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[2012] NSWSC 1276
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In the matter of Idylic Solutions Pty Ltd - Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 (24 October 2012)
Last Updated: 10 January 2013
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Case Title:
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In the matter of Idylic Solutions Pty Ltd -
Australian Securities and Investments Commission v Hobbs |
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Medium Neutral Citation:
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Hearing Date(s):
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4-6, 9-13, 16, 17, 19, 23-27 & 30 July, 3,
8-10, 14-16, 21-24 & 29 August, 5-6, 10,12 September 2012 |
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Decision Date:
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Jurisdiction:
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Equity Division - Corporations List |
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Before:
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Decision:
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Judgment for plaintiff against first, third,
fourth and eighth defendants on some or all of the claims made against them.
Orders to
be made following hearing as to penalty. |
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Catchwords:
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CORPORATIONS - whether various defendants acted as
de facto or shadow directors in relation to various of impugned corporations -
directors and officers duties - duty of care and diligence - duty to act in good
faith and for a proper purpose - duty not to make
improper use of position -
whether officers were 'involved' in contraventions by others - Corporations Act
2001 (Cth) ss 79, 180(1), 181 and 182AGENCY - whether illegal acts were
within scope of agency - whether independent contractors were acting as agents -
consideration
of the scope of authority - whether scope of authority limited to
the express terms of a contractual document CORPORATIONS - financial
services and product - whether business confined to provision of financial
education or extended to provision
of a financial product or financial product
advice - whether business required a financial services licence - Corporations
Act 2001 (Cth) s 911ACORPORATIONS - managed investment scheme - whether
there was contribution of money or money's worth in consideration for an
interest
in the benefits produced by the scheme - whether scheme was required to
be registered - Corporations Act 2001(Cth) s 601ED(5) MISLEADING AND
DECEPTIVE CONDUCT AND FALSE STATEMENT - by directors and officers - by various
of the corporate administrators of the
various investment funds - whether would
lead recipient into error - relevance of contemporaneous disclaimers -
Corporations Act 2001 (Cth) ss 1041E, 1041G and 1041H - Australian Securities
and Investments Commission Act 2001 (Cth) ss 12DA, 12DB and 12DF
EVIDENCE - civil penalty proceedings - whether Jones v Dunkel inferences
can be drawn where defendant fails to call particular witness
in a civil penalty
proceeding |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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J Anderson et al, The New Law of Evidence (2nd ed,
2009) Austin and Black's Annotations to the Corporations Act (LexisNexis
Butterworths) H Bennett and G A Broe, "The civil standard of proof and the
"test" in Briginshaw: Is there a neurological basis to being "comfortably
satisfied" (2012) 86 ALJ 258S G Coroneo, The Australian Consumer Law
(2011) G E Dal Pont, Law of Agency (2nd ed, 2008) Professor P Finn, "The
Fiduciary Principle", in Equity Fiduciaries and Trusts, TG Youdan (ed)
(1989)Ford's Principles of Corporations
Law R Meagher, D Heydon and M
Leeming, Meagher, Gummow & Lehane's Equity Doctrines & Remedies (4th ed,
2002) S Odgers, Uniform Evidence Law (10th ed, 2012) Ritchie's Commentary
on the Uniform Civil Procedure RulesW A Seavey "The Rationale of Agency"
(1919-1920) 29 Yale Law Journal 859P Watts and F M B Reynolds, Bowstead and
Reynolds on Agency (19th edn, Sweet & Maxwell, 2010) |
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Category:
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Parties:
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Australian Securities and Investments Commission
(Plaintiff) David John Hobbs (First Defendant) Min Hua Li (Second
Defendant) David John Collard (Third Defendant) Huimin Wu (Fourth
Defendant) Con Koutsoukos (Fifth Defendant) Brian John Wood (Sixth
Defendant) Jimmy Truong (Seventh Defendant) Jacqueline Hobbs (Eighth
Defendant) Idylic Solutions Pty Ltd ACN 121 960 754 (Ninth Defendant) 888
Management Inc (Tenth Defendant) Geneva Financial Ltd (Eleventh
Defendant) Barclaywest Ltd (Twelfth Defendant) Preserved Investment Group
Ltd (Thirteenth Defendant) North Wave Ltd (Fourteenth Defendant) G P
Global Ltd (Fifteenth Defendant) |
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Representation
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J A Halley SC with J R Clarke, A Kuklik
(Plaintiff) |
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- Solicitors:
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Ms G Hayden, Solicitor for Australian Securities
and Investments Commission (Plaintiff) |
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File number(s):
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Publication Restriction:
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JUDGMENT
- HER
HONOUR: This matter, which was listed before me for hearing in the
Corporations List commencing on 4 July 2012, relates to various investment
schemes through which funds were pooled for the purpose of investment into the
offshore wholesale market. In total, more than AU$50,000,000
was invested in
these investment schemes.
- The
Australian Securities and Investment Commission contends that the fourteen
individual investment schemes the subject of these
proceedings constituted
(either collectively or individually) a financial product within the meaning of
Division 3, Part 7.1 of the Corporations Act (2001) (Cth) for the
operation of which an Australian financial services licence was required.
Neither Mr Hobbs, nor any of the corporate
or individual administrators or
operators of the respective investment schemes was (and this is not disputed)
the holder of an Australian
financial services licence.
- ASIC
contends that the individual investment funds (each of which is said to have
utilised, or been derived from, a "white label"
or generic managed investment
scheme developed by the first defendant, Mr David Hobbs, in about 2002), and
everything comprising
the operation of those schemes (such as the sale of FTC
financial education subscriptions and the OEM/KLM process to which I will
shortly refer), collectively formed part of a single managed investment scheme,
the operation of which required compliance with s 601EB of the Corporations
Act.
- ASIC
has referred to the generic scheme or product that it contends was developed by
Mr Hobbs (and that was able to be adapted or
tailored for use by different
corporate administrators) as the "Hobbs scheme" or the "Hobbs financial
product". Mr Hobbs denies that
there is any "Hobbs scheme" or "Hobbs financial
product" (but accepts that there was a financial product or scheme of some kind,
to which he refers as the "Reisinger product"). Where I use those terms in these
reasons it is simply for convenience, as a description
of that which ASIC
contends amounts to an overall scheme or financial product developed and/or
promoted by Mr Hobbs.
Structure of these reasons
- The
issues in the proceedings cover a range of topics and span activities over a
number of years, necessitating a detailed exploration
of the facts. For ease of
reference, I set out below a table of contents in respect of my reasons for
judgment. I have published
these reasons in two parts: the first containing an
overview, introductory matters and the chronology of events, and my findings
as
to credibility of Mr Hobbs and the witnesses called by ASIC; the second as to Ms
Reisinger's evidence, matters relating to authentication
of documents, the
submissions made by Mr and Mrs Hobbs on financial matters and my factual
findings and findings as to the issues
for determination.
CONTENTS
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Structure of these reasons
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Structure of these reasons
Structure of these reasons
Structure of these reasons
[5]
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Overview
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Overview
Overview
Overview
[6]
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Proceedings
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Proceedings
Proceedings
Proceedings
[50]
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Defendants
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Defendants
Defendants
Defendants
[58]
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Schemes
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Schemes
Schemes
Schemes
[122]
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Dramatis Personae
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Dramatis Personae
Dramatis Personae
Dramatis Personae
[130]
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Cadent accounts
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Cadent accounts
Cadent accounts
Cadent accounts
[239]
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Manner in which communications were sent
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Manner in which communications were sent
Manner in which communications were sent
Manner in which communications were sent
[247]
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DVD Seminar
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DVD Seminar
DVD Seminar
DVD Seminar
[253]
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OEM/KLM Process
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OEM/KLM Process
OEM/KLM Process
OEM/KLM Process
[287]
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Examples of scheme documents
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Examples of scheme documents
Examples of scheme documents
Examples of scheme documents
[318]
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Summary as to the position of the Defendants
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Summary as to the position of the Defendants
Summary as to the position of the Defendants
Summary as to the position of the Defendants
[360]
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Mr and Mrs Hobbs
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Mr and Mrs Hobbs
Mr and Mrs Hobbs
[361]
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Ms Wu
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Ms Wu
Ms Wu
[405]
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Mr Collard
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Mr Collard
Mr Collard
[409]
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Status of Wu and Collard Submissions
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Status of Wu and Collard Submissions
Status of Wu and Collard Submissions
[422]
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Summary of findings
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Summary of findings
Summary of findings
Summary of findings
[423]
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Chronology
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Chronology
Chronology
Chronology
[442]
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Pre 1998-1999
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Pre 1998-1999
Pre 1998-1999
[433]
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Events in 2000
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Events in 2000
Events in 2000
[454]
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Events in 2001
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Events in 2001
Events in 2001
[481]
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Events in 2002
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Events in 2002
Events in 2002
[500]
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Events in 2003
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Events in 2003
Events in 2003
[557]
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Events in 2004
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Events in 2004
Events in 2004
[605]
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Events in 2005
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Events in 2005
Events in 2005
[646]
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Events in 2006
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Events in 2006
Events in 2006
[679]
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Events in 2007
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Events in 2007
Events in 2007
[752]
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Events in 2008
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Events in 2008
Events in 2008
[821]
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Credibility of Witnesses
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Credibility of Witnesses
Credibility of Witnesses
Credibility of Witnesses
[830]
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Mr Hobbs
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Mr Hobbs
Mr Hobbs
[831]
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Witnesses Called by ASIC
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Witnesses Called by ASIC
Witnesses Called by ASIC
[944]
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(i) Scheme Administrator
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(i) Scheme Administrator
[946]
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Mr Koutsoukos
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[967]
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Mr Wood
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[1008]
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Mr Truong
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[1020]
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Ms Bi Hong Dong
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[1024]
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(ii) FTC Executives - Mr Diaz
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(ii) FTC Executives - Mr Diaz
[1033]
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(iii) Investors
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(iii) Investors
[1059]
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Mr Richard Blow
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[1064]
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Mr Nicholas Stavropoulos
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[1066]
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Mr Gideon Russell
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[1086]
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Ms Lei Huang
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[1087]
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(iv) Friends/Relatives/Hobbs office personnel
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(iv) Friends/Relatives/Hobbs office personnel
[1111]
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Mr Craig Dent
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[1111]
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Mrs Emma Burnard
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[1117]
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Mrs Suzanne Watson
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[1124]
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Mr Pierre Mitchell
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[1127]
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Mrs Brenda Hobbs
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[1129]
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Mr Grant Clements
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[1133]
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Mr Robert Fitzgerald
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[1159]
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(v) Mr Parsons
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(v) Mr Parsons
[1163]
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(vi) Ms Reisinger
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(vi) Ms Reisinger
[1195]
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Authenticity of New World Holdings documents
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Authenticity of New World Holdings documents
Authenticity of New World Holdings documents
Authenticity of New World Holdings documents
[1258]
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Financial/Accounting Submissions
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Financial/Accounting Submissions
Financial/Accounting Submissions
Financial/Accounting Submissions
[1279]
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Legal Principles
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Legal Principles
Legal Principles
Legal Principles
[1334]
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De facto/shadow directors
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De facto/shadow directors
De facto/shadow directors
[1335]
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Agency
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Agency
Agency
[1344]
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Financial services contraventions
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Financial services contraventions
Financial services contraventions
[1375]
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[1376]
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[1386]
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Misrepresentation contraventions
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Misrepresentation contraventions
Misrepresentation contraventions
[1423]
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Directors' duties
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Directors' duties
Directors' duties
[1476]
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Breach of fiduciary duties
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Breach of fiduciary duties
Breach of fiduciary duties
[1497]
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Aiding and abetting
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Aiding and abetting
Aiding and abetting
[1509]
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Matters raised by Mr Hobbs - relief from liability
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Matters raised by Mr Hobbs - relief from liability
Matters raised by Mr Hobbs - relief from liability
[1514]
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Evidentiary Principles
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Evidentiary Principles
Evidentiary Principles
Evidentiary Principles
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Onus
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Onus
Onus
[1526]
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Jones v Dunkel inferences
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Jones v Dunkel inferences
Jones v Dunkel inferences
[1535]
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Authentication of business records
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Authentication of business records
Authentication of business records
[1551]
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Issues for Determination - Findings
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Issues for Determination - Findings
Issues for Determination - Findings
Issues for Determination - Findings
[1556]
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Findings - the Hobbs companies
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Findings - the Hobbs companies
Findings - the Hobbs companies
[1568]
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Findings - FTC/OEM/KLM
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Findings - FTC/OEM/KLM
Findings - FTC/OEM/KLM
[1661]
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Findings - allegations as to the roles of particular individual
defendants
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Findings - allegations as to the roles of particular individual
defendants
Findings - allegations as to the roles of particular individual
defendants
[1690]
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Findings - Individual schemes
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Findings - Individual schemes
Findings - Individual schemes
[1706]
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Principal Issues for Determination
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Principal Issues for Determination
Principal Issues for Determination
Principal Issues for Determination
[1907]
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"Hobbs scheme" issues
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"Hobbs scheme" issues
"Hobbs scheme" issues
[1908]
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Misrepresentation issues
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Misrepresentation issues
Misrepresentation issues
[2140]
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Direct contraventions
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Direct contraventions
Direct contraventions
[2316]
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Breach of directors' or other duties
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Breach of directors' or other duties
Breach of directors' or other duties
[2347]
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Aiding and Abetting Breaches of Directors' Duties
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Aiding and Abetting Breaches of Directors' Duties
Aiding and Abetting Breaches of Directors' Duties
[2407]
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Breach of fiduciary duties
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Breach of fiduciary duties
Breach of fiduciary duties
[2418]
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Defences/matters pleaded in answer to the claim
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Defences/matters pleaded in answer to the claim
Defences/matters pleaded in answer to the claim
Defences/matters pleaded in answer to the claim
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Limitations defence
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Limitations defence
Limitations defence
[2432]
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[2443]
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Conclusion
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Conclusion
Conclusion
Conclusion
[2477]
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Declarations and Orders sought by ASIC
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Declarations and Orders sought by ASIC
Declarations and Orders sought by ASIC
Declarations and Orders sought by ASIC
[2490]
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Annexure A - ASIC's List of Dramatis Personae
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Annexure A - ASIC's List of Dramatis Personae
Annexure A - ASIC's List of Dramatis Personae
Annexure A - ASIC's List of Dramatis Personae
Annexure A - ASIC's List of Dramatis Personae
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Annexure B - ASIC's Chronology
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Annexure B - ASIC's Chronology
Annexure B - ASIC's Chronology
Annexure B - ASIC's Chronology
Annexure B - ASIC's Chronology
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Annexure C - Aide-memoire re Summary of Schemes (Cadent)
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Annexure C - Aide-memoire re Summary of Schemes (Cadent)
Annexure C - Aide-memoire re Summary of Schemes (Cadent)
Annexure C - Aide-memoire re Summary of Schemes (Cadent)
Annexure C - Aide-memoire re Summary of Schemes (Cadent)
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Annexure D - ASIC's Summary of Principal Issues for
Determination
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Annexure D - ASIC's Summary of Principal Issues for
Determination
Annexure D - ASIC's Summary of Principal Issues for
Determination
Annexure D - ASIC's Summary of Principal Issues for
Determination
Annexure D - ASIC's Summary of Principal Issues for
Determination
Overview
- Investments
in most of the individual schemes were typically made in the name of
international business corporations (IBCs) registered
in offshore jurisdictions
(jurisdictions that Mr Hobbs has himself described, in a seminar he presented in
about 2003 and to which
I will refer throughout as the DVD Seminar, as "privacy
havens", and which were referred to in a Master Fund power point presentation
as
"privacy heavens"), including Anguilla, Vanuatu and the British Virgin Islands.
ASIC contends that for most (though not all) of
the individual schemes falling
under the umbrella of the Hobbs scheme the incorporation of an IBC was a
prerequisite to investment
therein (though even where this requirement applied
to a scheme it seems not always to have been complied with in practice - as,
for
example, with the investment by Mr Earl Conroy in his individual capacity of
funds in the Smart Money Scheme, on the contract
for which Mr Hobbs signed as
introducer or broker).
- While
ASIC does not dispute the fact that moneys were contributed to the respective
funds by way of investment, it contends that the
identity of the particular
investor (as an IBC) was a sham and that the relevant investments were in truth
made not by the IBCs but,
rather, by the individuals (who were retail, not
wholesale, investors) on whose application the IBC in question was incorporated.
In that regard, ASIC points to the fact that the moneys contributed by scheme
members to the individual schemes were (with limited
exceptions) not paid from
an account in the name of the particular IBCs and that, in general, the scheme
agreements were completed
and executed in a manner and form that demonstrated
that the 'investor' or 'scheme member' was the individual rather than the IBC
associated with that individual. (In the alternative, ASIC contends that the
particular IBCs were the alter egos of the individual
investors and/or that the
investment by the IBC was in each case as the relevant individual's agent).
- Two
of the schemes (the Super Save Superannuation Fund and the 888 (Super Save)
Fund) were promoted for investment of superannuation
funds by trustees of
self-managed superannuation funds (SMSFs). In connection with those funds, a
process was put in place (through
an entity incorporated in New Zealand,
Diligence Discovery Ltd) to monitor the investment of the funds and to confirm
to investors
both the receipt of funds and the acquisition with those funds
(once pooled with other investor funds) of US Treasury Bills or Notes.
(I
interpose to note that this exercise seems to have been largely, if not wholly,
an administrative one; limited to relaying to
the investors information received
respectively from the relevant scheme administrators and/or from the US clearing
house reporting
on the acquisition of the US Treasury Notes or T Bills, rather
than the independent verification of that information.) Despite the
assurances
of Mr Hobbs to the contrary, there is no evidence of any independent external
oversight or checking of the investment
process.
- ASIC
contends that Mr Hobbs promoted and offered the Hobbs financial product to
unsophisticated retail investors in Australia on the
basis that it was an
offshore investment into the wholesale market that would enable those investors
to obtain investment benefits
(at a high rate of return) otherwise available
only to wholesale or sophisticated investors and that Mr Hobbs did so through
financial
education seminars and investor meetings (held in various locations in
Australia, including commercial premises in New South Wales,
South Australia and
Victoria, and at private homes in New South Wales) conducted by himself with one
or more others (FTC executives)
and/or by word of mouth through his agents (the
said FTC executives). The FTC executives were persons appointed or approved by
Mr
Hobbs (in his stated capacity as International Sales Manager of Future
Trading Corporation Limited, an IBC incorporated in Vanuatu).
- ASIC
contends that Mr Hobbs recruited the FTC executives (a number of whom were his
relatives or friends) not only to market the sale
of financial education
packages but also to introduce potential investors in Australia and New Zealand
to the investment opportunities
available through particular schemes or funds
(information as to which was provided, nominally at least, by a separate entity
known
as KLM or KLM Enterprises Ltd).
- The
FTC executives who gave evidence in these proceedings appear to have had little
or no formal financial qualifications or training.
ASIC contends that at all
material times each of the FTC executives acted as an agent of Mr Hobbs in
conducting the FTC business
(including the promotion of investments) in
Australia. Mr Hobbs denies that the FTC executives were his agents (but in his
defence
he makes the positive assertion that they were agents of FTC for the
purposes of selling financial education material [24]).
- Broadly
speaking, ASIC contends that the process by which individuals in Australia and
New Zealand were able to gain access to the
opportunity for offshore investment
through the various investment funds the subject of these proceedings involved
one or more of
the steps set out below (not all of which applied, or were
followed, strictly in each particular case). (I set out later extracts
from the
text of the standard communications sent as part of the OEM/KLM process, which
illustrate the formulaic nature of the said
process.)
- For
the most of the individual schemes, the first step was the subscription by a
potential investor to an FTC financial education
package (most commonly through
a "gold" level subscription at a cost of AU$4,000, although there were other
levels of subscription
- silver and platinum), for which the subscriber received
a series of 18 booklets (issued over a 3 year period) on various topics
(including "The Art of Arbitrage", "The ABC of IBCs", "Is Your Money Really in
the Bank", "Debt Restructuring", "Budgeting") as well
as various newsletters and
"newsflashes" (in relation to matters such as international investment frauds or
scams, including warnings
as to "prime bank" scams, Nigerian e-mail scams and,
somewhat ironically, "Ponzi" schemes).
- Some,
at least, of the booklets (which were not particularly sophisticated in form or
content) were written by Mr and Mrs Hobbs. (Mr
Hobbs nevertheless contends that
a number of booklets were provided to him by a US attorney, Mr Howard (Kip)
Becker). The booklets
were printed by Mrs Hobbs' sister (Mrs Ngaire Dent) and
her husband (Mr Craig Dent) at, and sent to the FTC subscribers from, their
home
in Queensland.
- At
least in relation to the 888 (Super Save) Fund, it seems that the requirement
for subscription to FTC may not have been applicable
(Ms Bi Hong Dong's
affidavit at [110] and [115]).
- The
second step was the establishment by an FTC subscriber (and potential investor)
(at a cost of around $3,000) of an IBC in an offshore
jurisdiction (information
as to how to do so having been provided either following a request made
by the potential investor by facsimile to an entity known as OEM Limited
or in some cases by the FTC executive to the potential investor directly.
(In the case of the Super Save and 888 (Super Save) Funds,
investors were
required to set up an SMSF for the purposes of making the
investment.)
- Third,
for those schemes to which the OEM/KLM process applied, there was the issue of a
letter on OEM letterhead to the "administrator"
of the IBC (the administrator
usually being the individual who had subscribed to the FTC educational package
and who had made application
for the IBC) acknowledging receipt of a request for
information as to investment funds and advising of the referral of that request
to another entity (KLM). The issue of letters on OEM/KLM letterhead generally
took place from Mr Hobbs' office in New Zealand (though
in relation to one of
the funds, Integrity Plus, the scheme administrators in New South Wales at one
stage issued the letters themselves).
In New Zealand, the OEM/KLM process was
administered by Mr Hobbs' personal assistant (Mrs Suzanne Watson) and her
daughter (Mrs Emma
Burnard), each of whom gave evidence in the proceedings of
her understanding of the OEM/KLM process (from which it was apparent that
they
were doing little more than following instructions that had been given to them).
- Broadly,
it seems that, before (in some undisclosed fashion) "referring" to KLM the
"request" for information as to investment funds,
Mrs Watson and/or her daughter
had to be satisfied that the investor "qualified" for the investment (ie, that
an IBC had been incorporated
in an "appropriate" offshore jurisdiction and that
there had been an appropriate response to any information sought from the FTC
subscriber in that regard - including that the purpose of the IBC was
"educational").
- There
is no documentation evidencing any referral, as such, of such a request to KLM.
Seemingly, what happened was simply a change
of letterhead for the next step in
the process. Although the fax number for OEM/KLM (which was the same number) had
a UK prefix,
facsimile transmissions to those numbers were diverted by an
internet-based fax service provided by a US company (J2) to Mrs Burnard
at her
email address in New Zealand (the cost of the J2 service being paid by a company
operating from Mr Hobbs' office - Tasman
Business Consultants). Of the funds the
subject of these proceedings, only potential investors in Master Fund, First
Secured Bond
Unit Trust, Covered Strategies, Smart Money, Elite Premier and
Elite Premier Option Two Unit Trust went through the initial OEM fax
process.
- The
fourth step was that, potential investors were provided, by a letter on KLM
letterhead (again generally issued by Mrs Watson/Mrs
Burnard in New Zealand),
with a list (that varied from time to time) of the funds into which investment
could be made (including
a brief description of those funds and a risk profile
in respect of each fund, with a rating from 010 as to the investment risk
associated
with that fund). At least in one instance, where the potential
investor sought to invest in a fund other than those nominated in
the KLM list
of funds provided to her, this was permitted.
- Once
investors selected a particular investment fund, generally documentation was
issued for the acquisition (in the name of the relevant
IBC or the SMSF, as the
case may be) of units in the particular unit trust (the documentation so issued
being a private placement
memorandum for the relevant scheme, watermarked or
embossed with the particular IBC name and an investor number, and a pro forma
agreement to be entered into between the IBC and the corporate administrator of
the particular investment scheme). In some of the
funds, investment was effected
(in some or all instances) through the acquisition of shares in the corporate
administrator of the
scheme (the Enhanced Fund and the Good Value
Fund).
- The
material terms of each scheme memorandum and scheme agreement were in strikingly
similar form. (I set out later in these reasons
extracts from the text of a
typical memorandum and agreement.) ASIC contends that the documents were drafted
by Mr Hobbs or otherwise
supplied by him (or his assistant, Mrs Watson) to the
scheme administrators. Mr Hobbs denies that he drafted or supplied memoranda
or
fund documents to scheme administrators. (I interpose to note that it defies
commonsense to suggest that disparate scheme administrators,
and particularly
scheme administrators with no previous experience in operating investment funds,
would independently have created
documents in such similar terms and format
(even down to adopting the same process of watermarking the memoranda) without
some common
denominator. The evidence points overwhelmingly to Mr Hobbs as being
the relevant common denominator between the various schemes.)
Mr Hobbs says that
the template for the scheme memorandum for Smart Money, the initial fund
administered by Geneva Financial, was
provided to his wife by Mr Becker. This is
not consistent with the chronology of events.
- For
the period from 2001 to around 2007, much of the scheme documentation was
printed and dispatched by Mr and Mrs Dent from their
home in Queensland but at a
later point (in about 2007), the printing and dispatch of such documentation was
carried out by an IBC
called Swiss First Security (or Swiss First Securities)
from Tonga (or one of the Pacific Islands). In some instances potential
investors
would be provided with the scheme memorandum and agreement by the
scheme administrators themselves (such as, for example, by Mr Koutsoukos,
Mr
Wood or Mr Truong with respect to investments in Integrity Plus and Super Save).
- In
one of the funds (the Good Value Fund), investment through the fund was limited
to shareholders of the corporate administrator
(North Wave Ltd). However, for
most of the individual schemes funds were solicited more
broadly.
- Unit
certificates (and/or letters confirming the investment) were issued in respect
of the investments. Those certificates were in
the name of the IBCs, but usually
sent to the address (in Australia or New Zealand) of the person on whose behalf
or at whose request
the IBC had been established. (On the scheme agreement
investors nominated the relevant address for correspondence and bank account
details for payment of returns. The nomination of those details care of the
individuals is one of the factors relied upon for ASIC's
sham
argument.)
- Each
scheme was administered by a corporate administrator, which (with one exception
for a short period) was an offshore incorporated
IBC. The corporate
administrators were operated or managed by individuals (usually FTC executives)
who variously described themselves
as administrators, principals, directors,
beneficial owners or consultants of the corporate administrator. ASIC contends
that each
of the individual scheme administrators was a de facto director or
officer of the respective corporate scheme administrators and
that none had any
relevant experience or qualifications to offer interests in, or to operate,
managed investment schemes in Australia.
- (In
these reasons where I refer to scheme administrators, I am referring to the
individuals, as opposed to the corporate entities
named in the scheme agreements
as administrator of the relevant funds to whom I refer as corporate
administrators. References to
the "fund administrators' are non-specific -
largely because, where I so refer to them, this is using the term given to them
by Mr
Hobbs.)
- It
is contended that Mr Hobbs directed or otherwise procured the corporate
administrators of particular individual schemes (with the
exception of 888 Turks
& Caicos, Geneva Financial, Preserved Investments and ISPL) to open (non
interest-bearing) bank accounts
with Technocash Pty Limited, a company
incorporated in New South Wales that provides multi-currency facilities. ASIC
contends that
the corporate administrators of the relevant schemes used the
Technocash accounts to accept the deposits of funds sent to the account
by
telegraphic transfer in various currencies; to pay funds by telegraphic transfer
to other accounts in any of those currencies;
and to transfer funds within the
account from one currency to another.
- For
some (but not all) of the individual schemes some (but by no means all) of the
investment moneys were transferred (through a broker
in the United States -
mostly, Ms Lisa Reisinger, the branch manager of a company in Illinois called
New World Holdings LLC) to investment
accounts held with a futures commission
merchant in the United States (Cadent Financial Services LLC) for trading on the
US wholesale
market by particular commodity traders (or CTAs) with whom the
corporate administrators had entered into trading agreements.
- In
the period between December 2004 and March 2007, the scheme administrators of
each of the Super Save Fund, Master Fund, Pinnacle
Fund, 888 (Super Save) Fund,
Enhanced Fund, Prestige Unit Trust, Elite Premier Option Two Unit Trust, Good
Value Fund and Best Fund,
opened and operated derivatives trading accounts with
Cadent in the names of the respective corporate administrators of those funds.
ASIC contends that this was at the direction of Mr Hobbs and that he (either
personally or by his agents, Ms Li and Mr Collard) introduced
various of the
scheme administrators to Ms Reisinger for that purpose. Ms Reisinger had
formerly been an employee of an entity known
as Refco (Refco being described by
Mr Hobbs at the DVD Seminar as an "international clearing house", in terms that
conveyed the clear
impression that he had previously had dealings with or
through Refco).
- In
the case of Integrity Plus, it invested funds with Cadent through accounts
opened in the name of ISPL (the only corporate scheme
administrator that was
incorporated in Australia), which was for a short time one of the administrators
of the Super Save Fund.
- ASIC
contends that it was pursuant to the instructions or advice of Mr Hobbs (or his
agents, New World Holdings and Ms Reisinger)
that various of the corporate
administrators entered into the Cadent trading agreements (or sub-accounts) for
the investment of the
funds deposited to their Cadent accounts (and allocated an
amount for each of the Cadent traders appointed by them and the leverage,
if
any, to be applied to that account).
- The
earlier funds - First Secured Bond Unit Trust, Smart Money, Elite Premier (ie
the first Elite Premier Fund) and Covered Strategies
did not invest funds with
Cadent (though there was an application pending for a Cadent account to be
opened by the corporate administrator
of the Covered Strategies Fund in 2007,
when the ASIC investigation that led to these proceedings, came to Cadent's
attention and
thereafter that application did not proceed). In due course, the
respective Cadent accounts were frozen.
- As
part of the investment of funds through Cadent, the corporate administrators of
various of the funds that had opened or operated
Cadent accounts (other than
Secured Bond, GP Global and North Wave) gave instructions for the purchase of
United States Treasury
securities or STRIPS ("Separate Trading of Registered
Interest and Principal of Securities") using investors' funds from the relevant
Cadent account. Those US Treasuries were credited to the Cadent account from
which the funds for their purchase had originated (and,
in the case of Preserved
Investments, were utilised for the purpose of bond trading). Those securities
(together with funds held
in cash in the respective Cadent accounts) were
utilised as security to meet margin calls on derivatives trading conducted by
the
Cadent traders appointed to the particular Cadent account. ASIC contends
that this was, again, something that was done pursuant to
the instructions or
advice of Mr Hobbs (or his agents, New World Holdings and Ms
Reisinger).
- (US
Treasury STRIPS were purchased for Integrity Plus (Ex A Table 171), Super Save
(Ex A Table 171), Pinnacle Fund and 888 (Super
Save) (Ex A Tables 172/173),
Enhanced Fund (Ex A Table 176), Best Fund and Prestige Fund (Ex A Tables 174 and
175) and the Elite
Premier Option Two Unit Trust (Ex A Table
177).)
- Apart
from the investment of funds with Cadent, ASIC contends that Mr Hobbs directed
or otherwise procured various of the scheme administrators:
to disburse investor
funds in a broad range of speculative and unsecured investments (many of which
generated no returns) and to
cause corporate administrators to transfer funds to
other individual schemes or to the scheme administrators themselves (or to
related
parties, other scheme administrators and companies or entities
controlled by Mr Hobbs), none of which was authorised under the respective
scheme memoranda (or disclosed to investors in the various
schemes).
- The
"cross-pollination" of funds from different schemes is one of the factors from
which ASIC submits it can be inferred that the
individual schemes formed part of
one collective scheme. ASIC further submits that this demonstrates the extent to
which Mr Hobbs
was directing or controlling the operation of these investment
schemes.
- As
to the commissions or other amounts paid or payable at various stages of the
investment process, they were as follows:
- the FTC
executives (who, in reality, seem to have been little more than salespersons and
regarded as such by Mr Hobbs) received a
10% commission for each subscription
received for FTC financial education packages (paid out of the Tasman Business
Consultants'
account);
- the person
identified as the introducer or "broker" in the scheme agreements entered into
by investors with the corporate administrators
for the respective schemes
(commonly being the FTC executive who had sold the FTC subscription packages in
the first place, though
in the case of agreements where Mr Hobbs was the named
broker or introducer it is not clear whether there was a prior FTC sale)
obtained
commissions from the introduction of the investors to the fund
(generally a 12% commission out of the "profit" or return from the
scheme,
according to Mr Koutsoukos);
- scheme
administrators themselves seem to have charged a higher percentage (20%)
commission (and in the case of scheme administrators
who introduced clients to
the investments they received the 12% commission plus the introducer's or
broker's commission); where the
scheme administrator himself or herself had
personally invested in the fund or done so through an IBC controlled by him or
her there
was still an administrators' and an introducers' fee taken out before
the distribution of "profit" to that investor, as I understand
it. (In the case
of Mr Clements and Mr Fitzgerald, they understood that a portion of their
commission as scheme administrators (namely
20% of the 20%) was payable to Mr
Hobbs as "rent" for the space they occupied in Mr Hobbs' Nelson
office);
- various
agreements or arrangements were also entered into pursuant to which Mr Hobbs (or
his wife) was entitled to (and ASIC contends,
though this is disputed, was paid)
commissions, fees or other amounts of money in connection with: the operation of
the Cadent accounts;
the purchase, sale, marketing and/or management of US
Treasuries for the corporate administrators of the individual schemes; the
provision (or purported provision) of research reports to corporate
administrators; as well as a share of the commission paid to
New World Holdings
(as its broker's fee in relation to the Cadent accounts). Mr Hobbs also received
payments referable to the investment
by one or more of the schemes with an
entity known as NCCN (through a US attorney, Mr Donald Caffray).
- In
all, ASIC claims that Mr Hobbs had a financial interest in the various
investment management schemes in five ways: first, through
the sale of the FTC
subscriptions (on the basis that moneys received by FTC were treated by Mr Hobbs
as his own moneys); second,
by receipt of commissions payable as an introducer
or broker for some of the investors (in particular, two of the investors in the
Smart Money Fund of which Mrs Hobbs was a co-scheme administrator); third, by
the receipt of commissions and other amounts with respect
to the investment of
the funds with Cadent (including a share of each of the: incentive or
profitability fees payable to CTAs, management
fees charged by CTAs; round turn
commission on the trades in each account; and float, namely the interest paid to
Cadent on the cash
held in the Cadent accounts) as well as sums referable to the
commission for the purchase of the US Treasuries (from MLN), a share
of the ROF
consulting fees; a share of the payment for 'research reports' provided to
scheme administrators; and a share of the New
World Holdings' commission from
Cadent (none of which payments being disclosed, it is said, to investors) (ASIC
has calculated the
payments received into the Hobbs bank accounts pursuant to
these arrangements as totalling in excess of NZ $450,000); fourth, by
the sale
to particular FTC executives (namely, Mr Koutsoukos, Mr Wood and Mr Truong, to
whom, from time to time, I refer collectively
as the J&B Financial officers)
of intellectual property in a 'white label fund' (or worldwide contacts he had
in relation thereto);
and, fifth, through the use of investors' funds in the
acquisition of assets by or for the benefit of Mr Hobbs (or those associated
with him) (such as the property in which Mr Hobbs presently has an office).
- Mr
Koutsoukos has deposed to the making of a statement by Mr Hobbs in about mid
December 2007 (when ASIC's investigations into the
Super Save and/or Integrity
Plus schemes were underway) to the effect that this was putting at risk "$50,000
a month income from
all of the funds that [he] had introduced to Cadent". I have
not sought to calculate the average total of the monthly commissions
and other
payments received by or to the benefit of Mr Hobbs (since precise quantification
of this amount is not necessary for present
purposes). I note, however, that it
is contended by ASIC that sums totalling some US$867,840.04; AU$50,481.47 and
NZ$1,569,028.99
were paid to Mr Hobbs and the Hobbs interests out of the
fourteen individual managed investment scheme funds. This is disputed by
Mr
Hobbs, who contends that he received no commissions in respect of any of the
investment schemes the subject of these proceedings
and that his income was
derived from FTC and from commissions received on a separate Global Funeral
Services investment. (Mr Hobbs
contends that the amounts paid to him are far
less than those to which he was entitled from the Global Funerals
transaction.)
- For
certain of the funds (Integrity Plus, Super Save, Master Fund and Enhanced
Fund), ASIC contends that corporate administrators
withdrew amounts from Cadent
accounts (on the instructions or advice of Mr Hobbs, or his agents New World and
Ms Reisinger) and paid
all or part of those amounts to scheme members by way of
purported profit or returns on investment but that these payments were in
fact
out of capital not profits (as demonstrated by Tables 162, 163, 164 and 165,
which were admitted in evidence as summaries pursuant
to s 50 of the Evidence
Act 1995 (NSW)).
- In
respect of the three largest schemes (Integrity Plus, Super Save and Master
Fund), ASIC contends that, over the relevant period,
returns (including
substantial amounts paid out of capital invested by other scheme members) were
paid to investors: in the Integrity
Plus Fund totalling A$8,177,132.57,
US$2,379,170.68, NZ$69,211.14 and £17,004.54 (and commissions were paid to
FTC executives
out of the Integrity Plus Fund totalling US$152,639.38 and
A$727,568.57); in the Super Save scheme totalling US$97,164.05 and A$855,594.98
(and commissions were paid to FTC executives totalling US$6,922.43 and
A$70,151); and in the Master Fund scheme totalling US$69,984.93,
A$71,317.75 and
NZ$3,625 (with commissions to FTC executives totalling US$7,930.68 and
A$13,451.57).
- ASIC
contends that each of Mr Hobbs, FTC and the respective scheme and corporate
administrators for Integrity Plus, Super Save, Master
Fund and First Secured
Bond Unit Trust made various representations to potential investors in the Hobbs
scheme (or alternatively
in each of the individual schemes) that were false and
misleading: namely, representations to the effect that the Hobbs scheme could
lawfully provide investors with access to offshore investment products and
opportunities; that the principal advanced by the investors
would be secured or
otherwise protected; that investors could expect to receive returns in the
vicinity of 3 to 4% per month; that,
with respect to Integrity Plus, Super Save,
Master Fund and First Secured Bond Unit Trust, funds would be invested in AA+ or
A+ securities;
that, with respect to Integrity Plus and Super Save, investors
would be able to redeem or withdraw their capital upon giving 60 days
notice
from the first anniversary of their investment; and that each of Integrity Plus,
Super Save and Master Fund was generating
profits or sufficient profits to
enable returns to be paid to investors in each fund.
- ASIC
also contends that Mr Hobbs and Mr Collard made false and misleading
representations to potential investors in Barclaywest (or
the Enhanced Fund)
concerning a project in China and to potential investors in the 888 (Super Save)
Fund concerning an alleged commercial
bond investment of $207
million.
- Mr
Hobbs was not himself the titular administrator of any of the individual schemes
nor was he formally appointed as a director or
officer of any of the corporate
administrators (though he signed at least one document as the duly elected
secretary of one of the
corporate administrators, Geneva Financial, when an
application for a Cadent account was lodged by that company). However, ASIC
contends
that Mr Hobbs was a de facto director and officer of FTC and a de
facto, or alternatively shadow, director and officer of each of
the corporate
administrators (as a de facto director/officer on the basis that he acted in the
position of a director or officer
of both FTC and each of the corporate
administrators; as a shadow director/officer on the basis that the scheme
administrators (themselves
being said to be de facto directors of each corporate
administrator) were accustomed at all material times to act in accordance with
the instructions or directions of Mr Hobbs). (In the event that the individual
scheme administrators are found not to be de facto
directors (and are simply
officers, agents or employees) of the respective corporate administrators, it is
said that Mr Hobbs must
be the de facto director, as there is no one else who
could fit that role.)
- Liability
on the part of Mr Hobbs for the misleading and deceptive conduct contraventions
is alleged both in his own right and, as
principal, for the conduct of those who
it is alleged acted as his agents in relation to the schemes.
- As
to Mrs Hobbs, Mr Collard and Ms Wu (each of whom is also joined as an individual
defendant to the proceedings) ASIC contends that
Mrs Hobbs and Mr Collard were
at all material times de facto directors or alternatively officers of one or
more of the corporate
administrators (being someone who acted in a position of a
director of the said company or companies; made or participated in the
making of
decisions that affected the whole or a substantial part of the business thereof;
and a person who had the capacity to affect
significantly the financial standing
thereof), and that Ms Wu was solely an officer of the particular corporate
administrators with
which she as associated.
- In
summary, the contraventions contended to have been committed by the respective
defendants fall within the following categories:
(i)financial services contraventions: of s 601ED(5) of the Corporations
Act (operating an unregistered managed investment scheme in Australia): by
FTC, the corporate administrators and by each of Mr Hobbs,
Mr Collard, Mrs Hobbs
and Ms Wu (in respect of the Hobbs scheme) or, alternatively, by those involved
in the Integrity Plus, Super
Save and Master Fund schemes (if there is not found
to be one overall "Hobbs" scheme); and of s 911A of the Corporations Act
(carrying on an unlicensed financial services business in Australia by each
of those entities and individuals);
(ii)misleading and deceptive conduct contraventions (variously, by Mr Hobbs
and one or more of the corporate and scheme administrators)
of s 1041E of the
Corporations Act, (making statements or disseminating false or misleading
information); s 1041G of the Corporations Act (engaging in dishonest
conduct in relation to a financial product or service); s 1041H of the
Corporations Act (engaging in misleading or deceptive conduct in relation
to a financial product or a financial service); s 12DA of the ASIC Act
(engaging in misleading or deceptive conduct in relation to financial services);
s 12DB of the ASIC Act (falsely representing that financial services were
of a particular standard) and s 12DF of the ASIC Act (misleading the
public as to the characteristics or suitability for purpose of financial
services).
(iii)breaches of directors' (and/or officers') duties:
(a)owed by Mr Hobbs (as a de facto or shadow director or officer of FTC,
PJCB, ISL and Secured Bond) involving contraventions of both
s 180(1) of the
Corporations Act (failure to exercise care and due diligence) and s 181
of the Corporations Act (failure to act in good faith) arising from the
financial services contraventions by each of FTC, PJCB, ISL and Secured Bond;
(b)owed by Mr Hobbs (as a de facto or shadow director or officer of each of
the corporate administrators to PJCB, ISL, ISPL, Secured
Bond, 888 Vanuatu,
Geneva Financial, Preserved Investments, Ultimate Investments, Barclaywest and
GP Global) by causing the respective
companies to make payments that led to him
gaining an advantage for himself or others and causing detriment to each
corporation (in
contravention of s 182 of the Corporations Act); and
(c)owed by Mr Collard (in respect of Secured Bond, Barclaywest and 888
Vanuatu), Mrs Hobbs (in respect of Geneva Financial) and Ms
Wu (as an officer
only) (in respect of Barclaywest and 888 Vanuatu) (in contravention of ss 181
and or 182 of the Corporations Act respectively).
(iv)as an alternative to the principal contraventions, aiding and abetting
claims: against Mr Hobbs in respect of contraventions by
Messrs Wood, Truong and
Koutsoukos, Ms Li and Ms Wu of ss 181 and 182 of the Corporations Act;
and against each of Geneva Financial and Mrs Hobbs in respect of the
contraventions of s 182 alleged against Messrs Wood, Truong and Koutsoukos and
in respect of the contraventions of ss 181 and 182 alleged against Mr Hobbs.
(v)(if they are not found to have been acting as directors/officers of the
respective entities) breaches by each of Mr Hobbs, Mr Collard
and Ms Wu of
fiduciary duties allegedly owed to investors in the "Hobbs scheme" or one or
more of the individual schemes (by placing
himself or herself in a position
where there was a real and substantial risk that his or her interest would
conflict with those of
investors; by obtaining an advantage for himself or
herself by reason of their position or from an opportunity gained by reason of
that position; and by failing to account to investors in the said scheme for
benefits and gains obtained by him or her in breach
of his or her duties).
- Contraventions
of directors' and officers' duties are alleged against Messrs Wood, Koutsoukos,
Truong and Ms Li only for the purpose
of establishing the aiding and abetting
claims against Mr Hobbs (and in one instance Mrs Hobbs). (Similarly,
contraventions are alleged
against various of the now de-registered IBCs for the
purpose of establishing the breach of directors' duty allegations against Mr
Hobbs and others.)
Proceedings
- The
present proceedings are a consolidation (by order made by Palmer J on 27 August
2010) of three separate sets of proceedings each
brought by ASIC in relation to
a particular investment scheme (the Super Save, Integrity Plus and Master Fund
schemes respectively).
- The
first two sets of proceedings were commenced in late 2007 (the first, being
5864/07, was commenced on 5 December 2007 in relation
to the Super Save scheme,
and the second, being 6021/07, was commenced on 14 December 2007 in relation to
the Integrity Plus Unit
Trust or the Integrity Plus scheme), after ASIC had
conducted compulsory (s 19) interviews with various of the persons associated
those schemes. In 2008, ASIC commenced the third set of proceedings (4532/08),
in relation to the Master Fund scheme.
