Barnes v Addy

Supreme Court of NSW|2014-11-04|Before: Nicholas AJ

Background 18Following is a non-exhaustive summary of the relevant evidence, which was not controversial. 19From about 1996 Mr Preston and his wife, through the plaintiff, invested with Famularo. In May 2005 Famularo told Mr Preston that he had a new scheme, developed by himself with SGB, which provided him with margin loans against the value of shares and other assets. He represented that it was fully backed by SGB. He referred Mr Preston to Mr Athol Halversen, his broker, who arranged for an investment loan. 20In June 2005, at Famularo's suggestion, Jamtrade Limited ("Jamtrade"), was incorporated. Famularo was the sole director and controller. His company was a 51% shareholder, and the plaintiff was a 49% shareholder. Jamtrade was one of the Famularo entities. 21On 21 September 2005 Mr Preston, as a director of the plaintiff, signed a third party security provider document to support a loan from SGB to Jamtrade. By letter of 25 February 2009 from SGB to Mr Preston, SGB noted that the plaintiff had provided a third party security provider document for the loan to Jamtrade, but stated that neither Mr Preston nor the plaintiff lodged any shares or managed funds on the loan. It confirmed it had no record of Mr Preston providing security for the loan to Jamtrade. 22On 23 November 2006 Jamtrade acquired 80,000 BHP shares through a St George Margin lending account for the cost of $2,122,188.87. An SGB document headed "Client Summary" dated 20 June 2007 described Jamtrade as the client and Famularo as the advisor. It recorded the portfolio value in the amount of $2,572,702.23, and the loan outstanding in the amount of $1,757,680.76. 23Between August 2005 and July 2007, Mr Preston received about nine payments each of $6,000.00 from the Famularo entity, Famtrust Pty Ltd ("Famtrust"), and, later, Jamtrade. Between August 2005 and July 2008 Famularo made payments of $6,000.00 per month to Mr Preston's account with the Commonwealth Bank for payment of interest on an investment loan from Perpetual Trustees Australia Pty Ltd. 24In about April 2008 Mr Preston was encouraged by Famularo and Halversen to borrow funds from SGB to refinance the loan from Perpetual Trustees Australia Pty Ltd. In about June 2008 SGB provided the amount of $700,000.00 by way of a "low doc loan" for this purpose. 25By August 2008 Mr Preston was concerned about the safety of his investment with Jamtrade. Famularo told him that his money was all invested through St George Margin Lending, and was safe. However, Famularo failed to attend to the loan repayment due on 23 September 2008, which Mr Preston was required to meet. Since July 2008 the plaintiff has not received repayment of its capital investment of approximately $1,000.000.00 through Jamtrade from either Famularo or any Famularo entity. Mr Preston has never received what he claims to be a 49% share of profits in Jamtrade. 26Halversen was a director of Sydney Mortgage Market Pty Ltd, and operated as a mortgage broker in the Sydney area between 2003 and 2012. Famularo told him that he was a stock broker who had been trading in options for his clients. Between about 2005 and 2008 he acted for persons referred to him by Famularo to obtain loans through SGB for the purpose of investment with Famularo. He said (affidavit 22 August 2014 para 21): "I estimate that in the period from April to August 2008, I arranged finance on behalf of approximately 20 Famularo Investors from Perpetual to St George Bank. Each such St George Bank home loan was a low document loan. In the majority of cases funding was sought on the basis that the borrower was a company with an ABN albeit that the investors were predominantly "mum and dad" investors. Famularo provided the ABNs and in some cases also provided documentation for me to submit to St George Bank as part of the application by that client for the loan." 27On occasions in 2006 and 2007, Famularo told Halversen that he was setting up a trading platform with SGB, the details of which he had explained to SGB. He said that SGB were putting special accounts and arrangements in place because no-one had done before what he was doing. 28On 10 October 2012 ASIC published a notice that Halversen had been banned as a mortgage broker for six years. The publication included the following: "An ASIC investigation found that from 2005 to 2008, while working for Sydney Mortgage Market, Mr Halversen acted as a broker for people seeking loans to invest in a financial scheme. It was found that Mr Halversen submitted nine loan applications through either Perpetual Ltd or to St. George Bank which contained information that was false and misleading about the income and employment of the borrowers." 