Findings
684 I make the following findings on the issue of liability. I deal with damages separately.
685 Wealthsure was granted an Australian Financial Services Licence under the Financial Services Reform Act 2001 (Cth) on 15 January 2004 to, amongst other things, provide financial advice and deal in financial products. Mr Bertram was an authorised representative of Wealthsure.
686 Mr Bertram was employed by David Bertram & Associates Pty Ltd, which carried on business under the name of "DBA Financial Designs".
687 On 30 September 2003, Mr Bertram applied in writing to Wealthsure to be appointed as a representative. One of his personal referees was Mr Wayne Mackintosh.
688 In November 2003, Wealthsure and Mr Bertram executed a Representative Agreement whereby Mr Bertram would act as a representative of Wealthsure in relation to Wealthsure's financial services business and any other financial products which Wealthsure offered or may offer in the future.
689 On 15 January 2004, Wealthsure issued a Certificate of Authorisation describing Mr Bertram as "an authorised representative of Wealthsure pursuant to s 916A of the Corporations Act for the purpose of providing advice and dealing in a financial product … on behalf of the Licensee [Wealthsure] in respect of the following classes of products" described in the Certificate.
690 Section 916A of the Corporations Act provides that a financial services licensee (Wealthsure) may give a person (Mr Bertram) a written notice authorising the person, for the purposes of Chapter 7 of the Corporations Act, to provide a specified financial service or financial services on behalf of the licensee.
691 The products for which Mr Bertram was licensed included: basic deposit products, managed investments including master trusts, wrap facilities, property syndicates, margin lending products, tax effective instruments and securities.
692 On the same day, Wealthsure published a document under the name of David Bertram & Associates Pty Ltd trading as DBA Financial Designs, which included an adviser profile for David Bertram.
693 In that document Wealthsure claimed that it could provide advice and arrange transactions for basic deposit products, risk insurance products, annuities and pensions, superannuation, managed investments, securities and Government stocks and bonds.
694 It said that Mr Bertram "is in turn authorised to advise on these services and products as an authorised representative of WealthSure Financial Services".
695 After the issue of the Certificate of Authorisation on 15 January 2004, Mr Bertram commenced to carry on business as an authorised representative and financial adviser for Wealthsure.
696 Mr Bertram was Wealthsure's agent and authorised to speak for Wealthsure.
697 From March 2004, Norton Capital was licensed to carry on financial services on a financial services business and to provide financial product advice.
698 Prior to September 2004, Wealthsure and Norton Capital had a strong business relationship. Wealthsure had approved another product Norton Capital suggested - Westpoint. Some time before September 2004, Mr Norton approached Mr Pawski about Neovest. Mr Norton had the first Neovest prospectus. He told Mr Pawski that Neovest showed an attractive return paying 20% for Foundation Shares and 15% for Equity Shares, with dividends to be paid monthly over a 12 month term. Neovest was investing its money in a related entity, Neo Lido, which was a property developer. Mr Norton told Mr Pawski that he had agreed to become a director of Neovest. He told Mr Pawski that the executive directors, Mr Spencer and Ms Perovich, had agreed to provide personal guarantees in respect of Neovest. It is clear that Mr Norton had already reached agreements with the Neovest dirctors when Mr Norton spoke to Mr Pawski.
699 Mr Pawski said that during that conversation with Mr Norton he read the first prospectus which he said he noted was consistent with what Mr Norton had told him. Mr Pawski formed the opinion, from what he had been told by Mr Norton, that Neovest was an attractive investment; that it would make sufficient profits to meet the dividends; and the directors were investing their own money. Mr Pawski thought that a return of 15% to 20% was not unusual because the investment did not offer capital growth, but rather was an income paying investment.
700 At or about the same time, Mr Bertram met with Mr Wood, an employee of Norton Capital.
701 Before Mr Norton spoke to Mr Pawski and Mr Pawski formed the opinions to which I have referred, Mr Norton had spoken to Ms Perovich and Mr Spencer and offered to raise money on the Neovest prospectus. Mr Norton told them he was a specialist in capital raising and that he had studied Neovest and wanted to raise money for it.
702 He told the directors that he had a relationship with Wealthsure and Wealthsure would, if certain requirements were met, see the prospectus filled.
703 Mr Norton told the directors that he would assume responsibility for raising capital for Neovest, but he insisted on their agreement to a number of matters. He insisted that he be appointed a director of Neovest; that he be issued with a non-dividend bearing management share that would give him a veto of future appointments to the board of Neovest; that Mr Townley continue as a director of Neovest; that Mr Spencer and Ms Perovich provide personal guarantees on behalf of the Neolido Group in favour of Neovest to better secure advances from Neovest to Neolido Group Companies; and that Neovest resolved to pay dividends on its preference shares monthly. The Neovest directors decided to accept Mr Norton's terms.
704 On 9 September 2004, Norton Capital executed a Heads of Agreement with the Neolido Group for the raising of mezzanine funding for the Neolido Group, pursuant to the prospectus issued by Neovest dated 3 February 2004.
