AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v PACIFIC BLUE SECURITIES PTY LTD

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 MATTER OF PACIFIC BLUE SECURITIES PTY LTD (ACN 136 973 521) BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

AND: PACIFIC BLUE SECURITIES PTY LTD (ACN 136 973 521)

INTRODUCTION 1 The Australian Securities and Investments Commission (ASIC) seeks an order for the winding up of Pacific Blue Securities Pty Ltd (ACN 136 973 521) (PBS) under s 461(1)(k) of the Corporations Act 2001 (Cth) (the Act) and associated orders. ASIC also seeks orders against Sean Michael Fogarty (Mr Fogarty), the sole director and shareholder of PBS: 1. pursuant to ss 1324 and 1101B of the Act, restraining Mr Fogarty for a period of 10 years from carrying on, or being knowingly concerned in the carrying on by another person, of any business dealing in a financial product or financial products (as that term is defined in s 763A(1) of the Act) unless he is the holder, or is the authorised representative of the holder, of an Australian Financial Services Licence; 2. pursuant to s 1101B(4)(f) of the Act, restraining Mr Fogarty from providing financial services consisting of dealing in financial products; 3. pursuant to s 1323 of the Act, restraining Mr Fogarty from taking or sending money, or other property of PBS, or himself out of Australia and from leaving Australia for a period of 6 months; and 4. pursuant to s 1323 of the Act, requiring Mr Fogarty to surrender any passport. On 10 and 17 September 2009, the Court made interim orders of a similar nature to those set out in paras [1(3) and 1(4)]. 2 For the reasons that follow, I would grant ASIC some, but not all, of the orders it seeks. I do not propose to grant the order sought in para [1(2)] above, being an order restraining Mr Fogarty from providing financial services, consisting of dealing in financial products: see s 1101B(4)(f) of the Act. As Counsel for ASIC properly conceded, that form of order is too broad and would render the other substantive order sought against Mr Fogarty otiose.

BACKGROUND 3 Before turning to the current application, it is necessary to set out the history of this proceeding. By an originating process dated 10 September 2009, ASIC sought declarations and injunctions relating to contraventions of s 911A of the Act alleged to have occurred as a result of PBS carrying on an unlicensed business of dealing in financial products with the involvement of Mr Fogarty. 4 On the same day (10 September 2009), ASIC filed an interlocutory process seeking a variety of orders, including orders restraining the carrying on of the business and any dealings with funds in certain bank accounts of PBS. 5 On an ex parte application by ASIC, also on 10 September 2009, Goldberg J made a number of interim orders pending the hearing and determination of the interlocutory process: see paras [1(3) and (4)] above. On 17 September 2009, those interim orders were extended and modified. The originating process, the interlocutory process, the ex parte orders and other documents were served on PBS. PBS has not filed an appearance or sought to appear at any of the subsequent hearings, including the hearing of this application. 6 ASIC was unable to personally serve Mr Fogarty. On 8 October 2009, Goldberg J made an order for substituted service on Mr Fogarty. Substituted service was effected, but Mr Fogarty has not filed an appearance or sought to participate in the proceedings. The evidence disclosed, and I was further informed by Counsel for ASIC during the hearing of this application, that ASIC has not been successful in making contact with Mr Fogarty. 7 On 17 December 2009, Goldberg J granted ASIC leave to file an amended originating process. An order was made for substituted service of the amended originating process on PBS and Mr Fogarty. The hearing of the amended originating process was set down for 9 February 2010. By the amended originating process, ASIC sought the orders set out in para [1] above. 8 As against PBS, ASIC submitted that it is just and equitable that PBS be wound up because: 1. the business which PBS purported to carry on was unlawful; 2. the purported business of PBS was, in fact, a sham and a fraud upon the public; 3. there has otherwise been lack of probity, misconduct or mismanagement in the affairs of PBS productive of a lack of confidence in its management; 4. it is in the public interest of the protection of the investing public that PBS be wound up. 9 ASIC's case against Mr Fogarty is that as sole director and shareholder of PBS, he was instrumental in PBS' conduct, including the alleged fraud on the public, its misconduct and mismanagement. As a result, ASIC submitted that it is necessary for the protection of the public, and in the interests of PBS and its investors, that the orders sought against Mr Fogarty be made.

