_Delmenico v Brannelly & Ors_

District Court of Queensland|2007-08-09

[1] The plaintiff was formerly a Commonwealth public servant who retired in 1995. He works part-time in the tourist industry. He is now 66 years of age. He and his wife have bought and sold a modest portfolio of real estate. After his retirement, the plaintiff also invested in shares as part of his self-managed superannuation fund, usually after consulting a stock broker. In early April 2005, he decided to look for another investment and replied to an advertisement by the first and second defendant. Following discussions and the receipt of information from the first defendant, the plaintiff invested or loaned a total of $100,000.00 by way of two promissory notes of $50,000.00 each in a company called Bayshore Mezzanine Pty Ltd.[1]

[2] The defendants engaged in the provision of financial investment advice or information. The second defendant was at all material times the authorised agent of the third defendant and the first defendant is a director of the second defendant and was the duly authorised agent of the second defendant. The defendants deny that the plaintiff was a person to whom they provided financial advice. The first and second defendants assert that they provided information to third parties such information having been researched by the third defendant and approved for distribution.

[3] The plaintiff sues the defendants in negligence, for providing negligent advice and alternatively for breaches of the Corporations Act 2001 (Cth),[2] the Australian Securities and Investments Commission Act 2001 [3], the Trade Practices Act 1974 (Cth)[4] and the Fair Trading Act (Qld).[5] In the addresses by counsel it was common ground that the causes of action were to be confined to negligence and a breach of the ASIC Act.[6] Section 12 DA provides as follows:

A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

[4] The plaintiff responded to an advertisement and spoke to the first defendant. The plaintiff said that he told the first defendant that he was managing his own superannuation fund and that he had a line of credit on his house and which he "could draw down on for secure investments and if he thought this was a secure investment" to send out the information. The first defendant asked if he wanted a full financial plan done and the plaintiff responded that all he wanted was his financial advice on products that the first defendant was offering.[7] Initially, the first defendant offered to the plaintiff an investment in a Prime Retirement and Aged Care Property Trust.[8] This was rejected by the plaintiff after he received the letter of 6 April 2005 as unsuitable as he would lose money if he withdrew funds early.[9] The plaintiff told the first defendant that he wanted a short term investment with a return of around 10% and that he had about $50,000.00 to invest. The defendant made mention of a Westpoint mezzanine company called York and that he "would get back" to the plaintiff.[10] The defendants contend this conversation on 6 April was not pleaded and did not occur. The letter of 6 April being Exhibit 2 was sent by the first defendant. It confirms that a conversation occurred. No explanation was given as to why the first defendant did not give evidence. As is correctly submitted by the plaintiff, an inference can be drawn that his evidence would not have advanced the defendants' case.[11] A similar principle is applicable to other conversations. Of even greater significance is that the plaintiff presented as a credible witness whose evidence was supported by documents on significant issues. It is not necessary for the efficacy of the case for this conversation to be pleaded. It is part of the surrounding circumstances.

[5] There was a follow up letter from the first defendant[13] which is of little consequence. The letter of 18 July spoke of "the excellent opportunity to invest in high yielding promissory notes offering a 14% return on a minimum of $50,000.00 with a company who have an established record of over 20 years". Of greater significance is the second last paragraph on page 1:

For specific projects, unsecured Promissory Notes are issued in a special purpose company. In each project, this company has a second ranking mortgage over the development property and a second ranking charge over the special purpose company. In addition, Westpoint Corporation and associated entities provide a guarantee of the company's obligation under the loan and security documents that will be released once all Promissory Notes have been repaid and all interest payments made.

[6] Although not named at that stage, the special purpose company was Bayshore Mezzinine Pty Ltd. The development was identified as the Westpoint Group Bayshore Development. Attached to the letter of 18 July was a disclosure document. Apart from disclosing the commission payable to the second and third defendants, it contained the following:

Please note that the attached information is not financial advice and is for information purposes only.

As you did not describe your current situation to me, have not sought advice nor were given advice by any Authorised Representative of Deakin Financial Services Pty Ltd, Australian Financial Services Licensee , number 231158 ('the Licensee'), it is possible that the chosen product is not approved for use by Representatives of the Licensee. It is also possible that there may be products available from other financial product provider(s) that are more suitable to your needs.

