The evidence before the primary judge
160 In my opinion, there was no evidence that investors contributed money as consideration to acquire interests produced by a scheme (para (a)(i)) or that investors' funds were to be pooled, and by use of the pool produce benefits for the investors, or "members" (para (a)(ii)). Rather, the evidence as a whole supported the opposite conclusion.
161 The principal affidavit before the primary judge was sworn by a solicitor, Michael Fabbro, on 4 September 2008. I accept the submission by NAB thatMr Fabbro's evidence does not explain the nature, or elucidate the existence, of any 'scheme' but rather, seems merely to assume it. His evidence is assertive and conclusionary in character. It asserts that various clients and associates of McFarlane were invited by him to "invest funds in the Scheme" with such funds "generally [being] deposited into the … Account". Mr Fabbro produced a bundle of correspondence between McFarlane and investors as supposed evidence of these propositions.
162 None of McFarlane's correspondence with clients or actual or potential investors makes any mention of any intention for investors' funds to be pooled in the relevant sense. Rather, in my view, the evidence discloses that McFarlane received clients' funds and invested them on their behalf in various types of investments as individuals. An example is McFarlane's email dated 6 June 2008 to Mr Mark Bateup which senior counsel for Mr Norman characterised as the high point of the evidence below and supportive of the orders made by the primary judge. It was in the following terms:
Minimum amount is usually $20,000 but $10,000 will be OK if that is convenient for you now. I can link you as a client with Mum.
Minimum term is 30 days.
Yes the funds are available according to what deposit term you choose, but of course if you had an emergency I would always endeavour to get around that. Draws may be by cheque mailed to you or direct into your designated bank account
Current rates are 30 days call 12.50% pa. 45 days call 13.25% pa and 60 days call 13.95% pa. We place them on a 6 months rollover basis with one of the aforesaid call terms designated.
All our funds placed through MCFARLANES Trust Account are fixed term with the 4 pillar banks, ANZ, NAB, WESTPAC and COMMONWEALTH. Therefore they are capital guaranteed. We place funds for some very large clients.
Mark, we have large funds being placed today and on Tuesday next. You could bank your $10,000 direct to any NAB bank branch into the following account:
I can then guarantee the above figures.
NAB
MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT
BSB NO 085 005
ACCOUNT NO 04909 7085
I would then email you confirmation and you could then advise me as to where you wanted our Certificate of Deposit mailed.
We are looking forward to seeing your chirpy Mum tomorrow morning.
Cheers,
Allan McFarlane
MCFARLANES
163 The other kind of documents said to bear on the question were the so-called "Certificates". These were provided by McFarlane to his clients purporting to certify the investment supposedly made by him on their behalf. They were all in similar terms although the identity of the relevant bank and the terms varied across the several certificates.
164 The following is an example of such a certificate dated 18 October 2001 on the letterhead of MCFARLANES, apparently signed by McFarlane:
BATCH NO 801
CERTIFICATE NO 74328/BANKS/1/RO
This is to certify that
MRS DORIS ETHEL DENTON
of
34 SNEAD CRESCENT, FAIRVIEW PARK, SOUTH AUSTRALIA 5126
has this day placed the sum of
NINETY-SIX THOUSAND, SIX HUNDRED AND SEVENTY-SIX DOLLARS AND NINETY-SIX CENTS ($96,676.96)
on bank funds deposit for a period of
SIX MONTHS ON A ROLLOVER BASIS
at an interest rate of
8.75 PER CENTUM PER ANNUM
MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT
BANK FUNDS
18 October 2001
165 I accept the submissions made on behalf of NAB that the certificates provided to investors by McFarlane are reflective of investments of funds on different dates, in different amounts, in different investment products and on different terms for the sole benefit of the individual owners of those funds. Specifically, those documents purport to "certify" the following:
(a) an investment on 14 February 2005 of $100,000 by Vaughan and Karin Sage on bank funds deposit for a period of six months on a rollover basis at an interest rate of 8.00% per annum, with withdrawals on 7 day's notice;
(b) an investment on 10 October 2003 of $110,000 by Wendy Lyttle on (Pacific) foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 10 March 2004, with costs of $250.00;