705 The terms of that agreement are set out in these reasons.
706 The Heads of Agreement had all the consequences and effects that I have identified in paragraph [224] of these reasons. I accept Ms Perovich's evidence that she was told by Mr Norton that the payment of monthly dividends was a requirement of Norton Capital's principal financial client planner, Wealthsure.
707 The marketing fee was excessive. The agreement for Neovest to pay all dividends on a monthly basis in arrears was unlawful. The representation that Mr Norton was an independent director was untrue.
708 On 14 September 2004, Mr Norton was appointed a director of Neovest and thereafter attended all relevant Board meetings.
709 On 16 September 2004, Mr Pawski emailed Wealthsure's representatives advising that he had recently approved the Neovest redeemable preference share offering.
710 Mr Pawski sent that email before Norton Capital prepared its research report which was dated October 2004. Prior to approving Wealthsure as an investment, Mr Norton had received the Info Pack, which had been given to Norton Capital for the purpose of preparing its research report.
711 Because Mr Pawski also received the Info Pack (although not until after he approved Neovest on 16 September 2004), Mr Pawski received the same information that Mr Norton had for the purpose of Mr Norton preparing his October report. Mr Pawski read the Norton Capital research report before 16 September 2004. He was not sure, but he said it may have been a draft. It must have been a draft because the research report is, as I say, dated October 2004.
712 Mr Pawski read the first prospectus prior to Neovest being approved and understood the document, felt comfortable with it, and understood its context. He also had a number of conversations with Mr Norton, Mr Wood, Ms Fallon, a business development manager for Norton Capital and Mr Andrew Hull.
713 Mr Pawski's email of 16 September 2004 is important in a number of respects.
714 The advice to Wealthsure's representatives was that the investment was a mezzanine product and has a term of one year with a return to the client of between 15% or 20%, depending on the option taken. Due to the risks associated with the mezzanine product, the maximum investment per client is 15% of the client's net assets. In compiling the net assets, the net assets do not include the family residence but include superannuation and all investment assets. The advice to the representatives was that borrowing was not permitted.
715 Mr Pawski said he did not decide to put Neovest on to the approved list without first carefully reviewing the documents provided by Norton Capital and subject to Mr Norton becoming a director, and Ms Perovich and Mr Spencer providing guarantees. I do not accept that he carefully reviewed the documents because if he had he would not have put Neovest on the approved list.
716 Mr Pawski failed to make any proper assessment of the Neovest prospectus and of the information he had received up to 16 September 2004. If he had, he would not have made the investment an approved product. Nor would he have sent the email that he did on 16 September 2004. If, after 16 September 2004, he had properly analysed the documents within the Info Pack, he would have removed Neovest from the APL.
717 The due diligence report that was prepared by Mr Norton and Norton Capital failed to take into account a number of important matters which, if they had been considered, must have meant that Mr Norton and Norton Capital would have refused to approve the product. The Norton Capital research report was prepared negligently.
718 Mr Bertram on his own admission, and thus Wealthsure of whom he was an agent, have failed to carry out any due diligence of any kind in relation to this investment, notwithstanding that it was known to be, as Mr Pawski himself described it, as a product with associated risks. Mr Bertram said he was unaware of a significant number of problems pertaining to the solvency of the Neolido Group. He said that if he was aware of those matters, he would not have recommended Neovest to the plaintiffs. I accept that evidence. However, an ordinary, competent and prudent financial adviser would have undertaken inquiries to ascertain information pertaining to the solvency of the Neolido Group. Mr Bertram, on his own admission, failed to adequately investigate the solvency of the Neolido Group and in doing so failed to properly assess the appropriateness of recommending an investment in Neovest to the plaintiffs.
719 Mr Pawski knew that Mr Norton was not independent and was a director of Neovest. He knew that Mr Norton had exclusive rights to distribution for the prospectus and was to receive commission for capital raised. Mr Pawski knew that Mr Norton had a commercial benefit from the success of sales, as well as in the research. He agreed that it would be arguable that Mr Norton was not independent. He also knew that Norton Capital was to receive 13% by way of commission, which it would share with Wealthsure. He would have known, if he had read the prospectus, that preference shares were only redeemable at the option of the directors. He would have also have known that the dividends were payable only at the option of the directors.
720 The guarantees, which he said that he insisted upon, were of no value at all. Ms Perovich and Mr Spencer's net worth was calculated by reference to their investment in the Neolido Group. If the Neolido Group were to fail then their investment failed and their worth was correspondingly reduced. The only time that Ms Perovich and Mr Spencer would be called upon to honour the guarantee would be in circumstances where the Group had failed.
721 Mr Pawski understood what a redeemable preference share was and that there was no obligation upon the directors to redeem those shares and that, in those circumstances, the investor might receive nothing.
722 Mr Pawski made his advisers aware that the investment was of high risk.
723 In those circumstances, he had an obligation to ensure that a proper due diligence was done in relation to the investment before he put it on his approved investment list.
