Pestano & Anor v Madden & Ors

Supreme Court of NSW|2007-05-15|Before: Smart AJ

CITATION : Pestano & Anor v Madden & Ors [2007] NSWSC 545

CATCHWORDS : Application for Security for costs and stay - Co-plaintiffs - Individual and Corporation - Corporation unable to meet anticipated costs - Substantial overlapping of factual matters on liability - hearing actions together not materially increasing hearing time and costs - likely costs order against both plaintiffs if they lose - Security not ordered.

Australian Securities and Investments Commission Act 2001 Corporations Act 2001 LEGISLATION CITED : Defamation Act 2005 s 9 Defamation Act 1974 s 8A Financial Services Reform Act 2002 (Cth)

Fiduciary v Morning Star [2004] NSWSC Harpur v Andrews Australia Limited 1984 1 Qd R CASES CITED : Interwest Ltd v Tricontinental Corp Ltds (1991) 5 ASCR Roach & Ors v Page & Ors (No 1) [2003] NSWSC Winnote Pty Ltd (In Liq) & Anor v Page & Ors (2005) 64 NSWLR

PARTIES : Douglas Pestano & Morgan Price Pty Limited v Madden & Ors

(P) Mr R Sheldon COUNSEL : (D1 & D2) Mr Nguyen (solr) (D3) Mr R Beech-Jones SC

(P) Bryan Gorman & Co SOLICITORS : (D1 & D2) Ebsworth & Ebsworth (D3) Middletons

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

20435/05: DOUGLAS PESTANO & MORGAN PRICE PTY LIMITED v MADDEN & ORS JUDGMENT

1 By their notices of motion all defendants applied for orders for security for costs against both the first and second plaintiffs, stated in the Amended Statement of Claim (ASC) to be Douglas Pestano and Morgan Price Pty Limited and stays pending the provision of such security.. There is a question as to the correct name of the second plaintiff. In some of the documents it appears to be "Morgan Price Limited". If the latter is the correct name the Amended Statement of Claim should be further amended.

2 The first and second defendants relied on an affidavit of Mr M Nguyen, their solicitor, and adopted the submissions of the third defendants.

3 At an early stage of the hearing Senior Counsel for the third defendants told the Court that he did not press for an order that Mr Pestano provide security for costs nor for a stay of his action against them. He pressed for an order that Morgan Price Pty Limited or Morgan Price Limited, depending on the correct name, provide security for costs and that the proceedings by it against his clients be stayed pending such provision,

4 The first defendants were Phillip MacDonald Madden and Julia Anne Madden t/as Maddens Commercial Lawyers and/or Maddens Business & Property Lawyers. The second defendant was Maddens Lawyers Business & Property Pty Ltd. The third defendant comprised Mr A T Sutherland and six others t/as Eakin McCaffery Cox; they were solicitors.

5 By their amended Statement of Claim the plaintiffs, in summary, assert that: (a) about 22 February 2002 Messrs Pestano and Joseph met with Phillip Madden, a partner in Maddens Commercial Lawyers (MCL);

(b) that the plaintiffs had developed a business model involving the plaintiff corporation, by its employees and officers, calling residents of New Zealand from Australia with recommendations for the trading of stocks in the United States ("the business");

(d) Mr Madden advised the plaintiffs to seek to acquire an existing broker's licence and between 20 March 2002 and 4 April 2002 attempted to negotiate on behalf of the plaintiffs to acquire such a licence;

(e) On 4 April 2002 Mr Madden told the plaintiffs that he would make application to ASIC on their behalf for a licence appropriate to the business; and

(f) The first and/or the second defendant agreed for reward, and was paid to obtain an appropriate licence. 6 The first and second defendants summarised their instructions thus: (a) About 11 March 2002 Mr Madden accepted instructions from Messrs Pestano and Joseph to seek an existing stockbroking licence for assignment; and

(b) About 17 May 2002 Mr Madden accepted instructions from Mr Pestano to provide legal services relating to advice on relevant Corporations Act law and content of authorisations and proofs to accompany lodgement of AFS Licence application to ASIC. 7 There appears to be a dispute as to the ambit of the retainer of the first and second defendants.