(c) an investment on 9 August 2007 of $567,500 by Willem and Hendrika Baartse on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 7 December 2007 with Bank of America costs of $500.00 and McFarlane's placement fee of $750.00;
(d) an investment on 10 April 2007 of $550,000 by Ian and Christine Norman on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 18 August 2007;
(e) an investment on 18 October 2001 of $96,676.96 by Doris Denton on bank funds deposit for a period of six months on a rollover basis at an interest rate of 8.75% per annum;
(f) an investment on 18 April 2005 of $10,000 by the Cronulla Baptist Church on Pacific foreign exchange for a period of 120 days at a 10.00% gain, maturing on 16 August 2005, with costs of $150.00;
(g) an investment on 2 January 2008 of $400,000 by Alexander and Gillian Stevenson on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 2 May 2008, with Bank of America costs of $2,500.00 and McFarlane's placement fee of $750.00;
(h) an investment on 10 January 2008 of $50,000 by Bethany Denton on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 18 May 2008, with Bank of America costs of $500.00 and McFarlane's placement fee of $250.00;
(i) an investment on 27 February 2008 of $429,225.00 by Louise van Herpen on bank funds deposit for a period of six months on a rollover basis at an interest rate of 13.50% per annum at 45 days call on $370,000 and 10.05% per annum at 7 days call or 12.50% per annum at 30 days call on $59,225.00;
(j) an investment on 1 May 2008 of $240,672.71 by Marlene Hutchins on foreign exchange placement for a period of 120 days at a 11.00% gain, maturing on 29 August 2008, with Bank of America costs of $750.00 and McFarlane's placement fee of $200.00 together with "rewards" of 2 business class return air tickets;
(k) an investment on 23 May 2008 of $385,148.58 by Fay Bateup on bank funds deposit for a period of twelve months on a rollover basis at an interest rate of 14.05% per annum with withdrawals on 90 days call and on further sum of $20,000 at 12.50% per annum on 30 days call.
166 Some email correspondence suggests that McFarlane made weekly or twice-weekly "placements" of investors' funds, for example, the email exchange with Mark Bateup in June 2008 and the email to Marlene Hutchins of 29 April 2008. The evidence does not support, in any way whatsoever, the investing of composite funds across the "pool" of funds held in any combination of contributors. In other words there is no evidence of investors' funds being pooled or commingled for some common purpose of obtaining some shared or mutual financial benefit. The reference in one email to McFarlane 'com[b]ining' small amounts of investors' funds was for the purpose of accessing 'rewards' of five business class airfares - rewards which were referred to in the certificate apparently issued to Ms Hutchins on 1 May 2008 and referred to above. Such a limited combination, of less than 20 members does not qualify as a managed investment 'scheme' requiring to be registered under the Act.
167 The individual nature of the investments is further evidenced by a series of other documents, for example a document entitled "Ian and Christine Norman Statement of Funds placed through McFarlane's Trust Account as at 11 January 2008". That statement shows a running account, with various debits and credits, only some of which relate to the Normans personally. The entries on the statement include:
(a) for the Norman Family Trust:
(i) an opening balance as at 11 December 2006 of $173,910.35;
(ii) periodic debits of $5,000, $8,000 or $15,000 constituting "payments to CPS Credit Union";
(iii) a credit described as "interest";
(iv) a closing balance as at 11 January 2008 of $108,698.73;
(b) for the Bodyguard & Misty Superannuation Fund:
(i) an opening balance as at 11 December 2006 of $7,713.99;
(ii) three debits constituting payments to the Australian Taxation Office;
(iii) a credit described as "interest";
(iv) a closing balance as at 11 January 2008 of $4,804.51;
(c) for Ian and Christine Norman:
(i) an opening balance as at 11 December 2006 of $535,218.55;
(ii) a payment of $52,840.00 to Wirr-away Motor Homes;
(iii) two credits described as "TX net gain";
(iv) a credit described as "interest";
(v) a closing balance as at 11 January 2008 of $568,988.79;
(d) total funds of $682,492.03 as at 11 January 2008, of which $500,000 was supposedly on "TX placement" and $182,492.03 was in the Account.
