REASONS FOR JUDGMENT
1 This proceeding has been brought by the Australian Securities and Investment Commission ('the Commission') in respect of two separate financial schemes said to have been conducted in a fashion that contravened provisions of the Corporations Act 2001 (Cth) ('the Act'), the Corporations Law and the Australian Securities and Investment Commission Act 2001 (Cth) ('the ASIC Act'). The parties have reached a settlement in order to avoid what would have been a lengthy and expensive trial of issues raised by the pleadings. The settlement involves the making of orders by the Court which are in the nature of penal orders. Therefore, it is appropriate for the Court to be satisfied that the orders are appropriate.
2 Parties, including regulators such as the Commission, should be encouraged to reach a compromise in proceedings such as these. On the other hand, the ultimate responsibility for the imposition of penalties for contravention of the Act lies with the Court. Nevertheless, if the Court is satisfied that the parties have been properly represented and advised, it should be slow to decline to accept a compromise that will save both the community and the Court, as well as the parties, considerable time and expense.
3 The first respondent, Gramax Investment Club Limited ('Gramax'), the third respondent, B International Limited ('B International'), the fifth respondent, Club Invest Limited, are incorporated under the laws of the Republic of Vanuatu. From around 8 July 2003, the second respondent, Mr Graham McLachlan, has been the sole director, manager and shareholder of Gramax. Mr McLachlan is an Australian citizen.
4 From around 19 July 2003 to 26 May 2004, Gramax and Mr McLachlan have accepted approximately $935,000 from Australian investors. They issued receipts to Australian investors confirming that the moneys would be invested on their behalf. The moneys were pooled in a bank account held by Mr McLachlan. Some of the moneys were transferred to bank accounts in Vanuatu for the purposes of Gramax. Shares in Club Invest were purchased using the pooled moneys. Gramax and Mr McLachlan had paid moneys to Australian investors representing returns on interests acquired by them. Those activities are described as the 'Gramax Scheme'.
5 Gramax and Mr McLachlan have carried on their activities independently of the other respondents to the proceeding and there is no relevant connection between them, beyond their common connection with the Republic of Vanuatu and the fact that Gramax is a shareholder of Club Invest. It is appropriate to observe that no allegations have been made that any of the respondents have misappropriated funds invested by Australian investors in the Gramax scheme.
6 From 18 July 2003, Gramax and Mr McLachlan carried on a financial services business, dealt in financial products, arranged for persons to deal in financial products and issued financial products in Australia. At no time did either Gramax or Mr McLachlan hold an Australian Financial Services licence. At no time were they authorised to provide a financial service on behalf of a person holding an Australian financial services licence. At no time did they hold a securities dealers licence and or a proper authority from a securities dealers licence holder.
7 From 19 July 2003, Gramax has published information promoting the Gramax Scheme on an internet website and has directed prospective investors to that information. Australian investors have been invited to register their interest in investing with the Gramax Scheme from the Gramax website. Gramax has disseminated information about the Gramax Scheme by e-mail, telephone or in person, and has published contact information citing a postal address in Queensland.
8 By reason of the matters I have just briefly described, Gramax intended to influence, or could reasonably be regarded as having intended to influence, Australian investors to apply for, and acquire interests, in, Gramax. By reason of the way in which Gramax conducted its business, as briefly described, Gramax dealt in financial products within the meaning of the Act and Gramax intended to induce prospective investors to acquire interest in the Gramax Scheme, or ought to have known that its conduct was likely to have that effect. Accordingly, Gramax has carried on a financial services business in Australia within the meaning of s 911A of the Act without holding an Australian Financial Services licence or being authorised by the holder of an Australian Financial Services licence.
9 From about 19 July 2003, Mr McLachlan caused information to be displayed on the Gramax website and engaged in much the same conduct as Gramax, by reason of which Mr McLachlan intended to influence Australian investors to apply for, and acquire interests in, the Gramax Scheme.
10 By reason of those matters, Mr McLachlan has provided financial services in Australia without holding an Australian financial services licence and has provided financial services on behalf of Gramax, which itself carried on a financial services business in Australia in circumstances where Gramax did not hold an Australian financial services licence.
11 From about 23 February 2004, Mr McLachlan, in his capacity as a director of Gramax negotiated a payment plan with Club Invest, under which Gramax received a commission for all moneys Gramax invested with Club Invest. From 23 February 2004, Mr McLachlan held moneys on behalf of Gramax in a personal bank account in Queensland, transferred those moneys to a Gramax bank account in Vanuatu and purchased shares in Club Invest using some of those moneys. During the period 23 February 2004 to 4 June 2004, Club Invest received moneys from Gramax, which became a shareholder in Club Invest. By reason of those circumstances, Gramax and Mr McLachlan dealt in financial products on behalf of Club Invest.
