Lee v Westpac Banking Corporation - [2012] NSWSC 899 - NSWSC 2012 case summary — Zoe

NSWNSWSC

Lee v Westpac Banking Corporation

[2012] NSWSC 899

Supreme Court of NSW|2012-08-09

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Court

Supreme Court of NSW

Decision date

2012-08-09

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Original judgment source is linked above.

Judgment (29 paragraphs)

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Judgment 1HER HONOUR: This matter is about whether Westpac Banking Corporation misled two investors in relation to a product called the Guaranteed Portfolio Service (GPS) in June 2007. This matter has been referred to me for hearing by the list judge. 2The first plaintiffs are Michael Lee (Lee) and Majed Hawatt (Hawatt). The second plaintiff is Sandstone Constructions Pty Ltd (Sandstone). Mr Lee is the sole director of Sandstone. The first defendant is Westpac Banking Corporation (Westpac). The second defendant is BT Funds Management Limited (BT Funds). The third defendant is BT Funds Management No 2 Limited (BT No 2). At the outset it is helpful to set out how the GPS works.

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The GPS 3The GPS allows a person to borrow a principal amount from Westpac to fund the acquisition of units in investments managed by BT Funds and BT No 2. The GPS also allows a person to pay the interest due on the principal loan annually in advance and has a fixed term of five years. It is only available to "wholesale clients" and "sophisticated investors" (see ss 761G and 708 of the Corporations Act 2001 (Cth)). 4The GPS provides "capital protection" for the investor provided the investment is held until the maturity date, which in this case was 25 June 2012. This means that the investor, after five years, will recoup their initial capital investment. Initially, the entire investment is placed in the active funds managed by BT Funds and BT No 2. Westpac protects that initial investment by "switching" a portion of the investment capital between the "active" funds and "passive" assets depending upon movements in the "active" funds. The passive assets are known as "zero coupon" bonds issued by Westpac. Zero coupon bonds do not generate income before maturity and are not capable of becoming worth more than their face value. 5The purpose of the switching, which occurs when the active funds reach specified "Buy Triggers" and "Sell Triggers" is that Westpac can expose the investment to favourable investment conditions but in the event of adverse movement in the value of the active funds, can protect the investment within the passive assets that are not exposed to market risk. 6The GPS brochure incorporated a number of charts to explain how the mechanism worked. If the value of the units in the management fund decreased to the level of a sell trigger, a portion of the investment would be the investment would be switched into fixed income investments to ensure that the guaranteed amount was protected (Ex B 159): 7If the value of the units in the managed funds increased to the level of a buy trigger a portion of the investment would be from fixed income investments into units in the managed funds (Ex B 159): 8If the value of the units in the managed funds increased to the level of the "profit trigger" the capital protected amount would increase by 20 per cent of the initial investment (Ex B 159): 9The buy triggers and sell triggers were defined in a way designed to ensure that the value of the investment never fell below the "bond floor" the present value of the capital protected amounts. 10If, as a result of the operation of the sell triggers, 100 per cent of the investment was allocated to the zero coupon bonds, it would remain in the bonds until the maturity date and the capital will not be reallocated to the active funds for the remainder of the five year term. It would then be redeemed to fund the guaranteed amount. In addition, if only 4 per cent of the invested sum remained in the active funds, the remainder of the investment would be transferred to the zero coupon bonds. 11The GPS product comprises two contracts, namely the GPS Form of Asset Allocation Advisory Agreement (GPS advisory agreement) and the GPS Form of Loan and Security Agreement (GPS loan agreement). 12Investors can also borrow money with which to make interest repayments on the GPS loan agreement (GPS interest loan agreement).

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The alleged representations 16In June 2007, Greg Nazvanov was employed by Westpac Financial Consultants Limited as a financial consultant and was seconded to Westpac. The plaintiffs in their further amended statement of claim at [17] to [20] plead as follows: 17Mr Nazvanov was authorised by each of the defendants to make representations to the plaintiffs as to the characteristics and likely future performance of the GPS loan agreement and the GPS advisory agreement (the GPS products). 18On 8 June 2007, Mr Nazvanov on behalf of Westpac represented to Mr Lee on behalf of the plaintiffs that the GPS products had the same, or substantially the same, characteristics as the Protected Equity Loans (PEL) that Mr Lee and Mr Hawatt had previously obtained from Westpac (the first representation). This representation was contained in an email to Mr Lee (FASC [18]). 19On 22 June 2007, at a meeting, Mr Lee informed Mr Nazvanov that the plaintiffs wished to have the ability to withdraw their investment from the GPS products after one year without penalty. At that meeting, Mr Nazvanov represented orally to Mr Lee, on behalf of the plaintiffs, that the GPS products had the same, or substantially the same, characteristics as the Protected Equity Loans that Mr Lee and Mr Hawatt had previously obtained from Westpac. He also represented to Mr Lee that they could withdraw their money from the GPS any time after the first anniversary of the initial investment (the second representations). 20Westpac does not admit these allegations (Defence to FASC [18] - [20]). 21The plaintiffs plead that at no time prior to their entry into the agreements, did Mr Nazvanov advise them of the key features of the GPS (the third representation, being a representation by silence). This alleged representation is discussed in further detail later in this judgment. 22Westpac does not admit that allegation, and seeks to rely on the terms of the GPS products (Defence to FASC [21]). 23The plaintiffs alleged (FASC [24A]) that they had a reasonable expectation that the defendants would advise them of the key features of the GPS products identified in [21] of the FASC. 24The plaintiffs rely on the two alleged positive representations and the alleged representation by silence as the basis for all claims, being breach of s 12DA of the ASIC Act; breach of s 12DB of the ASIC Act; negligence and the claim pursuant to the Contracts Review Act. It is common ground that if the misleading or deceptive conduct claim fails (s 12DA), so too will the other claims.

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Background 28Mr Lee was born in China. Following schooling, he worked there as a civil engineer for a number of years. In 1990, he migrated to Australia. 29In 1999, Mr Lee formed a partnership business with Mr Hawatt, known as Stonepac Developments (Stonepac), which specialised in property development. At around the same time Mr Lee also set up Sandstone. Sandstone is a business that provides construction services to development projects. Mr Hawatt has no equity nor interest in Sandstone. 30Generally, Stonepac and Sandstone work together on property development projects with Stonepac being the property development arm and Sandstone the construction arm. Mr Lee generally has the key role in Sandstone and a more prominent role in Stonepac. These roles involve purchasing land; arranging finances; liaising with local councils, contractors and sub-contractors and consultants; and overseeing construction works. Mr Hawatt's role in Stonepac is generally limited to the technical engineering aspects. 31Since 1990, Mr Lee has bought and sold a number of properties both in the course of his business activities and also personally. In around 2001, Mr Lee started investing in shares. Between 2001 and June 2004, he estimated that he traded approximately $100,000 worth of shares. Over that time he tried to learn what he could about the operation of the share market. From June 2004 to June 2007 Mr Lee, on behalf of Stonepac and Sandstone, continued to trade in large values of shares (T57). 32On 17 August 2004, Sandstone, through Mr Lee, bought 25,000 units in Cochlear Limited for the sum of $500,000 (Ex 9). On 21 February 2005, Sandstone sold the Cochlear Limited shares for $700,000 (Ex 10). In five months Sandstone, through Mr Lee, had made a profit of $200,000 on the Cochlear shares. On 21 September 2004, Sandstone bought 10,000 units in National Australia Bank Limited for a sum of $270,000 (Ex 12). On 23 March 2005, Sandstone bought 100,000 units in Telstra Corporation Limited for the sum of $542,000 (Ex 11). On 23 March 2005, Sandstone was registered in the Clearing House Electronic Subregister System (CHESS) (Ex 13). CHESS facilitates the settlement and clearing of trades in shares and provides an electronic subregister for shares in companies listed on the Australian Securities Exchange (ASX). 33Before I make any further findings of fact, it is necessary to record how I have approached, firstly, the evidence of Mr Lee and, secondly, the fact that the Westpac financial planner, Mr Nazvanov, was not called to give evidence nor was his affidavit read. He was authorised by Westpac to market financial products including the GPS and was the one who allegedly made the representations. Since 2004, Mr Nazvanov had marketed Westpac products to the plaintiffs.