- ASIC
sought and obtained asset preservation orders under s 1323 of the
Corporations Act in relation to the Super Save and Integrity Plus schemes
(orders being made on an ex parte basis on 2, 14 and 18 December 2007,
respectively). On 5 February 2008, freezing orders were made restraining
additional defendants
(including Mrs Hobbs) from removing assets from Australia
and orders were made for the remission to this Court of the outstanding
balance
then held in the Cadent accounts. (Amounts totalling AU$19,383,475.20 and
US$1,580,593.02 have been paid into Court representing
sums then held in various
of the Technocash and Cadent accounts as well as moneys held by various of the
corporate administrators.
Following various payments authorised to be made out
of some of those moneys, there presently remain the sums of AU$738,484.36 and
US$616,759.28 held by the Court.)
- In
mid 2009, ASIC conducted compulsory interviews of various persons resident in
New Zealand (including Mr Hobbs, although his interview
was not completed due to
health issues at the time) pursuant to requests made by ASIC to the Financial
Markets Authority of New Zealand
under the May 2002 International Organization
of Securities Commissions Multilateral Memorandum of Understanding Concerning
Consultation,
Cooperation and the Exchange of Information (MMoU). Those
interviews (referred to in these reasons as the s 10 interviews) were conducted
pursuant to s 10 of the Securities Act 1978 (NZ) following the issue of
summonses to the respective witnesses.
- In
January 2010, again following a request under the MMoU, ASIC (in conjunction
with the Commodity Futures Trading Commission in the
United States), conducted a
compulsory examination of Ms Grace Elizabeth (Lisa) Reisinger. (I refer to this
as the CFTC examination.)
In May this year, I granted leave to ASIC (over the
objection of Mr and Mrs Hobbs, then represented by Counsel, and having heard
submissions also by the solicitor then appearing for Mr Collard) to adduce as
evidence in the proceedings (and to be admitted if
so adduced) the transcript of
that examination pursuant to Part 4 of the Foreign Evidence Act 1994
(Cth). (I note that the application was also made under Part 5 of the Supreme
Court Act 1970 (NSW) and s 63, or alternatively s 64, of the Evidence Act
1995 (NSW).) The leave so granted was subject to any objection that might be
taken by the defendants at the hearing as to relevance or
form and subject to
weight. (At the hearing, the transcript and exhibits of Ms Reisinger's CFTC
examination were admitted, subject
to weight, as Ex AO.)
- In
the period from commencement of the respective proceedings in 2007/08 to their
consolidation by Palmer J in 2010, there were various
changes to the parties
joined as defendants thereto. By the time that the hearing of the consolidated
proceedings commenced on 4
July 2012, there had been further changes to the
constitution of the proceedings. In particular, shortly before the commencement
of the hearing I granted ASIC leave to discontinue proceedings against three of
the named defendants in the consolidated proceedings
(the fifth to seventh
defendants), on the basis that it had then commenced a criminal prosecution
against them. (Those three defendants
swore affidavits that were read in ASIC's
case and each was in due course cross-examined by Mr Hobbs.)
- The
proceedings against the second defendant, Ms Li, were the subject of a stay
ordered by Barrett J (as his Honour then was) on 11
June 2010 until further
order. In addition, various of the corporate defendants had been deregistered
prior to the commencement of
the proceedings (and there has been no application
for the revival of those companies).
- As
a result of the above (and the stance that at that stage had been taken by the
third and fourth defendants, to which I will shortly
refer), as at 4 July 2012,
when the hearing before me commenced, the position was that the proceedings were
actively contested only
by the first defendant (Mr David Hobbs, to whom I will
refer throughout as Mr Hobbs, as distinct from his brother, Mr Robert Hobbs)
and
the eighth defendant (Mr Hobbs' wife, Jacky, to whom I will refer throughout as
Mrs Hobbs, as distinct from Mrs Brenda Hobbs,
her sister-in-law). To some extent
this position changed late in the course of the proceedings when both the third
defendant (Mr
David Collard) and the fourth defendant (Ms Huimin Wu) sought to
take an active role in the proceedings. I refer to this below, when
outlining
the position in relation to each of the respective defendants.
Defendants
- Mr
Hobbs is the first defendant in the consolidated proceedings. (He was
not initially joined as a defendant to either of the first two sets of
proceedings but was
joined as the twelfth defendant to the 5864/07 proceedings
and as the seventeenth defendant in the 6021/07 proceedings by orders
made by
Austin J on 11 July 2008.)
- Mr
Hobbs represented himself in the hearing before me. He has, however, had the
benefit of legal representation and advice at various
times both before and
during the course of these proceedings (including when he attended his s 10
interview in New Zealand in May 2009; at the time of the filing of his defence
in these proceedings (at least to the extent that
such an inference can be drawn
from the fact it was then witnessed by the solicitor in New Zealand who had
acted for him for some
time, Mr Phillip Bellamy); in April 2012, when various
interlocutory applications brought by ASIC came before the Court for hearing;
and shortly prior to the commencement of the hearing, when I was informed that
both a semi-retired barrister and a law student in
New Zealand were providing
some assistance to Mr and Mrs Hobbs). Prior to the commencement of the hearing
there was also some evidence
(on which reliance was placed for the Hobbs'
interests in resisting an interlocutory application by ASIC for leave to issue a
subpoena
to Mr Bellamy) that Mr Hobbs had had the benefit of legal advice from
Mr Bellamy in the period from 2007-2011 in relation to the
matters the subject
of the proceedings (and I infer that Mr Bellamy's familiarity with the matter
was not a passing one, since it
was put to me that it would take him a
considerable time to pass on his knowledge to other lawyers).
- No
defence was filed by Mr Hobbs to the Second (or Third) Further Amended Statement
of Claim (the former being the version of ASIC's
pleading as at the commencement
of the hearing before me; the latter being the final version which I gave leave
to be filed at the
close of the evidence in these proceedings in order to
incorporate certain errata that had been noted by ASIC in the pleading as
it
then was and to enable alternative allegations to be made as to the place of
incorporation of two of the corporate entities referred
to in the proceedings,
OEM and KLM, to accord with the evidence that had emerged in the proceedings of
possible multiple entities
with those names).
- An
Amended Defence had, however, earlier been filed by Mr Hobbs (to the then
Further Amended Statement of Claim) on 30 May 2011 (to
which on 15 June 2011,
ASIC had filed a Reply). That pleading was verified by Mr Hobbs, whose
attestation of the affidavit was witnessed
by Mr Bellamy. (I note in passing
that the affidavit verifying the defence bears a computer footer that reads,
relevantly, "clients/4296
[tasman business consultants limited]/002 (australian
litigation)", which on its face suggests that at least at that stage Mr Bellamy
had some retainer in relation to the Australian litigation (Tasman Business
Consultants being an entity associated with Mr Hobbs
and his wife and in whose
name one or more client files had been opened in the firm by which Mr Bellamy
was then employed, Fletcher
Vautier Moore).
- As
to the amendment to the pleaded allegations in relation to the date and place of
incorporation of each of OEM and KLM, I had in
mind that it has been recognised
as appropriate (where no issue of procedural fairness is involved) for leave to
be given to amend
the pleadings to accord with evidence that has emerged during
the trial. In Ingot Capital Investments Pty Limited v Macquarie Equity
Capital Markets Limited [2008] NSWCA 206 Ipp JA (considering the authorities
and principles relevant to the question whether a party would be allowed at
trial to depart from
its pleaded case) noted that at trial "there may be a
departure from the pleadings where adherence to them would be unjust or unfair"
citing Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR
279; 92 ALR 53; [1990] HCA 11 per Mason CJ and Gaudron J at CLR 286-7; ALR
58-9). In Banque Commerciale, Dawson J had observed
that:
But modern pleadings have never imposed so rigid a framework that if evidence
which raises fresh issues is admitted without objection
at trial, the case is to
be decided upon a basis which does not embrace the real controversy between the
parties. Special procedures
apart, cases are determined on the evidence, not the
pleadings.
- In
the present case, evidence as to the existence (or likely existence) of at least
two different OEM/KLM entities was put before
the Court during the hearing (to
which I will refer in due course) without objection. Mr Hobbs had neither denied
nor admitted the
allegations as to the incorporation of OEM/KLM as had then been
pleaded, thus putting ASIC to proof thereof. There was (and remains
in my view)
uncertainty as to which was the particular corporate entity (if any) on behalf
of which Mrs Watson and Mrs Burnard sent
correspondence when implementing the
"OEM/KLM" process (a process of which Mr Hobbs had previously purported, at the
very least at
the 2003 DVD Seminar, to have knowledge).
- Those
matters, coupled with the fact that no allegations were made in the proceedings
of any breach of duty in relation to the OEM/KLM
entities, led me to conclude
that it was appropriate to allow this particular amendment. (On ASIC's case, as
I understand it, little
if anything turns on whether the steps carried out in
the names of OEM and KLM were on behalf of companies incorporated in any
particular
one of the possible jurisdictions.) I indicated that I would give Mr
Hobbs leave to adduce any further evidence he might wish to
call in relation to
the place of incorporation of the respective companies but no such evidence was
forthcoming.
- I
understand that Mr Hobbs raises the same matters in defence to the final version
of the pleading against him as are pleaded in his
filed defence to the earlier
version of that pleading (other than that he now invites me to accept ASIC's
alternative case against
the fund administrators as correct). (Similarly, I
understand that Mrs Hobbs in substance maintains her earlier defence to the now
revised pleading.)
- By
way of general summary as to Mr Hobbs' background, Mr Hobbs has worked for a
number of years in the finance industry, though he
has no formal degree
qualifications (at the DVD Seminar he is recorded as saying that he "honoured in
financial planning" and at
least one witness referred to Mr Hobbs having said he
had studied financial planning at Harvard - Mr Blow). In his affidavit of 3
August 2012, Mr Hobbs deposes (at [2]) to having "a background in life insurance
and financial planning in New Zealand" and to having
worked at various times for
NZI, Colonial Mutual and Norwich Union (during which time Mr Hobbs says that he
became aware of the wholesale
investment market - [3]).
- In
correspondence over the period from 2000/2001 onwards, Mr Hobbs has described
himself variously as a Certified International Financier
(CIF) and as a member
of the International Society of Financiers (ISF). As I understand it, the former
is in the nature of an honorific
title and the latter an indication of
membership of the society in question (which membership Mr Hobbs no longer
holds, having not
renewed it at some unidentified time). It was not suggested
that membership of the ISF was restricted to those with any particular
academic
qualifications.
- Mr
Hobbs has described himself in a number of different capacities for entities
associated with one or more of the schemes: as authorised
officer of FZF Vanuatu
(when he signed a proxy on 4 August 2012 for use in an investors meeting in the
liquidation of the Master
Fund scheme to be held on 8 August 2012); in various
correspondence as consultant, and on at least one occasion as a "director",
of
FZF Anguilla. He admits that he occupied the position as International Sales
Manager of FTC. On at least one occasion he signed
a letter as "director" of
FTC. He has also signed documents as administrator of Trans Management
Corporation (the IBC named in the
private placement memorandum as the outside
trustee for various of the schemes) (Ex AU 3921) and as the secretary of Geneva
Financial.
- The
second defendant is Ms Min Hua Li (referred to by various of the
witnesses as Lili). Ms Li was described by Mr Hobbs (at the DVD Seminar) as a
surgeon from China (which
makes Mr Hobbs' derision during the hearing, of Mr
Parsons' reference to Ms Li as a doctor or brain surgeon somewhat remarkable).
I
was informed at various interlocutory hearings, and again at the commencement of
the hearing, that Ms Li is presently incarcerated
in China. There has been no
order lifting the operation of the stay ordered by Barrett J on 11 June 2010 of
the proceedings against
her. ASIC therefore seeks no relief against Ms Li
(though findings as to her conduct will be of relevance to various claims made
against the other defendants).
- Ms
Li is identified by ASIC as the scheme administrator or co-scheme administrator
of a number of the schemes the subject of these
proceedings (those being the
Master Fund, First Secured Bond Unit Trust, Pinnacle Fund, 888 (Super Save)
Fund, Enhanced Fund and
Best Fund schemes).
- After
the commencement of the hearing, a bundle of material was forwarded by facsimile
transmission to the Court Registry comprising
a handwritten letter in English,
purportedly (though I have no reason to doubt this) signed by Ms Li, together
with a number of pages
of handwritten Chinese characters (that I cannot read and
that no party has sought to have translated). That material was forwarded
to me
in chambers and I made arrangements for my staff to provide copies of that
material to Mr Hobbs, to Mr Collard and to ASIC.
That material is not in
evidence but has been retained on the Court file. On the morning of 5 September
2012, my chambers received
from the Registry a further bundle of correspondence
(an original handwritten letter and a photocopy of another letter) again
purportedly
signed by Ms Li. Copies of that material were provided to the
parties. Again, the material has been retained on the Court file but
it is not
in evidence and has not been read.
- The
third defendant is Mr David Collard. Mr Collard is identified by
ASIC as the scheme administrator or co-scheme administrator of each of the
Master Fund, First Secured
Bond Unit Trust, Pinnacle Fund, 888 (Super Save)
Fund, Good Value Fund and Enhanced Fund (those schemes being grouped together,
for
descriptive purposes, by ASIC as the "Li/Collard" schemes, and referred to
on one occasion in opening as the "Li/Collard/Wu" schemes).
The reason for that
collective description is that it is contended that one or both of Ms Li and Mr
Collard was associated with each
of those schemes (and that Ms Wu was
associated, as an officer of the relevant corporate administrators, with a
couple of those schemes
- the 888 (Super Save) and Enhanced Fund schemes).
- Although
Mr Collard initially filed a defence in these proceedings (in November 2010, at
which time he was unrepresented), in April
2012 an unconditional submitting
appearance was filed on his behalf (at which time he was represented in the
proceedings by Mr Hartnell
of Atanaskovic Hartnell). Mr Collard was in
attendance in Court throughout most of the hearing (and communications to Mr and
Mrs
Hobbs through the course of the hearing were made via Mr Collard's email
address). Other than as set out below, Mr Collard played
no active role in the
hearing.
- On
no less than four occasions during the course of the hearing before me Mr
Collard sought to intervene and to take a more active
role (leaving aside the
occasions on which Mr Collard intervened from time to time (always politely) to
make observations or comments
on matters of evidence or the like).
- On
the first occasion (on 30 July 2012, the seventeenth day of the hearing), Mr
Hobbs indicated that Mr Collard wished to address
me. When I sought to clarify
with Mr Collard the precise nature of the statement he wished to make (having
explained - from T 1152.20
- that the consequence of the filing of an
unconditional submitting appearance was that he had elected to abide by the
decision of
the Court and not to take an active role in the proceedings), Mr
Collard's response was to the effect that he wished to address me
as to the
impact these proceedings had had on him over the past four years (not as to the
evidence in the proceedings as such nor
as to the question of what findings
should be made on the allegations that had been made against him). I indicated
that he would
have an opportunity, if the occasion arose for a hearing on
penalty, to make such submissions at that later stage of the
proceedings.
- On
the second occasion, after the close of evidence from both ASIC and Mr Hobbs,
but before the commencement of ASIC's oral closing
submissions, Mr Collard
handed up to me a defence that he had filed in the Registry (without leave) on
15 August 2012. (Any application
for leave to file the defence would, at least
implicitly, have encompassed an application for leave to withdraw the
unconditional
submitting appearance that had been filed on Mr Collard's behalf
in April this year.)
- Mr
Collard's then stated position was that, having been in Court for some six weeks
during the course of the hearing to that date,
he had heard things he believed
that were not correct and he said that he was seeking an opportunity to correct
some of those matters.
He informed me that the defence he had filed in the
Registry the day before had been prepared after discussion with Mr and Mrs Hobbs
(and that it had been typed by Mrs Hobbs). That defence was a mixture of broad
denials and assertions (including commentary as to
the perceived oddity that a
particular company had not been joined as a defendant and the statement that "I
am now of the understanding
that by poor legal advice I do not have the right of
natural justice").
- In
its form, the proposed new defence was in my view liable to be struck out as an
embarrassing pleading within the meaning of that
expression as used in Part 14
of the Uniform Civil Procedure Rules 2005 (NSW). It did not purport to
respond to particular allegations of fact or law contained in ASIC's pleading
(unlike the defence that
had been filed by Mr Collard dated 18 November 2010,
which had pleaded to each of the paragraphs of the then Further Amended
Statement
of Claim - in the most part either denying or not admitting the
respective allegations, though in some instances admitting particular
allegations).
- In
support of his (informal) application to rely on the latest filed defence, Mr
Collard invoked in general terms the principle of
natural justice. He filed no
evidence in support of that application.
- With
a view to the expeditious conduct of the proceedings, I did not require the
filing by Mr Collard of a formal motion for leave
to withdraw the submitting
appearance and to file (out of time) the defence that had been handed up to me.
For the reasons that I
briefly outlined at the time, as recorded on the
transcript, I dismissed that application. As I did not publish written reasons
at
the time, I set out briefly below the basis on which I was not prepared to
accede to Mr Collard's application at that stage of the
proceedings.
- Leave
to withdraw an appearance may be appropriate in circumstances where the
appearance has been entered by mistake or where a solicitor
has acted without
proper instructions in entering the appearance (I refer in this context to the
authorities cited at [12.5.5] of
Ritchie's Commentary on the Uniform
Civil Procedure Rules - Firth v John Mowlem & Co Ltd [1978] 1 WLR
1184; Evergreen Tours Pty Ltd v McLaren [2010] NSWSC 1362), though not
limited to such circumstances (Rothmans of Pall Mall (Overseas) Ltd v Saudi
Arabian Airlines Corp [1981] QB 368). However, it was not apparent that Mr
Collard's position fell within the category of case in which it has been seen as
appropriate
to permit the withdrawal of an appearance.
- Although
(as Senior Counsel for ASIC, Mr Halley SC, pointed out) there was no evidence in
support of the application by which Mr Collard's
assertions from the bar table
could be tested, I considered it relevant that, even taking into account those
assertions, Mr Collard
did not go so far as to suggest that there had been any
mistake at the time the submitting appearance was entered on his behalf.
At that
time (as I understand had also been the case when ASIC sought s 1323 relief in
relation to the funds with which Mr Collard
was involved) Mr Collard had had the
benefit of legal assistance from Mr Hartnell (a lawyer presumably not unfamiliar
with at least
some of the background to the issues in the proceedings, given the
reliance placed by Mr Hobbs on the giving of advice by Mr Hartnell
in 2002
relation to matters related to the sale of FTC educational material and offshore
investment, to which I will later refer).
- From
what Mr Collard said to me, it seemed that he had subsequently formed the view
(whether this was before or after discussion with
Mr and Mrs Hobbs as to his
proposed new defence, I do not know) that the advice he had earlier received in
relation to the filing
of the unconditional submitting appearance had been "poor
legal advice" and that he would now be denied natural justice if not permitted
to raise the matters contained in the new defence. There was no evidence of what
Mr Hartnell's advice in that regard had been. ASIC's
position (which I accepted
as clearly correct) was that if Mr Collard wished to withdraw the submitting
appearance on the basis of
allegations as to the quality of the legal advice he
had received at the time then it would be incumbent on him to adduce evidence
in
admissible form as to those matters. (Had Mr Collard sought to adduce such
evidence I would have been concerned to ensure that,
before waiving legal
professional privilege in the content of that advice, Mr Collard appreciated
precisely what consequence such
a waiver would be likely to have, in terms of
opening up the content of his instructions to Mr Hartnell in relation to the
issues
in the proceedings or on which the advice in relation to the filing of a
submitting appearance had been given.)
- As
I understood it, Mr Collard's position (as articulated in the course of
discussion on this application) was simply that he wanted
to reinstate the
denials/non-admissions contained in his November 2010 defence (particularly in
relation to the denial that there
had been a distribution of returns out of
capital not profits in relation to the fund administered by Secured Bond - see
[186] of
the Second Further Amended Statement of Claim) and to make submissions
as to the evidence already before the Court, but that he was
not seeking to
adduce any new evidence in his defence.
- As
to what ASIC's position would be if Mr Collard were to be permitted to withdraw
his submitting appearance, Mr Halley submitted
that, even if Mr Collard did not
seek formally to adduce evidence in his defence, the prospect of Mr Collard then
seeking to take
an active part in the proceedings (by the making of submissions)
had the potential to cause significant delay and confusion in the
timely
disposition of the proceedings (having regard to the fact that Mr Collard was
unrepresented and might well not appreciate
the distinction between submissions
and evidence - a concern that in my view had no little foundation having regard
to the content
of Mr Collard's proposed new defence and which was borne out by
the submissions subsequently handed up by Mr Collard).
- Mr
Halley made it clear that ASIC accepted that, on any view, it bore the onus of
proving each of the allegations that it had made
against Mr Collard and that
ASIC would have to prove the facts it alleged against Mr Collard independently
of any defence that might
have been mounted against its case, on a basis akin to
a summary judgment application. (Subject to final instructions, Mr Halley
also
indicated in response to a query from me that he considered that ASIC's position
would be that, if Mr Collard's submitting appearance
were not withdrawn, ASIC
would not be seeking to rely on any admissions contained in his earlier filed
defence. I have proceeded
on the basis that this is the case.)
- It
was further submitted, as I understood it, that (unless Mr Collard wished to put
a positive defence beyond that which was contained in his November 2010
defence) in practical terms there was no denial of procedural fairness in Mr
Collard
not being given leave to withdraw his submitting appearance, since ASIC
would have the burden of proving the allegations that Mr
Collard had previously
denied or not admitted in any event (and particularly since it had been Mr
Collard's presumably informed election
to file the submitting appearance at the
relevant time).
- As
to the effect of the filing of a submitting appearance after the filing of a
defence in the proceedings, in First Chicago Australia Limited v Yango
Pastoral Co Pty Ltd [1977] 2 NSWLR 177, Sheppard J seemed to proceed on the
basis that a subsequent submitting appearance would override an earlier filed
defence and it
seems to me implicit in the filing of a submitting appearance
that reliance is no longer being placed on any earlier filed defence.
- It
is suggested in Ritchie's Uniform Civil Procedure Rules NSW (by
reference to Garsec v His Majesty The Sultan of Brunei [2007] NSWSC 882,
where an application for leave to withdraw an appearance was rejected in
circumstances where the applicant had previously applied
for summary judgment in
the proceedings) that leave to withdraw will be particularly inappropriate where
the applicant has previously
taken an active part in the proceedings. Here, it
should be noted that Mr Collard had not sought to avail himself of the
opportunity
given by the leave granted by Palmer J in March 2010 to apply to
contest the order made for his joinder to the proceedings and, at
least to the
extent that Mr Collard had filed a defence, he had taken an active part in the
proceedings before the filing of a submitting
appearance (and Mr Hartnell had
appeared for him on at least one occasion when ASIC's interlocutory applications
in April this year
were before me).
- Furthermore,
not only was Mr Collard physically present in Court during most of the hearing
of the evidence but Mr Hartnell, though
by then not appearing for Mr Collard,
had also been present in Court throughout a large part of the opening of ASIC's
case (and,
it might be assumed, would have had the opportunity to advise Mr
Collard had he thought the advice to file a submitting appearance
should be
revisited having regard to anything said in opening at least while Mr Hartnell
was in Court).
- On
the basis that there was no evidence as to the circumstances in which the
submitting appearance was filed (and Mr Collard's indication
of what his
evidence might be in that regard did not suggest that there was any operative
mistake on Mr Collard's part at the time
that had led to the filing of the
submitting appearance), I considered that the statutory objective set out in s
56 of the Civil Procedure Act 2005 (NSW), for the just, quick and cheap
resolution of the real issues in dispute in the proceedings would not be met by
permitting the
withdrawal of the submitting appearance at such a late stage of
the proceedings. (In that regard, I had in mind that the new defence
then sought
to be filed would have been liable to be struck out as embarrassing in any
event.) While Mr Collard had expressed a concern,
in hindsight, as to the
quality of the legal advice that he said he had been given, the fact remained
that the appearance had been
entered with the benefit of legal advice and there
was no basis established for the suggestion that whatever advice Mr Collard had
been given was in any way unsound.
- I
was also of the view that if (as it seemed to me to be) the real concern by Mr
Collard in seeking to withdraw the submitting appearance
was so as to be able to
reinstate the earlier defence (as opposed to bringing a new positive case in
defence) and to make submissions
as to the evidence (as opposed to adducing any
new evidence), there was no denial of natural justice in refusing that
application.
Mr Collard had already had (and had elected not to take) an
opportunity to mount a defence to the ASIC case and it did not seem to
me
(having regard to the content of the earlier filed defence) that Mr Collard
would be in any materially different position if leave
were not given to
reinstate that defence, in the sense that ASIC would still have to prove its
case on the evidence already before
the Court whether or not regard was had to
Mr Collard's earlier denials/non-admissions.
- I
also considered that, in a practical sense, Mr Collard was likely to have the
opportunity to provide input into the submissions
that would be made by Mr Hobbs
(in circumstances where Mr Collard had clearly been involved in discussion with
Mr Hobbs throughout
the hearing and some of Mr Hobbs' cross-examination of
ASIC's witnesses seemed to me to be directed at matters concerning Mr Collard).
Mr Hobbs' defence of the allegations made against him was, as then put by him,
not inconsistent with the denials/non-admissions previously
made by Mr Collard
and there was no suggestion at that stage that Mr Hobbs was adopting or
proposing to adopt any different position
from Mr Collard in relation to matters
relating to the funds of which ASIC contends that Mr Collard was a scheme
administrator.
- When
I gave my ruling on the oral application that had been made (unsupported by any
evidence) by Mr Collard for leave to file the
defence, I indicated that if there
were to be a formal application made by Mr Collard then it would need to be
supported by admissible
evidence that it would then be open to ASIC to test. No
such application was made.
- The
third occasion when Mr Collard sought to intervene was at the conclusion of the
oral closing submissions made by each of Mr and
Mrs Hobbs on 6 September 2012.
Mr Collard had earlier prepared and served some written submissions, to which
ASIC objected on the
basis that they largely contained assertions as to matters
in respect of which there was no foundation in the evidence that was before
me.
Mr Collard then wished to address me on the matters contained therein - in
particular to deny any dishonesty or misleading conduct
on his part and to
submit that the six funds with which he was associated were operated differently
from those operated out of the
J&B Financial office by the fifth to seventh
defendants. I explained again to Mr Collard that he had made an election to file
the unconditional submitting appearance (at a time when he had legal advice) and
that it was not appropriate for me to take into
account in closing submissions
matters which were not the subject of evidence before me (though I note that
where his written submissions
could properly be characterised as submissions,
and not evidence, I have considered the matters contained therein as noted in
these
reasons).
- Finally,
in the course of Mr Halley's oral reply submissions, Mr Collard again sought to
provide his version of events (when asked
to assist Mr Hobbs in pointing to the
evidence for some of Mr Hobbs' closing submissions). I refused to permit him to
do so.
- The
fourth defendant is Ms Huimin Wu (also known as Ms Nancy Wu). Ms
Wu is identified by ASIC as the co-scheme administrator of the schemes
administered by Barclaywest
and 888 Vanuatu (the Enhanced Fund and the 888
(Super Save) Fund respectively).
- Ms
Wu was joined as a defendant to the 6021/07 proceedings in March 2010. No
appearance was filed by or on behalf of Ms Wu in the
proceedings (nor was there
any application by or on her behalf to set aside the order made for her joinder
as a defendant within
the time specified by Palmer J in March 2010).
- Prior
to her joinder as a defendant, Ms Wu had filed an affidavit and had sought to
appear as an interested party in the 6021/07 proceedings
(seeking relief in
relation to the disbursement out of Court of moneys in relation to another
investment scheme, the Procash scheme,
which is not a scheme the subject of the
consolidated proceedings). Therefore, it could not be said that Ms Wu was not
aware at least
of the existence of proceedings in relation to the Super Save
scheme (albeit that she may not have understood the import of the allegations
made against her when she was joined as a defendant to those proceedings).
- On
26 March 2010, after her joinder as a defendant to the consolidated proceedings
(though it is unclear whether there is any association
between the two events),
Ms Wu filed a notice of discontinuance as an interested party.
- When
the hearing of the proceedings before me commenced, a query was raised by Mr
Halley as to whether Ms Wu might be seeking to pursue
a strike out application.
The matter was called outside Court but there was no appearance by or for Ms Wu
and I confirmed that I
was not aware of any such application (no such
application being on the Court file so far as I could tell). The following
morning,
Mr Hobbs raised the position of Ms Wu and, relevantly, referred to an
affidavit of Ms Wu that he said he would be happy to read because
he believed
that she needed a defence. (Mr Hobbs informed me that he had paid the court
filing fee for the filing of an affidavit
by Ms Wu. Why the affidavit had not
reached the Court file by that stage is a mystery but it had not done so. I
suspect that this
may be because the affidavit was attached to the Notice of
Motion and that did not bear a filed stamp.)
- Mr
Halley informed me that, on 30 June 2012, ASIC had received, by facsimile
transmission from Mr Hobbs' secretary in New Zealand
(Mrs Doreen Andrews), a
copy of an affidavit of Ms Wu and a Notice of Motion signed by Ms Wu (but not
apparently filed with the Court)
seeking an order in the following terms:
We seek from the Court to remove me from these proceedings. There were no
such things as Wu schemes. I was not an officer or in any
official capacity for
any of the companies. I dealt with approximately ten people and their offshore
companies who were close friends.
My involvement constitutes a waste of
taxpayers money. I have not breached any corporations law. I only sent letters
on instructions
of Ms Min Hua Li. [In Ms Wu's 28 August 2012 submissions she
asserts that she signed documents as "Per administrator" on the instruction of
Ms Li and
Mr Collard; though she acknowledges that on at least one template
letter signed by her the word "per" did not appear; she also maintains
that she
always acted on the direction of Mr Li or Ms Dong.]
Mr Halley noted that the affidavit (which he confirmed ASIC was neither
tendering or reading) consisted of a number of comments on
statements contained
in the Statement of Claim. ASIC's position was that if Ms Wu wished to make any
application she would need to
do so in person or with legal representation on
her behalf.
- On
that occasion (5 July 2012) I indicated to Mr Hobbs that, as far as I was aware,
Ms Wu had not filed a notice of appearance in
these proceedings and (in the
event that he were to be in communication with her) that if Ms Wu did wish to
make some form of application
in relation to her position as a defendant to the
proceedings then she would need to file a Notice of Appearance and a Notice of
Motion so that her application could be dealt with in a proper fashion. (I also
indicated that Ms Wu would be advised to seek legal
advice if she wished to
defend the proceedings.)
- Nothing
then happened until a document was filed in the Registry by facsimile on 30 July
2012, that being a Notice of Motion dated
27 June 2012 by Ms Wu seeking by way
of relief for the Court to remove Ms Wu as a party (thus, relief of the kind
indicated in the
facsimile transmission sent to ASIC a month earlier). The first
indication I had that any such document had been filed was the receipt
by my
staff of an email communication from ASIC, copied to Mr Hobbs, on 31 July 2012
in which objection was taken to the filing of
an affidavit with the Notice of
Motion by Ms Wu (on the basis that it included material the subject of without
prejudice privilege).
My staff made enquiries as to the filing of any such
documents and when those documents were retrieved from the Registry, the
affidavit
in respect of which ASIC had foreshadowed an objection was placed,
unread, into a sealed envelope. I considered it best, in the interests
of
expeditious case management, to vacate the then listing of Ms Wu's Notice of
Motion that was before the Registrar and to list
the Notice of Motion before me
on 3 August 2012 (when the matter was otherwise before me for directions).
- There
was no appearance for or on behalf of Ms Wu on 3 August 2012. On that occasion
Mr Halley informed me that ASIC had communicated
with Ms Wu by email on 1 August
2012 as to the listing of her motion on 3 August 2012 and had asked that she
inform ASIC whether
Ms Wu or her legal representative intended to appear on that
occasion, to which ASIC had received no response. By this stage, ASIC's
evidence
in chief had concluded and it had closed its case in chief. Mr Halley also
reiterated ASIC's concern that a without prejudice
statement of agreed facts
that was served in draft had been included in the affidavit.
- As
there was no appearance for Ms Wu on that occasion I asked my staff to forward
an email communication to Ms Wu to advise that the
Notice of Motion had not been
dealt with in her absence and that if Ms Wu wished to move on that motion then
she would need to attend
in Court by no later than 10am on 8 August 2012 to do
so. There was no attendance on that occasion by or on behalf of Ms Wu.
- On
the morning of 15 August 2012, I received in chambers a copy of an affidavit
sworn 2 August 2012 by Ms Wu and a defence that had
been signed and verified by
Ms Wu (both documents having been filed, without leave, in the Registry the
afternoon before). On that
occasion, Ms Wu's husband (Mr Yuan Ming Zhang) was in
attendance in Court. He confirmed that his wife wished to proceed on the basis
of the defence that had been filed. His explanation from the bar table for his
wife's delay in filing the defence was that no order
from the Court requiring
his wife's attendance in Court had been served (and his, or perhaps her, belief
that she could not attend
Court without such an order for fear of breaching
conditions attached to what he referred to as her CentreLink
entitlements).
- I
indicated to Mr Zhang that as there had been no compliance with the orders that
were made for the filing of a defence by his wife
it would be necessary for her
to obtain leave to file the defence out of time (and that the fact that the
Registry had accepted the
document was not sufficient). I also indicated that
his wife would need, at that late stage in the proceedings, to give an
explanation
as to why there was no compliance with the earlier orders and why it
was that she was only then seeking to file the defence.
- ASIC's
concern was that the participation of Ms Wu in the proceedings at that stage
would have significant ramifications for the management
of the case (given Ms
Wu's alleged involvement in the Li/Collard schemes). ASIC also objected to a
defence being filed in the form
of that which had been accepted by the Registry.
- I
directed that if Ms Wu wished to pursue the application for leave to file the
defence she should attend (or to have legal a representative
in attendance) at
10am on 16 August 2012. On that occasion Ms Wu attended in person. Having heard
her explanation from the bar table
as to the delay in filing the defence, I
rejected her informal application for leave to file the defence (and published
short reasons
for that decision in due course) but made an order for the
referral on an urgent basis of Ms Wu to the pro bono panel for the purpose
of
her being provided with pro bono advice to explain the difference between the
making of submissions (which is what Mr Hobbs informed
me from the bar table was
all that Ms Wu wished at that stage to do) and the giving of evidence in
relation to the matters the subject
of the allegations made by ASIC against Ms
Wu.
- When
the hearing resumed (after an adjournment to permit the preparation by ASIC of
written closing submissions) on 21 August 2012,
there was a further application
by Ms Wu (represented on a pro bono basis by Ms Campbell of Counsel) for leave
to file an amended
version of the defence and an affidavit sworn by Ms Wu on 20
August 2012. For the reasons I gave on that date, I gave leave for the
filing of
the defence (with the deletion of those paragraphs or parts thereof that I
considered to be embarrassing) and for the filing
and reading of the affidavit
of 20 August 2012 (subject to various evidentiary rulings), though I imposed
certain conditions on that
leave (including a limitation in relation to the
filing of any further evidence by Ms Wu). Both Mr Hobbs (on his and, as I
understand
it, his wife's behalf) and Ms Wu (through her Counsel) had confirmed
that, if Ms Wu were permitted to file a defence and read the
affidavit she had
prepared (with the rulings that I had indicated I would make in that regard),
then if ASIC chose not to cross-examine
Ms Wu (on the matters in her affidavit
or otherwise) they would not ask me to draw any inference adverse to ASIC's case
by reason
of the fact that it had not cross-examined Ms Wu.
- Ms
Wu served two sets of submissions: the first on 22 August 2012 and the second
(after she had been notified that there was objection
taken to the bulk of the
first as constituting evidence not submissions) on 1 September 2012 (though
dated 28 August 2012). Both
were largely in the nature of unsworn evidence not
submission. I have not taken into account in deciding the issues for
determination
those portions of the submissions that amount to unsworn (and
untested) evidence or assertion by Ms Wu but I accept that she denies
the
allegations that she was an officer of the relevant companies and she maintains
that some of the evidence of Ms Dong is incorrect
or should be read as
confirming that Ms Dong obtained instructions directly from Ms Li.
- The
fifth, sixth and seventh defendants (Mr Con Koutsoukos, Mr Brian Wood
and Mr Jimmy Truong) are the three defendants in respect of whom I granted
leave to ASIC on 18 May 2012 to discontinue these proceedings (ASIC having
by
then commenced criminal proceedings against them). They have been identified by
ASIC as the co-scheme administrators of the schemes
descriptively referred to as
the Burwood schemes (being administered from the J&B Financial office in
Burwood), those being the
Integrity Plus and Super Save schemes.
- The
eighth defendant is Mrs Jacqueline (Jacky) Hobbs, the wife of Mr
Hobbs. Like her husband, Mrs Hobbs was self represented at the hearing but had
earlier filed a defence both in her
own right and on behalf of the (by then
already deregistered) eleventh defendant (Geneva Financial Limited). In
general, Mrs Hobbs relied on Mr Hobbs to speak for her in Court but where there
were issues relevant to Mrs Hobbs' personal
position (such as the decision
whether or not to adduce evidence in her own defence) I asked Mrs Hobbs to
inform me directly as to
what her position was.
- In
due course Mrs Hobbs elected (after having taken the opportunity to obtain
advice as to her position) not to adduce evidence in
her own defence (as a
consequence of which ASIC did not seek any adverse inference to be drawn from
the fact that Mr Hobbs did not
call evidence from her in his case). Mr and Mrs
Hobbs in effect made joint submissions at the close of the hearing (though there
was a differentiation in one respect - namely as to whether there was acceptance
that the alternative case put by ASIC against the
fund administrators, of which
Mrs Hobbs was one, was correct).
- Mrs
Hobbs is identified by ASIC as the co-scheme administrator of the Smart Money
Fund and the Prestige Unit Trust Fund (the corporate
administrator of each being
Geneva Financial). (Mrs Brenda Hobbs, who is married to Mr Hobbs' brother,
Robert, is identified as a
co-scheme administrator of the Smart Money and
Prestige Funds. She was at one stage joined as a party to one or more of the
earlier
proceedings but is not a defendant to the consolidated
proceedings.)
- The
ninth to fifteenth defendants are corporations, of which all but two have
been de-registered. The two companies which remain registered are the ninth
defendant (Idylic Solutions Pty Ltd, to which I refer as ISPL), which
is registered in New South Wales and which was for a short period the corporate
administrator of
the Super Save Fund, and the fourteenth defendant
(North Wave Ltd), which was incorporated in Vanuatu and is the corporate
administrator of the Good Value Fund. Each of the other corporate defendants
was
incorporated in an offshore jurisdiction and deregistered at various dates. (It
seems likely these entities were deregistered
for non-payment of annual
registration fees in the offshore jurisdiction of their incorporation.) (ISPL is
a different entity from
Idylic Solutions Ltd, ISL, which succeeded ISPL as the
corporate administrator of Super Save.)
- One
of the deregistered companies is Geneva Financial Limited (the
eleventh defendant). It was incorporated in Anguilla in 1999. It appears
from the evidence before me that it was struck off the register of companies
in
that jurisdiction (for non-payment of fees) on 11 May 2011. Nevertheless, a
joint defence was filed in the proceedings on behalf
of both Mrs Hobbs and
Geneva Financial (and verified by Mrs Hobbs) after that date (on 30 May 2011).
Insofar as Geneva Financial
no longer existed as a legal entity at the time of
the filing of a defence purportedly on its behalf on 30 May 2011, logically that
defence can have no effect vis a vis the company. (Although it appears that Mrs
Hobbs was still taking some steps in the name of
that company after its
deregistration, it is not clear when Mrs Hobbs became aware that the company had
in fact been deregistered.)
- Defences
have also been filed by Mr Collard for the tenth defendant, 888
Management Inc (a company incorporated in Vanuatu and referred to in these
proceedings as 888 Vanuatu to distinguish it from other companies of
the same
name), the corporate administrator of both the Pinnacle Fund and the 888 (Super
Save) Fund, and the twelfth defendant, Barclaywest Limited (a
company also incorporated in Vanuatu), the corporate administrator of the
Enhanced Fund. Mr Collard's contact details were included
on both defences and
Mr Collard signed and verified the respective pleadings as "Administrator".
Again, those defences can have no
effect vis a vis those companies given that
the companies were deregistered and had no legal existence at the relevant time
(but
it is relevant to note that Mr Collard was still prepared to sign as
administrator of the companies at that time, though, again,
it is not clear
whether he appreciated that they had been deregistered at the
time).
- On
the application of ASIC on 11 February 2011, I ordered that the ninth
(ISPL), fourteenth (North Wave) and fifteenth (GP Global)
defendants be taken to have admitted each of the allegations made against
them in the then Further Amended Statement of Claim unless, in each
case, a
defence was filed by the respective defendant by 18 February 2011. (Insofar as
that order related to a deregistered defendant,
it could logically have no
application. However, it does operate as against each of ISPL and North Wave,
neither of which filed a
defence by the date specified in the order and both of
which are therefore taken to have admitted the allegations made against them.)
- Mr
Halley informed me that the various deregistered corporate defendants have been
named as defendants on the basis that (to the extent
that they are corporate
administrators) orders or directions may need to be made for the re-registration
of those companies in order
for distributions to be made (out of the moneys held
in Court) to investors in the schemes administered by them. (By way of example,
reference was made to the mixing of funds from investors in the Integrity Plus
scheme and the Super Save scheme. The liquidator of
those schemes, Mr Barry
Taylor, has characterised moneys paid to investors in those two schemes as
returns of capital as opposed
to the payment of interest on capital, for the
purpose of determining the distribution of the balance of the funds. It is
anticipated
by ASIC that there might need to be a similar allocation amongst
other funds where there has been a mixing of moneys.)
Schemes
- The
details of the fourteen individual schemes the subject of these proceedings may
be summarised as follows:
(i)Integrity Plus Unit Trust (which received investments from
investors for the period from 24 December 2004 to 30 December 2007). The
corporate administrator
of Integrity Plus was PJCB International Ltd. The scheme
administrators of Integrity Plus were Mr Koutsoukos, Mr Wood and Mr Truong.
On
20 June 2008, orders were made by Austin J that the Integrity Plus Unit Trust
scheme be wound up. Mr Barry Taylor was appointed
as the liquidator of the
scheme pursuant to s 601EE(1) of the Corporations Act.
In the period between 24 December 2004 and 31 December 2007, scheme members
invested capital of US$28,501,428.53, AU$860,088.38, £9,996.78
and
€45,915.50 in Integrity Plus. Integrity Plus was one of the funds that
invested in Cadent and from which ASIC contends
returns were paid out of capital
not profit (Ex A Table 165). From February 2005 to December 2006 some of the
funds invested in this
scheme were transferred to a bank account in the name of
Mr Donald Caffray (a US attorney) then transferred by Mr Caffray to an account
held by NCCN with Cadent (for which account the introducing broker was an entity
referred to as TraderView/TraderVest - see Ex AO
p485 - entities owned or
controlled by a Mr Theodore (Ty) Andros); thereafter any Integrity Plus funds
invested through Cadent were
invested through the ISPL Cadent account
(including, after ISL took over the administration of the scheme, funds invested
through
ISL since the ISPL Cadent account was not changed when the role of
corporate administrator changed from ISPL to ISL). The subsequent
introducing
broker was New World Holdings (Ex AO p485). Treasury STRIPS were purchased for
this fund (Ex A Table 171).
(ii)Super Save Superannuation Fund (which received investments from
investors for the period from 10 July 2006 to 6 December 2007). There were
successive corporate administrators
of this scheme: 888 Management Incorporated
(referred to by ASIC as "888 Turks & Caicos" as it was there incorporated);
ISPL
(which, as noted earlier, was incorporated in Australia); and ISL (which
was incorporated in Vanuatu.) The scheme administrators
were Mr Koutsoukos, Mr
Wood and Mr Truong. Similar winding up orders were made in relation to the Super
Save Superannuation Fund
scheme in 2008, with Mr Taylor appointed as the
liquidator of the scheme.
In the period between 10 July 2006 and 6 December 2007, scheme members
invested capital of US$6,332,482.26 with Super Save. Again,
Super Save was one
of the funds that invested in Cadent and from which ASIC contends returns were
paid out of capital not profits
(Ex A Table 163). Investment was through ISPL's
Cadent account and New World Holdings was the introducing broker. Treasury
STRIPS
were purchased for this fund (Ex A Table 171).
(iii)Master Fund (which received investments from investors for the
period from 14 October 2004 to 7 May 2008), the corporate administrator of which
was Secured Bond Ltd. ASIC contends that the scheme administrators were Ms Li
and Mr Collard. In the period between 13 October 2004
and 7 May 2008, scheme
members invested AU$1,214,190.58 and US$1,499,162.57 in Master Fund. On 28 May
2012, on the application of
ASIC, I appointed a liquidator to Secured Bond and
ordered that the Master Fund scheme be wound up pursuant to s 601EE of the
Corporations Act, on the application of ASIC. Mr Barry Taylor was
appointed the liquidator of the Master Fund scheme.
