Australian Securities & Investments Commission v Axis International Management Pty Ltd

Federal Court of Australia|2011-07-21|Before: Gilmour J

Quentin Phillip O'Doherty Ward, the sixth defendant, be disqualified pursuant to s 206E of the Corporations Act 2001 (Cth) from managing corporations for a period of 6 years.
Timothy Francis Johnston, the seventh defendant, be disqualified pursuant to s 206E of the Corporations Act 2001 (Cth) from managing corporations for a period of 20 years. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 157 of 2008

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGE: GILMOUR J DATE: 21 JUly 2011 PLACE: PERTH

INTRODUCTION 1 Australian Securities and Investments Commission (ASIC) seeks orders against the sixth defendant (Ward) and the seventh defendant (Johnston) disqualifying them from managing corporations for 15 years and 20 years respectively. These applications follow from findings of contraventions of the Corporations Act 2001 (Cth) (the Act) which are the subject of my earlier judgment in this case: Australian Securities & Investments Commission v Axis International Management Pty Ltd (No 5) [2011] FCA 60 (Judgment). 2 Neither Mr Ward nor Mr Johnston appeared at the hearing of these applications although Mr Ward, who had until recently been represented by solicitors, relied upon written submissions filed on his behalf. I have had the benefit of these and other detailed written submissions and where appropriate I have adopted them in these reasons without attribution at every point. 3 Section 206E of the Act allows a court, on the application of the plaintiff, to disqualify a person from managing corporations in the following circumstances: (a) either: (i) where the person was an officer of a body corporate that contravened the Act at least twice and each time the person failed to take reasonable steps to prevent the contravention (even if the failure to take those reasonable steps was not itself a contravention); or (ii) where the person was an officer of a body corporate and contravened the Act at least twice; and (b) the court is satisfied that the disqualification is justified. 4 ASIC need only establish one of the circumstances outlined in (a)(i) and (a)(ii) above to found the basis for an order and then must satisfy the Court that the disqualification is justified. 5 The Court, in considering whether or not a disqualification is justified, may have regard to: (a) the person's conduct in relation to the management, business or property of any corporation; and (b) any other matters the court considers appropriate. 6 Against Mr Ward, though not against Mr Johnston, ASIC relies on s 206E(1)(a)(ii), on the basis that Mr Ward has in these proceedings been found to have, at least twice, contravened the Act while an officer of a body corporate, the first defendant (Axis). 7 ASIC also relies on s 206E(1)(a)(i) against both Mr Ward and Mr Johnston. Under that provision, ASIC's bases for seeking the disqualification orders are: (a) Mr Ward was an officer of Axis, indeed its sole director, when that body corporate contravened the Act at least twice: Judgment [5], [204]; (b) Mr Johnston was an officer of Green Triton Limited (Green Triton) and Firepower Investments Pte Ltd (Firepower Investments) and indeed their controlling mind when each of those bodies corporate contravened the Act at least twice: Judgment [24], [214]; and (c) Each of Mr Ward and Mr Johnston failed to take reasonable steps to prevent the contraventions by Axis, and Green Triton and Firepower Investments respectively. 8 Santow J in Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [56] summarised the applicable principles as follows: (i) Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards: Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387 at 395; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 at 349-50; Australian Securities Commission v Donovan (1998) 28 ACSR 583 at 602; Australian Securities Commission v Roussi (1999) 32 ACSR 568 at 570-1; Re Strikers Management Pty Ltd; Australian Securities Commission v Dimitri (unreported, Fed C of A, Burchett J, No NG 3789 of 1996, 7 May 1997, BC9702133); Re Tasmanian Spastics Association; Australian Securities Commission v Nandan (1997) 23 ACSR 743 at 751. (ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office: Australian Securities Commission v Roussi, above, at 570; Re Gold Coast Holdings Pty Ltd; Australian Securities and Investments Commission v Papotto (2000) 35 ACSR 107 at 112. . (iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors: Australian Securities Commission v Roussi at 570; Re Gold Coast Holdings Pty Ltd, above, at 112; Re Tasmanian Spastics Association, above, at 751. (iv) The banning order is protective against present and future misuse of the corporate structure: Australian Securities Commission v Donovan, above, at 603. (v) The order has a motive of personal deterrence, though it is not punitive: Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 at 205; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd, above; Australian Securities Commission v Donovan at 607; Re Tasmanian Spastics Association at 751. (vi) The objects of general deterrence are also sought to be achieved: Australian Securities Commission v Donovan at 602. (vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company: Australian Securities Commission v Donovan at 607. (viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty: Australian Securities Commission v Donovan at 605-7. (ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public: Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd; Australian Securities and Investments Commission v Parkes (2001) 38 ACSR 355 at 386; Australian Securities Commission v Forem-Freeway Enterprises; Australian Securities Commission v Roussi at 570-1. (x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct: Australian Securities Commission v Donovan at 607; Australian Securities and Investments Commission v Parkes, above, at 386. (xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming: Australian Securities Commission v Forem-Freeway Enterprises at 351. (xii) The eight criteria to govern the exercise of the court's powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess: • character of the offenders; • nature of the breaches; • structure of the companies and the nature of their business; • interests of shareholders, creditors and employees; • risks to others from the continuation of offenders as company directors; • honesty and competence of offenders; • hardship to offenders and their personal and commercial interests; and • offenders' appreciation that future breaches could result in future