Australian Securities and Investments Commission v Preston

REASONS FOR JUDGMENT 1 The first defendant, Mr Preston, embarked upon a scheme which he hoped would yield him a substantial profit. Unfortunately for Mr Preston, but fortunately for his clients, the Australian Securities and Investments Commission stepped in. Following an investigation ASIC brought this application to shut down the scheme. It alleged that Mr Preston's company, Manito Pty Ltd, the second defendant, had breached ss 1041E (false or misleading statements) and 1041H (misleading or deceptive conduct) of the Corporations Act 2001 (Cth) as well as ss 12DA (misleading or deceptive conduct), 12DB (false or misleading representations) and 12CB (unconscionable conduct) of the Australian Securities and Investments Commission Act 2001 (Cth). ASIC also alleged that Mr Preston himself had breached ss 180, 181 and 182 of the Corporations Act, which contain the standard duties imposed upon directors and other company officers, including the duty to act in good faith and to exercise care and diligence. It sought declarations to those effects and injunctions to prevent further breaches. Mr Preston and his company did not oppose the making of declarations (although I had to be satisfied that the evidence justified the relief sought) and consented to injunctions being entered against them that would bring the impugned conduct to an end. Having considered the evidence, I made the orders sought (with some minor variations) and said that I would in due course publish reasons. What follows are those reasons. 2 Mr Preston's scheme was simple. Its success depended upon the gullibility of his clients as well as their lack of sophistication. In very broad outline this is how the scheme worked. Manito adopted the trading name Superannuation Retrieval Services, sometimes called "SRS". It went into business giving advice to people regarding how they should deal with their superannuation benefits. At no time did the company or Mr Preston hold the required financial services licence to give that advice. Through its agents, including Mr Preston, the company contacted people with existing benefits in superannuation funds. It is not clear how the people were selected. At any rate, they were advised that their financial interests would best be served if they established a self managed superannuation fund into which their existing benefits could be "rolled over". Clients were led to believe that establishing such a fund was a straightforward exercise and relatively inexpensive. If a client accepted the advice, Manito procured the client to execute an authority pursuant to which the client's existing superannuation benefits were to be rolled-over into a trust account established by the company. The client was also asked to sign an authority permitting Manito to deduct its fees from the amount received. Manito would then (or so the proposal went) forward the remaining amount to the client. In all Manito collected more than $77,658 on behalf of its clients. It did not, however, account for the relevant amounts in all cases. Despite repeated requests, many clients did not recover any of their superannuation benefits from the company. In some instances it seems Manito placed the money it received on clients' behalf into its own bank account. That account is now depleted. Something in the order of $63,560 was still due to clients. For this reason, one of the orders made was that the defendants sell certain property with the proceeds to be made available to clients to reimburse them for their outstanding superannuation benefits. 3 It is convenient to explain in a little more detail how the scheme worked. The explanation will be given by reference to three dealings with specific clients. I do not propose to use the actual names of these clients, but will instead use an initial. 4 The first person is "L". L was contacted by telephone unexpectedly by an agent from Manito. The agent told L that he knew a way by which she and her husband could take control over their superannuation benefits in order to earn more interest. A few days later an agent (perhaps the same person) met L and her husband for approximately one hour. He informed them that SRS could locate and consolidate their superannuation benefits into a self managed superannuation fund and that they could then use the money to pay off their home loan. At the time, the couple had between them approximately $35,000 worth of benefits in various funds. They were asked to provide the names of the superannuation funds in which they could recall having benefits. They provided that information together with member numbers. L was told that she would have to pay a fee for Manito's services but that the self managed fund would make a substantial amount of money through interest or investment in shares. Neither L nor her husband was informed of any restrictions on the use of their benefits or any management, compliance or administrative requirements in relation to a self managed superannuation fund. They were not told that to establish a self managed superannuation fund it was necessary to create a trust and appoint a trustee to the fund. 5 At the meeting certain documents were given to L and her husband. These included brochures promoting the benefits of self managed superannuation funds with such statements as "Your money in your bank account