Solicitors:
Commonwealth Director of Public Prosecutions (Crown)
Australian Government Solicitor (ASIC)
Kings Law Group (Accused)
File Number(s): 2020/293887
[2]
Application to set aside subpoena
HIS HONOUR: The trial of John Anthony Bigatton, is scheduled to have commenced this week. There have been a number of late applications which seem to put that hearing in jeopardy.
This is the first of a series of decisions that I am required to make prior to the commencement of the trial. It is an application by Australian Securities and Investment Commission ("ASIC") and the Commonwealth Department of Public Prosecutions ("CDPP") to set aside subpoena in relevantly identical terms issued to each of them. Those subpoena were issued on 5 July 2023 at the request of the Accused. As I have said, the subpoenas are relevantly identical in that they call for the production of the same category of documents.
In terms the documents sought are:
1. All documents relating to communications between the FBI and ASIC regarding investigations into or concerning Bitconnect; and
2. All materials provided by the FBI to ASIC.
By notice of motion filed 14 July 2023, ASIC seeks orders setting aside the subpoena to it. By motion filed 26 July 2023 the CDPP seeks the same orders upon the same bases.
R v Bigatton [2023] NSWDC 290 | Case summary | Zoe
I have heard submissions from both parties which are effectively made by ASIC adopted by the DPP although the CDPP made some further points. I shall refer collectively to ASIC and the DPP as the applicants.
The parties are in agreement that the power to make orders, the orders sought, exist and is to be found in r 53.23 of the District Court Rules and that the appropriate test for me to apply in considering the matter is that explained recently by the Court of Appeal in New South Wales in Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145. It was also common ground that if there is a difference between the test explained in that case and the test described in decisions such as Attorney General (NSW) v Chidgey (2008) 182 A Crim R 536, then I should apply the Blacktown City Council test as it is apparently more favourable to the Accused.
I will proceed on that basis. In passing I should observe that in my respectful opinion, the identified difference between the tests described in those decisions is more an illusion than reality.
The relevant test in Blacktown City Council is what is to be found in Bell P's reasons at [65] vis:
"…will materially assist on an identified issue or there is a reasonable basis beyond speculation that it is likely the documents subpoenaed will so assist".
It is the second aspect of that test which is in play in this application. One of the matters that has been made clear in recent decisions on the topic of setting aside subpoenas is that tags or tests by analogy to concepts such as fishing expeditions and the like, are now to be avoided. Rather my understanding of the test is that a reason a subpoena will be set aside is if it can be identified that it has no potential to assist a party on a legitimate forensic purpose. Such a subpoena will be set aside because absent such a legitimate forensic purpose it must be seen to be for purposes extrinsic to the litigation and can thus be described as an abuse of process in the sense that they have been issued for a purpose other than the proper conduct of the proceedings.
To understand the application, it is necessary to explain the relevant aspect of the prosecution to which the subpoena is directed. The prosecution arises out of investigations into the conduct of various people around the world alleged to have been involved in the activities of what is being described as the BitConnect scheme.
The Accused has been indicted on two counts. Relevantly one count is for operating an unregistered managed investment scheme contrary to the provisions of s 601EE(5) and s 1311(1) of the Corporations Act 2001.
The BitConnect scheme was, as I have explained, apparently operated in various jurisdictions around the world. As might be expected, ASIC has investigated the activities relating to the scheme within or connected to Australia and the Federal Bureau of Investigations ("the FBI") has investigated the activities relevant to its jurisdiction.
As might be expected between such authorities in conducting such an investigation, there have been communications and cooperation between the investigating authorities in the United States and Australia.
The FBI's investigations have led to at least one prosecution in the United States, that being against Glen Arcaro, which prosecution was brought in the United States District Court, Southern District of California, being case number 21CR2542‑TWR.
Mr Arcaro has pleaded guilty to a number of offences in that jurisdiction, and there is evidence of what is described as a "plea agreement" being the facts agreed to by the prosecution and Mr Arcaro for the purpose of him pleading to some offences in the United States. Mr Arcaro's plea agreement, which is before me, contains the following statements:
33. BitConnect never registered its Lending Program as an offering and sale of securities with the SEC; nor did it have a valid exemption from this registration requirement.