proceedings Australian Securities Commission v Roussi at 570-1; Re Gold Coast Holdings Pty Ltd at 111; (xiii) Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were: • large financial losses; • high propensity that defendants may engage in similar activities or conduct; • activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy; • lack of contrition or remorse; • disregard for law and compliance with corporate regulations; • dishonesty and intent to defraud; • previous convictions and contraventions for similar activities. Australian Securities and Investments Commission v Hutchings; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd; Australian Securities Commission v Parkes; (xiv) In cases in which the period of disqualification ranged from 7-12 years, the factors evident and which lead to the conclusion that these cases were serious though not "worst cases", included: • serious incompetence and irresponsibility; • substantial loss; • defendants had engaged in deliberate courses of conduct to enrich themselves at others' expenses, but with lesser degrees of dishonesty; • continued, knowing and wilful contraventions of the law and disregard for legal obligations; • lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform; Australian Securities Commission v Forem-Freeway Enterprises; Australian Securities Commission v Donovan; Australian Securities Commission v Roussi; Re Strikers Management Pty Ltd; Re Gold Coast Holdings Pty Ltd. The difficulty with Roussi's case is that disqualification for 10 years was ordered, as this was the period of disqualification that the ASC had sought. Had a longer period been applied for, Einfeld J may have considered giving a longer period: Australian Securities Commission v Roussi at 571. (xv) The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were: • although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated; • the defendants had no immediate or discernible future intention to hold a position as manager of a company; • in Donovan's case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings; Australian Securities Commission v Donovan; Re Tasmanian Spastics Association. 9 In Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, McHugh J at 152-155, with one exception, cited these propositions with approval. They have, variously, been applied in many subsequent cases: Elliot v Australian Securities and Investments Commission (2004) 10 VR 369 at 406-7; Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 3) (2005) 56 ACSR 204 at 207-8; Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595 at [80] to [114]; Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) (2010) 268 ALR 303 at 307-8. However, as McHugh J found at [56]-[57], as did the plurality judgment at [37], the conclusion reached by Santow J in Adler that s 206E has no punitive element was wrong. Exposure to a disqualification order is exposure to a penalty. Accordingly, factors taken into account in the criminal jurisdiction: retribution, deterrence, reformation, contrition as well as protection of the public are also central to determining whether an order of disqualification should be made: McHugh J at [52]. 10 In Re One Tel Ltd; Australian Securities and Investments Commission v Rich (2003) 44 ACSR 682 Bryson J warned at 692 that each case is specific to its own facts and that little guidance can be obtained from considering the penalties imposed in other cases. The decision in Beekink at [112] on this point is to like effect. Nevertheless, to avoid inconsistency of approach, ASIC contends that it is permissible for the court to consider penalties applied in other cases, and for this purpose, ASIC submitted a table, summarising the disqualification penalties applied in other cases. A similar table was considered by the court in Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110 at [138]. I accept that such a table is relevant for that limited purpose and I have taken its contents into account. 11 ASIC places emphasis upon the decisions in Australian Securities and Investment Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; Australian Investors Forum (No 3) as well as Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2005) 55 ACSR 411. Each of these cases involved contraventions of s 727. 12 In Pegasus a company was found to have contravened s 727 of the Act by receiving investments from members of the public without a prospectus. There were other contraventions (including that the director had incorporated and managed Pegasus although disqualified from doing so) and the investment scheme appeared to be a kind of Ponzi scheme. The director was disqualified for 30 years. 13 In Australian Investors Forum (No 3) a corporate group was used to raise funds from members of the public for investment in various businesses. The funds were raised without prospectuses and were misapplied. There were numerous contraventions of the Act, including of s 727. The details of the contraventions appear in the report of Australian Securities and Investments Commission v Australian Investors Forum (No 2) (2005) 53 ACSR 305. Two directors were disqualified for 25 years. The circumstances the court took into account in imposing the disqualification orders are set out at [29] to [58] of Australian Investors Forum (No 3). 14 In Elm Financial Services there was one contravention of s 727 and a number of other contraventions of other sections of the Act in the issue of debentures and units in a trust. Barrett J disqualified one director, Mr Terracini, for 7 years and the other, Mr Young, for 5 years. His Honour said at [7]: All the contraventions involved apparently deliberate failure to observe fundamental statutory rules directed towards protection of investors. The legislation proceeds on the clear basis that persons should be invited to invest in financial products only if statutory specifications concerning product structure and materials for decision making are met and if advice given or solicitations made are honest, frank and fairly based. Both Mr Terracini and Mr Young failed in material and serious ways to abide by these rules ... 15 In Beekink a company issued a prospectus for investment in a managed investment scheme which was misleading in a number of respects. The directors were lawyers who said in their defence that they relied on the staff of the custodian of the scheme and did not read the prospectus. One of the directors, Mr Beekink, personally undertook to repay half of the capital losses of the investors excluding interest. The other two directors arranged for the firm that they were partners of to repay the remaining capital losses of investors. Mr Beekink was disqualified for 12 months.