now!", "no more fees" and "quick and easy to establish". The couple were asked to sign a number of forms, including a "Client Authority" form (authorising Manito to set up a self managed fund and to deal with the Australian Taxation Office on their behalf), "Terms and Conditions" (which included a one-off fee of $1,500), and an "Authority to Deduct Fees from Refund" (authorising the company to deduct its fee from any "retrieved" superannuation moneys). The last form stated that Manito would administer the client's rolled-over benefits through a trust account that would be subject to independent audit. Another form contained an acknowledgment that neither client had received financial advice from Manito. Needless to say, both the statement and acknowledgement were untrue, as were, to a large extent, many of the representations in the promotional brochures. L and her husband signed the forms. They did not receive any independent financial advice before proceeding with the proposal. Initially the agent told them that the money would be deposited into their chosen bank account, but they were later informed that each of their superannuation funds would send SRS a cheque. The agent also told them that after deducting its fee, SRS would forward to them a cheque for the remaining amount. L was told she would "receive something" in about two weeks. 6 Two weeks passed and the couple did not hear back. L contacted Manito's office in Melbourne and was informed that while one cheque from one fund had been received, the company was awaiting the remaining money. L was also told that she would not be able to bank any cheque from SRS without signing further documents, one of which was a trust deed. It is not clear whether the documents were signed. In any event, a few weeks later L received a cheque for $16,584 being the amount due to L after the company's fee of $1,500 was deducted from the actual amount issued by the fund. L attempted to bank the cheque but it was dishonoured. When she contacted Manito she was told by Mr Preston that another cheque would be sent. This never eventuated. Numerous attempts by L and her husband to obtain their funds were to no avail. 7 Two other clients, M and his wife, K, were similarly "cold-called" by a Manito representative. At a meeting, they were told that SRS could help them to transfer the benefits from their existing superannuation fund (or funds) into another superannuation fund and that the money could be put into a trust account until they selected that fund. They were not told that they would be establishing a self managed superannuation fund. The documents they signed, however, revealed the true position. In particular, the Client Authority form signed by both M and K gave Manito the authority to establish a self managed superannuation fund on their behalf. Like L, they also signed the Terms and Conditions and Authority to Deduct Fees forms. One other document signed by M, which it seems L was not given, was an acknowledgment that Manito and SRS did not hold an Australian financial services licence. Unfortunately, this was not adequate warning to M that something was amiss. He provided the agent with the details of approximately six superannuation funds in which the couple held benefits. When after a number of weeks they did not hear back on the progress of their superannuation roll-overs, the couple made numerous attempts to contact the company. Eventually they were informed that two cheques from two funds had been received but that a third was outstanding and that they would be contacted when it arrived. After some months, and a number of failed attempts to recover all three cheques, M received in the mail two cheques from SRS in the amounts of $210.84 and $389.70 respectively. The package containing the cheques included an unsigned trust deed and an "ETP Roll-over Statement" documenting the roll-over of benefits from the relevant superannuation funds into the self managed fund. A third cheque for $8,876, from one of K's superannuation funds, was never received. It was later discovered by ASIC that this cheque was made out by the superannuation fund to M's newly-created self managed fund but was subsequently deposited into Manito's own bank account. It seems the money was then used for the company's, or Mr Preston's, own purposes. 8 The final example concerns T, who migrated to Australia from Ethiopia in the early 1990s. T and a friend, S, came across a television advertisement publicising Manito's services. S contacted the company and a meeting was arranged which T also attended. During the meeting, T and S were told that Manito could get their superannuation benefits "out" for them and that they could then manage the benefits themselves and do whatever they wanted with the money. S, but not T, signed the various forms in order to start the roll-over process. Later, T attended the offices of Manito. There he met Mr Preston and another agent. They told T that he could manage his own self managed superannuation fund and that this would save him a minimum of $200 per year in administrative fees and charges. When T asked whether he could use the money in the fund to make a deposit on a home he was told that how he used the money was "up to [him]". They also said that if T wanted further information in relation to SRS he could go to the ATO website and that SRS was "registered" on that