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Mr Lee's credibility 34I closely observed Mr Lee while he was giving evidence and during cross examination. Counsel for Mr Lee submitted that cross examination can be a demanding and intimidating task, even for fluent English-speakers, and that, having regard to Mr Lee's "obvious" difficulty with English, the Court should exercise greater than usual caution about drawing adverse inferences from his demeanour under cross examination. After carefully listening to, and observing, Mr Lee give evidence during lengthy cross examination, I would not describe him as having obvious difficulties with English. At times when a question was long or complex he asked for it to be repeated. Overall, the answers he gave demonstrated that he definitely had understood the questions he was being asked. He presented as an intelligent and astute witness. 35Mr Lee admitted in evidence that he was prepared to be untruthful to Westpac in order to borrow money to invest in the stock market (T61-62). These untruths were designed to portray Mr Lee as having more assets than he actually had. Mr Lee stated that he held investments overseas when he did not and he exaggerated the number of shares he held as at 4 June 2004. 36Mr Lee's personal tax return for the year ending 30 June 2004 (Ex 1) at Question 19 asked: "Foreign source income and foreign assets or property During the year did you own, or have an interest in, assets located outside Australia which had a total value of AUD $50,000 or more?" 37Mr Lee's answer to this question was "No". 38However, in his statement of financial position submitted to St George dated 4 June 2004 (Ex 5), Mr Lee stated that he had "overseas investment" in the sum of $500,000. In cross examination he admitted this statement of financial position was false (T53.1). 39In his statement of financial position, Mr Lee stated that he had shares worth $300,000. However, in paragraph [8] of his affidavit dated 10 June 2010, Mr Lee stated that, between 2001 and June 2004, he estimated that he traded approximately $100,000 worth of shares. In cross examination he admitted that the sum $100,000 contained in his affidavit was correct and that the sum of $300,000 contained in his statement of financial position was false (T53.39). 40Mr Lee admitted to making a false statement in a letter to Westpac dated 22 June 2004, in which it was said that he and Mr Hawatt had received independent taxation advice with respect to the PEL (T61.37). Mr Lee also admitted that he was untruthful when he indicated on documents he signed that he had read them. In his application for the GPS product for Sandstone in June 2007 he indicated that he had read the various agreements in relation to the GPS product, when he had not done so (T105.30). He also made a false statement to Westpac in the application for a further interest loan in May 2008 that he had read the various agreements (T107.19; Ex B 231). 41On the second day of cross examination Mr Lee was challenged as to whether he was telling the truth when he told the Court that he had obtained legal advice in relation to the Guarantee (T100.5-103.6). The transcript accurately records Mr Lee's hesitation in relation to the questions on this topic, an indication that Mr Lee was in fact making this evidence up: Mr Lee says "Sorry?" as an answer twice in this exchange (at T101.6 and T102.26) and "Huh?" as an answer six times (at T101.22-28; T102.1-7; T102.38-44). Other times in his evidence Mr Lee had said: "Sorry can you repeat" (or something similar) and had never used the phrase "Huh?" except in the exchange at T100.5-103.6. He then went on to give an account of how he went to his solicitor's office without an appointment, spoke to the receptionist and then saw the solicitor. Counsel for Westpac in her submissions has summarised what occurred and it accords with my observations. I have reluctantly come to the conclusion that Mr Lee made a further false statement when he wrote "Yes" in the Guarantee document that he had received advice from his own lawyer (Ex B 222). He told this Court he had done so because he thought that this approach might obviate him being caught out making a further false statement. It did not. 42Lastly, Mr Lee at times was evasive and not prepared to make obvious concessions. Mr Lee was evasive in relation to the profits he had made in relation to his investments (see eg T78.40); he was not initially prepared to accept that it was his signature that appeared on the Sandstone application form (T92-94.8 in contradiction to his affidavit evidence: Aff 10/6/10 at [51]); initially, he also refused to accept that he was very keen and wanted to invest in a further $1.5 million in May 2006 (T65.30-66.21). 43On the second day of cross examination, Mr Lee was asked whether he received taxation advice from his accountant Mr Galanopoulos in 2004, concerning the deductibility of interest accruing under the PEL. He said that he had (having previously said he had not). In re-examination, he explained that under the pressure of cross examination he thought that the reference to "independent taxation advice" meant advice from an accountant other than his own (T108). I accept this explanation and do not make any adverse finding about this evidence. 44While Mr Lee was strongly challenged in cross examination, his evidence as to what Mr Nazvanov said at the meeting of the 22 June 2007 was not discredited in any way. 45The defendants did not call a number of witnesses who could have given relevant evidence, namely Greg Nazvanov, the plaintiffs' relationship manager Darren Moore or Moghseen Jadwat, another Westpac employee. No explanation was given as to why these people were not called. While the other witnesses were perhaps peripheral players, Mr Nazvanov's evidence was vital if Westpac was to prove that the oral representations were not made or not made in the terms recounted by Mr Lee. There was no explanation given to this Court for his absence. I have no hesitation in drawing a Jones v Dunkel (1959) 101 CLR 298 inference against Mr Nazvanov that his evidence generally would not assist the defendants' case, in particular as to the representations said to have occurred at the meeting on 22 June 2007. 46Overall, the approach I have taken to Mr Lee's evidence is that I should treat it with caution and consider it in light of contemporaneous documentation. 47However, I should make it clear that I accept Mr Lee's evidence as to the representations that were made on 22 June 2007. In doing so I bear in mind the warning, highlighted by Westpac, given by McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 318-319, where his Honour stated: "Where, in civil proceedings, a party alleges that the conduct of another was misleading or deceptive, or likely to mislead or deceive (which I will compendiously described as "misleading") within the meaning of s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), it is ordinarily necessary for that party to prove to the reasonable satisfaction of the court: (1) what the alleged conduct was; and (2) circumstances which rendered the conduct misleading. Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. ... Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court "must feel an actual persuasion of its occurrence or existence". Such satisfaction is "not ... attained or established independently of the nature and consequence of the fact or facts to be proved" including the "seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding". Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a causes of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration." 48Mr Lee's evidence as to the words spoken by Mr Nazvanov on 22 June 2007 was unchallenged in cross examination. Furthermore, his evidence is consistent with what Mr Lee repeated to Mr Hawatt on 24 June 2007 before Mr Hawatt signed the GPS documents.

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The 4 June 2004 meeting 57On 2 June 2004, Mr Lee sent an email to Mr Nazvanov in preparation for a meeting they had arranged to have two days later, asking for information about certain stocks (Ex B 104). 58On 4 June 2004, Mr Lee and Mr Hawatt attended the meeting with Mr Nazvanov at the Kingsgrove office. Mr Hawatt asked Mr Nazvanov some questions and recalled that during the meeting, Mr Nazvanov said words to the effect: "You will need to invest a large amount of money for this investment to work for you, at least a million dollars or so. I would suggest about four million dollars across your two companies." and "The investment term for the PEL product is three years, but you can pull out early." 59Mr Hawatt asked, "What happens if the share market goes down? Do we lose the whole amount?" to which Mr Nazvanov replied, "No. The PEL product is a secure investment with the only downside risk being loss of interest. The upside is that you can make good money on the investment if the share values increase." 60Mr Lee and Mr Hawatt also understood that there were tax advantages associated with interest payments on the PEL which would be beneficial to their companies. Mr Lee remembers Mr Nazvanov gave them advice in relation to shares in News Corporation and in a sugar making company, and said words to the effect: "You want to get a mix of stocks that have potential for capital gain and good dividend income." 61As to the stocks referred to in Mr Lee's email of 2 June 2004, Mr Nazvanov spoke about them and provided Mr Lee with recommendations as to whether or not to buy certain shares, and in what quantity. Mr Nazvanov and Mr Lee then chose the particular stocks together for the PEL. During that meeting, Mr Lee and Mr Hawatt signed various forms for the PEL. 62At the meeting on 4 June 2004 Mr Lee and Mr Hawatt invested "capital" in the sum of $3.8 million in the PEL product for a period of three years (Ex B 106). In doing so they say that they accepted and relied on Mr Nazvanov's advice in relation to the amount and the period to invest.

