Lock v Australian Securities and Investments Commission

National Practice Area: Commercial and Corporations

Sub-area: Corporations and Corporate Insolvency

Counsel for the Plaintiffs: Mr AS Martin SC with Mr M Robinson SC, Ms J Lucy and Mr T Bagley

Solicitor for the Plaintiffs: Levitt Robinson Solicitors

Counsel for the Defendant: Mr JC Giles with Mr MJ Smith

Solicitor for the Defendant: Norton Rose Fulbright Australia

14 June 2016 In the Table of Contents the paragraph numbers for the last six headings have been amended to read: Control [246] Vulnerability [251] Assumption of responsibility or reliance [257] Reasoning by analogy [260] Conclusion [267] CONCLUSIONS ON STRIKE OUT APPLICATION [268]

14 June 2016 At the end of the second paragraph in the quoted extract in paragraph 136 the words "Mengel at 547" have been replaced with the words "the Mengel case 69 ALJR 527, 547".

AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGE: GLEESON J DATE OF ORDER: 4 february 2016

1. The further amended statement of claim filed on 28 July 2015 be struck out.
2. The plaintiffs pay the costs of the defendants' interlocutory application dated 28 April 2015. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT PLAINTIFFS AND GROUP MEMBERS [4] PRINCIPLES TO BE APPLIED ON A STRIKE OUT APPLICATION [7] PLEADED FACTS [12] Storm [13] The Storm Model [16] Collapse of Storm [19] Losses suffered by the plaintiffs and group members [25] The causal relationship between ASIC's conduct and the alleged losses [29] ASIC's dealings with Storm [41] Regional surveillance investigation [44] Regional Surveillance Decision [52] Prospectus and the prospectus investigation [63] Trailing commissions investigation [75] Breach reports and enforceable undertaking [78] ASIC AND THE STATUTORY CONTEXT FOR THE CLAIMS [82] Objects of the ASIC Act [83] ASIC's functions under the ASIC Act [84] ASIC's function under the Corporations Act [86] Chapter 7 of the Corporations Act [87] Provisions governing the conduct of Australian financial services licensees [89] ASIC's statutory powers [93] MISFEASANCE IN PUBLIC OFFICE [99] The alleged invalid or unauthorised conduct [99] Regional Surveillance Decision [100] Prospectus Investigation Decision [106] Breach of Prospectus Investigation Duty [110] Breach of Alternative Prospectus Investigation Duty [115] Section 42 of FASC: "In the event that a duty of care is necessary to establish misfeasance" [118] Legal principles [121] Bad faith [127] Elements of the tort of misfeasance in public office [128] Invalid or unauthorised omissions [131] Unlawfulness by reason of invalid exercise of power [133] Can an omission be unlawful where there is no duty to act? [136] Malice [139] Is the relevant conduct capable of being found to be unlawful conduct which caused loss to the plaintiffs? [142] Regional surveillance and prospectus investigation decisions [142] Breaches of the Prospectus Investigation Duty and alternative prospectus investigation duty [150] Conclusion [154] Does FASOC plead malice sufficiently? [155] Allegations of improper and unlawful motive [157] Allegations of bad faith [164] Regional Surveillance Decision [165] Prospectus Investigation decision and breaches of Prospectus Investigation Duty and Alternative Prospectus Investigation Duty [171] Allegation that ASIC did not make a real attempt to comply with its obligations [173] ASIC's alleged bad faith as to the risks of harm [178] Allegation that ASIC's actions in 2008 impeach its inaction in 2007 [186] Conclusion on claims of tort of misfeasance in public office [188] NEGLIGENCE [189] The alleged negligence [189] The alleged duties of care [192] ASIC's contention: no duty of care [194] Considering duty of care on a strike out application [195] Affirmative duty of care on a statutory authority [201] Claim for damages for pure economic loss [210] Duty to control a third party's conduct [213] Duty to warn [214] Absence of direct relationship between ASIC and the plaintiffs and group members [217] ASIC's role [219] ASIC's first argument: alleged duty is inconsistent with ASIC's functions and objects [232] ASIC's second argument: salient facts do not support imposition of duty of care [242] Foreseeability [242] Control [246] Vulnerability [251] Assumption of responsibility or reliance [257] Reasoning by analogy [260] Conclusion [267] CONCLUSIONS ON STRIKE OUT APPLICATION [268]

GLEESON J: 1 By application dated 28 April 2015, the defendant ("ASIC") seeks an order pursuant to rule 16.21(1) of the Federal Court Rules 2011 (Cth) that the plaintiffs' amended statement of claim be struck out. 2 On 23 July 2015, the plaintiffs served a proposed further amended statement of claim ("FASOC") which was filed, with minor amendments, on 28 July 2015. The strike out application is now directed to the FASOC. 3 The FASOC attempts to plead a claim against ASIC based on the torts of misfeasance in public office and negligence in connection with ASIC's regulation of Storm Financial Ltd ("Storm"), which held an Australian financial services licence ("AFS licence") issued under the Corporations Act 2001 (Cth) ("Corporations Act"). There is no allegation that ASIC had any direct dealings with any of the plaintiffs or the group members. In summary, the case is that ASIC's conduct in regulating or failing to regulate Storm resulted in clients of Storm suffering financial loss. In particular, the plaintiffs complain of ASIC's failure in late 2007 to impose conditions on Storm's licence and/or to inform the market of its concerns regarding Storm.

PLAINTIFFS AND GROUP MEMBERS 4 The proceeding is a representative action brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) ("Federal Court Act"). The plaintiffs and the persons whom the first and second plaintiffs represent in the proceeding are persons who: (1) received financial planning and advice services from Storm; (2) pursuant to advice from Storm, used loans to acquire financial products; and (3) at some time between 1 November 2007 and 31 January 2009, held investments in unit funds bearing Storm's brand or otherwise endorsed by Storm to its clients, which funds were index funds indexed to a particular sector of the Australian stock market ("Storm Index Funds"). 5 The group members received advice from Storm over a period between about 1995 and December 2008, which advice they accepted in whole or in part. 6 The third plaintiff represents a sub-class of the group members, comprising Storm clients who held units in the Storm Index Funds of which the responsible entity was Colonial First State Investments Ltd ("Colonial FS") in the immediate lead up to the termination of those funds.

PRINCIPLES TO BE APPLIED ON A STRIKE OUT APPLICATION 7 Rule 16.21(1) provides relevantly that a party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading fails to disclose a reasonable cause of action, or is likely to cause embarrassment in the proceeding. 8 It must be apparent on the face of the statement of claim that the facts pleaded, if proved, would establish the cause of action relied upon by the relevant plaintiff or plaintiffs. In Wride v Schulze [2004] FCAFC 216 at [25], a Full Court said: …the pleadings must disclose a reasonable cause of action against the party against whom the cause of action is brought and must state all material facts necessary to establish that cause of action and the relief sought. A "reasonable cause of action" for this purpose means one which has some chance of success if regard is had only to the allegations and the pleadings relied on by the applicant. 9 The power to strike out a pleading because it discloses no reasonable cause of action will be exercised only in a plain and obvious case: Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97; (2012) 203 FCR 325 at [43] and [44]. 10 A pleading may be struck out as embarrassing if it simply asserts a conclusion to be drawn from facts not stated: Trade Practices Commission v David Jones (Australia) Pty Ltd (1983) 7 FCR 109 at 114. In Spiteri v Nine Network Australia Pty Ltd [2008] FCA 905, Edmonds J said, concerning the predecessor rule to r 16.21: 22. Embarrassment … 'carries the connotation of a pleading which is susceptible to various meanings, or contains inconsistent allegations or in which alternatives are confusingly intermixed or in which irrelevant allegations are made tending to increase expense. The list is not intended to be exhaustive': Bartlett v Swan Television and Radio Broadcasters Pty Ltd (1995) ATPR 41-434. 23. A pleading which is internally inconsistent is embarrassing: Vasyli v AOL International Pty Ltd (NG 219/96) Lehane J, 19 August 1996, unreported. A pleading should assert the basic and constituent facts, not the evidence upon which those facts will or may be proved at trial. A pleading is defective if it simply asserts a conclusion to be drawn from the facts not stated: Trade Practices Commission v David Jones (Australia) Pty Ltd (1985) 7 FCR 109 at 114 - 115; and is not saved by using the words '[i]n the premises' to introduce the conclusion: Davids Holdings Pty Ltd v Coles Myer Ltd (1993) ATPR 41-227. 24. The pleading should enable the respondent to know, with sufficient clarity, the case which it is required to meet: Dare v Pulham (1982) 148 CLR 658 at 664. 11 For the purposes of the strike out application, the Court assumes that the facts as alleged in the FASOC can be established at trial: Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537 at [6].

PLEADED FACTS 12 Apart from preliminary matters, the FASOC is organised into chapters under the following headings: (1) Storm; (2) First plaintiff's involvement with Storm; (3) Second plaintiff's involvement with Storm; (4) Third plaintiff's involvement with Storm; (5) Group members' involvement with Storm; (6) Collapse of Storm; (7) ASIC's relationship with Storm; (8) Misfeasance in public office; (9) Negligence.

Storm 13 Storm's business was regulated under Division 3 of Part 7.7 of Chapter 7 of the Corporations Act. The business included providing to "retail clients" within the meaning of s 761G of the Act "financial product advice" and "personal advice" within the meaning of s 766B, "financial products" as defined in Division 3 of Part 7.1 of the Act and "financial services" as defined in Division 4 of Part 7.1 of the Act. 14 At all relevant times Emmanuel and Julie Cassimatis were the joint executive directors and sole beneficial shareholders of Storm. 15 Storm was placed into liquidation on about 26 March 2009: ASIC, in the matter of Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) v Storm Financial Ltd (Receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 269.

The Storm Model 16 The "Storm Model" of financial advice was developed over the period between about 1994 and 2004. The plaintiffs summarised their case about their dealings with Storm as follows: Once accepted as a client, each group member was provided with substantially the same advice (known as the 'Storm Model': FaSOC [7.1] and [10.1]). Particular aspects of the Storm Model are relevant to the plaintiffs' claims: (a) It required clients to commit to Storm's Philosophy and invest a substantial amount of time and money in investing with Storm: FASoC [6.2] and [10.4]; (b) It required clients to pay significant upfront fees to participate in the model (for example, the First Plaintiff had an annual income of $49,000 and paid an upfront fee of $25,699 in August 2007 and $13,921 in November 2007: FASoC [11.2), [11.8] and [12.2]); (c) It created a conflict of interest between Storm and its clients. Storm's clients paid upfront fees of 7% for each unit in a Storm index fund and 0.5% trailing commissions each year: FASoC [9.1]. As such, Storm was incentivised to advise clients to borrow more to invest in its funds and only move money out of one fund if it went into another Storm fund (whereby the client would have to pay a further upfront fee): FASoC [9.2] and [9.3]; (d) The initial advice was prepared centrally, and did not properly take into account the individual circumstances of the investor. Essentially, each investor was provided with initial advice to use all available equity, and as much leverage as the investor could obtain, to invest in index funds that Storm branded or endorsed: FASoC [6.5(d)], [6.5(e)] and [6.6]; and (e) Following the initial advice, Storm would provide further investment advice to clients. This additional advice was generated automatically and almost entirely based on how changes in the value of the Storm index funds had affected a client's loan to value ratio (with the loan to value ratio being monitored by a software program called 'Phormula'): FASoC [8.1]. So, if the market went up, Storm's investors would borrow to purchase more units in Storm funds: FASoC [6.5(e)] and [7.2]. But, if the market fell, Storm's investors were also automatically advised to also borrow to purchase more units in Storm funds: e.g. FASoC [6.5(e)] and [13.2]. The substantial upfront fees meant that the Storm Model only produced positive returns for its clients while the market was rapidly growing: FASoC [6.7], [6.8]. The high fees, high leverage, and centralised advice to increase their leverage and exposure to the market during periods of market stress, created a substantial risk of loss if the market fell or grew at a low rate. For example, the First Plaintiff received investment advice from Storm in November 2007 to borrow $157,000 against his home loan and $105,000 in a margin loan to invest in Storm index funds (as well as borrowing to pay Storm's fees in paragraph 3(b) above): FASoC [11.12] and [12.2]. In December 2007, following an 8.18% fall in the ASX, the First Plaintiff was advised by Storm to increase his margin lending facility from $105,000 to $121,114 and invest those funds (minus Storm's fees) in Storm index funds: FASoC [13.2] and [13.13]. In April 2008, following a further 7% fall in the ASX, the First Plaintiff was advised to increase his margin loan account from $122,982 to $ 181,718 and invest those funds (minus Storm's fees) in Storm index funds: FASoC [14.3]. In other words, the First Plaintiff was advised by Storm's automatic financial advice system to borrow the equivalent of his annual income to invest in a market that had fallen 15% over the previous five months. Although not expressly alleged in the FASoC, the plaintiffs and group members expect to lead evidence at trial that by the time the First Plaintiff redeemed his units on 1 January 2009 the equity value of the First Plaintiff's investments had fallen from $148,154.57 (as at 31 March 2007) to approximately $17,000 (i.e. he had lost approximately 88.5% of his investment after paying back the debt), in circumstances where, pursuant to Storm's advice, the initial equity contribution had been raised by mortgaging his home. 17 The plaintiffs allege that, in designing the Storm Model, Storm failed to consider the potential impact on its clients of a protracted flat market or of a sharp or prolonged market downturn, during which the costs incurred by the clients' loans, together with the fees associated with their investments, would be higher than the level of growth in the market. 18 It is also alleged that Storm's institutional policy was to provide advice solely in accordance with the Storm Model.

Collapse of Storm 19 As a consequence of the "Global Financial Crisis", from late 2007 and over the course of 2008, the stock market in Australia went through a prolonged and sustained decline in value. Accordingly, the values of units in Storm Index Funds also went through a prolonged and sustained decline over that period. 20 In early October 2008, Storm sent a letter of advice to all its geared clients recommending that they switch either up to 50% or up to 100% of their entire Storm portfolios into cash and requesting that clients provide to Emmanuel Cassimatis authority to effect that switch at its discretion. This advice is referred to as the "October letter". 21 It is alleged, in particular, that the October letter was sent in breach of Storm's AFS licence, which provided that Storm was not permitted to operate a discretionary portfolio account. 22 The plaintiffs and the majority of the group members provided the consent requested in the October letter. As it turned out, the investments of the plaintiffs and the majority of the group members were not switched to cash in October 2008. 23 In early December 2008, the Commonwealth Bank of Australia ("CBA") lowered the loan to value ratios applicable to the Storm Index Funds managed by Colonial FS and Challenger Managed Investments Ltd. This led to CBA peremptorily redeeming the group members' remaining holdings in those funds and selling all equities secured by their CBA margin loans. 24 Between about 10 December 2008 and 31 January 2009, the Storm Index Funds managed by Colonial FS and Challenger Managed Investments Ltd were terminated by the relevant responsible entities.

Losses suffered by the plaintiffs and group members 25 The particulars to paragraph 43.5 of the FASOC identify the losses suffered as a result of the alleged misfeasance in public office as: (a) The difference between the respective financial positions of the plaintiffs and the group members had ASIC required an enforceable undertaking from Storm and its promoters to restrain them from providing financial product advice, personal advice, financial services, or the provision of financial products, on or before 31 January 2008, and their current respective financial positions; and (b) The respective financial position of the third plaintiff and the members of the sub-class had ASIC begun an investigation into Colonial FS under Part 3 of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") on or about 29 October 2008, and their current respective financial positions. 26 The FASOC states that further particulars of the claims of the plaintiffs and the group members will be provided in due course. 27 By paragraph 47.1 of the FASOC, the same loss is said to have resulted from ASIC's negligence. 28 As to paragraph 43.5(a), ASIC's statutory powers do not include a power to require the provision of an enforceable undertaking: see s 93AA(1) of the ASIC Act. The plaintiffs do not contend that ASIC had such a power. It follows that the case for the losses based on ASIC's failure to require an enforceable undertaking must fail: no loss could have been suffered by reason of ASIC's failure to do something which it had no power to do. Accordingly, I would strike out particular (a) of paragraph 43.5.

