Stoyef v Masu Financial Management Pty Ltd

Paragraphs 38 to 44 and the legislation 8 The existing amended statement of claim and the proposed further amended statement of claim plead several causes of action, but only that pleaded in paras 38 to 44 is of present concern. 9 Paragraph 38 (all references to paragraphs are references to paragraphs of the proposed further amended statement of claim) pleads that each of the Westpoint Products constituted a "managed investment scheme" within s 9 of the Corporations Act 2001 (Cth) (the Act) by reason of facts pleaded in that paragraph. (I note that in para 2(b) the Westpoint Products are defined as the promissory notes, whereas elsewhere, such as in paras 38 to 44, those promissory notes are said to be managed investment schemes - an inconsistency that should be eliminated. Unfortunately, but I think unavoidably, I will have to use the expression with both meanings in these reasons.) 10 Paragraph 38A pleads that each Westpoint Product had more than 20 investors and, further or alternatively, was promoted by a person or an associate of a person who was, when the Westpoint Product was promoted, in the business of promoting managed investment schemes. This pleading has reference to s 601ED(1) of the Act, and leads to a pleading in para 38B that each Westpoint Product was therefore required by s 601ED to be registered with the Australian Securities and Investments Commission (ASIC). 11 Section 601ED(5) of the Act prohibits a person from operating a managed investment scheme that is required to be registered unless it is registered. Paragraph 38C pleads that Westpoint and the Westpoint entities were within that prohibition. 12 Paragraph 38D pleads that since none of the Westpoint Products were registered with ASIC, they were liable to be wound up pursuant to s 601EE of the Act. Section 601EE provides that if a person operates a managed investment scheme in contravention of s 601ED(5), ASIC, the person operating the scheme or a member of the scheme may apply to the Court to have the scheme wound up. 13 It follows, according to para 39, that each investment in each Westpoint Product was an interest in a managed investment scheme, and was therefore a "financial product" within the meaning of s 764A of the Act. Section 764A is the first section in Subdiv C of Div 3 of Pt 7.1 of the Act. It includes within the expression "financial product", relevantly, an interest in a managed investment scheme that is not a registered scheme (para (ba) of s 764A(1)). 14 It further follows, according to para 40, that advice given by Masu, by itself and through its representatives, to invest in Westpoint Products constituted "financial product advice" within the meaning of s 766B of the Act. Section 766B provides that financial product advice is, relevantly, a recommendation or a statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product, or class of financial products, or an interest in either, or could reasonably be regarded as being intended to have such an influence. 15 Division 2 of Pt 7.9 deals with "Product Disclosure Statements". I will use the abbreviation "PDS". Of present concern are Subdivs A, B and C of Div 2. Within Subdiv A (which is headed "Preliminary"), s 1011B defines "regulated person" in relation to a financial product to mean, relevantly, "an issuer of the financial product" or "any financial services licensee". The issuer of the Westpoint Products was Westpoint or a Westpoint entity (I will continue to refer to both possibilities as the pleading does, although my understanding is that the issuers were the five Westpoint entities, not Westpoint itself). According to para 6(e) of the proposed further amended statement of claim, Masu was the holder of an Australian financial services licence, that is to say, was a financial services licensee. Accordingly, Masu, as well as Westpoint or the Westpoint entities, was subject to such obligations as the Act imposed upon a "regulated person" in relation to the Westpoint Products. 16 Another definition within s 1011B is that of "responsible person". That expression is defined in relation to a PDS as having the meaning given by s 1013A(3) of the Act. Subsection 1013A(3) defines "responsible person" as the person who, or on whose behalf, a PDS for a financial product is required to be prepared. 17 The distinction between a "regulated person" and a "responsible person" in relation to the Westpoint Products is important. In substance, Mr Stoyef's pleaded case is that, for reasons that will appear, Masu, as a "regulated person", was obliged to give him and the group members a PDS that Westpoint or the relevant Westpoint entity, as the "responsible person", was obliged to prepare. 18 Subdivision B within Div 2 of Pt 7.9 is headed "Requirements for a Product Disclosure Statement to be given". 19 Sections 1012A, 1012B and 1012C within Subdiv B, deal with three situations in which an obligation to give a PDS arises. Mr Stoyef relies only on s 1012A. 20 Section 1012A, the first section within Subdivision B, announces in subs (1) that s 1012A(1) sets out the situations in which giving financial product advice that consists of, or includes, a recommendation to acquire a financial product gives rise to an obligation on a regulated person to give another person a PDS for the product. It is the giving of financial product advice of that kind that is pleaded as having given rise to an obligation on Masu to give Mr Stoyef and the group members a PDS for the Westpoint Products. Subsection 1012A(3) provides: A regulated person must give a person a Product Disclosure Statement for a financial product if: (a) the regulated person provides financial product advice to the person that consists of, or includes, a recommendation that the person acquire the financial product; and (b) the person would acquire the financial product by way of: (i) the issue of the product to the person (rather than the transfer of the product to the person); or (ii) the transfer of the product to the person in circumstances described in subsection 1012C(5), (6) or (8) (secondary sales that require a Product Disclosure Statement); and (c) the financial product advice is provided to the client as a retail client; and (d) the financial product advice is personal advice to the client. The Product Disclosure Statement must be given at or before the time when the regulated person provides the advice and must be given in accordance with this Division. It will be noted that the obligation imposed by s 1012A(3) is absolute. It is para 41 of the proposed further amended statement of claim that pleads that pursuant to this provision, Masu and its authorised representatives were obliged to give a PDS to Mr Stoyef and group members. 