Act; and (v) civil proceedings by the Investors. ASIC says that this degree of exposure to risk was greater than that to which a director, acting with the required degree of care and diligence, would permit Storm to be exposed. 34 As I explain later in these reasons, it is notable that neither of these pleaded manners of contravention involved any allegation that Mr and Mrs Cassimatis acted in any particular way which was directed toward any particular investor. ASIC properly conceded that the conduct of Mr and Mrs Cassimatis which founds their liability under s 180(1) consisted of a single, continuing course of conduct and (if proved) amounted to a single contravention of s 180(1) by each of them (ASIC closing, [37]). 35 Following various concessions, there were 45 individuals, or 27 individuals or couples, upon whom ASIC relied in closing submissions. The reference to Part E investors is a reference to those investors where the facts are pleaded in detail in Part E of the statement of claim. The Schedule investors are those investors whose details are pleaded in a very summary form in a schedule to the statement of claim: (1) Mr and Mrs Dodson (Part E investors); (2) Mr and Mrs Herd (Part E investors); (3) Ms Longmore (Part E investor); (4) Mr and Mrs Sondergeld (Part E investors); (5) Mr and Mrs Higgs (Part E investors); (6) Ms Allom (Schedule investor); (7) Mr and Mrs Harvey (Schedule investors); (8) Ms Somossy (Schedule investor); (9) Mr and Mrs Betts (Schedule investors); (10) Mr Bleakley (Schedule investor); (11) Mr and Mrs Dillon (Schedule investors); (12) Mr and Mrs Galley (Schedule investors); (13) Mr and Mrs Gordon (Schedule investors); (14) Mr and Mrs Hainsworth (Schedule investors); (15) Mr and Mrs Harper (Schedule investors); (16) Mr and Mrs Johnson (Schedule investors); (17) Mr Kilgallon and Ms Harman (Schedule investors); (18) Ms Knight (Schedule investor); (19) Mr and Mrs Madden (Schedule investors); (20) Mr Perkins (Schedule investor); (21) Ms Quinton (Schedule investor); (22) Ms Roberts (Schedule investor); (23) Mr and Mrs Schuler (Schedule investors); (24) Ms Tulloch (Schedule investor); (25) Mr and Mrs Walker (Schedule investors); (26) Mr and Mrs Williams (Schedule investors); and (27) Mr and Mrs Wilson (Schedule investors).

The relief sought 36 ASIC seeks the following primary relief: (1) by s 1317E(1) of the Corporations Act, declarations that Mr and Mrs Cassimatis each contravened their obligations as directors of Storm under s 180(1) of the Corporations Act; (2) by s 1317G of the Corporations Act, civil penalties in respect of each of those contraventions; (3) by s 206C or alternatively s 206E(1)(a)(i) of the Corporations Act, orders that Mr and Mrs Cassimatis each be disqualified from managing corporations; and (4) by s 1324(1) and s 1324(6) of the Corporations Act, orders that Mr and Mrs Cassimatis each be restrained from holding an AFSL or from providing financial services under any AFSL. 37 By consent of the parties, and on the basis of the assumption upon which they had proceeded for several years, the trial of liability was held separately from questions of appropriate remedies. With one exception, all of the orders sought by ASIC are dependent upon proof that Mr or Mrs Cassimatis contravened s 180(1) of the Corporations Act. The exception is in relation to the orders sought under s 206E(1)(a)(i). Under that subsection, the orders sought by ASIC require proof of contraventions by Storm and failure by Mr or Mrs Cassimatis to take reasonable steps to prevent each contravention.

The nature of the allegations 38 Section 140(1) of the Evidence Act 1995 (Cth) provides that in a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities. Section 140(2) then provides that: Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account: (a) the nature of the cause of action or defence; and (b) the nature of the subject-matter of the proceeding; and (c) the gravity of the matters alleged. 39 This provision includes the common law approach, from Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336. Part of that principle is the consideration of the ordinary experience of people that the more grave the allegation, the less likely it might be expected to be (all other things being equal) that a respondent would, on the balance of probabilities, have committed the act. An assessment of the gravity of the allegations will include consideration of the likely consequences if the allegations are made out. As Mansfield and Gilmour JJ said in Ashby v Slipper [2015] FCAFC 15; (2014) 219 FCR 322, 345 [69], the more grave the allegations and their potential consequences, "the stronger is the evidence required to conclude that the allegations have been established which will give rise to those consequences". 40 In this case, the allegations against Mr and Mrs Cassimatis involve a weighty subject matter and allegations of substantial gravity, including conduct which is the subject of potential penalties and potential banning orders. My findings in this case are made in light of these considerations in s 140 of the Evidence Act 1995 including the gravity of the allegations.

THE STORM MODEL 41 Before I turn to discuss the evidence of the witnesses, it is necessary to explain the operation of the Storm model which sets the scene for their evidence. The evidence of the operation of the Storm model was given in the most comprehensive detail in Mr McCulloch's evidence. It is necessary to say something about Mr McCulloch's evidence because of its importance. Apart from Mr and Mrs Cassimatis, he was one of the people who were the most familiar with Storm's operations. 42 Mr McCulloch was an impressive and careful witness with great knowledge of Storm's activities. His affidavit evidence was comprehensive. In his oral evidence he answered questions directly with careful consideration. On many occasions he considered a question at length before responding sometimes with a simple "yes". His recollection was very good. But it was not perfect. For instance, he was mistaken about the year when he started providing financial advice. He frankly admitted that the documentary evidence related to this was likely to be more reliable than his memory. 43 Mr McCulloch had great familiarity with the Storm model. For more than a decade before 1998 his role as an employee of the Commonwealth Bank was to manage the bank's relationship with Mr and Mrs Cassimatis. In late 1998, he began working for Storm in the Townsville office with 10 to 12 other people. Mr McCulloch was Storm's group accountant (a senior management position). He prepared monthly and quarterly reports, and liaised with the banks. In 2002 he also took on the role of a senior adviser (ts 167). By 2007 his predominant role was an adviser although sometimes he also prepared loan application requests, Confidential Financial Profiles, and presented cash flows. 44 Mr McCulloch participated in staff, client and Storm Executive Committee meetings. He attended numerous client education workshops and briefings to financial institutions. From 2005 to 2008, he presented many of Storm's education workshops. He learned directly from, and reported to, Mr and Mrs Cassimatis. Mr McCulloch explained that although Storm's business grew and was refined over time, the underlying elements of the business did not change.

The stages of the Storm investment process 45 Mr McCulloch had a comprehensive understanding of the process usually adopted by Storm when advising clients. As he explained, that process had various stages. The stages were as follows: (1) a preliminary appointment or "primer" meeting; (2) an education workshop; (3) a Confidential Financial Profile meeting and preparation of cash flow; (4) a review or reviews of the recommended cash flow with the prospective client and subsequent steps including the preparation of the SOA; (5) a presentation of the SOA; (6) the signing by the client of the loan documents and investment documentation, and the investment processing; (7) further investment "steps"; and (8) no exit plan. 46 The investment process rarely took fewer than three months to complete.

Preliminary appointment or "primer" meeting 47 The first meeting with a prospective client generally went for half an hour to an hour. Mr McCulloch said that during these meetings, prospective clients were told words to the effect that Storm had a unique style of advice and was not a traditional financial planner. They were told that Storm was a specialist organisation that used "debt as a cornerstone" of its advice. There would be a preliminary conversation with prospective clients about their current financial situation and their reasons for seeking financial advice. Prospective clients who were still interested after the preliminary appointment were invited to attend an education workshop.

Education workshop 48 Storm's education workshops were generally presented by Mr Cassimatis or employees who were chosen by Mr Cassimatis. Mr McCulloch and Mr Benson said that Storm had a strict rule that every client was required to attend an education workshop before they were given any advice. Storm's Procedural and Compliance Manuals described it as part of the "Client Process". 49 The education workshops typically lasted between several hours and one day. They were held approximately every fortnight at Storm's offices and by videoconference if necessary for remote clients. There were usually between 20 and 25 people in attendance, and up to 50 people watching by videoconference. 50 Mr McCulloch said that he recalled Mr Cassimatis saying to him words to the effect that the purposes of the education seminars were to "outline the Storm style of investment advice and to weed out people who would be unlikely to invest with Storm because they only wanted to invest in real estate" or were "complete nervous Nellys who would not want to mortgage their home". Mr McCulloch recalled Mr Cassimatis saying words to the effect that he did not want to "waste Storm's resources on prospective clients who were never going to invest". 51 Mr McCulloch said that during the education workshops, the presenter would explain: (1) the types of assets that could be invested in; (2) that Storm recommended clients build wealth by using home loans and margin loans to borrow funds to invest in index funds; (3) that Storm was not a traditional financial planner and specialised in one area of client advice, that being advice about investing in indexed share funds; and (4) that volatility in the share market was used to trigger further investments. Mr McCulloch said that attendees were told that Storm's philosophy was that if the share market fell in value by 10% or more from the date of the initial investment, a further investment should be made using cash reserves to fund the further investment and lower the average cost of the investment; and if the share market rose in value by 10% or more from the date of the initial investment, a further investment should be made by increasing the margin loan and returning the LVR to its level at the time of the initial investment. 52 The same PowerPoint presentation was used during each education workshop as a visual aid, although Mr and Mrs Cassimatis expanded and modified the presentation over time. The PowerPoint presentation initially involved 20 to 30 slides. Over time it increased to approximately 350 slides, although not all of the slides were presented at each workshop. The content of the workshop could be changed only after approval by the compliance team (ts 178). 53 The format of the workshop was standardised by the slides and the phrases which were used. Mr McCulloch learned from Mr Cassimatis to say particular phrases when particular slides from the PowerPoint presentation were displayed and he used those phrases when presenting (ts 179). 54 A central theme of the workshop, whoever presented it, was that clients should embrace debt rather than be scared of debt. For instance, one slide of the PowerPoint presentation depicted three people, owing $2 billion, $200,000 and $0 respectively. The audience was invited to choose which person they would rather be. If their answer was the person owing no money, Mr McCulloch would explain that this was a "herd" mentality, and that the audience had to think differently about the concept of wealth. If the audience's answer was $200,000, Mr McCulloch was trained to say that this was the "worst position to be in", and that it was indicative of "Mum and Dad, growing up in the suburbs, trying to put their kids through school, paying off the mortgage, living life stressed out." The "correct" answer was the person owing $2 billion. Mr McCulloch would say, "If you owe nothing in retirement, that means you own nothing. If you owe $2 billion in retirement, what does that mean you own? It means you must own at least $4 billion to $5 billion". 55 When Mr McCulloch presented the workshop, he would compare two types of investors. Both investors had a surplus income of $500 per month. The first, "Tom", invested that $500. The second, "Helen", approached Storm for advice, and, following that advice, bought a debt of $500 per month, and then bought an expensive asset. Mr McCulloch was trained to explain how Helen would end up with a capital base worth $2.12 million, which was considerably better than Tom's investment. Using this example, Mr McCulloch would explain that "the more you borrow, the higher the return on your equity". Graphs would be shown to the audience, and Mr McCulloch would explain that a 10% debt ratio was too low to be effective for the purpose of creating wealth, and that the debt ratio "optimum range" was between 40-60%. 56 The workshop also compared different types of investments. With reference to comparative tables, Mr McCulloch would explain that, historically, shares performed better than both cash and property. He said that Mr Cassimatis trained him to talk about a unit in an index fund as a "supershare", because it is a "truly diversified fund", and "actually owns every share available on the ASX". Mr McCulloch said that he was trained to say words to the effect of: So what Storm recommends is that you guarantee yourself the big stacks of coins by investing your money in one of these supershares. So how do you buy one of these supershares. You do it by pooling your money with hundreds or thousands of other investors' money and putting it in a unit trust. That unit trust in turn will buy shares in every company that makes up the All Ords in the same proportion that its held within the All Ords… This is how we guarantee you the big stacks of coins, which is the average return….

Confidential Financial Profile meeting and preparation of cash flow

Confidential Financial Profile meeting 57 After the education workshop, prospective clients who still wished to invest would generally have a one-on-one meeting with an adviser or adviser's assistant. This was known as the Confidential Financial Profile meeting. At this meeting, the prospective client would be given a Financial Services Guide, and would be asked to complete a Confidential Financial Profile. 58 The Confidential Financial Profile meeting involved obtaining from the prospective client a significant amount of financial information and documentation (including pay slips, bank statements, loan statements, superannuation statements and insurance documentation). Mr McCulloch would spend up to two hours completing a Confidential Financial Profile which recorded the client's personal details, employment details, income, living and other expenses, and assets and liabilities. 59 Mr McCulloch said that he was trained to say at the start of the meeting words to the effect of: Remember Storm isn't here for everybody. The type of advice we're going to give may make you feel uncomfortable, and we need to talk about what we talked about during the workshop. During the workshop, we showed you certain slides to deal with change, and remember we're trying to get you to think logically, not emotionally. If you think emotionally, you'll never put up with volatility. If you think logically, you'll realise that people who make more money tend to put up with assets that can increase and decrease in value over time. In relation to risk and volatility, we talked about risk during the workshop and we talked about the fact that there are different types of risks, one being default risk, one being asset selection risk…. You may still think that to get a high return you need to take a higher risk. That's not Storm's point of view. Storm's point of view is that you need a higher volatile asset that gives you high returns without the risk of default. 60 Prospective clients were asked to read and put their initials on the "volatility and risk statements" in the Confidential Financial Profile. That statement repeated the information provided to the client during the education workshop by drawing a distinction between two types of risk: (1) "real risk" was described as the possibility of irrecoverably losing some or all of the client's capital; and (2) "manageable risk" was described as investing in an asset that has value which can rise and fall (volatility) but in such a way that there is certainty that over a longer time frame the value will rise. 61 Prospective clients were then asked to sign the box that applied to them. There were four boxes: (1) "I am prepared to entertain speculative ventures of a risky nature and am prepared to lose my asset totally if necessary in an attempt to make high profits"; (2) "I am prepared to accept short to medium term volatility and am also prepared to accept a level of real risk where some of my asset may be irrecoverably lost"; (3) "I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated"; and (4) "I am not prepared to accept any level of volatility and realise that this selection will result in low growth and substantial exposure to inflation risk". 62 Mr McCulloch said that before prospective clients ticked a box, he was trained to say words to the following effect: [Storm is] going to recommend that you invest in a volatile asset, but a safe volatile asset, and that's why we invest in 'supershares'. And that's what this third statement is all about. We're asking you to take on the risk of a volatile asset but a safe volatile asset. And that's the risk we're asking you to accept. The first box isn't a Storm client. That's a person who is prepared to take on extreme risk and put all their money in one stock. And we all know what happened to HIH, OneTel and Alan Bond. The last box means that you're part of the herd. You are going to be one of those 88 people reliant upon the pension in retirement. If you tick either the first box or the last box you won't be a Storm client. You are either too risky or too conservative. Both will result in poor financial outcomes. So take your time, read the statements and then initial the box that applies to you. 63 Mr McCulloch said that he was told by Mr and Mrs Cassimatis that if the prospective client did not sign the risk level in the Confidential Financial Profile described as "I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated", Storm would not provide financial advice to the person. Similar evidence was given by Mr Benson. Mr McCulloch also said that he recalled Mrs Cassimatis saying that there was no point giving the Confidential Financial Profile to her cash flow team unless that box was ticked because she would not process it. However, despite the apparent rigidity in Storm's expressed position, Mr McCulloch said that Storm would sometimes provide advice to a client who ticked the second box. 64 Apart from those people who ticked the first or fourth boxes, there were other prospective clients to whom Storm did not provide advice. These were people who had no ability to borrow, and therefore could not engage in the Storm model (ts 207) or people who indicated an investment time horizon of fewer than five years. As Mr Benson explained, clients were required to tick, or agree to, an investment time horizon box in their Confidential Financial Profile of five to seven years or longer. The clients would not be advised if the box of "Up to 1 year" or "1 to 4 years" was ticked. 65 It was, however, rare for a Storm client not to accept the "condition" of undertaking investment for at least five to seven years. This condition was emphasised in the Storm workshops and would have been reiterated by advisers when clients "educated" in the Storm model sought to invest using that model.

Preparation of the cash flows 66 Once the Confidential Financial Profile was complete and verified, the Storm data entry team or "input cell" would enter that information into the cash flow spreadsheet. Later, probably in late 2007 once the Phormula database had been developed, the information would be entered into that database. Mr Turvey's evidence was that it would take a member of the cash flow team approximately four hours to prepare a cash flow and to have it approved. 67 Initially, only Mr and Mrs Cassimatis had the authority to prepare a cash flow. However, by 2006, cash flows began to be prepared by the cash flow cell (also described as the "cash flow committee", the "compliance cell" or "SWAT" (Supervision, Workflow, Analysis and Training)). Although the preparation of cash flows had expanded from Mr and Mrs Cassimatis to include a few others in the cash flow cell, the preparation of cash flows was still tightly controlled. As Storm's Procedural and Compliance Manual explained, no one in Storm was permitted to change a cash flow until the revised cash flow had been resubmitted to the cash flow cell and approved. When the cash flow cell prepared the cash flows, all relevant versions of the cash flows were saved (ts 433). 68 The cash flow was prepared in an Excel spreadsheet which had been created by Mr Cassimatis with the assistance of one of Storm's Authorised Representatives, Mr Notaras. It included an input of all of the client's income and expenditure upon which Storm's recommendations were based. And the formulas in the spreadsheet modelled a suggested investment plan. Every plan was done over a 17 year period, irrespective of the age of the client. The cash flow also showed how much the client could borrow secured by a home loan and a margin loan, and the amount the client would need to contribute in order to fund the investment. 69 The cash flows involved many standardised formulas but they did not merely involve inserting a client's figures into a spreadsheet. Sometimes more information about the client was requested (such as more precise tax calculations: ts 207-208). Different clients also had different provisions made for contributions and cash reserves (ts 198). Different approaches were also taken for different classes of client. As Ms Bock and Mr Turvey said, if a client was not retired an overall debt ratio of 60% or less (with a home loan of 80%) would be used and capital growth was not generally the sole source of funding for the recommended borrowings. However, for a client who was retired or nearing retirement age, the overall debt ratio was 50% or less (assuming a home loan of 60%). 70 A critical component of the cash flow was a client's "cash reserves", sometimes referred to as a "cash dam". These cash reserves were held in a Cash Management Trust. The cash flow showed these reserves of cash over a 17 year period having regard to: (i) the client's revenue and expenses flowing from the recommendations; (ii) the client's contributions and distributions; and (iii) an assumed rate of return. Ms Bock explained that Storm's practice was to leave a minimum of 12 months of interest servicing in the cash reserves (ts 132). 71 As Mr McCulloch explained, cash flows would not be approved if the clients' cash reserves were not predicted by the cash flow to increase over time. If the cash reserves were not shown as increasing with the assumption of no growth then the parameters were changed to allow growth in the investment, such as after a period of between two and five years for retirees. However, these "cash flows" did not factor in any period of negative growth (ie any decline in the value of the index funds). In the extreme case, where "cash reserves", even after adjusting the parameters, still did not show an increase over time (potentially because the client did not have sufficient capacity to borrow), then the prospective client would not receive a recommendation to invest in accordance with the Storm model. 72 It will be apparent from this discussion that, as Mr McMaster explained, the "cash flow" was not really a cash flow and that "cash reserves" were not actually cash reserves. The formulas calculated "cash reserves" as a combination of cash and growth in the index funds (ts 306). The index funds were relatively liquid so that clients could generally sell them when they wanted to (at least prior to the GFC) (ts 186) but they were not actually cash. Not only did the spreadsheet treat the growth in index funds together with cash, but it also assumed that the growth would not be liquidated because it was assumed that there would be dividends and further growth; the cash rate would only be applied to the actual cash balance of the cash reserves unless cash reserves became "negative" (because the cash had all been used and the growth had been liquidated) (ts 156).

The three types of cash flows 73 For many clients, the cash flow cell would prepare three cash flows. 74 First, a "viability cash flow" or "recommended cash flow" was prepared. That was the cash flow discussed above. It generally formed the basis for the SOA to the client. This cash flow showed the lowest investment returns of the three cash flows prepared. Mr Cassimatis taught Mr McCulloch to say that this type of cash flow showed that a plan could survive under adverse conditions but that the other cash flows were more realistic. Mr McCulloch said that the other cash flows assisted clients to invest by showing the extra wealth that could be generated. 75 Secondly, a "reality check cash flow" was prepared which was based on the viability cash flow but (i) used the current interest rates rather than the higher interest rates of the viability cash flow, and (ii) used historical average share market growth rather than no growth or a low rate of growth after two to five years. 76 Thirdly, a "maximum capacity cash flow" was prepared which increased the amount of the margin loan to the maximum allowable under the margin lender's LVR requirement.

Review of the cash flow with the prospective client and subsequent steps including preparation of the SOA 77 Once the cash flow was prepared and approved, it would be sent to the relevant adviser to be presented to the prospective client. Advisers could, and often did, query the recommendations or make suggestions on any aspect of a proposed cash flow to the cash flow committee. But the final decision lay with the cash flow cell (ts 177). As I explain later in these reasons, Employee Representatives were given spreadsheets without formulae so that they could not amend the cash flows. Authorised Representatives had the formulae but they were unlikely to do any more than insert the client's provided figures so that the client could see the operation of the spreadsheet. 78 The cash flows were generally presented to the client in a one-on-one meeting between the client and the Storm adviser. The meetings lasted two to four hours. The adviser would explain the cash flow, the assumptions underlying it, the home loan or margin loan borrowings required, and the amount the prospective client was required to contribute to the plan (although usually this contribution was only where the client was not retired). Mr McCulloch said that at these meetings he was trained to (i) repeat topics from the education workshop; (ii) show clients a projected cash reserve levels graph to "prove" the "viability" of the plan; and (iii) conduct the meeting in a way which would not shock the client by the level of debt. 79 Mr McCulloch said that if the client wished to modify information previously provided, or if the client was dissatisfied with part of the cash flow, the adviser would send the cash flow back to the cash flow cell which retained control over the cash flow. Once a new cash flow was prepared, another meeting would be held with the prospective client to discuss the revision. That process could be repeated a number of times until the client was satisfied (ts 186). 80 Once the prospective client was satisfied with the viability cash flow, the following process would take place: (1) the client would sign various bank application and privacy consent forms which enabled Storm to approach home lenders on the prospective client's behalf; (2) the SOA cell commenced preparation of the SOA; (3) the banking cell issued requests for quotes to various home lenders and, if the client had requested a specific bank, to that bank; (4) the SOA cell would select a bank and a margin lender; (5) the cash flow cell would confirm the accuracy of the final viability cash flow, taking into account the amount of funding offered by the bank; and (6) once the SOA was complete, the cash flow cell checked and approved it. A hard copy was then delivered to the adviser for the adviser to present to the client.

The SOA and cash reserve advice 81 Each SOA was based on a template document. A substantial part of the template contained generic advice. Over the years, the template evolved from a 20 to 30 page document to a document of 150 pages or more. 82 For almost 90% of the clients, Storm's advice was to obtain a loan secured by the client's home, as well as a margin loan, and to use the funds from these loans to invest in index funds based on the ASX 300. The remaining 10% were generally young people who did not have an asset base such as a family home. Storm's advice to them was to obtain a margin loan or a personal loan to invest in indexed share funds. 83 Although the SOA contained much template advice, and was often based upon the same model of borrowing against the home with a margin loan, it also considered some of a client's particular circumstances. Within the standardised parameters of Storm's advice, there were variables that changed between clients, such as the LVR, overall debt ratio, the level of cash reserves, and the amount of contributions to the plan (ts 198). 84 All clients who were advised to invest in the Storm model would have money in the cash reserve based upon an initial starting balance recommended by Storm. There would be additions of cash from the client's income or tax refunds. The cash reserve (to the extent that it genuinely contained cash) would be used to: (i) finance the client's debts or living expenses if the index funds did not provide any returns for a period of time; (ii) provide protection against margin calls (by financing them if necessary (ts 177)); (iii) provide a source of funds to allow the client to take further investment "steps"; and (iv) meet expenses of the plan and fund any extraordinary expenses (ts 188). 85 Storm sometimes suggested action to increase cash reserves. For instance, an investment "step" for a retiree might have meant that the retiree's cash dam became inadequate to service his or her debt for a two year period if there was no growth in the share market. This was because the "cash" reserve would often include growth as "cash" for retirees, so that a need for real cash required the retiree to sell units to increase real cash reserves. On other occasions, measures were suggested which did not increase cash reserves. For instance, Storm generally recommended dividends be reinvested, rather than placed in the cash dam, and Storm almost always recommended that interest on a margin loan be pre-paid and capitalised to the loan (a practice that was relatively common in the banking and taxation industry: ts 188-189).

Presentation of the SOA 86 Once an SOA had been prepared, an adviser would meet with the prospective client for two to three hours to explain the recommendations contained within it. A hard copy of the SOA would be given to the client together with all relevant Product Disclosure Statements. 87 Mr McCulloch described how he was trained to reassure prospective clients at this meeting that Storm's plan implemented measures designed to ensure that the client had no risk of getting a margin call. He would also ask whether the clients' personal circumstances had changed (ts 196). The typical process also involved insisting that the client take the SOA home to read it, to flag pages that he or she did not understand, and to raise any questions.

Client signs loan documents and investment documentation, and investment is processed 88 Once the prospective client was happy with the SOA, the client would sign the SOA and an Authority to Proceed. Storm advised the client of the selected bank, obtained the documentation, and gave it to the adviser to have it signed by the client. 89 When the documents were signed, Storm sent them to the lenders. Home loan funds would be provided to Storm. Storm's fees were typically paid from the home loan borrowings. Storm also sent (i) the margin loan security funds and the documents to the margin lender which funded the margin loan, and (ii) a request to purchase units in the relevant index funds to the responsible entities of those funds.

Further investment "steps" 90 Storm encouraged each client to act on various volatility movements in the share market, described as "trigger points". A trigger point would trigger a review of whether the client should be advised to make a further investment. When a client acted on a trigger point or increased his or her investment this was described as a "step". An updated cash flow was prepared and approved by the cash flow cell, an SOAA was prepared by the SOA cell, and the cash flow cell confirmed the SOAA. Clients might see their advisers to discuss the SOAA. 91 The trigger points were the same for all clients. They applied whether the client was working or retired, young or old. However, the client's LVR, cash reserves and any large pending expenditure might affect whether Storm recommended the client take a step. A step would generally be recommended when there was a change in the financial market, or a change to the client's personal circumstances (either where the value of one of their assets increased, or where the client received additional funds like through an inheritance). 92 There were two types of steps recommended by Storm when there was a change in the financial market. First, there was a "build step", which encouraged further borrowing and further investment as the markets rose. Secondly, there was a "recovery step", which encouraged further investment if the market had fallen. A rise or a fall in the market of 10% or more from when the client invested would often trigger a recommendation for a further step investment.

"Bulk steps" 93 In May 2007, at the request of Mr Cassimatis, a program was written to identify the additional borrowings and investment to take any particular client to a particular LVR. The program could automatically generate "personalised" SOAAs for a large number of clients. Mr and Mrs Cassimatis initially set the LVR at 56%. This figure was subsequently increased to 58%. Then, in January 2008, it was increased again to about 62%. Mr McCulloch said that no one else had, or was invited to have, any input into that LVR figure. 94 An example of the use of this program to generate "bulk steps" occurred in July 2007. On that occasion a large number of SOAAs (around 1,600) were sent to the advisers to be presented to their clients. If an adviser did not consider that the SOAA should be sent to the client, he or she was required to record in a spreadsheet the reasons for that decision. Mr and Mrs Cassimatis would then decide whether they would send the SOAA directly to the client. 95 Mr McCulloch said that for bulk steps after July 2007 the SOAAs were sent directly to clients by Storm's head office. Mr McCulloch said that Mrs Cassimatis explained to him that the reason for this change of method was to prevent advisers inappropriately deciding to withhold SOAAs. The evidence of a practice by Storm of sending SOAAs directly to clients even before 2007 was also supported by evidence from Mr Benson from an earlier period. Mr Benson recalled being on holidays in Noosa in December 2006 and being telephoned by about six of his clients who told him that they had received an SOAA directly from Storm's head office. 96 Mr and Mrs Cassimatis disputed this evidence. They relied upon what was said to be a contradictory response by Mr McCulloch in cross-examination. In cross-examination it had been suggested to Mr McCulloch that he had described "two procedures" for bulk steps in his (very lengthy) affidavit. He was not shown his affidavit, but the two procedures were described to him by cross-examining senior counsel as (i) "where the statements of advice was signed by the advisors individually and given to clients" and (ii) "where the statements of advice were assigned at the head office and given to clients". Mr McCulloch then replied "Sorry, signed by advisors of their office, and then given to the advisors to give to clients". He agreed with the proposition that "on both occasions the statements of advice went to the advisors before they went to the clients" (ts 190). 97 I do not consider that Mr McCulloch's answers to these questions were intended to be absolute. The question did not discriminate between bulk steps before July 2007 and those after 2007. If the whole period were involved then the accurate position is that subsequent bulk steps were sometimes sent by Storm straight to a client, bypassing the adviser. But this did not always occur. An example of when it did occur can be seen in a letter sent from Ms Bock to all advisers asking for information about "clients who should not be included in this mail out" and saying that "we intend to post all recommendation letters from the Townsville office and have them returned directly to Townsville for processing". Mr McCulloch explained that this type of communication did not happen for every bulk step but rather it occurred because of the Christmas period (ts 190). After 2007 many of the bulk steps were sent directly to the client. Even the 6 November 2007 prospectus offered by Storm provides an example of the common use of bulk steps being sent directly to clients. One passage in the prospectus, pleaded in Mr and Mrs Cassimatis' defence at [311]-[312] as accurate, and which passage was admitted by ASIC, said that: Phormula identifies clients with Step Investment opportunities and automatically generates Statements of Additional Advice ("SOAAs"), which are sent to clients to be authorised. Storm efficiently implements this process and is able to generate significant new FLUA [Funds and Liabilities Under Advice] volumes in short periods of time. For example, during the ASX market volatility experienced in July and August 2007, Storm despatched 2,094 SOAAs, of which 1,292 or 62% were authorised by the end of September 2007… (emphasis added).

No exit plan 98 The Storm model had no exit strategy for clients. Mr McCulloch said that he heard Mr Cassimatis tell clients that the clients should not aim to redeem their investments but should aim to pass the portfolios and loans onto their beneficiaries, and should consider succession planning for that purpose. Mr Benson said that during his due diligence, Mr Cassimatis told him that a Storm investment was perpetual, without a defined exit point, and the strategy was for the client to draw income from the "cash" reserve for the rest of his or her life.

THE WITNESSES 99 Mr and Mrs Cassimatis did not give evidence. They called no witnesses other than Professor Valentine who gave expert evidence jointly with Mr McMaster. 100 The witnesses for ASIC can be conveniently divided into eight groups as follows: (1) the Storm advisers and employees; (2) the Part E investors; (3) the experts; (4) the employees of ASIC; (5) Storm's non-executive directors; (6) Storm's compliance auditors; (7) Storm's IPO advisers; and (8) the Aon employees. 101 The evidence of the witnesses in each of those groups (including the pleading concerning the relevant Schedule investors) is summarised below.

(1) The Storm advisers and employees 102 There were six witnesses in this group: Mr Barrett, Ms Davies, Mr Benson, Mr McCulloch, Mr Turvey, and Ms Bock. There were a number of relevant themes in their evidence. Those themes are: (1) the control that Mr and Mrs Cassimatis had over Storm; (2) the operation of the cash flow worksheets; (3) the limited circumstances in which clients were not directed to the Storm model; (4) the retention of clients and increase in client investments; and (5) the operation of the Storm model. 103 The last of these themes, the operation of the Storm model, has been discussed in detail in the previous section of these reasons. This section briefly summarises the evidence of the witnesses, and then focuses upon the remaining four themes.

A summary of the Storm adviser and employee witnesses 104 Mr Barrett is an accountant who was employed by Storm from April 2007 until January 2009. He was brought in to Storm when Storm was preparing to list on the stock market. His role was to assist in preparing for the IPO and to support the Chief Financial Officer. In 2008, he became the joint Chief Financial Officer. 105 Ms Davies is an accountant who worked for PriceWaterhouseCoopers when Storm was a client. She dealt with Mr and Mrs Cassimatis and Ms Frawley. From the end of 2004, Ms Davies was employed by Storm. She worked in the Townsville office from January 2005 until January 2009. Her roles included Storm's internal accounting, day to day financial operations, and Mr and Mrs Cassimatis' personal accounting. Ms Davies was also a member of the Executive Committee from the end of 2004 until July 2006, and then again from March 2007. 106 In 2008, Mr Barrett and Ms Davies became joint Chief Financial Officers of Storm. Mr Barrett focused upon financial accounting and Ms Davies focused upon business management and upon Mr and Mrs Cassimatis' personal finances. Mr Barrett supervised others in Storm's finance team, maintained Storm's financial accounting records and prepared statutory accounts, prepared monthly management accounts and monthly board reports (together with Ms Davies), served on Storm's Executive Committee, and dealt with the Commonwealth Bank in relation to day to day financial operations. In October or November 2008, after a drop in the market, he and Ms Davies began regularly preparing and providing Mr and Mrs Cassimatis with cash flows for Storm in light of anticipated receipts and expenditures. 107 Mr Benson has been a financial planner since 1990. In late 2004 or early 2005, Mr Benson met with Mr Cassimatis to discuss the prospect of his company (Trevor Benson Investments) becoming an Authorised Representative of Storm. Mr Cassimatis explained the Storm model to Mr Benson. Mr Benson undertook 18 months of due diligence before he agreed. At this time, Trevor Benson Investments had around 2000 clients, all of whom became clients advised under Storm's AFSL after Trevor Benson Investments became an Authorised Representative. 108 Mr McCulloch is a financial planner. I have already made reference to his background and his impressive evidence in the section of these reasons which considered the Storm model. As I explained, he began working for Storm in 1998 as Storm's group accountant and took on roles as a senior adviser. After Mr and Mrs Cassimatis, he was a person who was one of the most familiar with the Storm model and operations. 109 Mr Turvey has degrees in business and finance. He worked as an adviser assistant to two of Storm's Authorised Representatives (Ms Seymour and then Mr Notaras) from July 2004 until April 2007. From April 2007 until early 2008, he was employed by Storm as an adviser assistant. He filed documents, telephoned clients to make appointments, printed documents, and attended meetings. He attended Storm training sessions for advisers and assistants conducted by Mr Cassimatis as well as staff workshops. In 2008, Mr Turvey became the junior member of the cash flow team. He usually prepared his part of the cash flows from the Brisbane office. 110 Ms Bock was employed at Storm's head office in Townsville from January 2006 until January 2009. She was a most impressive witness. She had an excellent understanding and recall of her work at Storm. Initially Ms Bock worked as a receptionist. But she received general training in Storm's operations. In February 2006 Ms Bock transferred to Storm's back office where she processed client paperwork. 111 As Storm grew, the back office was divided into teams which dealt with paperwork for: (i) confirmations; (ii) investment processing; (iii) bank processing/funding; (iv) cash flow input; (v) SOAs; (vi) SOAAs; and (vii) superannuation. Consistently with Storm's rotation policy, Ms Bock rotated between different areas as she became proficient in each area. Over time, Ms Bock worked in: (i) confirmations; (ii) investment processing; (iii) cash flow input; (iv) SOAAs; and (v) superannuation. After Ms Bock moved into the cash flow cell in early 2007, she prepared thousands of cash flows.

The themes in the evidence of the Storm advisers and employees 112 As I have explained above, there were five key themes in the evidence of the Storm advisers and employees. My conclusions on the remaining four of those themes are set out below.

(1) The control that Mr and Mrs Cassimatis had over Storm 113 In closing submissions, Mr and Mrs Cassimatis said that "[t]he notion that the respondents were responsible for Storm's operations at a high level is not contested." Nevertheless, it is necessary to illustrate the extent of their control and the degree to which it permeated through Storm from the highest levels of executive management to even mundane day to day activities. The evidence establishes that Mr and Mrs Cassimatis had knowledge of and an extraordinary degree of control over every aspect of the Storm model and Storm's operations including the day to day business of Storm even after the company had acquired more than 2,000 clients. This is not said as a criticism. They were managers, directors, and the sole shareholders and it might be thought unsurprising that they exercised a very high degree of control. But it is an important context to understand my conclusions later in these reasons that Mr and Mrs Cassimatis breached their duties including by an assessment of the actions of a reasonable director with their responsibilities. Although there was some evidence of a desire by Mr and Mrs Cassimatis to encourage suggestions, communication, or new ideas, the control that they asserted was extensive to the point that it substantially stifled much possibility of dissent or contradiction, as they would have been aware. 114 First, Mr and Mrs Cassimatis controlled the Executive Committee and the board of Storm. 115 The Executive Committee was established in late 2003. The original members were initially a small group of Storm employees, although in mid-2007 it was expanded to include all Authorised Representatives. Mr McCulloch, Mrs Davies and Mr Barrett all explained that the purpose of the Executive Committee meetings was to work out how to implement the ideas and decisions that Mr and Mrs Cassimatis presented. The meetings typically ran for several hours (ts 173). 116 Mr Barrett and Mr McCulloch described how the meetings, held every few months, were controlled by Mr and Mrs Cassimatis. Mr Cassimatis usually chaired the meetings. If he was away then Mrs Cassimatis was the chair. Executive Committee members did not propose resolutions or vote on issues. Mr and Mrs Cassimatis would inform the Executive Committee of decisions that they had made. They would convey information to members of the Executive Committee, and allocate tasks. There was rarely, if ever, any dissent from committee members. The Executive Committee could make suggestions about how best to implement Mr and Mrs Cassimatis' decisions but there was rarely any different view expressed. A contrary view never prevailed. 117 In cross-examination, Mr McCulloch was shown the minutes of a meeting on 15 February 2005. The minutes show that on that occasion, the members of the committee were each given a task to set a policy and to prepare an explanation of the policy they wanted Storm to implement. Mr McCulloch explained that the task was set after Mr and Mrs Cassimatis said that everything was being left up to them, and that "there need to be other people in the organisation also making decisions about certain parts of the business" (ts 173). But despite their expressed desire for other people to take on a greater role in making decisions affecting Storm's business, this did not translate into any significant decision affecting Storm being made without the approval of Mr or Mrs Cassimatis. 118 From 2007, after all Authorised Representatives became members of the committee, Ms Davies observed that many issues such as buying new equipment or appointing new Authorised Representatives were removed from the Executive Committee to the board. Meetings of the Executive Committee became more irregular. 119 As for board meetings, Mrs Cassimatis approved all draft agendas, board papers, and minutes. The minutes were prepared by Ms Davies and presented to Mrs Cassimatis before they were distributed. Mr Benson also could not distribute board papers until Mrs Cassimatis approved them. At board meetings Mr Cassimatis was the chairperson. Issues were raised by Mr and Mrs Cassimatis. The non-executive directors discussed the issues but did not raise new issues. Mr Barrett described those meetings as "information sessions" conducted by Mr and Mrs Cassimatis involving consistently positive information for the independent non-executive directors concerning Storm business and decisions that Mr and Mrs Cassimatis had made. Mr Barrett's impression, which I accept to be the case, was that the independent non-executive directors were passive at these meetings. 120 Secondly, even apart from management level decisions, Mr and Mrs Cassimatis asserted a high level of control over all aspects of Storm's finances from the most serious to the most mundane. Mr and Mrs Cassimatis explained to Ms Davies that no one was allowed into the accounting team's room in the head office without their authority. Although Mr Barrett was the Chief Financial Officer, he could not make any payment, no matter how small, without the approval of Mrs Cassimatis when she was available. And Ms Davies explained that after she joined Storm she became aware that only Mr and Mrs Cassimatis had authority to sign cheques for Storm. At a later stage, other persons were authorised to sign cheques but only when (i) Mr and Mrs Cassimatis were unavailable, and (ii) the cheque could not await their return. When they were out of the office, they usually approved the payment by email or phone. If they were away for a lengthy period of time then Ms Davies was required to provide Mrs Cassimatis with a list of payments that were made. Mr Barrett also gave examples of situations where a credit card was running low and flights needed to be paid. He needed to ask Mrs Cassimatis for a payment of $22,000. Ms Davies described how she prepared a two page cash flow document for Mrs Cassimatis on a weekly basis with information such as current bank balances and compliance issues concerning Storm's financial services licence. 121 Thirdly, Mr and Mrs Cassimatis had considerable control over the financial advisers and the process for giving advice concerning the Storm model. I have already explained how the SOAs and cash flows were prepared centrally by Storm in a process over which Mr and Mrs Cassimatis had control. As Mr Cassimatis told Mr Benson, the role of an Authorised Representative of Storm was to collect data from clients and to present to them the advice that had been prepared by Storm. Indeed, during Mr Benson's period of due diligence, Mr and Mrs Cassimatis each said to him that Storm advisers made no decisions but that "our specialists" or "our financial engineers" formulated the content of and prepared all advice to clients, obtained quotes from lenders, and executed recommendations. Further, as Ms Bock said, Mr and Mrs Cassimatis insisted upon approving any advice to a client who did not meet Storm's mandated investment parameters. 122 Mr Benson gave evidence, which I accept, of one occasion in early 2007 when he thought some of the clients should not take a step. Because of this, he did not send to the clients the SOAAs that had been sent to him from Storm. A few weeks after he had received the SOAAs by email, he was told by someone at Storm Headquarters that not all of the clients who he advised had signed the SOAA. He explained that he did not think some clients should receive the SOAA. Mr Cassimatis subsequently said to him that he should not "assume the advice is not appropriate for the clients, we are the specialists and you should present it as it is sent to you". 123 Mr and Mrs Cassimatis also set sales targets for Storm. In a number of meetings prior to June 2008, Mr Cassimatis told advisers to consider the ability of their clients to make additional "step" investments so that Storm could achieve its financial targets. In the lead up to the attempted IPO, each of Storm's offices was also given particular targets to meet, and the company as a whole had a global target. Even after the proposed float in 2007 failed, Mr and Mrs Cassimatis said that they intended to seek to float the company again in 2008 and that it would be necessary to continue to improve on previous financial results. So, as Mr McCulloch said, in 2008 the pressure to achieve sales was even more intense. 124 Fourthly, Mr and Mrs Cassimatis asserted significant control over the education workshops. As Mr McCulloch explained, all changes to the slides had to be approved by Mr and Mrs Cassimatis. And, as I have explained, Mr McCulloch was trained by Mr Cassimatis in what he could say at the education workshops. The same was true of Mr Benson. On the rare occasion when a client of Mr Benson's could not attend a workshop, Mr Cassimatis allowed Mr Benson to present the workshop content to that client on a one-on-one basis. But Mr Cassimatis made it clear that strict adherence to the slides was necessary and Mr Benson was not authorised to make any changes to the presentation. 125 Fifthly, as I have already explained, Mr and Mrs Cassimatis asserted significant control over the preparation of the cash flows. Mr Cassimatis was the main designer of the spreadsheet and formulae. And, as Mr McCulloch said, Mr and Mrs Cassimatis set the parameters used in the preparation of cash flows and for a number of years nobody other than Mr Cassimatis tested the cash flow modelling (ts 207). Even when some control over the cash flows was relinquished and authority was delegated to Ms Richards, and to a lesser extent Ms Bock and Ms Geissman, Mr and Mrs Cassimatis still approved the cash flows. 126 Delegated authority was closely controlled. Mrs Cassimatis was the head of the cash flow team and had the ultimate authority to sign off on all the documents. Ms Richards reported directly to Mrs Cassimatis. Below Ms Richards was Ms Bock. Ms Richards could sign off on a broader range of documents than Ms Bock, however if a matter fell outside the authority of Ms Richards, Mr or Mrs Cassimatis were the only persons who could authorise the matter. Ms Bock was trained by Mrs Cassimatis. If Ms Bock needed to clarify something on a file she was working on or needed approval, she would report to Ms Richards but occasionally she went directly to Mrs Cassimatis such as when a client or proposed client did not meet required investment parameters. 127 Advisers also had little influence on the content of a new client cash flow. They could make recommendations or suggestions in Phormula (which sometimes occurred) but the cash flow was prepared by the cash flow team and any change to the cash flow needed to be approved by the cash flow team. 128 One matter relied upon by Mr and Mrs Cassimatis was evidence from Mr McCulloch that in a discussion about testing, Mr Cassimatis had suggested that he and Mr George Cassimatis should test "logic" and three others should test the "application" of the model. The distinction was made in the context of the proposed new Phormula system but the distinction was not explained. It might be doubted whether this separate testing occurred but, in any event, I do not accept that the testing by any person apart from Mr Cassimatis extended to testing the operation of the model (and its "logic") in relation to any investor with characteristics, or similar characteristics, to the class pleaded by ASIC. Mr McCulloch also emphasised that the discussion concerned testing that other parties "should" conduct. 129 Sixthly, as Ms Davies observed, Mr Cassimatis led the presentations to external parties often in the presence of Mrs Cassimatis. Mrs Cassimatis would contribute to the presentations. The presentations given by Mr Cassimatis to external parties, as well as to clients, included the following: (i) education seminars; (ii) update meetings for groups of clients; (iii) meetings where the content of the proposed advice was presented by Mr Cassimatis to the client; (iv) presentations on the Storm model to high profile prospective clients; (v) meetings with external parties such as Macquarie Bank in mid-2006 and the Commonwealth Bank in 2008; (vi) at least one presentation that Ms Davies attended which was to a person who became an Authorised Representative; and (vii) "roadshow" presentations in the lead up to the IPO. 130 Ms Davies also described the content of some of these presentations which followed the standard pattern. She said that Mr Cassimatis explained that he was the person, or architect, who developed Storm's model. Ms Davies also said that Mr Cassimatis explained how Storm recommended clients to take "steps" when the market had risen or fallen. He used the slides which he told Ms Davies that he had developed over a long period of time. He would explain how clients should embrace debt and not be scared of it. 131 Seventhly, the process of giving advice in an SOA was tightly controlled by Mr and Mrs Cassimatis. Mr McCulloch observed that until 2006 or 2007, every Authorised Representative of Storm was primarily trained by Mr Cassimatis, with Mrs Cassimatis also providing some training in relation to compliance issues. As a general rule, the new Authorised Representative and Mr Cassimatis would present cash flows and SOAs jointly for the first three months. 132 The advisers would not prepare the SOAs that they presented. As I have explained, they were prepared by Storm centrally based upon a template. Mrs Cassimatis was responsible for the changes to the SOA template. Until about 2006, Mr Cassimatis or Mrs Cassimatis approved every SOA. After that, some authority was delegated to a select number of employees. But advisers were not permitted to create or amend an SOA. Mr McCulloch said that whenever he communicated a client's concern with an aspect of an SOA, Mrs Cassimatis would either reject any change to the advice or would arrange for Mr Cassimatis to present the recommendation to the client. 133 Mr McCulloch also said, and I accept, that Mr and Mrs Cassimatis frequently said words to the effect that the giving of any advice to Storm clients that was inconsistent with the Storm system of advice would not be countenanced. One passage in Storm's 6 November 2007 prospectus (as pleaded in Mr and Mrs Cassimatis' defence at [311], and admitted by ASIC) said as follows: Storm's client grouping, commoditised advice and centralised administration model enables ERs and ARs to focus on acquiring new clients and building client relationships, allowing them to manage more clients and greater FLUA [Funds and Liabilities Under Advice] volumes. 134 Eighthly, Mr and Mrs Cassimatis developed Storm's relationship with external bodies. Mr and Mrs Cassimatis issued proposals to the Bank of Queensland to raise capital for the purpose of expanding Storm's business operations. Mr Cassimatis met with the banks (up to one every month) and would negotiate with the banks about LVRs and the use of investment growth and dividends in assessing loan applications. Mr Cassimatis also had a relationship with entities which were responsible for the index funds into which Storm typically recommended investment, badged as "Storm" funds (ts 165) as well as margin lenders. Indeed, one margin lender agreed to lend 100% value against cash securities, when most margin lenders would only lend 95% (ts 205). Storm was also able to negotiate with the banks a longer period for meeting a margin call and higher buffers (ie the level at which the line to value ratio was allowed to rise above the notional margin call trigger before it actually triggered a margin call) (ts 186). At least in relation to one product, the margin call period was five business days (ts 186). 135 In summary, Mr and Mrs Cassimatis were intimately familiar with, and exerted control over, nearly every aspect of Storm's operations. Nevertheless, the control was not absolute and there were some, usually less consequential, decisions that were taken by others. This was mainly out of necessity. In cross-examination, Mr McCulloch said that by 2007 to 2008, Storm had offices in a number of different States in Australia, and had over 100 employees. And he said that Mr and Mrs Cassimatis sometimes took holidays (ts 175). For example, in mid-2007 a number of Storm employees including Mr and Mrs Cassimatis went on a trip to the Mediterranean (ts 175). Prior to this trip, Mr McCulloch sent Mr and Mrs Cassimatis a long email explaining the ways in which he could assist to keep the office running smoothly in their absence, including assisting to process pay cheques, hosting workshops and organising for someone to be able to sign Storm's cheques on a temporary basis. Mr Barrett also accepted that he made some decisions without referring to Mr and Mrs Cassimatis, such as the decision to cancel software training and make a complaint to the training provider, and the decision about the type of credit card obtained for Mrs Cassimatis (ts 78-79). 136 Despite the extraordinary control that Mr and Mrs Cassimatis had over Storm, and despite the lack of dissent about which they were aware, to a limited extent they did encourage some approachability and transparency, and on some occasions they raised the possibility that others might take responsibility for "some" issues. As I have explained, these broad statements did not have much effect. The instances of these statements included in an executive meeting in 2003 when either Mr or Mrs Cassimatis explained that a key goal of Strom was to "retain approachability and transparency across all people within the group". There was also evidence that, in 2005, Mr and Mrs Cassimatis gave members of the Executive Committee an opportunity to present a "spiel" concerning policy that they would like to see set, including LVR policy. At that meeting Mr or Mrs Cassimatis observed that everything was being left up to them and that other people in the organisation might need to make decisions about "certain parts" of the business.