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The first Protected Equity Loan 63Over the six months or so from June 2004 onwards, the PEL investment performed well and the value of most of the stocks increased. By around January/February 2005, some of the stocks in the PEL investment had made a good profit and on that basis, Mr Lee and Mr Hawatt decided to close out their positions in those stocks. In January 2005, and again in February 2005, Mr Lee instructed Westpac to terminate the PEL investment in relation to certain stocks and received confirmation that the investment in those stocks had been terminated. 64On 9 March 2005, Mr Lee emailed Mr Nazvanov as follows (Ex 14): "...Today, I have noted our portfolio already exceed of $1,000,000 profit. Very good news and very happy. ..." [Mr Lee's emphasis] 65By November 2005, stocks with the code NWSLV (one of the News Limited companies) had fallen in value. Mr Lee asked Westpac for an indication of what they would recover if they terminated the PEL in relation to those stocks. On 4 November 2005, Mr Lee received a letter from Westpac confirming an indicative loss of approximately $11,500 on termination of stock code NWSLV. The fact that they were going to make a small loss on the NWSLV shares came as a surprise to him, because Mr Lee thought that the option provided a 100 per cent capital guarantee. 66On 9 November 2005, Mr Lee received an email from Mr Nazvanov informing him that the NWSLV holding had been terminated. However, on 14 November 2005, Mr Lee was copied in on an email from James Poon of Westpac to Mr Nazvanov, which contained a revised loss estimate of $39,739.29. On 15 November 2005, Mr Lee sent an email to Mr Poon in which he asked for an explanation about why the option was not covering 100 per cent of the stock loss. After reading Mr Poon's response of 15 November 2005, Mr Lee was confused about the fact that the option would not cover 100 per cent of their loss. On 16 November 2005, he forwarded a copy of Mr Poon's email to a stock broker who he knew, Justin Beeton. 67In the end, Mr Lee says that he found the whole thing very difficult to understand, even with the explanations provided by Mr Poon. Eventually Mr Lee came to understand that even though they had received the benefit of the option and it had reduced their loss on the NWSLV shares, there were additional bank fees, charges and interest incurred because they had terminated the NWSLV holding before the end of the three year term of the PEL. He understood that those extra fees, charges and interest produced the loss. 68On 22 November 2005, Mr Lee gave final instructions to Mr Poon by email to close their position in NWSLV.

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The second Protected Equity Loan 69In around early May 2006, Mr Lee received a telephone call from Mr Nazvanov in which he said words to the effect: "Michael, the stock market is still strong. Do you want to make another investment in a PEL product this year?" 70Mr Lee responded to the following effect: "I will think about it. Maybe we should arrange to meet to discuss?" 71At some stage during the next few weeks Mr Lee discussed the potential further PEL investment with Mr Hawatt in the following terms: "I have spoken to Greg about another Westpac Protected Equity Loan investment. The market is still pretty strong and I think there's an opportunity there. I think we should invest, but not as much this time, maybe $1.5 million across the two companies." 72Mr Hawatt replied, "Ok. If you think we should then I'm fine with it." 73On 10 May 2006, Mr Lee had a conversation with Mr Darren Moore, the commercial manager at Westpac whom Mr Lee dealt with in relation to property matters. Mr Moore then emailed Mr Nazvanov saying (Ex 7): "...Michael wants 2x PEL $750 + loan to cover 12 mths interest on both. He wants to meet next week and will call me to arrange....note your diary .... I told I would approve no problems. He will start his stock research ..." 74On 12 May 2006, Mr Lee emailed Mr Nazvanov stating (Ex 8): "Subject Meeting Next Week - MUST ... I have just send (sic) SMS to you about several stocks. Give me your opinion and your list of stock. I cannot wait till 24th and I would like to meet you sometimes next week. I have already to speak with Darren and will borrow 1.5M from 2 companies. ..." 75Eventually, in cross examination, Mr Lee agreed that at this time he was very keen to invest in the stock market (T66). The letter certainly conveys this impression by the subject "Meeting Next Week - MUST". 76In June 2006, Mr Lee and Mr Hawatt met with Mr Nazvanov at their Kingsgrove office. They discussed some stock selections and they signed the application forms for the PEL. On 23 June 2006, the second application on behalf Mr Lee and Mr Hawatt for the PEL was executed. The amount invested was $1.5 million. 77Between approximately June 2006 and February 2007, some of the stocks in the second PEL had increased in value, and on that basis, Mr Hawatt and Mr Lee decided to close out their positions early in some stocks. 78From about mid 2007 onwards, some other stocks in the second PEL decreased in value. Based on what Mr Lee had learned from his experience with the first PEL, he realised that although he could terminate those holdings early and get the benefit of the put option, some of that benefit would be overtaken with Westpac's break costs. Mr Lee decided to retain those stocks for the term of the PEL and hoped that their price might recover in the meantime. 79Overall Mr Lee and Mr Hawatt made a profit on both PEL investments.

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The Guaranteed Portfolio Service Investment 80Sometime in around May 2007, Mr Lee received a telephone call from Mr Nazvanov. They had a conversation to the following effect: Nazvanov:Are you interested in making a further investment this year before the end of the financial year? Lee: I don't think so as you know we already have our position open in the market through the second PEL." 81At this time, Mr Lee says that he was not particularly interested in making another investment because he thought they already had enough exposure to the share market through the second PEL. Despite the fact that he had told Mr Nazvanov in May 2007 that they were not interested in making another investment, Mr Lee says that Mr Nazvanov continued to send him investment material and emails. 82On 8 June 2007, Mr Nazvanov sent Mr Lee a further email with attachments describing different investment products marketed by Westpac, including one entitled, "WestpacGPS-MarketingFINAL.pdf". In the email Mr Nazvanov relevantly wrote (Ex B 149): "Michael, if you have a Sophisticated investor certificate we can offer you another PEL-like gem this year. Please, note that we shall need application by Thu next week to process in time. ... Let me know what amount you will be doing: $1m, $1.5m, $2m? The loan interest can be prepaid as per usual- in case of PEL at 7.75%, in case of Mac GT at 7.95%" [my emphasis added] 83Mr Lee says that he had a quick look at the email, but did not open nor read any of the attachments. He understood from the email that Mr Nazvanov was inviting him to enter into another PEL with Westpac, or something similar. The plaintiffs rely on this email as the first representation. 84On 18 June 2007, Mr Lee received a further email from Mr Nazvanov in relation to investing with Westpac prior to the end of the financial year (Ex B 168). 85On 21 June 2007, Mr Lee received a telephone call from Mr Nazvanov during which they had a conversation to the following effect: "Nazvanov:Did you receive my emails? Lee:Yes. Nazvanov:What do you think about the GPS product I have sent you material on? Lee:I haven't had time to read any of the material so I don't know what this product is. Nazvanov:It is a great product run by our best fund manager. You don't even need to pick the stocks yourself like you do with the PEL since the fund manager will choose what the best performing stocks are. If you want to get into the GPS, you must have a relevant certificate signed by your accountant by the 22nd. If you want I will send you the accountant's document to you by fax. Lee: Ok then. Maybe let's have a meeting tomorrow to discuss." 86Later, on 21 June 2007, Mr Lee received a further email from Mr Nazvanov in relation to the GPS product (Ex B 169). Mr Nazvanov told Mr Lee in the email that the "AUS Focus fund" was managed by Crispin Murray. Mr Lee understood Mr Murray to be the person Mr Nazvanov had said in their telephone conversation was Westpac's "best fund manager". Mr Lee did not read the attachment to the email but decided to wait for Mr Nazvanov to explain the product in their meeting the following day.