168 A further document is entitled "PG & CA Denton (Total) Deposit Funds placed through McFarlanes Trust Account as at 31 January 2008":
(a) commences with an opening balance as at 20 August 2007 of $789, 845.28;
(b) contains a credit entry "Add TX Net Gains" of $64,150.00;
(c) then sets out a series of debit entries under the heading "Less Payments", including:
(i) six payments to the NAB Visa account;
(ii) six payments entitled "Adelaide Bank Loan";
(iii) one payment to the Australian Taxation Office for the P&C Denton Super Fund;
(iv) two further payments entitled "NAB Account - PG Denton";
(d) contains a further credit entry "Add Interest" of $4,661.82;
(e) concludes with a closing balance of $790,295.10 as at 31 January 2008.
169 There are several further statements of funds passing through the Account, evidencing similar kinds of transactions and which are obviously personal to the individual investors
170 Other evidence disclosed that some of the moneys passing through the Account belonged to McFarlane himself. For example, correspondence passing between solicitors for Mr Norman and solicitors for the trustee of McFarlane's estate prior to the hearing before the primary judge refers to a confidential investigative report conducted by Messrs Edwards Marshall into transactions on the Account in the 2007 and 2008 financial year, which showed that almost $500,000 was drawn from equity in McFarlane's house and paid into the Account in that year. The trustee, Mr Carter, deposed that he had concluded, apparently on the basis of the Edwards Marshall report, that there was a mingling of personal and investors' funds in the Account.
171 There were a number of 'form' letters signed by persons who said they had invested funds with McFarlane. Each include the following statements:
I am an investor who has lost a significant amount of money by reason of placing my funds with the late Mr Allan McFarlane. … I understood that the funds deposited with Mr McFarlane on trust for me were to be invested by Mr McFarlane in accordance with my instructions. I understood that, at all times, I continued to be the beneficial owner of those funds because they were deposited in a trust account.
Mr McFarlane said to me that my trust funds would be invested on my behalf in different types of investments, most commonly foreign exchange investments with the Bank of America. It now appears that he fraudulently used those funds for his own personal gain.
…
I understand that dozens of other investors placed their trust funds in the Allan McFarlane Chartered Accountant Trust Account with the National Australia Bank, under materially similar circumstances to me.
…
172 The investors had no appreciation whatsoever that their funds were going to be pooled or combined with those of other investors in order to produce some benefit for all. Rather, the letters speak of the investors' funds being invested on "my" behalf and "in accordance with my instructions" in various kinds of investments. And, while the letter refers to the signatory nowbeing aware that other investors placed their funds with McFarlane under similar circumstances, there is no indication that he or she understood at any stage that such funds were to be combined with his or her own as part of an investment scheme.
173 The statements in the letters are consistent with the proposition that McFarlane acted as the signatory's finance broker or investment adviser for the purpose of investing funds placed with him in various kinds of investments for the benefit of the individual investor.
174 Section 601ED(6) provides relevantly that a person is not operating a managed investment scheme merely because they are acting as an agent for another person.
175 There is no evidence that investors contributed their funds as consideration for the acquisition of rights or interests in some identifiable scheme. There is no evidence that funds were to be pooled and, by use of the pool, produce benefits for the members of the alleged scheme. Rather, investors placed funds with McFarlane for individual investment and for the benefit of that investor alone. There is no programme or plan under which investors would share in any financial benefits produced. In my opinion, their funds whilst paid into the Account were not funds which, objectively, were to be pooled for a common purpose and were not in fact pooled for a common purpose. Their funds were commingled with the funds of other investors and, apparently, those of McFarlane himself, but such commingling does not of itself amount to 'pooling' any more than the deposit by various clients of funds into a solicitor's trust account does: Re Magarey Farlam Lawyers Trust Accounts (No 3) (2006) 96 SASR 337 at 373 [123], 379-380 [144]-[146].
176 In my opinion the evidence did not disclose the first two statutory features of a "managed investment scheme" within the meaning of paras (a)(i) and (ii) in s 9 of the Act. It is unnecessary to consider the third feature. The appeal ought be allowed.