[7] At this point in time, the plaintiff did not know what a promissory note was.[14] He thought that it was something like a mortgage or shares in a company.[15] The returns on the investment and the term of 12 months appealed to the plaintiff, as did the reputation of Westpoiont and the fact that it provided a guarantee for Bayshore's obligation. The plaintiff took that to mean that "being a guarantee to me that they would repay my moneys with interest".[16] The reference to 'unsecured' meant to the plaintiff that there was no first mortgage. He was cognisant of the second mortgage over the development property and a second ranking charge over the special purpose company. When describing this anomaly, the plaintiff said that it "must be that I - with my promissory note - would have some interest in that particular charge".[17] He had no idea what a mezzanine company was.[18]

[8] Attached to the letter of 18 July, was a newsletter dated May 2005[19] Even though there were some explanatory notes in both the letter and the newsletter, it is clear that the first defendant had not clearly explained to him what the nature of the transaction was. It is also clear that the letter of 18 July 2005 is somewhat misleading. For example, Bayshore did not have a second ranking mortgage over the development property nor did Westpoint or its associated entities "provide a guarantee for the company's obligations under the loan and security documents[20] if the word 'loan' is intended to refer to the promissory note. Understandably, the plaintiff believed that he was getting a guarantee from the Westpoint Group and a charge over the Bayshore Port Melbourne Trust. These matters will be discussed later. It gives credence to the evidence of Mr Child who said that a prudent financial adviser should explain in 'layman's terms' the information provided in writing.[21]

[9] The plaintiff gave evidence that he believed that the defendants were providing advice or recommending the promissory notes as an investment.[22] He did not consider that the first defendant was merely passing on information.[23] The plaintiff accepts that he read parts of the newsletter.[24]

[10] Following the receipt of the letter of 18 July 2005 and the newsletter, the plaintiff spoke to the first defendant again and recorded that conversation[25] which reads as follows:

Spoke to Brannelly and said

-not interested in Prime Retirement and Aged Care Trust

as PDS indicates that the loss would be approx 20% if need to get out. Also term too long.

-I said what I need is -

. A short term investment @ around 10%

. Suitable for gearing as I will be using borrowed money

. Regular income returns (monthly)

. Secured Funds

- He said that investment in Bayshore Mezz would be ideal for my purposes

- I said that as long as he is satisfied that my investment would be secure then pls send relevant im.

- He said he was satisfied that investment in Westpoint very secure.

[11] The defence put to the plaintiff that the conversation never occurred. That suggestion does not sit comfortably with the opening words of the letter of 22 July 2005[26] which reads as follows:

Further to our recent telephone conversation regarding the above...

[12] The first defendant did not give or call evidence. There is no reason to doubt the plaintiff's evidence that the conversation occurred. The secure nature of the investment loomed large as one reason for entering into the transaction.

[13] This letter is similar to the letter of 18 July except as pointed out by the plaintiff there is reference to in excess of $10 million being raised.[27] An Information Memorandum was also sent.[28] The diagram on p 2 of the Memorandum was not clear to the plaintiff and he referred back to the letter 22 July for clarification. Specific reference was made to the second last paragraph.[29] Even though there was no mention of the additional floors or to the front end costs in the Memorandum, mention had been made to it in the letter. The plaintiff inferred that the first defendant was keeping up to date with the project.[30]

[14] At the time he signed the application for a promissory note,[31] the plaintiff says that he did not know what a debenture was. He was applying for a promissory note.[32]

[15] Confirmation was received from the first defendant that the application and cheque for $50,000.00 had been received and passed onto Kebbel. Kebbel Investment Group seemed to have a role to play collecting funds.[34] Parts of the letter[35] did not ring true to the plaintiff as it asserted that "you have decided to make an investment based on your own research" and that "As you did not describe your current situation to me, have not sought advice nor given advice by any Authorised Representative of Deakin Financial Services Pty Ltd."[36] The latter was true as far as the plaintiff was concerned. He had received his advice from the first defendant. He was cross examined about this but it appears that he did not turn his mind to the intricacies of the law of principal and agent. He asserted that he had relied upon what the first defendant told him and that he had described his personal circumstances to the first defendant as outlined above.[37]

[16] By letter of 2 August 2005, the plaintiff received confirmation from Bayshore relating to the promissory note and the interest schedule.[38]

[17] This letter is of some significance. The defendants' case at trial was that they were not providing advice to the plaintiff in relation to the Bayshore investment, merely information. This letter is sent between the dates of the first and second investment by the plaintiff. It confirms that the defendants were undertaking research into alternative investment opportunities for the plaintiff including a Westpoint option. Reference is made to the Bayshore investment and as the type of investment the plaintiff may wish to continue with. This letter is more consistent with the plaintiff's version of events that the defendants were providing advice not merely information, although the defence contend that it is not specifically referable to the subject promissory notes. However, it does talk of "this type of investment" and precedes the second investment of $50,000.00.