LEGISLATIVE FRAMEWORK AND RELEVANT CASE LAW 10 Insofar as the application concerns PBS, s 464 of the Act provides that where ASIC is investigating, or has investigated, under Div 1 of Pt 3 of the Australian Securities and Investments Commission Act 2001 (Cth), matters being, or connected with, or including affairs of the company, ASIC is authorised to apply for an order winding up a company. This is the position here. ASIC commenced an investigation into PBS' affairs and that investigation is continuing. 11 The Act applies to an application under s 464 as though the application had been made by PBS: s 464(2). Section 462(2) gives ASIC standing to make the application for an order to wind up the company on any of the grounds in s 461. Section 464(3) requires notice of the application to be given to PBS. This was done in two ways. First, by ASIC complying with the substituted service order made on 17 December 2009: see s 109X(6) of the Act. Secondly, by ASIC advertising the application. 12 Section 461 of the Act provides that a Court may order the winding up of a company if "the Court is of the opinion that it is just and equitable that the company be wound up": s 461(1)(k) of the Act. For present purposes, it is sufficient to refer to the decision of Lander J in Australian Securities and Investments Commission v International Unity Insurance Pty Ltd [2004] FCA 1059 in relation to an application by ASIC under s 461(1)(k). In that decision, His Honour summarised the relevant propositions at [135]-[139] as follows: [135] The plaintiff is authorised to make an application for winding up on the just and equitable grounds where it is in the public interest to do so: Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 at 532. [136] There are a number of separate grounds which justify the making of a winding up order under this head. If mismanagement, misconduct or lack of confidence in the conduct and management of the affairs of a company is established, it may be appropriate to wind up the company under this head: Australian Securities Commission v AS Nominees Limited at 532-533; Australian Securities & Investments Commission v ABC Fund Managers (2001) 39 ACSR 443 at 469. [137] If the plaintiff can establish that there have been breaches of the provisions of the Act, including, but not limited to, breaches of directors' duties, inadequacy of accounts and inadequacy of record keeping, it may be appropriate to make an order under this head: Australian Securities Commission v AS Nominees Limited at 532-533; Australian Securities & Investments Commission v ABC Fund Managers at 469. [138] If there is a need to ensure investor protection, a winding up order may be made under this head: Australian Securities Commission v AS Nominees Limited and Others at 532-533; Australian Securities & Investments Commission v ABC Fund Managers and Others at 469. [139] An order may be made if a company has not carried on its business candidly and in a straightforward manner with the public: Australian Securities & Investments Commission v Austimber Pty Ltd [1999] FCA 566; (1999) 17 ACLC 893. Such an order would also be appropriate where the corporation has acted fraudulently or entered into sham transactions. 13 In relation to Mr Fogarty, ASIC relies on ss 1101B, 1323 and 1324 of the Act. Section 1101B provides that, on the application of ASIC, the Court may make such orders as it thinks fit if it appears to the Court that a person, for example, has contravened a provision of Ch 7 (including s 911A) or any other law relating to dealing in financial products or providing financial services. 14 Against that background, I now turn to consider the facts.