Again, Master Fund invested through Cadent and ASIC contends it paid returns
out of profit (Ex A Table 162). From November 2004 until
November 2005, some of
the funds invested with Master Fund were transferred to the Caffray account and
then invested with Cadent
through Mr Caffray's NCCN Cadent account;
subsequently, funds invested in the Master Fund scheme were invested with Cadent
through
the Secured Bond Cadent account. TraderView/TraderVest was the initial
introducing broker for both accounts; subsequently the introducing
broker for
the NCCN was changed to New World Holdings. Treasury STRIPS were not purchased
for this fund (Ex AO p419).
(iv)First Secured Bond Unit Trust (which received investments from
investors for the period from 10 December 2003 to 31 December 2004), the
corporate administrator
of which was Secured Bond. ASIC contends that the scheme
administrators were Ms Li and Mr Collard. In the period between 10 November
2003
and 31 December 2004, scheme members invested US$800,402.23 in the First Secured
Bond Unit Trust. It did not open a Cadent account
nor did it invest in Cadent.
Some of the funds invested in this scheme were transferred to KJB Trust
Foundation, with which Mr Hobbs
informed me Mr Lynn Caswell was associated.
(According to Ms Xu, this is the account that Ms Li told her had been the
subject of
mismanagement by Mr Caswell, at which time she says Ms Li offered to
arrange a transfer of funds from this account to Master Fund.)
Between February
2004 and September 2004, funds were transferred from this scheme to Preserved
Investments for investment in the
Elite Premier Option Two Unit Trust.
(v)Pinnacle Fund (which received investments from investors for the
period from 18 July 2007 to 4 December 2007). The corporate administrator of
this
fund was 888 Vanuatu. ASIC contends that the scheme administrators were Ms
Li, Mr Collard and Ms Wu.
In the period between 18 July 2007 and 4 December 2007, scheme members
invested US$511,935 and AU$232,800 in the Pinnacle Fund. Moneys
invested in the
Pinnacle Fund were invested through 888 Vanuatu's Cadent account with New World
Holdings. Treasury STRIPS were purchased
for this fund (Ex A Tables 172 and
173). No returns were paid to investors.
(vi)888 (Super Save) Fund (which received investments from investors
for the period from 24 November 2006 to 27 September 2007). The corporate
administrator
of this fund was 888 Vanuatu. ASIC contends that the scheme
administrators were Ms Li, Mr Collard and Ms Wu.
In the period between 24 November 2006 and 27 September 2007, scheme members
invested US$128,000 and AU$420,311 in the 888 (Super
Save) Fund. Moneys from
this fund were invested through the 888 Vanuatu Cadent account. New World
Holdings was the introducing broker.
Treasury STRIPS were purchased for this
fund (Ex A Tables 172 and 173). No returns were paid to investors.
(vii)Good Value Fund (which received investments from investors for
the period from 6 December 2006 to 19 September 2007). The corporate
administrator
of this fund was North Wave Ltd. ASIC contends that the scheme
administrators were Mr Collard and Mr Bernard Moore (Mr Bernard Moore
gave
evidence in the proceedings and admits this). Solicitation for investment in
this fund was limited to the scheme administrators.
New World Holdings was the
introducing broker.
In the period between 13 December 2006 and 19 September 2007, scheme members
invested US$50,087.39 in the Good Value Fund. Moneys
from this fund were
invested through North Wave's Cadent account. Treasury STRIPS were not purchased
for this fund (Ex AO p419).
No returns were paid to investors.
(viii)Enhanced Fund (which received investments from investors for the
period from 31 August 2007 to 27 September 2007). The corporate administrator
of
this fund was Barclaywest Ltd. ASIC contends that the scheme administrators were
Ms Li, Mr Collard, Ms Wu and Ms Bi Hong Dong.
(Ms Dong gave evidence in the
proceedings and admits this.)
In the period between 31 August 2007 and 27 September 2007, scheme members
invested AU$317,092.72 and US$15,725 in the Enhanced Fund.
At least some of the
moneys invested in this fund were through acquisition of shares in Barclaywest.
Moneys from this fund were invested through Barclaywest's Cadent account. New
World Holdings was the introducing broker. Treasury
STRIPS were purchased for
this fund (Ex A Table 176). ASIC relies on Ex A Table 164 as establishing that
for this fund (in all but
one instance) returns were paid out of capital.
(ix)Best Fund (which received investments from investors for the
period from 24 January 2005 to 8 March 2007). The corporate administrator of
this
fund was GP Global Ltd. ASIC contends that the scheme administrators were
Ms Li and Mr Guo Ping Zhang. (Mr Zhang gave evidence in
the proceedings and
admits this.)
In the period between 24 January 2005 and 8 March 2007, scheme members
invested capital of US$164,189.41 in the Best Fund. This fund
invested with
Cadent. Initially this fund invested with Cadent through its investment through
the Master Fund (via its Secured Bond
Cadent account) in November 2006. Then GP
Global Cadent account was established. The introducing broker was
TraderView/TraderVest
then New World Holdings. Treasury STRIPS were purchased
for this fund (Ex A Table 176). No returns were paid to investors.
(ASIC notes that Mr Zhang placed the funds received from Best Fund scheme
members either through GP Global into Secured Bond for investment
in the Master
Fund or directly to Secured Bond for investment in Master Fund. It is submitted
that GP Global was effectively operating
as a subset of the Master Fund operated
by Mr Collard and Ms Li.)
- the "Hobbs
office schemes"
(x)Prestige Unit Trust (which received investments from investors for
the period from 23 February 2005 to 20 December 2006). The corporate
administrator
of this fund was Geneva Financial. ASIC contends (and it is not
denied) that the scheme administrators were Mrs Jacky Hobbs and Mrs
Brenda
Hobbs.
In the period between 29 March 2005 and 1 October 2007, scheme members
invested capital of US$187,287.46 and AU$300,000.00 in the
Prestige Unit Trust.
This fund invested through Cadent, through the Geneva Cadent account. The
introducing broker was TraderView/TraderVest.
Treasury STRIPS were purchased for
this fund (Ex A Tables 174 and 175). Returns were paid to investors.
(xi)Smart Money (which received investments from investors for the
period from 15 October 2002 to 8 July 2005). The corporate administrator of this
fund was again Geneva Financial. ASIC contends (and again it is not denied) that
the scheme administrators were Mrs Jacky Hobbs and
Mrs Brenda Hobbs.
In the period between 15 October 2002 and 8 July 2005, scheme members
invested AU$767,582.94 in the Smart Money Fund. The fund did
not invest with
Cadent. Some of the funds invested with this scheme were transferred to Bizcards
Inc, an entity associated with Mr
Malcolm Carr.
(xii)Elite Premier Unit Trust (which received investments from
investors for the period from 13 September 2002 to 20 August 2004). The
corporate administrator
of this fund was Preserved Investments Group Ltd. ASIC
contends that the scheme administrator was Mr Grant Clements, who worked out
of
the Hobbs office in Nelson (and who gave evidence in the proceedings and
admitted this).
In the period between 13 September 2002 and 20 August 2004, scheme members
invested US$118,679.50 in the Elite Premier Unit Trust.
This fund did not invest
with Cadent. Some of the funds invested in this scheme were transferred to
Magny-Cours for (or purportedly
for) investment in the Cash Builder fund.
(xiii)Elite Premier Option Two Unit Trust (which received investments
from investors for the period from 17 June 2003 to 8 November 2007). The
corporate administrator of this
fund was again Preserved Investments Group. The
scheme administrator was Mr Clements.
In the period between 17 June 2003 and 8 November 2007 scheme members
invested US$2,482,886.88 in Elite Premier Option Two Unit Trust.
From November
2003 through to December 2004, there were transfers of moneys invested in this
fund variously to Refco Capital, KJB
Foundation, Keystone International Ltd,
Global Forex Trading, FX Direct Dealer and Mr Caffray. After the Preserved
Investments Cadent
account was opened some of the moneys invested in this fund
were invested with Cadent through the Preserved Cadent account. The initial
introducing broker for that account was TraderView/TraderVest, then this was
changed to New World Holdings. Treasury STRIPS were
purchased for this fund (Ex
A Table 177). Returns were paid to investors (out of profits). Between 21
November 2007 and 29 February
2008 moneys invested in this scheme were also
invested with an entity named Boston Trading.
(xiv)Covered Strategies Unit Trust (which received investments from
investors for the period from 15 May 2003 to 12 November 2004). The corporate
administrator of this
fund was Ultimate Investments Ltd. ASIC contends that the
scheme administrator (for the relevant period) was Mr Robert Fitzgerald,
who
also worked out of the Hobbs office in Nelson. (Mr Fitzgerald gave evidence in
the proceedings and accepted this.)
In the period between 15 May 2003 and 12 November 2004, scheme members
invested US$2,915,176.50 in Covered Strategies. (While there
was a pending
account application for Cadent at the time of the ASIC investigation into the
schemes, no such account was ever opened.)
From October 2003 to November 2005,
some of the funds invested with Ultimate Investments were transferred to an
Optionz NZ bank account.
Between May 2003 and May 2004, those funds were
transferred by Mr Parker to an account with Options Xpress/Legend Clearing Co
and
on 22 August 2003 funds held in the Optionz NZ account were transferred by
Mr Parker to an entity known as Interactive Brokers.
- It
can therefore be noted that, of the schemes the subject of these proceedings,
the earliest schemes in operation were the (first)
Elite Premier scheme (in
operation from September 2002) and the Smart Money scheme (in operation from
October 2002), both of which
were run out of the Hobbs office.
- In
2003, the operation commenced of the Elite Premier Option Two Unit Trust, the
Covered Strategies Unit Trust (although that may
have been a new iteration of an
earlier fund operated by Mr Parker) and the First Secured Bond Unit Trust,
respectively (the first
two being run out of the Hobbs office, the last being
the first of the schemes operated from Australia by Ms Li and Mr Collard).
- 2004
saw the commencement of operation of the Master Fund and Integrity Plus Unit
Trust (both operating from Australia; the first
being a Li/Collard scheme and
Integrity Plus being the first of the Burwood schemes); 2005, the Best Fund (run
by Ms Li and Mr Zhang
out of Australia) and Prestige Unit Trust (the second
Geneva Financial fund operated from New Zealand); 2006, the Super Save
Superannuation
Fund (a Burwood scheme), and the 888 (Super Save) Fund and Good
Value Fund (both Li/Collard schemes); and 2007, the commencement
of the Pinnacle
Fund and the Enhanced Fund (both Li/Collard schemes). (Ms Wu was involved in
each of the Pinnacle, Enhanced and 888
(Super Save) Funds.)
- The
two schemes in which superannuation funds were invested were Super Save and 888
(Super Save), both of which were set up in 2006.
- Of
note from the above short chronology is that there was a marked increase in the
establishment of schemes operating from Australia
from 2004 onwards, consistent
with the statement by Mr Hobbs to attendees of the October 2003 DVD Seminar that
"we want to build
up a larger team to manage funds in
Australia".
- Various
other funds or schemes were referred to in the course of the evidence. Most of
these seem to have been earlier funds, for
example a fund run by Mr Robert Diaz
(the Express Fund, to which Mr Hobbs made reference in the DVD Seminar); the
Solid Gold fund
(to which Mr Hobbs again made reference in the DVD Seminar and
which was said to be run by solicitors out of Maroochydore); the Cash
Builder
Unit Trust scheme (a scheme of which Mr Pierre Mitchell, an accountant working
in Mr Hobbs' office, was the scheme administrator
and the corporate
administrator of which was Magny-Cours Ltd); the Procash scheme (with which Ms
Wu accepts that in some fashion
she was associated); and funds called the
Platinum Fund, the Emerging Technologies Fund and the Mozart Fund, respectively
(scheme
memoranda for which were provided to Mr Koutsoukos for use as a basis
for later scheme memoranda - something that casts doubt on
Mr Hobbs'
recollection that the initial template was that used for the first Geneva
Financial scheme memorandum and was provided
by Mr Becker to Mrs Hobbs).
- Other
funds seem to have been in operation during part or all of the period in which
the fourteen above schemes were operated (such
as the UniFund scheme, to which
reference is made, inter alia, in Ms Reisinger's CFTC examination (Ex
AO), and in Mr Koutsoukos' affidavit, as a fund with which Keele University was
associated;
a Global Funerals scheme (with which Mr Hobbs was involved); and
Infinity Fund, a fund said to be associated with Mr Stanton, a barrister
who
acted (at least at one stage) for ISL (or ISPL) in the 5864/07 proceedings).
None of those schemes or funds is the subject of
the claims made in these
proceedings (though the existence of a Global Funerals transaction or scheme is
something on which Mr Hobbs
places great weight as explaining the receipt by him
of moneys from Secured Bond).
Dramatis Personae
- Attached
as a schedule to these reasons is the list of the dramatis personae handed up by
Mr Clarke of Counsel (who appeared with
Mr Halley for ASIC) in the course of
submissions on 16 August 2012. I do not propose to make separate reference at
this stage to
all of the entities and individuals there noted (and, as Mr Clarke
made clear, I note that in part it includes what ASIC contends
or understands to
be the case in relation to certain of the entities). However, in order to enable
the chronology of events to be
more readily understood, I briefly note the
following:
- A
variety of Hobbs' family members have had some involvement in one or more of the
schemes the subject of these proceedings. I have
already referred to Mr and
Mrs Hobbs. (Mr Hobbs is contended by ASIC to have been the "mastermind"
behind the various schemes.) Mr and Mrs Hobbs (and/or Tasman Business
Consultants) traded at times as "Business Solutions" and maintained a joint
(J&D Hobbs) bank account (to which ASIC contends
various commission payments
were made) as well as a Business Solutions bank account.
- Mr
Hobbs' younger brother, Mr Robert Hobbs, who lives in New Zealand
and is married to Mrs Brenda Hobbs, worked from time to time in the Hobbs
Nelson office. According to Mr Hobbs' letter dated 22 November 1999 to Sovereign
Trust International
(an entity which provided registered office services for Mr
Hobbs in Hong Kong in relation to Magny-Cours), Mr Robert Hobbs was employed
by
Mr Hobbs "on a full time basis".
- Mr
Mitchell (the accountant who worked in that office over the period in question)
gave evidence that Mr Robert Hobbs performed tasks
directly for Mr Hobbs
(Mitchell [5]). Mr Clements (who also worked out of the Hobbs office for a
period) gave evidence that Mr Robert
Hobbs' role included running errands (T
677.29-31). Mr Hobbs said his brother processed new subscriptions for FTC.
According to Mr
Mitchell, wages for Mr Robert Hobbs were paid by Tasman Business
Consultants (on instructions from Mr Hobbs) (Mitchell [25], [38]).
- Mr
Robert Hobbs was an authorised signatory to the Hong Kong bank account of, and
nominated as "a" (and later purportedly the sole)
beneficial owner of,
Magny-Cours Ltd (the IBC in respect of which Sovereign Trust provided services
for Mr Hobbs and the corporate
administrator for Cash Builder Unit Trust, as
well as, relevantly, the entity into whose bank account payment for the sale of
"IP"
in a white label fund was made by J&B Financial in 2007).
- Mr
Hobbs did not call his brother to give evidence in his defence. ASIC submits
that a Jones v Dunkel inference should be drawn in that regard in
relation to evidence going to the particular issue as to the disbursement of
certain
funds out of the Magny-Cours account (namely, the issue as to what
happened to the sum of $200,000 paid by J&B Financial in November
2003 for
the purpose of acquisition of the intellectual property in the white label fund
or funds referred to in an invoice issued
on KLM Enterprises letterhead). ASIC
submits that it can be inferred that the $200,000 was a payment referable to the
sale by Mr
Hobbs personally of IP in relation to a white label fund (though the
invoice was on KLM letterhead) and that the payment of funds
into the
Magny-Cours account supports that conclusion.
- Mr
Hobbs disputes that KLM was his alter ego and maintains that the moneys were
paid to Magny-Cours at a Mr Chen's request. He was
initially unable to recall
what had happened to that money but later insisted in the witness box that it
was invested. I consider
in due course what inference, if any, should be drawn
from the fact that Mr Robert Hobbs was not called to give evidence by his
brother
(though on Mr Hobbs' own evidence he was in regular communication with
him throughout the hearing).
- Mr
Robert Hobbs' wife, Mrs Brenda Hobbs (who was subpoenaed to give evidence
in these proceedings by ASIC), was the co-scheme administrator of the Prestige
and Smart Money
Funds. In some documents signed by Mrs Brenda Hobbs she has
described herself as a beneficial owner and controller of Geneva Financial,
in
others as a principal of the company. Mrs Brenda Hobbs was an introducer for
some of the investors in the funds administered by
Geneva Financial (and
obtained commission in that role as well as a half share of the administration
fees payable to Geneva Financial).
Mrs Hobbs submits that her sister-in-law
shared equal responsibility for the running of Geneva Financial (an inference
said to be
available from the evidence that an equal payment of administration
fees was made to Mrs Brenda Hobbs).
- Mrs
Hobbs' sister, Mrs Ngaire Dent, who lives in Queensland and did not give
evidence in the proceedings, was involved in the printing and distribution
(within Australia)
both of FTC educational material and, for some time, private
placement memoranda and contract documentation in relation to investment
in the
various funds. Her husband, Mr Craig Dent (Mr Hobbs' cousin) assisted her
in that task. He was subpoenaed by ASIC to give evidence. He was adamant that he
did no more than
provide assistance for his wife and (as he told me more than
once) that the role of he and his wife was solely that of "publishers
and
distributors". He maintained records of FTC subscribers (with the assistance, he
says, of his then young daughter) and reported
thereon to Mr Hobbs.
- In
the DVD Seminar, Mr Hobbs broadcast a short promotional film of what was
described as the "Nelson office" of FTC (though Mr Hobbs
acknowledged in
cross-examination that it also showed footage of the Dents' home in Queensland).
Mrs Dent appeared on that promotional
film and Mr Hobbs confirmed that she was
included in the description (on that film) of the "highly trained personnel"
involved in
the distribution of the financial education material (though it is
not clear what qualifications she had to support such a
reference).
- Tasman
Business Consultants was incorporated in New Zealand on 10 March 1998 (Ex AX
15374). It is admitted that Mr Hobbs is the sole director of that company
and
that he and his wife each hold 50% of the shares of the company. Mr Hobbs
described the business of Tasman Business Consultants,
in his letter dated 22
November 1999 to Sovereign Trust, as "solely investment" and said
that
All money transferred to [the entity that ultimately became Magny-Cours] will
be profit from current investment with the above companies
and from my
personal consulting business, Tasman Business Consultants Ltd, of which I
conduct business appraisals, insurance, estate planning, financing, etc. (my
emphasis)
- Tasman
Business Consultants was the entity to which all FTC subscription payments were
made (paid into an ANZ bank "trust" account
in its name). It was also the entity
from which payment of various expenses and wages was sourced (including expenses
in relation
to FTC, expenses in relation to the work carried out by each of Mrs
Watson and her daughter Mrs Burnard in relation to the OEM/KLM
process, expenses
in respect of the work carried out by Mr Robert Hobbs, and payments for the rent
and other bills related to Mr
Hobbs' office) via a transfer of funds by Mr Hobbs
to the second (BNZ) bank account. Mr Mitchell says that this was on Mr Hobbs'
instructions ([25], [38]) (and there seems no one else who the evidence
discloses gave, or was in a position to give, such instructions).
- According
to Mr Mitchell, the second bank account opened in Tasman Business Consultants'
name (a BNZ account) was a business account
(Mitchell [29]-[30]). (As I
understand it, there were only relatively few payments relating to the schemes
the subject of these proceedings
paid into that BNZ account.)
- At
all material times, Mr Hobbs maintained an office at the registered office of
Tasman Business Consultants (the address of which
changed over the period in
question). From June 2001 until July 2004, its registered office address was at
the BNZ Building in Trafalgar
Street, Nelson, New Zealand; from July 2004 to 5
August 2011, it was at the State Building in Bridge Street, Nelson, New Zealand.
Its registered office is now at a property at Echodale Place, Stoke, Nelson, New
Zealand owned by Legend of Bathurst Limited (a company
incorporated in New
Zealand on Mr Hobbs' instructions - Mr Nicholas Moore's affidavit at [31]). Mr
Mitchell confirmed (and this is
consistent with the way in which various of the
witnesses referred to the Tasman Business Consultants' office) that the Tasman
Business
Consultants' office was referred to as Mr Hobbs' office.
- The
Tasman Business Consultants' Nelson address (then the State building) is noted
on the letterhead of at least one of the IBCs (Trans
Management Corporation (Ex
AU 3921 - 2005). Tasman Business Consultants also maintained a post office box
address in Stoke, Nelson,
New Zealand (the details of which appear on the
letterhead of various other entities to which reference is made in these
reasons).
- Magny-Cours
Ltd (to which I have already referred in passing above) is an IBC that was
incorporated in the Turks and Caicos Islands (presumably as
a shelf company of
some kind) on 27 July 1999. Mr Hobbs applied in 1999, through an entity in Hong
Kong (Sovereign Trust International),
to acquire an offshore IBC. Magny-Cours
(initially expected to be called Edgewood International) was the IBC that was
eventually
so acquired. In his application form, Mr Hobbs instructed Sovereign
to provide nominee directors, shareholders, email and telephone
forwarding
services and a company bank account. Renewal fees indicate that registered
office and agency services were also provided
by Sovereign.
- The
nominee shareholder of Magny-Cours was identified as Midland Investments Ltd and
the nominee director was Sovereign Managers Ltd.
A share certificate was issued
in the name of Midland Investments on 23 November 1999. Midland Investments
signed a Nominee Declaration
on 23 November 1999, declaring that it held its
issued share in Magny-Cours Ltd as nominee for Mr Hobbs.
- Mr
Hobbs was thus the beneficial owner of Magny-Cours at least as at November 1999.
By letter dated 25 November 1999, Sovereign Secretaries
(TCI) Limited confirmed
to the HSBC bank that Mr Hobbs was the beneficial owner of the company (and
attached his passport details,
therefore presumably had been instructed to do
so).
- In
around May-June 2000, Mr Hobbs authorised Mr Mitchell to be a signatory to
operate the Magny-Cours' bank account (by faxes dated
26 May 2000 and 6 June
2000). (At that time, Mr Mitchell was the administrator of the Cash Builder Unit
Trust.) Mr Mitchell deposed
(at [10]-[11]) that funds from investors in that
scheme were forwarded to the Magny-Cours bank account at HSBC in Hong Kong (and
that Mr Hobbs later said they had been stolen).
- In
September 2000, Mr Hobbs "as the ultimate beneficial owner" sent a fax to
Sovereign Trust authorising Mr Mitchell to discuss and
arrange for the issue of
shares in Magny-Cours to Mr Robert Hobbs as a cobeneficial owner of Magny-Cours
and it appears that a further
share was issued to Mr Robert
Hobbs.
- In
February 2001, Mr Hobbs sent a fax to Sovereign Trust advising that he wished to
"withdraw" as a beneficial owner of Magny-Cours,
leaving his brother "the sole
beneficial owner of the company (the fax transmission imprint has a 13 February
2001 date). The letter
stated that a nominee declaration was being forwarded by
post. Whether or not it was so forwarded is unclear.
- Mr
Hobbs seems at least to have retained some degree of control in respect of the
company insofar as he issued various directions
for the disbursement out of that
company's account (countersigned by his brother) by letters dated 23 September
2004, 21 December
2004, 16 March 2005, 2 May 2006, 27 November 2006 (and signed
other directions solely in his own name - 20 January 2008 and 5 July
2008). Mr
Hobbs accepted in cross-examination (when pressed) that he had treated
Magny-Cours as his (and/or his brother's) personal
company (to the extent that
payments for various personal expenses were paid out of that company on his
instructions). This continued
after February 2001.
- Trans
Management Corporation is an IBC that was incorporated in Vanuatu. It is
identified in the respective private placement memoranda of each of the schemes
the subject of the proceedings as the trustee of the scheme. (It was also
described as the trustee of other schemes not the subject
of these proceedings,
such as the Cash Builder Unit Trust, Platinum Fund and Mozart Fund).
- Correspondence
in relation to renewal of the fees for provision of registered agent's services
in respect of Trans Management was
sent to the Hobbs office. Mr Jim Cable (who
worked in or out of the Hobbs office around then) stated in an email dated 12
July 2001
(relating to services for IBCs) that the ownership of Trans Management
Corp had been transferred to OEM (describing OEM as "a Nevis-based
company").
There is no evidence of any such transfer of ownership. (I note that insofar as
this suggests that OEM was based in Nevis,
and the correspondence is at a stage
when the OEM entity in the British Virgin Islands had not yet been incorporated,
this might
provide some support for the inference that over the relevant period
of time there were multiple OEM entities, assuming that OEM
had actually been
incorporated anywhere at that stage and was not simply a business name being
used in some loose fashion.)
- A
letter dated 4 May 2005 signed by Mr Hobbs in the stated capacity as
administrator of Trans Management (and nominating the "nasl"
email address as
his contact email address) was on letterhead nominating the then registered
office address of Tasman Business Consultants
(the State building) as the
address of Trans Management (Ex AZ 3921).
- I
interpose to note that the apparent connection between Trans Management and the
Hobbs office (from which a number of the funds for
which it was the nominated
trustee were administered) and the lack of any evidence to suggest that there
was any independent function
carried on by Trans Management, belies the
suggestion that Trans Management was an external trustee in any sense of being
independently
accountable to investors in the schemes. The only scheme
administrators who suggest that they reported (in any sense) to Trans Management
were Mr Grant Clements (in relation to the two Elite funds) and Mr Fitzpatrick
(in relation to the Covered Strategies fund). Mr Clements
gave evidence that he
reported to Trans Management through Mr Hank Parker (Ex AQ), though Trans
Management was (according to its
2005 letterhead) based in the same office as Mr
Clements himself. Mr Fitzgerald could not recall to whom he emailed his reports
(T
933.13-14) but appeared surprised in the witness box to hear it suggested
(and said he did not know) that Trans Management was an
IBC for which the
registered office and agency services were being renewed by Mr Hobbs (T
940.16-18, T 942.25-29). (Mr Hobbs maintained
that his understanding was that
the "outside trustee" role was by Mr Becker, Mr Chen, Mr Parker and others.
There is no evidence
that any of those individuals took any steps to perform the
role of an external trustee in relation to the schemes.)
- International
Management Incorporation is an IBC that was incorporated on 17 August 2005
in Vanuatu. The certificate of incorporation for this company was sent to the
Tasman
Business Consultants office marked to the attention of Mr Hobbs. On 4 May
2007, International Management Incorporation was struck
off the register of
companies in Vanuatu. It was the entity through which Mr Hobbs held 25% of the
shares in Barclaywest.
- First
Zurich Financial Ltd is the name of an IBC that was incorporated in Anguilla
on 19 August 2002 (and later deregistered on 21 July 2006). (I refer to it
as
FZF Anguilla to distinguish it from the IBC of the same name that was later
incorporated in Vanuatu on the application of Ms Li
and Ms Dong on 22 March
2007.) There is a question as to which of FZF Anguilla or FZF Vanuatu was the
entity through or with which
Mr Hobbs entered into a facilitation agreement with
Global Funerals in 2006, on which as already noted he relies heavily for the
submission that he received no commission referable to the funds the subject of
these proceedings and that any commission he did
receive was referable to Global
Funerals. (The agreement itself refers only to First Zurich Financial Ltd, so on
its face it is not
clear whether it was FZF Anguilla or FZF Vanuatu.) Mr Hobbs
wrote a great deal of correspondence (mainly as consultant but once as
director)
on the FZF Anguilla letterhead.
- As
adverted to above, First Zurich Financial Ltd is also the name of an IBC
that was subsequently incorporated in Vanuatu (to which I will refer as FZF
Vanuatu). This IBC was one
that, according to Mr Hobbs in the witness box, was
set up for him (and that he regarded as being beneficially owned by him). It
may
or may not be the entity that is party to the Global Funerals commercial bond
facilitation transaction.
- Swiss
Financial Security (or Securities) is an IBC that, from 2007, commenced the
printing and distribution of private placement memoranda and scheme agreements
from one of
the Pacific islands (probably Tonga).
- As
noted above, Mr Hobbs maintained an office in Nelson at the registered office
address of Tasman Business Consultants over the relevant period.
References in these reasons to the Hobbs office or the Nelson office are
references to the registered office
of Tasman Business Consultants at the
relevant time.
- Working
in the Hobbs office over part or all of the period from 2000-2008 were various
people: Mrs Doreen Andrews (Mr Hobbs' secretary);
Mrs Suzanne Watson (Mr Hobbs'
personal assistant); Mr Robert Hobbs (Mr Hobbs' brother); Mr Jim Cable (who
carried out some administrative
tasks such as organising the renewal of IBCs and
who was in the office for the period around 2001-2003); Mr Pierre Mitchell, an
accountant
(and administrator of the Cash Builder Unit Trust) who was in the
office from around 1999 to 2008; Mr Robert Fitzpatrick, (administrator
of the
Covered Strategies scheme) who was in the office from about September 2003 to
early 2005; and Mr Grant Clements, (the administrator
of the two Elite Premier
schemes) from around 2000. (Mrs Emma Burnard, Mrs Suzanne Watson's daughter,
visited the Hobbs office from
time to time but mainly worked from her own home.)
Each of those (other than Mrs Andrews, Mr Robert Hobbs and Mr Jim Cable) gave
evidence in the proceedings either having been subpoenaed by ASIC to attend for
that purpose or, in the case of Mr Mitchell, having
sworn an affidavit shortly
before the hearing.
- According
to Mr Hobbs, when questioned as to the reference in the DVD Seminar to others in
his office who were "running funds", there
were others who also worked in the
Nelson office at various times, including an accountant (Mr Mills), a solicitor
(Mr Mark Wheeler)
and another accountant (Mr Alistair Wilkins). No other witness
referred to those persons having been working in the Nelson or Hobbs'
office
during the period in question. (Mr Clements' diagram of the office layout in the
respective buildings (Ex AR) did not indicate
any office occupied by persons of
those names.) Mr Hobbs conceded that at least one of the three persons named
above had not been
in the office for very long. (The relevance of this is to
indicate Mr Hobbs' apparent propensity to overstatement and imprecision,
in that
the impression conveyed by what he said at the DVD Seminar about others in his
office "running funds" was not that of persons
there for a short time who had
nothing to do with FTC or KLM.)
- Mrs
Suzanne Watson is a hairdresser by occupation (though she stated her
occupation as a broker on at least one Smart Money scheme agreement - something
she described as just an "anomaly"). She acted as (an unpaid) personal assistant
to Mr Hobbs in the Nelson office over a period of
years, performing work of an
administrative nature (T 429.48, T 430.14, T 440.45-T 441.13). (Although there
had been an issue raised
at an earlier interlocutory application as to her role
in the Hobbs office, at T 1233.46-49 in cross-examination Mr Hobbs accepted
that
Mrs Watson was his personal assistant.)
- Mrs
Watson did not have her own office at the Hobbs office, according to Mr Clements
(T 675.46-676.6), but worked variously in Mr
Hobbs' own office or in the office
forecourt area. Mrs Watson's work included filing documents (in what she herself
referred to as
an "ad hoc" fashion - T 472.10), sending and receiving
correspondence relating to FTC executives, coordinating the dispatch of FTC
materials to FTC executives, and undertaking work in connection with OEM/KLM and
Diligence Discovery. Mrs Watson's expenses were
reimbursed by Mr Hobbs by way of
cheques drawn on the Tasman Business Consultants account (T 465.3-7,
41-45).
- Mrs
Emma Burnard (nee Watson) is Mrs Watson's daughter. She carried out tasks on
a paid basis (from her home) in relation to the OEM/KLM procedure and she
incorporated
Diligence Discovery Ltd in New Zealand (according to Mrs Watson, at
Mr Hobbs' suggestion or direction) to perform the due diligence
work in relation
to the Super Save and 888 (Super Save) Funds.
- Mrs
Doreen Andrews is Mr Hobbs' secretary or assistant (as so described by Mr
Mitchell at [5] and Mr Clements T 674.36-40, T 677.48-49). According to
Mr
Clements (T 678.1-3), Mrs Andrews took instructions directly from Mr Hobbs.
(Some of Mr Hobbs' evidence suggests, implausibly
in my view, that Mrs Andrews
exercised a great degree of autonomy in the making of decisions on matters dealt
with in the Hobbs office.
In this regard, his failure to call Ms Andrews to give
evidence to that effect gives me comfort in drawing the inference otherwise
available on the evidence before me that Mrs Andrews fulfilled no more than a
secretarial role, reporting to and taking instructions
from Mr Hobbs.)
- Mrs
Andrews and her husband owned and controlled Nelson Administration Services
Ltd (NASL), from which it appears that the initials "nasl" in the email
address used for many of Mr Hobbs' email communications were
derived. NASL
provided secretarial services to businesses in Nelson, New Zealand. (According
to Ex AX, a New Zealand company search,
it was struck off in 2007; the
liquidator's report disclosing that it ceased trading in about
2004.)
- As
noted above, Mr Hobbs did not call evidence from Mrs Andrews. ASIC submits that
an adverse inference can be drawn that her evidence
would not have assisted Mr
Hobbs' defence on two issues: first, as to the authorship by Mr Hobbs of a book
titled "The Art of Arbitrage"
(which he contended in cross-examination was
prepared by him for NASL and not the same as the FTC booklet of the very same
name that
in previous evidence he said was provided to him or written by Mr
Becker - evidence given in the face of glaring inconsistency between
his
affidavit reference to the provision of the books and his evidence in the s 10
examination as to his authorship of that book; and second, as to the issue of
access by Mr Hobbs to "nasl" emails (namely, the rather
remarkable suggestion by
Mr Hobbs that, as his secretary, Mrs Andrews would make her own decision as to
what emailed documents addressed
to Mr Hobbs would be printed and/or shown to
him). I consider those matters in due course.
- Mr
Jim Cable worked in the Nelson office at least for some period around
2001-2003. His work appears to have included administrative work relating
to the
renewal of IBCs such as FTC and Trans Management Corporation (Exhibit AU p 1543
being an email dated 12 July 2001 in relation
to renewal fees). Mr Cable was
appointed as a director of Global Visions Ltd in July 2003, that being a
company incorporated in New Zealand of which Mr Hobbs was a shareholder.
(According to Mr Diaz ([128]),
Mr Cable had a role administering a fund called
Covered Calls for a period prior to about late 2003, which fund appears then to
have
been restyled the Covered Strategies fund that was administered for a time
by Mr Fitzgerald.) Mr Cable also operated an IBC called
New Millennium
Opportunities out of Mr Hobbs' office (Ex F tab 41 being a reference by Mr Cable
on New Millennium Opportunities letterhead).
(Mr Cable's email address had the
prefix "nmo".)
- Mr
Pierre Mitchell is an accountant who worked part-time from the Nelson office
as a bookkeeper for the period from about 1999 to 2008 (having previously
worked
for Mr Hobbs at Colonial Mutual in Nelson - Ex F tab 41 p3). He was the
administrator of the Cash Builder Unit Trust fund
for a time up to 2003 and he
was for a time an authorised signatory of the bank account for Magny-Cours. He
says he acted in those
capacities on instructions from Mr Hobbs
([8]-[10]).
- Mr
Mitchell performed accounts payable and bank reconciliation work for the Tasman
Business Consultants BNZ account for Mr Hobbs ([24])
but says (and I accept)
that he never made any transaction on that account unless authorised he do so by
Mr Hobbs ([27]). Mr Mitchell's
wages were paid out of the Tasman Business
Consultants account (he says on instructions from Mr Hobbs) ([25] and [38]).
- Mr
Grant Clements is a truck driver by trade. He accepted, in examination in
chief by Mr Clarke, that he regarded Mr Hobbs as something of a "father
figure"
(T 671.47-T 672.1). He worked in the Hobbs' office for some time from around
2000. At the time Mr Clements commenced work
in the Nelson office, he was
seemingly at a loose end from an employment perspective. Mr Clements says he
initially shared an office
with Mr Mitchell (when Tasman Business Consultants
was in the BNZ building) (T 674.26-27; T 676.45-46). Mr Clements said that he
had no financial qualifications but he did his own research. Questioned by Mr
Hobbs, Mr Clements agreed that he had written an ebook
on finance (40 Questions
to ask your Investment Broker). (There was no copy of that book in evidence from
which to assess the degree
of financial knowledge Mr Clements had gained while
doing the research he said he did in Mr Hobbs' office.)
- Mr
Clements applied for the incorporation of the IBC named Preserved Investment
Group, which was the corporate administrator of both
the Elite Premier funds (T
683.27). He was not paid by Mr Hobbs or Tasman Business Consultants (T
673.47-674.5) but received commission
as administrator of the Elite Premier
Option Two Unit Trust (Ex A tab 109; T 725.30-48). Mr Clements says that he paid
rent to Mr
Hobbs from around 2006 for his occupation of space in the Hobbs
office (T 728.44-729.44). (Mr Halley notes that this rent arrangement
was not in
writing and that it was referable not to the area occupied but, on Mr Clements'
evidence, to a share of profits from the
fund.)
- Mr
Robert (Bob) Fitzgerald is a retired supermarket operator and owner. He
worked in the Hobbs' office from about September 2003 to early 2005 (T 899.4-9,
T
989.19-31; Mitchell [5]).
- Mr
Fitzgerald incorporated the IBC called Ultimate Investments, through which he
administered the Covered Strategies fund (T 899.43-900.12).
Mr Fitzgerald
received commission in that capacity and (like Mr Clements) understood that he
was to pay rent to Mr Hobbs referable
to a percentage of profits earned by the
fund - that agreement again not being in writing and not referable to the area
occupied
(T 951.46-952.3; T 952.34-43; T 952.49-953.21; Ex AT tab 3; T
976.50-977.4). Mr Fitzgerald says he ceased working as administrator
of Covered
Strategies in late 2004 but that, when he found nothing was being done about the
clients' investment for the six-month
period thereafter, he formally resigned as
"director" in mid 2005.
- Relevantly,
Mr Fitzgerald saw his role as administrator as an administrative one and sought
Mr Hobbs' assistance when Mr Fitzgerald
was having difficulty obtaining a
response from Mr Parker in relation to funds that had been invested with
him.
- FTC
is an IBC that was incorporated and registered in Vanuatu on 30 November 1999.
According to the Vanuatu Financial Services Commission,
its records show that
the company was struck off the register on 7 November 2007 (and that its
registered office address, and registered
agent, in Vanuatu "is no longer
active").
- The
FTC Financial Education brochure (Ex AU 8239) describes FTC as an "innovative
provider of financial education" and says that "The
program takes novice and
experienced investors alike and transforms their financial results through
continuously expanding their
knowledge and awareness of finance". The
application form for FTC subscription included a document headed
"Confidentiality Agreement
- Non-Disclosure and Non-Circumvention Agreement"
containing an agreement that there be no "contact with any institutions,
clients,
individuals, or parties introduced by" FTC.
- At
the opening of the session on day one of the DVD Seminar, Mr Hobbs
said:
The company[ies] we're going to discuss this morning is Future Trading
Corporation Limited. Future Trading Corporation Limited is incorporated in
Vanuatu, it's owned by the international company OEM limited. Future Trading
Corporation does not sell or offer investments or give financial advice. Future
Trading Corporation is a financial
education company, and you will probably hear
me reiterate that a number of times. By law in Australia we can [share]
financial [education]
information by education, but the moment you make an
investment offer, in Australia, you must have either the twelve twenty rule
or
have a registered prospectus. ... (my emphasis) (P 3 lines 30-39) [Pausing
there, the last sentence clearly goes to the lawfulness
of the making of the
investment offer.]
- Registration
fees for FTC appear to have been invoiced to Mr Hobbs. (At least as at 29 May
2003, correspondence advising as to the
schedule of fees due for FTC and Trans
Management Corporation, being the annual government registration fee and an
annual registered
agent and office fee payable to the Vanuatu Financial Services
Commission in relation to those companies was sent by a Mr Roger Jenkins
B.Fin.Admin FCPA in Vanuatu, addressed to Mr Hobbs at Mr Jim Cable's New Zealand
"nmo" email address - Exhibit AU 1543.)
- Mr
Hobbs concedes in his closing submissions that he has given conflicting accounts
as to how FTC was set up (and I consider later
the explanation he has provided
for those conflicting accounts).
- In
his written closing submissions, Mr Hobbs maintains that Mr Kip Becker "arranged
for [FTC] to be set up". However, in the DVD Seminar
Mr Hobbs is recorded as
saying (inconsistently with his evidence in the witness box, and also his
closing submissions) "I sold I
formed Future Trading ...I formed Future Trading
and bought all the investment products there". In cross-examination he suggested
that this statement related only to the formation of the investment products
(though that of itself seems inconsistent with Mr Hobbs'
present submission that
it was Mr Becker and Ms Reisinger who had developed the investment products). In
cross-examination Mr Hobbs
said:
A. I didn't incorporate it [FTC], I formed the products of FTC.
Q. Do you deny that you formed FTC?
A. Absolutely.
Q. Have you ever told anybody that you formed FTC, Mr Hobbs?
A. Let's make sure of the difference of incorporated and formed. Formed
products, yes. Incorporated the company, no. (my emphasis) [In fact
Mr Hobbs had told the attendees at the DVD Seminar that he had "formed"
FTC.]
- Mr
Hobbs, taken in cross-examination to the DVD Seminar transcript, noted that on
the video he had used the verb "formed" not "incorporated"
but then said: "I
formed the company, the products. And I was to be paid, which I was never paid".
Although Mr Hobbs maintained that
he was to be paid something (if and when the
company was sold) he said he did not know whether the company was ever sold.
Later in
cross-examination, Mr Hobbs said that FTC "was sold between Mr Chen and
Becker. At one stage I was supposed to have ownership of
FTC, but that never
happened".
- When
pressed on the sale to which he was there referring (and out of which he had
said that he "was supposed to get paid for a portion
of FTC, which I never
did"), Mr Hobbs said that Mr Chen and Mr Becker were selling part of FTC to
another person (and that Mr Chen
had said that Mr Hobbs was going to get paid
from it). (Somewhat testily, Mr Hobbs suggested that Mr Halley would be welcome
to check
the register of companies to confirm that he, Mr Hobbs, did not have
any interest in FTC, a rather disingenuous answer given that
Mr Hobbs seems to
have understood that IBCs were typically incorporated in "privacy havens" and it
might be expected that it would
not necessarily be a simple matter to determine
beneficial ownership of such companies. While I might otherwise have attributed
this
response to the pressure of cross-examination, it is noteworthy that Mr
Hobbs' attitude when faced with seemingly inconsistent propositions
in the
witness box was often to treat them dismissively in that fashion.)
- Turning
to the contemporaneous documents, on at least one occasion Mr Hobbs signed a
copy of a letter on the letterhead of FTC (to
a Mr Keith Callins) above the
words "David J Hobbs CIF Director" (letter dated 7 June 2002, Ex AU 1218, giving
the "nasl" email address
as his contact address). When asked how he came to sign
a letter on the letterhead of FTC which described himself as director, Mr
Hobbs'
response was "I obviously didn't check it" and said that "I guess nobody's past
making a mistake". Then at T 1235.05, Mr Hobbs
said (tellingly in the context of
the multiplicity of corporate personas involved in the operation of the
investment process in respect
of the various schemes):
A. ... Mrs Andrews [his secretary] wrote on a number of different letterheads
for me and that's obviously just a mistake.
- I
consider in due course the conclusions that ASIC submits should be drawn as to
Mr Hobbs' involvement with FTC.
- ASIC
contends these companies are or were in effect controlled by, or alter egos of,
Mr Hobbs.
- I
have already noted the amendment to the pleading that was made in relation to
the details of incorporation of these companies. ASIC
had pleaded (at [26] and
[27] of the Second Further Amended Statement of Claim) that both OEM and KLM
companies were incorporated
in the British Virgin Islands. Mr Hobbs' verified
defence (to the same allegation in the Further Amended Statement of Claim as
appeared
in the Second Further Amended Statement of Claim) contained a
non-admission of that allegation on the basis that he did not know
and could not
admit that allegation. The verified defence filed for Mrs Hobbs (and Geneva
Financial) similarly pleaded to a lack
of knowledge in relation to that
allegation.
- As
now pleaded, the relevant allegations in the Third Further Amended Statement of
Claim are that:
26. O.E.M. Ltd was a company incorporated in British Virgin Islands on 12
December 2003 up to the date of its deregistration on 1
May 2007 and further or
alternatively:
(a)a company incorporated in Anguilla;
(b)a company incorporated in the Federation of Saint Kitts and Nevis;
(c)a company incorporated in the Bahamas;
(d)an entity known as O.E.M.Ltd or OEM Ltd ...
27. KLM Ltd was a company incorporated in British Virgin Islands on 11
February 2002 up to the date of its deregistration on 1 November
2004 and
further or alternatively K.L.M. Ltd or alternatively K.L.M. Enterprises Ltd
was:
(a)a company incorporated in Anguilla;
(b)a company incorporated in the Federation of Saint Kitts and Nevis;
(c)an entity known as K.L.M. Ltd or KLM Ltd or K.L.M. Enterprises Ltd ...