34. In its marketing materials, BitConnect touted its proprietary "Trading Bot" and "Volatility Software" as the centrepiece of its Lending Program knowing the marketing materials contained multiple fraudulent statements. BitConnect represented that it would use investors' money as working capital to fund its own investment activity. Specifically, it fraudulently claimed its proprietary Trading Bot and Volatility Software would generate substantial profits to investors by trading on the volatility of cryptocurrency markets.
35. To entice investors to invest, BitConnect posted misleading information about the Lending Program's purported daily interest rates and historical returns on the BitConnect Website, and advertised the Lending Program on Coinmarketcap.com, a popular website in the digital asset space that tracked price, available supply, trade volume, and market capitalisation of various digital tokens.
36. To participate in the Lending Program, an investor was first required to create an account on the BitConnect Website and then to transfer Bitcoin to a Bitcoin blockchain address provided to the investor and controlled by BitConnect. BitConnect pooled the investors' Bitcoin in a series of addresses, or digital wallet, on the Bitcoin blockchain, which BitConnect controlled.
37. The investor's account page on the BitConnect Website would then reflect the investor's Bitcoin investment in the investor's Bitcoin wallet.
38. The investor could then Remit the Bitcoin to Bit Connect to purportedly purchase BCC tokens on the BitConnect Exchange, a digital currency exchange, and then "lend" the BCCC tokens to BitConnect, which, in turn, would purportedly invest these proceeds into the volatility of Bitcoin via the Trading Bot.
39. BitConnect charged Lending Program investors an exchange fee through the BitConnect Exchange each time they exchanged their Bitcoin for BCC or exchanged BCC back into Bitcoin.
40. Although BitConnect operated an MTB through its BitConnect Exchange, BitConnect never registered with FinCEN, nor complied with the statutes and regulations governing an MTP under the Bank Secrecy Act, as found at Title 31, United States Code and Title 31 of the Code of Federal Regulations.
41. In truth, the Lending Program was a massive Ponzi scheme. BitConnect did not use a Trading Bot and Volatility Software to generate income for investors and instead used money from new BitConnect investors to pay off older BitConnect investors.
42. Though the Lending Program, BitConnect obtained more than $2 billion from retail investors worldwide.
BitConnect's Referral Program
43. BitConnect also operated a pyramid Scheme known as the Referral Program through which BitConnect relied on BitConnect promoters in order to promote and direct investors to invest in BitConnect's Lending Program.
44. ARCARO and other promoters used unique internet hyperlinks known as "Referral links" to offer the BitConnect Lending Program on their personal social media pages. Investors, in turn, used the referral links to access the BitConnect Website and invest in BitConnect's Lending Program. BitConnect paid commissions to ARCARO and other promoters who successfully convinced investors to invest in the Lending Program. The referral links ensured that ARCARO and other promoters were compensated by Bit Connect with the appropriate commission.
The applicant's point of substance on this application is that communications between the FBI and ASIC referrable to the FBI's investigations in the United States, and in particular those concerning Mr Arcaro, would not only not be admissible in this trial but also can have no rational bearing on the issues at all, and therefore the subpoena has no legitimate forensic purpose within the meaning of that concept explained in cases such as Blacktown City Council.
The applicant's case is whether or not the FBI has concluded to the point of persuading the prosecuting authorities in the United States to lay charges and obtain concessions from an accused that the BitConnect scheme was a "Ponzi scheme" is entirely irrelevant and extraneous to any issues in the case before this Court.
The difficulty in this application, and I apprehend the difficulty that would bedevil the trial, is that the phrase or description "Ponzi scheme" is not a legal concept, rather it is jargon for a general state of affairs. It is the type of phrase which undoubtedly will have different meanings to different people in different context. At the highest level of generality my understanding and I think for the purpose of this application this is sufficient, is that a Ponzi scheme is a systemic fraud wherein people are induced to "invest" money into a scheme with the intention and having been told that it would be invested in a particular way for a particular purpose, when in fact the money is simply stolen by the promoter for their own purposes more often than not to repay other earlier victims of the same fraud who have been calling for the return of their investments. Money is then paid out to those other victims as fictitious returns or income and/or capital.