FACTS 15 PBS was registered on 7 May 2009. Its registered office was, at all material times, Level 3, 480 Collins St, Melbourne. Mr Fogarty is, and was at all material times, the sole director and shareholder of PBS. Neither Mr Fogarty nor PBS was the holder of an Australian Financial Services Licence. 16 PBS maintained a website at the URL 'www.pbsecurities.com.au'. A screen dump of parts of that website printed on 18 August 2009 was tendered in evidence. 17 As ASIC submitted, one of the "products" PBS offered on its website was called a "Managed Account". Clients were to deposit monies so that PBS would trade on their behalf in what was labelled "Margin From Difference" or "MFD". The website stated that "MFD trading [took] advantage of the difference in opinion between different brokers and the prices that they are willing to offer on events around the globe". 18 Similar representations were made in a brochure published by PBS and distributed to potential clients. One of those clients was Robert Mace (Mr Mace). He gave sworn evidence that, in late July 2009 and early August 2009, he was contacted by persons purporting to be representatives of PBS. A number of representations were made to Mr Mace by at least one of the PBS representatives. First, that if he invested with PBS, his money would be invested on the stock exchange in what was called "margin trading". Secondly, that PBS was run in conjunction with the Commonwealth Bank. Thirdly, that PBS would manage any money invested, and that the money would be invested on the stock exchange on behalf of Mr Mace, historically returning profits on trades between 5% and 7%. Fourthly, that the normal subscription term was two years. Finally, that if he invested $5,000, he could expect to receive a total return of $25,000 less a subscription fee of $9,900 for managing the investment. 19 As a result of these representations, Mr Mace transferred $5,000 into PBS' bank account with the Commonwealth Bank on 10 August 2009 (PBS CBA Account). An entry of $5,000 appears as a credit to the PBS CBA Account on that date. From 7 May 2009 to 14 September 2009, it appears that PBS, in fact, operated at least three bank accounts. Copies of the banks' records of transactions on those accounts were in evidence. 20 The PBS CBA Account had the most deposits and withdrawals. The bank records show a large number of deposits by a variety of people most commonly in the amount of $500 or $5,000 or a multiple of those amounts. An analysis of the deposits, undertaken by an ASIC investigator, shows that the amount deposited to the PBS CBA Account by investors was in excess of $300,000, totalling $309,400. A list of the persons identified by ASIC as potential investors was provided to the Court. There were additional deposits of a further $57,025, much of which was represented by cash deposits in other amounts which, although could not be excluded as possible investor payments, have not been allocated to a particular investor. 21 As noted earlier, other accounts were maintained by PBS including an account with the National Australia Bank (PBS NAB Account). The bank records show that a total of $44,469.75 was deposited by investors into the PBS NAB Account. A further $10,000 was deposited by investors into an account PBS held with the St George Bank. I will refer to these three accounts collectively as the "PBS Accounts". 22 ASIC submitted, and I accept, that having regard to the contents of the website, the brochure and the evidence of Mr Mace, the inference to be drawn is that the amounts recorded in the PBS Accounts represent a pool of monies deposited by clients (including Mr Mace) for the purpose of being used by PBS to invest in trading (in MFD's or otherwise), with a view to generating a profit to the clients. PBS was carrying on a business that included receiving such monies for that purpose. 23 The difficulties for PBS and Mr Fogarty arise in a number of ways. For present purposes, it sufficient to mention just a few. First, as noted earlier, neither PBS nor Mr Fogarty held a licence which entitled them to carry on that business. Secondly, there are no debits or credits to any of the PBS Accounts that can be identified which would indicate investment or trading activity. 24 Secondly, at present, only $60,000 remains of the amounts deposited into those accounts. The withdrawals, totalling in excess of $117,000, are significant. Mr Fogarty was the sole authorised signatory for both the PBS CBA Account and the PBS NAB Account. In relation to the St George Bank account, the bank records do not identify the authorised signatories, although Mr Fogarty is recorded as the contact person. ASIC submitted, and I accept, that the inference to be drawn is that the withdrawals from the PBS CBA Account and the PBS NAB Account were directly authorised by Mr Fogarty, and that, on balance, the withdrawal from the St George account (of $5,500) was authorised by him. There is nothing to suggest that any of the investors' funds were used for share trading. That conclusion is supported by evidence before the Court. 25 The balance of the withdrawals was analysed by ASIC. Some appear to be for rent and other business expenses. Others appear to be a number of weekly payments to named persons which have the character of wages or commissions. Having regard to those matters ASIC submitted, and I accept, that despite the previous representations made on both the website, in the brochure and to Mr Mace, PBS did not utilise the moneys deposited by investors for the purposes of trading. In fact, PBS used the preponderance of those moneys either to meet its own expenses or else permitted them to be appropriated by Mr Fogarty or persons authorised by him. That finding is supported by a copy of the withdrawal debit slips in relation to the withdrawals from the PBS NAB Account and the PBS CBA Account, which were tendered in evidence. Mr Fogarty's signature appears on each of them. 26 Finally, if that was not sufficient, Mr Fogarty is the sole director of PBS. As ASIC submitted, he is taken to be aware of the facts especially given the absence of any explanation from PBS or from him.

ANALYSIS 27 What then is the legal consequence of those factual matters having regard to the earlier legislative scheme? 28 In my view, it is apparent that the product offered by PBS was a financial product within the meaning of s 763A of the Act, being a facility through which each client or investor was to make, and did make, a financial investment as described in s 763B of the Act. PBS carried on the business of issuing such a product and dealing in it as defined in s 766C(1). Dealing in a financial product is a means of providing a financial service within the meaning of s 766A(1), and the business of dealing in financial products is a financial services business within the meaning of s 761A. 29 As I have noted earlier, PBS was not licensed to carry on that business. It therefore contravened s 911A in carrying on that business. The facts establish that each of the four categories of conduct identified by Lander J in International Unity Insurance Pty Ltd [2004] FCA 1059 (see [12] above) are present here and would justify the Court being satisfied that it is appropriate to wind up PBS on the just and equitable ground. It is therefore appropriate that paras [1] and [2] of the orders sought by ASIC be made. 30 In relation to the application for injunctions against Mr Fogarty, as I have noted earlier, the Court has the power to grant the injunctions. By reason of Mr Fogarty's involvement in PBS' contravention, he himself has contravened s 911A of the Act: see, for example, s 1311(1) of the Act. In my view, it is appropriate that the Court grant the following orders against Mr Fogarty: 1. Sean Michael Fogarty is restrained for a period of 10 years from the date of this Order from carrying on, or being knowingly concerned in the carrying on by another person, of any business of dealing in a financial product or financial products (as defined in s 763A(1) of the Act) unless he is the holder, or is the authorised representative of the holder, of an Australian Financial Services Licence. 2. Sean Michael Fogarty is restrained for a period of 6 months from the date of this Order: (a) from taking or sending out of Australia any money, financial products or other property of the Company or himself; (b) from leaving Australia without the consent of the Court. 3. Within 3 days of service of a copy of this Order upon Sean Michael Fogarty, Sean Michael Fogarty deliver to any registry of this Court all passports in his possession, custody or control pending the expiry of the period of 6 months referred to in Order 2 above. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.