MR WARD 16 ASIC tendered in addition to the Agreed Statement of Facts from the trial, the following further evidence regarding Mr Ward: (a) affidavits of Robin Baird, Carol Ashworth, Ronald Nottle, Marilyn Nottle, Darryl Edmondson, Ludmilla Edmondson, Benjamin Carter, Shannon Carter, Nicholas Furlan, Camelia Furlan, Geoffrey Allan, Nola Allan, Penny Buchan and Angela Jones; (b) transcripts of s 19 examinations conducted on 31 May 2007 and 28 September 2007; (c) extract from the National Personal Insolvency Index showing the bankruptcy on 2 August 1995 of Mr Ward; (d) Banning Order pursuant to s 829(a) of the Corporations Law dated 1 November 1995; (e) Banning Order under ss 920A and 920B of the Act dated 3 July 2009; (f) email from Mr Ward to Mr Johnston dated 30 May 2006; (g) email from Mr Ward to Mr Stein dated 13 March 2006; (h) table attached to ASIC's written submissions summarising the consideration paid by purchasers of shares in Firepower Holdings Group Pty Ltd (Firepower BVI) brokered by Axis in sales which were the subject of declarations made following the trial, derived from the investor affidavits and share register. The total consideration paid was $976,470; (i) table attached to ASIC's written submissions summarising the consideration paid by all purchasers of shares in Firepower BVI brokered by Axis between 1 June 2005 and 6 June 2006, derived from the investor and share register. The total consideration paid was $21,499,311.65. 17 I have treated the table attached to ASIC's submissions as an aide memoire which conveniently contains relevant evidence otherwise admitted into evidence at the original trial.

