Newman v Financial Wisdom Limited; Newman v Hold Pty Ltd [2004] VSC 216

Newman v Financial Wisdom Limited; Newman v Hold Pty Ltd [2004] VSC 216 - VSC 2004 case summary — Zoe

[323]

(a) at a time when a person (in this section called the "representative") is a representative of only one person (in this section called the "indemnifying principal") or of 2 or more persons (in this section called the "indemnifying principals"), the representative:

(i) engages in particular eligible securities conduct; or

(ii) proposes, or represents that the representative proposes, to engage in particular eligible securities conduct;

(b) another person (in this section called the "client") does, or omits to do, a particular act because the client believes at a particular time in good faith that the representative engaged in, or proposes to engage in, as the case may be, that conduct:

(i) on behalf of some person (in this section called the "assumed principal") whether or not identified, or identifiable, at that time by the client; and

(ii) in connection with a securities business or investment advice business carried on by the assumed principal; and

(c) it is reasonable to expect that a person in the client's circumstances would so believe and would do, or omit to do, as the case may be, that act because of that belief; whether or not that conduct is or would be within the scope of the representative's employment by, or authority from, any person.

(2) If:

(a) subparagraph (1) (a) (i) applies; or

(b) subparagraph (1) (a) (ii) applies and the representative engages in that conduct; then:

(c) as between the indemnifying principal and the client or a person claiming through the client, the indemnifying principal is liable; or

(d) as between any of the indemnifying principals and the client or a person claiming through the client, each of the indemnifying principals is liable; as the case may be, in respect of that conduct in the same manner, and to the same extent, as if he, she or it had engaged in it.

(3) Without limiting the generality of subsection (2), the indemnifying principal, or each of the indemnifying principals, as the case may be, is liable to pay damages to the client in respect of any loss or damage that the client suffers as a result of doing, or omitting to do, as the case may be, the act referred to in paragraph (1) (b).

(4) If:

(a) there are 2 or more indemnifying principals;

(b) 2 or more of them are parties (in this subsection called the "indemnifying parties") to a proceeding in an Australian court;

(c) it is proved for the purposes of the proceeding:

(i) that the representative engaged in that conduct as a representative of some person; and

(ii) who that person is; and

(d) that person is among the indemnifying parties; subsections (2) and (3) do not apply, for the purposes of the proceeding, in relation to the indemnifying parties other than that person.

[403]

(a) the videos would involve the production of quality television documentary programs about ethnic minorities in South East Asia;

(b) the proprietary rights to the documentaries were to be held under licence by Asia Film House Pty Ltd. Asia Film House would enter into a production services agreement with him, under which he would undertake to produce a film. Asean Film Distributors Ltd would then be sub-contracted by the partnership, for a fee, to manage the production of the film on his behalf;

(c) finance for the investment would be obtained through a loan with Hemisphere Finance, with the security being the rights and interests in the film and documentaries under the partnership and production services agreement;

(d) there would have to be a 20% cash contribution towards his total contribution of the partnership, which he would have to arrange himself;

(e) the end product, being the documentaries, would be produced and marketed internationally, initially in English, Chinese and Thai, and later in other languages;

(f) the demand for the end product over time would be such that Asean would provide a performance guarantee with a supporting letter of credit;

(g) the documentaries would be marketed to stations such as the ABC, Special Broadcasting Service, Discovery Channel, and pay television;

(h) the Video Documentary Partnership would be a quality, income producing investment;

(i) the Video Documentary Partnership would be guaranteed to produce a sound return;

(j) he would be guaranteed to receive a return of 100% of the money he invested in the partnership;

(k) because of the guarantee, and supporting letter of credit, the partnership would be a secure investment which carried a low financial risk;

(l) all money invested by him would be 100% tax deductible;

(m) interest repayments on any loan that he took out to invest in the partnership would be 100% tax deductible;

(n) the person responsible for the production of the video documentaries was sufficiently skilled, expert and experienced to carry out their tasks without placing his funds at risk; and

(o) the Video Documentary Partnership was approved by the ASC.