21 Paragraph 42 pleads that Masu, by itself and its representatives, recommended that Mr Stoyef and the group members acquire one or more of the Westpoint Products, but in breach of s 1012A did not give him or them a PDS. 22 Paragraph 42A pleads that "on the assumption that the Westpoint Products were managed investment schemes that were required to be registered", the PDS required would have contained statements that, in summary, the particular Westpoint Product was a managed investment scheme required to be registered with ASIC but was not so registered and was therefore at significant risk of being wound up. 23 According to para 43, Mr Stoyef and the group members have suffered loss and damage because they invested in one or more of the Westpoint Products but will receive little or no return on their investments as a result of Westpoint and the Westpoint entities being placed into external administration and/or having had a controller appointed, yet they would not so have invested if they had been given a PDS that contained the matters referred to at [22] above. 24 Finally, in para 44 it is pleaded that Mr Stoyef and the group members are entitled to recover the loss and damage suffered by them pursuant to s 1022B of the Act. Subsection 1022B(1) provides, relevantly: This section [s 1022B] applies in the following situations: (a) a person: (i) is required by a provision of this Part to give another person (the client) a Product Disclosure Statement or … (the required disclosure document or statement); and (ii) does not give ( ... ) the client anything purporting to be the required disclosure document or statement by the time they are required to do so; or ... [emphasis in original] The case of Mr Stoyef and the group members is that para (a) applies because Masu was required by s 1012A(3) to give them a PDS but did not give them anything purporting to be the required PDS. 25 Section 1022B(2) provides, relevantly: In a situation to which this section [s 1022B] applies, if a person suffers loss or damage: (a) if paragraph (1)(a) applies - because the client was not given the disclosure document or statement that they should have been given; or ... the person may recover the amount of the loss or damage by action against the, or a, liable person ... 26 It is now necessary to refer to Subdiv C of Div 2 of Pt 7.9. Subdivision C is headed "Preparation and content of Product Disclosure Statements". Section 1013A, the first section within Subdivision C, provides, relevantly, that a PDS that is required to be given by s 1012A "must be a document that has been prepared by the issuer of the financial product". In the circumstances of the present case, the issuer is Westpoint or the relevant Westpoint entity. Subsection 1013A(3) provides that the person who, or on whose behalf, a PDS for a financial product is required to be prepared is, in Div 2, referred to as the "responsible person" for the financial product. 27 A dispute between the parties emerges from s 1013C. That section deals with the required content of a PDS. Subsection (1) of s 1013C provides that a PDS must include, relevantly, statements and information required by s 1013D and the information required by s 1013E. Subsection 1013D(1) provides, relevantly, that a PDS must include information about any significant risks associated with holding the financial product. Section 1013E provides, relevantly, that a PDS "must also contain any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product". Mr Stoyef pleads in para 42A (referred to at [22] above) that a PDS in the present case would have referred at least to the fact that each of the Westpoint Products was a managed investment scheme required to be registered with ASIC but not registered with it and therefore liable to be wound up, and in para 43 (referred to at [23] above) that he and the group members, if they had been given such a PDS, would not have invested in the Westpoint Products. 28 Masu, however, refers to s 1013C(2) of the Act which provides, relevantly: The information required by sections 1013D and 1013E need only be included in the Product Disclosure Statement to the extent to which it is actually known to: (a) the responsible person; and (b) ...; and (c) ...; and (d) any person: (i) named in the Statement as a financial services licensee providing services in relation to the issue or sale of the financial product; and (ii) who participated in any way in the preparation of the Statement; and (e) ...; and (f) ...; and (g) if any of the above persons is a body corporate - any director of that body corporate. 29 In its written submissions Masu submitted that the pleading was defective for failing to plead that Masu had had actual knowledge of the facts that the Westpoint Product in question was required to be registered, was not in fact registered, and was in consequence liable to be wound up. On the hearing, however, I think counsel for Masu accepted, as I hold to be correct, that it is the issuer (Westpoint or the relevant Westpoint entity) (or any of its directors), whose knowledge is relevant. Accordingly, on the hearing Masu's submission became a submission that the pleading is deficient for failing to allege actual knowledge on the part of the issuer.

