Australian Securities & Investments Commission v Oxford Investments

Federal Court of Australia|2008-06-30|Before: Heerey J

In these orders the following are defined terms: (A) the Act means the Corporations Act 2001 (Cth); (B) the ASIC Act means the Australian Securities and Investments Commission Act 2001 (Cth); (C) financial product advice has the meaning given in s 766B(1) of the Act; (D) financial product has the meaning given by s 764A of the Act; (D) financial service in orders 4 and 7 below has the meaning given by s 12BAB of the ASIC Act and otherwise has the meaning given by s 766A(1) of the Act; (E) security has the meaning given by s 761A of the Act; (F) derivative has the meaning given by s 761D of the Act. THE COURT DECLARES THAT:

Between January 2004 and March 2006 the first defendant contravened s 911A of the Act in that, without being the holder of an Australian financial services licence, it provided financial product advice in the ordinary course of a business carried on by it, by conducting courses of instruction in which the second defendant: (a) stated opinions with respect to trading in share price index futures; (b) made recommendations as to the methods and strategies to be employed in trading share price index futures; (c) stated opinions with respect to price or trading signals discernible from the interpretation of charts constructed from data relating to historic trading in share price index futures, which, or any of which, could reasonably be regarded as being intended by the first and second defendants and each of them to influence the persons attending such courses of instruction or any of them in making a decision in relation to a particular class of financial product namely share price index futures.
On each occasion when the first defendant contravened s 911A as declared in paragraph 1 above, the second defendant was involved in that contravention (within the meaning of s 79 of the Act) in that: (a) he caused the first defendant to carry on the financial services business referred to in para 1; (b) he conducted the courses of instruction referred to in para 1, and thereby procured and or alternatively was knowingly concerned and party to the said contravention.

BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

AND: OXFORD INVESTMENTS (TASMANIA) PTY LTD ACN 077 910 877

REASONS FOR JUDGMENT 1 The first defendant Oxford Investments (Tasmania) Pty Ltd, by its sole director, the second defendant Mr Steven Moore, carried on a business of providing instruction in a computer system for trading futures contracts on the Sydney Futures Exchange. Neither Mr Moore nor Oxford has ever held an Australian financial services licence or an appointment as the Authorised Representative of the holder of an Australian financial services licence. 2 The plaintiff Australian Securities and Investments Commission seeks declarations that: (a) Oxford have carried on a financial services business without an Australian financial services licence in contravention of s 911A of the Corporations Act 2001 (Cth); (b) Mr Moore: (i) was involved in Oxford's contravention of s 911A; (ii) himself contravened s 911B of the Act by providing financial product advice on behalf of Oxford; (c) Mr Moore and Oxford have contravened s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) by Mr Moore making certain false representations on behalf of Oxford. 3 The parties have tendered to the Court an Agreed Statement of Facts and proposed consent orders.