The causal relationship between ASIC's conduct and the alleged losses 29 Paragraph 43.4 of the FASOC alleges that, as a result of ASIC's "failure to exercise its Powers and/or Additional Powers lawfully and in good faith": (a) the plaintiffs and group members did not arrange their affairs in accordance with prudent financial advice tailored to their individual circumstances, and instead arranged their affairs in accordance with financial advice provided by Storm; and (b) the first and second plaintiffs, and group members, became liable to receive margin calls and had their units in Storm Index Funds peremptorily redeemed when the ASX was close to its nadir; and (c) the third plaintiff, and other group members whose units were not redeemed, were compelled to sell down their investments at a time when the ASX was close to its nadir. 30 Thus, the case is not that ASIC's conduct was the direct and immediate cause of the plaintiffs' and group members' losses. Rather, the case is that ASIC's conduct led the plaintiffs and group members to experience certain events, or failed to protect them from experiencing certain events which occurred, by which events losses were suffered. 31 Paragraphs 43.2 and 43.3 of the FASOC plead: 43.2 Had ASIC exercised its Powers and/or Additional Powers lawfully and in good faith, the Plaintiffs and Group Members would, in or prior to late 2007, have: (a) been made aware of the risks of investing according to the Storm Model; (b) addressed those risks through seeking prudent financial advice tailored to their individual circumstances; and (c) been advised to sell down their units in the Storm Index Funds in order to repay some or all of their loans. 43.3 Had ASIC exercised its Powers and/or Additional Powers lawfully and in good faith, the Plaintiffs and Group Members would, in the course of late 2007 and/or early 2008: (a) the plaintiffs and group members would have arranged their affairs in accordance with prudent financial advice tailored to their individual circumstances, rather than in accordance with the financial advice provided by Storm; and (b) accordingly, the first and second plaintiffs, and group members, would have avoided becoming liable to receive margin calls and having their units in the Storm Index Funds redeemed, in which case the Colonial FS-managed Storm Index Funds would not have been terminated during a time when the market was at a record low, and the unit holdings of the Third Plaintiff and the members of the Sub-Class would not have been forcibly redeemed. 32 It is not clear whether it is alleged that some or all of the plaintiffs and group members would not have acquired units in Storm Index Funds and borrowed money to acquire those units, had ASIC acted lawfully. Paragraph 43.2 (particularly paragraph 43.2(c)) suggests that this is not the case put against ASIC. Rather, the complaint appears to be that the plaintiffs and group members did not receive advice (from a financial adviser or, perhaps, from ASIC) to "sell down" their units in the Storm Index Funds in order to reduce or repay their borrowings. However, there is no stated basis for a case that ASIC's failure to exercise its statutory powers prevented the plaintiffs and group members from obtaining such advice from a financial adviser. 33 Paragraph 43.3 does not identify the prudent financial advice which would have enabled the plaintiffs and group members to have avoided becoming liable to receive margin calls and having their units in the Storm Index Funds redeemed. Would it have been advice not to acquire units in the Storm Index Funds, not to borrow money to acquire units, to sell units or some other advice? Nor does paragraph 43.3 state facts by which ASIC's exercise of statutory powers would have caused the plaintiffs and group members to obtain prudent financial advice. The case might be that, if ASIC had exercised its statutory powers, the plaintiffs and group members would have sought and obtained prudent financial advice because Storm would have been prevented from giving advice or because the plaintiffs and group members would have realised that they should obtain advice from someone other than Storm. 34 The "Powers and/or Additional Powers" referred to in paragraphs 43.2 to 43.4 comprise eight statutory powers, described at paragraphs 94 and 95 below. In paragraph 43.1 of the FASOC, there are four positive actions that, it is alleged, ASIC would have taken in about late 2007 if it had exercised its relevant powers according to law, being: (a) The imposition on Storm of an enforceable undertaking similar in substance to an undertaking proposed on 20 December 2008, described below; (b) The imposition on Storm of conditions on its AFS licence similar in substance to the proposed enforceable undertaking of 20 December 2008; (c) Making its concerns regarding Storm known to the public, by way of media release or otherwise; (d) Taking other reasonable action in order to protect the interests of Storm's clients. 35 Paragraph 35.16 of the FASOC sets out clause 5.1(a) and (b) of the proposed enforceable undertaking of 20 December 2008, as follows: (a) Storm will not, before [31 December 2009], engage with (except in compliance with clause 5.1(c), (d) and (e) of this Enforceable Undertaking) and/or provide financial services to any of Storm's clients in relation to or in connection with: (i) any existing margin loan; or (ii) the use of debt directly or indirectly in order to acquire financial products; or (iii) the management of any financial products in connection with a geared portfolio. (b) Storm will not, before [31 December 2009], engage with (except in compliance with clause 5.1(c) of this Enforceable Undertaking) and/or provide financial services to any new clients in relation to or in connection with: (i) the use of debt directly or indirectly in order to acquire financial products; or (ii) the management of any financial products in connection with a geared portfolio. 36 Clauses 5.1(c), (d) and (e) of the proposed enforceable undertaking are not pleaded. 37 As noted above, ASIC had no power to impose on Storm an enforceable undertaking. Accordingly, there is no basis for the allegation in paragraph 43.1(a) and I would strike out that sub-paragraph. 38 Paragraph 43.1(d) is so vague that it is liable to be struck out. In order to properly articulate a case based on a failure to act, the plaintiffs must identify what particular acts it is alleged that ASIC was obliged to have done. Accordingly, I would also strike out sub-paragraph 43.1(d). 39 Once these subparagraphs are struck out, the remaining case is that, if ASIC had acted lawfully, it would have imposed conditions on Storm's financial services licence and/or made its concerns regarding Storm known to the public. 40 These allegations suggest that the case may be that ASIC: (1) failed to prevent Storm from providing financial services which services the plaintiffs and group members would not otherwise have received, and as a result, they altered their financial situation to their detriment by, for example, acquiring units in Storm Index Funds and borrowing money to finance those acquisitions; (2) failed to prevent Storm from providing financial services which services the plaintiffs and group members would not otherwise have received, and as a result, they failed to alter their financial situation by, for example, not selling units in Storm Index Funds and using the sale proceeds to reduce or repay the borrowing which had financed the acquisition of the units, to their detriment; (3) failed to warn the public of matters concerning Storm which, if known, would have caused the plaintiffs and group members to refrain from taking financial services from Storm.

ASIC's dealings with Storm 41 Section 30 of the FASOC ("Relationship prior to November 2007") pleads facts concerning ASIC and its predecessor's dealings with Emmanuel Cassimatis prior to November 2007 and the AFS licences granted to predecessor entities to Storm. 42 There was correspondence between the Australian Securities Commission (the predecessor to ASIC) ("ASC") and Mr Cassimatis in October 1993, that is, before the development of the Storm Model. 43 In November 1995, following an inspection of Storm, ASC officers wrote to Mr Cassimatis stating, among other things, that Storm was in breach of disclosure obligations and had not adequately disclosed to its clients the risks involved with investing in the securities that Storm was then recommending. After receiving a response from Mr Cassimatis, the ASC decided not to take, and did not take, any further action.

Regional surveillance investigation 44 Section 31 of the FASOC (entitled "The Regional Surveillance Investigation") pleads facts concerning an investigation in 2005, during which ASIC sought and obtained documents from Storm in order, inter alia, to review Storm's compliance with its AFS licence conditions, and detect and address misconduct and systemic issues. In March 2005, two officers of ASIC (Mr Holiday and Mr Armstrong) met with Storm personnel to discuss the audit and, in the course of that meeting, the ASIC officers had the Storm Model explained to them in detail by Mr and Mrs Cassimatis. 45 After receiving documents from Storm, ASIC conducted an audit of the documents. 46 The plaintiffs allege that, following the March 2005 meeting ASIC, through Mr Holiday and Mr Armstrong, knew or ought to have known the following matters: (1) That Storm "did not as a matter of practice, or probably did not as a matter of practice, give such consideration to, or conduct such investigation of, the subject matter of the advice as was reasonable in all of the circumstances, within s 945A(1)(b) of the Corporations Act". Having regard to the language of s 945A(1)(b), set out in full at paragraph 49 below, the "advice" was "personal advice" given to a person as a "retail client": s 944A. "Personal advice" is defined by s 766B(3) to mean financial product advice given or directed to a person in circumstances where the provider of the advice has considered one or more of the person's objectives, financial situation and needs or a reasonable person might expect the provider to have considered one or more of those matters (FASOC [31.5]); (2) That Storm was providing, or was probably providing, advice which was not appropriate to each of its clients, having regard to the consideration it was required to give and the investigation it was required to conduct within s 945A(1)(c) of the Corporations Act (FASOC [31.6]); (3) That Storm's system of providing financial advice to clients resulted, or probably resulted, in Storm consistently contravening s 945A(1) of the Corporations Act when providing financial advice to clients (FASOC [31.7]). 47 These are not clear and unequivocal allegations of actual knowledge. It is not alleged that ASIC had actual knowledge of a contravention of s 945A in relation to any particular client or clients. In Armitage v Nurse [1998] Ch 241 at 257, Millett LJ noted that an allegation that the defendant "knew or ought to have known": …is not treated as making two alternative allegations, i.e. an allegation (i) that the defendant actually knew with an alternative allegation (ii) that he ought to have known; but rather a single allegation that he ought to have known (and may even have known - though it is not necessary to allege this). 48 The particulars provided to support the allegations as to ASIC's state of knowledge set out above comprise the following facts allegedly learned at the March 2005 meeting: (1) Storm's advisers had no authority to prepare advice for clients; (2) All advice was prepared by a central committee; (3) Storm's advice required rigid discipline; (4) Storm's typical advice was that clients use debts to purchase units in Storm-badged Index Funds; (5) Storm encouraged clients first to borrow against their property and then take out margin loans in order to purchase units in the funds; and (6) Storm advised additional investment through borrowing in response to changes in clients' loan to value ratios resulting from movements in the market. 49 At the relevant time, s 945A(1) provided: (1) The providing entity must only provide the advice to the client if: (a) the providing entity: (i) determines the relevant personal circumstances in relation to giving the advice; and (ii) makes reasonable inquiries in relation to those personal circumstances; and (b) having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and (c) the advice is appropriate to the client, having regard to that consideration and investigation. 50 The six particulars are not inconsistent with compliance with s 945A. For example, it is not alleged that ASIC knew or ought to have known that Storm had not determined the relevant personal circumstances in relation to giving any particular advice, or that it did not, as a matter of practice, make such a determination. Nor is it alleged that ASIC knew or ought to have known that Storm had not made reasonable inquiries in relation to personal circumstances in connection with any particular advice, or that it did not, as a matter of practice, do so. 51 At paragraph 31.4 of the FASOC it is alleged that, during the March 2005 meeting, one of the ASIC officers in attendance "raised a concern that, as reviews of client circumstances were driven by movements in the market, and Storm's clients were being processed en masse, Storm would face challenges in complying with the regulations regarding provision of financial advice". It is not alleged that the relevant ASIC officer was acting dishonestly or otherwise than in good faith in raising this matter as a "concern".

Regional Surveillance Decision 52 The plaintiffs allege that, on about 29 March 2005, following the conclusion of the regional surveillance investigation, ASIC through Mr Holiday and another ASIC officer, Mr Eastment, identified particular breaches of the Corporations Act for ASIC to request that Storm address (which did not include a breach of s 945A(1)), but otherwise decided to take no further action. It is not alleged that any ASIC officer identified any breach of s 945A but deliberately failed to request that Storm address any such breach. 53 In the chapter of the pleading entitled "Misfeasance in public office", there is a further allegation that ASIC, through Mr Holiday and Mr Eastment, "considered whether to, and decided to not, exercise its Powers and/or Additional Powers to take any further regulatory or enforcement action in relation to the risks identified at paragraph 36.2(a)" of the FASOC. Paragraph 36.2(a) is set out at paragraph 58 below. It is this decision which is described in the FASOC as the "Regional Surveillance Decision". 54 On 29 March 2005, ASIC wrote to Storm, advising it of the outcomes of the audit, including findings that Storm had breached various obligations. Storm responded by advising ASIC that it would ensure that it addressed most of the breaches raised. After receiving Storm's response, ASIC through officers including Messrs Holiday, Eastment and Armstrong decided not to take, and did not in fact take, any further action with respect to the "concerns raised" during the regional surveillance investigation. 55 Paragraph 36.2(a) of the FASOC pleads relevantly that, at the conclusion of the regional surveillance investigation, ASIC through officers including the "Regional Surveillance Officers" and the "Prospectus Investigation Officers" knew of "the risk that Storm's conduct posed to the plaintiffs and group members". The definitions section of the FASOC refers the reader to paragraph 36.2(b) for "Regional Surveillance Officers" and 36.2(a) for "Prospectus Investigation Officers" but neither of these paragraphs identifies the relevant officers. The "Regional Surveillance Officers" are defined, at paragraph 31.11, to include Mr Holiday, Mr Eastment and Mr Armstrong. At paragraph 33.18, five ASIC officers are named as officers involved in the "Prospectus Investigation". 56 It is not alleged that ASIC's officers had any particular knowledge of any of the plaintiffs or the group members. At the time of the conclusion of the regional surveillance investigation, the first and third plaintiffs were not yet clients of Storm. Presumably, the group members comprise a mix of persons who were current and future clients of Storm at the time of the conclusion of the regional surveillance investigation. 57 The nature of the risk posed by Storm's conduct is not specified in the FASOC. Clearly, it is a risk of financial loss but the precise hazard or hazards are not identified. Paragraph 36.2(a) pleads that by no later than the conclusion of the regional surveillance investigation, the "Regional Surveillance Officers" knew of "the risks posed" by the following matters: (i) Storm's advisers had no authority to prepare advice for clients and all advice was prepared by a central committee; (ii) Storm's clients were encouraged to borrow against their property and also to take out margin loans in order to fund their investments; (iii) Storm advised clients to make additional, leveraged, investments in response to changes in clients' loan to value ratios as a result of market movements; (iv) As a result of (i) to (iii) above, Storm was unable to properly comply with the law regarding the provision of financial advice, including s 945A of the Corporations Act; (v) Storm had failed to adequately disclose to its clients the risks inherent in its advice and had a history of failing to disclose the risks involved in investing in financial products; (vi) Storm failed to comply with statutory requirements regarding its holding itself out as an "independent" financial planner; (vii) Storm had a record of representing to its clients that it was an "independent" financial adviser despite not meeting the requirements for the use of that terms under s 923A of the Corporations Act by virtue of receiving trailing commissions from financial institutions; (viii) Storm had a record of failing to address possible breaches of its obligations when notified of ASIC's suspicions of those breaches; (ix) In the premises of (i) to (viii), Storm systematically made misrepresentations to its clients, in breach of s 12DA of the ASIC Act and/or s 1041H(1) of the Corporations Act. 58 Paragraph 36.2(a)(iv) does not follow, as a matter of inference, from (i) to (iii). Putting aside the ambiguity of the words "unable to properly comply", in order to allege that Storm had not complied with, or did not comply with, s 945A, it is necessary to allege that Storm had provided advice without complying with the elements of s 945A. Paragraphs 36.2(a)(i) to (iii) do not, without more, demonstrate non-compliance with any particular requirement of s 945A. 59 Paragraph 36.2(a)(ix) also does not follow, as a matter of inference, from (i) to (viii). In order to make an allegation that Storm systematically made misrepresentations, it is necessary to identify the representation or representations systematically made and the falsity of that representation or those representations. The only sub-paragraph which might satisfy these requirements is (vii), although it is not clear what is meant by the words "had a record" in that sub-paragraph. 60 The particulars set out below paragraph 36.2(a) "repeat the matters pleaded in" sections 30, 31 and 36.1 of the FASOC. Section 30 ("Relationship prior to November 2007") and section 31 ("Regional surveillance investigation") are summarised above. The matters in those sections do not support the allegation of knowledge in paragraph 36.2(a). In particular, knowledge cannot be inferred from matters that ought to have been known. As noted above, the allegations of state of mind in section 31 are not distinct allegations of knowledge. 61 Paragraph 36.1 alleges that the knowledge that ASIC's officers obtained during their investigations is attributed to ASIC. 62 These particulars do not assist to identify the risk that Storm's conduct posed to the plaintiffs and group members of which ASIC is alleged to have been aware. It could not be suggested that the plaintiffs and group members made investments in Storm Index Funds in the belief that the investments were risk-free. Based on paragraph 43.2(c) of the FASOC, the risk intended to be alleged may be a risk that the plaintiffs and group members would not decide to sell an investment in a Storm Index Fund that they would have sold had they been sufficiently informed of the risks entailed in retaining the investment.