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Meeting with Mr Nazvanov on 22 June 2007 87On 22 June 2007 at about 5.00pm, Mr Lee met Mr Nazvanov at the Kingsgrove office. Mr Hawatt was not present at the meeting as he was overseas at the time. The meeting lasted about 40 minutes. Mr Nazvanov and Mr Lee spent 15 minutes talking about markets in general, particular stocks and general economic conditions. They then had a conversation to the following effect: "Nazvanov: Global equities are good and will keep growing in my view. Another sector which is going to be a good performer is the Asian sector because both the Chinese and the Indian economies are booming. The GPS product is one in which you can invest in these sectors. It is an investment run by the best fund manager. It provides the same protection as the PEL. However for the GPS you don't need to pick the stocks as professional traders will pick the stock for you. The interest you pay on the money you borrow is only 8.5% and there is scope for a much greater return on the investment. Lee: It sounds good but I don't want to stay in the investment for more than one year. Nazvanov: That's ok. You will have to pay a penalty if you exit the investment before one year. But if you get out after one year and one day, you can exit without paying any penalty. Lee: What would the penalty be if you got out within 12 months? Nazvanov: It's about 1% - which means about $10,000 if you invested $1 million." [my emphasis added] 88The plaintiffs rely on this email as the second representations. 89Mr Lee's evidence was that initially he did not want to pursue another investment because they were already exposed with the second PEL. He did not want to be exposed to the share market much beyond the middle of 2008, because he believed that sometime after that there would probably be some kind of downward correction. He says that the major factor that changed his mind was that, like the PEL, the GPS provided a capital guarantee. However, based on what Mr Nazvanov had told him, the GPS seemed to be an improvement on the PEL because he could pull out any time after 12 months without penalty. Mr Lee thought this would avoid the problem that he experienced in November 2005 with the first PEL. 90At the meeting on 22 June 2007, Mr Nazvanov showed Mr Lee the GPS application form and they completed some parts of the form. Mr Nazvanov then left the application form for Mr Hawatt and Mr Lee to complete over the weekend. 91On 23 June 2007 Mr Hawatt returned from overseas. Later that day Mr Lee telephoned Mr Hawatt and they had a conversation in words to the following effect: "Lee:I need you to come over tomorrow and sign some documents for another investment I think we should do with Westpac. We need to have them signed now because it is near the end of the financial year. Hawatt:Ok I will come over to your place tomorrow to sign them." 92Early in the evening on 24 June 2007, Mr Hawatt went over to Mr Lee's house and a conversation took place in words to the following effect: "Hawatt:So tell me about this investment and why we are doing it. Lee This one is just like the PEL investment. It's 100% capital protected. It's run by Westpac's best fund managers, they choose the shares and when to buy and sell. We only have to stay in the product for one year and one day and our interest payments are only 8.5%. I think the investment should make some money and we only have to remain in the investment for just over one year. Hawatt: Ok, that sounds good." 93As previously stated, I accept Mr Lee's account of the conversation between Mr Nazvanov and himself at the meeting on 22 June 2007. His version of the conversation is corroborated by what he told Mr Hawatt occurred at that meeting. 94Mr Lee and Mr Hawatt then completed the GPS investment and loan application forms on 24 June 2007. These forms, together with a certificate by an accountant, Louis Galanopoulos & Co Pty Ltd, dated 22 June 2007, were provided to Westpac. The certificate certified that Mr Lee, Mr Hawatt and Sandstone, had net assets of at least $2.5 million or had gross income for each of the last two financial years of at least $250,000 (Ex B 202). The certificate qualified Mr Lee, Mr Hawatt and Sandstone as "sophisticated" investors for the purpose of entering into the GPS investment. 95On 25 June 2007, Mr Nazvanov sent the guarantee documents to Mr Lee by email. Mr Lee does not think he looked at these documents since they arrived late, at 10.22pm. On 26 June 2007 Mr Lee received a further email from Mr Nazvanov attaching amended guarantee documents. 96On 26 June 2007, Mr Lee and Mr Hawatt executed a guarantee and indemnity in favour of Westpac, guaranteeing the obligations of Sandstone under its GPS agreements (Ex B 216). 97In cross examination Mr Hawatt was asked whether or not he was aware that he was guaranteeing the debts of a company in which he holds no interest and no equity (Sandstone). At T114-115 he gave the following evidence: "Q. So, you agree that in June 2007 you signed this document? You accept that? A. Yes. Q. So, if we go back to the front page, what this document is telling you is that you've guaranteed money for Sandstone Constructions, do you see that? ... A. I can read it now, yes. But at the time, I didn't know was guarantee for the Sandstone. Basically, the partnership. Q. Is that the first time-- A. That's right. Q. It's the first time you realise, sitting there in the witness box, you personally guaranteed Sandstone Constructions? A. That's right. Q. So, it would surprise you then, if you look at page 218, that you guaranteed Sandstone's loan up to $2 million? Can you see that from the line, about the fourth line down from the top? There is a limit on the amount you could be required to pay under the guarantee. It's page 218. A. Yes." 98Mr Lee was not asked any questions as to why Mr Hawatt was guaranteeing his (Mr Lee's) company's debts. 99Mr Lee and Mr Hawatt invested $2 million in the GPS, allocating $1 million to each of BT Wholesale Focus Australian Share Fund and BT Wholesale Asian Share Fund. They applied for both an investment loan to finance the $2 million investment, selecting a fixed interest rate of 8.55 percent for the first year, and an interest loan for $171,000 to prepay the interest for the 2007/2008 year. This interest loan was repaid on 25 June 2008. 100Sandstone invested $1 million in the GPS, allocating $500,000 to each of BT Wholesale Focus Australian Share Fund and BT Wholesale Asian Share Fund. Sandstone also applied for both an investment loan to finance the $1 million investment, selecting a fixed interest rate of 8.55 percent for the first year, and an interest loan for $85,500 to prepay the interest for the 2007/2008 year. This interest loan was repaid on 25 June 2008. 101In around May 2008, Mr Lee realised that the one year anniversary of their GPS investment was approaching. On 13 May 2008, he received a letter from Westpac notifying them that the two GPS interest loan agreements were due to mature on 25 June 2008. 102Shortly after receiving the letter from Westpac, Mr Lee telephoned the Westpac customer service number and eventually spoke with a male person from Westpac who could talk to him about the GPS investments. Mr Lee does not recall the name of the person he spoke to. However, he had a conversation with him to the following effect: "Lee: Our GPS investment is coming up to the one year anniversary on 25 June. We have decided that we want to exit the investment shortly after that anniversary occurs. We can do that without penalty can't we? Westpac representative: No you cannot. The term of the GPS investment is five years and the capital protection is only available at the end of that 5 years, and not beforehand. If you exit now, you will incur a huge loss. What you can do is enter into a loan agreement to borrow the interest payments for the next year of the investment if you want to. Lee: Can you please send me the forms." 103Mr Lee says that this is the first time he became aware that the capital protection for the GPS was only available at the expiration of five years. Up until this time, based upon the advice they had received from Mr Nazvanov, Mr Lee believed that they could exit the GPS after one year and one day without penalty and with the protection of the capital guarantee. 104Following the phone call with the Westpac customer representative, Mr Lee had a conversation with Mr Hawatt to the following effect: "Mr Lee: I have just spoken to Westpac. Apparently the GPS investment is not like the PEL at all. We cannot exit early without penalty as I thought we could. The minimum investment term is 5 years and we do not get the benefit of capital protection until after the end of the 5 years." 105At that time, Mr Lee decided that they ought to borrow the interest for the GPS loan agreement for a further year until 25 June 2009 (Ex B 226). The reasoning behind that was to see how the GPS investment was performing in a year so that they could potentially close the position in another 12 months with a smaller loss. Mr Lee did not think that they had any other option at the time. Consequently on 25 June 2008 they borrowed a further $171,000 to pay the interest accruing on the $2 million loan to 24 June 2009 and Sandstone borrowed a further $85,500 to pay the interest accruing on the $1 million loan to 24 June 2009. 106In 2008 a period of turbulence on the financial markets occurred, known as the Global Financial Crisis (or GFC). 107By 27 November 2008, 100 percent of Lee, Hawatt and Sandstone's units in the BT Wholesale Focus Australian Share Fund had been redeemed and the proceeds used to acquire Westpac Zero Coupon Bonds. As a result, on or about 27 November 2008, Mr Lee and Mr Hawatt received letters from Westpac advising them of "Cleanup Calls" in relation to both GPS investments. The letter in relation to Mr Lee and Mr Hawatt's GPS investment advised (Ex B 235): "Under the terms of the Agreement, where the allocation to the Active Asset Portfolio represents less than 4% of your Dynamic Portfolio, Westpac is authorised to fully liquidate your investment in the Active Asset Portfolio, by redeeming the remaining units in the underlying managed fund, and using the proceeds to invest in the Fixed Income Portfolio. Your Dynamic Porfolio(s) that have been subject to a Clean-up Call as follows: Underlying Managed Fund Active Portfolio allocation prior to Clean-up Call Initial Investment Amount Investment Value as at 17/11/2008

[15]

BT Wholesale Focus Australian Share Fund 2% 1,000,000.00 841,933.44" 108The letter in relation to Sandstone's GPS investment was to similar effect (except that the initial investment amount was $500,000 and therefore the corresponding values were proportionately smaller; see Ex B 240). 109Upon reading these letters, Mr Lee says that he became aware for the first time that under the GPS product, Westpac could transfer the entire amount of the investments into zero coupon bonds and that there would be no further reallocation to other active assets for the five year life of the GPS investment. It became apparent to him upon reading these letters that the transfer of these investments into zero coupon bonds meant that they could never effectively make any profit on the investment but they would have to continue to pay interest on the GPS loans at a rate in excess of the interest rate which the zero coupon bonds would attract. 110Mr Lee says that he did not know about zero coupon bonds, or that once the entire investment was converted into bonds, they were locked into the position and could not avoid making a loss. 111By 28 January 2009, 100 percent of Lee, Hawatt and Sandstone's units in the BT Wholesale Asian Share Fund had similarly been redeemed and the proceeds used to acquire Westpac Zero Coupon Bonds. 112As at 30 June 2009, Lee and Hawatt's holdings of Westpac Zero Coupon Bonds were worth $1,740,235.55 with a face value of $2 million. Sandstone's holdings of Westpac Zero Coupon Bonds were worth $870,579.02 with a face value of $1 million. 113Mr Lee's view was that he was comfortable with the protection provided by the options associated with the PEL, because it enabled them to stay in the market when the stock prices were going down, with the potential to ride the market back up again. The problem with the GPS, as Mr Lee now understands it, is that once the value of the stocks go down, you are stuck with the bonds but you still have to pay interest on the loan. He says that had these features of the GPS been explained to him, he would not have entered into the GPS investments (either personally or through Sandstone) and would have advised Mr Hawatt against doing so too. Mr Hawatt holds the same view as Mr Lee in relation to investing in the GPS.