8 The first and second defendants denied the allegation of the plaintiffs that they relied on the skill and advice of the first and second defendants in providing advice as to the legal requirements of the business.

9 The first and second defendants asserted that about 4 April 2002 Mr Madden informed Mr Pestano of the availability of two broker's licences for sale, by email of that date. They denied that about 4 April 2002 he told the plaintiffs he would make application on their behalf for a licence appropriate to the business.

10 P M Madden and J A Madden asserted that: (a) as at or about 2002 J A Madden was not a partner of P M Madden and P M Madden was in sole practice trading as Maddens Commercial Lawyers

(b) Maddens Business and Property Lawyers commenced practice on or after 1 July 2004 11 The plaintiffs further alleged that on 15 November 2002 Mr Madden either on his own account and/or as a director shareholder and/or employee of the second defendant advised the plaintiffs that It was not necessary that they obtain a licence for the purposes of the business and that this advice was wrong. It was further alleged that towards the end of November 2002 Mr Madden provided further advice to the effect that the plaintiffs could do whatever they wanted because they were not regulated and that this advice was wrong. It was alleged that the second defendant was vicariously liable for the acts and omissions of Mr Madden in and about the retainer.

12 The first and second defendants asserted that about 13 May 2002, by FAX, Mr Madden advised Mr Pestano that an AFS licence was not required under the Corporations Act and the Financial Services Reform Act to only deal in US securities to residents of New Zealand, but otherwise denied that about 15 November 2002 Mr Madden advised the plaintiffs that it was not necessary that they obtain any licence for the purposes of the business. They deny that any advice given by Mr Madden was wrong.

13 The first and second defendants further asserted that about 26 November 2002 Mr Madden sent a FAX to Messrs Joseph and Pestano and SP Capital referring to "Dealing In US Securities To Residents of New Zealand" and enclosing a further copy of the FAX of 13 May 2002 (previously mentioned) but otherwise denied that Mr Madden provided advice to the effect that the plaintiffs could do whatever they wanted because they were not regulated.

14 The first and second defendants deny that any further advice given by them was wrong.

15 Again, there appears to be a dispute as to the ambit of the retainer and the precise issues on which the first and second defendants were asked to advise. They appear to define those issues more narrowly than the plaintiffs.

16 About 13 January 2003 Mr Pestano received a FAX addressed to him marked "Confidential - For Addressee Only" from Mr Madden. The FAX stated: "We confirm our legal advice given to you on 13 Jan 2003 by telephone that an Australian Financial Services (AFS) license is not required under the Corporations Act and the Financial Services Reform Act to only deal in US securities to residents of New Zealand.

No financial advice or dealing occurs in respect of an Australian resident or security in Australia and therefore no AFS license is required under the relevant legislation."

Mr Pestano has stated in his affidavit of 22 September 2006 that on or about 17 January 2003 Morgan Price Limited commenced business on the strength of this advice. This involved trading in stocks listed on the US Stock Exchange for people mainly resident in New Zealand.

17 This FAX is capable of providing some support for the plaintiffs' case against Mr Madden, subject to the terms of the retainer and the precise issues upon which Mr Madden's advice was sought.

18 P M and J A Madden and the second defendant, Maddens Lawyers Business & Property Pty Limited, rely on it not coming into existence until on or after 1 June 2003.

19 The plaintiffs allege that in January 2003 they retained the third defendants to provide advice concerning the business and that about 25 January 2003 Mr McCaffery one of the third defendants told the plaintiffs that he agreed with the advice from Mr Madden (as conveyed by Mr Pestano). The plaintiffs allege that relying on the advice received from each of the defendants the plaintiffs commenced to operate the business without obtaining any licence.

