Australian Securities and Investments Commission v Vanguard Investments Australia Ltd

Counsel for the Plaintiff: M O'Sullivan KC with G Ayres

Solicitor for the Plaintiff: Australian Securities and Investments Commission

Counsel for the Defendant: P Solomon KC with A Folie

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: VANGUARD INVESTMENTS AUSTRALIA LTD (ACN 072 881 086) Defendant

order made by: O'BRYAN J DATE OF ORDER: 25 September 2024

THE COURT ORDERS THAT:

1. The defendant pay an aggregate pecuniary penalty to the Commonwealth of $12,900,000 in respect of its contraventions of ss 12DF and 12DB(1)(a) and (e) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) set out in the declarations made on 28 March 2024.
2. Pursuant to s 12GLB(1)(a) of the ASIC Act, within 30 days of this order, the defendant publish, at its own expense, a written adverse publicity notice (Notice) in the terms set out in the Annexure to these orders.
3. The defendant ensures that the Notice:
   1. is published on the following webpages maintained by it (the Webpages):
      1. https://www.vanguard.com.au/personal/about-us/our-esg-approach/our-approach-to-esg
      2. https://www.vanguard.com.au/personal/invest-with-us/etf?portId=8224;
      3. https://www.vanguard.com.au/personal/invest-with-us/fund?portId=8136;
      4. https://www.vanguard.com.au/personal/invest-with-us/fund?portId=8135;
   2. is maintained on the Webpages for 12 months from the date of these orders; and
   3. appears immediately upon access by a person to the Webpages as a picture tile with the heading, "Notification of Misconduct by Vanguard".
4. The plaintiff pay the defendant's costs of and incidental to the hearing on 8 March 2024, and the defendant otherwise pay the plaintiff's costs of the proceeding. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ANNEXURE - ADVERSE PUBLICITY NOTICE The Federal Court of Australia has ordered Vanguard Investments Australia Ltd (ACN 072 881 086) (Vanguard) to publish this notice. Following action by the Australian Securities and Investments Commission (ASIC), on 25 September 2024, the Federal Court ordered Vanguard to pay a pecuniary penalty of $12,900,000 for contravening Australia's financial services laws. On 28 March 2024, the Court declared that Vanguard contravened these laws by making false or misleading statements about the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Ethically Conscious Fund) in:

Introduction

1. This proceeding concerns an investment fund called the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (ARSN 618 349 090) (Vanguard Ethically Conscious Fund or the Fund), which is a registered managed investment scheme of which Vanguard Investments Australia Ltd (Vanguard) is, and at all relevant times has been, the responsible entity. The composition of the Fund is based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Bloomberg SRI Index), which is a customised index that was designed by Bloomberg for the Fund at Vanguard's request. The letters "SRI" are an initialism for "Socially Responsible Investing". The Vanguard Ethically Conscious Fund commenced operation in or around August 2018. Investors, including institutional, wholesale and retail investors, could invest indirectly in the underlying securities that comprise the Fund by acquiring units in one of three classes of units issued by the Fund: an Australian dollar (AUD) hedged class of units; a New Zealand dollar (NZD) hedged class of units; and an exchange traded fund (ETF) class of units.
2. The Australian Securities and Investments Commission (ASIC) alleged that, in the period between approximately 7 August 2018 and approximately 17 February 2021 (relevant period), Vanguard:
3. made false or misleading representations that the Vanguard Ethically Conscious Fund, and interests in the Fund, were of a particular standard, quality or grade or had certain performance characteristics or benefits in contravention of ss 12DB(1)(a) and (e) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act); and
4. engaged in conduct that was liable to mislead the public as to the nature, the characteristics and the suitability for their purpose of the Vanguard Ethically Conscious Fund, and interests in the Fund, contrary to s 12DF(1) of the ASIC Act.
5. In broad terms, ASIC alleged that, by statements made through different media, Vanguard represented to potential investors that:
6. the Fund offered an ethically conscious investment opportunity;
7. before being included in the Fund, securities were researched and screened against applicable environmental, social and governance (ESG) criteria; and
8. securities that violated applicable ESG criteria were excluded or removed from the Fund.