(2) The operation of the cash flow worksheets 137 In my discussion of the Storm model, I have already explained the operation of cash flow worksheets generally. However, one matter upon which potentially contradictory evidence was given concerned the access which Storm advisers (both Authorised Representatives and Employee Representatives) had to cash flow worksheets. 138 Mr Turvey explained in cross-examination that when he was a member of the cash flow team, he would email Excel spreadsheets to advisers containing a cash flow for the client. However, although the adviser could make changes to the cash flow document, the formulas were removed (ts 439-440). Mr Turvey believed that the reason why the formulas had been removed was so that advisers did not change the cash flow without approval from the cash flow team, especially in front of the client (ts 440). 139 The effect of the removal of the formulae was that if the adviser inputted any information into the cash flow excel worksheet, then the cash flow would not be affected. Only the cell into which the information was inputted would change. It would not be possible from the spreadsheet to consider or investigate the effects of the change upon the rest of the cash flow. 140 Although Mr Turvey said that it was "common knowledge" that most advisers had access to a copy of a cash flow with formulas (ts 440), it is unlikely that the Authorised Representatives would have transposed client information from the client cash flow to the illicit worksheet with the formulas. One reason why this would have been unlikely is that they would have been aware of the tight control asserted by Mr and Mrs Cassimatis over the operations of Storm and they would likely have been aware that formulas had been removed to ensure that control. Another reason is that they were dependent upon the support of Mr and Mrs Cassimatis. It was clear that Mr and Mrs Cassimatis did not want them to have formulas that could result in changed scenarios being presented to clients in the cash flow worksheet. Indeed, in an exhibit to Mr McCulloch's affidavit he annexed "cash flow notes" from a training session saying: Cashflow is company IP and must be protected. Never email cashflows with formulas to clients or [Authorised Representatives]. Cashflows may be emailed when the formulas have been removed from the document (always ask how this is done and have someone check prior to sending). 141 Mr McCulloch, however, gave evidence (which I accept) that although Authorised Representatives could not manipulate the excel spreadsheets, it was possible for Employee Representatives to do so because they were provided with spreadsheets with the formulae. Ms Bock gave the same evidence in her affidavit. Nevertheless, on one occasion when Mr McCulloch amended a cash flow worksheet, he was reprimanded by Mrs Cassimatis. And Mr McCulloch was an employee who had a great deal more trust reposed in him by Mr and Mrs Cassimatis than was reposed in many other employees or Authorised Representatives. 142 An ambiguous part of Mr McCulloch's evidence was when he said that, at one stage, Mr Cassimatis thought clients would have more faith in the Storm model if they could see the numbers being inputted and manipulated to come up with the cash flow plan (ts 174). Mr McCulloch did not explain which "numbers" an Employee Representative would input and manipulate in front of the client to "come up with a cash flow plan". What I take Mr McCulloch to mean is that the inputting of numbers would be the same numbers that had been initially contained in the cash flow. This would show the calculations being made. 143 It is possible, but unlikely, that in some cases an Employee Representative might have shown a client how a cash flow might be different based on an additional input which had not been included by the cash flow team in the spreadsheet (such as including expenditure for travel). But an Employee Representative would have avoided this scenario because (i) such an additional input, if confirmed by the client, would have to be sent back for alteration to the cash flow team; (ii) the detail of the cash flows and the control exerted over them by the cash flow team made it clear that Employee Representatives should not experiment in front of the client with scenarios other than those provided in the worksheet (including the viability cash flow which was described in Phormula notes for Mr and Mrs Dodson as the "worst case" scenario); and (iii) the Employee Representatives would likely have been aware that the Strom model encouraged uniformity as much as possible and that the Authorised Representatives were not entitled to have access to spreadsheets with formulae included. 144 To put this another way, an Employee Representative might show the client how the "inputting" of the same numbers provided to the cash flow team into the boxes in the cash flow would cause the cash flow to generate results. But the Employee Representative would not experiment in front of the client with different scenarios (such as inputting new information into the spreadsheet which had not been provided by the cash flow team). As Mr McCulloch explained, both Authorised Representatives and Employee Representatives could suggest to the cash flow team that changes be made to a cash flow arising from information provided by a client or as requested by a client, but they were not permitted to make changes to the cash flow.

(3) The limited circumstances in which clients were not directed to invest using the Storm model 145 There were very few circumstances when clients of Storm were not advised to invest using the Storm model. In some circumstances clients were given additional advice, such as superannuation or insurance advice, but very rarely were clients not advised to invest using the Storm model, on Storm's conditions. Provided a client accepted Storm's conditions (the most significant of which were agreeing that the investment was intended for a period of five years or longer and agreeing to one or two of four risk categories), those few circumstances were almost exclusively limited to cases where the client simply had no capacity to borrow necessary funds or where the capacity to borrow was too limited given their need for income. There are numerous reasons why I draw this inference. 146 First, although in cross-examination Mr McCulloch was referred to examples of clients who were not advised to invest in the Storm model, these were people who had no capacity to take any further debt (ts 207). Even if prospective clients had very little ability to obtain sufficient debt, all possible ways were considered to obtain additional debt. 147 A specific example is Mr and Mrs Harvey. Mrs Harvey did not have a job. Although Mr Harvey was working, the Phormula note said that he was expecting to retire immediately. It was observed in their Phormula notes that Mr and Mrs Harvey's overall income was $46,844 per annum, and their expenses were $44,118 per annum (with 10% margin included). They had a mortgage of $57,000 and a credit card debt of $12,396. Despite Mr Harvey being about to retire and Mr and Mrs Harvey already using almost all their income for expenses, the first note in Phormula was to "look at possibility of using equity from their house along with margin lending" and "see what income they can produce from the plan with $0 contributions". Ms Geissmann (a member of the cash flow team) then observed in response: Unfortunately there is little we can do to give these clients a decent income into retirement. They have very little super and no other assets we can leverage off apart from their home but because they are looking to pull an income immediately any investment will not have a growth period in which to consolidate. 148 Nevertheless, Mr and Mrs Harvey were ultimately advised to invest in the Storm model. The Phormula notes said that Macquarie Bank was prepared to lend money to them, but only after they obtained a letter from an independent legal adviser. 149 Secondly, Mr McCulloch explained that he was taught by Mr Cassimatis that one purpose of the education workshops was to introduce potential investors to the concept of borrowing to invest more than they would otherwise be prepared to do. In the workshops Mr Cassimatis would explain that the correct answer to a question about the person who the prospective client should "want to be" was the person who owes $2 billion. These are just two instances which illustrate how Mr and Mrs Cassimatis believed, and the premise of the application of the Storm model was, that clients who could borrow sufficient funds would make money and should invest using the Storm model. 150 Thirdly, as Mr McCulloch explained, Mr Cassimatis was asked by people at institutions on a few occasions why Storm gave all its clients the same advice. Mr McCulloch observed that Mr Cassimatis had a standard response to that question which was to say words to the following effect: Because essentially everybody has the same need, and that is that they don't want to be reliant on the pension in retirement. The only way to avoid this is to have a shit- load of capital, and to get that capital they all need debt because there is no other way to acquire shit-loads of capital without debt. That is why debt is an integral part of the Storm model and why we always recommend debt. 151 Fourthly, in a presentation to research analysts dated 11 October 2007, Storm described one of the steps in "client education" as optimising the client's balance sheet. The slide that explained this described the use of leverage to increase investment capacity and build wealth over time. The first step was to ascertain debt capacity including by refinancing existing property and other assets. The second step was to determine the optimal loan to value ratio. The powerful emphasis was upon determining the extent to which the client had capacity to borrow to invest according to the Storm model rather than to determine whether a client, who might be retired or nearly retired, had sufficient other assets or income for the Storm model to be appropriate. 152 Fifthly, I have already described the evidence of Mr Benson that when he suggested that some Storm clients he was advising should not take a step, Mr Cassimatis subsequently said to him that he should not "assume the advice is not appropriate for the clients, we are the specialists and you should present it as it is sent to you". This is an illustration of the control that was asserted over advisers and also of the focus of Storm upon applying the Storm model to all those who met Storm's criteria and who had sufficient capacity to borrow to invest according to the Storm model.

(4) The retention of clients and increase in client investments 153 The final theme in the evidence of the Storm advisers and employees was the manner in which Storm retained clients and increased their investments. As I have explained, there was no exit plan from Storm. 154 As Mr McCulloch explained, Storm had a high rate of retention of clients and its clients were encouraged not to sell their investments as the market fell. Once an investor decided to become involved with the Storm model, there was a powerful emphasis on control remaining with Storm. For instance, as Mr McCulloch explained, one of the education workshop slides (slide 24) referred to "financial subcontractors" of Storm including accountants, real estate agents, fund managers, lenders, solicitors, valuers and insurance providers. In relation to each "subcontractor" on the list, Mr McCulloch learned to say words to the effect of: If an accountant is needed to be spoken to in relation to the structure of a plan, whether it goes in the personal names, a trust or a company, we will do that negotiation for you. If a valuation is needed, we'll organise the valuation for you. 155 Mr McCulloch was also taught by Mr Cassimatis to say: You can deal directly and invest the money directly yourself with a fund manager, but you won't have the pulling power and the purchasing power that Storm has in obtaining lower fees and terms and conditions for those funds. 156 As I have explained, investors were often encouraged to increase their investment when the market fell more than 10%. I have already referred to the operation of "steps", including the extraordinary extent to which bulk steps were sometimes taken. The investors were introduced to this process early in the education workshop. Mr McCulloch would reiterate, as he was trained to do, that: it is very important that you do not be spooked into selling when assets are low or going against what we determine is the long-term trend. That's why you should listen to the advice of a professional financial planner, who will guide you on a path to making wealth in the long run.

(2) The relevant Part E investors and the relevant Schedule investors

Which investors were proved to be planning for retirement? 157 As I have explained, part of ASIC's pleaded case was that Mr and Mrs Cassimatis breached their duties as directors in circumstances in which they caused or permitted Storm to provide advice to investors who satisfied five criteria. One of those criteria, which assumed significant importance in the expert evidence, was that the investors were "retired or approaching and planning for retirement". ASIC pleaded that each of the Part E investors and the Schedule investors satisfied this criterion. 158 Mr and Mrs Cassimatis admitted that the nine Part E investors were retired or approaching and planning for retirement (Defence [246(i)]). 159 Mr and Mrs Cassimatis also admitted that the following Schedule investors were retired at the date of the SOA (Defence [247(c)]): (1) Mr Bleakley; (2) Ms Knight; (3) Mr and Mrs Walker; (4) Mr Jones; (5) Mr and Mrs Madden; (6) Mr McConnell; and (7) Mr Schuler (but not Mrs Schuler whom ASIC pleaded was in full time employment). 160 Mr and Mrs Cassimatis then admitted that seventeen other investors were "planning for their retirement at the date of their first SOA". However, they did not admit that any of the Schedule investors "were retired or approaching and planning for retirement" (Defence [247(d)], [247(e)]). The admission in relation to the seventeen other Schedule investors was only that they were "planning for their retirement" and not that they were approaching retirement. Senior counsel for Mr and Mrs Cassimatis submitted that the admission that Schedule investors were planning for retirement was an admission that this was an objective that they had when they approached Storm, rather than an admission about the imminence of retirement. Hence, he agreed with the example that the admission would encompass a 35-year-old professional who wants to make plans for, say, retirement at 60 (ts 598). This is the plain meaning of Mr and Mrs Cassimatis' pleading. 161 The plea by Mr and Mrs Cassimatis, objectively construed, involved no admission that the seventeen investors were approaching retirement. Senior counsel for ASIC relied upon expert evidence of Mr McMaster that a person is planning for retirement when there is a short period to plan for retirement, and when changes in the market could affect that person's situation (ts 560). In his report he consistently referred to "when someone is close to retirement and planning for that event": [112] (page 36; Mr and Mrs Dodson); [36] (page 126; Ms Longmore); [35] (page 167; Mr and Mrs Sondergeld); and [35] (page 212; Mr and Mrs Higgs) (emphasis added). In cross-examination, Professor Valentine also said that he and Mr McMaster had agreed on "five years as the cut-off" for the period in which a more conservative approach needed to be taken for persons who were close to retirement (ts 385). They had agreed that negative gearing was high risk within a period of five years to retirement (ts 355). I accept these matters, but I do not accept that Mr McMaster's opinion about when a person is planning for retirement is (i) the only circumstance when people plan for retirement (such as the 35 year old professional), or (ii) relevant to construe the scope of the admission by Mr and Mrs Cassimatis. 162 The conclusion, therefore, must be that ASIC has failed to prove that the seventeen investors who Mr and Mrs Cassimatis admitted were planning for retirement were persons who were also approaching retirement in the sense that retirement was imminent. I treat Mr Schuler in this group because, although he was retired, his wife was not retired and the advice from Storm was given to Mr and Mrs Schuler as a couple. Although Mrs Schuler's full time income was only $29,000, ASIC's case was presented by a general focus upon the list of characteristics (including retirement or approaching retirement, and low income) rather than by examination of circumstances which might be closely analogous to those who met all the characteristics. 163 When I raised the issue during closing submissions about the lack of proof that many Schedule investors were retired or approaching retirement, senior counsel for ASIC expressed some understandable exasperation that ASIC's attempts to confine what would otherwise have been large volumes of evidence might have been thwarted as a consequence of an understanding which evolved during directions hearings that there was little in dispute about the key features of the Schedule investors. However, my conclusion in relation to the seventeen Schedule investors must be understood by reference to two important matters of context. 164 First, the primary case against Mr and Mrs Cassimatis alleged only one breach each. The precise number of breaches by Storm only ever added colour to ASIC's case. As I ultimately conclude in this case, it does not affect the result as to liability, especially in circumstances in which I do not accept that the Storm model was applied to retirees or near-retirees without the knowledge of Mr and Mrs Cassimatis. The forensic decision by ASIC to plead the details of all of the Schedule investors in very brief form was therefore entirely proper even with the risk, which eventuated, that some aspect might turn out to be disputed. 165 Secondly, as senior counsel for Mr and Mrs Cassimatis submitted, the dispute about "approaching retirement" really only crystallised after the experts met and agreed that negative gearing was a high risk strategy for persons within five years of retirement.

The evidence of the relevant Part E investors and the pleading concerning the relevant Schedule investors 166 None of the Schedule investors gave evidence; their position was summarised in the pleadings and admitted in the respects mentioned above. None of the Part E investors was required for cross-examination. It is sufficient for these reasons, therefore, to consider only those relevant investors who were retail investors and approaching (or at) retirement because they are the relevant investors in relation to whom Storm might have breached its duties.

Mr and Mrs Dodson 167 When Mr and Mrs Dodson were advised by a Storm representative their circumstances were as follows. Mr Dodson was 60 years old. His wife was 55 years old. They had a combined total income before tax of $58,996 per annum which included a double orphan pension of $3,640 per annum. They were the guardians of a girl whose parents had died. 168 In 2003, Mr and Mrs Dodson sold the cake shop that they ran for 18 years. Mr Dodson started night shift work in a job doing security and traffic control. Mrs Dodson worked in aged care. They had saved superannuation, and had an investment with a Colonial managed fund, with a combined total of just over $300,000. After expenses plus 10%, they had $9,410 surplus funds each year. They owned their own home which was worth around $460,000. They had lived there for 27 years. Mr Dodson had a heart condition. They wanted to travel in retirement. Storm understood that he and his wife were "preparing for retirement in a few years". 169 Mr and Mrs Dodson had limited investment experience. They had owned residential property and had units in the Colonial fund but they had never owned shares or investment property and had never had a margin loan. 170 In 2003, Mr and Mrs Dodson met the fund manager for the girl for whom they were guardians, Mr Fullerton-Smith. He had managed the girl's funds following the death of her father. In the second half of 2007, Mr and Mrs Dodson discussed with Mr Fullerton-Smith the prospect of investing in the Storm model. Mr Fullerton-Smith became their Storm adviser. 171 Mr and Mrs Dodson attended the education workshop. After that, Mr Fullerton-Smith prepared a Confidential Financial Profile which Mr and Mrs Dodson signed. Their Confidential Financial Profile described their objectives as: To live self-sufficiently and be happy until the day you die. Travel in retirement. 172 Mrs Dodson also initialled the option on page 22 under the heading "Personal Profile" which said: I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated. 173 In November 2007, Mr and Mrs Dodson received advice from Storm in an SOA. In internal communications on Phormula, Storm officers had considered advising Mr and Mrs Dodson to take an 80% mortgage over their home but had concluded that: I am not sure if they will get an 80% lend so have assumed 60% against the home (this can be adjusted if need be) plus some margin lending for an investment of $315K. 174 Mr and Mrs Dodson were advised: (i) to borrow $276,000 from the Bank of Queensland to invest in indexed funds; (ii) to borrow $90,000 against that investment as a margin loan from Colonial Margin Lending, using their existing Colonial managed funds worth approximately $65,000 as security for their margin loan; and (iii) with the debt of $386,000 to obtain an investment of $315,000 in indexed funds, and reserves of approximately $21,000 in the Macquarie Investment Management Limited Cash Management Trust. The remainder, $26,960, was to be paid to Storm for its fees. 175 The investment by the Dodsons in indexed funds was ultimately as follows: (1) $222,000 in the Storm Australian Industrials Indexed Trust; (2) $105,000 in the Storm Australian Resources Indexed Trust; and (3) $18,000 in the Storm Australian Technology Indexed Trust. 176 Mr and Mrs Dodson accepted Storm's recommendation. They deposited $500 per month into the Macquarie Cash Management Account. All of the interest payments from the loans were paid out of the Macquarie Cash Management Account or the interest was capitalised. 177 On 18 April 2008, Mr and Mrs Dodson received an SOAA from Storm. The SOAA recommended that they borrow an additional $53,994 from their existing margin loan with Colonial Margin Lending and use the borrowed funds to: (1) invest $2,000 in the Storm Australian Technology Indexed Trust; (2) invest $36,000 in the Storm Australian Industrials Indexed Trust; (3) invest $12,000 in the Storm Australian Resources Indexed Trust; and (4) pay Storm's fees of $3,994. 178 They accepted that recommendation and signed the documents provided by Storm. 179 On 5 September 2008, shortly before the full impact of the GFC, Mr and Mrs Dodson received another SOAA from Storm which recommended that they borrow an additional $10,000 from their existing Colonial Margin Loan and deposit the additional borrowed funds into their Macquarie Cash Management Trust Account to build cash reserves. They accepted Storm's recommendation. 180 On 8 October 2008 and 21 October 2008, Storm wrote to Mr and Mrs Dodson in relation to what Storm described on 21 October 2008 as "what is proving to be unprecedented world events", namely the GFC. Storm advised them switch up to 100% of their portfolios out of shares and into cash. They accepted Storm's recommendation. 181 In January 2009 Storm went into voluntary administration. 182 Prior to investing with Storm, Mr and Mrs Dodson owned their own home. They had a Colonial investment and superannuation totalling $300,000. They had no substantial debt. Mr and Mrs Dodson now have a home loan on their house of $287,000 (with an offset of $197,000), a line of credit drawn to $32,000, and no Colonial investment. Neither has been able to retire. Mr Dodson continues to work as a casual security officer and Mrs Dodson continues to work as an aged care worker.

Mr and Mrs Herd (Part E investors) 183 Mr and Mrs Herd were married for 54 years. Until they retired in 1992, Mr Herd was a school principal, and Mrs Herd was a teacher. For the decade after they retired, Mr and Mrs Herd relied solely on their superannuation funds and part pension as a source of income. 184 Immediately before investing with Storm, Mr and Mrs Herd had a combined income of approximately $39,000 which was their aged pension, investments and dividends. They were debt free. Mr and Mrs Herd had concerns about their declining financial base. 185 In August 2007, Mr and Mrs Herd invested with Storm. In their Confidential Financial Profile, Storm estimated their assets to be $689,879. They had no liabilities. 186 Mr and Mrs Herd had limited borrowing or investment experience prior to becoming clients of Storm. They had owned a residential and investment property (for which they had borrowed money), but had never owned shares or units in a managed fund and had never had a margin loan. 187 In mid-2006, Mr and Mrs Herd were contacted by Mr O'Brien, a Storm representative who invited them to attend a Storm workshop in the Redcliffe area. Mr Herd recalled that the presentation was about how investors could make money from borrowing funds against their assets. Mrs Herd remembered how the speakers had talked about "good debt and bad debt", about "using money to make money" and that a good way of achieving success was to use the equity in the home to borrow funds. Mrs Herd also remembered being shown lots of facts, figures and graphs. 188 Between mid-2006 and November 2006, Mr and Mrs Herd attended at least two further meetings with Mr O'Brien. They provided him with information for their Confidential Financial Profile which described their objectives as: To increase my retirement income. 189 They described their risk profile as: I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated. 190 Mr and Mrs Herd accepted Storm's SOA recommendations. They signed each of the documents provided by Storm. Storm recommended that Mr and Mrs Herd: (1) borrow $222,000 from the ANZ Bank and $240,000 as margin loan from Macquarie; (2) cash out $152,000 from existing allocated pension polices; (3) use these funds to invest $525,000 in the Storm index funds and to pay Storm's fees of $41,793; and (4) use their home, valued at approximately $480,000, as security for the loan from the ANZ bank and the margin loan from Macquarie Margin Lending. 191 On 20 March 2007, Mr and Mrs Herd were given an SOAA which recommended that they (i) borrow an additional $53,719 from Macquarie, and (ii) use the borrowings to invest $50,000 in the Storm index/trust funds and to pay Storm's fees of $3,719. They accepted the recommendations. 192 On 16 July 2007, Storm sent Mr and Mrs Herd a second SOAA making the same recommendations again to borrow an additional $53,719 from Macquarie, and to use the borrowings to invest $50,000 in the Storm index/trust funds and to pay Storm's fees of $3,719. Again, they accepted the recommendations. 193 On 17 August 2007, Storm sent Mr and Mrs Herd a third SOAA which recommended that they (i) borrow an additional $74,009 from Macquarie; (ii) use $69,000 of the borrowings to invest into existing investment funds; and (iii) use the remainder to pay Storm's fees of $5,009. Again, they accepted the recommendations. 194 On 20 October 2007, Storm sent Mr and Mrs Herd a fourth SOAA which recommended that they: (1) redeem $20,000 of their investment in Storm index/trust funds; (2) deposit the funds into their cash reserve; and (3) replace the withdrawn funds by borrowing an additional $20,000 from their existing margin loan with Macquarie to invest in Storm index/trust funds. 195 In late 2007, Storm also recommended that Mr and Mrs Herd refinance their home loan from ANZ to NAB and increase the amount of their home loan from the $220,000 to $304,000. They accepted this recommendation. 196 On 29 July 2008, Storm advised Mr and Mrs Herd that their margin loan was in buffer at 81.66%. Storm recommended that they link $25,000 of the funds from their cash reserve to their margin loan. Mr and Mrs Herd accepted Storm's recommendation. 197 On 8 October 2008, following the GFC, Storm recommended that Mr and Mrs Herd switch up to 100% of their portfolio out of equities and into cash, and obtain a refund of pre-paid interest. In a second letter on the same date, Storm recommended that Mr and Mrs Herd switch up to 50% out of equities and into cash. Mr and Mrs Herd did not speak to anyone from Storm about the letters. They accepted Storm's recommendations by signing the letters. At no time did Mr Herd receive any advice about a margin call. 198 Mr and Mrs Herd had no specific recollection of closing out their investments in the Storm index funds. Initially they were unaware that most of their Storm index funds were redeemed to cash and deposited in their cash reserve account. In December 2009, they redeemed their remaining investments and deposited the funds in their bank account. They received less than $10,000 for the redemption. When they closed their margin loan account they were charged a break fee of approximately $10,000. 199 Mr and Mrs Herd were unable to meet repayment obligations on their home. They sold their home in around July 2009 for $483,000. The proceeds of the sale went to paying off their NAB home loan debt. The remaining proceeds were deposited in their bank account. 200 Before Mr and Mrs Herd invested with Storm, they had a comfortable life. Subsequently, they relied on the charity of their family, and had had to give away or sell their possessions at well below cost. They moved in to a house in Caboolture which they purchased with their remaining savings. They used their full age pension for day to day living expenses. 201 On 31 October 2014, Mr Herd died from a heart attack. He was 77 years old.

Mr and Mrs Higgs (Part E investors) 202 Mr and Mrs Higgs have been married for 41 years. Mr Higgs is 65 years old and Mrs Higgs is 61 years old. On 1 April 2004, Mr Higgs retired from paid employment because of disability. He was receiving an income protection insurance payment for this disability. 203 In April 2006, Mr and Mrs Higgs first invested with Storm. Storm estimated their assets at $655,268 and their liabilities at $84,350. They had a combined income of approximately $79,000 per annum. 204 Mr and Mrs Higgs had limited borrowing and investing experience prior to becoming clients of Storm. They had owned residential properties (for which they had borrowed money), but had never owned an investment property, had never owned shares, and had never owned units in a managed fund or an indexed fund. 205 After becoming acquainted with Storm, in early 2006 Mr and Mrs Higgs attended a Storm workshop, which they described as an "information evening". Subsequently they met with a Storm representative, Ms Frawley. They provided her with information from which their Confidential Financial Profile was produced. It described their objectives as: Work a plan given Ray is now on IP benefits. To derive an income and not be dependent on work. To live self-sufficiently and be happy until the day you die. To be tax effective. Retirement planning. Holiday to Tasmania. Build a small blacksmith play room shop. 206 Although I am satisfied that they did tick the box on the page they initialled, they did not recall ticking that box, which said: I am prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated. 207 On 31 March 2006, Storm provided Mr and Mrs Higgs with an SOA which recommended that they: (1) extinguish private debt; (2) borrow $320,000 from Bank of Queensland; (3) borrow $20,000 from Macquarie Margin Lending; (4) use the borrowed funds to: (a) invest $300,000 in the three Storm Australian Indexed Trusts; (b) pay $17,000 into a cash reserve account; and (c) pay Storm's fees of $22,789. 208 Mr and Mrs Higgs instructed Storm to proceed with the recommendation. However, before the investment was implemented, on 5 May 2006 Storm amended the SOA. The amendment was made because their property was valued lower than expected and their amended bank loan was for $304,000 rather than $320,000. So the amended recommendation was that they: (1) borrow $304,000 from Bank of Queensland; (2) borrow $35,000 from Macquarie Margin Lending; (3) use the borrowed funds to: (a) invest $15,000 in the Storm Australian Technology Indexed Trust; (b) invest $200,000 in the Storm Australian Industrials Indexed Trust; (c) invest $85,000 in the Storm Australian Resources Indexed Trust; and (d) pay approximately $13,000 into a Macquarie Cash Management Account. 209 Mr and Mrs Higgs accepted the recommendation and signed the documents for Storm. They did not receive any other financial or legal advice other than the advice from Storm. Storm made all of the arrangements. 210 All of the interest payments from the loans which Storm arranged and which related to investment in the Storm indexed funds were paid out of the cash reserve account or capitalised. 211 On 29 November 2006, Storm sent Mr and Mrs Higgs an SOAA which recommended that they borrow an additional $107,437 from their margin lender to invest $100,000 in the Storm index funds and pay Storm's fees of $7,437. Mr and Mrs Higgs accepted the recommendation. 212 On 5 March 2007, Storm sent Mr and Mrs Higgs a second SOAA. Storm recommended that they borrow an additional $53,719 from their margin lender to invest another $50,000 in the Storm Australian Indexes and pay Storm's fees of $3,719. Again, Mr and Mrs Higgs accepted Storm's recommendation. 213 On 8 May 2007, Storm sent Mr and Mrs Higgs a third SOAA. This time Storm recommended that they borrow an additional $31,815 from their margin lender to invest another $30,000 in the Storm Australian Indexes and pay Storm's fees of $1,815. Storm also recommended that they capitalise interest payments on their margin loan and redeem $5,000 from one of the Storm indexes (the Australian Industrials Indexed Trust) to deposit in their cash reserve account. Shortly afterwards, Storm also advised Mr and Mrs Higgs to capitalise their prepaid interest. Again, Mr and Mrs Higgs accepted Storm's recommendation. 214 On 30 July 2007, Storm sent Mr and Mrs Higgs a fourth SOAA. Storm recommended that Mr and Mrs Higgs borrow an additional $48,267 from their margin lender to invest $45,000 in the Storm Australian Indexes and pay Storm's fees of $3,267. Yet again, Mr and Mrs Higgs accepted Storm's recommendation. 215 On 17 August 2007, Storm sent Mr and Mrs Higgs a fifth SOAA recommending that they borrow an additional $56,848 from their margin lender to invest $53,000 in the Storm Australian Indexes and pay Storm's fees of $3,848. Once again, Mr and Mrs Higgs signed the documents and Storm's recommendation was implemented. 216 On 19 December 2007, Storm sent a sixth SOAA to Mr and Mrs Higgs recommending that they borrow an additional $37,599 from their margin lender to invest $35,000 in the Storm Australian Indexes and pay Storm's fees of $2,599. Again, Storm's recommendation was accepted. 217 On 22 January 2008, Storm sent a seventh SOAA to Mr and Mrs Higgs recommending that they borrow an additional $21,485 from their margin lender to invest $20,000 in the Storm Australian Indexes and pay Storm's fees of $1,485. Shortly afterwards, Storm also advised Mr and Mrs Higgs to capitalise their prepaid interest. Storm's recommendations were accepted. 218 On 28 July 2008, as the GFC hit, Storm wrote to Mr and Mrs Higgs recommending that they redeem $45,000 from the Storm Resources index and deposit it into their cash reserve account with $15,000 linked as security for the margin loan. Mr and Mrs Higgs signed the letter and authorised this change. 219 On 8 October 2008, Storm then advised Mr and Mr Higgs to switch up to 100% of their portfolio out of equities and into cash and obtain a refund of any remaining interest prepaid. As usual they accepted the recommendation. 220 On 19 January 2009, after Storm had gone into administration, Mr and Mrs Higgs received a letter from Macquarie Bank Limited demanding their margin loan be repaid by 31 March 2009. Mr and Mrs Higgs paid out the margin loan using funds from their cash reserve account. 221 Ultimately, Mr and Mrs Higgs lost $420,450 as a consequence of investing in Storm: (1) lost superannuation of approximately $80,500; (2) lost monthly contribution amounts which were deposited into the Macquarie Cash Management Trust account of approximately $37,950; and (3) owing the Bank of Queensland approximately $302,000. 222 In order to meet repayments on their Bank of Queensland investment home loan of $302,000 (which they pre-pay approximately $20,000 of interest per year), Mr Higgs has returned to paid work despite his health problems. 223 Mr and Mrs Higgs put their home on the market but they have been unable to sell it. Despite his disability, Mr Higgs commenced working as a self-employed environmental inspector. He is unsure how long he will be able to maintain employment. But without his income Mr and Mrs Higgs will be unable to meet their loan repayments.

Ms Knight, Mr and Mrs Madden, and Mr and Mrs Walker (Schedule investors) 224 ASIC made the sensible forensic decision not to call evidence or plead all of the circumstances of each of Ms Knight, Mr and Mrs Madden, and Mr and Mrs Walker. Their circumstances were pleaded in a Schedule to the statement of claim which was the subject of some admissions. 225 Mr and Mrs Cassimatis admitted that each of these five Schedule investors: (1) were clients of Storm; (2) were retired; (3) had little or limited income (as described below); (4) had few assets (as described below); and (5) had little or no prospect of rebuilding their financial position in the event of suffering significant loss. 226 As for Ms Knight, she was 64 years old and had an annual income of $18,520 at the date of the initial SOA. There was a dispute between the parties about the amount of her initial SOA and investment but, on any view, it was less than $70,000. There was also dispute about the final amount of her investment and borrowings but, again, it was common ground that those amounts were between $250,000 and $300,000. 227 As for Mr and Mrs Madden, Mr Madden was 61 years old and Mrs Madden was 60 years old at the date of the initial SOA. They had an income of $43,348. The final value of their investment, which was also the amount they were advised to invest in their SOA, was $467,000, with borrowings of $349,000. Mr and Mrs Madden were never advised to take step investments ([19] Defence; [8(a)] Reply). 228 Although Mr and Mrs Cassimatis admitted that Mr and Mrs Madden were clients of Storm, in their closing submissions Mr and Mrs Cassimatis said that the Maddens were "not a client of Storm, but a client of Victorian Families Pty Ltd, which operated under a different ASFL". No evidence was tendered by Mr and Mrs Cassimatis in support of this submission. No application was made by Mr and Mrs Cassimatis for leave to withdraw their admission that Mr and Mrs Madden were clients of Storm: see Turner & Townsend Pty Ltd v Berry [2012] FCA 111 [14] (Jagot J). ASIC relied on this admission, together with others in relation to the Schedule generally, in its forensic decision not to call masses of evidence in relation to the many Schedule investors. ASIC also referred to some matters which might have supported Mr and Mrs Madden being clients of Storm, including their authorisation for the dispersal of funds in accordance with the advice they had received, including a payment to Storm of the fees for that advice, and a letter signed by Mr Cassimatis to Mr and Mrs Madden on 8 October 2008 advising them to switch their investment to cash. However, none of these matters was the subject of evidence, presumably because Mr and Mrs Cassimatis did not seek leave to withdraw their admission. 229 As for Mr and Mrs Walker, Mr Walker was 70 years old and Mrs Walker was 68 years old. They had an income of $39,385. The final value of their investment was $1,039,000, and the final value of their borrowings was $929,110.

The expertise of the two experts 230 The two experts who gave evidence were Mr McMaster and Professor Valentine. Mr McMaster's position as Adjunct Professor at the College of Business at Victoria University concluded recently. Professor Valentine is currently the Visiting Professor of Finance at Macquarie University. It is unnecessary to delve into the considerable detail of the curricula vitäe of the two experts. It suffices to say that both have been involved in the teaching and practice of applied finance at a number of universities. Both are prolific authors. Both have consulted with industry. The two experts expressed their opinions on matters during the relevant period of 31 March 2006 until 5 September 2008.

The credibility and reliability of the two experts 231 Mr McMaster was an extremely impressive expert. He was thoughtful and his views were generally crystal clear. He conceded points and, on the few occasions he had made minor errors, he immediately acknowledged those errors. On occasion, however, Mr McMaster's even-handed, independent, and impartial approach caused him to agree that a proposition was reasonable even though there was ambiguity in the proposition. For instance, he was taken to a statement in a report by the Productivity Commission that housing could be viewed as an investment good (ts 268-269). The report was the December 2015 Productivity Commission Research Paper entitled Housing Decisions of Older Australians. At page 44 of the report the Productivity Commission explained that there are several mechanisms for drawing on housing wealth in old age. These include: (i) selling the house in whole or in part; (ii) renting out the home; and (iii) drawing down equity using a financial equity release product. Mr McMaster then agreed with the proposition of Professor Valentine that housing could be viewed as an investment asset. But there is ambiguity in this agreement and it should not be taken as agreement that the family home could appropriately be used as a source for borrowing in retirement (or near-retirement) for investment in the share market. Nor was Mr McMaster's evidence a concession that it was appropriate to include the family home as an asset in an investment portfolio. Even Professor Valentine conceded that there was no suggestion in the report that a mechanism involved "borrowing and gearing against their home to invest in the share market" (ts 366). 232 In contrast with Mr McMaster, Professor Valentine was not an impressive expert witness. I have no doubt that he is extremely knowledgeable in the area of finance. There were also areas where his evidence explained points that had not previously been clear. Although each issue in dispute must be assessed on its merits and in light of all the evidence, in general I am not prepared to accept Professor Valentine's evidence on matters in dispute without great caution. This is for six reasons. 233 First, Professor Valentine's preparation for his written report was less than thorough. This is not said by way of criticism although it does diminish Professor Valentine's reliability. As Professor Valentine said, his report was prepared "in a very short period of time" (ts 388). He said that he did not see the documents which contained each investor's risk profiles (ts 374). Those documents were the Confidential Financial Profiles of the investors. They were exhibited to the affidavits sworn by the Part E investors. 234 Secondly, Professor Valentine's oral evidence oscillated, sometimes on important details. This was, perhaps, due to the little time that he was given to prepare for the hearing. An example to which ASIC referred was the switch by Professor Valentine, within only two pages of transcript, from describing the Part E investors as "loss averse" to describing them as "Balanced investors" (ts 372-374). 235 Thirdly, Professor Valentine had previously been involved with the issues about which the proceeding was concerned and was committed to the Storm model in a manner which impaired his ability to assess it independently. Professor Valentine said that he actively promoted the Storm model as long ago as 1999 and was in court "actively promoting it" (ts 412). 236 This approach was evident from the defensive and sometimes remarkable positions that he took in giving oral evidence. An example was when Professor Valentine was confronted in cross-examination with evidence that Mr and Mrs Dodson intended to retire in a few years. He queried what was meant by a "few" and suggested that it was "obvious" that Mrs Dodson had ten years before retirement. He said that the adviser should have said "three" if that was what he or she was thinking (ts 376-377). 237 Fourthly, Professor Valentine was not impartial in relation to the issues with which the litigation was concerned, nor in relation to the respondents themselves. He had previously allowed Mr and Mrs Cassimatis to use his name in promotional material for Storm (ts 413). He had spoken to investors who were considering the Storm model (ts 413). He had accepted an invitation to become a non-executive director of Storm, although that invitation was later withdrawn when the IPO did not proceed (ts 417). And he had provided training to Storm staff (ts 414). 238 Fifthly, there were concerning matters about Professor Valentine's evidence which involved his willingness to support the position of Mr and Mrs Cassimatis, without necessarily assessing all of the evidence. 239 One example of this was a report that Professor Valentine prepared for Storm concerning a complaint made by a client. Mrs Cassimatis had told Professor Valentine that the "client is deceased and his estate's solicitor is trying it on, we feel". Professor Valentine had not seen the advice upon which the complaint was based. But nevertheless he concluded that the solicitors were at fault by deciding to liquidate the portfolio (ts 416). Whether or not his conclusion was correct, it is surprising that it was expressed in strong terms ("There is no merit in this complaint") without having seen the advice given by Storm to the client. 240 Another example that is of some concern in light of all of the matters I have discussed was that Professor Valentine chose to send a draft copy of the joint report to the solicitors who instructed him before he signed the report. He said that he thought that solicitors wanted to see the joint report because "solicitors do tend to attempt to fiddle with things like that" and "[b]ecause they may feel that it's not as favourable to their client as they would like it to be" (ts 420). He described the solicitors for Mr and Mrs Cassimatis as "my solicitors" (ts 420). 241 Sixthly, at points in Professor Valentine's report he selectively quoted from material. One example of this was his choice of quotations from a report by the Productivity Commission. He quoted from passages including the following: In recent years, much has been written about the improved wellbeing and benefits for older Australians if they made greater use of the equity in their family home to supplement their retirement incomes. While there are several ways of drawing on housing wealth, proponents of this argument often advocate using financial equity release products (page 23). A house is also a durable good and home ownership can be a significant investment decision and ultimately a major source of a household's wealth. (Page 40) Housing can be viewed as an investment good: a store of wealth that can be used as a source of income to fund retirement or leave bequests for future generations (page 51). 242 Professor Valentine then went on to say that "given that equity in the family home can be a source of retirement income, why not begin to access it before retirement?" 243 However, although he quoted from page 23 of the Productivity Commission report, Professor Valentine did not refer to all of the relevant passages on page 23. On the same page the Commission said this (emphasis added): Setting aside the potentially valid precautionary and bequest motives for not drawing on housing wealth, there is some basis to those claims. However, there are limits to the scope for using home wealth to supplement incomes in old age, and financial products to facilitate such home equity withdrawal are not necessarily attractive for their intended demographic. 244 For these six reasons, as well as my overall assessment of Professor Valentine and Mr McMaster, I am not generally prepared to accept Professor Valentine's evidence on matters where he and Mr McMaster were in dispute without extreme caution.

The two essential issues upon which expert evidence was given 245 Although the experts canvassed a wide range of sub-topics, my discussion below considers their evidence in the context of the two primary matters in dispute to which the expert evidence was directed. These related to s 945A of the Corporations Act which is considered later in these reasons. 246 The first issue was whether, having regard to information obtained from the relevant client about his or her personal circumstances, Storm gave such consideration to, and conducted such investigation of, the subject matter of the advice as was reasonable in all of the circumstances. The second issue was whether the advice was appropriate to the client, having regard to that reasonable consideration and investigation.