20 All defendants point to the email sent by the third defendants to the plaintiff about 28 January 2003 that having regard to s 911A(1) and s 911D of the Corporations Act 2001 an Australian company and its officers may be caught by s 911A(1) and require an AFS licence if they are marketing US securities to New Zealand residents, particularly if those residents also had Australian residency. The advice continued that the only "conclusive" way of avoiding the restrictions of the Act would be to physically operate out of New Zealand that that it would also be prudent to conduct operations in New Zealand through a separate New Zealand company, albeit a subsidiary of the Australian company and to have the New Zealand company staffed by non-Australian employees.

21 Mr Pestano stated that he had received conflicting advice and the position needed to be clarified. He said that after the receipt of the email of 28 January 2003 he had a conversation with Mr McCaffery who "basically did not say to stop trading or anything like that". In his oral evidence Mr Pestano said that he basically asked Mr McCaffery if they should stop trading and he said, "No". The plaintiffs did not stop trading. They proceeded in circumstances where he had been advised that a licence was probably not required but that this view of the legislation could be wrong and that the only way of conclusively avoiding the restrictions of the Corporations Act 2001 was to do as Mr McCaffery advised. Mr Pestano was prepared to take the risk of carrying on trading without taking the steps outlined by Mr McCaffery. It would be a major step for a fledgling business to stop trading.

22 Senior Counsel for the third defendant was critical of Mr Pestano for not including his alleged conversation with Mr McCaffery in his affidavit and submitted that at the least the Court should be dubious whether it occurred and whether the text was as summarised by Mr Pestano. On receipt of the email it would not be unusual for a client to telephone his solicitor, ask what should be done next, for example, should trading from the Sydney premises by telephone and electronic means cease immediately, how quickly could a licence be obtained and could he carry on business in the meantime on an interim basis including any steps he should take. Put colloquially the email contained "belt and braces" advice. It was cautious advice designed to ensure that the plaintiffs were not sued by ASIC. It did not purport to state or conclude whether a licence was in fact required by the second plaintiff to carry on the business of contacting from Australia clients and potential clients resident in New Zealand as to trading in US securities and arranging for them to do so. I am not sure what exactly was involved or envisaged by "trading in US securities". Did it, for example, refer to corporations based in the United States and listed on a stock exchange in the USA?

23 I interpolate that Senior Counsel for the third defendants submitted that the plaintiffs' case against them was not a strong one having regard to the email of 28 January 2003 and Mr Pestano's non-inclusion of the substance of the subsequent conversation which he alleged he held with Mr McCaffery. It is too early to start forming a view as to the strength of the plaintiffs' case against the third defendants and evaluating the credibility and reliability of Mr Pestano's evidence.

24 The third defendants assert that in about January 2003 they were retained by Morgan Price Pty Ltd (or Morgan Price Ltd) to provide advice in respect of an application for an AFS licence. This is a more limited retainer than the one alleged by the plaintiffs, namely to provide advice concerning the business.

25 In answer to the plaintiffs' allegation that on 25 January 2003 Mr McCaffery was informed of the advice received by them from the first and second defendants and that Mr McCaffery told the plaintiffs that he agreed with such advice, the third defendants said that on or about 28 January 2003 a representative of the second plaintiff emailed a copy of an email from the first and/or second defendants addressed to representatives of the plaintiffs to Mr McCaffery and that he sent an email to the plaintiffs or their representatives that day. It was to the effect earlier summarised. Otherwise the plaintiffs' allegations are denied.

26 Each defendant respectively denied that the plaintiffs commenced to operate the business without obtaining any licence in reliance on any advice from such defendant.

27 The plaintiffs allege that on 18 June 2003 ASIC having commenced to investigate the plaintiffs, suspended the operation of the business and that in consequence they incurred losses from the failure of the corporate plaintiff, were damaged in their commercial standing by virtue of having traded without licences required by ASIC, lost the opportunity to generate profits through legal operation of the business and suffered a reduction in their capacity to obtain and maintain employment in the area of financial services.