724 After he approved the product, Mr Pawski left it to Norton Capital to advise as to the continuing suitability of Neovest as an investment.
725 On 19 September 2004, Ms Perovich, Mr Spencer, Neo Lido, Neolido Holdings, Sylvana Perovich Pty Ltd and Richard Spencer Pty Ltd gave a guarantee and indemnity to Neovest in respect of the due performance by Neo Lido, Neolido Holdings and their subsidiaries in respect of any investor loans by Neovest to Neo Lido, Neolido Holdings and their subsidiaries.
726 The financial advisers, if they had thought about it, could not have taken any comfort from the guarantee and indemnity. Neo Lido and Neolido Holdings were guaranteeing their own performance which is no more than a promise to perform. Mr Spencer and Ms Perovich, and the private companies which they control, were purporting to guarantee Neo Lido and Neolido Holdings' performance but all of their wealth was contained within Neo Lido and Neolido Holdings and, in those circumstances, those guarantees were also worthless.
727 In October 2004, Norton Capital published two documents; a research report and an Information Summary/flyer.
728 In the research report, referring to the investment, Norton Capital said that the preference shares would be redeemed at the sole discretion of the board of Neovest, but that the prospectus confirmed that the board intended to redeem the preference shares 12 months after their issue at their subscription price plus any accrued but unpaid dividends. That part of the report also recognised that the company had published a company update on 17 September 2004, in which it announced that the board had resolved that dividends would be declared and paid in monthly instalments.
729 The research report recognised that the level of risk was high and directed the reader's attention to risks and risk management. In relation to risk management, it was pointed out that Neovest would have a second ranking or following mortgage over all development properties in relation to which Neovest lent funds to Neo Lido. It was pointed out that the developer, Neo Lido Pty Ltd and Neolido Holdings, and the shareholders and directors of each of those entities, had provided a guarantee and indemnity to Neovest for all amounts loaned by Neovest to Neo Lido or Neolido Holdings.
730 It identified the preference shares and their rights and rankings. It described Neo Lido's development. It identified the four directors and made reference to Mr Norton and the fact that he held one redeemable preference share known as a "Management Class", which prevented the removal or appointment of directors without his approval.
731 It pointed out that the investment parameters in the investment plan provided that the return to Neovest is to be no lower than 2% above the coupon rate on the preference shares. That statement had been made in the investment plan, which had been prepared in or before August 2004.
732 When that statement is analysed, it is apparent that if Neo Lido and Neolido Holdings were to pay 22% to Neovest on the monies loaned by Neovest, then Neovest could not hope to pay redeemable preference shareholders 20% on their investment for two reasons. First, Neovest had to pay 13% on the capital raised, which it assumed would be redeemable every year, which would have meant a continuing 13% payable on capital as it was redeemed each year. Secondly, it would have had to have paid income tax on the profit that it derived from lending Neo Lido and Neolido Holdings money returning 22%. Because Neovest was acquiring investors who were putting in capital, it had no right to offset the cost of the capital against the interest earned on the loans to Neo Lido and Neolido Holdings. The whole plan, when analysed, simply could not work.
733 It is inconceivable that Norton Capital, and Mr Norton, did not recognise this at this time. It is also inconceivable that Mr Pawski, who said he read these documents, did not recognise the very flaws in the plan. The only explanation can be is that all of those concerned failed to carry out their review of Neovest competently. The only other explanation is that the far too generous commissions led them to overlook the matters to which I have referred.
734 Norton Capital noted that Neovest intended to redeem the preference shares at the expiration of 12 months in one of three ways. First, by payments generated from the profits of working capital of the Neolido Group. I have already addressed the interest rate that would have to have been earned for Neovest to pay out its investors. It would have had to earn a much higher interest rate than 45% to 50% if it was going to obtain profits in excess of the 20% it had to pay to the Foundation redeemable preference shares and the 13% it had to pay to Norton Capital in raising capital. Secondly, it would redeem the preference shares by payments generated from receipts of the Neo Lido directors and associated parties in respect of the Mango Hill/Kinsella Heights estate joint venture with the BMD Group. That proposition was no more than aspirational. Thirdly, it was intending to redeem the preference shares by further capital raising through issue of new shares or other facility or other offer.
735 Redeemable preference shares can only be redeemed on the terms on which they are issued: s 254J(1) of the Corporations Act. They may only ever be redeemed if the shares are fully paid up, and out of profits or the proceeds of a new issue of shares made for the purpose of the redemption: s 254K.
736 Neovest would have had to have made profits which clearly could not have been made or made an issue of new redeemable preference shares for the purpose of redeeming the existing redeemable preference shares each year. That was not contemplated.
737 What in fact was contemplated was that later investors' capital would be used to pay interest on earlier investors' redeemable preference shares. The scheme that was proposed in the prospectus and which Norton Capital examined was a "Ponzi" scheme. Mr Norton, Norton Capital and Mr Pawski failed to recognise a scheme which was a Ponzi. The third to eighth defendants would not accept that the Neovest offering was a Ponzi, but it was both the plaintiffs' and the first and second defendants' case that it was such a scheme.