Overview of the evidence

1. At the penalty hearing, the parties relied on the evidence adduced at the liability hearing. Vanguard also read the following affidavits without objection:
2. the affidavit of Curtis Jacques affirmed 14 June 2024 and its annexure;
3. the affidavit of Andrew Eric Jones affirmed 18 June 2024; and
4. two affidavits of Samuel John William Dowler along with their respective annexures, the first affirmed 18 June 2024 and the second affirmed 31 July 2024.
5. ASIC did not require the deponents for cross-examination.
6. The parties also tendered a statement of agreed facts dated 19 April 2024 (incorporating a revised Annexure B filed on 23 July 2024, which corrected errors in the original). During the penalty hearing, it became evident that the parties were not in agreement on the meaning of certain paragraphs in the statement of agreed facts. Pursuant to directions made at the hearing, on 8 August 2024 the parties filed an amended statement which replaced the 19 April 2024 document, and which incorporated the revised Annexure B. I will refer to the 8 August 2024 statement as the SOAF.
7. A practice has emerged in recent years whereby statements of agreed facts are prepared in a form with footnote references to documents, sometimes as pinpoint references, and the referenced documents are also tendered in evidence. The practice is generally unhelpful and begs a number of questions, including:
8. are the documents being tendered to prove the agreed fact;
9. are the documents being tendered to qualify the agreed fact in some unspecified manner; or
10. are the documents being tendered to supplement (rather than qualify) the agreed fact?
11. Section 191 of the Evidence Act 1995 (Cth) stipulates that evidence is not required to prove the existence of an agreed fact and evidence may not be presented to contradict or qualify an agreed fact unless the Court gives leave. It follows that documentary footnotes are not required to support an agreed fact, and it is unnecessary and unproductive for the parties to tender documents for the purpose of proving the agreed facts. It also follows that, without the leave of the Court, parties are not permitted to tender documents that qualify an agreed fact.
12. That leaves the possibility that footnoted documents are being tendered as a supplement to (as opposed to a qualification of) the agreed fact. There is obiter support for the proposition that evidence which supplements or elaborates upon an agreed fact does not contradict or qualify it: see FV v The Queen [2006] NSWCCA 237 at [42]-[44] per Kirby J (with whom McClellan CJ and Hoeben J agreed). However, if the purpose of the tender of a document is to supplement an agreed fact, it is unhelpful to include a footnote reference to the document in the statement of agreed facts. Such a practice only generates uncertainty as to the intended meaning of the footnote. If a party wishes to rely upon a document in proof of a fact that is supplementary to an agreed fact, the party should tender the document, identify the part relied upon, and advance submissions about the asserted fact established by the document.

Relevant statutory provisions and legal principles

1. ASIC seeks pecuniary penalties under ss 12GBA(1)(a) and 12GBB(3) of the ASIC Act (as in force during the relevant period).
2. From the start of the relevant period until 12 March 2019, the applicable penalty provision was s 12GBA of the ASIC Act which relevantly provided as follows: 12GBA Pecuniary penalties (1) If the Court is satisfied that a person: (a) has contravened a provision of Subdivision C, D or GC (other than section 12DA); or … the Court may order the person to pay to the Commonwealth such pecuniary penalty, in respect of each act or omission by the person to which this section applies, as the Court determines to be appropriate. (2) In determining the appropriate pecuniary penalty, the Court must have regard to all relevant matters including: (a) the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and (b) the circumstances in which the act or omission took place; and (c) whether the person has previously been found by the Court in proceedings under this Subdivision to have engaged in any similar conduct.
3. In relation to contraventions of ss 12DB and 12DF, s 12GBA(3) stipulated that the maximum penalty for a body corporate was 10,000 penalty units. Subsection 12GBA(4)(b) relevantly provided that if conduct constitutes a contravention of two or more provisions referred to in subsection 12GBA(1), the contravener is not liable to more than one pecuniary penalty under s 12GBA in respect of the same conduct. By the declarations of contravention made by the Court on 28 March 2024, the Court declared that Vanguard contravened s 12DF in respect of each of the PDS representations, website representations, media release representations, YouTube representations and FNN presentation representations, and contravened s 12DB in respect of each of the website representations, media release representations, YouTube representations and FNN presentation representations. The effect of s 12GBA(4)(b) is that, to the extent that Vanguard's conduct involved a contravention of both s 12DF and 12DB, only one penalty is to be imposed.
4. Effective 13 March 2019, being a date partway through the relevant period, s 12GBA was repealed and substituted by new provisions dealing with pecuniary penalties: Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) s 3 and Sch 2, item 8. From that date, new ss 12GBB, 12GBC and 12GBCA relevantly provided as follows: 12GBB Pecuniary penalty orders … Court may order person to pay pecuniary penalty (3) If a declaration has been made under section 12GBA that the person has contravened the provision, the Court may order the person to pay to the Commonwealth a pecuniary penalty that the Court considers is appropriate (but not more than the amount specified in section 12GBC). (4) An order under subsection (3) is a pecuniary penalty order. Determining pecuniary penalty (5) In determining the pecuniary penalty, the Court must take into account all relevant matters, including: (a) the nature and extent of the contravention; and (b) the nature and extent of any loss or damage suffered because of the contravention; and (c) the circumstances in which the contravention took place; and (d) whether the person has previously been found by a court (including a court in a foreign country) to have engaged in any similar conduct. 12GBC Maximum pecuniary penalty The pecuniary penalty must not be more than the pecuniary penalty applicable to the contravention of the civil penalty provision. 12GBCA Pecuniary penalty applicable … Pecuniary penalty applicable to the contravention of a civil penalty provision - by a body corporate (2) The pecuniary penalty applicable to the contravention of a civil penalty provision by a body corporate is the greatest of: (a) the penalty specified for the civil penalty provision, multiplied by 10; and (b) if the Court can determine the benefit derived and detriment avoided because of the contravention - that amount multiplied by 3; and (c) either: (i) 10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision; or (ii) if the amount worked out under subparagraph (i) is greater than an amount equal to 2.5 million penalty units - 2.5 million penalty units.