29There was evidence of correspondence between officers of SGB and Halversen seeking further information in respect of loan applications submitted on behalf of various clients. An example was SGB's letter of 25 June 2008 in respect of a "Low Doc Home Loan" application for $635,000.00 for Mr Thomas Vaarzon-Morel. It included the following: "Thank you for the above application. We have verified the information provided and to assist us in the processing of this application could you please provide documents listed below: Missing Documents (1) Affordability statement (2) Clarification - see notes below" 30Also in evidence were letters to Halversen from Famularo entities providing information as to an applicant's investment in response to requests from SGB. Examples are the letters of 12 December 2007 as to Mr Vaarzon-Morel's share portfolio with Tradeshare Pty Ltd ("Tradeshare"), and the letter of 17 January 2008 from Famularo as to Ms O'Dea's portfolio with Famtrust. 31During the period April 2005 to about July 2006 investors provided SGB with security for margin loans advanced to Famularo entities through its margin lending account. In evidence were letters, in similar terms, from SGB to third party security providers confirming approval of the relevant St George Margin Lending applications. A typical example is the letter of 11 April 2005 to Mr Bud Cham which included: "We have pleasure in advising you that the St George Margin Lending application of which you are a Third Party Security Provider has been approved. Risks of Margin Lending In acting as a Third Party Security Provider you acknowledge having read and understood the St George Margin Lending terms and conditions, the Risk Disclosure Statement, the Power of Attorney conditions and the background on CHESS. As set out in the terms and conditions of the loan agreement, if there is an event of default on the loan, you as Third Party Security Provider risk losing any property that has been given as security on the loan. .... We are here to help you We are here to help you, and if you have any questions about St George Margin Lending please contact our Account Managers ..." 32The transcript of the public examination of Famularo on 27 February 2009 recorded his explanation of the operation of the entities he controlled. Relevantly, the Famularo entities in which the borrowed funds were invested included Sharevest (Aust.) Pty Ltd, Tradeshare, Famtrust and Bacnet Pty Ltd ("Bacnet"). Between May 2007 and April 2008 Sharevest and Tradeshare advanced the sum of about $20 M to Bacnet for investment. These advances were described by Famularo as inter-company loans. Bacnet, in turn, transferred funds back to Sharevest, Tradeshare, and Famtrust for repayment of investors and for the payment of interest. The funds in Famtrust were also used for inter-company loans or investment in other companies, and to pay off Famularo's personal credit card or other accounts.

Consideration 33It is convenient to turn first to the plaintiff's submissions that it may be entitled to make a claim for relief against the defendant arising out of the involvement of SGB in an unregistered managed investment scheme in contravention of s 601ED(5) of the Act. 34The plaintiff submitted that the scheme operated by Famularo through entities controlled by him appeared to be a management investment scheme which was not, but should have been, registered. The plaintiff accurately summarised the evidence relied upon as follows: (a)At least 150 persons or entities provided funds to be invested with Famularo and/or the Famularo entities, and Famularo engaged in share and option trading on behalf of these investors: (b)Between 2005 and 2008, about 50 of Famularo clients were referred to Halversen to assist them obtaining funding or further funding which was, in turn, provided to Famularo for investment purposes; (c)Various investors in the scheme appeared to have had their funds pooled as they invested in some of the same Famularo entities including Famtrust, Sharevest, Tradeshare and Farmtrade. It appears the funds were employed in a common enterprise; (d)The investors had limited knowledge of the operation of the scheme and, in the plaintiff's case, Famularo merely provided a brief explanation of the trading operations, and said that all that the plaintiff needed to do was to sign various documents with Famularo otherwise in control of its investments; (e)Famularo himself and through associates such as Halversen or Mr Jock Murray actively promoted the scheme, particularly in the period from 2005 to 2008. 