Sometime Ponzi schemes might be intended to be a Ponzi scheme from the moment they are conceived. However, on other occasions legitimate schemes may over time, and often after losses have been incurred, develop into Ponzi schemes.
This definitional question about what is a Ponzi scheme is for reasons I will explain perhaps important to this application and may assume greater importance on other applications or in the trial itself.
The Accused wishes to run a point at trial to the following effect.
He wishes to submit that as a matter of law, a scheme cannot, on the one hand be a managed investment scheme capable of being registered under the Corporations Act with ASIC, and at the same time be a Ponzi scheme.
This is because, so the argument goes, by reference to the very definition of managed investment schemes in s 1 of the Corporations Act, what has to be registered as a managed investment scheme (by route of a process of statutory implication) is something that is capable of being registered by ASIC as a managed investment scheme.
The argument is that if a scheme is in fact a Ponzi scheme, then regardless of the fact that the fraudster, if they were to seek to register the fraudulent scheme with ASIC, would seek to and potentially successfully hoodwink ASIC to the effect that what the scheme was in fact a managed investment scheme and not a fraudulent scheme designed to steal money from people. In fact, objectively what ASIC was being asked to register was in fact a Ponzi scheme and therefore ASIC would not only not be required to register it as a managed investment scheme, but also would positively be required not to register it.
Some support for this legal proposition is to be found in cases such as National Australia Bank v Norman (2009) 180 FCR 243.
ASIC's fundamental submission I think depends upon the above proposition of law being wrong. It contends that as a matter of law it is possible for a scheme to be at the same time a managed investment scheme and a Ponzi scheme.
In support of this submission, it relies on cases such as ASIC v Marco (No 13) [2023] FCA 83 and ASIC v Dunjey [2023] FCA 361.
The Accused, relying on what it says cases like Norman are authority for at trial, wishes to make submissions to the jury that because the scheme the subject of the prosecution, at least may possibly be a Ponzi scheme, there is therefore reasonable doubt that the failure to register the scheme as a managed investment scheme was a breach of the law because the scheme in fact could not be registered as a managed investment scheme and it would have been wrong for ASIC to do so.
He says that relevant to that aspect of the case may well be the lines of inquiry suggested or referred to by the FBI to ASIC to the effect that it followed, might have exposed more facts than are otherwise available to the effect that the scheme was in fact a Ponzi scheme. Thus, while I think conceding that any communications from the FBI about such matters would not be admissible as evidence of any fact contained within those documents in the proceedings, the submission is that there is a legitimate forensic purpose being that they may well assist in the foreshadowed cross‑examination, or at least the planning of cross‑examination, of ASIC witnesses to the effect that potential lines of inquiry have not been followed, which may bolster the Accused's ability to make the above submission.
If I approach the matter upon the basis of acceptance of the Accused's view of the law, I am persuaded that there is some legitimacy in the production of the documents. On the other hand, if ASIC is right and as a matter of law a scheme can be both a Ponzi scheme and a managed investment scheme at the same time, then it seems to me that the documents are wholly extraneous to the resolution of any issue in this case.
I have decided, and I do not think either party suggests otherwise, that it is not appropriate for me, on an interlocutory application to set aside subpoenas to resolve that important and fundamental legal question. Rather, that will be a matter for the trial judge to determine for the purpose of directions to the jury or perhaps on the receipt of evidence or perhaps it will be something I will need to determine later this week on one of the other various applications which I have before me.
For my own part, and this is no more than a preliminary view and I have not heard from the Crown at all on this application, I think both parties may be wrong when they suggest that the answer must be binary.
To resolve the question of law, there is firstly a very important question of statutory construction as to whether what the legislation intended to be managed investment schemes that had to be registered, captured schemes that masqueraded for all intents and purposes as managed investment schemes requiring registration, but in fact were nothing more than an elaborate fraud. There is obviously room for debate as to whether it is open to construe the legislation to the effect that if promoters wish to promote to the public schemes that are held out so as to be in every way caught by the managed investment scheme provisions, then they ought to be under an obligation to register those schemes. This question of law is something that I do not propose to enter upon on this application.