Nature and extent of the contraventions

1. The nature and extent of the contravening acts are detailed in the liability judgment and will not be repeated in detail. The following are the key findings relevant to the assessment of penalty.
2. Vanguard contravened s 12DF(1) of the ASIC Act by engaging in conduct in relation to financial services that was liable to mislead the public as to the nature, the characteristics and the suitability for their purpose of those financial services, and also contravened ss 12DB(1)(a) and (e) by making false or misleading representations that the Vanguard Ethically Conscious Fund and interests in it were of a particular standard, quality or grade, and had certain performance characteristics or benefits. The relevant contraventions consisted of:
3. the media release representations, which conveyed representations that
   1. the Fund offered an ethically conscious investment opportunity, and that the Fund did this by seeking to track the Bloomberg SRI Index;
   2. before being included in the Bloomberg SRI Index, and therefore the Fund, securities were researched and screened against applicable ESG criteria; and
   3. securities that violated applicable ESG criteria were excluded or removed from the Bloomberg SRI Index and therefore the Fund;
4. the YouTube representations and the FNN presentation representations which conveyed the same representations as the media release representations, save for the fact that they did not refer to the Bloomberg SRI Index; and
5. the PDS representations and the website representations which conveyed the same representations as the media release representations save for the fact that those materials conveyed that only securities issued by companies (rather than securities generally) were screened against ESG criteria.
6. Each of the above representations were misleading within the meaning of s 12DF(1) and ss 12DB(1)(a) and (e) because:
7. the research and screening for the Bloomberg SRI Index, and therefore the Fund, had limitations which meant that not all securities were screened against ESG criteria;
8. a significant proportion of securities in the Bloomberg SRI Index and the Fund were from issuers that were not researched or screened against applicable ESG criteria; and

Circumstances in which the contraventions occurred

1. It was an agreed fact that the number of investors in each of the classes of units in the Vanguard Ethically Conscious Fund grew from 12 investors as at 30 August 2018 to 959 investors as at 16 February 2021. The market value of the funds under management (FUM) in the Fund as at 30 June 2021 was in excess of $1.1 billion.
2. It was also an agreed fact that, in the past several years, in Australia and globally, there has been a significant increase in demand for, and investment in, investment products focused on ESG considerations. The demand by investors for investment products that are calibrated by reference to ESG criteria was expressly referenced by Vanguard when developing, launching and promoting the Fund. For example:
3. An internal memorandum from Rachel White and Balaji Gopal to Vanguard's Global Investment Committee dated 19 March 2018 and titled "Launch of Australian domiciled ESG funds and ETFs" stated: Environmental, social, and governance ("ESG") investing is emerging as a global and enduring trend. Vanguard has an opportunity to help shape this trend and differentiate itself with a clear message and a low cost offer in Australia and New Zealand ("NZ"), where investors are increasingly seeking products and investments that reflect their ESG values.
4. The media release stated that the Fund was launched to provide "greater choice for investors who wish to reflect their values in their investment holdings".
5. In the FNN presentation, Rachel White of Vanguard stated that ESG investing was growing, with $622 billion in Australia "invested in ES&G strategies", of which $65 billion was said to be "invested in core ESG products … growing quite rapidly".
6. In the YouTube video, Ms White said: … there is three key reasons we think ESG investing matters to clients and will continue to be an enduring trend. The first is around investment rationale, so there's more and more academic research showing ESG to have a neutral to slightly positive impact on company performance. The second piece is around investor preference, so we're finding that there's more investors that care about responsible and ESG investing and that's particularly true for female investors and also younger generations like millennials. Three [in] four millennials have said they would prefer their investments or superfunds to be invested responsibly than just to maximise investment returns. And, the final one is the environment is more conducive to ESG investing, so there's more indices and more products available to give investors more choice, there's more data and standardisation by companies and there's more regulation to support the ongoing development of ESG investing.

Loss and damage suffered because of the contraventions

1. ASIC did not contend that Vanguard's contraventions caused any financial loss to investors. Rather, ASIC submitted that the loss and damage in this case manifests in the loss of opportunity for investors to invest in accordance with their investment values. Vanguard accepted that its conduct had the potential to cause harm to its investors, characterised as the loss of an opportunity to make a different purchasing choice, had the investors been provided with accurate information.
2. Mr Samuel Dowler holds the title of Investment Product Analytics Lead at Vanguard. Mr Dowler analysed the daily cashflow data and records of daily FUM held by Vanguard for the period 1 January 2021 to 30 June 2021, to identify if there were any material redemptions from the Vanguard Ethically Conscious Fund that occurred during the period in which Vanguard disclosed the misrepresentations to the market. The parties were in agreement that such disclosures occurred in mid-February 2021 and in April 2021. Mr Dowler's evidence showed that there was no material increase in Fund redemptions that can be causally attributed to Vanguard's disclosures. On the basis of that evidence, Vanguard submitted that the misrepresentations were not significant to investors in the Fund (arguing that if the disclosures had been important to investors, it would be expected that investors would redeem their investment upon learning of the true position).
3. In my view, Mr Dowler's evidence does not rise to the level for which Vanguard contends. A redemption decision is distinct from an investment decision. An investor's decision to redeem their investment is affected by many factors, including fund performance since the date of investment and tax consequences of redemption, which differ from the factors that affect the initial investment. For that reason, it cannot be inferred that Vanguard's misrepresentations were of no or little significance to the decision made by investors to invest in the Vanguard Ethically Conscious Fund at the time that the investment decision was made.