website. T signed the three forms and took home with him a document which he was instructed to get a close friend or family member to sign. He was not told that this document was a trust deed, nor was he told of any need for a trustee to be appointed to his self managed fund. Later, T's existing superannuation fund informed him directly that it was unable to proceed with the roll-over request as the fund was still receiving contributions from his employer. When T rang Manito to find out what was happening he was told that the period for rolling-over his superannuation had not yet passed and that he would have to wait. After further delays, T tried to contact Manito on the same telephone number that he had previously used. The company was no longer there. After being contacted by ASIC in relation to the defendants' activities, T became concerned about his benefits and telephoned his superannuation fund. Fortunately for T, it turned out that his superannuation benefits had not been paid to Manito. 9 This conduct which, in one way or another, was repeated in respect of at least 30 clients, contravened the ASIC Act and the Corporations Act in at least the following respects. First, by representing to clients that their superannuation benefits could be used in any way they wished and that the moneys would be paid into and administered through a trust account (as stated on one of the forms signed by clients), the company breached s 1041E of the Corporations Act. Section 1041E prohibits the making of statements (or the dissemination of items of information) which are false or misleading and which is likely to induce a person to dispose or acquire a financial product. A self managed superannuation fund is a "superannuation interest" under the Superannuation Industry (Supervision) Act 1993 (Cth) (see ss 10, 17A) and is deemed to be a "financial product" for the purposes of the Corporations Act by s 764A(1)(g). 10 Second, by failing to inform clients about restrictions on the use of existing superannuation benefits rolled-over from a superannuation fund, as well as the various management and compliance requirements - in particular the need for a trustee to be appointed to a self managed fund - the company breached s 1041H of the Corporations Act and ss 12DA of the ASIC Act. Those sections prohibit misleading or deceptive conduct in relation to financial services and, in the case of the Corporations Act, financial products. 11 The company also engaged in unconscionable conduct in contravention of s 12CB of the ASIC Act. Such conduct not only included the various misrepresentations and omissions in relation to superannuation benefits and self managed superannuation funds, but also the advice given to clients encouraging them to establish a self managed fund when it was not in their interests to do so in light of both the skills and expense required to establish and maintain the fund. Further, the company behaved unconscionably when it failed to pay to clients the benefits received on their behalf and when, in some instances, it mixed clients' moneys with its own funds and applied them for its own use. 12 In causing or permitting Manito to engage in the contravening conduct and in not taking reasonable steps to prevent it from doing so, Mr Preston contravened ss 180, 181 and 182 of the Corporations Act. Section 180 and 181 contain the well-known obligations imposed on directors and other company officers of care and diligence and good faith. Section 182 provides that a director or other officer or employee must not improperly use their position to gain an advantage. In particular, by transferring moneys from the company's bank accounts to a personal bank account from which he made payments to various financiers, Mr Preston breached all three provisions in a most insidious way. 13 Section 1324(1) of the Corporations Act empowers the court, on the application of ASIC, to grant an injunction restraining a person from engaging in contravening conduct. Having had regard to the evidence, it was necessary, in my view, that the discretion be exercised here. I was also of the view that the injunction granted should be a permanent one. It was appropriate that it encompass any provision of financial product advice or dealing in financial products, as well as any holding out by either defendant of being able to do so, without an Australia financial services licence. 14 One reason for making the injunction permanent is that this was not the first occasion upon which Mr Preston and his company had committed similar contraventions of the legislation. In earlier proceedings brought in West Australia, the Federal Court found that Manito had contravened s 911A of the Corporations Act by carrying on a financial services business without an Australian financial services licence. The facts underlying those proceedings were of a very similar nature to those here and involved misleading and deceptive advertising by the company, which was then being run from Perth. The Court made orders declaring contraventions of the Corporations Act and permanently restraining the defendants from conducting a financial services business in breach of that Act. Those orders seem not to have had their intended effect, hence the present case. Mr Preston is lucky that this was the extent of the complaints made against him. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.