Section 206E(1)(a)(i) 18 Under this provision, ASIC must establish that: (a) Mr Ward was an officer of a body corporate that twice contravened the Act; and (b) he failed to take reasonable steps to prevent the contraventions. 19 In respect of (a), the court has held that Axis committed 15 contraventions of the Act by distributing application forms contrary to s 727. Mr Ward was the sole director of Axis during these contraventions: Judgment at [5]. 20 In respect of (b) - the failure to take reasonable steps to prevent the contravention - ASIC submits that Mr Ward should have ensured that Axis: (a) did not distribute any application forms in relation to offers in the shares; (b) directed its employees and agents, including Vincenzo Vallelonga, not to distribute any application forms; and (c) provided training to those people who were employees and agents in the requirements of Part 6D.2 of the Act and specifically s 727. 21 Each of those matters was pleaded against Mr Ward and opened at the trial. The relevant evidence discloses that: (a) Axis was the broker for the sale of shares on 15 occasions in breach of the Act; (b) Mr Ward was Axis's sole director during the relevant period and responsible for the operations of Axis and its employees. Mr Ward was the only person involved in the financial advice and planning role at Axis, other than Mr Vallelonga, who had an administrative role, and the only person authorised to give financial advice; (c) Mr Ward was involved intimately in the brokerage of the shares by Axis and he, on 9 of the 15 occasions, attended to the distribution of the application forms himself. He personally caused the contraventions to occur. 22 Furthermore: (a) The affidavits of Mr and Mrs Allan, Mr and Mrs Ashworth, Ms Buchan, Ms Jones, Mr and Mrs Furlan, Mr and Mrs Edmondson and Mr and Mrs Nottle, the investors to whom the sales of shares were brokered by Mr Ward himself, establish that: (i) Mr Ward determined that Axis would distribute application forms; and (ii) Mr Ward made no enquiry of any of them as to matters concerning Part 6D.2, i.e. whether the purchasers came within any of the statutory exemptions from disclosure. (b) The affidavits of Mr and Mrs Ashworth, Mr Baird, Mr and Mrs Carter, Ms Buchan, Ms Jones, Mr and Mrs Furlan, Mr and Mrs Nottle establish that: (i) Mr Vallelonga distributed the application forms only after the investors had an initial meeting with Mr Ward; and (ii) no enquiry was made of any of them by Mr Vallelonga as to any matter concerning the exemptions, from which it can be inferred that no, or no adequate, training was given to Mr Vallelonga as to the need for such enquiry. 23 Mr Ward did not plead a positive case in opposition to the allegations in the Further Amended Statement of Claim or lead any evidence to the effect that steps had been taken on those matters. 24 Mr Ward submits that Axis and he were in a different category to Johnston, Firepower and others selling shares as Axis was merely used as one of the conduits for the distribution of application forms. He contends that in determining what standard of conduct should be considered reasonable for the purpose of s 206E(1)(a)(i), regard may be had to the limited scope of Axis' activities in determining whether the steps taken by Axis and Ward were "reasonable steps" and that those who proposed the sale of the shares, and their method of sale, ought to carry a greater onus and be required to take more stringent steps before it might be considered that they have taken "reasonable steps".. 25 I do not accept these submissions. Mr Ward negligently failed to identify that the distribution of application forms constituted a contravention of s 727 of the Act. That is, as I found in the Judgment at [199], a discrete statutory proscription. I do not regard it as a lesser form of prohibited conduct. 26 Mr Ward then submits that he took steps to confirm that the proposed distribution of application forms was compliant in that he consulted Mr Stein whom he considered to be an experienced corporate lawyer. Mr Stein, he argues, then provided him with a procedure to follow and considered that he (Mr Ward) was trying to comply with the law and was not attempting to conceal matters. Mr Ward submits that he took reasonable steps in that he sought professional advice from Les Stein, a lawyer and Corporate Counsel for Firepower as to what procedure should be followed so as to comply with the law; that he acted on the advice given and forwarded the advice to his employees and colleagues at his company, Axis. 27 I do not accept these submissions. The assertions of fact are not supported in the evidence. Mr Stein did outline a procedure to follow by email dated 12 April 2006 sent, amongst others, to Mr Ward. It was in these terms: The steps are: 1. Form for sale of shares is signed; 2. The funds come into your account; 3. You notify me in writing that the money has come in and send me a copy of the share transfer; 4. I notify you that the transferee is on the Share Register; 5. You release the money to FP Investments; 6. Share certificate issued. 28 This email does not constitute evidence of a request for legal advice as to what was required for Mr Ward's and Axis' involvement to be "compliant" with the Act or that such advice was given. The email merely set out steps to be taken which were of an administrative character. There is no evidence to support a finding as to what Mr Stein thought that Mr Ward was trying to do, even if such evidence were relevant and admissible. Moreover, 11 of the 15 contraventions had occurred by the time Mr Stein wrote this email. 29 I am satisfied on the evidence and by ASIC's submissions as to this issue that Mr Ward failed to take reasonable steps to prevent the contraventions.

Section 206E(1)(a)(ii) 30 Under this provision it must be established that Mr Ward himself contravened the Act: that he personally distributed the application forms. On 8 February 2011 the court declared that Mr Ward himself contravened s 727 on 9 occasions.