Prospectus and the prospectus investigation 63 Section 32 of the FASOC pleads facts in connection with Storm's lodgement of a prospectus with ASIC in November 2007 for the offer of shares to the public. The alleged facts include that various ASIC officers were aware of the contents of the prospectus as a result of its lodgement. 64 Section 33 of the FASOC is entitled "Prospectus investigation". Relevantly, it is alleged: (1) In about mid-2007, an ASIC officer profiled Storm and noticed some matters which he considered to be highly unusual being: (a) Storm claimed no further service was provided to earn trail commissions, but it referred to extensive ongoing "servicing" provided to clients; and (b) Revenues of $44 million were generated by 34 advisers; (2) On 7 November 2007, an ASIC officer assessed the recently lodged prospectus as being "high risk" and referred the matter for full surveillance; (3) On 12 November 2007, ASIC advised Storm that it would visit Storm's offices to better understand Storm's advice model and its "Phormula" system described in the prospectus; (4) Three ASIC officers, Ms Korpi, Ms Jong and Ms Koromilas, visited Storm's office on 13 November 2007, at which they were told certain things set out in the FASOC and received a typical Storm Statement of Advice under s 761A of the Corporations Act; (5) After the meeting, one of the ASIC officers determined that Storm's business model was "innovative" and therefore Storm's representation to that effect was not misleading or deceptive. 65 Section 761A defines a "Statement of Advice" to mean a Statement of Advice required by s 946A to be given in accordance with Subdivisions C and D of Division 3 of Part 7.7. 66 At paragraphs 33.15 to 33.17, the plaintiffs allege that, following the 13 November 2007 meeting, ASIC through Ms Korpi, Ms Jong and Ms Koromilas, knew or ought to have known the following matters: (1) That Storm "did not as a matter of practice, or probably did not as a matter of practice, give such consideration to, or conduct such investigation of, the subject matter of the advice as was reasonable in all of the circumstances, within s 945A(1)(b) of the Corporations Act"; (2) That Storm was providing, or was probably providing, advice which was not appropriate to each of its clients, having regard to the consideration it was required to give and the investigation it was required to conduct, within s 945A(1)(c) of the Corporations Act; (3) That Storm's system of providing financial advice to clients resulted, or probably resulted, in Storm consistently contravening s 945A(1) of the Corporations Act when providing financial advice to clients. 67 This language repeats the language of paragraphs 31.5 to 31.7 of the FASOC. 68 The particulars provided to support the allegations as to the ASIC officers' states of mind following the 13 November 2007 meeting comprise the following facts allegedly learned at the meeting: (1) Storm's process for issuing a statement of advice being: (a) First, the client meets with a "para planner", who gathers information about the client and its financial circumstances; (b) Second, the information gathered is referred to a central panel in Storm's head office in Townsville; (c) Third, the information is used to prepare a draft statement of advice in the central office; (d) Fourth, the central panel signs off on the statement of advice; (e) Fifth, the statement of advice is provided to the adviser; and (f) Sixth, the adviser meets with the client to discuss the statement of advice; (2) Storm's process for issuing a statement of advice was calculated to "ensure consistency of advice and remove any bias of the individual adviser"; (3) Storm's client education process was specifically designed to filter out potential clients who were not "long term, disciplined and [did not] have the same attitude as Storm"; (4) Storm did not divide its clients into categories, as other financial advisory firms did; and (5) Storm's provision of financial advice to clients was automated in order to free up time for advisers to spend with clients instead of preparing advice for clients. 69 Again, these particulars do not support the allegations that the ASIC officers knew or ought to have known that Storm was acting in contravention of s 945A, in the absence of any allegation that they knew or ought to have known of one or more facts from which it could be inferred Storm had failed to comply with one or more of the requirements of s 945A. 70 Paragraph 33.18 alleges that, after the 13 November 2007 meeting with Storm, the relevant ASIC officers decided: (a) To launch the "trailing commissions investigation"; (b) To make a s 739 order to prevent the initial public offering of Storm's stock to the public, pending the resolution of the trailing commissions "issue"; (c) Not to take any further steps with respect to the matters raised in and issues identified during the prospectus investigation. 71 Paragraph 39.9 of the FASOC alleges that, by 16 November 2007, ASIC through the "Prospectus Investigation Officers" (including at least Ms Korpi and Ms Jong) "considered whether to, and decided to not, exercise ASIC's Powers and/or Additional Powers to take any further regulatory or enforcement action in relation to the risks identified at paragraph 36.2" of the FASOC. 72 Paragraph 36.2(b) of the FASOC pleads that, at the conclusion of the prospectus investigation, ASIC through the "Prospectus Investigation Officers" knew the following matters: (i) Storm did not divide its clients into categories for the purpose of providing them with financial advice; (ii) The Storm Model was based on the provision of centralised advice that was prepared automatically; (iii) The automatically generated advice failed to take into account the individual needs of investors; (iv) The Storm Model was highly leveraged, and the "Additional Step Investments" would cause clients to increase their leverage during periods of market downturn (by making "Recovery Steps"); (v) As a result of matters set out at (i) to (iv) above, the Storm Model posed significant risk to investors during periods of negative changes in market conditions; (vi) Storm's clients would not receive financial advice appropriate to their individual circumstances as, to the knowledge of the "Prospectus Investigation Officers": A. each of Storm's financial advisers handled approximately 400 clients, which ASIC, and in particular Deborah Koromilas, knew to be far more clients than most financial advisers handled; B. Storm's financial advisers spent substantially less time planning advice for their clients than did most financial advisers; C. the financial advice provided by Storm to its clients was commoditised, and devised in Storm's central office and not by the financial advisers assigned to the clients; and D. Storm's central office was catering to far more clients than it had previously due to a number of recent acquisitions. (vii) In the premises of sub-paragraph (v) above, Storm's system for providing financial advice to clients meant that it contravened, or was likely to contravene, s 945A(1) of the Corporations Act when providing advice to clients; (viii) Storm would, as a result of a conflict with its clients' interests encourage its clients to incur more debt than a prudent financial planner would do, in view of its clients' individual circumstances as, to the knowledge of the "Prospectus Investigation Officers": A. the Storm Model created an incentive for Storm to encourage its clients to heavily gear their assets in order to invest in Storm Index Funds, whether or not doing so would be in the best interests of the clients; and B. Storm had a practice of encouraging its clients to heavily gear their assets in order to invest in Storm Index Funds regardless of the movement of the markets, in such a way as would bring substantial income to Storm. (ix) Storm's Financial Services Guide represented to Storm's investors that Storm would only recommend an investment to an investor after considering its suitability for that investor's individual investment needs, objectives and financial circumstances. In the premise of sub-paragraphs (i) and (ii) Storm systematically made misrepresentations to its clients, in breach of s 12D(1) of the ASIC Act and/or s 1041H(1) of the Corporations Act. (x) about the matters known to "Regional Surveillance Officers" about Storm as a result of the regional surveillance investigation, because that information was held by ASIC at all relevant times and, in carrying out their duties, the "Prospectus Investigations Officers" consulted, or had an obligation, or an opportunity to consult, the ASIC file concerning Storm and in particular ASIC's records concerning the regional surveillance investigation. 73 The particulars set out below paragraph 36.2(b) "repeat the matters pleaded in" sections 32 and 33 and paragraph 36.1 of the FASOC. Sections 32 and 33 are summarised in paragraphs 64 and 65 above. As noted earlier, paragraph 36.1 makes allegations that knowledge of particular ASIC officers is attributable to ASIC. These particulars do not support the allegations of knowledge in paragraph 36.2(b). 74 I accept that (ii) and (iii) provide a basis for the allegation (in (vii)) of knowledge of a contravention of s 945A. I accept that (ii) and (iii) also provide a basis for the allegation in (ix). However, to the extent that the allegations depend upon the matters pleaded in sections 32 and 33 (as they appear to, from the particulars), those matters in those sections do not support the allegation of knowledge in paragraph 36.2(b).

Trailing commissions investigation 75 The trailing commissions issue is identified in paragraph 34.1 of the FASOC as a concern "about an anomaly in Storm's accounting practices whereby Storm had treated as financial assets future trailing commissions earned from the managers of Storm's Index Funds in relation to Storm's clients' investments in those funds". 76 Paragraph 34.3 pleads that, over the course of several months, ASIC and Storm negotiated a resolution to the trailing commissions issue. Paragraph 34.4 alleges that, on or about 26 March 2008, ASIC determined to approve Storm's proposed resolution to the trailing commissions issue. 77 It is not clear how this investigation is relevant to the case made against ASIC because, as appears from paragraph 31 above, the complaint is that the plaintiffs' and group members' losses resulted from their alleged inability to take action in or prior to late 2007.

Breach reports and enforceable undertaking 78 Section 35 of the FASOC sets out events between October 2008 and December 2008. Again, it is not clear how this investigation is relevant to the case made against ASIC. 79 Paragraph 35.11 alleges that, on about 12 December 2008, ASIC commenced an investigation into Storm in relation to suspected breaches of its obligations as an AFS licence holder under s 912A of the Corporations Act and ss 12DA(1) and 12DB(1)(g) of the ASIC Act. Shortly thereafter, notices were issued under s 19(2) of the ASIC Act to Emmanuel and Julie Cassimatis to appear before ASIC for examination under oath. 80 Paragraph 35.14 pleads that on about 20 December 2008, ASIC provided to Storm a proposed enforceable undertaking which it "strongly encouraged" Storm to provide. This is the proposed undertaking referred to in paragraph 43.1 of the FASOC, and mentioned earlier. The proposed undertaking is alleged to have recorded that ASIC held the following "concerns": A. Storm does not have in place the resources and/or the infrastructure to be in a position to provide financial services to the geared clients and/or comply with the Licence, as required by the Corporations Act. B. During the falling market, Storm provided financial services to the geared clients without full consideration of their personal circumstances and on a discretionary basis, in breach of Clause 18 of their [AFS licence], s 912A and s 945A of the Corporations Act. C. During the falling market, Storm represented to and/or agreed with some of the geared clients, that it would provide financial accommodation, for those clients, to assist those clients to meet their margin calls. Notwithstanding such representation(s)/agreement(s), Storm did not in fact extend such financial accommodation for those clients and/or did not advise those clients that it had not extended such financial accommodation. These actions may amount to a breach or breaches of one or more of the provisions of Part 2 Division 2 of the ASIC Act. D. Storm provided financial product advice to geared clients in margin call, that they request from the margin lender a 14 day period to consider their position. In doing so Storm may have mislead (sic) clients by failing to advise them of the consequences of such action. These actions may amount to a breach or breaches of one or more of the provisions of Part 2 Division 2 of the ASIC Act. 81 It is not pleaded that there was any dishonesty or lack of good faith on the part of any ASIC officer in proposing an enforceable undertaking recording those matters as "concerns" held by ASIC.

ASIC AND THE STATUTORY CONTEXT FOR THE CLAIMS 82 ASIC is a body corporate created under the ASIC Act.

Objects of the ASIC Act 83 Section 1 of the ASIC Act provides: Objects (1) The objects of this Act are: (a) to provide for the Australian Securities and Investments Commission (ASIC) which will administer such laws of the Commonwealth, a State or a Territory as confer functions and powers under those laws on ASIC; and (b) to provide for ASIC's functions, powers and business; and (c) to establish a Corporations and Markets Advisory Committee to provide informed and expert advice to the Minister about the content, operation and administration of the corporations legislation (other than the excluded provisions), about corporations and about financial products and financial markets; and (d) to establish a Takeovers Panel, a Companies Auditors and Liquidators Disciplinary Board, a Financial Reporting Council, an Australian Accounting Standards Board, an Auditing and Assurance Standards Board and a Parliamentary Joint Committee on Corporations and Financial Services. (2) In performing its functions and exercising its powers, ASIC must strive to: (a) maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and (b) promote the confident and informed participation of investors and consumers in the financial system; and (d) administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and (e) receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it; and (f) ensure that information is available as soon as practicable for access by the public; and (g) take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it. (3) This Act has effect, and is to be interpreted, accordingly.

ASIC's functions under the ASIC Act 84 Section 11 of the ASIC Act confers on ASIC a multiplicity of functions. It provides relevantly: Corporations legislation functions and powers and other functions and powers (1) ASIC has such functions and powers as are conferred on it by or under the corporations legislation (other than the excluded provisions). (2) ASIC also has the following functions: (a) to provide such staff and support facilities to the Panel, the Disciplinary Board and the Review Board as are necessary or desirable for the performance and exercise by the Panel, the Disciplinary Board and the Review Board of their respective functions and powers; (b) to advise the Minister about any changes to the corporations legislation (other than the excluded provisions) that, in ASIC's opinion, are needed to overcome, or would assist in overcoming, any problems that ASIC has encountered in the course of performing or exercising any of its functions and powers. (3) ASIC may, on its own initiative or when requested by the Minister, advise the Minister, and make to the Minister such recommendations as it thinks fit, about any matter of a kind referred to in section 148. (4) ASIC has power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions. (6) Subject to this Act, ASIC has the general administration of this Act. (8) ASIC may, with the consent of the Minister, enter into an agreement or arrangement with a State or Territory for the performance of functions or the exercise of powers by ASIC as an agent of the State or Territory. (9) ASIC has such functions and powers as are referred to in such an agreement or arrangement. However, ASIC is not under a duty to perform such functions or exercise such powers. (9A) ASIC may have functions or powers conferred on it by or under a law of a State or Territory if: (a) that law provides for, or relates to, the repeal, amendment or termination (however described) of the operation of, any of the replaced legislation within the meaning of item 22 of Schedule 8 to the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999; and (b) the conferral of the powers or functions is in accordance with: (i) provisions of an agreement entered into by the Commonwealth and the State or Territory, being provisions approved by the Minister for the purposes of this subsection; (ii) an approval given by the Minister for the purposes of this subsection. ASIC has the functions and powers so conferred by that law. However, ASIC is not under a duty to perform such functions or exercise such powers. (10) ASIC may, with the written consent of the Minister, enter into an agreement or arrangement with a regulatory body of a foreign country under which ASIC undertakes to assist that regulatory body to ascertain whether Australian auditors comply with audit requirements that are: (a) imposed by or under laws of that foreign country; or (b) adopted as professional standards in that foreign country. (11) The Minister may, in writing, vary or revoke the Minister's consent mentioned in subsection (10). … (14) ASIC has the following functions: (a) to assist a regulatory body with which it has entered into an agreement or arrangement under subsection (10) to examine the policies and working practices of an Australian auditor, so as to help the regulatory body to ascertain compliance with audit requirements to which the agreement or arrangement relates; (b) to disclose to a regulatory body with which it has entered into an agreement or arrangement under subsection (10) the information that ASIC has obtained in assisting in such an examination. (15) In performing the function referred to in paragraph (14)(a), ASIC may examine policies and working practices of an auditor in general or in their application to particular audits or in both of those respects. (16) ASIC is not under a duty to perform a function referred to in subsection (14) or to exercise a power in relation to such a function. (17) ASIC is not subject to any directions of the Minister in relation to: (a) entering into an agreement or arrangement under subsection (8) or (10); or (b) performing functions or exercising powers referred to in subsection (9); or (c) performing functions conferred under subsection (9A) or (14) or exercising any related powers. 85 Additionally, s 12A confers additional functions on ASIC, as follows: (1) ASIC has the functions and powers that are conferred on it by or under Division 2 of Part 2 of this Act and by or under the following Acts: (c) the Insurance Contracts Act 1984 ; (d) the Superannuation (Resolution of Complaints) Act 1993; (e) the Life Insurance Act 1995; (f) the Retirement Savings Accounts Act 1997; (g) the Superannuation Industry (Supervision) Act 1993. (2) ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system. (3) ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the payments system by: (a) promoting the adoption of approved industry standards and codes of practice; and (b) promoting the protection of consumer interests; and (c) promoting community awareness of payments system issues; and (d) promoting sound customer-banker relationships, including through: (i) monitoring the operation of industry standards and codes of practice; and (ii) monitoring compliance with such standards and codes. (4) Subsections (2) and (3) confer functions and powers to the extent to which they are not in excess of the legislative power of the Commonwealth. (5) ASIC may: (a) advise the Minister about any changes to a law listed in subsection (1) that ASIC thinks are needed to help overcome any problems that ASIC has encountered in the course of performing its functions or exercising any of its powers under that law; and (b) advise the Minister and make such recommendations as it thinks fit about any matter relating to its functions in subsections (2) and (3). (6) ASIC has power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions.

ASIC's function under the Corporations Act 86 By s 5B of the Corporations Act, subject to the ASIC Act, ASIC has the general administration of that Act.

Chapter 7 of the Corporations Act 87 Chapter 7 is entitled "Financial services and markets". The main object of Chapter 7 is set out in s 760A, being to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities. 88 Part 7.6 of Chapter 7 establishes a licensing regime for providers of financial services, by the issue of AFS licences.

Provisions governing the conduct of Australian financial services licensees 89 Section 912A sets out general obligations imposed on the holder of an AFS licence. 90 Section 945A of the Corporations Act is set out at paragraph 49 above. 91 Section 1041H of the Corporations Act provides that a person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive. 92 Section 12DA(1) 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.

ASIC's statutory powers 93 The expressions "Powers" and "Additional Powers" are defined in section 38 of the FASOC. 94 The "Powers" are: (1) The general powers of investigation under s 13 of the ASIC Act, where ASIC has reason to suspect: (a) a contravention of the corporations legislation (other than the excluded provisions); or (b) a contravention of a law of the Commonwealth, or of a State or Territory in this jurisdiction, being a contravention that: (i) concerns the management or affairs of a body corporate or managed investment scheme; (ii) or involves fraud or dishonesty and relates to a body corporate or managed investment scheme or to financial products. (2) The general power of administration over the Corporations Act under s 5B of that Act, particularly as it relates to the enforcement and administration of Part 7.7 of the Act; To give a written notice requiring the production to a specified member or staff member, at a specified place and time, of specified books relating to affairs of a body corporate, under s 30(1) of the ASIC Act; (3) To direct a financial services licensee to give to ASIC a written statement containing the specified information about the financial services provided by the licensee or its representatives; or the financial services business carried on by the licensee, under s 912C(1) of the Corporations Act; (4) To make an order under s 739(1) of the Corporations Act ("stop order"). 95 The "Additional Powers" are: (1) To impose additional conditions on an AFS licence under s 914A(1) of the Corporations Act; (2) To show cause, at a hearing, why its AFS licence should not be suspected (and to suspect or cancel that licence following that hearing) under s 915C(1) of the Corporations Act; (3) To accept a written undertaking given by a person in connection with a matter in relation to which ASIC has a function or power under the ASIC Act, in accordance with s 93AA(1) of the ASIC Act; (4) To do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions, under s 11(4) of the ASIC Act. 96 As noted in paragraph 34 above, the allegations of what ASIC should have done, if it had acted lawfully, are in paragraph 43.1 of the FASOC. If paragraphs 43.1(a) and (d) are struck out, the remaining allegations are that ASIC should have done the things in paragraphs 43.1(b) and (c). However, even though paragraph 43.1 is premised on the situation "[h]ad ASIC exercised its Powers and/or Alternative Powers", those powers are not all powers to do the things in paragraphs 43.1(b) and (c). The potentially relevant powers are: (1) The power to impose additional conditions on an AFS licence under s 914A(1) of the Corporations Act; and (2) The power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions, under s 11(4) of the ASIC Act. 97 The relevance of the other "Powers" and the other "Alternative Powers" to the case as pleaded is not clear. 98 The plaintiffs accepted that each of the "Powers" and "Additional Powers" is a discretionary power.

The alleged invalid or unauthorised conduct 99 The plaintiffs plead four relevant acts or omissions, said to amount to torts of misfeasance in public office. They are: (1) The Regional Surveillance Decision (see paragraph 39.7 of FASOC); (2) The Prospectus Investigation Decision (see paragraph 39.12 of FASOC); (3) Alternatively to (2), "at the conclusion of the prospectus investigation (that is, around 16 November 2007), ASIC was under a duty to decide whether to take regulatory or enforcement action in relation to specified known risks and failed to do so because it failed to act reasonably and lawfully when considering whether to exercise that duty ("breach of the Prospectus Investigation Duty") (paragraph 39.13(d) of FASOC); (4) Alternatively to (2) and (3), "at the conclusion of the prospectus investigation, having regard to known risks caused by Storm's conduct, the circumstances called for the exercise by ASIC of certain powers, ASIC therefore had a duty to exercise them and erred by failing to do so" ("breach of the Alternative Prospectus Investigation Duty") (paragraph 39.14(e) of FASOC).