(1) Consideration and investigation of the subject matter of Storm's advice 247 Mr McMaster gave up to 12 reasons for different investors, explaining why Storm did not give consideration to, or conduct such investigation of, the subject matter of the advice as was reasonable in the circumstances. ASIC relied upon his evidence but only asserted six categories of unreasonableness (some of which combined matters which Mr McMaster had separated). 248 One of ASIC's six categories of reason was that Storm had incorrectly classified the Part E investors as "Balanced" investors rather than "Conservative" investors. I consider that matter in the context of the subsequent issue which is whether Storm's advice was appropriate. Although I conclude that the investors were manifestly Conservative investors, this conclusion of clear error does not necessarily mean that there had been a failure to give reasonable consideration and investigation of the circumstances. I am not satisfied that ASIC has proved that Storm was unreasonable in relation to its investigation of, and consideration given to, the investors' risk profiles. In particular, I do not consider that the investigation was unreasonable. As to whether the consideration was unreasonable, ASIC did not submit that an inference of unreasonable lack of consideration (rather than merely an error) could be drawn simply from the erroneous conclusion that was reached in each case that the investor was a "Balanced" investor. 249 Another of the categories upon which ASIC relied for its claim of lack of reasonable consideration and investigation of the subject matter of the advice was Storm's inclusion of the family home as an asset in the investor's portfolio. As I explain in the subsequent section of these reasons, the use of the family home in this way made the advice "inappropriate". But there is a difference between an unreasonable assumption (which leads to inappropriate advice) and a lack of reasonable consideration and investigation of the subject matter of the advice. The use of the family home as an asset in the investors' portfolios was the former, not the latter. 250 As for the other four categories of reason relied upon by ASIC, for the reasons below I accept each category as an independent basis which would have been sufficient by itself for the conclusion of unreasonableness within the terms of s 945A(1)(b). Those categories are considered below in relation to Mr and Mrs Dodson. However, as I explain at the conclusion of this section, they apply equally to the other Part E investors as well as to the Schedule investors who met the five ASIC criteria, including that they had limited income and that they were approaching retirement. 251 First, Storm did not give reasonable consideration to, or conduct reasonable investigation of, alternative investment strategies for those Part E and relevant Schedule investors who were retired or who were approaching retirement. Although investors were often advised to see other financial advisers who might have advised on other financial possibilities, Storm was still required to give reasonable consideration to, and conduct reasonable investigation of, alternative investment strategies for those investors who had limited income. Their circumstances required additional consideration of options beyond the generalised Storm model. In relation to Mr and Mrs Dodson, as Mr McMaster said (footnotes omitted): Mr & Mrs Dodson were relying on a relatively small amount of capital to provide them with income for the rest of their lives. They could not afford to take high risk but the strategy of borrowing to invest and concentrating their leveraged investments in the share market was a high risk strategy. 252 As Mr McMaster explained, the high risk arose because the inherent volatility of the share market created a risk of negative returns in early years which was magnified by the use of debt. In contrast, there were a number of alternative strategies that should reasonably have been considered and investigated by Storm. One of those was taking a small loan for any travel (ts 339). Another possibility was investing their excess income into superannuation. A third possibility was taking out a reverse mortgage over their residence (ts 397). Indeed, on a number of occasions Professor Valentine referred to this third strategy of releasing the equity in a home by a home equity loan or a reverse mortgage. 253 The inference I draw from the evidence is that none of these options was reasonably considered or investigated. One reason for this inference is the absence of any mention of any of these alternatives in the SOA. Mr Cashel's evidence, which I accept was the industry view, was that there had always been an obligation on an adviser to advise on alternative strategies. He said that it was not uncommon for an adviser to say in the SOA what the alternatives were and why one alternative was not advised (ts 488). At the very least this should be done in working papers. However, as Mr and Mrs Cassimatis had been informed, and as I explain later in these reasons, from 2005 (and certainly not later than 2007) any alternative strategies considered should have been contained in the SOA. An SOA should also have contained the "pros and cons" of each alternative. 254 Another reason for this inference is the powerful emphasis upon, and ubiquity of, the Storm model for clients. Mr McCulloch, who was an impressive witness and whose evidence I accept, explained that Mr and Mrs Cassimatis frequently said words to the effect that the giving of any advice to Storm clients that was inconsistent with the Storm system of advice would not be countenanced. Mr McCulloch, with his vast exposure to Storm and its clients, was also unaware of any investment client who was not advised to purchase units in index share funds. Mr McCulloch explained how he was taught by Mr Cassimatis to say things to prospective clients at education workshops including that Storm was not a traditional financial planner and specialised in one area of client advice, that being advice about investing in indexed share funds. 255 The only limited consideration that was occasionally given to other alternatives for the relevant investors concerned superannuation products. But although Storm also gave advice on occasion on insurance and gave generic tax advice, that consideration and recommendation was not usual. And it was not sufficient for the discharge of Storm's s 945A obligations in relation to the relevant investors. 256 Mr and Mrs Cassimatis pointed to a number of matters to support a submission that such advice was not rare. They pointed to superannuation and insurance experts that Storm hired (such as Ms Millar: ts 444); the evidence of Ms Bock and Mr McCulloch that Storm gave superannuation advice; and advice given to Mr and Mrs Sondergeld. It is necessary to understand these matters in the context of all of the evidence. 257 Evidence was given by Mr Turvey of a statement he made to an adviser: …I note that clients have chosen 1-4 year investment time horizon in the [Confidential Financial Profile]. As you know, 5-7 year time horizon is the minimum term we're willing to look at recommend any type of geared strategy for. Please discuss with client and let me know the outcome. I will need that page of the [Confidential Financial Profile] altered & re-initialled. If you can't get them to agree, we can treat them as a "classic" client, and I will pass this onto Kerry Millar. 258 In other words, the exceptional circumstance was to treat a client as a "classic client" and not to apply the Storm model. This exceptional circumstance might have arisen if the client would not agree to a different time horizon. However, Mr Turvey said that he was never involved with a client who was referred to Ms Millar (ts 445). And, as I have said, Mr McCulloch was not aware of any investment client who was not advised to purchase units in index funds. 259 As for Mr McCulloch, when he was asked whether Storm gave advice on superannuation he appeared to be surprised. He agreed that advice was given on a variety of issues but he did not say what the variety was, nor did he say whether that variety departed from the template type of advice given in the SOAs based on the Storm model. Nor did he expressly agree that superannuation was one of those issues (ts 164). 260 The evidence of Ms Bock was that although "there were exceptions" to advice being given to invest in a geared fund, generally Storm gave that recommendation (ts 137). Ms Bock did not say what the exceptions were, but she said that the general advice from the superannuation team when a matter was referred to them for consideration was to invest in a Storm backed (internally) geared superannuation fund (ts 137). It is very unlikely that serious consideration was given by advisers to recommend investment in these superannuation products in the case of the retired or near-retired Part E or Schedule investors instead of a Storm model investment. For instance, although Mr and Mrs Sondergeld were given advice on 21 June 2004 to roll over their superannuation into a superannuation fund which had 100% exposure to shares, this was (i) when they had specifically sought advice about superannuation, and (ii) when their goal was to organise their superannuation and grow it over 4 to 9 years. Even then, Storm did not merely provide superannuation advice. Mr and Mrs Sondergeld were recommended to attend the Storm workshop. After they decided to retire in 2006, and after having attended several Storm workshops, they agreed to invest using the Storm model. 261 Secondly, Storm did not adequately determine the objective of its advice, which required measurement and, where possible, quantification. At [1992(h)] of the statement of claim, ASIC pleaded that Storm "did not determine or quantify the objective of the advice and, accordingly, there were no parameters for the extent of the gearing and the amount of risk that the [i]nvestors should take". 262 As Mr McMaster explained in his evidence, an objective can be precise (ie pay off a student loan in 5 years) (ts 247). Or it might be less precise (such as an objective to "increase net asset position") which is measurable but not quantified (ts 248). 263 Mr McMaster also explained that if the objective is not quantified then the focus should be on repositioning the client's assets to use assets efficiently. Where there are quantifiable financial objectives then they should be quantified so that they can be measured by a timeframe and a quantum. He explained that by quantifying an objective a financial adviser can determine what financial resources and how much risk needs to be applied to achieve the objective. Even Professor Valentine accepted the accuracy of a statement in an article annexed to his report which had this effect (ts 381-382): The time horizon and investment objectives Investment advice should be tailored to the client's situation. This means that a 'one-size-fits-all' approach is unlikely to be the correct approach. It is unlikely that there are any two individuals who have exactly the same characteristics in the areas mentioned in the previous section of the paper. Also, people who have different objectives and preferences with respect to their investment choices. For example, they have different target retirement dates, different expectations for the level of their retirement income and different levels of wealth that they wish to pass onto their families. Advice should take account of these differences; that is, it should be tailored to each individual. 264 To take Mr and Mrs Dodson as an example, Storm ascertained that their relevant personal circumstances included desires to live self-sufficiently and travel in retirement. The desire to live self-sufficiently required consideration of the detail of their usual living expenses including how those expenses might change over time. Would there be likely increased costs for health expenses? Would there be decreased costs when their dependent ward became independent? As for travel, to which places did Mr and Mrs Dodson wish to travel? How often did they wish to travel? In what manner would they travel? And, underlying all of these points, what would be the cost of their travel? Were there years when they might not wish to travel (and could save that expenditure)? Were there likely to be years when they could not travel, such as for health reasons (including Mr Dodson's heart condition)? 265 The inference I draw is that, like the instance of Mr and Mrs Dodson, Storm generally did not give reasonable consideration or investigation to these matters to determine or quantify the objective of its advice in relation to the other relevant investors. The inference is based on a number of reasons. 266 A primary reason for the inference is the rarity in the SOAs for any detail of these expenses or changes. The same absence of consideration can be seen in the SOAs for other relevant investors (to whom I conclude Storm contravened s 945A): Mr and Mrs Herd, and Mr and Mrs Higgs. 267 A second reason, which independently would justify this inference, is that there is a lack of any of this detail in the cash flows for Mr and Mrs Dodson, Mr and Mrs Herd (other than living expenditure), and Mr and Mrs Higgs. Mr Turvey gave evidence, which I accept, that all relevant versions of the cash flows that were prepared were saved (ts 433). 268 Mr and Mrs Dodson's cash flow, produced in November 2007 at around the time of the SOA, had $0 as the entry for extraordinary expenses and yearly living expenditure. The cash flows did not even include the extent of expenditure for future years such as when Mr Dodson was well into his 70s (a conclusion which even Professor Valentine thought was "certainly not" reasonable: ts 406). 269 The adviser for each Part E and Schedule investor, as relevant to those investors for whom Storm might be liable, was as follows: (1) Mr and Mrs Dodson's adviser was Mr Fullerton-Smith, an Employee Representative; (2) Mr and Mrs Herd's advisers were Mr O'Brien and Mr Jelich, who were both Authorised Representatives; (3) Mr and Mrs Higgs' adviser was Ms Frawley, an Employee Representative; (4) Ms Knight's adviser was Ms Fraser, an Employee Representative; (5) Mr and Mrs Madden's adviser was Mr Thompson, an Authorised Representative; and (6) Mr and Mrs Schuler's adviser was Mr Dalle Cort, an Authorised Representative. 270 As I have explained, the cash flow worksheet was sent to Storm's Authorised Representatives with the formulas removed so it was unlikely that they would have been able to use the cash flow worksheet by entering data for these expenses and living expenditure. Although the Employee Representatives (advisers for Mr and Mrs Dodson, Mr and Mrs Higgs, and Ms Knight) had access to cash flow worksheets with formulas, I do not consider that it is likely that Employee Representatives would have considered and investigated, and hence advised clients, in a different way from Authorised Representatives by entering new scenarios into the cash flow which had not been tested by Storm's cash flow team. The desired approach to the Storm model was known to the advisers, particularly with its emphasis on uniformity at every stage. The control which the cash flow team asserted was significant, and that control was also known to the Employee Representatives. The Employee Representatives were not involved with any changes made by the cash flow team during the viability phase. All advisers were required to report any change to the clients' circumstances or potential circumstances to the cash flow team. For these reasons, I consider that the only change that Employee Representatives might have made when they showed clients an adjusted cash flow spreadsheet would have been, to use the words of the Phormula description of the process undertaken by Mr and Mrs Dodson's Employee Adviser, to go "through the cashflow and [deliver] the figures". 271 A third reason for the inference is that subsequent to the SOA, and to the investment, some foreseeable incidents occurred about which Storm had not given reasonable consideration in the cash flows or SOAs. One example was that only four months after the SOA for Mr and Mrs Dodson, the following entry was made in Phormula: Paul and Val have phoned the office and are in need of $20K to purchase a new car as Pauls car has died. can we withdraw the funds and Margin up the $20K as their LVR on their margin loan is very low. Cashflow required as soon as possible as clients need funds ASAP. 272 Ultimately, Mr and Mrs Dodson decided to use "holiday money" to pay for the purchase of their new car. 273 In summary, having ascertained the personal circumstances of the Part E investors, including their objectives such as to live self-sufficiently and their desires such as to travel in retirement, Storm was required to consider the information and conduct such investigation of it as was reasonable in the circumstances. This included quantifying their objectives wherever reasonably possible. It did not do so. 274 Thirdly, Storm did not conduct an adequate sensitivity analysis before advising the Part E investors. Although Mr McMaster did not say that a sensitivity analysis was a universal practice in the industry, he described how he had seen many financial planners conduct sensitivity analyses (ts 300). In cross-examination he explained the role and importance of a proper sensitivity analysis (ts 301): Sensitivity analysis is designed to see how the client is affected if different outcomes occurred - good outcomes as well as poor outcomes - and it's designed to show the change in equity that would occur in the event that these various outcomes came to pass, and it can be put in front of a client and shown to them, "Look, the average return of this type of investment over the last 10 years has been X and if we had that average investment return over the [next] year, this is the outcome you would expect. If, on the other hand, we had a negative return of the same amount, this is the outcome you would expect. If, on the other hand, we had, you know, a significant downturn, this is the outcome you could expect and if we had a significant upturn, this is the outcome you could expect," and by doing that, the client very clearly understands the type of risk they're taking if any of these outcomes occur. 275 Given the significance of the investment for the Part E and Schedule investors in their circumstances of limited income and limited means, a proper sensitivity analysis was necessary so that the investors could determine how they would be affected if the expected benefits were not delivered. They would reasonably have needed to see how their equity (net assets) would be affected by downturns in the market. As Mr McMaster explained, "that's all they're really interested in" (ts 302). In their circumstances, the defects in the sensitivity analysis by Storm involved a failure to give reasonable consideration to, and conduct reasonable investigation of, the subject matter of the advice. 276 There were two defects in the sensitivity analysis performed by Storm. The first, although less significant defect, was that the graphs and cash flows prepared for the investors did not clearly show their net equity position. The net equity position was not clearly shown because the graph marked "cash reserves" was actually a graph of the movement in combined cash and index fund values but not the value of the family home. Not only was this inaccurately labelled as a "cash" reserve but it also did not show the net asset position (ts 306). This was because on Storm's model the family home should have been included to obtain a net asset position (although I explain later that the family home ought not to have been treated as an investment asset in the first place). 277 The second and more fundamental defect was that the cash flows prepared by Storm did not properly reveal to the client the effect of different scenarios, particularly movements in the market. Storm's typical cash flows for each client, which followed a template model, were of three varieties, although sometimes there were multiple cash flows within one of these varieties. None of the cash flows provided for any negative growth from the index funds. As I have explained, the first type of cash flow was the "viability cash flow". The second was the "reality check cash flow" which was prepared using higher interest rates for the loans and lower growth rates. The third was the "maximum capacity cash flow" which used a higher interest rate again for the margin loan. However, even the maximum capacity cash flow was not, as Mr McMaster said in re-examination, an appropriate sensitivity analysis in relation to the circumstances where the investments performed badly. This was because negative investment returns were never tested (ts 335). 278 As I have explained above, it is possible, but unlikely, that an Employee Adviser who had legitimate access to the cash flow worksheets with the formulae could have experimented in front of the client with different scenarios of negative investment returns. But I do not consider that any of them would have done so. In closing submissions, Mr and Mrs Cassimatis properly did not suggest the contrary. Indeed, a Phormula note for Mr and Mrs Dodson described one of the cash flows prepared by the cash flow team as the "worst case scenario". 279 In reply submissions Mr and Mrs Cassimatis' answer to this second defect was to submit that Storm and its clients were well aware that the share market could fall. Hence, they submitted that by taking a longer term view and using conservative averages, Storm sought to model the behaviour of a proposed portfolio over that period. Mr and Mrs Cassimatis submitted that Storm's assumption of no growth over a three year period was "very conservative" given the average three year growth of 14%. 280 Mr and Mrs Cassimatis' submission misses the point and does not accurately represent the evidence. The figure of 14% was from Professor Valentine's evidence that the share market grew by 14% over "a very long period of time" (ts 401). More fundamentally, the experts agreed in their report that there was a probability of a negative return from the share market every four years (including dividends) and that a financial adviser should look at how the client would be affected if a negative return occurred, and advise the client with regard to that risk (answer to questions 15a and 16). This point is self-evident. Simply because an investor has an investment time horizon of, say, ten years does not mean that there will never be circumstances in which the investor might wish to, or need to, sell the investments earlier. Nor does it mean that the investor will be uninterested in the performance of the investment over the course of that ten year period. As the investment timeline is shortened from ten years the point becomes even more cogent. 281 To give a concrete example used by Mr McMaster, one very pessimistic scenario that Storm could have shown to clients in a sensitivity analysis based on the recommendations in the SOA might have involved using the average of the lowest 12 month return from the ASX/S&P 200 between 1980 and 2007 which was -22%. As Mr McMaster accepted, in loose terms this was the average worst case scenario over that period (ts 408). Two possibilities Mr McMaster considered in his report were an adverse movement of around half of this amount (-10.24%) or an adverse movement of slightly more than this at -25.95%. Those amounts would have generated losses of equity for that year of, respectively, approximately $55,000 and $120,000. Negative returns like this would not achieve Mr and Mrs Dodson's objectives. In his understated way, Mr McMaster explained in his oral evidence that the cash flow to which Mr and Mrs Dodson were taken (which did not account for any negative returns) was not the worst case scenario that they might have been told about (ts 333). 282 Some of the assumptions used by Mr McMaster to obtain the losses of $55,000 and $120,000 were contested in cross-examination. As I explain later in these reasons, Mr McMaster made some assumptions which were questionable and he generally acknowledged this in cross-examination. But the short point is that with the interest rates used in the SOA, losses in a single year would be suffered by investors such as Mr and Mrs Dodson unless the capital growth plus dividends exceeded a particular amount (estimated by Mr McMaster to be around 7.29% and rounded in Mr and Mrs Cassimatis' submissions to be 8%). As Professor Valentine said in cross-examination, and as is common sense, if a loss occurred in a short period of time before retirement there may not be time for it to be recouped (ts 384). 283 Mr and Mrs Cassimatis also relied upon the margin call test that Storm performed when preparing its viability cash flow. However, as Mr McMaster explained in re-examination, the consequence of a margin call test only formed a "very minor" part of testing the sensitivity of different share market consequences (ts 335). Investors would be interested in knowing not merely the circumstances in which a margin call would occur but other different adverse market circumstances. 284 Mr and Mrs Cassimatis also submitted that it was not "rocket science" to conclude that borrowing to invest at 8% requires a return above 8% to be profitable. That can be immediately accepted. But the precise point at which losses would be suffered, and the calculation (and amount) of different possible losses, is not so simple. The extent to which the return might need to exceed 8% would depend upon other costs, including Storm's fees. 285 Fourthly, and closely related to the third point, Storm did not give reasonable consideration to the income of the Part E and Schedule investors in all their circumstances. I have reached this conclusion less easily than the first three conclusions particularly due to the absence of any information about how the cash flow team considered and applied the income of the investors in each different cash flow that might have been experimented with by the cash flow team or that was provided to the adviser. Further, although the clients' income and expenditure was not considered by Storm as part of the cash flow, I am not satisfied that those matters were not considered at all. Storm prepared a detailed Confidential Financial Profile for each investor which dealt with issues of income and expenditure. As Mr McMaster said, the omission was not one which involved a failure to consider income and expenditure at all. 286 However, there is one important respect in which Storm's consideration was not reasonable. Storm did not conduct an analysis of the clients' actual cash flow independently of the proposed investment to determine whether the client had capacity to fund the costs associated with the borrowings and any margin calls to the extent not covered by income from the investments. No cash flow was prepared which considered this possibility. Indeed many of the relevant investors had little independent capacity to fund such costs. Although Storm did consider the probability of a margin call, Storm omitted to go further to consider the extent to which the relevant Part E or Schedule investors could fund borrowing costs from their own income or resources. The likely conclusion would have been that they could not fund borrowings or margin calls from their own income or resources. I agree with the conclusion of Mr McMaster that this omission was unreasonable in the circumstances. A margin call was not impossible, nor was it something which was only likely to occur with a "Black Swan" event. In cross-examination, Mr McCulloch explained that after the share market downturn following the September 11, 2001 attacks there were approximately eight to 15 of Storm's clients, from several hundred, who received margin calls (ts 191). 287 To take Mr and Mrs Dodson again as an example, a properly conducted sensitivity analysis would have revealed that the Storm model could result in losses which might eventually have combined to require Mr and Mrs Dodson to make payments to fund their borrowing costs once their cash reserves were exhausted. Mr McMaster analysed the position of Mr and Mrs Dodson at the time of their SOA, and he concluded that (i) their cash flows provided for increasing cash flow deficits; (ii) the deficits would exhaust the cash reserves within a relatively short period of time; and (iii) the cash reserves were not sufficient to cover any margin calls if they arose. 288 In cross-examination, senior counsel for Mr and Mrs Cassimatis subjected Mr McMaster's analysis to a searching examination. Mr McMaster made some assumptions that might be questioned. For instance, he assumed that the double orphan pension received by Mr and Mrs Dodson was taxable income for which no rebate was available (ts 287). It is likely that the pension was received for the care of the child for whom Mr and Mrs Dodson were guardians, but no evidence was given about its origin, about how long it would be received, or about its tax treatment. Another potentially questionable assumption was that a weekly $300 payment that Mrs Dodson received should be excluded from income. Mr McMaster excluded the payment only because Storm had excluded it and there was no evidence explaining why it had been excluded by Storm (ts 285). On the other hand, there may have been good reasons why it had been excluded by Storm, such as if the payment were only temporary. 289 Other assumptions attacked by senior counsel for Mr and Mrs Cassimatis were properly made by Mr McMaster. One of those, upon which there was lengthy cross-examination, was whether it was legitimate for him to treat Mr and Mrs Dodson's annual cash contribution to the plan of $6,000 as a cash outflow. As Mr McMaster explained, that was an outflow from Mr and Mrs Dodson. It was properly reflected as a cash outflow. If, as senior counsel hypothesised (but upon which there was no evidence), the $6,000 was actually used to defray interest expenses, then (and only then) the result (rather than the cash flow) would be that there was an additional $6,000 of funds available to Mr and Mrs Dodson (ts 332). So too, dividends that had been reinvested might be able to be sold to meet expenses as required but this is not a predicted cash flow. 290 Ultimately, I am satisfied that the analysis performed by Mr McMaster was a reasonable one. But the basic point is that Storm gave no reasonable consideration to the extent to which any of the relevant Part E or Schedule investors could fund interest payments from their own resources in a scenario where their cash reserves were exhausted. A reasonable consideration and investigation into a client's capacity to fund the borrowing costs required Storm to consider scenarios in which the client would have been required to pay those costs without access to investment income. The analysis that Storm did of the probability of margin calls being made demonstrated that this scenario was not a likely possibility. But in the circumstances of the Part E and Schedule investors, and the extreme consequences for them of default, this exercise should reasonably have been performed. It was not performed.

(2) The inappropriateness of the advice to the relevant Part E investors and Schedule investors 291 In this section I consider the appropriateness of the advice in relation to each of the relevant Part E investors and each of the Schedule investors who was retired or approaching retirement and was of limited means and had limited ability to rebuild his or her financial position. I conclude that the advice was inappropriate for three independent reasons. It is notable that even Professor Valentine, who was utterly devoted to the Storm model, conceded in cross-examination that if retirement is imminent then advice to borrow significantly against the home to invest is unreasonable (ts 377). 292 The three independent reasons why the advice was inappropriate are as follows. First, Storm inappropriately classified the relevant Part E investors as "Balanced investors" and advised them as such. The same reasoning applies to the relevant Schedule investors. Secondly, Storm included the Part E and Schedule investors' family home in their asset portfolio for investment purposes. Thirdly, and independently of the other two matters, in all the circumstances, the advice to the relevant investors to utilise the Storm model was generally inappropriate.

The investors' risk profiles 293 Mr McMaster explained that a reasonably competent financial adviser should determine a client's tolerance to investment risk, which is called the client's "risk profile". He explained that the risk profile given to an investor initially determines the asset allocation which is appropriate for the investor. He described the general approach to identifying a risk profile of an investor as typically including seven risk profiles: (1) Conservative - low risk, bias towards secure income producing investments; (2) Moderately Conservative - bias towards income producing but with more growth investments than Conservative; (3) Moderate - this portfolio will produce slightly more income than growth; (4) Balanced - balance of returns between income producing and growth investments; (5) Moderate Growth - will produce more growth than income; (6) Growth (also referred to as Moderately Aggressive) - bias towards growth with a small component of income producing investments; and (7) High Growth (also referred to as Aggressive) - high risk, all growth and some speculative investments. 294 Mr McMaster accepted that some financial planners use fewer sources than these seven categories. An example which he said was not uncommon was the use of four categories in some ASIC publications: "Cash", "Conservative", "Balanced", and "Growth". 295 Storm concluded that the Part E investors were "Balanced investors" rather than "Conservative investors". 296 Mr McMaster explained that a typical ratio of growth assets (shares and property) to defensive assets (fixed interest and cash) for a Balanced investor was 60% growth and 40% defensive. But for a Conservative investor the typical ratio was 20% growth and 80% defensive. Professor Valentine agreed with this assessment of a typical conservative portfolio. However, there is some flexibility in the proportions. The precise percentages and the precise content of a balanced or conservative portfolio is one upon which reasonable minds might differ (ts 261). For instance, a reasonable example of a balanced portfolio was given by a textbook from which Mr McMaster taught, involving 65% growth and 35% defensive: (1) Cash 5%; (2) Bonds 30%; (3) Global equities 20%; and (4) Australian equities 45%. 297 The process of risk profiling involves some subjectivity and evaluation. But conclusions are not at large. In their joint expert report, Mr McMaster and Professor Valentine agreed that the most common method of establishing a person's risk profile was to have the person complete a questionnaire that points to an asset allocation model and then to discuss the implications of that with the person. 298 Mr McMaster concluded, and on the evidence before the Court I accept, that each of the Part E investors was likely to be a Conservative investor. I have explained the inconsistent nature of Professor Valentine's evidence on this point. However, the aspect of his evidence which I accept was where, in the joint expert report, Professor Valentine described the Part E investors as "loss averse" (11 [32]). This description was apt in the sense that it conveys that the Part E investors were inexperienced investors who wanted low risk investments with secure income. But I do not accept the further evidence of Professor Valentine that "Advisors should attempt to educate investors so that they abandon this view" (11 [32]). There is a difference between (inappropriately) trying to educate investors to abandon an appropriately Conservative view involving low risk as Professor Valentine was suggesting, and (appropriately) advising clients clearly to identify choices and to make decisions on how best to fulfil their financial and lifestyle objectives (ts 250). 299 Although I conclude that each investor was likely to be a Conservative investor, I accept that there are elements of uncertainty surrounding this conclusion. One reason for the uncertainty is that risk profiling involves subjective elements and, as Mr McMaster accepted, a person's risk profile can change over time and might be affected by recent investment experiences (ts 240). Another reason for the uncertainty is that, as Mr McMaster also accepted, it can be difficult to determine the risk profiles of the individual investors without interviewing them. 300 Despite the uncertainty, there are four reasons why I am satisfied that an adviser could not reasonably have reached the conclusion that the relevant Part E investors were Balanced investors (ie Mr and Mrs Dodson, Mr and Mrs Herd, and Mr and Mrs Higgs). 301 First, the relevant Part E investors who were approaching retirement or retired were persons for whom the potential loss of their home would be catastrophic. This is particularly so because those investors had few assets and had little or no prospect of rebuilding their financial position in the event of suffering significant loss. 302 It is true that each of the investors was told in the SOAs that there was a possibility of losing their home: Apply the same caution if you are thinking of using your home as security - borrow conservatively as a default on the loan could mean loss of the security for the loan. If you have used your home as security, this means you could lose your house. 303 The investors were also told in the SOAs about some of the risks of borrowing to invest. Although the investors signed each page of the SOA, some SOAs were more than 100 pages long. I do not consider it likely that any of the investors would have read all of the statements in the SOAs in careful detail. The SOAs contained statements including the following to which Mr and Mrs Cassimatis extracted from the lengthy documents: Share prices are highly volatile, moving through wide ranges in relatively short periods of time. … Volatility is the risk that most share investors are particularly wary of, as falling asset prices reduce the value of a portfolio, perhaps at a time when the realisation of the assets is planned. This can be particularly dangerous when borrowing is involved, as interest payments and other commitments must still be met, and the lender may recall some of the debt - this is known as a 'margin call'. … Gearing … can dramatically change the level of risk in an investment strategy. … Generally, the higher the level of risk you are prepared to accept when investing the higher the potential return will be. At the same time, the potential loss may also be higher. This is called the risk/reward trade-off. 304 These statements cannot be read in isolation. Other statements in the SOA would reasonably have alleviated concern about risk (emphasis in original): We have included many conservative estimates of incomings, and have overstated many of the outgoings. The result is that the material that follows will in most cases be more pessimistic than any actual results achieved by the investment plan. We emphasise again that the purpose of this Cashflow is to test in rigorous conditions that the Plan is viable. … Variability of investment returns is the main risk posed by this kind of investment. Provided you have the appropriate time frame, your plan contains strategies to safeguard you, and to allow you to profit from this volatility. 305 Secondly, the relevant Part E investors were placated substantially about any of the risk involved in the Storm model. I do not consider that the statements above warning about risk, even if viewed in isolation, meant that these investors had a higher appetite for risk (in other words, that they were willing to accept risk despite warnings). More powerful than those statements in a long document were the oral presentations, with slides, which were shown at the Storm workshops and encouraged the investors to adopt the view that any risk involved in the Storm model was minimal and that debt should not be feared. 306 The PowerPoint slides shown at the workshops emphasised the "need for debt" (slide 114), and the notion that "Fear of debt [is] a costly error" (slide 123). In the slides dealing with risk, after setting out three types of risk, slide 278 said (emphasis added): So how can you handle Real Risk? Using the Index Approach to buy shares means that you have guarded against: • Default Risk • Asset Selection Risk • Share Selection Risk 307 The next slide, entitled "VOLATILITY (Manageable Risk)" said that this risk is "investing in an asset whose value can rise and fall but in such a way that over a longer time frame there is certainty that the value will rise" (emphasis added). And slide 289, titled "The role of the cash reserves dam" explained that it would permit the client to "live stress free". This was followed by another slide entitled "So how can you handle Real Risk?" It explained that "adequate Cash Reserves will ensure that you can handle the variability of returns delivered by the market" (emphasis in original). Mr McCulloch explained how he was trained by Mr Cassimatis to say that the "real risk" is "not having your assets in the best asset class, which is shares" and that: We say to you it doesn't matter whether the market goes up or goes down, you can still make money… This is the way that Storm can make you the big stacks of coins. We use volatility to enhance your returns in a compressed timeframe. So it doesn't matter whether the market goes up or goes down, returns can be enhanced whatever the market does. 308 Another example of the relevant Part E investors being placated about possible risk is the evidence Mr McCulloch gave of things he said in the education workshops which he had been taught to say by Mr Cassimatis. He drew an analogy between building a house, and building a financial plan. Mr McCulloch would explain that, similar to a house in North Queensland having to withstand the stress of a cyclone, with financial planning you need to withstand the stress of inflation or a share market correction. And that similar to engaging a builder to build a house, you need to engage a financial planner to build a financial plan. Mr McCulloch said that he would acknowledge that clients can do their own financial planning, but: … you should not go down that path. Let somebody who has the expertise, the industry experience and the purchasing power construct your financial plan for you, and that's where Storm come into play. We will step in on your behalf and deal with all the subcontractors that are needed to build a financial plan. 309 Mr McCulloch was also taught to say that "Storm has a different point of view to other traditional financial planners out there in the industry, and that is we believe that you should never, ever destroy your capital base". He would say "When we talk about risk, we're not talking about losing your home. We are talking about the risk of being financially poor going into retirement", and: Most of you sitting here in this room are aware that too much debt is dangerous. However, what most of you may not realise is that not having any debt is just as financially dangerous. No debt means you've got no assets. Therefore, you have no income to be able to do the things that you want to do in retirement. There is, however, a level of debt that is appropriate for your needs to acquire a decent capital base yet remain relatively safe, and we call that the sweet spot of debt. 310 Mr McCulloch explained that at one stage in the education workshop presentation, prospective clients would be shown a 1990 newspaper article written by Noel Whittaker, titled "You can't lose on index funds". Mr McCulloch described how Mr Whittaker was a very well-known and respected financial planner in Queensland in the period 2006 to 2008 (ts 181). Mr McCulloch would also reassure the attendees at the workshop that Storm had "a system of advice which has worked over many years for many different clients all of whom have achieved good outcomes". As I have explained, he was trained by Mr Cassimatis to explain that the use of index funds was how Storm would "guarantee you the big stacks of coins, which is the average return". 311 Mr McCulloch was also taught to show a series of slides warning the prospective clients of scammers and bad financial advisers, and to advise the audience that Storm had "no complaints. We have not been penalised by ASIC and our reputation is impeccable. But, you can only form your own judgement by meeting with us over the next 3 to 6 months". Mr McCulloch would also explain select provisions of the Corporations Act and say words to the effect that: Unlike the old Corporations Law which imposed financial fines on financial advisers, the new Corporations Act could result in a jail term for advisers giving inappropriate financial advice. There is no way that I or my advisers will be going to jail to make or lose you money. 312 The reassurance that clients received about the low level of risk was not limited to the education workshop. Although none of the relevant Part E investors was advised by Mr McCulloch, it is likely that they would have been given advice similar to the advice that Mr McCulloch was trained (by Mr and Mrs Cassimatis) to give clients. At early meetings, Mr McCulloch told clients that "Storm's point of view is that you need a higher volatile asset that gives you high returns without the risk of default" (emphasis added). He was also trained to say at the meeting where the SOA was presented that Storm's plan implemented measures designed to ensure that the client had no risk of getting a margin call. 313 Thirdly, and reinforcing the evidence of the relevant Part E investors and their circumstances, the profile chosen by the Part E investors was consistent with a Conservative profile; not with a Balanced profile. In their Confidential Financial Profile, Mr and Mrs Dodson said that they were "…prepared to accept volatility if in the medium to long term the investment growth is higher and the risks over that term are minimal or eliminated" (emphasis added). Their investment term was 10 years. The only profile that was more conservative was one which was akin to requiring a fixed interest investment. And they had specifically not chosen the box which said that "I am prepared to accept short to medium term volatility and am also prepared to accept a level of real risk where some of my asset may be irrecoverably lost". 314 Fourthly, even if the relevant Part E investors had an unusual appetite for risk, it was appropriate that they be treated, and advised, as Conservative investors. They might choose to reject that advice but it was the appropriate basis for the advice that should have been given. Even Professor Valentine accepted that since housing is a good which provides shelter and accommodates people's physical, emotional and social familial needs (which change as they age) as a general proposition the closer one gets to the time for retirement, the less attractive borrowing against the house becomes (ts 367). He therefore accepted that generally a more conservative approach has to be adopted for persons who are at or near retirement (ts 385). This general proposition might be subject to exceptions such as where the client has considerable wealth or where there is a prospect of some other money coming into the equation, like an inheritance (ts 391). But none of the relevant investors fell within that category. All of them were persons for whom there was little or no prospect of rebuilding their financial position in the event of suffering significant loss. 315 As ASIC submitted, the conclusion that the relevant Part E investors were Conservative investors does not necessarily mean that the existing asset allocations of each of the investors was a conservative allocation. For instance, as Mr McMaster accepted, the asset allocation of Mr and Mrs Dodson was skewed towards growth assets, particularly shares that they held. Prior to their investment with Storm, their assets had evolved to a portfolio that was already inconsistent with their status as Conservative investors. Advice consistent with their status as Conservative investors should have recommended smaller exposure to the share market, not greater exposure. The recommendation by Storm did not involve a typical 20% growth and 80% defensive proportion for a Conservative investor. Instead, it inappropriately involved the following balanced portfolio (62% growth, 38% defensive): (1) shares 48%; (2) property 14%; and (3) cash 38%.

The family home was inappropriately treated as an asset in the investment portfolio 316 A second reason why Storm's advice to the relevant Part E and Schedule investors was inappropriate was because it inappropriately treated their family home as an asset which formed part of their investment portfolio. If the value of the residence was removed from the portfolio of investment assets then it is apparent that these investors were advised to adopt a higher LVR than even Storm considered to be prudent for them as (on Storm's view) Balanced investors. The effect of the advice was to concentrate their investments in shares and take a higher risk than Storm considered was appropriate for either a Balanced investor or a Conservative investor. 317 As Mr McMaster explained at the start of the concurrent expert evidence, the treatment of the family home in the Storm model was one of the two main issues in dispute between him and Professor Valentine (the other being the reasons why the Storm strategy failed in the GFC) (ts 219). The treatment of the family home by Storm was described by Mr McMaster as "central" to his criticism of the Storm model (ts 319) although Mr McMaster said (and I accept) that even if the house were properly included in the investment portfolio he would still have concluded that the advice was unreasonable based on the risk allocation for a Conservative investor (ts 338). Professor Valentine said that it was appropriate to include the family home in an investment portfolio. 318 Professor Valentine said that even though the home was not intended to be sold, including it in the asset allocation of the investment portfolio gave a more appropriate representation of the risk that the client was taking. He gave four reasons for this: (1) economists and public policymakers regard a home as an asset. Homes are included in official data on personal wealth, available in bankruptcy cases and are included in deceased estates; (2) the risk of a portfolio must be measured for all assets in it. A family with a share portfolio and which does not own a home is in a very different position to another family with the same share portfolio but which also owns a home; (3) advisers should give advice which prevents large losses over the relevant time horizon so the advice should not require sale anyway; and (4) the standard method of reducing the risk of a portfolio (ie the volatility of the return on it) relative to the average return on it is to properly diversify the holdings in it. A portfolio which combines property and shares will be well diversified. But many investors in Australia hold an undiversified portfolio because their largest asset is a house. Hence, much of Australians savings is not available to fund productive investment. 319 As the concurrent expert evidence developed, it became clear that the disagreement between the experts about the use of the family home as part of the investment portfolio was because the experts were asking different questions. Professor Valentine was asking the question "what is the risk of all assets considered as a whole (independently of whether the family home might have to be sold)?" But Mr McMaster was asking "what is the risk that my investment portfolio might lead me to have to sell my home?" The experts agreed that the former question, by definition, required the inclusion of the family home because they both accepted, and as is plain, that the family home is an asset. But the second question requires the exclusion of the family home from the assessment of the risk of the investment portfolio because it is an asset about which the investor has a very different risk profile. Again, almost by definition, the home must be excluded from an analysis of the risk of an investment portfolio when one asks "what is the risk of an investment portfolio failing to such an extent that the home might have to be sold?" The experts acknowledged that they were asking these different questions (ts 320). 320 There might be circumstances in which it may be useful to ask the first question. For some investors the risk of selling their home might not be substantially different from the risk of selling other assets in the investment portfolio or using other available assets to meet repayment demands or margin calls. An example given by Mr McMaster would be an investor who lives in a leased property and also leases out the only home that he owns (ts 223). As Mr McMaster accepted, a client who was willing and prepared to sell his or her home for an investment portfolio would be a situation where it might be appropriate to include the home in the investment portfolio (ts 266). But he had never come across a client in that situation (ts 266). 321 In the circumstances of this case, the answer to the second question was part of the essential information which the relevant Part E and Schedule investors needed. As Mr McMaster explained, the second question is asked so that the investor "can isolate that risk and understand it" (ts 320). The relevant Part E and Schedule investors were over 50 years old and were retired or approaching retirement. They had little or limited income, few assets apart from their home and little or no prospect of rebuilding their financial position in the event of suffering significant loss. They were persons for whom the second question was the appropriate question in assessing the risk of their investment portfolio. In other words, their circumstances were such that it could not possibly be appropriate to treat their home as an investment asset, because they could not reasonably tolerate any risk of selling it. 322 Mr McMaster said in the joint report, and I accept, that he had supervised, managed and analysed the advice of hundreds of financial planners, and has been a practising financial planner from 1982 to the present day. He said that the only instance that he has ever seen of a financial planner including a residence in the asset allocation of an investment portfolio is in the SOAs produced by Storm. I accept this evidence. It applies with even greater force to the relevant investors in this case. 323 Mr McMaster said, and again I accept particularly in relation to the relevant investors, that the principal reasons why financial planners do not include the residence in the investment portfolio asset allocation are: (1) the family home is always a personal use and lifestyle asset even though equity in it can be accessed for gearing of investments, so the family home should only be included as an investment property if the clients expressly agree that they are prepared to sell it and employ the funds in the investment portfolio; (2) a portfolio needs to be rebalanced over time as asset values within it change, but the family home would be an asset in the portfolio that cannot be sold or rebalanced; and (3) the Storm strategy was designed so that eventually investments would be sold to repay the debt, leaving profit remaining. But since the home cannot be sold, a financial planner should examine the asset allocation of the investment strategy alone. To include the home is to present a misleading view of the risk and the expected return of the strategy. 324 In cross-examination, Mr McMaster was asked what factors he would take into account in determining whether or not a particular investor should borrow against the house to invest. He replied as follows (ts 276, emphasis added): Well, age can be a factor, but it's not a necessary factor. For example, you might have a person who is very wealthy, of advanced age, and because of their particular circumstances it might be appropriate to gear them. But, generally, if you were a person approaching retirement, you know, close to retirement, or in retirement, it's my opinion that you would generally choose not to take that risk, and the reason for that is that, generally, people in that - those circumstances don't have the capacity to - to fund - to replace any capital that might be lost through poor investment judgment, for example. 325 Hence, the experts agreed (although Professor Valentine's views oscillated at other times), and I accept, that generally the closer a person gets to retirement the less attractive it will be to borrow against the family home. The qualification "generally" was expressed by Professor Valentine (just as it had been by Mr McMaster) because there are some persons who have the wealth or income to be able to manage that borrowing (ts 366-367). In this case, however, all of the relevant investors had limited wealth and limited income. 326 My conclusion therefore is that the use of the family home in the investment portfolio for the relevant investors was inappropriate. As even Professor Valentine accepted, if the home were excluded then the clients would be in a high risk position. 327 This conclusion does not mean that the family home is irrelevant to the consideration of the financial planner. An investor's home should be included in the relevant personal circumstances of the investor and in the consideration in giving an investor advice about attaining his or her objectives. But without an analysis of the risk of the investment portfolio independently of the risk of the family home, it would be inappropriate to advise the client by using the family home as part of an investment portfolio (ts 224-225).

The advice was inappropriate in any event 328 Even if Mr and Mrs Cassimatis were correct that (i) the relevant investors were Balanced investors, and (ii) the home should be included as part of their investment portfolio, I would still conclude that the advice was inappropriate because the circumstances of the relevant investors meant that a double geared investment which was concentrated in the share market was not appropriate for them as it involved high risk. 329 Mr McMaster's ultimate conclusion was that the reason why the Part E investors suffered so badly during the GFC was for three reasons: (1) the concentration of investment assets in share market investments; (2) the high level of debt relative to investment assets; and (3) the absence of financial capacity to maintain their position during a downturn in markets. 330 To these reasons must be added the possibility of a significant market fall. The extent of the GFC was not a matter which Storm could reasonably have foreseen at the time of the advice given in the SOAs to investors, although the experts agreed that a fall of up to 10% could have been predicted (ts 223). Nevertheless, even without the benefit of hindsight, the three matters to which Mr McMaster referred left the investors exposed to significant downturns in the market. A significant downturn, potentially exceeding 10% by a considerable margin, such as 22% (see above [281]), was a possibility. 331 The experts agreed in their report that "a financial planner should generally not advise a retired person or a person nearing retirement to invest in high risk investments" (10 [21]). They also agreed that generally negative gearing is "high risk within a period of approximately 5 years to retirement" (10 [23]). Mr McMaster expressed similar sentiments in relation to Mr and Mrs Dodson (54 [217]), Mr and Mrs Herd (at 100 [153]), Ms Longmore (143 [139]), Mr and Mrs Sondergeld (189 [172]), and Mr and Mrs Higgs (at 235 [196]). Mr McMaster reiterated this point in his oral evidence (ts 355, 357). 332 This point applies to all the relevant investors. To take Mr and Mrs Herd as an example, they were aged pensioners and were relying on a relatively small amount of capital to provide them with income for the rest of their lives. As Mr McMaster said, "[t]hey could not afford to take high risk but the strategy of borrowing to invest and concentrating their leveraged investments in the share market was a high risk strategy" (101 [161], footnotes omitted; see also in relation to Mr and Mrs Dodson (at 55 [226]), Ms Longmore (144 [148]), Mr and Mrs Sondergeld (190 [181]), and Mr and Mrs Higgs (at 236 [206])). 333 Although Mr McMaster accepted that his reference to negative gearing was to an investment strategy which was only viable if the investor relies on the tax deductions arising from the difference between expenses and income (ts 355), his point about the risk of negative gearing was broader than that. In his report Mr McMaster referred to negative gearing more generally as a strategy which involved borrowing to invest (31 [84], 42 [155]). He also explained that negative gearing was high risk because the borrowing leverages risk as well as return (ts 355). In his report he explained the reasons why negative gearing within five years of retirement is generally high risk (27 [60]): Regardless of a client's objectives and risk profile, a financial adviser has a primary obligation to give advice that will not place a client in a position where the risk of their strategy could significantly affect their financial capacity to maintain their present financial position (based on the reasonable judgement of the financial adviser). For example: In my opinion a retired couple who owned their home, had no debt and had a small amount invested would not be suited to the risk of negative gearing. The reason for this view is that if their geared investments declined in value they would generally not have the cash reserves nor surplus income to replace those investments or meet any margin calls. Additionally they generally would not have the surplus income to pay the net investment costs (after allowing for investment income). In my opinion a negative gearing strategy for people in this position has the risk that it could significantly affect their financial capacity to maintain their present (before gearing) financial position. In my opinion a reasonably competent financial adviser would not advise clients in this position to take high risk or to leverage risk by negative gearing. 334 In the joint expert report Mr McMaster said, in relation to Mr and Mrs Dodson (35-36): (101) In my experience a reasonably competent financial adviser would have identified the income required in retirement and the date that the income was required. (102) In planning for retirement the objective is to accumulate a particular amount of capital by the date of retirement so that it can produce a particular amount of income. (103) A reasonably competent financial adviser will identify the amount of income required by the client and the date when that income will commence (the date of retirement). With this information the adviser can calculate the amount of capital that will be required at retirement. (104) This is an essential pre-requisite to formulating a retirement planning strategy for a client. A reasonably competent financial adviser will design the financial strategy to achieve the capital objective at retirement. If this is not possible the adviser will discuss a modified strategy with the client. …. (111) By definition, once a person has retired they have lost the capacity to replace capital that may be lost through poor investment judgement. Consequently it is generally inappropriate for a retired person to introduce high risk investments or strategies into their investment portfolio. (112) Similarly when someone is close to retirement and planning for that event, it is inappropriate to risk their capital with high risk investments or strategies. 335 Mr McMaster expressed the same sentiments in relation to Mr and Mrs Higgs (at 211-212), Ms Longmore (125-126), Mr and Mrs Sondergeld (166-167), and similar sentiments in relation to Mr and Mrs Herd (at 77-78). I accept those conclusions. They apply equally to all the relevant investors.

The irrelevance of whether the client accepts the advice 336 During oral evidence, there was some discussion about the need for an adviser to accept the ultimate view of the client. Mr McMaster agreed, and I find, that an instruction from a client will almost always override advice which is given (ts 224). However, it is not to the point that the relevant investors ultimately agreed with the advice and gave instructions to proceed. Section 945A is a prohibition upon giving advice that is inappropriate. As ASIC submitted, there is no prohibition upon implementing an inappropriate instruction.

The witnesses 337 Six employees of ASIC gave evidence. They were Ms Koromilas, Ms Korpi, Ms Jong, and Messrs Anderson, Armstrong, and Holiday. The evidence of the ASIC witnesses was particularly important in relation to the claims by Mr and Mrs Cassimatis that serious breaches of the Corporations Act by Storm were not foreseeable, or were very remote. Mr and Mrs Cassimatis relied on the absence of any identified warning by any of the ASIC witnesses, despite their familiarity with Storm in different capacities. 338 Ms Koromilas has qualifications in law and economics. From October 2007 to June 2010 she was employed by ASIC as Assistant Director in the Compliance - Financial Advisors team. She oversaw all aspects of compliance in financial services, provided by financial services licensees based in New South Wales. In October 2008 she became the Senior Executive Leader in Financial Advisers stakeholders team. 339 Ms Korpi also has qualifications in law and economics. In October 2005 she commenced employment with ASIC as an analyst in ASIC's Compliance Directorate, Capital Markets team. This role mainly involved analysing prospectuses and related party documentation. From August 2007 her role was as a lawyer in ASIC's Capital Markets team. 340 Ms Jong has qualifications in accounting. She worked for ASIC from 1998 until 2008. During this time she held a range of positions, including the role of Manager of the Capital Markets team in Sydney. She was involved with the review of Storm's prospectus. But she had little or no recollection of the events of a decade earlier. Her recollection in her affidavit evidence was very much constructed from the documentary record. She was able to add little in oral evidence which was understandable given the lapse in time. 341 Mr Anderson was employed by ASIC in June 2007. In 2007 and 2008 he was an analyst in the Compliance Financial Services Large Entities team in Sydney. Around September 2007, ASIC had a compliance project called the "High Growth Project". It involved the compliance teams nationally examining financial services licensees who had experienced significant growth in a short period of time and considering whether they had sufficient resources for their growth rates. Mr Anderson reviewed the accounts of various entities including Storm. 342 Mr Armstrong has qualifications in accounting, and has worked in a compliance role at ASIC since 1991. In 2005, he was an analyst in Financial Services Regulation Compliance team. His role was to conduct surveillance of financial services licensees. In 2005, the team was involved in a national campaign to observe how AFSL holders were responding to changes to the Corporations Act introduced by the Financial Services Reform Act 2001 (Cth). The focus was on compliance systems and processes including the new licensing regime which commenced on 10 March 2004. 343 Mr Holiday is a Certified Practising Accountant who has worked for ASIC and its predecessors for more than 35 years. From 2005 to 2008 he worked as an analyst in the Financial Services Regulatory Compliance team. This team monitored managed investment schemes, insurance agents as well as Australian financial service licensees and their authorised representatives. Since 2008 he has been an analyst in the Investment Managers and Superannuation stakeholder team. As an analyst, Mr Holiday has monitored entities for compliance with the relevant legislation and policy. He has never been an investigator involved in ASIC's enforcement activities.

The themes in the evidence of the ASIC employee witnesses 344 There were three relevant themes to the evidence of the ASIC employee witnesses. One of those concerned ASIC's audits of AFSL holders. That is considered later in these reasons. The other two were: (1) a review that was conducted in March 2005 by Mr Holiday and Mr Armstrong; and (2) a meeting on 13 November 2007 with Ms Koromilas, Ms Jong and Ms Korpi following Storm's lodgement of a prospectus pending a proposed IPO.