[17]

Claim of misleading and deceptive conduct 117Section 12DA of the ASIC Act provides that 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. 118It was not disputed that Mr Nazvanov's dealings with the plaintiffs were in trade or commerce and were in relation to financial services. Westpac admitted that Mr Nazvanov was, at all relevant times, seconded to Westpac and was authorised by Westpac to represent them for the purpose of marketing the GPS products. 119Section 12GF of the ASIC Act relevantly provides that a person who suffers loss or damage by conduct of another person that contravenes a provision of Subdivision D (including s 12DA) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. 120Section 12DA of the ASIC Act contains similar wording to s 52 of the Trade Practices Act 1974 (Cth) (TPA), which is now repealed, except that the ASIC Act refers to financial services. Case law relating to s 52 is instructive in relation to s 12DA of the ASIC Act. 121In Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60 McHugh J (in the minority as to the final determination) said at [109]: "The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself." 122Section 12DA does not require that the defendant intended to mislead or deceive a plaintiff. In Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216, Stephen J (with whom Jacobs J agreed) said: "In s 52(1) nothing turns ... upon ... intent ... In the tort of passing off, the defendant's absence of intention to deceive will not provide him with a defence; "trading must not only be honest but must not even unintentionally be unfair". As I read s 52(1) the same may be said of it, it is concerned with consequences as giving to particular conduct a particular colour. If the consequence is deception, that suffices to make the conduct deceptive. ... The section should be understood as meaning precisely what it says and as involving no questions of intent upon the part of the corporation whose conduct is in question." (citations omitted) 123Furthermore liability imposed by s 12DA, like liability imposed by s 52, is unrelated to fault: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 per Gibbs CJ. 124In Butcher, in reaching their conclusion that there had not been misleading conduct, Gleeson CJ, Hayne and Heydon JJ had regard to the nature of the parties, the character of the transaction contemplated and the contents of the document that, in that case, allegedly contained the misrepresentation (at [40]). I shall adopt the same approach, having regard thirdly to the conduct of Mr Nazvanov and the email sent by him on 8 June 2007, said to amount in this case to misleading or deceptive conduct.

[18]

The nature of the parties 125The parties were, on the one side, Mr Lee and Mr Hawatt. They operated a business of purchasing and developing property for profit (T30-33). This involved borrowing large sums of money to purchase land and develop properties, and selling the finished product (T43-49). Together they had in the previous 2 years made nearly $1 million from participating twice in a PEL. Mr Lee was well experienced in the stock market by June 2007, having traded approximately $100,000 in shares up to June 2004 and then $6.7 million dollars in shares to June 2007 (T57.36). He registered Sandstone for a CHESS account with the ASX. There was evidence that Mr Lee was keen to invest large amounts of money on the stock market in order to gain profit. However, the evidence also reveals that, when Mr Nazvanov initially approached him about the GPS, Mr Lee was prudent and felt that Sandstone was already "exposed" through the second PEL. 126I accept that the parties obtained an accountant's certificate certifying that they fulfilled the requirements to be considered "sophisticated" investors (see Ex B 210) and held themselves out to Westpac as such through the forms submitted in their application for the GPS (Ex A: F15 210). However, the reason that Mr Lee and Mr Hawatt had their accountant fill out the form establishing that they were sophisticated investors was because they were advised to do so by Mr Nazvanov. Furthermore the "sophisticated investor" label only confirmed that, jointly, the plaintiffs held a certain amount of net assets or had earned a certain gross income. The fact that a plaintiff has been a successful businessman over many years is by no means a bar against relief pursuant to s 12DA (see for example Coco v Westpac Banking Corporation [2012] NSWSC 565). 127The evidence in relation to the previous PEL investments demonstrates that Mr Lee did not necessarily understand the minutiae of how a financial product would work in practice. He had not understood that his capital investment was not guaranteed if he exited early. He had, however, eventually worked out that the associated put options would mitigate any losses due to early exit. Mr Nazvanov had been involved in the PEL investments and therefore knew Mr Lee's limited capacity to understand complex financial products. 128Mr Hawatt relied on Mr Lee's advice so far as his, and Sandstone's, investment in the stock market was concerned. Mr Hawatt gave evidence that Mr Lee was in control of his and Mr Hawatt's investments on the stock market (T110.37) including the PEL and the GPS products (T110.46). Generally speaking, Mr Hawatt would rely on Mr Lee's decision to invest (T111.29) and he signed the application form for the GPS as requested by Mr Lee (T114.9). 129On the other side, Mr Nazvanov was a financial planner working for Westpac who had facilitated Mr Lee and Mr Hawatt's successful investment in the two Protected Equity Loans in 2004 and 2006. The unchallenged evidence of Mr Lee is that Mr Nazvanov had been advising him about the plaintiffs' investments since 2004. 130On any view, this is not a case where Mr Lee can be said to have had a superior knowledge of the GPS in comparison to Mr Nazvanov.

[20]

The two positive representations 132The email of 8 June 2007 from Mr Nazvanov, relied upon by the plaintiffs, is in evidence. I have accepted the unchallenged evidence of Mr Lee in relation to what Mr Nazvanov said at the meeting of 22 June 2007. Therefore, the two positive representations occurred and the question is whether Mr Nazvanov's conduct (the email and what he said at the meeting) was misleading or deceptive or was likely to mislead or deceive, having regard to the course of conduct as a whole, in light of the surrounding facts and circumstances. 133To summarise, the plaintiffs rely on the following positive representations: (1)Mr Nazvanov's email, in which he offered the plaintiffs "another PEL-like gem"; (2)Mr Nazvanov's assurance at the meeting of 22 June 2007 that the GPS "provides the same protection as the PEL"; (3)Mr Nazvanov's assurance at the meeting of 22 June 2007 that, if the plaintiffs exited the GPS "after one year and one day, you can exit without paying any penalty". 134Westpac submitted that the statement in the email and the oral statements were not misleading or deceptive because, in essence, Mr Nazvanov said there were similarities between the PEL and the GPS products, and that this was correct. 135It is true that the GPS and the PEL were similar in many respects. The similarities included that both products involved the lending of money for investment purposes and offered a guarantee that at the end of the term of the agreement, the bank would pay the customer no less than the amount of capital invested. Both products also offered customers the possibility of paying interest on the capital loan in advance on an annual basis. Both products allowed for the capital investment to be borrowed in its entirety by way of interest only loan and the interest on the capital loan could also be borrowed. The tax effectiveness of each transaction was also a feature that was similar (T80.32, 81.28 and 117.46). 136However, the critical difference between the two products is the way the capital guarantee operated:

Under a PEL, a sum of money could be borrowed to purchase securities from a list approved by Westpac for a term of 1, 3 or 5 years. The loan was 100% capital protected at maturity and that protection was achieved by a put option that gave the borrower the right to require Westpac to purchase any parcel of securities, held by the investor under the PEL agreement at the maturity date, for an amount equal to the loan advanced in respect of that parcel of securities. Westpac hedged its potential liability under the put option by placing on the ASX tradable put options in relation to the securities purchased by the investor.
The put option was only exercisable at the maturity date. However when an investor terminated a PEL before the maturity date, Westpac would calculate the "Break Costs" by taking into account the value of the underlying tradeable options at the date of termination. So in the case of a security that had fallen in value, causing its corresponding option to rise in value, Westpac would sell the option for a profit and credit that amount to the investor (see what happened when the plaintiffs sold their holding in NWSLV, referred to above).
Therefore, in a PEL, the capital protection was capable of yielding a benefit to the investor in the event of early termination, through the sale of the underlying put options. There was no such mechanism in the GPS.
In a PEL, the investor's money stayed invested in the security and therefore retained the capacity to recover value in a rising market. In the GPS, the capacity of the investment to recover losses may be inhibited and eventually destroyed by reallocations to zero coupon bonds. The zero coupon bonds were not tradeable and were not redeemable any time before maturity. At maturity they would not be worth more than face value. 137These differences had practical consequences for the plaintiffs. I accept that they entered into the GPS on the understanding that after one year they could withdraw their money and obtain the benefit of the capital guarantee (or at least a partial benefit, as derived from the put options under the PEL). 138Westpac submitted that this Court should find that the statement "It provides the same protection as the PEL" was understood by Mr Lee as the product provided capital protection, because this is consistent with what Mr Lee said in evidence (T87.18), what Mr Lee said in his June 2010 affidavit (at [47]) and what he told Mr Hawatt. I accept that Mr Lee was attracted by the capital protection offered by the GPS. However, his concern that the plaintiffs be able to exit the arrangement early is clear from the evidence: he withdrew early from some stocks in both PEL investments, he spoke to Mr Nazvanov about exiting the GPS early and he flagged the possibility of early exit without penalty to Mr Hawatt. As his evidence portrays, Mr Lee had not wanted to invest further in June 2007, while the second PEL was still on foot, but what persuaded him to do so was the capital guarantee and his understanding that it was possible to pull out of the GPS without penalty after one year. 139Mr Nazvanov's statements were wrong because the GPS did not afford the same protection as the PEL (and in fact worked quite differently) and the plaintiffs could not exit without penalty after one year. Furthermore, even if every sentence of a representation considered separately is true, a representation may be misleading because it is composed to highlight the appealing aspects of a product: ACCC v TPG Internet Pty Ltd [2011] FCA 1254 at [40]. 140Mr Lee had not read the promotional material emailed to him on 8 June 2007. Furthermore Mr Nazvanov knew that the purpose of the meeting on 22 June 2007 was for him to explain the GPS product. Finally, Westpac was proceeding on the basis that Mr Nazvanov had advised the plaintiffs about the GPS. This is clear from Westpac's Sponsor Memo & Credit Approval Summary dated 28 June 2007 which recorded that (Ex A: 16 224): "Client has sought investment to assist wealth creation following advice from BT advisor (Nazvanov)." 141Mr Lee gave evidence that when Nazvanov told him "after one year and one day, you can exit without paying any penalty", he understood that to mean that although interest was payable, "break fees" were not payable (T89.19-20). I agree that Mr Lee has interpreted this from the words that Mr Nazvanov said. I accept, also, that there is a reference, albeit fleetingly, to "break costs" in the guarantee signed by the plaintiffs: "there is a limit on the amount which you can be required to pay under this Guarantee and Indemnity. It is $2,000,000 (or any other amount agreed in writing) plus a further amount of 20% of that amount (to cover Break Costs) plus amounts like government duties and charges, fees, costs, expenses and interest." 142Westpac submitted that what Mr Lee says he understood Mr Nazvanov to be saying should be rejected as inherently implausible. No commercial business would enter into a transaction for five years and permit an exit after 12 months without penalty. 143Mr Lee was asked at T87-89: Q. ... the part that you have got what Mr Nazvanov was telling you, he said, "It provides the same protection as the PEL"? A. That is right. Q. And you understood that to mean it provided the same capital guarantee as the PEL, is that right? A. Also the same product and guarantee with the put option in it. Q. You said a moment ago that the reason you chose the GPS is that it provided a capital guarantee like the PEL, is that right? A. That's right. Q. And where you say Mr Nazvanov says, "It provides the same protection as the PEL", you understood that to be it meant it provided a capital guarantee to your investment amount? A. Yes. ... Q. And if you decide that you don't want to borrow the money for all that period of time you would have to pay interest that Westpac had worked out it would charge you for the period of time of the borrowing, is that correct? A. Yes, that's correct. ... Q. ... As well as the interest you know that if you break a contract early, a mortgage or any kind of contract with the Bank, and you know from your PEL experience if you break a contract early, there will be what are called break costs? A. Break costs? Q. You know that. So if we go down to near the bottom you have got a record there of Mr Nazvanov saying, "You will have to pay a penalty if you exit the investment before one year but if you get out after one year and one day, you can exit without paying any penalty"? A. Yes. ... Q. In your experience you have had to pay break costs when you have broken an agreement with Westpac earlier, hadn't you? A. Yes. Q. So you understand when you break a contract early you have to pay break costs? You understand that, don't you? A. Yes, I understand. Q. So when Mr Nazvanov said that to you, you knew he wasn't talking about break costs, didn't you? A. No, I understand that the break costs $1,200. I understand that a 1 percent penalty means that is the break cost from the GPS. Q. And if you didn't break until after a year, Westpac wouldn't ask you for any break costs, that's what you thought? A. Yes, because that's a great product run by the best fund manager of the Westpac." 144I do not accept that Mr Lee understood that there would be no break costs associated with an early exit of the GPS. He had previously paid break costs under the PEL. However, Mr Nazvanov's assurance that there would be no penalty after one year misled Mr Lee to believe that the capital guarantee would still operate on early exit, even if there were break fees to be paid. That Mr Lee interpreted Mr Nazvanov's words to mean that the capital guarantee would still operate to some extent is a credible interpretation, in light of Mr Lee being told that the GPS provided the same protection as the PEL, in which the put option helped to cover any charges associated with early exit. 145The positive representations are misleading. They misled the plaintiffs into thinking that the GPS had substantially the same characteristics as the PEL and that the plaintiffs could withdraw their investment in the GPS after one year without losing all of the capital protection.

[21]

Third representation: The representation by silence 146This representation is said to be made out from a failure of Mr Nazvanov to tell the plaintiffs certain matters, namely the main characteristics of the GPS of which the plaintiffs remained unaware. To summarise, the plaintiffs say that Mr Nazvanov should have advised them of the following:

The GPS agreements were to have a term of five years and the capital guarantee did not operate if the investment in the GPS was not retained until maturity;
In the GPS, unlike in the PEL, an investment could be substantially or completely switched into an allocation to the Westpac zero coupon bonds and remain so until the maturity date;
The zero coupon bonds would not generate income for the plaintiffs, would not become worth more than their face value and were not capable of increasing in value if the value of the active asset portfolio changed during the term of the GPS agreements, unlike the put options under the PEL that provided capital protection;
A significant risk and disadvantage of the GPS products was that in the event that 100 per cent of the investment was allocated to zero coupon bonds early in the five year term, to get the benefit of the capital guarantee the plaintiffs would have to continue to pay interest on the loans for the term of the GPS agreement, with no prospect of recovering any more than the initial investment amount at the maturity date;
There were other protected equity loans offered by Westpac, that did not have the same characteristics as the GPS products, where the guarantee was payable after one or two years;
That he was not advising them about the important features and risks of the GPS products. 147Silence is capable of amounting to conduct that contravenes s 12DA of the ASIC Act. The principles in relation to conduct by silence have been reiterated by French CJ and Keifel J in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited [2010] HCA 31 where their Honours adopted the Full Court of the Federal Court's decision in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. Their Honours said: "[18] ...Silence, as Black CJ said in his concurring judgment, was to be assessed as a circumstance like any other: the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. Gummow J referred to the limitation that 'unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist'." 148Westpac submitted that nothing gave rise to a reasonable expectation, in the circumstances of a dealing between Mr Nazvanov (who was not providing financial advice) and the plaintiffs, through the first plaintiff (an experienced stock market investor) that Mr Nazvanov would not have assisted the plaintiffs entering into the investment without disclosing the matters set out above. 149I reject Westpac's submission. Whether a failure to inform a negotiating party of a certain matter constitutes misleading conduct requires close analysis of all of the circumstances of the transaction, including the commercial sophistication of the parties, their experience in their respective fields, the nature of the transaction, the documents, whether one party was put on notice of a relevant matter or failed to make any further reasonable inquiries and the history of the transaction: Miller & Associates at [91]. 150The evidence in relation to the PEL investments demonstrates Mr Lee and Mr Hawatt's reliance on Mr Nazvanov for explanation as to specific features of financial products. It also shows their lack of real sophistication or understanding of complex financial products and, coupled with the positive misrepresentations by Mr Nazvanov, sets up their reasonable expectation that Mr Nazvanov would advise them about the differences between the PEL and the GPS. These included that the PEL offered the option to exit early with some capital protection and continued exposure to the stock market, whereas under the GPS there was a real risk of investors getting locked into passive assets, making it impossible to generate any profit until the maturity date. 151Mr Nazvanov knew or ought to have known that Mr Lee was unlikely to have appreciated certain characteristics of the GPS and would not appreciate them without an explanation. If the impugned conduct involves, as it does here, the provision of an explanation, it must adequately convey the information which the recipient reasonably expects to receive: Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84. Samuels JA continued in that case at 88 by saying that an explanation may be misleading or deceptive because: "the explanation is simply wrong in certain respects, or because it is silent about material matters. In either case the explanation given may be likely to mislead or deceive because by positive misstatement or by omission it conveys to the recipient a false impression." 152I find that the representation by silence was misleading, except to the extent that the plaintiffs allege that Mr Nazvanov should have told them that there were other protected equity loans offered by Westpac. The plaintiffs were well aware of the existence of the PEL product, having entered into two such investments. 153By way of defence to the representation by silence the defendants relied upon what is set out in the GPS documentation, namely the GPS advisory agreement, the declarations by Mr Lee and Mr Hawatt that they had read that agreement, and their declaration acknowledging that their investment would be subject to investment risk, including loss of income or capital invested, and that Westpac did not guarantee the repayment of capital from any of the managed funds except as expressly set out in the GPS advisory agreement. I will now consider the effect of the written material.