12 It follows that Gramax and Mr McLachlan have provided financial services in Australia on behalf of Club Invest in circumstances where Club Invest did not hold an Australian financial services licence. The Gramax Scheme is a managed investment scheme, within the meaning of the Act. The Gramax Scheme was not registered with the Commission as such. In the circumstances I have briefly described, the Gramax scheme required registration but was not registered. Between 19 July 2003 and 4 June 2004, Gramax disseminated information by causing electronic documents to be published on the Gramax website. Those documents were likely to induce persons to apply for, and acquire interests in, the Gramax Scheme. They were prepared and issued in order to induce persons within Australia to apply for, and acquire interests in the Gramax Scheme.
13 The documents on the Gramax website contained statements and representations that were false in material particulars. In reliance on those statements, Australian investors applied for and acquired interests in the Gramax Scheme. In the circumstances, Gramax has made statements and representations, in trade or commerce, in relation to financial services that are misleading or deceptive and that are likely to mislead and deceive Australian investors.
14 The parties asked the Court to make declarations of contravention of various provisions of the Act and the ASIC Act in relation to the matters involving Gramax briefly described above.
15 Before saying something about the provisions of the statutes, I shall say something about the circumstances relating to the third to ninth respondents. The sixth respondent, Mr Philip Northam, is a director and secretary of Biri International, a director of Club Invest, and a citizen of Australia, although he is resident in Vanuatu. The eighth respondent, Mr Alan Veivers, is a director of Club Invest and a citizen of Australia, although he is also resident in Vanuatu.
16 Between 7 May 2001 to 1 July 2003, Biri International operated a managed investments scheme that required registration. Biri International accepted moneys from Australian investors and in return issued rights to benefits produced by the scheme. It pooled moneys from more than 20 Australian investors to produce financial benefits and had day to day control of the operation of the scheme to the exclusion of the members. The scheme had around 130 Australian members and operated under the business name, Biri Investment Club. Gramax and Mr Lachlan carried on their activities independently of the third to the ninth respondents. As I have said, there is no relevant connection between them, beyond their common connection with the Republic of Vanuatu and the fact that Gramax is a shareholder of Club Invest. There is no allegation in the proceeding that any of the third to ninth respondents has misappropriated funds invested by Australian investors in the Club Invest scheme or the Biri scheme.
17 The third to the ninth respondents assert that, prior to the commencement of this proceeding, they were not aware that their activities contravened any laws of Australia and had taken steps to ensure that their future activities comply with Australian law. After the proceedings were commenced and served on the third to the ninth respondents, they consented to the continuation of orders made against them and have cooperated with the Commission in its investigations. The respondents have expressed regret that their activities contravened Australian laws.
18 In addition to that public expression of regret, the respondents assert that, by their cooperation with the Commission's investigation and by agreeing to the settlement of the proceeding in the manner to which I shall refer in due course, they have demonstrated that their regret is bona fide.
19 Biri International and Club Invest carried on a financial services business. They dealt in financial products and they issued financial products in Australia. In particular, Biri International promoted and marketed the Biri scheme to Australian investors through its website and through representations made personally by Mr Northam and Mr Veivers to Australian investors. Club Invest and Messrs Northam and Veivers promoted and marketed interests in Club Invest to Australian investors through the Club Invest website.
20 Club Invest induced, and continued to induce, Australian investors to acquire interests in the Biri scheme and in Club Invest, by paying the investors a commission in the form of a referral fee if they referred to Biri International and Club Invest other investors who subsequently invested in the Biri scheme or in Club Invest. By reason of the conduct of the Biri scheme, and its operation as a managed investments scheme that required registration, in circumstances where the Biri scheme was not registered with the Commission as a managed investments scheme, there was a contravention of the Act.
21 At no relevant time has Biri International held a securities dealer's licence or proper authority from the holder of a securities dealer's licence. Nevertheless, it has purported to issue interests in the Biri scheme. It has disposed of interests in Biri Investment Club, and it has carried on a securities business in Australia.
22 From 11 March 2002 to 1 July 2003, Biri International operated a managed investments scheme under the business name, Biri Investment Club. Biri Investment Club was, at relevant times, owned and operated by Biri International. By its conduct of the Biri Investment Club, Biri International engaged in conduct that it ought to have known was likely to induce investors in Australia to apply for and acquire interests in Biri Investment Club. It also engaged in conduct that it ought to have known was likely to have the effect of inducing investors in Australia to apply for and acquire interests in the Biri Investment Club. Biri International has not held an Australian Financial Services licence at any time. Nor was it an authorised representative of an Australian Financial Services licensee.