35Further, it was submitted that the evidence indicated that SGB may well have known of, and assisted in, the operation of the scheme. Support was said to be derived from the following facts: (a)The funds of many of the 150 investors with Famularo and/or the Famularo entities where channelled into the same entities such as Fundtrade Pty Ltd, Sharevest and Tradeshare and, in some cases their funds were transferred from one Famularo entity to another; (b)From May 2005, Famularo represented that the operation of the scheme had been developed in conjunction with SGB, and he referred on a number of occasions to meetings he had with SGB concerning trading strategy and the establishment of a trading platform; (c)In May 2005 at Famularo's behest the plaintiff executed a Power of Attorney and appointed SGB and Value Nominees Pty Ltd as its attorneys in respect of certain property; (d)Jamtrade operated a St George Margin Lending Account; (e)In 2008 the plaintiff's borrowings which were invested in the scheme were refinanced with a loan from SGB brokered by Halversen at Famularo's behest; (f)About 20 other investors borrowed funds from SGB brokered by Halversen at the behest of Famularo during 2008; (g)Halversen regularly liaised with representatives of SGB during the process of arranging loans from SGB for the plaintiff and other investors in the scheme; (h)In support of the applications for loans from SGB of some investors documentation relating to their investments in the scheme was provided to SGB by Famularo and/or Famularo entities. 36For the defendant it was put that the evidence was incapable of supporting an entitlement to a claim based on SGB's knowledge of the operation by Famularo of a fraudulent and dishonest design or of an unregistered managed investment scheme, or of a breach of fiduciary duty by Famularo. In short, it was put that the evidence did not link SGB to any relevant transaction other than as a lender in the normal course. For the following reasons I reject the defendant's submissions. 37In my opinion, in an application of this kind, the task of evaluation of the whole of the evidence requires a broad approach to be taken. It shows that Mr and Mrs Preston borrowed the funds which they invested with the plaintiff. The plaintiff invested those funds in Jamtrade through which Famularo traded in shares funded by a highly geared margin loan account with SGB. Mr Preston provided an authority to SGB for a third party security in support of the margin loan, although it appears that no security was, in fact, provided. 38In June 2008 the Preston's original borrowing from Perpetual was refinanced by SGB, brokered by Halversen. In return for its investment, the plaintiff and/or the Prestons received interest payments, as well as payments in respect of the loan from Perpetual. 39The route by which Jamtrade obtained investment funds from the plaintiff was substantially similar to that by which Famularo obtained funds for Famularo entities from other investors, i.e: by way of loans from SGB which, in many cases, were brokered by Halversen. In support of some loan applications to SGB by investors Famularo provided SGB with information about their portfolios, including holdings in Famularo entities, for consideration in the approval process. Another feature of Famularo's modus operandi was to obtain from investors an authority for the provision of third party security to SGB to support margin loans to a Famularo entity for share trading activity. The inter-mingling of investor funds between Famularo entities was illustrated, for example, by Famularo's evidence at his public examination of inter-company transactions involving Sharevest, Tradeshare, Famtrust, and Bacvest. 40In my opinion, the evidence suggests it may well be the case that the extent of inter-dependence and inter-company transactions between the various Famularo entities constituted a single collective or conglomerate managed investment scheme promoted and operated by Famularo, to which investors contributed their funds advanced by SGB (cf: Re Idylic Solutions Pty Ltd: ASIC v Hobbs (2012) NSWSC 1276). Alternatively, the evidence may show that Famularo operated such schemes through separate companies funded by investors (eg: ASIC v McDougall (2006) FCA 427: Karl Suleman Enterprizes (in Liq) v Babanour (2004) NSWCA 214). (At this stage, it is premature to consider whether the exception for a body corporate under subpar (d) of the definition of "managed investment scheme" in s 9 of the Act would apply.) 41The present question is whether there is enough to incline the mind to acceptance of the proposition that SGB has in any way been involved in a contravention, by act or omission, directly or indirectly, knowingly concerned in, or party, to a contravention by reason of the failure to register the managed investment scheme. The wide language of s 79 exemplifies the necessity for taking a broad brush approach to the evaluation of the evidence. 