Regional Surveillance Decision 100 The alleged decision, pleaded in paragraph 39.4 of the FASOC, is a decision, by ASIC, through its officers Jeremy Holiday and Paul Eastment, not to exercise ASIC's "Powers and/or Additional Powers [to] take any further regulatory action in relation to the risks identified at paragraph 36.2(a)" of the FASOC. 101 The particulars below paragraph 39.4 refer to paragraph 31.8 and its particulars. 102 Paragraph 31.8 states: On about 29 March 2005, following the conclusion of the Regional Surveillance Investigation, ASIC, through Jeremy Holiday and Paul Eastment identified particular breaches for ASIC to request that Storm address (which did not include a breach of s 945A(1) of the Corporations Act), but otherwise decided to take no further action. Particulars Document titled "Licensee Interim Surveillance Report - Storm Financial Limited' signed off by Jeremy Holiday on 29 March 2005 at 10:59 am and reviewed by Paul Eastment on 29 March 2005 at 11.33 am. In particular, the report marked 'no' next to 'is there a reasonable prospect that enforcement may result or are you considering a referral to enforcement'. 103 Without referring to paragraph 31.8, paragraph 39.4 may imply that Jeremy Holiday and Paul Eastment gave consideration as to whether to exercise each of the eight powers that comprise the "Powers and/or Additional Powers". However, read with paragraph 31.8, the impugned decision appears to be a decision "otherwise…to take no further action". 104 The matters said to render the regional surveillance decision unlawful are set out at paragraph 39.6 of the FASOC, namely: (a) Failure to take into account matters said to be mandatory considerations; (b) Failure to act reasonably and rationally; and/or (c) Failure to make a decision consistently with the purposes for which the "Powers and Additional Powers were granted" (collectively the "three administrative law errors"). 105 The alleged mandatory considerations are set out at paragraph 39.2 of the FASOC. They comprise matters which ASIC must strive to achieve or promote by s 1(2)(b) and (f) of the ASIC Act, ASIC's functions under s 12A(2) and (3)(b) of the ASIC Act, the objects of Chapter 7 of the Corporations Act set out in s 760A(a) and (b) of that Act and the risks of injury and financial harm to persons in the position of the plaintiffs and group members arising from the matters in paragraphs 36.2(a) and (b) of the FASOC (set out at paragraphs 57 and 72 above).

Prospectus Investigation Decision 106 The alleged prospectus investigation decision is similar to the regional surveillance decision. That is, it is an alleged decision that relevant ASIC officers considered whether to, and decided to not, exercise ASIC's "Powers and/or Additional Powers to take regulatory or enforcement action in relation to the risks identified at paragraph 36.2" of the FASOC. 107 The particulars below paragraph 39.9, describing the decision, refer to paragraph 33.18 and its particulars. 108 Paragraph 33.18 alleges, relevantly: After the meeting with Storm on 13 November 2007, ASIC (through the officers involved in the Prospectus Investigation, including Christopher Anderson, Deborah Koromilas, Elizabeth Korpi, Belisa Jong, and Mary Chan), decided: … (c) Not to take any further steps with respect to the matters raised in, and issues identified during, the Prospectus Investigation. Particulars In relation to the decision in sub-paragraph (c), document titled 'Prospectus - Equities - Unquoted' for Storm Financial Limited as updated on 16 November 2007. In particular, the Result is 'no further action required' and the Summary of Action notes 'NFA required'. 109 The matters said to render the prospectus investigation decision unlawful are the three administrative law errors.

Breach of Prospectus Investigation Duty 110 Paragraph 39.13 of the FASOC pleads that, at the conclusion of the prospectus investigation, ASIC was under a duty "to decide to take regulatory or enforcement action in relation to the risks identified in paragraph 36.2(a) and (b) of the FASOC" (referred to in the pleading as the "Prospectus Investigation Duty"). 111 Sub-paragraph 39.13(b) of the FASOC states: In considering whether to make that decision, ASIC was required to: (i) take into account the Mandatory Considerations; and/or (ii) act reasonably and rationally; and/or (iii) make a decision consistently with the purposes for which the Powers and Additional Powers were granted. 112 The alleged breach of that duty is pleaded as follows at paragraphs 39.13(c) and (d): (c) ASIC's [sic] failed to act in accordance with the matters raised in sub-paragraph (b) in considering whether to make that decision or in failing to properly consider whether to make such a decision, and thereby failed to comply with the Prospectus Investigation Duty; and (d) ASIC's failure to comply with the Prospectus Investigation Duty was unlawful. 113 As Mr Giles, counsel for ASIC, noted, the FASOC does not identify the source or nature of the Prospectus Investigation Duty. 114 In the plaintiffs' written submissions, it was argued that ASIC had a "public law duty to act" where a decision not to act lacks an evident and intelligible justification. It was noted that a public authority could be placed under a duty to exercise a discretionary power enforceable by the remedy of mandamus: Commissioner of State Revenue (Vic) v Royal Insurance [1994] HCA 61; (1994) 182 CLR 51 at 88 (Brennan J, Toohey and McHugh JJ agreeing); Pyrenees Shire Council v Day [1998] HCA 3; (1998) 192 CLR 330 ("Pyrenees") at [24] (Brennan CJ).

Breach of Alternative Prospectus Investigation Duty 115 Paragraph 39.14 of the FASOC pleads a further alternative case that, at the conclusion of the prospectus investigation, ASIC was under a duty "to exercise the Powers and/or Additional Powers to address the risks identified in paragraph 36.2(a) and (b)" of the FASOC (referred to in the FASOC as the "Alternative Prospectus Investigation Duty"). 116 Paragraph 39.14(e) of the FASOC states: By failing to exercise the Powers and/or Additional Powers to protect consumers of Storm's financial services, including the Plaintiffs and Group Members ASIC breached [the Alternative Prospectus Investigation Duty] and thereby acted unlawfully. 117 The submissions referred to the duty pleaded by paragraph 39.14(d) as a public law duty.

Section 42 of FASC: "In the event that a duty of care is necessary to establish misfeasance" 118 Section 42 of the FASOC is in the following terms: 42. In the event that a duty of care is necessary to establish misfeasance 42.1 If, which is denied, a duty of care is necessary to establish ASIC's misfeasance, the Plaintiffs and Group Members further say that: (a) in exercising its Powers during the Investigations, ASIC assumed a duty towards the Plaintiffs and Group Members as part of an identifiable class of investors and potential investors in the Storm Model; and (b) in particular, ASIC owed the Plaintiffs and Group Members the duties of care set out at paragraphs 44.11 and 44.12 below. 119 Paragraphs 44.11 and 44.12 allege: 44.11 In the course of, and at the conclusion of, the Regional Surveillance Investigation, ASIC owed a duty towards investors in the Storm Model to avoid causing economic harm to those investors by: (a) exercising its Powers and/or Additional Powers with reasonable care to disclose to those investors the risks set out in paragraph 36.2(a) above, and (b) exercising its Powers and/or Additional Powers with reasonable care to require Storm to address, minimise or avoid the risks to those investors set out in paragraph 36.2(a) above. 44.12 In the course of the Prospectus Investigation, ASIC owed a duty towards investors in the Storm Model to avoid causing economic harm to those investors by: (a) exercising its Powers and/or Additional Powers with reasonable care to disclose to investors in the Storm Model the risks set out in paragraph 36.2 above; or, in the alternative (b) considering with reasonable care whether to exercise its Powers and/or Additional Powers to require Storm to disclose to those investors the risks set out in 36.2 above, and (c) exercising its Powers and/or Additional Powers with reasonable care to address, minimise or avoid the risks to those investors set out in paragraph 36.2 above; or in the alternative (d) considering with reasonable care whether to exercise its Powers and/or Additional Powers to require Storm to address, minimise or avoid the risks to those investors set out in paragraph 36.2 above. 120 For the purposes of this application, I understand the duties referred to in paragraphs 44.11 and 44.12 to be the duties of care underpinning the claim in negligence.

Legal principles 121 The plaintiffs noted that the precise limits of the tort of misfeasance in public office are undefined. However, as the joint judgment observed in Northern Territory v Mengel [1995] HCA 65; (1995) 185 CLR 307 ("Mengel") (at 345) it is "a deliberate tort in the sense that there is no liability unless there is an intention to cause harm or the officer concerned knowingly acts in excess of his or her power". At 347, the joint judgment stated: The cases do not establish that misfeasance in public office is constituted simply by an act of a public officer which he or she knows is beyond power and which results in damage. Nor is that required by policy or by principle. Policy and principle both suggest that liability should be more closely confined. So far as policy is concerned, it is to be borne in mind that, although the tort is the tort of a public officer, he or she is liable personally and, unless there is de facto authority, there will ordinarily only be personal liability. And principle suggests that misfeasance in public office is a counterpart to, and should be confined in the same way as, those torts which impose liability on private individuals for the intentional infliction of harm. For present purposes, we include in that concept acts which are calculated in the ordinary course to cause harm, as in Wilkinson v Downton [1897] 2 QB 57, or which are done with reckless indifference to the harm that is likely to ensue, as is the case where a person, having recklessly ignored the means of ascertaining the existence of a contract, acts in a way that procures its breach. 122 These observations were cited with approval in the joint judgment in Sanders v Snell [1998] HCA 64; (1998) 196 CLR 329 ("Sanders") at [38] and [42]. 123 In Pyrenees at [124], Gummow J noted that misfeasance in public office "concerns conscious maladministration rather than careless administration". 124 Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld: Federal Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; (2008) 237 CLR 146 at [60]. In Leinenga v Logan City Council [2006] QSC 294, at [64], Mullins J said: …the tort of misfeasance in public office is not easily established. It depends on the impugned act being committed by the public officer with the requisite state of mind both in committing the act and in holding the requisite intention to cause the loss or damage that is alleged to flow from the impugned act. It is a very serious allegation to be made against a person who holds public office. It cannot be made in a broad brush way. It requires particularity in setting out the facts that can, if proven, establish the cause of action. 125 See also Pharm-a-Care Laboratories Pty Ltd v Commonwealth (No 3) [2010] FCA 361; (2010) 267 ALR 494 at [66], [68] and [69]. 126 As for fraud or dishonesty, the tort of misfeasance in public office must be distinctly alleged and sufficiently particularised, and it is not sufficiently particularised if the facts pleaded are consistent with innocence or honest incompetence: Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2003] 2 AC 1 ("Three Rivers") at 291 to 292 (Lord Millett); Danthanarayana v Commonwealth [2014] FCA 552 at [97] (Foster J); Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 278 ALR 291 at [605]. It is not sufficient to allege unlawful conduct: it is necessary to plead the primary facts that will be relied upon to justify any inference of unlawfulness: Three Rivers at 292; NRMA Insurance v Flanagan [1982] 1 NSWLR 585 at 603.

Bad faith 127 The following propositions are taken from the Full Court's decision in SBBS v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCAFC 361; (2002) 194 ALR 749 at [43] to [46]: (1) an allegation of bad faith is a serious matter involving personal fault on the part of the decision maker; (2) the allegation is not to be lightly made and must be clearly alleged and proved; (3) there are many ways in which bad faith can occur and it is not possible to give a comprehensive definition; (4) the presence or absence of honesty will often be crucial; see SBAU v Minister for Immigration and Multicultural and Indigenous Affairs [2007] FCA 1076; (2007) 70 ALD 72 ("SBAU") at [27] citing SBAP v Refugee Review Tribunal [2002] FCA 590 per Heerey J at [49] and NAAP v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 805 per Hely J at [25]; (5) the circumstances in which the Court will find an administrative decision maker had not acted in good faith are rare and extreme. This is especially so where all that the applicant relies upon is the written reasons for the decision under review: SBAU at [28] citing SAAG v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 547 per Mansfied J at [35] and SCAA v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 668 at [38] per von Doussa J; (6) mere error or irrationality does not of itself demonstrate lack of good faith: SBAU at [29]. Bad faith is not to be found simply because of poor decision making. It is a large step to jump from a decision involving errors of fact and law to a finding that the decision maker did not undertake its task in a way which involves personal criticism; see NAAG of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 713; (2002) 195 ALR 207 at [24] per Allsop J, as he was then, quoted with approval in NAAV v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCAFC 228; (2002) 123 FCR 298 at [107] by Black CJ; (7) errors of fact or law and illogicality will not demonstrate bad faith in the absence of other circumstances which show capriciousness: SBAU at [31]; (8) it is not necessary to demonstrate that the decision maker knew the decision was wrong. It is sufficient to demonstrate recklessness in the exercise of the power: SCAZ v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCA 1377 ("SCAZ").

Elements of the tort of misfeasance in public office 128 The tort of misfeasance in public office is concerned with the misuse or abuse of public powers or authorities: Leerdam v Noori [2009] NSWCA 90; (2009) 227 FLR 210 at [103]; Sanders at [37]. "The rationale of the tort is that in a legal system based on the rule of law executive or administrative power 'may be exercised only for the public good' and not for ulterior and improper purposes": Three Rivers at 190. 129 As summarised by Deane J in Mengel at 370, the five elements of the tort are: (1) an invalid or unauthorised act; (2) done maliciously; (3) by a public officer; (4) in the purported discharge of his or her public duties; (5) which causes loss or harm to the plaintiff. 130 As to (3), ASIC accepted, for the purposes of the strike out application, that an entity in the position of ASIC is arguably a public officer and could arguably commit the tort of misfeasance in public office: cf Porter v OAMPS Ltd [2005] FCA 232; (2005) 215 ALR 327. As to (4), there was no dispute that the relevant acts or omissions occurred in the purported discharge of public duties.

Invalid or unauthorised omissions 131 In Mengel at 355, Brennan J stated that "[a]ny act or omission done or made by a public official in purported performance of the functions of the office can found an action for misfeasance in public office". 132 In Three Rivers, Lord Hutton stated (at 228) that, "whether the public officer is sued in respect of an act or an omission, it must be a deliberate one involving an actual decision and liability will not arise from injury suffered by mere inadvertence or oversight".

Unlawfulness by reason of invalid exercise of power 133 ASIC accepted that that the tort of misfeasance in public office could arguably apply to an act or omission which is unlawful in the sense that it is infected with jurisdictional error. 134 ASIC also accepted, for the purposes of the strike out application, that an act is unlawful for the purposes of the tort if it is affected by non-jurisdictional legal error. In Mengel, Brennan J said relevantly at 356: A number of elements must combine to make a purported exercise of administrative power wrongful. The first is that the purported exercise of power must be invalid, either because there is no power to be exercised or because a purported exercise of the power has miscarried by reason of some matter which warrants judicial review and a setting aside of the administrative action. There can be no tortious liability for an act or omission which is done or made in valid exercise of a power. A valid exercise of power by a public officer may inflict on another an unintended but foreseeable loss - or even an intended loss - but, if the exercise of the power is valid, the other's loss is authorised by the law creating the power. In that case, the conduct of the public officer does not infringe an interest which the common law protects. However, a purported exercise of power is not necessarily wrongful because it is ultra vires. The history of the tort shows that a public officer whose action has caused loss and who has acted without power is not liable for the loss merely by reason of an error in appreciating the power available. Something further is required to render wrongful an act done in purported exercise of power when the act is ultra vires. 135 In Sanders, the joint judgment said at 344: For present purposes it may be accepted that the tort of misfeasance in public office extends to acts by public officers that are beyond power, including acts that are invalid for want of procedural fairness.

Can an omission be unlawful where there is no duty to act? 136 In Three Rivers, at 230, Lord Hobhouse said: If there is a legal duty to act and the decision not to act amounts to an unlawful breach of that legal duty, the omission can amount to misfeasance for the purpose of the tort: R v Dytham [1979] QB 722; Henly v Lyme Corporation (1828) 5 Bing 91, 107. What is not covered is a mere failure, oversight or accident. Neglect, unless there is a relevant duty of care, does not suffice and the applicable tort would then be negligence not misfeasance and different criteria would apply: X (Minors) v Bedfordshire County Council [1995] 2 AC 633; the Mengel case 69 ALJR 527, 547. The relevant act (or omission, in the sense described) must be unlawful. This may arise from a straightforward breach of the relevant statutory provisions or from acting in excess of the powers granted or for an improper purpose. Here again the test is the same as or similar to that used in judicial review. 137 ASIC referred to the following statement by Lord Millett (at 236 to 237): The parties are agreed that there is no conceptual difference between sins of omission and sins of commission. This may be so; but factually there is a great difference between them. It is no accident that the tort is misfeasance in public office, not nonfeasance in public office. The failure to exercise a power is not in itself wrongful. It cannot be equated with acting in excess of power. The tort is concerned with preventing public officials from acting beyond their powers to the injury of the citizen, not with compelling them to exercise the powers they do have, particularly when they have a discretion whether to exercise them or not. There seems to be only one case in the books where a failure to exercise a power gave rise to the tort: R v Dytham [1979] 1 QB 722, 727G, where Lord Widgery CJ said in terms that the neglect must be "wilful and not merely inadvertent." Ferguson v Earl of Kinnoull (1842) 9 Cl & Fin 251 and the cases there cited were all cases of wilful breach of duty. Henly v Lyme Corporation (1828) 5 Bing 91 was in my opinion a case of breach of statutory duty, not of misfeasance in public office. In conformity with the character of the tort, the failure to act must be deliberate, not negligent or inadvertent or arising from a misunderstanding of the legal position. In my opinion, a failure to act can amount to misfeasance in public office only where (i) the circumstances are such that the discretion whether to act can only be exercised in one way so that there is effectively a duty to act; (ii) the official appreciates this but nevertheless makes a conscious decision not to act; and (iii) he does so with intent to injure the plaintiff or in the knowledge that such injury will be the natural and probable consequence of his failure to act. 138 I accept that, at least for the purposes of considering the strike out application, an omission may be relevantly unlawful (for example, because the omission involved some failure to comply with administrative law) even though there was no duty (whether statutory or at common law) to act. However, the relevant omission must be deliberate and must have caused loss. The causation question requires consideration of what the relevant public officer would have done if there had been no such deliberate omission. In the case of an unlawful decision not to exercise a discretionary power, there may have been a range of alternative lawful decisions, one of which might include a lawful decision not to exercise the power.

