INSIGHTS: The Storm has passed!

April 27, 2018

Author

On 22 March 2018, Justice Dowsett of the Federal Court in Queensland imposed civil penalties of $70,000 each on Mr and Mrs Cassimatis (Mr and Mrs C), the directors of Storm Financial and disqualified them from managing corporations for 7 years: ASIC v Cassimatis (No 9) [2018] FCA 385.

Justice Edelman had previously found they had breached their duties as directors under section 180(1) of the Corporations Act 2001 (Cth) (the Act) in a hearing which determined the liability issues: ASIC v Cassimatis (No 8) [2016] FCA 1023.

The Borrowing Model

The conduct in question involved the directors allowing Storm to provide financial advice to a group of investors that was inappropriate for their circumstances.

The Storm model of advice, created by Mr and Mrs C, involved:

  • clients borrowing against their homes and using those loan funds to invest in funds based on the ASX300 (a market capitalisation weighted index made up of the largest 300 companies listed on the Australian Securities Exchange).
  • clients taking out a home loan and a margin loan in order to purchase units in index funds and pay Storm’s fees.
  • encouraging clients to take ‘step’ investments over time.

In late 2008 and early 2009, many of Storm’s clients were in negative equity positions, sustaining significant losses.

Breach of Best Interests Duty

Edelman J found that the breach of directors duties by Mr and Mrs C caused or permitted Storm to breach sections 945A(1)(b) and (c) [now repealed  and replaced with the new Part 7.7A containing the best interest duty] and sections 912A(1)(a) and (c) [general obligations of an AFS Licensee].

In particular, the contraventions of section 945A(1) occurred as Storm:

  • failed to give consideration to the subject matter of the advice.
  • did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances.
  • provided financial advice which was not appropriate to the investors having regard to the obligations above.

In this regard, the sample group of 11 investors identified in the legal proceedings had 5 key characteristics indicating that they were financially vulnerable, namely that they were:

  • over 50 years old.
  • retired or close to retirement.
  • had few assets other than a family home.
  • had little income.
  • had little or no prospect of rebuilding their financial position in the event of a significant loss.

It should be noted that under the new Part 7.7A containing the best interest duty, an AFS Licensee has an obligation to comply with the ‘best interests’ duty and to identify:

  • the subject matter of the advice sought by the client (whether explicitly or implicitly); and
  • the objectives, financial situation and needs of the client that would reasonably be considered relevant to advice sought on that subject matter (client’s relevant circumstances).

Penalties

As Edelman J was appointed to the High Court, Justice Dowsett had to deal with the issues of penalties, disqualification and restraining orders.

Dowsett J refused an application by ASIC seeking a direction under section 50(1) of the Evidence Act 1995 (Cth) that it be able to give evidence from a database in summary form. His Honour held that the evidence was not relevant and should not be admitted.

His Honour also refused an application by Mr and Mrs C seeking to withdraw an admission in their defence that Storm had provided advice to Mr and Mrs Madden. His Honour stressed the need for finality in litigation and commented that he doubted that a withdrawal of the admission would have any material bearing on penalties or other relief.

Dowsett J made declarations under section 1317E as to the breaches by Mr and Mrs C of section 180 (1) of the Act so as to cause or permit Storm to contravene sections 945A(1)(b) and (c) and section 912A(1) (a) and (c) of the Act. His Honour commented that he regarded the breaches of director’s duties as serious and that the extent of control which Mr and Mrs C had over the affairs of Storm was a weighty consideration in determining penalties.

Dowsett J said:

“It is essential that any significant infringement of the law be properly identified and condemned. It is more important that offenders and potential offenders be deterred from similar misconduct.”

His Honour reviewed the various decisions imposing penalties and/or disqualification on directors and officers of AWB and James Hardie.

His Honour:

  • concluded that the conduct of Mr and Mrs C was more serious than that of Mr Shafron (General Counsel of James Hardie) and Mr Lindberg (CEO of AWB) as it continued over a long period of time, was initiated by them and executed under their supervision.
  • adopted the figures suggested by ASIC and imposed pecuniary penalties of $70,000 each on Mr and Mrs C and a 7 year disqualification from managing corporations commencing on the date of publication of his reasons. The maximum penalty for a breach of directors’ duties under section 180 is $200,000.
  • observed that whilst the conduct of Mr and Mrs C was not dishonest, their contraventions were serious.
  • noted the delay between the commencement of the proceedings in 2010 and the hearing in May/June 2016 which was partly due to ASIC’s difficulties in pleading its case. Dowsett J declined to grant the injunctive relief sought by ASIC.

The Orders

Costs

As to costs, Dowsett J ordered that:

  • Mr and Mrs C pay the costs of ASIC except to the extent that such costs have been dealt with by other orders and excluding costs relating solely to one, or any combination of, the following issues (Mr and Mrs C’s issues):
    • the allegation of criminal conduct by Storm;
    • the allegation that Mr Bleckley, Mr Laymore, Mr and Mrs Sodegold, Mr Jones and Mr McConnell were retail investors;
    • the allegation that Storm had contravened section 945A(1)(a); and
    • the allegation that Storm had contravened section 1041E.
  • ASIC pay the costs of Mr and Mrs C in relation to Mr and Mrs C’s issues.

Declaration and Penalty

ASIC sought that the following orders be made against Mr and Mrs C:

  • a declaration that Mr and Mrs Cassimatis had breached their duties pursuant to section180 of the Act;
  • a pecuniary penalty of $70,000 each;
  • disqualification from managing a corporation for 7 years each; and
  • an injunction from holding an Australian Financial Services Licence (AFSL) for 10 years each.

The Court ordered each of the declaration, the pecuniary penalty and disqualification. However, the Court declined to issue an injunction on the basis that there was nothing unlawful in seeking an AFS Licence and relevant the statutory provisions only authorised the Court to issue an injunction to restrain unlawful conduct.

Lessons

The Storm case demonstrates the scope of penalties a Court can order for a breach of directors’ duties and the factors the Court will considered in determining the amount of any fine or disqualification.

The seriousness of the misconduct is not mitigated by the mere fact that the Company itself did not suffer any actual loss as a result of the directors’ action.

This decision marks the end of ASIC’s Storm-related litigation.

For further advice please contact our Financial Services Principal Michael Bracken and Consultant Catherine Osborne.


Disclaimer: This information is current as of April 2018. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.