- A
company named KLM was recorded as having been incorporated in the British Virgin
Islands on 11 February 2002. Similarly, a company
by the name of OEM was
recorded as having been incorporated in the British Virgin Islands on 12
December 2003. There is, therefore,
evidence from which I accept that companies
by the name of KLM and OEM were incorporated in the British Virgin Islands as at
February
2002 and December 2003, respectively.
- On
1 November 2004, the KLM entity that was incorporated in the British Virgin
Islands was deregistered and on 1 May 2007, the OEM
entity incorporated in the
British Virgin Islands was also deregistered. (The apparent lack of attention
paid to the payment of fees
for renewal of KLM/OEM's respective registration
might perhaps suggest that these were entities in little more than name;
alternatively,
it might suggest that the companies were by then no longer
serving a particular purpose, though the OEM/KLM process, according to
Mrs
Watson, continued "well after" Mr Becker's death in 2004. Since the
deregistration of IBCs for non-payment of fees was a common
feature, perhaps the
more likely explanation is that at some point no one bothered to attend to such
niceties.)
- As
noted earlier, back in July 2001 Mr Cable had referred to OEM as a "Nevis-based"
company and some of the OEM letterhead used by
Mrs Watson and Mrs Burnard is
consistent with OEM being a company as based in Nevis. I accept therefore that
there is some evidence
to suggest that an earlier IBC by the name of OEM may
have been in existence and being based in Nevis. (Similarly, some of the KLM
letterhead used by Mrs Watson and Mrs Burnard described KLM as an entity in
Nassau, the Bahamas though there is no evidence of incorporation
in that
jurisdiction).
- More
conclusively, there is also evidence to suggest that registration fees were paid
for companies of those names in Anguilla (and
in 2006, after the deregistration
of those Anguillian companies had been confirmed, Mr Hobbs applied to revive the
registration of
companies of those names in Anguilla). I would infer from this
that there were also, at some stage, entities known as OEM and KLM
incorporated
in Anguilla.
- I
was informed by Mr Halley in opening that ASIC had been unable to obtain
confirmation of any corporate registration of OEM/KLM other
than in the British
Virgin Islands but that it acknowledges the possibility that a company of the
OEM name was also incorporated
in Anguilla and/or the Bahamas (and/or Nevis, as
the letterhead stated) and that a company of the name KLM was incorporated both
in the Bahamas and the British Virgin Islands (and possibly also in
Anguilla).
- Mr
Hobbs said in cross-examination that he did not know the ownership structure for
OEM as at 2002/2003 other than that he knew "it
was owned by a number of
people". He said that he had not looked at the register for OEM; did not know in
what country OEM was incorporated;
and did not know when it was incorporated.
His evidence was that the only knowledge he had of OEM was what other people had
told
him (but indicated that he had not seen any difficulty in relying on that
when telling others about the company, saying "Yes; but
I had a lot of trust in
Mr Becker").
- In
his written closing submissions, Mr Hobbs maintains that it was "Ms Reisinger/Mr
Becker" who "established the OEM/KLM arrangements"
(though this may be a
reference to the putting in place of the process to be followed under the
OEM/KLM names and not incorporation
of the companies as such).
- When
questioned at the DVD Seminar as to the structure of the ownership of FTC and
the OEM/KLM companies, Mr Hobbs responded (with
no apparent reticence) as
follows:
Right. Future Trading Corporation is a Vanuatu registered company.
...
Future Trading is owned by OEM Limited, which is a Nevis registered company I
believe.
...
Now, OEM is owned by attorneys, licensed security advisers and fund managers
from the US, and there's an accountant there as well.
- When
asked whether he was part of that company (OEM) as well, Mr Hobbs
said:
I sold - I formed Future Trading.
...
And I didn't form OEM or KLM, but I formed Future Trading and bought all
the investment products there, but when I developed the multiple sclerosis I
had to make sure that the structure was put in place internationally, if
anything
happened to me, everything continued in a normal fashion. So we have
people around the world, in the high places only in the companies that are
running - running the operations. We also - one of the people that owns
OEM - and KLM actually I must say - is a gentleman who lectures on finance at
the Kentucky University
in Kentucky, a Mr Parker, and that allows us to also
use the whole Kentucky University's as - when we're doing research, which is
pretty good because we get
it for nix, you know. So no I am not the owner any
more, and that's simply for medical reasons.
...
KLM is a completely stand-alone identity. KLM is owned by an attorney, a
licensed security adviser, fund manager and an accountant,
and the gentleman, Mr
Parker, who works at the university, and that manages all the investment
products. The investment products are run by Merrill Lynch, Rothchilds,
Refco, SocGen Bank, and two of them are run here in Australia by solicitors
in
Brisbane [this being a reference to Solid Gold] and also a options trader here
in Australia.
Tomorrow I'll name some of the board - some of the people that own the
identities. No they are not listed. And I don't think they
will ever - they will
ever float. Some of the funds we have a capping on, so when we reach that level,
which is a pretty low level,
obviously they will be capped at that. There's a
property fund that I hadn't touched on which I will - if you'll just remind me
tomorrow,
I will touch on a property fund that's quite interesting coming up and
- and a few others. Does that help? (my emphasis)
- Neither
Mrs Watson nor Mrs Burnard was able to assist in relation to the details of the
companies on whose letterhead they communicated
with investors. Mrs Watson's
evidence, when taken to changes in the letterhead used by OEM over time, was
that she could remember
doing it but did not know why. She agreed that initially
the OEM letterhead had an address in Charleston, Nevis and that the letterhead
subsequently changed to an address in Nassau in the Bahamas. She knew nothing
about any office in Charleston in Nevis and did not
know where Nevis was;
similarly she knew no details of any OEM office in Nassau in the Bahamas, though
she knew where Nassau was.
- Mrs
Watson then said, when asked if she recalled seeing any payment to J2 for the
work that it did in diverting faxes to an email
address of her daughter in New
Zealand:
A. No, and I find it awkward, now that I'm seeing it like this, that there's
Nassau in The Bahamas and England on the same address.
It really was of no
consequence to me. I didn't take any notice of it.
- Mrs
Watson confirmed that it was not possible that she herself had come up with
those address details. She also said that Mrs Burnard
had not suggested the use
of those addresses.
- In
that regard, Mr Halley notes that the evidence discloses a practice throughout
the relevant period in which companies with the
same names were incorporated in
different jurisdictions (so, for example, a company by the name of 888
Management Inc was incorporated
variously in each of Vanuatu, the Turks and
Caicos Islands and Australia; similarly there were two companies incorporated
with the
name First Zurich Financial Ltd, one in Anguilla and one in Vanuatu).
(Mr Hobbs himself seems to have regarded the process of incorporation
as
involving simply a transfer of the same name to another jurisdiction, at least
having regard to his evidence as to the potential
incorporation of FTC in
Australia.)
- On
the evidence before me I find that there were companies known as OEM and KLM
incorporated in both British Virgin Islands and Anguilla
at some stage during
the relevant period. (I am not satisfied that there is sufficient evidence to
conclude that there was also an
OEM in Nevis or the Bahamas or a KLM in the
Bahamas.)
- There
is therefore some uncertainty as to which particular OEM or KLM company or
entity (if any) was involved as part of the process
by which investment in
offshore funds was made possible to FTC subscribers. (It seems to me that there
is also the possibility, having
regard to the lack of any corporate presence of
OEM/KLM at the supposed registered address shown on the letterhead of those
companies,
and the general imprecision shown in the use of titles by Mr Hobbs
and others associated with him, that the reference to the OEM/KLM
on the
letterheads was itself a sham and that there was no separate entity involved in
the process at all).
- At
the very least, it can be confidently concluded that no (or little) attention
was paid by Mrs Watson or Mrs Burnard to the details
of where and when the
companies (on whose letterhead they were issuing documents) were incorporated or
where they were based. There
is no suggestion that either Mrs Watson or Mrs
Burnard was responsible for setting up the particular companies. Nor is there
any
evidence to suggest that either of Mrs Watson or Mrs Burnard obtained
instructions or directions from anyone other than Mr Hobbs
in relation to the
tasks performed by them on behalf or in the name of OEM/KLM.
- From
May 2004, various individuals executed FTC Executive Agreements (in what seem to
have been a standard form); including Ms Paulina
Dabelic on 11 May 2004; Ms Li
on 16 May 2004; Mr Collard on 28 May 2004; Mr Diaz on 1 June 2004; Mr Wood on 26
August 2004; Mr Truong
on 22 September 2004; Mr Koutsoukos on 13 October 2004;
(it appears that at least Messrs Wood and Truong had earlier executed other
FTC
agreements that were seemingly treated as having been superseded when they set
up business with Mr Koutsoukos from the J&B
Financial offices). Mr Hobbs
accepts that the persons listed at [45] were FTC executives (but maintains that
they were not his agents).
A number of FTC executives gave evidence on affidavit
or orally in chief in these proceedings. Their evidence was consistent on the
fundamental aspects of the case, though some had better recall than
others.
- Corporate
administrators of the respective funds/IBCs
- Over
the period from December 1999 through to around 2006, the entities that ASIC
contends were the corporate administrators of the
respective investment schemes
the subject of the present proceedings were incorporated in various offshore
jurisdictions (and in
one case - ISPL - in Australia). The relevant corporate
administrators that were incorporated as IBCs (and other IBCs who feature
in the
relevant events) are set out below. (For chronological context I have included
some of the IBCs to which relevance has already
been made.)
- Magny-Cours Ltd
(administrator of the Cash Builder Unit Trust) was incorporated in the Turks and
Caicos Islands on 27 July 1999 (and
"acquired" by Mr Hobbs in November
1999);
- FTC was
incorporated in Vanuatu on 30 November 1999 (deregistered on 7 November
2007);
- Preserved
Investments Group Limited (administrator of the two Elite Premier Schemes) was
incorporated in Vanuatu on 16 December 1999;
- a company called
KLM Ltd was incorporated in British Virgin Islands on 11 February 2002 (and
deregistered on 1 November 2004) (on
2 August 2006, Mr Hobbs applied to have
KLM's Anguillian registration revived, nominating the beneficial owner as Ms
Li);
- FZF Anguilla was
incorporated in Anguilla on 19 August 2002 (and deregistered on 21 July 2006);
- Geneva Financial
Ltd (administrator of Smart Money and Prestige) was incorporated in Anguilla on
20 August 2002 (and deregistered
on 11 May 2011);
- Secured Bond Ltd
(administrator of First Secured Bond Unit Trust and Master Fund) was
incorporated in Anguilla on 14 July 2003 (and
deregistered on 30 June 2009); a
document was signed appointing Ms Li and Mr Collard as directors of the company
in November 2006
(it would seem that this was in order to establish what was
necessary for the opening of the Cadent accounts); on 12 April 2007 a
Consent to
Act as director was signed by Mr Emori Tunaosara Tolio in Fiji; on 25 May 2008
documents were signed recording the acceptance
of Ms Li's resignation as an
administrator and the appointment of Mr Collard as sole administrator with
effect from that date (Ex
AU 15493; Ex AU 15496);
- Ultimate
Investments Ltd (the administrator of Covered Strategies Unit Trust) was
incorporated in Anguilla on 1 October 2003 (and
deregistered on 6 January 2009);
- a company known
as OEM Ltd was incorporated in the British Virgin Islands on 12 December 2003
(and deregistered on 1 May 2007);
- PJCB
International Ltd (the administrator of Integrity Plus Unit Trust and the Super
Save Superannuation Trust) was incorporated in
Anguilla on 14 September 2004
(and deregistered on 30 June 2009);
- North Wave Ltd
(the administrator of Good Value Fund) was incorporated in Vanuatu on 21 July
2005;
- International
Management Corporation (the entity through which Mr Hobbs held shares in
Barclaywest Ltd) was incorporated on 17 August
2005 (and deregistered on 4 May
2007);
- 888 Turks &
Caicos (one of the three administrators of the Super Save Superannuation Fund)
(that being one of three companies
whose name was 888 Management Inc) was
incorporated in the Turks and Caicos Islands on 19 August 2005;
- Destiny Holdings
was incorporated in Anguilla on 21 September 2005 and deregistered on 30 June
2009;
- Barclaywest Ltd
(the administrator of the Enhanced Fund) was incorporated in Vanuatu on 22
February 2006;
- 888 Vanuatu (the
administrator of the Pinnacle and 888 (Super Save) Funds and the second of the
three 888 Management Inc companies)
was incorporated in Vanuatu on 20 April
2006; Equity Holdings Ltd was appointed as nominee director of the company on
its incorporation;
it resigned on 21 April 2006 and a Quiang Li of China was
appointed in its place (Ex AX 15492) as confirmed by Moores Rowland Vanuatu
to
Cadent on 14 November 2006 (Ex AX 15495);
- ISL (the third
of the three administrators of Super Save Superannuation Fund) was incorporated
in the British Virgin Islands on 27
July 2006 (but presumably not acquired by
the J&B Financial officers until later, since in the meantime ISPL was
incorporated
in New South Wales on 28 September 2006) (ISL was deregistered on
or before 10 June 2008);
- the Anguillian
OEM Ltd/KLM Ltd companies were, at some stage before August 2006, registered in
Anguilla and as at August 2006 had
been deregistered (on 2 August 2006, Mr Hobbs
applied to have KLM's registration revived, nominating the beneficial owner as
Ms Li);
- FZF Vanuatu
(which may or may not be the entity associated with the Global Funerals
transaction) was incorporated in Vanuatu on 22
March 2007.
- As
to other companies:
- 888 Management
Australia Ltd (now Serenity Management Ltd) (the Australian 888 Management
entity) was incorporated in New South Wales
on 26 June 2006;
- Diligence
Discovery Ltd was incorporated in New Zealand on 27 April 2006, and deregistered
on 31 March 2009; and
- Legend of
Bathurst was incorporated in New Zealand on 29 October 2007.
- Also
referred to in the evidence (and featuring briefly in the Hobbs closing
submissions) was Wyndom Enterprises, an IBC with which
Mrs Hobbs (and perhaps
others) was associated. (Wyndom Enterprises was described in oral submissions by
Mrs Hobbs, tellingly having
regard to the way IBCs seem to have been treated as
emanations of the individuals associated therewith, as "my IBC", though Mrs
Hobbs
suggested the next day that there might be other beneficial owners with a
share in the company).
- Mr
Kip Becker was a US securities attorney. ASIC does not dispute that someone
of that name existed. Mr Hobbs adduced evidence of his death on
12 April 2004.
Mr Becker features heavily in Mr Hobbs' account of the circumstances in which Mr
Hobbs became involved in investment
into the wholesale market in the United
States. Mr Hobbs contends that the investment product represented by the various
investment
schemes the subject of these proceedings (ie "pooled" or blended
investment) was one that was developed jointly by Mr Becker and
Ms Reisinger.
- Mr
Hobbs maintains that it was Mr Becker who wished to set up FTC; who prepared or
provided some of the FTC booklets; who (though
his evidence on this was
inconsistent) wanted legal advice to be obtained in Australia (from Mr Miles and
then again in 2002) as
to the activities of KLM; who (himself or with Ms
Reisinger) made the arrangements for the OEM/KLM procedure; who advised as to
the
US requirements for investment in the products in question; who drafted or
provided the template for the Geneva Financial private
placement memorandum
(and/or scheme agreement); and who was one of the owners of
OEM/KLM.
- Mr
John Chen (sometimes referred to by Mr Hobbs as Chan) is someone to whom Mr
Hobbs says he was introduced by Mr Becker shortly after Mr Hobbs
met Mr Becker
in about late 1989/1990. According to Mr Hobbs, Mr Chen told him that he was
involved with a business called Investors
International LLC and referred to
people paying up to US$250,000 to attend educational seminars in the United
States (something to
which Mr Hobbs referred when it was suggested to him in
cross-examination that $4,000 was a lot to pay for the FTC educational package).
- It
is suggested by Mr Hobbs that Mr Chen: had some ownership interest or
association with FTC (and that it was Mr Chen who was initially
to develop the
business of FTC in China); may have prepared some FTC booklets; and sold the IP
in a "white label" fund to J&B
Financial in 2007 and then requested the
money be deposited to Mr Hobbs' Magny-Cours account.
- Mr
Donald Caffray is (or was at the relevant time) an attorney in California in
the United States, through whom some of the funds invested in various
of the
schemes were placed. Both Integrity Plus and Master Fund moneys were initially
invested with Donald Caffray through NCCN Cadent's
account. (According to Mr
Koutsoukos (at [230]), when the J&B Financial officers asked Mr Hobbs, in or
about September or October
2004, while they were setting up PJCB and Integrity
Plus, where they should send the Integrity Plus money, Mr Hobbs told them to
send it to Mr Caffray "because he controls the account" and that Mr Hobbs had
been dealing with him for many years.)
- Mr
Lynn Caswell was a businessman or banker who, according to both Ms Reisinger
(Ex AO 194) and Mr Hobbs (in his submissions), had been on the US
Federal
Reserve Board. According to Ms Reisinger, at one stage he had a share in ROF
Consulting (to which I refer shortly) through
a company called Sun Coastal. Ms
Reisinger says either she or Mr Matthews had introduced Mr Hobbs to Mr Caswell
(Ex AO 194) in early
2003. (Mr Hobbs informed me, during Mr Halley's opening,
that KJB Foundation was associated with Mr Caswell.)
- Mr
Hank Parker, according to Mr Hobbs, is (or was) an academic at a University
in Kentucky. Mr Hobbs, in cross-examination, placed his first meeting
with Mr
Parker as probably in about 1995 (T 1400.50). Mr Diaz gave evidence that Mr
Hobbs had said to him that Mr Parker owned OEM/KLM
but that Mr Parker disavowed
this (Mr Diaz' evidence suggests, though this is perhaps unclear, that this
disavowal was made in a
meeting at which Mr Hobbs was present).
- Mr
Parker provided Mr Hobbs (in about July 2003) with information in relation to a
proposed LEAPS strategy. I would infer that this
information formed the basis of
instructions shortly thereafter given by Mr Hobbs to Mr Fitzgerald as to the
administration of what
became the Covered Strategies fund (although Mr Hobbs
maintained in cross-examination that the source of those instructions was Mr
Kip
Becker).
- Cadent
Financial Services LLC was a limited liability company in the state of
Illinois. It was registered as a Futures Commission Merchant on 10 January 2003
and
it was approved as a member of the National Futures Association on the same
date. A broker dealer notice was registered in its name
on 11 May 2003. (Its NFA
membership and broker dealer registration were subsequently withdrawn in 2010
and its Futures Commission
Merchant registration withdrawn in 2011. It has no
current status on the National Futures Association Register in the United States
and no currently listed principals). For the funds that invested in Cadent
accounts, its role was as a futures commission merchant
(or FCM) that solicited
or accepted orders to buy or sell futures contracts or options on futures and
accepted money or other assets
from customers to support such orders.
- Mr
Paul Fry was a principal of Cadent. Ms Cheryl Fitzpatrick was the
General Counsel of Cadent.
- New
World Holdings LLC was registered as an introducing broker on 10 August
2003, approved as an NFA member on the same date, and was registered as a
commodity
trading advisor (or CTA) on 7 September 2004. As I understand it, New
World Holdings therefore solicited or accepted orders to buy
or sell futures
contracts or commodity options but did not accept money or other assets from
customers to support such orders.
- It
is noted as an active company on the register of companies noted (Ex AU 3431) on
the Illinois Secretary of State website. (It has
almost the same address as that
of Cadent.) According to a printout from the National Futures Association
Register, the current status
of New World Holdings LLC is that of a commodity
trading adviser, a member of the NFA and an introducing broker. Its listed
principals
are currently Mr Erdman, Mr Fritz and Mr Gaus.
- Mr
Steve Erdman was one of the managing members of New World Holdings LLC. (He
had previously worked with an international clearing house called
Refco.)
- Ms
Lisa Reisinger was a broker at Refco with Mr Erdman before becoming a broker
employed as a branch manager by New World Holdings as a branch manager
in
Illinois. Her evidence is that it was in her capacity as a broker at Refco that
she first met Mr Hobbs (in about September 2002).
- Ms
Reisinger says that the Geneva Financial account was introduced to Cadent prior
to she and Steve Erdman at New World becoming involved
(Ex AO p17.1-5). Ms
Reisinger says (Ex AO at 19.17) that a broker at Refco (Chris Hardin) had
introduced her to Mr Diaz and that,
within two days of that introduction, Mr
Hobbs called her.) Ms Reisinger said she had no personal knowledge of what
business Mr Hobbs
was doing at Refco (but said she was told he was opening up
commodity accounts and Forex accounts). (This is consistent with Ms Reisinger's
email communications at the time, to which I refer in due course.) At p20.17/18
of her examination transcript [Ex AO], Ms Reisinger
says that she was (only)
"just licensed" in March 2002 as an "Associated Person" (meaning that she could
introduce accounts or business
to a broker) and she was registered with the NFA
(National Futures Association).
- ROF
Consulting LLC is a limited liability company that was incorporated on 2 May
2003 in the United States in Alaska (Ex AU 1504, 1497). According to
Ms
Reisinger (Ex AO p117) it was formed to become an introducing broker (but she
says the decision was made probably by September
2006 that it would not fill
that role on the Cadent accounts). It was operated by Ms Reisinger, Mr Alan
Matthews, Mr Jim Green and
Mrs Nancy Dadey (who had equal shares in the company
according to Ms Reisinger), to whom Ms Reisinger referred as her business
partners
(Ex AO 1195). Ms Reisinger said that Mr Alan Matthews was a managing
member and the treasurer and secretary of ROF Consulting. Ms
Reisinger says she
was a shareholder and a director or officer of ROF. (It appears that there was a
falling out between Ms Reisinger
and Mr Matthews at some stage - Ms Reisinger's
evidence being that she considered that Mr Matthews had not acted appropriately
insofar
as he had worked outside ROF Consulting (with TraderView/TraderVest) for
or on account of Mr Hobbs and Ms Li (EX AO 117.8-16).)
- The
purpose of ROF's formation, according to its articles of organisation, was to
provide services to investment managers and other
financial institutions. The
primary business of "ROF Consultant LLC", according to an executive summary at
(EX AU 276), was to "research
emerging fund managers, alternative investments,
commodity financial future, insurance products and banking products on behalf of
[its] clientele" and to provide "manager due diligence, expansive quantitative
and qualitative analysis and in depth perusal on trading
strategies... ." Its
mission was "to provide reliable timely and accurate date to help our clientele
make solid investment decisions".
- From
at least around August 2006 there was an arrangement in place whereby ROF
Consulting and Mr Matthews were to perform "consulting,
research, price
negotiating and purchase of treasury STRIPS" for the Geneva Financial, preserved
Investments and NCCN Cadent accounts
(see Ex AO tab 80). Mr Matthews 'verified'
whether there were opportunities to trade the treasury STRIPS in these accounts.
A fee
was charged to the Cadent accounts and was then split between the
shareholders of ROF Consulting and Business Solutions equally (Ex
AO
pp726-727).
- NCCN
LLC is a limited liability company that was incorporated on 14 October 2004
in the United States, in Nevada (Ex AU 3228; 3027, 2994,
11833). (The North
Carolina Department of Security State records at 21 August 2008 show the NCCN as
active and having been "formed"
on 14 December 2004.) According to EX AU 2994,
the managers or members were ROF Consulting LLC and Sun Coast Investments &
Consulting
Inc. Mr James E Green signed as "organizer" for the company. This
confirms Ms Reisinger's evidence in her CFTC examination that ROF
Consulting and
Sun Coast Investments (an entity associated with Mr Caswell) had merged together
to form NCCN. Ms Reisinger says that
this was in order to do bond trading at
brokerage firms. Ms Reisinger said that the ownership of NCCN LLC was held
equally by Ms
Reisinger, Ms Dadey, Mr Matthews and Mr Green.
- Ms
Nancy Dadey (now deceased) was Ms Reisinger's mother and a shareholder or
member of ROF Consulting. She is named as an Associated Person on at
least one
of the Cadent account applications and was regularly copied with email
correspondence in relation to the Cadent investments.
- Mr
Alan Matthews was associated with New World Holdings (and regularly copied
with email correspondence relating to the Cadent accounts) and a member
of ROF
Consulting.
- TraderView/TraderVest,
according to Ms Reisinger, were associated with or owned Mr Ty Andros and did
"custom blended portfolios using CTA's historical
trading results, blended them
all together and created a portfolio". Ms Reisinger says she introduced Mr Hobbs
to TraderView (Ex
AO p18) (referring there, it seems, to a meeting in 2004) but
later learnt that Mr Hobbs had already had a Cadent account (for Geneva
Financial) with TraderView (though NCCN) for about six months at that time. (The
NCCN TraderView Cadent account for Geneva Financial
was one that Ms Reisinger
says was opened in February 2005.) Ms Reisinger's understanding of the role of
TraderView (or TraderVest)
was that it was an introducing broker and CTA (and
that it was the introducing broker for the NCCN accounts) (Ex AO
p121).
- Mr
Ty Andros was identified by Ms Reisinger in her CFTC examination (Ex AO tab
36 p17.21) as someone who owned a company (or companies) called
TraderView/TraderVest and who had been introduced to her by Mr Paul Fry from
Cadent. Commission on some of the Cadent accounts was
shared with Mr
Andros.
- MLN
LLC was a limited liability company incorporated in Nebraska. MLN was a
company established as at around 11 April 2006 (Ms Reisinger
thought it was
September 2007 but see Ex AV 5820), the members of which were Ms Reisinger, Mr
Carper, and Ms Dadey. Ms Reisinger's
evidence was that MLN had an agreement with
Mr Hobbs in relation to the sharing of marketing fees from the sale of the
T-STRIPS in
a four-way split (ie Mr Hobbs' share was 25%). The Acknowledgement
of Filing for this company was addressed to a Michael D Carper
(as was a
certificate of dissolution or revocation as at 2 June 2009 for non-payment of
biennial fee and failure to file a biennial
report in 2009 (due before 1 April
2009). Ms Reisinger was identified as holder of one third of the company's stock
as at 2006 (EX
5205).
- Mr
Chuck Weed was a securities broker at a firm known as Morgan Keegan &
Cutter Co (or Cutter & Co). At EX AO, Ms Reisinger explained that
Cadent
ordered T-STRIPS from Mr Chuck Weed and that there was a marketing agreement
between MLN and Mr Weed for payment to MLN of
a marketing fee in relation to the
sale of those T-STRIPS. (There were separate agreements between each of Mr Hobbs
("dba", or doing
business as, Business Solutions) and Mrs Hobbs with MLN to
share in those commissions.
- Mr
Malcolm Carr, according to Mr Hobbs affidavit of 8 August 2012, was an
options trader trading as Bizcards Inc. Mr Hobbs says (at [2]) that Mr
Carr came
to Nelson in mid 2002 "following Mr Diaz's telephone call to Jacky and I in
regard to Mr Carr's trading business" and that
Mr Carr spoke to Brenda, Jacky,
Robert and he before Geneva made its first investment. Mr Hobbs points out that
Ms Reisinger's CFTC
examination transcript refers to a Mr Carr who travelled to
New York with Mr Diaz in 2002.
- Mr
Richard (John) Parsons is a computer programmer whose firm (HelloPages Ltd)
was retained to develop websites for various of the corporate administrators
(on
the instructions of Mr Hobbs). There was clearly a serious falling out between
the two. Mr Parsons gives evidence (among other
things) as to his understanding
of the interrelationship between the various schemes based on what Mr Hobbs and
others in the Hobbs
office told him. (That evidence is damning of any suggestion
that Mr Hobbs was not associated with or involved in the overall Hobbs
scheme.)
- Mr
Nicholas Moore is a solicitor and partner of Fletcher Vautier Moore in the
Nelson office in New Zealand, who opened various client files in the
name of
Tasman Business Consultants and Legend of Bathurst Ltd on the instructions of Mr
Hobbs.
- Mr
Phillip Bellamy is a solicitor who was at the relevant times employed by
Fletcher Vautier Moore in the Nelson office in New Zealand and who acted
on the
various client files for Tasman Business Consultants and Legend of Bathurst Ltd
on the instructions of Mr Hobbs.
Cadent accounts
- Paragraphs
[80][128] plead to the establishment by various of the corporate or scheme
administrators of Cadent trading accounts and
the investment of some of the
funds through Cadent in the United States.
- Not
all of the schemes the subject of the present proceedings had funds invested
with Cadent. Of the schemes where funds were not invested into Cadent
(namely the First Secured Bond, Smart Money, Elite Premier and Covered
Strategies funds), Mr Clarke notes that
those funds had either ceased, in
effect, to operate by that stage or no further funds were being invested into
those funds for investment
at that time. Furthermore, only a proportion of the
investment funds in particular schemes were transferred to a Cadent account (for
example, for the Integrity Plus scheme only some $4 million out of around $21
million invested in that fund was actually invested
with
Cadent).
- Handed
up to me by way of an aide memoire by Mr Clarke on 6 July 2012 (and attached as
a schedule to these reasons for ease of reference)
is a summary of the
investment by the various schemes in Cadent and the manner by which that
investment was made.
- The
first Cadent account that was opened for any of the schemes the subject of the
proceedings was the Geneva Financial account opened
by Mrs Hobbs and Mrs Brenda
Hobbs, each of whom executed a Cadent Agreement for Geneva Financial on 10
December 2004. Relevantly,
this scheme was not opened through New World
Holdings.
- Thereafter,
on 3 May 2005, Mr Clements executed a Cadent Agreement for Preserved Investment;
on 7 June 2006, Ms Li and Mr Collard
executed a Cadent Agreement for Secured
Bond; on 28 July 2006, Mr Collard and Ms Suzan Fi Ou executed a Cadent Agreement
for 888
Vanuatu; on 23, 25 and 28 September 2006, respectively, Cadent
Agreements were executed by each of Mr Zhang (for GP Global), Mr Collard
and Ms
Ou for 888 Vanuatu and Mr Collard and Mr Bernard Moore for North Wave (the
latter's evidence being that he signed on instructions
from Mr Collard and Mr
Hobbs); and on 21 March 2007, Ms Dong and Ms Wu executed a Cadent Agreement for
Barclaywest. (As already noted,
there was a Cadent account application pending
for Ultimate Investments at the time that Cadent became aware of the ASIC
investigations
into the Burwood schemes.) Reference was also made by Ms
Reisinger to another Cadent account in the process of being opened at that
stage
(through a company named TITL), this being a company to which reference was made
by Mr Hobbs in his cross-examination of Mr
Koutsoukos. I consider this in due
course.
- Some
of the earlier investment schemes the subject of these proceedings invested
funds in the US through Mr Caffray and the account
that he had opened with NCCN
(through a broker called TraderView or TraderVest). Mr Clarke notes that the
funds transferred from
some of the schemes in Australia to Mr Caffray's trust
account in the United States were placed in the NCCN pooled account with Cadent.
- Over
the period 2005 through to 2006, the introducing broker for all of the schemes
that invested through Cadent became New World
(though for some schemes there was
a periodic handover of the introducing broker role from TraderView/TraderVest).
(Mr Clarke notes
that for some of the accounts, the handover period from Trader
View/Trader Vest to New World took between one and two years to complete,
presumably while open trading positions were progressively closed.) By mid 2007,
it seems that it was anticipated that most of the
NCCN Cadent accounts opened
through TraderView/TraderVest would have been closed (by reference to the
communications between Ms Reisinger
and Mr Erdman around that time as to the
payout for commission on Mr Caffray's former accounts).
- The
associated person with respect to every account for which the scheme in respect
of which funds were invested with Cadent was noted
(in the New World Holdings'
business records) as Ms Reisinger. Mr Hobbs was identified in the New World
Holdings' records as the
foreign introducing broker with respect to each of the
schemes that had accounts for investment with Cadent. (Mr Hobbs disputes this
and maintains that he was only the foreign introducing broker for the Global
Funerals Cadent account that was opened in 2006.)
Manner in which communications were sent
- I
raise two matters by way of general comment as to the correspondence in
evidence.
- First,
communications to and from a variety of email addresses were in evidence in the
proceedings. Many of the emails to and from
the "nasl" email address (to which
Mrs Andrews had access in the Nelson office when working for Tasman Business
Consultants) were
emails addressed in the body of the message to Mr Hobbs or
signed in his name. On at least one occasion (as noted earlier) Mr Hobbs
gave
the "nasl" email address as his contact email (for Trans Management). Mr Hobbs
confirmed at T 1396 from line [41] that he did
not recall anyone other than Mrs
Watson and Mrs Andrews being authorised by him using the nasl email address.
There were also at
least two other email addresses used by Mr and Mrs Hobbs, a
"hobbs clear.net" email address and "hobbs tasman.net" address. Mr Cable
had his
own email address commencing with the prefix "nmo" (which seems to be a
reference to the initials of the IBC incorporated
by or for him). Mr Robert
Hobbs used an "rmh" email address. Mrs Brenda Hobbs seems to have used a "Hobbs
Family" email address.
Mrs Burnard had an email address at her home. Facsimile
transmissions from the Tasman Business Consultants office seem to have been
sent
on a machine with the fax header of "FTCL" or "nasl" or Tasman Business
Consultants.
- Mr
Hobbs' evidence was that (at the relevant time) he was not particularly skilled
in using computers. (He relies on this to dismiss
as implausible the evidence
that he himself typed amendments to the Super Save memorandum in the J&B
Financial offices). From
the evidence he gave, it suggests that Mr Hobbs was
content for others to send and open email communications on his behalf (and to
sign off under his name), whether or not he had given instructions for them to
do so and whether nor not he had approved them. (Indeed,
if his explanation of
some of the communications received in the Court during the course of the
hearing were to be accepted, his
secretary was not only authorised to send
correspondence in his name but also to make formal requests of ASIC on his
behalf without
his knowledge. As already noted, ASIC invites me to draw Jones
v Dunkel inference that the evidence of Mrs Andrews on the issue as to her
practice in drawing emails to Mr Hobbs' attention would not have
assisted her
case.)
- Second,
it is evident (from even a cursory review of the correspondence and
communications) that either little attention was paid
or care given as to the
use of the titles ascribed to persons associated with various of the investment
schemes (whether as director,
beneficial owner and controller, principal,
consultant, administrator, secretary or authorised officer) or there was little
understanding
of, or intention to distinguish between, the various corporate
roles. (Mr Hobbs' evidence in cross-examination suggested that he
had paid
little regard to the capacity in which he signed documents, even as during the
course of proceedings when he signed as proxy
as recently as an authorised
officer of FZF Vanuatu though there was no suggestion of any formal resolution
so to appoint him, or
the letterhead used when so doing. This reinforces the
conclusion that the respective entities were treated as alter egos or extensions
of Mr Hobbs.)
- So,
for example, Mr Hobbs (who denies being a director of FTC) has on at least one
occasion signed a letter on FTC letterhead (being
the letter to Mr Callins) in
that capacity. On 3 September 2004, he signed a fax to Mr and Mrs Brock as
"director" of FZF Anguilla
(that bearing a notation "cc Rob Diaz") with a fax
transmission header from Tasman Business Consultants. Mr Hobbs signed the Cadent
account application by Geneva Financial as its "acting" secretary and he signed
the Cadent foreign broker application as a director
(though there is no
suggestion that he has ever actually been appointed to either position).
Similarly, Mr Fitzgerald resigned as
a "director" and yet there is no suggestion
that he was ever made a director of Ultimate Investments. Others have also
signed documents
in varying capacities (such as Mrs Hobbs and her sister-in-law
Mrs Brenda Hobbs, who have described themselves variously as principal,
beneficial owner and controller, and administrator of Geneva Financial).
- While
nothing may turn on this in most instances, it reflects a lack of understanding
of corporate roles and responsibilities on the
part of many of those involved in
the various schemes consistent with a lack of sophistication by the individuals
involved. In Mr
Hobbs' case, I can only assume it reflects a lack of care or
precision in how he expressed matters (evident also in the manner in
which he
expressed himself in correspondence and in his affidavit). (I note this because
it is of relevance in assessing whether,
in particular instances where he has
selectively or inaccurately quoted from documents or transcript (for example by
reference to
the extracts provided to ASIC of the Hartnell advice or by
reference to his reliance on statements taken out of context in the Reisinger
examination transcript) this is indicative of a deliberate attempt to misstate
matters or is due to an habitual imprecision in his
written or spoken language.
I suspect the latter.)
DVD Seminar
- Mr
Diaz gave evidence that this was taken as a promotional video (which perhaps
begs the question as a promotion for what or to whom).
The particular seminar
that was filmed seemed to be attended by a number of FTC executives (or persons
who worked with FTC executives)
and persons with a role of some kind in the
finance industry. Although, as Mr Halley notes, many FTC executives were also
investors,
the content of the presentation conveyed to me the impression that
this was mainly a seminar for FTC executives or potential executives.
- The
video footage of this seminar was described by Mr Halley (in my view with no
exaggeration) as a defining moment in the hearing.
It was certainly a defining
moment in that it enabled me to see and hear Mr Hobbs addressing a group of
existing and/or potential
FTC executives (whether or not they were also
potential investors) as to various matters in terms consistent with those that a
number
of witnesses have described as being said at other seminars and meetings
presented or attended by Mr Hobbs and indisputably inconsistent
with the
dogmatic denials by Mr Hobbs in his affidavit as to the making of any such
statements or as to his practice in that regard
(such as references to specific
investment funds - that he says in his affidavit he made a point of not making
[19] - and references
to rates of return).
- Mr
Halley submits that the DVD not only gives contemporaneous insight into events
at that time (around 2003) but provides corroboration
for the evidence of the
individual investors and scheme administrators as to what they witnessed Mr
Hobbs say at other seminars or
meetings (on the basis that there is little
difference in substance between their recollection of what was said to them at
meetings
they attended, at which Mr Hobbs was present, and what was recorded on
the DVD).
- The
significance of the DVD Seminar footage, in my view, is not simply that it lends
credence to the recollection of other witnesses
who have deposed to the making
of statements by Mr Hobbs to the same effect on other occasions but that it
casts real doubt on the
reliability of Mr Hobbs' recollection.
- Reliance
is placed by Mr Halley on the DVD Seminar transcript as making clear: the
interrelationship between FTC, OEM and KLM (and
particularly between FTC and
KLM); the extent to which the specific investment funds were identified in the
course of discussions
with potential investors; the extent to which
representations were made as to the very high level of returns that could be
achievable;
and the use to which Mr Hobbs deployed the advice from Mr Hartnell
to make representations concerning the lawfulness of the proposed
investment. Mr
Halley submits (and I agree) that the seminar also made clear the central role
played by Mr Hobbs in promoting the
investments in the scheme. From the video
footage it is apparent that Mr Hobbs exercised control over the meeting, was the
main presenter
and dealt with questions from the attendees. Emphasis is also
placed by Mr Halley on the identification by Mr Hobbs with the scheme
and the
investment opportunities he there described (in his frequent use of "we" and
"our" that Mr Hobbs sought to explain a way
as a mere figure of speech).
- Briefly,
by way of the content of Mr Hobbs' presentation, I note the following
matters.
- Mr
Hobbs gave an example (with reference to the Art of Arbitrage booklet and
assistance from Mr Diaz) of how arbitrage could be used
in relation to a home
mortgage; he later also used the example of leverage and arbitrage with car
clubs. He emphasised the various
scams and frauds in the market place (such as
at p4.21-47; p9.7-11; pp11.8-10, p13.35-39, p14.13ff as to fraudsters' use of
prime
bank, p15.33-35), the most common of which he said was in relation to off
balance sheet activities (p11.15ff). Enlighteningly, perhaps,
at p13.34-39, Mr
Hobbs explained how "like all things that are real, people who go out and want
to create a Ponzi or a scam, they
take a little bit of truth from everything,
and because you people want to research what we've discussed here this morning
already,
every part of that is easily researched so you can actually make that
stand up and look correct, but they take that sort of information
and they
create a scam from it". (It seems to have been part of Mr Hobbs' modus operandi
to emphasise his own credibility by pointing
out scams of
others.)
- At
p15.24, referring to a particular kind of investment (that he said was only for
"a Refco"), Mr Hobbs commented that "it's not a
product that KLM have, I must
make it very clear on that". At p14.37, Mr Hobbs posed the rhetorical question
as to why banks would
use a trust or a foundation to raise funds around world
from sophisticated investors and said that it was "because if they did it
themselves they would have to put to [a] prospectus and it's reportable" and at
p16.15, Mr Hobbs emphasised that:
...it's not a retail product that we talk about, I mean the products that
we talk about are options, commodities, foreign exchange, arbitrage mutual funds
and so forth. All cleared
by major banks and securities.
- What
was made clear by Mr Hobbs was that what he was talking about at the seminar
was:
...taking the process to [bits] of what future trading does,
how it educates people, what that education can lead to and what the
opportunity somebody can participate in from that education (my emphasis) (P
16.33-36)
- Ironically,
in light of the allegations now being made against Mr Hobbs, when asked to
clarify where the scam came into the example
that he had given earlier, Mr Hobbs
said:
...they give their money to somebody or you know, they send it onto some
individual or some company and that's the last they see of
their money (P 17
line 6)
- As
to what FTC did ("what's the bottom line and what it does and what it offers and
where the people end up and what they get for
that subscription"), Mr Hobbs
emphasised that one of the areas for subscribers was a due diligence area (and
that "we have on file"
thousands of companies and individuals from around the
world that are inappropriate finance houses or investment houses available
for
checking by subscribers) saying that "our educational process is all about
educating individuals, showing them what is real,
what is not real, and having
back-up for them" (see from Ex R p18.17-36).
- At
p17.37-43 of the DVD Seminar transcript, Mr Hobbs is recorded as
saying:
The real level is for sophisticated individuals and institutions and very,
very few people in the world can ever show you where to
go. And that's - how do
I put this, that's - it's not a product we would ever, ever recommend as a
retail, it's just too difficult
and sure enough some time over the next two
days, somebody's probably going to ask, do we know where to go, let's just put
it this
way, yes, we do, but it would only be to absolutely select people we
introduce them to a bank or to where they can conduct that business
because they
have to be that style of person. (my emphasis)
- Resuming
after the lunch break on the first day of the seminar, Mr Hobbs moved onto the
business of FTC:
Why do we have future trading corporations? We have future trading
corporations here as a financial educational material, it does
not sell or offer
investments. Future trading corporations are there so we share all manner of
financial information on wholesale
investments, retail investments and different
concepts that people can put together using opportunities that they previously
were
unaware of, maybe that's differing structuring, arbitrage, this style of
operation. And we can legally share by manuals and newsletters
what is real in
the world. We can identify people who act in an inappropriate manner. And we can
show people how they can legally
structure themselves to take an advantage of
what is being offered amongst funding which is worldwide, without making any
offer here
in Australia. And so because we're not giving financial advice, we're
not selling or offering investments, we do not require the
licensing and we do
not require the indemnity insurance.
So that's a very, very important aspect of why the financial education is in
place. (p19.19-23)
- Mr
Hobbs explained the debt restructuring product that he said he had been involved
with the group that developed it and that he said
"we have sold a huge amount
of business, based on this product", referring to the debt restructuring
booklet. He contrasted this product with the mortgage arbitrage example and then
said that:
So again, we have the copyright on this product here. We've had
a major insurance company in Australia via a solicitor make noises about wanting
to buy the product from us, we're not going to sell the product, it is
for our subscribers. And we'll help them through the situation.
(p21.31-34) (my emphasis)
- Mr
Halley emphasises that, in the context of the discussion of what FTC did, Mr
Hobbs juxtaposed the position of KLM:
So the opportunity from Future Trading's point of view: we do not offer
investment, we do not offer investment advice, but we will lead people to a
position where they can access real things. And the investment products
is not owned by Future Trading, it's owned by KLM Enterprises Limited.
So when somebody takes what we call an executive agreement with us with
Future Trading, that is to sell financial subscriptions, and then they wish
to sell investments, that contract for investment sale is with [KLM]
Enterprises. Now, some of the investment opportunities with KLM Enterprises are:
you can have monthly income producing funds, quarterly
income producing funds,
annual income producing funds. Remember that 98 per cent of the funds are profit
based funds.
...
Future Trading have a position with the printers that the moment we receive
that subscription, we hold it for 30 days, because we
offer a 30-day money back
guarantee. And at the end of the 30-day period we pay three years of printing up
front. Obviously we can
obtain it a little cheaper that way. And we pay three
years postage up front. There's not a lot of money that's left behind in the
subscription. Subscription is a legal means to an end.
The investment products. All the investment products carry a commission. The
average commission, it works out about 2 per cent. So
if it's paid monthly, it's
about 2 per cent. If it's paid quarterly, it's about 2 per cent of the quarterly
result, and same annually.
That's the rule of the thumb. So there's significant
earnings for a client, and there's also significant earnings for an
introducer.
Now, there's two different terminologies. A person selling financially
education subscription is called an executive. A person that's selling
investment product is called an
introducer. But an introducer cannot sell
an investment product until the client has formed a company in a legal
jurisdiction offshore and has
made a request from offshore for investment
information and wants specific investment information. So you don't make any
offer of
selling an investment or legal advice here in Australia. And I can't
emphasise that enough.