42As to the issue of SGB's knowledge, I would regard it as a matter of common sense, or of reasonable inference, to conclude that SGB analysed each loan application received both from investors and Famularo entities. The exercise may well have involved obtaining information as to the purpose of the loan, and the business and operations of the borrower in order to decide whether to lend and, if so, the terms and security required for the loan. In the plaintiffs' case an authority for the provision of third party security was sought and obtained to support Jamtrade's loan. 43It is reasonable to infer that, in the approval process, SGB made enquiries before advancing a margin loan to satisfy itself that the third party security, if provided, would be sufficient. It appears that similar requirements for third party security were made in respect of many loans to Famularo entities. 44It is also reasonable to infer that SGB had access to the financial records of the Famularo entities to which it provided margin loans which may have disclosed the extent of inter-company loans and/or other dealings between Famularo entities, and a pattern of activity and dealings indicative of breaches of fiduciary duties owed by Famularo to investors funded by loans from SGB. It may also be expected that SGB kept itself informed as to the financial situation and activities of the Famularo entities. The amounts advanced either to investors represented by Halversen, or to Famularo entities were substantial. It is probable that, in order to guard against risk of default, SGB obtained information as to their financial performance and operations. 45Furthermore, it appears that SGB provided loans to the plaintiff, to investors, and to the Famularo entities, over many years for a common purpose namely, investment in share trading controlled by Famularo. That it did so, in my opinion, appears to be consistent with representations made by Famularo to Mr Preston and Halversen to the effect that his investment scheme had been explained to, and developed with, SGB.

Conclusion 46In my opinion, the evidence is sufficient to demonstrate that the plaintiff may be entitled to bring a claim for a relief against the defendant arising out of its involvement in a contravention by Famularo and/or Famularo entities under s 601ED(5) of the Act. Accordingly, the plaintiff is entitled to an order for preliminary discovery. 47It was not disputed that Famularo may have breached his fiduciary duties towards the plaintiff, and other investors. 48As the plaintiff has established that it may be entitled to make a claim for relief, I propose to order the defendant to discover all documents that relate to the question of whether or not the plaintiff has a claim. The category of documents which relate to the question of SGB's knowledge or involvement under s 79 of the Act is likely to be sufficiently comprehensive to assist the plaintiff in also determining whether or not it is entitled to make claims for relief under the first or second limbs of Barnes v Addy, or, indeed, any other claim. Accordingly, it is unnecessary to separately decide whether the evidence demonstrates that the plaintiff may be entitled to make claims under either or both limbs for the purposes of an order under r 5.3. 49With the agreement of the parties, I defer ruling upon the categories of documents to be discovered and, it follows, as to the practicable means of compliance. 50I also defer making final orders as to costs, although I note that it appears to be accepted that the defendant should pay the plaintiff's costs of this application and the plaintiff should pay the defendant's costs of production. Also outstanding is the issue of whether or not the plaintiff should give security for the defendant's costs under r 5.6. 51I direct the plaintiff to prepare Short Minutes of Order. If there are outstanding questions as to costs or other matters which require further argument, arrangements should be made to relist the proceedings with my Associate by 4.00pm, 6th December 2014.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 November 2014

The Principles 11The key principles relevant to an application for preliminary discovery were stated in Hatfield v TCN Channel 9 Pty Ltd (2010) NSWCA 69 by McColl J as follows: "[47] First, "[i]n order for it to 'appear' to the Court that the applicant 'may be entitled' to make a claim for relief, it is not necessary for the applicant to show a prima facie or pleadable case": Morton v Nylex Ltd (at [25]). [48] Secondly, while "the mere assertion of a case is insufficient ... [i]t will be sufficient if there is reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground": Morton v Nylex (at [25]). [49] Thirdly, "belief requires more than mere assertion and more than suspicion or conjecture. [It] is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action": St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 at 154 26, per Hely J, referring in turn to John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 at [13], [14], [17] and [73], per Emmett J. The use of the word "may" indicates