The contravening conduct 4 The contravening conduct took place between July 2003 and January 2006 (the relevant period). At all times during this period Mr Moore was authorised to act on Oxford's behalf in relation to the conduct of its business and affairs. He was the sole director of Oxford from 17 November 2004. 5 During the relevant period Oxford carried on a business of providing instruction or training, conducted by Mr Moore, in a system of trading futures contracts based on the published works of W D Gann and other authors on the subject of market analysis and strategy. This system is referred to in these reasons as "the Methodology". Mr Moore conducted both one-to-one instruction and seminars for up to 10 participants. The price charged by Oxford for this instruction was typically in the range of $33,000-$38,000 although not all customers paid the full amount. 6 The defendants have admitted that Mr Moore made representations to a number of prospective customers of Oxford's business as follows ("he" being Mr Moore): (a) to David Clubb in or about April 2003 that he was living comfortably off the profits he was making by trading in stock market futures contracts using a trading system he had developed; (b) to Steven Andrew Castrisios in or about November 2003 that he had made a great deal of money over a three year period using a trading system he had developed to trade the SPI200 futures contract; (c) to Suzanne Mary Burke in or about September and December 2004 that: (i) he had been very successful in using his trading system and software, so much so that he could not use all the money he had made; (ii) his system and software had enabled him to make large amounts of money trading on the financial markets. 7 The defendants have further admitted that these representations were incorrect and misleading. 8 A principal component of the Methodology was the "ABC Pattern Analysis". Mr Moore instructed customers in techniques of interpreting charts produced from data about recent trading in share price index futures to identify from swings in the price of the relevant contract the points at which the direction and extent of the next movement of the price could be predicted. 9 Oxford provided its customers with historical data relating to the Sydney Futures Exchange Share Price Index (SPI) and regular updates of that data together with a licence to use computer software written on its behalf and known variously as "Gann Analytical Software" or "Stocks" (the Software) and intended for use in interpreting the data and applying the Methodology. 10 Written materials provided to the customers by Oxford included statements articulating principles to be applied in successful trading and rules for trading in share price index futures. The more important of these rules were as follows: Gann theory states that there is order to the movement of markets. By using the proper tools to analyse this movement, an accurate forecast for future direction can be made. The proper use of the various Gann analysis tools will help you to determine when these major moves are most likely to occur. The Rule of Rules for trading the SFE Share Price Index: If a Pattern Formation, being - • an ABC Pattern • a Double Top • a double bottom is confirmed, entry must be supported by: Gann Swing - Mechanical Method A two or three day swing back from the major/intermediate trend and then an approved opening position Hi/Low Moving Average Indicator Turn the Hi/Low Moving Average Indicator (Number of Bars) to 1. The midline is set to 1 and the high/low lines set to 0. Rules for Trade Entry 1. A legitimate ABC pattern formation based on a two or three day swing must be present. 2. The opening price must be within 25-30% of the blue hi/low moving average line (Blue being the default colour). The % is calculated from the range of a confirmed C day. 3. Only trade with the major or intermediate trend. Trading Rules 1. The basis of the trading plan is the swing chart. You will construct your daily and weekly swing charts exactly as I have shown you previously. 2. Only trade with the trend. An up trend is defined as a market in which the most recent swing high is higher than the swing high which preceded it, ands the most recent swing low is higher than the swing low which preceded it. A downtrend is the opposite, that is, a lower swing high and a lower swing low. 3. In respect of trades on the long side, the intended trade is identified by the formation of a Point C. Point A is the start of the immediately preceding up move. Point B is the termination of the first up move and is identified by a swing down. Point C is the termination of the counter-trend, corrective move and is identified by a swing up. Point B must be above the previous swing top. 4. The distance between Points A and B is measured for three reasons. Firstly, the long trade must be entered at, or before, the market has traveled up a distance equal to 25% of the A-B range, from Point C. Secondly, the progressive 25% moves are used for the placement of stop-loss levels and the exiting of positions. Thirdly, we rate the strength of a market by its retracements against the main trend. In a strongly trending market the retracement will usually be 50% or less of the A-B range. 5. Upon entering an initial trade, a stop loss is placed one point below Point C. 6. In a strongly trending market, we will add to our position when, an old top is crossed by 3 points. In this case, we will place out stop loss below the low of the previous day. 7. Upon the market reaching 50% of the A-B range, a stop is placed 5 points below the 50% level. Instruct your broker to act on an intra-day basis and not just at the end of the day. 8. As the market moves up, each time it passes through the next 25% barrier, the stop is raised to 5 points below that barrier, ie, 75%, 100%, 125% and so son. For example, when the market passes through the 75% level, which is, say, at a price of 3119, out stop would be moved to 3114. 9. Profits are taken the first time the progressive stop is triggered. 10. Trading short positions is the exact opposite of the above rules for trading long positions. 11 From some time in 2004, Moore provided to Oxford's customers an Excel spreadsheet called a "Trading Plan" which applied the Methodology to convert the customer's analysis into instructions to be given to a futures broker.

The relevant legislation 12 Section 911A of the Corporations Act, subject to presently immaterial exceptions, provides that a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services. 13 Section 911B provides: A person (the provider) must only provide a financial service in this jurisdiction on behalf of another person (the principal) who carries on a financial services business if one or more of the following paragraphs apply… The following paragraphs require that either the principal or the provider holds an Australian financial services licence covering the provision of the services, or the principal is exempt under s 911A(2). 14 "Financial services business" is defined in s 761A of the Corporations Act as "a business of providing financial services". According to s 766A(1) a person provides a financial service if, inter alia, they provide "financial product advice". This term is defined in s 766B as follows: financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence. 15 "Financial product" is extensively defined in Div 3 of Pt 7.1 of the Corporations Act. However, for the purposes of this case it is admitted by the defendants that the SFE SPI Index Futures Contract is an arrangement that satisfies the conditions of the definition of "derivative" in s 761D(1) of the Act. As a result it is one of the things that is specifically included in the definition of "financial product" by s 764A(1)(c).