28 Each defendant relied on the proceedings instituted by ASIC in the Supreme Court against the plaintiffs and the documents in support of its claims.

29 The plaintiffs sued in negligence and for breach of contract relying on the defendants (a) advising the plaintiffs that they required no licence for the conduct of the business when they did

(c) failing to recommend to the plaintiffs that they obtain a relevant licence prior to commencing to operate the business

(d) failing to exercise reasonable care and skill in the performance of the retainer 30 All defendants rely on contributory negligence on the part of the plaintiff by (a) unreasonably ignoring advice provided by the third defendants in writing dated about 30 April 2002 that a proposed activity of marketing US stocks to Australian residents would probably constitute providing a "financial service" within the terms of the Financial Services Reform Act 2002 (Cth) , thus requiring an AFSL

(b) continuing to instruct the third defendants in respect of the preparation of an AFSL in the period January and/or April 2003 to June 2003 without providing instructions to them that they were in fact carrying on the business without an AFSL. 31 The third defendants asserted that if (which is denied) the plaintiffs commenced or continued to operate the business without obtaining any licence in reliance on advice from the third defendants, such reliance was wholly unreasonable.

32 The third defendants, in para 34(b) of their defence pleaded that the plaintiffs were not entitled to any damages, since the business as carried on without an AFSL was unauthorised or otherwise unlawful or illegal for breach or potential breach of a series of nominated provisions of the Australian Securities and Investments Commission Act 2001.

33 The plaintiffs alleged further or in the alternative that the defendants and each of them engaged in conduct that was misleading or deceptive or likely to mislead or deceive. The particulars were: (a) holding themselves out as possessing the requisite skill and expertise to advise the plaintiffs in relation to the licensing requirements of the business

(b) telling the plaintiffs that they did not need a licence to conduct the business. 34 The loss and damage claimed were as follows: (a) Loss of investment (b) Loss of profits (c) Damage to reputation (d) Damage to prospects of obtaining financial licences. 35 The first and second defendants asserted that no loss was suffered by the plaintiffs as a consequence of any act or omission by the first and second defendants.

36 The third defendants contended that the plaintiffs were not entitled to damages: (a) As a matter of public policy; and/or

(b) Since they are barred by s 9 of the Defamation Act 2005 and/or by s 8A of the Defamation Act 1974 ; and/or

(c) since those damages are not known to the law. 37 From the exhibits to the affidavit of T C Blyth of 16 August 2006 it appears that ASIC commenced proceedings against Morgan Price Ltd, Mr Pestano, Mr Joseph and Mr Leow. On 22 September 2003 this Court by consent made declarations that Morgan Price Limited between 20 January 2003 and 19 June in the course of conducting its business from premises at North Sydney contravened s 911A of the Corporations Act 2001 by expressing opinions and making recommendations to persons resident in New Zealand and the United Kingdom to purchase securities traded on stock exchanges in the USA and applying for and arranging for the purchase of securities traded on such stock exchanges for persons resident in New Zealand and the United Kingdom in circumstances where Morgan Price Ltd did not have an AFSL. There was also a consent declaration to similar effect against the three natural persons that each of them contravened s 911B of the Corporations Act. Consequential restraining orders were made.

38 In Mr Pestano's affidavit of 22 September 2006 he stated that he and his colleague, Nicholas Leow, met with Mr McCaffery and Sunil Varkey on 11 June 2003. Mr Leow recorded that at the meeting they were advised that it was not necessary to set up a meeting with ASIC as yet, that it would be desirable to lodge the AFSL application as soon as possible and before speaking to ASIC, that it was not clear whether there had been any breach of New Zealand law or English law and that ASIC would not be concerned with an Australian company's activities overseas if they are not in breach of Australian law. Mr Pestano said that Mr McCaffery told him to tell their brokers they had nothing to worry about. Mr Pestano stated that Messrs McCaffery and Varkey did not advise them to stop trading or advising clients.