Benefits from the contravening conduct

1. The SOAF provided the following information concerning the financial returns received by Vanguard from its management of the Vanguard Ethically Conscious Fund:
2. for the financial year ending 31 December 2018, Vanguard earned revenue of $66,573 and incurred a net loss of $243,981;
3. for the financial year ending 31 December 2019, Vanguard earned revenue of $330,183 and incurred a net loss of $562,793;
4. for the financial year ending 31 December 2020, Vanguard earned revenue of $630,702 and incurred a net loss of $797,142;
5. for the financial year ending 31 December 2021, Vanguard earned revenue of $976,945 and incurred a net loss of $2,615,925; and
6. for the financial year ending 31 December 2022, Vanguard earned revenue of $1,345,096 and incurred a net loss of $2,303,934.
7. ASIC did not attempt to quantify any financial benefit to Vanguard from the contravening conduct and I accept that any such quantification is not feasible.
8. ASIC submitted, however, that by its misleading conduct, Vanguard gained a number of benefits, including:
9. the ability to attract investors to the Fund more effectively than would have been the case if Vanguard had accurately disclosed the screening limitations and the Fund's exposure to issuers engaged in the excluded industries;
10. an enhanced reputation as a provider of index funds with ESG characteristics and credentials; and
11. earning higher management fees than for a comparable fund without ESG characteristics, as illustrated by the difference between the management fees charged in respect of the ETF class of units in the Fund (0.26% pa of net asset value) and the management fees charged in respect of the EFT class of units in the Vanguard Global Aggregate Bond Index Fund (0.20% pa of net asset value).
12. Vanguard accepted that it may have benefited from the fees paid by any investors who invested in the Fund in reliance on the representations, and who would not have invested had they been aware of the true position. Vanguard submitted, however, that the quantum of any such benefit cannot be determined and that there is no evidence that any investor in fact invested in reliance on the representations. Vanguard disputed the balance of ASIC's submissions with respect to benefits gained by Vanguard as result of the contravention.

Deliberateness of the contraventions

1. It was an agreed fact that Vanguard's contraventions were not deliberate in the sense that Vanguard did not intend to contravene the ASIC Act.
2. Nevertheless, ASIC tendered in evidence email communications involving employees of Vanguard in support of a contention that Vanguard's employees were reckless as to the accuracy of the representations concerning ESG screening. ASIC submitted that:
3. Vanguard's contraventions are properly characterised as reckless because Vanguard had ample information that there were significant limitations in the ESG screening for the Vanguard Ethically Conscious Fund that were not disclosed to investors and were inconsistent with the Fund being marketed as "ethically conscious";
4. the contraventions reflected (at least) a failure to understand, and a lack of curiosity about, Vanguard's own products and how they worked;
5. the contraventions reflected a failure of compliance or oversight; and
6. given the steady feed of adverse information about the ESG screening for the Fund, the later contraventions - those arising from the PDSs issued in 2020 - were more serious than the earlier contraventions and Vanguard was "courting the risk of illegality" by continuing to make representations about the Fund that were inconsistent with the concerns that should have been addressed by that adverse information.
7. Vanguard submitted in response that the email communications relied on by ASIC do not support the findings sought by ASIC and there is no basis for a finding that any Vanguard employee was consciously aware of the fact that any of the representations about the Vanguard Ethically Conscious Fund contained a false or misleading statement or were reckless in that regard.
8. It should be observed at the outset that the evidence adduced by the parties on the issue of the deliberateness of the contraventions was limited. It appeared that ASIC had not conducted examinations of relevant Vanguard employees and the evidence it adduced was confined to information and documents provided by Vanguard in response to notices issued by ASIC under s 912C of the Corporations Act 2001 (Cth) (912C notices). Vanguard elected not to adduce evidence from any person who had been involved in the creation and promotion of the Vanguard Ethically Conscious Fund. I infer that any such evidence would not have assisted Vanguard on the question of the deliberateness (or recklessness) of the contravening conduct.