738 The first and second defendants' defence was that the scheme was a Ponzi, but they failed to explain how it was that their clients, who were experts, failed to recognise it.
739 The research report identified risks and mitigating factors, but used the mitigating factors to lessen the risk. The research report concluded with the Norton Capital viewpoint in which it is stated that:
Norton Capital considers this offer to be comparable to other fixed interest income producing investment products. This offer is an opportunity for investors to participate in a potentially relatively short term investment with a high yield, compared to investments and bank term deposits.
740 In the Norton Capital flyer, under "Norton Capital Viewpoint", Norton Capital wrote:
Norton Capital has applied its research and due diligence process to the Neovest Prospectus. Norton Capital has recommended this investment as a Norton Capital Approved product. Reasons include:
High yield
Acceptable level of risk due to 2nd ranking or following security and a guarantee relating to loan of mezzanine funds to Neolido
• Strong management.
741 In my opinion, if Norton Capital had carried out a due diligence enquiry it could not have made the recommendation that it did and it could not have approved the product.
742 But there is another matter of analysis that the financial advisers failed to undertake. If Neovest was able to pay 20% on the Foundation redeemable preference shares and 15% on the Equity redeemable preference shares, after paying 13% commission for the raising of capital and after paying income tax, it meant that Neo Lido, Neolido Holdings and the Neolido Group would have to be paying somewhere between 45% to 50% on the loan made by Neovest to Neo Lido, Neolido Holdings and the Neolido Group. Any financial analyst would know that any company that was required to pay interest rates of that kind was under serious stress. No-one made those inquiries or conducted such an analysis.
743 On 23 September 2004, the directors, including Mr Townley and Mr Norton, resolved that dividends would be declared and paid in monthly instalments.
744 The resolution was unlawful. Dividends can only be paid out of profits. The profit is only declared annually. Mr Townley later tried to explain how it might have worked but, in my opinion, the resolution was fraught. Those who made it, and those who knew of it, Mr Pawski and Mr Bertram, must have known that the resolution was unlawful.
745 Between 14 and 23 September 2004, Neovest had appointed Mr Norton, had obtained the guarantees to which I have referred, and passed the resolution relating to dividends. Putting aside the appointment of Mr Norton, the other two steps the directors took were of no assistance and no protection to existing or potential investors in redeemable preference shares in Neovest. Mr Norton's appointment was of no assistance to investors because he was not, as was represented, independent.
746 Four days later, 3 Point Finance appointed receivers and managers to both Neo Lido and Neolido Holdings. Their appointments were terminated the same day.
747 In April 2005, Neo Lido and Neolido Holdings were insolvent. I accept Mr Robinson's evidence in its entirety. The extent of the insolvency cannot be determined, but both companies were unable to meet their debts as and when they fell due. The Neolido Group, with the exception of Neovest, was also insolvent.
748 Neovest was probably not insolvent because it had raised its funds through the issue of redeemable preference shares. By doing so, it did not incur any debt but enlarged its capital.
749 It had lent $270,000 to Neolido Holdings, which it must have borrowed from another source which is, on the evidence, unknown. However, it is likely that it borrowed the monies from another member of the Neolido Group. If that were the case, it would probably mean that Neovest could have set off that debt against the debts owed to it by the Neolido Holdings.
750 However, that does not matter. It is simply enough to find that at the relevant time Neovest was not insolvent.
751 On 3 February 2004 and 29 March 2005, Neovest issued the first and second prospectus respectively.
752 I am not able to make any findings in relation to the solvency of Neo Lido and Neolido Holdings as at 3 February 2004, but I am of the opinion that Neo Lido and Neolido Holdings were also insolvent as at 29 March 2005.
753 In those circumstances, the second prospectus contained a number of inaccurate statements.
754 Those inaccuracies were identified in [463] to [477] of these reasons.
755 I do not think that the directors of Neo Lido and Neolido Holdings believed that those companies were insolvent when the second prospectus was issued. I think they wrongly believed that whilst the companies were stretched, they were able to meet their debts as and when they fell due. However, that is not so much to the point. What is more important is the omissions from the prospectus that would have enabled investors to make an informed choice as to whether to invest in the redeemable preference shares on offer.
756 Neovest was formed for the sole purpose of raising finance to on-lend to Neo Lido and Neolido Holdings, and the Neolido Group by way of mezzanine finance or leveraged finance on second mortgage.
757 It was the directors' intention, notwithstanding the terms of the prospectus, to apply all funds raised through the medium of the prospectus to Neo Lido and Neolido Holdings.
758 In those circumstances, the prospectus contained a number of inaccuracies to which I have already referred. Most importantly, it was inaccurate in that it did not advise that if Neovest were to loan monies to Neo Lido, Neolido Holdings and the Neolido Group, the monies would be irrecoverable and, in those circumstances, the redeemable preference shareholders would neither receive a dividend nor be able to redeem their shares and that their investment would be entirely lost.
