Paige v FPI Limited & Anor

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

JUDGMENT Introduction 1 The plaintiffs (Mr and Mrs Paige) have known the third defendant (Mr McDonald) for many years. By 1989 they had through their efforts, Mr Paige as a school headmaster, and Mrs Paige as a physiotherapist, accumulated assets which enabled them to look forward to a secure future when they retired. They had planned for this to occur within ten years. 2 The plaintiff and Mr McDonald first became friends in the 1960's. They saw each other regularly on social occasions. 3 Mr McDonald completed a training course in financial planning with FPI Limited (FPI) in January 1987. FPI was licensed as a securities dealer under the Securities Industry Code. In June 1987 he was issued with a Dealer's Representative Licence under the Securities Industry Code as a representative of FPI. 4 In 1989 and 1990 Mr McDonald gave advice to the plaintiffs with respect to the most effective management of their incomes and the investment of some of their assets. As a result of that advice the plaintiffs allege they lost money and now sue in contract, tort, and for breaches of the Trade Practices Act 1974, the Fair Trading Act 1987 and the Securities Industries Act 1980.

The knowledge and experience of Mr McDonald 5 Mr McDonald obtained a Bachelor of Science degree in 1981 and worked as a geophysicist until 1986. In 1986 he commenced working as an insurance salesman before completing a training course with FPI in January 1987. FPI was licensed as a securities dealer under the Securities Industry Code. He also obtained a Diploma of Financial Planning from Deakin University. Having previously held a Dealer's Representative licence he obtained a Proper Authority as a representative of FPI on 3 November 1989. 6 Mr McDonald gave evidence of the limitations on his capacity to recommend investments. Because of the licensing regime he could not recommend direct investments in shares or bonds. His training had taught him that, rather than investors making direct investments, it is better to have a professional who has the expertise and resources to manage an individual's funds as part of a larger pool. 7 Mr McDonald was questioned about the source of the knowledge he accessed when advising his clients. He said he received, and examined, a regular newsletter from FPI which also provided him with tapes and floppy discs. He did not subscribe to the Australian Financial Review although he said he may have glanced at it from time to time. He did not follow share prices on the stock exchange as a regular matter, although he would check the prices of property trusts on the day they regularly were published. He generally did not read reports as to the state of the property market. 8 Mr McDonald was asked about various articles published in 1989 and 1990 dealing with the property market and managed funds, their present position and future prospects. He could not confirm having read any of them. It seems he relied almost entirely on FPI for the information which and advice he passed on to his clients.

The initial discussions 9 In the middle of 1989 the plaintiffs sold a domestic dwelling which they owned, at 15 Homestead Avenue, Collaroy, for about $540,000. After paying off a mortgage on their home at 194 Conleroy Road, Kurrajong and buying a modest week-ender at Lemon Tree Passage, they were left with approximately $300,000 in cash from the sale. At the time they also owned a modest number of shares, some life insurance policies and a motor vehicle. 10 There are differing accounts of the first contact between the plaintiffs and Mr McDonald in relation to the events in dispute. There are also differing accounts of other conversations which took place during the course of the dealings between the parties. I am satisfied that, within the limits of his recollection, understandably unsure after the lapse of time, Mr Paige always endeavoured to tell the court the truth, as did his wife. Both made concessions where called for, and responded in an appropriate manner when challenged. I do not have the same view of Mr McDonald. At times his evidence was evasive and I formed the view he was determined to reconstruct a suitable version of the events which did not always reflect the true position. Where his evidence differs from that of the plaintiffs, and it is necessary to resolve the difference, I prefer the evidence of the plaintiffs. 11 However, the matter first arose, the plaintiffs and Mr McDonald had a number of conversations in which Mr McDonald offered to assist the plaintiffs with their investments. I have no doubt he offered them assistance as a friend, but it is now apparent, although unknown to the plaintiffs at the time, he would also gain from the advice. It is also plain that because of the limits of his knowledge and the restrictions on his choice of investments, due to his relationship with FPI, he was only able to give limited advice. He could not offer them investments other than those on a list authorised by FPI, which was confined to managed funds. 12 The plaintiffs first significant step in the investment of their available funds, was an attempt to acquire real estate. They were familiar with this type of investment, having owned a number of properties, due partly, I infer, from the necessity to move from time to time because of Mr Paige's career as a teacher. Mr McDonald gave the plaintiffs advice about this prospect in August 1989. He set out some basic assumptions on paper which concluded that the plaintiffs could afford to pay $650,000 for a property. They identified a suitable property to purchase but it sold for significantly more than they could afford and it became necessary to look elsewhere for an investment. No other property opportunity emerged. 13 During the course of other, and probably casual, conversations in 1989, Mr McDonald had disclosed that he was a licensed financial planner with an arrangement with FPI. He also told the plaintiffs that FPI was a licensed dealer in securities, although he did not indicate the limitations on his capacity to recommend investments. I accept that during these conversations, Mr Paige had indicated his frustration with the level of tax he was paying and was interested in the possibility of an active investment strategy. Both he and his wife were inexperienced in financial matters and had little idea about how to create such a strategy. 14 When the plaintiffs were unable to locate a suitable investment property, Mr McDonald raised with them the fact that he was in the financial planning business and could, using the information from FPI, arrange an investment portfolio for them. The plaintiffs were understandably curious as to how this could be done and although disputed by Mr McDonald, I am satisfied he said to them words to the effect of "It is all computerised, the computer selects it, you just punch it in and the computer tells you how much you are going to get, what are the best investments and what is the rate of return." 15 Mr McDonald offered to review the whole of the plaintiffs' financial affairs, including their living expenses. He indicated that he would be able to identify investments as part of an overall plan which could be tailored to fit in with their domestic and investment needs. The plaintiffs accepted his offer.

The matter of risk 16 In around November or December 1989 the plaintiffs attended a meeting with Mr McDonald and Maryann McGregor, his associate, at Mr McDonald's office. At that meeting the funds available to the plaintiffs were discussed and Mr McDonald offered some views as to the approach which the plaintiffs should take. The accounts given by Mr and Mrs Paige and Mr McDonald as to the matters discussed at this meeting are different. Before I turn to the detail, it is important to appreciate the context of the conversation. 17 The approach to investment developed by Mr McDonald, using FPI software, required the client to be interviewed to assess his or her "risk profile". This profile would then be manipulated by the computer to identify the nature and mix of investments appropriate for a person with that profile. The greater the risk profile the less safe would be the range of investments chosen. After the range had been identified the specific investments would be nominated by Mr McDonald from the list provided by FPI. 18 Accordingly it was critical to the advising process that the risk profile be correctly identified. If this was not done the client could end up with totally inappropriate investments for their needs. Apart from the particular investments to be funded, the structure of the investment package, using borrowings to set up a negatively geared arrangement, depended on the risk profile which was identified. 19 The task to be undertaken by the interviewer was included in a standard form provided by FPI. The sheet, one of a number in the package, and headed "Personal Information" contained a section entitled "Concerns Profile". 20 The first question required the client to provide both an estimate of the long term inflation rate and an estimate of return on investments after tax. Quite how the average, and usually unsophisticated investor, could usefully answer these questions is not immediately apparent. Presumably the reason a person placed themselves in the hands of an investment adviser was because of his or her lack of knowledge of financial matters and although he or she may understand the present inflation rate, it could not be expected, that they could make a reliable prediction as to the future rate. In any event answers to these questions do not appear to have a great deal of direct relevance to the outcome of the process. 21 The form also includes a question in the following terms, "How much of a 'risk taker' are you?" Underneath that question an indication is given of the numbers which should be used to classify the person by reference to the question. One equals very low, two equals low, three equals moderate, four equals high, five equals very high. No explanation is given of the elements which a person should bring to bear on an evaluation of their preparedness to take risk. Furthermore, no explanation is given of the consequences of any answer which might be obtained. The question contains no indication of whether or not the evaluation involves an assessment of a preparedness to lose capital, as well as sacrifice potential income, or whether only the latter is to be considered. 22 In the same section and on the right hand side six other topics are referred to. They are described as Inflation Hedge, Tax Advantage, Safety, Liquidity, Current Income and Family Benefit. Again, no indication is given of the approach to be taken to the evaluation of each topic. It appears however, that Mr McDonald had been trained to ask a standard form of question in relation to each matter and evaluate the answer by assigning a number between one and ten. He had also been told that a client could only ascribe one number to any particular topic so that the six matters would be graded in their importance by the interviewer. 23 It is important to appreciate that the approach which Mr McDonald had been trained to take to the evaluation of the answers to these questions, had the consequence that a person with the least concern about safety would be assigned the lowest number on the scale. This is the opposite of the scale in respect of the question in relation to preparedness to take risk, where the highest number was assigned to a person with the least safe approach to their investment. 24 The six topics are identified on the form but do not have any supporting information. No indication is given of the consequence of an answer at either end of the available scale, and the effect which the answer might have upon the recommended investments is not identified. In fact, answers to questions such as Inflation Hedge and Tax Advantage at the high end of the scale have the consequence that a person will be classified as being prepared to take a high risk. The consequence of answers to the other questions, apart from safety, was not made clear. The difficulty is that any person being asked questions about whether or not they wish to have a hedge against inflation or a tax advantage would almost certainly answer "yes", although he or she may not appreciate that the consequence may be their classification as a high risk taker. Only when the consequence of the answers are known, and a person is informed of the quality of the investments which he or she may accordingly be encouraged to pursue, could any true indication of a person's risk profile be obtained.

The meeting in November/December 1989: Mr Paige's evidence. 25 Both Mr and Mrs Paige conceded that their recollection of the total detail of the November/December 1989 conversation is not complete. A similar concession was not made by Mr McDonald, who purported to give a detailed account of the exchange. However, the plaintiffs are certain of a number of matters, some of which are critical to these proceedings. 26 In his affidavit, Mr Paige gave this account of the meeting: At the meeting Mr McDonald said 'You have this money available and you have to be careful what you do with it. You shouldn't do anything risky. In this regard, you should aim at growth of 14% annually, which I can assure you is conservative. At this rate, you would double your money in five years. Negative gearing will make it all possible. I'll give you a written prospectus which spells out everything.' I said to Mr McDonald 'This all sounds very good, but how would we do it?' Mr McDonald then gave a long and detailed explanation of the administration arrangements (including his role); how bank accounts were to be set up; what he would do for us; how much it would cost us and how the scheme would work. He said 'The overall management fee will be 0.8% of the value of the portfolio.' Mr McDonald spoke for about an hour during the meeting. He had a whiteboard and described the accounts and how the investment money would go into the different accounts. He said 'I will tailor this arrangement to fit what your living expenses are, so you will need to tell me what they are and you will need to budget and keep to it.' At the outset he said 'I will not charge you anything to set it up but you will pay 0.8% of the portfolio.' He said 'This is half what I charge others. That is 1.6%.' He explained how negative gearing worked. He wrote upside down on the board, and said 'you will have to borrow for this.' Either I or my wife said 'We have not considered borrowing. We just want to invest the money we have.' He said 'If you don't borrow you can't get the benefits of negative gearing. You will be so much better off doing it this way.' Then he gave mathematical examples of how negative gearing worked and said 'You borrow so much, you save so much in tax and you get so much capital growth, easy' He showed us actual examples but I cannot remember what they were. He showed us by this method what he said could be achieved and said 'You can double your money in five years, and you can have $1.2 million if you do it this way. You have to do it very quickly if you want to take advantage of the interest rates and get in on this good thing.' I had never heard of unlisted property trusts previously, and at no stage did Mr McDonald state that he was going to invest our money in such trusts. In fact, there was never any mention of unlisted property trusts during the meeting, or that the proposed investments would rely heavily on such trusts. Mr McDonald said 'This is what I think you should do, borrow $300,000.00. You could borrow more, but be conservative. We borrow the $300,000.00 and invest this plus the $300,000.00 you already have and that will give you a portfolio of $600,000.00.' I do not recall an interest rate being mentioned nor where the money was to be borrowed from. Mr McDonald said" 'I will arrange the loan.' I asked him 'Where is the money going to go?' and he said 'It will all be in the prospectus and I advise you to read it carefully.' 27 With respect to the possible risks involved in the investments, Mr Paige gave the following account: "At no time during this meeting did Mr McDonald or his associate mention the possibility of my wife and I losing money on the proposed investment. Mr McDonald said 'The thing would be so structured that you couldn't lose. It is just a question of how quickly you will win.' My wife Kay asked "How can you be so sure of this?' Mr McDonald said 'I can assure you that the portfolio is flexible. We can move your money from one thing to another to take advantage of trends in the market. The investments I am proposing are 'rock solid', reliable investments which are at the top of the pile.' He said 'You will have to borrow money, but the interest from the investments and the tax savings will more than cover the repayments.' 28 Mr Paige was impressed by Mr McDonald's presentation. He stated that: "By the conclusion of that meeting, and in reliance on the representations which had been made by Mr McDonald, I agreed to consider the proposals further. Mr McDonald then said 'I would like you to prepare a detailed budget of your expenditure for the coming year. I will let you have a detailed proposal in writing as soon as I can.' 29 When cross-examined, Mr Paige was questioned about Mr McDonald's account of the conversation at this meeting. He was asked about the discussion with respect to his preparedness to take risks. The following exchange occurred: "Q. Mr McDonald's affidavit gives more detail of what he says occurs at this meeting. --- A. Well, I am sure I did not say: "I'm not a very high risk taker. I'd say I am a high risk - taker above moderate".

Q. That is something you definitely deny? A. Yes.

Q. But he may well have asked you what sort of risk taker you were? A. We were both present at the meeting and I can assure you my wife would have hit the roof if I had said that. My recollection is that we stressed that we didn't want to take any risks with the money.

Q. Are you able to tell me about the terms in which you may have expressed those sentiments, or the terms in which you believed you expressed them? A. As I said. "We don't want to risk the money. We want something that is safe". 30 Mr Paige was also asked whether the various topics on the standard form were raised with him by Mr McDonald. He stated that although he had not initially recalled this part of the conversation, he was reminded of it when he read Mr McDonald's affidavit. He indicated that the matters were raised although he had no recollection of any discussion of the inflation rate. 31 He was challenged as to his recollection of the discussion about flexibility and security. The following exchange occurred: "Q. According to your affidavit in paragraph 20, after the reference to the flexibility of the portfolio, he went on to say "We can move your money from one thing to another to take advantage of trends"? A. That is more or less what he said.

Q. The next bit, he told you, did he: "The investments I'm proposing are rock solid, reliable investments at the top of the pile." A. Once again I'm paraphrasing, but that is the gist of what he said. I don't say he used those actual words.

Q. That is the impression which was left on your mind? A. Yes.

Q. And he said earlier, according to your paragraph 20, that: "The thing would be so structured that you couldn't lose, it's just a question of how quickly you will win"?

A. Again that is the gist of what he said. That is the impression that was created in my mind anyway. There was no talk of losing money that I can recall. It was a question of how much do you want to make and how quickly.

Q. Well, while there may not have been talk of losing money, do you truly assert that there was a specific statement that you couldn't lose? A. That's probably an exaggeration, yes.

Q. That may somewhat overstate-- A. Yes.

Q. -- the degree of certainty which was conveyed to you? A. Yes, yes.

Q. You had been told, of course, something about doubling your money in five years? A. Yes.

Q. And he also said, "It's a question of how quickly you will win"? A. Well, how quickly--

Q. Does that mean that he was telling you it might take more than five years to double your money? How are we to reconcile those two propositions? A. Again, I can't remember what came first, what statement was made before what, you know, it's, I'm trying to truthfully give my recollection of the gist of the conversation but whether this was said before that, or what was implied by statements at this stage of the game, all I can say is the impression that I got, that I formed to the best of my recollection today.

Q. Was the gist of it that at a 14 per cent return, which according to Mr McDonald was feasible, five years would have the effect of doubling your money? A. That's what he said, yes. I think that was one of the calculations he did for us on the whiteboard.

The meeting in November/December 1989: Mrs Paige's evidence. 32 In her affidavit, Mrs Paige gave a similar account of this conversation to that given by Mrs Paige. They were both criticised for this but explained that, although they had not collaborated in making the affidavits, they had discussed the relevant events a great many times and had often discussed the conversations which had taken place. I accept their evidence. In her account Mrs Paige said: "At no stage did Mr McDonald talk about the actual investments. While he told us that we would have to borrow money, he assured us that the interest from the investments and the tax savings would more than cover the repayments. The talk was more about what we would do with the surplus." 33 Mrs Paige, was also cross examined about the conversation at the meeting. With respect to the matter of risk, this exchange occurred: "Q. Do you see what he [Mr McDonald] says in paragraph 20? A. Yes.

Q. Is it right or wrong? A. No, as I recall I said that we didn't want to take any risks at all with the money that we had.

Q. And what did Mr McDonald say after you said you didn't want to take any risks at all? A. Well, as I recall it he just said it was a matter of how much interest you made on the money. I never understood at that time and I still didn't until the very end that any of the capital was at risk." 34 Later, she was asked: Q. What about paragraph 30 of Mr McDonald's affidavit? A. All I recall about the possibility of losing money was that it was a question of how much interest you were going to make on the money. I never, as I said before, I didn't understand that any of the capital would be lost.

Q. Did you understand that if you wanted to get a good return on your money you had to take some sort of risk? A. Obviously I do now, but I don't think I did at the time. No, I, I think I felt that it was just a matter of investing the money wisely and getting a return on it. I didn't think there was a risk in that regard.

Q. All right. What about what Mr McDonald says here. He says he had said to you, "No investment can be guaranteed"? A. He may well have said that. I can't remember whether he said that or not." 35 I accept Mrs Paige's evidence. I am satisfied that although Mr McDonald may have said that no investment can be guaranteed, he intended the plaintiffs to understand, that although the return might vary, their capital would not be at risk.

The meeting of November/December 1989: Mr McDonald's evidence. 36 In his affidavit Mr McDonald gives an account of this conversation which varies in a number of respects from that of the plaintiffs. With respect to the risk profile (the classification on the scale 1 to 5) he said in his affidavit: "During the meeting, in relation to risk, Mr Paige and I had a conversation to the following effect:

I said: 'You have to grade yourself in terms of what kind of risk taker you are - from one to five. The FPI Personal Information Form requires you to grade yourself with a number between one and five. One is a very low risk taker, two is a low risk taker, three is a moderate risk taker, four is a person who is a high risk taker, and five is someone who is a very high risk taker.' Mr Paige: 'I am not a very high risk taker. I'd say I am a high risk taker - above moderate.' I said: 'Then you would be graded four on the scale.' I then wrote the number "4" against the question "How much of a risk taker are you?" which appeared at the bottom of a Personal Information Form which I was filling out during the meeting. A copy of that form is annexed to my affidavit and marked "D"." 37 He said there was also a discussion in relation to the appropriate "concern profile". Mr McDonald said: "At the same meeting we had a conversation about Mr Paige's "concerns profile" to the following effect: I said: "I also have to record your concerns profile - with a number between one and ten showing how concerned you are, if at all, about various aspects of investing. These are also recorded on the form. Give me a number between one and ten to show how concerned you are about these points - the higher the number, the more concerned you are." I then asked Mr Paige a series of questions and, after each answer, I recorded, in the bottom right-hand side of the Personal Information Form, the number which Mr Paige stated to me in relation to each of those items. The questions which I asked Mr Paige (one at a time) were to the following effect: I said: "How concerned are you about ensuring that your investments are a hedge against inflation?" "How concerned are you to ensure that you get tax advantages out of your investments?" "How concerned are you for the safety of your investments?" "How concerned are you to have liquidity in your investments - that is, to be able to sell them when you want to?" "How concerned are you about being able to call on the current income from the investments as opposed to leaving the income to accumulate?" "How concerned are you about ensuring that your investments provide disability and/or death benefits for you and your family?" 38 Mr McDonald does not suggest that he gave the plaintiffs an explanation of any of the issues behind the questions or the consequence of their answers. Mr McDonald also said they had a conversation about the potential rate of inflation and Mr Paige's expectations from his investments: "Also as part of your concerns profile, I need to record your estimate of the long term inflation rate, and your estimate of what return you want on the investments after tax. What do you think the long term inflation rate will be?" Mr Paige: "About 7%." I said: "And what rate of return are you looking for on your investments after tax?" Mr Paige: "I want to keep up with inflation, so I would say 7% after tax." I said: "The earnings and growth rates for different types of investments will differ. Some types of investments give you more income but less growth, and other investments give you less income and more growth. Growth rates of 14% have been achieved and, if that rate could be achieved, you would be doubling your money in five years, but that is above the historical long term growth rate for investments." 39 In his oral evidence Mr McDonald was asked about the meeting. He gave the following account of the sequence in which the events occurred. The exchange relates to the discussion at the meeting and its ultimate translation into a printed document ("the plan") which I consider later in these reasons for judgment. "Q. So the question of whether or not you are a high risk taker, is reflected by the numbers 1 to 5 on the form? A. On the one hand, but the test is taken from the concerns profile.

Q. I'm sorry? A. And the combination. I think it's the combination of the two that determines that print-out, the combination of the answers to those questions. That information is fed into the computer, the answers to those questions.

Q. So the number 4 comes out, does it, in relation to risk taker in response to the numbers that are put in? A. No, that was a verbal question of Paige. I asked him where he sat. I read each one of them to him and he said "above moderate". I said, "3 is moderate, 4 is high, 5 is very high". He said "Above moderate". I said, "That makes 4, which is high". And I then wrote it down.

Q. And then you say that they answered the question "safety out of 10", by giving you a 4? A. Yes.

Q. So what relationship is there between the answers, the numbers, and the number 4 given in response to being a high risk taker? A. I don't understand the mechanism of the computer programme that determines this, I just put the data in.

Q. But is there supposed to be any relationship at all? Can the computer come out with a different number? A. I doubt that the question would be there if it wasn't relevant to the programme. It serves another purpose too, your Honour.

Q. Do we have here the computer number that came out? A. The computer printed the graph and printed the words above it.

Q. Just looking at the numbers that came out, I don't know how you do it, on the scale of 1 to 10, the mean there is going to be something like 6, isn't it? A. Yes, the high 5s.

Q. Does that make someone a high risk taker? A. According to this programme it does.

40 He was asked, in cross-examination, whether he offered any explanation to the plaintiffs of the matters that they should consider when giving answers to these question. The following exchange occurred: "Q. In this series of questions that you have set out here in paragraph 23, you've not added anything about giving any explanation to them about what these various things meant? A. No, I haven't detailed in my affidavit every word that was uttered at the interview. Where explanation was required, I gave it.

Q. Where explanation was required, you gave it? A. Yes.

Q. Can you tell me where you did give any explanations now and if you can't remember, I accept it's 12 years ago? A. I would have read these words because they are part of the interview process.

Q. I'm asking about explanations. A. And I don't recall precisely if I was asked to amplify any of those points or not. I may have.

Q. Or you may not have? A. I may not have. It may have been, they may have been comfortable with the understanding of what it meant. 41 I am satisfied that no explanations were given. Neither Mr or Mrs Paige understood the consequence of the answers they gave to these questions. 42 When cross-examined, Mr McDonald was directly asked whether Mr Paige had identified himself as a high risk taker. It was put to him that at no time did Mr Paige say that he was a high risk taker. He answered: No, I haven't asserted that he did. 43 This answer is contrary to the evidence he gave by affidavit. 44 Mr McDonald's evidence was that he explained at the meeting how the investments would be structured and the operation of managed fund investments. He said that he explained the concept of negative gearing in the following manner: "Negative gearing for investments in managed funds works the same way as negative gearing for a property investment. Just as you can claim a deduction for mortgage interest when you buy a rental property, you can also claim a deduction for interest when you borrow money to invest in managed funds. Even if the income from funds is low, and the growth rates are high, you can still claim all of the interest as a deduction against the investment income and your other income - in your case your salary and wages income from your employment as a headmaster. When you negatively gear, you multiply the chances for profit because you are using borrowed moneys, not just your own, but you also multiply your chances for loss because you could lose not only your own money but also the borrowed money which, of course, you would have to repay. When you borrow in this way there could be margin calls - that is where, if the value of the security drops below a certain security/loan ratio, the lender can require you to take steps to restore the ratio. You would have to do this either by repaying some of the borrowing or providing acceptable security or by selling some of the investments and using the sale proceeds to pay off some of the loan until the required ratio was restored." 45 I do not accept this evidence. Although I have no doubt that negative gearing was discussed at the meeting I accept the evidence of the plaintiffs that the possibility of capital loss was not discussed. Mr McDonald was concerned to impress upon the plaintiffs the opportunity for gain by investing in his recommended portfolio and I am satisfied did not advise in relation to possible losses. 46 Mr McDonald denied telling the plaintiffs that the investment would be structured so that they could not lose, instead he said that he stated words to the effect: "No investment can be guaranteed. But the range of investments recommended by FPI are backed up by the research division of FPI as being reliable investments. When I give you my written recommendations you will be able to read a printout of some information about each of the investments from the research division of FPI." 47 Mr Paige gave evidence that Mr McDonald told them "You will have to borrow money, but the interest from the investments and the tax savings will more than cover the repayments". Mr McDonald denied saying this, and instead he said: "The income distributions from the investments should just about cover the interest payments on the loan which would be an interest only loan. This means that you would not be paying tax on any of the investment income as the interest will be equal to or slightly more than the investment income. You won't have to pay capital gains tax on the growth in value of the investments unless you sell them." 48 I accept Mr Paige's evidence. Although Mr McDonald may not have used the actual words "the investment is guaranteed", I am satisfied that he never apprised the plaintiffs of the possibility of a capital loss. The whole of the conversation was directed toward identifying the level of return from the investments and demonstrating how the borrowings could be financed to fund the projected capital returns. 49 The position is confirmed by this exchange in the evidence of Mr McDonald: "Q. See, what I want to ask you was this: doesn't commonsense suggest to you that people in this position, when they come to you, are looking for security of their investment? A. Yes. Q. And indeed, didn't you represent to them that your investment would be secure? A. I think I represented to them the investment strategy, the words, if anything, would be secure. Didn't specify any particular investment. The words I say were investment strategy would be a secure investment strategy."

The boat 50 Mr Paige gave evidence that he had for some time prior to the meetings with Mr McDonald, wished to own a boat to be used by the family. Having recently acquired the weekender at Lemon Tree Passage he believed a boat would add significantly to his enjoyment. His original intention was to buy a boat for about $20,000 which he and his family would use. However, during the course of a week-end which he spent with his wife and Mr McDonald at the Lemon Tree Passage property he made inquiries at a local marina. His wife was against acquiring a boat but Mr Paige was determined. He spoke with the owner of the marina when Mr McDonald was present and was given the idea that he could borrow to buy a more expensive boat and hire it with the expectation of a financial return. Although it was originally suggested that Mr McDonald may have encouraged Mr Paige into such a venture, this suggestion was not ultimately pursued. However, it is plain that Mr McDonald did advise that when considering the plaintiffs' personal financial situation and an appropriate investment strategy he would bring the boat into account. He did not advise the acquisition of the boat but undoubtedly included the financial expectations arising from it, in his financial planning advice. By this means he demonstrated to the plaintiffs that they could afford the investment in a large an expensive pleasure cruiser. 51 It is apparent from Mr McDonald's own evidence that he negotiated the acquisition of the boat for Mr Paige. He gave evidence of the discussion he had with Mr Paige about the boat during which projections for income and outgoings were considered. Mr McDonald said he indicated to Mr Paige that the representations made by the organisation offering to manage the boat may be exaggerated and that the projections should be cut in half. When asked by Mr Paige what would happen if the boat did not produce the income anticipated, Mr McDonald advised that he would still have to keep up the lease payments, whether the boat generates any income or not. No mention was made of the consequences for the overall financial strategy, including the proposed borrowings, if the boat failed to generate the predicted income. 52 The boat was acquired in late 1989. It was taken to Lemon Tree Passage where a firm trading as Crew-a-Cruiser took control of it on Mr Paige's behalf. Apparently some hirings were obtained in January/February 1990, however, income from the boat virtually ceased after that time. Crew-a-Cruiser do not appear to have been a satisfactory manager of the boat, and apart from failing to obtain bookings, their charges for management and maintenance proved to be excessive. Ultimately the relationship was terminated and Mr Paige recovered a judgment in the District Court against Crew-a-Cruiser. However, he has not been able to enforce that judgment. The boat was brought to Sydney and was later sold. The lease was paid out prior to the sale of the boat from the proceeds of the Lemon Tree Passage property which was sold in July 1991 for $132,000.00. 53 There are two other matters which must be considered in relation to the boat. Mr Paige said that he had a discussion with Mr McDonald in which Mr McDonald said: "I can come in with you on the boat if you get into trouble." Mr Paige, on affidavit, said that his response was "If that's the case you can use the boat whenever you like and I will let the hirers know." 54 Mr McDonald denied this conversation. However, in at least one important respect it is confirmed by a file note of 7 January 1990 where Mr McDonald records "There is another letter to sign, the one which allows my use of their boat which is earlier on this tape which should be ready for them to sign when they come down." 55 The second matter relates to a denial by Mr McDonald that he arranged the lease of the boat and also arranged for someone to take the boat to Lemon Tree Passage. The first paragraph of the same file note of 7 January 1990 completely contradicts Mr McDonald's account of these events and I reject his evidence. The Investment Plan and the letter of 8 January 1990 56 Some of the documents which the parties must have had in 1989 and 1990 have now been lost. However, some file notes of Mr McDonald have survived and, from those, a reliable account of certain events is available. The file notes make plain that Mr McDonald involved himself in the whole of the plaintiffs' financial affairs. His advice extended to recommending that insurance policies should be cashed to provide funds for extensions to the plaintiffs' Kurrajong home, leaving their other available funds to be invested in his recommended investment plan. 57 It is not clear why this was appropriate advice. Given the nature of the sacrifice involved in the surrender of the policies it may have been prudent to leave the insurance in place and reduce the funds to be invested through Mr McDonald. No complaint is now made about this advice, although it indicates the extent to which Mr McDonald involved himself in the plaintiffs' personal affairs. He effectively took control of all of the plaintiffs' financial arrangements. 58 I have previously referred to Mr McDonald's file note of 7 January 1990 which records a number of matters. The recommendation to surrender the life insurance investments is recorded and it is indicated that Mr McDonald's office facilitated this arrangement. The file note also makes the following statement in relation to the suggested investment strategy: "As regards the investment strategy. They have agreed to go ahead with the $622,000 investment. They want to do that immediately. See if we can arrange a time on Monday for the documentation to be signed. Peter will come down and do that. We should get all the Advance Bank loan applications ready and all the prospectus' ready and prepare their bank diagram and bank system for presentation. This is the key feature which needs to be done very carefully and set up which accounts will receive the income from the investments, the boat etc. It will also be necessary to do tax variations for them and we need to know most definitely what their current tax position is. Brian Nizette to advise on Monday." 59 The date of this note is important. It appears that it was not until the following day that Mr McDonald prepared the letter incorporating his written advice to the plaintiffs. Mr McDonald gave evidence that the sequence was otherwise, however I do not accept his evidence. The letter is dated 8 January 1990, and was accompanied by the typed Investment Plan which is a computer generated document. I am satisfied that the plaintiffs committed themselves to the investment recommended by Mr McDonald based only upon his oral presentation without the written document. As a consequence when they received the written material although they perused it, they did not make any great effort to understand it. They relied on Mr McDonald, their close friend and apparently competent adviser. 60 The letter of 8 January 1990 includes a statement of relevant facts and objectives. It says that the plaintiffs have stated that they had approximately $280,000 (and not the amount of $300,000, or perhaps $322,000, originally identified) for immediate investment and wished to have exposure to a portfolio of investments which had the potential to generate sufficient capital growth to protect the value of their capital against tax and inflation over the long term. Of course this was the interpretation placed on the situation by Mr McDonald. Although, when understood by a person sophisticated in financial matters, this may have meant the investor would have to take risks, including risks with his or her capital, I am satisfied that this was not understood by the plaintiffs. 61 The letter also included the statements: "You wish to retain an adequate portion of your assets in readily accessible form. You wish to spread your assets between a range of investments to obtain the benefits offered by diversification." 62 As later became apparent, notwithstanding those statements, the plan offered to the plaintiffs did not meet either of these criteria. In fact a large proportion of the investments were placed into unlisted property trusts and, then, with a significant bias, to one asset manager. 63 The letter provided the advice that, because the plan is flexible, changes in the portfolio can be made without incurring any up-front commissions or brokerage. Accordingly it is suggested that there will be freedom to alter the relative asset allocation, without being concerned about the costs of making changes. It is also stated that Mr McDonald will provide an ongoing service by way of review of personal expenditure and the budget and investment strategy at a cost of .2 percent per quarter of the portfolio valuation. Both these matters were to cause difficulty in the future. 64 The letter provides some indication of the strategy behind the recommended plan. Two categories of recommendations are discussed. The first, relating to "savings and protection", states that it is fundamental to the recommended strategy that present levels of personal income should be maintained. It is emphasised that interruptions to this projected income stream can put the whole investment strategy at risk and appropriate insurance is recommended. However, no consideration is given to any failure in the rate of return from the investments. Emphasis is placed on the plaintiffs' budget which is said to be "the heart of the financial plan". The prospects of the success of the plan are emphasised by a reference to the prospect that surplus income can be invested so as "to turn income into assets." 65 The "investment strategy" is the second limb of the plan. Of particular significance is the suggestion that the recommended strategy will meet investment objectives "within the framework of a secure investment strategy". This strategy is said to be "to diversify across property, equities and loan securities through large, reputable trusts." The letter continues: "Cash at call has been incorporated to provide liquidity for drawdowns and unexpected expenses via your 'wealth account' and to enable you to take advantage of attractive investment opportunities when they arise. We have recommended a holding in loan security trusts. These funds invest in bonds and securities issued or guaranteed by the Federal, State or Local Governments of Australia and New Zealand and their statutory authorities. We have recommended a geographically diversified property exposure with emphasis on prime commercial, industrial and retail property. We believe these sectors of the property market offer the best prospects for capital appreciation over the medium term. You can also expect a portion of your return from these investments to be tax free. We recommend small exposure to the Australian sharemarket via relatively conservatively managed funds which place emphasis on blue-chip stocks that provide reasonable levels of dividends. This will avail you of the taxation benefits of dividend imputation. Over the longer term such share investments are well placed to generate a return in excess of the rate of inflation. We have recommended a modest investment in overseas sharemarkets to provide at least some diversification into the world's major economies. The overseas funds provide a means of obtaining exposure to economies with stronger prospects than Australia and growth markets which are either unrepresented or underdeveloped in Australia, such as electronics or precision machinery. Overseas funds have the capacity to outperform domestic share funds over the longer term through their ability to move funds between the world's major stockmarkets to take advantage of different growth phases. Such an investment is, of course, subject to fluctuations in the value of the Australian dollar, but we believe that in the long term this overseas investment will work to your advantage. The above recommended property and equity growth investments must be seen as longer term growth investments. Please note however, that it is characteristic of such investments that a particular rate of return cannot be guaranteed and their value may fluctuate. Hence, capital growth projections shown in this report are only intended as a guide. Each of the products recommended here are known as "managed funds". A more detailed background of a managed fund is contained in the Background to Managed Funds attached to this plan." 66 The letter does not refer to any prospect of the capital value of the investments being eroded. However, with respect to prospective income, it is stated that "a particular rate of return cannot be guaranteed", and that the value of the investments may fluctuate. Capital growth projections are said to be a guide. 67 The products recommended are stated to be "managed funds". No explanation is given in the letter of the nature of these funds. They are not identified as unlisted and no advice is given as to the capacity to realise the investments in a falling market. 68 In relation to the plan it is said to offer "broad diversification across property, Australian and overseas shores and fixed interest investments". 69 It states: "Please note that should you unexpectedly need to draw on your capital, the growth investments may generally be redeemed with a short period under normal trading conditions at the prevailing unit price. […] We provide a brief summary of the investments, recommended, but advise you to study the enclosed prospectus'/brochures before investing. Estimates of income and compound capital growth are based on assessments of economic conditions as well as investments management performances over a period of time into the future. Such figures are purely estimates and may vary with changing circumstances. Please study the investment portfolio and when you are comfortable with the strategy we can proceed step by step. In the meantime if you have any queries, please do not hesitate to contact me." 70 In summary the letter represented that if the plaintiffs followed the advice given they would achieve their investment objectives of sufficient capital growth to protect their capital against tax and inflation over the longer term. As Mr McDonald represented in the discussion the doucment emphasised that the recommended investments will meet the plaintiffs' objectives within the framework of a "secure investment strategy." The investment plan 71 The investment plan, a copy of which accompanied the letter, is incorporated in a document which is dated 4 January 1990. The copy of the document tendered in evidence, does not appear to be complete and it is not possible to reconstruct the precise order in which the various pages were compiled. The original pages do not appear to have been numbered. 72 The plan has a number of notable features. Firstly, the advice which is given is to invest the whole of the sum within managed funds. No direct investments are contemplated. This was necessary because of Mr McDonald's relationship with FPI and the limitation of his licence which confined him in the range of investments he could recommend. 73 The document contains financial projections for only the first year of the plan. No information is given as to the predicted outcomes beyond this period. Undoubtedly, the reader is expected to believe that the projected returns will continue indefinitely. Accordingly, the document contains no predictions as to the outcome if the economy turns adverse, and it is not possible to identify any critical assumptions, which if not fulfilled, may lead the investors into difficulty. Although the document makes plain that from the capital sum invested in any particular fund there will be an establishment fee, including brokerage, it does not indicate that a fee would be paid to FPI or to Mr McDonald. 74 The plan contains a page headed "Concerns Profile". It indicates that Mr McDonald has classified the plaintiffs as "high" risk takers and it is said that their profile as high risk takers is reinforced by the graph presented on that page. The graph is merely a reflection of the numbers which Mr McDonald wrote onto the standard form when conducting the interview in late 1989. Although after careful examination of the detail it is possible to identify the consequences of the graph, they are not immediately apparent. The words suggest that a high rating on the graph indicates that the customer is concerned about that issue. The highest concern would be given the number ten. Of course, a high rating would conventionally be understood to be the first in any ranking, with the consequence that the greatest concern would be given the number one. 75 Mr Paige says that although he examined this page in the document, he did not read the words but rather looked at the diagram: "Q. When you got the document in which he classified you as a high risk taker, did you think it was wrong? A. I don't think I actually saw this sentence. I think I looked straight to the diagram. Q. He says the diagram reinforces your high-risk profile? A. Yes, I know it says that, but I can't remember having seen those paragraphs. I'm not saying they were not there. Of course they would be there. Q. Does it seem to you that Mr McDonald, from this document, got the wrong idea about whether you were a high-risk taker or not? A. Yes, that would appear to be the case, yes. Q. And you did not go back to him and say; you should give me investment advice on some other basis, because I am not a high-risk taker, because I am concerned about the safety of my business? A. We said that at the start. Q. But, he seems to have got the wrong idea in that respect, does he? A. Yes, I didn't take it back to him at this stage and say; you have got the safety factor wrong." 76 The plan provides an indication of the portfolio break up which is a reflection of the risk profile generated for the plaintiffs. Forty-five percent of the total is indicated to be invested in property and 43.4 percent in equities. The balance is indicated as being invested in interest bearing investments. As far as market exposure is concerned, the plan indicates that it is important to spread the risk and provide exposure to better performing market sectors at any given time. Accordingly, the document purports to relate the investment portfolio back to its fundamental assets with the following break-up: Interest bearing 26.1% Property 38.3% Equities 35.7% 77 The document also contains an indication of estimated income and growth from the portfolio. This is shown in a table which, as I have indicated, is limited to predictions for the first year. A caution is included suggesting that the rates are only estimates and should not be taken as guarantees of investment performance. The table indicates growth rates revealing an estimated average income from a portfolio of 7.9 percent and an estimated average growth rate of 6.9 percent. As these are estimates for income in only the first year of the plan, it is misleading to describe them as averages during the course of the investment. 78 Mr Ridd, who described himself as a compliance consultant, gave evidence about the process by which the investment portfolio was derived: "Q. … I would be interested to know if, instead of being classified as high risk, the Paiges had been classified as low risk, what low risk investors, what would you have expected, if anything, to be the difference in the recommendations made? A. I would start again on page 32 where it shows an investment portfolio with 43 per cent equities, 45 per cent property and 11 per cent interest bearing, I would see a vastly different asset allocation mix. Q. What would you expect it to be? A. For a low one? A low risk you probably, looking at perhaps 15 per cent shares, 10 per cent - you will get different opinions on this, but I would expect to see something like 60 per cent in more the fixed interest, interest bearing securities, that is for a low, perhaps even more. Q. And a medium? A. Medium is perhaps evenly balance, about a third each might be a reasonable one. These are very rough. It is also noticeable at this time there is no mention of international securities, where in today's language we are talking, you know, we see a vastly different mix. But in the language of the time, I would have thought a medium one would be a fairly evenly balanced portfolio, spread amongst those three sectors, in terms of asset allocation."

79 Having discussed the particular investment proposals, the document continues with a general discussion about investments. Two types of investments are referred to - loan investments and equity investments and it is indicated that most managed funds participate in one or more of these investments. There is a statement of the advantages and disadvantages of each. Property investment is also discussed and there is a description of managed investment products. There is a statement in relation to these products which expresses the author's view of their characteristics. It is said: "Managed investment products offer the following advantages: . full time professional management of investments in areas of high volatile returns and complex tax legislation. . diversification of investment risk with relatively small sums of money. . diversification of investment opportunity with relatively small sums of money. . access to investment opportunities usually beyond the resources of the man in the street. . pooled cost of management (this is particularly important in the areas of equity and property investment where transaction and ongoing management costs can be very high for the individual). . regular revaluations of assets (a very time consuming and expensive process for a diversified portfolio). . availability of income re-investment programs making ongoing management of savings simpler. . regular updates from the funds manager of what is happening in the financial world in general and to your investment in particular. The following characteristics may be perceived as disadvantages: . all of the above come from an upfront fee of up to 8% and an annual ongoing fee of between 1% and 3% depending on the product. . the investor has little control over day-to-day investment decisions."

80 It is plain that the author of the document intends that the client will see managed investment products as an attractive form of investment. The advantages are said to be considerable, the disadvantages, apart from the fees involved, are confined to the fact that the investor has little control over day to day investment decisions. It is not made plain that the quality of the manager, and the portfolio which it acquires, will be critical to the outcome of the fund. Furthermore, it is not indicated that the product which is being referred to is one which will have no market for the investments beyond a redemption by the Fund Manager. As it happens this proved to be a critical element in the success of the unlisted funds investments. 81 The description of managed investment products is followed immediately by a discussion of historical investment returns. It is not difficult to appreciate that one of the purposes of this juxtaposition was to encourage clients to see managed investment products as a sound and relatively secure way of investing their capital. Under the heading of "Historical Investment Returns" it is suggested that anyone who has fallen "under the spell of the dream of 'risk free, rapid capital appreciation' should have second thoughts." It is also stated that a major problem with the share market is that it experiences major volatility. The document states that anyone who needs to realise share investments "in a market slump either has not planned sensibly or is gambling." Comment is also made in relation to fixed interest securities with the prophecy that "it is a matter of much debate as to whether interest rates will ever return to the four and five percent of the 1950s." 82 The precaution is given in large type as to the "basic rules." They are: "DO NOT CONFUSE GAMBLING AND INVESTING. DO NOT INVEST MONEY IN MEDIUM TO LONG TERM INVESTMENTS WHICH YOU MAY NEED AT SHORT NOTICE. HAVE REALISTIC EXPECTIONS. HAVE SUFFICIENT TIME HORIZONS." 83 The clear inference is that although there are many risky, although superficially attractive forms of investment, investment in managed investment products through FPI is a sound way to approach the improvement of your financial position. 84 The document contains no evaluation of the risk profile of the investments proposed and the reader is given no indication whether the portfolio which is being recommended avoids the difficulties referred to in the section discussing historical investment returns. Of course, the document does state that the plaintiffs have been identified with a high risk profile but even if this section was adequately understood the document does not make plain that the investments chosen reflect a high risk situation. I accept the plaintiffs' evidence that they did not appreciate the information in the plan. They did not see this as a problem for they placed their trust in Mr McDonald whom they viewed as a friend. 85 It was a fundamental element of the investment plan that the plaintiffs would borrow an amount equivalent to the monies they had available to invest. Although it is plain that this increased the prospective return from the investment plan it also had the consequence that the risk was significantly increased. Furthermore, the loan, which was arranged with the Advance Bank, was fixed with an interest rate of 16.4 per cent. Accordingly, if returns from the investments were to fall significantly below the projected level, reflecting a down turn in the economy and reduction in the rate of inflation, the loan would become an increasing burden upon the investment plan. This was not made plain in the written material and was not discussed with the plaintiffs. 86 Mr Paige was asked about the risks which he understood from reading the plan: "Q. Now, under the heading Historical Investment Returns, you were being told here that if you had the dream of risk free rapid capital appreciation, you should have second thoughts? A. That is what that says here. Q. And you read it at the time, may I take it? A. Well, I should have read it. I don't remember reading it, but it was there for me to read. Q. Well, did you have the dream of risk free rapid capital appreciation? A. That is what we understood would be the result of this portfolio, that money would grow quickly as those assessments, or assumptions, indicate and the risks were not - although they are pointed out here - they were not mentioned verbally at the time the thing was discussed. Q. Would you have thought that you could get risk free rapid capital appreciation? A. It does sound stupid, I agree, but we relied on the assurances that this was a good, safe flexible portfolio. Q. But you never dreamt it could be risk free, did you? A. Well, we didn't think we were at a risk which we might not be able to afford. We didn't think there was a chance of us getting to the stage where the whole thing would prove to be untenable. No, we didn't think this would happen. We didn't think it could happen. But, once again, that is pretty naïve. Q. Well, it might have been attributed to the state of the economy, looking back on things? Don't you think that would have had something to do with it? A. It would have had something to do with it, obviously. Q. But, at no time would you have regarded rapid capital appreciation to be considered with risk free? A. No, not if I thought about it, no. Q. And your general thinking about financial matters, the expression is that there is no such thing as a free lunch? A. I understand what that means, yes. Q. And you understand the concept, in investment terms, of there being a correlation between risk and return on investments? A. Yes, I understood that the higher the rate of return, usually the greater the risk. But, we were assured that this was not a particularly high rate of return, but it sounded like it at the time; that this was a conservative rate of return which was achievable. Q. It was a rate of return put forward in a highly inflationary environment? A. Well, it had been highly inflationary for a long time. I think we certainly thought, I suppose like a lot of people, that it would continue. Q. And it did not seem out of order, at the end of the 1980s, that an asset could appreciate 8 or even 10 per cent in a year because of the inflationary environment that we had all become used to? A. Yes."

The life insurance policies 87 Mr Paige also gave evidence that it was Mr McDonald who advised them to cash life insurance policies to pay for renovations to their Kurrajong property, rather than take money from their available cash. 88 Mr Paige believes this advice was given at the November/December meeting and gave this account: "During the same visit I or my wife said to Mr McDonald "We also need to use some of the money to finish the improvements at our Kurrajong property." Mr McDonald said "If you want to make extensions and improvements to your house at Kurrajong, you should sell your shares and cash in your life insurance policies rather than use some of your capital, as it is no good having funds outside the scheme. It is better to have all your funds managed by me so that I can keep an eye on it all. In reliance on Mr McDonald's advice, our life policies were surrendered in early 1990 realising about $12,000.00 (rather than a surrender value of $52,604.00 if the policies had run their full course until 18 February 1999 and 3 February 2004), and our shares were also sold realising about $28,000.00. These amounts went into our bank account. I think this was a "Wealth Account" set up by Mr McDonald with Advance Bank." 89 Mr McDonald denied this account. He said that he gave no advice in relation to the surrender of insurance policies and draws attention to his file note dated 4 November 1989 which records that Mrs Paige has received "a $40,000 AMP payout" from cashing in an insurance policy. However, Mr McDonald did not draw attention to his file note, dated 31 October 1989, which records the following: "We have a number of AMP policies of Peter's and Kay's all of which have to be reviewed and we can also make some decisions about cashing those in to pay for some renovations which Peter wants to do to his Kurrajong property." 90 There is a further file note dated 7 January 1990. It is this note which records the plaintiff's decision to proceed with the investment and includes the following: "We should also draw down all their AMP investments except for the joint ones that Kay holds with her mother … . A letter should be prepared for the surrender of those policies for Peter and Kay to sign on Monday." 91 Mrs Paige gave evidence by affidavit about the insurance. She says it was discussed during Mr McDonald's visit to Lemon Tree Passage. Her account was: "During the same visit I or my husband said to Mr McDonald: "We also need to use some of the money to finish the improvements at our Kurrajong property." Mr McDonald said: "If you wanted to make extensions and improvements to your house at Kurrajong, you should sell your shares and cash in your life insurance policies rather than use some of your capital. As it is no good having funds outside the scheme. It is better to have all your funds managed by me so that I can keep an eye on it all." 92 I accept Mrs Paige's evidence. 93 Having regard to the file notes I have no doubt that Mr McDonald gave advice to the plaintiffs with respect to the surrender of the insurance policies. Whether or not the file note of 4 November is correct it is clear that it was not until after 7 January 1989 that at least some policies were surrendered. I accept the evidence of the plaintiffs and reject Mr McDonald's suggestion that he played no part in the decision to surrender the policies. There is a handwritten note on Mr McDonald's file which indicates that someone in his office forwarded letters surrendering the policies to the AMP Society on 17 January 1990.

Some conclusions in relation to the advice given and decisions made 94 Because of the lapse of time, and the loss of some documents, it is not possible for any of the parties to be entirely confident about the conversations which took place. However, there are a number of critical matters about which it is possible to reach conclusions. 95 I am satisfied that the plaintiffs did not identify themselves as high risk takers. Although I accept that Mr McDonald must have raised the issue and identified the six matters which could inform that decision, he gave no explanation of the matters and how they would reflect in a risk profile. I have no doubt that if Mr Paige had accepted that he was a high risk taker, Mrs Paige would have protested. 96 Whatever may have been said at the meeting, Mr McDonald did write the number 4 against the risk profile of the plaintiffs. It is likely that he has done this because of a misunderstanding of the plaintiffs responses to the various questions in the concerns profile. I have no doubt that Mr McDonald never adequately explained how the various responses would be reflected in a summary conclusion with respect to the plaintiffs' risk profile and the investment recommendations which would necessarily follow. His knowledge of the process appears to have been confined to asking questions, and applying the recommendations of the computer, without any real appreciation of the potential outcome for his client. 97 I am also satisfied that Mr McDonald offered to provide the plaintiffs with an investment scheme which, having regard to their cost of living, including the cost of leasing a boat, was a scheme which he advised they could afford. Mr McDonald did not explain the risks to the viability of the scheme if the boat investment failed. He did not explain the consequences if the actual revenue did not meet the predictions. I accept Mrs Paige's evidence that Mr McDonald said words to the effect of "You borrow so much, you save so much in tax and you get so much capital growth, easy." He also said "You can double your money in five years, and you can have $1.2 million if you do it this way." 98 During the course of their discussions, Mr McDonald never advised that the capital invested would be at risk. I accept the plaintiffs' evidence that he told them they should not do anything risky and that the approach he would recommend would be conservative. I am also satisfied that the effect of the advice he gave to the plaintiffs was "the thing would be so structured that you couldn't lose. It is just a question of how quickly you will win" even if those precise words were not used. The possibility of a capital loss was not included within the advice given. 99 Although the plaintiffs did not fully understand the scheme being suggested by Mr McDonald, both Mr Paige, and his wife, determined to go ahead with the proposal upon his recommendations. They viewed him as a friend and a person they could rely upon for sound investment advice. He held himself out as a person able to advise them about the totality of their financial affairs and qualified to do so. He went so far as to advise in relation to personal budgets, based on anticipated domestic and other spending. Because of the discussions they had had with Mr McDonald neither plaintiff contemplated that their capital could be at risk. This was critical to their decision to accept his advice with respect to appropriate investments. 100 It is apparent that the plaintiffs had never heard of unlisted property trusts before discussing the matter with the third defendant. I am satisfied that during this initial conversation unlisted property trusts were not mentioned, although when documentation was provided it was made plain that this was the method by which a substantial proportion of the funds would be invested.

The matter of fees 101 Mr McDonald's ultimate recommendations provided for the investment of a total of $580,000. Through his arrangement with FPI Mr McDonald was paid commissions totalling $23,225. The plaintiffs say that they were never made aware by Mr McDonald that he was to receive these monies or indeed any monies apart from a fee for the ongoing management of their portfolio. 102 The investment plan includes a single page summary of each of the proposed investments, except for the Aust Wide Opportunity Trust. Each contains a statement of an establishment fee and the amount of any brokerage. It is no where indicated that this brokerage fee will be paid to Mr McDonald and the plaintiffs gave evidence that they were never told this would occur. 103 Mr McDonald was asked about fees. There are two issues which arise, one being any initial fee to be paid, and the other, any fee payable when restructuring the investments. The following exchange occurred: "HIS HONOUR: Q. When you say in the plan that they can take up these investments through you, you will be remunerated by the - A. I point out the brokerage in the plan. Q. But how would someone know that that was coming to you? A. Because I explained that I work for FPI, I went through the same process as when I explained it to you, the establishment fee and the brokerage and how that works and FPI and that I work with FPI. That is when I explain all about the computerisation, the software I receive from them and that I am remunerated by them. Q. And you say, do you, that you told them that the brokerage fee would go to FPI? A. Yes, and in particular on walking them through the plan prior to them implementing this, when they came back, I showed them on the various pages where those amounts had been set aside, where the gross amounts had been diminished by that establishment fee. They could see - Q. That is when they came back and signed up, is it? A.. That's after they had taken the report home, read it and I pointed things out to them, I handed them the plan. When they came back, again we were together for an hour or two, I can't remember how long it was, it was quite a long time. There was nothing else to talk about but the plan. I don't think there was any question ever that the Paiges thought there was no remuneration of any kind in this for me. DONOVAN: Q: Did you tell them that part of the establishment fee would come to you? A. I told them the establishment fee, part of the establishment fee would go to FPI and as their agent I am remunerated by them." 104 Mr Paige also gave evidence about this matter. His evidence conflicts with Mr McDonald. "Q. In your mind it was the position, was it, that he was providing his services to you, giving you financial advice and he was not getting financial compensation for that from anyone? A. That was what we understood. I can recall saying to him, more than once, as we discussed the possibility of going into a formal arrangement with him, "What are you going to get out of it", "What do you get out of it", and he said, "Oh, we'll get a management commission, but let's get it up and running first". That was the - "We'll worry about that later", and I thought he was being very generous with his time, but as I have said before in these proceedings, we were on pretty - had been on pretty good terms over quite a long time. So I did raise the question of, "What do you get out of it". I didn't say directly, "Do you get a commission", but I thought perhaps we might have to pay upfront or something like that, but he reassured us, or he assured us that was not necessary. Q. But you knew he was getting commissions out of the transactions? A. He was going to get a commission on managing the portfolio if we decided to go along with it. Q. He was getting commissions from the transactions you were entering into? A. Well, he didn't tell me that - not in so many words any way. Q. What do you think he said about this matter when you raised with him "What are you getting out of it"? A. He said, "Oh, don't worry about that. We'll get it up and running and then we'll see about that", or words to that effect. Q, What did he say about the commissions? A. Well, he says that - at the meeting he pointed to the brokerage figures and he says - he pointed out to us that there was brokerage here and brokerage there - OBJECTION - CARNOVALE - WHEN AND WHERE IS IT ALLEGED MR McDONALD SAID THAT. ALLOWED. Q. Did you want to continue? A. Will I continue. Mr McDonald says - he pointed to these things at a meeting and he may have, but at no time can I recall him saying to me, "I get a percentage of the money that goes into the funds". In fact, I do remember saying at one stage when we saw the difference between the net opening value and what was supposed to go in, "What's happening to the difference" and he said, and I remember him saying, "That all goes to the funds"." 105 I do not accept Mr McDonald's evidence. I have no doubt the plaintiffs believed Mr McDonald was assisting them without a fee. Although the plaintiffs understood that Mr McDonald was remunerated by FPI, they believed he was helping them as a friend without payment except for any later ongoing management fee. They placed their complete trust in Mr McDonald encouraged by a belief in his friendship for them and apparent generosity. 106 In the letter of 8 January 1990 the following statement is made: "An important feature of the MRs system is that changes in a portfolio can be made without incurring any upfront commission or brokerage. This means that you would be free to alter the relative asset allocation of your portfolio to suit your changing circumstances without having to be concerned about the cost of making more changes." 107 There can be no doubt that the reader was to infer that the flexibility promoted as a feature of the plan would come at no cost. Mr McDonald was asked about this statement: "Q. Yes. The second paragraph under the heading "Establishing, managing and reviewing your plan"? A. Yes, "An important an important feature" - yes, is that the paragraph? Q. Yes? A. That I would elect not to receive any commission. Q. You might, but what about - A. I only mentioned the commission. Q. Or brokerage? A. That is the same, people use it intermittently. Q. But there would be a fee charged by the fund? A. Not always. Q. Did you tell Mr and Mrs Paige there might be a fee charged by the fund? A. I would have explained on each of the investments. Q. Did you tell them in that document? A. I told them at the point of investment, where I pointed out in the each, there was only a handful of investments they made and I explained the printed brokerage and up front fees that were listed in the application on the prospectus. It showed there whether or not they charged fees and what their management expense ratio, that the manager's fees, the trust's fees and the like. Q. How does what you tell me now sit with the second sentence, "You are free to alter without having to be concerned about the cost of making these changes"? A. The cost to me? Q. I'm sorry? A. The cost to me or the cost to FPI is making the statement. Q. Don't you think that would be understood as the cost to the investor? A. Sorry, the cost to the investor to FPI, charged by FPI. Q. I see? A. It may not be worded well, I don't know. That is the intention of the statement. It is a significant difference in that the bulk of the establishment fee was brokerage, if you have one of those pages of text." 108 It is apparent that the written document does not accurately reflect the real situation. Mr McDonald's explanation is not acceptable. I do not believe that the plaintiffs were aware that any fee would be charged for a change in the investment mix.

109 Both the plaintiffs and Mr McDonald called experts who gave evidence as to the quality of Mr McDonald's advice. 110 The plaintiffs called Mr Geoffrey Wall, an experienced financial planner, who has been giving financial advice since 1987. He described the process by which an adviser, with the benefit of an unrestricted licence, could advise clients across the range of available investments. 111 Although Mr Wall has no tertiary qualifications, he was an impressive witness. He says that the recession which occurred was very obvious to a competent investment adviser well before 1990. Because of concerns which he had about unlisted property trusts Mr Wall was advising his clients to redeem their investments in them by October 1989. He correctly identified that one of the problems of investing in unlisted property trusts was the difficulty of redemption during hard economic times. 112 Mr Wall was challenged as to his understanding of the academic writings and other publications relating to prudent investment. He responded by suggesting that in his opinion there, "is a lot more to recommending a portfolio than purely deciding by some principles of investment that may have been developed in some other market by some other person in some other country." 113 He said that in January 1990 he "would certainly not be looking to unlisted property trusts" as an investment. However, he accepted that for the period up to 1990 there had been major growth in investments in managed funds including both listed and unlisted property trusts and it was apparent that investment advisers had continued to advise clients to invest in unlisted property trusts. 114 Evidence of growth in listed and unlisted property trusts can be seen in the various media reports from 1989 to 1990. In an article appearing in the Business Review Weekly on 12 August 1989, it was reported that figures from the Unit Trust Association of Australia showed that the total assets of members of the organisation rose almost 12 per cent between the end of June and 30 September, taking assets to $37.66 billion. It was further noted that the percentage of unlisted property trust assets had risen to 25.8 per cent of the total (of unit trust assets), compared with just under 20 per cent in 1988 and 22.6 per cent in June 1989. An article in the Australian Financial Review on 4 October 1990 reported that "just as publicity about falling property values has peaked, investors have favoured large unlisted property trusts ahead of other forms of managed investment with the exception of cash management trusts." The article noted that the total value of the 90 unlisted trusts and 33 listed trusts had risen from $6 billion in 1986 to $18 billion at December 1989. The same article also noted that "the annual return from 91 unlisted property trusts has fallen from an average of 14.5 per cent over the last three years to 6 per cent currently, based on annualised returns for the five months to February, according to the Westpac PGE Property Investors Index." 115 Mr Tony Hartnell, Chairman of the Australian Securities Commission, on 14 May 1991, noted the rapid growth of unlisted property trusts throughout 1988 and 1989. Mr Hartnell apparently stated that in June 1988, the total assets of unlisted property trusts were valued at approximately $5 billion and at March 1990, $10 billion, 90 per cent of which was in real property. 116 The pressure on unlisted property trusts which emerged in 1990 can also be seen reflected in newspaper reports. 117 On 18 June 1990, comment by the executive director of the Unit Trust Association of Australia that "according to the regular quarterly returns made by our members, for every $3 of redemptions in the March quarter there were $4 of new applications." However, from July 1990 media reports focused not on the growth of unlisted property trusts, but on fears of collapse in the unlisted property industry and the intervention of the National Companies and Securities Commission and the suspension of buy-back provisions for trustees and funds managers who had been experiencing a run in redemption applications. Some headlines were "ASX Plan to Rescue Trusts" Australian Financial Review, 9 July 1900; NCSC Talks to Trustees" Sydney Morning Herald, 14 July 1990; "Property Trusts to Suspend Payouts" Sun Herald, 15 July 1990; "Threat of Buyback Freeze on Unlisted Property" Sydney Morning Herald, 16 July 1990. 118 Mr Wall was critical of the investment advice given in early 1990 to invest in unlisted property trusts and said the overall advice was flawed. He said "the horrific weighting towards unlisted property trusts, the highly unreasonableness of weighting to one fund manager, generally in my view, which is obvious from my approach, is an irresponsible approach to investment portfolio for these particular clients." 119 In his written report, Mr Wall provided detailed criticism of Mr McDonald's advice to the plaintiff. He said that although Mr McDonald "expounds the necessity for diversification" his recommendation showed a disproportionate bias towards property. The actual diversification based on net recommended investments amounts was: Property 53.62% Shares 42.77% Bonds 2.70% Other 0.91% 120 Mr Wall considered that the recommended portfolio also showed a heavy bias towards "Advance Asset Management", which was to receive 64.25% of the funds. 121 Mr Wall was critical of the risk profile generated for the plaintiffs by Mr McDonald, noting "[T]here was no evidence of any detailed risk assessment testing which would support Mr Bruce McDonald's findings." He concluded that "it would be difficult for a prudent adviser to understand why Mr Bruce McDonald would not be aware of the problems associated with a market downturn in property where investments were substantially in unlisted property trusts." 122 Finally, Mr Wall was critical of the structure of the overall plan, including the reliance on negative gearing, and the extent of cash reserves recommended. He said: "Mr Bruce McDonald mentioned that if there is a shortfall in gross income due to the income performance of his recommended portfolio the Paige's could draw on their cash reserve and then their capital. There is no mention of the implications of a capital drawdown with regard to Capital Gains Tax. Mr Bruce McDonald recommends that Mr Peter and Mrs Kaye Paige set aside $5,000 as a "Cash Balance". This "Cash Balance" was intended to be used for pending taxation payments and as cash for emergencies. A prudent financial adviser would consider this to be inadequate and would have recommended such a "Cash Balance" to be at least $20,000 to cover approximately 6 months of normal living expenses. In a situation where investment gearing was present this "Cash Balance" would need to be greater still."

The evidence of Professor Norman 123 Professor Norman was called by FPI. He is an Associate Professor at Melbourne University with considerable experience as an adviser and consultant. He is well known for his media appearances and an audio tape briefing service on economic matters which he provides. 124 Professor Norman reviewed the process by which Mr McDonald gave advice to the plaintiffs and the quality of that advice. He was asked about the fact that two-thirds of the investment portfolio was placed with the one manager. He described this as a "risky" investment portfolio, indicating that it had to be risky to provide an expectation of a real rate of return. 125 He had three criticisms of the written advice given by Mr McDonald. Firstly, he criticised the failure to provide references for the data in the advice. Nothing turns on that matter in the present case. Of greater significance is his opinion that "one or two statements of expected returns … should have been more fully hedged". His view was that "on every occasion, every page in which a financial expectation is given, … should be laced with warnings and caveats that these are expectations". He believed this is important because "people can so easily believe that a financial expectation is a guarantee or a certainty … most people who are not professional investors can easily believe that an expectation is a certainty." 126 His third criticism was of the length and complexity of the document. He believed a better and clearer summary of the investment plan could have been provided. 127 Notwithstanding these criticisms, Professor Norman was of the opinion that the advice given by Mr McDonald was reasonable at the time. However, that opinion was dependent on the classification of the plaintiffs as high risk takers being correct. 128 In his opinion, classification to a lower risk category should have resulted in less exposure to the Advance investments. Category 1 would have had no exposure to equity or property. Category 2 would have some equity and property investments, probably capped at 25 per cent. Category 3 would have capped equity and property investments at 50 per cent. 129 Professor Norman was asked about the inexperienced person's understanding of the relationship between risk and return. He agreed that ordinary people have difficulty understanding the relationship. He said: "I would add that over time, and I have said this in the statement, the understanding of the financial options available and their characteristics has greatly improved in recent years, I would say it has greatly improved since this time." 130 He was re-examined in relation to his classification of the investments appropriate to each of Mr McDonald's categories. He said this: "Category 1 would be the one described to his Honour. There are both necessary and sufficient conditions on this case, they coincide. Category 1 would only cover the most conservative investors who effectively are not investors at all, they want a custodial function and they are prepared to go backwards in terms of the purchasing power of their wealth to have the satisfactory that they will have no other losses in nominal terms. A category 2 would be substantially conservative people who are not entirely satisfied with the custodial function, they would be investors who are very risk averse, perhaps investors who have been subject to bad experiences or bad experience is known to them, perhaps brought up in families and circumstances that are themselves ultra conservative and do not feel envy when they see people making considerable sums of money through the application of risk and innovation. Category 3 is a further progression towards the risk end, but is still a very conservative category and I would call 2, 3 4 and 5 all of them risk, but in the McDonald categories, only 4 and 5 really get that appellation. A category 3 would be people who wish to take a risk with a very confined part of their portfolio, and they may include a diversity of people in relation to his Honour's question, but their understanding of the link between risk and return, it is most likely that they would be a category 3 after some of this was explained to them. I regard it as an extremely important function of people like Mr McDonald in the nineteen-eighties and early nineties in helping people understand these options and essential that any risk be explained to them. As to some extent, I believe he did. Category 4, where the Paiges are put, are people who are prepared to dispense with safety to a greater degree and are made aware that a necessary condition for getting real rates of return is a significant component in their asset allocation of equity and property, or off-shore exposures. I have mentioned off-shore exposures in my affidavit because it is common for me to recommend that to people who want this type of exposure and I believe it has been a very successful recommendation for me and for others. And category 5 are the people who are either playing with marginal money and are prepared to lose the lot with the expectation of making ten or 20 or more fold from their initial investment. You could almost call this the gambler types. I see nothing in the documents given to me that the Paiges were the gambler types and I believe it was correct for McDonald to assess them not to be in the fifth category. I do not know the processes that led Mr McDonald to assess them to be a 3 or a 4 and it is in that area that I believe the debate should take place." 131 Importantly, he was asked about the process of classification of the plaintiffs. He observed that "the critical question is safety." He said: "I believe that the court should give particular attention to the processes that caused Mr McDonald to give a rating of 4. Now, 4 means in this scale that zero means totally unconcerned and 10 is almost an obsession with the matter. And here the striking element of this chart is the lowest rank of any of these six considerations for safety and if Mr McDonald has executed those processes properly, then in my opinion he is perfectly justified in placing the investors into the high risk category or perhaps even into the extremely high risk category, although the interest in liquidity etcetera would suggest that they be placed in the fourth. So the question really transcends into another, which I cannot answer and that is: Did Mr McDonald correctly and professionally assess the Paiges as having the least concern for safety, compared with any of the other six criteria on this concerns profile, and if the answer is that the procedures were reasonable, I believe his categorisation is correct." 132 He was asked about the process which he believed an adviser should undertake when classifying a client. He made plain his view that if the process was correctly undertaken, it should occur in two stages with the clients being made aware of the consequences of their answers for their risk profile and the potential investments. 133 He was asked: "Q. Would there be any risk of error if that was to take place, in that, is it reasonable to assume that for someone to understand the effect of their answer, say to inflation hedge, in the context of risk, they would need to understand how inflation hedge may speak to risk conclusion before answering or not? A. At least in a broad way, because to answer a high amount of inflation hedge is taking the portfolio more and more out of, for example, safe government bonds. I mean safe government bonds and cash with low interest rates is no inflation hedge and I would say that an adviser like Mr McDonald should have alerted the clients to the consequences of that, but the proper way to do this, in my opinion, is a two staged process. The first stage, perhaps without the benefit of the implications, is to ask objectively how the people felt about these things, without necessarily knowing that and then once they have given the answer, to explain the significance of that and I take that as the reason for the letter on 8 January, almost pleading with the Paiges "Come back if there's anything you don't understand, read this document thoroughly." Now, we know in retrospect that Mr Paige says "Some of this was Greek to me" and he says that he didn't understand that. This is a fairly common thing. Now, it is for this Court to decide where the responsibilities lay there, but it is quite plain that some process took place. In my opinion it should be a two staged process. There is a case for not explaining the significance of this so that you get an unmanufactured answer from investors like the Paiges to say what they really think about family needs and inflation hedge and safety and then when the results are in, they might be surprised that even a seven out of ten mark for inflation hedge means that they are not going to be terribly interested in government bonds and bank deposits, in which case the process might take place a second time."

The sequence of events 134 The exact sequence of events after the meeting in November/December 1989 is not entirely clear. However, the plaintiffs must have met with Mr McDonald when they received the written documentation including the letter of 8 January 1990 and the investment plan. 135 Clearly the meeting was preceded by either a meeting or phone call, at which time the plaintiffs indicated that they wished to proceed with the investment proposal, at that time said to be for a total sum of $622,000. This is apparent from the file note of 7 January 1990. It was not until some time shortly after 8 January 1990 that the plaintiffs actually signed the necessary documentation. 136 The plaintiffs went to Mr McDonald's office to execute the documents initiating the various investments. Mr Paige said that when this occurred the papers were put in front of them by Mr McDonald who said "sign this and sign this" and so on. He said "there was no time to read them and Mr McDonald did not say what they were, what they were for or where the money was to go". He said they were told they would get six monthly reports advising on the program of the investments. Mr Paige said he received these reports in August 1990, February 1991 and again in August 1991. 137 Mr McDonald gave a different account of these events. I reject this account. I have no doubt the plaintiffs understood very little about the particular investments which Mr McDonald had chosen, and that Mr McDonald did not explain how they would operate. Some further conclusions 138 I am satisfied that by the end of their discussions with Mr McDonald, the plaintiffs were persuaded that investments of the type he proposed would meet their needs. By 7 January 1990 they were committed to his recommended investment strategy. This occurred before they obtained the written document, the letter forwarding it is dated 8 January 1990, and in these circumstances, to the extent that the document provided any explanation, it would have had little impact upon the plaintiffs. Mr McDonald made the scheme appear attractive and affordable to the plaintiffs. In his affidavit Mr McDonald states that he said: "The income distribution from the investments should just about cover the interest payments on the loan which would be an interest only loan. This means that you would not be paying tax on any of the investment income as the interest will be equal to or slightly more than the investment income. You won't have to pay capital gains tax on the growth in value of the investments unless you sell them." 139 If something of this order was stated by Mr McDonald it is plain that his advice was inadequate. A competent adviser would have indicated that it was critical to the plan that the return from the investments continue and that the plaintiffs must maintain the cash flow from their employment and other opportunities. Unless this happened the inevitable consequence would be that the plaintiffs would be forced to sell, and possibly, on a falling market, occasioning a capital loss. The only caution in relation to the necessity to maintain an appropriate cash flow, if the plaintiffs undertook the investment proposed, is in the letter from Mr McDonald of 8 January 1990. That letter refers to the necessity for the plaintiffs to protect their income, which is a reference to the income from their employment. Nowhere in that letter is the critical relationship of the return on the investments and the capacity to maintain the plan discussed. His advice was that the investment return would be adequate to service the loan leaving them to understand that that was not a matter which they needed to concern themselves with. 140 I am satisfied that during the course of the discussion in November/December 1989, Mr McDonald raised the question of borrowing and advised the plaintiffs to take a loan of $300,000. I am also satisfied that he told them that they need not worry about any risk associated with the loan because the structure of the plan would be such that there would be no risk to them. 141 I am satisfied that Mr McDonald did not explain that a significant investment would be in unlisted trusts, and certainly did not explain that this form of investment did not allow an investor to trade his or her interest on the open market. He did advise the plaintiffs that their investment would be flexible, and they could change the portfolio investments as the market changed. Mr McDonald promoted his suggested strategy to them as an investment in a spread of investments which would provide both security and flexibility. 142 I am satisfied that the plaintiffs were committed to the plan following Mr McDonald's recommendations before receiving the letter dated 8 January 1990. 143 I am also satisfied that the plaintiffs were not advised that their capital would be at risk, but were told their investments would be secure and could be expected, over time, to protect them from the effects of inflation. 144 The plaintiffs were advised to invest their capital in managed funds, this being the only form of investment Mr McDonald could recommend. Although their risk profile was identified, it was not appreciated by the plaintiffs that being identified as "high risk" in the plan document meant that their investments may be other than secure. 145 I have no doubt that because of their long friendship the plaintiffs trusted Mr McDonald to provide advice which met their needs and expectations and did not believe it necessary that they understand for themselves all of the written material. They were not sophisticated in financial matters and relied up Mr McDonald's representation that he was qualified to understand and interpret their needs.

Statement of Investments 146 The investments the plaintiffs made in January 1990 were: · Advance Imputation Fund: Mr Paige acquired 180,045 units at a cost of $120,000, as per the investment plan. · Advance Split Property Fund: Mr Paige acquired 101,087 Combined units in this Fund at a cost of $120,000, as per the investment plan. · Advance Split Property Fund: Mr Paige acquired 152,643 Income units in this Fund at a cost of $160,000, as per the investment plan. · Westpac International Investment Trust: $55,000 invested to acquire a number of units in this Trust. · BT Select Markets Trust: Mrs Paige acquired 21,186 units in this Trust at a cost of $75,000. · Aust Wide Flexi Property Fund: Mrs Paige acquired 50,000 Opportunity units in this Fund at a cost of $50,000. · The total invested by Mr and Mrs Paige in January 1990 was $580,000.

The events which followed 147 It was not long after making the investments before problems with the plan began to appear. As early as February 1990 Mr Paige became concerned about the honesty of Crew-a-Cruiser with respect to maintenance bills and other matters and he asked Mr McDonald to make inquiries on his behalf. Mr Paige says that the agreement between him and Mr McDonald was that Mr McDonald would do whatever was necessary to manage the boat. During the months which followed the income generated from lettings of the boat was significantly less than the outgoings necessary to maintain it. 148 Apart from the boat, Mr Paige began to have concerns about the performance of the overall plan. He tried repeatedly to ring Mr McDonald with diminishing success. Mr Paige became increasingly concerned as to whether they were achieving sufficient returns to pay the interest on the money which had been borrowed to fund the investments, including the lease on the boat. 149 As I have already discussed, the performance of unlisted property trusts during 1989 appears to have been positive. Although Mr Wall was concerned about their prospects in the latter part of 1989 this does not appear to have been the general view. Reference to the financial press of the period gives an indication of the bullish predictions which were being made. Although listed property trusts had responded to the significant downturn in the stock market unlisted trusts appeared to remain an attractive investment. Of course, it was only a matter of time before the economic downturn, and the difficulties in the property market, would be reflected in the performance of unlisted trusts. 150 Significant difficulties with respect to the liquidity of the trusts became widely known by July 1990. By the middle of that month the rate of redemptions had increased to the point where there were fears of collapse. The Aust Wide Trust emerged as particularly vulnerable and a freeze on redemptions was imposed. Freezes or delays were also imposed by other trusts. 151 The position in relation to unlisted trusts worsened throughout the latter part of 1990 and into 1991, although at times positive reports were generated in the press. By August 1990 the National Companies and Securities Commission (NCSC) had intervened and laid down rules in relation to redemption periods and liquidity ratios. On 20 August 1990 the Australian Financial Review reported that although listed property trusts were trading at discounts, units in unlisted property trusts were expected to trade at fire sale prices. 152 At the same time other areas of the Australian economy were under pressure. This was accompanied by an international downturn. Australia technically moved into recession in the second half of 1990, and other financial bodies, including the State Bank of Victoria, Pyramid Building Society, the IOOF financial group, and the Bank of Melbourne came under significant pressure. 153 Ultimately the Commonwealth Government stepped in to save the unlisted property trust industry. Redemptions were frozen and the industry restructured. The Corporations (Unlisted Property Trusts) Amendment Act 1991, made effective from 23 July 1991, became the vehicle by which the trusts were ultimately listed and the industry placed on a viable footing. 154 The history of the plaintiffs' investment portfolio can be partially reconstructed from the diary notes kept by Mr McDonald. These file notes also reveal the extent to which Mr McDonald had taken control of the plaintiffs' financial affairs. 155 By June 1990 it was apparent that the projections made less than six months earlier would not be realised. The file notes indicate that this was largely brought about by the under performance of the charter boat, where the original annual shortfall was estimated to be approximately $5,000 a year but had become approximately $25,000. It is also apparent that neither the fees payable to Mr McDonald, nor those payable to the plaintiffs' accountants, had been provided for in the financial projections which were then made. Mr McDonald noted that the "short fall could be more in the order of $12,000 or $13,000 after we add on those costs." (Leaving aside the boat.) 156 Apparently a lengthy conversation occurred between Mr Paige and Mr McDonald on 13 July 1990. During the course of that conversation the monies necessary to complete the renovations on the plaintiffs' Kurrajong home were discussed. There was also discussion about the adequacy of the allowances which had been made in the budget for the normal living expenses of the plaintiffs. The financial position was described as in a "cash flow crisis" and it was recognised that there was a necessity to restructure the investment portfolio. It was apparent that the difficulties with the financial strategy which had been devised were now imposing increasing emotional strain on the plaintiffs. 157 The file notes contain a cash flow projection which was apparently completed in October 1990. The deductions in relation to the boat are shown as an annual sum of $42,400 with an income of only $9,360. The outgoings and income in relation to the portfolio of investments was shown as almost equal. Accordingly, by this time the only predicted tax loss was that generated by the boat. The file contains notes of ongoing negotiations in relation to the prospective sale of the Lemon Tree Passage property although it had still not been sold. 158 There was a major meeting between the plaintiffs and Mr McDonald on 12 January 1991. At this meeting Mr McDonald stressed the need to sell the Lemon Tree Passage property as soon as possible. Again the difficulties with the boat were identified and a decision was made to remove it from the control of Crew-a-Cruiser and bring it closer to Sydney. The prospect of selling the boat was discussed but it was realised that because of the depressed economy the sale of luxury items such as the cruiser would be very difficult. 159 A further meeting occurred on 25 February 1991. Mr Paige brought with him the October cash flow projections and there was a discussion about the value of the investment portfolio. Apparently Mr Paige expressed alarm when he was told that his portfolio which he believed, having regard to the projections he was originally given, should have been worth $630,000, was now worth only $532,000 to $540,000. Mr McDonald records in his minute the following: "I have now explained and shown him how the projection works and have given him a copy of his report. He understands and is accepting and comfortable with that position. His wife is still concerned that the portfolio has gone down, albeit we did the calculations, the portfolio as a whole has gone down 4.7 per cent when indeed, property has fallen 15 to 25 per cent, international equities by 23 per cent and the rest of the equities by about 21 per cent. I told him overall, we are very proud of outperforming every benchmark and we can do that in the bad times, then when the good times come, are comfortable that the projections we did are realistic. I told him the concern we do have that he is consuming all the income. The performance of the fund is not 14 per cent ie 8 per cent growth, 6 per cent income, as he's consuming the income. This has been brought about by the abysmal performance of the boat, which we spoke about at length." 160 With respect to the investment portfolio the plaintiffs apparently asked why investments could not be switched out of property into equities having regard to the state of the property market. Mr McDonald records that "I told them that was the core of the portfolio, put in place as it was. There are penalties and difficulties in switching that on the other investments around it were to be used to trade and balance the portfolio." He concludes that "the portfolio will stay as it is, but we'll trade within the limits of what we are able to do with that portfolio. What we need is a cash injection … ." 161 It is obvious that these remarks would have caused alarm for the plaintiffs. They had been advised by Mr McDonald at the time of entering into the scheme that one of the advantages was the flexibility to switch investments. Furthermore, it had been represented to them that investments could be switched without penalties. They were now being told that there were "penalties and difficulties." The flexibility which had been represented as an advantage giving security and prospective gains did not exist. 162 The file note also contains a comment upon the value of the investment portfolio. It is in these terms: "They put $600,000, $300,000 of it borrowed. The establishment costs was about $25,000. They drew out $20,000, which is $45,000 out of $600,000, leaving the portfolio value at $555,000. It is valued today at $553,000 so we have lost very very little, and indeed, have had income of the order of $20,000 odd in that half of the financial year, so it hasn't done all that badly when one looks at the situation as it really stands." 163 These numbers are of course quite different from the projection which was made as late as October 1990. That projection contemplated that the plaintiffs would start the year with an investment of $595,000 rising to a capital value of $630,250. Having regard to this projection it was not surprising that the plaintiffs were concerned when advised that the value of the portfolio at February 1991 was in fact only $553,000. The income was of little consequence as it was required to pay the bank interest which was of the order of $49,200 per annum. It must have been obvious that a shortfall was imminent for the year. When adjustment is made to the initial investment making it $580,000, the capital value was clearly being eroded. Compared with either the original projection or that made in October 1990, the representation that the investment was secure was not borne out. The position becomes significantly worse when it is appreciated that neither the original management fee nor that claimed by Mr McDonald in July 1991 has been provided for, in these calculations. 164 The position continued unchanged through the early part of 1991. The plaintiffs were unable to sell the Lemon Tree Passage property, and the boat continued to cause difficulties. The plaintiffs' financial position was in serious decline. Their capital was eroding and the income was significantly less than their outgoings. 165 A further review of the plaintiffs' position was undertaken in July 1991. It had not improved. It was at this meeting that it was agreed that the proceeds of the Lemon Tree Passage sale would be used to pay out the lease on the boat. At this time Mr McDonald also suggests refinancing the Advance Bank loan. Interest rates had fallen and Mr McDonald was considering renegotiating the mortgage without penalty. As it happened, the Advance Bank would not waive the penalty, and the proposal does not appear to have been pursued. 166 At this time there was a discussion about the lack of apparent attention by Mr McDonald to the plaintiffs' affairs. He explained that he had not charged them fees and accordingly it may have been hard to get hold of either himself or his assistant, Maryann McGregor. However, Mr McDonald now indicated that he was going to place the plaintiffs on the same footing as any other client and charge them for the general maintenance of their portfolio and for other time he devoted to their affairs. 167 He communicated this intention in a letter dated 10 July 1991. He sought an annual fee of 1.6 per cent per annum of the value of the portfolio (double the original) as a "retainer" and time-based costing for all services. The plaintiffs wrote in reply expressing their dissatisfaction with the investment plan and Mr McDonald's part in devising and managing it. In his letter, Mr Paige accepts that he bears the primary responsibility for buying the boat but says he "would never have considered it without your assurance that the scheme would work." The plaintiffs' position is stated in summary: "To sum up: we have lost confidence in the portfolio you have designed, in the financial advice that you have provided, and in the efficiency of your office, which falls way short of your professed aim 'to exceed the expectations of the client at every stage'. We cannot endure another 12 months of uncertainty and doubt, operating on a budget which we know to be inadequate, faced with greatly increased incidental charges which, on past experience, will be generated by FPW's inefficiency, and paying twice as much for the privilege of holding a portfolio that we are not satisfied with."

168 Although the plaintiffs' letter was dated 28 August 1991, Mr McDonald did not reply until 16 December 1991. His letter was lengthy and responded to many of the plaintiffs' complaints. He accepted no responsibility for the investment in the boat, and although acknowledging that the portfolio had ceased to be liquid, due to the government imposed freeze, he suggested that this should not be of concern as the plaintiffs were investing, at least for the medium term. 169 Mr McDonald's file note of August 1991 contains the result of his inquiries in relation to the Advance Bank loan. The penalty for early repayment is noted as $16,400. Mr McDonald undertakes a further review of the plaintiffs' position although he makes no provision in relation to the boat. He expresses the hope that the boat will have been sold and will no longer be a difficulty. Although the file note is dated 13 August 1991 it refers to the forwarding of a retainer agreement to the plaintiffs. That agreement was forwarded with a letter dated 10 July 1991. It was the forwarding of that letter, with its indicated charges, which finally caused the plaintiffs to terminate the arrangement with Mr McDonald and seek to wind up the investment portfolio.

The decision to sell 170 I have already discussed the failure of the boat investment and the consequences for the investment plan. It ultimately led to the sale of the Lemon Tree Passage property to fund the payout of the lease on the boat which was also ultimately sold. 171 During 1990 and 1991 the plaintiffs were becoming increasingly concerned about their investments. When they received the letter of 10 July 1991 their concerns were heightened, particularly as they realised that instead of an annual fee of approximately $5,000 for the management of their investments, they would have to pay between $11,000 and $15,000. They came to believe that Mr McDonald had failed to meet his promise to actively manage their investments and they considered that his personal involvement in their affairs had diminished. 172 Mr Paige said in his affidavit evidence that he "concluded that [he] had no alternative but to wind the investment plan up." He said he came to the view that the additional proposed charges were impossible to meet and "[he] decided to take the investments out of Mr McDonald's hands." This decision was made in August 1991. However, it was not until well into 1992 that the investments were sold. About the middle of 1992 the plaintiffs approached Bridges Financial Services Pty Ltd ("Bridges") for advice and Mr Paige says he "learned that the financial situation was much worse than I had been led to believe by Mr McDonald." He says that he was made aware that after the sale of the investments and payment of penalty interest to Advance Bank for early payment of the loan, a net sum of $135,000 would be left from their investments. 173 Mrs Paige said in her affidavit evidence that "we had been losing money from day one of the operation". "In August 1991 my husband and I decided that we should cut our losses and get out of the scheme. We wrote to Mr McDonald on 28 August 1992 in response to Financial Planning Works letter of 10 July 1991 in which we were informed that there would be a doubling of the management fee to 1.6% and the introduction of substantial sundry charges and charges for interviews. In our letter we informed Mr McDonald that we were taking the matter out of his hands."

174 Mr Paige said that after they received the advice from Bridges, they sold all the investments with the exception of Aust-Wide which was still frozen. He said, "At that stage we had lost confidence in the whole thing. We just wanted to wind it up. That was the advice we had from Bridges." 175 He was asked: "Q. What is your explanation then for the sale of all the investments in July 1992, indeed more than you needed to sell to pay off Advance Bank? A. Well, we had to try and get some of this money back and one way that we could do it, was to extend our house that we bought and put a second storey on it and hopefully sell it in the future and make a capital gain that wouldn't be taxable. To do that we needed money. Q. You had become disenchanted with investments in shares and commercial property? A. We had become disenchanted with the scheme we had and we went to see somebody else, namely, the man from Bridges at Dee Why and he advised us to wind it up, which we did. Q. Did Bridges ever advise you to invest in the Advance Imputation Fund? A. I can't say, because we didn't end up following any of the alternative plans that Bridges put to us. Q. I mean, you are not suggesting that Bridges' advice to you was that there were no investments in any managed funds that were suitable to you? A. No, I am not suggesting that, because they did put a number of proposals to us, which included managed funds. They actually gave us three alternatives, what they call a high risk scheme, a moderate risk scheme and a low risk scheme, but we ended up not following any of those, not following their advice in that regard. We, at that stage, had lost confidence, yes. Q. You had lost confidence in investing in the share market or in the property market or managed funds? A. I think we lost confidence in people giving us advice. We were pretty shattered actually and we had had this going on for a number of years. We had the most awful trouble with the boat, which once again I repeat, I don't blame Mr McDonald for, and we just wanted to get out of it but if we had not been in that position and if we had not had this loan hanging over us, I don't believe that we would have sold our shares at a loss simply because the market went down." 176 I am satisfied the decision to sell was made once the plaintiffs realised that the representation that they would have a secure investment was not correct. In fact, rather than being a secure investment, their capital was eroding, their outgoings on the plan were far in excess of the income and they were being asked to pay fees far greater than originally promised. The plaintiffs' claim 177 The plaintiff claims in contract, tort, for breaches sections 52 and 53 of the Trade Practices Act 1974, for breaches of sections 41 and 42 of the Fair Trading Act 1987 and for breaches of sections 68C(2)(c) and 68E(1) of the Security Industries Act 1980. 178 The advice which was provided to the plaintiffs was given by Mr McDonald without fee. Mr McDonald's expectation of payment came if the plaintiffs determined to proceed with the recommendation in which event he would be remunerated through FPI. He would receive payment from the plaintiffs only if they elected to retain him to provide the ongoing management of their investment portfolio. 179 In fact the plaintiffs retained Mr McDonald to manage their investments and the plaintiffs also claim in relation to the advice given, or which should have been given, during the course of that on-going relationship. However, in the event this claim was faintly pressed. No evidence was given as to the nature of that advice and when it should have been proffered. I do not propose to consider it further. 180 Together with the statutory matters, the essence of the claim that was ultimately pursued, as I understand it, is the claim against McDonald for which FPI is also liable, for negligent advice. 181 Particulars of the alleged breach and negligence are as follows: a) Failure to provide reasonable and proper investment advice;

b) Failure to exercise due care and skill in respect of the provision of the said investment advice;

c) Failure to exercise reasonable care for the security of the investment property of the plaintiffs;

d) Failure to provide investment advice which was suitable for and in accordance with the plaintiffs purpose;

e) Failure to provide any or any adequate warning to the plaintiffs of the danger to which they were exposed in acting upon the said investment advice;

f) Permitting the plaintiffs to undertake investments in reliance upon the said investment advice when it knew or ought to have known that the plaintiffs were likely to suffer loss and damage as a consequence thereof;

g) Failure to have a reasonable basis for making the securities recommendations to the plaintiffs, and in breach of Section 68E(1) of the Security Industries Act 1980;

h) Failure to ascertain that the securities recommendations provided to the plaintiffs were appropriate having regard to the information that the First and/or Second and/or Third Defendant had about the plaintiffs' investment objectives, financial situation and particular needs, and in breach of Section 68E(1) of the Security Industries Act 1980;

i) Failure to give consideration to and conduct such investigation of, the subject matter of the securities recommendations provided to the plaintiffs as was reasonable in all the circumstances, and in breach of Section 68E(1) of the Security Industries Act 1980;

j) Failure to ascertain that the securities recommendations provided to the plaintiffs were appropriate having regard to the information that the First and/or Second and/or Third Defendant had about the plaintiffs' investment objectives, financial situation and particular needs, and in breach of Section 68E(1) of the Security Industries Act 1980;

k) Failure to make securities recommendations to the plaintiffs which were based on a proper consideration and investigation of the information that the First and/or Second and/or Third Defendant had about the plaintiffs' investment objectives, financial situation and particular needs, and in breach of Section 68E(1) of the Security Industries Act 1980. 182 It was also pleaded that the defendants breached their fiduciary duty to the plaintiffs. 183 A further claim was brought during the course of the proceedings, in which it was alleged that Mr McDonald concealed from the plaintiffs that he could only advise in relation to a limited range of investments and failed to disclose that he was entitled to commissions if they invested in accordance with his recommendations. 184 The damages claim was finally pleaded as follows: 1. The capital loss as assessed by what went in and what came out. $122,533.00.

adjustment Australia Wide $22,188 $18,000 $4,188 $4,188 $126,621

2. Loss of opportunity to obtain income on money unavailable between January 1990 to July 1992. The base calculation put forward by the plaintiffs is the bank term deposit rate to be ascertained but allowing this Court to increase or decrease the opportunity lost if the overall circumstances of the plaintiffs including their own considerations of their plans.

4. Interest at the Supreme Court rates from 29 July 1992 to the present time. 185 Although proceedings were also brought against Financial Planning Works Pty Ltd, who Mr McDonald came to work for after the initial investments had been made, that claim was settled during the course of the proceedings. 186 The first defendant concedes that if Mr McDonald is liable it will also be liable. 187 The defendants reject each of the plaintiffs' claims. In addition, Mr McDonald pleads that the plaintiffs were guilty of contributory negligence by failing to read the letter provided to them by Mr McDonald and by failing to seek explanations of any parts of the document which they did not understand.

Some conclusions on liability 188 It is plain that in the present case Mr McDonald owed the plaintiffs a duty of care (see Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241). Even if the plaintiffs did not expressly request advice from Mr McDonald it is clear that he encouraged them to act upon the advice he gave (see San Sebastian Properties Pty Ltd v Minister Administering the Environmental and Planning Assessment Act 1979 (1986) 162 CLR 340. 189 It cannot be doubted that it was reasonable for the plaintiffs to rely upon Mr McDonald's advice. He held himself out to be a person who, with FPI, was equipped to provide them with advice in relation to the whole of their financial affairs, and could identify an appropriate investment portfolio. The advice which Mr McDonald gave went beyond advice in relation to appropriate investments. He invited the plaintiffs to place the whole of their financial affairs in his hands. He prepared total cash flow projections for them, and identified the extent to which they could borrow for the purpose of investing in managed funds. He assumed responsibility for advising them in relation to the investment in a significant pleasure craft which he incorporated into a tax effective investment plan, and with the benefits of negative gearing, demonstrated to them, that they could afford it . 190 I am satisfied that Mr McDonald breached his duty of care in a number of ways. Firstly in preparing the risk profile for the plaintiffs, Mr McDonald failed to adequately inform them of the nature of the information he was seeking and the purpose for which it would be used. I have found that the plaintiffs never told him they were high risk takers and if he, as it would appear, came to this conclusion and expressed it in the various documents, he did so wrongly. As this conclusion was critical to the whole investment strategy, it was of the utmost importance that Mr McDonald ensure that the plaintiffs understood the nature of the questions they were being asked, and the purpose for which the answers were to be used. This he did not do. His advice was quite inadequate. 191 It is also plain that by assuming responsibility for the planning of the whole of the plaintiffs' financial affairs, Mr McDonald accepted a burden of competently advising them in relation to the risks which may be inherent, not only in the investments which he was recommending, but also in the other elements of their financial arrangements. In particular, the risk that the plaintiffs may not be able to sustain their existing incomes was a critical risk to the success of the financial scheme. 192 Although Mr McDonald adequately identified the risk in relation to their personal income stream he did not, in my opinion, adequately identify and advise the plaintiffs of the risk to their financial security which was provided by the investment in the boat. Although Mr McDonald did not initiate that investment, it was Mr Paige's idea, because of the role he had undertaken, it was incumbent upon him to effectively evaluate the risk which the boat investment involved and inform the plaintiffs of the critical impact which failure in that investment would have upon the whole scheme. Effectively, the investment in the boat constituted an additional borrowing of $105,000 so that the total borrowing which the plaintiffs were committing themselves to by accepting Mr McDonald's advice was $405,000. 193 By including the boat investment as part of the overall package, the risk profile to the plaintiffs was undoubtedly high, if not very high. The duty which Mr McDonald owed to the plaintiffs required him to expressly warn them that the scheme might fail if the return from the investments could not be sustained or if the boat failed to achieve the predicted return. Although I accept that it was Mr Paige who decided to embark upon the boat venture, a duty fell upon Mr McDonald to make plain that his recommended investment strategy was put at risk if the boat venture failed. By representing, as I am satisfied he did, that the investment plan he was recommending was secure, Mr McDonald failed to bring to the plaintiffs' attention that their capital was at risk. If the boat venture did not perform, the boat might have to be sold, and if this could not occur other assets would obviously have to be realised to deal with the bank debt. It should have been obvious, and he should have advised that this may have to take place in a market where the capital value of the investments had fallen. 194 Mr McDonald should have informed the plaintiffs that there were risks to their capital in the investments which he was recommending. He should have advised them that borrowing and investing in managed funds weighted in favour of unlisted property trusts involved significant risks. His advice was otherwise. That those risks should have been obvious to Mr McDonald is plain from the fact that the investment package which was created was a result of the classification of the plaintiffs as high risk takers. 195 But for the advice of Mr McDonald the plaintiffs would have invested their surplus funds either in property or in a portfolio of blue chip investments. They would not have borrowed to invest in equities. 196 I am satisfied that the advice given by Mr McDonald was negligent. I am also satisfied that Mr McDonald relevantly breached the Trade Practices Act and the Fair Trading Act. 197 With respect to the Securities Industries Act I have concluded that Mr McDonald failed to adequately identify the plaintiffs' investment needs and risk profile. In my opinion Mr McDonald did not adequately explain the process of risk evaluation to the plaintiffs. As a consequence, Mr McDonald did not conduct his discussion with the plaintiffs in a manner which would have enabled him to adequately identify the plaintiffs' investment needs. For this reason, the risk profile he recorded for the plaintiffs was not correct and the portfolio of investments which he recommended was inappropriate. 198 A reasonable investigation by Mr McDonald would have at least ensured that he explained to them the elements of and practical application of their risk profile to the investments which he was recommending. I am satisfied that Mr McDonald did not have a reasonable basis for recommending a portfolio to the plaintiffs appropriate for persons prepared to take high risks. 199 Although I am satisfied Mr McDonald did not disclose the commission he was to receive if the plaintiffs made the recommended investments in my opinion disclosure would not have made any difference to the decision they would have made. 200 For purposes other than the Securities Industries Act, it is necessary to determine whether the breach of duty by Mr McDonald occasioned the loss suffered by the plaintiffs will depend upon the nature of the representation made. The mere giving of advice to invest in particular assets may not give rise to a liability in damages if the assets are sold on a falling market. Markets, it may be accepted, will rise and fall. However, if the representation made and relied upon is to the effect that the investment is secure then, if negligently made, and a loss is suffered, the defendant may be liable.

The cause of the loss 201 The plaintiffs made the decision to terminate the plan and sell the investments in August 1991, although they were not in fact sold until 1992. Their disillusionment with the plan stemmed from the failure of the boat investment, the inadequate investment income, the fall in the capital value of the investments and the proposed increases in the management fees. All these factors would inevitably lead to a continuing erosion of their capital. They concluded that the commitment to a borrowing of $300,000 at a fixed interest rate of 16.4 per cent was untenable having regard to the failure of the scheme to achieve the projected income, and the prospect of significantly increased management fees. 202 The evidence of Mr Paige was that the income from the investments was insufficient to cover the bank loan interest. This is denied by Mr McDonald. However, it is clear from Mr McDonald's file note of 25 February 1991, that the income was not covering the interest on the loan. The interest bill was $49,200 - the income from the investments for six months is stated to be of the order of only $20,000 - an obvious shortfall. This fact, added to by the failure of the boat investment and the proposed significant increase in management fees, made the investment plan no longer viable. 203 The plaintiffs' position was serious, not only because of the eroding capital, but because the plan was failing to produce anywhere near adequate income to meet the bank interest. 204 The defendants submit that with respect to causation, this case should be approached in the same manner as Lindgren J determined that issue in NMFM Property Pty Ltd v Citibank Ltd (No 10) (2000) FCA 1558. In that case the allegation was that, by reason of the advice given by the advisers, the investor was induced to enter into an investment without being given appropriate warnings as to the level of security. After the investments had been made the market turned adverse and the investors sold. His Honour found that the sale was not occasioned by any identifiable increase in the investor's debt but occurred because "he was concerned the value of the investments was steadily declining, as he learned from his regular calls to the telephone service that gave him the unit prices." His Honour found that the investors: "Suffered loss because the unit price had fallen to such an extent that they took a commercial decision not to wait for the price to recover, but rather to crystallise their position against the possibility that the price might drop even further. I therefore accept Citibank's submission in the case of the Minichinis the cause of the loss was the dramatic decline in unit prices and the Minichinis commercial decision. The drop in market price would not have been a supervening cause if Jones representation had been that no decline would ever occur, even short term, and the evidence had established that the Minichinis would not have invested in the package but for that representation."

205 The present case is quite different. I have no doubt that the plaintiffs would not have taken up the investment plan recommended by Mr McDonald but for his representation that it was a secure investment strategy from which they could not lose. I am also satisfied that they would not have invested in the plan if they had been advised of the risks to their capital if they were unable to maintain the predicted income stream from all their investments, including the boat, and that they may have to sell assets on a falling market. The representation which was made to the plaintiffs was that they were investing in a secure plan and provided they effectively managed their household budget they would enjoy capital growth while the investment income met the obligations under the loan. It was the failure of these representations which caused them to lose faith in the whole scheme and sell (see MGICA (1992) Ltd v Kenny & Good Pty Ltd 1996 77 FLR 307 at 330E.) 206 I am also satisfied that but for the advice given by Mr McDonald the plaintiffs would have invested their available funds either in property or in a portfolio of blue chip investments. They certainly would not have borrowed to fund the investment (unless it was property) and, accordingly, it is unlikely that they would have been under pressure to realise the investments on an adverse market. But for the assurance of Mr McDonald that they could accommodate the investment in the boat, as part of their overall strategy, they would not have entered into the lease and hiring arrangement for it. A boat may have been purchased but it would not have been financed by a lease arrangement, and would not have been incorporated as part of the overall plan. The failure of the boat investment made it necessary to sell the Lemon Tree Passage property and with net negative returns, the prospect of increased fees and declining value of the assets, the plaintiffs had little alternative but to sell the portfolio at a loss and pay out the loan meeting the penalty costs. 207 The assurance given to them by Mr McDonald was that their capital was secure. This representation being both false and negligent caused the plaintiffs' loss which was crystallised when the investments were sold. 208 As I have indicated the claim was ultimately expressed as a total sum of $126,621, being the capital loss occasioned upon the sale of the managed investments, including the Aust Wide investment. A further $16,000 is claimed as the amount of the penalty, which it was necessary for the plaintiffs to pay in order to repay the loan to Advance Bank before its due date. Apart from the claim with respect to the Aust Wide investment, these claims may be readily understood and are supported by the evidence. The arithmetical sums are not in dispute. With respect to the alleged loss on the sale of the Aust Wide investments, the evidence does not entitle me to determine that claim. Unlike the other sums the arithmetic was not agreed, indeed it was disputed and I am of the opinion that claim should not be allowed. 209 The defendants submit that the plaintiffs' damages should be limited to the difference, if any, in the price paid for the investments and their value when purchased and refer to Potts v Miller (1940) 64 CLR 282. It is further submitted that the most the plaintiffs can show is that the transactions were induced by a misrepresentation and the losses would not have occurred but for the transaction. In my opinion this submission cannot be accepted. As I have found that the plaintiffs were induced to invest by the representation that the plan was secure and their capital would not be lost, the plaintiffs are entitled to recover the loss which flows from that representation. 210 In the present case that sum is the loss occasioned when the investments were sold. That loss flowed directly and naturally from the negligent representation. (Kenny & Good Pty Ltd & Anor v MGICA (1992) Limited (1999) 199 CLR 413 at 440 para 61.) 211 Whether different considerations arise with respect to damages in tort, for a breach of the Trade Practices Act or the Securities Industries Act does not have to be considered in the present case. However, for the purpose of s 68F of the Securities Industries Act 1980 there can be no doubt that the plaintiffs accepted Mr McDonald's advice and having acted upon it, suffered loss. 212 A further claim is made for the income said to be lost because of the lack of opportunity to invest money which was not available to the plaintiffs between January 1990 to July 1992. The amount of this claim was not supported by evidence. I accept that the plaintiffs would have invested these monies in quality investments during this period with the expectation of a return. However, whether a return would have been made, and the extent of it, I am not able to identify. 213 Furthermore, during the relevant period the plaintiffs did receive income from the investments although the total amount received was not the subject of evidence. 214 It was submitted by the plaintiffs that I should apply a calculation derived from the bank term deposit rate to determine the alleged loss of profit. However, the lack of any evidence makes this impossible. The court was merely invited to speculate which is obviously inappropriate. 215 Accordingly, I have concluded that the plaintiffs are entitled to a verdict in the sum of $138,533. It would be appropriate to apply interest to that sum from 1 August 1992 to the date of judgement.

Contributory negligence 216 It was submitted by the defendants that any verdict, in tort, in favour of the plaintiffs, should be reduced by reason of their contributory negligence. A reduction of the order of fifty percent was suggested as appropriate. 217 In my view no adjustment should be made on account of contributory negligence. Although I accept that the plaintiffs could have more carefully examined the documentary material provided to them by Mr McDonald, having regard to the circumstances in which his advice was given, I do not think they were negligent in failing to ask questions of him. In my opinion, because of their friendship with Mr McDonald and the assurances which he gave them, they were content to accept his advice although they did not fully understand its implications. I doubt whether many lay people would have understood all of the material in any event. Having regard to the circumstances, in my opinion the plaintiffs were reasonably entitled to rely on Mr McDonald and were not negligent because of any failure to question the advice which he had given. 218 I find a verdict for the plaintiff and invite the parties to bring in short minutes reflecting the appropriate sum having regard to the interest which is payable. I reserve the question of costs.

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