There is however a subsidiary question which will be built into every discussion of this topic, and that is the question of whether something is a Ponzi scheme or not will always be a matter for evidence. Precisely what is meant by that phrase, in any particular circumstances, may differ from case to case and undoubtedly differs from jurisdiction to jurisdiction. Most importantly, as I have observed, there will be, and this is on my high level understanding of what a Ponzi scheme is, there will be some Ponzi schemes which were always intended from conception by their promoters to be Ponzi schemes and there will be other Ponzi schemes which have developed from totally legitimate schemes, when they were conceived, into Ponzi schemes along the way. I find it very difficult at face value to accept the proposition that if at the time when registration was required to take place there was no intention for the scheme to operate fraudulently then it ought not to have been the registration required by the law at that time. Again, this is not a concluded view, but it needs to be thought about before the topic comes up again.
That all being said, for the purpose of this application all I need to do is to observe that there is a live and real bona fide issue between the parties which if resolved in favour of the Accused would mean that the documents do have a legitimate forensic purpose.
The reason I have come to that conclusion is that I think the evidence allows me to conclude as follows:
1. There obviously are relevant communications between ASIC and the FBI.
2. Those communications, by reference to the definition in the subpoenas themselves, are in relation to the relevant investigation.
3. I infer that those communications include discussions between the investigating authorities as to potential lines of inquiry that one or both of them may or may not be pursuing.
Whilst I find it difficult to identify precisely where the line is to be drawn as between speculation and a reasonable basis more than speculation, in this case I do think that there is a reasonable basis for me to infer that there might, in the communications between ASIC and the FBI, be information which would give the Accused the forensic ammunition he is are seeking in the way that I have explained. In other words, it may assist the Accused in developing an argument to the effect that there are unexplored lines of inquiry on the topic of whether what is under consideration is a Ponzi scheme or not.
I have not overlooked the submissions by the applicants to the effect that large swathes of the documents are apparently going to be the subject of claims for both legal professional privilege and public interest immunity. In my view, whether or not such claims are to be made is a question that can be dealt with on production of documents and is not relevant in this case to a conclusion that there is no legitimate forensic purpose for the issuing of the subpoena. I accept that there may be cases where it is so blindingly obvious that what is being sought is all going to be the subject of a successful claim for some sort of privilege where the conclusion can be drawn that the subpoena is either an abuse of process or oppressive, this, in my view, is not one of those cases.
Finally, I turn then to the significance of the earlier decision by Bennett SC DCJ of this Court, wherein his Honour concluded at para [33]:
"I accept the submission made on behalf of ASIC that those communications between the agencies are at best hearsay representations and could not rationally affect, directly or indirectly, the assessment of the probability of the existence of the facts in issue in the proceedings which include ultimately whether the Crown can displace as a reasonable possibility the misidentification of the accused as the person nominated I the material upon which it is intending to rely."
I find as a matter of substance that this application is the same as that that was brought before Bennett SC DCJ. Whilst I accept that the plea agreement itself was not known to the Accused at the time of that application, the fact that the scheme as alleged by ASIC could be described as a Ponzi scheme, must have or should have been obvious to the Accused. Yet the way the case has been put before me was it is clear from the reasons of Bennett SC DCJ, not the argument that was put before his Honour.
I do not think that there has been a material change in the circumstances between the time of the application before Bennett SC DCJ and this application. However, my understanding of the law in this regard is that a material change in circumstance is not necessary to allow me to effectively rehear the same application. Rather, it is a discretionary factor and there will of course be a point where it may become clear that a party is doing no more than making the same application repeatedly before different judges, which can of course amount to an abuse of process. Nonetheless, I take into account as a matter of discretion the way the matter was put before Bennett SC DCJ, but I do not find that a reason to dissuade me from what I think is the substance of the matter, which is that I have concluded on different evidence and different submissions that there is a legitimate forensic purpose in the documents sought to be produced.
For these reasons, I have decided to dismiss both applications to set aside subpoena.
[3]
Amendments
17 May 2024 - Publication restriction lifted.
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Decision last updated: 17 May 2024