[22]

Consideration of the written material 154Westpac says that it informed the plaintiffs, through the documents associated with GPS agreement, of the characteristics of the GPS of which the plaintiffs now say they were unaware. There are five relevant documents, the content of which forms part of the circumstances from which the conduct is to be characterised:

GPS Brochure;
The two application forms;
The GPS advisory agreement;
The GPS loan agreement; and
The sophisticated investor declaration and accountant's certificate. 155I accept that these documents did contain the following information, among other information:
that the guaranteed amount under the GPS was only payable at the end of five years (see for example Ex B 157);
that during the term of the agreements the investment capital is transferred between the active funds and zero coupon bonds (see for example Ex B 158);
that in the event 100% of the investment was invested in zero coupon bonds it would remain allocated until the end of the five year term (see for example Ex A:F1 39). 156Furthermore, in relation to both GPS loan agreements, Mr Lee and Mr Hawatt declared (Ex A: F15 203): "(n) I/We acknowledge that:
Investments in Managed Funds are not deposits with, or other liabilities of, Westpac or any other Westpac Group company and are subject to investment risk including possible delays in repayment and loss of income or capital invested; and
None of Westpac or any other Westpac Group company guarantees any particular rate of return on, or the performance of, any of the Managed Funds, nor do they guarantee the repayment of capital from any of the Managed Funds except as expressly set out in the Asset Allocation Advisory Agreement. ... (r) I/We understand the risks in connection with the Asset Allocation Advisory Agreement, the Loan and Security Agreement, the Managed Fund and the Dynamic Portfolio and have not relied on any representation (whether oral or written) from Westpac as investment, financial, legal or taxation advice as to their suitability to my/our circumstances." 157These are standard form clauses. There is no evidence that the defendants specifically brought these clauses to the attention of the plaintiffs, in the context where Mr Nazvanov was being asked specific questions about the intricacies of the GPS. 158A misleading or deceptive representation is not necessarily corrected by referring the representee to a document containing detailed terms and conditions. Any purported corrective or qualifying information must be sufficiently clear and sufficiently prominent if it is to prevent an inaccurate primary message from being misleading or likely to mislead and the degree of prominence required to dispel a false message increases with its potential to mislead: Australian Competition and Consumer Commission (ACCC) v TPG Internet Pty Limited at [58] - [59]. 159On the evidence in the present case, the generic declarations and clauses in the application form did not have the effect of communicating to the plaintiffs any relevant qualification in respect of Mr Nazvanov's advice. As a matter of fact, the plaintiffs relied on the advice to decide to enter into the GPS agreements. 160Similarly counsel for the plaintiffs submitted that the misleading or deceptive character of what Mr Nazvanov said was not ameliorated by providing the plaintiffs with the documents attached to Mr Nazvanov's email of 8 June 2007. I agree. Those documents did not purport to be a correction of what Mr Nazvanov later said on 22 June 2007. To the contrary, what he said on 22 June 2007 was properly understood by Mr Lee to be an explanation of what the documents contained. The documents did not correct Mr Nazvanov's incorrect statement with the same level of prominence or clarity as the simple and straightforward explanation he gave Mr Lee on 22 June 2007. 161As in Coco v Westpac Banking Corporation "[f]ar from the written material trumping anything [the representor] said, [the representor's] statements were directed at how the arrangements described in that written material worked. The statements qualified that which the written material contained. It was open to [the representor], particularly in response to the specific inquiries made of him, to tell the plaintiff that the answer was to be found in the written and legal material. This he did not do." (at [84]).

[23]

The conduct of the plaintiffs in relation to this investment 162The defendants submitted that Mr Lee had carelessly disregarded his own interests in order to make profit on the share market. They pointed out that Mr Lee did not read any of the relevant documents in relation to an investment of over $3 million and that, in relation to four of those documents, he had told Westpac that he had read them. The transactional documents would have revealed the matters Mr Lee said he did not know about the GPS. Furthermore, he had based his decision to invest on an erroneous assumption about the product after speaking with Mr Nazvanov. Mr Hawatt similarly chose not to read any of the documents, relying instead on Mr Lee. 163In Elders Trustee and Executor Co Limited v E G Reeves Pty Limited (1987) 78 ALR 193 at 241, Gummow J held: "It is, of course, fundamental that s 52 is not designed for the benefit of persons who fail, in the circumstances of the case, to take reasonable care of their own interests..." 164However, as Applegarth J pointed out in Suncoast Pastoral Company Pty Ltd v Coburg AG (No 2) Pty Ltd [2012] QSC 157 at [52], the view that the TPA (and, by analogy, the ASIC Act) was not intended to benefit persons who fail to take reasonable care for their own interests "is not supported by later decisions of the High Court and other courts which have considered the issue. This body of authority supports the proposition that the purpose of the Act was 'to protect the imprudent as well as the prudent', 'the trusting as well as the suspicious'." His Honour referred to Parkdale Custom built Furniture Pty Ltd v Puxu Pty Ltd at 214-215, among other cases. 165No doubt many investors would have chosen to read the documents in relation to the GPS in full. However, in light of the purpose of the ASIC Act and the relevant case law, my finding that Mr Nazvanov engaged in misleading or deceptive conduct is undisturbed by what the defendants allege in relation to the plaintiffs' conduct.

[24]

Principles in relation to causation 166To recover damages for misleading or deceptive conduct under s 12GF of the ASIC Act the plaintiffs must prove that they suffered loss or damage "by" conduct of another person that was in contravention of s 12DA. 167In Wardley Australia Ltd v State of Western Australia (1992) 109 ALR 247, Mason CJ, Dawson, Gaudron and McHugh JJ said, referring to an analogous provision in the Trade Practices Act (Cth), at 253: "The statutory cause of action arises when the plaintiff suffers loss or damage "by" contravening conduct of another person. "By" is a curious word to use. One might have expected "by means of", "by reason of", "in consequence of" or "as a result of". But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common sense concept of causation recently discussed by this court in March v Stramare (E & MH) Pty Ltd, except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had Parliament intended to say something else, it would have been natural and easy to have said so." 168Therefore, whether the plaintiffs' loss was caused by Mr Nazvanov's conduct is determined by approaching the matter in a common sense and practical way. However, common sense answers to questions of causation will differ according to the purpose for which the question is asked: Travel Compensation Fund v Tambree (2005) 224 CLR 627 per Gummow and Hayne JJ at [45]. 169Also in Travel Compensation Fund v Tambree, Gleeson CJ said at [30]: "In recent cases, this Court has pointed out that, in deciding whether loss or damage is "by" misleading or deceptive conduct, and assessing the amount of the loss that is to be so characterised, it is in the purpose of the statute, as related to the circumstances of a particular case, that the answer to the question of causation is to be found." 170The purpose of the ASIC Act is to provide relief for persons who have suffered loss by contravening conduct: Byrne v Cooke [2010] QSC 76 at [22]. I also consider that the discussion by Kirby J (in the minority) in Butcher at [179] - [181] is helpful. In that discussion, the Trade Practices Act (Cth) (and, by analogy, the ASIC Act) was said to be a "consumer protection statute". Therefore, the purpose of the ASIC Act suggests that s 12GF should be read as having wide, rather than narrow, application. 171The question is not what was the sole cause of the loss or damage which has been sustained; it is enough to demonstrate that contravention of s 12DA was a cause of the loss or damage sustained: I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41 at [57]. It follows that, even if the Court were persuaded that one cause of the plaintiffs' loss was their failure to properly study the documents or seek advice about them, the plaintiffs nonetheless would succeed provided that the misleading conduct was a cause of the loss. However, the conduct must have materially contributed to the loss: Henville v Walker (2001) 206 CLR 459. 172This case is similar to the fact scenario in Coco v Westpac Banking Corporation. Mr Lee attributed importance to what Mr Nazvanov told him, both in email form and orally. He addressed a specific question to Mr Nazvanov, namely, whether there would be a penalty if the plaintiffs decided to withdraw from the GPS investment and Mr Nazvanov responded to that query. 173Mr Lee gave evidence, which I accept, that he would not have entered into the GPS investments (either personally or through Sandstone), and would have advised Mr Hawatt against doing so, had the features of the GPS been properly explained to him. Taking into account the evidence as to the representations made, and the context in which they were made, it is my view that the conduct of Mr Nazvanov caused Mr Lee's loss for the purpose of s 12GF of the ASIC Act. 174I do not accept the submission by the defendants that the warranty contained in the documents that the plaintiffs "have not relied on any representation (whether oral or written) from Westpac as investment, financial, legal or taxation advice as to their suitability to my/our circumstances" (see Ex A:F15 203) means that the chain of causation is broken. 175If in fact misleading conduct has induced a contract, that fact cannot be negated by the mere circumstance that in the contract there is a clause stating the contrary. In Bowler v Hilda Pty Ltd (1998) 153 ALR 95 at 109, Heerey J said that there is: "... a substantial body of authority in this Court which holds that exclusionary and disclaimer clauses cannot override the 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 contravention of the statute: see the review by Burchett J in Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 at 556-558." 176In Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 at 556-557, Burchett J said: "A misrepresenter does not obliterate the effect of a misrepresentation clearly made, which induces an assent to proposed terms, by adding, as the time of final agreement approaches, a qualification capable of conveying merely that the misrepresentation, the substance of which is not withdrawn, may not be accurate in every detail and may require some, possibly quite minor, qualification. ... When a court comes to apply that principle to a case of a plain misrepresentation, said later to have been disclaimed, it should not allow fine textual analysis, nor the differently orientated rules of contract law, to distract it from seeing the obvious. A disclaimer or qualification will frequently have little or no effect on the impact of a misrepresentation. A man may tell a lie loudly, while murmuring the truth inaudibly, unconvincingly, or so blandly that it is unlikely to receive any hearing. Much the same may be true of a disclaimer which is inconspicuous, or very general, or apparently merely formal. This Court has, on a number of occasions, rejected defences based on clauses of the present kind in actions for contraventions of s 52. Once misrepresentation has been shown, the statute prevails over a formal disclaimer. If such a clause is to be effective, it must be by enabling the conduct as a whole (including in it the provision to the complainant of the document containing the clause) to be seen as not misleading." 177Mr Nazvanov was in contact with Mr Lee by email, telephone and in person and had been communicating with him in relation to investments since 2004. I have found that he made positive representations that were misleading, and that his silence in relation to certain matters was also misleading. The defendants cannot seek to escape liability by reason of a standard form clause contained in the GPS agreements. In this case I find that in fact Mr Lee suffered loss or damage "by" the contravening conduct of Mr Nazvanov.