ASIC's evidence

1. The principal Vanguard employees who were party to the email communications relied on by ASIC were (in order of seniority):
2. Rachel White, who held the positions Senior Manager, Product Strategy (until October 2020) and Head of Product Strategy (November 2020 - July 2021); and
3. Adam Herdel, who held the position Product Analyst, Fixed Income.
4. Vanguard's response to a 912C notice dated 26 June 2023 issued by ASIC stated that each of Ms White and Mr Herdel were involved in or responsible for the creation of, and ongoing operation of, the Vanguard Ethically Conscious Fund, together with Evan Reedman, the Head of Product, and Balaji Gopal, the Head of Product Strategy (until June 2020) and the Head of Personal Investor (July 2020 - June 2023). Vanguard's response indicated that each of Ms White and Mr Herdel were subordinate to Mr Reedman and Mr Gopal. A letter from Vanguard's solicitors to ASIC dated 8 September 2022, providing a statement to ASIC on behalf of Vanguard in response to a 912C notice dated 25 August 2022 issued by ASIC, stated that Mr Reedman was responsible for the Fund's PDS due diligence process, which was managed by his team.
5. Ms White was the person whose interview with FNN was published on YouTube on or about 14 December 2018 and whose presentation at an FNN Fund Manager event on or about 5 December 2018 was published on the FNN website on or about 14 December 2018. The evidence does not reveal which employees of Vanguard were responsible for the content of the media release issued on 30 August 2018. However, the media release attributes a number of statements to Mr Reedman, and it is reasonable to infer that Ms White, as Senior Manager of Product Strategy reporting to Mr Reedman, would have been involved in the preparation of the media release. I am able to draw that inference more confidently in circumstances where Vanguard elected not to adduce evidence from any employee involved in the preparation of the documents containing the misleading representations.
6. The email communications relied on by ASIC involved employees of MSCI ESG Research LLC (MSCI), particularly Naomi English, Associate Director. MSCI performed the research and screening against ESG criteria on behalf of Bloomberg (as explained in the liability judgment at [27]ff).
7. The period in which the relevant emails were sent commenced in January 2018, prior to the launch of the Vanguard Ethically Conscious Fund in August 2018, and continued until September 2019. ASIC also placed reliance on an internal Vanguard email dated 17 February 2021 and an internal memorandum dated 23 February 2021. However, I do not consider that the February 2021 documents are relevant to the deliberateness of the contravention as they occurred at the end of the contravening period and are associated with steps taken by Vanguard to correct the disclosures about ESG screening of securities in the Fund made in the PDS and on its website.

Vanguard's evidence

1. As noted earlier, Vanguard did not adduce evidence from any employee involved in the development or promotion of the Vanguard Ethically Conscious Fund. It did, however, adduce evidence from Curtis Jacques who is the Head of Product Offer, and a director of, Vanguard. Mr Jacques joined Vanguard on 18 November 2020 in the role of Head of Risk and was appointed a director on 21 January 2022. Mr Jacques's evidence largely related to the steps taken by Vanguard to prevent a repetition of the contravening conduct that occurred in this case. However, Mr Jacques also gave evidence, based on his review of Vanguard's systems and procedures, as to the likely causes of the contravening conduct in this case. Mr Jacques's evidence on that topic was to the following effect:
2. In the relevant period, Vanguard did not have a single overarching process for producing a PDS for a fund and instead had multiple separate processes involving different teams within Vanguard that did not always seamlessly operate together.
3. Vanguard's Product Strategy team was the team whose personnel had the specialist skillset for researching a new proposed index which would be tracked by a Vanguard product and the methodology for constructing that index. The Product Management team had primary responsibility for establishing and maintaining a fund once its index had been created. Both teams were involved in the creation of a PDS for a new fund. However, as the Product Management team had primary ongoing responsibility for an existing fund, PDSs were treated as primarily the responsibility of that team, especially in respect of PDS maintenance and reviews. While the Product Management team had responsibility for maintenance of the PDSs, they did not have specialist expertise in the ESG screen disclosures or a structured and controlled process to obtain input from the specialist resources in the Product Strategy team that did have that expertise.
4. Between 2018 and 2021, Vanguard did not have a formal process or 'trigger event' policy that clearly defined the circumstances that would trigger an escalation and assessment of disclosure issues, so as to cause the Risk team to become involved in matters that could potentially impact PDS disclosure.
5. Mr Jacques had learned that some staff in the Product Strategy team had become aware during the relevant period, as a result of interactions with Bloomberg, of ESG screening limitations impacting the Vanguard Ethically Conscious Fund. However, Mr Jacques was not aware of any information which suggested that the existence of the ESG screening limitations was communicated to senior personnel in the Product Management team that had primary responsibility for the Fund's PDS disclosure at the time, or communicated to the Office of General Counsel, the board of directors, or Mr Jacques as the Head of Risk.