[684]

(a) Healy and Quarrell were principles of the Sentinel Group;

(b) Quarrell and Healy had banking, accounting and financial services experience;

(c) Quarrell and Healy would provide appropriate advice to them and Quarrell would be their personal adviser;

(d) Sentinel specialised in looking after individuals so that its services would be tailored to their needs;

(e) Effective tax planning was an integral part of the Sentinel Group service including the preparation of taxation returns;

(f) Sentinel would maximise the benefits of superannuation and rollover funds;

(g) The Sentinel Group would assist them to create wealth and enhance their net worth;

(h) Sentinel would provide professional preparation of their personal tax returns;

(i) Sentinel personnel were extremely well qualified, experienced, competent and trustworthy;

(j) If given the administration of the Baldings' funds, Sentinel could use flexibility to take advantage of various investment opportunities Sentinel either created or which they were well positioned to become aware of;

(k) Over time, with careful management, Sentinel could improve their final retirement fund position from the existing $140,000 - $170,000 to around $400,000, even up to $600,000;

(l) Investments in residential housing was one of the ways that Sentinel handled client funds;

(m) The type and location of investment property were the most important criteria and Sentinel was already involved in the construction of some well located luxury units;

(n) They could establish a superannuation trust fund in their name which would be under the management of Sentinel.

(o) All proposed investments would be subject to their consultation and approval;

(p) They should transfer existing funds to the Superannuation Trust Fund which would be created. With their approval the money would then be temporarily lent to Guard Finance, until June 1997 while awaiting the first suitable vehicle such as some proposed units to invest all or part of their funds;

(q) Guard Finance could pay 12% interest capital guaranteed and that the moneys were lent to Sentinel clients for various developments and mortgage bridging type deals that banks were less likely to fund but which were both safe and fully viable;

(r) For an ongoing fee of $70.00 a month Sentinel would provide all accounting services such as tax returns and appropriate planning and advice which would improve their tax position while remaining within ATO Guidelines.

[841]

Mr Smith was retired but had been employed by Pacific Dunlop or related companies for some thirty odd years. For many years he was employed as a marketing manager and his last occupation with the Group was as a General Manager of a joint venture company. Mr and Mrs Smith were married for 32 years. Mrs Smith testified that her husband was financially naïve and was not an experienced investor. I accept her evidence. I further accept the evidence of Healy who said that Mr Smith was an extremely honest and down-to-earth individual who trusted his advisers. Mr Smith was a client of Pamacorp, where he regarded Healy ("Mr Smooth") as the "main man". I would infer that Mr Smith was aware of and relied upon the representations which the evidence shows were made by Pamacorp as to the expertise of the Pamacorp advisers and the expert services provided by Pamacorp. In 1994, Healy told Mr Smith that he, Quarrell and Schimana were proposing to take their major clients with them to a new organisation called Sentinel. At that time, Mr Smith was employed by Pacific Dunlop. Mr Smith had a meeting with Healy, Quarrell and Schimana, probably on 22 August 1994, at Sentinel's premises in South Yarra. This was an introductory meeting, during which the services which they were offering to provide (including tax planning and investment advice) and their fees were discussed. The topic of tax-effective investments must have been raised, because Mr Smith testified that he said to them right from the beginning "I'm not in the business of cheating tax, or the tax man or anybody else, but if we can defer tax, or find another way to do it, let's go for it". Mr Smith said he visited the Sentinel premises in South Yarra about 15 times. On the first occasion, he received and read the Sentinel brochure, and the slips included in it with photographs of Quarrell and others. Mr Smith noticed the statements in the written material concerning the expertise of the Sentinel advisers, which was further reinforced by statements made to him at the meeting. He later received and read the letter from Sentinel dated 20 October 1994. I infer that Mr Smith thereafter acted in reliance upon the expertise of the advisers and in the expectation of the services that they were able to provide as represented in this written material.

[973]

(a) An employment redundancy for myself in December 1991 was followed by lengthy periods over five and a half years of uncertainty, unemployment and part time employment whilst commuting between Melbourne and Sydney. This period also included the final two years living and working in Malaysia. Most of this time, due to family circumstances and a conservative view of our future financial situation, my wife and I, by necessity, spent apart. Gaining a position back in Australia in 1996 put some hope for the future and a certainty back into our lives. Although we were still apart, with myself in Darwin and my wife in Melbourne, we were working toward protecting ourselves against any repeat of the previous experiences and positioning to be able to live together again.

(b) In June 1997, following a number of failed telephone attempts made from Darwin, to contact Sentinel, I telephoned a friend who was also a Sentinel client. He advised me that Sentinel had gone into voluntary liquidation two days previously and that we all had probably lost most if not everything that we had invested. He was in his car, returning home after an attempt to recover his personal superannuation documentation and taking legal advice.

(c) Exacerbated by the distance from Melbourne, the feelings of shock, panic, fear, helplessness and powerlessness were overwhelming and could never the described satisfactorily. I had to ring my wife and break the news whilst trying to think of anything she might be able to do to determine or help our position. Her shock was very evident and her initial reaction, like mine was panic and denial.

(d) I was undoubtedly panicked and my reaction was to protect my employment at all costs. I therefore stayed in Darwin. Combined with all of her responsibilities of managing a human services business, my wife attempted to determine what, if any action we could take. She was suddenly thrust into something that neither of us fully understood and there was little that I could do to help her.

(e) We were at a loss and did not know where to turn. We eventually decided that we had to engage legal and alternative finance advice. My wife attended the meeting arranged by the administrators, necessitating the absorption of rafts of material which she then had to try to pass on to me by telephone and later facsimile.

(f) Being apart from my wife and because of the enormity of the problem at hand, communication between us became very difficult and exceedingly stressful whenever the subject had to touch on Sentinel. Neither of us has wanted to talk about the problem as it was so painful and it has only been over the past six to twelve months that we have been able to touch upon the subject and discuss it with some openness.

(g) The constant arrival of pieces of mail and numerous telephone calls, mostly containing more bad news of losses and legal obligations just increased the panic and stress levels. If I thought of something whilst talking on the telephone, that my wife might be able to undertake in Melbourne in respect of our position, she was immediately stressed and was reluctant to discuss it further. Sleep became difficult, I had panic attacks and the inability to discuss the problem with anyone all served to make life a nightmare for at least a year following the collapse.

(h) Since the collapse of Sentinel, our future has continued to appear relatively bleak. The knowledge that we will be unable to undertake our planned self-funded retirement has been a constant source of ongoing, nagging worry. It has resulted in the need to compulsorily remain in full time employment, to at least 65 years of age followed by the spectre of the aged pension. The legacy to this day, is one of a continued reluctance on my part to open mail or answer the telephone. This is because of a fear of the possibility of receiving further bad news in relation to our dealings with Sentinel and some hidden obligation left over from their mismanagement of our affairs.

(i) The feelings and emotions from a personal and traumatic event such as this can never be satisfactorily described on paper. The enormous negative impact on every aspect of my life cannot be overstated nor fully reflected in this statement."

[1034]

(a) At the age of nearly 61 years I expected to be living in modest comfort with my husband on our farm enjoying normal and ordinary pleasures associated with retirement. I had looked forward to developing with my husband our property into a viable enterprise which would provide a supplement to our superannuation investments. Frank and I had spent our whole working lives supporting our children and saving so that we could support ourselves in our retirement.

(b) We shared with love the height of happiness brought by our children as well as the depths of pain and sadness with the loss of our eldest child all of which deepened and strengthened our commitment to our loving relationship.

(c) Never could I have imagined the emotional physical and financial battering we have lived through since Sentinel collapsed. The constant battle to survive both physically and financially, to put food on the table, hold onto our farm and face the crisis of health and drought has been traumatic. The stress of dealing with departments such as Centrelink was humiliating.

(d) The physical limitations of our age and the inability to increase that mental and physical effort to be able to provide basic living and health needs, now and in the years ahead, is not just daunting, it is frightening. The feeling of futility in trying to improve our situation is disempowering and demoralising to say the least. This battle of living hand to mouth has taken a severe toll on our health and our relationship.

(e) We work afternoon and night shifts to enable us to work the mornings on the farm. My night shifts mean long periods apart. Despite our efforts, our income is at minimum wage level and we are always under pressure to meet our financial obligations. We have been driven to the point of exhaustion physically and emotionally.

(f) Our personal relationship has been severely strained and stretched almost to breaking point on several occasions. We used to be a trusting, relaxed, fun-loving couple who enjoyed the company of our friends and simple activities like bushwalking, sailing, the theatre and dancing. Social activities of this type are not even an option to be considered. We have become isolated and trapped by the very effort to survive and retain our farm. Our love has not diminished, just the ability to share even a few hours of relaxed pleasure in each others company.

(g) I was known to optimism, fun, laughter and a lover of life. Now I am deeply depressed by our situation and desperate at being unable to change our predicament.

(h) Most recently, life decisions will now need to be made for my husband's health, where he may have to give up work in the near future. Yet again, as a direct result of Sentinel's collapse, we are being thrust back into survival mode."

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