Malice 139 Concerning malice, in Mengel, Brennan J said (at 357 to 358): I respectfully agree that the mental element is satisfied either by malice (in the sense stated) or by knowledge. That is to say, the mental element is satisfied when the public officer engages in the impugned conduct with the intention of inflicting injury or with knowledge that there is no power to engage in that conduct and that that conduct is calculated to produce injury. These are states of mind which are inconsistent with an honest attempt by a public officer to perform the functions of the office. Another state of mind which is inconsistent with an honest attempt to perform the functions of a public office is reckless indifference as to the availability of power to support the impugned conduct and as to the injury which the impugned conduct is calculated to produce. The state of mind relates to the character of the conduct in which the public officer is engaged - whether it is within power and whether it is calculated (that is, naturally adapted in the circumstances) to produce injury. …It is the absence of an honest attempt to perform the functions of the office that constitutes the abuse of the office. Misfeasance in public office consists of a purported exercise of some power or authority by a public officer otherwise than in an honest attempt to perform the functions of his or her office whereby loss is caused to a plaintiff. Malice, knowledge and reckless indifference are states of mind that stamp on a purported but invalid exercise of power the character of abuse of or misfeasance in public office. If the impugned conduct then causes injury, the cause of action is complete. The plaintiffs submit that the requisite elements of the cause of action are satisfied by "constructive knowledge" of the absence of power to engage in particular conduct and foreseeability of the injury suffered by the plaintiff. This submission carries concepts familiar in the law of negligence into the tort of misfeasance in public office to which, in my opinion, those concepts are foreign. A public officer is appointed to his or her office in order to perform functions in the public interest. If liability were imposed upon public officers who, though honestly assuming the availability of powers to perform their functions, were found to fall short of curial standards of reasonable care in ascertaining the existence of those powers, there would be a chilling effect on the performance of their functions by public officers. The avoidance of damage to persons who might be affected by the exercise of the authority or powers of the office rather than the advancing of the public interest would be the focus of concern. Foreseeability of damage to another by one's own conduct is the factor which warrants the imposition of a duty of care to the other when engaging in the conduct. But the tort of misfeasance in public office is not concerned with the imposition of duties of care. It is concerned with conduct which is properly to be characterised as an abuse of office and with the results of that conduct. Causation of damage is relevant; foreseeability of damage is not. 140 Deane J said (at 370 to 371): In the context of misfeasance in public office, the focus of the requisite element of malice is injury to the plaintiff or injury to some other person through an act which injuriously affects the plaintiff. Such malice will exist if the act was done with an actual intention to cause such injury. The requirement of malice will also be satisfied if the act was done with knowledge of invalidity or lack of power and with knowledge that it would cause or be likely to cause such injury. Finally, malice will exist if the act is done with reckless indifference or deliberate blindness to that invalidity or lack of power and that likely injury. Absent such an intention, such knowledge and such reckless indifference or deliberate blindness, the requirement of malice will not be satisfied. 141 In Three Rivers at 247, Lord Hope explained "untargeted malice", that is, malice in the absence of an intention to inflict injury on a person or persons, as follows: Where the tort takes this form the required mental element is satisfied where the act or omission was done or made intentionally by the public officer (a) in the knowledge that it was beyond his powers and that it would probably cause the claimant to suffer injury, or (b) recklessly because, although he was aware that there was a serious risk that the claimant would suffer loss due to an act or omission which he knew to be unlawful, he wilfully chose to disregard that risk. In regard to this form of the tort, the fact that the act or omission is done or made without an honest belief that it is lawful is sufficient to satisfy the requirement of bad faith. In regard to alternative (a), bad faith is demonstrated by knowledge of probable loss on the part of the public officer. In regard to alternative (b), it is demonstrated by recklessness on his part in disregarding the risk.

Is the relevant conduct capable of being found to be unlawful conduct which caused loss to the plaintiffs?

Regional surveillance and prospectus investigation decisions 142 It is far from obvious that the pleaded mandatory considerations are, in truth, mandatory. The question is whether those considerations are matters which the relevant decision-maker was bound to take into account for there to be a valid exercise of the power to decide: Sean Investments Pty Ltd v Mackellar [1981] FCA 191; (1981) 38 ALR 363 at 375. The question is determined by whether the relevant statute expressly or by necessary implication requires the repository of the power to have regard to that matter or to matters of that kind as a condition of exercising the power: Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24 at 55; Foster v Minister for Customs and Justice [2000] HCA 38; (2000) 200 CLR 442 at [22] per Gleeson CJ and McHugh J. 143 Neither the Corporations Act nor the ASIC Act expressly required any of the pleaded mandatory considerations to be taken into account as a condition of deciding whether to exercise any of ASIC's relevant statutory powers. 144 As to whether either statute impliedly requires ASIC to have regard to any of the mandatory considerations, that is a matter to be determined by reference to the subject matter, scope and purpose of the statutes. However, as a general proposition, where relevant considerations are not specified, it is largely a matter for the decision-maker to determine which matters he or she regards as relevant and the comparative importance to be accorded to those matters. 145 I am very doubtful that the pleaded mandatory considerations are matters that ASIC was required to have regard to as a condition of making the regional surveillance decision or the prospectus investigation decision. 146 The allegations of failure to make the decisions consistently with the purposes for which the "Powers and Additional Powers" were granted are conclusions that are unsupported by facts. The plaintiffs' written submissions seem to suggest that an allegation that ASIC acted for an improper purpose. In my view, the pleading should state the alleged purpose with which the decisions were made (to the extent that the complaint is that ASIC acted for an improper purpose) or the particular purposes or purposes with which it is said that ASIC acted inconsistently (to the extent that the complaint is that ASIC failed to act consistently with particular purposes). 147 I accept it is not so plain and obvious that the claims that these two decisions were unlawful (in the sense that they involved one or more of the pleaded administrative law errors) must fail that they should be struck out on this basis. 148 However, to plead a claim of misfeasance based on a decision to take no further action, it is necessary to allege that the decision to take no further action had particular consequences in the nature of harm to the plaintiffs and the group members. There is no relevant allegation in the FASOC. 149 If the case is that ASIC was required to do something that it did not do at the conclusion of either investigation, and that it is the failure to do this thing or things that caused loss, then that is not pleaded. In particular, paragraph 43.1 of the FASOC (set out at paragraph 34 above) is not relevant to the misfeasance case based on these decisions in the absence of an allegation that ASIC was required to exercise any particular power as a consequence of the regional surveillance investigation or the prospectus investigation. Lest it be thought otherwise, in my view, it is not adequate simply to allege that a failure to exercise one or more powers involves misfeasance in public office. It is necessary to identify each omission said to be tortious, as well as the facts relied upon to allege a causal connection between the omission and loss suffered by the plaintiffs and the group members. If the alleged omission involves a failure to exercise a power that could be exercised in one or more ways, then it is necessary to specify how the power was required to be exercised in the particular circumstances. Without these details, it is not clear whether the case is that ASIC was obliged to do something particular to act lawfully, or whether the case is that ASIC could have done any of a range of things in order to have acted lawfully. It is necessary to know this in order to understand how the alleged unlawfulness caused harm to the plaintiffs and group members.

Breaches of the Prospectus Investigation Duty and alternative prospectus investigation duty 150 The breach of the Prospectus Investigation Duty is alleged to have occurred "in considering whether to make that decision or in failing to properly consider whether to make such a decision" (FASOC 39.13(c), see paragraph 112 above). No specific decision is identified. The alleged duty is a duty "to decide to take regulatory or enforcement action". The FASOC does not state whether the breach involves a failure to make a particular decision, or whether it involves only a failure to take certain matters into account and to act in certain ways in discharging the duty to decide without any requirement to have made a particular decision as a result. 151 If the latter, then any administrative unlawfulness of the decision had no consequence for the plaintiffs and group members and the fifth element of the tort (causation) would be absent. 152 If the case is that the breach of the Prospectus Investigation Duty involved a failure to impose one or more conditions on Storm's AFS licence, or a failure to make public ASIC's concerns about Storm (being the matters pleaded in paragraph 43.1 of the FASOC), then that case is not pleaded in relation to this alleged duty. 153 The alleged breach of the Alternative Prospectus Investigation Duty is the failure to exercise the Powers and/or Additional Powers to protect consumers of Storm's financial services (see paragraph 116 above). There is no allegation that the failure to exercise the Powers and/or Additional Powers was a failure to take any action apart from the actions in paragraph 43.1 of the FASOC. If the case is wider than paragraph 43.1 then the FASOC should say so. If the case is limited to the matters in paragraph 43.1, then the case does not concern a failure to exercise the Powers and/or Additional Powers, but only the powers to do the things pleaded in paragraph 43.1 (bearing in mind that paragraph 43.1(a) and (d) are liable to be struck for the reasons given earlier).

Conclusion 154 For the reasons set out above, I am not satisfied that the FASOC discloses a reasonable cause of action based on the tort of misfeasance in public office by reference to any of the regional surveillance decision, the prospectus investigation decision and the breach of the Prospectus Investigation Duty. While it may disclose a reasonable cause of action based on breach of the Alternative Prospectus Investigation Duty, paragraph 39.14(e) of the FASOC is embarrassing in that it fails to identify the alleged misconduct with precision and fails to identify the facts to support a claim that the alleged misconduct caused loss.

Does FASOC plead malice sufficiently? 155 In case I am wrong in my conclusions above, I have also considered whether the FASOC pleads sufficient facts to demonstrate that the alleged conduct was deliberate in the requisite sense. 156 For this analysis, I will assume that the states of mind of the various ASIC officers who had dealings with Storm can be attributed to ASIC, as alleged, in an appropriate case.

Allegations of improper and unlawful motive 157 It is not alleged that any of ASIC's officers were motivated by spite, or sought to harm any of the plaintiffs and group members. There is no allegation that any of ASIC's officers was motivated by the prospect of a personal benefit, or the prospect of a benefit for ASIC. There is no allegation that any ASIC officer sought to avoid any disadvantage to him or herself or ASIC by the impugned conduct. 158 Paragraph 40.10 of the FASOC alleges that ASIC's motive ("through the ASIC officers") in making the regional surveillance decision was improper and unlawful. The particulars to paragraph 40.10 state that the motive was "to avoid having to make a real attempt to take into account the mandatory considerations in making the regional surveillance decision or make that decision according to law". 159 Paragraph 40.11 makes a similar allegation in connection with the alleged failure to carry out the Prospectus Investigation Duty and the Alternative Prospectus Investigation Duty and in making the prospectus investigation decision. 160 No facts are pleaded to support the allegation of motive or to justify any inference as to the motive. 161 The facts pleaded do not explain why any such motive on the part of one or more ASIC officers should be attributed to ASIC. 162 A motive of "avoiding having to make a real attempt" requires knowledge of the duty to do that which is sought to be avoided. However, there is no pleading or particularisation of facts to support a case that ASIC or any of its officers knew that ASIC was under a duty, for example, to impose a licence condition on Storm's AFS licence. The mere fact that ASIC and its officers can be taken to know that they are obliged to act lawfully is insufficient to support the allegation. The mere fact that ASIC and its officers did not do something is insufficient to support an allegation that they avoided having to make a real attempt to do that thing. 163 The allegations of improper and unlawful motive are tantamount to allegations of bad faith, with significant implications for the reputations of the persons who are publicly accused: cf Rajski v Bainton (1990) 22 NSWLR 125 at 136. In the absence of facts of the kind I have identified above, the FASOC does not disclose a proper basis for the allegations of unlawful and improper motive. Paragraphs 40.1 and 40.2 of the FASOC are insufficient for this purpose, for the reasons explained below.

Allegations of bad faith 164 Section 40 of the FASOC is entitled "ASIC's bad faith as to the unlawfulness of its decisions". This title suggests that section 40 is directed to the regional surveillance decision and the prospectus decision, and not to the breaches of the Prospectus Investigation Duty and the Alternative Prospectus Investigation Duty. However, it appears from paragraphs 40.2(c) to (e) that section 40 addresses all four matters.

Regional surveillance decision 165 It is alleged in paragraph 40.1 of the FASOC that ASIC, through the relevant ASIC officers: (a) knew that ASIC could have exercised the "Powers and Additional Powers" in the course of the regional surveillance investigation; (b) knew that ASIC was required to exercise the "Powers and Additional Powers" in a manner consistent with its duties under s 1(2)(b), (f) and (g) and s 12A(2) and (3)(b), its functions under s 12A, (4) and (6) of the ASIC Act and the objects of the Corporations Act; (c) knew that in making the regional surveillance decision, ASIC made the pleaded administrative law errors; (d) knew that the regional surveillance decision was unlawful; or (e) alternatively, recklessly disregarded the risk that the regional surveillance decision was unlawful. 166 As to (a), this paragraph raises the question whether ASIC could have exercised each of the Powers and Additional Powers lawfully, in the circumstances of this case. In particular, as paragraph 38.2(b) of the FASOC recognises, the power to impose additional conditions on Storm's AFS licence is conditioned by the requirement to give the licensee an opportunity to appear, or be represented, at a hearing before ASIC that takes place in private; and to make submissions to ASIC in relation to the matter. 167 In my view, paragraph 40.1(a) is embarrassing in that it pleads a conclusion without the facts supporting that conclusion. Those facts would include identifying the precise manner in which any particular power could have been exercised. 168 Paragraph 40.1(a) also appears to encompass irrelevant facts, namely the entitlement to exercise powers in the absence of an allegation that ASIC was required to exercise a power or powers in order to have acted lawfully in making the regional surveillance decision. 169 The particulars given to support paragraph 40.1(c) are "the matters in (a) to (c) (sic)". These particulars are not particulars of ASIC's alleged knowledge that the decision made the pleaded administrative law errors. What is required is a basis for the allegation that ASIC knew it had made an administrative law error when it decided to take no further action against Storm at the conclusion of the regional surveillance investigation. The facts that ASIC knew it had certain powers and that it was required to exercise those powers in certain ways say nothing about its knowledge of the pleaded administrative law errors in connection with the regional surveillance decision. For example, one of the pleaded administrative law errors is a failure to act reasonably and rationally. A decision maker who fails to act reasonably and rationally will not be assumed to be aware that he or she has acted in that manner. 170 The particulars given to support paragraphs 40.1(d) and (e) are the matters in (a) to (c). These particulars say nothing about ASIC's knowledge of or recklessness as to the unlawfulness of the decision.

Prospectus Investigation decision and breaches of Prospectus Investigation Duty and Alternative Prospectus Investigation Duty 171 Paragraph 40.2 generally follows the same form as paragraph 40.1, except that it refers to the prospectus decision and the breaches of the Prospectus Investigation Duty and the Alternative Prospectus Investigation Duty. 172 However, the particulars of ASIC's knowledge of the pleaded administrative law errors are different. The particulars to paragraph 40.2(c) state that the relevant knowledge is to be inferred from the roles of the relevant ASIC officers in making the prospectus investigation decision or, otherwise, their roles in carrying out the prospectus investigation. These particulars are equally consistent with absence of the alleged knowledge. The mere participation in the investigation and the decision do not support a finding of knowledge of the alleged administrative law errors.

Allegation that ASIC did not make a real attempt to comply with its obligations 173 In the alternative to paragraphs 40.1 and 40.2 of the FASOC, it is alleged that: (1) The relevant ASIC officers had authority to decide how ASIC exercised its "Powers and/or Additional Powers" in relation to Storm (FASOC [40.4]); (2) It follows from the matters pleaded in section 39 of the FASOC that, in the course of the investigations, ASIC and the ASIC officers made the three administrative law errors in making the regional surveillance decision and the prospectus investigation decision (FASOC [40.5]); (3) Having regard to: (a) ASIC's knowledge of the risks set out in paragraph 36.2 at the conclusion of each investigation; (b) ASIC's "Powers and/or Additional Powers" to address "that harm"; (c) ASIC's objects and purposes and the objects and purposes of the "Powers and/or Additional Powers"; and (d) the serious risk of harm that the Storm Model posed to investors or potential investors in the Storm Model, in particular, the serious risk of harm posed by the risks set out in paragraph 36.2; if ASIC (through the ASIC officers) had made a real attempt to act lawfully, then it would have exercised those powers to address the risks set out in paragraph 36.2 (FASOC [40.6]); (4) ASIC (through the ASIC officers) did not exercise its "Powers and/or Additional Powers" to address the risks set out in sub-paragraph 36.2 (FASOC [40.7]); (5) In the premises, ASIC acted in bad faith in making the regional surveillance decision and the prospectus investigation decision (FASOC [40.8]). 174 In essence, the allegation is that the known circumstances imposed a duty upon ASIC, if it were to avoid acting in bad faith, to take action. However, the following matters are not identified: (a) The harm referred to in paragraph 40.6(b); (b) The nature of the "serious risk of harm"; (c) The facts by reason of which the risk was serious; (d) Whether or not ASIC is alleged to have known of the serious risk of harm, or of the serious nature of the risk; (e) The facts by reason of which the conduct involved capriciousness or other conduct warranting personal criticism, as opposed to simply poor decision making; (f) The facts by reason of which the conduct warranting personal criticism is to be attributed to ASIC rather than simply to the officer or officers who engaged in the relevant misconduct; (g) The particular power or powers that would have been exercised, had ASIC acted in good faith; (h) The manner in which each such power would have been exercised. 175 In my view, the allegations in paragraphs 40.4 to 40.7 do not support the allegation of bad faith in paragraph 40.8, whether that is bad faith on the part of ASIC or on the part of any individual ASIC officer. In particular, the mere fact that there was a serious risk of harm, not alleged to have been known to ASIC, cannot support a conclusion that ASIC acted in bad faith in making the pleaded decisions. At most, the allegations support a finding of poor decision making. 176 Alternatively to paragraphs 40.3 to 40.8 above, paragraph 40.9 of the FASOC alleges: (a) having regard to the matters in paragraph 40.6, if ASIC had made a real attempt to comply with the Prospectus Investigation Duty and/or the Alternative Prospectus Investigation Duty, then it would have exercised its "Powers and/or Additional Powers" to address the risks set out in paragraph 36.2; and (b) ASIC (through the ASIC Officers) did not exercise its Powers and/or Additional Powers to address the risks set out in paragraph 36.2. (c) in the premises, ASIC (through ASIC Officers) acted in bad faith in failing to carry out the Prospectus Investigation Duty and/or the Alternative Prospectus Investigation Duty. 177 Paragraph 40.9 suffers from the same defects as paragraphs 40.4 to 40.8.