[25]

Mr Hawatt's loss and damage 178Whether there is causal link between the Mr Nazvanov's conduct and Mr Hawatt's loss is a more difficult question. In Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58, the Court of Appeal (Sheller, Ipp and McColl JJA) said at [159]: "We accept [counsel's] submission that, whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s 82(1) of the Trade Practices Act 1974. Persons who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, "by" that conduct, they suffered loss or damage. As [counsel] pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation." 179Westpac submitted that the evidence establishes that Mr Hawatt would do what Mr Lee told him to do, so that Mr Hawatt has not suffered any loss by the defendants' conduct, although he may have suffered loss or damage by Mr Lee's conduct. Westpac further submitted that none of the evidence relied on for the representation was sent to or said to Mr Hawatt so that he has no case against Westpac in relation to any of the pleaded causes of action. I do not agree. Mr Lee's advice to Mr Hawaat did not come from a vacuum. Mr Hawatt was present when Mr Nazvanov had initially explained the features of the PEL investments. Mr Nazvanov was aware from the PEL transactions that Mr Hawatt left the decision-making in relation to the financial products to Mr Lee and therefore that Mr Hawatt was also going to borrow funds to invest in the GPS product based on what Mr Nazvanov told Mr Lee. Mr Nazvanov knew that his advice would be relayed to Mr Hawatt by Mr Lee. I accept Mr Hawatt's evidence that, had he known about the key features of the GPS in June 2007, he would not have agreed to invest in the scheme. 180As Giles JA observed, in the context of the Trade Practices Act (Cth), in Colly Cotton Marketing Pty Ltd v Simmons [2006] NSWCA 134 at [161], "to speak of reliance can be an artificial approach to causation". 181I am satisfied that, for the purposes of the ASIC Act, the misrepresentations caused Mr Hawatt's loss. I have reached this conclusion for two reasons: First, the terms of s 12GF of the ASIC Act are not to be unduly restricted. It is always a question of fact as to whether the loss or damage claimed has been caused "by" the misleading or deceptive conduct: see the discussion of Einstein J in HIH Insurance Limited (In Liquidation) v Adler [2007] NSWSC 633 commencing at [70]. Secondly, Mr Hawatt can establish causation through Mr Lee, who relayed Mr Nazvanov's misrepresentations to him in substantially the same terms. Mr Hawatt gave evidence that Mr Lee told him "We can get out after one year and one day without penalty". 182The case is analogous to the facts in Port Stephens Shire Council v Booth [2005] NSWCA 323, a negligence case in which purchasers of land were misled by the defendant council, through their agent, a solicitor. In that case Giles JA (with whom Beazley JA and Hunt AJA agreed), said at [147]: "Causation may be established by reliance on a misleading statement, or it may be otherwise established; there can be causation, including reliance, through an agent. It is not necessary that the purchasers themselves had read the terms of a s 149 [Environmental Planning and Assessment Act 1979] certificate and were misled by its terms, and causation may be established by proof that, because the certificate was misleading, the purchasers through [their solicitor] were not alerted to the forecast noise affectation and proceeded with their purchases when they would not have done so had the certificate been framed with reasonable care." 183Causation through an agent could extend to cover the facts in this case, namely reliance by an investor on another investor, who is relying on misleading representations. The investor who relies on the representations is therefore a link, rather a break, in the chain of causation. In this case I find that in fact Mr Hawatt suffered loss or damage "by" the contravening conduct of Mr Nazvanov.

[26]

Relief 184The damage suffered by the plaintiffs as a result of Mr Nazvanov's conduct is the interest payments they have made to date pursuant to the GPS loan agreements and the GPS interest loan agreements. As set out above, the parties agreed that the plaintiffs have paid $380,086.48 to the first defendant (Statement of Agreed Facts at [16]; see also T2). 185The plaintiffs submitted that they are entitled to damages plus interest. In The Owners Corporation Strata Plan 70579 v Midwest Constructions Pty Ltd [2012] NSWSC 644, Sackar J set out the purpose of awarding pre-judgment interest at [103] - [105]: "The High Court comprising Mason CJ, Dawson, Toohey and Gaudron JJ in Haines v Bendall (1991) 172 CLR 60 explained the underlying policy behind such an award at 66 - 67 as follows: An award of interest up to the date of judgment is an award of interest in the nature of damages: Fire and All Risks Insurance Co. Ltd. This statement acknowledges that the award of interest is an integral element in the attainment of the object of damages, namely, to compensate a plaintiff for injury sustained. Hence the award of interest is compensatory in character. ... In Thompson v. Faraonio, the Privy Council stated that "[t]he reason for awarding interest is to compensate the plaintiff for having been kept out of money which theoretically was due to him at the date of his accident" (emphasis added): see also Batchelor v. Burke, per Gibbs C.J.; M.B.P. (S.A.) Pty. Ltd. v. Gogic; cf. Ruby v. Marsh, per Barwick C.J. The award of interest for the period of delay in payment between the date of accrual of the cause of action and judgment affords the fair legal measure of compensation: Pheeney v. Doolan, per Reynolds J.A. Thus, it is the award of damages and, where appropriate, interest awarded on damages for the period up until the judgment takes effect which allows the plaintiff to be placed in or restored to the situation, as far as money can do, in which he or she would have been but for the defendant's negligence. ... As a general proposition a successful plaintiff will be entitled to an award of interest: Ruby v Marsh (1975) 132 CLR 642 at 644." 186The plaintiffs should have an order for damages against the defendants for the agreed amount plus interest. 187Mr Nazvanov's conduct has also caused the plaintiffs to undertake the continuing liability under the GPS agreements referred to in the Statement of Agreed Facts at [19]. The plaintiffs should have an order under s 12GM of the ASIC Act declaring the GPS agreements to be void and unenforceable. 188Costs are discretionary. Costs usually follow the event. The defendants are to pay the plaintiffs' costs as agreed or assessed.

Lee v Westpac Banking Corporation

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Judgment (29 paragraphs)

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Legislation Cited (3)

Cases Cited (27)

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