759 On 11 October 2004, a contractual relationship was formed by Mr Bertram's and Wealthsure's offer to act as Mr and Mrs Selig's financial adviser, and Mr and Mrs Selig's acceptance of that offer, as constituted by the giving of the FSG which Mr and Mrs Selig acknowledged receiving. The consideration was the services and advice to be provided and the commissions and fees to be paid. The parties thereafter conducted themselves on the basis of that contractual relationship.
760 The Statement of Advice that was given Mr and Mrs Selig on 29 November 2004 contained a number of statements which were unsuitable for Mr and Mrs Selig's circumstances.
761 First, it was stated that they would want to borrow a total of approximately $1.5 million and invest those funds, as well as $200,000 of their existing funds, in order to obtain sufficient income to meet any shortfalls in rental income from the recommended property portfolio as well as capital growth.
762 The recommendations contained in that document were entirely inappropriate for Mr and Mrs Selig. It was recommended that they borrow $1,150,000 and invest $1,000,000 of that sum into Neovest Foundation Shares. That advice should not have been given because the Neovest Foundation Shares were never likely to return 20% as represented in the Statement of Advice. Nor would the shares be likely to be redeemable because the shares, after being purchased, would be worthless.
763 The further advice, that they arrange a margin loan for a further $350,000 secured against the initial investment of $350,000, was again inappropriate for Mr and Mrs Selig's needs.
764 In the Statement of Advice, Mr and Mrs Selig were wrongly advised that their portfolio would be well-structured and diversified, and provide them with sufficient flexibility to enable adjustments to be made to the portfolio in the future should the need arise.
765 They were wrongly advised that the implementation of a negative gearing strategy would provide their portfolio with the opportunity to achieve growth that would not have been possible otherwise.
766 They were wrongly advised that the resulting increase in their retirement fund was estimated at $3,504,600 and they would have an increase in their retirement income of approximately $245,321.98 per annum. To the extent that any advice purported to be on the basis of the information in the Fact Finder of 11 October 2004, I find the Fact Finder inappropriate and inadequate for the kinds of investment strategies that were recommended.
767 There was no basis for the advice which was given. Mr and Mrs Selig should have been advised that the advice was incomplete and inaccurate.
768 The strategy that was recommended, to borrow $1,150,000 on a line of credit as well as an additional $350,000 via a margin loan, was inappropriate for Mr and Mrs Selig's needs.
769 All four of the Cash Flow and Debt Management Strategy Papers, which were prepared by Mr Bertram or DBA Financial Services for Mr Mackintosh to give to Mr and Mrs Selig, contained advice that was inappropriate for Mr and Mrs Selig's needs.
770 Mr Selig is dyslexic and has difficulty reading. English is not Mrs Selig's first language. In late 2004 and early 2005, both Mr and Mrs Selig had no earning capacity. Mr Selig was physically incapacitated and Mrs Selig was not trained for any work. They had three assets; the two units of the Sea Aura Apartments being apartment numbers 3 and 12, and a half interest in apartment number 4, which settled in December 2004 for $545,000. A good part of that half interest had to be used to meet other obligations.
771 After settlement of apartment number 4, the only income Mr and Mrs Selig had was from the rental of apartment number 12, being $380 per week. Mr Selig's taxable income for the financial year ended 30 June 2004 was $21,003. Mr and Mrs Selig were asset rich and income poor.
772 They wished to increase their income to meet their living expenses and to provide something for their later years. Because they had little income, they were not appropriate persons to enter into negative gearing arrangements. That should have been apparent to those who were advising on the strategy that was adopted.
773 The purpose of negative gearing is to buy an asset that produces income on borrowed monies such that the cost of borrowing exceeds the income produced by the asset. The excess of the cost of borrowing over the income from the asset is deducted from the tax payer's income, so reducing the tax payer's incidence of liability to taxation. The purpose of negative gearing is to hold the asset while it increases in value and to make a capital profit greater than the lost income. The more usual candidates for negative gearing are those who have high income and who are on the highest marginal tax rate.
774 Mr and Mrs Selig had assets. What they did not have was income.
775 Mr Mackintosh was a real estate agent who was unable to give financial advice because for reasons, which are unimportant, he was not authorised. Mr Bertram and Mr Mackintosh were friends. He and Mr Bertram worked in conjunction where Mr Mackintosh would give advice in relation to the purchase of real estate, whilst Mr Bertram would give the financial advice in relation to the funding of the purchase of the real estate. That is what they did in respect of Mr and Mrs Selig.
776 Mr Mackintosh made his income through selling real estate. Mr Bertram made his income by giving financial advice. It suited them both to work together.
777 Clearly, Mr and Mrs Selig could not borrow money to purchase real estate unless the income produced from the purchased real estate exceeded the cost of borrowings. That was simply not possible or, at least, it was not possible in relation to the real estate that Mr Mackintosh was hoping to sell.