ASIC's alleged bad faith as to the risks of harm 178 Paragraph 41.1 of the FASOC alleges that ASIC, through the regional surveillance officers, knew that the regional surveillance decision would, or was likely to, harm the investors in the Storm Model, including the plaintiffs and the group members. 179 Paragraph 41.2 pleads, in the alternative, that ASIC, through the regional surveillance officers, was aware that there was a serious risk that Storm clients (including the plaintiffs and group members) would suffer loss or harm as a result of the regional surveillance decision and ASIC, through the regional surveillance officers, recklessly disregarded that risk. 180 The particulars to each of paragraph 41.1 and 41.2 refer to paragraphs 36.2(a) and 40.3 of the FASOC. In turn, paragraph 40.3 refers to paragraphs 40.4 to 40.9. 181 Paragraphs 41.3 and 41.4 make similar allegations in connection with the alleged failure to carry out the Prospectus Investigation Duty and the Alternative Prospectus Investigation Duty and in making the prospectus investigation decision. 182 Paragraph 36.2(a) is set out at paragraph 57 above. In essence, it alleges that the officers knew certain matters about the manner in which the Storm business was conducted, including that the business encouraged its clients to take certain risks, that the Storm business did not comply with ss 923A and 945A of the Corporations Act and that Storm systematically made misrepresentations to its clients, in breach of s 12DA of the ASIC Act and/or s 1041H(1) of the Corporations Act. I have explained the deficiencies in paragraph 36.2(a) at paragraphs 58 to 62 above. 183 Paragraphs 40.4 to 40.9 are considered in paragraphs 173 to 177 above. The allegations in those paragraphs are not relevant to the allegation of knowledge as to the likely consequences of the regional investigation decision. 184 Further, the particulars to paragraph 36.2 do not support the allegation of knowledge in paragraph 41.1. At most, they support an allegation that ASIC knew of a possibility that the plaintiffs and the group members had made or could make investment decisions that they would not have made had Storm not contravened the Corporations Act, and that the plaintiffs could possibly suffer financial loss as a consequence of making those investment decisions. 185 Accordingly, I do not accept that the pleaded facts support the allegation of bad faith in paragraphs 41.1 to 41.4 of the FASOC.

Allegation that ASIC's actions in 2008 impeach its inaction in 2007 186 Paragraph 41.5 of the FASOC alleges, further to paragraphs 41.1 to 41.4, that: (a) Storm's business and the risks posed to investors in the Storm Model by the matters set out at paragraph 36.2 did not materially change between 13 November 2007 and 20 December 2008; (b) ASIC's knowledge and understanding of Storm's business and its knowledge of the risks set out at paragraph 36.2 did not materially improve between 13 November 2007 and 20 December 2008; (c) In the premises, the relevant ASIC officers, for at least about 12 months prior to 20 December 2008 had actual knowledge: (i) of the matters in relation to which ASIC eventually exercised its powers under Part 3 of the ASIC Act; and (ii) that those matters posed a foreseeable risk to persons in the position of the plaintiffs and group members; yet failed to or, alternatively, decided not to, exercise those powers until after the plaintiffs and group members had suffered the financial losses pleaded in section 43. (d) In the premises, in making the prospectus investigation decision and/or in failing to carry out the Prospectus Investigation Duty and/or the Alternative Prospectus Investigation Duty, ASIC was aware of or recklessly disregarded: (i) the fact that ASIC was acting unlawfully in making the prospectus investigation decision; and (ii) the risks of injury to the class of persons in the position of the plaintiffs and group members, to an extent amounting to reckless untargeted malice; and thereby failed to act in good faith. 187 These allegations do not support the alleged failure to act in good faith. They proceed upon an unstated and unfounded assumption that ASIC's decision to take action in 2008 was made pursuant to a duty to act.

Conclusion on claims of tort of misfeasance in public office 188 For the reasons given above, I conclude that the FASOC does not disclose a reasonable cause of action against ASIC for the tort of misfeasance in public office.

The alleged negligence 189 In essence, the case in negligence rests upon similar, but not identical, facts to the case based on the tort of misfeasance in public office. 190 Section 45 of the FASOC is entitled "Breach of duties - Regional Surveillance Investigation". After reciting facts concerning the investigation, paragraph 45.5 of the FASOC alleges: In the course of, and after concluding the Regional Surveillance Investigation, ASIC breached its duty of care towards the Plaintiffs and Group Members by failing to: (a) exercise its Powers and/or Additional Powers with reasonable care to disclose to investors in the Storm Model the risks set out in paragraph 36.2(a); and (b) exercise its Powers and/or Additional Powers with reasonable care to require Storm to address, minimise or avoid the risks to those investors set out in paragraph 36.2(a). 191 Section 46 of the FASOC is entitled "Breach of duties - Prospectus Investigation". Paragraph 46.1 alleges: In the course of, and after concluding, the Prospectus Investigation, ASIC breached its duty of care towards the Plaintiffs and Group Members, by failing to: (a) exercise its Powers and/or Additional Powers with reasonable care to require Storm to disclose the risks to those investors set out in paragraph 36.2 above; and/or (b) in the alternative, rationally consider whether to exercise its Powers and/or Additional Powers to require Storm to disclose to those investors the risks to set out in paragraph 36.2 above; (c) exercise its Powers and/or Additional Powers with reasonable care to require Storm to address, minimise or avoid the risks to those investors set out in paragraph 36.2 above; or (d) in the alternative, rationally considering (sic) whether to exercise its Powers and/or Additional Powers to require Storm to address the risks to those investors set out in paragraph 36.2 above or to otherwise minimise those risks.

The alleged duties of care 192 The alleged duties of care are set out at paragraph 119 above. In each case, the duty is a duty towards investors in the Storm Model to avoid causing economic harm to those investors. 193 However, the FASOC does not allege that ASIC caused economic harm to the plaintiffs or the group members. The pleaded causal relationship between ASIC's conduct and the alleged harm is explained at paragraphs 29 to 40 above.

ASIC's contention: no duty of care 194 On behalf of ASIC, it was argued that there is no basis for the alleged duty of care by reason of: (1) The functions and purposes of ASIC imposed, and the discretionary powers conferred on ASIC, by the ASIC Act; and (2) The nature of the plaintiffs' claim as a claim for pure economic loss.

Considering duty of care on a strike out application 195 In Agar v Hyde [2000] HCA 41; 201 CLR 552 ("Agar v Hyde"), Gaudron, McHugh, Gummow and Hayne JJ said at [64]: It may be difficult for a court to say from the pleadings that a claim by a plaintiff that the defendant is liable in negligence is bound to fail because it is not arguable that the defendant owed the plaintiff a duty of care. Such cases do arise. In Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241, this Court held that the statement of claim did not disclose a cause of action in negligence against the defendant auditors. In Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628; [1971] AC 793, the Privy Council held that the declaration in that case was demurrable because it did not describe a relationship which imposed upon the defendants a duty of care in giving advice to the plaintiff. However, as Barwick CJ observed in Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 456 at 473: "[In] fact pleading as it was introduced in the judicature system, there is no necessity to assert or identify a legal category of action or suit which the facts asserted may illustrate, involve or demonstrate and on which the particular relief claimed is based or to which it is relevant." The result is that frequently the conventional form of pleading in an action of negligence will not reveal the alleged duty with sufficient clarity for a court considering an application for summary termination of the proceeding to be sure that all of the possible nuances of the plaintiff's case are revealed by the pleading. Further, and no less importantly, any finding about duty of care will often depend upon the evidence which is given at trial. Questions of reliance or knowledge of risk are two obvious examples of the kinds of question in which the evidence given at trial may take on considerable importance in determining whether a defendant owed the plaintiff a duty of care. 196 In New South Wales v Spearpoint [2009] NSWCA 233, Allsop ACJ noted (at [23]) that, Whilst the ultimate question as to the existence of a duty of care is one of law (Vairy v Wyong Shire Council [2005] HCA 62; (2005) 223 CLR 422 at [62]) the task is one which is fact rich and fact intensive. To put it as Windeyer J did in Mount Isa Mines v Pusey [1970] HCA 60; (1970) 125 CLR 383 (at 398 and 399) it is "a value judgment upon ascertained facts". 197 At [26], he concluded that it "is often, though not always, inappropriate to dismiss summarily a claim such as this on the pleadings, at least as they stand at an early stage in litigation". In that case, the question was whether the police owed a duty of care to a victim of an attack by a person who was subject to an apprehended violence order. 198 The plaintiffs relied on the statement of Connolly J in West v New South Wales [2007] ACTSC 43 at [26] that "[w]here there is no binding authority to say that the cause of action is unsustainable, it seems to me that a defendant faces a heavy burden in persuading a trial judge to strike out a cause of action as being unreasonable". They also referred to the judgment of French J (as he then was, Beaumont and Finkelstein agreeing) in Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1572; (2000) 104 FCR 564 ("Johnson Tiles") declining to strike out the claim in negligence on the basis that "the principles, and more importantly, their application in particular cases, are not so settled and not so clear cut that it can be said the claim is untenable" (at [79]). 199 In Johnson Tiles, the case was that Esso owed a duty of care when designing, installing, operating and maintaining the Longford gas plant to avoid causing pecuniary loss resulting from an explosion at the gas plant, following which gas supplies were unavailable to most consumers in the State of Victoria for about two and a half weeks. 200 "A defendant will only be liable, in negligence, for failure to take reasonable care to prevent a certain kind of foreseeable harm to a plaintiff, in circumstances where the law imposes a duty to take such care": Sullivan v Moody [2001] HCA 59; (2001) 207 CLR 562 ("Sullivan v Moody") at [42], cited with approval in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36; (2014) 254 CLR 185 ("Brookfield") at [19] by French CJ. In this case, the following features of the claim raise doubt about whether the facts as pleaded give rise to a reasonable cause of action.

Affirmative duty of care on a statutory authority 201 The claim involves the imposition of an affirmative duty of care on a statutory authority. In Crimmins v Stevedoring Industry Finance Committee [1999] HCA 59; (1999) 200 CLR 1 ("Crimmins"), McHugh J (Gleeson CJ agreeing) said, at [79] and [80]: Common law courts have long been cautious in imposing affirmative common law duties of care on statutory authorities. Public authorities are often charged with responsibility for a number of statutory objects and given an array of powers to accomplish them. Performing their functions with limited budgetary resources often requires the making of difficult policy choices and discretionary judgments. Negligence law is often an inapposite vehicle for examining those choices and judgments. Situations which might call for the imposition of a duty of care where a private individual was concerned may not call for one where a statutory authority is involved. This does not mean that statutory authorities are above the law. But it does mean that there may be special factors applicable to a statutory authority which negative a duty of care that a private individual would owe in apparently similar circumstances. In many cases involving routine events, the statutory authority will be in no different position from ordinary citizens. But where the authority is alleged to have failed to exercise a power or function, more difficult questions arise. In Australia, the starting points for determining the common law liability of statutory authorities for breach of affirmative duties are the decisions of this Court in Sutherland Shire Council v Heyman (1985) 157 CLR 424and Pyrenees Shire Council v Day (1998) 192 CLR 330. In Heyman (1985) 157 CLR 424 at 459-460, Mason J, speaking with reference to a failure to exercise power, said: "Generally speaking, a public authority which is under no statutory obligation to exercise a power comes under no common law duty of care to do so ... But an authority may by its conduct place itself in such a position that it attracts a duty of care which calls for exercise of the power. A common illustration is provided by the cases in which an authority in the exercise of its functions has created a danger, thereby subjecting itself to a duty of care for the safety of others which must be discharged by an exercise of its statutory powers or by giving a warning ..." 202 In Crimmins, Hayne J said at [270] and [271]: The fact that the Authority is a statutory body given statutory discretions does not prevent the application of ordinary principles of the law of negligence: Sutherland Shire Council v Heyman (1985) 157 CLR 424; Pyrenees Shire Council v Day (1998) 192 CLR 330. But the courts have often found the task of identifying the duty of care that is owed by a statutory body to be difficult. To whom is the duty owed? What is the content of the duty? There are several reasons why the task is difficult. As Gummow J pointed out in Pyrenees Shire Council v Day (1998) 192 CLR 330 at 375, a person claiming against a public body with statutory powers seeks "to translate the public law 'may' into the common law 'ought'". Should the courts (and can the courts) distinguish between policy and operational decisions of statutory bodies? Is the distinction between non-feasance and misfeasance relevant? Does it matter that the constituting statute gives a body some statutory duties and then, in different language, gives it some statutory powers? Is the body to be liable in negligence when it does not use the powers it was given but was under no statutory duty to use them (or perhaps even to consider their use)? All these, and more, are questions that may arise. 203 This is not a case in which ASIC's position can be compared to that of an ordinary citizen: the alleged duties are framed as duties to exercise powers conferred upon ASIC by statute. This is also not a case of the kind described by Mason J as one in ASIC's conduct is alleged to have created a danger, thereby subjecting ASIC to a duty of care. 204 It should be remembered that the duty of care found in Crimmins was a duty to protect a waterside worker from the risk of personal injury in the course of his employment. The duty of care arose from the particular circumstances of Mr Crimmins' relationship with the Authority, with different members of the majority emphasising different aspects. 205 Hayne J found that the Australian Stevedoring Industry Authority did not owe Mr Crimmins a duty of care. He was in the minority on that point. However, his reasons for refusing to find a duty are instructive. He said, at [295] and [296]: To impose a common law duty of care on the Authority would have affected the way in which the body went about its task. It would have shifted the Authority's attention from what the general good of the industry required (which, of course, included workplace safety but was not limited to that) to what should be done to avoid the Authority being held responsible for particular breaches of workplace safety by those having primary responsibility for the task - the employers of waterside labour. Whatever may have been the social benefits of having the Authority fulfil that kind of role (and they may now be thought to have been large) it is essential not to lose sight of the fact that this is not the role that the Parliament gave it. That being so, the courts should not, indeed cannot, do so. The present case is even clearer. The appellant's complaint is that the Authority made no order. It did not exercise its quasi-legislative power. If the appellant is to succeed then, it is necessary to show that the Authority, exercising reasonable care, was duty bound to exercise its power to make a general order and to exercise that power in a particular way. What I have called the distortion of focus is greater if a common law duty to exercise the power (as opposed to a common law duty affecting how the power is exercised) is found to exist. It is greater because the imposition on the Authority of a duty owed to individuals means that the Authority would have been bound to consider the position of those individuals and to do so regardless of what other subjects may have properly required its time and attention in performing the functions given to it by the Act. The Authority's focus would shift from the good of the industry to protection of the Authority from suit. (The distortion of focus would be no less if the duty were cast in terms of a duty to consider making an order, but the appellant did not contend for such a duty.) 206 The proposition that ASIC owed a duty to a particular class of investors seems to suggest the possibility that it might owe such a duty to investors more generally, particularly since the duty is not founded upon any direct relationship between ASIC and the members of the class of investors. If this is the case, then the content of the duty may have to take into account the possible impact of any, such as a disclosure of risks, upon other investors. In Graham Barclay Oysters v Ryan [2002] HCA 54; (2002) 211 CLR 540 ("Graham Barclay Oysters"), Gleeson CJ noted (at [8]) that, "[i]f it is not possible to answer [the question as to what is the content of the duty owed] with reasonable clarity, that may cast doubt on the existence of the duty". 207 In Graham Barclay Oysters, McHugh J observed at [82]: The likelihood of the common law imposing an affirmative duty of care whose content may require the exercise of a statutory power increases where the power is invested to protect the community from a particular risk and the authority is aware of a specific risk to a specific individual. 208 Gummow and Hayne JJ said at [145]: … the co-existence of knowledge of a risk of harm and power to avert or to minimise that harm does not, without more, give rise to a duty of care at common law. The totality of the relationship between the parties, not merely the foresight and capacity to act on the part of one of them, is the proper basis upon which a duty of care may be recognised. Were it otherwise, any recipient of statutory powers to licence, supervise or compel conduct in a given field, would, upon gaining foresight of some relevant risk, owe a duty of care to those ultimately threatened by that risk to act to prevent or minimise it. As will appear, the common law should be particularly hesitant to recognise such a duty where the relevant authority is empowered to regulate conduct relating to or impacting on a risk-laden field of endeavour which is populated by self-interested commercial actors who themselves possess some power to avert those risks. 209 In this case, the plaintiffs and group members must be taken to have been aware that they were entering into a "risk-laden field of endeavour" by investing money (including borrowed money) in the hope of a return. There can also be no doubt that they were acting in their self-interest in taking advice from Storm. There is a question about whether the plaintiffs' and group members' reliance upon Storm (as opposed to reliance upon ASIC, although that is also alleged "in the sense [of] a general expectation that [ASIC's] powers would be exercised with reasonable care") may lead, with other factors, to the imposition of a duty of care upon ASIC.