Sections 206E(1)(b) and (2) 31 These provisions introduce the discretionary factors the court may take account of in determining whether or not to disqualify Mr Ward. 32 ASIC submits the following factors, which I find are established on the evidence, are relevant: (a) Axis received benefits from the sales of the shares in the form of direct payment by the purchasers for administration services relating to the purchase of the shares by the self managed super funds. The total value of these benefits was of the order of $34,000. (b) Mr Ward knew the purpose of the share sales was fundraising. He must also have known the type and the financial acumen of investors he was brokering the sale of the shares to as they were mostly existing clients. (c) Mr Ward is an experienced financial adviser, who was an authorised representative for a financial services licensee in the past and had worked in the financial planning industry or insurance industry since 1 January 1973. (d) Mr Ward strongly encouraged his clients to acquire shares in Firepower BVI, sometimes with glowing assessments of the company for which he had no reasonable basis. (e) Indeed, Mr Ward acknowledged in his email to Mr Johnston of 30 May 2006 that there was no information available on which to base a decision to invest. Most of the contraventions involving Axis and Ward had occurred by this time. (f) In the Firepower BVI share sales the subject of the declarations against Axis and Mr Ward, the total amount paid for the shares was $976,470. (g) In all the Firepower BVI share sales brokered by Axis during the period from 1 June 2005 to 6 June 2006 on behalf of Green Triton, Firepower Investments or Owston, based on the share register, the total amount paid for the shares was $21,499,311.65. (h) Mr Ward provided to one purchaser a disclosure document that stated explicitly that shares should only be offered to experienced or professional investors. I find in this respect that Mr Ward knew that he was distributing offer forms to "Mums and Dads" and should not have been. (i) Mr Ward has in the past been disqualified from doing an act as a representative of a securities dealer or investment adviser because of bankruptcy in 1995. As a consequence of his bankruptcy and in accordance with then s 229 of the Corporations Law he was prohibited from managing a corporation without leave of the court. (j) Mr Ward did not adduce any evidence of good character or of remorse or contrition. (k) There are three mitigating factors that should be taken into account in Mr Ward's favour: (i) There has been no evidence of any dishonesty on his part. However, there is evidence of at least a careless disregard for legal requirements concerning corporate fund raising. (ii) He did repurchase Firepower BVI shares from the Furlans when they did not list on the Alternative Investment Market of the London Stock Exchange (AIM) as had been promised. (iii) Mr Ward is currently subject to a banning order that prevents him from providing financial services until 3 July 2017. That banning order arose from his dealings in the sale of shares in Firepower Holdings Ltd which was registered in the Cayman Islands and Firepower BVI. 33 Subject to what follows later in these reasons all of these factors are relevant. Some attract more weight than others. I note, in particular, that I place little weight on the fact that Mr Ward was previously disqualified from doing an act as a representative of a securities dealer or an investment adviser because of his bankruptcy. I have no information as to what circumstances led to his bankruptcy. 34 It is submitted on behalf of Mr Ward that the following ought also be taken into account by way of mitigation: (a) Mr Ward relied on the advice provided by Les Stein, a lawyer employed by the Firepower Group. I have found that Mr Ward did not rely, relevantly, on advice that what Axis and he were doing was compliant with the Corporations Law. (b) Although there were 15 contraventions in total, the contraventions all arose from the same error, that is, a belief on the part of Mr Ward that he was not breaching s 727 of the Act, but merely acting as a conduit between those who applied to purchase shares and those who agreed to transfer shares. Mr Ward did not understand that he could be described as a "person offering securities" since he did not have legal capacity to give effect to the share transfer or to bind a party to an agreement to transfer shares. There is substance in the submission that all the contraventions were the result of one error. However, the relevant error was, I find, carelessness on Mr Ward's part as to the requirements of the law. His case concerning him not being a "person offering securities" is beside the point. The contraventions concerned the distribution of application forms for offers of securities contrary to s 727(1). (c) Mr Ward has co-operated with the plaintiff; attended a significant portion of the trial and is now in receipt of an order banning him from working in financial services, effectively depriving Mr Ward of his principal source of income. As a consequence, Mr Ward now possesses considerable awareness of the seriousness of breaches of the Act with respect to irregular dealings in the sale of shares. I accept this submission. (d) Mr Ward was not privy to the same level of information and knowledge as others such as Johnston, and relied on repeated representations made on a sustained basis that the shares were a sound investment and that there was nothing untoward. He refers, by way of example, to the redacted liquidator's report attached as annexure "GMB-2" to the affidavit of Gary Martyn Bertram sworn 6 May 2011, at [30] and [62]. I do not regard this as a mitigating factor. Mr Ward should have made himself aware of the requirements of the law. He failed to do so. (e) Arguably Mr Ward should have been aware of the type and financial acumen of the investors he was dealing with, but the share dealings were not engaged in by Mr Ward with intent of defrauding or causing detriment to his client investors. Indeed, Mr Ward was so convinced of the worth and reliability of the Firepower shares and the Firepower company in question that he, his family and his associated entities purchased Firepower shares on at least fourteen occasions, spending over $1,093,504.00 doing so. I accept this submission. (f) Although the total sum paid for the shares the subject of declarations against the Axis and Mr Ward was $976,470, this was only a tiny portion of the "shares [sold] for sums totaling more than $75 million without meeting any reporting, disclosure or prospectus requirements" with respect