the court does not have to reach "a firm view that there is a right to relief": Telstra Corporation Ltd v Minister for Broadband, Communications and the Digital Economy (2008) 166 FCR 64 at [58]. [50] Fourthly, the requirement that the matters set out in r 5.3 of the Uniform Civil Procedure Rules "appear[s]" to the court to establish an entitlement to an order under the rule may be wider than the requirement in the Federal Court Rules, O 15A, r 6 that there "is reasonable cause to believe": see Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399; (2006) 69 IPR 595 at [22] per Young CJ in Eq; Papaconstuntinos v Holmes à Court [2006] NSWSC 945 at [17] per Simpson J; Hornsby Shire Council v Valuer General of NSW [2008] NSWSC 1179 (at [33]), per Adams J. Nevertheless Hely J's statement in St George Bank (at 154 26) remains apposite, namely that "whilst uncertainty as to only one element of a cause of action might be compatible with the 'reasonable cause to believe' required by subpara (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe". [51] Fifthly, "the question posed by [r 5.3(1)(a)] ... is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent [but] ... whether the applicant has sufficient information to make a decision whether to commence proceedings in the court. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences": St George Bank (at 154 26](f)) (emphasis in original); see also Morton v Nylex (at [33]). Thus application of the rule will not be precluded by the fact that the applicant already has available evidence establishing a prima facie case for the granting of relief, as there might be matters of defence which could defeat a prima facie case: Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 1500 at [41], per Lindgren J, referred to with approval by the Full Federal Court (French J,Weinberg J and Greenwood J) in Telstra Corporation Ltd (at [60]). [52] Sixthly, as Hely J said in St George Bank (at 26), "the Rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the court, exercised in the particular circumstances of each case"." 12In St George Bank Limited v Rabo Australia Limited (2004) FCA 1360 Hely J observed: "[26] The following propositions emerge from the authorities in which the proper application of O 15A r 6 has been considered by judges of this Court: (h) it is no answer to an application under the rule to say that the proceeding is in the nature of a 'fishing expedition': Paxus Services at 733. Indeed O 15A r 6 'expressly contemplates' what once might have been castigated as 'fishing': Bailey v Beagle Management Pty Ltd (2001) 105 FCR 136 at [27]. As Burchett J commented in Paxus Services, the rule is (at 733): ... designed to enable an applicant, in a situation where his proof can rise no higher than the level the rule describes, to ascertain whether he has a case against the prospective respondent ...." 13Taken overall, the authorities suggest that the question of whether or not an applicant may have a claim against a person is, ultimately, a matter of impression. In other words, the question for the Court is whether the evidence is reasonably capable of inclining the mind towards acceptance of the applicant's case that it may have a claim for relief of the nature propounded. Although mere suspicion or conjecture is not enough, demonstration of a prima facie, or even a pleadable case, is not required. A beneficial approach to the construction and application of the rule should be taken.

The issues 14The defendant opposed the application, principally on the grounds that the evidence was insufficient to show that the plaintiff may be entitled to make a claim for relief against it. 15The crucial question for determination is whether it appears the plaintiff may be entitled to make a claim for relief against the defendant. In dealing with the parties' submissions, I respectfully adopt the approach taken by McDougall J in Steffen v ANZ Banking Group Limited (2009) NSWSC 666, para 26: ".... I do not think that, at least as a general proposition, applications under r 5.3 should attract detailed and lengthy elaboration. As Gyles J observed in C7 Pty Ltd v Foxtel Management Pty Ltd [2001] FCA 1864 at [39], "arguments of the length and elaboration on all sides on this application are not envisaged by or necessary in order to satisfy [r 6]. They would have done justice to a final hearing. A prima facie case does not have to be demonstrated"." 16It was common ground that the plaintiff had made reasonable enquiries. It was not disputed that the requirements of r 5.3(b) and (c) were met. 17As the plaintiff brings this application on its own behalf and not in a representative capacity, it must demonstrate that the evidence indicates its entitlement to a claim rather than an entitlement which others may have.

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