Claim for damages for pure economic loss 210 The claim is for damages for pure economic loss. In Brookfield, Crennan, Bell and Keane JJ considered the history of the development of liability at common law for unintentionally inflicted economic loss from [121]. They referred, with apparent approval, to the acceptance by Gleeson CJ, Gummow, Hayne and Heydon JJ in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515 of the general rule of the common law that damages for economic loss which is not consequential upon damage to person or property are not recoverable in negligence even if the loss is foreseeable. 211 In Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180, at [73], McHugh J quoted with approval the following statement of Lord Oliver in Murphy v Brentwood District Council [1991] 1 AC 398 at 487: The infliction of physical injury to the person or property of another universally requires to be justified. The causing of economic loss does not. If it is to be categorised as wrongful it is necessary to find some factor beyond the mere occurrence of the loss and the fact that its occurrence could be foreseen. Thus the categorisation of damage as economic serves at least the useful purpose of indicating that something more is required ... 212 In Precision Products (NSW) Pty Ltd v Hawkesbury City Council [2008] NSWCA 278; (2008) 74 NSWLR 102 ("Precision Products"), Allsop P (Beazley and McColl JJA agreeing) said relevantly at [105]: The circumstances in which the common law will impose a duty of care to avoid causing pure economic loss have been the subject of considerable debate and uncertainty in Australia since Caltex Oil (Australia) Pty Limited v The Dredge "Willemstad" [1976] HCA 65; 136 CLR 529. Since then, in a series of cases in the High Court culminating in Woolcock Street Investments v CDG (Bryan v Maloney [1995] HCA 17; 182 CLR 609; Hill v Van Erp [1997] HCA 9; 188 CLR 159; Esanda Finance Corporation Limited v Peat Marwick Hungerfords [1997] HCA 9; 188 CLR 241; Pyrenees Shire Council v Day; and Perre v Apand) the High Court has identified an approach based on the presence, in the particular circumstances, of "salient features" that, when combined, constitute or reflect a sufficiently close relationship to give rise to a duty of care. Such salient features include the inherent likelihood of the production of economic loss (Caltex Oil (Australia) at 576) and assumption of responsibility and known reliance (Bryan v Maloney and the negligent misrepresentation cases). The most important of these features, however, is vulnerability, in the sense discussed in the joint reasons of Gleeson CJ, Gummow, Hayne and Heydon JJ in Woolcock Street Investments v CDG (at 530 [23]): [23] … 'Vulnerability', in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, 'vulnerability' is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. (Citation omitted)

Duty to control a third party's conduct 213 Although the plaintiffs' submissions described the alleged duty as a duty "to avoid causing…investors economic harm", the alleged duties are, mainly, in the nature of a duty to control the conduct of a third party, Storm. In Stuart v Kirkland-Veenstra [2009] HCA 15; (2009) 237 CLR 215 at [88], Gummow, Hayne and Heydon JJ said: The co-existence of a knowledge of a risk of harm and power to avert or minimise that harm does not, without more, give rise to a duty of care at common law: Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 at 596 [145]. As Dixon J said in Smith v Leurs (1945) 70 CLR 256 at 262, "[t]he general rule is that one man is under no duty of controlling another man to prevent his doing damage to a third": see also Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254. It is, therefore, "exceptional to find in the law a duty to control another's actions to prevent harm to strangers": Smith v Leurs (1945) 70 CLR 256 at 262.

Duty to warn 214 The alleged duty to warn is also not a duty "to avoid causing…investors economic harm", contrary to the plaintiffs' submissions. 215 In Graham Barclay Oysters, at [64], McHugh J said: Although different concepts inform the law of negligence, ordinarily there is a duty to warn only if there is a foreseeable risk that a person will be led to believe that something is safe when it is not. 216 In this case, the relevant activity (investing, and, in particular, investing borrowed funds) is not inherently safe. Accordingly, the case must be that, in the circumstances, ASIC was obliged to take reasonable steps (having first identified the relevant class of investors) to inform them of risks apart from those of which they could be taken to have been aware.

Absence of direct relationship between ASIC and the plaintiffs and group members 217 The case is not based on any direct relationship between the plaintiffs and ASIC. It is not alleged that ASIC knew of the particular circumstances of any individual plaintiff or assumed responsibility in relation to any individual plaintiff. 218 In Perre v Apand, there was no relationship between the parties. However, the High Court concluded that the circumstances of the case brought the Perres and Apand into such close and direct relations as to give rise to a duty of care owed by Apand not to cause purely economic loss. The relevant loss was the result of the spread of a disease to the Perres' potato crops from non-certified seed used by Apand in the conduct of experimental activities on land near the Perres' crops. Gummow J (Gleeson CJ agreeing) noted at [215] and [216]: … As a practical matter, Apand was in control of the initiation and conduct of the experimental activities using the Sparnons' property. Apand both selected and supplied the seed and chose the location for the experiment. The Perres had no way of appreciating the existence of the risk to which they were exposed by the conduct of the Apand experiment and no avenue to protect themselves against that risk. They thus stood in quite a different position from that of the financier in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords which had the power to deal from a position of strength in ordering its commercial relationship with the party to whom it provided financial accommodation (1997) 188 CLR 241 at 266, 284-285, 304. Here, the relevant risk to the commercial interests of the appellants was in the exclusive control of Apand. Its measure of control was at least as great as that of the Shire in Pyrenees Shire Council v Day (1988) 192 CLR 330 at 384. …

ASIC's role 219 ASIC's functions and objects are broad and multi-faceted. 220 An example of an object which reflects ASIC's role in promoting the public interest generally, which might be thought to conflict with a duty to a particular class of investors is the object in s 1(2)(a) of striving to "maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy". Providers of financial services and financial products are likely to have different interests in the performance of the financial system and the economy from investors, and investors do not have uniform objectives. 221 As Hayne J observed in Crimmins, in the passage cited above at paragraph 205, the imposition of a duty of care in the exercise of a regulatory function such as investigation or imposition of a condition on a licence creates the risk of distortion of focus away from the public interest and towards protection of the relevant statutory authority from suit. 222 In New South Wales v Paige [2002] NSWCA 235; (2002) 60 NSWLR 371 at [93], Spigelman CJ said (Mason P and Giles JA agreeing on this point): When considering the issue of coherence it is necessary to give close consideration to the statutory scheme: specifically whether a common law duty is "inconsistent" or "incompatible" with the statute and, relevantly in this case, the regulations. (See, for example, Crimmins at 13 [3], 16 [18], 39 [93], 46 [114], 72 [203]-[213]); Sullivan v Moody at 582 [60].) However, issues of coherence may arise even if there is no direct inconsistency. It may be enough if the effect of imposing civil liability is to "distort [the] focus" of the statutory decision-making process. (Crimmins at [292] per Hayne J.) 223 Spigelman CJ continued: 115. As a general rule, in my opinion, it is undesirable to inhibit an investigation into the exercise of a statutory power which protects public interests by imposing the chilling effect of a risk of civil liability. As Lord Keith of Kinkel said in Hill v Chief Constable of West Yorkshire [1989] 1 AC 53 at 63 with reference to police investigation of crime: "In some instances the imposition of liability may lead to the exercise of a function being carried on in a detrimentally defensive frame of mind." … 118. In Rowling v Takaro Properties Limited [1988] 1 AC 473, the Privy Council had before it a claim for damages said to have been caused by an ultra vires decision made by a Minister pursuant to a statutory power. The Privy Council identified a number of factors that militated against the imposition of any duty of care. A number of these considerations are material in the present context. These factors include the following (at 502): "... in the nature of things, it is likely to be very rare indeed that an error of law of this kind by a minister or other public authority can properly be categorised as negligent. As is well known, anybody, even a judge, can be capable of misconstruing a statute; and such misconstruction, when it occurs, can be severely criticised without it attracting the epithet 'negligent'. Obviously, this simple fact points rather to the extreme unlikelihood of a breach of duty being established in these cases ... but it is nevertheless a relevant factor to be taken into account when considering whether liability in negligence should properly be imposed." 119. Their Lordships went on to refer, as a further consideration, to "the danger of overkill" by reference to certain circumstances in which "the imposition of liability may even lead to harmful consequences", about which their Lordships elaborated (at 502): "... once it became known that liability in negligence may be imposed on the ground that a minister has misconstrued a statute and so acted ultra vires, the cautious civil servant may go to extreme lengths in ensuring that legal advice, or even the opinion of the court, is obtained before decisions are taken, thereby leading to unnecessary delay in a considerable number of cases." 120. In Rowling v Takaro, their Lordships rejected the proposition that a minister was under an obligation to take legal advice in cases relevant to the exercise of a discretionary power (at 502-503). They concluded that the imposition of liability in negligence could lead to delay occurring in the decision-making process. Nevertheless, their Lordships did not determine the issue. They decided the question on the issue of breach of duty, rather than the existence of a duty. The circumstances of the case proved to be an example of what their Lordships indicated would usually be the case, that is, the mere misconstruction of a statute cannot be described as negligent. 224 In Precision Products at [119] and [120], Allsop P referred to the lack of coherence between administrative law doctrines and the imposition of monetary compensation for the flawed or failed exercise of governmental power, saying relevantly: As will be seen, if standards of administration are to be regulated and enforced by recourse to the recovery of damages at common law, the courts must necessarily become involved, not just in the constitutional role of ensuring legality, but also in laying down standards of administrative conduct by reference to a standard of reasonable care. This standard setting and its enforcement by the courts would be in relation to the exercise of power of another branch of government and in circumstances where there exist machinery and techniques for the setting and maintenance of good administration and good government. … The above is not to deny the continued force of Caledonian Collieries Ltd v Speirs [1957] HCA 14; (1957) 97 CLR 202 and like cases. When a Council examines a power to build a structure, approve a plan, give permission for an act or otherwise engage in activity, it may well be required (on pain of liability in damages) to exercise care in relation to someone who may be affected by the power's exercise. What tends to strike at the coherence of administrative law here is the positing of a duty to exercise reasonable care not to make a flawed decision by, for instance, failing to give procedural fairness or failing to confine the power within statutory limits. Such a duty, as contended for here, would tend to open public authorities to the spectre of compensation for flawed decision-making, in circumstances where the validity of the exercise of power can be tested and resolved by judicial review, and where standards of competence and skill are well able to be dealt with by an appropriate regime of governmental administration. 225 In this case, the posited duty is a duty to exercise reasonable care not to make a flawed decision by making the pleaded administrative law errors. The situation is different from Precision Products, however, in that the plaintiffs and group members were not realistically in a position to seek judicial review of the conduct now said to have involved breach of a duty of care. 226 In Yuen Kun Yeu v Attorney General of Hong Kong [1988] AC 175 ("Yuen Kun Yeu"), the Privy Council held that the Commissioner of Deposit-taking Companies of Hong Kong did not owe a duty of care to depositors with a company that subsequently went into liquidation, causing the plaintiffs to lose their deposits. The case bears some similarities with the present case, in that there were allegations that the deposits were made in reliance upon the company's registration by the Commissioner, that the Commissioner knew or ought to have known had he taken reasonable care that the company's affairs were being conducted fraudulently and to the detriment of depositors, that he should have ensured the company's compliance with the relevant regulation and that he should not have registered the company or should have revoked its registration. 227 The Privy Council recognised that one of the purposes of the relevant regulation (although not the only one) was to make provision for the protection of persons who deposit money (at 194). They also accepted that it was reasonably foreseeable by the Commissioner that, if an uncreditworthy company were placed on or allowed to remain on the register, persons who might in the future deposit money with it would be at risk of losing that money. However, that factor was outweighed by the following matters: (1) Future depositors were not the only persons whom the Commissioner should properly have in contemplation. In considering the question of removal from the register, the immediate and probably disastrous effect on existing depositors would be a very relevant factor; (2) The Commissioner did not have power to control the day-to-day management of the company. His power was limited to putting it out of business or allowing it to continue; (3) The immediate cause of the depositors' loss was the conduct of the company. Another cause was the depositors' conduct in depositing their funds with a company that turned out to be uncreditworthy. Considerable information was publicly available about the company and no doubt advice could have been obtained from investment advisers; (4) Before the deposits were made, the Commissioner had no relationship with the depositors; (5) The circumstances that the Commissioner had cogent reason to suspect that the company's business was being carried on fraudulently and improvidently did not create a special relationship between the Commissioner and the company; or between the Commissioner and those unascertained members of the public who might in the future become exposed to the risk of financial loss through depositing money with the company; (6) While the investing public might feel some confidence that the provisions of the regulation went a long way to protect their interests, reliance on the fact of registration as a guarantee of the soundness of a particular company would be neither reasonable nor justifiable, nor should the Commissioner reasonably be expected to know of such reliance, if it existed. 228 Finally, the Privy Council acknowledged the force of arguments put on behalf of the regulator that the imposition of a common law duty of care could lead to distortion of regulatory judgment, by producing a defensive approach to the Commissioner's work. 229 The decision in Yuen Kun Yeu was cited by the High Court with apparent approval in Sullivan v Moody at [58]. 230 In Davis v Radcliffe [1990] 1 WLR 821, the Privy Council found that the members of the Finance Board and the Treasurer of the Isle of Man did not owe a duty of care to depositors of a bank licensed under statute. The Privy Council concluded that the case was relevantly indistinguishable from Yuen Kun Yeu. The Council identified the following considerations as militating against the imposition of a duty of care: (1) The functions of the defendants were "typical functions of modern government, to be exercised in the general public interest"; and (2) The defendants did not possess sufficient control over the management of the bank to warrant the imposition of liability in negligence. 231 In considering the question of functions, the Privy Council said at 826-827: No doubt, in establishing a system of licensing for banks, regard was being had (though this is not expressly stated in the long title of the Act) to the fact that the existence of such a licensing system should provide an added degree of security for those dealing with banks carrying on business in the Isle of Man, including in particular those who deposit money with such banks. But it must have been the statutory intention that the licensing system should be operated in the interests of the public as a whole; and when those charged with its operation are faced with making decisions with regard, for example, to refusing to renew licences or to revoking licences, such decisions can well involve the exercise of judgment of a delicate nature affecting the whole future of the relevant bank in the Isle of Man, and the impact of any consequent cessation of the bank's business in the Isle of Man, not merely upon the customers and creditors of the bank, but indeed upon the future of financial services in the island. In circumstances such as these, competing considerations have to be carefully weighed and balanced in the public interest, and, in some circumstances … it may for example be more in the public interest to attempt to nurse an ailing bank back to health than to hasten its collapse. The making of decisions such as these is a characteristic task of modern regulatory agencies; and the very nature of the task, with its emphasis on the broader public interest, is one which militates strongly against the imposition of a duty of care being imposed upon such an agency in favour of any particular section of the public.

ASIC's first argument: alleged duty is inconsistent with ASIC's functions and objects 232 As ASIC's submissions recognised, the starting point is an examination of the statutory regime under which ASIC operates. In Graham Barclay Oysters at [146], Gummow and Hayne JJ said: The existence or otherwise of a common law duty of care allegedly owed by a statutory authority turns on a close examination of the terms, scope and purpose of the relevant statutory regime. The question is whether that regime erects or facilitates a relationship between the authority and a class of persons that, in all the circumstances, displays sufficient characteristics answering the criteria for intervention by the tort of negligence. 233 ASIC argued that the language of the ASIC Act did not support the existence of the alleged duty: it is not expressly imposed by the Act, the Act uses the language of "functions" and "objects" (not duties) and ASIC's powers are expressly discretionary. ASIC contended that the express conferral of a discretion to exercise a power is inconsistent with a duty to exercise the power in a particular way, as the FASOC in effect alleges. These considerations are not determinative. As Gummow and Hayne JJ said in Graham Barclay Oysters at [148]: …the discernment of an affirmative legislative intent that a common law duty exists, is not, and has never been, a necessary pre-condition to the recognition of such a duty. 234 ASIC also argued that s 246 of the ASIC Act pointed against the existence of a common law duty. Section 246 provides relevantly that ASIC is not liable to an action or other proceeding for damages for or in relation to an act done or omitted in good faith in performance or purported performance of any function, or in exercise or purported exercise of any power, conferred or expressed to be conferred by or under the corporations legislation, or a prescribed law of the Commonwealth, a State or a Territory. 235 In my view, the opposite is the position. Section 246 points more towards the existence of a common law duty of care because it operates to exclude liability which would otherwise be imposed: liability in negligence is the kind of liability that might well be excluded by s 246: cf Minister for Youth and Community Services v Health and Research Employees Association (1987) 10 NSWLR 543 at 561; TC v State of New South Wales [1999] NSWSC 31 at [160]; Board of Fire Commissioners (NSW) v Ardouin [1961] HCA 71; (1961) 109 CLR 105; Puntoriero v Water Administration Ministerial Corporation [1999] HCA 45; (1999) 199 CLR 575. In saying this, I am not intending to express any concluded view about the operation of s 246 in this case. 236 ASIC argued that its statutory functions and objects are inconsistent with the alleged duty of care. It contended that the objects in s 1(2) of the ASIC Act, which ASIC is directed to strive to achieve, are likely to conflict or at least involve tensions in relation to a duty of care. 237 In Sullivan v Moody, the High Court said, at [60]: The circumstance that a defendant owes a duty of care to a third party, or is subject to statutory obligations which constrain the manner in which powers or discretions may be exercised, does not of itself rule out the possibility that a duty of care is owed to a plaintiff. People may be subject to a number of duties, at least provided they are not irreconcilable. A medical practitioner who examines, and reports upon the condition of, an individual, might owe a duty of care to more than one person. But if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that the duty exists. Similarly, when public authorities, or their officers, are charged with the responsibility of conducting investigations, or exercising powers, in the public interest, or in the interests of a specified class of persons, the law would not ordinarily subject them to a duty to have regard to the interests of another class of persons where that would impose upon them conflicting claims or obligations. 238 Sullivan v Moody was a quite different case from this one, in that the alleged duty of care was directed to a person under investigation. However, the statutory powers under consideration such as the power to impose a licence condition are powers that are to be exercised in the public interest: compare Rich v Australian Securities and Investments Commission [2004] HCA 42; 220 CLR 129 at [49]. 239 Another object which tends to be inconsistent with the imposition of the duty of care is the object in s 1(2)(b) of striving to "promote the confident and informed participation of investors and consumers in the financial system". The language of "promote" is suggestive of a concern with systems, rather than the interests of individual participants. The reference to "investors and consumers in the financial system" suggests a requirement to balance various interests, rather than a duty to a particular class of investors. 240 In itself, the language that ASIC must "strive" is inconsistent with the imposition of a duty towards a class of persons to take reasonable care, because it does not mandate a standard of conduct. 241 Taking these various matters into account, and applying reasoning of the kind in Yuen Kun Yeu, I accept the strength of ASIC's submission but not that it is so strong as to render the plaintiffs' claim untenable.