The March 2005 review by Mr Holiday and Mr Armstrong 345 On 10 March 2005, Mr Holiday and Mr Armstrong visited Storm's office in Townsville as part of a regional surveillance campaign to review compliance with changes to the Corporations Act. Prior to the visit, Mr Holiday considered documents that Storm had provided to ASIC and prepared notes of issues that he intended to raise with Storm. ASIC also issued a notice to Storm, with which it complied, requiring that Storm provide, during the visit, documents which included client files, Financial Services Guides (pro forma), and SOAs (ts 506). 346 Mr Armstrong and Mr Holiday met with four people from Storm, including Mr and Mrs Cassimatis. Mr Armstrong's evidence was that Mr Holiday took the lead role in the surveillance of Storm. At the meeting with Storm, Mr Holiday explained that ASIC's main focus was upon how Storm had responded to changes to the Corporations Act (ts 511). 347 At the meeting, one of the representatives from Storm explained to Mr Holiday and Mr Armstrong the operation of the Storm model. They were told that Storm advised clients to borrow for investment purposes, including with home loans and margin loans (ts 513). Mr Holiday made notes, but could not recall the discussion, describing how he was told that the typical client of Storm was "high equity" and "experienced" or had experience in borrowing (ts 513-514). Mr Holiday assumed that Storm would have retired clients because it was a financial planning business (ts 512). But neither Mr Holiday nor Mr Armstrong gave evidence of any discussion about Storm having clients who were retirees. I conclude that matter of this level of detail were not discussed beyond the reference to typical clients being "high equity". 348 During their review, approximately five client files were made available to Mr Armstrong and Mr Holiday in a room at Storm, but due to the length of the meeting they only spent a short time reviewing these files and at a very high level (ts 503). There was no evidence that they made any assessment of whether the advice on those files was appropriate for the particular clients. There would not have been sufficient time to make that assessment, and that was not the purpose of the review. 349 During the meeting, Mr Holiday recommended that Storm seek assistance from compliance specialist firm Tribeca in relation to using SOAAs for existing clients as well as generally with Storm's template SOA. 350 Following the meeting, Mr Holiday sent a letter to Storm which said, on page 3: Please note that ASIC's visit was not intended to be a comprehensive review of your compliance arrangements. A compliance visit should not be taken or represented as a statement of approval or endorsement of your operations. 351 A similar statement was again made on page 2 of a letter which Mr Holiday sent to Mrs Cassimatis on 25 November 2005.

The 13 November 2007 meeting 352 On 13 November 2007, ASIC met with Storm again. The meeting occurred after Storm had lodged its prospectus for the proposed IPO of shares in the company. The meeting was at Storm's Sydney office. The attendees from ASIC were Ms Koromilas, Ms Jong and Ms Korpi. 353 Ms Jong said that the meeting on 13 November 2007 ran for at least an hour and could have run for two hours (ts 523). It was arranged in response to an invitation from Storm's accountants (PwC) for ASIC to be given a demonstration of the Phormula software. 354 Shortly prior to the meeting ASIC met with Storm's external advisers who informed ASIC that the average LVR for Storm's client base was 55%. ASIC also considered the lodged prospectus, a Financial Services Guide, and a template SOA (ts 541-542). 355 One purpose of the 13 November 2007 meeting, which I accept was communicated to Storm, was described by Ms Korpi: Purpose of the visit: Discuss with Storm how a typical client is put through the "Storm education process" and what services the client receives thereafter. How does the Phormula software system and SoAA fit into this process? We will be seeking a demonstration of Phormula. How does Storm provide personal advice and take into account material changes to the client's financial position? 356 Another purpose was explained as follows: In relation to meeting the client's personal situation and objectives, how does the reliance on leverage and index-funds fit into this? What if a client's circumstances do not justify a leveraged position? How does Storm deal with this? ([I]s there a reasonable basis for that advice as per s945A?) 357 The concern was with a "typical" client. It was not to assess or to sample Storm's treatment of any categories of client. The visit also took place in the context of the pending IPO. 358 Ms Koromilas' evidence also placed the purpose of the meeting on 13 November 2007 into context. The context, which would have been reasonably apparent to Mr and Mrs Cassimatis if it had not been communicated, was for ASIC to gather information about Storm's business processes to assess against representations made in the prospectus. As Ms Jong explained, ASIC had concerns about Storm's prospectus. One concern was the manner in which Storm accounted for trailing commissions for the financial year ended 30 June 2006. A second concern was the claim in the prospectus that Storm's Phormula software was "innovative". The purpose was not to undertake an audit of Storm's business. Nor was it to review any advice given by Storm to its clients. The purpose was to examine the matters described by Ms Korpi in the context of Storm's prospectus. 359 During the meeting Storm described its model of investment. Ms Richards (the compliance manager for Storm) gave a PowerPoint presentation on the business model. There was also a presentation of the Phormula software and a discussion about how that software was used to generate draft advice recommendations for clients based on market movements. Some of the slides from Storm's education workshop were shown to ASIC but it is impossible to conclude which of the hundreds of slides were shown (ts 542-543) other than to conclude, as Ms Korpi recalled, that Mr Cassimatis' examples of clients were in their 40s or 50s. 360 There was discussion of Storm's client base but the evidence of that was very limited. Ms Korpi, who had the best memory of the meeting (although understandably still a limited recall, nearly a decade later), said that there was discussion of Storm's clients including those "close to retirement or in retirement or in their 40s or 50s" (ts 543). I accept her evidence that there was also discussion of the comparatively low income of many Australians in retirement age (ts 543) and that Storm told ASIC that it "has a fair share of non-high net worth clients" (ts 534). Ms Korpi also asked about client debt levels, and one of Storm's representatives replied saying that Storm used relatively low loan to value ratios so there was no problem with the level of debt. Ms Koromilas, who had only been at ASIC for a short time and had not been confident in making other comments at the meeting, told Mrs Cassimatis that she wished other advisers had procedures and processes that were as good as Storm's. 361 During the meeting Mrs Cassimatis was "quite insistent" (to use the words of Ms Koromilas) that Ms Koromilas take an SOA from Storm which had been provided to a client, saying that Storm had previously been told that the SOA might benefit from being shorter. Mrs Cassimatis asked Ms Koromilias to review the SOA and suggest improvements. Ms Koromilias took the document but explained that ASIC would not provide advice about the document's compliance with the law (ts 535-536). The SOA was subsequently anonymised and then provided to Mr Anderson who told Ms Koromilas that he saw nothing irregular or unusual in the document. 362 Mr Anderson said that when he looked at the sample SOA, his primary focus was on the fees and trailing commissions charged by the Company. He never analysed the advice component of the SOA as he did not have sufficient information to do so (ts 517). He also said that he did not communicate any response to Storm (ts 517). No changes to the SOA were suggested by ASIC to Storm when they met again in February 2008.

(5) Storm's non-executive directors 363 The two non-executive directors who gave evidence were Mr Hutley and Mr Nelson. Mr and Mrs Cassimatis relied upon their evidence, as evidence of highly qualified professionals who did not foresee any breach, to submit that potential breaches of the Corporations Act were not reasonably foreseeable. 364 Mr Hutley was an honest witness who, with the significant lapse in time, struggled to remember details. As Mr and Mrs Cassimatis submitted, he is highly qualified. He has qualifications and experience in finance and financial compliance and risk. He worked as the Director of Risk Advisory Services at KPMG from 2000 to 2006. He published a leading work on the Australian Financial Services Reform Act. He was, and is, the Managing Director of his own financial services consultancy business. He also completed a certificate in a financial planning course to develop his skills and knowledge in compliance. He was a non-executive director of Storm from 23 January 2007 until 14 December 2008. 365 Mr Nelson was only cross-examined for about 10 minutes. But he was an impressive witness with a good recall of relevant events. He has qualifications in economics and laws. He has held senior executive roles with a number of financial services providers and a directorship with a financial manager. These included positions as General Counsel for Consolidated Press Holdings and other companies, General Manager (and later Head of International and Mergers and Acquisitions) for Insurance Australia Group Limited and Head of Strategy and Planning, Australia and New Zealand, for HSBC Bank. He had his own consultancy business for corporate initiatives. But, he does not have compliance experience in a financial planning context, and his compliance experience in the insurance industry is limited. He has never practiced as a financial planner. He was a non-executive director of Storm from late 2006 until 10 December 2008. In 2008, Mr Nelson also became a client of Storm (ts 464). 366 In January 2007, the non-executive directors of the board were Mr Hutley, Mr Nelson, and Mr Meakin. The reason why Mr and Mrs Cassimatis appointed a non-executive board was to assist Storm with listing on the stock exchange. However, the duties of the non-executive directors were more wide ranging than merely the listing. They involved general oversight of Storm and input into its strategic direction, although the IPO was the focus. 367 Around the time of becoming non-executive directors, Mr Hutley and Mr Nelson learned about the Storm business by attending a "Board Strategy Day" in Sydney in January 2007. Mr and Mrs Cassimatis gave a high level description of the Storm model including the education process and managing client accounts. Mr Hutley and Mr Nelson also learned about Storm's business from discussions with Mr and Mrs Cassimatis and other Storm staff and management, from board meetings, and from attendance at Storm client education seminars. Mr Hutley and Mr Nelson were given a number of policies, including a Risk Policy, which needed to be finalised prior to the ASX listing. Shortly before a meeting on 19 October 2007, they were also asked by Mrs Cassimatis what information they wanted to see from Storm. 368 Mr Hutley also requested, and received, information about LVRs that were prevalent throughout the investor base. Mr Nelson recalled the board receiving regular reports from management about margin loan LVR levels and the margin loan book. However, Mr Hutley said that the board's focus in 2007 was very much on the IPO. Target LVRs for Storm's clients were sometimes (but not always) reported to the board but Mr Hutley did not understand his role to be to question them (ts 455). 369 Other documents that Mr Hutley requested, and received, were concerned with Storm's compliance framework. The documents included: (i) Storm's risk profile; (ii) the compliance policy/framework; (iii) the compliance plan; (iv) the last three reports from monitoring program; (v) the induction training given to staff; (vi) training given to Authorised Representatives; (vii) the breach classification and reporting policy; (viii) the Training Register; (ix) the last AFSL statutory audit result; (x) the Complaints Register; (xi) evidence of EDR membership; (xii) the conflicts of interest policy; (xiii) the Conflicts of Interest Register; (xiv) the outsourcing policy; (xv) a schedule of outsourced providers; and (xvi) the cash flow projections for the next 12 months. 370 The general oversight role of the board included considering the management accounts, reading the CEO's report, and being advised of the main business issues at the time. But the board was not involved with the actual management of Storm. The day to day operation of the company was the responsibility of Mr and Mrs Cassimatis as managing directors. Mr Hutley and Mr Nelson both recalled that Mr and Mrs Cassimatis would speak to the CEO's report during board meetings, and that each meeting would cover matters such as financials, new business and revenues. In the few instances when the board was asked to ratify management decisions there was usually a very clear recommendation from Mr and Mrs Cassimatis about the best decision. 371 Although Mr Hutley and Mr Nelson became reasonably familiar with the Storm business, there were real limitations upon the extent to which they understood the details of Storm's business and its model. These limitations were natural given their constraints as non-executive directors and the limitations would reasonably have been known to Mr and Mrs Cassimatis. 372 One example of the limited familiarity that Mr Hutley would have had is that there is nothing in the list of documents requested by Mr Hutley which would have suggested to Mrs Cassimatis that Mr Hutley was considering the way that the Storm model was applied to particular clients. 373 Another example of these limitations is that Mr Hutley recalls reviewing Storm's policy documents and having discussions with people at Storm about internal compliance, but his review of Storm's compliance policies was at a high level and was not detailed. Mr Hutley also recalled looking at a compliance report around March 2007 that Paragem had prepared in 2005, but he did not review any client files, cash flows, spreadsheets or client specific SOAs. He did not consider the manner in which any advice was given to any particular client nor the appropriateness of any advice that Storm gave to a particular client. 374 Again, when Mr Hutley was included in a working party in 2008 to revise and update the statement of advice, he saw a statement of advice (singular) which would have been in template form (ts 456). He did not consider a sample selection of the statements of advice, especially in relation to retired clients with few assets. 375 Mr Nelson also did not undertake any formal review. He was aware that there was a compliance committee at the executive level, but he was not involved in it. Mr Nelson only recalled reviewing Paragem's compliance reports in passing.

(6) Storm's compliance auditors 376 The two witnesses in this group were Mr Cashel and Ms Wybenga. 377 Mr Cashel is a former futures trader who worked at ASIC for a decade before working for companies that provide compliance services and regulatory advice to financial services businesses. His evidence was concerned with the compliance service he provided to Storm while at Tribeca and later, the service provided by the company which became Tribeca's parent, Paragem. Mr Cashel was a man with a strong recollection, an excellent understanding of the subject matter in his profession, and no reluctance to offer his opinion. He was a profoundly independent witness and thoroughly reliable although, on occasion, prone to a superlative. 378 Ms Wybenga had worked for the New South Wales Corporate Affairs Commission, for a financial services regulatory organisation in London, and for ASIC, before commencing with Integratec (later Tribeca and then Paragem) in 2004 alongside Mr Cashel. Together they conducted many "licensee compliance reviews". Although Ms Wybenga was plainly a highly competent professional, her memory of the events in 2005 and 2007 was, understandably, limited. In some aspects her evidence and recollection was not wholly consistent with Mr Cashel's. On those occasions, I prefer Mr Cashel's evidence. 379 In 2002, Mr Cashel assisted Mrs Cassimatis to transfer Storm's securities licence over to an AFSL. Following that work, in 2005 and in 2007, Tribeca and Paragem respectively were engaged to produce a compliance review report. On both occasions the report was produced by Mr Cashel and Ms Wybenga. The first occasion was on 25 February 2005. The second occasion was a report in May 2007 for $5,000 plus GST. On both occasions, their brief was to assess whether Storm was complying with the obligations of an AFSL holder which included the supervision and monitoring of its representatives. 380 Mr Cashel and Ms Wybenga would split the work between them during the review. Since Mr Cashel was experienced in writing policies and procedures for licensees when preparing AFSL applications (particularly during the transition period from securities dealers licences to AFSLs which occurred between 2000 to 2004), he would generally review a licensee's policies and procedures. Both of them reviewed Financial Services Guides from time to time. Ms Wybenga would always review the licensee's professional indemnity insurance. Depending on the number of the licensee's representatives, both of them might assess the licensee's supervision and monitoring program. This would involve assessing whether the licensee's written policies and procedures were appropriate given the size and nature of the business, questioning the person responsible for compliance and testing what the licensee actually did in practice. 381 Mr Cashel described the process that he and Ms Wybenga followed when conducting licensee compliance reviews. 382 First, in advance of meeting with the licensee, they sent out a list of documents that the licensee should provide at the meeting. The documents they requested included the Financial Services Guide, all of the company's financial reports, professional indemnity insurance information, various policy documents, and documents that related to the financial services business including the supervision and monitoring of the licensee's representatives. 383 Secondly, they attended the licensee's premises for a two day site visit. This commenced with an "opening interview" with the responsible manager for approximately an hour and a half. 384 Thirdly, after the opening interview, the documents were compared with what had been said during the opening interview. They considered whether those documents were acceptable from ASIC's point of view. They also tested particular procedures detailed in those policies to ensure that what was written in the policy was carried out. If they found that they needed additional documents during the course of that review, they asked the licensee to provide them. 385 Mr Cashel and Ms Wybenga would also ask principals if they had identified any breaches and then look at the companies' Breaches Registers to see if they were recorded (ts 475). If any breaches had occurred, Mr Cashel and Ms Wybenga would consider whether the breach was significant enough to be reported to ASIC. They would also look to see whether any systemic breaches had not been addressed. 386 Fourthly, after the site visit, Mr Cashel and Ms Wybenga prepared a compliance review report which was issued to the client within four weeks of the visit. 387 This process was applied to the licensee reviews of Storm in 2005 and 2007. There is no doubt that Tribeca and Paragem gave a general approval to Storm in those reviews, subject to raising a matter of concern explained below. Paragem considered, and Mr Cashel explained, that Storm's process for monitoring and rectifying systemic breaches and notifying ASIC of significant breaches were "very good" policies (ts 477). Mr Cashel identified nine breaches recorded in Storm's Breaches Register (ts 476). Based on the reasoning given by Storm, no breach was significant enough to report to ASIC. Mr Cashel also analysed Storm's Complaints Register. Seven complaints were lodged in the period 2001 to June 2006. All were resolved satisfactorily (ts 476-477). 388 The 2005 Tribeca report concluded that, in the opinion of Mr Cashel and Ms Wybenga, "STORM has in place policies and procedures that are reasonable and designed to ensure compliance with its licence conditions, Corporations Act and ASIC policy." The most comprehensive recommendations were broadly in relation to the supervision, monitoring and training of representatives, and more specifically in relation to updating Storm's Compliance Manual. Recommendations were also made in relation to Storm's internal policy regarding Powers of Attorney, inconsistent definitions in its professional indemnity insurance policy, its need to update ASIC's Authorised Representative Register and its internal Financial Services Guide, and Storm's cash flow requirements. 389 The 2007 Paragem report outlined the findings as follows: Our Findings 1. STORM has in place documented policies and procedures that are relevant to its size and business operations. 2. STORM has incorporated compliance procedures as a risk management tool in the day to day operations of the business. 3. The current compliance program is at a standard where it is pro-active and should identify systemic breaches and non-compliance by representatives. 4. STORM has dedicated compliance staff who are proficient In their knowledge of the Corporations Act and ASIC Policy and are skilled in carrying out the compliance program's requirements. 5. Paragem identified some issues as requiring attention, and the remainder of this report addresses these issues. 390 The issues that required attention were (i) the accuracy of any exclusions that may apply to the professional indemnity insurance policy schedule for the period 21 November 2006 to 21 November 2007; (ii) the lack of a standard checklist or guideline to be used by all Storm front line managers when reviewing representatives to ensure consistency and compliance; (iii) outdated training for three Storm employees; (iv) outstanding action items on three Storm Compliance Committee meeting minutes; (v) the lack of a general advice warning on newsletters and in advertising; (vi) a failure to include a calculation in the cash projections made in preparing cash flows; (vii) minor omissions in the Financial Services Guide; and (viii) minor suggested amendments to documented policies and procedures. 391 Despite these issues, the 2007 report concluded that: From discussions with STORM's management and compliance officers and our review of relevant documentation and testing of procedures it is our opinion that STORM has a robust compliance program and ensuring compliance with the regulatory and internal requirements is a priority within the business. 392 Mr Cashel explained that the policies were not just motherhood statements but they were specifically tailed to Storm (ts 478). I address the limitations of the Tribeca and Paragem reviews later in these reasons.

(7) Storm's IPO advisers 393 The two IPO advisers who were proposed to give evidence were Mr McElvogue and Mr McFarlane. Mr McFarlane did not provide an affidavit and was not called to give evidence. Mr McElvogue was not required for cross-examination. The evidence from the IPO advisers was therefore limited to Mr McElvogue's affidavit evidence. 394 Mr McElvogue is a qualified Chartered Accountant and a fellow of the Institute of Chartered Accountants. He has worked for the firm which is now PricewaterhouseCoopers (PwC) since 1992 with a broad range of experience. Since 2005 he has been a partner. 395 The PwC office in Townsville had been Storm's auditor for a number of years. Mr McElvogue took over this role when he moved to the PwC office in Townsville in 2005. He initially dealt with Mr and Mrs Cassimatis, Mr McCulloch, Mr Locke, and Ms Davies. 396 In 2006, Mr and Mrs Cassimatis told him that they wanted to list Storm publicly by an IPO. Mr McElvogue identified people within PwC and PwC Securities who could assist Storm in relation to the IPO process. The persons at PwC Securities to whom Mr McElvogue put Storm in contact were (i) Mr Blom (an Authorised Representative who acted as an Investigating Accountant); (ii) Mr Denny, a partner in PwC's Corporate Finance group; and (iii) Mr Gulbin, a Director in the Corporate Finance team from PwC's Sydney office. 397 As part of the IPO process, a due diligence committee was formed, with representatives from: (1) PWC and PwC Securities; (2) Storm (including Mr and Mrs Cassimatis); (3) Macquarie Bank Limited; (4) Macquarie Equity Capital Markets Limited; (5) UBS; and (6) Mallesons Stephen Jaques (MSJ). 398 PwC Securities' work on the IPO commenced in early 2007. On 5 November 2007, it issued a long form due diligence report to the Storm board, and to Storm's due diligence committee. 399 On 31 October 2007, MSJ produced a due diligence planning memorandum which was adopted by the due diligence committee on that day. MSJ described the due diligence process as being undertaken to assist in "meeting the content requirements for the Prospectus and ensuring that the Prospectus is accurate and complete" and also "minimising, to the extent possible, potential liability under Australian law for the Prospectus, including to ensure that the Company and its directors, and the Seller and its directors, and the other persons involved with the preparation of the Prospectus will have applicable defences to liability available to them if the objective of an accurate and complete Prospectus is not achieved". 400 Ultimately, the conclusions of PwC in the due diligence report were: Based on our review of the Financial Information, which is not an audit, nothing has come to our attention that causes us to believe, and we do not believe, from the viewpoint of our expertise that: a) The Prospectus contains a statement about the Financial Information which is misleading or deceptive, in the form and context in which it appears; b) There is an omission of information required by the recognition and measurement principles prescribed in the Australian Accounting Standards and other mandatory professional reporting requirements in Australia, and the accounting policies adopted by the Company to be included in the Financial Information; c) The director's [sic] best estimate assumptions, as set out in Section 7.5.3 of the Prospectus, when take [sic] as a whole, do not provide reasonable grounds for the preparation of the Forecast Financial Information; d) The due diligence and verification systems and due diligence enquiries set out in the due diligence planning memorandum adopted by the Company (the "Planning Memorandum"), as they apply to our review of the Financial Information (as described in this report), have not been conducted in accordance with the Planning Memorandum. e) The due diligence enquiries we made in our review of the Financial Information do not constitute: a all enquiries which are reasonable in the circumstances; and b. reasonable steps to ensure that the Prospectus would not be defective as it relates to the Financial Information; or f) It would be unreasonable for the DDC to rely on this report. 401 Mr McElvogue's evidence set out the scope of the work undertaken by PwC Securities in relation to the Investigating Accountant's report and the related role on the due diligence committee. In broad terms that scope was: (1) a review in accordance with accounting standards of financial information (income and cash flow statements from 2004 to 2007) for the sole purpose of identifying anything in the prospectus which is omitted or which is misleading or deceptive; (2) an Investigating Accountant's report on the financial information for inclusion in the Prospectus; (3) due diligence enquiries; (4) a report describing the work on the due diligence review; and (5) participating as a member of the due diligence committee in relation to the Prospectus for the sole purpose of considering matters relevant to the financial information. 402 The report (at Appendix 5) included an Investigating Accountant's report prepared by Mr Blom on behalf of PwC Securities after its review of Storm's historical and forecast financial information. Based on the review of Storm's historical financial information, Mr Blom concluded that nothing had come to PwC Securities' attention which caused it to believe that (i) the pro forma balance sheet had not been properly prepared on the basis of the pro forma transactions; (ii) the pro forma transactions did not form a reasonable basis for the pro forma statement of financial position; or (iii) the historical financial information did not fairly present Storm's financial performance since 2004. Based on PwC Securities' review of Storm's forecast financial information, Mr Blom concluded that nothing had come to PwC Securities' attention that caused it to believe that the best estimate assumptions and forecast financial information set out in the Prospectus was not reasonably and properly prepared. 403 During the IPO process, neither PwC Securities or PwC was asked to, nor did they: (1) review the terms of financial advice given by Storm to particular clients or individual advice files for clients; (2) undertake a detailed assessment of whether Storm was delivering financial advice via the Storm model of advice which was adequately tailored to the individual requirements of particular clients; or (3) review or consider the advice given to any of the investors referred to in ASIC's statement of claim.

(8) The Aon employees 404 The two witnesses in this group were Mr Laming and Ms Lazarus, who both worked at Aon Risk Services Australia Ltd (Aon). Aon was Storm's insurance broker. Neither witness was required for cross-examination on the affidavit evidence. The relevance of the affidavit evidence of the Aon employee witnesses is that again Mr and Mrs Cassimatis rely upon the failure of Storm's insurers to raise any concerns about the operation of the Storm model as a matter to show that they were not in breach of their duties, or should be excused from any breach. 405 Mr Laming is qualified as an accountant with considerable experience in insurance. From April 2008 to 2012, he was the New South Wales State Manager (Professional and Consumer Risks) of the Professional and Consumer Services team at Aon. This team was responsible for routine matters and the day to day contact with clients and insurers. 406 Ms Lazarus is an insurance claims officer with qualifications in law and insurance broking. She has worked at a variety of different brokering firms including, from around September 2007 to May 2009, as an account executive in Aon's Professional and Consumer Services team which had a large number of clients measuring in the hundreds. Financial planners represented a very small proportion of clients (1 or 2%). Ms Lazarus' biggest client was Storm. She dealt with the renewal of Storm's professional indemnity insurance once when it became due in November 2008. Whilst she was the main point of contact at Aon for Storm, she worked closely with Mr Laming. Any of the important correspondence concerning Storm's insurance was written in collaboration with Mr Laming. 407 Aon's Professional and Consumer Services team arranged various different types of insurance although their main product was professional indemnity insurance. Many professions had a common due date for their professional indemnity insurance, which meant the team often dealt with mass renewals. 408 Most of the clients in the Professional and Consumer Services team were dealt with by a homogenous insurance policy. Larger or more complex clients were required to complete a longer insurance proposal form and to provide certain documents about their business such as (for financial planners), a Financial Services Guide, policy documents and a sample SOA. 409 Storm was not covered by an existing insurance facility so it had to complete the longer insurance proposal form. Ms Lazarus' role was (i) to ensure that Storm had correctly filled out the proposal form and had provided all of the requested documents, and (ii) to deal with the prospective insurers to obtain the best insurance deal for Storm. Ms Lazarus did not recall whether Storm provided a sample SOA ahead of its 2008 insurance renewal, but she said that it would have been required to do so. 410 During 2008, Mr Laming maintained the relationship between Aon and Storm, including the renewal of Storm's professional indemnity insurance. Mr Laming became involved because Storm wanted someone senior involved. Storm was considering moving to a new insurance broker. 411 Soon after Mr Laming commenced working at Aon in April 2008, he and Ms Lazarus met with Mr Cassimatis and Ms Davies at the Storm office in Brisbane. At that meeting, Mr Laming and Ms Lazarus explained the Aon insurance broking process, and said that they would do their best to obtain the most competitive deal on Storm's insurance. 412 Prior to Storm's insurance renewal, Ms Lazarus had a second meeting with representatives from Storm and several prospective insurers. The meeting was conducted in two sessions. The first session was a presentation to Ms Lazarus and the insurers about Storm and the model of advice provided to its clients. The second session involved a presentation to prospective clients. During the first session insurers asked questions about Storm and its advice model. Ms Lazarus said that she did not understand much of what was being said because she had little technical knowledge of financial planning or investment. She said that her role was to manage the relationship with Storm and negotiate with prospective insurers.

THE RELEVANT LEGAL PRINCIPLES IN RELATION TO BREACHES BY MR AND MRS CASSIMATIS

The history and nature of the directors' duties in s 180 413 ASIC's allegations of contravention by Mr and Mrs Cassimatis rely upon s 180 of the Corporations Act. It is necessary to set out the background to s 180 in some detail because the issues raised by Mr and Mrs Cassimatis involve fundamental considerations to which I referred in the introduction to these reasons. Section 180(1) provides: 180 Care and diligence - civil obligation only Care and diligence - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer 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 or officer. Note: This subsection is a civil penalty provision (see section 1317E). 414 Section 180(2) of the Corporations Act is concerned with the business judgment rule. It is unnecessary to reproduce that section because Mr and Mrs Cassimatis abandoned that aspect of their defence in closing submissions. 415 In this section of my reasons I focus only upon directors' duties although s 180 is plainly concerned also with other officers of a corporation (as defined). This case involves only Mr and Mrs Cassimatis as directors.

The historical antecedents to the modern statutory duties of directors 416 It is necessary to commence with the history of directors' duties at general law (common law and equity). Some of the leading modern cases have asserted that when the legislature created statutory liability the content was broadly the same as the common law. 417 Although most judicial discussion of the general law duties of directors usually commences from a decision of the House of Lords in 1872, the first major decision, and probably the most influential, concerning the duties of company directors was The Charitable Corporation v Sutton in 1742. That decision was reported by Atkyns and also in the Modern Reports: The Charitable Corporation v Sutton (1742) 2 Atk 400; 26 ER 642; 9 Mod 349; 88 ER 500. The Charitable Corporation was a company which was founded to lend money to the poor upon the security of a pledge of their goods. The executives were a managing committee of "committee men" (ie directors). Due to the frauds of warehouseman and four others, the Charitable Corporation suffered losses of £350,000. The worst example of the frauds was lending money to the warehouseman himself against old pledges or fictitious pledges. 418 The Corporation brought a bill in equity against fifty people, including the directors and other officers. It alleged liability in two ways which were plainly set out in the Modern Report (9 Mod 349, 353; 88 ER 500, 502). First, liability based on "manifest breaches of trust and duty". Secondly, liability on the basis that they were "grossly negligent". The second basis was a reference to "crassa negligentia", deriving from a decision referred to by the Lord Chancellor in both reports. The decision was the famous bailment decision of Holt CJ in Coggs v Barnard (1703) 2 Ld Raym 909; 92 ER 107. The Chief Justice in Coggs had, himself, taken this concept from the Roman law distinction (quoting, but incorrectly citing J.3.15 rather than J 3.14.3), reflected in the work of Bracton, and embodied in the concept of culpa lata which subsumed negligentia. This concept of crassa negligentia was imposed upon the gratuitous bailee who was not "chargeable without an apparent gross neglect" ((1703) 2 Ld Raym 909, 915; 92 ER 103, 111). 419 One ground upon which the defendants resisted liability was that their position as directors was merely honorary. The Lord Chancellor rejected this submission, saying with reference to Coggs in his decision in The Charitable Corporation v Sutton (2 Atk 400, 406; 26 ER 642, 645): By accepting of a trust of this sort, a person is obliged to execute it with fidelity and reasonable diligence; and it is no excuse to say that they had no benefit from it, but that it was merely honorary… 420 Although the Lord Chancellor recognised that liability existed for the honorary directors, the imposition of a standard of "gross neglect" or crassa negligentia imposed the lowest of the standards recognised by Holt CJ in Coggs. This became a common approach to honorary positions in the 19th century. As Professor Getzler explains, this standard was almost mimetically reproduced in later cases in relation to the standard of care for voluntary trustees: Getzler J, "Duty of Care" in Birks P and Pretto A (eds), Breach of Trust (Hart Publishing, Oxford, 2002) 45, 47. 421 In the Atkyns report of The Charitable Corporation v Sutton, Atkyns observed that the bill was dismissed against some of the defendants. Other directors were found to be liable. Those liable were the directors, the identity of whom the Master was directed to enquire, who signed notes (payable on demand) to the warehouse keeper on the false pledges (2 Atk 400, 407; 26 ER 642, 645). 422 The decision in The Charitable Corporation v Sutton was applied more than a century and a half later in a case which became one of the progenitors of the modern approach to the liability of directors. In Overend and Gurney Company v Gibb (1872) LR 5 HL 480, the House of Lords held that gross negligence was a species of misfeasance. In that case, the bill in equity sought to impose liability upon the directors of the failed Overend and Gurney Company Ltd. The House of Lords upheld the decision of the Lord Chancellor to dismiss the bill. The Lords might have been surprised by the later prolific citation of their decisions. The most comprehensive decision was delivered ex tempore by the Lord Chancellor, Lord Hatherley, shortly after the reply by Mr Cotton QC (484) (as his Lordship was then). The Lord Chancellor, sitting on the appeal from himself, explained that he felt more comfortable expressing his opinion on the appeal from his own decision because the House was unanimous. The Lord Chancellor said that a valid exercise of powers by directors would lead to liability if (at 487): …they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into? Was there crassa negligentia on their part which, though not charged in words, is, it is argued, shewn by the facts, so that they should be fixed with the loss of the fund intrusted to their hands for the purpose of making the acquisition of the business; was the acquiring of that subject-matter, through the medium of those funds, with the amount of knowledge which the directors had attained, an instance of crassa negligentia? 423 The reference to crassa negligentia again repeated the approach which had been taken by Holt CJ in Coggs to a gratuitous bailee, and by the Lord Chancellor in The Charitable Corporation v Sutton to an unremunerated director. However, the emphasis on the voluntary nature of the office had been lost. 424 Despite the Lord Chancellor's reference to crassa negligentia, the distinction between gross negligence and mere negligence become controversial in English law. Shortly before the decision in Overend and Gurney Company v Gibb, Willes J (a judge skilled in maritime law and therefore familiar with notions of crassa negligentia) had remarked that gross negligence is "ordinary negligence with a vituperative epithet" (Grill v The General Iron Screw Collier Company (Ltd) (1866) LR 1 CP 600, 612), a concept he borrowed from Baron Rolfe, the later Lord Cranworth (Wilson v Brett (1843) 11 M & W 113, 116; 152 ER 737, 739). And even in cases which adopted the distinction between the different types of negligence it was sometimes said that "for all practical purposes the rule may be stated to be, that the failure to exercise reasonable care, skill, and diligence, is gross negligence": Thomas Giblin (Executor of Richard Lewis) v John Franklin McMullen (1868) LR 2 PC 317, 337 (Lord Chelmsford). 425 Despite these criticisms of the concept of gross negligence, it became generally accepted that something more than "mere" negligence was required to make directors liable. As Romer J said at first instance in Lagunas Nitrate Company v Lagunas Syndicate [1899] 2 Ch 392, 418, "undoubtedly, directors have always been held by the Courts as being in a very favourable position as compared with other agents in respect of the degree of negligence which will make them liable to an action". The emphasis historically on the voluntary nature of the directors' office as the basis for a lower standard of care, consistently with bailees or trustees, had been forgotten. It was replaced by a new rationale. Indeed, Romer J had been counsel for the unsuccessful liquidator before Chitty J in Grimwade v Mutual Society (1885) 52 LTR 409, 416, where Chitty J had explained that the reason why directors, unlike trustees, were not liable for "mere negligence" was "obvious". It was said to be "arising in great measure out of the nature of the business which they have to conduct, which, in the case of commercial and trading companies, is often of a speculative and even hazardous character". Hence directors acting within power and in good faith were not liable for "want of discretion", want of "good judgment", or for "pursuing a policy which proves a failure". 426 One of the most heavily cited decisions in the modern law concerning directors' duties was the decision of Romer J (the son) in In re City Equitable Fire Insurance Company, Limited [1925] Ch 407. That case concerned the liability of directors and other company officers for losses sustained by the company. The liquidators relied upon s 215 of the Companies (Consolidation) Act 1908 (UK) which imposed liability for misfeasance by directors. In his Lordship's exposition on directors' duties of skill and care, Romer J accepted (as his father had in Lagunas Nitrate Company v Lagunas Syndicate) that "gross negligence" involved a duty of different content from mere negligence (428). His Lordship also relied upon the statement of law from the Lord Chancellor in Overend and Gurney Company v Gibb. But, at 428-429, he also approved the remarks of Lindley MR in Lagunas Nitrate Company v Lagunas Syndicate. At 435, the Master of the Rolls said: If directors act within their powers, if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company. In this case they clearly acted within their powers: they did nothing ultra vires: fraud is not imputed. The inquiry, therefore, is reduced to want of care and bona fides with a view to the interests of the nitrate company. The amount of care to be taken is difficult to define; but it is plain that directors are not liable for all the mistakes they may make, although if they had taken more care they might have avoided them: see Overend, Gurney & Co v Gibb. Their negligence must be not the omission to take all possible care; it must be much more blameable than that: it must be in a business sense culpable or gross. I do not know how better to describe it. 427 At the turn of the century when Lagunas Nitrate Company v Lagunas Syndicate was decided, all of the cases concerning the duties of directors had been Chancery decisions. However, an important aspect of the decision of Lindley MR was that his Lordship spoke of directors' duties as being owed both at common law and in equity. This conclusion was later supported by the majority in Daniels v Anderson (1995) 37 NSWLR 438, 492 who regarded as "outdated" the suggestion that the duties of a director were limited to equity. Some doubt has been expressed about this conclusion: see Heydon JD, "Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?" in Degeling S and Edelman J (eds), Equity in Commercial Law (Thomson, Sydney, 2006) 196-197. However, perhaps as a consequence of the common law retreat in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 from the absolutism of Derry v Peek (1889) LR 14 App Cas 337, the dominant position is now that directors owe a single general law duty, recognised by both common law and equity, to take reasonable care: see Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 237-239 (Ipp J); Bristol and West Building Society v Mothew [1998] Ch 1, 17 (Millett LJ) and the comprehensive discussion in Heath W, "The Director's "Fiduciary" Duty of Care and Skill: A Misnomer" (2007) 25 C & S LJ 370. 428 By the 1990s at the latest, the common law and equity had moved to a position where a director's duty to take care was one which was concerned with negligence, not gross negligence. It may be, however, that (putting onus of proof issues to one side) the business judgment rule in s 180(2) of the Corporations Act moves the statutory duty back to something akin to a requirement of gross negligence. It is unnecessary to consider that question in this case because reliance on s 180(2) was abandoned by Mr and Mrs Cassimatis.

The legislative imposition of private and public duties 429 One of the first statutory provisions enacted in Australia for the liability of directors was the Companies Act 1896 (Vic). Section 116(2) of that Act provided: Every director shall be under an obligation to the company to use reasonable care and prudence in the exercise of his powers and duties, and shall be liable to compensate the company for any damage incurred by reason of culpable neglect to use such care and prudence… 430 As three leading commentators on company law observe, that section was the subject of great debate. It was based upon a draft English bill which was never enacted but which was annexed to a Committee report: see Langford R, Ramsay I and Welsh M, "The Origins of Company Directors' Statutory Duty of Care" (2015) 37 Syd LR 489, 490, 493-494 and Board of Trade, United Kingdom, Report of the Departmental Committee Appointed by the Board of Trade to Inquire What Amendments Are Necessary in the Acts Relating to Stock Companies Incorporated with Limited Liability under the Companies Acts, 1862 to 1890, Command Paper 7779, 1895 cl 10(2). 431 An important aspect of s 116(2) of the Companies Act 1896 was that it was concerned only with private rights. The obligation was "to the company". And the liability was "to compensate the company". But the duty of care in s 116(2) was not re-enacted when the 1896 Act was repealed and replaced by the Companies Act 1910 (Vic). 432 Nearly half a century elapsed before another legislative provision was enacted. This time the provision was not limited to private rights of the company. The next enactment was s 107 of the Companies Act 1958 (Vic): (1) A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. (2) Any officer of a company shall not make use of any information acquired by virtue of his position as an officer to gain an improper advantage for himself or to cause detriment to the company. (3) Any officer who commits a breach of the foregoing provisions of this section shall be guilty of an offence against this Act and shall be liable to a penalty of not more than Five hundred pounds and shall in addition be liable to the company for any profit made by him or for any damage suffered by the company as a result of the breach of any of such provisions. (4) Nothing in this section shall prejudice the operation of any other enactment or rule of law relating to the duty or liability of directors or officers of a company. 433 The history and background to this provision are discussed in detail by Gummow and Hayne JJ in Angas Law Services Pty Ltd (in liquidation) v Carabelas [2005] HCA 23; (2005) 226 CLR 507, 528-530 [55]-[64]. The second reading speech of the Bill for the 1958 Act observed that s 107 was the first statutory provision of its kind in Australia or the United Kingdom. It seems unlikely that the Victorian drafters had forgotten about the 1896 Victorian Act. The reference to the 1958 Act being the first statutory provision of its kind may have been intended to emphasise the distinction from the 1896 Act. Although the section was thought to be declaratory of the law "to a large extent", there was also emphasis on the public concern of "an effective deterrent to misconduct". An explanation incorporated into Hansard by resolution provided the following (Victoria, Parliamentary Debates, Legislative Assembly, (Hansard), 9 September 1958, 331): To a large extent the clause is declaratory of the existing law, but it is believed that a restatement of the principles of honesty and good faith that should govern directors' conduct, clearly set out in the Act, will be an effective deterrent to misconduct and will free the courts from the technicalities of the existing law in dealing with all forms of dishonesty and impropriety by directors. 434 As Gummow and Hayne JJ explained in Angas Law Services v Carabelas (530 [62]), the reference to "existing law" was to the civil law; "the joinder of civil and criminal remedies meant that the section could not be described simply as declaratory of the law as a whole". Section 107(1) was notably different from s 116(2) of the 1896 Act because the obligation in s 107(1) appeared to be of both a public and a private nature. At least, it was subject to both public and private remedies. The section preserved the general private law concerning directors' duties (s 107(4)). But unlike s 116(2) of the 1896 Act, the statutory obligation requiring that a "director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office" was not expressed as being owed only to the company. A breach of the duty was an offence punishable by a fine of up to 500 pounds. That penalty was in addition to a liability to the company for any profit made by the director, or any damage suffered by the company, from the breach: s 107(3). There was also a provision in the 1958 Act empowering the Attorney-General to take action in the name of the company in certain circumstances (s 144(6)). 435 The 1958 Act was repealed by the first Schedule to the Companies Act 1961 (Vic). But s 107 remained, without substantial change, as s 124(1) of the new uniform Companies Act 1961, enacted in each State: "A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office." Subsequent decisions observed of this provision that the obligation was to act honestly and with reasonable diligence but not, as the general law had required, with "skill": "[w]hat the legislature by the sub-section is demanding of honest directors is diligence only; and the degree of diligence demanded is what is reasonable in the circumstances and no more": Byrne v Baker [1964] VR 443, 450 (the Court). 436 The subsequent history and evolution of the legislative provisions was comprehensively traced by Austin J at first instance in Australian Securities and Investments Commission v Vines [2003] NSWSC 1116; (2003) 182 FLR 405, 409-418 [15]-[48]. It suffices for these reasons to emphasise that although there was considerable debate about the terms and operation of the various provisions, their dual character as public and private duties was maintained since 1958. 437 In 1981, s 229(2) of the Companies Act 1981 (Cth) and uniform Companies Codes broadly replicated the terms of s 124 of the uniform Companies Act 1961 providing as follows: An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties. 438 The provision still imposed both private and public consequences. The maximum penalty for contravention of the duty in s 229(2), as a public sanction, was $5,000. 439 The next relevant legislation was the Corporations Act 1989 (Cth). But key provisions of that legislation were held to be unconstitutional in New South Wales v Commonwealth [1990] HCA 2; (1990) 169 CLR 482. Co-operative legislation, described as the Corporations Law, was enacted. With one significant difference, it broadly repeated s 229(2) in a section now numbered as s 232(4). The difference was that contravention was no longer subject to a penalty of $5,000. 440 In 1992, s 11 of the Corporate Law Reform Act 1992 (Cth) amended the terms of s 232(4). The new provision was as follows: In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances. 441 The amended provision was a civil penalty provision (see s 232(6B)) and subject to the criminal and civil consequences of contravention in Part 9.4B (see s 1317DA). The civil penalty regime included powers to prohibit a person from managing a corporation for a period and powers to order payment of civil penalties of up to $200,000 (s 1317EA(3)). The power to seek civil penalties orders was conferred upon the Commission, a Commission delegate, or a person authorised in writing by the Minister (s 1317EB). There was also liability imposed for any person involved in a contravention of s 232(4) (see s 1317DB). 442 The 1992 amendments preserved the possibility of criminal liability if the civil penalty provision was contravened "knowingly, intentionally, or recklessly" and either "dishonestly and intending to gain, whether directly or indirectly, an advantage for that or any other person", or "intending to deceive or defraud someone" (s 1317FA). 443 In 1999 the criminal penalties for breach were removed by the "CLERP" amendments in the Corporate Law Economic Reform Program Act 1999 (Cth). The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) explained that this was because it was considered that the concept of negligence was inconsistent with dishonesty ([6.1]). That Act also removed the liability, under s 1317DB, of a person for involvement in a breach of the duty of care and diligence. However, the powers to order civil penalties and disqualification were maintained. The 1999 Act amended the terms of the duty as follows (with a business judgment rule in subsection 2 omitted): 180 Care and diligence - civil obligation only Care and diligence - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer 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 or officer. Note: This subsection is a civil penalty provision (see section 1317E). 444 The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 explained at [2.8] the approach taken to directors' duties: Directors are subject to both the general common law and a range of statutory duties (eg approving company financial statements, signing a prospectus). Directors have a contractual relationship with the company and a fiduciary relationship with shareholders. The Law codifies common law duties of loyalty and care. It also requires directors to exercise their powers in good faith and in the best interests of the company. A breach of requirements imposed under the Law may result in civil and/or criminal liability for directors. 445 In 2001 the Corporations Act was enacted. The Corporations Act was enacted after a referral of power from the States to the Commonwealth following the decisions of the High Court in Re Wakim; Ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 and The Queen v Hughes [2000] HCA 22; (2000) 202 CLR 535. The terms of s 180 remained the same as the terms in the Corporations Law introduced by the CLERP amendments.

The parties' submissions about the nature of s 180 as a public or private wrong 446 Mr and Mrs Cassimatis submitted that the directors' duties in s 180, although having a public component by public enforcement and public sanctions, had remained an essentially private duty since 1958. They submitted that s 180 was a duty only owed by Mr and Mrs Cassimatis to Storm. They also submitted that in solvent companies the only interest of the company is the interest of its shareholders. 447 In contrast, ASIC submitted that the directors' duties in s 180 are public duties and not merely private duties. ASIC submitted that they are not duties owed only to the corporation. Almost two decades ago, a similar observation was made by Professors Whincop and Keyes who observed a number of areas where corporations law had moved from a private model to a private-public hybrid. They argued that directors' duties had a public component because by "converting directors' duties into obligations with penal consequences for breach, corporate governance is brought into a public sphere": Whincop M and Keyes M, "Corporation, Contract, Community: An Analysis of Governance in the Privatisation of Public Enterprise and the Publicisation of Private Corporate Law" (1997) 25 FL Rev 51, 87. The authors suggested that the interests protected by an enforcement action in the public sphere might not be limited to the interests of the corporation but might also include broader concerns and the interests of other persons directly or indirectly affected by the conduct of the corporation (at 87-88). 448 In the section which follows I consider these competing submissions. The point is of fundamental importance to the theory of directors' duties. But, ultimately, it does not affect the outcome of this case. For that reason, although I set out the different conceptions raised by the parties in this case, I have not reached a concluded view on the ultimate question.

A contravention of s 180(1) might involve both a public and a private wrong

The nature of public wrongs and private wrongs 449 Sir William Blackstone differentiated two types of wrongdoing by contrasting "private wrongs" with "public wrongs": Blackstone W, Commentaries on the Laws of England, Vol 3 (Clarendon Press, Oxford, 1765) Ch 1, 2. 450 Private wrongs which are not created by statute are actionable at common law (such as torts), or in equity (such as breach of confidence, breach of fiduciary duty and so on) or in either jurisdiction (genuine fraud). As I have explained, it came to be accepted that a breach of a duty of care and diligence by a director was another matter which was actionable both at common law and in equity. 451 Private wrongdoing is relational. It involves a breach of a duty in relation to another person. For example, speaking of the duty of care in Palsgraf v Long Island Railroad Co 162 NE 99, 101 (NY CA, 1928), Cardozo CJ explained that "[n]egligence, like risk, is thus a term of relation. Negligence in the abstract, apart from things related, is surely not a tort, if indeed it is understandable at all". As Handley JA explained in Seltsam Pty Ltd v McNeill [2006] NSWCA 158 [4], this principle is one of basic correlativity in private law requiring an infringement of the applicant's rights: see also Bourhill v Young [1943] AC 92, 108 (Lord Wright), 117 (Lord Porter). 452 This principle of private law does not apply to public duties. A public duty to take care can and often does arise without being in relation to a person. There are few, if any, places in the world where a person who drives at 200km per hour on an empty street does not seriously breach a legislated public duty. If no person or property is damaged then no private duty to a person is breached. But the public duty is breached. 453 Public wrongs, particularly when created by legislation, can be of different types. Three types are pertinent in this case: (1) one type is a public wrong which is parasitic or dependent upon a private wrong but where the legislature merely imposes additional public sanctions and additional enforcement mechanisms; (2) a second type is a public wrong which is based upon a private wrong but which is independent of the private wrong, including having different elements based upon different interests which are protected; and (3) a third type is a public wrong which has no private law counterpart or which has not been adapted from private law.