to Firepower BVI. See the redacted liquidator's report attached as annexure "GMB-2" to the affidavit of Gary Martyn Bertram sworn 6 May 2011, at [15]. I do not regard this as an accurate picture of the circumstances involving Axis and Mr Ward. Whilst not a circumstance of aggravation it is relevant to take into account, in relation to this submission, that Axis brokered Firepower BVI share sales in the order of $21 million between 1 June 2005 to 6 June 2006 although I am not aware of just what is meant by "brokered" in this context. (g) The personal gain made from fees charged by Axis payable by investors was, relatively speaking, a small amount of approximately $34,000. The commission was only payable when the share application was accepted by the share vendor and Mr Ward did not receive any payment from Firepower. Axis' and Mr Ward's dealings with the investors and Firepower shares was just one part of their total business dealings, involving other services in administering self managed super funds, as well as providing financial advice generally and operating an insurance business. This was not a dishonest or fraudulent scheme on Mr Ward's part to unjustly enrich himself to the detriment of others. Indeed most of this benefit was eroded when Mr Ward re-purchased the Furlan's shares when they failed to list on the London Stock Exchange at a cost of $30,000. I accept this and the balance of Mr Ward's submissions, which follow, as being mitigating factors. (h) Mr Ward co-operated by conferring at length with ASIC legal representatives, with the consequence that an agreed statement of facts was prepared prior to trial, sparing the time and expense of proving those factual issues at trial; (i) Mr Ward repurchased shares from the Furlans at a cost of $30,000.00 which in itself is an expression of contrition and remorse; (j) Mr Ward has no prior convictions, or contraventions of the Act; (k) Mr Ward will be 62 years of age at the time of the disqualification hearing and is approaching retirement age and a period of his life in which he intends to reduce his vocational activities. He has been punished by the plaintiff banning him from conducting his profession as a financial advisor. This has had the effect of preventing him from earning a living in the conduct of his profession. 35 Mr Ward then submits that in light of the circumstances below, disqualification is not justified given: (a) Mr Ward's good character, in that he has no prior convictions or contraventions, other than the instant contraventions being dealt with in the current proceedings; (b) Mr Ward does not constitute a risk to the public in the future, given that he is the subject of a banning order preventing him from working in financial planning (the capacity in which these contraventions were made) until 3 July 2017; (c) the risk to the public in the future from Mr Ward is further minimized given he is 62 years of age and he is approaching retirement age; (d) the risk to the public in the future is also lessened by Mr Ward's greater awareness of his obligations under the Act in the wake of the instant proceedings and the steps he should take to ensure he is independently informed of his obligations, rather than relying on the representations of others; (e) Mr Ward was acting honestly and in reliance upon the professional advice others, namely Les Stein, Corporate Counsel for Firepower, and (f) Mr Ward wishes to be able to act as director of companies associated with him and his family created for the purpose of self-managing his superannuation funds. 36 ASIC however submits that a banning order for 15 years is appropriate to protect the public, taking the foregoing matters into account and in particular: (a) the number (15) of contraventions; (b) Mr Ward's active promotion of the sales; (c) the fact that Axis was paid commission on the sale of the shares; (d) the substantial losses suffered by purchasers of the shares, but noting his repurchase of shares from the Furlans; (e) the seriousness of contravention of s 727; (f) Mr Ward's previous disqualifications referred to at paras 29(i) and 29(l)(iii) above; (g) the lack of evidence of good character, remorse or contrition; (h) the absence of any dishonesty, but his careless disregard for the requirements of the law. 37 I find that the contraventions by Mr Ward were a serious departure from the requirements of the Corporations Law. They occurred in a commercial environment where unsophisticated investors are exposed to significant financial loss where such requirements are not met. That is what occurred here. A period of disqualification is, in my opinion, warranted. Whilst I accept that the need for personal deterrence is relatively low the need for general deterrence is a significant factor. Additionally, it is important, in order to maintain public confidence in the law that the Court underline the need to uphold the norm of corporate standards found in the Act. However, there is no evidence of dishonesty on the part of Mr Ward and ASIC does not contend otherwise. I earlier found that the contraventions by Mr Ward were the result of his carelessness. There is no real question of personal enrichment. Such as there was, it was offset by Mr Ward's repayment of the funds to the Furlans. This repayment is, to an extent, a tangible expression of remorse. Indeed he and his associates suffered significant personal loss to the extent of their investment in Firepower BVI shares. I do not consider that it has been demonstrated that Mr Ward has a predisposition to this kind of conduct or that there is any real likelihood that such conduct will be repeated. 38 Mr Ward is excluded from providing financial services as a result of an ASIC banning order dated 3 July 2009 and made pursuant to ss 920A(1) and 920B(2) of the Act which operates until 3 July 2017, a period of eight years. This has and will operate to enjoin him from practising in his field as a financial planner for that period. That in itself is a significant punishment as well as being protective of the public. He is 62 years old and has no intention of involving himself in corporate activity other than as a Director, in the future, of companies associated with himself and his family created for the purpose of self managing his own superannuation funds. 39 I consider then, in all of the above circumstances that a period of 15 years sought by ASIC is excessive and unwarranted and that Mr Ward ought be disqualified for a period of 6 years from managing corporations. This is a substantial period and reflects adequately the need for general deterrence as well as other factors which I have mentioned.