Consideration 30 As noted in the last paragraph, Masu's primary attack on paras 38 to 44 was based on a misconception, but I will deal with Masu's case as it took shape on the hearing. 31 Paragraph 42A does not plead facts showing why the PDS, that s 1012A required Masu to give to Mr Stoyef and the other group members, would have contained at least the statements and information referred to in that paragraph (this is not the subject of Masu's complaint). Paragraph 42A does not refer to s 1013A, 1013C, 1013D or 1013E. 32 Mr Stoyef is not required to plead the evidence by which he will attempt to prove that the hypothetical PDS would, as a matter of fact, have contained the statements and information identified in para 42A. Consistently with the pleading, Mr Stoyef will not rely on the operation of the sections mentioned alone. Indeed, if his pleading had referred to them alone, it would certainly have been defective because it would have left open the possibility that the issuer would not have prepared each PDS as required by law. 33 In pleading what the PDS would as a matter of fact have contained Mr Stoyef necessarily pleads what the issuer of the PDS knew (see s 1013C(2)). Mr Stoyef could not prove that the PDS proposed "would have contained, at least, the … statements and information [referred to]" without proving that the issuer knew that the Westpoint Products were managed investment schemes, that they were required to be registered but were not registered, and that they were therefore vulnerable to being wound up. 34 I do not think that Mr Stoyef was required to plead expressly that Westpoint or the relevant Westpoint entity that issued the Westpoint Product in question had actual knowledge of the matters referred to in para 42A as Masu contends. The pleading of what the PDS would as a matter of fact have contained is an adequate pleading of actual knowledge of those matters on the part of the issuer. Accordingly, on the main issue that was debated on the hearing, Mr Stoyef succeeds and Masu fails. 35 Mr Stoyef makes a further answer to Masu's attack on his pleading. He submits that s 1013C(2) operates as an exception to the general obligation created by ss 1013A(1), 1013C(1), 1013D(1) and 1013E. According to his submission, the words "Subject to ... subsection 1013C(2)," at the beginning of ss 1013D(1) and "Subject to subsection 1013C(2)" at the beginning of s 1013E indicate this. 36 Mr Stoyef's further answer would require consideration if Mr Stoyef relied exclusively on the terms of the Act, as distinct from relying simply on what would, as a matter of fact, have been contained in the contemplated PDS. The question that would be raised is whether, on the proper construction of the Act, the client of the financial services licensee would bear the onus of pleading and proving actual knowledge of the responsible person (or of any of its directors) referred to in s 1013C(2), or whether the financial services licensee (being the "regulated person" in this case) would bear the onus of pleading and proving by way of defence that none of them had that knowledge. 37 In view of my holding that Mr Stoyef does plead (implicitly) actual knowledge on the part of the issuer, I do not need to resolve this question, but since it was the subject of detailed submissions, I make the following observations in relation to it. 38 If I had been required to resolve the question, I would have held that it was for Mr Stoyef to plead that the issuer of each PDS had actual knowledge of the matters mentioned in ss 1013D and 1013E, that is to say, I would have held that s 1013C(2) does not operate as an exception but as going to delimit the extent of the obligation created by ss 1013D and 1013E. To my mind, the opening words "Subject to … subsection 1013C(2)" in s 1013D and "Subject to subsection 1013C(2)" in s 1013E suggest that this is so, as do the opening two lines of s 1013C(2) (set out at [28] above). 39 It will be recalled (see [24] and [25] above) that, pursuant to s 1022B(1)(a), s 1022B applies to the situation where a person is required to give another person "a" PDS, but does not give that other person "the required product disclosure statement" (my emphasis). Paragraph (a) of s 1022B(2) provides for the recovery of loss or damage if a person suffers loss or damage because the person was "not given the disclosure document or statement that they should have been given" (my emphasis). Mr Stoyef draws attention to the distinction between paras (a) and (c) of s 1022B(1). Para (a) is a "no PDS" case whereas para (c) provides for the situation in which a PDS is given that is defective - a "deficient PDS" case. Thus, Mr Stoyef distinguishes the present case from one in which a PDS was given which omitted to draw attention to the unregistered status of the Westpoint Products and their consequent vulnerability to being wound up under s 601EE. Mr Stoyef's argument is that in a "no PDS" case like the present one, para (a) in each of subss 1022B(1) and 1022B(2) refers only to a PDS irrespective of its content. Masu, on the other hand, argues that it also refers to the required content of the particular PDS in question. 