Conversations after receipt of letter of 12 October

[18] After receiving Exhibit 13, the plaintiff had contact with the first defendant. He asked the first defendant if the Bayshore investment was still open and it was later confirmed that it was. The plaintiff was curious as to how it could be. The first defendant replied that investors were "coming and going all the time."[40] During this second conversation, the plaintiff indicated that he was willing to invest $50,000.00.

[19] The plaintiff subsequently received a letter of 17 October 2005[41] with a copy of the Information Memorandum and the application form. It also included an attached disclosure sheet similar to that attached to the letters of 18 and 22 October 2005. A subsequent letter of 20 October 2005[42] confirmed receipt of the money and the application form and that the monies had been forwarded to Kebbel. It also asserted that the plaintiff had relied on his own research and that advice had not been sought and that the plaintiff had not described his current situation to the first defendant. It also had attached the Fee Disclosure Statement. The Promissory Note was issued and dated 24 October 2005.[43] It was received by the plaintiff probably after November.[44]

[20] The plaintiff asserted that he quickly read through the disclosure document before providing the funds. He thought it was a pro forma document which did not impact on him.[45] He confirmed that the letter of 20 October contained the same errors which appeared in the other letters concerning his own research etc.

[21] Later, on 2 November, 2005 a letter was sent[46] referring to other investments. These were not acted upon. By letter dated 9 November 2005,[47] the first defendant suggested that the plaintiff might take advantage of reinvesting the $100,000.00 with the Westpoint Income Fund by transferring out of Bayshore. It offered a 2% bonus upfront. The letter asserted that Westpoint had never defaulted on their obligations to investors. From this point on, the plaintiff never received any further interest payments. The Administrators were appointed on 6 December 2005. In fact by letter dated 12 June 2007, the Liquidator of Bayshore confirmed that "there are reasonable grounds to believe that all promissory notes and mezzanine notes issued by Bayshore Mezzanine Pty Ltd have no value or have only negligible value".[48]

[22] In evidence, the plaintiff confirmed that lack of security would have meant that he would not have invested:[49]

...Mr Delmenico, if you had been told that with respect to these promissory notes that you were getting was really a promise from Bayshore Mezzanine to pay you your money back with interest, that any guarantee was not directed to you but to Bayshore Mezzanine, that there was no mortgage in favour of Bayshore Mezzanine over the property and that there was no registered charge in place in favour of Bayshore Mezzanine, would you have made the investment? - Absolutely no way.

[23] The plaintiff stated also that if the issue of the promissory notes was in breach of the Corporations Law or regulations he would not have applied for them.[50] Also, if he had been told of the high commissions being paid of 6% plus an additional 13% he would not have touched the investment.[51]

[24] The defence contended that what the defendants provided was information. Putting aside for the moment the disclosure document attached to the relevant correspondence, it was the plaintiff's contention that recommendations were made. That can mean counsel or advice.[52] The statement that this "is an excellent opportunity to invest"[53] clearly is a recommendation. The plaintiff had given sufficient information to allow the first defendant to form a view of what an appropriate investment would be.

[25] The first defendant was willing to make recommendations without seeking further information. The diary note[54] confirms the nature of the interchange. The plaintiff did not want a financial plan, he wanted specific advice about an appropriate product for himself given the parameters provided to the first defendant. The first defendant confirmed that the Bayshore proposal was "ideal for my purposes" and that the investment in Westpoint was "very secure"[55]

[26] In a case of this nature, one cannot divorce the nature of the conduct of the defendants and the disclosure/disclaimer provisions of the relevant documents.[56] It is necessary to look at everything the defendants did, and particularly the first defendant, up to the point when the monies were paid by the plaintiff or moreover when he accepted the proposal. In Butcher's case, the "agent did no more than communicate what the vendor was representing, without adopting it or endorsing it."[57] There are three aspects to look at in accordance with Butcher's case[58], the nature of the parties, the nature of the transaction and the contents of the documents.

[27] One should keep in mind also that it has been held in relation to s 53(a) of the Trade Practices Act that:[59]

When, however, a representation is conveyed in circumstances in which the carrier would be regarded by the relevant section of the public as adopting it, then he makes the representation. It will be a question of fact in each case, but in my opinion the wholesaler who resells goods labelled without attribution of authorship can be taken in ordinary circumstances to adopt the text of those labels.

[28] A similar provision in the ASIC Act is 12DB(1)(a). It includes the innocent implied adoption of a false statement.[60] In the present case, the plaintiff contends that the first defendant provided misleading information in the correspondence[61] and so did not merely adopt statements from the third defendant.[62] It seems that the documents prepared by Westpoint were not misleading but rather were misinterpreted by the first defendant. Therefore, it cannot be said that the first defendant was merely adopting material prepared by Westpoint. He was providing advice to the plaintiff.