23 By providing information about Club Invest by email, telephone and in person, and by causing information to be displayed on an internet website established by it, Club Invest has dealt in a financial product, within the meaning of the Act and engaged in conduct which it ought to have known was likely to have the effect of inducing investors in Australia to apply for and acquire shares in Club Invest. In the circumstances, Club Invest has carried on a financial services business in Australia, within the meaning of s 911A of the Act, without holding an Australian financial services licence.
24 On or about 31 March 2003, Club Invest made an offer of shares in Club Invest to members of the Biri Investment Club. On or about 1 July 2003, Club Invest issued Biri Investment Club members with a number of Club Invest shares, proportionate in value to their interests in the Biri Investment Club. Since 1 July 2003, Club Invest has issued shares in Club Invest to around 500 Australian investors. Club Invest has also made offers to existing Club Invest shareholders to acquire shares in related companies by way of email correspondence. In the circumstances briefly described, Club Invest has made offers of shares without a disclosure statement as required by s 727 of the Act.
25 Mr Northam, from about 11 March 2002 to 26 May 2004, has engaged in conduct which was likely to induce investors in Australia to apply for and acquire shares in Club Invest. He has engaged in conduct that he ought to have known was likely to have the effect of inducing investors to apply for and acquire shares in Club Invest. At no time did Mr Northam hold an Australian financial services licence, nor was he an authorised representative of an Australian financial services licensee.
26 Similarly, from 11 March 2002 to 10 August 2004, Mr Veivers engaged in conduct that was likely to induce investors in Australia to apply for and acquire shares in Club Invest. He also engaged in conduct that he ought to have known was likely to have the effect of inducing investors in Australia to apply for and acquire shares in Club Invest. At no relevant time did Mr Veivers hold an Australian Financial Services licence, nor was he an authorised representative of an Australian Financial Services licensee.
27 In the circumstances briefly described, I am satisfied that there have been contraventions by various of the respondents of ss 601ED(5), 627, 780, 911A(1) and 911B(1) of the Act. There has also been a contravention of s 12DA(1) of the ASIC Act.
28 Section 601ED(5) provides:
'A person must not operate in [Australia] a managed investment scheme that [section 601ED] requires to be registered…, unless the scheme is so registered.'
29 Section 727(1) provides:
'A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with [the Commission].'
30 Section 780 of the Corporations Law and of the Act before the repeal of that section, provided:
'A person must not carry on a securities business unless the person holds a dealer's licence or is an exempt dealer.'
31 Section 911A(1) of the Act relevantly provided:
'A person who carries on a financial services business in Australia must hold an Australian Financial Services licence covering the provision of the financial services.'
32 Section 911B(1) also relevantly provided:
'A person must only provide a financial service in Australia on behalf of another person who carries on a financial services business if the principal holds an Australian Financial Services licence covering the provision of the service.'
33 Finally, s 12DA(1) of the ASIC Act provides:
'A person must not in trade or commerce engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.'
34 The settlement of the proceeding involves the respondents consenting to declarations of various contraventions of the provisions to which I have just referred. It is also proposed that Mr Lachlan will consent to an order under s 1101B of the Act restraining him from providing financial product advice, dealing in an financial product, or operating a registered scheme for a period of five years. It is proposed that Mr Northam will consent to an order restraining him from providing financial product advice, dealing in a financial product or operating a registered scheme for a period of three years. Mr Veivers will consent to an order restraining him from providing financial product advice, dealing in a financial product or operating a registered scheme for a period of two years. I am satisfied that those restraints are appropriate having regard to the nature of the contraventions to which I have referred and the expression of regret on the part of the respondents.
35 It is also proposed that there will be orders restraining Gramax, Biri International and Club Invest from operating an unregistered managed investment scheme, from carrying on a financial services business and from providing a financial services business on behalf of other persons in contravention of ss 601ED, 911A or 911B of the Act.
36 Finally, it is proposed that there be remedial orders. It is proposed that Gramax will undertake to the Court that it will make an offer to each of the investors in the Gramax scheme to return any funds held on behalf of such investors. It is also proposed that Gramax will undertake to cease the payment of referral fees except to the extent that any vested right has already arisen. It is also proposed that Biri International, and Club Invest will make offers, to each of the investors in Club Invest and in the Biri scheme, to return any funds held on behalf of those investors. It is also proposed that Biri International and Club Invest will discontinue payment of any referral fees, except to the extent that any vested right has arisen.
37 I am satisfied from the agreed statement of facts that have been filed by the parties that the proposed compromises are appropriate ones and that the Court should make orders in accordance with the orders proposed on behalf of the parties.
I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.