177 In fact the evidence, as a whole, supports an inference that, objectively, there was never an intention that investors' funds were to acquire interests in a scheme, a feature of which was that funds were to be pooled to obtain benefits for them. Rather it discloses that, at all times, McFarlane's plan was to misappropriate investors' funds by fraudulent misrepresentations made to investors. Senior counsel for the first respondent submits that if contributors intend to acquire benefits from part of the scheme as defined, then that is sufficient; and that here, part of the Scheme, which was not disclosed to the Scheme investors, was to misappropriate the contributions of the investors.
178 He submits that the subjective intention of contributors to acquire benefits produced by the scheme was met in that they contributed their moneys into a single bank account with the intention of acquiring financial benefits, namely, high interest returns, which McFarlane promoted and promised. That McFarlane had a wider and fraudulent scheme than that contemplated by the investors does not mean, so the argument goes, the contributors were not hoping to acquire benefits by the scheme. The promise of interest was part of the scheme.
179 Mr Norman submits that the relevant plan of action was that McFarlane regularly procured deposits of money from his clients into the Account, which his clients believed were being provided for the purpose of investments of various kinds although they were in fact fictitious and which he did not invest butmisappropriated to his own use.
180 In other words, the Scheme, according to the respondents, was the way in which McFarlane defrauded his clients, not the way in which the investment fund was supposed to be operated.
181 That McFarlane had a programme or plan of action, and that he undertook a course of conduct to effectuate that programme or plan of action, is evidenced, they submit, by the following:
(a) McFarlane accepted deposits of his clients' money in the NAB Trust Account;
(b) his clients knew that their funds were being deposited in the trust account, and thought that the moneys were going to be invested by him; and
(c) he misappropriated those moneys from that trust account.
182 The submission then is, putting it slightly differently, that on what the investors knew and had been promised there were benefits available but never received because of the subsequent fraud and misappropriation of the moneys by McFarlane. The Scheme therefore had several characteristics which included those known to investors and those not known namely, the fraudulent activity. Viewed in this way, the inclusion of the fraudulent activity in the definition of the Scheme was necessary to define the way in which the Scheme was operated, in part, by McFarlane. Senior counsel for the first respondent submits that there is no prohibition in the Act from so doing. Indeed the primary judge defined the scheme to include the conduct of McFarlane in misappropriating the moneys of scheme investors.
183 I do not accept these submissions. As I have already explained, s 601EE allows managed investment schemes to be wound up where a person operates a scheme in contravention of s 601ED(5). Section 601ED(5) prohibits a person from operating a managed investment scheme that is required to be registered, unless the scheme is so registered. Section 601ED(5), accordingly, envisages that the unregistered managed investment scheme is of a kind which ought to have been, and could in fact have been, registered. In my opinion, a scheme involving, even in part, misappropriation as one of its features, is not a scheme of a kind which is capable of registration by the Australian Securities and Investments Commission under s 601EB of the Act.
184 Whilst in the colloquial sense it may be regarded as a scheme, it is not a statutory scheme within the meaning of s 9 of the Act and, it follows, cannot be subject to a winding up order of the Court under s 601EE or otherwise.
185 Any scheme involving aprogramme or plan for themisappropriation of investors' funds could not involve contributions being pooled or used in a common enterprise to produce financial benefits "for the people … who hold interests in the scheme", as required by the second limb of the definition of "managed investment scheme".
186 As senior counsel for NAB put it,investors in a supposed scheme could not be taken to have intended to contribute money as consideration to acquire rights to benefits produced by a scheme in which they would be defrauded.
187 The appellant in the event that its primary ground of appeal was unsuccessful also challenged the form of orders made by the primary judge. It is unnecessary, given my conclusion that there was no managed investment scheme to deal with this subsidiary ground.
188 The appeal should be allowed. The declaration and orders of Mansfield J of 28 November 2008 as varied by his Honour on 2 June 2009 should be set aside and in their place the application for a winding up order dated 8 September 2008 be dismissed.
189 The first respondent should pay the costs of National Australia Bank Limited of the application for leave to appeal, and of the appeal, to be taxed if not agreed.