39 Mr Pestano complained that neither Messrs Madden or McCaffery or any of their employees informed him of the implications and consequences of trading without an AFSL, nor of any potential damage to the company branding and trading rights. He was never advised that trading without an AFSL would damage the company's reputation, those of his business colleagues and his reputation.

40 Mr Pestano stated that in September 2003 he exchanged contracts on the purchase of the shares in Acumwealth Pty Ltd which held an existing AFSL. He settled that purchase in February 2004 and changed the name to Morgan Price Private Clients Pty Ltd and as its managing director authorised Morgan Price Limited to recommence trading in US securities. On 1 September 2004 ASIC agreed to a variation of the AFS License of Morgan Price Private Clients Pty Ltd. Mr Pestano was nominated as the key person.

41 By letter of 2 November 2006 the solicitors for the plaintiffs wrote: "We are instructed that Morgan Price Limited is currently not trading. Apart from cash of about $1,000 it has no other assets and it has no liabilities. It currently exists for the purpose of these proceedings although it may trade in the future."

42 In his oral evidence Mr Pestano said that Morgan Price Limited was the company in these proceedings. Mr Pestano said that Morgan Price Limited incurred trading losses and a costs order in favour of ASIC. The defendants were ordered to pay the costs of ASIC assessed at $10,000; they include Morgan Price Limited and Mr Pestano. In cross-examination Mr Pestano agreed that to the extent that he incurred losses it was as a shareholder of Morgan Price Limited. Mr Pestano agreed that Morgan Price Limited was the entity operating the business and that it was the entity which he hoped would generate profits.

43 Mr Pestano said that about 80 per cent of the clients left Morgan Price Limited when the news emerged that it was operating without a licence and ASIC had taken action.

44 On Mr Pestano's assessment he has assets of about $60,000.

45 Mr Pestano did not accept that Morgan Price Limited engaged in either unconscionable conduct or misleading and deceptive conduct,.

46 Senior Counsel for the third defendants submitted: (a) The plaintiffs had a weak case

(b) The plaintiffs appear to be seeking to recover damages for the recovery of losses incurred in the conduct of a business which was unlawful.

(c) There was an overlap between the case of the corporate plaintiff and Mr Pestano as an individual but the facts and circumstances were different. It seems that a lot of his loss was reflected loss, that is, the company sustained losses and Mr Pestano's losses arose as a result of his being a shareholder. This is a debate for another day. (The third defendants did not have any particulars of damage as yet).

(d) A staying of the case by the corporate plaintiff does not lock Mr Pestano out of the Court for his case.

47 Mr Pestano is no longer a shareholder or director of Morgan Price Limited. He did hold 80 per cent of the shares but he said that he has given his shares in that company to his brother.

48 Morgan Price Limited could not meet any costs order made against it and Mr Pestano could only meet a small portion of any costs order made against him. The costs of this action are likely to be heavy. Extensive preparation will be required and the hearing is likely to last four to five days. One question of some difficulty is likely to be the damages, if any, attributable to Mr Pestano and those, if any, attributable to Morgan Price Limited. The third defendants contended that most of the losses suffered would probably be those of the company and were not recoverable. The evidence so far points to Mr Pestano being the principal actor in the events which took place. However, there was evidence of about 12-13 employees being engaged in the business at one stage.

49 The evidence upon liability in the claim of Mr Pestano and that of Morgan Price Limited will substantially be identical. In each instance the credibility of Mr Pestano will be important if not critical. There could be some divergence as to damages with questions arising as to what losses, if any, should be attributed to Mr Pestano and what losses, if any, should be attributed to the company. Experience has shown that if the two claims are heard together there is not likely to be extended debate over the person or entity to which any loss should be attributed. My assessment is that by hearing the two claims together the overall hearing time is likely to be extended by no more than two hours. In the context of this case that is minimal both as to time and cost. If the two cases were heard separately each would take four days and possibly five days with each having to be heard by a separate judge unless the parties otherwise agreed and accepted the findings made in the case which was heard first. Hearing the cases separately would probably have the effect of there being extended debate on which alleged losses could be claimed by the plaintiff in the claim which was heard first,

50 It is probable if there were separate hearings that the claim by Mr Pestano would be heard first.

51 The third defendants submitted that if a stay were granted until security in a substantial amount was provided by Morgan Price Limited the probabilities are that the company would not be able to provide that security within a reasonable time, given its present assets and liabilities and that on application by them the company's action against them would be dismissed.