778 Originally the advice that was given by Mr Mackintosh and Mr Bertram to Mr and Mrs Selig was to purchase seven investment properties at $365,000, each with a rental income of $340 per week. As Mr Bertram said in his advice to Mr Mackintosh:
Could not really fit in any more than this as they have no personal income tax to defray using tax dedutions.
779 The advice that was given to Mr Selig, which was contained in the Cash Flow and Debt Management Strategy Paper given to Mr and Mrs Selig on 15 November 2004, was to sell apartment number 4 and realise $260,000, and then obtain a letter of credit against the unit in which they lived and the unit which they rented, being apartments numbered 3 and 12, for the purchase of the seven investment properties at $365,000 each.
780 The total cost of the investment properties would have been $2,555,000 and they would have returned, assuming they were fully tenanted at a rental of $340 for the whole of the year, $123,760 per annum.
781 By itself, that proposition was not feasible because the cost of the borrowings would have far exceeded the notional income. So the advice was to borrow another $1,150,000 for the purpose of investing $700,000 into Neovest at 20% per annum, investing a further $300,000 into Neovest at 15% per annum, as well as $150,000 into managed funds, and a further $350,000 margin loan.
782 For the advice to purchase the units to work, Mr and Mrs Selig's income had to be significantly greater than $20,000 per annum. They had estimated that they needed $52,000 per annum to meet their living expenses. What was being suggested was that they borrow money at commercial rates and invest in Neovest at significantly higher rates in order to off-set the losses in relation to the seven units.
783 Although this proposition did not eventuate, it indicates, in my opinion, the inappropriateness of the whole strategy that Mr Bertram and Mr Mackintosh developed for Mr and Mrs Selig.
784 Put shortly, Mr and Mrs Selig were being advised to borrow something in excess of $4.05 million for the purpose of investing $1 million of that sum in a high risk investment, merely so they could negatively gear the apartments that Mr Mackintosh was trying to sell. Even if the investment in Neovest had not been so risky, the strategy was simply inappropriate. The strategy did not change between then and the time Mr and Mrs Selig made their investment with Neovest, although the proposal became more modest. The strategy was always inappropriate for Mr and Mrs Selig.
785 Four separate documents, which were entitled "Cash Flow and Debt Management Strategy Paper", all of which were prepared by Mr Bertram, were given to Mr and Mrs Selig between 15 November 2004 and 18 April 2005.
786 Two Statements of Advice were given; one on 29 November 2004 and the second on 18 April 2005. Both of those documents were required by law to be given to Mr and Mrs Selig.
787 On 9 December 2004, the plaintiffs executed contracts for the purchase of three units that were being marketed by Mr Mackintosh, being Lots 1, 7 and 9 at 78-80 Berrima Street, Wynnum. The cost of those units was $375,000, $380,000 and $430,000 respectively, making a total of $1,185,000. Deposits of $37,500, $38,000 and $43,000, totalling $118,500, were paid.
788 Mr and Mrs Selig entered into those contracts upon the understanding that they would, in due course, borrow further monies to invest in Foundation or Equity Shares in Neovest so as to return sufficient income to meet the cost of borrowings for the three units at Wynnum and return sufficient monies to meet their living expenses. That is borne out by the application made on 16 December 2004 by the plaintiffs to the National Mortgage Company to borrow $2.3 million.
789 As at this date, Neovest intended to issue a second prospectus following upon the research report of Norton Capital and the advice given by Mr Norton. Neovest was not seeking to raise any monies on the first prospectus. It was not in Mr Bertram's interests or Wealthsure's to recommend Mr and Mrs Selig invest pursuant to the first prospectus, because the second prospectus provided both Mr Bertram and Wealthsure and, of course, Mr Norton and Norton Capital, with a greater return by way of commission.
790 Settlement on the units which were still to be constructed, did not occur until 7 September 2005. Mr Bertram told Mr and Mrs Selig on about 15 January 2005 that there was a problem with the Neovest prospectus. Mr Bertram gave that advice because he knew that the first prospectus was to expire and that a second prospectus would issue in the near future, which could be relied upon for advising Mr and Mrs Selig to enter into an investment with Neovest.
791 The further Cash Flow and Debt Management Strategy Papers that were prepared by Mr Bertram and provided by Mr Mackintosh to Mr and Mrs Selig contained some odd recommendations having regard to the execution of the Wynnum contracts on 9 December 2004, unless Mr Mackintosh had not given up hope of selling further units in excess of those for which contracts had been entered into. That is probably the case, because otherwise Mr Mackintosh really had no interest in meeting Mr and Mrs Selig. However, the further strategy papers and the later Statement of Advice that were given after 9 December 2004, which made reference to the purchase of units at Wynnum indicate, in my opinion, that all of the parties, being Mr and Mrs Selig, Mr Mackintosh and Mr Bertram, understood that the purchase of the Wynnum units was conditional upon the plaintiffs also investing in Neovest to obtain sufficient income to enable them to meet the cost of the borrowings on the units that were purchased.