Conduct and Disclosure/Disclaimer - relevant factors

[29] The plaintiff had made investments in the past in shares but always after receiving advice from a stockbroker.[63] His wife did not seem to play a role. They had bought and sold some real estate which did not seem to be more than a few occasions including their own residences and well within the experience of the average householder. The plaintiff did not present as an experienced businessman but rather as a retiree trying to maximise his returns with the appropriate advice. In cross examination and in the written submissions there was an attempt to cloth the plaintiff with the wisdom of an astute investor. The fact that he held a senior position in government and that he ran a self managed superannuation fund does not give him that qualification. His lack of knowledge of the security provided and the nature of a promissory note point towards a limited exposure to such matters. The fact that the first defendant misconstrued the nature of the security makes the erroneous assumptions of the plaintiff more understandable. He had a self managed superannuation fund but seemed to rely on advice when dealing with his share portfolio. It could not be said that he was "intelligent, shrewd and self reliant" as were the purchasers in Butcher's case. In fact, he described himself as naïve and somewhat of an idiot when questioned about the present transactions. Although that is somewhat depreciatory, it is credible when one analyses his knowledge of what a promissory note meant and what security he believed he held under the note, having relied upon the material provided by the first defendant.

[30] On the other hand, the first defendant did not give evidence. In an attachment to the letter of 18 July 2005,[64] the defendants describe their operation as follows:

Brannelly has been providing exclusive and specialized financial services to small businesses, professionals and individuals for over four decades...Today Brannelly has forced a reputation as a leader in the financial services field...At Brannelly our focus has always been on achieving an even greater understanding of the specialised nature of our client's businesses and personal ambitions...

Brannelly Financial Pty Ltd is authorised to operate under Deakin Financial Pty Ltd's Australian Financial Services Licence (No. 231159), issued by the Australian Securities and Investment Commission (ASIC) on 1 October 2003.

[31] There is no doubt that the defendants were specialists in their field over many years. The plaintiff was a fledgeling investor in the property management trust area.[65] His knowledge of the types of securities offered was limited to his understanding that he did not have a first mortgage which was something he could relate to given his property dealings. It is accepted that he did not appreciate the nature of a promissory note or a debenture. He clearly relied upon the recommendations or advice offered by the first defendant as an expert in the field[66] as evidenced by the letters of 18 and 22 July 2005. The plaintiff was informed by the Disclosure provisions that "the attached information is not financial advice and is for information purposes only". A Disclosure note was attached to the letters of 18 and 22 July and 17 October 2005. Also, it was stated that "As you did not describe your current situation to me, have not sought advice nor were given advice by any Authorised Representative" etc. The plaintiff did not place weight on this as he believed that it was a pro forma document.[67] The form of the Disclosure supports that view. The plaintiff gave evidence that he had provided his personal details to the first defendant and in fact had sought his advice. The nature of the information in the diary note[68] would support that view. The cross examination of the plaintiff did not detract from his general credibility. His understanding of the documents, the nature of the security offered and his reliance on the first defendant are completely consistent with a laymen's approach to this type of investment which was described by the expert Mr Child as "unusual".[69] The defendants contend that it was significant that the disclosure statements were attached to three letters only. I fail to see that point except to say that the letters were part of the overall transactions. The plaintiff, I find, received advice from the first defendant in relation to the subject promissory notes. It was submitted by Counsel for the plaintiff that the first sentence of the Disclosure Statement does not say that the plaintiff cannot rely on the information given to him by the defendants. To that extent, the Disclosure document is ineffective to negate representations of fact. I accept that submission as correct.

[32] The plaintiff had provided the essential details of what type of investment he wanted. Of particular importance was that it was a secured investment. In fact in cross examination he gave evidence of some nine features contained in the material received from the first defendant and what he was told which led him to invest in the promissory notes:

a. that the company he was investing in had a second ranking mortgage and a second ranking charge[70] and that this was some type of security.

b. That there was a guarantee by Westpoint relevant to Bayshore.[71]

c. The second ranking mortgage over the development property. [72]

d. The charge over the Bayshore Port Melbourne Trust.[73]

e. The first defendant told him that it was a secure investment.[74]

h. There was an 80% coverage of the debt on the property sales.[77]

i. There were no entry or exit fees.[78]