...
...We have a number of solicitors around the world that can form the correct
companies for them to operate from, give them the legal
advice and so forth. An
introducer also receives a commission directly from those solicitors if you send
them to that client for
- to form a company.
Some of the solicitors used is: Sovereign. Well you can go on the net and
have a look at Sovereign Group.com. Sovereign Group is UK
tax barristers, out of
the UK of course, that specialise in international finance and tax. They advise
countries on tax matters.
They form companies and teach the clients how to do
the transfers and manage those companies for clients. They manage companies for
some very, very prominent people around the town - around the world, including
here in Australia. (my emphasis)
- Pressed
by Ms Wool on the question as to the structure of FTC and the relationship with
OEM and then KLM, Mr Hobbs gave the answer
that I have earlier
extracted.
- On
the second day of the seminar, Mr Hobbs referred to returns of 30% or 20%; to
hundreds of funds doing anywhere from 50% to 200%
per annum and referred again
to the top performing fund "this is not a fund we have anything to do with,
because we cannot get an
audited set of accounts for it - but the top return on
a compounded fund for a 12-month period last year was 2028 per cent, and that
was on a highly leveraged futures trading fund". Mr Hobbs recapped the position
as to the security laws to which he had referred
the day
before:
If a product does not have a registered prospectus here in this country,
we cannot make a financial offer, an investment offer or
give financial advice.
So the only way we can share that information is by education, which is why
we have Future Trading Corporation, which prints manuals
on a variety of
financial subjects, prints newsletters, also those newsletters cover financial
planning, the booklets cover the art
of arbitrage,... (my emphasis) [this again
going to the lawfulness of the making of an offer]
and referred again to the example of arbitraging the purchase of a motor
vehicle "especially for the two gentlemen just arrived today".
(Conceivably,
those two could have included Dr Gray, who Mr Hobbs said had made a presentation
about cardiovascular issues at this
seminar, though there was no indication that
such a topic would be discussed). Mr Hobbs explained:
Now, a company such as that is called an IBC, which is an international
business corporation. And you can elect to be as simple or
as complex with that
type of arrangement as what you wish. Our philosophy is keep it simple, you
know. There's no reason to be expensive
and complicated. Keep it as simple as
possible. It's there to do a purpose, and that's it. But the procedure is where
the client
has an IBC, that its the IBC that requests either financing or
investment information. And they receive that from offshore. So we can give
you a fax number, for example. You can fax to a company offshore in the IBC's
name requesting investment or finance
information. (my emphasis) [this
squarely contradicts Mr Hobbs' evidence that he did not know the OEM fax number
and that subscribers might be
able to find it out from the FTC material]
- At
Pt 2 p16.15 of the transcript of the DVD Seminar, Mr Hobbs
said:
Moving on to the product managers. And lets again clearly identify the
difference between Future Trading Corporation and KLM Enterprises Limited.
Future Trading Corporation
does not sell, offer or give financial advice. It's
education only. KLM Enterprises is a company that manages all the investment
products around the world. It's registered in Nevis. It's run by attorneys,
accountants, licensed securities advisers and a fund
manager from the
US.
Now, each fund that is under their umbrella, and sometimes it takes two to
three years during their due diligence process before they add a fund to their
portfolio. And currently I think there's around 20 different funds, ranging
from monthly income type products to quarterly to annual compounding.
Returns
from 2 or 3 per cent a month up to funds that are very, very high performing
style funds. Risk is spread across different
markets. And we can go into the
actual funds a little bit later. [The suggestion that there was sometimes 2-3
years due diligence
on funds is ludicrous in light of the speed with which funds
seem to have been set up and to have commenced accepting investments.]
But each fund has its own manager. So if we have a fund trading in foreign
exchange, for example, there is one particular fund that
we've been
offered a capital guarantee on that trades in foreign exchange. Now, yesterday I
showed you some of the returns since 1988 up to
this year on that particular
fund. I think the worst year was about 29 per cent and the best year was about
118 per cent. And it
showed you month by month the returns. That particular
trader, which is again is cleared through Refco, which is the largest clearing
house in the world, we have been offered a capital guarantee, a AAA rated
guarantee, on those particular funds. Now, that is a first
in the foreign
exchange market.
And, I mean, you can take - you could take a fund like that anywhere and be
hard pushed to compete. Now, that particular fund, the manager in Australia
for that fund there is Rob. It's called the Express Fund. Express Fund is a unit
trust, and that means there is outside trustees. Every transaction has outside
trustees overseeing it, the clients issued units,
the money goes into Refco, and
the profits come out of Refco directly. So it's overseen by Refco, overseen
by trustees, overseen by independent accountants, and also the traders' trading
profiles overseen
by additional independent auditors and Refco themselves as
well.
So there's a huge amount of checks and balances on every transaction. Now,
you may say that that's gone a little bit overboard. Perhaps
it has, but you can
never be too secure, you know. The greater transparency and the greater number
of checks and balances you have,
the better something can be. ... (my
emphasis)
- Again
at Pt 2 p17.17:
...But - but every product also has a local manager. So when somebody - a
client wants information, contracts or whatever, you can go to the local manager
to obtain the information, providing
the client has followed the procedure,
providing the client has a company, and that company has requested the
information from offshore. If they haven't requested the information from
offshore - and we're going to go through what that information looks like a
little
bit later - can't deal with them simple as that. (my emphasis)
- Later,
Mr Hobbs said:
So that's just another little quick overview on that. But each investment has
its own manager. Now, in New Zealand we have two accountants,
we have a
solicitor that comes in three days a week, we have an ex-bank manager of 30
years, all running different funds. [This seems to have been an overstatement
at best, since the evidence given by Mr Hobbs in the witness box was that the
persons to
whom he was there referring were not running funds connected with the
KLM listed funds. Moreover, there is no evidence to corroborate
that those
persons were in fact in or working out of the Hobbs office as at October
2003].
- In
the witness box Mr Hobbs denied that he had represented to FTC executives and
introducers that they could generate significant
profits if they were able to
attract investors to invest in the funds that KLM made available. That denial is
impossible to accept
having regard to what was said in the DVD Seminar (whether
or not that was a "one-off" seminar, as Mr Hobbs contends). As to the
commission
payable to introducers, Mr Hobbs said:
I can tell you commission-wise for introducers to that the most I've ever
paid an introducer, which is paid directly from the company
by the way, was
228,000 for a days work. I went and sat down with the accountants for this
introducer and came out at the end of
the time and handed him the forms and he
just earned 228,000, which is not a bad days work. (p22.28-32)
- Pressed
on this in the witness box, Mr Hobbs answered as follows:
Q. Do you remember suggesting to FTC executives and potential introducers of
funds that they could expect to receive 20% off any profit
that might be
generated by a fund?
A. I think 20% of profit was the figure that Becker had said.
Q. I am asking about what you said to FTC executives?
A. The executives didn't sell investment.
Q. Who sold investments, as you understood it?
A. They'd have introducers of whatever company it was.
Q. As you understood the position, the person who was the FTC executive was
also the KLM introducer, wasn't it; he or she?
A. As I read through the information, yes. (my emphasis)
- Mr
Hobbs did accept that the KLM "introducer" "probably" gave the OEM fax number to
the investor so that the investor could then send
a fax to OEM to receive the
list of KLM funds, but did not accept that the introducer was the same person
who had been the FTC executive
until the investor incorporated the IBC. Again,
having listened to the DVD Seminar, it is impossible to accept that (at least as
at 2003), Mr Hobbs had no idea as to the manner in which the FTC executive/KLM
introducer structure operated. It may well be that
his short term memory has
been affected by his medical condition (as he said in the witness box); it is
difficult to see how he could
seriously suggest that he had only become aware of
the executive/introducer role having read through the information in these
proceedings.
Q. So who were the introducers, then, Mr Hobbs?
A. Well, you'd got to be listed in each of the companies that you owe in
these proceedings. I wouldn't know them.
- The
content of the DVD presentation seemed to me to be directed at training persons
how to present the FTC financial package (and
the potential for investment in
the 'KLM' funds) to others. I reach that conclusion by reference, among other
things on the DVD footage,
to the introduction by Mr Hobbs, which suggests that
there is a business agenda to the seminar (namely the reference to there being
a
lot to go through over the next two days); to the reference to discussion of a
"sales track" to go through; to the explanation
as to how an FTC executive who
wishes to sell investments can do so through an investment sale contract with
KLM; to the emphasis
placed on the enormous amount of money Mr Hobbs paid to one
introducer on one occasion for one day's work (no doubt calculated to
encourage
others to become introducer's); and to the guidance given as to how to answer
questions from investors or to explain things
to investors (one of the attendees
praising Mr Hobbs at one stage for a good answer).
- In
that regard, Mr Halley emphasised that there was significant evidence from
investors and from scheme administrators (many of whom
were also investors) such
that there was not a clear distinction between someone who was an FTC executive
(or introducer) and someone
who was an investor. He also pointed to the evidence
that Mr Hobbs conducted not only seminars that were principally addressed the
training of executives but also seminars principally addressed to investors who
were not currently FTC executives (and submits that
the accounts given at both
types of seminar bear the same striking similarity).
- I
accept that there is a striking similarity between some of the statements by Mr
Hobbs that may be heard on the DVD and those to
which various persons attending
other seminars or meeting (whether in the capacity of potential investors or
otherwise) have deposed.
Particularly significant in that context is that the
handwritten notes of Mr Blow at the meeting on 15 February 2003 contain very
similar statements (down to high rates of return for some funds and the 7 out of
10 rule of thumb for profit that Mr Hobbs referred
to at the DVD
Seminar).
- Mr
Hobbs was adamant that the DVD Seminar was a "oneoff" situation. In light of Mr
Blow's evidence alone, Mr Hobbs' characterisation
of this as a one-off situation
cannot be correct. It may well be that this is the first and only occasion on
which a seminar of this
kind was video-taped but that does not make the content
of the seminar unique. Even if that were to be the case, and even if the
only
attendees were FTC executives or potential FTC executives (not investors), it
seems to me unlikely in the extreme that examples
of the kind given at the DVD
Seminar were not being given (to people who were or might become FTC executives)
for the purposes of
those people subsequently making similar statements to
others in relation to the matters the subject of the presentation.
- The
suggestion that this was simply a gathering of people who were interested in
hearing about discussion on a range of topics (including
diet and cardiovascular
issues - of which there is not a hint on the DVD) seems to me fanciful
(particularly having regard to the
way in which the attendees introduced
themselves by reference to their position as financial advisers or the
like).
- As
to what inferences I should draw from the fact that statements made on that DVD
are statements that are very similar (and sometimes
the same) as statements that
individual investors say they heard Mr Hobbs or other FTC executives make at
other seminars, I considered
whether this raised an issue as to the probative
value of similar fact evidence, noting what had been said by Gummow J (then
sitting
in the Federal Court) in Lyons v Commonwealth Bank of Australia
[1991] FCA 74; 28 FCR 597 as to similar fact evidence in civil proceedings (there relating to
alleged representations in respect of foreign currency loans
agreements). His
Honour, noting that Lord Wilberforce in Director of Public Prosecutions v
Boardman [1975] AC 421 at 444 had said that "experience plays as large a
part as logic" in judging whether one fact is probative of another, was
considering
(during the course of cross-examination of the director of the
plaintiff company and on the eighth day of the trial) whether to admit
statements by three others who had had dealings with the bank officer in
question.
- The
evidence there sought to be introduced was as to conversations that took place
after the entry into the first currency loan agreement
and was sought to be
relied upon to corroborate the veracity of the evidence of the director
concerned and as circumstantial evidence
from which one might infer the making
of representations to that director.
- His
Honour concluded that the case was one where the facts the subject of the then
application, though similar in the wider sense
(in that they possessed a common
characteristic, but not one where the common characteristic was the significant
for the enquiry
at hand) were nevertheless irrelevant in the legal sense and
hence inadmissible (such that it was not there necessary to deal with
the
restrictions imposed by the similar fact doctrine). His Honour considered that
while there had been dealings with various customers
in relation to foreign
exchange loans over the relevant period, the dealings with particular customers
varied with the particular
circumstances as they arose and that the nature of
the causes of action propounded meant that the applicants were required to
establish
the specific representations pleaded. His Honour said that "As a
matter of ordinary experience of human behaviour, the evidence which
the
applicants seek to lead would not tend to prove the making of the
representations upon which the applicants rely".
- The
significance ASIC attributes to the DVD footage (as noted above) is that it is
consistent both with the extensive evidence given
by various witnesses as to
meetings at which Mr Hobbs addressed FTC executives and with the evidence given
as to meetings at which
Mr Hobbs addressed people who were not FTC executives
(but at which FTC executives were present) or in more private discussions he
had
with individual investors at the conclusion of the meeting.
- It
is submitted by Mr Halley that even if the DVD were the only evidence of the
representations that were made by Mr Hobbs (and/or
FTC executives) (which I
accept it clearly is not), the representations there made as to how the system
worked and how people were
able to obtain access to investment funds, would be
sufficient to establish the conduct by Mr Hobbs/FTC of a financial services
business
in Australia (and the need for it to be registered as a managed
investment scheme).
- The
DVD is in my view significant in that it establishes beyond any doubt that some
of the evidence so dogmatically given by Mr Hobbs
(such as his evidence that he
made a point of not saying things that, on the DVD, he is clearly heard to be
saying) cannot be accepted.
That (and the numerous other inconsistencies between
his evidence and contemporaneous documents or records to which I refer later)
has led me to conclude that I cannot safely rely on Mr Hobbs' recollection of
events unless otherwise corroborated.
OEM/KLM process
- I
have referred earlier to OEM/KLM. The process referred to as the "OEM/KLM
process" involved the purchasers of the FTC education
package (or the IBCs they
had incorporated, in accordance with information given to them by or through FTC
executives) receiving
information in relation to various investment funds
through which they could invest funds offshore in the wholesale market. The
OEM/KLM
process involved the issue of correspondence, variously on the
letterhead of "OEM" or "KLM", which ultimately led to the provision
of
information to potential investors in relation to the investment schemes the
subject of these proceedings.
- It
was described by Mrs Watson as part of a "seamless" process. She gave evidence
that Mr Hobbs had first told her about OEM/KLM and
when asked what he had said,
Mrs Watson said:
A. Well, people wanting to, further information on funds et cetera, they
could work through the OEM system, which was to identify
whether they were in a
correct jurisdiction.
- Mr
Watson confirmed that she had not spoken to anyone other than Mr Hobbs and her
daughter about the OEM system at the time.
- Letterhead
used by Mrs Watson and Mrs Burnard (which from time to time used different
logos) described OEM as incorporated in the
Federation of Saint Kitts &
Nevis (in the British West Indies). Letterhead used by Mrs Watson and Mrs
Burnard described KLM as
an entity in Nassau, the Bahamas.
- As
noted earlier, although the facsimile number for each of OEM and KLM was shown
on the letterhead as having a UK prefix, faxes sent
to that number were diverted
to an email address in New Zealand, where they were received and dealt with by
Mrs Watson and/or Mrs
Burnard. The explanation for this (proffered by Mrs
Watson) was in my view implausible:
Q. So, you say for convenience, the potential inquiry for the IBC was to be
faxed to a UK number and then what happened to it then?
A. Then converted into an email to Emma. It was a system that was it was just
for convenience. I don't know of another way that it
could have been done. I'm
sure it could have been done another way, but the J2 system suited and that was
used. So, people from China
or the UK or Australia, wherever, as long as they
were in could establish that they had an IBC, could pursue this line.
Q. Did anyone suggest to you that you set up a UK fax number through J2 for
investors to use?
A. I can't remember how that was set up.
Q. Had you yourself had any dealings with J2 before this was established as
part of the OEM, KLM process?
A. No.
Q. Did it ever occur to you at the time that it might have been just a little
bit easier to have faxed the material directly to Emma
in New Zealand rather
than via a United Kingdom fax number?
A. Well, it was a new system to me. I was just fitting in with whatever. I
don't recall how it happened, but it certainly was convenient.
It meant that
Emma didn't have to pick up the phone every time a fax came through or whatever.
It meant that she could pick up the
email and respond to it in her own time,
which was usually on a daily or, you know, if there was a long weekend there
would be that
break, but she could respond to it in her own time.
- It
was not suggested how this system would have been any more convenient than
advising FTC subscribers of Mrs Burnard's email address
in the first place. It
seems to me almost inconceivable that the purpose of this process was not to
create the false impression of
an international persona for
OEM/KLM.
- (Documents
on OEM/KLM letterhead were later also issued directly by persons in the J&B
Financial office in Burwood, though still
with the international details noted
for the companies.)
- The
content of the OEM standard form letter does not readily lead to the conclusion
that it was part of a sophisticated business operation.
The version received by
Ms Xu, for example, and signed by her on receipt on 19 June 2006, contains
repetition ("O.E.M is a referral
company", a description of which Mrs Watson
said, as at 2006, she had no understanding), spelling and grammatical errors
("invest
only what you can afford to loose" [sic]; "Investment referral can only
be made available to persons or company's [sic] situated
in the correct
jurisdiction"); and what can only be described as broad 'motherhood' statements
(which I set out below), concluding
with the following warning:
Warning: Beware of fraudulent investment, such as prime Bank
Instruments, pyramid companies and Nigerian Letter scams
- The
letter is dated in accordance with the American practice of putting the month
first (though it was issued from New Zealand). (While
this might suggest that
the template for this letter was taken from a document prepared in America,
there is no basis for any finding
that it was provided to Mrs Watson or Mrs
Burnard by anyone other than Mr Hobbs). The letter sought information as to the
name of
the company; country of registration and "dominant purpose" of the
company (the evidence being that subscribers were told to complete
this by
specifying "Education" as the dominant purpose). The letter contains the
following:
Please read carefully. Key points to consider before any investment is
undertaken.
(a)The Sleep Test: If you cannot sleep peacefully at night don't invest.
(b)Greed: Do not invest for greed. It can obscure your vision.
(c)Past Performance is not a guarantee of future projections of
investments.
(d)Spread Investment Portfolio over different markets both onshore and
international.
(e)Invest only what you can afford to loose, no more than 20% of your
portfolio in any one investment.
(f)Declare all profits and pay taxes due.
(g)Read as much as possible on the style of investments.
- This
letter was followed by a letter to the administrator of the IBC (sent usually to
a fax number in this jurisdiction) as follows
(the text of this being taken from
the letter received by Ms Xu (who named her IBC Midea Ltd, after a rice cooker
in her kitchen):
Please confirm, that the O.E.M. Limited Referral Information for Midea Ltd,
has stated to O.E.M. Limited the jurisdiction in which
Midea Ltd is registered
is in Vanuatu.
Midea Ltd has stated to O.E.M. Limited the dominant purpose of Midea Ltd is
Education.
O.E.M. Limited does not accept any liability for the information supplied by
Midea Ltd.
Midea Ltd agree that no investment offer or issues of interest of any kind
have been made to Midea Ltd in the USA, UK, Australia or
New Zealand.
I confirm all information was sourced by Midea Ltd from an
offshore-incorporated Midea Ltd in the appropriate jurisdiction.
- After
the administrator's signature there is the statement:
O.E.M. Limited does not guarantee or offer any form of assurance as to the
investment performance or safety of capital invested.
- Again,
the statements in this letter do not convey the impression of a sophisticated
financial operation. Apart from being almost
meaningless, the statement as to
the source of the information is remarkable given that at the time this letter
was signed (on Mr
Hobbs' case) no information as to any investments should have
been given to the FTC subscriber.
- The
next step in the "referral" process was the issue of a letter generally on the
letterhead of "K.L.M Enterprises Ltd". Mrs Watson's
evidence in this regard was
instructive:
Q. Do you have any understanding as to who at OEM Ltd may have referred these
types of matters to KLM Enterprises Limited?
A. It was just a seamless followon from the OEM that fulfilled what OEM
required and this fund information was then automatically
released by KLM.
(my emphasis)
...
Q. When you say "automatically", what do you mean by that?
A. Exactly what I said.
Q. Was any human intervention involved?
A. No, Emma would have the documents showing that they were an authentic IBC
and were quite entitled, therefore, to receive this information,
if they wanted
it.
- Furthermore,
it is apparent from some of the evidence that the "seamless" process extended to
the issue of letters even if the wrong
information had been provided. Mrs
Watson, taken in the witness box to the correspondence by which Mr Jouravlev had
sought information
as part of the OEM/KLM process ( having earlier explained
that the process was that "once a person had authenticated that they had
a
genuine IBC by providing an IBC certificate and signed their name to verify that
that existed, then their name was given to the
KLM system and those funds,
information, or overviews, that research could be extended to that person or
that entity") was quick
to point out a problem with the request that Mr
Jouravlev had made:
Q. Is that a type of document that you're familiar with?
A. Well, I can see straight away that it is an incorrect document and if OEM
had received this, they would have replied that they
were not able to work with
this person because they wouldn't have they need to authenticate that they are
an IBC requesting information.
Q. You don't suggest you recall this particular document, do you?
A. Well, I probably have, but there was a standard letter that went out in
reply to. Nobody could just request to OEM for a list of
funds. OEM didn't have
that function. OEM was designed to establish that the person was in the correct
jurisdiction.
...
A. This person should have written that they were requesting further
information or educational material. There should be no mention
of any list of
funds or anything.
- (Despite
Mrs Watson's adamance on that point, in fact the KLM letter had issued
notwithstanding the incorrect response from Mr Jouravlev,
indicating that the
information itself can hardly have been important in the scheme of things and
was more likely to have been a
formality). It was clear from Mrs Watson's
evidence that the only person who told her the requirements of the system in
that regard
would have been Mr Hobbs.
- There
were in evidence copies of letterhead purporting to be that of KLM Enterprises
Ltd (which stated that the company had an office
address in the Bahamas) (Ex AM
tabs 11,12,15) (sometimes also with the Stoke, Nelson post office box address of
Tasman Business Consultants)
(Ex AM tab 15). Mr Halley notes that for each of
the versions of KLM Enterprises Ltd documents (with either an office address in
the Bahamas or with the PO Box address in Stoke, Nelson) there was again a
document arranged to be sent to persons in Australia by
Mrs Watson or Mrs
Burnard.
- The
letter received by Ms Xu, for example, starts by saying:
Thank you for the information provided. [By this point the only "information"
provided was the signed letter stating the name of the
company, country of
registration and dominant purpose of the company] O.E.M. Limited has obtained an
overview of Midea Ltd and referred
your request to us. The following information
is provided by K.L.M. Enterprises Limited
- The
addressee is asked "Please select the fund or funds you require further
information [sic]" and to fax that request to a UK fax
number (the very same fax
number as that on the OEM letterhead). A risk scale is provided and funds are
listed by reference to that
scale. There is a statement as to funds that "will
be available shortly". In the case of the letter to Ms Xu, she was advised that
"The bond underwriting funds have been withdrawn until the trading of these
funds commences".
- There
is a disclaimer at the foot of each page of the letter:
DISCLAIMER:RESIDENTS OF THE UNITED KINDGON [sic], UNITED STATES OF AMERICA,
AUSTRALIA AND NEW ZEALAND CANNOT APPLY
- The
letter then sets out information in relation to various of the funds (including
the statement in relation to Integrity Fund that
"All funds are protected
by way of United States treasury notes which on maturity yield 100% of the
invested capital" and again in relation
to Master Fund that "All funds
are capital protected by United States treasury notes" (my
emphasis).
- The
standard form response from Ms Xu (not in conformity with the process it would
seem) was addressed to "Dear OEM" and requested
"contract and information for"
the specified fund. A response to that issued on KLM Enterprises letterhead
stating that:
The information you have requested is currently being collated
A KLM introducer will be in touch with you shortly regarding your
request.
- In
the case of Ms Xu's investment in Master Fund, a private placement memorandum
was issued in English and a contract dated 13 July
2006 was signed, Mr Collard
signing as broker and Ms Li witnessing his signature. The declaration as to
source of funds was completed
(not in Ms Xu's writing) as "Re-Finance"
(consistent with her evidence that she raised the $220,000 funds from drawing
down on her
home loan). Two days after the contract was signed (though seemingly
before moneys had been transferred from Ms Xu to the Technocash
account), Ms Xu
received a letter from the "Administrator for Secured Bond Ltd" on Secured Bond
letterhead (at what I understand
to be Mr Collard's post office box) advising
that it had been noted that under the declaration of source of fund it said
"re-finance"
and stating:
The Master Fund wishes to advise Midea Ltd any money invested should be
discretionary capital
advice that by then would seem to be too late to make any difference to the
investor.
- Ms
Xu, who speaks, reads and writes almost no English, was provided with various
documents that were written in English. She deposes
that she signed various
documents without having read them (and as they were in English she would not
have been able to read them).
She was introduced to Ms Li and Mr Collard through
a friend of hers (Ah Bi). Her evidence was that Ms Li and Ah Bi assisted her to
complete the application forms for FTC subscription. Ms Xu was sent various
documents in relation to the incorporation of her IBC
that she says, and I
accept, she has never read and no one ever read or explained them to her. She
had no understanding as to the
legal relationship between Midea (the IBC
incorporated on her instructions) and herself. Not surprisingly, she was also
unable to
read the FTC booklets. This is of relevance in that the request letter
sent to OEM (in accordance with the OEM/KLM process) was in
English. Her
evidence is that it was faxed to her and she signed it (after Ms Li had told her
that "There is a certain format. Nancy
[Wu] will help you. Ask Nancy about the
letter, about the contents. If you don't know how to do the letter, ask Nancy.
She will help
you". Ms Xu also deposes to a conversation with Ms Wu in which she
says Ms Wu agreed to help her (and would fax the letter to
her).
- Ms
Xu's explanation of the process by which the OEM/KLM letters were prepared for
her, signed (and where necessary completed on instructions
from either Ms Li or
Ms Wu) is a telling illustration of the mechanical nature of the so-called
referral process (and shows that
Ms Wu's involvement in that process was at more
than an administrative level).
- For
completeness, I note that, during the course of Mrs Watson's oral evidence, she
did suggest that Mr Becker had had some involvement
with OEM and KLM, evidence
that led to the application by Mr Halley (to which I acceded) for leave to
cross-examine Mrs Watson:
(Examination in chief)
Q. Did you have any understanding, as at 2006, as to what a referral company
was?
A. No.
Q. And at any other time that these letters were sent by OEM to IBCs?
A. No, they weren't I mean, I just know that OEM didn't handle any
investments whatsoever. They were simply establishing that a person
was in the
correct jurisdiction to receive any information that they might wish to get,
pertaining to fund information.
Q. And how do you know OEM wasn't handling any investments?
A. Well, insofar as I was involved with it, it simply wasn't.
Q. And were you aware of anybody, other than your daughter Emma, having any
involvement with OEM?
A. No.
Q. By that I mean in the process of sending out these letters to IBCs. Just
you and Emma were the only two involved in that process?
A. Well, the original the principals of OEM and KLM in China and the US.
So, I know that Kip Becker had advice or whatever. I know
he had involvement
with this.
(Cross-examination)
Q. The fact is, Ms Watson, you, at no time, spoke to anybody other than Emma
and Mr Hobbs in relation to OEM and KLM?
A. That is correct.
Q. And to the extent that you are suggesting that anybody other than Mr Hobbs
had any involvement with OEM or KLM, that is based solely
on what Mr Hobbs might
have told you, isn't it?
A. Yes.
- Significantly,
Mrs Watson not only said that originally the wording of the OEM non-solicitation
statement (and overall wording) would
have been "set up by Mr Hobbs", but she
also said in relation to the KLM funds information letter that:
Q. Did you ever discuss with Mr Hobbs whether that material should be
included?
A. No, I don't think so. Mr Hobbs usually would give me the risks scale
which I assume he'd discussed with the fund manager, but, other than that,
it was just a mechanical thing really to send up to Emma and then be included in
this printout.
...
Q. So, you recall Mr Hobbs would give you that?
A. Yes.
Q. And you would include that in the document?
A. Yes, and I'm sure sometimes those risk scales were in the material
received, but I do recall sometimes that David had an input to that. Where he
arrived at that, I don't know. (my emphasis)
- I
also note that Mrs Watson seemed unconcerned at subsequently deleting material
in relation to the OEM process once it had ceased
to operate (not consistent
with the existence of overseas owners of the company to whom there might have
been an obligation to report).
Tellingly, in my view, Mrs Watson's evidence was
that at some stage the OEM/KLM process just "dried up" and, as to the documents
that she had been keeping for OEM and KLM, she said:
A. Well they were of no particular use. I just got rid of all the surplus
material. There was quite a lot of it and it began from
the OEM requests through
to the fund advice. It was taking up a lot of room in my place and I was happy
to destroy it. I think I
probably kept the relevant page on the IBC and that was
the end of the matter.
- Mrs
Watson was unable to say what had happened to the documents that she had
retained other than that she supposed she took them into
the Nelson office.
(That is consistent with Mr Hobbs being the person from whom instructions were
given or to whom she reported in
relation to matters relating to OEM/KLM. Had
Mrs Watson been of the understanding that the owners of OEM/KLM were persons in
the
US it would not have made sense for her to consider herself free to dispose
of documents of that kind - particularly when her evidence
elsewhere was "I
wasn't able to just biff a document because I didn't think it was
important.")
- As
to whether Mrs Watson had been the person who set up the OEM/KLM process or who
set out the requirements in relation to OEM and
KLM, Mrs Watson said:
A. The framework would have been set up by Mr Hobbs and Emma and I made it
work.
- Mr
Hobbs put to Mrs Watson in cross-examination whether she recalled Mr Hobbs
having conversations with Mr Becker. While her immediate
response was that she
did, Mr Halley notes that there was no evidence that Mrs Watson had ever met Mr
Becker or would have recognised
his voice (or was in a position to hear the
other side of the conversation in any event). Mr Hobbs then
asked:
Q. Did you ever recall seeing a file in my office with Mr Becker's name on
it?
A. Yes.
Q. Did you ever recall seeing an email I sent to all parties when Mr Becker
passed away?
A. Yes.
Q. Following Mr Becker's passing away, which was in 2004, I believe after
that time the OEM, KLM system started to dry up, did it?
A. Yeah, not long after. [But Mrs Watson then corrected this to note that
"... it was well after"]
- Therefore,
on Mrs Watson's evidence the OEM/KLM process continued well after Mr Becker's
death.
Example of scheme documents
- ASIC
submits, and a cursory review reveals, that there is a remarkable similarity
between the relevant scheme memoranda and private
placement agreements. I set
out below the salient features of the respective documents (noting that there
are variations as between
the different funds, particularly in relation to the
types of investment to which reference is made in the scheme memoranda and the
rates of return identified therein).
- The
Private Placement Memorandum issued by Geneva Financial for the Prestige Unit
Trust followed the same broad template as the memoranda
for various of the other
investment schemes. The footnote of each page stated that "This is not a
solicitation for funds nor is it
to be construed as such". It comprised a series
of sections (respectively headed Legal Warning; What is Prestige Unit Trust,
Geneva
Financial Limited and Trust Deed; Investment Statement; Disclosure
Statement; Administration Services; Investment Objectives and
Fees; Investor
Suitability; Risk; Redemptions; Funds' Objectives; Taxation).
- The
memorandum was replete with statements that it did not constitute an offer,
solicitation, recommendation to buy or sell any securities
for investment, and
did not contain investment or other advice or opinion; as well as disclaimers as
to the provision of any warranty
or guarantee of any kind (including as to
accuracy, reliability or completeness of the information). The memorandum also
contained
considerable repetition of statements such as those relating to the
role of Geneva Financial and to the nature of the investments
as being by
private placement.
- The
memorandum described the Prestige Unit Trust as a "pooled investment vehicle",
stating that "When you invest in Prestige Unit
Trust, you pool your money with
all other investors. Your investment amount is defined by contract". Elsewhere,
under the heading
"Administration Services", the memorandum stated that "All
money paid into Geneva Financial Limited's account will be pooled and
the
investor's amount will be qualified by a contract". (It is by no means clear
that any distinction is being drawn when there are
similar statements expressed
with slightly different wording, such as in the example just noted - "defined"
as opposed to "qualified".)
- Geneva
Financial was described as the "administrator" of the pooled investment. The
memorandum noted that Geneva Financial did not
retain investor's money during
the term of the investment and that "Your investment is forwarded to an account
held by the issuing
fund manager" (though it also contemplated that funds might
be held in Geneva Financial's bank awaiting sufficient funds to be accumulated
for investment, and noted that no interest would be paid thereon). (There is no
suggestion in this part of the memorandum that funds
could be dealt with other
than by investment as part of a pooled investment or retention in the bank
account pending such an investment.)
- Trans
Management Corporation was identified as the trustee company. Its role was
stated to be "to safeguard the investor's rights".
(There is no evidence that
Trans Management Corporation ever did anything in a trustee role in relation to
any of the investment
schemes for which it was named as trustee, though in two
schemes the scheme administrators recalled sending some sort of reporting
material to it.)
- The
Investment Statement noted (as was repeated more than once elsewhere in the
memorandum) that the investment was by "Private Placement".
For Prestige Unit
Trust the nature of that investment was stated to be:
A blend of licenced [sic] investment trading companies. The commodities
traded include the S&P 500, FX, bonds, options, interest
rate swaps and
other macro commodities
- The
memorandum noted that an Offshore Fund Manager contracted to Geneva Financial
was providing the investment. (Presumably, that
offshore fund manager, for the
funds that invested with Cadent, was Cadent Financial. However, there is no
definition of the entity
in the memorandum)
- In
the section headed "Administration Services", the memorandum
stated:
Geneva Financial Limited has the right to invest the pooled funds at its own
discretion [though earlier the investment into which the funds were to be
placed had been specified by reference to particular types of investment
as
extracted above] and the benefits Geneva Financial Limited receives are
returns above the projected best efforts return pro rata as set out in the
Private
Placement Memorandum and contract. Brokers are rewarded by
commission by Geneva Financial Limited. This reward to the broker can be paid
direct by the Fund Managers
Marketing Company for a particular Fund manager, or
the commission may be forwarded to Geneva Financial Limited to reward the
brokers.
(my emphasis)
- Even
though the above provides for a discretion in the administrator as to the
investment of the funds, it still contemplates that
the investment is to be part
of a pooled investment (relevant when considering the investment by the
administrators of the Master
Fund of investor funds in "private investments" or
payment of moneys to entities associated with Mr Hobbs).
- Under
the heading "Investment Objectives and Fees", the memorandum also contemplated
the retention by Geneva Financial of a broad
discretion as to the selection of
investments into which the moneys contributed by an investor may be
placed:
The objective is to offer an opportunity to invest into bond trading or any
other opportunity outlined in this memorandum. Geneva
Financial Limited reserves
the right to spread the pooled investment over all, selected or a single fund.
Geneva Financial Limited can exercise this right at any time, without
consulting the investors. (my emphasis)
- Later,
under the heading "Funds' Objectives" (which I assume to be a case of the errant
apostrophe rather than a global statement
as to the objectives of this and other
funds), it is noted that "The Funds' [sic] objective is to provide profit and
preservation
of capital" and that:
Other opportunities may become available to the Fund Manager [I note that
the memorandum has elsewhere been at pains to note that Geneva Financial is not
the Fund Manager, so in context this
is presumably a discretion on the part of
the offshore fund manager] without consulting investors. The requirement for
utilising any other investment is as follows:
a)Risk profile similar or lower
b)Profit return similar or greater
c)Funds held in a more liquid manner
- As
to returns, the "Investment Statement" stated that these were to
be:
Best efforts basis paid on a performance basis in arrears. Ie, at times
profit may be paid monthly. At other times depending on investment
performance,
profit may be paid following a greater period of time.
- "Best
efforts" was (somewhat unenlighteningly) said in that section to
mean:
To the greatest degree of determining effort to produce returns based on a
realistic track record basis.
[not "whatever", as Mr Hobbs said in the witness box]
- Under
the "Administration Services" heading, there was the statement that
The majority of fund managers perform on a "best efforts basis" whereas
profit returns can rise or fall against any projections, meaning
there is no set
guarantee of rate of return.
- Again,
under the heading "Investment Objectives and Fees", it was said that
The Prestige Unit Trust fund return objective is best efforts.
- The
memorandum stated, in more than one place, that the investment was a 12 month
contract "which cannot be altered". Under the heading
Redemption, it was noted
that redemption of capital was not possible for twelve months and further that
"[n]o partial redemption
is available in the first twelve months" and that
thereafter "[f]or partial redemption the investment must maintain a minimum of
USD$10,000.
- There
were somewhat inconsistent statements as to what was to happen at the expiry of
the 12 months. First, in the "Investment Statement"
section, there was a
statement that the investor is required to give 60 days written notice before
withdrawal of capital. In the
Administration Services section there is a
statement that all capital invested will be returned to Geneva Financial bank
account
at maturity of the contracts Geneva Financial holds with fund managers
(or the fund managers' marketing companies) and then that
"[a]ll contracts will
automatically roll over unless the investor advises otherwise" followed
immediately by the statement that the
investor's funds "will be returned" after
the expiry date of the contract "providing 60 days notice in writing has be
[sic] submitted
to Geneva Financial Limited". Under the "Redemptions" heading,
it was said, again, that after the initial twelve months a total or
partial
redemption "is available upon receipt of a 60 days written notice from the
investor to Geneva Financial Limited, otherwise
the investment term is renewed
for another twelve months". (I note these statements having regard to the
suggestion put in closing
submissions by Mrs Hobbs as to the ability of
investors at seemingly any time to direct the withdrawal or disbursement of
funds from
the Master Fund scheme if those funds had not already been invested
as part of a pooled investment. Strictly speaking, that would
require a
redemption of the capital for that purpose.)
- As
to risk, the "Investment Statement" (at [6]) stated:
Because the Fund Manager does not have a registered prospectus an investor
must consider the style of investment as high risk as the
Fund Manager is
domiciled internationally. If an investor wishes to do due diligence he or she
would find this process extremely
difficult. Geneva Financial Limited wishes to
make investors aware that they should consider this investment high risk.
and at [14] that investors should only invest discretionary capital. Pausing
there, the risk being here identified is that an investor
will have difficulty
carrying out "due diligence" on the internationally styled Fund Manager, not
that the nature of the investments
into which fund moneys will be invested would
of itself be high risk.
- Reference
to risk is also to be found in the section headed "Investor Suitability", where
the statement was made that the opportunity
is suited only to investors "who can
bear the material risk involved and can bear the loss of their entire
investment" and can commit
their funds "for a minimum of twelve (12) months".
Again, there was the following reference to risk, described as a due diligence
difficulty but coupled with the suggestion that for some investments there would
be a capital guarantee, under the heading "Risk":
While most international investments have insurance against theft or
misappropriation of capital and while some carry a guarantee
from the fund for
capital invested, it should be noted that International Funds are domiciled
internationally and are relatively
difficult for any party to conduct due
diligence. Also, changes in market conditions around the world can affect Fund
Managers' performance.
It must be accepted that this administration opportunity
[which in passing seems to me an odd way to describe an investment
opportunity] carries a high risk as trading in the bond market is considered
a high risk area and only suitable for those investors who can afford
to lose
the money invested.
It should be stressed that all investments carry risk and Geneva Financial
Limited do not hold any privileged position with any Managed
or Mutual Funds or
Fund Managers.
The invested capital is "capital protected" by the use of a US Treasury
note. On maturity of this note the invested capital is matured
in full. (my
emphasis)
- It
can be seen from the extract above, that statements as to risk are followed
immediately by the assurance that the invested capital
is "capital
protected".
- Private
Placement Agreements
- As
this featured in the oral closing submissions by Mrs Hobbs, I refer to the
Private Placement Agreement entered into between Geneva
Financial (as
Administration Company) and Wyndom Enterprises Ltd (variously defined as the
Investor and the Client) dated 14 January
2003. It was headed "Smart Money
Agreement", from which I infer that the particular investment scheme to which
these funds were directed
was the Smart Money scheme. Again, the terms of this
agreement are strikingly similar to the terms of the agreements entered into
for
other investment schemes.
- Under
this agreement, Wyndom Enterprises (the IBC which Mrs Hobbs described as "my
IBC" and with which she accepts she was at least
a beneficial owner or otherwise
associated) agreed (by clause 1) "to grant Limited Power of Attorney to Geneva
Financial Limited
to pool the sum of $5,858.57 to a Private Placement
Investment". The monetary sum and the details of the Investor/Client were
handwritten
by Mrs Hobbs.
- Wyndom
Enterprises agreed in clause 2 that Geneva Financial offered no guarantee on
capital or return of any profit; indemnified Geneva
Financial for any loss of
Wyndom Enterprises' capital or profits; and acknowledged that "All investment
returns are on a best efforts
basis from the Private Placement funds or groups".
Pursuant to clause 7, Wyndom Enterprises confirmed that the funds invested were
"good clean/cleared funds not subject to any conditions or
restrictions".
- Wyndom
Enterprises confirmed in clause 8 that it fully understood "the risk of this
investment" and had initialled the Geneva Financial
private placement
memorandum. It agreed "to abide by the contracts Geneva Financial Limited enters
into regarding pooled investments"
(clause 9) and stated its understanding that
"our funds will be pooled with other investors' funds" (clause
10).
- Clause
11 contained an agreement to keep confidential all transactions with Geneva
Financial and an acknowledgment that "These transactions
Are not Public
Offerings, but by Private Placement only". Clause 12 contained an
acknowledgement that Geneva Financial "is not a
Fund Manager or an Investment
Advisor, but an Administration Company only, designed to pool clients'
Investments and to receive the
profit and disburse the profit to clients".
- Clauses
14 and 15 (perhaps somewhat inconsistently with the proposition that Geneva
Financial was no more than an administration company)
contained 'suggestions'
(the contractual status of which is unclear) by Geneva Financial (namely, that
all investors' portfolios
should be spread over a variety of investment options
and that all investors should only invest discretionary capital). Clause 16
stated the Investor's understanding that it was provided with "general advice on
this particular investment" and of the "risks associated
with the investment,
including performance".
- Clause
18 contained an acknowledgment that no registered prospectus, current or past,
was offered or shown for this investment and
that the Investor "have had the
principles of Private Placement explained". (Presumably, at least on Mr Hobbs'
case, that explanation
and the "general advice" referred to in clause 16 were as
contained in the private placement memorandum to which reference was then
made
on clause 20 - since the only other source for such explanation or advice, in
the circumstances in which the private placements
seem to have occurred, would
be directly from the introducing broker or FTC executive as the case may be or
at an earlier FTC seminar
or meeting. This is particularly apparent in the case
of investors who signed the private placement agreements at the same time as
the
scheme memorandum was provided to them - and for those in the Pinnacle Fund who
invested moneys and signed temporary contracts
before the scheme memorandum and
private placement agreements, the only feasible source of advice can have been
the introducer or
FTC executive.)
- Clause
19 stated an acceptance that Geneva Financial "has completed the necessary steps
to the best of its ability and knowledge to
conform to the Private Placement
standards" (though how an investor would be in a position to acknowledge this is
beyond me) and
clause 20 specified "the compliance Geneva Financial Limited has
adhered to" as including (c) the production of an investment statement,
(d) the
production of a private placement memorandum, (e) the employment of a reputable
accountant to review all transactions on
a regular basis, and (somewhat oddly as
a description of a compliance step by Geneva Financial) included in (f) that
"[t]he investor
confirms the funds invested are discretionary funds and could
accept without hardship, full loss of funds".
- Clause
21 contained an agreement by the Investor (Wyndom Enterprises) that it was "not
a resident of the USA, UK, Australia or New
Zealand nor has any expression of
interest, offer or promotion arrived from [a] person or company from" those
countries. The basis
for the statement of residence of Wyndom Enterprises was
presumably that it was incorporated offshore (though the address of Wyndom
Enterprises was noted throughout the document as an address in Nelson that was
then, as I understand it, the Hobbs' residential address,
so that presumably
correspondence with Wyndom Enterprises would be within the jurisdiction). (In at
least one of the Smart Money
contracts (Mr Conroy) where no IBC was named and
where the residential address was stated to be in New Zealand, the statement as
to residence was on its face incorrect - that being an agreement on which Mr
Hobbs is named and signed as broker.)
- Mrs
Hobbs signed the document on behalf of Wyndom Enterprises. Her signature was
witnessed at various places by Mr Hobbs, whose occupation
(if I read his writing
correctly, was stated as "Business Consultant"). The document was not signed on
the attestation page for Geneva
Financial.
- Following
the signed agreement (and seemingly appended to it) were a succession of
separate signed statements or agreements, those
headed "Non-Solicitation
Statement and Legal Warning", "Confidentiality Agreement - Non-Disclosure and
Non-Circumvention Agreement",
"No Advice Acknowledgement" (at the foot of which
is a section headed "Confirmation by Geneva Financial Limited Broker"), each
witnessed
by Mr Hobbs, and (after two appendices containing bank account details
for the client and an instruction to the client to forward
the investment
directly by bank transfer to Geneva Financial's WestpacTrust account) a Release
and Waiver and a Declaration of Source
of Funds. (Interestingly, as indicative
of the degree of attention paid to the execution of such documents, Mr Hobbs
witnessed the
section for the Broker's Signature even though that was designated
as N/A (which I read as meaning Not Applicable).)