792 On 2 February 2005, Mr Bertram's firm, DBA Financial Designs, prepared a further Cash Flow and Debt Management Strategy Paper for Mr Mackintosh to provide to Mr and Mrs Selig. Mr Bertram was aware of the strategy that would be included in the paper and I accept his evidence which is set out in detail at paragraph [436] of these reasons.
793 On 22 February 2005, following upon an advertisement placed in the Sunshine Coast Daily on 18 February and 19 February 2005, Norton Capital and Wealthsure, and Mr Bertram, made a presentation at the Mooloolaba Yacht Club promoting Neovest for the purpose of inducing those present at the presentation to invest in Neovest.
794 On 2 March 2005, Neovest's first prospectus expired.
795 On 15 March 2005, the plaintiffs obtained two loans from the National Mortgage Company through the Adelaide Bank in the sum of $399,000 and $560,000 for the purpose of settling on the Wynnum contracts. The first loan was secured over unit 12, and the second over unit 3; the two apartments owned by Mr and Mrs Selig in the Sea Aura apartment complex. The interest rate on the total sum of $959,000 was 8.19%.
796 On 29 March 2005, the Neovest directors signed the second prospectus, which was registered with ASIC on 31 March 2005. In that prospectus it was disclosed that $4,423,260 had been raised to 31 December 2004 pursuant to the first prospectus.
797 The prospectus, in my opinion, misstated the financial position of Neo Lido and Neolido Holdings. At the time the prospectus was registered, those companies were probably insolvent.
798 I accept Ms Perovich's evidence that prior to the registration of the prospectus, the directors took advice form Ms Steele of NRH who advised the directors on both the contents of the prospectus including the arrangements that had been made with Mr Norton and Norton Capital.
799 I also accept Ms Perovich's evidence that the second prospectus was carefully prepared and thoroughly vetted by Mr Norton and Norton Capital, and many of the statements in the second prospectus were as a result of requirements that Mr Norton had insisted upon.
800 The second prospectus omitted a number of matters which would have impacted upon the solvency of Neo Lido and Neolido Holdings, which were relevant for the purpose of determining whether Neovest could recover its advances to Neo Lido and Neolido Holdings. The matters omitted are identified earlier in these reasons.
801 I find that the second prospectus did not include all of the matters referred to in paragraph [476] of these reasons.
802 The second prospectus also misstated the agreement with Norton Capital, which was to pay Norton Capital 13% commission, and also failed to disclose that Norton Capital was not an independent entity.
803 The second prospectus also failed to disclose the appointment of a receiver by 3 Point Finance, an act that Ms Perovich herself admitted was a serious matter affecting Neo Lido and Neolido Holdings and their creditors, who she said had become "very concerned". The appointment of a receiver to the very entities to which Neovest would be loaning monies was a material matter of which investors ought to have been informed via the prospectus.
804 Very shortly after the prospectus was registered, Neo Lido received a demand from one of its bankers in the sum of $2,093,000.
805 I reject Ms Perovich's evidence that the directors' bank guarantee covered that demand and any loss would have been occasioned by the directors.
806 That matter was relevant because the directors were said to have given guarantees in relation to the performance by Neo Lido and Neolido Holdings of their obligations.
807 A few days after the prospectus was issued, Suncorp also issued a demand but this time in the sum of $5.2 million.
808 On 18 April 2005, at a meeting with Mr and Mrs Selig, Mr Mackintosh provided them with a further Cash Flow and Debt Management Strategy Paper, which had been prepared by Mr Bertram. That document recommended two distinct strategies for Mr and Mrs Selig - either to invest $350,000 into Neovest, or $450,000 into Neovest. In the Executive Summary, the recommendation was to "Purchase $400,000 into Neovest". Any advice that included advice that Mr and Mrs Selig invest in Neovest should not have been given.
809 Nor should Mr and Mrs Selig ever have been advised to purchase four investment properties as the Strategy Paper suggested. Nor should they have been advised to invest in a margin loan.
810 The advice contained in the fourth Cash Flow and Debt Management Strategy Paper, which was similar to the advice that had been included in the three previous Cash Flow and Debt Management Strategy Papers, was not appropriately researched and there was not a reasonable basis for the giving of the advice.
811 On the same day, Mr Bertram met with Mr and Mrs Selig and provided them with a Statement of Advice: Limited Advice dated the same day. In that advice, Mr Bertram recommended Mr and Mrs Selig borrow $450,000, to invest by purchasing $450,000 of Foundation redeemable preference shares in Neovest in their joint names. The Statement of Advice that was given Mr and Mrs Selig on 18 April 2005, like the Statement of Advice that had been given to them on 29 November 2004, contained recommendations that were inappropriate for their circumstances and the recommendations were based upon incomplete research and a misunderstanding of the Neovest prospectus.