[33] The plaintiff relied upon the letter of 18 July for eight of the nine factors. The other factor was that he was told that it was a secure investment.[79] What he received were two promissory notes which were unsecured in any way as far as the plaintiff's position was concerned. Bayshore may have had a charge in relation to the Bayshore Port Melbourne Trust.[80] There was also a guarantee referred to in Exhibit 8 from the Westpoint Guarantor Group to Bayshore. Reference is also made to the Newsletter[81] and the Information Memorandum[82] by the defendants as describing the true nature of the transaction. It is asserted that the plaintiff was aware of the limitations put upon the information provided by the first defendant. The defendants do concede that there was no second ranking mortgage held by Bayshore over the development company as suggested in the letters of 18 and 22 July. The defence submissions also deal with each of those points such as (f), (g), (h) and (i) are true and not actionable. The other points are dealt with in the defendants' written submissions.[83] Of course. There is a concession that (c) is inaccurate but not actionable if one looks at all of the documents provided by the first defendant. A similar argument is put up in relation to (a), (b), (d) and (e). In particular, the meaning attributed to statements in the letters and attached material could not have led the plaintiff to interpret the documents in the manner he has. Having considered those submissions, I reject same. The question of the conduct of the parties and the interaction with the disclosure statements have been discussed.[84] The findings are set out hereafter.

[34] Reference had been made to the letters of 18 and 22 July 2005 together with the attached Disclosure document and the Newsletter and the Information Memorandum. The plaintiff's case is that although he may have read all or parts of the documents, he did not really understand, for example, the security aspect from the diagram in the Information Memorandum.[85] When he failed to understand it, the plaintiff went back to the letters sent by the first defendant[86] and reached the conclusion that what the first defendant said was correct and that it was a secure investment. He did not speak to the first defendant about the possible discrepancy between the letters and the other information in the Memorandum or the newsletter. The fact that the plaintiff has been careless or could have discovered the misrepresentation had he made proper inquires of the first defendant does not allow the latter to avoid liability for such misrepresentations.[87] In Henville v Walker[88] it was held by the whole court that if the offending conduct in breach of s 52 (1) of the Trade Practices Act was one of two concurrent causes of the claimant's loss then that was enough to enable damages to be recovered under s 82. The majority allowed recovery of the whole amount lost. Gleeson CJ who was in the minority on that point isolated the causative effect of the misleading statement from the entire loss. However, on the unanimous point he stated:

It will commonly be the case that a person who is induced by a misleading or deceptive representation to undertake a cause of action will have acted carelessly, or will have been otherwise at fault, in responding to the inducement. The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of a victim of a contravention is not a bar to an action under s82 unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage. The respondents knew the purpose for which their representations were being relied upon by the appellants. The Full Court accepted that the making of the representations amounted to engaging in misleading or deceptive conduct in trade or commerce. There was no warrant for a conclusion that the negligence of the appellants in relation to the feasibility study was the sole cause of the decision to undertake the project.

[35] It should be noted that the provisions of s12 GF of the ASIC Act have not been pleaded to allege contributory negligence to allow a just and equitable assessment.

[36] The approach to be adopted in the present case was touched upon in Downey and Anor. v Carlson Hotels Asia Pacific Pty Limited and Ors.[89]:

In such circumstances the proper approach has been held to involve an inquiry into what "a reasonable person in the position of the [representees] taking into account what they knew, would make of the [representor's] behaviour".[90]

[37] The thrust of the defendants' case here is that given the experience of the plaintiff in investments, his previous working experience and his evidence, his explanation that he relied upon what he read in the letters was incredible and should be rejected. In Downey's case it was described as acting "unreasonably on the erroneous assumption that it was the first defendant making such statements."[91] In discussing this concept, Keane JA said that the question is "whether the erroneous assumption was extreme and fanciful or is of a kind that may be attributed to an ordinary or reasonable member of the class of person at whom the allegedly misleading and deceptive conduct is directed".[92]

[38] In the present case, having regard to the relevant letters,[93] and the conversation of 21 July 2005, the plaintiff proceeded on the erroneous basis that:

a. That there was a mortgage in favour of Bayshore over the development property, whether second ranking or otherwise.

b. That there was a guarantee by Westpoint Corporation and associated entities to the promissory note holders

c. There was a second ranking charge in favour of Bayshore

d. That the investment was an excellent opportunity and secure.