52 Because of the substantial overlap of the factual issues and the benefits of hearing both claims together this is a case where, if the plaintiffs lost, an order is likely to be made that both pay the costs of the third defendants. This would impose a liability on Mr Pestano to pay the whole of such costs. Complications could arise if one or both the plaintiffs were partly successful.

53 I have not overlooked that both plaintiffs are seeking damages for damage to reputation and the difficulties such claims face.

54 I would not in any event have been minded to grant a stay of the claim of Morgan Price Pty Limited at this stage. Rather I would have separated the claims of Mr Pestano and Morgan Price Limited and directed that Mr Pestano's claim be heard first and that the application for a stay pending provision of substantial security by that company be listed for directions 14 days after delivery of judgment in Mr Pestano's action. The Court would then have available the findings of the Court in Mr Pestano's claim. These would have been likely to be of considerable assistance.

55 Counsel referred to many authorities including Roach & Ors v Page & Ors (No 1) [2003] NSWSC 722, Winnote Pty Ltd (In Liq) & Anor v Page & Ors (2005) 64 NSWLR 244, Maple v Hughes [2002] NSWSC 617, Harpur v Ariadne Australia Limited 1984 1 Qd R 523, Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 and Fiduciary v Morning Star Research [2004] NSWSC 664, all of which I have considered and found to be helpful.

56 I have stated my views on the extensive overlapping of the factual issues on liability and the benefits of hearing both claims together, the likely order as to costs and the likely small extension of the hearing time because of the two claims being heard together with some possible differences as to damages.

57 I have spent the greater part of this judgment dealing with the arguments advanced by Senior Counsel for the third defendants because the first and second defendants adopted the submissions of the third defendants and did not advance any additional submissions. That resulted in commendable economy and saving of time. The ground was well covered.

58 In the case of the first and second defendants there will also be the extensive overlapping of the factual issues on liability, benefits in hearing both claims together and the same likely order as to costs. There will be the likely small extension of hearing time because of hearing the two claims together. While there are differences between the two claims many of the issues posed as to damages will raise similar problems. The merits of the plaintiffs' claims against the first and second defendants should be regarded as a neutral factor subject to the matters next mentioned which have been raised earlier and require prompt attention, that is, within the next 21 days: (a) The Amended Statement of Claim should contain the correct name of the second plaintiff. I grant leave to the plaintiff within 14 days to amend the name of the second plaintiff and insert its correct name. In the event of such amendment not being made within 21 days and Morgan Price Pty Limited being a non-existent company I grant leave to the defendants to restore the matter to the list on 3 days notice for the purpose of dismissing or striking out the purported action by Morgan Price Pty Limited.

(b) The plaintiffs should check whether Mrs J A Madden was a partner at any relevant time and, if not, discontinue the claim as against her. This would be subject to meeting her costs to date.

(c) The plaintiffs should check when Maddens Lawyers Business & Property Pty Limited was incorporated. If it was not in existence at any relevant time the action against it should be discontinued. Again, this would be subject to meeting its costs to date. If a Sanderson order or a Bullock order is sought that application can be reserved for future consideration.

59 I appreciate that at the time Mrs Madden and Maddens Lawyers Business & Property Ltd were joined there may have been doubt in the minds of the plaintiffs legal representatives as to who should be joined but the time has come to resolve these matters. It is desirable that costs should be contained.

60 I dismiss the applications for security for costs. The costs of the plaintiffs of each application should be borne by the respective defendants.

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.

Financial Services Reform Act 2002(Cth)

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