MR JOHNSTON 40 Mr Johnston, in my view, is in a much more serious category of contravener than Mr Ward. Additionally, there are important considerations relevant to Mr Johnston which extend beyond the contraventions. 41 In addition to evidence adduced at trial in relation to Mr Johnston, ASIC also relies on: (a) Redacted supplementary report by the liquidator of Firepower Operations Pty Ltd under s 533(2) of the Act dated 19 February 2010; (b) The Firepower Trust trustee minutes dated 27 May 2005; (c) Letter from Mr Johnston to Managecorp Ltd dated 27 June 2005; (d) Letter from Mr Johnston to Managecorp Ltd dated 27 July 2005; (e) Letter from Mr Johnston to Managecorp Ltd dated 22 November 2005.

Section 206E(1)(a)(i) 42 Under this provision, ASIC must establish first that Mr Johnston was an officer of a body corporate that twice contravened the Act and, second, that he failed to take reasonable steps to prevent the contraventions. 43 As to the first matter, the Court has held that Mr Johnston was an officer of Firepower Investments when it committed six contraventions of s 727: Judgment at [214], Schedule A, Part B and Schedule E. The court also held that Mr Johnston was an officer of Green Triton when it committed five contraventions of s 727: Judgment at [214], Schedule A, Part F and Schedule E. 44 As to the second matter, ASIC pleaded in para 234 of the Further Amended Statement of Claim that Mr Johnston should have: (a) made inquiry of all persons authorised to make, promote, or otherwise facilitate the offer of shares by Firepower Investments and Green Triton (brokers) in order to determine whether the matters pleaded in paragraphs 214-217 of the Further Amended Statement of Claim (the various statutory exemptions) were true in relation to such offers; and (b) directed all of the brokers to take all steps necessary to ensure that no offers for the sale of shares by Firepower Investments and Green Triton were made before 2 June 2006 except in circumstances where the matters pleaded in paragraphs 214-217 of the Further Amended Statement of Claim were true. 45 Mr Johnston by para 30 of his defence admits the allegation in (b) above and, while he pleaded that he believed that Green Triton and Firepower Investments gave such a direction to Axis, no evidence has been led of that or that he took any steps of the kind alleged in paragraph 234 of the Further Amended Statement of Claim. 46 The Court found that on each occasion that Green Triton or Firepower Investments had made an offer in contravention of s 727(1), the transaction was brokered by Axis and Ward: Judgment [214] and Schedule D to the Judgment. 47 At the trial it was put to Mr Johnston that he took no steps to ensure that brokers who sold the shares in Firepower BVI knew what the legal requirements were and imposed no restrictions on them as to whom they could sell the shares. His answers were non-responsive. 48 I am satisfied from the foregoing that Mr Johnston failed to take reasonable steps to prevent the contraventions.