812 The advice contained in the Statement of Advice should not have been given.
813 In particular, it contained inaccurate information in the following respects. It stated:
The following strategies are considered suitable for your needs because:
Borrowing $450,000 from your Line of Credit will provide you with initial investment funds of $450,000.
Due to your income requirements, no other fund has been recommended apart from Neovest Foundation Shares which pay 20% return per annum - paid monthly.
This strategy was recommended as it provides you with a diversification across both asset classes and fund managers required and at the same time provides the gearing level appropriate to your income position. Access to funds is also available if required.
814 That advice was not appropriate for Mr and Mrs Selig. The advice was not correct. The advice had not been researched. The advice should not have been given.
815 The advice put Mr and Mrs Selig at substantial risk.
816 The recommendation that the purchase be in their joint names was to balance the benefits of tax deductions against both incomes "as well as reducing potential capital gains tax against just one income in the future".
817 There was no possibility of any capital gains tax payable on any investment in Neovest because the shares were only redeemable at the value at which they had been purchased.
818 At the time of that meeting, Mr Bertram had seen a copy of the second prospectus which he gave to Mr and Mrs Selig. He had only summarily read the first prospectus. He told them that the second prospectus was a new prospectus that had been issued by Neovest, that was in similar terms to the previous prospectus, which had been provided to them. He told them that the second prospectus contained more detailed information about the product and risks associated with an investment in Neovest. He told them that the Norton Capital research, which he had previously provided to them, was still valid.
819 The Statement of Advice, of Mr Bertram's own admission, was defective and was not appropriate for the investment of which Mr and Mrs Selig made. The Statement of Advice was simply a document that was available at the time. Mr Bertram did not tell Mr and Mrs Selig how Neovest shares could be redeemed, or whether Neovest in fact would be able to redeem them. He did not discuss with Mr and Mrs Selig how commissions would be paid out of monies raised by Neovest. He did not tell them how Neovest might be able to redeem the preference shares after 12 months, even though he had noted that the risk level was high.
820 He did not tell Mr and Mrs Selig that there was no guarantee that dividends would be paid to shareholders or that shares would be redeemed.
821 A competent and prudent financial planner would not ordinarily recommend an investment of shares in a company that was not listed, had no secondary market and had no previous financial record, as being suitable for a person who had never invested in shares before.
822 The advice that Mr Bertram gave to Mr and Mrs Selig was contrary to the directions Mr Pawski had given in his email of 16 September 2004, because it advised Mr and Mrs Selig to use borrowed funds to invest in Neovest, and it advised them to invest more than 15% of their net assets excluding the family residence. Mr Bertram did not tell Mr and Mrs Selig that his advice was contrary to the instruction he had been given by Wealthsure.
823 Mr Selig said that he acted on the advice given by Mr Bertram and I accept his evidence in that regard.
824 It was Mr Bertram's continuing advice between September 2004 and 18 April 1005 that Mr and Mrs Selig should borrow money to invest in Neovest for the purpose of being able to meet loan commitments on monies borrowed for the purchase of units to be marketed and marketed by Mr Mackintosh.
825 When Mr Bertram gave his advice to Mr and Mrs Selig, Neo Lido, Neolido Holdings and the Neolido Group was insolvent. That being the case, if Neovest was to lend money to those entities, which was the sole purpose of the Neovest capital raising, then the Neovest loans to Neo Lido, Neolido Holdings and the Neolido Group would be irrecoverable.
826 I accept Mr Robinson's evidence in relation to the financial position of the Neolido Group, Neo Lido and Neolido Holdings.
827 On 22 April 2005, Mr and Mrs Selig withdrew $450,000 from the RX02 account which they invested in Neovest and, on the same day, Neovest issued the Share Certificate recording the purchase and issue of 450,000 Foundation Shares paid to $1.
828 Mr and Mrs Selig received only one dividend, which was on 7 May 2005, for the sum of $7,500.
829 On 13 May 2005, ASIC issued a notice to Neovest under s 30 of the ASIC Act. By 17 May 2005, over $13 million worth of redeemable preference shares had been sold by Neovest.
830 The commission payable to Mr Norton and Norton Capital was $1.69 million. Wealthsure and its advisers were to receive 6% of the capital raised, which would have been $780,000. Of that 6%, Wealthsure's advisers received two-thirds, being $520,000.
831 Although ASIC issued an interim order on 17 May 2005 directing Neovest not to offer, issue, sell or transfer any securities in Neovest under the prospectus of 29 March 2005, and issued further orders of the same kind between then and October 2005, that was of no assistance to Mr and Mrs Selig, whose investment had already been made.
832 They must have been aware, as early as 7 June 2005, that they were unlikely to receive dividends in the short future in relation to their investment in Neovest. However, they were advised by Mr Spencer and by Wealthsure that the position would be rectified. Contrary to that advice, there was never any prospect that the position could be rectified because, in fact, Mr and Mrs Selig's investment in Neovest was lost at the date the investment was made and the funds were provided by Neovest to Neo Lido, Neolido Holdings and the Neolido Group pursuant to the facility.