Contraventions of s 180(1) involve both a public and a private wrong 454 On one view, breaches of general law directors' duties, ie at common law and in equity, involve both a public and a private wrong. In the Atkyns report of The Charitable Corporation v Sutton, Hardwicke LC was reported as saying that the "the employment of a director [is] of a mixed nature: it partakes of the nature of a publick office, as it arises from the charter of the crown" (2 Atk 400, 405; 26 ER 642, 644). In the Modern report, the Lord Chancellor was reported to have said of the office of director that "[i]t is public, as it rises under a charter, and as the abuse of it tends to affect public credit. But as it does not concern public government, but the negotiation of private property, it is therefore a private office" (9 Mod 349, 355; 88 ER 500, 503). 455 However as I have explained, over time, the general law of directors' duties became closely associated with private wrongdoing. It would be difficult now to contend that the common law or equity impose public duties on directors. In contrast, Australian company legislation since 1958 has clearly recognised a public character to the duty in s 180(1). For the reasons which follow, the Corporations Act plainly continues to treat a contravention of s 180(1) as both a public and a private wrong. The real issue raised by the parties in this case would seem to be whether it is a public wrong of character (1) or character (2) in [453] above. 456 As a private wrong, s 180(1) is a breach of a duty owed only to the corporation. Its content, like that of the common law and equitable duty, has been shaped by the private interests of the corporation. The private character of s 180, as a duty owed between persons, is evident in the liability of an officer to the corporation to compensate the corporation for loss. The predecessor to s 180 in the Uniform Companies Code was described as involving the same test, for compensation for failure to exercise a reasonable degree of care and diligence as contained in Overend and Gurney Company v Gibb in 1872 and In re City Equitable Fire Insurance Co in 1925: Vrisakis v Australian Securities Commission (1993) 9 WAR 395, 450 (Ipp J). 457 In contrast, the public character of s 180, as a public duty or duty which is owed at large, is evident in numerous ways: (1) a breach of s 180 can be prosecuted by a public body (ASIC), and remedies such as injunctions are available for a breach or threatened breach of s 180(1) at the instance of "a person whose interests have been, are or would be affected by the conduct" (s 1324); (2) a breach of s 180 can give rise to pecuniary penalties, payable to the Commonwealth of Australia; (3) a breach of s 180 can give rise to disqualification from acting as a director for a period of time; and (4) unlike directors' duties at general law, it is not possible to ratify a statutory breach: Angas Law Services v Carabelas, 523 [32] (Gleeson CJ and Heydon J); Forge v Australian Securities and Investments Commission [2004] NSWCA 448; (2004) 213 ALR 574, 654-655 [378]-[383] (McColl JA; Handley and Santow JJA agreeing). 458 In Forge v Australian Securities and Investments Commission, McColl JA (with whom Handley and Santow JJA agreed) referred to the protective purpose of disqualification, which prevents the director from acting as such in other corporations as well, and said that "in this sense civil penalty proceedings involve public rights" (654 [381]). Again, in International Swimwear Logistics Ltd v Australian Swimwear Company Pty Ltd [2011] NSWSC 488 [106], Ward J said: The concepts of public interest, public policy and commercial reality in the context of corporate governance encompass considerations of community confidence in the management of commercial businesses by directors. Various indicators point to the fact that there is a public interest in the enforcement of the duties owed by directors to their companies. Indeed, the role of the State (via ASIC) in the enforcement of statutory duties, the existence of civil penalty provisions, and the ability for directors to be held criminally liable for their actions, confirms the recognition of a public interest in the enforcement of directors' duties. 459 At one point in oral closing submissions, senior counsel for Mr and Mrs Cassimatis appeared to submit that s 180(1) remained solely a private wrong despite (i) the possibility of public prosecution of it and public injunctions; (ii) possible public sanctions for it; and (iii) the inability of the corporation to waive or ratify breaches of it (ts 586-587). Of course, attaching a trunk, tusks, and a long tail to a wombat does not make it an elephant. But the public prosecution, injunctions, sanctions, and inability to waive or ratify show that there is, at least, a public duty which is parasitic upon the private duty. 460 In contrast, ASIC submitted that the public duty exists independently of the private duty so that it is owed to the public at large and is not merely a public duty that attaches additional enforcement and sanctions to a private duty owed to the corporation.

Authority considering the operation of s 180(1) as a public wrong 461 Despite decades of litigation, there has rarely been any need to pay close attention to the nature of the public wrong that is created by s 180(1). In this case, ASIC relied upon the alleged contravention of s 180(1) in its character as a breach of a public duty to assert that a contravention of s 180(1) is not limited to obligations owed to the company. ASIC made this submission in response to the arguments by Mr and Mrs Cassimatis that directors of a solvent company could not breach duties of care and diligence to a company of which they were the only shareholders. 462 ASIC submitted that s 180(1), in its public character, prescribes a norm of conduct and "does not impose a duty owed to another [person]". As I have explained, ASIC's submission was effectively that s 180(1) imposes a duty which is independent of the private wrong and which therefore requires consideration of the public interest, separate from the interest of the corporation, in determining whether a contravention has occurred. 463 In contrast, Mr and Mrs Cassimatis' submissions assumed that any public aspect to the duty that existed was effectively parasitic upon the private wrong, requiring consideration of the interests involved in its public aspect (such as in relation to sanctions) only after a conclusion that the private wrong has been contravened. 464 Although it is well accepted that the private wrong in s 180(1) is not identical to the general law duty, it has never been conclusively determined that an action brought for a contravention of s 180(1) in its public character is necessarily identical to one which is brought for contravention of s 180(1) in its private character. A number of authorities were referred to in detail by counsel for the parties in this case. None of them conclusively resolves this point. 465 In Vrisakis v Australian Securities Commission the question for the Western Australian Full Court of the Supreme Court was whether the appellant had breached his duty of care and diligence as a director of Rothwells Ltd under s 229(2) of the Companies (Western Australia) Code 1961 (WA). As I have explained, that Code was part of the uniform 1981 legislation which imposed a duty to take a reasonable degree of care and diligence. A majority of the Full Court held that the evidence could not support the conviction. The decision of the majority of the Full Court on this point was given by Ipp J, with whom Malcolm CJ agreed. His Honour explained that under s 229(2) an offence could be committed "without any damage having been sustained" by the company. Hence, the question was merely whether the defendant director had exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties (449). However, he continued (449-450): Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise. Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question. 466 This passage was adopted in Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 398 [102]. The last sentence was also repeated by Ipp J (Malcolm CJ and Seaman J agreeing) in Permanent Building Society v Wheeler, 239. 467 Numerous other subsequent cases support the assumption by Ipp J that the duty of care and diligence, even when relied upon as a public duty seeking public sanctions, is a duty which is owed only to the company. Reference to the duty, in a public context, as one which is owed to the company, or as one which reflects the common law duty, has been repeated numerous times: Diakyne Pty Ltd v Ralph [2009] FCA 721; (2009) 72 ACSR 450, 469 [84] (Jagot J); Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 [532] (Murphy J); Australian Securities and Investments Commission v Warrenmang Limited [2007] FCA 973; (2007) 63 ACSR 623, 628 [22] (Gordon J); Australian Securities and Investments Commission v Mariner Corporation Ltd [2015] FCA 589; (2015) 327 ALR 95, 173-174 [445] (Beach J). 468 In none of these cases does it appear that the characterisation of the duty was an issue. Nothing turned upon this issue and no argument was made about it. However, one case where the distinction, although not clearly argued, might have made a difference was the decision in the New South Wales Court of Appeal in relation to the predecessor provision to s 180(1) (ie s 232(4) of the Corporations Law) in Vines v Australian Securities & Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451. In that case, Mr Vines argued that where the breach was asserted in its character as a public duty, such as for the purpose of a pecuniary penalty or disqualification, then the standard of care required was higher. The New South Wales Court of Appeal rejected that submission. One significant reason for this was that the public consequences of civil penalties and disqualification require "consideration of further matters over and above the contravention itself" which reflected a lack of intention to adjust the standard of care (476 [150] per Spigelman CJ; Santow JA agreeing at 554 [587]; Ipp JA agreeing at 602 [805]).

Summary of conclusions on the nature of s 180(1) when enforced as a public wrong 469 The discussion above illustrates that there is a large body of authority which has treated s 180(1) as a duty which is owed only to the company, even when it is enforced by ASIC or when public sanctions are sought. However, apart from possibly the decision in Vines, the precise character of s 180(1) was not explored in any of these cases. Even in Vines it was not explored in the context, or the detail, as it was in the submissions in this case. Nevertheless, in this case it is neither necessary nor appropriate to attempt to resolve this issue, and this question of high level theory. It suffices to indicate some of the matters which were not explored in submissions and which might have a significant effect on any conclusion about the nature of s 180(1) as a public duty. 470 One matter, indeed the primary matter, which requires close attention is the text of s 180(1). The textual indication which supports ASIC's submission that the s 180(1) duty of care is a duty which is not merely owed to the company might be seen in the way that the literal terms of the duty are tied to the exercise by directors of their powers expressed generally and to the discharge of their duties expressed generally. In other words unlike the terms of the 1896 legislation, s 180(1) does not, in terms, confine the duties and powers of directors to those duties and powers which are imposed upon them, and conferred upon them, by the company. Some duties of directors are duties which are undertaken by the director to the company. But other duties of directors, in their capacity as directors, are imposed by law. 471 Contextual and purposive considerations are also relevant. A contextual consideration of this question which was not explored is the section immediately before s 180(1), where the Corporations Act provides in s 179(1) that: This Part sets out some of the most significant duties of directors, secretaries, other officers and employees of corporations. Other duties are imposed by other provisions of this Act and other laws (including the general law). 472 Another contextual consideration which might, at first blush, indicate that the concern of s 180(1) extends beyond the interests only of the corporation is the provision for injunctions in s 1324 at the instance of "a person whose interests have been, are or would be affected by the conduct". 473 Ultimately, it may be that these textual and contextual indications are only weak indications in support of ASIC's submission that s 180(1) treats the public duty as not merely replicating the private duty with additional public sanctions and enforcement but creating an independent public duty requiring consideration of a general norm of conduct which is not limited to the interests of the corporation. The textual and contextual indications are certainly not conclusive. 474 Against these considerations are a number of arguments to the contrary, many of which were not explored in submissions. The first and most obvious of these was that the series of legislative amendments and alterations to what is now s 180(1) has taken place against a dominant understanding, albeit one which has not been the subject of argument, that the section and its predecessors are concerned with duties owed to the corporation. 475 The second argument is that the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth), quoted above, referred to the legislation "codifying" common law duties of care. Although this reference was preceded by a reference to the duties owed by directors under "both the general common law and a range of statutory duties (eg approving company financial statements, signing a prospectus)" ([2.8]), the "codifying" description supports the dominant approach which treats the public duty as based on an identical private law duty which has come to be understood as owed only to the company. The reference to "codifying" is nevertheless curious because s 185 of the Corporations Act preserves the common law duties. 476 The third argument is that the dominant approach has an elegant simplicity and clarity which might be thought to be an important matter of contextual construction because of the need for directors to be able to determine whether their acts might involve a breach of duty. The dominant approach treats the obligations of a director in the same way whether they are enforced as private wrongs to the corporation or as public wrongs. And the legislation uses the same words to describe the duty, whether characterised as private or public. This contrasts with what might be a very difficult duty owed by directors, backed by pecuniary sanctions, to consider public interest at large which might even be contrary to the interests of the corporation. 477 Fourthly, and finally, the dominant approach has support from the manner in which the standard of care issue was resolved in Vines v Australian Securities & Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451. 478 Ultimately, it is not necessary in this case to reach a conclusion about the extent to which, if at all, the s 180(1) duty of care and diligence applies to the exercise of powers and the discharge of duties other than those conferred by, or owed to, the company. Nor, in the absence of full submissions on all of the matters I have discussed, is it desirable to attempt to express a concluded view. The reason why it is not necessary to resolve this issue is because, as senior counsel for Mr and Mrs Cassimatis submitted, this case is concerned only with the due care and diligence obligation in relation to the discharge of Mr and Mrs Cassimatis' duty to manage Storm. As I explain below, Mr and Mrs Cassimatis' duty to consider Storm's interests when managing the corporation does not require a narrow construction of Storm's interests which is limited only to the interests of its shareholders. Hence, I am content to proceed on the basis that Mr and Mrs Cassimatis' public duties as directors in managing Storm could only be contravened if they acted contrary to Storm's interests rather than contrary to any general norm of conduct. Nevertheless, Storm's interests should not be construed narrowly. It is to that point that I now turn.

The content of the duty to the company in s 180(1) 479 I have already explained the dominant test for the content of the duty in s 180(1). That test is commonly described by reference to the decision of Ipp J in Vrisakis v Australian Securities and Investments Commission. Three important aspects of that test must be emphasised. 480 First, the reference by Ipp J to "harm" is best understood as a reference to harm to any of the interests of the corporation. In other words, all the corporation's interests are relevant when considering, as Ipp J described, the process of "balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question" (449-450). 481 One reason why the concept of harm should not be confined narrowly is that the overarching question is that of due care and diligence in the exercise of powers or discharge of duties. The broad terms of the legislation do not confine the relevant interests of the corporation which fall for consideration. Further, s 180(1) does not require any proof of actual loss to the company. Harm to its interests including reputation might also occur without prospective loss. 482 There is a strong indication that the scope of possible harm to the corporation contemplated by Ipp J was not limited to pecuniary loss and might extend to unlawful conduct which can cause non-pecuniary consequences for a corporation. Immediately before the passage about foreseeable risk of harm, Ipp J referred to the lack of intention by the legislature to "dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity" (449, emphasis added). A corporation has a real and substantial interest in the lawful or legitimate conduct of its activity independently of whether the illegitimacy of that conduct will be detected or would cause loss. One reason for that interest is the corporation's reputation. Corporations have reputations, independently of any financial concerns, just as individuals do. Another is that the corporation itself exists as a vehicle for lawful activity. For instance, it would be hard to imagine examples where it could be in a corporation's interests for the corporation to engage in serious unlawful conduct even if that serious unlawful conduct was highly profitable and was reasonably considered by the director to be virtually undetectable during a limitation period for liability. 483 For these reasons, I conclude that the foreseeable risk of harm to the corporation which falls to be considered in s 180(1) is not confined to financial harm. It includes harm to all the interests of the corporation. The interests of the corporation, including its reputation, include its interests which relate to compliance with the law. 484 Although these non-financial concerns about legality of conduct are relevant considerations, in this case the potential consequences of the alleged failures to comply with the law were also serious financial threats to Storm including a potential threat to its very existence by the loss of its AFSL. 485 Secondly, the reference to "balancing" in the assessment of due care and skill in Vrisakis v Australian Securities and Investments Commission should not be taken literally. The factors to be considered are not to be balanced or weighed as though by a common metric. Even one of the godfathers of United States law and economics said that in weighing the factors of likelihood of injury, seriousness of potential injury, and interest to be sacrificed to avoid the risk, the considerations are "practically not susceptible of any quantitative estimate" and "a solution always involves some preference, or choice between incommensurables": Conway v O'Brien 111 F 2d 611, 612 (2nd Cir, 1940) (Learned Hand J). For instance, suppose a director makes a decision to commit a serious breach of the law, by intentionally discharging large volumes of toxic waste. Suppose the decision is made on the basis that the financial cost of avoiding the breach would be far greater than the cost of a pecuniary penalty under the relevant environmental regulation. This conduct might nevertheless involve a breach of the director's duty of care and diligence, irrespective of any other breaches. In other words, the director might not avoid liability merely because he or she proved that a balancing exercise showed that the likely financial cost of a penalty was exceeded by the likely profit from a serious contravention of the law. 486 The reference to "balancing" by Ipp J should be understood as a reference to the well-known decision of Mason J in Wyong Shire Council v Shirt [1980] HCA 12; (1980) 146 CLR 40, 47-48 (emphasis added): [T]he tribunal of fact must first ask itself whether a reasonable man in the defendant's position would have foreseen that his conduct involved a risk of injury to the plaintiff or to a class of persons including the plaintiff. If the answer be in the affirmative, it is then for the tribunal of fact to determine what a reasonable man would do by way of response to the risk. The perception of the reasonable man's response calls for a consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have. It is only when these matters are balanced out that the tribunal of fact can confidently assert what is the standard of response to be ascribed to the reasonable man placed in the defendant's position. The considerations to which I have referred indicate that a risk of injury which is remote in the sense that it is extremely unlikely to occur may nevertheless constitute a foreseeable risk. A risk which is not far-fetched or fanciful is real and therefore foreseeable. But, as we have seen, the existence of a foreseeable risk of injury does not in itself dispose of the question of breach of duty. The magnitude of the risk and its degree of probability remain to be considered with other relevant factors. 487 This exercise is "forward looking" to what a reasonable person would have done, not backward looking at what would have avoided the injury: New South Wales v Fahy [2007] HCA 20; (2007) 232 CLR 486, 505 [57] (Gummow and Hayne JJ). And, as Gleeson CJ said in Fahy, at 491 [6]: What is involved is a judgment about reasonableness, and reasonableness is not amenable to exact calculation. The metaphor of balancing, or weighing competing considerations, is commonly and appropriately used to describe a process of judgment, but the things that are being weighed are not always commensurate. 488 Thirdly, it is important that the duty in s 180(1) is applied in the terms of that section. In the discussion above of the history of s 180(1), I explained that in 1992, s 11 of the Corporate Law Reform Act 1992 (Cth) inserted a new provision which tied the officer's duty of diligence to "the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances". The Explanatory Memorandum explained that the concept of "an officer of the corporation in the corporation's circumstances" in the new provision was not intended to change the law from decisions including AWA Ltd v Daniels trading as Deloitte Haskins & Sells (1992) 7 ACSR 759. The Explanatory Memorandum continued: 84. The inclusion of the expression 'a reasonable person' is intended to confirm that the required standard of care and diligence is to be determined objectively. 85. The proposed new subsection obliges a Court to place the reasonable person 'in a like position' with the relevant officer. Australian law recognises that the special background, qualifications and management responsibilities of the particular officer may be relevant in evaluating his or her compliance with the standard of care. At the same time, Australian law also recognises that decisions must be made on the basis of the circumstances at the time and without the benefit of hindsight. 86. The proposed new subsection 232(4) also obliges the Court to place the reasonable person in the position of an officer 'in the corporation's circumstances'. Thus, the proposed subsection 232(4) will recognise that what constitutes the proper performance of the duties of a director of a particular corporation will be influenced by matters such as the state of the corporation's financial affairs, the size and nature of the corporation, the urgency and magnitude of any problem, the provisions of the corporation's constitution, and the composition of its Board. 87. In the case of a business corporation, the standard would reflect the fact that corporate decisions involve risk-taking. The courts have in the past recognised that directors and officers are not liable for honest errors of judgement: Ford's Principles of Company Law (6th ed., 1992) at p.528-9. They have also shown a reluctance to review business judgments taken in good faith… 489 In Vines v Australian Securities & Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451, 475 [142], Spigelman CJ said that "Parliament, when it used language, albeit in a slightly modified form, plainly derived from the civil case law, had in mind a standard of care of a similar character". Of course, as his Honour acknowledged, the rules of statutory interpretation must be applied in construing the section. The Chief Justice was referring to the predecessor provision to s 180(1) of the Corporations Act (ie s 232 of the Corporations Law) but in Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1, 128 [7191], Austin J explained that it was inconceivable that the law reverted to a less objective standard when s 180 was enacted in March 2000. 490 The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 explained at [1.3] that the changes to the duties of directors were designed so that: clarification of the director's duty of care and diligence, and of the ability of directors to delegate functions and to rely on the advice of experts when making decisions, will give directors the confidence to engage in entrepreneurial or informed decision making. 491 At [4.2] this new duty was said "to clarify that the standard of care required by the duty must be assessed by reference to the particular circumstances of the officer concerned". The reason for this was explained at [6.24] and [6.25]: Current section 232(4) was inserted by the Corporate Law Reform Act 1992 to provide that 'an officer of a corporation must exercise a degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances'. The explanatory memorandum indicated that the words 'in a like position' were intended to allow consideration of the special background, qualifications and management responsibilities of a particular officer in evaluating their compliance with the standard of care. However, doubt has been expressed about whether current section 232(4) enables the Courts to have regard to the circumstances of the particular officer as well as their position in the corporation. The draft provisions have been rewritten to clarify that whether the officer has breached the standard of care and diligence is determined both by regard to the corporation's circumstances and the officer's position and responsibilities within the corporation (proposed subsection 180(1)). 492 The effect of this has been described as being that "non-executive directors are not subject to the same (higher) standard as executive directors": Australian Securities and Investments Commission v Rich, 129 [7196] (Austin J). Although the duty (one of care and diligence) remains the same, the standard that a director must meet will depend upon the corporation's circumstances and the officer's position and responsibilities including his or her status as an executive or not. 493 In Shafron v Australian Securities and Investments Commission [2012] HCA 18; (2012) 247 CLR 465, 476 [18] a joint judgment of six of their Honours explained that: The degree of care and diligence that is required by s 180(1) is fixed as an objective standard identified by reference to two relevant elements - the element identified in para (a): "the corporation's circumstances", and the element identified in para (b): the office and the responsibilities within the corporation that the officer in question occupied and had. No doubt, those responsibilities include any responsibility that is imposed on the officer by the applicable corporations legislation. But the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer. 494 In Australian Securities and Investments Commission v Mariner Corporation Ltd, 173 [441], Beach J said that It is also not in doubt that in considering the acts or omissions of a particular director, one looks at factors including the director's position and responsibilities, the director's experience and skills, the terms and conditions on which he has undertaken to act as a director, how the responsibility for the company's business has been distributed between the directors and the company's employees, the informational flows and systems in place and the reporting systems and requirements within the company. 495 The third point then, in summary, is that the consideration required by Ipp J of the foreseeable risk of harm together with the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, must take place from the perspective of the corporation's circumstances and the office and the responsibilities of the director. This has significance in this case because of the vast responsibilities assumed by Mr and Mrs Cassimatis, and the strength of control that they asserted over Storm.

The submission that s 180(1) does not apply where the directors are the sole shareholders of a solvent company 496 Mr and Mrs Cassimatis submitted that the degree of risk that a solvent company should adopt in pursuit of profit is a matter for the directors and shareholders to determine. They asserted that "there is nothing per se illegal in a director of a solvent company causing or permitting a company to pursue a venture, no matter how risky or even foolhardy, if this is what the shareholders want" ([472]). They asserted that there is no breach of s 180(1) by a director who, with the consent of the shareholders, embarks on a course of conduct which is highly likely to contravene provisions of the Corporations Act. This was because "the pursuit of the risky venture is the raison d'être for the limited liability company in the first place" ([472]). Indeed, they went so far as to submit that a director would be acting with care and diligence, and not in breach of s 180(1), if he or she intentionally acted in contravention of the Corporations Act. Mr and Mrs Cassimatis submitted that "where the directors and the shareholders are one and the same, ratification is implicit" (Maxwell, 399 [103]). Hence, they argued, they could not be liable for any breach of s 180(1). 497 It can be immediately accepted that the pursuit of ventures which involve risk is one key purpose of the limited liability corporation. That purpose, and its basis as a reason why some shareholders invest, is an important context in the assessment of whether s 180(1) has been contravened by a director. The business judgment rule (which is not relevant in this case) adds further weight to this matter. However, this does not give a director carte blanche to engage in any venture even if the venture is highly likely to (and does) contravene the law. 498 The submission to the contrary by Mr and Mrs Cassimatis must be rejected for four reasons explained in more detail below. First, it is not consistent with the text of s 180(1). Secondly, it is not consistent with the history and context of s 180(1). Thirdly, it is unprincipled. Fourthly, it is not supported by the authorities upon which Mr and Mrs Cassimatis rely.

Inconsistency of the submission with the text of s 180(1) 499 As I have explained, shareholders cannot ratify a breach of s 180(1) of the Corporations Act. Mr and Mrs Cassimatis accepted this but they submitted that the shareholders could authorise a breach of s 180(1). In other words, the day before a breach of s 180(1) occurred the shareholders could authorise a breach but, the next day, they could not ratify it. This would be a bizarre consequence. 500 The submission by Mr and Mrs Cassimatis that the duty does not arise, or has no content, if the shareholders consent to the conduct has no support in the text of the provision. The submission effectively requires the additional italicised words to be implied: "unless the shareholders previously consent to or authorise the conduct, a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence…". 501 In Taylor v Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531, French CJ, Crennan and Bell JJ said (at 548 [38], footnotes omitted): The question whether the court is justified in reading a statutory provision as if it contained additional words or omitted words involves a judgment of matters of degree. That judgment is readily answered in favour of addition or omission in the case of simple, grammatical, drafting errors which if uncorrected would defeat the object of the provision. It is answered against a construction that fills "gaps disclosed in legislation" or makes an insertion which is "too big, or too much at variance with the language in fact used by the legislature". 502 The implication sought by Mr and Mrs Cassimatis is very large. And it is substantially at variance with the language used by the legislature in a provision which, although adapted from the equitable duty, created public sanctions for contravention.

Inconsistency of the submission with the history and context of s 180(1) 503 As I have explained in the section of these reasons concerning the history and nature of directors' duties, since at least 1958 there has been a public interest in the enforcement of directors' duties. Even assuming that the duties are owed only to the company, the duties of care and diligence that directors owe have not, since 1958, been capable of being characterised as the subject of purely private enforcement. This is one reason why shareholders cannot ratify a breach of the public aspect of s 180(1). It must also be a reason why that aspect of the duty cannot be authorised (or deprived of content) merely because shareholders, even of a solvent company, acquiesce in the actions of the directors.

The submission is unprincipled 504 In Australia, an action for the tort of negligence can succeed even where the conduct of the defendant was intentional: Williams v Milotin [1957] HCA 83; (1957) 97 CLR 465, 474 (the Court); Wilson v Horne [1999] TASSC 33; (1999) 8 Tas R 363; Gray v Motor Accident Commission [1998] HCA 70; (1998) 196 CLR 1, 9-10 [22] (Gleeson CJ, McHugh, Gummow, and Hayne JJ), 28 [85] (Kirby J); Croucher v Cachia [2016] NSWCA 132 [22], [26] (Leeming JA); Handford P, "Intentional Negligence: A Contradiction in Terms?" (2010) 32(1) Syd LR 29. 505 As a matter of principle this conclusion must be correct. A duty to take care does not discriminate between intended and unintended acts or consequences. A person can fail to exercise care by acts and consequences which are intended or unintended. The same conclusion must also apply to s 180(1) which, as I have explained, was based upon general law notions of a duty of care and diligence. Indeed, in The Charitable Corporation v Sutton the five intentional fraudster directors were liable for the corporation's losses, and other directors were also liable for gross negligence, including those who intentionally renewed pledges knowing that they had not been discharged. 506 If Mr and Mrs Cassimatis' submission were accepted, it would mean that directors could act in a manner which was intended, and known, to be in serious breach of the Corporations Act yet not be in breach of their duty of care and diligence for so long as they are the sole shareholders and the company is solvent. That proposition cannot be correct. As Keane CJ said in Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364, 427 [198], "[i]t is not an intention lightly to be attributed to the legislature that a director of a company might lawfully decide, as a matter of business judgment, that a corporation under his or her direction should not comply with a requirement of the Act".

The submission is not supported by authority 507 Senior counsel for Mr and Mrs Cassimatis submitted that in a solvent company the directors' obligations to act in the interests of the company "may be equated" to an obligation to act in the interests of the shareholders as a whole. For this proposition, senior counsel relied upon the decision of Street CJ in Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722, 730 and its citation with approval by Gummow and Hayne JJ in Angas Law Services v Carabelas, 532 [67] (emphasis added): In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration. 508 If the italicised part of the quote from Street CJ were taken to be a reference to the statutory duty in s 180(1) then it would now be incorrect. It is well established that shareholders cannot, as a general body, authorise or ratify a breach of statutory duty by the directors. It is, therefore, necessary to explain the context in which that statement was made, and cited with approval. 509 In Kinsela the primary judge had made orders rescinding a lease of business premises that a company had granted to its two former directors. The primary judge found that the lease was granted at below market rental. The lease was granted just prior to the company being ordered to be wound up in insolvency. Two grounds upon which the liquidator alleged that the lease should be avoided was that it was not granted in the best interests of the company as a whole and that it was granted in breach of fiduciary duty. Importantly, the liquidator relied on principles of equity in both claims (Russell Kinsela Pty Ltd (In liq) v Kinsela [1983] 2 NSWLR 452, 458-462 (Powell J)). The former directors sought to meet this claim by submitting that the lease was granted with the unanimous knowledge and approval of all of the shareholders. The primary judge accepted, with serious reservations, that if the lease were authorised by all of the shareholders after full disclosure to them, then the directors could not have exercised their powers otherwise than for the benefit of the company as a whole. But he concluded that one shareholder had not been fully informed. 510 On appeal, the Court of Appeal considered the authorities by which the primary judge had considered himself bound to conclude that full disclosure and consent of shareholders would have "validated an action which would otherwise be beyond the powers of the directors" (729). The Chief Justice (with whom Hope and McHugh JJA agreed) explained that the "generality of their enunciations of principle, were not intended to, and do not, apply in a situation in which the interests of the company as a whole involve the rights of creditors as distinct from the rights of shareholders" (729-730). It was immediately after this discussion that the Chief Justice set out the passage above upon which Mr and Mrs Cassimatis rely. 511 Two important points of context should be made about the decision in Kinsela. Both of those points show that the decision on appeal cannot be applied directly to s 180(1) as Mr and Mrs Cassimatis submit. 512 First, the case was concerned only with duties owed at general law, in equity. The liquidator's claims were not based on any predecessor provision to s 180(1). As I have explained above, s 180(1) and its predecessors since 1958 introduced a dual public and private wrong for a breach of directors' duties. 513 Secondly, the comment by Street CJ about the interests of the shareholders entitling them to be regarded as the company was made in the context of contrasting the interests of a solvent company and those of an insolvent or near-insolvent company. The point being made was that the rights of creditors could not preclude the ratification of conduct which would otherwise be a breach of duty by a director. The narrow compass of this point was made clear at 732 where Street CJ said (emphasis added): It is, to my mind, legally and logically acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach in prospect or ratify it in retrospect. 514 The Court of Appeal did not purport to consider any circumstance where any interest other than the proprietary interests of the shareholders and the interests of creditors was involved. The point being made was simply that where the interests of the corporation were coincident with only the interests of the shareholders then it was plainly acceptable for the shareholders to authorise or ratify any breach. 515 The same point was made in Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1, 534 [4393]. There, Owen J said that whether the general body of shareholders is the embodiment of "the company as a whole" will "depend on the context, including the type of company and the nature of the impugned activity or decision". He went on to explain that this was the sense in which he understood the statement by Street CJ in Kinsela: In my view the interests of shareholders and the interests of the company may be seen as correlative not because the shareholders are the company but, rather, because the interests of the company and the interests of the shareholders intersect. 516 The words chosen by Owen J are important. The interests of shareholders "may" be correlative because those interests "intersect". The interests are not necessarily identical. Much will depend on context. Indeed, Owen J also referred to the decision of Barwick CJ in Ashburton Oil NL v Alpha Minerals NL [1971] HCA 5; (1971) 123 CLR 614, 620 who had said that the interests of the company and of the majority shareholders might not "happen to be identical". At 534 [4395], Owen J continued: It is, in my view, incorrect to read the phrases "acting in the best interests of the company" and "acting in the best interests of the shareholders" as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored. 517 This statement was not the subject of critical comment on the appeal (Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1). It was adopted by Almond J in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2013] VSC 543 at [26]-[27] (not considered on appeal in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9; (2015) 318 ALR 302). 518 At 534 [4394] Justice Owen also adopted remarks by Heydon JD, "Directors' Duties and the Company's Interests" in Finn PD (ed), Equity and Commercial Relationships (Law Book Company, Sydney, 1987) 134-135 (and see also McPherson BH, "Duties of Directors and the Powers of Shareholders" (1977) 51 ALJ 460, 468-469): The duty which is owed to the company is not to be limited to, or to be regarded as operating alongside, a duty to advance the interests of shareholders. There is no superadded duty to shareholders … And the directors' duty to the company is not to be limited to the duty to consider shareholders... 519 Again, in Singer v Beckett sub nom Re Continental Assurance Co of London Plc (No 4) [2007] 2 BCLC 287, Park J observed (at 294) that directors' duties are "owed to the company, not to its shareholders or creditors". 520 Contrary to the submissions of Mr and Mrs Cassimatis, this context, and these two aspects of the decision in Kinsela, were not overlooked by Gummow and Hayne JJ in Angas Law Services v Carabelas when their Honours quoted from Street CJ. Indeed, their Honours had been two of the members of a joint judgment in Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, 178-179 who had said (together with McHugh and Callinan JJ): It may be readily accepted that directors and other officers of a company must act in the interests of the company as a whole and that this will usually require those persons to have close regard to how their actions will affect shareholders. It may also be readily accepted that shareholders, as a group, can be said to own the company. But the company is a separate legal entity and the question ... is what damage (if any) did it suffer... The question is not whether the shareholders... were adversely affected… 521 The decision in Angas Law Services v Carabelas concerned an action by the liquidator of Angas Law Services against the former directors, Mr and Mrs Carabelas. They were also the only shareholders. The claim brought by the liquidator was for compensation to be paid to the company for alleged breaches of s 229(2) and s 229(4) of the South Australian enactment of the Uniform Companies Codes (Companies (South Australia) Code 1961 (SA)). The breaches were said to have arisen by a course of conduct involving two transactions. The High Court held that the alleged damage would only have arisen based upon a novation which did not occur. 522 The context in which Gummow and Hayne JJ quoted the passage from Street CJ was in response to a submission by the liquidator that "any act of 'appropriation' [of company assets] caused by an officer of the corporation is a breach of the standard of propriety required by s 229(4) of the [Uniform Companies Codes which concerned improper use of an officer's position]" (see 532 [66]). Their Honours rejected that submission because it was based upon a standard of conduct that was too "inflexible". The context in which their Honours quoted from Street CJ in Kinsela was therefore to express that there may be circumstances in which an appropriation of assets by an officer will not breach provisions concerning impropriety. Their Honours did not suggest that in a solvent company a director could never breach the duty of care and diligence in s 229(2). Nor did their Honours suggest that the remarks in Kinsela applied automatically to allegations of breach of statutory duty. Indeed, at [43], their Honours expressed agreement with the reasons of Gleeson CJ and Heydon J who had said (at 523 [32]): The shareholders of a company cannot release directors from the statutory duties imposed by sub-s (2) or sub-s (4) of s 229. In a particular case, their acquiescence in a course of conduct might affect the practical content of those duties. 523 In other words, the interests of the corporation includes the interests of the shareholders. Hence, where the shareholders acquiesce to a course of conduct then that acquiescence might affect the practical content of the duty. But the acquiescence does not eliminate or relieve the duty where there are other relevant interests of the corporation apart from the interests of the shareholders. 524 Finally, in the Maxwell decision, upon which Mr and Mrs Cassimatis placed considerable emphasis, Brereton J referred to the decision in Angas Law Services v Carabelas and explained (at 398 [103]) that shareholder acquiescence in a course of conduct can affect the practical content of those duties, saying that: where there is an identity of interest between the directors and the shareholders, so that in effect the directors are the shareholders, the requirement to prevent self-interested dealing, constrain management and strengthen shareholder control - which is [a] fundamental purpose and rationale of these duties - is much less acute. That is a circumstance which can impact considerably on the content of the duties. 525 Again, the content of a duty of care and diligence can be considerably affected by shareholder consent because the interests of the shareholders will often be satisfied. But, to reiterate at the risk of undue repetition, the interests of the corporation are not always entirely coincident with the interests of the shareholders.

The submission that s 180 cannot be used to create "back door" accessory liability 526 Mr and Mrs Cassimatis submitted, in some detail, that s 180 "cannot be used to create liability in directors merely because their companies have contravened other provisions of the [Corporations Act]" ([553]). That submission should be accepted. It must be emphasised, however, that this case is concerned only with liability under the Corporations Act. As J D Heydon recently wrote, it is an open question whether the statutory regime for accessorial liability means that equity should abstain from interfering on any basis which differs from the statutory one: Heydon JD, "Equity and Statute" in Turner PG (ed), Equity and Administration (Cambridge University Press, Cambridge, 2016) 211, 220-221. 527 Accessory liability is recognised in s 79 of the Corporations Act which provides that "a person is involved in a contravention if, and only if, the person": (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention. The considerations that arise in s 180(1) are quite different. That section does not require any contravention, or threatened contravention, by the corporation. It is concerned with whether an officer exercised the degree of care and diligence of the reasonable person (as described) in the exercise of the officer's powers and discharge of his or her duties. Contraventions, or risk of contraventions, by the corporation are circumstances to be taken into account in that assessment. They are not the only circumstances. And they are not conditions for liability. 528 This point was never seriously in dispute. As ASIC submitted, "there is no issue of 'accessorial liability'. The cases all concern circumstances in which the directors are primarily liable for a breach of s 180, which imposes duties upon them" ([63], emphasis in original). As Beach J said in Australian Securities and Investments Commission v Mariner Corporation Limited, 174 [447], it "is wrong to assert that if a director causes a company to contravene a provision of the Act, then necessarily the director has contravened s 180". 529 The reason why this issue arose was because at various points in their submissions, ASIC referred to the duty of directors to "ensure that the corporation meets its statutory obligations". This phrase, taken from the Supreme Court of Canada in relation to a statutory provision with a critical difference, is both misleading and inaccurate in Australia. A duty to "ensure" compliance is a duty of strict liability. Any failure of compliance by the corporation will lead to liability for the director. The duty in s 180(1) of the Corporations Act is not a duty of strict liability. Nor is it a duty which requires the director to take every possible step to avoid a foreseeable risk of contravention of legislation. 530 The steps which a reasonable director (in the terms of s 180(1)) must take will always depend on all of the corporation's circumstances. An assessment of whether a breach by a particular director has been committed will depend on the response of a reasonable person who is a director of a corporation in those circumstances with the same responsibilities within the corporation as the director. Each case should be assessed on its own facts. It is unnecessary to consider here whether it could ever be a reasonable response for an officer intentionally and knowingly to cause the corporation to breach the law. That issue does not arise in this case. 531 Finally, this submission by ASIC has no real support in the Canadian Supreme Court decision which ASIC cited. That decision which referred to a "duty to ensure" compliance was BCE Inc v 1976 Debentureholders [2008] 3 SCR 560. Section 122(1)(b) of the Canada Business Corporations Act (1977) provides that "every director and officer of a corporation in exercising their powers and discharging their duties shall … exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances". The joint judgment of the Court explained at 584 [38]: The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation. 532 Such a principle of directors "ensuring" that the corporation complies with its statutory obligations cannot even be considered of persuasive force in this case for three reasons. First, even in Canada it might be doubted whether the Supreme Court's reference to a director being obliged to "ensure" that the corporation meets its statutory obligation would be interpreted literally so that liability is imposed on directors whenever the corporation did not meet its statutory obligations. Secondly, the statement was made in relation to the "fiduciary duty" in s 122(1)(a) not the "care, diligence and skill" duty in s 122(1)(b). The section with which the Supreme Court was concerned was s 122(1)(a), a statutory duty to "act honestly and in good faith with a view to the best interests of the corporation" (see 583-584 [36]-[37]). Thirdly, the Canadian legislation was being interpreted in light of s 122(2) which provides that "Every director and officer of a corporation shall comply with this Act, the regulations, articles, by-laws and any unanimous shareholder agreement." There is no Australian counterpart to that subsection.

The Maxwell decision 533 The principal decision relied upon by Mr and Mrs Cassimatis was Maxwell. Mr and Mrs Cassimatis relied heavily on that case for five propositions. There was substantial dispute between them and ASIC about the scope and effect of that decision. It is necessary to explain why the decision in Maxwell is not a binding authority for any of the five propositions before assessing each of those propositions. 534 In Maxwell, ASIC sought orders against individual directors including declarations that they had contravened various provisions of the Corporations Act. All but one defendant consented to the proposed orders. The exception was Mr Nahed. Although Mr Nahed did not consent, he did not appear at the trial. The issues discussed in the reasons of the primary judge were therefore not the subject of any submissions by a contradictor. Some of the propositions adopted by the primary judge were assumed to be correct in the absence of any argument to the contrary. In CSR Ltd v Eddy [2005] HCA 64; (2005) 226 CLR 1, 11 [13], Gleeson CJ, Gummow and Heydon JJ said that "where a proposition of law is incorporated into the reasoning of a particular court, that proposition, even if it forms part of the ratio decidendi, is not binding on later courts if the particular court merely assumed its correctness without argument". See also Cross R and Harris J, Precedent in English Law (4th ed, Clarendon Press, Oxford, 1991) 158-161. 535 The primary judge in Maxwell found that Mr Nahed was a director of a company which had breached a variety of different duties. Mr Nahed was liable to be disqualified under s 206E(1)(a)(i) of the Corporations Act due to the contraventions by the company. However, allegations of contraventions by Mr Nahed were unsuccessful. In relation to alleged contraventions of s 727 and s 734 of the Corporations Act, the primary judge held that accessory liability provisions were unavailable. In relation to alleged contraventions of s 911A or s 911B of the Corporations Act, the primary judge held that Mr Nahed was not in the business of providing and did not provide a financial service. The primary judge also found that Mr Nahed had not committed the alleged contraventions of s 180(1). However, the primary judge accepted the admissions by other directors that they had breached their duties under s 180(1) by allowing the corporation to contravene the provisions of the Corporations Act where such contravention was likely to result in jeopardy to the interests of the corporation (409 [144]). In this context, Mr and Mrs Cassimatis relied on Maxwell for five propositions. 536 First, that any contravention of s 180 "must be founded on jeopardy to the interests of the corporation": 399-400 [105]. Mr and Mrs Cassimatis' submissions rely on this proposition being reaffirmed in Australian Securities and Investments Commission v Citrofresh International Ltd (No 2) [2010] FCA 27; (2010) 77 ACSR 69, 80 [51] (Goldberg J); Australian Securities & Investments Commission v Fortescue Metals Group Ltd (No 5) [2009] FCA 1586; (2009) 264 ALR 201, 378-379 [897] (Gilmour J); Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224; (2008) 69 ACSR 1, 16 [50] (Hamilton J); Australian Securities and Investments Commission v Warrenmang Limited [2007] FCA 973; (2007) 63 ACSR 623, 630 [27] (Gordon J); Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 [1477] (Ward J); and Australian Securities and Investments Commission v Mariner Corporation Limited, 173 [444] (Beach J). 537 In none of these cases was there any submission, or any issue, about the meaning of the expression "jeopardy to the interests of the corporation". That expression appears to have been used as a shorthand way of explaining that when a court considers the duty of care and diligence it must do so in light of the interests of the corporation. Proceeding on the assumption, as I do in this case, that s 180(1) is concerned only with the interests of the corporation, then if the interests of the corporation are not threatened, nor the subject of any potential prejudice, there cannot be any breach. In other words, where the interests of the corporation are not in "jeopardy" in this sense then there cannot be a breach. An act which does not foreseeably harm any of the interests of the corporation cannot be a breach of a duty of care and diligence to the corporation. 538 It is clear that this is the manner in which the expression "jeopardy to the interests of the corporation" is used in many, if not all, of the cases cited above. However, if the concept of a "jeopardy to the interests of the corporation" were to mean anything more than this then it would involve adding additional restrictions to s 180(1) which are not present in the text, and which are not required by the history or context of the provision. 539 The statement in Maxwell also should not be taken out of context. The reference by Brereton J at 399-400 [105] to "jeopardy to the interests of the corporation" was a reference back to his Honour's use of this expression at 399 [104] where he explained that although s 180(1) does not impose a general obligation upon directors to conduct the corporation in accordance with law generally or the Corporations Act, [t]here are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. 540 As I have explained, and as Brereton J recognises in this passage, the interests of the corporation include its compliance with the law. The "relevant" jeopardy is the threat of damage to the interests of the corporation which include the risks of exposure to sanctions from breach of the law. The qualification at the end of the paragraph is important. The reference to "at least" includes the obvious cases of contravention. At the other extreme, there are cases which can be easily excluded. For example, conduct by a director which subsequently causes a corporation to breach the law will not be a breach of a duty of care and diligence merely because it causes the corporation to breach the law if, at the time, no reasonable person holding the director's office with the director's responsibilities, acting reasonably, could ever have foreseen that the conduct would cause the corporation to breach the law. 541 Secondly, and thirdly, Mr and Mrs Cassimatis rely upon Maxwell for the propositions that (i) s 180(1) is not a duty owed in the abstract, but is owed to the corporation, and (ii) it is necessary to consider "whether the risks obviously outweighed any potential countervailing benefits": 399 [104], 402 [110]-[111]. Hence, they also rely on Maxwell for the proposition that that there can be no breach of s 180(1) unless (398 [102]): if it was reasonably foreseeable that the relevant conduct might harm the interests of the company - which means the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company… 542 As I have explained, I proceed on the basis that the duty is owed only to the corporation. Nevertheless, this does not mean that the "harm" to the interests of the company is necessarily limited to financial harm. 543 Fourthly and fifthly, Mr and Mrs Cassimatis rely on Maxwell for the propositions that (i) s 180 does not oblige directors "to conduct the affairs of the company in accordance with law generally or the Corporations Act in particular": 399 [104] and (ii) that s 180 does not provide "a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made": 402 [110]. For the reasons explained above, those propositions should be accepted.

The elements which must be proved for a civil contravention of s 945A

The concepts used in s 945A 544 A "financial product" includes "a facility through which, or through the acquisition of which, a person makes a financial investment" (s 763A(1)(a)). One instance where a person provides a financial service is where the person provides financial product advice (s 766A(1)(a)). 545 The reference to "financial product advice" was defined at the relevant time in s 766B(1): 766B Meaning of financial product advice (1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence. 546 One type of financial product advice is "personal advice". The term "personal advice" was defined in s 766B(3) of the Corporations Act (which is also in Chapter 7) as follows: (3) For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where: (a) the provider of the advice has considered one or more of the person's objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or (b) a reasonable person might expect the provider to have considered one or more of those matters. 547 Section 766B(4) provides that "general advice" is financial product advice that is not personal advice. 548 Section 944A of the Corporations Act (in Division 3 of Part 7.7 in Chapter 7) provides that Division 3 applies to personal advice in the following circumstances: 944A Situation in which Division applies This Division applies in relation to the provision of personal advice (the advice) in the following circumstances: (a) the advice is provided: (i) by a financial services licensee (the providing entity); or (ii) by a person (the providing entity) in their capacity as authorised representative of a financial services licensee (the authorising licensee), or of 2 or more financial services licensees (the authorising licensees); and (b) the advice is provided to a person (the client) as a retail client.