Financial product advice 16 It follows from these provisions that a financial services business includes a business of providing financial product advice. It is admitted by the defendants that Oxford carried on a business of providing instruction or training in the Methodology. If that training involved the provision of financial product advice, then it must follow that Oxford was carrying on a financial services business. 17 The business which Oxford and Mr Moore carried on involved a recommendation or statement of opinion. The statements they made necessarily implied that Mr Moore held the opinion that application of the Methodology would enable the user to trade profitably. It is not to the point that the defendants did not advise a client as to particular transactions, as for example whether to buy, sell or hold a particular security. It is sufficient that their system would "influence" such a decision, in the sense of making available information, and a system of analysing that information, which would be seen by a recipient as relevant to the making of a decision. 18 A similar issue arose in Re Market Wizard Systems Ltd [1998] 2 BCLC 282. A company marketed a computer system and provided purchasers with daily information. The system analysed that information to generate buy, sell or hold signals in respect of options in each of 12 traded stocks. The signals showed the customer whether they should be neutral, long or short on a given day, and whether they should buy, sell or hold. 19 On behalf of the company it was argued that the system was simply a matter of calculation based on historical data and the updates put in by the customer and was no more than a "sophisticated and technologically based 'calculator'". Carnwath J in the English High Court rejected this argument (at [35]). In his Lordship's view, the argument might have had some substance if the program only provided a convenient means of extracting and analysing data as to historical movements in the market without offering any interpretation of that information as a guide to future action. The promotional material of the company, however, was inconsistent with the limited function suggested. The whole purpose of the program, as described by its inventor, was directed towards "the use of parabolas in determining the future direction of market price". 20 Market Wizard was followed by Moynihan J in Australian Securities and Investments Commission v Online Investors Advantage Inc [2005] QSC 324. 21 Market Wizard is supportive of the decision in the present case. Indeed, the legislation under consideration in Market Wizard (the Financial Services Act 1986 (UK) Sch 1, Pt II, par 15) was more restrictive than the Corporations Act provision in that it was expressed in terms of giving to investors "advice on the merits of their purchasing, selling, subscribing for or underwriting an investment". As already mentioned, "financial product advice" as defined in s 766B is not limited to recommendations or opinions directed towards any particular transaction or any particular course of action the recipient might have in mind. 22 In the present case there has been, first, an expression of opinion that, in specified circumstances arising from a particular kind of market analysis, trading in a particular way is likely to be profitable. Secondly, there is the provision of technical aids that assist in identifying those circumstances from day to day. The combined effect is the provision of financial product advice within the meaning of the statute. 23 As to the intent element of "financial product advice", there could be no doubt, and the defendants admit, that the statements and conduct of Oxford and Mr Moore could reasonably be regarded as being intended to have the relevant influence; that is to say the objective test of par (b) of the definition is satisfied. 24 I find therefore that Oxford and Mr Moore have contravened ss 911A and 911B of the Corporations Act.

Misleading or deceptive conduct 25 Section 12DA(1) of the ASIC Act prohibits conduct in trade and commerce in relation to financial services that is misleading and deceptive or likely to mislead and deceive. 26 The representations detailed in [6] above were clearly made in trade or commerce. The defendants have admitted that they were incorrect or misleading. Although made by Mr Moore, Oxford's responsibility for them is established by s 12GH(2) of the ASIC Act, Mr Moore being authorised to act generally on its behalf in relation to the conduct of its business and affairs, including (it should be inferred) the securing of customers for the business. 27 Making the representations will therefore have been a contravention of s 12DA if they were made in relation to financial services. A separate set of definitions for this purpose is contained in ss 12BA, 12BAA and 12BAB of the ASIC Act. In addition, the ASIC Act picks up the definitions in s 761A of the Corporations Act of expressions which are not defined in the ASIC Act (for example, the definition of "derivative"): ASIC Act, s 5(2). 28 A derivative is specifically included in the expression "financial product" by s 12BAA(7)(c) of the ASIC Act and the definitions of "financial service" and "financial product advice" in s 12BAB are relevantly the same as in the Corporations Act. Were the representations made "in relation to" the financial product advice that Oxford was proposing to supply to the intended customers to whom the representation was made? Clearly they were. The representations bore upon the potential value of the advice to the recipients. 29 The admissions establish contraventions by Oxford and Mr Moore of s 12DA of the ASIC Act.

Relief 30 The declarations and other orders sought should be made. The facts stated in these reasons are findings of fact for the purposes of s 12GG of the ASIC Act. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

Associate: Dated: 30 June 2008 Counsel for the Plaintiff: R D Strong

Solicitor for the Plaintiff: Australian Securities and Investments Commission

Solicitor for the Defendants: Tony Hargreaves & Partners

Corporations Act 2001(Cth)ss 79, 761A, 761D, 764A, 766A, 766B, 911A, 911B

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (1)