40 Had it been necessary to resolve this question, I would have held that the words quoted above from the two paras (a) refer to the particular PDS that the Act required to be given, and therefore to its required contents. That PDS must contain the information required by ss 1013D and 1013E subject to s 1013C(2). It would be for Mr Stoyef to plead and prove the extent of the issuer's actual knowledge of the matters mentioned in ss 1013D and 1013E. 41 As noted at [32] above, a mere pleading of the statutory provisions and of actual knowledge on the part of the issuer would be deficient: what would be missing would be an allegation that the issuer would as a matter of fact have included in the hypothetical PDS that which the statutory provisions required, being that which was within the actual knowledge of the issuer. 42 Masu referred to Shipley v Masu Financial Services Pty Ltd [2008] NSWSC 252, but that case is distinguishable for two reasons. The first reason is that Hammerschlag J noted (at [49]) that the argument before him appeared to proceed on the basis that Masu was a "responsible person" in relation to the Westpoint Products because it was within the notion of "either the issuer of the financial product or the person making the offer to sell the financial product". In the present case, however, Mr Stoyef relies exclusively on s 1012A on the basis that Masu provided financial product advice to Mr Stoyef and the group members, that consisted of or included a recommendation that they acquire the Westpoint Products. Accordingly, the only "responsible person" in the present case was the issuer of the Westpoint Product relevant to the particular investor, being either Westpoint or a Westpoint entity. The second reason is that the statement of claim in that case pleaded what a "proper" PDS of the kind that the defendant or its authorised representatives was required to give to the plaintiffs would have contained. In the present case, the relevant paragraphs of the further amended statement of claim do not use the word "proper" to qualify the PDS that was required to be given. 43 .There are, however, in my opinion, two pleading defects which Masu has identified. First, the words "at least" in para 42A are objectionable. Mr Curtin of counsel for Masu, submitted that his client is entitled to know now, rather than at trial, what is all of the particular information that Mr Stoyef says would have been included in the PDS which would have altered his and the group members' minds, because his client would like to investigate, or at least may choose to investigate, the question whether that information was known to "the responsible person" referred to in s 1013C(2)(a). 44 I agree. The proposed further amended statement of claim should omit the words "at least". If Mr Stoyef later wishes to allege that the hypothetical PDS would have contained further information that would have caused him and the group members not to invest, he will need to seek leave to amend further at that time. 45 The second defect also concerns para 42A. It is surely not intended to assert that the PDS given to, say, Mr Stoyef would have referred to "each of the Westpoint Products". The expression "each of the Westpoint Products" occurs throughout para 42A. Surely the intention is to allege that the PDS would have stated that the particular Westpoint product which was being recommended and in which the particular client invested "was a managed investment scheme …", and so on. 46 The proposed further amended statement of claim should be amended to make this clear. 47 In para 12 of his written submissions, counsel for Masu raises a further alleged defect of the pleading in so far as it relates to Mr Stoyef, but this was not explored in oral submissions, and it is difficult for me to resolve it. No doubt Mr Stoyef's legal advisers will give attention to the matter if they see any substance in it.

Conclusion 48 For the above reasons: · Mr Stoyef should have leave to file and serve the proposed further amended application and the proposed further amended statement of claim (subject to his making the amendments referred to above); and · Masu's motion should be dismissed. 49 There will be a direction that the parties attempt to agree on the form of the orders to be made, to which will be attached the form of the proposed documents to be filed. 50 If necessary, I will hear argument on costs, but my present view is that since Mr Stoyef succeeded on the main issue that was debated, but Masu succeeded on some minor issues, Masu should be ordered to pay 60% of Mr Stoyef's costs of the two motions. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate: Dated: 13 June 2008 Counsel for the Applicant: MJ Slattery QC and M Dicker

Solicitor for the Applicant: Australian Securities and Investments Commission

Solicitor for the Respondent: Thomson Playford Lawyers