Section 945A 549 Section 945A of the Corporations Act was added in 2001 and repealed in 2012. During the time that it was in force it was not amended. It appeared in Division 3 of Part 7.7 in Chapter 7. Section 945A made provision in relation to "advice": 945A Requirement to have a reasonable basis for the advice (1) The providing entity must only provide the advice to the client if: (a) the providing entity: (i) determines the relevant personal circumstances in relation to giving the advice; and (ii) makes reasonable inquiries in relation to those personal circumstances; and (b) having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and (c) the advice is appropriate to the client, having regard to that consideration and investigation. (2) In any proceedings against an authorised representative of a financial services licensee for an offence based on subsection (1), it is a defence if: (a) the licensee had provided the authorised representative with information or instructions about the requirements to be complied with in relation to the giving of personal advice; and (b) the representative's failure to comply with subsection (1) occurred because the representative was acting in reliance on that information or those instructions; and (c) the representative's reliance on that information or those instructions was reasonable. 550 The effect of the sequence of provisions discussed in the previous section is that "advice" in s 945A means "personal advice", which is a type of "financial product advice". "Financial product advice" includes a recommendation or statement of opinion intended to influence a person or persons in making a decision "in relation to" a particular financial product. 551 Section 945A(1) contains three limbs in respect of financial product advice (the advice). The providing entity must only provide advice if all limbs are satisfied. ASIC's case alleged that both of the second limb (s 945A(1)(b)) and the third limb (s 945A(1)(c)) were not satisfied. It is sufficient for ASIC to establish a contravention by Storm if it establishes that only one limb was not satisfied. ASIC does not allege a failure to satisfy the first limb (s 945A(1)(a)).

The elements which must be proved for a criminal contravention of s 945A

The interaction between s 945A and the Criminal Code 1995 (Cth) 552 A failure to comply with s 945A is both a civil contravention and a criminal offence (see s 1311 of the Corporations Act). Section 1308A of the Corporations Act provides that, subject to the Corporations Act, Chapter 2 of the Criminal Code applies to all offences against the Corporations Act. 553 Chapter 2 of the Criminal Code is entitled "General Principles of Criminal Responsibility". It provides in s 2.1 that its purpose is to "codify the general principles of criminal responsibility under laws of the Commonwealth". It purports to contain all the general principles of criminal responsibility that apply to any offence, irrespective of how the offence is created. Sections 3.1 and 3.2 of Chapter 2 then provide for a scheme involving a division between physical elements and fault elements of an offence generally reflecting the approach of Dixon CJ in Vallance v The Queen [1961] HCA 42; (1961) 108 CLR 56, 59-60 and Brennan J in He Kaw Teh v The Queen [1985] HCA 43; (1985) 157 CLR 523, 564-566: 3.1 Elements (1) An offence consists of physical elements and fault elements. (2) However, the law that creates the offence may provide that there is no fault element for one or more physical elements. (3) The law that creates the offence may provide different fault elements for different physical elements. 3.2 Establishing guilt in respect of offences In order for a person to be found guilty of committing an offence the following must be proved: (a) the existence of such physical elements as are, under the law creating the offence, relevant to establishing guilt; (b) in respect of each such physical element for which a fault element is required, one of the fault elements for the physical element. 554 If no fault element is provided for a physical element that consists only of conduct, intention is the fault element for that physical element (Criminal Code s 5.6(1)). If no fault element is provided for a physical element that consists of a circumstance or a result, recklessness is the fault element for that physical element (s 5.6(2)) which can be proved by proof of intention, knowledge or recklessness (s 5.4(4)). 555 Division 4 of Chapter 2 of the Criminal Code is concerned with physical elements. It includes the following: 4.1 Physical elements (1) A physical element of an offence may be: (a) conduct; or (b) a result of conduct; or (c) a circumstance in which conduct, or a result of conduct, occurs. (2) In this Code: conduct means an act, an omission to perform an act or a state of affairs. engage in conduct means: (a) do an act; or (b) omit to perform an act. 556 Divisions 5 and 6 are concerned with fault elements. They include the following: 5.1 Fault elements (1) A fault element for a particular physical element may be intention, knowledge, recklessness or negligence. (2) Subsection (1) does not prevent a law that creates a particular offence from specifying other fault elements for a physical element of that offence. 5.2 Intention (1) A person has intention with respect to conduct if he or she means to engage in that conduct (2) A person has intention with respect to a circumstance if he or she believes that it exists or will exist. (3) A person has intention with respect to a result if he or she means to bring it about or is aware that it will occur in the ordinary course of events. 5.3 Knowledge A person has knowledge of a circumstance or a result if he or she is aware that it exists or will exist in the ordinary course of events. 5.4 Recklessness (1) A person is reckless with respect to a circumstance if: (a) he or she is aware of a substantial risk that the circumstance exists or will exist; and (b) having regard to the circumstances known to him or her, it is unjustifiable to take the risk. (2) A person is reckless with respect to a result if: (a) he or she is aware of a substantial risk that the result will occur; and (b) having regard to the circumstances known to him or her, it is unjustifiable to take the risk. (3) The question whether taking a risk is unjustifiable is one of fact. (4) If recklessness is a fault element for a physical element of an offence, proof of intention, knowledge or recklessness will satisfy that fault element.

Characterising the elements of an offence under s 945A(1)(b) 557 In this case, it was common ground that the elements of an offence under s 945A(1)(b) at the relevant times were: (1) a providing entity (element 1); (2) provides advice (element 2); (3) to a retail client (element 3); (4) without giving reasonable consideration to the subject matter of the advice (element 4); or (5) without conducting reasonable investigations of the subject matter of the advice (element 5). 558 Elements 1 and 3 are physical elements because they are circumstances. Element 2 is a physical element because it is conduct. However, ASIC submitted that elements 4 and 5 are fault elements. 559 It is not a textual strain to treat as "conduct" the elements of (i) failing to give reasonable consideration to, and (ii) failing to conduct reasonable investigations of, the subject matter of the advice. Both of these elements 4 and 5 involve omitting to do an act in a required manner. There is no necessary tension with a fault element of intention in relation to elements 4 and 5 by reason of s 5.6(1). A person can "mean to" provide advice without giving reasonable consideration or conducting reasonable investigations of the subject matter. A simple example would be the provision of advice where the provider knows that he or she has only given perfunctory consideration to the subject matter. 560 There are also strong contextual indications that elements 4 and 5 are physical elements and are not fault elements. One contextual indication is the express provision of fault elements or strict liability for the respective physical element in other sections in Chapter 2 of the Corporations Act: see ss 916F, 952E, 952G, 1021FA, 1021FB, 1021NB, 1021NC (strict liability provisions), 1041B (intention and recklessness), and 1041E (recklessness, knowledge and reasonably ought to know). The absence of any express provision in s 945A(1)(b) is an indication that the elements were physical. 561 A second contextual indicator that elements 4 and 5 are physical elements (so that there is no fault element provided in s 945A(1)(b)) is that the proper characterisation of s 945A(1)(c) is that there is no fault element provided in that subsection. 562 It would be a surprising construction for s 945A(1)(b) to be construed as providing a fault element but s 945A(1)(c) not to do so, given the overlap of their respective subject matter. Indeed, such a conclusion would lead to an incongruity between the degree of fault that ultimately arises in the s 945A(1)(c) offence (intention or recklessness) and the degree of fault that would ultimately arise in the s 945A(1)(b) offence (unreasonableness). 563 The reason why the offence in s 945A(1)(c) requires intention and possibly recklessness is because the result of the provision of inappropriate advice, or the conduct of "providing advice which is not appropriate" does not, by itself, import fault. An adviser might provide inappropriate advice for reasons which do not involve any fault. Therefore, s 5.6(1) or s 5.6(2) of the Criminal Code requires either intention (if the provision of the inappropriate advice is characterised as conduct) or recklessness (if characterised as a result) as the fault element for the provision of inappropriate advice. In closing submissions (at [34], [466]) ASIC conceded that no standard of fault was provided in s 945A(1)(c) with the element of the provision of "inappropriate" advice. 564 These matters of text and context which point to a construction of elements 4 and 5 as physical elements which means that the fault element is the requirement of intention for a contravention of s 945A(1)(b). Against this, ASIC relied upon the decision of the New South Wales Court of Criminal Appeal in R v Lee [2007] NSWCCA 71; (2007) 71 NSWLR 120. In that case, the New South Wales Court of Criminal Appeal considered the mental element for an offence under s 31(1) of the Financial Transaction Reports Act 1988 (Cth). That section broadly provided that it was an offence if a person was a party to two or more non-reportable cash transactions and, having regard to various matters, it would be reasonable to conclude that the person conducted the transactions in that manner or form for the sole or dominant purpose of ensuring, or attempting to ensure, that the currency involved in the transactions was transferred in a manner and form that: (iii) would not give rise to a significant cash transaction; or (iv) would give rise to exempt cash transactions. 565 The New South Wales Court of Criminal Appeal held that the physical element in (iv) was a "result of conduct" (see 122 [4] (Spigelman CJ), 138-139 [84] (Bell, Howie and Buddin JJ), and 134-135 [67] (Sully J)). A majority of the court held that the fault element for that result was prescribed in s 31(1) as the requirement of the "sole or dominant purpose". As Spigelman CJ explained, the words "sole or dominant purpose" could be either a fault element or a physical element (as an integral part of (iv) or as a "circumstance"). At 122-123 [9], Spigelman CJ said: The word "circumstance", referring to an aspect of either "conduct" or the "result of conduct", within the meaning of s 4.1(1)(c) of the Code, is capable of extending to virtually any word of the English language in which an offence is expressed. Nevertheless, the structure of the Code distinguishes between "physical elements" and "fault elements". Where a matter clearly involves an aspect of conduct which, in normal parlance, would be understood to involve fault on the part of the alleged perpetrator of an offence then, in my opinion, the matter should be classified as a "fault element", rather than be swept up within the breadth of the word "circumstance", as a physical element. 566 ASIC relied on this remark by Spigelman CJ. However, with respect, the Chief Justice could not have been suggesting that a fault element would always be identified by reference to the clear use in normal parlance. Although the normal use of words is relevant, the process remains one of statutory interpretation. In this case, the statutes to be interpreted are the Corporations Act and the Criminal Code. The textual and contextual elements point towards a characterisation of elements 4 and 5 as physical elements, namely conduct. This means that a criminal breach of s 945A(1)(b) requires proof of intention.

No criminal offence by Storm was proved 567 ASIC conceded that it had not proved intention or recklessness. In the absence of any evidence from Mr or Mrs Cassimatis, and in the absence of any evidence from which an inference of intention or recklessness by any Storm adviser or employee could be drawn, I accept this concession. Since intention or, at least, recklessness is a requirement for proof of an offence under s 945A(1)(b) or s 945A(1)(c), it follows that ASIC's case involving an allegation of criminal breaches of s 945A(1)(b) or s 945A(1)(c) must fail.

Which investors were retail clients? 568 Section 945A only applied to advice "provided to a person (the client) as a retail client": s 944A(b). 569 For present purposes, s 761G relevantly provides that a person is a "retail client" unless the person is a "sophisticated investor" under s 761GA, or unless an exception in s 761G applies. ASIC relied on s 761G(7). In this case, s 761G(7) has the effect that a financial product or financial service "is provided to the person as a retail client" unless an exception applies. The exception relied upon by Mr and Mrs Cassimatis was s 761G(7)(a). 570 Section 761G(7)(a) provides: the price for the provision of the financial product, or the value of the financial product to which the financial service relates, equals or exceeds the amount specified in regulations made for the purposes of this paragraph as being applicable in the circumstances (but see also subsection (10))… 571 Section 761G(10) provides that: In addition to specifying an amount or amounts for the purposes of paragraph (7)(a), the regulations may do either or both of the following: (a) deal with how a price or value referred to in that paragraph is to be calculated, either generally or in relation to a specified class of financial products; (b) modify the way in which that paragraph applies in particular circumstances. 572 Regulation 7.1.18 of the Corporations Regulations 2001 (Cth) specifies the price relevant to s 761G(7)(a) as $500,000. Further, reg 7.1.18(3) provides as follows: For paragraph 761G(10)(a) of the Act, the price of an investment-based financial product: (a) is the amount that is paid or payable to acquire or purchase the investment-based financial product; … 573 The reference to the amount that is "paid or payable" is a description of how to calculate the "price" for the provision of the financial product referred to in s 761G(7)(a). The reference to "payable to acquire" must therefore be to the amount that would be payable as the price rather than to a legal liability to pay. As the marginal note to the "price" regulation provides, the "price for the provision of the financial product" is generally the amount that is actually paid for the acquisition or the amount which is payable. That will be determined "at or before the time the client acquires, or is issued with, the financial product": reg 7.1.18(1) note 1; reg 7.1.19(1), note 1; Acts Interpretation Act 1901 (Cth) s 13. 574 The other element of s 761G(7)(a) is the "value" of the financial product to which the financial service relates, other than "a debenture, stock or bond issued or proposed to be issued by a government" (s 764A(1)(j)). That value is "the amount of money that stands to the client's credit in relation to that investment-based financial product": reg 7.1.19(3)(b). Regulation 7.1.19 specifies the value relevant to s 761G(7)(a) as having the same limit of $500,000. At the time that the SOAs or the Financial Services Guides were provided to the investors, there was no money standing to their credit. The focus for s 761G(7)(a) in this case must be on the amount that is paid or payable for the acquisition of the financial product. 575 Mr and Mrs Cassimatis submitted that some of the investors were not "retail clients" for four reasons: (1) Mr and Mrs Cassimatis submitted that the correct test was to ask whether the price for the investment which was advised exceeded $500,000 not whether the actual investment made exceeded $500,000. The investors who fall within a disputed category where the amount advised was more than $500,000 are Mr Bleakley, Ms Longmore, Ms Roberts, and Mr and Mrs Sondergeld; (2) Mr and Mrs Cassimatis also submit that in the case of SOAAs, the financial products to which the financial service of advice relates were both the amount of the advice in the SOA and the amount of the advice in the SOAA; (3) Mr and Mrs Cassimatis submitted that the investments made by husband and wife investors were made jointly so the husband and wife should be aggregated and treated as a single investor. If the aggregation had the effect that the investment exceeded $500,000 then the aggregated investor was not a retail investor. The investors who fall within this disputed category are Mr and Mrs Hainsworth, Mr and Mrs Herd, Mr and Mrs Johnson, Mr and Mrs Sondergeld, Mr and Mrs Walker, and Mr and Mrs Williams; and (4) Mr and Mrs Cassimatis also submitted that the investments made by husband and wife investors were made jointly so the amount invested by the husband and wife should be aggregated and treated as a single investment. If that aggregation had the effect that the investment exceeded $500,000 then each of the husband and wife was not a retail investor. The investors who fall within this disputed category are Mr and Mrs Hainsworth, Mr and Mrs Herd, Mr and Mrs Johnson, Mr and Mrs Sondergeld, Mr and Mrs Walker, and Mr and Mrs Williams.

Is the relevant amount for a retail client the amount advised or the amount actually invested? 576 In some cases, the investment which was advised was more than $500,000 although the actual investment made was less than $500,000. Mr and Mrs Cassimatis submitted that the relevant amount is the amount advised. ASIC submitted that it is the amount invested. This dispute applies to Mr Bleakley, Ms Longmore, Ms Roberts, and Mr and Mrs Sondergeld. 577 The short answer to this issue is that whether a person is a retail investor can vary from time to time. But for the purpose of assessing whether advice contravened s 945A, the relevant time is the time when the advice was given. Regulation 7.1.19(8) provides: If a financial services provider needs to assess the status of a client as either retail or wholesale at a particular time in order to ensure that the client complies with the Act, or for any related purpose, the value of a financial product may be assessed at any time, whether or not a financial service is being provided at that time in relation to that product. Note: Subregulation (8) will ensure that a provider of financial services may assess a client's status at any time (for example, the provider may need to ascertain whether a periodic statement must be sent to the client under section 1017D of the Act because the client is a retail client). 578 In relation to Mr Bleakley, on 21 March 2006 he was advised in his SOA to invest in index funds and cash management trust reserves in the amount of $635,000. That advice exceeded the $500,000 threshold. At the time of the provision of the advice, Mr Bleakley was therefore a wholesale investor. The advice was not "provided to [Mr Bleakley] as a retail client": s 944A(b). The advice did not become subject to s 945A when Mr Bleakley later invested less than $500,000 (ie $350,000). The advice had already been provided to Mr Bleakley as a wholesale client. 579 Again, in relation to Ms Longmore, on 25 March 2008, she was advised in her SOA to invest in index funds and cash management trust reserves in the amount of $556,000. That advice exceeded the $500,000 threshold. At the time of the provision of the advice, Ms Longmore was therefore a wholesale investor. The advice was not "provided to [Ms Longmore] as a retail client": s 944A(b). Again, the advice did not become subject to s 945A when Ms Longmore later invested less than $500,000 (ie $390,000). The advice had already been provided to Ms Longmore as a wholesale client. 580 Ms Roberts was in a different situation. She was advised on 26 May 2006 to invest $520,000 in index funds and cash management trust reserves. But, she subsequently became worried about borrowing 80% on her house. On 31 August 2006, the recommended investment was amended to $279,000. The letter of amendment said that the revised recommendations should be considered with the original SOA. On 31 August 2006, therefore, the amended SOA incorporated the original statement of advice and was issued to Ms Roberts as a retail investor. 581 As for Mr and Mrs Sondergeld, their initial SOA on 13 September 2006 recommended a total investment of index funds and cash management trust reserves of $1,010,000. At this time they were not retail investors because the amount payable for the acquisition of the financial product was more than $500,000 each. The cash management trust reserve amount which was actually acquired was $37,178 rather than the anticipated $85,000. However, ASIC did not submit that the SOA was subsequently amended. Mr and Mrs Sondergeld were not retail investors at the time of the SOA.

The "step" investments in the SOAAs 582 Mr and Mrs Cassimatis submitted that in the SOAAs, the financial products to which the financial service of advice related were both the amount of the advice in the SOA and the amount of the advice in the SOAA because (i) the SOAA referred to the original investment and the original SOA, and (ii) the SOAA described the investment as a "step". 583 Then the principal difficulty with this submission is that each of the SOA and the SOAA was a separate advice. It was submitted that the SOA was therefore given to those investors as wholesale investors where they had later invested a total of more than $500,000. If the submission of Mr and Mrs Cassimatis were correct then a person could be a retail investor but cease to be one after, say, a decade of investing when the total investment exceeded $500,000. Such a result is not required by the text of the regulations. Nor is it consistent with their purpose. 584 Mr and Mrs Cassimatis submitted that regs "7.1.18(5) and 7.1.19(5) show that the limit is determined by aggregating various financial products the subject of the advice" ([102(c)]). That submission is correct but it omits the crucial opening words of reg 7.1.19(5): "at a single point in time". The focus is upon the total investment at a single point in time. The same approach is taken in reg 7.1.17B. Again the focus is upon aggregation of amounts for a class of financial products provided "at or about the same time". The single point of time in this case is the time of the SOAs. 585 In oral submissions, senior counsel for Mr and Mrs Cassimatis properly conceded that a contravention in relation to a retail client at the date of an SOA did not "disappear" if a subsequent investment due to an SOAA meant that the client invested more than the $500,000 limit (ts 600). 586 Senior counsel for Mr and Mrs Cassimatis submitted instead that the additional amount in the SOAA should not be treated as independent of the SOA for the purpose of determining whether, at the time of the SOAA, the client was still a retail client. There is force to this submission, but it need not be determined in this case. ASIC did not allege any contravention of s 945A arising from any SOAA. Nor did ASIC plead or submit that the terms of an SOAA were such that they incorporated the terms of the original SOA. The contraventions of s 945A alleged by ASIC were therefore confined to the initial SOAs (including the time of an amended SOA such as in the case of Ms Roberts). That is the relevant time for assessing whether an investor is a retail or wholesale investor.

Can the investors be aggregated? 587 Mr and Mrs Cassimatis submitted that investors who were couples were given a single SOA, were advised to invest jointly, and were described as joint investors. They submitted that investors who were couples should be aggregated. 588 In Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2; (2015) 254 CLR 425, 441 [48], French CJ, Hayne, Bell and Gageler JJ explained that the maxims concerning the nature of a joint tenancy and statements by later writers that joint tenants are "considered by the law as one person for most purposes" cannot be taken as the premise for deductive reasoning about the effect of a joint tenancy. The focus must be on the text, context, and purpose of the statutory provision. 589 The words of s 761G militate against the submission by Mr and Mrs Cassimatis. On numerous occasions the section refers to "the person", "a person", "a retail client", or a "professional investor". On each occasion the reference to a person is in the singular. 590 The context of s 761G also militates against the submission by Mr and Mrs Cassimatis that the investors can be aggregated. For instance, even in circumstances, provided for in s 1012H, where a financial product is provided to a group of people, there remains a concern about each individual person. Hence, provision is made for circumstances in which a person who is able subsequently to elect to join the group to be subject to the limit of $500,000 which "is to be used to determine the status of each person who elects, or may elect, to be covered by the investment-based financial product" (emphasis added): regs 7.1.18(5) and 7.1.19(7). 591 The statutory purpose of s 761G also militates against the aggregation of two investors who will both suffer the consequences of a breach of the provisions which are concerned with protecting retail clients. That statutory purpose is concerned with the protection of vulnerable investors. The purpose of a distinction between "retail clients" and "wholesale clients" is that wholesale clients (such as those who purchase financial products for over $500,000) are treated as not requiring the same protection as retail clients because "it is recognised that wholesale clients do not require the same level of protection, as they are better informed and better able to assess the risks involved in financial transactions": see Explanatory Memorandum, Financial Services Reform Bill 2001 at 8 [2.27]. 592 Retail clients are afforded the following protections: (1) the right to receive a Financial Services Guide: Division 2 of Part 7.7; (2) the right to receive SOAs and for that advice to have a reasonable basis (where personal advice is given): Division 3 of Part 7.7; (3) the right to receive Product Disclosure Statements: Division 2 of Part 7.9; and (4) the right to compensation and complaint handling arrangements: Part 7.5; s 912A and s 1017G. 593 If a couple, each of whom would be a retail investor, invested jointly then there is twice the vulnerability or exposure to the lack of these protections. The submission by Mr and Mrs Cassimatis that the two investors should be aggregated runs contrary to both the words and the protective purpose of the provision. Indeed, if the submission by Mr and Mrs Cassimatis were correct there is no reason why it should not apply to any joint investment by retail investors, not merely for married investors, and not merely investments by only two persons. The protective purpose of the provision would be easily circumvented by encouraging aggregation of two or more single investors to be joint investors.

Is the total amount of the joint investment the amount invested by each investor? 594 Mr and Mrs Cassimatis also submitted that the investments made jointly by married clients should be aggregated. It appears that the advice from Storm to investors who were couples was typically that they should make a joint investment in the legal sense. In other words, the interest of each would continue as an entire interest upon survivorship, rather than an interest in common, in part. For instance, the advice in the SOA to Mr and Mrs Herd was in the following typical or standardised form on this point: During retirement or in situations where you and your partner are earning no or little other income, the tax benefits of the higher taxpayer owning all of the investment assets are reduced. In this case, joint ownership will give the greatest advantage since it facilitates income splitting, which enables you to use the tax free threshold and stepped marginal tax rates to reduce tax payable. 595 Their investment was then made in joint names. 596 In contrast with the submissions of Mr and Mrs Cassimatis, ASIC submitted that "where a couple has invested jointly (such that each individual owns a 50% share of the investment) then … the price or value of the financial products acquired is the price or value of each individual's 50% share in the relevant financial product" ([358]). The premise of ASIC's submission is incorrect. When a couple invests jointly, each person owns, and is entitled to, 100% of the investment unless the joint ownership is severed. Joint ownership is ownership of the entirety of the investment for each joint owner. 597 However, I do not accept the submission by Mr and Mrs Cassimatis that the amount of a joint investment should be aggregated. The "working out rule" in reg 7.1.18(3)(a) is concerned with the amount "that is paid or payable to acquire or purchase the investment-based financial product" (emphasis added). It is not the value to which each person might become (jointly) entitled. The SOAs did not contemplate any particular manner by which couples would pay for the financial products. In the absence of any evidence of alternative arrangements, the assumption must be an equal contribution from each.

Conclusions on which investors are retail investors 598 My conclusions on this issue are therefore that all of the Part E investors and all of the Schedule investors were retail clients except for Mr Bleakley, Ms Longmore, Mr and Mrs Sondergeld, Mr Jones and Mr McConnell. ASIC conceded that the latter two were not retail clients.

The first limb of s 945A(1): investigation into relevant personal circumstances 599 The first limb of s 945A(1) required that, prior to giving advice, the providing entity must (i) determine the relevant personal circumstances in relation to giving the advice; and (ii) make reasonable inquiries in relation to those personal circumstances. 600 As ASIC accepted in its closing submissions in reply (at [85]), it did not allege that Storm had contravened this limb. There was no contravention proved of s 945A(1)(a).

The second limb of s 945A(1): reasonable consideration and investigation of the subject matter of the advice 601 The second limb of s 945A(1) provided that a providing entity must only provide advice to a client if, having regard to information obtained from the client in relation to the client's personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances. 602 The parties dispute what constitutes the subject matter of the advice. They also dispute whether there was reasonable consideration and investigation of the advice's subject matter.

The subject matter of the advice 603 Mr and Mrs Cassimatis plead that the subject matter of the advice was the investment in the index funds and cash management trust referred to in the SOA. 604 ASIC submitted that the subject matter was broader than this. ASIC said that the subject matter consisted of (statement of claim [192]): (a) the matters set out in the statement in the second paragraph on page 13 of that Statement of Advice that: "You have asked our advice on the best ways to continue your wealth building over the next 10 years and beyond. Important financial goals for the future include building a solid financial base that will aid your wealth creation, allowing you to maintain a comfortable lifestyle into your retirement. It is therefore a major aim to produce a portfolio of assets that will result in an income stream independent of your personal exertion work. This will facilitate the transition to relying on income from your capital, that is, you embark on your Journey to Capitalism." (b) the investment recommendations set out on page 50 of that Statement of Advice… 605 The investment recommendations set out in the Dodsons' SOA, for example, were that Mr and Mrs Dodson: (1) take out a loan of $276,000.00 from the Bank of Queensland; (2) take out a margin loan of $90,000.00 from Colonial Margin Lending; (3) use their existing managed funds worth approximately $65,000.00 as security for the margin loan; (4) using those borrowings to invest: (a) $16,000.00 in the Storm Australian Technology Indexed Trust; (b) $202,000.00 in the Storm Australian Industrials Indexed Trust; (c) $97,000.00 in the Storm Australian Resources Indexed Trust; (d) pay Storm's fees of $26,960.00 for the advice; and (e) the residue of approximately $21,000.00 in a Macquarie Cash Management Trust Account. 606 In essence, the submission by Mr and Mrs Cassimatis is that the subject matter of the advice was the index funds and the cash management trust and ASIC said that the "subject matter of the advice" was the index funds, the cash management trust, the home loan, and the margin loan. ASIC's submission should be accepted for three reasons. 607 First, Mr and Mrs Cassimatis' submission is inconsistent with the text of s 945A when read with the relevant definitions. As I have explained, the "subject matter of the advice" in s 945A(1) is the subject matter of "a recommendation or a statement of opinion, or a report… that…is intended to influence a person…in making a decision in relation to a particular financial product" (emphasis added). The subject matter is not limited to "a particular financial product". 608 The words "in relation to" are commonly used in legislation. Parliament uses this expression in defining the terms in s 945A against a background of well recognised interpretation that has described it as "an expression of wide and general import": Fountain v Alexander [1982] HCA 16; (1982) 150 CLR 615, 629 (Mason J). A recommendation or statement of opinion "in relation to" a financial product such as an index fund must include the recommendation concerning how to borrow to invest in that index fund. The subject matter of that advice is broader still. It is the general subject matter with which the relevant matters relating to the financial product are concerned. 609 Secondly, the context of s 945A(1)(b) supports the broader construction proposed by ASIC. Section 945A has an overall concern with "advice" (in the broad sense as defined). That overall concern is given effect by a cascading series of enquiries which can be broadly summarised. The first stage is that s 945A(1)(a) focuses upon the need to determine personal circumstances and to make reasonable inquiries into those circumstances. The second stage is that based on that determination and those inquiries, the providing entity must give reasonable consideration to, and reasonably investigate the subject matter of the advice. Finally, the third stage is that after having made those investigations the advice given must be appropriate. 610 This context emphasises that the reason why "subject matter of the advice" is the expression at the second stage, and "advice" is the expression at the third stage is because at the second stage the advice has not yet been given. The subject matter of the advice contemplates the investigation of all of the matters (and more) upon which the advice will ultimately be based. 611 Thirdly, the extrinsic material does not support a more limited reading of the "subject matter" of the advice. Mr and Mrs Cassimatis initially submitted that their interpretation of "the subject matter of the advice" was supported by the Explanatory Memorandum of the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth), which repealed s 945A and which referred to a "know your product" process in providing advice. Their submission was that the "subject matter" of the advice was the financial product so that s 945A(1)(b) was concerned with considering and investigating the financial product to know the product. 612 However, as senior counsel properly conceded during oral submissions, this passage only appeared in a draft Explanatory Memorandum for the 2011 Bill (ts 597). It did not appear in the Explanatory Memorandum that was put before Parliament. There is nothing in the admissible context to the section which confines the subject matter of the advice to be only the financial product.

Was the consideration and investigation of the subject matter of the advice reasonable? 613 The question in the second limb is whether, having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances. 614 I have explained above in my assessment of the expert evidence, in the instance of the relevant Part E investors and those Schedule investors (who had limited income and assets, and were approaching or at retirement etc), why Storm did not give such consideration to, and conduct such investigation of, the subject matter of the advice as was reasonable in all of the circumstances. 615 Mr and Mrs Cassimatis submitted that ASIC failed to identify the relevant personal circumstances of the clients. The phrase "relevant personal circumstance" is defined in s 761A of the Corporations Act: "in relation to advice provided or to be provided to a person in relation to a matter, are such of the person's objectives, financial situation and needs as would reasonably be considered to be relevant to the advice". Mr and Mrs Cassimatis relied on two reasons. I reject each of those reasons. 616 First, they pointed to the absence of any evidence from advisers who dealt with the Part E or Schedule investors about the personal circumstances of those investors. This was said to show that ASIC had not proved what investigations were made or what consideration had been given by Storm. I do not accept this submission. Conclusions about the advice that was given can be reached by inference as well as direct evidence. ASIC tendered affidavits sworn by the Part E investors who met with the advisers, the Confidential Financial Profiles completed by those investors, the Phormula notes Storm maintained for each of those investors, and the SOAs which Storm provided to each of those investors. 617 Secondly, Mr and Mrs Cassimatis submitted that a crucial personal circumstance was not proved by ASIC. This personal circumstance was the clients' subjective tolerance and preparedness to take risks. They also relied upon the expert evidence of Mr McMaster that in almost all circumstances an instruction from a client will override other considerations (ts 224). This submission should also be rejected. Both of these matters were addressed above in the context of my consideration of the expert evidence. As I explained, there was evidence from which the subjective tolerance of the relevant investors could be inferred including their preparedness to take risks. Further, the instructions of the client after the advice is received cannot make unreasonable consideration or unreasonable investigation reasonable.

The third limb of s 945A(1): appropriate advice 618 The third limb of s 945A(1) is that the providing entity must only provide advice to the client if the advice was appropriate to the client, having regard to the aforementioned consideration and investigation. 619 I have explained above the reasons why I accept Mr McMaster's evidence and why I conclude that the advice given to the Part E and Schedule investors falling within ASIC's pleaded class was not appropriate having regard to an investigation and consideration of the subject matter of the advice as was reasonable in all of the circumstances. 620 As I explained, Professor Valentine was not an impartial, independent expert. He was so heavily committed to Storm and its model that he could not assess the model objectively. Nevertheless, on this issue even Professor Valentine conceded that it was generally unreasonable to apply the Storm model to persons who were retired or close to retirement (ts 377). This was a concession of the inevitable.

The elements of a contravention of s 1041E 621 Section 1041E is contained in Chapter 7 of the Corporations Act. It provides (notes omitted): 1041E False or misleading statements (1) A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if: (a) the statement or information is false in a material particular or is materially misleading; and (b) the statement or information is likely: (i) to induce persons in this jurisdiction to apply for financial products; or (ii) to induce persons in this jurisdiction to dispose of or acquire financial products; or (iii) to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and (c) when the person makes the statement, or disseminates the information: (i) the person does not care whether the statement or information is true or false; or (ii) the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading. (2) For the purposes of the application of the Criminal Code in relation to an offence based on subsection (1), paragraph (1)(a) is a physical element, the fault element for which is as specified in paragraph (1)(c). (3) For the purposes of an offence based on subsection (1), strict liability applies to subparagraphs (1)(b)(i), (ii) and (iii). 622 In oral submissions, senior counsel for ASIC faintly argued that for a criminal breach of s 1041E, ASIC would have to prove a fault element under s 1041E(1)(c), but that a civil contravention of s 1041E requires only proof of the elements in s 1041E(1)(a) and (b). Senior counsel frankly admitted that there was no authority in support of that submission (ts 573). The submission is contrary to the plain text of s 1041E which requires satisfaction of each of (a), (b) and (c). The presence of s 1041E(2) prescribes which of the elements of the contravention are physical elements and which are fault elements for the purposes of an offence. It no more removes the fault element from a civil contravention than it removes the physical element.

The allegations of contravention of s 1041E 623 ASIC alleged that Storm contravened s 1041E by statements in the Financial Services Guide and statements in the SOA provided to each investor. 624 As to the Financial Services Guide provided by Storm to each investor, ASIC relied upon the statement that Storm "will only recommend an investment to you after considering its suitability for your individual investment needs, objectives and financial circumstances". 625 As to the SOA provided to each investor, ASIC relied on statements that: (1) the report had been prepared following investigation into the needs of the client; (2) Storm had made recommendations to address the needs of the client based on the assumptions set out in the SOA; (3) Storm had recommended a process that would help the client to achieve his or her goals; and (4) Storm had used the information provided to it about the client's current financial position and any other relevant circumstances to evaluate the existing financial profile of the client and to prepare the recommendations in the SOA. 626 In each case, ASIC's allegations of contravention by Storm raise four issues. 627 First, whether the statements were a current or a continuing representation of fact. ASIC submitted that they were. However, as Mr and Mrs Cassimatis submitted, ASIC did not plead that any implication arose from the statements. The representation of fact conveyed by the statements, as pleaded, was limited to the ordinary meaning of the words. If any implication had been pleaded then it would have raised other issues which were not considered. These include whether the implication was a representation of fact or a promise and, if it were the latter, then the nature of the promise and any fact represented other than a present intention. 628 Secondly, whether the statements were likely to induce persons to acquire financial products (the Storm Funds in accordance with Storm's recommendations). 629 Thirdly, whether the statements were false in a material particular, or whether they were materially misleading. 630 Fourthly, whether this falsity or misleading nature ought reasonably to have been known by Storm. Although ASIC also pleaded that Storm did not care whether the statements were true or false, ASIC's case was put only on the basis that Storm ought reasonably to have known of the misleading or false nature (ts 572). This was an appropriate concession in the absence of sufficient evidence from which any inference of recklessness could be drawn.

Whether the statements were likely to induce persons to acquire financial products

The persons whom the statements must be "likely to induce" 631 The statements made in SOAs and Financial Services Guides were directed to particular potential investors. Hence, as ASIC submitted, the question was whether in the case of each individual investor the statements were likely to induce that investor to acquire Storm's financial product (ts 575).

The meaning of "likely to induce" 632 As ASIC observed, there is authority which says that "likely to induce" means more probable than not: Australian Securities Commission v Nomura International Plc (1998) 89 FCR 301, 395-396 (Sackville J); Australian Securities Commission v McLeod [2000] WASCA 101; (2000) 22 WAR 255, 266 [47] (Owen J relying on Boughey v The Queen [1986] HCA 29; (1986) 161 CLR 10; Ipp and Anderson JJ agreeing). 633 However, in a decision which ASIC relied upon, James Hardie Industries NV v Australian Securities and Investments Commission [2010] NSWCA 332; (2010) 274 ALR 85, 128 [184], the New South Wales Court of Appeal, in a joint judgment, considered the common position that had been adopted by the parties that the word "likely" means "real and not remote chance". After referring to the contrary authority, the New South Wales Court of Appeal said that the comment of Baroness Hale of Richmond in SCA Packaging Ltd v Boyle [2009] UKHL 37; [2009] 4 All ER 1181, 1200 [68] was compelling: "...Parliament can always use the word 'probable' if that is what it means...". 634 With respect, I prefer the approach of the New South Wales Court of Appeal. When s 1041E was introduced by the Financial Services Reform Act, Parliament chose to use the word "likely", and it did not define that word as "probable", in the context of an established meaning of "likely" in the context of conduct that is misleading or deceptive. It had been established for two decades at the time s 1041E was introduced that conduct is likely to mislead or deceive if there is a "real and not remote chance": Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union [1979] FCA 85; (1979) 42 FLR 331, 346 (Deane J); Global Sportsman Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 2 FCR 82, 87 (the Court). Although Parliament did not define "likely" as meaning a "real and not remote chance", and although the meaning of the word "likely" can vary according to the context in which it is used (Boughey v The Queen, 20 (Mason, Wilson and Deane JJ)), the context in this case supports a meaning which does not require proof of a chance that is more probable than not. 635 A statement can be "likely to induce" an investor to acquire a financial product even if the statement is only one of several statements which are likely to induce the investor to make the acquisition. It is also relevant whether the persons making the statement intended that the statement induce the investor: James Hardie Industries NV, 128-129 [185]-[186] (the Court); Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union, 348 (Deane J).

Were the statements likely to induce the investors to purchase? 636 One of the primary matters upon which Mr and Mrs Cassimatis relied was that none of the Part E investors gave evidence that they read, let alone relied upon, the statements. This is not conclusive. Whether or not the statements were actually relied upon is not conclusive of whether they were likely to be relied upon: see, in a related context, Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177, 201-202 (Deane and Fitzgerald JJ). In some cases evidence, or lack of it, will have little importance. In other cases the evidence will be of greater importance. 637 An example where the lack of evidence of actual reliance was of little importance is Snoid v Handley [1981] FCA 180; (1981) 54 FLR 202. In that case, the appellants were members of the New Zealand band called "Pop Mechanix". The trial judge found that the band had engaged in misleading or deceptive conduct. They played, distributed, and sold the same type of music as an established Sydney band called "Popular Mechanics". The appellants submitted that the trial judge had failed to give weight to the absence of evidence of any actual deception at the point of sale in a case alleging misleading or deceptive conduct. The appellants submitted that such evidence could have been easily adduced if it had been available. The Full Court held (at 211-212) that "such evidence, even if it had been called, would have been of limited importance at the trial. It certainly would not have been decisive". The relevant class of consumers spanned all of Sydney and Canberra. There was a likelihood that persons interested in the music of Popular Mechanics would be interested in the music of Pop Mechanix. And on the occasions when the record was played on the radio the name of the band (phonetically the same or similar) was announced. 638 In contrast, the absence of any evidence that an investor was induced was important in James Hardie Industries NV. In that case, the New South Wales Court of Appeal explained (at 160 [341]), by reference to the decision of Deane J in Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union, that: the fact that persons were not in fact induced is not necessarily determinative of the predictive exercise the court is required to undertake in determining whether a breach of s 1041E has been established. However … in certain instances where conduct has run its course, a court would rarely be justified in ignoring the actuality of what had happened… 639 The absence of evidence in that case was relevant because the small number and sophistication of persons to whom the statement was made meant that what "in fact happened" was "a relevant cross-check to the court's predictive exercise" (160 [344]). The Court of Appeal upheld the conclusion of the primary judge, as one which was open to his Honour, that the statements were not likely to induce (160 [342]). 640 Although it is material in this case that none of the investors gave evidence that any of the statements was an inducing factor for their purchase, there are nevertheless four matters which satisfy me that each of the statements was likely to induce the investor to acquire the Storm financial product. 641 First, the statements were prominent in the context of the material provided. 642 The Financial Services Guide was only six pages long, excluding the cover page and back page. The statement upon which ASIC relied was made in the middle of the first page after the cover page when discussing the services offered by Storm: Advice on managed investments, deposit products, bonds, debentures, stocks issued or proposed to be issued by Government, and debentures of incorporated and unincorporated bodies, life insurance investment and risk products, retirement savings account products and superannuation. We will only recommend an investment to you after considering its suitability for your individual investment needs, objectives and financial circumstances. 643 The statements made in the SOAs were a less substantial part of documents which were often much longer. For instance, the SOA provided to Mr and Mrs Dodson was 138 pages long, the SOA provided to Mr and Mrs Herd was 178 pages long, and the SOA provided to Mr and Mrs Higgs was 84 pages long. However, each of the statements was made in an important context. To consider each in turn by reference to the SOA for Mr and Mrs Dodson: (1) The statements that "the report had been prepared following investigation into the needs of the client", and that "Storm had made recommendations to address the needs of the client based on the assumptions set out in the SOA" appeared on the first page of the SOA after the cover page. The statement was contained in a paragraph of the letter to Mr and Mrs Dodson which introduced the SOA which read (emphasis added): We met for approximately 1 hour prior to your attending an Introduction and Overview session conducted by Andrew Lythgo and myself on the 24th October 2007 that ran for approximately 3 hours. This was followed by individual discussions with myself on 1st November 2007 where we completed your Confidential Financial Profile, and 14th November 2007 where the initial viability of your cashflow was discussed with Andrew Lythgo and myself. You have now returned to receive this written recommendation. Following investigations into your needs we have prepared this report for your consideration. Please take the time to review all topics carefully as our recommendations to address your needs are based on the assumptions outlined. In addition, we have enclosed the relevant Product Disclosure Statements for all recommended products in this report. This recommendation has an expiry date of February 2008. Should the recommendation not be actioned in this time, we will need to revise your position to consider any changes that may be relevant. (2) The statement that Storm had "recommended a process that would help the client to achieve his or her goals" appeared in the final paragraph again in the opening page letter of the SOA for Mr and Mrs Dodson: Once again, thank you for the opportunity to recommend a process that will help you to achieve your goals for the Now, Middle and End of your life. (3) The statement that Storm had "used the information provided to it about the client's current financial position and any other relevant circumstances to evaluate the existing financial profile of the client and to prepare the recommendations in the SOA" only appeared on page 20 of the SOA. By itself, I have doubts about whether it was likely to induce (in the sense of being a factor likely to induce) Mr and Mrs Dodson to purchase. But it reinforced the similar statement made in the opening letter about the recommendations being based on the assumptions outlined. And it appeared immediately above the place on the page where Mr and Mrs Dodson signed to acknowledge that they had read the page, and immediately below a bold and shaded heading entitled "Sources of Information" in a paragraph which read: Sources of Information You have provided us with information about your current financial position and any other relevant circumstances. We have used the information you have provided to evaluate your existing financial profile, and to prepare these comprehensive Recommendations. 644 Secondly, the Financial Services Guide and SOAs were intended to induce investors, none of whom in this litigation was a sophisticated investor, to purchase the Storm financial products. As I have explained, the intention that statements induce investors to invest is a material consideration when deciding whether they were likely to do so. 645 The Financial Services Guide and SOAs were provided to investors prior to their investment as part of the Storm process described above. As ASIC submitted, the Financial Services Guide and the SOAs were received by the investors when they were in the process of being, or having been, "Stormified". Ms Korpi described that expression, as Mr Cassimatis used it, as meaning that clients had to undertake an intensive education seminar and had to be "taught how to be a Storm investor" before they could invest in the company. The clear inference is that the statements were intended to induce the investors to invest. 646 Thirdly, although every case depends upon its own facts, it is notable that the relevant investors in this case were not sophisticated investors like those in James Hardie Industries NV. Each of the investors was retired or approaching and planning for retirement, had little or limited income, few assets, limited savings, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. The information provided to these investors had more significance than it would have had to experienced, wealthier investors. The statements would have been likely to be considered by these investors in the process of weighing up whether to purchase the Storm financial products. 647 Fourthly, the investors signed every page of the SOA to indicate that the page had been read. At the bottom of the page Storm included a box for signature which read "We have read and understood this page".

The statements were not false in a material particular nor were they materially misleading 648 Mr and Mrs Cassimatis submitted that the statements, as pleaded, had only the ordinary meaning of the words used. They submit that this ordinary meaning was neither false nor misleading. Whether statements are misleading or deceptive must be determined at the time they were made, although later events may be taken into account: Bill Acceptance Corporation Ltd v GWA Ltd (1983) 78 FLR 171, 178-179 (Lockhart J).

The Financial Services Guide statement 649 The statement in the Financial Services Guide was pleaded only as an express statement. ASIC did not plead any implication that those considerations and recommendations would be careful, diligent or appropriate. ASIC pleaded that the statement was of the fact that "Storm had considered the suitability of the recommendations for the individual investment needs, objectives and financial circumstances of each of the [investors]" (statement of claim [2231(b)], emphasis added). 650 ASIC pleaded that Storm had not even considered these matters for two reasons. First, because the recommendations were "so inappropriate to [the investors'] personal circumstances". Secondly, because Storm's primary focus in formulating its investment advice to each investor "was to ascertain their capacity to borrow money to invest in the Storm Funds and preparing a cash flow". Thirdly, "due to the operation of the Storm model, the only investment strategy that Storm would recommend to each of the Investors would be to invest in the Storm Funds using borrowed funds" (statement of claim [2231(c)]). 651 It is possible that a consideration might be so perfunctory, or so fleeting, that it might not amount to a consideration at all. But the Financial Services Guide statement did not involve any false or materially misleading representation of a present lack of consideration for three reasons. 652 First, s 941D of the Corporations Act required the Financial Services Guide to be provided to investors before the provision of the advice (financial service). This is what occurred (see the SOA, page 2, for Mr and Mrs Dodson, Herd and Higgs). Even on the assumption that the pleaded statement was a continuing representation, it was made prior to the provision of advice. It was a continuing representation of an opinion that a future recommendation by Storm would involve consideration of suitability for individual investment needs, as well as objectives and financial circumstances. There is no evidence from which an inference can be drawn that this opinion was other than honestly held. 653 Secondly, although the only investment that Storm would recommend to investors was to invest in Storm funds with borrowed money, this did not mean that Storm failed to consider the personal circumstances of the investors at all. In some instances, Storm informed investors who satisfied its criteria for investment that they should not invest due to their investment needs or objectives, or financial circumstances. Almost invariably, however, this was because the investor could not borrow sufficient funds. The Financial Services Guide also explained: we focus on mobilising the assets that you already have in order to accelerate the process of improving your financial position. If you do not accept this fundamental approach, then it may be that your goals are inconsistent with our goals for you. In that case, we recommend that you seek the advice of a company who will advise you on how to tend the assets you have already accumulated. 654 Thirdly, although the Storm model was inappropriate in relation to the relevant investors, I am not satisfied that it was so unreasonable or so inappropriate that the inference should be drawn that Storm had not even considered the individual circumstances of investors in those particular cases. Indeed, ASIC pleaded, and I have found, that Storm investigated, and ascertained, the individual circumstances of the investors. For instance, at [182] of the statement of claim, ASIC pleaded that the Confidential Financial Profile recorded the personal circumstances of the investors including, for example in relation to Mr and Mrs Dodson, that their objectives were: (i) to live self-sufficiently and be happy until the day they died; and (ii) to travel in retirement. There is a difference between an inference of no consideration and a conclusion that consideration was, in some respects, unreasonable, and that the advice was inappropriate. 655 On the basis of ASIC's pleaded case, the statement in the Financial Services Guide was not false in any material particular, nor was it materially misleading.