Findings

1. The evidence referred to above supports ASIC's characterisation that some aspects of Vanguard's contravening conduct were objectively reckless with respect to compliance with the company's legal obligations under s 12DB and/or 12DF of the ASIC Act. In particular, I consider that the media release, YouTube and FNN presentation representations were made with reckless disregard to their accuracy.
2. In respect of the media release representations (made on 30 August 2018), I infer that persons involved in the preparation of the media release, including particularly Ms White, were aware of the ESG screening limitations that applied to the Bloomberg SRI Index and the Vanguard Ethically Conscious Fund. Despite that, the media release misrepresented that, before being included in the Bloomberg SRI Index, and therefore the Fund, all securities were researched and screened against applicable ESG criteria and securities that violated applicable ESG criteria were excluded or removed from the Bloomberg SRI Index and therefore the Fund. I infer that the desire to promote and market the Fund as "ethically conscious" took priority over ensuring that the composition of the Fund, and the extent of ESG screening, was accurately disclosed.
3. It was Ms White who gave the interview to FNN that was subsequently uploaded to YouTube and who gave the presentation at the FNN Fund Manager event that was uploaded to the FNN website during December 2018. The interview and presentation were misleading in the same manner as the media release, in circumstances where Ms White was aware of the ESG screening limitations. Again, I infer that the desire to promote and market the Fund as "ethically conscious" took priority over ensuring that the extent of ESG screening was accurately disclosed.
4. The same characterisation cannot be applied to the representations made in Vanguard's PDSs for the Fund or on its website with respect to the Fund. It is apparent that a greater degree of diligence was applied to those representations. Vanguard's PDSs and website represented only that securities issued by companies were researched and screened against applicable ESG criteria before being included in the Fund. Although even that representation was not entirely accurate, the circumstances that rendered it inaccurate were more subtle and the evidence does not establish that Vanguard's employees were conscious of those limitations during the relevant period. It can be accepted that the possible limitation of ESG screening to publicly listed companies (and excluding private companies) was adverted to on two occasions in the emails referred to earlier. However, the first of those occasions was in an email sent by Ms English of MSCI in January 2018 with respect to the composition of the Global Agg SRI ex Fossil Fuels Index which is a different index to the Bloomberg SRI Index and merely involved discussions concerning the formulation of the Bloomberg SRI Index. It provides an insufficient basis to infer that Ms White was aware during the relevant period that ESG screening in the Bloomberg SRI Index did not extend to private companies. The second of those occasions was in the email exchanges between Vanguard and Bloomberg in August and September 2019 in which Bloomberg provided an explanation of why MSCI did not "rate" or "cover" certain securities. While the difficulties of rating private companies were referred to in that context, again I consider the email exchanges provide an insufficient basis to infer that Mr Herdel and Ms White were conscious that ESG screening in the Bloomberg SRI Index did not extend to private companies, or its implications for product disclosure.

Whether the contravention arose out of the conduct of senior management

1. The evidence adduced by the parties with respect to the employees of Vanguard who were involved in the contravening conduct was limited. As observed in the preceding section, Vanguard elected not to adduce evidence from any person who had been involved in the creation and promotion of the Vanguard Ethically Conscious Fund, and the evidence adduced by ASIC was confined to information and documents provided by Vanguard in response to 912C notices issued by ASIC.
2. Nevertheless, and as noted above, Vanguard's response to the 912C notice dated 26 June 2023 stated that the following persons were involved in or responsible for the creation, and ongoing operation, of the Vanguard Ethically Conscious Fund (listed in order of seniority):
3. Evan Reedman, the Head of Product;
4. Balaji Gopal, the Head of Product Strategy (until June 2020);
5. Ms White, Senior manager, Product Strategy (until October 2020) and Head of Product Strategy (November 2020 to July 2021); and
6. Andrew Reeve, Head of Product Management.
7. Further, and again as noted above, a letter from Vanguard's solicitors to ASIC dated 8 September 2022 (providing a statement to ASIC on behalf of Vanguard in response to a 912C notice dated 25 August 2022) stated that Mr Reedman was responsible for the Fund's PDS due diligence process, which was managed by his team.
8. The evidence does not reveal the precise role and tasks undertaken by the above persons with respect to the preparation of the media release, PDSs and website pages in relation to the Vanguard Ethically Conscious Fund. It was, of course, Ms White who gave the interview to FNN that was subsequently uploaded to YouTube and who gave the presentation at the FNN Fund Manager event that was uploaded to the FNN website during December 2018. In the absence of evidence concerning the precise role and tasks undertaken by the above persons with respect to the preparation of the media release, PDS and website pages in relation to the Vanguard Ethically Conscious Fund, it is open to find, on the basis of the statements made by or on behalf of Vanguard to ASIC (which constitute relevant admissions), that each had some involvement in the contravening conduct. That is not to say that each of those persons was aware of the misleading character of the representations in the media release, PDS and website pages in relation to the Fund. It is a finding, though, that senior employees were involved in the preparation of disclosure material relating to the Fund that was misleading and contravened ss 12DB and/or 12DF of the ASIC Act.

Size and financial position of contravening company

1. The following facts concerning the size and financial position of Vanguard were agreed between the parties.
2. For the years ending 31 December 2018 to 31 December 2022, Vanguard reported its income, profit and FUM as follows (all figures expressed in million dollars): FY18 FY19 FY20 FY21 FY22 Total income $179.9m $216.4m $296.9m $288.4m $300.5m Net profit $10.7m $13m $50.4m $21.6m $26.1m Total FUM $146,977m $185,814.5m $175,596.7m $112,978.5m $104,646.1m

1. The Fund constitutes a relatively small proportion of Vanguard's overall business. The annual income earned by Vanguard from the Fund was less than 1% of Vanguard's annual income in each year to FY22, and the market value of the FUM in the Fund averaged less than 1% of the market value of Vanguard's total FUM in that period.
2. Vanguard is a wholly owned subsidiary of The Vanguard Group Inc (Vanguard Group), which is one of the world's largest investment management companies and has more than A$10 trillion in assets under management. As at 30 June 2023, Vanguard Group offered 430 investment funds worldwide. As at 31 December 2022, more than 50 million investors were invested in funds offered by the Vanguard Group, and it had approximately 20,000 employees worldwide.