Sections 206E(i)(b) and (2) 49 ASIC relies on the following discretionary factors which, as matters of fact, I find were established on the evidence including that Mr Johnston was aware that "mums and dads" were investing in Firepower BVI: (a) The total amount paid by the purchasers of shares pursuant to offers found to have been in contravention of s 727 by Firepower Investments and Green Triton, which was $736,470. (b) The total amount paid by all purchasers of shares from Firepower Investments and Green Triton identified in the schedule to the Further Amended Statement of Claim, which was, on the basis of the share register, $19,130,336.50. (c) Mr Johnston was the controlling mind not only of Firepower Investments and Green Triton but also Firepower BVI (as director and executive chairman), the ultimate beneficiary of the funds raised by the sale of its shares. On the basis of the share register, those funds totalled $61,380,784.82. (d) Mr Johnston received substantial sums of money from the sale of Firepower BVI shares by Green Triton. This is apparent from a consideration of the trustee resolution dated 27 May 2005 of the Firepower Trust, into which proceeds of the sale of Green Triton shares were paid; the letter of 27 June 2005 from Mr Johnston to Managecorp Ltd; the letter of 27 July 2005 from Mr Johnston to Managecorp Ltd; the letter of 22 November 2005 from Mr Johnston to Managecorp Ltd and the affidavit evidence of Gordon Hill. This amounts to some $2.75 million. (e) Mr Johnston was aware that the sales of shares in Firepower BVI amounted to capital raisings by it. (f) Mr Johnston gave evidence at the trial not only that the sales of shares were capital raisings but also that he was aware of legal restrictions and disclosure requirements for capital raising. (g) At trial Mr Johnston said he took steps to ensure that disclosures were made but the evidence revealed none. Mr Johnston could only point to legal advice from Dean & Rowick in March 2006 but that advice does not appear to have been followed. In any event many sales had already been made by then. (h) According to John Finnin, Mr Johnston told him that there were lots of "mums and dads" investing in Firepower BVI. At trial Mr Johnston denied this, though Mr Finnin's recollection is supported by contemporaneous notes. (i) Mr Johnston was a director of Firepower Operations Pty Ltd (Firepower Operations), an Australian-based subsidiary of Firepower BVI, which is now in liquidation. Funds raised by the sale of Firepower BVI shares by Green Triton and Firepower Investments were transferred to Firepower Operations: Judgment at [213]. The liquidator has made a number of criticisms of Mr Johnston's conduct as a director of Firepower Operations in his supplementary report. These include the following: (i) Firepower Operations has a shortfall of assets over liabilities of nearly $27 million and there are no funds for a distribution to creditors. (ii) During the course of public examinations of him by the liquidator Mr Johnston admitted that he had deliberately omitted from a report as to assets prepared by him details of material assets. (iii) The liquidator holds the opinion that the causes of that Firepower Operations' failure were: • No genuine business or realistic plan to earn or retain revenue, in circumstances where the intellectual property in the Firepower products was, to the knowledge of the sole director Mr Johnston, owned by another entity not controlled by Firepower Operations and with interests adverse to Firepower Operations. • Significant and repeated transfers of company monies to third parties with no entitlement to them, including the third defendant, Owston Nominees Pty Ltd (a company associated with Warren Anderson) and Firepower Investments (a company incorporated in Malaysia and associated with Mr Johnston). • Poor financial control, evidenced by the lack of financial records and inability of the Director(s) to provide a complete report as to assets in a timely manner, in conjunction with other records in relation to Firepower Operations' operations. • Poor strategic management, evidenced by Firepower Operations returning significant losses through its four years of trading. • Inadequate cash flow, evidenced by the lack of cash available leading to aged payables being overdue and a number of creditors commencing legal proceedings. • Reliance on associated companies and investors for continued funding, evidenced in the liabilities specified in the Financial Statements (sourced from QuickBooks records), which details inadequate revenue to cover expenses, which were met from funds borrowed from related parties. • A high cash burn rate, with Firepower Operations spending large sums on sponsorship and international office operating costs, rather than on legitimate income generating activities. • Substantial trading losses being incurred by Firepower Operations due to its high cash burn rate on non-income generating activities and its minimal revenue generated from trading. (j) In addition, the liquidator's report finds that Mr Johnston had responded inadequately to the liquidator's requests for information and that he had actively taken steps to attempt to avoid the examination summons. This led to Mr Johnston's arrest on a warrant issued by this court (proceedings WAD197/2009). (k) Mr Johnston did not proffer any evidence of good character, remorse or contrition. (l) Though there has been no evidence of dishonesty, the evidence does reveal a reckless disregard by Mr Johnston for legal requirements concerning corporate fund raising and corporate governance generally.

Disqualification period 50 ASIC submits that a banning order in respect to Mr Johnston for a substantial period is appropriate to protect the public, in light of the foregoing matters, and in particular: (a) the number (11) of contraventions; (b) the large sums of public money invested in Firepower BVI; (c) Mr Johnston was the controlling mind of Firepower BVI, Green Triton and Firepower Investments; (d) he realised that the sale of shares in Firepower BVI were capital raisings; (e) he knew that there were legal restrictions on and disclosure requirements for capital raisings, but that he took no steps to ensure they were complied with; (f) his reckless disregard for legal requirements generally concerning corporate fund raising and corporate governance generally; (g) the absence of evidence of good character, remorse or contrition, 51 ASIC submits Mr Johnston should be disqualified from managing corporations for 20 years. 52 These submissions are well supported in the evidence. They reflect the most serious departure by Mr Johnston from standards of conduct and statutory compliance required of a director of a public company. It is the kind of conduct which diminishes investor and public confidence in the commercial markets. Not only did the actual contraventions in this case directly lead to considerable losses but Mr Johnston's conduct generally in the governance of the affairs of the companies in the Firepower Group and most notably Firepower Operations demonstrates a reckless disregard on his part for preserving company assets and protecting the financial interests of shareholders and creditors. Section 206E(2)(a) empowers the Court to take such matters into account in determining whether disqualification is justified. The irrecoverable losses to shareholders and creditors have been very substantial. 53 I am satisfied that not only should personal deterrence and retribution be reflected in the period of disqualification but that there is also a strong foundation for a lengthy period attributable to general deterrence and the protection of the public. Whilst there is no evidence of actual dishonesty on his part I am satisfied that Mr Johnston was aware of the need for disclosure requirements under the Act to be met and that he knowingly disregarded these. He was, to a significant extent, personally enriched as a result of the share sales. Mr Johnston should be excluded for a very long period of time from having access to or control over shareholders investments and the interests of creditors within a corporate structure. I am satisfied that the period of disqualification sought by ASIC in all the circumstances is reasonable. I would disqualify Mr Johnston from managing corporations for a period of 20 years. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Corporations Act 2001(Cth)ss 206E, 533(2), 727, 920A, B

At a glance

Court

Decision date

Before

Source

Judgment (13 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (6)

Cited By (5)