The SOA statements 656 ASIC pleaded that the SOA statements were false in a material particular or materially misleading for two reasons (statement of claim [2234(a)]). First, the Storm process of creating the SOAs had not used all of the information which the investors had provided about their personal circumstances. Secondly, the recommendations contained in the SOAs were not appropriate to the personal circumstances of the investors and therefore did not address the needs of the investors or help them to achieve their goals. 657 The first pleaded reason for the false or misleading nature of the statements concerns the first, second and fourth SOA statements that the SOA had been (i) prepared following investigation into the needs of the client; (ii) "had made recommendations to address the needs of the client based on the assumptions set out in the SOA"; and (iii) that "Storm had used the information provided to it about the client's current financial position and any other relevant circumstances to evaluate the existing financial profile of the client and to prepare the recommendations in the SOA". 658 It is difficult to see how these statements could be misleading or false due to the failure of the SOAs to use "all of the information which the investors had provided about their personal circumstances". First, none of these statements carries with it the implication that all of the information that investors provided about their personal circumstances would be investigated or used. A client would not reasonably expect that everything said, no matter how peripheral, would be investigated. Secondly, ASIC never identified which information about the client's current financial position was not used in relation to each relevant investor. Thirdly, ASIC did not identify which of the assumptions set out in the SOAs were false or misleading or made to be so by the information that was not provided. 659 In written submissions in reply on this point ASIC asserted ([133]): One example should suffice to dispose of this argument. ASIC has both pleaded and proved that the advice was not appropriate for the Part E investors. Once that is accepted it must follow that the statements in each of the statements of advice that the Company had recommended a process that would help the client to achieve their goals must have been false or misleading. Inappropriate advice will not help the clients to achieve their goals. 660 This does not address the first, second or fourth SOA statements or any of the gaps to which I have referred. It is a submission concerned only with the third SOA statement that "Storm had recommended a process that would help the client to achieve his or her goals". 661 The statement that the process "would help the client to achieve his or her goals" is, in part, promissory. A promise of something in the future which is not fulfilled is not, by itself, a false or a misleading statement. This is because a promise that something will happen in the future is not false or misleading at the time it is made merely because that future event does not come to pass. This reasoning has been applied in relation to whether an unfulfilled promise can be misleading or deceptive conduct in contravention of the former s 52 of the Trade Practices Act 1974 (Cth): Fubilan Catering Services Limited (Incorporated in PNG) v Compass Group (Australia) Pty Ltd [2008] FCAFC 53 [91] (the Court); Global Sportsman Pty Ltd v Mirror Newspapers Ltd, 88 (the Court); Bill Acceptance Corporation Pty Ltd v GWA Ltd, 179 (Lockhart J). 662 However, again, by analogy with s 52 of the Trade Practices Act, a promise may include a false or misleading statement if the promise contains a representation, express or implied, of present fact, such as that the promisor is capable of performing the promise or that the promisor intends to perform the promise: Fubilan Catering Services v Compass Group, [91] (the Court); Global Sportsman v Mirror Newspapers, 88 (the Court); IDI Enterprises Pty Ltd and Another v Classified Transport Pty Ltd [2011] SASCFC 123; (2011) 111 SASR 155, 164-165 [43]-[45] (Peek J); Cohen v Centrepoint Freeholds Pty Ltd (1982) 66 FLR 57, 87-88 (Smithers J). 663 ASIC's submission was effectively an allegation that the promise in the third SOA statement included a representation of present fact that the Storm process was capable of helping the client to achieve his or her goals. I accept this submission, although, in context, the representation would be better expressed as being that Storm believed that its process was capable of helping the client to achieve his or her goals. This is particularly so because some of the goals to which reference was made were expressed in vague terms. For instance, at page 6 of Mr and Mrs Dodson's SOA there was reference, in typical terms reproduced in other SOAs, to a common goal of "more leisure time" and another goal of "living happily". 664 This representation in the third SOA statement was not false or misleading. First, there is no basis to conclude that the relevant individual at Storm who gave or approved the advice did not honestly believe that it was capable of helping the client. Secondly, ASIC did not plead that the third SOA statement carried any implied representation that the advice was reasonable or appropriate and, for that reason, was capable of assisting the investor to achieve his or her goals.

The falsity or misleading nature ought reasonably to have been known by Storm 665 Although I have concluded that none of the statements was false or misleading, there may have been another reason why ASIC's case based on s 1041E might have failed, at least in part. This reason concerns whether the fault element, which would establish both a civil and a criminal contravention, was proved. ASIC and Mr and Mrs Cassimatis both treated the fault element as a binary question, assuming that it would be answered in the same way for all investors. I doubt whether this would have been the result if I had reached the conclusion that any of the statements were false in a material particular, or that they were materially misleading. Much would depend upon the particular statement which was found to be false or materially misleading and, in light of that finding (i) the circumstances of the particular person who knew of the false or misleading statement, and (ii) the circumstances of the particular client. Neither was examined in submissions. 666 As to (i), although ASIC submitted that the false or misleading nature of the statements ought reasonably to have been known by Storm through the knowledge of "those at the Company responsible for approving the advice to the [i]nvestors", ASIC did not identify those relevant persons at Storm. As Mr and Mrs Cassimatis submitted, the persons could only have been the Authorised Representatives who dealt with the relevant clients or unidentified members of the cash flow cell. These were the only people who would have seen the SOA. 667 As to (ii), whether the fault element was proved would, of course, also depend upon the representation which was found to be false or misleading and the reason why it was found to be misleading.

Conclusions on s 1041E 668 None of the statements, as pleaded by ASIC, was false in any material particular or materially misleading. Storm has not been proved to have contravened s 1041E of the Corporations Act.

The alleged breaches of s 912A consequent upon the breaches of s 945A 669 Section 912A of the Corporations Act is part of Division 3 "Obligations of financial services licensees". Section 912A provides: 912A General obligations (1) A financial services licensee must: (a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and … (c) comply with the financial services laws… 670 Section 761A is contained within Chapter 7 of the Corporations Act. It defines a "financial services law" as a provision of Chapter 7 that covers conduct relating to the provision of financial product advice. Section 945A, as a provision of Chapter 7 at the relevant time, is therefore a "financial services law". 671 There was very little focus in submissions upon a breach of s 912A. This was probably due to the fact that the parties assumed (and Mr and Mrs Cassimatis expressly conceded), and I accept, that in this case contraventions of ss 945A(1)(b), 945A(1)(c) or 1041E would demonstrably prove a failure to comply with the financial services law, in breach of s 912A(1)(c). I am satisfied that this is the case. 672 There is little utility in considering whether the contraventions by Storm of s 945A were also contraventions of s 912A(1)(a) as well as s 912A(1)(c). The only relevance of the allegation by ASIC of breach of s 912A(1)(a) is that it demonstrates another potential threat to Storm's AFSL licence arising from the contraventions of the Corporations Act. However, for completeness, I conclude that the contraventions of s 945A were also contraventions of s 912A(1)(a). 673 Although ASIC has not proved that the services were not provided honestly, the contraventions of s 945A(1)(b) and s 945A(1)(c) were sufficiently serious departures from reasonable standards of performance of advice that they involved a failure to ensure that the financial services covered by the licence were provided efficiently, honestly and fairly. 674 This approach to "efficiently, honestly and fairly", which treats the expression as including an assessment of reasonable expectations of performance and reasonable standards of performance, is consistent with the decision in Australian Securities and Investments Commission v Camelot Derivatives Pty Limited (In Liquidation) [2012] FCA 414; (2012) 88 ACSR 206. In that matter, Camelot Derivatives engaged in "churning", which is trading with the effect of generating excess commissions for the broker. ASIC sought and obtained declarations including that Camelot Derivatives was in breach of s 912A of the Corporations Act. At [69], Foster J recited submissions by ASIC with which he expressed agreement. Those submissions were as follows: (a) The words "efficiently, honestly and fairly" must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672 ... (b) The words "efficiently, honestly and fairly" connote a requirement of competence in providing advice and in complying with relevant statutory obligations: Re Hres and Australian Securities and Investments Commission (2008) 105 ALD 124; [2008] AATA 707 at [237]. They also connote an element not just of even handedness in dealing with clients but a less readily defined concept of sound ethical values and judgment in matters relevant to a client's affairs: Re Hres and Australian Securities and Investments Commission (2008) 105 ALD 124; [2008] AATA 707 at [237] … (c) The word "efficient" refers to a person who performs his duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672... Inefficiency may be established by demonstrating that the performance of a licensee's functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 679 ... (d) It is not necessary to establish dishonesty in the criminal sense: R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at 110. The word "honestly" may comprehend conduct which is not criminal but which is morally wrong in the commercial sense: R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at 110 ... (e) The word "honestly" when used in conjunction with the word "fairly" tends to give the flavour of a person who not only is not dishonest, but also a person who is ethically sound: Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672 …

Application of the test for contravention of s 180(1) 675 As I have explained, the test which I apply in this case for contravention of s 180(1), as expressed in Vrisakis, involves consideration of all circumstances including the foreseeable risk of harm to any of the interests of Storm and the magnitude of that harm, together with the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, and any burdens of further alleviating action. 676 The consideration of these matters is from the perspective of the conduct of a reasonable person who is a director of Storm, in Storm's circumstances, having the responsibilities of Mr or Mrs Cassimatis. As I have explained, those circumstances and responsibilities include their experience and skills, the terms and conditions on which they undertook to act as directors, how the responsibility for the company's business was distributed between them and the company's employees, and the informational flows and reporting systems within the company. For simplicity, in my discussion below I will refer to all of this context compendiously as the responsibilities, relevantly, of Mr or Mrs Cassimatis. 677 ASIC's case, and Mr and Mrs Cassimatis' defence, focused upon Mr and Mrs Cassimatis' liability without differentiation between them. I have expressed these reasons in a similar way but my evaluation has proceeded by reference to their individual circumstances. At a very high level of generality, as Mr Hutley and Mr Nelson observed in relation to the definition of responsibilities during the IPO process, Mrs Cassimatis ran the day to day operational matters such as compliance, financial affairs and corporate administration of Storm, and Mr Cassimatis made strategic decisions in relation to Storm's future direction and plans for growth. 678 However, the reason why the parties did not seek to distinguish the liability of Mr Cassimatis from Mrs Cassimatis was clear from the evidence. Although Mr and Mrs Cassimatis had separate roles at this high level of generality, in their day to day management of Storm they were both involved in almost all aspects of the business. For instance, although Mrs Cassimatis was the head of compliance, Mr Cassimatis was heavily involved with matters closely related to compliance including the Storm financial model, the education workshops and the training of advisers. And although Mr Cassimatis was involved in the development and testing of the Storm financial model, Mrs Cassimatis was extremely familiar with, and involved with, the model.

The reasonable foreseeability and likelihood of contraventions of the Corporations Act 679 As I explained in the introduction to these reasons, it is at least arguable that ASIC's case need not have been brought on the basis that actual contraventions of the Corporations Act must be proved as a stepping stone to liability of Mr or Mrs Cassimatis. It is arguable that when considering compliance with the Corporations Act a reasonable director of a company in Storm's circumstances, with Mr or Mrs Cassimatis' responsibilities, should not have been required to make an assessment of whether a breach must actually occur in order to determine whether he or she would be in breach of duty. It might have been sufficient, for example, to reach the conclusion that future conduct (including omissions) meant that a breach of the Corporations Act was extremely likely and that this high degree of risk, and its consequences, might give rise to a breach despite other considerations such as the burden of alleviating precautions. Nevertheless, this case was presented on the basis that actual breach by Storm of the Corporations Act was a precondition for a finding of a breach by Mr and Mrs Cassimatis of s 180(1). I proceed on that basis. 680 I have explained above that Storm committed civil contraventions of s 945A(1)(b) and s 945A(1)(c) of the Corporations Act. These breaches were not merely reasonably foreseeable. At the time of the breaches, a reasonable director with the responsibilities of Mr and Mrs Cassimatis should have regarded them as likely. 681 In relation to s 945A(1)(c) of the Corporations Act, I do not consider that a reasonable director with Mr or Mrs Cassimatis' responsibilities would need to have had any of the expert knowledge of Mr McMaster to reach the conclusion that Storm had not reasonably considered or reasonably investigated the advice's subject matter in relation to investors in the class pleaded by ASIC (leading to contraventions in relation to the relevant investors). This conclusion is reached as a whole, taking into account the likelihood of all of the breaches that occurred, based upon what a reasonable director with Mr or Mrs Cassimatis' responsibilities would have considered at the time. In particular, having regard to their responsibilities and Storm's circumstances there was a strong likelihood of one or more breaches such as (i) a lack of reasonable consideration of alternative investment strategies; (ii) inadequately determining the objective of advice given; (iii) inadequate sensitivity analyses being performed; and (iv) a failure to consider a client's cash flow independently of proposed income to determine the client's ability to fund interest payments or margin calls. 682 Even more clearly, expert advice would not reasonably have been needed for Mr or Mrs Cassimatis reasonably to conclude that it was likely that advice to invest in the Storm model was not appropriate (within the terms of s 945A) for investors in the class pleaded by ASIC (retired or approaching retirement, few assets other than their home and limited superannuation, little prospect of rebuilding their financial position etc). The most obvious reason for this was the inappropriate inclusion of the family home as an investment asset for these investors. But, in any event, a reasonable director with Mr or Mrs Cassimatis' responsibilities would have realised that there was a strong likelihood that retired or near-retired investors in this class would be inappropriately advised to use their homes as security for their investment. 683 Mr and Mrs Cassimatis submitted that a breach could not have been foreseen, or foreseen as likely, due to the absence of any warning signs. I explain below why I reached my conclusion about likelihood despite these matters. However, it is first necessary to reiterate several factors relevant to my conclusion of the foreseeable likelihood of contravention to a reasonable director with Mr or Mrs Cassimatis' responsibilities. 684 First, no-one was more familiar with Storm's clients, the Storm model and its application than Mr or Mrs Cassimatis. I have referred in detail in these reasons to the extent to which Mr and Mrs Cassimatis were integrally involved in almost every aspect of Storm's business. A reasonable director of a company in Storm's circumstances and with Mr or Mrs Cassimatis' responsibilities would have known Storm's clientele and demographic very well. 685 Mr Cassimatis was also more familiar than anyone with Storm's model. He had developed and adapted the Storm model over a long period of time. Although he explained it to institutions such as PwC and to the non-executive directors, he (and to a lesser extent, Mrs Cassimatis) understood the details and application of that model far better than anyone else. 686 Mr Nelson explained that at the time of the proposed IPO he had raised concerns about the "proprietorial culture" that existed at Storm. Mr Nelson said that Storm did not have the usual structure of a public company with proper devolution of functions and responsibilities to suitably experienced and qualified senior executives. Mr Nelson described Storm as being run by Mr and Mrs Cassimatis as a family company where the two shareholders/directors made most, if not all, of the key management decisions and directed most, if not all, aspects of the company's operations. This applied particularly to the Storm model and Storm's clients and operations. 687 As for Storm's clients and their demographic, although in 2006 to 2008 Storm had over one thousand clients ranging in age, ownership of assets and liabilities, and income and expenses (ts 201-202), Mr and Mrs Cassimatis would have been better informed about the client demographic than anyone else in Storm, and far better informed than anyone outside Storm. 688 A reasonable director of a company in Storm's circumstances and with Mr and Mrs Cassimatis' responsibilities would have been well aware that this demographic included clients who were retired or who were approaching retirement and who had little income and few assets apart from their family home and limited superannuation. Many examples could be given to demonstrate this reasonable, as well as actual, awareness. Some of them were given earlier in these reasons at [145]-[152], and [254]-[260]. There I explained that there were almost no exceptions to the persons to whom the Storm model was applied. Provided that the person had capacity to borrow, and accepted Storm's conditions, that client was almost always advised to invest in accordance with the Storm model (although the parameters might change such as the amount of cash reserve, LVR, etc). 689 Another particular example showing awareness of a retiree demographic is how Mr Cassimatis taught Mr McCulloch to say the following at education workshops (emphasis added): Storm has a different point of view to other traditional financial planners out there in the industry, and that is we believe that you should never, ever destroy your capital base. In fact, as you get older, your need for capital actually increases. You get older, you need health care, you want to do more things, you want to travel the world, you may want to travel Australia. Therefore, your need for wealth and income does not diminish the day you stop working. You need your capital base to keep on growing and generate the income that you need going forward. 690 A particular approach was taken in the preparation of cash flow statements for those clients who were retired or nearing retirement (with an overall debt ratio of 50% or less rather than 60% or less). And, reflecting the few assets and limited income that some retired clients had to fund the Storm plan, the model sometimes relied upon higher "cash reserves" which included matter which were not "cash" such as assumptions of growth in the index funds after two years, as well as including payment of dividends, and imputation credits to fund the interest payments. 691 Secondly, Mr and Mrs Cassimatis exercised their powers as directors and used their considerable assumed responsibilities to create circumstances which involved their extremely significant control over Storm and its affairs, and over its advisers. I have explained the many manifestations of the control that Mr and Mrs Cassimatis had over Storm, beyond matters such as the development and testing of the Storm model. 692 Thirdly, Mr and Mrs Cassimatis exercised their powers as directors to create education workshops which involved strong suggestions to potential investors to use greater debt for investing than the investors otherwise would have been prepared to do. One example of these suggestions, discussed above, is how Mr McCulloch explained that Mr Cassimatis told him that part of the education workshop was designed to introduce potential investors to the concept of investing a far greater amount than they otherwise would invest. The investors would use debt for that purpose. As Mr Cassimatis would explain in education workshops, the prospective client should "want to be" a person who owes $2 billion. Numerous other examples of how Mr and Mrs Cassimatis and Storm encouraged debt were given above including at paragraphs [54]-[56], [59], [62], [78], [130] and [304]-[312]. 693 There was no issue in this case concerning whether this exercise of their powers was generally appropriate. The relevant point is that this is an example of the ways that Mr and Mrs Cassimatis used their powers to encourage the application of the Storm model including to persons who would include retired, or near-retired investors with limited income, few assets, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. As I have explained, these were investors who a reasonable director with Mr or Mrs Cassimatis' responsibilities should have concluded had an appropriately conservative approach to investment. 694 As I explained earlier, there is no particular magic in the precise definition or the chosen five characteristics of the class pleaded by ASIC. The essential point is that the five characteristics identified by ASIC were chosen to demonstrate that the particular class was comprised of investors who were particularly vulnerable. 695 Fourthly, Mr and Mrs Cassimatis used their powers to create an environment in which there were few circumstances in which clients of Storm were not advised to invest using the Storm model (including its conditions, which prospective clients, who had attended the workshops and persisted with their desire to invest, generally accepted). The few circumstances where clients were not advised to invest using the Storm model were almost all cases where the client simply had no capacity to borrow necessary funds or where the capacity to borrow was too limited given the client's need for income. 696 In summary, my ultimate conclusion without relying upon hindsight is that a reasonable director of a company in Storm's circumstances and with Mr or Mrs Cassimatis' responsibilities would have been aware of a strong likelihood of contravention of the Corporations Act if he or she exercised his or her powers to cause or permit the Storm model to be applied to clients who were in the class pleaded by ASIC, particularly investors who were retired or near retirement with few assets and limited income. Or, to put this conclusion in negative terms, a reasonable director of a company in Storm's circumstances and with Mr or Mrs Cassimatis' responsibilities would have been aware of a strong likelihood of contravention of the Corporations Act if he or she did not exercise his or her powers to prevent or prohibit the Storm model from being applied in such indiscriminate circumstances which included application to clients who were retired or near retirement with few assets and limited income. 697 Each of the contraventions that I have found was caused or permitted by the exercise by Mr and Mrs Cassimatis of their powers and control over Storm. In relation to s 945A(1)(b), these included: (i) the failure to give reasonable consideration to, and conduct reasonable investigation of, alternative investment strategies for those investors; (ii) the failure adequately to determine the objective of its advice, which required measurement and, where possible, quantification; (iii) the failure to conduct an adequate sensitivity analysis before advising the Part E investors; and (iv) the failure to give reasonable consideration to the extent to which any of these investors could fund interest payments from their own resources in a scenario where their cash reserves were exhausted. In relation to s 945A(1)(c), these included: (i) the inappropriate classification by Storm of the Part E investors as "Balanced investors"; (ii) the inclusion of the Part E and Schedule investors' family home in their asset portfolio for investment purposes; and (iii) the generally inappropriate nature of the advice to the investors in the five pleaded circumstances by ASIC to utilise the Storm model. 698 For the reasons I have given I am satisfied that contraventions of the nature of those which occurred concerning s 945A(1)(b) and s 945A(1)(c) were reasonably foreseeable (and would have been foreseen as having a strong likelihood) to a director of a company in Storm's circumstances and with Mr or Mrs Cassimatis' responsibilities, and exercising his or her powers. However, although I reach this conclusion, the assessment of reasonable foreseeability and likelihood of contravention at the time of contraventions for the purposes of s 180(1) should take place at a higher level of generality. A director of a company in Storm's circumstances and with Mr or Mrs Cassimatis' responsibilities, and exercising his or her powers, would have considered that it was likely that persons in the position of the relevant investors would be given inappropriate advice in breach of s 945A. That assessment would generally subsume the numerous more specific contraventions that I have found in relation to the two particular limbs of s 945A. And that should be the level of generality for the assessment of breach in this case. 699 I turn below to each of the matters relied upon by Mr and Mrs Cassimatis and the reasons why I reached this conclusion despite these matters. All of them, considered together, provided some limited basis for Mr and Mrs Cassimatis to have derived comfort about the lack of complaint or warning concerning the Storm model. 700 However, there are reasons why I considered that this support was limited. One reason was because some of the matters below actually should reasonably have raised some concern. Another reason is that some of the people who provided statements of comfort to Mr and Mrs Cassimatis did so because Mr and Mrs Cassimatis had made statements to them which would have reassured them that the Storm model was being applied to clients for whom that advice was appropriate. Perhaps the most significant reason was that a reasonable director with the responsibilities of Mr and Mrs Cassimatis would have been aware that the extent of his or her responsibilities within Storm gave each of them a degree of knowledge and understanding of Storm which no other person came close to approximating. They would have been aware that this knowledge and understanding of the Storm model and its application was apparent to others. The reasonable director in their position might have drawn some comfort for a conclusion that the basic Storm model was not defective in its fundamentals or its application. But, there would have been little comfort that they could have drawn from these matters to conclude that the advice given by advisers to vulnerable clients in the position of the relevant investors was appropriate. In other words, any approval or absence of warning came from others who had far more limited knowledge of, and far more limited access to, the Storm model, Storm's clients, and the application of the Storm model to its clients than Mr or Mrs Cassimatis.

Storm's insurers, law firms and the Financial Planning Association 701 Mr and Mrs Cassimatis relied upon the absence of any expression of concern by Storm's insurers, the law firm de Groots, the law firm MSJ, and the Financial Planning Association of Australia Limited (FPA). 702 As to Storm's insurers, the difficulty with this submission is that there was no evidence of what, if any, consideration the insurance companies told Storm that they had given to the information provided by Storm to Aon. The insurance brokers were provided with a template SOA and a copy of Storm's Financial Services Guide. They also had some information about Storm's clients. There was no evidence of concerns expressed by particular insurers. But this does not have substantially assist Mr or Mrs Cassimatis. Even putting to one side the fact that an absence of evidence of concerns is not evidence of absence of concerns, in relation to Ms Lazarus and Mr Laming, as Mr and Mrs Cassimatis should reasonably have been aware, it was not part of Ms Lazarus' or Mr Laming's role to assess the documents provided by Storm or the appropriateness of the advice provided by Storm. Mr Laming described their role as analogous to "mailmen"; that is, passing information as required to and from clients and insurers. 703 The evidence of the first meeting between Mr Laming and Ms Lazarus and Storm was typical of the nature of the information with which they were concerned in their dealings. Mr Laming said that at that meeting Mr Cassmatis gave a very positive image of the company, and spoke about how Storm looked after its clients. But Mr Cassmatis did not speak in detail about the type of financial advice provided to Storm's clients (although he did touch upon investment in index funds and gearing to invest). Mr Laming did not recall any discussion about Storm's methods of borrowing against the family home to invest, or the types of clients serviced by Storm. 704 Turning to the law firms, there was very little evidence about any advice that the law firm of de Groots provided to Mr and Mrs Cassimatis, and the advice from MSJ was very limited. 705 Mr McCulloch said that in late 2007 or early 2008, Storm had formed an alliance with the specialist estate lawyers de Groots for Storm clients who were interested in passing on their share portfolios in their wills (ts 180). Mr McCulloch said that de Groots did not express any concerns to him about the application of the Storm model to elderly people (ts 180). But there was no evidence about what de Groots had been told about the circumstances of Storm's elderly clients. There was no evidence whether de Groots was aware that Storm had clients who were retired or near retirement to whom the model had been applied where they had limited assets and income. There was no evidence that de Groots had been asked to advise on any issues relating to any such client of Storm. And there was no evidence about whether de Groots had communicated anything of this nature to Mr or Mrs Cassimatis. 706 As for MSJ, Mr and Mrs Cassimatis relied upon work that the law firm did on the prospectus as well as advice that MSJ gave to Storm on 1 August 2008. Several points are noteworthy about the advice given by MSJ. First, the advice concerned an SOA in template or standard form. MSJ was not concerned with the circumstances in which that advice might be applied to particular clients. In neither of the retainers to MSJ was the law firm asked to advise on the manner in which the Storm model was applied to particular clients. Nor was MSJ provided with information upon which such advice could have been given. Secondly, as was clear from the invoice sent, the total time spent reviewing the SOA was one hour by one partner of the law firm and a little over one day by a junior solicitor. Thirdly, even in relation to the generic SOA, MSJ observed in their covering email that the final "sign-off" was subject to a review of the final draft of the SOA and added that: We note that the SoA is very long. Section 947B(6) of the Corporations Act does require an SoA to be worded in a clear, concise and effective manner, and ASIC has provided guidance that generic research or educational materials should be excluded… 707 As for the FPA, it is admitted on the pleadings that it had a quality assurance program and that Mr Butcher from the FPA sent a complimentary email on 7 October 1999 to Mr and Mrs Cassimatis in response to their email on the same day. Mr and Mrs Cassimatis had written because they were concerned because they had been "told by several people that the FPA and you in particular have made comments to the effect that the FPA is very concerned about the 'Cassimatis' way of doing things". They were told this by several different people in different States. 708 Mr Butcher replied as follows: There is absolutely no area of concern. Indeed you are one of the few principal members of the FPA with a clearly defined financial planning process rather than the normal "I wouldn't recommend for the client what I wouldn't do myself" or such vague comments that I get from most planners. In my view it is infinitely superior to have your own investment process than to just recommend First State, Merrill Lynch and Perpetual just because they are recommended by ASSIRT. I also see a clearly defined process such as yours as being good from a control point of view because it ensures a consistency of advice from the dealership perspective. I was certainly satisfied when I visited your office that your company has satisfied itself with the process which is really all the FPA can do. 709 Several points should be made about this email. First, it was an informal communication written in 1999. It is unclear whether in 1999 Storm had any clients who were retired and with limited income and assets, who had invested in the Storm model or who had been advised to do so. Secondly, even if Storm did have such clients at that time, Mr and Mrs Cassimatis could not reasonably have assumed that this was known to the FPA. Thirdly, Mr Butcher did not purport to speak on behalf of the FPA in his informal communication. Fourthly, the statements were not made in the context of any investigation or examination of Storm's affairs by the FPA. 710 Mr and Mrs Cassimatis also relied in their pleading on the FPA's review of Storm in June 2002 which concluded that matters of concern were only minor in nature. However, ASIC pleaded in reply (and it does not appear to be controversial) that: (i) the review was based on information provided by Storm; (ii) the review was expressed not to be a full audit of Storm's financial practice but was instead an assessment of compliance with FPA requirements; and (iii) the review was not concerned with, and did not address, compliance with the substantive provisions of the Corporations Act. This pleaded assertion was not pressed in Mr and Mrs Cassimatis' submissions and the FPA review was not tendered in evidence by ASIC.

Paragem 711 The compliance reviews by Paragem are the most significant of the matters relied upon by Mr and Mrs Cassimatis to demonstrate the unlikelihood that a reasonable director in their position would have foreseen a breach of the Corporations Act, including s 945A. 712 Paragem's (including Tribeca's) reviews were discussed above. They did not find any, or any likely, serious contraventions by Storm of any provision of the Corporations Act. As I have explained, Paragem gave a general approval to Storm in those reviews. Paragem considered, and Mr Cashel explained, that Storm's process for monitoring and rectifying systemic breaches and notifying ASIC of significant breaches were "very good" policies (ts 477). Some of the subsequent comments from Mr Cashel were glowing. His email on 15 January 2009 was expressed in very positive terms: Of all the licensee[s] we have dealt with over the years I can say that there are only 2 that I would regard as truly professional and Storm is one of them. Brenda said she would rather deal with Storm than any other licensee. Although some may say that Storm was extravagant in its image, underneath that image was a professional organisation that provided employment and educated its staff and put clients first. 713 The approvals from Paragem were, however, subject to serious limitations. The known limitations are such that a reasonable director in Mr and Mrs Cassimatis' position could not reasonably have placed great weight on the Paragem reports in assessing whether the Storm model and its application was compliant with the Corporations Act. 714 First, the $5,000 "licensee compliance review" conducted by Paragem was conducted only on the information provided to it. Separate inquiries were not conducted. A different type of review offered by Paragem was a "representative review" which involved a review of representatives' businesses through the client files. As a reasonable director in Mr or Mrs Cassimatis' position would have known, the Storm review was not a representative review. As Mr Cashel explained, in representative reviews the appropriateness of the advice given by a representative to clients is considered. 715 One consequence of the review not being a representative review is that Mr Cashel and Ms Wybenga did not consider any client files although, as I explain below, one was requested as a sample (ts 479). They did not even review Storm's template SOA. The licensee compliance review was heavily dependent upon information given to Paragem by Mr and Mrs Cassimatis. As Mr Cashel said, "we ask the client to produce these documents. If they don't want to produce them… that's okay. … if we did see [a document], the report would have made comments on it". Mr Cashel was told that Storm's clients should be "treated [as] retail", that a majority were between 45 and 55, and that the clients had "no kids - no debt" (by which reference to "kids" he meant "no dependent children") (ts 474-475). Mr Cashel and Ms Wybenga were aware that Storm's advice involved gearing and margin lending. They were told that there were around 3,500 clients (ts 474). 716 Secondly, Mr Cashel said that he did not have, or did not recall, any discussions about whether Storm had clients who were retirees (ts 475). Mr Cashel was shown an advertising flyer for a presentation on retirement funding. He accepted that he probably saw it in 2007 and that he would have analysed it to ensure it was not misleading and contained the required general advice warnings. But he did not recall the flyer in any further detail (ts 475). Ms Wybenga was not asked whether she was aware that any clients were retired or close to retirement. The reports did not make any reference to retired clients. And I do not accept that either Mr Cashel or Ms Wybenga was made aware of any Storm clients who were retired, or near retirement, in circumstances where they had few assets and limited income (as pleaded by ASIC). 717 Thirdly, both Mr Cashel and Ms Wybenga gave evidence that in 2005 they had told Storm that Storm personnel should be going to the offices of representatives with a checklist. Mr Cashel said that this process had not been adopted at the time of the 2007 report (ts 481). Although Ms Wybenga agreed that in 2007 this had been implemented, I prefer Mr Cashel's evidence that there was nothing which demonstrated to them that this had been implemented. Ms Wybenga accepted that there was no record of who had visited, when the person had visited, or what was done (ts 492). Mr Cashel explained that there is nothing better than a compliance staff member sitting as a passive observer to listen to what an adviser is saying to make sure that the advice process is being followed (ts 482). He said that he thought that senior advisers did sit in on interviews but that a compliance officer should be independent (ts 482). 718 Fourthly, although Mr Cashel used superlative descriptions of Storm's processes in addition to the strong email he sent in 2009 (describing Storm as one of only two of his client base of fifty companies that he would regard as "truly professional" (ts 472)) those statements were based in part upon his strong support for the centralised Storm model which reduced the risk of problems with representatives. The statements would have been understood by a reasonable director in the position of Mr and Mrs Cassimatis in light of the lack of any review by Mr Cashel of client files. Indeed, Mr Cashel said, and I accept, that he had asked for a client file to be made available (in his request for documents) but he was not given one. He accepted (although Ms Wybenga did not) that viewing a single client file would normally be an essential part of the process (ts 479). But he said that he was not given a client file because it would have been included in his report if he had seen one.

The absence of any attempt to conceal any facts and the knowledge of lenders and advisers 719 Mr and Mrs Cassimatis also relied upon a number of matters in support of a submission that there was an absence of any warning to them despite knowledge of Storm's circumstances being public. 720 One matter relied upon in support of this submission was the prospectus issued by Storm in advance of its proposed IPO, and the absence of any suggestion that the prospectus contained any misleading statement. Each of Mr McCulloch, Mr Hutley and Mr Nelson signed verification certificates in relation to the prospectus. Mr and Mrs Cassimatis submitted that on a fair reading of the prospectus, the fact that Storm model was being applied to a broad range of clients - which would presumably include clients such as the Part E investors - was published to the world at large. 721 These matters could not have provided any reasonable director with a substantial basis to believe that Storm's approach to investors was compliant with the Corporations Act. The prospectus did not contain any information about advice that Storm gave to clients in the circumstances of the pleaded investors. There was no hint that the Storm model had been applied to clients who were retired or near retirement, with few assets and little income (as pleaded). 722 Mr and Mrs Cassimatis also submitted that the age and financial details of the individual Part E investors and their participation in the Storm model were known to: (i) their banks and lenders - particularly including the CBA and representatives from Challenger and Colonial (margin lenders) (ts 165); (ii) Storm's advisers; and (iii) the clients themselves and anyone they chose to communicate with (including the other financial advisers whom Storm invited to consult). Mr and Mrs Cassimatis submitted that there is no evidence of any of these people expressing the view that advice to the Part E investors or similar clients was inappropriate (at least prior to the GFC). Indeed, they submitted, Mr Benson spent 18 months undertaking due diligence inquiries into Storm and was impressed with what he saw in terms of Storm's compliance policies and procedures. Mr Benson then transitioned 70 or so clients over to the Storm model, of varying ages and financial position. 723 These matters might have provided some degree of comfort to a reasonable director with the responsibilities of Mr and Mrs Cassimatis that Storm was providing appropriate advice. But that comfort would, again, have been limited. 724 In relation to the lenders, there are three reasons why this comfort would have been limited. 725 First, it would be unreasonable for any director to assume that advice to a client to invest was appropriate merely because a bank or lender had agreed to lend, particularly where the bank had taken security over the investor's family home. By agreeing to lend with that security it could not be assumed that the bank expected that there was no real likelihood that the security would ever be called upon. I do accept, however, that Mr and Mrs Cassimatis might have reasonably derived some degree of comfort from the banks' agreement to lend, including in circumstances in which (i) there were numerous meetings with the CBA, including one when Mr Cassimatis met with senior executives for several hours to explain the Storm model, and (ii) on the assumption that all the lenders had access to information about the assets, liabilities, income, and age of prospective borrowers and would take these matters into account in deciding whether to approve the loan. 726 The comfort derived by Mr and Mrs Cassimatis in relation to this matter was also limited in relation to the most substantial meeting with the CBA upon which Mr and Mrs Cassimatis relied. This was the meeting between Mr Cassimatis and senior executives. But this meeting was in 1999. It is difficult to draw any inference concerning whether, and the extent to which, Storm had vulnerable clients at that time, before the expansion of Storm's client base over the next decade and up to a decade before Storm obtained the clients who were pleaded as falling within ASIC's class. Even more importantly, at a meeting which lasted only a few hours and which traversed the many aspects of Storm's model and operations, I do not consider it likely that Mr Cassimatis would have descended in any detail to the demographics of Storm's clients, and unlikely that he would have specifically directed the attention of the CBA to Storm's clients including retirees with few assets and little income. 727 Secondly, a reasonable director might not have expected that banks would have had the same duties to Storm as directors. I put to one side the unlikelihood of any general duty of care being owed by a bank to a corporation which seeks to obtain a loan on behalf of a client or the statutory duties of the banks. It is enough to say that any reasonable director would have concluded that the lenders had quite different interests from the company when deciding whether to lend. 728 Thirdly, the ANZ bank representatives expressed concern to Mr McCulloch and Ms Richards about the way that the Storm model assumed, or relied upon, growth in the index funds in the cash flows (ts 161). Although ANZ's concern was expressed generically, it is particularly important in circumstances where retirees or near-retirees invested in the Storm model with few assets and limited income. Mr McCulloch said that the concern was passed on to the banking team and to the compliance team (ts 209). It is likely that the concern would have been mentioned to Mrs Cassimatis, and I am satisfied that this would have occurred. 729 As for the advisers, including Mr Benson, the extent to which any or all of the advisers were aware that the demographic of Storm's clients included those clients in the class pleaded by ASIC was far more limited than Mr or Mrs Cassimatis. I am, however, satisfied that some of the advisers would have been aware of some retiree investors. And the advisers to persons in the position of the relevant investors would have been aware of the circumstances of those investors including their limited assets and limited income. Storm had also required the Authorised Representatives to agree in writing that services would be performed in an ethical manner and that (in broad terms) the representative would give appropriate advice and have a reasonable basis for advice that was given (setting out the terms of s 945A). 730 However, a reasonable director with the responsibilities of Mr and Mrs Cassimatis would have realised that in Storm's circumstances it was unlikely that any adviser would express concerns to Storm. I have described the considerable control that Mr and Mrs Cassimatis exerted over the advisers and the advice given. The SOAs were given to the advisers to present to the clients. For an adviser to conclude that the advice was not appropriate the adviser would need to disagree with the content of what had been provided by Storm. Mr and Mrs Cassimatis would have known that the advisers, who were highly remunerated by Storm, would have been aware that (i) Mr and Mrs Cassimatis had complete faith in the Storm model subject to its conditions being met, and (ii) Storm, and not the advisers, had control over the advice to be given and the decisions to be made concerning the clients. 731 Consistently with this strong assertion of control over the SOAs was the response by Mr Cassimatis to the unusual instance of a decision by Storm being questioned. Mr Benson referred to an occasion when he said that did not think some of his clients should receive an SOAA. Such an occasion of questioning whether an SOAA should be sent would be rare. But when it occurred on this instance Mr Cassimatis subsequently told Mr Benson that he should not "assume the advice is not appropriate for the clients, we are the specialists and you should present it as it is sent to you". 732 Mr and Mrs Cassimatis themselves relied upon one matter said to be a step taken to prevent Storm breaching the Corporations Act (closing submissions [433(s)]). That matter was that they had taken steps to ensure that recommended advice by Storm (if accepted by the client) was properly implemented. But the steps that they took to ensure that the advice in the SOA provided to the advisers was implemented, if accepted by the client, reinforced their control. The paragraph from Mr McCulloch's affidavit upon which Mr and Mrs Cassimatis relied illustrates this point. He said (at [25]): Storm's investment processing team, which would facilitate the various applications required to implement the investment recommendations once they had been accepted by a client, was required to check the proposed investment plan against the last cash flow approved by the compliance section. If there was a difference between the last approved cash flow and the recommendations made to, and accepted by, the client then the processing team was not permitted to implement the plan. These were the directions given to me by Mr and Mrs Cassimatis. 733 Finally, as for the clients themselves, I accept that Storm maintained a register of complaints and that, despite having advised thousands of clients, Storm received only 10 complaints from March 2001 to September 2008. However, this would not have provided much comfort to a reasonable director with Mr and Mrs Cassimatis' responsibilities that appropriate advice had been given to all clients including the class pleaded by ASIC. The clients in the relevant class had been convinced by Storm to invest. A reasonable director could not expect that any of the clients in the relevant class would complain that advice was inappropriate, at least until the client lost money. More fundamentally, a complaint by the client would assume that the client had, at least, some familiarity with the Corporations Act or the responsibility of financial advisers. 734 In any event, I do not accept that there was a complete absence of complaints to provide comfort to a reasonable director that advice being given to the relevant class was appropriate. Although there is little evidence of the details of all the complaints recorded by Storm, a lack of evidence is not evidence of a lack of complaint. For instance, ASIC did tender evidence of a complaint made by Mr Bullivant in relation to advice received by Mrs Bullivant. Mr and Mrs Cassimatis admitted in their rejoinder that: (1) the complaint received from Mr Bullivant was supported by an independent assessment of Storm's advice to Mrs Bullivant undertaken by Independent Complaint Solutions Pty Ltd and set out in a report dated 16 June 2004; and (2) the complaint and the assessment undertaken by Independent Complaint Solutions Pty Ltd were discussed at a meeting at Storm's Brisbane office on 13 July 2004 that was attended by various people including Mr and Mrs Cassimatis. 735 Although this document was not tendered for the truth of its contents, it is evidence that a complaint had been made to Storm which asserted that, in relation to a portfolio valued at $6,529,167 there had occurred a shortfall of $4.8 million which was needed to repay the bank loan, and that the bank would become a mortgagee in possession. It was alleged that the advice was inappropriate. It was alleged that the SOA did not clearly show the likely cash flow position of the client if the recommendations were undertaken and a period of unfavourable and rigorous market conditions were experienced. It was alleged that it was highly questionable that the cash flow requirements of the client were sustainable. Whether or not these allegations were accurate, they are evidence that at least one complaint had been made, and made by an investor who might have had considerably greater resources than those in the pleaded class.

The ASIC reviews and correspondence 736 Mr and Mrs Cassimatis relied upon four of the instances of reviews by, and correspondence with, ASIC. The first was in 1993, the second in 1995, the third in November 2005, and the fourth in November 2007. In addition, Mr and Mrs Cassimatis relied upon audits that ASIC conducted of AFSL holders, and ASIC's program of "shadow shopping". Each of these matters can be considered in turn. None would have given any significant basis for a reasonable person in Mr and Mrs Cassimatis' position to expect that the Storm model and its application was entirely compliant with the Corporations Act. To the contrary, some of these matters should have raised concerns. 737 As for the 1993 correspondence, this involved an article written in the press by Mr Cassimatis which promoted the low risk of index funds. ASIC investigated. Mr Cassimatis responded to the investigation including in his reply a newspaper article written by the respected financial commentator Noel Whittaker. That newspaper article (to which Storm referred on many occasions, including in SOAs), was entitled "You can't lose on index funds". Mr Whittaker began the article with the words "Psst! How would you like to learn about a foolproof way of selecting shares: one that guarantees that you cannot lose your money?" This article, and these words, were repeated in the slides used by Mr Cassimatis in the education workshops. The print of the article in the slides exhibited on this appeal was impossible to read, but there was no suggestion that Mr Whittaker's article had encouraged double gearing and mortgaging the family home in order to invest in index funds. 738 ASIC responded to Mr Cassimatis' letter by saying that "having regard to the ASC's current enforcement strategies, it has been decided that no further enquiries will be made into this matter by this Office". This was not an endorsement of the Storm model. More importantly, it said absolutely nothing about the application of the Storm model to retirees with little income and few assets. 739 As for the 1995 correspondence, on 9 October 1995 an inspection was conducted by Mr Bell and Mr Dziedzic from ASIC. They recorded in a memorandum that eight portfolios were reviewed which "had negative gearing margin lending recommendations". Mr Cassimatis was described as having responded that "clients are made fully aware of the necessity to set adequate sums of monies aside to meet the possibility of a margin call" and that only two clients were made subject to a margin call and that both margin calls had been easily met. 740 The ASIC inspection concluded that: On the basis of discussions and explanations provided, there appears to be insufficient evidence, at this point in time, to suggest that the recommendations were not in accordance with the requirements of section 851. 741 The reference to "insufficient evidence, at this point in time" was hardly a ringing endorsement of the Storm model. Further, it appears that none of the eight portfolios could have involved retirees with limited income and assets (other than the family home). In particular, during the inspection Mr Cassimatis "expressed the view that the pensioner and retiree population did not constitute a large part of his client base". It does not appear that Mr Cassimatis had suggested that these retirees were given negative gearing advice especially if they had limited income and few assets. The authors explained that "it was pointed out to the licensee that there should be no doubt in the minds of the investor about the losses which may result in times of market downturns. In particular those investors who have encumbered their principal residence as security should be made aware of the risks associated with such schemes". 742 The 1995 correspondence would not have given any comfort to a reasonable director with the responsibilities of Mr and Mrs Cassimatis so far as the Storm model was applied to retirees with little income and assets. It should have had the opposite effect. 743 The November 2005 review conducted by Mr Holiday and Mr Armstrong would not have led a reasonable director with the responsibilities of Mr and Mrs Cassimatis to conclude either that Storm's practices and procedures were lawful or that any risk of action being taken by ASIC in respect of the application of the Storm model to its clients was minimal. This is essentially for three reasons. 744 First, the meeting and review was far from comprehensive. ASIC had explained that the limited purpose of the review was in relation to changes to the Corporations Act. Mr Armstrong recalled discussion of the SOAAs but not discussion of the SOAs or cash flows or retired clients (ts 502-503). Mr Holiday had recommended at the meeting to Storm that Storm should engage a specialist compliance firm (which became known as Paragem) (ts 512). The implication from this recommendation was that ASIC was not performing a comprehensive review. 745 Secondly, I infer that there had been little or no discussion of the specific application of the Storm model to particular clients, and no discussion of retirees. To the extent that clients had been discussed, and to the extent that five client files were briefly reviewed, they caused Mr Holiday to make a note that the typical Storm client was "high equity". 746 Thirdly, two letters sent by ASIC to Storm after the visit had explained that ASIC's visit was not intended to be a comprehensive review of Storm's compliance arrangements and that a compliance visit should not be taken or represented as a statement of approval or endorsement of Storm's operations. 747 As for the November 2007 review, a reasonable director with the responsibilities of Mr and Mrs Cassimatis might have taken some solace from this meeting about Storm's procedures, but much. The meeting lasted for only 1-2 hours. It was not convened as a meeting or review for the purposes of examining Storm's procedures in giving advice. And, although there was some discussion about some of Storm's clients being "close to retirement or in retirement or in their 40s, 50s" (ts 543), the comparatively low income of many Australians in retirement age, and some of Storm's clients not having high net worth, I do not consider it likely that there was any discussion about whether Storm advised anyone to invest in the Storm model if the person was (i) close to or in retirement, and (ii) with low income and few assets. The examples shown on slides were clients in their 40s. And Ms Korpi's file note of the meeting described statements from Storm (likely Mr Cassimatis) which would suggest that Storm had not informed ASIC that it advised retirees to invest in the Storm model and had given the opposite impression: "treat client like corporation", "no autopilot, client's gearing level", "all clients treated as retail even though many clients wholesale", "reasonable basis of advice retail", "3 out of 4 say no debt - still a Storm client give traditional model". 748 On the rare occasion when ASIC representatives asked general questions about clients they were placated but the placation was without specific information about particular clients. So when Ms Korpi asked about client debt levels one of Storm's representatives said that Storm used relatively low LVRs so there was no problem with the level of debt. And when Ms Korpi asked Mr Cassimatis what would happen if the share market collapsed or there was a correction, Mr Cassimatis said words to the effect that he could not see that happening. 749 The final matters relied upon by Mr and Mrs Cassimatis in relation to ASIC was ASIC's audits of AFSL holders and ASIC's programme of shadow shopping. 750 ASIC had a program of reviewing and auditing practices and procedures of AFSL holders. Senior counsel for Mr and Mrs Cassimatis cross-examined Mr Cashel about an email concerning this regulation that Mr Cashel sent to his clients, including Storm, on 11 May 2005. The email was not pellucidly written because of a potential double negative, but it appeared to suggest that after September 2005 advisers would no longer be obligated to include in an SOA information on alternative products or strategies that were considered but do not form part of the final recommendation. The email read: (b) The following refinements DO NOT become effective until ASIC advises (expected September). (i) Statements of Additional Advice will not be required where there is an ongoing relationship between a client and a licensee/[Authorised Representative] and there are no significant changes in the clients personal circumstances. All that will be required is that the adviser retain a 'record of the advice'. I expect the devil will be in the detail when ASIC issues its class order. (ii) Advisers will not be obligated to include in a Statement of Advice information on alternative products or strategies that were considered but do not form part of the final recommendation (advisers will still have to retain working papers for 7 years that show these considerations). 751 The email was received by Mrs Cassimatis and noted for consideration at the next compliance update. Mr Cashel said that although he did not recall doing so, he would have advised clients, including Storm, after September about the effect of the changes (ts 469). He said, and I accept, that he would have advised that after October ASIC had clarified that the relaxation in (b)(ii) had not occurred. Advisers were required to include in an SOA the information about alternative products and strategies that they had considered (ts 469). 752 In any event, on 28 May 2007 ASIC issued Regulatory Guide 175. The Regulatory Guide described its purpose as being to consider how certain conduct and disclosure obligations in Part 7.7 of the Corporations Act apply to the provision of financial product advice to retail clients. It set out ASIC's policy for providing financial advice, and preparing and providing an SOA. The guide expressly said that (emphasis added, notes omitted): RG 175.126 In administering the law, we will take the view that an SOA should: (a) clearly and unambiguously set out the providing entity's personal advice; and (b) set out in easy-to-understand language, in one place, the reasoning which led to the advice, including: (i) subject to RG 175.127, a concise summary of the client's relevant personal circumstances as ascertained after making the reasonable inquiries required by s945A(1)(a); (ii) a generic description of the range of financial products, classes of financial product or strategies considered and investigated within the meaning of s945A(1)(b)); and (iii) a concise statement of the reasons why the advice was considered appropriate, including the advantages and disadvantages for the client if the advice is acted on. 753 Mr and Mrs Cassimatis submitted that there was nothing in the Regulatory Guide which provided that it was inappropriate to recommend double gearing to retirees with limited income and assets. Literally, this statement is correct. But there are many types of potentially inappropriate advice which were not contained in the Regulatory Guide. Further, there are statements in the Regulatory Guide which ought reasonably to have been understood as having this effect. For instance, an example of inappropriate advice at the other end of the age spectrum from recommending doubly geared investments to retirees (or near-retirees) might be thought to be the recommendation of a very low risk savings account to a 20 year old. Page 33 of the Regulatory Guide said: RG 175.90 If none of those financial products that the providing entity is authorised to advise upon is appropriate for the client, the providing entity must not recommend that a client buy any financial product. Note: For example, it would be inappropriate to recommend a savings account to a 20 year old for their retirement savings, even if the providing entity was only authorised to advise on deposit products. 754 Mr and Mrs Cassimatis then relied upon the statement in the guide (RG 175.5) that ASIC would monitor and review the provision of advice across the industry. The suggestion seems to have been that they could derive comfort from the failure of ASIC to point out any contravention involving provision of advice to retirees with limited assets and income to invest in the Storm model. But Mr and Mrs Cassimatis would reasonably have known that ASIC had not conducted a careful review of all their SOAs and the circumstances of all Storm's clients. The mere fact that ASIC regulated the industry, including by monitoring, reviewing, and auditing, could not have given any particular comfort to Mr and Mrs Cassimatis beyond their specific communications and interactions with ASIC as described above. And some of those matters should have given some cause for concern rather than comfort. 755 Mr and Mrs Cassimatis then descended to the detail of ASIC's actions to submit that a reasonable director with their responsibilities would have been aware that ASIC carried out "shadow shopping" programs from time to time. As Ms Koromilias explained, the term "shadow shopping" was a reference to ASIC seeking advice from a financial planner, either directly or indirectly, for purposes which included evaluating whether the licensee was complying with the law in its provision of advice (ts 539). A reasonable director with Mr or Mrs Cassimatis' responsibilities would have been aware that ASIC conducted shadow shopping from time to time (ts 538). But although senior counsel for Mr and Mrs Cassimatis submitted that they could not have known if Storm had been "shadow shopped", senior counsel did not mention the box on the Confidential Financial Profile for an adviser to tick after asking the client "Are you a shadow shopper?" 756 In 2003, ASIC produced a survey on the quality of financial planning advice, which covered numerous retirees and people approaching retirement. The shadow shopping component involved 53 volunteers who each approached three financial planning firms (page 10). ASIC concluded that: Recommended gearing 32% of plans recommended gearing as a strategy. It could be using an existing home as security for a loan or using a margin loan. There was little difference in the overall quality of advice where gearing was recommended. Gearing was sometimes recommended where it did not fit the client's risk profile. Where gearing was recommended, 26% of plans (10 out of 39) were in the "Poor" / "Very Poor" categories for Item 4.2 "Strategy matches client's risk profile", compared to 21% of plans without gearing. 757 Mr and Mrs Cassimatis relied on this conclusion for their submission that (i) gearing on the home did not strike ASIC or the Australian Consumers Association as problematic or inherently inappropriate, and (ii) although a substantial percentage of plans were "poor" or "very poor" for matching a client's risk profile, Storm was never told that it was in either of those categories. 758 Once again, I do not consider that a reasonable director with Mr or Mrs Cassimatis' responsibilities would have derived comfort from this to conclude that Storm's approach was entirely compliant with the Corporations Law. If anything, these matters should also have raised concern. First, ASIC published the names of the firms that had been approached. Storm was not one of them (pages 19-20). Secondly, of all of the firms approached, more than half (51%) were classified as providing advice which was either "borderline", "poor", or "very poor" (page 17). At least 14% did not meet minimum legal standards (page 31). Thirdly, an inference which might have been drawn from the report is that none of the financial advisers surveyed had offered advice to retirees, or those near retirement, to engage in geared investments. Indeed, at one point the report observed (at page 14) that advisers did not help a person near retirement even when that person had spare cash flow but it did not even suggest that a geared investment strategy should have been recommended: In some cases, the consumer gained the impression that the planner was not interested in them as a client. This may be because the planner was targeting a different market segment. For example, one volunteer of modest means was told by all 3 planners that there was nothing the planner could offer. This was despite the consumer being very anxious to plan for her retirement in 5 years' time and having some spare cashflow. Fourthly, on page 49, under the heading "Explanation of investment risks" ASIC referred to the importance of explaining investment risks especially with the prospect of dramatic market declines (emphasis added): For this item, 34% of plans scored "Fail" or "Poor". Brokers were particularly bad, with 9 out of 13 plans scoring "Fail" or "Poor". This result is all the more worrying given the plans were obtained during a period of dramatic market declines, when investment risk was a topical issue. Explanation of investment risk is particularly important when negative gearing or direct share purchases were recommended, or when the client is dependent on the income. Problems included: • no evidence that this element had been specifically addressed; • too much generic material; and • no discussion of risk profile to support recommended allocations in investments.