Compliance culture

1. Mr Jacques gave evidence about:
2. the actions taken by Vanguard once it became aware of inaccuracies in the PDSs in respect of the Vanguard Ethically Conscious Fund;
3. the likely causes of the contravening conduct; and
4. improvements to Vanguard's compliance systems that have been introduced subsequent to the contravening conduct occurring.
5. Each of the above topics is relevant to the Court's assessment of Vanguard's compliance culture.
6. Mr Jacques deposed that he first became aware of inaccuracies in the PDSs issued in respect of the Vanguard Ethically Conscious Fund on 15 February 2021. On that day, the ETF class of units in the Fund was placed into a trading halt. As discussed below, Vanguard self-reported the contravention to ASIC and cooperated with ASIC in the resolution of this proceeding. Mr Jacques also deposed that, immediately after discovering the problem with the Vanguard Ethically Conscious Fund, Vanguard's Product team undertook a review of Vanguard's other exclusionary screened index funds that used ESG criteria. In around May 2022, Vanguard identified and reported to ASIC that statements made in a PDS for a separate fund, the Vanguard International Shares Select Exclusion Index Fund, regarding the exclusion of "securities involved in the production, manufacturing, or significant sales of tobacco" were not accurate. On 1 December 2022, Vanguard paid three infringement notices issued by ASIC in connection with that matter.
7. Mr Jacques's evidence regarding the likely causes of the contravening conduct with respect to Vanguard's Ethically Conscious Fund is referred to above. Mr Jacques expressed the opinion that the absence of a clearly defined end-to-end PDS (verification) process and a formal "trigger event" policy (that defined circumstances that would trigger an escalation and assessment of disclosure issues) were material factors that contributed to the failure to ensure that all disclosures about the Fund accurately reflected the limited scope of ESG screening applied to the Bloomberg SRI Index.
8. Mr Jacques described the improvements that have subsequently been made to Vanguard's compliance systems, including:
9. introducing new policies and procedures relating to the drafting, verification, implementation, finalisation and post-approval processes for PDSs and other disclosures;

Cooperation with the enforcement authority and contrition

1. It is an agreed fact that, in respect of the matters the subject of this proceeding, Vanguard self-identified and self-reported to ASIC, and that Vanguard has cooperated with ASIC in respect of its investigation including by responding to ASIC's requests for information and documents in relation to the investigation in a prompt and constructive manner.
2. As explained in the liability judgment, Vanguard admitted ASIC's allegations in the proceeding, save for one disputed issue concerning the nature and scope of the representations made in the PDSs for the Vanguard Ethically Conscious Fund and associated website representations. On that issue, Vanguard was successful.
3. I find that Vanguard has cooperated fully with ASIC in respect of this proceeding.

Whether the contravener has previously been found by a court to have engaged in any similar conduct

1. Each of s 12GBA(2)(c) (in respect of conduct that occurred wholly or partly before 13 March 2019) and s 12GBB(5)(d) (in respect of conduct that occurred wholly on or after 13 March 2019) requires the Court to take into account certain prior conduct of the contravener. However, that conduct is defined differently in each section. Section 12GBA(2)(c) requires the Court to take into account whether the contravener has previously been found by the Court in proceedings under Subdiv 2 of Pt 2 of the ASIC Act to have engaged in any similar conduct. In contrast, s 12GBB(5)(d) requires the Court to take into account whether the contravener has previously been found by a court (including a court in a foreign country) to have engaged in any similar conduct.
2. The parties agree that Vanguard has not previously been found by a court to have contravened a provision of the ASIC Act or Chapter 7 of the Corporations Act 2001 (Cth). I infer that it is an agreed fact that Vanguard has not previously been found by a court to have engaged in any similar conduct.
3. The SOAF refers to the fact that, in November 2022, ASIC issued three infringement notices (under Subdiv GB of Div 2 of Pt 2 of the ASIC Act) against Vanguard in respect of (alleged) contraventions of s 12DF of the ASIC Act in relation to statements made in PDSs for the Vanguard International Shares Select Exclusions Index Funds regarding the exclusion of "securities involved in the production, manufacturing, or significant sales of tobacco" from the index tracked by those funds. It is also an agreed fact that Vanguard paid $39,960 in compliance with the infringement notices on 1 December 2022 with no admission of liability. ASIC submitted that the Court may take these matters into account in determining the appropriate penalty in this case, although noted that they would not be given the same weight as civil penalty contraventions found by a court. Vanguard submitted that the Court ought not take into account, or alternatively ought place very little weight upon, these matters.
4. The issue and payment of an infringement notice under Subdiv GB of Div 2 of Pt 2 of the ASIC Act does not prove that the recipient of the notice contravened a relevant provision in Div 2 of Pt 2 of the ASIC Act. An infringement notice is issued under s 12GX(1) on the basis only of ASIC's belief that the recipient has contravened the relevant provision. Under s 12GXB(1), the infringement notice is required to give details of the alleged contravention. Under s 12GXG(1), payment of the infringement notice is not to be taken as an admission of guilt or liability in respect of the alleged contravention. It follows that the subject matter of the infringement notice rises no higher than an alleged contravention. As such, the agreed facts concerning the infringement notice, of itself, has no material bearing upon the assessment of penalty in this case.