- It
seems clear on the face of this agreement that what Wyndom Enterprises was
authorising Geneva Financial to do was to pool the specified
sum to a Private
Placement Investment (not to hold those funds on behalf of Wyndom Enterprises to
be disbursed as it might in the
future direct and not to invest other than as a
pooled investment, though there was a discretion, qualified to some extent,
reserved
both to Geneva Financial and to the unidentified Offshore Fund Manager
as to the type of investment into which pooled moneys might
be placed).
- In
those circumstances, until the moneys contributed by an investor were in fact
invested as part of a pooled investment, a question
could well arise as to the
basis on which the corporate administrator of the scheme held the funds and what
contractual or other
entitlement the investor had to withdraw those funds or to
direct them to be applied to a different purpose.
- As
noted above, the terms of the private placement agreements provide that the
investor is not permitted to withdraw those funds within
a twelve month period.
It would presumably be open to the corporate administrator to consent to an
earlier redemption of the funds
(though in so doing it might need to take into
account the interests of other investors - say, if this were to cause detriment
in
relation to funds already invested or would prejudice the ability of the
corporate administrator to make an investment of pooled
funds at a particular
time).
- However,
in the absence of an actual redemption of the funds there might well be an
argument (relevant to the characterisation of
some of the payments disbursed by
Secured Bond out of the Master Fund accounts, which ASIC contends were
investments or payments
not authorised or disclosed under the scheme memorandum
for that fund) that until such time as the funds were invested in accordance
with the private placement agreement (and scheme memorandum to the extent that
this was incorporated by reference into the agreement),
the corporate
administrator would hold those funds pursuant to what is commonly referred to as
a Quistclose trust; in other words, the corporate administrator would
hold them for the particular purpose for which they were invested with it
(and,
if that purpose became unattainable, it would hold them on trust for the payer)
(see Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Re
Elizabethan Theatre Trust, Lord v Commonwealth Bank of Australia, [1991] FCA 344; (1991) 30
FCR 491, at 502-503; [1999] FCA 27; (1991) 161 ALR 105; Peter Cox Investments Pty Ltd (In
liq) v International Air Transport Association [1999] FCA 27; (1991) 161 ALR 105, at
[32]-[39]; Australasian Conference Association Ltd v Mainline Constructions
Pty Ltd (In liq) [1978] HCA 45; (1978) 141 CLR 335, at 353; Twinsectra v Yardley
[2002] UKHL 12; [2002] 2 AC 164, Lord Millett (at 185)).
- Whatever
the status of the funds in the hands of the corporate administrators (before
such time as the offshore investments were made
with the pooled funds), it seems
to me that the terms of the private placement agreement make it clear that it
was not open to an
investor (once it had paid funds to the corporate
administrator of an investment scheme) to direct that the funds should be paid
elsewhere than for the purposes of the pooled investment (even when those funds
had not yet been used for the purposes of the proposed
investment)
without there being a redemption of the funds from the scheme (something
that as a matter of contract was not permitted within the twelve
month
period).
- The
same form of Smart Money contract was used for the investment by a Mr Earl
Conroy on 4 July 2003 of funds in the Smart Money scheme
(with a Smart Money
Contract number of SM019) (Ex AU 1604). This contract, to which I have adverted
above was (inconsistently with
the IBC procedure) not in the name of an IBC but
on its face directly with the named individual, whose address was noted as being
in New Zealand (despite the statement in clause 21 that he was not a resident of
that country). Mr Hobbs witnessed the execution
of the agreement by Mr Conroy,
Mrs Brenda Hobbs signing for Geneva Financial (with her signature witnessed by
her husband Mr Robert
Hobbs). On the Non-Solicitation Statement and Legal
Warning, Mr Hobbs' occupation is stated as "Finance". Relevantly, Mr Hobbs
signed
the Confirmation by Geneva Financial Limited Broker as the broker (and Mr
Hobbs is shown in the Geneva Financial records as the introducing
broker for
this investment and entitled to commission accordingly). I note this because it
demonstrates the incorrectness of Mr Hobbs'
unqualified assertion in these
proceedings that he was never the introducer of investors to the funds
administered by Geneva Financial.
- In
passing I also note that at Ex AU 3433, there is a Geneva Financial record of
January 2005 headed "Smart Money Profit Distribution
for January 2005", to which
Mrs Brenda Hobbs was taken during the course of her examination in these
proceedings, which records contract
SM019 as "Conroy/D Hobbs" and the monthly
profit and commission payable on the investment of funds under that contract
(after the
deduction of sums described as direct profit for Jacky and Brenda);
the net profit to be shared being divided up as to 44% client
share, 44%
administration expenses and 12% introducer commission. (The investment by Wyndom
Enterprises under contract SM010 appears
at the foot of the page with the
reference "Hobbs J/Hobbs J" but showing no amount for commission.) On this
document Mr Hobbs is
also shown as the broker for the Clifford contract SM 027.
The assertion by Mr Hobbs that he did not ever receive commission for
investments other than in respect of Global Funerals is not credible in light of
records of this kind.
- The
standard form agreement for the Prestige Unit Trust was in almost identical form
as that for the Smart Money fund (so, for example,
I refer to the 21 February
2005 Prestige Agreement between PJCB as Investor/Client and Geneva Financial as
Administration Company
- Ex AU 3635 - pursuant to which US$200,000 was invested
by PJCB in the Prestige Unit Trust through Geneva Financial).
- There
are some minor differences between the PJCB/Geneva Financial contract that the
Wyndom Enterprises/Geneva Financial contract,
including that the confirmation
appearing at the foot of the No Advice Acknowledgement is here headed
Confirmation by Geneva Financial
Introducer, not Broker as appeared in the
confirmation used on the Smart Money agreement. Appendix 1 in this version of
the agreement
gave the investor the ability to indicate the preferred option for
profit return as between telegraphic transfer of USD to any bank;
on-line
transfer of NZD to a selected NZD account in an NZ bank; or NZD cheque posted to
address. There was also the addition of
an Appendix 3, which directed the
investor to fax every page of the completed agreement to Geneva Financial after
the funds had been
transferred and to post the original to Geneva Financial at a
New Zealand address and stated that the agreement would then be signed
by Geneva
Financial and posted back to the client address. The investor was also directed
to sign the "associated Private Placement
Memorandum" and post a copy to Geneva
Financial at the stated New Zealand address.
- In
the case of the PJCB investment into the Prestige Unit Trust, the declaration
signed by each of Mr Wood, Mr Truong and Mr Koutsoukos
was that the currency
represented "the proceeds or monies obtained by" PJCB. (Even if the source of
those moneys was, as Mr Hobbs
contends he was told, the sale of Mr Koutsoukos'
properties, on the face of the documents signed by the J&B Financial
officers
this was an investment by PJCB (and accepted as such by Geneva
Financial). There is no basis in my opinion to treat this agreement
as a sham,
whatever the arrangements between Mr Koutsoukos and PCJB might have been as to
the funding for the investment.)
Summary as to the position of the defendants
- Before
turning to the chronology of events, I summarise briefly the position of those
defendants who took any form of active role
in the proceedings.
Mr and Mrs Hobbs
- Although
separately joined as defendants (and notwithstanding the potential for their
interests to conflict, as became apparent in
relation to the position taken by
Mr Hobbs in relation to ASIC's pleading against the fund administrators), Mr and
Mrs Hobbs provided
me with joint written submissions (save as to the one
paragraph that relates to the alternative claim against the fund administrators
to which I will turn shortly). Each addressed me orally on particular issues
(though I understood them to have been made on behalf
of both). (Where the
written submissions are expressed in the first person singular, I have
understood them to refer to Mr Hobbs
personally.)
- Mrs
Hobbs largely addressed me on the matters relating to Smart Money and Prestige
(the funds administered by Geneva Financial) and
on concerns she (and I
understand Mr Hobbs) have as to the provenance and reliability of the business
records on which ASIC relies
for the contention that Mr Hobbs received
commissions other than by reference solely to his involvement with Global
Funerals.
- Mrs
Hobbs was, and I say this with no criticism of her, at pains to point out that
moneys distributed to her (and to members of her
family) out of the Geneva
Financial accounts were moneys that she believes represented returns on
investments made into the funds
administered by Geneva Financial (and/or, in the
case of herself and Mrs Brenda Hobbs, for administration fees due for their work
in relation to the operation of the funds administered by Geneva Financial) and
that the returns were not made out of capital. In
that regard, Mr Halley made it
very clear that ASIC does not contend that Geneva Financial (unlike various
other corporate administrators)
paid returns to investors out of
capital.
- As
to the point at which Mr and Mrs Hobbs' submissions diverge, it is that Mr Hobbs
submits that ASIC is correct where it pleads an
alternative case against each of
the fund administrators (those fund administrators including not only his wife,
but also Mr Collard).
(In this regard, Mr Hobbs, having pleaded in his defence
that he does not know and cannot admit certain matters - thus putting ASIC
to
proof thereof - now submits that I can accept them as correct.)
- The
relevant paragraphs of the Third Amended Statement of Claim that Mr Hobbs now
submits can be found to be correct are, in essence,
various paragraphs that
contain allegations against Mr Hobbs in respect of identified conduct "by
himself or his [therein named]
agents" or allegations that are made expressly
further or in the alternative to allegations of the same conduct by Mr Hobbs, by
himself
or his agents. What Mr Hobbs invites me to find is that the conduct so
alleged by the "fund administrators" (presumably both individual
and corporate)
occurred but was not conduct as his agent.
- Some
of the conduct alleged is what one might think to be otherwise non-contentious
(so, for example, [66] alleges that each of the
individual scheme
administrators, and further or in the alternative each of the individual scheme
administrators and the corporate
administrators, caused investors to be sent a
certificate and/or letter confirming their investment); other conduct may be
more contentious
(for example, [67] alleges that some of the individual scheme
administrators (Ms Li, Mr Collard and Ms Wu) directed or procured some
investors
to sign a scheme agreement in respect of the Pinnacle and Master Funds
after the date of deposit of moneys).
- The
particular paragraphs identified by Mr Hobbs as allegations that he now accepts
as correct (but limited to the involvement on
the part of "fund administrators"
not acting as his agents) are as follows:
- [66] (issue of a
certificate or letter confirming investment);
- [67]
(back-dating of scheme agreements);
- [88] (opening
and operation of Cadent accounts);
- [90] (deposit of
funds from Super Save investors with other funds from PJCB for investment in
ISPL Cadent account);
- [92] (deposit of
funds from Master Fund investors into Secured Bond Cadent account);
- [94] deposit of
funds from investors in Pinnacle Fund and 888 (Super Save) Fund into 888 Vanuatu
Cadent account and deposit of funds
from investors in Enhanced Fund into
Barclaywest Cadent account);
- [96], (deposit
of funds from investors in Prestige into the Geneva Cadent account);
- [98] (deposit of
funds received from investors in Elite Premier Option Two into Preserved
Investment Cadent account);
- [100] (deposit
of funds received from investors in Good Value into North Wave Cadent account);
- [102] (deposit
of funds received from investors in Best Fund into the GP Global Cadent
account);
- [105] (entry
into Trading Contracts for the Cadent accounts);
- [107]
(allocation of an amount for the Cadent Traders to trade and extent to which the
amount could be leveraged);
- [111] (purchase
of US Treasuries using funds deposited by investors to the relevant Cadent
accounts);
- [116]
(withdrawal of amounts from the Cadent accounts);
- [118] (payment
of amounts to investors by way of purported profit on their investments in the
Schemes);
- [136] (opening
and operation of Integrity Plus Technocash account);
- [137] (receipt
of funds from investors in Integrity Plus); [139] (Integrity Plus Global Forex
account);
- [143] (transfer
of Integrity Plus funds purportedly for investment in various ways);
- [155] (making of
payments (in addition to Integrity Plus Return Payments) from the Integrity Plus
account to named persons and entities);
- [160] (transfer
by Destiny, purportedly by way of investment, of funds received from PJCB);
- [167] (opening
and operation of Super Save Technocash and other accounts);
- [177] (making of
payments (in addition to Super Save Return Payments) from the Super Save
Accounts to named persons and entity);
- [180] (opening
and operation of Master Fund Technocash and other accounts);
- [183] (making
purported investment of funds to Mr Caffray);
- [189] (making
Master Fund Return Payments and payment of purported commissions by Secured
Bond);
- [191] (making
defined Master Fund Payments);
- [194] (opening
and operation of First Secured Bond accounts);
- [197] (making
particular payments by way of purported investment of funds by Secured Bond);
- [201] (making
particular payments other than by way of purported commission from the First
Secured Bond Account);
- [204] (opening
and operation of Pinnacle Fund Technocash and Sovereign Bank accounts);
- [207] (making
particular payments by way of purported commission from the Pinnacle Fund
accounts);
- [209] (making
particular payments other than by way of commission from the Pinnacle Fund
accounts to certain persons and entities);
- [212] (opening
and operation of 888 (Super Save) Technocash account);
- [215] (making
particular payments by way of purported commission from the 888 (Super Save)
Technocash account);
- [217] (making
particular payments other than by way of commission from the 888 (Super Save)
Technocash account to Ms Li's wholly owned
corporation);
- [220] (opening
and operation of Prestige account);
- [223] (making
particular payments other than by way of commission from the Prestige account,
including to ROF);
- [226] (opening
and operation of Smart Money accounts);
- [229] (making
purported investment of funds to Mr Carr and/or Bizcards Inc);
- [231] (making
particular payments by way of purported commission from the Smart Money
accounts);
- [233] (making
particular payments other than by way of commission from the Smart Money
accounts to certain persons and entities);
- [256] (opening
and operation of North Wave account);
- [259] (opening
and operation of Enhanced Fund accounts);
- [262] (making
particular payments by way of purported commission from the Enhanced Fund
accounts);
- [264] (making
particular payments other than by way of commission from the Enhanced Fund
accounts to certain persons and entities);
- [267] (opening
and operation of Best Fund Technocash account);
- [270] (making
purported investment of Best Fund investor funds to Master Fund and then
withdrawal and investment of those and other
Best Fund investors' funds with
Cadent);
- [272] (making
particular payments by way of purported commission from the Best Fund account);
and
- [274] (making
particular payments other than by way of commission from the Best Fund account
to certain persons and entities).
- Where
acceptance of the allegations in any of those paragraphs is inconsistent with
the defence that Mrs Hobbs has filed in the proceedings,
Mrs Hobbs has informed
me that she maintains her position in relation to those
paragraphs.
- Mr
Hobbs' acceptance of the allegations in the above paragraphs is that it suggests
to me that he accepts (or would not dispute) in
broad terms the steps taken in
relation to the accounts (such as the opening of Cadent or Technocash accounts),
whether because this
is consistent with his general understanding of what
occurred at the time or otherwise; but that his defence rests in this regard
on
the denial of the proposition that those individuals or entities were acting on
his behalf (together with the further matters
raised in answer to the claim,
which I consider in due course). Ultimately, however, nothing turns on Mr Hobbs'
acceptance of the
alternative claim (since I am persuaded that the agency
allegations are correct). The fact that an alternative claim might succeed
on
the facts does not preclude a finding on the basis of the principal facts for
which ASIC contends.
- (Mr
Hobbs appears to concede that representations might have been made in relation
to the funds by himself or by others, insofar as
he submits that regardless of
any comments "I might have made" at the seminars, in choosing a fund in which to
invest investors must
have had regard to the information received from the
administrators; and he also explains that others may have referred to his
financial
expertise as part of their salesmanship.
- Turning
to the balance of their submissions, on which Mr and Mrs Hobbs are ad
idem, broadly speaking Mr and Mrs Hobbs squarely place responsibility for
the development of the financial product comprised by the relevant
schemes and
the operation of the investment schemes on Ms Reisinger. The Hobbs' central
proposition is that "Ms Reisinger was the
principal behind this, having
originally set up the product with Kip Becker" (and that she did not do so as Mr
Hobbs' agent) and
that it is she who is therefore responsible for any
contraventions by "fund managers".
- Mr
Hobbs submits that the Securities Exchange Commission "got it right" in bringing
certain charges against New World Holdings and
Ms Reisinger (to which I refer
later) and that ASIC is correct when it alleges that Ms Reisinger directed
things to occur (referring
to paragraphs [87], [89], [91], [93], [95], [97],
[99], [101], [104], [106], [110] and [115] of the pleading) but incorrect when
it alleges that Ms Reisinger was acting as Mr Hobbs' agent ([86], [87], [89],
[91], [93], [95], [97], [99], [101], [101], [106],
[110] and [115] in so doing).
I consider those submissions in due course.
- As
to the allegation that FTC executives were his agents, Mr Hobbs submits that the
FTC executives were, at most, agents of FTC (or,
he seems to accept, himself)
for the purpose of selling educational materials and not an agent for FTC
for all purposes. In essence, Mr Hobbs submits that to the extent that a person
who was an FTC executive
is found to have been a director or officer "of an
alleged scheme" and to have made representations or statements about a fund,
and that fund pays them commission, then that person is the agent of the
fund.
- Mr
Hobbs' contention in relation to the agency allegations in general, as I
understand it, is twofold: first, that as the FTC executives
were precluded by
their contract of employment with FTC from soliciting investments or giving
financial advice, then to the extent
that they acted in a way contrary to their
contractual obligations (or that was unlawful) that was unauthorised conduct not
within
the scope of the agency relationship or illegal conduct (and hence not
conduct for which the principal should be found liable); and
second, that the
relationship of principal/agent can be determined by reference to the question
whether payment for the agent's services
was received and, if so, by whom. As to
the position of Ms Reisinger Mr Hobbs submits that the agency arrangement is
between Ms Reisinger
and New World Holdings (and not between Mr Hobbs and New
World Holdings); and that Ms Reisinger dealt directly with the scheme
administrators.
I consider the agency submissions in due
course.
- Mr
Hobbs has emphasised that he was only engaged in the business of FTC, which was
that of selling of educational packages; that this
was his business and that he
was paid by FTC for this; that this was his principal source of income (though
there is no evidence
as to his overall income or any income tax or other records
from which this could be assessed); that the only "substantive" payments
he
received were in respect of a Taiwanese company (Global Funeral Services) "and
to the extent that there was anything else, [he]
was unaware of it". Mr Hobbs
placed emphasis on his assertion that his reason for having entered into any
agreement "with either
Cadent, New World, ROF or any other party", was that he
understood this to be in relation to Global Funeral Services and that he
understood any payments from these parties were also in relation to Global
Funeral Services.
- Mr
Hobbs submits that ASIC has wrongly included in its schedules the Global
Funerals payments (as if they were from one of the alleged
managed investment
schemes the subject of these proceedings). Mr Hobbs refers to the contract
between Global Funeral Services and
himself and other entities setting out the
agreement for Global Funeral Services to pay a fee of $1.5 million and refers to
clause
(I) that provides that "Commission payments are to be administered by Min
Hua Li of Secured Bond Ltd"; clause (j) "Commission and
fee payments are to be
paid to the Secured Bond Master Fund account for the facilitator". It is
submitted that, in accordance with
these clauses, Ms Li did in fact administer
the payments when they were received (reference being made to FZF's Statement of
Account
included with other Global Funeral Services details which it is said
shows the amounts transferred via Technocash being recorded
on the statement)
and that payments were made to the Secured Bond Master Fund account (FZF) for
the facilitator, which payments it
is said were held on investment in the Master
Fund until required by the facilitator (who Mr Hobbs identifies as
himself).
- Mr
Hobbs challenges the authenticity of the documents relied upon by ASIC,
maintaining that the source of the documents relied upon
by ASIC "is not really
known" (and that as the authors of the documents are not available for cross
examination, the Court should
be sceptical in according those documents any
weight). (In part this submission seems to rely on an assertion that the
underlying
source documents for the s 50 summaries were not provided to Mr and
Mrs Hobbs, although Mrs Hobbs frankly conceded that she and her
husband had not
personally reviewed the CD material served by ASIC in that regard (but that Mrs
Andrews had and had told her that
there were no Cadent source documents
therein).
- Mr
Hobbs also emphasises the defence he has raised by reference to his belief in
the legality of the activities (which might be thought
to sit somewhat
uncomfortably with his denial of any involvement in the activities beyond the
sale of FTC subscriptions if, by this
submission, he is referring to the
legality of offshore activities). (Mr Hobbs further maintains that he is not
aware of any law
"that says you cannot educate people about financial products"
(submission at [21]).)
- Mr
Hobbs variously points to advices he says he received from Mr Becker as to the
US requirements; from Mr Miles that what he was
doing was all "perfectly legal";
and from Mr Hartnell (and tendered evidence as to a later advice from Ms Maroun)
as to the Australian
requirements; from Fletcher Vautier Moore as to the New
Zealand position (a reference, it seems, to an opinion issued by Mr Bellamy
to
Cadent on his behalf). (ASIC's position is that to the extent to which the
advice proceeded on a manifestly false premise with
respect to the activities of
FTC and to the activities of OEM and KLM, any attempt to rely on that was not
reasonable (and in all
likelihood is more consistent with dishonest conduct and
certainly misleading or deceptive conduct.)
- (Mr
Hobbs accepted in cross-examination that when he received and read the Hartnell
advice he understood that what Mr Hartnell was
saying was that, provided
everything was offshore, it was outside the reach of the Corporations
Act.) Mr Halley submitted that Mr Hobbs also understood that even if there
was an offer or issue to an investor in Australia, then provided
that investor
was a wholesale client there may not be an issue under the Corporations Act. It
is not clear that Mr Hobbs accepted he understood that at the time, though in
the witness box he accepted that that was what
para 3.5 said.
- Mr
Hobbs accepted that when he read that advice he appreciated that what Mr
Hartnell was saying would not constitute a contravention
was an investment where
everything with respect to that investment (the application, the request, the
offer) was done offshore but
he was unsure as to the proposition that that
advice would not cover a situation where somebody in Australia had made a
request for
information concerning an offshore investment (nor as to whether the
advice would cover a situation where an offshore entity sent
private placement
memorandums and investor agreements to investors in Australia). As to the
latter, Mr Hobbs said "If it was an offshore
company I don't see any reason why
not". Mr Hobbs' understanding was tested in the following
exchange:
Q. I am talking Mr Hobbs, so we are not as crosspurposes, about the dispatch
of a private placement memorandum and an investor agreement
from offshore to an
investor in Australia, you understood that Mr Hartnell's advice didn't cover
that situation, did it?
A. No, I am not sure about that. I believe that if it was sent to an IBC
in the name of an IBC it didn't constitute anything.
Q. Mr Hartnell doesn't give you any of that advice in his letter, does he, Mr
Hobbs?
A. That's as I understood it.
Q. Where does Mr Hartnell say in his advice on which you rely of the 7 June
2002 that it's all right if it's sent to an IBC in Australia?
A. Well that's exactly as Mr Becker described it as well as so
Q. Mr Hobbs we are talking about Mr Hartnell's advice. Where does he say in
that advice that it's all right if you send it to an address
in Australia but
write an IBC name on the cover?
A. I don't see it.
Q. It's not there, is it?
A. I don't read it, no.
Q. And where does Mr Hartnell in his advice cover a situation where the
private placement memorandum and investor agreement is printed
in Brisbane and
sent to an investor in New South Wales?
A. I don't see anything about that in here.
Q. You wouldn't suggest for a moment that that situation would be covered by
Mr Hartnell's advice, do you?
A. Well I thought it would be.
Q. Mr Hobbs what part of the advice do you think covers that issue?
A. An offshore company.
Q. Mr Hobbs I am talking about the printing of a private placement memorandum
in Brisbane and the dispatch of that private placement
memorandum in Brisbane to
an address in New South Wales, do you follow me?
A. I do not know. I would have thought that would have been covered, that
would have been fine. (my emphasis)
- Seemingly,
for good measure, Mr Hobbs also invoked Mr Stanton's name in support of the
contention that offshore investment through
an IBC was covered by Mr Hartnell's
advice:
Q. You would agree that Mr Hartnell doesn't address that situation, does he?
A. I cannot read it here. Also Mr Stanton never raised an issue about this
either.
Q. Did you receive written advice from Mr Stanton, did you, Mr Hobbs?
A. No, Mr Stanton was, he worked for the J&B gentlemen. He never said
anything that was incorrect.
Q. So you told him everything you did, did you, Mr Hobbs?
A. No, he knew what they did.
- There
was no evidence from Mr Stanton and the evidence from the J&B Financial
officers, particularly Mr Koutsoukos, suggests that
Mr Stanton at least by 2008
had expressed concern about the legality of the investment schemes (though I
place no weight no this
given the fact that Mr Stanton gave no evidence in the
case).
- Although
Mr Hobbs denied setting up the "system" in question, he accepted that he had
understood, at all times between 2002 and 2007,
that the system that was in
place involved an investor in Australia sending a fax offshore typically in the
name of an IBC asking
for information as to what funds might be available for
that investor to invest in. He also accepted that after the fax asking for
information as to investment funds was sent that facsimile was diverted to Mrs
Burnard in New Zealand and he seemed to accept that
the position then was that
Mrs Watson and her daughter (Mrs Burnard) then ran a system which qualified the
investor by asking them
to confirm that they had an IBC.
Q. And the IBC wasn't allowed to say that the purpose for the IBC was that it
was created for investment purposes?
A. Oh I am not sure.
Q. You just can't remember one way or the other?
A. I don't recall, I don't know.
- This
is inconsistent with the dogmatic nature of Mrs Watson's evidence as to the
qualification process.
- Mr
Hobbs submits that, as he did not personally ("other than by association with
his wife" - a statement that was crossed out on subsequent
submissions) operate
any fund, he "really had no reason to take any further steps to ensure the
legality of what was being done"
and that "[i]ndeed in as far as activities in
New Zealand and America were concerned I had no idea an Australian court might
claim
jurisdiction". (To the extent that those submissions are made to support a
defence based on reasonable reliance on legal advice,
they seem to suggest that
it would be reasonable for Mr Hobbs to be indifferent as to the legality of what
was being done in respect
of the various funds to which, at the very least, he
had directed potential investors' attention in the seminars - a proposition
that
seems to me to be difficult for Mr Hobbs to maintain.)
- As
to the New World Holdings documents, two broad submissions are made: first, that
the accounts are incomplete, inaccurate and cannot
be verified from the
underlying source documents (that have not been provided) and, secondly, that
there is doubt as to their reliability
and reason to suspect these documents
were "reverse engineered" by reference to the fact that claims or charges have
been laid against
Ms Reisinger and New World Holdings in the United States (Mr
Hobbs also making reference in this context to the settlement of claims
made by
regulators against Cadent overseas). As to the latter, there is no evidence and
the only document sought to be tendered (which
I rejected) appeared to be on a
no-admissions basis. As to the former, the charges laid against Ms Reisinger and
New World Holdings
are no more than charges and, as I understand it, are being
defended.
- Mr
Hobbs submits that, even if the New World Holdings documents were to be correct,
New World Holdings has itself directly attributed
a large portion of the fees
($41,601,85 in November 2006) to the Global Funeral Services Cadent Accounts and
that any and all amounts
relating to Global Funeral Services need to be
extracted from ASIC's compilations because Global Funeral Services is not one of
the
funds the subject of these proceedings. It is submitted that the amount paid
to Mr Hobbs "allegedly for the funds the subject of
these proceedings is very
small and is a very small percentage of the Total Net "Commissions (Fees)". (As
to the last point, the
quantum of the commissions received, at least so far as
that not been seen to be de minimis, is not the issue - the question is
whether Mr Hobbs had a financial interest in the operation of the schemes, which
he clearly did
on the evidence before me, and whether (as a director or
alternatively, if he be one, as a fiduciary) he received a benefit or advantage
for himself out of the companies to the detriment of the company or
alternatively in conflict with his interest as a fiduciary.)
- I
should note at this point that Mr Hobbs has staunchly criticised ASIC, among
other things, for the fact that it has "chosen not
to investigate" the
involvement of Ms Reisinger (or others in the United States) and seems to have
suggested some impropriety in
that regard insofar as he has submitted
that:
The proceedings have been conducted to keep Ms Reisinger from being cross
examined by me and this combined with my lack of access
to exhibits has severely
prejudiced my ability to defend these proceedings. ...
- I
raise this in part because Mr Hobbs on various occasions throughout the hearing
made submissions suggesting improper conduct on
the part of ASIC or its
officers, which submissions were then withdrawn (generally when the lack of an
evidentiary foundation for
them was raised by Mr Halley). The above submission
was not withdrawn and thus needs, in fairness to ASIC, to be addressed.
- First,
as to the accusation that Mr Hobbs' "lack of access to exhibits" had severely
prejudiced his ability to defend the proceedings,
when I clarified with Mr Hobbs
what was meant by this reference I was advised that it related to the lack of
source documents underlying
the New World business records. I comment on this
when addressing the question of the weight to be attached to those documents
that
are in evidence. Suffice it to note that there was evidence (on the
occasion of ASIC's interlocutory application for leave to admit
summaries as
evidence pursuant to s 50 (the s 50 summaries)) of the voluminous amount of
underlying documents. Those documents were contained on a disc served on Mr
Hobbs in late
March or early April this year at a time when he was represented
by legal counsel (and, indeed, Mr Southwick of Counsel adduced some
evidence and
made some submissions as to the content of some of those documents). There is
nothing to suggest that any documents
have been kept from Mr Hobbs nor is there
evidence as to any inability by Mr Hobbs at the relevant time to access those
documents.
(It seems that Mr and Mrs Hobbs have relied on Mrs Andrews to review
some or all of the documentary material, Mrs Hobbs submitting
that if Mrs
Andrews had seen underlying Cadent source documents she would have told
her.)
- The
other accusation contained in the above submission was as to the suggestion that
ASIC had improperly chosen not to investigate
the position with Ms Reisinger
(and I note that Mr Collard similarly emphasises that Ms Reisinger was not a
defendant).
- From
the material before me it is apparent that ASIC has conducted compulsory
examinations in Australia, New Zealand and the United
States, invoking the MMoU
procedures to which I have referred above. Documents were obtained under
subpoena in those countries (in
the case of the documents from the United
States, these being referred to in the material relied upon for the application
to adduce
in evidence the s 50 summaries).
- It
is not for me to express any view as to whether Ms Reisinger (had she otherwise
been amenable to the jurisdiction) could or should
have been joined as a
defendant in the proceedings (nor, for that matter, is it to the point that
other persons involved in similar
schemes might have been joined as defendants).
- That
said, there is certainly nothing from which I could draw the conclusion that
ASIC had conducted its case so as to "keep Ms Reisinger
from being
cross-examined" by Mr Hobbs or, as elsewhere asserted, has in some way sought to
keep relevant information in relation
to the Global Funerals scheme away from
the Court's scrutiny. Mr Hobbs submitted that ASIC had resisted whenever he
raised the topic
of Global Funerals. In that regard, to the extent that
objection was raised to evidence or questioning about the Global Funerals
account at the outset, it was on the basis of relevance (and it was not clear at
that stage what reliance Mr Hobbs sought to place
on the Global Funerals account
- ie, that he would in his evidence assert that all commissions received were
referable to that account).
In any event, ASIC has conceded that there were
commissions received referable to the Global Funerals account (and the evidence
in
relation to the facilitation agreement was admitted) so that it is difficult
to see that anything flows from this complaint.
- (In
the context of Mr Hobbs' submissions as to Ms Dong's evidence, he also made the
submission (that frankly I can make little sense
of) that the information he
gave to the liquidator on behalf of his brother Robert had "triggered" the
information as to Cadent numbers
for ASIC to use.)
- To
my observation, in the conduct of the hearing ASIC has complied with its
obligations as a model litigant. Its officers and legal
representatives have
been helpful and courteous to the various self-represented defendants in the
proceedings during the course of
the hearing. Both Mr Halley and Mr Clarke were
assiduous in ensuring that ASIC's position on numerous issues was made clear in
advance
to Mr and Mrs Hobbs (such as whether adverse inference would be sought
to be drawn on particular matters) so as to permit them to
take a considered
view of the course they should adopt in their own interests in the hearing and
ASIC's legal officers were, to my
observation from their conduct in Court,
scrupulous in providing Mr and Mrs Hobbs with copies of all relevant material
and in communicating
matters concerning the conduct of the
proceedings.
- The
decision to admit the Reisinger transcript in evidence (subject to weight and to
any evidentiary objections that might be made
by Mr Hobbs in relation to the
transcript), was mine (as for that matter was the decision to admit the s 50
summaries in evidence). It was based on the evidence that was before me on those
applications and after consideration of the relevant
factors, including the
potential prejudice to the defendants. Mr and Mrs Hobbs had the benefit of legal
representation by Counsel
at least at the outset of those applications (and Mr
Collard had the benefit of submissions from Mr Hartnell on the Reisinger
transcript
application).
- I
do not accept that ASIC can fairly be criticised for the circumstances that led
to Ms Reisinger not being available for cross-examination
nor is there any basis
to suggest that the application to admit the transcript of her examination into
evidence was motivated by
a desire to keep Ms Reisinger from being
cross-examined by Mr Hobbs. Mr Clarke, on the hearing of the interlocutory
application,
candidly acknowledged that it would be preferable from ASIC's point
of view if Ms Reisinger were available for cross-examination
but indicated the
obvious difficulties in seeking to compel her attendance (she being a resident
of the United States).
- As
to the allegation that ASIC had made a decision not to investigate or prosecute
other defendants, I refer in due course to the
question whether that might be
said to have infringed any duty of fairness of the kind recently considered (but
not affirmed) by
the High Court in the Hellicar case (although Mr Hobbs'
submission was not put expressly on this basis).
- As
to the question of misleading and deceptive conduct, Mr Hobbs implicitly
concedes in his submissions that representations were
made by others as to his
financial expertise (insofar as he submits that there is no doubt that the
representation that he was a
financial expert "in the context of the selling of
the education packages" was utilised by the fund administrators "as also
amounting
to my endorsement of their funds" and goes on to accept that "indeed
the process of telling people about what is possible and what
exists is very
close on occasion to advising people as to what they should invest in") but
maintains that "there is no law that says
you cannot educate people about
financial products".
- As
to the last proposition, if (as here) the process of education about financial
products is part of, or coupled with, the solicitation
of investments in those
or other financial products, then Australian Securities and Investments
Commission v Chase Capital Management Pty Ltd [2001] WASC 27; (2001) 36 ACSR 778 shows that
in certain circumstances this may amount to contravention of statutory
provisions of the kind that ASIC contends have
been breached in the present
case. Similarly, if there is misleading and deceptive conduct in the context of
such seminars in the
course of promotion of financial services or products then
there is no reason to exclude the possibility of liability for such
conduct.
- As
a general matter, I note that Mr Hobbs, in his submissions, has made various
assertions as to matters not the subject of evidence
before me (and based on
what he says others have told him). I cannot take those untested assertions into
account, nor was it obvious
what conclusion would be able to be drawn therefrom
in any event. So, for example, he made submissions as to the derivation of
particular
company names in the proceedings, seemingly to distance himself
(and/or perhaps Mr Collard) from the naming of the particular funds
(such as the
Pinnacle Fund, that he said Ms Li had named after a visit to a Buddhist temple,
and the Enhanced Fund, as to which he
said neither Mr Collard nor Ms Wu could
recall its derivation). He also referred to another fund (said to be by the name
of Toptop)
about which he said he had no further details. There was no evidence
before me at the hearing about these matters and (although it
was put to Mr
Hobbs in cross-examination that the 888 Management companies might have been
linked to Mr Hobbs' interest in motor
car racing) I draw nothing from the naming
of the funds.
- As
to Mrs Hobbs' position, in particular, Mr Hobbs submits: that he always believed
that it was open to his wife to conduct these
"Reisinger Products" in accordance
with the Hartnell advice (the significance of Mr Hobbs' belief being is relevant
to whether Mrs
Hobbs was in breach); that there is no evidence that his wife
ever came to Australia for this business or that she participated in
any of the
seminars or did anything other than run the funds from NZ; that Mrs Hobbs was
acting outside of the jurisdiction and,
accordingly, not subject to Australian
rules; and that if she was subject to Australian rules then she had done nothing
wrong (referring
to Mr Hartnell's advice, though then querying whether that was
even provided to Mrs Hobbs). (As to the size of the Geneva Financial
Fund, I
note that ASIC accepts that, unless it comprises part of the overall collective
Hobbs scheme, no liability under s 601ED would arise.)
Ms Wu
- Very
late in the proceedings, as referred to earlier, Ms Wu sought to file a defence.
That defence, as filed by my leave, denies various
of the allegations as they
relate to Ms Wu, admits that she did not hold an Australian Financial services
licence, and otherwise
contains a non-admission as to the remaining parts of the
claim insofar as they relate to her.
- In
answer to the parts of the Third Further Amended Statement of Claim that relate
to Ms Wu, the defence goes on to make various statements,
including that she was
an investor in Master Fund and Barclaywest Ltd [7]; that she was "introduced to
these investments by Bi Hong
Dong (who she met in 2005) and Min Hua Li (who was
introduced to her by Bi Hong Dong in 2006) ([9]; that she did not know any of
the defendants prior to investing [10]; that she was asked by Ms Li in 2006 to
do some book keeping [14] and that she did this on
a voluntary basis for no
reward [15]; and that she allowed a number of meetings to take place at her
house in or around 2006 to 2008
at the request of either Ms Li or Ms Dong
(either of whom facilitated the meeting) and that sometimes Mr Collard also
attended) [18].
- Ms
Wu served two sets of submissions. Both contained numerous factual assertions
about matters as to which there was no evidence before
me. In essence, her
position is that she denies being an officer of the relevant companies, says
that moneys received by her were
in relation to investments made in the relevant
funds, says that she acted on instructions from Ms Li and Ms Dong (for no
reward)
and denies the allegations made against her.
- Ms
Wu's affidavit 20 August 2012 (read in support of her application for leave to
file the defence) deposes to Ms Wu having been introduced
to Secured Bond,
Barclaywest, 888 Vanuatu by Ms Dong and Ms Li. Ms Wu deposes that "I am just a
subscriber". She denies being an
officer or employee; denies any decision-making
role; says that she did receive commission in relation to a Pinnacle Fund
contract
(with a company she established Hao Ting Corp) and admits to the
receipt of some other moneys. Otherwise, her position is that she
helped do
paperwork at the request of Ms Li on a voluntary basis for no reward. Ms Wu
asserts that she signed documents at the direction
of Ms Dong or Ms Li; says
that she had a number of meetings at her house at the request of Ms Li or Ms
Dong but did not organise
them. Ms Wu deposes that she did not make
representations but admits that she did tell friends about her investments (and
she seemed
to accept in submissions that she had introduced approximately 30
people to FTC). Ms Wu takes issue with evidence given by Ms Dong
and with the
evidence of Ms Gao (and makes reference to a strong relationship between Ms Li
and Ms Dong).
Mr Collard
- Mr
Collard, as already noted, filed (though later wished to withdraw) a submitting
appearance. Through Mr Hobbs he provided submissions
(to which ASIC objected) as
to various aspects of the schemes the subject of the proceedings. Those
submissions suffer from the same
vice as the submissions served by Ms Wu. They
contain, in effect, Mr Collard's version of events (that being a version that
could
have been put forward had he chosen to defend the proceedings and adduce
evidence in his defence - he did not).
- In
summary, Mr Collard's submissions address various funds, each of which he
asserts was a "Reisinger Product".
- Mr
Collard asserts that 888 (Super Save) was controlled by Ms Li controlled; that
in September 2007 a small profit was paid and that
Ms Li liquidated the fund in
November 2007 at which time "the Super Save fund capital was lost with all the
open trades". Mr Collard
further asserts that the amounts were also lost due to
insider trading by an unidentified employee of Cadent (taking profitable trades
for that person's own account and passing less profitable or negative trades to
clients). Save for the evidence of Ms Li's role in
relation to the fund (and I
interpose to note that there seems no evidentiary basis for the assertion that
Ms Li was the principal
controller of the fund, Mr Collard also being a scheme
administrator of the fund) and as to the payment out of returns of capital
(as
disclosed in the s 50 summaries), neither of which supports Mr Collard's
assertions, there is no evidence of insider trading or other misconduct within
Cadent nor that it (or conduct of Ms Li) produced losses as asserted. In any
event, the claims made by ASIC do not depend on proof
that losses were made in
the Cadent trading.
- Mr
Collard submits that no commissions were paid to administrators from the 888
(Super Save) fund. The payments out of that fund are
as itemised in the s 50
summaries.
- As
to the Pinnacle Fund, Mr Collard submits that there were two profit payments (on
10 April 2007 and in January 2008, respectively)
that he contends were
calculated by Ms Reisinger "on the request of the administrator or one of the
owners of the company". Again,
Mr Collard asserts that the liquidation of open
trading positions and/or loss caused by the alleged insider trader makes it very
difficult to determine the loss sustained in this fund. Mr Collard submits that
there were four investors in that fund.
- Mr
Collard further notes that the Cadent opening accounts for the Pinnacle Fund,
888 (Super Save) Fund and the Enhanced Fund were
all opened by Ms Li (though I
note that Mr Collard witnessed various of the account opening documents). He
submits that he and Ms
Dong were "used" by Ms Li and that at all times the
controlling person was Ms Li. I note that this submission supports at least in
part the evidence of Ms Dong in relation to her role in the schemes. However, as
between Mr Collard and Ms Li, it is impossible on
the evidence to attribute a
primary role to Ms Li.
- In
relation to the Enhanced Fund, Mr Collard submits that the difference between
the original invested capital and the sum of money
returned to the Supreme Court
(which he quantifies at approximately US$100,000) is due to the same two
factors. He says that the
fund paid two profit payments (on 10 December 2007 and
5 May 2008) and also commission to the shareholders/investors of 12% and 10%
respectively on those dates.
- Mr
Collard submits that this fund is "not like" the Idylic fund (being owned,
operated and managed "very differently") and that these
funds should not be
grouped together as they are "individually owned and operated".
- Mr
Collard denies the allegations against him of misleading or deceptive conduct
and asserts his belief that he complied with all
the laws of Australia. The
basis for his asserted belief as to the legality of his actions is by reference
not only to the Hartnell
advice but also his asserted association (of which
there is no evidence) with a barrister (Mr Stanton) who it is asserted "spent
a
lot of time with Mr Collard and offered his opinion and approval of the business
Mr Collard was undertaking". In this context,
Mr Collard makes assertions as to
another fund of which he says that he, Ms Li, Mr Stanton and another were "the
owners" and which
he asserts was operated in the same way as the Master Fund,
Pinnacle Fund and Good Value Fund. Mr Collard takes issue with the fact
that
"ASIC has chosen not to include" that fund or Mr Stanton in these proceedings.
(As clarified with Mr Hobbs, this is a submission
that relates to the parties
against whom ASIC has commenced these proceedings, not any suggestion that ASIC
should have called Mr
Stanton or the other person identified by Mr Collard in
relation to that other fund to give evidence.)
- Mr
Collard emphasises, in relation to Ms Reisinger, that she was not joined as a
defendant in the proceedings and asserts that it
was "Ms Reisinger who gave all
the advice, set up the traders, clarified and made available profit when Ms
Reisinger stated profit
has been made on all these funds".
- Mr
Collard asserts that he did not receive a financial gain over and above the
other shareholders in Barclaywest (stating that his
"additional income" from the
Enhanced Fund was by the sale of some of his shareholding to other
shareholders). Mr Collard then makes
various assertions as to support he says he
has received from more than 50% of the owners of companies "that had invested
with the
alleged Li/Collard schemes" as evidence of his sincerity and belief
that he conducted all things correctly. There is no evidence
of such support
(nor is it relevant to the issues to be determined in the proceedings at least
at this stage). Similarly, the statements
by Mr Collard that he has made himself
available to investors, has "never been a flight risk" and has "conducted
himself in accordance
with all the ASIC orders" (whatever that might mean); as
well as the submission that he became the administrator of Barclaywest at
the
request of the other (Chinese) shareholders who called for the resignation of Ms
Dong and that he has received emails of support
from (unidentified) individuals
who have sworn affidavits in these proceedings; are unsupported by evidence and
irrelevant to the
issues presently being determined.
- As
to what he describes as "the Reisinger product Secured Bond Master Fund", Mr
Collard submits that this fund is "more complicated".
He asserts that this fund
was owned by two shareholders (Ms Li's company and his company) and that Secured
Bond was used for two
different purposes (running the Master Fund and receiving
the income from the separate Global Funerals Cadent account). He submits
that
"Secured Bond Master Fund" also received other moneys for share purchases (which
money he says came from shareholder profits)
and that "at other times investors
instructed payments to purchase share in other companies which would have come
from either investors
profit or their own profit". Mr Collard points to no
evidence to support those submissions, simply asserting that the bookkeeping
"and authorities for this" is held by ASIC.