The non-executive directors 759 A reasonable director with the responsibilities of Mr or Mrs Cassimatis could not have expected that the non-executive directors were in a position to form any opinion about whether Storm's advice to persons in the class of the relevant investors was appropriate. If anything, the evidence from Mr Nelson should have raised concerns to a reasonable director with the responsibilities of Mrs Cassimatis. 760 As I have explained, although the non-executive directors were highly qualified, they had far less knowledge of the Storm model than Mr or Mrs Cassimatis. Their knowledge was limited to a few sources, mostly documentary. Although Mr Hutley thought that Storm would have some clients in retirement he said that he had not met any (ts 457-458). Mr Nelson, who was an impressive witness, said that he thought that Storm's client base consisted primarily of sophisticated, high net worth investors. He did not know, and had not been made aware, that investors like the Part E investors were Storm clients. 761 Mr Hutley had been made aware of the general range of LVRs that Storm had and that Storm gave advice which involved taking home loans. He also was made aware that Storm had some retired clients. Mr and Mrs Cassimatis relied upon the detail of three slides which Mr Hutley could not recall having seen. Mr Hutley was shown the slides quickly in cross-examination. His attention was not drawn to any particular part of them. Although Mr Hutley said that he saw things which were "consistent" with the slides, he was not asked, and did not explain, the manner in which the things he had seen were "consistent" (ts 459). The slides he was shown had a couple of lines of print at the top which described three clients retiring with $500,000 or $750,000 in investments and income of $40,000 to $50,000. But the slides were dominated by a graph, rather than this client-specific information. The graphs showed the increasing value of the clients' investment vastly exceeding their net investment. I do not accept that Mr and Mrs Cassimatis could reasonably have considered that Mr Hutley was aware of the details of any particular retiree client. Indeed, Mr Hutley's evidence was that he was not even made aware that advice to clients "typically" involved a home loan (ts 456). 762 Neither Mr nor Mrs Cassimatis could reasonably have assumed that either Mr Hutley or Mr Nelson had any substantial knowledge of the manner in which Storm applied its model to particular clients. Mr and Mrs Cassimatis could not reasonably have expected that either of the non-executive directors was aware of matters such as (i) the financial position, including the income and assets, of any of the clients at the time they were given the advice, or (ii) the ability of any clients to fund the costs of any borrowings independently of the performance of the investments. The non-executive directors did not have that awareness. Mr Hutley was provided with the most information but, as I have explained, Mr and Mrs Cassimatis would reasonably have been aware that Mr Hutley did not review any client files, cash flows, spreadsheets or client specific SOAs. Mr Hutley did not consider the manner in which any advice was given to any particular client nor the appropriateness of any advice that Storm gave to a particular client. As for Mr Nelson, he said that if he had known of this then he would have been concerned and would have raised questions with Mr and Mrs Cassimatis. 763 Rather than being a source of comfort, a reasonable person with Mr and Mrs Cassimatis' responsibilities should have had concerns from some matters raised by the non-executive directors relating to the risk of the contraventions of the Corporations Act in relation to retired investors with low income and few assets (and little prospect of recovering their financial position). One of those matters was that in 2007 when Mr Nelson was contemplating joining Storm as a non-executive director he asked Mrs Cassimatis about the appropriateness of an equity-based leverage investment model for retirees. He recalled her replying that as people aged it would become more appropriate to have more of their assets in a more conservative mix such as cash and property. He also accepted that the gist of the conversation was that the retirees' comparative debt levels were lower (ts 464). Mr Nelson might have been placated but his queries should have raised concern, especially together with other concerns raised, to a reasonable director with Mr or Mrs Cassimatis' responsibilities.

The IPO advisers 764 In cross-examination, Mr McCulloch said that up to 10 people within Storm were working on the IPO prospectus in 2007, and Storm had a number of external advisers assisting as well - none of whom told Mr McCulloch that Storm's advice model was breaching the Corporations Act (ts 193-194). He said that the IPO had two parts: an offer to institutional investors and an offer to retail investors (ts 194). And he said that the timing of the IPO coincided with a fall in the market in December 2007 and another IPO from Westpac's financial planning business (ts 194). 765 The due diligence investigations were undertaken by PwC and MSJ (Storm's lawyers) prior to the proposed IPO of shares in Storm. Any reliance upon the work undertaken by external advisers such as PwC and MSJ must have regard to the scope of Storm's retainer with those firms. 766 Further, Mr McElvogue, at PwC, had no training or experience in the provision of personal investment advice to retail clients; he had no financial planning qualifications; and to the best of his knowledge no one else at PwC Securities or PwC who was involved in the work for the IPO had such training or expertise. 767 As ASIC submitted, nothing in the due diligence report (issued on 5 November 2007 by PwC Securities) suggested that during the due diligence process PwC were retained to investigate or report on whether Storm was providing advice to its clients in accordance with the requirements of the Corporations Act. To the contrary, Mr McElvogue's evidence was that during the IPO process, PwC was not instructed to, and did not: (1) review client files or the terms of financial advice given by Storm to any particular clients; (2) assess whether Storm's advice was appropriate to the individual circumstances of particular clients; or (3) review or consider the advice given to any of the investors referred to in ASIC's statement of claim. 768 Since neither PwC nor MSJ were retained to investigate or report on Storm's compliance with the Corporations Act in its advice to clients, a reasonable director with the responsibilities of Mr or Mrs Cassimatis (with knowledge of how Storm applied the Storm model to its clients) would not have relied upon the two due diligence reports, or the lack of concern by PwC, PwC Securities or MSJ, as a substantial basis upon which to conclude that Storm was wholly compliant with the Corporations Act.

Borrowing to invest a popular strategy and the unrepresentative nature of investors 769 Finally, Mr and Mrs Cassimatis submitted that borrowing to invest was a common strategy at the time, including the use of home loans and margin loans. They also submitted that the individual investors who suffered loss were not representative of the much larger group of investors. 770 I accept that borrowing to invest may have been a common strategy at the relevant times, although the use of both home loans and margin loans to invest was not common. I also accept that the class of investors pleaded by ASIC was a small proportion of Storm's customers. Mr Hutley explained that in 2007 Storm's client base (a term used very loosely) included more than 3,000 clients who had invested in index funds with loans including a margin loan (ts 457). 771 These matters may have made it less likely for a reasonable director without significant responsibilities to foresee the contraventions by Storm as likely. However, the nature of the responsibilities assumed by Mr and Mrs Cassimatis, and the manner in which they exercised their powers, was such that a reasonable director with their responsibilities should have foreseen, and foreseen as likely, the prospect that inappropriate advice would be given to persons in that small proportion represented by the pleaded class of retired investors with few assets and limited income.

The consequences of contravention and the burden of alleviating action 772 Mr and Mrs Cassimatis focused heavily upon the alleged lack of foreseeable likelihood of potential or actual breach. But, provided a breach is reasonably foreseeable, the likelihood of breach is only one matter to be considered in an assessment of the duty of care and diligence. Other crucial matters include the consequences of breach and the burden of alleviating action. Even if I had concluded that contraventions of the Corporations Act were reasonably foreseeable but unlikely (rather than my conclusion that they were likely) the consequences of breach were so significant, and the burden of alleviating action so minimal that it is still possible that a contravention by Mr or Mrs Cassimatis might have occurred. The alleviating action could have taken many forms such as for Mr or Mrs Cassimatis to take any steps to put in place any procedures for SOAs not to advise the application of the Storm model to persons in the pleaded class, broadly persons near or at retirement with few assets and limited income. 773 The extent of the adverse consequences that occurred for the investors was undoubtedly a result of the GFC which was an event with a magnitude which could not have reasonably been foreseen by a director in the position of Mr or Mrs Cassimatis. There may also have been other causes of their losses, as Mr and Mrs Cassimatis submitted. Those other causes may have included difficulties that the banks had in managing margin loans, margin calls not being received when they should have been received, the timing of the fall of the share market coinciding with the quarterly distribution in the index funds, delays in the banks updating their securities, volatile data from the banks, and mistaken calculations of LVRs by Colonial. Nevertheless, the existence of other possible causes does not detract from the significance of another cause of the relevant investors' loss, which was the inappropriate advice by Storm. If Storm had not inappropriately advised the relevant investors to mortgage their home and invest using the Storm model then they would not have invested in this way the first place and would not have been exposed. 774 Although many of the relevant investors suffered significant, life-altering, losses after the GFC, these losses were neither necessary nor sufficient for Storm's breach of s 945A of the Corporations Act. Further, although losses of this nature, whether due to the GFC or any other large market fall, might have been one way that the application of the Storm model to vulnerable investors became clear to many people outside Storm, the discovery of these breaches by Storm was not necessarily dependent upon these losses. It is not necessary to speculate upon the different ways that the breaches might have come to the attention of ASIC, whether by an adviser, a client, a competitor, a bank, or otherwise. The short point is that the likelihood of breaches, and the not insignificant size of the class of potentially vulnerable investors (retirees, with limited income and few assets) was such that the breaches were likely to be discovered at some point. At the very least, a reasonable director with Mr and Mrs Cassimatis' responsibilities, and in Storm's circumstances, should have realised that discovery of the likely breaches was a real possibility. And the consequences of discovery were catastrophic for Storm. 775 One consequence of the likely contraventions by Storm was that, by s 915C, ASIC could suspend or cancel Storm's AFSL because it had not complied with its obligations under s 912A. Storm was authorised by its AFSL to provide financial product advice for various classes of financial products including interests in managed investment schemes (which include index funds). The nature and seriousness of the contraventions by Storm were such that an action under s 915C to suspend or cancel Storm's AFSL licence was a real possibility. This consequence was not merely one which put Storm's interests in jeopardy. It was a threat to the very existence of Storm because s 911A of the Corporations Act requires a person who carries on a financial services business in Australia to have an AFSL. Any reasonable director would have taken this possibility extremely seriously. 776 Another consequence of the likely contraventions by Storm was the possibility of a banning order under the Corporations Act. Section 920A(1) of the Corporations Act permits ASIC to make a banning order in circumstances including contravention of s 912A by Storm or if Storm had not complied with a financial services law. Section 920C(1) provides that a person against whom a banning order is made cannot be granted an Australian financial services licence contrary to the banning order. In the circumstances of this case, a very real possibility arising from the likely contraventions of s 945A was a banning order. As Bromwich J said in Panganiban v Australian Securities and Investments Commission [2016] FCA 510 [15]: Banning orders under s 920A of the Corporations Act are one of the mechanisms used by ASIC to address concerns about shortcomings of such persons as financial advisors in respect of fairness, honesty and professionalism. Such a sanction, appropriately applied, has the necessary effect of deterring others from failing to adhere to those standards. That in turn facilitates ASIC's statutory obligation, in performing its functions and exercising its powers, set out in s 1(2) of the Australian Securities and Investments Commission Act 2001 (Cth) ... In particular, ASIC is required, in performing its functions and exercising its powers, to "promote the confident and informed participation of investors and consumers in the financial system": see s 1(2)(b) of the ASIC Act. 777 I accept that Storm took some steps in an attempt to reduce some of the consequences of potential breaches of the Corporations Act, including maintaining professional indemnity insurance, adopting an alternative dispute resolution policy, and maintaining open lines of communication with ASIC. As Mr and Mrs Cassimatis pointed out, they had also implemented risk management practice and policies for Storm which began with the following summary: Executive Summary Storm recognises that all financial service providers face situations or events that may constitute either opportunities from which the firm may benefit or threats to its success. To this end Storm has established a risk management framework that will maximise the firm's ability to profit from opportunities and minimise threats. The management of Storm recognises total avoidance of risk is not conducive to good business practice, however strong risk management policies and procedures will ensure the risks are contained. 778 But although some steps were taken, in light of the likelihood of risk of contravention in relation to the class of investors pleaded by ASIC and the seriousness of the consequences of breach, these steps were nowhere near enough to minimise the reasonably foreseeable risk presented to Storm. A reasonable director with the responsibilities of Mr or Mrs Cassimatis would have exercised his or her powers to take at least some steps to prevent advice being given to persons with all the attributes in the pleaded class (at least). Without taking some steps to address the application of the Storm model to these vulnerable investors then the number of these investors would probably have increased until some major event such as a market crash causing major losses for those in this class, brought this class into focus for those outside Storm such as ASIC. 779 It may be, although it is unnecessary to decide, that a reasonable director in their position and with their responsibilities would have taken such steps even in relation to investors with only some of these characteristics. But, to the investors in the pleaded class who were amongst the most vulnerable, there was no, or no substantial, steps taken by Mr or Mrs Cassimatis to prevent (ie not permit) inappropriate advice to them to invest using the Storm model. Instead, Mr and Mrs Cassimatis exercised their powers in a way that had the effect of encouraging the application of the Storm model to persons such as those in this class. The simple point is that they omitted to take any action at all to redress the likely breaches of the Corporations Act which they had caused or permitted by the creation and manner of operation of the Storm model. 780 Mr and Mrs Cassimatis submitted that their omission to take any steps was not significant because steps that they might have taken might have made no difference. 781 First, they pointed out that the five characteristics of the vulnerable investors, as pleaded by ASIC, were not the only characteristics of those clients. Others included matters such as the clients' tolerance of risks, desire to increase income, desire for capital growth, and many other factors. This is true but, as I have explained, none of these factors could make it appropriate for retired or nearly retired investors with few assets and limited income to invest in accordance with the Storm model. 782 Secondly, Mr and Mrs Cassimatis submitted that it was far from clear that exclusion of a category of client as a class would be preferable from a case by case assessment of the client's circumstances by an individual adviser. This cannot be correct. As I have explained, it would have been apparent to Mr and Mrs Cassimatis that the Storm model was being applied to clients in this vulnerable class. It was reasonably clear to them that a case by case analysis would not, and did not, exclude these clients. The Storm model applied, as they knew and intended, to almost every client who satisfied Storm's conditions and who could borrow sufficient funds. 783 Thirdly, Mr and Mrs Cassimatis submitted that the definition of ASIC's category was too loosely defined for an employee or representative of Storm to identify reliably whether a client or potential client fell within the category. Mr and Mrs Cassimatis are correct that ASIC's class was defined using terms of some elasticity" "approaching and planning for retirement", "little or limited income", "few assets", "little or no prospect of rebuilding their financial position", and "significant loss". But this submission misses the point that there is no magic in the precise identification of the class by ASIC, particularly in relation to the burden of alleviating precautions. For instance, it might have been sufficient for Storm simply to demand exclusion from the application of the Storm model all retired investors, or investors within 5 years of retirement, with income below a particular level and assets below a particular level. Even steps short of exclusion, such as guidelines, might have been sufficient. The simple point is that no steps at all were taken in this direction. 784 Fourthly, Mr and Mrs Cassimatis submitted that it would have been administratively difficult to implement a system that excluded clients or particular clients falling within ASIC's class. They pointed out that married couples who invested together were of different ages, sometimes only one member of a couple was retired, and investors who turned 50 might not wish to sell their investment on or shortly after their birthdays. This submission involves the erroneous assumption that Mr and Mrs Cassimatis' duty was to take steps which would absolutely ensure that no investor within ASIC's class could ever invest in Storm. This is not correct. A duty of care never requires a person to take steps to ensure that the consequence can never occur. For instance, Mr and Mrs Cassimatis might have implemented a system (such as directions to the cash flow and SOA cells for the Storm model not to be applied) which was designed to reduce the likelihood that Storm would advise the use of the Storm model in only a sub-group of ASIC's proposed class. That sub-group might have been retired investors with assets comprised only of a family home, combined income of less than $80,000, and superannuation and other assets of less than $150,000. I do not suggest that this would necessarily have been sufficient to discharge their s 180(1) duties. It might not have been sufficient. But, to reiterate, Mr and Mrs Cassimatis were not necessarily required to implement a system directed to redress only (what they described as) ASIC's "fixed exclusion parameters". But they were required, by the application of s 180(1), to take alleviating precautions which were sufficient in all the circumstances. There were no steps at all that were taken for alleviating precautions of this general type.

Section 1317S of the Corporations Act 785 Mr and Mrs Cassimatis pleaded that if they had breached their duties as directors then they ought fairly to be excused from those contraventions under s 1317S of the Corporations Act. 786 Section 1317S provides, relevantly for this case: 1317S Relief from liability for contravention of civil penalty provision (1) In this section: eligible proceedings: (a) means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 961M, 1317GA, 1317H, 1317HA or 1317HB); and (b) does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H, 1317HA or 1317HB). (2) If: (a) eligible proceedings are brought against a person; and (b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that: (i) the person has acted honestly; and (ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person's appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention; the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention. (3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and (b) when that action was taken; and (c) the results of that action. … 787 The term "eligible proceedings", defined in s 1317S(1) above as proceedings for a contravention of a civil penalty provision, includes proceedings for contravention of s 180. 788 The important words for the purposes of this case are "ought fairly to be excused for the contravention". They are words of very wide generality, importing a broad evaluative discretion.

The history of s 1317S 789 The history of s 1317S is important in two key respects. First, it demonstrates the dangers in applying directly the authorities which consider the phrase "ought fairly to be excused" in the context of trustee legislation. Secondly, and related to this point, it emphasises the importance of the omission of the word "reasonably". Prior to 1981, a person must have acted honestly and reasonably to come within the ambit of the excuse provision. 790 The key point in this section is to explain that by a series of legislative enactments, the provision in s 1317S of the Corporations Act was derived from s 3 of the English Judicial Trustees Act 1896 (UK) but involving a substantial change. As Lowry and Edmunds observe, s 3 was enacted against the backdrop of circumstances in the 1890s where "the ranks of those willing to act as lay trustees was rapidly dwindling and the shortfall was being met by professionals, generally solicitors"; the Lord Chancellor who moved the second reading of the Judicial Trustees Bill had remarked that people were showing great reluctance to act as trustees: Edmunds R and Lowry J, "Excuses" in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, 2002) 269, 274. 791 Section 3 of the English Judicial Trustees Act 1896 provided as follows: (1) If it appears to the court that a trustee, whether appointed under this Act or not, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the passing of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve the trustee either wholly or partly from personal liability for the same. (2) This section shall come into operation at the passing of this Act. 792 In 1906 the Company Law Amendment Committee was established to undertake a review of company legislation in the United Kingdom. The committee was chaired by Lord Loreburn LC (formerly Sir Robert Reid), who had also chaired the 1895 Select Committee on Trusts Administration which led to the Judicial Trustees Act 1896 s 3: see Edmunds R and Lowry J, "The Continuing Value of Relief for Directors' Breach of Duty" (2003) 66 MLR 195, 198. 793 The Company Law Amendment Committee reported that the Companies Act 1900 (UK) had "made many prudent and honest men decline to take the risk of accepting directorships, and rendered the promoter's task in organising his company more difficult" (Loreburn Report (1906) Cd 3052: Report of the Company Law Amendment Committee, London, HMSO, 1906, 5 [16(3)]). In an attempt to remedy this, the Committee drew upon its knowledge of the Judicial Trustees Act 1896, saying that "[a]n analogous power … has already been given to the Court in the case of trustees by Section 3(1)(a) of the Judicial Trustees Act, 1896". It recommended a new excuse provision for directors which had two limbs (10 [24]): We therefore recommend that the law be amended:- (1) By giving power to the Court to relieve any director or promoter from liability for breach of any duty imposed on him by the Companies Act, 1862 to 1900, provided that the breach has been occasioned by honest oversight, inadvertence, or error of judgment on his part. (2) By giving the Court power, in an action for negligence or breach of trust against a director, to relieve him from his liability on such terms as the Court may consider proper, where the Court is satisfied that he has acted honestly and reasonably. 794 The two-tiered approach recommended in the Loreburn Committee report caused considerable debate in the House of Commons in 1907. One proposal was to omit the provision altogether (Hansard, House of Commons (UK), Vol CLXXXI (Fourth Series), 21 August 1907, p 892 (Mr Hills), p 894 (Mr Radford). Mr Lloyd-George, then President of the Board of Trade, recommended a provision that only enacted the second tier of the Committee's two-tiered test. In doing so, he made reference to the Judicial Trustees Act 1896. The following Hansard extract summarises his recommendations (Hansard, House of Commons (UK), Vol CLXXXI (Fourth Series), 21 August 1907, pp 894-896) (emphasis added): …men were made directors of companies for different reasons. A man might be an inventor, for instance and it would be rather hard if, having been made a director because of his expert knowledge, he were held to be responsible for some great financial blunder in which he had no part, and against which he was never expected to protect the public. … So long as each director acted honestly in the special branch of the business allocated to him, he ought to have some protection. But he was not, of course, in favour of protecting the directors who grossly neglected their duty, and who showed that the trust which the public rested in them was misplaced. But the point was that they must not frighten away the best class of men… While he did not think they should insert provisions of that kind to frighten desirable men away, he wanted such protection of the public as was given in the Judicial Trustees Act... It might be that [an honest director, who had made a mistake through no fault of his own] was amply looked after under Subsection (2), taken from the Judicial Trustees Act, and which, no doubt by this time, had stood the test of judicial interpretation. 795 The House of Commons debate eventually resulted in the enactment of s 32 of the English Companies Act 1907 (UK), which provided (in similar terms to s 3 of the Judicial Trustees Act 1896): 32. If in any proceeding against a director of a company for negligence or breach of trust it appears to a court that the director is or may be liable in respect of the negligence or breach of trust, but has acted honestly and reasonably, and ought fairly to be excused for the negligence or breach of trust, the court may relieve him, either wholly or partly, from his liability on such terms as the court may think proper. 796 A body of case law has recognised that s 32 of the English Companies Act 1907, and the more recent, equivalent provisions, were derived from s 3 of the Judicial Trustees Act 1896: see eg Lawson v Mitchell [1975] VR 579, 585 (the Court); Edwards v Attorney General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667, 689 [118] (Young CJ in Eq.). 797 Section 32 of the Companies Act 1907 was reproduced the following year in s 279 of the Companies (Consolidation) Act 1908. Section 279 of that Act provided: 279. If in any proceeding against a director, or person occupying the position of director, of a company for negligence or breach of trust it appears to the court hearing the case that the director or person is or may be liable in respect of the negligence or breach of trust, but has acted honestly and reasonably, and ought fairly to be excused for the negligence or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as the court may think proper. 798 The excuse provision reached Australia in 1910. An identical provision to s 279 of the Companies (Consolidation) Act 1908 was enacted in s 288 of the Companies Act 1910 (Vic). The marginal notes to s 288 of the Victorian Act as enacted referred to "8 Edw. 7 c. 69 s. 279" (ie the Companies (Consolidation) Act 1908). 799 When the Victorian Bill was read for the second time, Mr Mackey said that the "notable departures" in Victoria from the laws of England were very minor (such as a requirement in Victoria that the publication of balance-sheets was compulsory). He explained that the benefits of Victoria enacting legislation similar to England included simplicity, certainty, and a greater body of applicable case law: Hansard, Legislative Assembly (Victoria), 4 August 1910, pp 479-480; see also Hansard, Legislative Assembly (Victoria), 10 November 1910, p 2197 (Mr Mackey), p 2198 (Mr Murray) and Hansard, Legislative Council (Victoria), 30 November 1910, pp 3754-3755 (Hon W S Mansfold)). 800 Section 288 of the Companies Act 1910 (Vic) was reproduced without amendment in s 288 of the Companies Act 1915 (Vic) and again in s 288 of the Companies Act 1928 (Vic). It was picked up in s 361 of the Companies Act 1936 (NSW), and s 254 of the Companies Act 1958 (Vic). 801 As I have explained earlier in these reasons, in 1961 the Australian States enacted uniform companies legislation. By this stage, the excuse provision had become more extensive, although its content did not differ substantially. It was followed by s 535 of the Companies Act 1981 (Cth). There a significant change was made. Relevantly for the purposes of this case, that section provided (emphasis added): 535 Power to grant relief (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity by virtue of which he is such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that he has acted honestly and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default or breach, the court may relieve him either wholly or partly from his liability on such terms as the court thinks fit. 802 The Explanatory Memorandum to the Companies Bill 1981 (Cth) explained that (emphasis added): Cl. 535: Power to grant relief 1163. Where there are proceedings actual or anticipated, for negligence, default, breach of duty or breach of trust against officers and certain other persons who have functions to perform in relation to a corporation, the court will be able to relieve that person of liability where it appears to the court that he acted honestly and ought fairly to be excused (CB cl 535). 1164. These powers to grant relief are based on those in [the Uniform Companies Acts] s. 365 except that the requirement that the person appear to have acted "reasonably" as well as honestly has been omitted - the NCB cl 561 also required reasonableness. 803 The omission of the word "reasonably" in s 535 of the Companies Act 1981(Cth) meant that it was no longer a requirement that a person act reasonably for the Court to be able to relieve him or her from liability. Since 1981, it has therefore been sufficient for the Court to find that the person acted honestly, and ought fairly be excused from liability. 804 Section 535 of the Companies Act 1981 (Cth) was later reproduced without substantial amendment as s 1318 of the Corporations Law when it was enacted in 1989. The Explanatory Memorandum to the Corporations Bill 1988 (Cth) explained that s 1318 of the Corporations Law was based on s 535 of the Companies Act 1981 (Cth) (at [3933]). Section 1318 was amended in 1992, and re-enacted as s 1318 of the Corporations Act 2001, albeit with some extension to who the section applies to (the provision did not use to apply to employees of a corporation). Section 1318 of the Corporations Act 2001, as currently enacted, provides (relevantly to this case): 1318 Power to grant relief (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit. 805 In 1992, s 1318 formed the basis for a new provision in the Australian Corporations Law, namely s 1317JA. Section 1317JA was introduced by the Corporate Law Reform Act 1992 (Cth). The Explanatory Memorandum of the Corporate Law Reform Bill 1992 (Cth) said that s 1317JA was "based on section 1318 enabling the Court to relieve a person from liability arising out of certain contraventions of a civil penalty provision where the person has acted honestly and, having regard to all the circumstances of the case, the person ought fairly be excused for the contravention" (31 [121]). 806 Section 1317JA was the predecessor to s 1317S of the Corporations Act 2001 (quoted above at the commencement of this section). Section 1317S was introduced as part of the Corporations Act in 2001. There was no detailed discussion of the provision in the Explanatory Memorandum of the Corporations Bill 2001 (Cth). Only minor amendments have been made to s 1317S since it was enacted in 2001. Specifically, in 2001 the list of civil penalty provisions in s 1317S(1)(a) was confined to ss 588M, 588W and 1317H of the Corporations Act. Additional provisions were added to this list in 2004 (s 1317HA) and 2012 (ss 961M, 1317GA and 1316HB of the Corporations Act). 807 Section 1317S is in similar terms to s 1318 of the Corporations Act 2001, and the criteria to be considered by the court are the same in relation to both provisions.

The omission of the requirement for "reasonableness" 808 As I have explained, a crucial break in the history of the provisions which led to s 1317S was the 1981 deletion of the requirement that the person seeking to be excused act "reasonably". The Explanatory Memorandum to the 1981 Bill did not explain the reason for the change. In Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2005) 65 NSWLR 281, 288 [23], Austin J pointed out that the Companies and Securities Law Review Committee's Discussion Paper No 9 had suggested that the deletion of the word "reasonably" was a response to a comment by North P where his Honour found it "difficult to understand how a negligent officer or auditor could nevertheless be held to have acted 'reasonably'": Dimond Manufacturing Co Ltd v Hamilton [1969] NZLR 609, 645; Companies and Securities Law Review Committee, Company Directors and Officers: Indemnification, Relief and Insurance, Discussion Paper No 9, April 1989, [114]-[115]. See also Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith [1989] SASC 1928; (1989) 54 SASR 285, 295 (Olsson J). 809 Although reasonableness is no longer a requirement before a person can be excused, as Bergin J explained in Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430, 456 [160], the reasonableness of conduct remains a relevant consideration in the exercise of the discretion concerning whether the relevant party ought "fairly" to be excused from liability. And although her Honour referred to the attention of the Court being "primarily" upon whether the director had acted honestly (at 456 [159]), this was simply to contrast the absolute requirement of honesty with the relegation of reasonableness from the status of a requirement to a mere factor to be considered: see Australian Securities and Investments Commission v Vines, 289-290 [32]-[33] (Austin J). 810 The element of reasonableness is therefore no longer a requirement for the excuse provision to apply, but the breadth of the expression "ought fairly be excused" is capable of incorporating reasonableness as a consideration. This is particularly so since the assessment must take place (i) in "all the circumstances of the case", and (ii) in light of the express incorporation of what might be seen as reasonableness matters in s 1317S(3). The more unreasonable the action (or, in the language of the older cases, the more "gross" the unreasonableness), the more unlikely that it will be that a person ought fairly to be excused. Indeed, Mr and Mrs Cassimatis did not make any submission to the contrary. 811 Of course, the extent of the unreasonableness (in the sense of lack of care and diligence in discharge of their duties) of the conduct by Mr and Mrs Cassimatis (as compared with a reasonable director in their circumstances and with their responsibilities) is only one factor to be considered in determining whether they ought fairly to be excused. In Morley v ASIC (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620, the Full Court referred to considerations other than the degree to which the person's conduct fell short of the statutory standard of care and diligence (at 630 [50]): the seriousness of the contravention and its potential or actual consequences; impropriety such as deceptiveness or personal gain (which may not survive acting honestly); and contrition. This is by no means exhaustive, and all the circumstances of the case are to be taken into account. 812 In AWA Ltd v Daniels trading as Deloitte Haskins & Sells (No 2) (1992) 9 ACSR 383, Rogers CJ in Comm Div considered a claim by Mr Hooke, the former chairman and chief executive officer of AWA Ltd, that he had acted honestly and reasonably and ought fairly to be excused under s 1318. Mr Hooke had acted honestly, he had derived no personal gain from the contraventions. But he should have known that something was very wrong. One of the matters relied upon by Rogers CJ in Comm Div (at 402) was that Mr Hooke held the two most important offices in the company. His Honour explained that "[i]t is essential for the purposes of corporate law that the courts rigorously enforce the obligations of those who seek and obtain high corporate office". 813 Although this was a decision under s 1318 at a time when reasonableness was a requirement, the point which also applies to s 1317S(2) is that an important factor is the scale of responsibilities of the director and the manner in which the director exercises his or her powers.

Whether Mr and Mrs Cassimatis acted honestly and ought fairly to be excused 814 I accept that Mr and Mrs Cassimatis acted honestly. They did not attempt to conceal any information about Storm from any regulator or compliance professional. On one occasion, Mr or Mrs Cassimatis informed ASIC that Storm had a "fair share" of clients who were not high net worth clients. Indeed, ASIC did not make any submission of dishonesty or concealment. 815 I also accept that, as Mr McCulloch described, Mr and Mrs Cassimatis genuinely held the view that capital loss could never occur with index fund investment in the Storm model and that this meant that even retired investors with limited income and assets had no real danger of being exposed to losses if they agreed to Storm's conditions such as the term of the investment and the level of risk tolerance. Indeed, from the evidence I heard it is likely that these views were (unreasonably) held with great conviction by Mr and Mrs Cassimatis. 816 I also accept that the pleaded investors were not representative of Storm's average customer, nor were they selected by ASIC at random. For many other investors no contravention has been proved. For instance, Mr Nelson said that his experience as a client of Storm (rather than a non-executive director) was consistent with advice being tailored to his individual circumstances. 817 In addition, I accept that if Mr and Mrs Cassimatis had been warned in strong terms either by ASIC or by persons with considerable experience and knowledge then they would have taken alleviating measures to avoid the risk of contraventions by Storm in relation to retired or near-retired investors who had little or limited income, few assets, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. This conclusion can only be drawn by inference because of the absence of direct evidence from Mr and Mrs Cassimatis. But I am satisfied that although they were powerfully committed to the Storm model, they were also conscious of the need for compliance and sought confirmation from a number of others about their compliance. They would have heeded a warning if it were expressed in strong terms from a person with considerable experience and knowledge. For instance, when Mr and Mrs Cassimatis appointed the non-executive directors they informed the non-executive directors that access would be provided to all information that was reasonably considered necessary. Mr and Mrs Cassimatis complied with this undertaking. They also promised the non-executive directors that they would be reimbursed for all reasonable expenses incurred in obtaining any professional advice approved by Mr Cassimatis and made available to the board. 818 Nevertheless, Mr and Mrs Cassimatis' management of Storm involved an extraordinary degree of control which reduced the likelihood of such a strong warning. As Mr Nelson observed, there was a need for the management below Mr and Mrs Cassimatis to be "more expert and more experienced" (ts 465). ASIC submitted, and I accept, that the conduct of Mr and Mrs Cassimatis in creating and overseeing the operation of the Storm model in a way which caused that model to be applied to clients for whom the advice was not suitable, even if explained as negligence and an honest mistake, involved a high degree of departure from the care and diligence required by s 180(1). 819 In their final submissions, Mr and Mrs Cassimatis submitted that additional reasons why they should be excused were because: (i) they took genuine steps to cause Storm to comply with the Corporations Act; (ii) they received comfort from the many other individuals and institutions that looked at the Storm model; and (iii) there was an absence of any warnings at the time. I have already addressed each of these matters in the context of considering whether contravention by Storm was likely, although I accept that they are matters that can also be taken into account at the stage of determining whether Mr and Mrs Cassimatis should be excused. 820 Mr and Mrs Cassimatis also pointed to their conduct in providing assistance to clients. This included: (i) Storm's provision of unsecured loans to clients who went into margin call in 2002; (ii) Storm's provision of similar assistance to clients - particularly retirees - in 2008; (iii) Mr Cassimatis' proposal to Colonial Margin Lending to take over the debts owed by clients in negative equity, although the proposition was not accepted by Colonial (ts 192); and (iv) Storm's insistence that commissions from banks be passed on to clients in the form of discounted fees and interests rather than being paid to Storm. 821 Mr and Mrs Cassimatis did provide substantial assistance to clients. During a period in 2002, Mr McCulloch said that approximately 30 to 50 clients (including himself) went into margin call as a result of rectifying an error on the part of Colonial Margin Lending, Colonial Geared Investments (ts 192). On that occasion, Storm supported some of those clients with unsecured loans. By 2005 or 2006 as the share markets recovered, all the moneys had been repaid (ts 192). Storm also lent moneys to retirees who went into margin call in 2008 (ts 192). 822 Storm also assisted clients in other ways. Mr McCulloch said that Storm refused to accept commissions from the banks that were offered to financial planners for referring loans (ts 193). Instead, Storm persuaded the banks to pass on the money they saved in the forms of discounted fees and interest rates (ts 193). 823 Finally, Mr and Mrs Cassimatis pointed to a letter sent to them by Mr and Mrs Sondergeld on 15 December 2008 thanking them for financial support and describing how "you and your company's help and generosity relieves the stress and worry to help us get over these difficult times until the world share market recovers from this slump". 824 All of these matters, when considered together, provide a significant argument for relief from liability. But, ultimately, I am not ultimately satisfied that Mr and Mrs Cassimatis should be excused from liability. Their role and responsibilities in Storm were so significant, and the contraventions were sufficiently serious, that their conduct ought not fairly be excused. They were responsible for establishing the Storm model which provided for double gearing for thousands of clients. They exercised an extraordinary level of control and power over the Storm business and should reasonably have known that the consequences of inappropriate advice to any class of client could reasonably be expected to be catastrophic for Storm (to whom their duties were owed). The approach they took was to create and advance a model, and a system for application of the model, to be applied in almost every circumstance where it was possible to borrow enough money for the application of the model to a client who satisfied Storm's conditions, including using the client's family home as part of their asset portfolio for the purposes of applying the model. This created a likely danger of inappropriate advice being given to the most vulnerable of clients. As Mr Cassimatis explained to the non-executive directors, his approach was to treat a client as if he or she were a company, in the sense that a company would borrow money to establish a business and then look to repay that loan as the business becomes profitable.

ASIC's ALTERNATIVE CLAIM FOR DISQUALIFICATION BASED ON SECTION 206E 825 Almost immediately before trial, ASIC applied to amend its originating application and statement of claim to allege, in the alternative, that Mr and Mrs Cassimatis should be disqualified from managing a corporation for a period that the Court considers appropriate based upon s 206E(1)(a)(i) of the Corporations Act. Those amendments were allowed: Australian Securities and Investments Commission v Cassimatis (No 6) [2016] FCA 622. 826 It is unnecessary to consider this alternative claim in any detail for two reasons. The first is that I have found that ASIC has established its primary claim. The second is that the parties agreed that any submissions on the fourth element of s 206E(1)(a)(i) should be made at the remedies hearing. 827 Section 206E(1) of the Corporations Act provides: 206E Court power of disqualification - repeated contraventions of Act (1) On application by ASIC, the Court may disqualify a person from managing corporations for the period that the Court considers appropriate if: (a) the person: (i) has at least twice been an officer of a body corporate that has contravened this Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 while they were an officer of the body corporate and each time the person has failed to take reasonable steps to prevent the contravention; or (ii) has at least twice contravened this Act or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 while they were an officer of a body corporate; or (iii) has been an officer of a body corporate and has done something that would have contravened subsection 180(1) or section 181 if the body corporate had been a corporation; and (b) the Court is satisfied that the disqualification is justified. 828 The section involves four elements: (1) the respondents were officers of a corporation; (2) the body corporate has at least twice contravened the Corporations Act; (3) the respondents have failed to take reasonable steps to prevent the contraventions; and (4) the court is satisfied that the disqualification is justified. 829 The first element is admitted by Mr and Mrs Cassimatis. 830 The second element is satisfied by findings I have made concerning the contraventions of s 945A(1)(b) and s 945A(1)(c) in relation to the six relevant investors or pairs of investor. 831 The third element also follows from the findings that I have made. ASIC pleaded that Mr and Mrs Cassimatis failed to take reasonable steps to prevent the contraventions by Storm (which I have found to be contraventions of s 945A(1)(b) and s 945A(1)(c)) because they failed to take any steps to prevent Storm from providing advice in accordance with the Storm model to the relevant investors. ASIC submitted, and I accept, that the same matters which established the breach by Mr and Mrs Cassimatis of their obligations under s 180(1) also established this failure to take reasonable steps. As ASIC submitted, it was Mr and Mrs Cassimatis' conduct in creating and overseeing the operation of the Storm model which caused it to be applied to clients for whom it was not suitable; Mr and Mrs Cassimatis took no steps to implement any system that would restrict the cash flow team, those preparing the SOAs, or the advisers, from giving advice to clients in the position of the relevant investors to invest in accordance with the Storm model. 832 Any submissions concerning the fourth element were deferred to the remedies hearing.

CONCLUSION 833 My conclusion is that Mr and Mrs Cassimatis each contravened s 180(1) of the Corporations Act by exercising their powers in a way which caused or "permitted" (by omission to prevent) inappropriate advice to be given to the relevant investors. Those relevant investors were members of a class of investor, as pleaded by ASIC, who (in summary terms) were retired or close to retirement, had few assets, little income, and little or no prospect of rebuilding their financial position in the event of suffering significant loss. A reasonable director with the responsibilities of Mr or Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice. The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons. 834 ASIC brought its case on the basis that one precondition, or "stepping stone", for a finding of contraventions by Mr and Mrs Cassimatis was that Storm also contravened the Corporations Act. I have serious doubt whether this assumption is correct. But I have proceeded on the basis that it is required because the parties had assumed this to be the case and conducted their case accordingly without submissions to the contrary. 835 I have found that Storm contravened s 945A(1)(b) and s 945A(1)(c) of the Corporations Act. The relevant investors about whom I conclude that Storm breached its duties were the following 11 investors (six instances if couples are treated together): (i) Mr and Mrs Dodson (Part E investors); (ii) Mr and Mrs Herd (Part E investors); (iii) Mr and Mrs Higgs (Part E investors); (iv) Ms Knight (Schedule investor); (v) Mr and Mrs Madden (Schedule investors); and (vi) Mr and Mrs Walker (Schedule investors). 836 My findings of contravention by Mr and Mrs Cassimatis are based only upon civil, not criminal, breaches of s 945A. No criminal breach of s 945A or s 1041E was proved. ASIC did not run any alternative case that in the absence of proof of such a criminal breach there was a real likelihood of such a breach. Although Mr and Mrs Cassimatis' submissions anticipated the possibility of such a case, it is not necessary to address it. It suffices to say that such a case would have had a number of serious obstacles. Indeed, ASIC itself did not bring any prosecution or refer any brief of evidence to the Commonwealth Director of Public Prosecutions to consider a prosecution of Storm. 837 This trial was concerned only with liability. All issues concerning remedies sought by ASIC against Mr and Mrs Cassimatis were deferred to a separate hearing. These subsequent issues include (i) the form of any declarations to be made; (ii) whether the contraventions were serious or materially prejudiced the interests of Storm (s 1317G) and, if so, the amount of any penalties; (iii) any disqualification orders to be made (including the alternative basis upon which such orders were sought under s 206E); (iv) any orders restraining Mr and Mrs Cassimatis from holding an AFSL or providing financial services; and (v) costs. The parties should now confer in relation to directions for the listing of a hearing in relation to these issues. 838 Finally, some remarks should be made about the conduct of this trial. This litigation was very large in scale and was aggressively fought. It carried with it potentially very significant consequences for the respondents. As initially framed, it involved hundreds of witnesses and thousands of exhibits. However, the co-operation between counsel ensured that the essential legal and factual issues were not lost in the mass of material. Further, although the size of the electronic database of exhibits was vast, and submissions ran to hundreds of pages, the co-operation and civility of all the legal representatives ensured that the focus remained on the real issues and this case was kept within manageable limits. These reasons, too, have likewise focused primarily upon those matters upon which the parties placed reliance in submissions within the forest of evidence. I certify that the preceding eight hundred and thirty-eight (838) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.