[39] Considering the relevant factors objectively and taking into account the particular background of the plaintiff as an investor it is open to find, which I do, that the plaintiff acted reasonably in assuming those matters. His failure to check again with the first defendant having perused the Newsletter and Information Memorandum does not alter that fact. He did not pay much regard to the Newsletter given its nature and the Memorandum, particularly the diagram, did not make sense to him. He went back to the letters drafted by the first defendant. The plaintiff presented as a credible person, supported by his diary note and his interpretation of the relevant letters was reasonable. The plaintiff was entitled to rely upon the reputation of the defendants to give credence to the statements in the letters and to make the investments.[94] The failure to make further inquiries is not fatal. Any misunderstanding is not unreasonable. Absent evidence from the defendants, it is open to find that any evidence called would not have supported their version of events and in particular the oral conversations and that the plaintiff's version is correct.[95] The existence of the diary note[96] supports that view.

[40] The plaintiff's counsel submits in their written submissions[97] that the representations made by the defendants which were false or misleading are as follows[98]:

a. that the opportunity to invest in the promissory notes was an excellent opportunity;

b. that the "special purpose company" (Bayshore Messanine Pty Ltd) had a second ranking mortgage over the development property;

c. that there would be a second ranking charge as security;

d. that there was a guarantee "for the company's obligation under the loan", where the company referred to was the special purpose company, and therefore Bayshore Mezzanine, so that the representation was that there was a guarantee from Westpoint Corporation and associated entities to the promissory note holder.

[41] Once it is accepted that those representations were made by the first defendant, not just adopting information provided by the third defendant, the next step is to determine whether they were misleading or deceptive. In the present case there is little doubt about that. None of the four aspects relied upon by the plaintiff were true. They were misleading and false. Also, when one looks to the evidence of Mr Childs, it is clear that this was an unusual investment and high risk given the nature of the promissory notes.[99]

[42] The defendants assert that there were no representations by virtue of the statements in the Disclosure documents attached to the letters of 18 and 22 July. In answer to that, the plaintiff refers to the statement of Keane JA in Downey[100]:

"...exclusionary and disclaimer clauses cannot override statutory prohibition against misleading and deceptive conduct or prevent the grant of appropriate statutory relief where loss or damage is, as a matter of fact, caused by a contravention of the statute"

[43] The defendants have submitted that they do not rely upon the disclosure clauses as exclusionary but merely to show that the defendants were not providing advice but merely information. If effect were given to that statement, it would be an indirect manner of excluding liability. As discussed above, there is a contrary finding in that the defendants were giving advice notwithstanding the attempt to deny same by reliance on the Disclosures. As argued by the plaintiff, the oral conversation on 21 July 2005 cannot be excluded in any event as the Disclosures did not relate to it. That is a correct submission. By itself, the representations in the diary would have been sufficient to show that the defendants were guilty of misleading and deceptive conduct in that the investment was not "very secure".[101] Also, the letters contained recommendations and representations which were meant to be acted on and that the Disclosure statements were incorrect and formed part of a pro forma attachment. The Disclosure statements did not have the effect of erasing the misleading statements.[102] The Disclosure documents did not have the effect of suggesting that the recommendations by the first defendant in the letters[103] were not accurate and should not be acted on.[104] The representations in the letters continued to influence the plaintiff to "labour under some erroneous assumption".[105] To say, as the defendants do, that the plaintiff read the newsletter or the Information Memorandum and could not have possibly been misled ignores reality. Even the first defendant failed to interpret the information correctly.

[44] The plaintiff gave evidence that he relied upon what he was told by the first defendant on 21 July 2005 and as evidenced by the letters of 18 and 22 July 2005. The defence say that the plaintiff told the first defendant that he handled his own superannuation scheme and did not require a financial plan. That was true. However, it is open to find that the plaintiff sought the guidance and advice from the first defendant in relation to a particular type of investment. That has been his pattern in the past to seek professional advice. The defendants contend[106] that the conversation alleged on 6 April 2005 that the plaintiff sought financial advice does not appear in the pleadings. That does not detract from the fact that the defendants held themselves out as giving advice. The letter from the first defendant[107] confirms that the defendants were capable of performing the task of doing research and advising the plaintiff. To contend otherwise fails to consider the nature of the relationship in this instance. It is open to find that the plaintiff made it clear that he wanted a secure investment and that he relied upon the first defendant in both instances to provide same. The arguments by the defendants that the Disclosure documents removed the reliance on the first defendant has been dealt with above in the context of whether advice was given. The failure by the plaintiff to get back to the first defendant after he read the obvious conflict between the Information Memorandum has been explained. The plaintiff believed that the letters clarified an otherwise complex and confusing explanation in the Information Memorandum. In any event, although the Information Memorandum and the Newsletter may deal with the risk factors, they do not adequately explain the nature of the security or more importantly, the lack thereof. As Mr Child correctly pointed out, a prudent financial advisor would explain in clear terms what the written documents provide for as otherwise the ordinary investor may not comprehend same. It is not to the point that the plaintiff relied more upon the letter of 18 July rather than 22 July. His evidence in relation to the latter was brief.[108] He compared both letters and they were similar. It was unnecessary to repeat his previous evidence concerning his interpretation or reliance. Objectively, his interpretation of the letters was reasonable and they contain actionable representations.