- Mr
Collard submits that the allegations that payments were made out of returns of
capital (and that "Secured Bond Master Fund allegedly
ponzied money") are
incorrect. He asserts that Mr Hartnell is holding copies of the company
documents "as security" and that if he
(Mr Collard) had been able to access all
the documents for Secured Bond Master Fund he would have been able to
reconstruct the account
and show all incoming and outgoing moneys "as opposed to
investment funds". (To the extent that he submits that ASIC holds all that
material, it would seem that the very exercise of reconciliation to which Mr
Collard says he could have undertaken had he had access
to the company
transactions is the exercise that the liquidator of the Master Fund has
undertaken and which forms the basis of the
s 50 summaries adduced in evidence
in the hearing before me).
Status of Wu/Collard submissions
- I
have read the Wu and Collard submissions carefully. Where I am satisfied that
they amount to submissions (rather than an attempt
to adduce unsworn evidence
through the submissions) I have taken them into account. Where they do not (and
regrettably that constitutes
the bulk of the submissions) I am unable properly
to take into account the matters asserted. I should add that the weight that
could
in any event be placed on unsubstantiated assertions of events (in the
face of evidence to the contrary from witnesses in the proceedings
whose version
of events was able to be challenged and tested and in the face of often
conflicting contemporaneous documents) would
be extremely low.
Summary of findings
- Handed
up to me by Mr Halley on 15 August 2012 was a 22 page list of the issues that
ASIC contends fall for determination in the proceedings
(some 195 issues in
all). Mr Hobbs did not suggest that any further issues fell to be determined,
although the specific issues pleaded
by way of further answer to the claims in
his defence (including the limitations issue raised by him - as to which there
were no
submissions) will be addressed in due course.
- In
summary, for the reasons set out below, I find as follows in respect of the
various categories of alleged contraventions.
- As
to the financial services contraventions I find that Mr Hobbs (and his agent or
alter ego, FTC), as well as the respective corporate
and scheme administrators
were involved in the period between 2002 and 2008 in the marketing and/or
implementation of a financial
product within of the Corporations Act
(namely the white label investment schemes that were adapted from a model
developed and/or modified for use in Australia and New
Zealand by Mr Hobbs). Mr
Hobbs' involvement in the development of that product is the only logical
explanation for his various references
to having intellectual property in the
funds; his ability to set up such funds; his offer to sell or set up funds for
others; and
the time and money he said he had spent establishing the investment
opportunities, about which he spoke at the DVD Seminar, various
FTC seminars and
meetings and, according to Ms Reisinger, when he met with Cadent
representatives).
- I
find that there was a contravention by Mr Hobbs (and by FTC and the respective
corporate and scheme administrators) of s 911A of the Corporations Act by reason
of the provision of financial services within this jurisdiction without an
Australian financial services licence.
- I
further find that the fourteen individual managed investment schemes (together
with the steps that formed part of the process of
such investment including the
sale of FTC subscriptions and the interposition of the OEM/KLM process)
constituted a collective managed
investment scheme, the operation of which
occurred partly within this jurisdiction and which required the issue of a
product disclosure
statement. I find that Mr Hobbs and each of the corporate and
scheme administrators were in breach of s 601ED(5) of the Corporations Act,
having operated an unregistered managed investment scheme within the
jurisdiction. (Had I found that the individual schemes did
not together comprise
an overall scheme, then I would have held that the Integrity Plus, Super Save
and Master Fund Schemes required
the giving of a product disclosure statement
and that there were breaches of s 601ED(5) by the persons involved in the
operation of those schemes, including Mr Hobbs).
- I
find that at all material times the FTC executives were agents of FTC (and that
FTC was in turn an agent or the alter ego of Mr
Hobbs) and that the corporate
and scheme administrators were the agents of Mr Hobbs in the promotion and
marketing of the overall
Hobbs scheme (including the promotion of investment
opportunities in the offshore wholesale market). As to the submission by Mr
Hobbs
that I should find for ASIC's alternative case (but not that the relevant
persons acted as Mr Hobbs' agents), I consider that the
agency allegations have
been made out and that Mr Hobbs is principally liable for the contravening
conduct of the agents in question.
- I
find that the representations alleged in paragraphs [279][291] were made by Mr
Hobbs (and the corporate administrators of each of
the individual schemes
through the relevant scheme administrators, acting on his behalf or as his
agents): namely, that the investment
of the funds was lawful in Australia; that
investors' funds would be capital protected; that the likely rate of return
would be in
the order of 3% or 4% per month on a regular basis (or somewhat less
in relation to the Pinnacle Fund); that investors' funds would
be invested in
A++ or A+ securities; that the capital would be available on redemption; and
that the proceeds would be invested in
United States Treasury STRIPS or notes. I
further find that those representations were false and misleading or likely to
mislead
and deceive in a material particular (and that Mr Hobbs, and relevantly
Mr Collard, must have been aware that this was the case or
reckless and
indifferent to the truth of the representation).
- I
find that the specific profits representations alleged in paragraphs [292][296]
were made in respect of each of the Integrity Plus,
Super Save and Master funds
(namely, that the distribution of purported profits to investors in those funds
represented to the investors,
and potential investors, that those schemes were
making significant sums of money permitting those schemes to pay significant
returns)
and that those were false and misleading or likely to mislead in a
material particular.
- I
find that the specific misrepresentations alleged in paragraphs [297] - [300]
were made in relation to the purchase of shares in
Barclaywest and 888 Vanuatu
concerning the existence of bonds in the order of $200 million and that those
were false and misleading
or likely to mislead in a material particular.
- I
find that each of Mr Hobbs, FTC, PJCB, ISL, Mr Collard, Ms Wu and Secured Bond
breached the various statutory provisions prohibiting
misleading and deceptive
conduct (ss 1041E, 1041G, 1041H of the Corporations Act and ss 12DA, 12DB
and 12DF of the ASIC Act) as more particularly set out in due
course.
- I
find that Mr Hobbs was a de facto director of FTC, OEM and KLM and was a shadow
director of each of the corporate administrators
(and of Diligence Discovery). I
find that the scheme administrators were de facto directors of the relevant
corporate administrators
with whom they were associated (and that Ms Wu a de
facto officer of the relevant scheme administrators - Barclaywest and 888
Vanuatu).
- I
find that the contraventions of ss 180, 181 and 182 alleged against Mr Hobbs (as
a de facto director and officer of FTC and shadow
director of the corporate
administrators) have been established (being satisfied that the corporate
administrators contravened the
respective sections of the Corporations
Act) and that Mr Hobbs gained for himself and others an advantage and caused
a detriment to the respective corporate administrators.
- I
find that Mr Collard, as a de facto (or shadow) director and officer of Secured
Bond breached his duties (having regard to the contraventions
by Secured Bond of
the Corporations Act) under ss 180-181 and that he contravened s 182
contravention having obtained a benefit for himself and to the detriment of the
corporation (having regard to the source of funds
and to whom the funds received
from the investors were transferred). I similarly find that Mrs Hobbs and Ms Wu
were in breach of
s 182 of the Corporations Act. (I do not accept that
the payments made to or for the benefit of each of those individuals can be
characterised as no more than investment
by them into the respective
funds).
- I
find that the allegations in paragraphs [342]-[365] of contraventions of the
Corporations Act and ASIC Act against each of Messrs Wood, Truong
and Koutsoukos have been established. (I note that those findings are only
relevant, having regard
to the discontinuance of the proceedings against them)
for the purposes of the aiding and abetting claims made against Mr Hobbs
([429(a)],
Mrs Hobbs ([451]) and Geneva Financial ([447]).)
- As
against Mr Hobbs I find that he was knowingly involved in the contraventions of
each of Mr Koutsoukos, Mr Wood, Mr Truong, Ms Li
and Mr Collard. As against Mrs
Hobbs, I am satisfied that she was knowingly involved in the contraventions of
Mr Hobbs. (As Geneva
Financial is deregistered, no orders could be made against
it in any event.)
- As
to the fiduciary duty claims, these were put essentially as alternative claims
in the event that Mr Hobbs, Mr Collard and Ms Wu
were at all times relevantly
acting not in a corporate role but personally. On that hypothesis, as I
understand it, no duties would
have been owed by them as de facto or shadow
directors or officers and the question would be whether fiduciary obligations
had nevertheless
arisen in their capacity as operators of one or more of the
schemes.
- While
I accept that that an operator of a managed investment scheme may well owe
fiduciary duties to investors, if the hypothesis
on which this claim is made is
that Mr Hobbs was not involved in the operation of the various schemes through
the corporate administrators
to be a de facto or shadow director or officer of
those entities (and his role had been limited to the sale of financial education
or establishment of investment funds for others to operate) then I would have
had difficulty in concluding that Mr Hobbs owed fiduciary
obligations to the
ultimate investors. I would, however, have found that Mr Collard and Ms Wu, who
were more closely involved in
the day to day dealings with investors, did owe
such obligations and were in breach thereof.
- Thus,
had this issue arisen for determination I would have found that each of Mr
Collard and Ms Wu owed (and was in breach of) fiduciary
obligations to investors
not to put himself or herself in a position of conflict of interest and not to
obtain an advantage for themselves
and to account for any benefit or gain
obtained in breach of those duties. I would have had more hesitation as to the
position of
Mr Hobbs up to the point at which his role extended beyond that of
presentation of the FTC seminars. As it is, this issue does not
arise. (I note
that the allegations in paragraphs [366] to [371] relating to alleged breaches
of fiduciary obligations by Messrs
Wood, Truong and Koutsoukos were not pressed
by ASIC.)
- As
to the matters raised by Mr and Mrs Hobbs in their defence, I am not satisfied
that the claims are statute barred. Nor do I consider
that the requirements for
relief under s 1317S or s 189 relief have been satisfied.
Chronology
- Attached
to these reasons is a chronology prepared by ASIC with dates of payments in and
out of the respective funds. Insofar as the
allegations made by ASIC as to the
involvement of Mr Hobbs and others in relation to the funds (and particularly
the contention as
to the collective nature of the individual schemes) turn on
findings as to disparate events that must be understood in their broad
chronological context, I summarise below the events relevant to an understanding
of the context of this dispute, as have emerged
from the evidence before me. (I
do not attempt to record all of the relevant events over the period from 1998,
as time and space
do not permit.)
Events pre 1998-1999
- Mr
Hobbs has given evidence (in his 3 August 2012 affidavit at [2]) in broad terms
of his background in the life insurance and financial
planning industry in New
Zealand. This is consistent with the account given by various of those who
attended at seminars where Mr
Hobbs himself spoke of his experience (and with
the accounts given by various FTC executives at these meetings as to Mr Hobbs'
background).
Indeed in the video footage of the DVD Seminar (a seminar attended
by, inter alios, FTC executives in around 2003), Mr Hobbs makes
reference to his
experience with Colonial Mutual as follows:
In the insurance industry I was with Colonial Mutual, I managed Colonial
Mutual, and we had to be very careful about how much money
of our own portfolio,
of our main fund, that we invest it back in our local communities and in local
countries. A very, very small
percentage of our funds were international. (my
emphasis)
[I emphasise at the outset Mr Hobbs' use of the first person plural as it
indicates the manner in which Mr Hobbs seems to identify
himself with
organisations or entities through which or with whom is carrying on business -
relevant when assessing what conclusions
should be drawn from the manner in
which he spoke of FTC and of matters relating to the OEM/KLM process.]
- According
to Mr Hobbs ([3]-[5]), he became aware of the wholesale investment market during
his time working with the above companies
and, in late 1989/1990, he was
introduced to Mr Becker, who shortly afterwards introduced Mr Hobbs to Mr Chen.
Mr Hobbs says (at
[6]) (in a paragraph that I read only as to the fact of the
communication and not its truth) that he subsequently attended some meetings
with Mr Chen and Mr Becker and that the latter told him that:
We have decided to establish an education company called Future Trading. Its
sole purpose is to provide educational materials. ...
We would be looking for
you to sell the product and build Future Trading into as big a company as
possible. I will be selling it
in America and Mr Chen will target the Chinese
market.
- There
is nothing more than Mr Hobbs' assertion that this was the case. There is no
evidence of any involvement by Mr Becker (or, for
that matter, Mr Chen) in the
incorporation of FTC in Vanuatu (or in the operation of the FTC business
conducted in Australia and
New Zealand). True it is that Mr Hobbs notified FTC
executives in 2004 of Mr Becker's death but that notification simply referred
to
Mr Becker's involvement as an "attorney". Significantly, there was no
replacement announced for Mr Becker's position (which seems
to indicate that any
involvement by him was in a supportive not principal role).
- If,
indeed, Mr Becker had spoken with Mr Hobbs and Mr Chen some time around 1990 as
to a decision to establish an education company
called Future Trading, then
there was no little delay between that decision and the incorporation of FTC in
1999. There is no explanation
as to why it would have taken until 1999 for the
company to be established. It may be, of course, that Mr Becker and/or Mr Chen
had
set up a Future Trading entity in the US (and/or China) at an earlier date
and that the Vanuatu incorporated company was a separate
entity later set up for
the purpose (consistent with the conversation that Mr Hobbs recounts and with
some of the statements made
in the DVD Seminar) of Mr Hobbs selling the
financial education product outside the US and China. However, this is mere
speculation
and would, in any event, suggest that the Vanuatu entity was under
Mr Hobbs' control (or was his part of the tripartite operation
that he says was
discussed).
- On
10 March 1998, Tasman Business Consultants Limited was incorporated in New
Zealand. As noted earlier, Mr Hobbs is the sole director
of that company; he and
his wife are the two 50% shareholders of the company. Two separate bank accounts
were subsequently opened
in New Zealand in the name of Tasman Business
Consultants (one with BNZ, that being described by Mr Mitchell as a business
account,
and the other a trust account opened with ANZ).
- In
November 1999, Mr Hobbs applied to Sovereign Trust International, an entity
based in Hong Kong, to purchase an offshore registered
company. (Initially the
company was proposed to be named Edgewood International but in fact the company
so acquired was named Magny-Cours
Limited.)
- Interestingly,
in the DVD Seminar, Mr Hobbs referred to a group called Sovereign Group, (which
may well have been a reference to Sovereign
Trust International) as being able
to assist in the incorporation of offshore companies:
We have a number of solicitors around the world that can form the correct
companies for them [the client] to operate from, give them
the legal advice and
so forth. An introducer also receives a commission directly from those
solicitors if you send them to that client for - to form a company. (my
emphasis)
Some of the solicitors used is: Sovereign. Well you can go on the net and
have a look at Sovereign Group.com. Sovereign Group is UK
tax barristers, out of
the UK of course, that specialise in international finance and tax. They advise
countries on tax matters.
They form companies and teach the clients how to do
the transfers and manage those companies for clients. They manage companies for
some very, very prominent people around the town - around the world, including
here in Australia.
- In
November 1999, a bank account was opened in the name of Magny-Cours with HSBC in
Hong Kong. The signatory to that account was nominated
by Sovereign Trust but Mr
Hobbs accepted in the witness box (though only when pressed) that instructions
in relation to the withdrawal
of moneys from that account (including for a
variety of personal expenses) were given by he and by his brother Robert.
- From
about 1999 (to 2003), Mr Mitchell administered the Cash Builder Unit Trust from
the offices of Tasman Business Consultants. He
said that he did so on the
instructions of Mr Hobbs ([8] - [10] of Mr Mitchell's affidavit). The corporate
administrator of that
trust was Magny-Cours (Ex F, tab 24). Funds received from
investors were sent to a bank account at HSBC in Hong Kong in the name
of
Magny-Cours (Mr Mitchell's affidavit at [10]-[11]). Mr Mitchell was authorised
to give instructions in relation to that account
for a time up to around June
2003 (which seems to be around the time that he ceased to be involved in the
Cash Builder scheme - Mr
Mitchell deposing to a conversation with Mr Hobbs in
2003 in which the latter said that the moneys invested with Magny-Cours had
been
"lost" or stolen.) Mr Hobbs ultimately accepted in cross-examination that he and
his brother were the beneficial owners of Magny-Cours.
- On
30 November 1999, FTC was incorporated in Vanuatu. Mr Hobbs agreed in
cross-examination that he knew FTC was incorporated in Vanuatu
(because he paid
the renewal fees for it) but said that he did not know when it was incorporated.
- To
Mr Hobbs' knowledge, FTC did not ever have its own bank account. FTC
subscription payments were paid into Tasman Business Consultants'
ANZ account
(as provided for in the FTC application form). Moneys for payment of FTC
Executives' commission, for the expenses of
those working in Mr Hobbs' New
Zealand office, such as Mrs Watson, or for expenses otherwise in relation to the
funds, such as the
payment of Mrs Burnard's fees for the Diligence Discovery
work were drawn from Tasman Business Consultants' account. (Mr Hobbs, in
the
witness box, said that payment of Mrs Watson's expenses and Mrs Burnard's fees
in connection with the OEM/KLM and Diligence Discovery
processes was in
compliance with a request made by Mr Becker, though there is no evidence of this
request and the payments continued
after Mr Becker's death in
2004.)
Events in 2000
- Hobbs'
employment contract with FTC
- In
September 2000, Mr Hobbs signed a document headed "Individual Employment
Agreement" (Exhibit AU 1161), which was apparently executed
on behalf of both
FTC and OEM (though there is no evidence of OEM Limited, as an entity, having
been incorporated in any jurisdiction
as at that stage and OEM was not described
as a party to the agreement as such). The parties to Mr Hobbs' FTC "Individual
Employment
Agreement" are identified at clause 1.0, namely FTC (defined as the
employer) and Mr Hobbs (defined as the employee).
- In
cross-examination, Mr Hobbs identified his signature on the document (that
having been witnessed by Pierre Mitchell "Company Director,
Nelson, Justice of
the Peace for New Zealand"). Mr Hobbs said he did not recognise the signature
appended to the document on behalf
of FTC (or OEM). He said that when the
document came to him it had already been signed by FTC and that he had dated the
contract
himself. (From a lay perspective, the signatures for FTC and OEM appear
to me to be the same.) Mr Hobbs said in the witness box that
he assumed that the
contract of employment was signed on behalf of both FTC and OEM by someone "out
of Mr Becker's office" in the
United States (though he could not recall where
that office was).
- In
passing, I note that the documentation of Mr Hobbs' employment arrangement is
thus almost a year after the incorporation of FTC
and some time after the
commencement of operation of at least one investment fund out of the Hobbs
office (the Cash Builder Unit
Trust). Moreover, it was some ten years after Mr
Hobbs says Mr Becker was expressing his desire for Mr Hobbs to build FTC into as
big a company as possible.
- Pursuant
to clause 2.1, Mr Hobbs was appointed to the position of "International Sales
Manager". Clause 2.4 provided that "the position
is located at the Employers
[sic] premises at Vanuatu but effective performance of the responsibilities of
this position may require
the Employee to travel away from that location. The
Employee will be given as much advance notice as possible of any travel that
may
be required". (Pausing there, there is no evidence that Mr Hobbs was at any time
after 12 September 2000, when the agreement
was signed, working from an office
in Vanuatu, nor is there any evidence that FTC actually maintained an
operational business office
in Vanuatu, as opposed to having a registered office
address there.)
- Clause
10 of the FTC Individual Employment Agreement imposed confidentiality
obligations on the employee. Clause 11.1 obliged the
employee to devote his full
time and attendance during working hours to the employer's business and not to
undertake "any other employment,
business or other interest" during the term of
the agreement "than otherwise previously agreed". (The term "Employers'
business"
was not defined.) Clause 11.2 provided that during the term of the
agreement without the prior consent of the employer, the employee
agreed not to
be directly or indirectly interested, engaged or concerned in any business
"involving the activities of [FTC]" in any
capacity nor directly or indirectly
to assist financially any entity carrying on the business of activities similar
to FTC. (These
clauses are of some relevance when considering the plausibility
of Mr Hobbs having undertaken the task of writing financial education
booklets
for NASL (the company incorporated by his secretary), at the same time as he was
bound by the confidentiality and non-competition
provisions of the FTC contract.
When this was raised with Mr Hobbs in the witness box Mr Hobbs asserted that he
had done so with
the knowledge and consent of Mr Becker though again, there was
no evidence of this.)
- Clause
15 provided that the agreement was to come into effect on the date it was signed
by the parties (presumably this can be taken
to be 12 September 2000, although
on Mr Hobbs' evidence it was signed by the parties on different dates) and
"shall continue in force
until it is terminated".
- The
schedule to the agreement (to which the contract referred for the list of the
employee's duties and remuneration provisions) seems
not to have been completed.
However, following the page headed "Schedule", there was a page headed "Contract
of Employment", setting
out the terms and conditions for the appointment of Mr
Hobbs to the position of International Sales Manager. Those terms and conditions
included:
- David John Hobbs
is to develop and promote Future Trading Corporation Limited by way of
recruiting and training Executives for Future
Trading Corporation Limited and
selling educational material of Future Trading Corporation Limited
internationally.
- Educational
material is to be developed under guidance of David John Hobbs.
- David John Hobbs
is required to ensure that Executives do not offer, promote or sell investments
from Future Trading Corporation Limited.
[ASIC points to this as indicating
an understanding of the danger of being seen or being taken to be promoting or
selling financial
products, though whether that understanding be attributable to
FTC or to Mr Hobbs or both may be a moot point.]
- David John Hobbs
is permitted to claim and be refunded all costs and expenses incurred in the
development, training and operation
of Future Trading Corporation Limited
...
- David John
Hobbs's disability is recognized and all reasonable costs incurred by the
requirement of help is accepted. This will include
travel, training, document
preparation, accommodation and entertainment but not limited to the
previous.
- David John Hobbs
is permitted to pay all costs and authorize loans from Future Trading
Corporation Limited income. All costs are assessable
and or deductible for tax
purposes for David John Hobbs or a nominated identity, and not for Future
Trading Corporation Limited.
- The performance
of David John Hobbs will be reviewed by OEM Limited and David John Hobbs must
make available immediately on request
of OEM Limited all material, accounts,
transactions and income details.
...
- The review date
is set for January 20, 2004. The target for the number of subscribers at this
dated [sic] for Future Trading Corporation
is 5,500 paid Gold members. Upon the
successful completion of this target David John Hobbs is entitled to a one off
payment of $AUD250,000.00.
- There
was no evidence of any performance review having been conducted in January 2004
(nor did Mr Hobbs adduce any evidence of any
communications between himself and
either FTC or OEM in relation thereto or otherwise to indicate that this was an
arms' length arrangement
with an employer not associated with himself). In
cross-examination, Mr Hobbs denied that there had been any such payment. The
emphasis
that Mr Koutsoukos says was placed by Mr Hobbs on the achievement of
targets for the number of FTC subscribers would be consistent
with Mr Hobbs
having an interest (under the FTC agreement) in achieving this target. (At
paragraph [511], Mr Koutsoukos gives evidence
that Mr Hobbs usually asked for
about 6 to 8 new clients per month. Mr Koutsoukos exhibited to his affidavit
communications from
Mr Hobbs pointing out that "currently we are five
subscriptions behind" and, later, pointing out the target for the balance of a
particular month.)
- Insofar
as OEM was nominated as the entity to carry out a review of Mr Hobbs'
performance (and remuneration), it would somewhat be
surprising (if it were in
fact an entity independent of Mr Hobbs) for Mr Hobbs to have (or have had) so
little knowledge of that
entity. One might expect the prospect of a large
performance bonus would have made it more likely that Mr Hobbs would have had an
interest in communicating his performance to OEM but there is no evidence of any
communication between Mr Hobbs and OEM in that regard.
- There
is also no evidence (merely the assertions made by Mr Hobbs) of any practical
involvement by anyone other than Mr Hobbs (or
those associated with and
reporting to him in the Nelson office) in the administration of FTC. The moneys
due to FTC for subscriptions
were paid into the Tasman Business Consultants'
bank account (and were seemingly treated as Mr Hobbs' own funds). Although Mr
Hobbs
asserts that the moneys were disbursed on Mr Becker's instructions, there
is no evidence of this (and, relevantly, no account seems
to have been made by
Mr Hobbs to any superior or other officer (or owner) of FTC as to what he was
doing on behalf of the company).
(Moreover, if Mr Becker had held an ownership
interest in the company, there is no explanation for the lack of any attempt by
an
executive or administrator of his establishment to realise that asset (nor
any evidence of payments from FTC to any owner.)
- Mr
Hobbs does not dispute that from some time in 2000 he was involved in FTC
presentations and seminars in Australia. Mr Hobbs deposes
(at [11]) that he
commenced marketing the educational packages for FTC from about 2000 and
that this was done by holding seminars. He also accepts that he attempted to
recruit sales executives to sell the educational packages.
(ASIC's contention is
that the evidence establishes that the seminars were also for the marketing of
offshore investment funds to
potential investors. Mr Hobbs denies
this.)
- Mr
Hobbs has deposed that the payments made to him 'by FTC' in relation to the
marketing of the educational packages were his principal
source of money at the
time ([11]). (As Mr Hobbs' employment agreement does not state the remuneration
payable by FTC, and the FTC
commission payments, as I understand it, went to the
FTC executives not Mr Hobbs himself (unless he sold the subscriptions), it is
not clear precisely what is contemplated by that evidence unless it involves an
admission by Mr Hobbs that the moneys paid for subscription
to the FTC financial
packages, less the commission for FTC executives, were moneys that he could
treat as his own. (That would be
consistent with there being no evidence of any
disbursement of moneys back to FTC from the Tasman Business Consultants bank
account.
Moreover, although Mr Hobbs suggested at the DVD Seminar that the
$4,000 subscription was largely exhausted by the costs of production
of the FTC,
it seems difficult to see how that could be the case at least having regard to
the manner in which the FTC educational
material seems to have been prepared and
distributed.)
- Mr
Hobbs' recollection as to the holding of FTC marketing seminars from about 2000
accords with the evidence of two of the FTC executives
(Mr Diaz and Mr Truong)
each of whom deposes to having attended FTC seminars in Australia around late
2000 at which Mr Hobbs was
in attendance.
- Mr
Diaz says that he first met Mr Hobbs at a seminar held at the offices of an
investment firm in Sydney in the latter half of 2000
([11] of his affidavit, as
amended by Mr Diaz in the witness box). Mr Diaz said that he had earlier been
provided with a copy of
the book entitled "The Art of IBCs" (that being the
title of one of the FTC educational booklets) by a business partner of his. Mr
Hobbs confirms (at [23]) that he had known Mr Diaz from about 2000.
- Mr
Diaz deposes that at that seminar in late 2000 he had a conversation with Mr
Hobbs in which the latter told him that he had a company
called Future Trading
Corporation. Mr Diaz says that Mr Hobbs said words to the effect "I have a
number of funds that people can
invest in" and referred to the ability to obtain
bigger returns if "you set yourself up offshore in a unit trust using an
International
Business Company".
- Mr
Diaz has also deposed (at [13]) to what Mr Hobbs said to the group of people at
that seminar, including that:
I don't sell investments, I sell financial education. The education I sell
will enable you to set yourself up with investments of
your own.
I have a number of different funds and unit trusts that provide returns of
between four and ten per cent per month. ... I have private
placement documents
for the investments that I can show you. One of the funds is called
Magny-Cours ...
In order to find out more about how to invest, you should join FTC and
receive the financial education package ...
FTC is a key to acquire knowledge of various investments. But FTC does not
promote investments.
FTC is owned by a company called OEM Limited and a separate company called
KLM Enterprises Ltd which offers investment opportunities...
Through OEM and KLM we have various investment opportunities available
returning very high returns per annum, some in the order of
3 to 10 per cent per
month.
One of the things that FTC does is report on fraud. FTC has a legal team
based at the University of Kentucky that investigates all
of the funds and makes
sure that your money is protected.
In order to utilise these opportunities you need to have registered a company
in a foreign jurisdiction such as the Dominican Republic
then send a fax to OEM
and acknowledgment that you are seeking investment information for educational
purposes.
After this you receive a list of available investments from KLM.
You need an IBC, as this is to own the investment, and because you're not
the owner then you are not breaking any laws here in Australia. (my
emphasis)
- I
have extracted the above (which is only part of what Mr Diaz recalls was said to
the group of people at that seminar) not only because
those statements bear a
remarkable similarity to statements that other persons who attended seminars at
which Mr Hobbs spoke over
the period recall he said (as well as a remarkable
similarity to what was said by Mr Hobbs himself in the DVD Seminar in about
2003)
but also because these statements were being made (according to Mr Diaz)
at a time some 18 months or so before Mr Hobbs says in his
affidavit that he was
being pressed by Mr Becker to issue private placement memoranda for investment
in KLM funds (and before Mr
Hobbs says he obtained advice from solicitors in
Australia as to the legality of the investment process then contemplated); some
12 months or so before the incorporation of KLM in the British Virgin Islands
and about three years before the incorporation of OEM
in that jurisdiction; and
(though the time disparity on this point is not as stark) shortly before Mr
Hobbs recalls he received advice
from Mr Becker as to the need to incorporate an
IBC in order legally to offer private placement opportunities in America (see
[8]
of Mr Hobbs' affidavit).
- (I
place little weight on the timing differences between the events Mr Diaz recalls
happening in late 2000 and Mr Hobbs' recollection
of the conversation with Mr
Becker about IBCs in early 2001. On either version, it is clear that Mr Hobbs
was talking to Mr Diaz
about the OEM/KLM process at a much earlier time than he
contends Mr Becker was suggesting it to him.)
- Mr
Diaz' recollection of events is consistent with the incorporation by him of an
IBC in the later half of 2000 (something he says
he did with Mr Hobbs'
assistance - "We can do that for you. No problem" - by filling in a form for the
incorporation of the IBC,
which he completed and sent to Mr Hobbs in New Zealand
by facsimile transmission ([21]-[24]) and with his investment in the Cash
Builder Unit Trust in about the beginning of 2001 to which he deposed
([26]-[27]).
- Mr Diaz'
involvement with FTC
- Mr
Diaz (who formed his own mortgage lending business called MortgageXpress in
about late 2000, operating from an office in Bankstown)
says that after that
first FTC meeting he applied to become a "member" of FTC and began receiving FTC
booklets and other material.
- Mr
Diaz deposed that towards the end of 2000 he began referring the FTC education
package to people that he knew and that he generally
sold the package to his
family and friends ([30]). Mr Hobbs disputes the timing of this and says in his
affidavit that prior to Mr
Diaz signing the executive agreement on 7 July 2001,
Mr Diaz was not involved in selling FTC educational packages ([23]).
- The
FTC executive agreement (Ex DJH 5) signed on 7 July 2001 by Mr Diaz is,
interestingly, countersigned by Mr Hobbs under the attestation
"Accepted by
Future Trading Corporation Ltd as agent" (my emphasis), Mr Hobbs there
seemingly understanding that he was taking that step as FTC's agent. The
commission there provided
for included AU$200 once per Gold Level Subscription
and was to be paid "from" FTC on receipt and clearance of subscription funds,
paid once per month. (The subscription commissions later increased to 10%, or
$400, on gold packages.)
- As
noted earlier, the FTC educational package which was marketed by Mr Hobbs,
involved (and this is not disputed) the payment of a
sum for which subscribers
received a succession of 18 booklets over three years, plus periodic newsletters
and newsflashes. Mr Hobbs,
tellingly, seems to have regarded the sale of the FTC
"product" as a sale of his "expertise" (see Mr Hobbs' submissions para 1(g)(a))
and to have felt free to engage in some "puffery" in that regard (Mr Hobbs
emphasising in submissions the difference between saying
things in the context
of the sale of a product or expertise and giving evidence under oath, as an
explanation in part for the differing
accounts he has given as to the setting up
of FTC).
- There
is conflicting evidence as to the provenance of the FTC booklets. Mr Hobbs
deposes (at [7]) (following his evidence at [6] to
the statement by Mr Becker as
to the decision for the establishment of an education company called Future
Trading to which I have
referred above) that:
I was provided with a number of booklets which I believe were prepared by
either Mr Chen or Kip Becker. Eg The Art of Arbitrage and the other booklets
in these proceedings. (my emphasis)
- Fairly
read, this suggests that all the FTC booklets in evidence or referred to in
these proceedings were prepared by either Mr Chen
or Mr Becker and simply
provided to Mr Hobbs. However, in both his s 10 examination in New Zealand and
his evidence in cross-examination
here, Mr Hobbs referred to the writing of
books by himself and by his wife (and Mrs Hobbs' own email correspondence
forwarding one
of the books to Mr and Mrs Dent is couched in terms that suggest
she was writing more than one book). I consider the import of this
inconsistency
on Mr Hobbs' credibility as a witness in due course.
- In
May-June 2000, Mr Hobbs authorised Mr Mitchell to be a signatory to, and to
operate, the Magny-Cours Hong Kong bank account (by
facsimile transmissions
dated 26 May 2000 and 6 June 2000, respectively). The relevance of the timing of
this may be linked to the
operation of the Cash Builder Unit Trust at that
stage. That said, it was clear from his evidence that Mr Mitchell did not regard
the Magny-Cours account as his own and that instructions from that account
largely came from Mr Hobbs.
- By
facsimile transmission to Sovereign Trust on 13 September 2000, Mr Hobbs
authorised Mr Mitchell to discuss and arrange for the
issue of shares in
Magny-Cours to Mr Robert Hobbs as co-beneficial owner.
Events in 2001
- In
February 2001 (by an undated document that, on its face, was sent on 13 February
2001) Mr Hobbs instructed Sovereign Trust International
to arrange for him to
withdraw as a beneficial owner of Magny-Cours (leaving Mr Robert Hobbs as the
sole beneficial owner). It is
not clear whether this instruction was ever
formally implemented and ASIC points to subsequent authorisations by Mr Hobbs
for payments
out of the Magny-Cours bank account as indicating a continuing
involvement by Mr Hobbs with the company account. (ASIC further notes
that in
later correspondence in 2005 Mr Robert Hobbs referred queries by Sovereign Trust
as to the account to Mr Hobbs to address.)
- Mr
Hobbs deposes (at [8]) to a conversation in early 2001 with Mr Becker in which
he says Mr Becker spoke to him about a private placement
fund that Mr Becker
said he and a Mr Ian Renert would be operating. Mr Hobbs says that Mr Becker
told him that the fund had to be
set up correctly to comply with Securities
Exchange Commission requirements. In that conversation, Mr Hobbs says that Mr
Becker said:
...The idea is that I will establish a company, KLM Enterprises, to act as a
broker to offer private placement opportunities. To conduct
that legally the
client has to have an international business corporation (IBC) registered in a
jurisdiction that allows them to
participate. ...
and that Mr Becker likened this to the registration of ships in certain parts
of the world (an example Mr Hobbs himself used in the
DVD Seminar) and to the
setting up of major banks and insurers having offices in those jurisdictions
without the need for a registered
prospectus. (It is not clear why Mr Becker
would have thought it necessary to give the example of major banks and insurers
setting
up offices in other jurisdictions if he was talking to someone he
understood to be himself familiar with the insurance and financial
planning
industry, but nothing turns on this.) According to Mr Hobbs, Mr Becker said that
Mr Chen wanted to register the IBCs in
Hong Kong and that Mr Becker also said he
wanted to get advice from an Australian lawyer as to whether this could be done
in Australia
(referring Mr Hobbs to a Mr Robert Miles who he said worked with
Fay & Cannon investment bankers and telling him that it was
proposed that
Fay & Cannon would become "shareholders" in Future Trading).
- I
note that insofar as Mr Hobbs' written closing submissions seems to attribute
the requirement for the use of IBCs (in order to meet
"SEC requirements") as
being one imposed by Ms Reisinger/New World Holdings, this reflects what seems
to me to have been a shift,
during the course of the hearing, from the
attribution by Mr Hobbs to Mr Becker of responsibility (or principal
responsibility) for
the establishment of FTC and the OEM/KLM process, to the
attribution of responsibility (or principal responsibility) for such matters
to
Ms Reisinger/New World Holdings. (To that extent, it seems an example of what Mr
Halley characterised as incremental change in
Mr Hobbs' evidence when faced with
the difficulty of explaining facts or events inconsistent with a particular
hypothesis or version
of events). (That said, Mr Hobbs elsewhere in his
affidavit evidence includes Mr Becker with Ms Reisinger as the persons who
established
the OEM/KLM "arrangements" and his defence largely attributes
responsibility for the investment schemes to Ms Reisinger, so perhaps
in this
instance there is less of an incremental change and more of a change in
emphasis).
- In
any event, there is no evidence (other than Mr Hobbs' statements to that effect)
to suggest that the proposal to set up a private
placement fund (or funds) with
the requirement that clients incorporate IBCs for investment therein was one
that had emanated from
Mr Becker in early 2001. (Of course, insofar as Mr Hobbs
had an understanding that the need for an offshore IBC was to satisfy SEC
requirements in the United States, it would not be implausible that such an
understanding had been conveyed to him by a securities
attorney in the US (or
even, for that matter, a broker trading in the US, although at this point in the
chronology, there is no suggestion
that Mr Hobbs had yet met Ms Reisinger). What
does not, however, follow therefrom is that it was any such overseas adviser who
was
responsible for the implementation of the schemes the subject of these
proceedings.
- Mr
Hobbs deposes (at [9]) that he subsequently obtained oral advice from Mr Robert
Miles (who he identified as an Australian solicitor)
to the effect "As far as I
am aware all of this is perfectly legal" and that Mr Miles also advised him that
Future Trading should
appoint "executives" rather than brokers or consultants.
(Though Mr Hobbs says he does not remember the explanation for the latter
advice, in his closing submissions he places weight on a perceived distinction
between "executives" and "agents".) Mr Hobbs was not
aware whether any written
advice was ever received from Mr Miles though he believed that FTC paid for the
advice. (If the payment
was made in Australia, that in effect must mean that the
payment was from Tasman Business Consultants' bank account since that is
the
only account through which FTC payments were made.)
- Mr
Hobbs has deposed that he had (more recently) attempted to contact Mr Miles "who
I believe now works at Equius Legal to see whether
he has any recollection of
the matter" but had been unable to do so "in the time available". (There is no
explanation of what attempts
Mr Hobbs had made in that regard or as to why there
had been insufficient time to do so. The Law Society's public records disclose
a
firm by the name of Equius Legal Pty Ltd, with an email address for an 'rmiles'.
One would have thought a simple phone call to
that firm would determine whether
this was the Robert Miles in question and whether he recalled, or had a record
of, giving any such
advice.) In any event, when assessing what weight could
reasonably have been placed on any such advice it would be necessary to know
what instructions had been given to Mr Miles (on which any such advice was
based). Suffice it is to note that Mr Hobbs' recollection
of the advice is that
it was in such broad terms as to have made it in my view unwise for anyone to
have placed much weight on it
as evidencing the legality of the proposed
conduct.
- Mr
Hobbs further deposes to a draft agreement having been drawn up (I gather at
around this time) setting out the terms and conditions
for executives of FTC
(though by then he had already signed his own employment contract). Mr Hobbs
placed emphasis on clause 1 of
that document (which provides that "Executives of
Future Trading Corporation Ltd agree not to offer or sell investment from Future
Trading Corporation Ltd") as indicating that any other activity by an FTC
executive (such as the sale of investment products) was
unauthorised. I consider
the import of this in due course.
- As
noted earlier, Mr Diaz and Mr Hobbs (as "agent" for FTC) signed a document on 7
July 2001 headed "Terms and Conditions for Executives
of Future Trading
Corporation Ltd".
- Mr
Diaz deposes that he also, on 7 July 2001, signed a document headed "The
Agreement Between Introducers And Companies & Entities
Listed in Appendices"
(a copy of which is at Ex F tab 27). On its face the document does not appear to
have been signed by any other
person or entity (and Mr Hobbs in his affidavit
asserts that neither he nor FTC was a party to that document). There were five
appendices
to that document, each listing one or more Unit Trusts, Funds or
other so-called entities and setting out the "details of returns
and commissions
as pertaining to the Companies and Entities and applicable investment" (clause 2
of the document). So, for example,
appendix one listed the Cash Builder Unit
Trust, Platinum Fund and the Emerging Technologies Unit Trust - "commission" on
the first
two being stated to be 2% per month "best efforts" paid monthly or at
the end of the "profit period". The appendix noted that commission
payments for
those three investment funds would be made by Magny-Cours Ltd (and, in the case
of the third, a "settlement company
nominated at the end of a client contract").
- Appendix
two listed the Executive Fund (Mutual Fund) with commission payments to be made
from New Millenium Opportunities Ltd; appendices
three, four and five listed
investments for which Global Visions Ltd was to pay the relevant commission. The
respective appendices
variously noted that all "clients" or "investors" (as the
case may be) must be domiciled in the "correct jurisdiction".
- The
document contemplated the receipt by an "introducer" (in this case Mr Diaz) of
monies on behalf of the Companies and Entities
listed in the appendices and
provided that these must be remitted to the respective Company(s) and/or
Entity(s) as soon as practicable
but not later than a maximum of 5 days (clause
6). Clause 13 stated that the Companies and Entities own all property rights and
intellectual
properties and entities listed.
- Accordingly,
this document seems to have contemplated that, as an "introducer", Mr Diaz would
be entitled to receive commission on
profits earned by investors introduced by
him to specified funds (and suggests that those funds were already in
existence). Mr Diaz
has deposed (at [46] that at or about the time of the
signing of this agreement, Mr Hobbs said to him words to the
effect:
The difference between an FTC executive and an FTC introducer is one is a
representative of KLM and the other is a representative
of OEM.
- The
drawing of a distinction between FTC executives and introducers is consistent
with the description of those roles given by Mr
Hobbs in the DVD Seminar (though
Mr Hobbs would say that FTC executives were not representatives for either OEM
or KLM). Relevantly,
the timing of entry into this document suggests that the
offshore investment process was in contemplation (and/or operation) at least
a
year before the Hartnell advice.
- Mr
Diaz gave evidence as to the promotion by him of the FTC education packages (and
says that he obtained FTC application forms for
that purpose from Mr Dent), as
well as his usual practice when signing clients up to FTC
([30]-[37]).
- Mr
Diaz says that he met both Mr Truong and Mr Wood, through his MortgageXpress
business, in about 2001 or 2002 and that he arranged
for them to meet Mr Hobbs
at a seminar in the MortgageXpress boardroom (as part of his practice of
arranging for groups of employees
of MortgageXpress who were interested in
becoming FTC executives to meet with Mr Hobbs) ([49]-[58]). There is no dispute
that both
Mr Truong and Mr Wood worked for a time in Mr Diaz' then mortgage
broking business (Mortgage Xpress).
- At
about that time, Mr Hobbs appointed Mr Diaz as an Area Manager for FTC (Diaz
[57]). Mr Truong says he became an FTC executive in
about 2001. Mr Wood signed
an FTC executive agreement (in largely the same form of that of Mr Diaz) on 4
July 2002 (by which time
the commission payable for gold level subscriptions had
increased to $400).
- Distribution
of FTC material
- From
around 2001, Mrs Ngaire Dent, with the assistance of her husband (Mr Craig
Dent), printed the FTC booklets for the purpose of
distribution to those who had
subscribed for FTC financial education packages. They also printed and
distributed, from 2001 through
to about 2007, Private Placement Memoranda and
investment agreements for various investment funds, which they distributed to
scheme
administrators for those funds. (Mr Dent later set up the FTC website
(according to him, on Mr Hobbs' instructions) (see Ex AP 37).)
- A
promotional video prepared in relation to FTC (featuring Mr Hobbs, as well as
his secretary, Mrs Doreen Andrews, and his sister-in-law,
Mrs Ngaire Dent) was
broadcast at the DVD Seminar, to which I will refer later, on which reference is
made to the "highly trained"
staff involved in the distribution of material
(that being a reference to Mr and Mrs Dent.)
- From
around 2001, Mrs Watson (Mr Hobbs' personal assistant), with the assistance of
Mrs Burnard (her daughter), became involved in
the operation of what I have
referred to (and described above) as the OEM/KLM process.
Events in 2002
- First Zurich
Financial, Anguilla
- Mr
Diaz has deposed that, in about early 2002, he and Mr Hobbs had a conversation
about forming a single business ([73]). Mr Diaz
says that at that time he was
using a business card referring to his business MortgageXpress and that Mr Hobbs
was using a business
card referring to Nelson Administration Services Ltd. Mr
Diaz says that, following this, FZF Anguilla was set up by Mr Hobbs (and
that
the two shared the expenses of that company equally).
- An
IBC by the name of First Zurich Financial Ltd was incorporated in Anguilla in
August 2002. Annual fees were paid to First Anguilla
Trust Company Ltd for
services including the provision of registered office and agent nominee
shareholder and director (Ex F tab
54). (In evidence was a copy of an invoice
for renewal of those services dated 23 May 2003, which was addressed by the
First Anguilla
Trust Company to Mr Hobbs at Tasman Business Consultants.) Mr
Hobbs signed documents variously describing himself as a consultant
and (or at
least one occasion) as a director of that company.