ASIC's second argument: salient facts do not support imposition of duty of care

Foreseeability 242 The FASOC pleads foreseeability as follows: 44.6 It would have been reasonably foreseeable to a reasonable person in ASIC's position that a failure by it to exercise its Powers and / or Additional Powers with reasonable care and skill at the conclusion of each Investigation might result in loss or damage to Storm's clients, including the Plaintiffs and Group Members. 243 ASIC accepted, at least implicitly, that the risk of economic loss to persons in the position of the plaintiffs and the group members as a result of inadequate regulation of Storm was foreseeable. 244 The plaintiffs submitted that "ASIC must also accept its knowledge of harm to group members". What is pleaded is knowledge of facts from which it is alleged that ASIC had knowledge of a risk of harm "to investors in the Storm model", with the particular harm that might be suffered being unspecified. 245 The plaintiffs also submitted that the allegations in the FASOC (paragraphs 36.2, 41.2 and 41.3) established ASIC's knowledge that its inaction "would lead to the group members suffering that harm". They submitted that, on the plaintiffs' case, "ASIC knew ... the harm that would flow from [Storm's] conduct". These submissions are not correct. There is no allegation of knowledge that group members would suffer harm if ASIC did not act, and nor are there factual allegations from which such knowledge could be inferred.

Control 246 "The factor of control is of fundamental importance in discerning a common law duty of care on the part of a public authority": Graham Barclay Oysters (Gummow and Hayne JJ at [150]). 247 The plaintiffs allege that ASIC exercised control over the harm suffered by the plaintiffs, "as a result of its statutory powers, in circumstances where it learnt of the harm after it engaged those powers and exercised its statutory powers to partially address that harm". But control is a question of degree. Thus, in Agar v Hyde, Gleeson CJ observed that the form of control that the International Rugby Football Board had over a game of football played in a Sydney suburb, or a country town, by reason of their collective capacity to alter the international rules, is a remote form of control. 248 In Graham Barclay Oysters, Gummow and Hayne JJ concluded that the Council's statutory powers to monitor and, where necessary, to intervene in order to protect, the physical environment of areas under its administration did not give the Council such a significant and special measure of control over the risk of danger that ultimately injured the oyster consumers so as to impose upon it a duty of care to those consumers. Gummow and Hayne JJ said at [150]: [The factor of control] assumes particular significance in this appeal. This is because a form of control over the relevant risk of harm, which, as exemplified by Agar v Hyde, is remote, in a legal and practical sense, does not suffice to found a duty of care. 249 I do not accept the submission that power to address a risk of harm together with preliminary steps to address a risk could constitute sufficient "control" for the imposition of a duty of care. In particular, the case law set out above makes it clear that the co-existence of knowledge of a risk of harm and power to avert or to minimise that harm does not, without more, give rise to a duty of care at common law. If steps taken by ASIC created a danger, then the position would be different. However, the mere fact of taking regulatory steps does not involve the kind of "significant and special measure of control" of which Gummow and Hayne JJ spoke in Graham Barclay Oysters. 250 The plaintiffs submitted that ASIC assumed control over the risk of harm to group members by its conduct in the regional surveillance investigation and the prospectus investigation. They asserted that the "test for establishing control is whether, by reason of ASIC's statutory powers, it had the power to protect a specific class including the plaintiff (rather than the public at large) from the risk of harm". Again, this submission ignores the fact that control is a matter of degree. It also ignores the limitations on ASIC's powers arising from administrative law requirements, such as s 914A(3) of the Corporations Act, mentioned earlier. It also ignores the availability of merits and judicial review of the exercise of ASIC's statutory powers.

Vulnerability 251 At paragraph 44.3 of the FASOC, the plaintiffs pleaded that they and the group members were in a position of vulnerability in that: (a) Storm had rigorous procedures to select clients who were inculcated with the Storm Philosophy and would willingly comply with advice provided by Storm; … (b) many of Storm's clients were of modest means and were unsophisticated investors; … (c) Storm and its accountants considered that Storm controlled its clients' future investments in the Storm Index Funds, and had devised Storm's accounting procedures accordingly; … (d) they were unaware of the totality of the risks identified in paragraph 36.2 above, and, to the extent that they were aware of particular risks identified in that paragraph, that knowledge did not enable them to properly asses the danger posed by the Storm Model; (e) they had no power to demand that Storm provide information in relation to these risks or, if they did, it was unlikely that they would exercise such power given the matters pleaded in sub-paragraphs (a), (b) and (d) above; (f) they were reliant on Storm to provide them with advice in relation to these risks (and Storm was not in a position to provide them with in­ dependent advice about these matters); and (g) by reason of the matters pleaded in (a) to (f) above, they were unable to protect themselves from the risks set out in paragraph 36.2 above. 252 The plaintiffs identified the question as being whether they could reasonably be expected to adequately safeguard themselves from the harm, citing Crimmins at [93] per McHugh J. However, that formulation of the question was stated in the context of a case that a duty of care was owed to take reasonable care to protect a waterside worker from foreseeable risks of personal injury. McHugh J explicitly noted (at [78]) that the principles applicable to cases of economic loss were set out by him in Perre v Apand. In the latter case, at [104], McHugh J said: What is likely to be decisive, and always of relevance, in determining whether a duty of care is owed is the answer to the question, "How vulnerable was the plaintiff to incurring loss by reason of the defendant's conduct?" So also is the actual knowledge of the defendant concerning that risk and its magnitude. If no question of indeterminate liability is present and the defendant, having no legitimate interest to pursue, is aware that his or her conduct will cause economic loss to persons who are not easily able to protect themselves against that loss, it seems to accord with current community standards in most, if not all, cases to require the defendant to have the interests of those persons in mind before he or she embarks on that conduct. 253 At [118], McHugh expressed the view that: If the plaintiff has taken, or could have taken steps to protect itself from the defendant's conduct and was not induced by the defendant's conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss. 254 In Perre v Apand at [11], Gleeson CJ referred to the influence of "the obvious vulnerability of a specific plaintiff" as an application of the idea that the degree (and nature) of foreseeability may have an important bearing on whether there is a duty of care. 255 In Woolcock, at [23] and [24], the joint judgment said: Since Caltex Oil, and most notably in Perre v Apand Pty Ltd (1999) 198 CLR 180, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. "Vulnerability", in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, "vulnerability" is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant's negligence in sowing a crop which caused the quarantining of the plaintiffs' land. In Hill v Van Erp (1997) 188 CLR 159, the intended beneficiary depended entirely upon the solicitor performing the client's retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 159, the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor's certification of the accounts of the company. In other cases of pure economic loss (Bryan v Maloney [(1995) 192 CLR 609 at 632)] is an example) reference has been made to notions of assumption of responsibility and known reliance. The negligent misstatement cases like Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556; (1970) 122 CLR 628; [1971] AC 793 and Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225 can be seen as cases in which a central plank in the plaintiff's allegation that the defendant owed it a duty of care is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information the defendant provided. And it may be, as Professor Stapleton has suggested (UCLA Law Review (2002), vol 50 531, at pp 558-559), that these cases, too, can be explained by reference to notions of vulnerability. (The reference in Caltex Oil to economic loss being "inherently likely" can also be seen as consistent with the importance of notions of vulnerability.) It is not necessary in this case, however, to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability. 256 The issue is not the plaintiffs' and group members' inability to protect themselves from the consequences of Storm's misconduct. I accept that an inability on the part of the plaintiff and group members to protect themselves from the consequences of a want of care on the part of ASIC in its regulation of Storm could be characterised as a form of vulnerability. However, as pleaded, the reasonably foreseeable consequences were possible financial losses rather than inherently likely, or even likely losses. Thus there is no vulnerability in the sense that the plaintiffs and group members were likely to suffer damage if reasonable care was not taken. Nor is there any reason to think that the matters pleaded in paragraph 44.3 are the kinds of matters that give rise to an inability on the part of the plaintiffs to protect themselves from the consequences of losses in a way that would cast the consequences of those losses on ASIC.

Assumption of responsibility or reliance 257 ASIC contends that in the absence of known dependence or assumption of responsibility, there can be no duty of care to prevent the plaintiffs and group members from suffering pure economic loss. 258 I do not agree that the law is as clear as this. Perre v Apand is a case which seems to contradict the proposition. However, the ultimate test is whether the relationship between the parties is sufficiently close to impose a duty of care, and the absence of any relationship prior to making the relevant investments is a telling factor against such a duty, as the Privy Council concluded in Yuen Kun Yeu. 259 The plaintiffs submit that they relied on ASIC to ensure that the advice and disclosures made by Storm complied with the law. However, they also submitted that this reliance is "not something that the plaintiffs need to independently prove to make good their claim". I consider reliance of this kind to be analogous to the reliance contended for in Yuen Kun Yeu: it would be neither reasonable nor justifiable for investors to have relied upon ASIC's regulation of Storm as a basis for acting on Storm's advice.

Reasoning by analogy 260 The plaintiffs sought to draw particular support from the cases of Pyrenees and Crimmins. However, neither of these involved a claim for pure economic loss. Pyrenees included a claim for property damage, while Crimmins was a personal injury case. 261 In Pyrenees, the relevant risk was identified as a "risk to life and property posed by [a] defective fireplace. It was a serious risk which, if it eventuated, might have seen the destruction of a large part of the township". 262 The risk in Pyrenees was quite different from the risk in this case. In Pyrenees, unlike this case, the Shire Council was aware of a specific risk (the risk of fire resulting from a defective fireplace at a particular location) to specific individuals. 263 The plaintiffs sought to rely on the following passage from the reasons of Gummow J (at [177]): The general rule is that "when statutory powers are conferred they must be exercised with reasonable care, so that if those who exercise them could by reasonable precaution have prevented an injury which has been occasioned, and was likely to be occasioned, by their exercise, damages for negligence may be recovered": Caledonian Collieries Ltd v Speirs (1957) 97 CLR 202 at 220; Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 436, 458, 484. A public authority which enters upon the exercise of statutory powers with respect to a particular subject-matter may place itself in a relationship to others which imports a common law duty to take care which is to be discharged by the continuation or additional exercise of those powers: Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 459-460. An absence of further exercise of the interconnected statutory powers may be difficult to separate from the exercise which has already occurred and that exercise may then be said to have been performed negligently: cf Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 479; Fellowes v Rother District Council [1983] 1 All ER 513 at 522; X (Minors) v Bedordshire County Council [1995] 2 AC 633 at 763.. These present cases are of that kind. They illustrate the broader proposition that, whatever its further scope, Lord Atkin's formulation in Donoghue v Stevenson [1982] AC 562 at 580 includes "an omission in the course of positive conduct ... which results in the overall course of conduct being the cause of injury or damage": Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 501. 264 That passage should be understood in the context of the following factual conclusions by Gummow J: (1) The Shire Council has a significant and special measure of control over the safety from fire of persons and property in Neill Street (where the defective fireplace was located); (2) The Shire Council's statutory powers facilitated the existence of a duty of care "but the touchstone of … its duty was the Shire's measure of control of the situation including its knowledge, not shared by Mr and Mrs Stamatopoulos [the tenants of the property] or by the Days [the owners of the adjoining property], that, if the situation were not remedied, the possibility of fire was great and damage to the whole row of shops might ensue"; (3) The Shire Council's duty of care arose "in circumstances where it was 'responsible for [the grave danger of harm's] continued existence and [was] aware of the likelihood of others coming into proximity of the danger and [had] means of preventing it or of averting the danger or of bringing it to their knowledge'"; (4) Apart from three other individuals, only the Shire Council officers knew of the latent defect in the physical condition of the property which presented a significant fire risk to it and neighbouring premises; (5) The occupants of the property and the adjoining property were ignorant of the "imperative need for something to be done" by reason of the incomplete and inadequate course of action taken by the Shire Council after an earlier fire; (6) the Shire Council officers had reached a conclusion that it was "imperative that the fireplaces be not used under any circumstances unless certain work was performed" The powers which they exercised were not likely to prevent a further fire, but those powers engaged the exercise of interrelated and specific powers that could have achieved that result. 265 In Crimmins, the members of the High Court who found a duty of care emphasised the significant degree of control. Kirby J found the relationship between Mr Crimmins and the Authority to be analogous to an employer-employee relationship. Gaudron J noted that "Mr Crimmins was not only vulnerable to injury by reason of the hazardous nature of his employment but he was less able than employees in most other industries to protect his own interests. The casual nature of his employment precluded the development of any longstanding employer-employee relationship in which he might usefully seek to secure his own health and welfare. And his relative powerlessness in that regard was magnified by the Authority's directions as to when and where he was to work in circumstances in which he was at risk of having his registration as a waterside worker cancelled or suspended if he did not obey". 266 In my view, it is not possible to reason by analogy from either of these cases to conclude that it is arguable that ASIC owed a duty of care towards the plaintiffs and group members.

Conclusion 267 Taking into account the matters set out above, I am not satisfied that the plaintiffs have reasonable cause of action in negligence on the facts pleaded. None of the cases above support a conclusion that it is arguable that ASIC owed a duty of care on the facts pleaded. The salient features of the case do not reveal a sufficiently close relationship to give rise to a duty of care. There is nothing to suggest that the nuances of the plaintiffs' case may improve their position.

CONCLUSIONS ON STRIKE OUT APPLICATION 268 The claim based on the tort of misfeasance in public office must be struck out on the basis that it fails to disclose a reasonable cause of action. 269 The claim based on negligence is deficient in that the FASOC does not plead facts that could support a finding of a common law duty of care owing to the plaintiffs and the group members. It is also deficient in that it does not identify with sufficient clarity how it is alleged that ASIC's alleged negligence caused the plaintiffs' losses. The allegations as to what would have happened "[h]ad ASIC exercised its Powers and/or Additional Powers" in section 43 are deficient because they do not identify precisely the facts upon which it is alleged that the plaintiffs suffered loss by reason of ASIC's conduct. In order to demonstrate that they have a reasonably arguable case, the plaintiffs would have to identify what ASIC should have done that would have prevented the loss which was sustained. 270 The allegations of causation are liable to be struck out to the extent that they allege that ASIC should have imposed an enforceable undertaking on Storm, when ASIC had no power to do so. Further, they are liable to be struck out to the extent that they allege that ASIC should have taken "other reasonable action" without identifying what action should have been taken. 271 To the extent that it is alleged that ASIC should have imposed a licence condition upon Storm, the FASOC is deficient in that it does not allege that, had the relevant licence condition been imposed, the plaintiffs would not have suffered financial loss. 272 To the extent that it is alleged that ASIC should have made its "concerns" regarding Storm known to the public in about late 2007, the FASOC is deficient in that it does not allege that, had ASIC done so, the plaintiffs would not have suffered financial loss. 273 The FASOC is also deficient in that it alleges, at paragraph 36.2, that ASIC knew of "the risks" posed by certain matters without specifying what are the alleged risks which ASIC knew. It is also deficient in that it alleges, at paragraphs 45.5 and 46.1, that ASIC breached its duty of care by failing to do certain things to disclose, address, minimise or avoid "the risks …set out in paragraph 36.2(a)" when paragraph 36.2(a) does not set out risks, but rather matters on the basis of which it is alleged that ASIC knew of certain unspecified risks. 274 When all these matters are taken into account, in my view, the FASOC is so deficient that it is liable to be struck out in its entirety, with costs. 275 The plaintiffs have had ample opportunity to plead a reasonable cause of action. The first directions hearing in this action was held on 4 February 2015. At that directions hearing the plaintiffs sought an adjournment of three months, with no directions to progress the action. The adjournment was sought because the plaintiffs had made an application under the Freedom of Information Act 1982 (Cth). Over ASIC's opposition the plaintiffs were granted the three month adjournment on the basis that, in that three month period, the statement of claim would be put into the form which constituted the plaintiffs' "final effort", to which they were "committed". 276 At the plaintiffs' request the action was re-listed for further directions on 28 April 2015. On that day the plaintiffs sought a further three month adjournment to 6 August 2015. The consequence of the orders made at that directions hearing was that the plaintiffs were given (a) further time to seek information said to be relevant to their claim and (b) leave to amend the ASOC. ASIC's strike out application was listed on 6 August 2015, a day which ultimately coincided with the period of time the plaintiffs has sought. 277 There is no reason to believe that the plaintiffs are able to plead additional facts that would support a reasonable cause of action. Accordingly, I will not grant leave to the plaintiffs to file a second further amended statement of claim. I certify that the preceding two hundred and seventy-seven (277) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.