Assessment of appropriate penalties

1. In the present case, the maximum penalty that may be imposed for the admitted contraventions is so high as to be practically meaningless. In respect of the contravening conduct that occurred wholly or partly before 13 March 2019 (being the six PDSs published in 2018, the website representations, the media release representations, the YouTube representations and the FNN presentation representations), the applicable maximum penalty is $2.1 million per contravention. Vanguard contravened ss 12DB(1)(a) and (e) and/or 12DF(1) each time a relevant representation was viewed by a potential investor. As set out earlier, that occurred on thousands of occasions, which results in a theoretical maximum pecuniary penalty in the billions of dollars. Further, in respect of contravening conduct that occurred wholly on or after 13 March 2019 (being the six PDSs published in July 2020), the applicable maximum penalty is approximately $25.6 million for each contravention. Again, in the period until the end of the contravening period (about 7 months), it can be estimated that the PDSs were viewed on hundreds of occasions. In Reckitt Benckiser, the Full Court observed (at [157]) that, where there was no meaningful overall maximum penalty given the very large number of contraventions, the assessment of the appropriate penalty was best assessed by reference to factors other than the statutory maximum.
2. Vanguard's contraventions should be regarded as serious. Vanguard's misrepresentations concerned the principal distinguishing feature of the Fund, being its "ethical" characteristics. Vanguard developed and promoted the Fund in response to market demand for investment funds having those characteristics. By its misleading conduct, Vanguard misrepresented the "ethical" characteristics of the Fund. Approximately 74% of the securities in the Fund by market value were not researched or screened against applicable ESG criteria. Further, Vanguard benefited from its misleading conduct. The misrepresentations enhanced Vanguard's ability to attract investors to the Fund, and enhanced Vanguard's reputation as a provider of investment funds with ESG characteristics, as compared to what would have been the case if Vanguard had accurately disclosed the ESG screening limitations and the Fund's exposure to issuers engaged in the excluded industries. Although it cannot be demonstrated that any investor suffered financial loss by Vanguard's misleading conduct, investors lost the opportunity to invest in accordance with their investment values.

Adverse publicity orders

1. ASIC also sought adverse publicity orders under s 12GLB(1) of the ASIC Act, which Vanguard did not oppose. Section 12GLB provides as follows. 12GLB Punitive orders requiring adverse publicity (1) The Court may, on application by ASIC, make an adverse publicity order in relation to a person who: (a) has been ordered to pay a pecuniary penalty under section 12GBB; or (b) is guilty of an offence under section 12GB. (2) In this section, an adverse publicity order, in relation to a person, means an order that: (a) requires the person to disclose, in the way and to third parties specified in the order, such information as is so specified, being information that the person has possession of or access to; and (b) requires the person to publish, at the person 's expense and in the way specified in the order, an advertisement in the terms specified in, or determined in accordance with, the order. (3) This section does not limit the Court's powers under any other provision of this Act.
2. In circumstances where Vanguard does not oppose the adverse publicity orders sought by ASIC, I consider it appropriate to make an order in the form sought by ASIC.

Costs

1. ASIC seeks its costs of the proceeding in respect of both the liability and penalty hearings. Although ASIC was unsuccessful in respect of the issue that was in dispute in the liability hearing, ASIC submitted that the mere fact that a court does not accept all of a successful party's arguments does not make it appropriate to deal with costs on an issue-by-issue basis (referring to Victoria v Sportsbet Pty Ltd (No 2) [2012] FCAFC 174 (Sportsbet) at [8]).
2. Vanguard submitted that the appropriate order is that it pay ASIC's costs of the proceeding, save for the contested issue on liability which was separately heard and determined by the Court and in relation to which Vanguard was wholly successful. Vanguard submitted that there is no reason why the ordinary position, that costs follow the event, ought not to apply. Vanguard argued that the present case can be distinguished from Sportsbet as the present case is not a case where, at trial, ASIC succeeded on some, but not all, contested issues. Rather, there was a discrete hearing which was required only by reason of the dispute between the parties on one issue, and Vanguard was wholly successful in relation to that issue.
3. I accept Vanguard's submissions in this regard and consider that the appropriate order is that ASIC pay Vanguard's costs of and incidental to the hearing on 8 March 2024 and that Vanguard otherwise pay ASIC's costs of the proceeding. I certify that the preceding one hundred and twenty-three (123) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan.