Paul Baker as Plaintiff Representative of 165 Plaintiff Group Members v The Partnership of Anne Patricia Larter, Alan Jones, Miraleste Pty Ltd t/as USG Partner and Leigh Johnson t/as STC Sports Trading Club

Supreme Court of NSW|2016-08-25|Before: Ball J, Hammerschlag J

Introduction

The plaintiff brings these proceedings as a representative of 165 named individuals each of whom paid money to invest in what was described as a sports betting and trading scheme operated by an entity known as "The Sports Trading Club Partnership" (STC). STC is the first defendant. It is a limited partnership formed under Part 3 of the Partnership Act 1892 (NSW). Its partners are the second, third and fourth defendants and, until 21 January 2014, the fifth defendant (Ms Johnson). The scheme is said to have been a sophisticated scam in which each of the defendants was involved.
By three notices of motion Ms Johnson, the sixth, seventh, eighth, tenth and eleventh defendants (together, the Arabella Foster Parties) and the twelfth defendant (Mr Foster) seek security for their costs of the proceedings. Mr Foster is a well-known fraudster who has been convicted on a number of occasions in relation to fraudulent schemes in which he has been involved. The evidence is that the eleventh defendant, Arabella Foster (Ms Foster), is the niece of Mr Foster. The sixth, seventh, eighth and tenth defendants are companies which at all material times were and are currently controlled by Ms Foster. Ms Johnson is a lawyer who has acted for Mr Foster in the past.
Ms Johnson's motion, which was filed on 8 July 2016, seeks an unspecified amount of security. It also seeks dismissal of the proceedings against her. However, in an email sent to the Associate to Hammerschlag J on 9 August 2016 Ms Johnson advised the court that she no longer sought summary dismissal of the proceedings and at the hearing of the motion on 25 August 2016, Mr Elliott, who appeared for her, advised the court that she no longer pressed the balance of the motion. In those circumstances, Mr Elliott accepted that the motion should be dismissed. The only outstanding question concerns costs.
The motion of the Arabella Foster Parties, which was filed on 26 July 2016, seeks security in the sum of $1,000,000. It also seeks orders for the service of notices under s 175(5) of the Civil Procedure Act 2005 (NSW) on group members designed to determine their willingness and ability to contribute to the provision of security. Similar orders are also sought by the notice of motion filed on 21 July 2016 by Mr Foster, except that he seeks security in the sum of $500,000.

Background

Before dealing with the motions, it is necessary to say something about the proceedings.
The plaintiff, and it appears other group members, became aware of the scheme from advertisements in local newspapers, which invited interested parties to contact "Mr Hughes". The evidence is that many of the investors including the plaintiff spoke to a Mr Mark Hughes, who was described as the "Australian Sales Manager of STC Australia", about the scheme and who read to them a prepared explanation of it. It appears that each investor was provided with a copy of an information memorandum in relation to the scheme, which described in some detail the nature of the scheme and how it operated. The information memorandum described Ms Anne Larter, the second defendant (who has filed a submitting appearance), as the "General Partner" and Ms Johnson as the "Legal Partner". It included photographs and biographies of each of them. Ms Johnson was described as having "carved out a distinguished career over 30 years as a lawyer representing clients from all walks of life". Ms Larter was described as having "international experience in manufacturing and marketing where she excelled for 20 years". No other defendants were mentioned in the information memorandum.
Each group member became what was described as an "Associate Member" of the scheme by signing a "Loan & Profit Sharing Agreement" with STC (the Loan Agreement) under which they lent to STC an amount of between $50,000 and $250,000. Under cl 2 of the Loan Agreement, the amount lent was to be applied by STC "for trading on financial markets including but not limited to sports and prediction markets through The Sports Trading Club Limited [the sixth defendant] at its sole discretion".
According to the information memorandum "actual trade decisions are made by our Account Managers, under the supervision of our Senior Analyst and Chief Investment Officer". Each Account Manager was said to have "extensive experience in trading on sporting events, and a track record of discipline and intelligent decision making" who "support the CIO through undertaking extensive statistical and trending analysis coupled with the rigorous background research and market intelligence". They were said to have information "not readily available to the general public" and to have "invaluable access to information received from our Scientific Research Director, Dr. Allan Snyder from the Sports Trading Club Insight Project at the University of Sydney, harnessing the extraordinary talents of Savants". Dr Snyder was described as "a living genius and brilliant learned scholar" who believed "that certain savants have an [sic] distinct advantage in sports trading, which gives us a diagnostic edge that no one else can achieve".
STC agreed to pay 50 percent of the gross profits made from investments (which could be drawn down monthly) and to repay the loan after a period (not exceeding three years) fixed by the Loan Agreement.
The plaintiff claims that the investment is a scam devised by Mr Foster and that neither the plaintiff nor any group member has been able to recover the money that was lent. It is alleged that the scheme was operated as a Ponzi scheme in which "profits" were paid to some investors out of loans made by other investors. The balance of the money raised from the scheme was paid from an account with Westpac in the name of STC to an account with HSBC in Hong Kong and from there to a number of other offshore accounts. The details of the payments and the accounts are not important for present purposes. It is sufficient to observe that the evidence is that the signatories on the STC Westpac account were the STC partners and that each of the other accounts was controlled by Ms Foster and, in the case of a number of the accounts, held in the name of one of the other Arabella Foster Parties. The amounts remaining in accounts into which it is known that proceeds of the investments were paid are currently the subject of freezing orders. The total amount held in those accounts is not in evidence. However, it is not sufficient to repay investors the amount of their loans.
The plaintiff's claim is put in various ways. He claims damages for misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law, for breach of contract and for deceit, conversion and conspiracy. He also claims that STC and the sixth to twelfth defendants knowingly received or knowingly assisted in the receipt of the loan amounts and as a result are liable to account for them as constructive trustee.
Ms Johnson's liability is said to arise from the fact that she was a partner of STC until January 2014. It is also alleged that her involvement in the scheme can be inferred from the following matters: 1. Ms Johnson acted for Mr Foster in relation to proceedings against him in connection with earlier scams in which he had been involved; 2. the information memorandum included Ms Johnson's name and photograph and described her as the "Legal Partner" of STC; 3. Ms Johnson was one of the signatories to the STC Westpac account; 4. Ms Johnson corresponded with Mr Foster in relation to the scheme and in one email expressed concern about how the scheme was being managed and operated and described it "as a Ponzi scheme by Peter [Foster] and hence is being illegally and fraudulently managed and operated".
The Arabella Foster Parties' liability is said to arise from their receipt and payment of money advanced by investors. Mr Foster's liability is said to arise because the scheme was devised by him. According to the plaintiff, "Mr Mark Hughes" is an alias of Mr Foster and Mr Foster dealt with many of the investors using that alias. In support of that allegation, the plaintiff relies on evidence given by Mr Gamble, a private investigator who has been investigating Mr Foster for a number of years and who has been retained by the plaintiff. Mr Gamble gives evidence that he heard a recording of a conversation between Mr Hughes and Mr Jericho, the sole director of Jericho Trading Pty Ltd, one of the investors. Mr Gamble identifies the voice of Mr Hughes as that of Mr Foster. The plaintiff also relies on correspondence between Mr Foster and Ms Johnson which suggests that Mr Foster played a substantial involvement in the scheme. Ms Johnson sent emails to Mr Foster at the email address "teamleader@sportstradingclub.com". The emails strongly suggest that Mr Foster played an important if not pivotal role in the scheme. As I have said, when Ms Johnson became concerned about the scheme and resigned as a partner of STC she wrote an email to Mr Foster describing the scheme as one organised by him.

Relevant legal principles

It is not necessary to set out in detail the principles applicable to the circumstances in which the court will order security for costs in representative proceedings. They were helpfully explained and analysed in some detail by Beech-Jones J in De Jong v Carnival PLC [2016] NSWSC 347. The following principles emerge from what his Honour said in that case: 1. The court has power to order that a plaintiff in representative proceedings provide security for the defendants' costs; 2. The court does not have power to order that members of the group whom the plaintiff represents provide security. However, the court may stay proceedings if group members unreasonably refuse to contribute to the provision of security for costs or may order that group members who unreasonably refuse to contribute be removed from the group; 3. The court may order that one or more notices be sent to group members for the purpose of determining their willingness and ability to contribute towards the provision of security; 4. In determining whether to order security the court will have regard to any relevant matter, including the matters set out in Uniform Civil Procedure Rules 2005 (NSW) r 42.21. Those matters include the plaintiff's prospects of success, the impecuniosity of the plaintiff and whether it is attributable to the defendant's conduct, whether an order for security would stifle the proceedings, the costs of the proceedings, whether the security sought by the defendant is proportionate to the importance and complexity of the subject-matter of the dispute and the timing of the application.

Decision

In my opinion, it is not appropriate to order security in favour of the Arabella Foster Parties or Mr Foster. There are three reasons.
First, on the available evidence, the case against the Arabella Foster Parties and Mr Foster is strong. Although Mr Fozzard, who appeared for the Arabella Foster Parties, did not concede that the scheme was a scam, the evidence strongly suggests that it was. The scheme promised unrealistic returns. It explained how returns would be earned in a way that was not credible and is, to a large extent, incoherent. The scheme was said to be managed by two apparently respectable persons, but in fact was largely operated by others. The money that was invested was transferred to accounts outside of Australia that were controlled by Ms Foster. No explanation has been offered for the payments. No explanation has been given for the role of the Arabella Foster Parties in the scheme. To the extent that the money is not the subject of freezing orders, it appears to have vanished. It was open to Ms Foster to give some explanation of the involvement of the Arabella Foster Parties in the scheme and what she thought she was doing when she authorised the transfers she did. She elected not to do so. Once it is accepted that there is strong evidence that the scheme was a scam, it must follow that there is strong evidence that the Arabella Foster Parties were involved in the scam because of their involvement in the transfer of the money.
As to Mr Foster, Mr Young who appeared for him, submitted that the evidence that Mr Foster was involved in the scheme in the way alleged was "paper thin". I do not accept that submission. Although Mr Gamble does not explain how he was able to identify Mr Foster's voice, it is apparent that Mr Gamble has been tracking Mr Foster's activities for a number of years including his various court appearances. It may be inferred from that that Mr Gamble is familiar with Mr Foster's voice and is able to identify it. It was open to Mr Foster to call evidence to the effect that he is not Mr Hughes. He chose not to do so. Mr Foster's correspondence with Ms Johnson strongly suggests that he played a major role in the scheme. Mr Young accepted that he could not say Mr Foster had no involvement in the scheme. His position was that the plaintiff had not proved that Mr Foster was involved in the scheme in the ways alleged. In the absence of some explanation from Mr Foster, the evidence suggests that the plaintiff has a strong case against him.
In my opinion, the strength of the case against the Arabella Foster Parties and Mr Foster, taken together with the nature of the allegations made against them, makes the case an inappropriate one in which to order security.
Second, I am satisfied that the plaintiff would not be able to provide security alone. The security sought by the defendants is large. The evidence is that the plaintiff's income is $160,000 per annum and that his only asset is a half interest in a property in Lesmurdie, Western Australia. The plaintiff estimates the value of that half interest to be $825,000. However, the property is the subject of a mortgage of approximately $1,380,000. Consequently, a simple order that the plaintiff provide security may well have the effect of stifling the claim.
It is possible that other group members could contribute to the provision of security. However, the investigation of that question through notices to group members is likely to be expensive and time consuming. In my opinion, those costs and the delay that would be caused by undertaking an enquiry of the sort that would be necessary is not justified in this case.
Third, the evidence in support of the security that is sought is wholly inadequate.
Mr Horsley, the solicitor for the Arabella Foster Parties, gives evidence of his charge out rates. After doing so he says that in his experience he would refer to these proceedings as "Very Large Litigation". He gives some explanation for that conclusion, including the fact that the claim is brought as a representative action, the fact that 12 defendants are involved and the issues involved. He says that because the litigation is Very Large Litigation in his view it will be necessary to retain both junior and senior counsel. The fact that off-shore companies and bank accounts are involved and the fact that his practice is in Queensland and it will be necessary for him to travel to New South Wales are also said to add to the costs. Based on those matters, and his experience, he estimates that the costs of fully defending the proceedings will be between $1 - 2 million.
Nowhere, however, does Mr Horsley say that the Arabella Foster Parties intend fully to defend the proceedings and what that is likely to involve. Similarly, Mr Horsley does not actually say that the Arabella Foster Parties have engaged or intend to engage senior and junior counsel or what their likely fees would be. Nor does Mr Horsley give any estimate of the costs of the work he says would be necessary to defend the proceedings fully. These gaps in the evidence are important. It is not at all clear from the Commercial List Response or the evidence filed by the Arabella Foster Parties how they propose to defend the proceedings and what work that would involve. The approach they took at the hearing of the application for security for costs was that the evidence lead by the plaintiff was inadequate to prove his case. If that is the position they take at the hearing, it is possible that they will lead no evidence and that their costs could be modest. It is not appropriate for the court to make guesses about how the Arabella Foster Parties intend to defend the allegations against them and the likely costs of that defence. In the absence of evidence on those matters, no security should be ordered.
The position of Mr Foster is similar. Mr Bilias, Mr Foster's solicitor, gives evidence of his charge out rates. He also gives evidence that he has retained Mr Young, junior counsel, whose fees are $5,500 per day and that he intends to retain senior counsel, who he estimates will charge $10,000 per day. Mr Bilias estimates that the costs up to the hearing will be approximately $500,000. That estimate is said to cover all interlocutory applications and the filing of evidence and responding to all the plaintiff's evidence. Mr Bilias also says that there "would need to be extensive use of Subpoenas and Notices to Produce and there may be a need for solicitors and counsel to take evidence in London and Hong Kong where it is alleged that the Sport Trading Club has at least represented that it had offices". Mr Bilias also estimates that Mr Foster's costs during the hearing will be $100,000 per week, although he gives no explanation of that estimate.
In addition, Mr Bilias does not give an explanation of what Mr Foster's defence is. Apart from bare denials, that defence cannot be gleaned from the Commercial List Response. As a result, Mr Bilias makes no attempt to relate the work that will need to be undertaken to the defence that Mr Foster proposes to run. Nor does he give a breakdown of the costs of that work so that the court can make some assessment of whether the costs are reasonable. At the hearing of the application for security for costs, Mr Foster's position was that the plaintiff's evidence in support of his case was weak. It is unclear whether Mr Foster will take the same approach at the hearing. If he does, his costs may well be modest. Again, the court should not be left to guess about those matters. In the absence of reliable evidence about the likely costs Mr Foster will incur in defending the case, there should be no order for security.

Orders and Costs

That leaves the question of costs.
In my opinion, there is no reason why Ms Johnson should not pay the plaintiff's costs of her motion. She only indicated that she did not press the strikeout part of her motion after the plaintiff had done work in seeking to resist that application. She only indicated that she does not press the motion so far as it concerned security on the day of the adjourned hearing.
The Arabella Foster Parties and Mr Foster were unsuccessful in their motions. There is no reason why costs should not follow the event.
There is a question whether the plaintiff's costs should be apportioned between the three groups of defendants. I have concluded that they should not. The work done by the plaintiff was largely relevant to each motion and would have to have been done whether only one or all three of the motions were filed. In those circumstances, I cannot see why the plaintiff should not be entitled to recover his costs from any of the defendants, although obviously he is not entitled to recover his costs more than once.
It follows that each of the motions should be dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 August 2016

Australian Consumer Law Civil Procedure Act 2005(NSW)

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