[45] The defendants are in breach of s 12DA of the ASIC Act. The statements by the first defendant were misleading and deceptive and related to financial services within the meaning of the Act. None of the four representations and assumptions made by the plaintiff were true or proved. The position with the second promissory note is similar to the facts with the first.[109] The letter of 17 October confirms the significant representations by the defendants.[110] The plaintiff confirmed the nine factors which he relied upon in relation to the second promissory note.[111] The defendants conceded that the information in the letters relating to the existence of a second registered mortgage was inaccurate but was corrected by the Information Memorandum. That aspect has been explained by the plaintiff. He did not understand the diagram.[112] Obviously, if the first defendant misconstrued the meaning of the Newsletter or the Information Memorandum as to the nature of the security, it was not unreasonable for the plaintiff to make the same erroneous assumptions. Damages can be claimed pursuant to s 12GF of the ASIC Act. In the present case, it is not pleaded nor has it been argued that the plaintiff has contributed to his own losses.[113]

[46] The defendants in the written submissions made reference to the fact that conversations occurred which were not pleaded as being relied upon. The conversation of 21 July was pleaded. The other conversations can be regarded as background evidence. If they are so limited, the plaintiff's case relied principally on the letters particularly those of 18 July, 22 July and 17 October. Together with the diary note[114] they by themselves would have been sufficient to prove misleading and deceptive conduct. There is also the admission by the defence that the reference to the second registered mortgage was inaccurate. It is accepted that the defence cannot limit the plaintiff's case to paragraph 11 as suggested.[115] There are other relevant paragraphs such as 7(iv) and (x) and 8(a)(iv) and 8(c) at page 17 of the Further Amended Statement of Claim. The nature of the security was something on which the plaintiff placed reliance in entering into the two promissory notes. The attempt by the defendants to limit reliance arguments to paragraph 11 of the pleading[116] ignores other evidence.[117]

[47] The plaintiff relies upon the alternative of a breach of duty care by the defendants in advising him. The defendants have denied that advice was given. This aspect has been discussed above. The defendants accept that if the first defendant was giving advice then a duty of care arose.[118] In the Hedley Byrne case the bankers, in the absence of a relevant disclaimer, were liable to a third party for negligent mis-statement as to the financial stability of their customer.

[48] It seems to be common ground that the defendants were not aware that Bayshore was financially unsound or was unable to make the interest payments or otherwise meet the terms of the promissory notes. The evidence called by the plaintiff was given by Mr Child. The defendants complain that his evidence was not supported by the pleadings. He concentrated on the need for a prudent financial advisor to know his product. In his view, the first defendant did not know his product and in particular he failed to make inquiry about the source of funds from which Bayshore would meet its commitments and also the nature of the security. The failings are more particularly described at page 5 of his report.[119] They are as follows:

1. fails to provide a reasonable explanation of a Promissory Note and the inherent risk in this form of investment.

2. makes an unrealistic claim of 14% return in 12 months which could only be achieved if the property being developed was completed and sold within 12 months.

3. The information provided fails to provide an explanation of how the investment product would meet it's (sic) claimed return.

4. fails to identify the high risks involved or adequately disclose that the investment is in high risk property development.

5. states that guarantees are in place indicating a higher level of security than was the case when actual guarantees were worthless.

6. fails to disclose adverse matters such as actions by the Australian Securities and Investment Commission (ASIC media release 04/157 May 2004).

7. refers to the product Disclosure Statement (PDS) which has no relevance to the investment product and could leave the client to conclude that the investment is subject to rules and regulations that would indicate greater safety and less risk than is the case.

[49] The defence submissions are correct to the extent that any inquiry by the first defendant may not have revealed a problem with the source of funds. Many of these projects are funded by mezzanine financial arrangements particularly when there is an overrun for the completion date. There was no evidence as to what such inquiry may have revealed except perhaps reliance on mezzanine funds including funds from Bridgecorp which is referred to in the diagram in the Information Memorandum as a Mezzanine Debt Financier.[120]

[50] In relation to the pleadings[121] and the evidence of Mr Childs, the defendants contend that the effect of his evidence was not pleaded. Mr Child did not attempt to swear the issue. His approach was that if the first defendant had known his product, it would have been obvious that the nature of the security provided, for example, would not have been described in the letters as it was. The errors have been discussed. In fact, the first defendant mis-described the nature of the security. Paragraph 23A(7), paragraph 15(c) as referred to in paragraph 23A, paragraph (vi) and (vii) on page 26 of the Further Amended Statement of Claim would seem to be adequate to plead such an allegation. The false representations are re-iterated at paragraph 17. The point made by Mr Child, which I accept, is that the first defendant if he had known his product, should have explained the features of the promissory note more clearly and certainly should not have misrepresented the nature of the security relevant to such promissory notes. One aspect referred to by Mr Child was that ASIC issued a media release in May 2004.[122] It stated that:

The Bayshore Mezzanine action was commenced shortly after ASIC issued a letter of demand in April 2004 to Westpoint group's solicitor that companies in the Westpoint group cease all promissory note fundraising.

[51] It is contended by Mr Child that such a notice ought to be known to financial advisers and that the plaintiff ought to have been made aware of the situation. It is certainly raised in the pleading at paragraph 23A(10). I am satisfied that the plaintiff would not have invested if such a warning has been told to him by the first defendant. He was looking for a secure investment. Such a warning would have cast considerable doubt about the promissory notes belonging to the secure category.

[52] The question of reliance has been discussed. The defendants have failed in their duty of care to the plaintiff by failing to advise him about the nature of the security being offered and by misrepresenting or failing to understand the true nature of the security and misleading the plaintiff in the correspondence. It was a clear case of the first defendant not understanding his product.

[53] The plaintiff seeks the sum of $114,736.62. It is based upon the two promissory notes of $50,000.00 each plus interest paid by the plaintiff on his equity borrowings. The interest rate varies from 7.68% to 8.43% which is below the 9% allowed by the court under the Supreme Court Act. However the latter rate is claimed on the interest paid not the capital sum. The claim seems to be reasonable. A credit was given for the three payments of $500.00 paid to the plaintiff.[123] The defendants say that[124] the plaintiff had received an entitlement to claim a tax advantage by reason of the relevant loss.[125] However, the evidence of the Liquidator Mr Vicars was that such a loss can only be claimed if the Liquidators issue a Declaration to allow such a loss. At this point, it has not issued.[126] Therefore, no tax loss can be claimed. As an alternative, the defendants say that the promissory notes still have potential and as that is not yet capable of assessment, it should be taken into account when assessing the loss. Given the alternative positions taken by the defendants, it seems reasonable that no allowance be made for the tax loss or any possible value being attributed to the promissory notes. To accept one submission ignores the force of the other. In any event on the balance of probabilities, the promissory notes seem of little or no value.

1. Judgment for the plaintiff against the defendants in the sum of $114,736.62.

2. It is further ordered that the defendants do pay to the plaintiff the costs of and incidental to this action, including reserved costs, to be assessed.

3. Liberty to apply.

[2] ss 766A,766B, 917E,945A, 947B and 947C and 953B

[3] ASIC Act ss 12BC,12BAA,12BAB, 12DA and 12GF

[6] s 12DA; it mirrors the provisions of s52 of the TPA

[8] Exhibit 2. Attached was a Product Disclosure Statement.

[52] Websters Third New International Dictionary Vol.II,1966 Ed.William Benton p1987

[56] Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; [2004] 218 CLR 592 at[39]

[59] Gardam v Geo Wills & Co [1988] FCA 194; (1988) 82 ALR 415 at 427

[65] see for example his evidence at T70.45-60

[87] Collins v Marrickville Pty Ltd v Henjo Investments Pty Ltd [1988] FCA 40; (1988) 79 ALR 83.

[89] [2005] QCA 199 at [69] per Keane JA with whom Williams JA and Atkinson J agreed.

[90] His honour referred to Butcher v Lachlan Elder Realty Pty Ltd. op cit at [37]

[94] Brannelly The Professional Perspective being part of Ex 4

[95] Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 312 and 319

[98] See also the Further Amended Statement of Claim paras. 7,8,10 and 11

[99] T190.1 - 60; 192.48 - 60; Ex 1 p 2

[100] op cit at [82] where his honour quotes with approval the statement from Bowler v Hilda Pty Ltd (1998) 80 FCR 191 at 207

[101] Ex 6; Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 at 200 referred to by Keane JA in Downey's case at [72]

[109] The defendants concede as much in Ex B at [86]

[118] Ex B at [119]; Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL 4; [1964] AC 465.

[122] Ex 23; pleaded at para 23A(10) p 38 of Further Amended Statement of Claim

Securities and Investments Commission Act 2001

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Judgment (112 paragraphs)

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Cases Cited (6)