- Diaz trip to
US in March 2002
- Mr
Diaz deposes to a trip that he made to America in about March 2002. Mr Diaz says
that this was at Mr Hobbs' request in order to
meet a Mr Manfred Schillingier
[perhaps Schillinger] and to meet some of the fund managers ([74]) (though when
he arrived in the
US no appointments with fund managers had been arranged). Mr
Diaz says that he spoke with Mr Schillingier who said he would arrange
for him
to meet Ms Lisa Reisinger when he was in Orlando (but says that this meeting
also did not occur). (Mr Hobbs, in his affidavit,
refers to para [74] of Mr
Diaz' affidavit in terms that seemingly suggest that this is no more than
assertion by Mr Diaz but without
contradicting the statement there made by Mr
Diaz.) Mr Hobbs places some weight on Mr Diaz having met Ms Reisinger before he,
Mr
Hobbs, did, but any such meeting was not during this trip. Mr Diaz understood
the purpose of the trip was to discuss investment opportunities
for Mr Hobbs
([78]). (As at 2002, Ms Reisinger was working as an Associated Person for an
entity called International Futures Group
LLC, of which Mr Erdman was one of the
owners. International Futures Group was then an introducing broker for Refco (Ex
AO, pp20-21).)
- ASIC
enquiry/Hartnell advice - 2002
- On
30 April 2002, an enquiry as to the business operations of FTC was made by ASIC
(by letter addressed to a Mr Arthur Bryce Cowern
in Queensland). ASIC's letter
(a copy of which is part of Ex BB) expressly referred to Mr Cowern's position as
'director' of FTC.
- In
that letter, ASIC took issue with the use of the company name "Future Trading
Corporation Limited" in Mr Cowern's business operations
on the basis that there
was no such company registered in Australia according to ASIC's database (noting
that this appeared to be
in breach of s 156 of the Corporations Act
2001). The letter also pointed out that it was an offence under the Act for
any person or group to offer securities in Australia unless
they were licensed
in accordance with the Act (and that no-one associated with FTC was so
licensed). ASIC's letter expressly noted
that "anyone who carries on a business,
which includes providing advice in relation to investments in securities, is
likely to require
a licence".
- Mr
Hobbs (who, in the witness box, was unable to recall anyone by the name of Mr
Cowern) had responded to that letter by facsimile
transmission on 8 May 2002
(and did so expressly on behalf of Mr Cowern). The fax was sent on "Future
Trading Corporation Limited"
letterhead with an address shown as Port Vila,
Vanuatu. As Mr Halley notes, Mr Hobbs (in his letter to ASIC) did not demur from
the
proposition that Mr Cowern was a director of the company.
- Mr
Hobbs (writing to ASIC as the "International Sales Manager" of FTC) on the
letterhead of FTC in May 2002 (a letter that on its
face was noted as being
copied to Mr Cowern) stated that:
Future Trading Corporation Ltd is a Vanuatu registered company producing
education material, this material explains Budgeting, Succession
Planning,
Mortgages, and Debt Restructuring etc. [Mr Halley submits that it is
significant that there was no reference here to the Art of Arbitrage booklet,
though that was included
in the list of books to which Mr Hartnell's attention
was later drawn.] Also by newsletter subscribers are warned against scams
such as prime bank, ponzi schemes, individuals etc. The majority of our
information
is collated from around the world.
Future Trading Corporation Limited does not sell or offer investments....
Future Trading Corporation Limited would be very concerned
if any person was
using our material to promote investments. (my emphasis)
- The
letter attached an extract from Mr Cowern's agreement ("to highlight" the point
made in the first sentence of the second of the
two paragraphs set out above);
noted that Mr Hobbs would give instructions "immediately not to use the term
"Limited" on any material"
(from which one might infer that Mr Hobbs considered
himself to be in a position where he was able to give directions to those within
FTC who were or might otherwise be using the material in question); and attached
a recent newsletter as an example of the newsletters
issued by
FTC.
- On
13 May 2002 (and, having regard to its contents, seemingly prompted by the ASIC
enquiry), a document was issued on FTC letterhead
(without the disclaimer that
appeared on later documents as to the sale by that company of information not
investments) addressed
to "all Executives" and signed by "DJ Hobbs CIF -
International Sales Manager" (Ex AU 1206), in which it is said, inter
alia:
We have received an enquiry from ASIC... The enquiry related to whether FTC
should be incorporated in Australia ...
FTC has taken the steps to incorporate in Australia anyway.
- The
letter referred to the making of a number of "minor changes" including the
change of the FTC logo to refer to Vanuatu and the
inclusion "on all material"
that FTC "does not offer or sell investments or give financial advice". One of
the minor changes was
said to be "applying to incorporate FTC in Australia"
(though that did not ever occur).
- Mr
Hobbs said that he did not recall the 13 May letter specifically but accepted
that it was his signature on the document. Mr Hobbs
recalled that there was an
enquiry from ASIC though he could not recall the date. Insofar as the letter
referred to FTC having "taken
the steps to incorporate in Australia anyway", in
the witness box Mr Hobbs said those steps were to go to the office of a
solicitor
(Mr Hartnell of Atanaskovic Hartnell), although there does not seem to
be any evidence that Mr Hobbs did go to Mr Hartnell's office
before sending the
5 June 2002 letter of advice. (Mr Hobbs also said in the witness box that he was
going to get Atanaskovic Hartnell
to incorporate FTC in Australia but that Mr
Hartnell "told us not to even consider it; it wasn't worth it", although that is
not
what Mr Hobbs conveyed to ASIC and it is not what Mr Hartnell's letter
stated.)
- By
letter dated 4 June 2002, Mr Hobbs further responded to ASIC (this time on
letterhead that included, under the logo, the words
"Future Trading Corporation
Limited Incorporated in Vanuatu" and, under the footer, a disclaimer as to the
company not giving investment
advice), stating that:
I am writing to advise, as of today's date Future Trading Corporation has not
received a completed legal opinion from our Australian
solicitor as to whether a
company should be incorporated in Australia. Hopefully we will receive this
opinion in the near future.
- It
is perhaps not surprising that, as at 4 June 2002, a completed legal opinion as
to incorporation had not yet been received, since
there is no evidence that any
request for such advice had by then been made (the first evidence of any such
request for advice being
a letter dated 5 June 2002 from Mr Hobbs, on the
letterhead of FTC, to Mr Hartnell of Atanaskovic Hartnell).
- Interestingly,
Mr Hobbs' affidavit of 3 August 2012 deposes (at [13]) to the circumstances in
which he came to seek advice from Mr
Hartnell in terms which suggest that this
was to satisfy concerns Mr Hobbs himself had had as to the legality of what had
been proposed
by Mr Becker (and without any reference either to the ASIC enquiry
that had been made the month before that advice was requested
or to any request
by Mr Becker for the provision of such advice). Mr Hobbs' evidence in
cross-examination was inconsistent insofar
as he varied between the position
that he had sought the advice (for the benefit of FTC) on his own account and
the position that
he had been requested by Mr Becker to obtain that advice. At T
1291.11:
Q. But you were the person wanting this advice, weren't you, Mr Hobbs?
A. Yes.
Q. And that's why you wrote this letter to Mr Hartnell, wasn't it?
A. Correct.
But at line 32:
Q. Why did it occur to you that if a company registered offshore did
something offshore to somebody else offshore it would have anything
to do with
Australia at all?
A. I am just exactly repeating what Kip Becker told me.
- At
[13] of his affidavit, Mr Hobbs says:
In 2002 Kip Becker began to press me with respect to possible private
placement investments of the kind discussed above. I was not particularly
comfortable with those proposals. I decided that I wanted some form of written
advice confirming the advice
I had previously received orally from Mr Miles.
I did some research and it appeared Mr Hartnell as a former chairman of ASIC
would be the best person to obtain advice from. (my
emphasis)
- Mr
Hobbs goes on in his affidavit to say that on 5 June 2002 he sought advice from
Mr Hartnell and that his letter to Mr Hartnell
set out his "understanding of
what Kip Becker was proposing".
- Whether
or not the advice was sought in order to give Mr Hobbs comfort as to what Mr
Becker was proposing (as his affidavit suggests)
or because Mr Becker had asked
him to do so (as he suggested at one stage in cross-examination), what is
undeniable is that Mr Hobbs
had responded to ASIC's enquiry by referring to
anticipated legal advice and that he thereafter conveyed to ASIC a portion of
the
advice so obtained. (Hence it is difficult to see the request for legal
advice from Mr Hartnell other than as being intended, at
least in part, to
address the concerns that had been raised by ASIC.)
- The
letter requesting advice commenced:
I am inquiring as to whether you would act for Future Trading Corporation in
the capacity of advice.
- The
signatory to the 5 June 2002 letter requesting advice is noted as being "David J
Hobbs, CIF, International Sales Manager". The
letter stated that FTC was "a
Vanuatu incorporated company selling financial information worldwide" (that
financial information being
said to comprise a number of manuals "covering
subjects such as Budgeting, Succession Planning, Debt Restructuring, Mortgages,
ABC
of IBCs, Introduction to Financial Statements etc", as well as a newsletter
by which a "subscriber" is "taken through an introduction
to financial planning"
and in which "[f]rauds and scams are also exposed, such as prime bank, ponzi,
etc"). A recent news article
was attached for Mr Hartnell's reference.
- In
the letter Mr Hobbs asserted unequivocally that "Future Trading Corporation does
not sell/offer investments or give financial advice".
- The
letter sought advice on two matters: the first being as to whether FTC was
required to be incorporated in Australia and the second
being as to the legality
of offshore investment in the circumstances there set out. The first question
was expressed as follows:
The question is, as Future Trading Corporation Ltd subscriptions are sold in
Australia and pays a commission to the retailer, should Future Trading
Corporation also be required to be incorporated in Australia? (my
emphasis)
- The
second question posed of Mr Hartnell was:
The second opinion being sought is an area we have described to
subscribers, that area is should an Australian resident seeking a prospectus
or memorandum of an investment product not registered in Australia
be able to
legally obtain [sic] the investment based on the following criteria. (my
emphasis)
If the person seeking the investment owns an IBC (International Business
Corporation) and the request and offer is offshore to offshore
and should the
prospectus memorandum be acceptable, then the IBC can invest. It is our
opinion that this did not contravene any securities laws of Australia but
we would like to be sure of this point.
- Mr
Hobbs' contact details were given care of, inter alia, Tasman Business
Consultants' post office box.
- Mr
Halley emphasised that the circumstances in which the investment, the subject of
the second question, was postulated were that
the "person seeking the investment
owns an IBC" (present tense) and that "the request and offer is offshore
to offshore" and notes that the use of the past tense indicates
that such
investment may already have occurred. (The last would be consistent with an
imprecision in the use of grammar that seems
apparent in much of the
correspondence emanating from Mr Hobbs or in relation to the schemes and I do
not place much weight on this).
In any event, what is clearly indicated by the
letter is that the type of investment about which Mr Hobbs is seeking advice on
behalf
of FTC (whether or not, as he said in evidence, at Mr Becker's request)
is an investment by an offshore IBC where the steps relating
to the investment
all occur offshore. (That, indeed, seems to have been Mr Hobbs' understanding of
the scenario about which advice
was given, having regard to his evidence at [18]
of his affidavit, which refers to the investment being totally offshore.) (What
is apparent in the present case is that, whether or not the "true" investor is
the offshore incorporated IBC, a number of the steps
in the investment process
occurred on-shore, even leaving aside the information given at FTC or investor
seminars or meetings (receipt
of the information as to the KLM funds available;
(issue and receipt of the private placement memorandum and contract); signing of
the contract for investment; payment of the moneys to be invested; receipt of
the unit certificate; and receipt of payments from
the fund
administrators).
- As
to the reference in the letter to "our opinion", Mr Hobbs was asked in
cross-examination at T 1291:
Q. So you say it's our opinion and I take it the "our opinion" includes you
in that context?
A. No, I am referring to the opinion from Mr Becker.
Q. So when you say it's our opinion that this did not contravene any security
laws of Australia, "but we would like you to be sure
of this point", that's not
a reference to you seeking the opinion, or referring to an opinion, it's a
reference to somebody else's
opinion, is that your evidence?
A. Again it's my figure of speech.
- By
letter dated 7 June 2002, Atanaskovic Hartnell responded to the request for
advice. Relevantly, that letter stated:
We refer to your fax dated 5 June requesting our advice in relation to the
extent that our securities laws contained in the Corporations Act 2001 regulates
certain activities conducted by Future Trading Corporation incorporated in
Vanuatu if at all.
- The
advice referred to the legislative requirements for registration of a foreign
company carrying on business in Australia (noting
the prohibition on a foreign
company carrying on business in Australia unless registered as a foreign
company) and to s 601CD(1) of the Corporations Act. The letter went on to
state that "The principal issue is whether or not your company is carrying on
business in Australia".
- There
was a reference in paragraph [1.2] of the letter to "retailers" selling the
business in Australia and the author notes "You
do not inform us of any other
link with Australia and we assume there is none". The letter also referred (at
[1.4]) to the existence
of law to the effect that "the act of an agent are [sic]
attributable back to the principal, in the context of determining whether
the
principal is carrying on business in the location", but observes that this is
"old law and there is also contrary authority".
- On
the first question, the letter concluded that:
In the circumstances, on the scarce factual information we have, we believe
it more likely than not that the company is not carrying
on business in
Australia solely by selling subscriptions through a 'retailer' but
abundant caution would suggest that the company should register as a foreign
company in Australia. Particularly would this be
so if the company wished to
have the ability to at any time to bring legal proceedings in Australia. (my
emphasis)
- Under
the heading "Sale of Financial Information" advice was also given as to the
operation of a new regulatory regime dealing with
the provision of financial
services and the letter stated at [2.5]:
It is our view that financial information of the kind provided by you is not
a financial product in itself and, further, does not
constitute financial advice
of a personal or general nature in relation to any financial product. Therefore,
the sale and distribution
of such financial advice through magazines,
newsletters, etc, does not, in itself, constitute the carrying on of a financial
services
business as defined. As a result Future Trading Corporation is not
required to hold an Australian financial services licence in relation to this
part of its activities under the Corporations Act. (my emphasis)
- In
relation to the question of the legality of investment by an IBC in the
circumstances set out in Mr Hobbs' letter, at [3.1], the
Atanaskovic Hartnell
letter stated:
You have asked us to confirm whether our securities laws (contained in the
Corporations Act) permit an Australian resident to invest in an investment
product which is not registered in Australia in circumstances where any
request for, and offer and issue of, that product is made totally offshore,
generally through an international
business corporation (IBC) established by the
Australian resident and located offshore. (my emphasis)
- (In
the present case, whether or not the investments were in truth made by an
offshore incorporated IBC, it is contended by ASIC that
the offer and issue of
the financial product were not made totally offshore. I agree.)
- The
Atanaskovic Hartnell advice proceeded on the stated assumption [3.2] that the
foreign investment was "in the nature of a pooled
managed investment" and made
reference to the statutory provisions relating to managed investment schemes
(noting the prima facie
requirement for registration if the scheme had more than
20 investors (whether wholesale or retail and whether located inside or
outside
Australia) and the express prohibition on opening such a managed investment
scheme in Australia if it was required to be,
but not in fact, registered.) At
[3.4] the author commented as to the inappropriateness of the jurisdictional
reach of the legislation
"to foreign investments where there are no offers or
issues of interests of any kind made in Australia" (though noting at [3.5] an
exception for foreign schemes making offers and issues in Australia provided all
such Australian investors are wholesale clients).
At [3.7], the letter
stated:
Separate to the question of the foreign fund, the product disclosure regime
contained in the Corporations Act provides that there is no requirement to give
the investor a disclosure statement where no offers or issues of foreign
products are made or received in Australia (note that there is no such
obligation where the investor is a wholesale client in any case). (my
emphasis)
and concluded at [3.8]:
Therefore it is our view that the proposal outlined in paragraph B of your
fax would not contravene the relevant provisions of our
Corporations
Act.
- On
10 June 2002, Mr Hobbs wrote to ASIC noting that advice had been sought from Mr
Hartnell "in regard to Future Trading Corporation
incorporating in Australia"
and stating that:
The opinion Future Trading Corporation has received from Mr Hartnell on this
issue is that "It is more likely than not that the company
is not carrying on
business in Australia". The opinion did state should Future Trading Corporation
wish "to have the ability at any
time to bring legal proceedings in Australia"
it would have to be incorporated in Australia. As this situation could probably
only
be relevant should a party in Australia attempt to duplicate our product,
we should consider this carefully.
- ASIC
submits that it is not coincidental that Mr Hobbs sought advice from Mr Hartnell
(having regard to the query that ASIC had made
and, in particular, to the
evidence as to the way Mr Hobbs later deployed that advice in seminars with FTC
executives or potential
investors by reference to Mr Hartnell having "written
the ASIC Act") on the basis that it might have been thought that the advice
would carry particular weight with ASIC coming, as it did, from Mr Hartnell. Mr
Hobbs denied this (although in his affidavit he deposed
that "I did some
research and it appeared Mr Hartnell as a former Chairman of ASIC would be the
best person to obtain advice from").
- In
any event, the timing of the advice (having regard to the ASIC query to which Mr
Hobbs was responding in relation to the Cowern
correspondence) makes it likely
that the advice was sought, as a minimum, as a means of satisfying ASIC (at
least if Mr Hartnell's
advice was to that effect) that the company did not need
to be registered in Australia as a foreign company because it was not carrying
on business here.
- Relevantly,
the extracted portion of Mr Hartnell's advice that was conveyed to ASIC in Mr
Hobbs' 10 June letter included neither the
qualification by Mr Hartnell that it
was based on the "scarce" information available to him nor Mr Hartnell's advice
as to the possibility
that the company might be said to be carrying on business
through agents in the jurisdiction. Furthermore, there was no suggestion
in the
letter to ASIC that the advice from Mr Hartnell had addressed any question as to
the legality of offshore investment.
- Ms Li and Mr
Collard's introduction to Mr Hobbs
- Meanwhile,
in May 2002 Mr Diaz was introduced to Ms Li and Mr Collard by another FTC
executive ([152]). He deposes that he introduced
them to Mr Hobbs and each
became an FTC executive.
- Geneva
Financial - Smart Money
- Mr
Hobbs has deposed (at [16] of his 3 August 2012 affidavit) that at about the
time he received the Hartnell advice he discussed
with his wife the prospect of
establishing a fund "of the kind discussed by Mr Becker" and that he and his
wife had discussions with
Mr Becker as to how to set up such a fund. (By this
time, of course, there were already various investment funds that had been
established
and of which Mr Hobbs seems to have had knowledge (having regard to
his comments at the DVD Seminar), making the timing and/or content
of this
discussion somewhat unlikely (given the similarity of some of the other scheme
documents to those of Smart Money). Mr Hobbs
nevertheless deposes that a
template document was subsequently emailed to his wife that she showed to him.
- In
his affidavit (at [16]), Mr Hobbs deposes to his understanding that at around
this time Mr Diaz introduced his wife to Mr Malcolm
Carr (who was an options
trader trading at BIZcards Inc). (Mr Diaz describes Mr Carr as a friend he knew
from Mr Diaz' time at Southern
Cross Consultants prior to 2001.) As I understand
it, Mr Hobbs relies on this as showing that the investment operations were not
at his direction or instruction.
- Geneva
Financial was incorporated as an IBC in about August 2002 and the Smart Money
fund was set up, of which Geneva Financial was
the corporate administrator. Mr
Hobbs says nothing about any suggestion that a significant sum was required in
order to set up a
fund of this kind - contrary to what others, such as Mr
Koutsoukos, said he told them as to the cost of so doing. Nor is there any
suggestion that any sum was payable for intellectual property in relation to the
fund (in contrast to the payment that Mr Koutsoukos,
Mr Wood and Mr Truong said
was made when the Integrity Plus fund was offered to them). As at the time the
Smart Money Fund began
operation, in around August 2002, it would seem unlikely
that Mr Hobbs did not already have some experience in relation to private
placement funds (since the Cash Builder Unit Trust had been operated by Mr
Mitchell out of his office since 1999 and the first of
the Elite Premier funds
was by then also operating out of the Hobbs office with Mr Grant Clements as
administrator).
- Other
investment opportunities available by August 2002
- There
is evidence that by August 2002 there were other investment opportunities
available for FTC subscribers of which Mr Hobbs is
likely to have been aware. By
email dated 6 August 2002, Ms Karen Strong (an FTC executive) communicated with
a number of other FTC
executives confirming arrangements for Mr Hobbs to see
"prospective clients" (Ex BC). That email notes that:
With regard to obtaining contracts and prospectuses, David wants to ensure
that IBC Administrators have firstly been through the OEM/KLM process which will
then enable them, upon receipt
of information on the funds from KLM, to request
further information and/or contracts etc on a particular fund or funds through
their
IBC. I'm clarifying a couple of minor details on this process but, in
the meantime, I understand contracts are now available for Express,
Elite
Premier, Mixed market and, possibly, Solid Gold. For information purposes a copy
of all contracts and prospectuses will be
held by Area Managers and I hope to
have the new contracts shortly.
- This
reference to the OEM/KLM process is consistent with the way in which Mr Hobbs
later described it at the DVD Seminar. Further,
although it does not appear that
the email was copied to Mr Hobbs (and hence it could not be said that he had in
some way adopted
its contents), to the extent that Mr Hobbs has admitted that
FTC executives were agents of FTC for the purpose of marketing or selling
financial education packages, this is relevant as a communication indicating
what FTC executives understood of the OEM/KLM process
and its connection to the
business of FTC.
- September
2002 visit by Mr Diaz to USA
- Mr
Diaz has deposed ([100]) that in September 2002, he went to the United States at
the request of Mr Hobbs to meet with some traders
and to discuss an investment
proposal in relation to about $20 million (a suggestion that Mr Hobbs dismissed
with no little scorn
on the basis that "With the greatest respect to Mr Diaz, I
would never have (and did not) send an unsophisticated Cleaner ... to
negotiate
a US$20million transaction" - [27]). However, Mr Diaz' account of a then
proposal for a large investment in the United
States is not inconsistent with
later email communications from Ms Reisinger and her mother (Ms Dadey)
complaining about over-commitment
and under-delivery on the part of Mr Diaz (to
which I refer below).
- Nothing
ultimately turns in my view on whether or not Mr Hobbs had asked Mr Diaz to
assist in the negotiation of such a transaction.
However, as pointed out by Mr
Halley, Mr Hobbs' dismissal of Mr Diaz as an unsophisticated cleaner is
inconsistent with the description
he gave to FTC Executives when appointing Mr
Diaz to the National Sales Manager role in August 2003 (and in marked contrast
with
the offence taken by Mr Hobbs in the witness box to Mr Halley's reference
to Mrs Watson as a hairdresser).
- Mr
Diaz' evidence is that he met Ms Reisinger (then a broker working to introduce
accounts to Refco) on that trip. Ms Reisinger's
evidence corroborates this (Ex
AO p 17-20).
- Hobbs meeting
with Ms Reisinger/Mr Erdman
- Mr
Hobbs deposes (at [28]) that he met Ms Reisinger following an introduction by a
Mr Chris Hardin (who he says had in turn been introduced
to him by Mr Becker on
11 September 2002). Ms Reisinger corroborates the evidence that she was
introduced by telephone to Mr Hobbs
by Mr Hardin (who was at Refco) on 12
September 2002 (Ex AO 17,29-30). Ms Reisinger says that Mr Carr was at the
meeting with Mr
Diaz. She also says that Mr Hobbs said that he wanted exposure
to the commodity markets in the United States by way of access to
commodity
trade advisers (CTAs) trading in those markets (Ex AO p 20).
- Mr
Hobbs, in his written submissions, emphasises that Mr Diaz had met Ms Reisinger
before he himself had done (although on either
account both Mr Diaz and Mr Hobbs
had met Ms Reisinger in September 2002), saying:
Ms Reisinger came to Australia and gave at least ten presentations. Each of
the fund administrators were present and indeed Mr Diaz
met Ms Reisinger before
I did. (Transcript page 357 lines 4-23, Diaz cross examination)
- Mr
Hobbs deposed to what he says Ms Reisinger told him in that conversation (which
I admitted, over ASIC's objection, only as to Mr
Hobbs' recollection of the
conversation not as to the truth of what he says he was told), including that
she had been speaking with
Mr Becker for some time working out a product called
investment blends and that "An investment blend involves the pooling of money
and having it traded by various traders in securities and foreign exchange". (Mr
Hobbs recalls Ms Reisinger referring to a "Ty Andros"
in that context; Ms
Reisinger appears to put her first meeting with Mr Andros as occurring in 2001.)
- Mr
Hobbs says that Ms Reisinger told him that the product had to be set up to
comply with SEC requirements and that no Americans could
invest unless they met
some very specific requirements. In particular, Mr Hobbs says that Ms Reisinger
told him that "In order to
make sure we would require them to set up an IBC so
that there is no doubt the investor is a company and not American". (Mr Hobbs
elsewhere has suggested that Mr Becker told him this at a much earlier time.) Mr
Hobbs also deposed to Ms Reisinger having introduced
him to Mr Steve
Erdman.
- Mr
Hobbs denies the account of the meeting given by Ms Reisinger in her CFTC
examination (Ex AO Tab 36 p17.6ff). (In his written submissions
he suggests that
Ms Reisinger put her first meeting with him as being in 2004 but at line 6 Ms
Reisinger says she was introduced
to him in 2002 at Refco and I consider a more
complete reading of the transcript puts Ms Reisinger's recollection of the date
of
the first meeting at September 2002). Ms Reisinger is recorded as
saying:
And at that meeting, he was - - he said that he was very involved in the
commodities market. The executive at Refco had introduced
me to David Hobbs.
He was already currently doing quite a bit of business with Refco. (my
emphasis)
- Mr
Hobbs denies that he ever had any business with Refco. This seems to be flatly
contradicted by his comments at the DVD Seminar
in relation to funds conducted
through Refco. For example:
But each fund has its own manager. So if we have a fund trading in foreign
exchange, for example, there is one particular fund that we've been offered a
capital guarantee
on that trades in foreign exchange. Now, yesterday I
showed you some of the returns since 1988 up to this year on that particular
fund. I think the worst year was about
29 per cent and the best year was about
118 per cent. And it showed you month by month the returns. That particular
trader, which is again is cleared through Refco, which is the largest clearing
house in the world, we have been offered
a capital guarantee, a AAA rated
guarantee, on those particular funds. Now, that is a first in the foreign
exchange market.
And, I mean, you can take - you could take a fund like that anywhere and be
hard pushed to compete. Now, that particular fund, the manager in Australia
for that fund there is Rob. It's called the Express Fund. Express Fund is a
unit trust, and that means there is outside trustees. Every transaction has
outside trustees overseeing it, the clients issued units, the money goes into
Refco, and the profits come out
of Refco directly. So it's overseen by Refco,
overseen by trustees, overseen by independent accountants, and also the traders'
trading
profiles overseen by additional independent auditors and Refco
themselves as well.
- Mr
Hobbs says (at [5] of his 7 August 2012 affidavit) that he understood from his
conversation with Ms Reisinger that the Securities
Exchange Commission had
requirements "that had to be complied with". (I interpose to note that whether
or not Ms Reisinger or Mr
Becker may have been the source of the belief by Mr
Hobbs that it was necessary for investment to be through an IBC, any such
conversation
seems to go to the requirements in the US, not to the question
whether investment, if conducted through an offshore IBC, would be
legal or
illegal in Australia or New Zealand).
- Ms
Reisinger's account of the position when she met Mr Hobbs in September 2002 was
that she was "new to the business" and did not
have a whole lot to offer him.
She went on to say:
So he would send his executives over to the United States when Steve [Erdman]
and I were looking for different CTAs and managers to
manage product to see if
there was anything that was a fee.
- The
thrust of that evidence seems consistent with the fact that on 26 September
2002, Ms Reisinger sent an email to the email addresses
of Mr Diaz and Mr Cable
(the latter at the "nmo" email address to which I have referred earlier and to
an "insl" email address) but
the text of the message commenced "David, Jim and
Robert". The email (Ex AU p1252) referred to a product that Ms Reisinger said
she
and Steve [Erdman] had for them "a principal forex program thru Refco" and
described this as a "Steve product through Refco". Ms
Reisinger said in the
email "Please see that David gets this email" (perhaps seen as necessary because
the email had been sent to
the email addresses of Mr Diaz and Mr Cable). Whether
or not it was in fact passed on to Mr Hobbs (and there seems no reason to think
it would not have been), this communication (like many others) is indicative of
an understanding on the part of Ms Reisinger that
Mr Hobbs had understanding of
(if not in fact already having done business of some kind through) Refco. (It is
also consistent with
Mr Diaz having been included in discussions in relation to
proposed investment products, despite Mr Hobbs' statement that he was
"an
unsophisticated cleaner" and "just learning" at the time.)
- Mr
Diaz gives evidence of a telephone conference call he and Mr Hobbs had on that
day with Ms Reisinger, Ms Dadey, Mr Erdman and Mr
Matthews in which he says that
Mr Hobbs stated that he had a potential customer base of $20 million and that
"we" were looking for
capital protection and multiple traders to manage the
investment portfolio for "our" clients ([102]). Mr Diaz also gives evidence
of a
trip he and Mr Carr made to the United States in October 2002 to meet with Mr
Lynn Caswell and refers to a meeting at the office
of Refco Capital to discuss
investment portfolios ([104], [108]) as well as a meeting with a Mr Phillip
Harris from Plimsoll Capital
([110]).
- On
19 December 2002 (Ex AU 3407), an email was sent from the "nasl" address (and
therefore presumably from Mr Hobbs or sent on his
behalf) to Mr Diaz (and copied
to Ms Reisinger), in relation to money that was said not to be available until
the New Year from a
client who had promised $3.2m. The email
read:
Dear Lisa ... I suggest we start transferring some of the smaller amounts to
Refco, and over the holiday period I will meet with another
client to seek
US$1million to transfer.
- This
(at the very least) suggests that as at late 2002 Mr Hobbs had contemplated
doing business with Refco (and strongly suggests
he had already done so,
contrary to what was said (at [28]) of his affidavit, as Ms Reisinger understood
him to have said).
Events in 2003
- Visit to
Australia by Mr Lynn Caswell
- Both
Mr Diaz and Mr Hobbs give evidence that in March 2003 Ms Reisinger and Mr Lynn
Caswell visited Australia and spoke at some of
the FTC seminars in Australia
(Hobbs [34]; Diaz [113]). Mr Hobbs asserted that this was arranged by Mr Becker
(though there is reference
in later communications between Mr Diaz and Ms
Reisinger/Ms Dadey to the trip having been paid for by Mr Hobbs; and Mr Hobbs
seemed
to accept, as I understand it, that he had paid for at least some of the
internal flights during that visit). Mr Diaz says that it
was arranged by Mr
Hobbs. Ms Li and Mr Collard attended the seminar at North Sydney according to Mr
Diaz. Mr Diaz says that at the
conclusion of the seminar Mr Hobbs said that if
the audience wished to find out more about the fund he had spoken about they
should
contact OEM ([115]). Mr Hobbs denies this.
- Mr
Hobbs says that he thought it would be interesting "for educational purposes" to
have a board member of the Federal Reserve (presumably
there referring to Mr
Caswell) speaking to attendees at the seminars and that it would be interesting
to hear Ms Reisinger's explanation
of commodities trading in the US. He deposes
that at the conclusion of the meeting there was no suggestion that people could
obtain
further information by contacting himself "or Future Trading nor OEM or
KLM" ([38]).
- The
suggestion that this trip was arranged by Mr Becker is not supported by anything
said in the subsequent exchange of correspondence
between Ms Reisinger and Mr
Diaz in relation to the trip, to which I refer in due course. As to Mr Hobbs'
recollection that there
was no suggestion made at the meeting that people could
obtain further information from himself, FTC, OEM or KLM, in light of the
glaring contradiction between some of the statements made in his affidavit and
what Mr Hobbs can be heard to have said at the DVD
Seminar, and Mr Hobbs'
inconsistent memory of various events put in issue in these proceedings, I can
place little reliance on this
broad assertion.)
April 2003 visit to US
- Mr
Diaz deposes that in April 2003 Mr Hobbs visited the United States and met with
Mr Caswell. This is corroborated by a later email
from Ms Dadey, though Mr Hobbs
did not accept that the "red carpet" had been rolled out for him on that
occasion.
- In
mid 2003, Mr Diaz entered into what seems to have been an investment contract
with Optionz NZ (of Kentucky, USA) (not in the standard
form template of the
investment contracts used by the corporate administrators in relation to the
schemes the subject of the present
proceedings) in which he agreed that no one
connected with Optionz NZ had given or offered financial advice and that there
was no
guarantee on capital or profit for that investment (Ex AU 1660). It seems
not to be disputed that Optionz NZ was an entity associated
with Mr Parker.
- Loss of Cash
Builder Unit Trust funds
- Mr
Mitchell (at that time the administrator for the Cash Builder Unit Trust) says
that in around June 2003 he was informed by Mr Hobbs
that the funds invested in
the Cash Builder Unit Trust (of which Magny-Cours was the corporate
administrator) had been stolen. Faced
with this (presumably alarming) news, Mr
Mitchell seems to have done no more than that he ceased to be a signatory to the
Magny-Cours
Hong Kong bank account. Thereafter, Formula Investments Ltd (a
company of which Mrs Doreen Andrews was the sole director, according
to Mr Diaz
at [236]), was the corporate administrator of the Cash Builder Unit Trust. (ASIC
contends that in this regard Mr Mitchell
followed Mr Hobbs' instructions,
referring to the document at Ex F tab 90, a fax from Mrs Andrews on 28 January
2004).
- On
25 June 2003, Mr Hank Parker sent an email to the "nasl" address forwarding a
message to "David" (Ex AU 1582), in which Mr Parker
gave an explanation of the
LEAPS strategy (that acronym standing for "Long Term Equity Anticipation
Security"). In that email he
noted that this strategy involved the sale of a
short term option for a higher strike price and the purchase (by inference at a
lower
strike price) of a long term option and said that there was an opportunity
to make significant gains on covered calls using "Blue
Chip" stocks by employing
leverage without margins. Subsequently (on 16 July 2003), Mr Parker sent a
further email to the "nasl"
address (with the subject header being "Options as a
way of life") commencing "David, ... few things you should know when
discussing LEAPS and calls" - my emphasis, noting that this indicates a
contemplation that Mr Hobbs might be discussing LEAPS and calls in one capacity
or another.
- The
timing of the above emails is relied upon by ASIC as evidencing Mr Hobbs'
involvement in the Covered Strategies scheme, having
regard to the instructions
that Mr Hobbs gave shortly thereafter to Mr Fitzgerald in relation to the LEAPS
strategy.
- On
4 August 2003, by letter endorsed "David J Hobbs CIF, Director" (my
emphasis) to Mr Fitzgerald, reference was made by Mr Hobbs to the "decision" to
form a unit trust investing in Covered Calls
using the LEAP strategy, and that
strategy was explained in terms consistent with the Parker emails. Instructions
were provided as
to what was to be done in relation to the investment process
for such a fund. Whatever "instructions" Mr Becker may separately have
given
(and there is no evidence of these), it is difficult not to conclude that what
Mr Hobbs was there relaying to Mr Fitzgerald
was Mr Parker's explanation of the
process.
- In
any event, this letter is clear evidence of Mr Hobbs giving instructions for the
conduct of an investment scheme. Significantly,
Mr Hobbs later intervened when
issues later arose as to the fund between Mr Fitzgerald and Mr Parker and then
stepped in (and assumed
control) when Mr Fitzgerald made it clear that he was
not continuing as "director" of the corporate administrator.
- Appointment
of Mr Diaz as National Sales Manager
- On
27 August 2003, by email from the "nasl" address to FTC, with the sender being
described as David J Hobbs CIF "International Sales
Manager" (Ex AU 1723), Mr
Hobbs announced the appointment of Mr Robert Diaz CIF to the role of National
Sales Manager for Australia,
stating that "Rob comes to the position with a very
successful background in building a solid financial business in Sydney". The
email stated that Mr Wood had filled Mr Diaz' previous position as Area Manager.
(As already noted, Mr Hobbs' description in his
affidavit of Mr Diaz as an
"unsophisticated cleaner" is inconsistent with the glowing terms in which his
appointment as National
Sales Manager was announced to FTC executives, a matter
that caused Mr Hobbs some difficulty in attempting to reconcile the two
statements
in cross-examination.)
- Mr
Diaz was provided by Mr Hobbs with a certificate confirming his appointment. He
exhibited to his affidavit a copy of an FTC chart
that he says Mr Hobbs also
provided to him in August 2003. That chart included, inter alios, Ms Karen
Strong (as an FTC executive
in Nowra) and Mr Ian Evans as an FTC executive (in
North Avalon) (confirming the positions of those two - reference to whom has
already
been made earlier).
- It
seems that at some time prior to 10 September 2003 a suggestion was made by Ms
Reisinger that an account with Refco (in which Mr
Hobbs and others had some
involvement) be closed (and that this was due to an issue that Ms Reisinger had
as to the non-fulfilment
of promises or commitments in relation to the
investments to be made through Refco of client funds). I say this because Ms
Reisinger
sent an email addressed to Mr Cable, Mr Diaz and Mr Hobbs on 10
September 2003, referring to a request she had made to close the
"Refco"
account. In that email she complained as to the "over-stating [of] a position
and under-delivering it" (in terms that seem
to have encompassed both Mr Diaz
and Mr Hobbs in that conduct) and referred to her concerns as to possible
repercussions for her
licence and for Refco as a result.
- Her
mother, Ms Nancy Dadey, sent a similar email (though less vehement and more
supplicatory in tone) on 11 September 2003 (in which
she referred to a first
meeting when "David and Jim [who I understand to be Jim Cable] came over" to
meetings in Chicago; and then
to meetings between Mr Malcolm Carr and Mr Diaz
with Mr Caswell in California; meetings they had in Chicago and New York; and
meetings
with Ms Reisinger in Omaha. (The email also referred to meetings of
groups in Australia although it is clear that this cannot have
been from Ms
Dadey's own knowledge as it is not suggested in the email that she was there.)
(This supports Mr Hobbs' recollection
that there was at least one trip to
Australia by Ms Reisinger - though whether she made ten presentations is not
clear on the evidence.)
- Mr
Diaz drafted a heated response to the emails from Ms Reisinger and Ms Dadey and,
tellingly, sent that draft to Mr Hobbs for comment.
In that email, Mr Diaz said
that he had not been able to answer bankers' queries until he had spoken to Mr
Hobbs. (He also referred
to Malcolm Carr as someone who "works with us and he is
loyal to David and myself"). Mr Hobbs made some handwritten amendments to
the
draft response but did not amend the references to Mr Carr (nor did he amend the
statement by Mr Diaz as to Mr Diaz not being
able to answer the bankers' queries
until he had spoken with Mr Hobbs). In a handwritten comment at the end of the
draft letter,
Mr Hobbs made reference to an issue as to Plimsoll Capital (an
entity of which he disavowed knowledge during cross-examination).
- This
email exchange (and Mr Hobbs' failure to dispute parts of it that one might have
thought would readily have been corrected had
Mr Hobbs not accepted the account
there given) is consistent with Mr Diaz' recollection of Mr Hobbs' involvement
(and inconsistent
with Mr Hobbs' denial of such involvement) in relation to the
opening of the Refco account that Ms Reisinger was requesting should
be closed).
- Mr
Diaz gave evidence that Mr Hobbs conducted training for FTC executives
([31]-[33]). (Mr Hobbs' evidence is limited to "recruitment"
not training per
se.) He deposed to having filmed a seminar (with assistance from others,
including Mr Wood or Mr Truong) conducted by Mr Hobbs in about
October 2003
([175]-[176]). The DVD footage of that seminar (and a transcript taken by
Auscript of that footage - Ex R) was in evidence
(and I refer to it as the DVD
Seminar).
- It
is not disputed by Mr Hobbs that he appears on that DVD footage. Nor does he
dispute that there was a seminar or meeting of some
kind that took place in
Australia, whether in a hotel behind the Queen Victoria building in Sydney (as
Mr Diaz says), or in an office
in Bankstown, (as Mr Hobbs says). Nor does he
dispute that he at least recruited FTC executives (which might fairly be seen to
be
part of the purpose of the presentation recorded on the DVD). Mr Hobbs does,
however, dispute the nature of the meeting that was
filmed on that occasion,
describing it as a one-off seminar (and asserting that it addressed a variety of
issues including diet and
vascular issues).
- As
to the timing of that seminar, it must have taken place after mid-2002 (since
there is a reference during the seminar to the comparative
position of
international currencies as at that time - Mr Hobbs suggesting that an earlier
prediction of his had been vindicated).
It seems likely to have taken place
after the Bali bombing on 12 October 2002 (assuming the reference to the events
in Bali having
an impact on exchange rates is a reference to those events).
- If
the reference by Mr Hobbs to a Bankstown office is a reference to the
MortgageXpress office from which Mr Diaz then carried on
business, then that
would presumably place the seminar as occurring before the falling out between
Mr Diaz and Messrs Wood and Truong
(who left the MortgageXpress business in 2004
but who was still in communication with Mr Hobbs at least as at September 2004).
It
might be expected that Mr Diaz would have been well placed to identify
whether the location of the seminar was his own office, had
that been the case.
In any event, the location of the seminar is not material.
- Mr
Hobbs accepted that he appeared on the video (with Mr Diaz beside him at the
front of the room). The DVD (parts of which were shown
in Court during Mr Hobbs'
cross-examination but the whole of which I later viewed outside Court) records
the attendees as having
identified themselves, at Mr Hobbs' invitation, at the
start of the seminar. From this, it is evident that the seminar was attended
by
a number of people who Mr Hobbs accepts were, at the time, existing FTC
executives (Mr Diaz, Mr Wood, Mr Collard, Ms Li, Mr Morrow).
A number of other
attendees identified themselves as working with Mr Diaz.
- Mr
Diaz gave evidence that Mr Truong had attended the seminar and (although Mr
Hobbs was unable initially to identify Mr Truong's
voice on the parts of the DVD
that were shown during his cross-examination), Mr Hobbs ultimately confirmed
that Mr Truong could be
seen in a later part of the DVD footage as having been
in attendance at this seminar.
- Mr
Hobbs' affidavit deposes to the video having been taken without his knowledge.
It is difficult to see how that could be the case,
in circumstances where the
room in which the seminar took place does not appear to be large and it is
evident from the sound recording
that there was more than one person in the room
involved in changing the videotapes at least at one point (which suggests that
there
was some activity at the back of the room when that occurred).
- Mr
Diaz says that he had been asked by Mr Hobbs to film the seminar for use as a
promotional video; that he recorded it on his camcorder
and then transferred it
onto a VHS tape; that in December 2003 he made two copies of the VHS tape; and
that he gave one copy to Mr
Hobbs in about early 2004. Mr Hobbs' real complaint,
it might be thought, is therefore that the tape was provided to ASIC (not that
it existed in the first place.)
- As
to the seminar itself, Mr Hobbs in his closing submissions suggests that the
seminar was of 3 days' duration. It does not seem
to me that this is necessarily
consistent with the reference made by Mr Hobbs at the opening of the seminar to
what would be discussed
"over the next two days". (That seems to me consistent
with the proposition that the seminar would occupy two, not three, days in
total, including the day on which Mr Hobbs was speaking and the
next.)
- The
information that Mr Hobbs indicates will be covered in the seminar is "financial
education and what financial education can lead
to in the way of income, and
enhancing the lives of clients here in Australia". He states
that:
We are very particular in the different companies that we will
discuss over the next two days, of how business is conducted and the law of
advice and no offerings so we will be spending a lot of time on that
particular fact ... (my emphasis)
- Having
carefully viewed the whole of the DVD Seminar footage and cross referenced it to
the Auscript transcript, it seems to me unarguable
that Mr Hobbs was the
principal presenter at the DVD Seminar (although Mr Diaz did assist in the
demonstration of some calculations
when Mr Hobbs was giving an example as to the
concept of arbitrage of a mortgage). That said, it is possible that one or more
others
spoke on the afternoon of the second day (assuming the seminar continued
after lunch on that day), as there appears to be no footage
after the
adjournment for lunch on the second day.
- As
to the purpose of the seminar, it is relevant to note the manner in which the
attendees introduced themselves on the first day.
Apart from those who
specifically introduced themselves as FTC executives or area managers (Mr Diaz,
who said "like Dave ...I'm also
a certified international financier"; Mr Wood;
Mr Morrow) there were a number who introduced themselves by reference to their
involvement
in financial or related matters (Mr Hayes, who said he was involved
in finance; Mr Baker, who said he was in finance brokering; Messrs
Kalikouroulos, Geoghan and Watson in mortgage brokering; Ms Wool, who said she
was involved in training in the area of financial
services (in particular,
insurance) (and who, to my observation, was the only participant who sought
during the seminar to pin Mr
Hobbs down to specifics); Messrs Tecarelli, Gaira
and "Sammy", who said they were consultants or employees for Mr Diaz'
MortgageXpress
business; Mr Smith, who described himself as a small businessman;
and Mr Fay, who said he was an investment banking businessman.
Also present were
Mr Collard, who described himself as having "been involved in investments and
plantations", and a woman who identified
herself as "Lilli, I am just operating
in success managing centre" (of whom Mr Hobbs said on the tape and essentially
confirmed in
cross-examination she was a surgeon from China). (After watching
the DVD outside Court, Mr Hobbs confirmed that Mr Truong was also
in
attendance.)
- Mr
Hobbs said in cross-examination that at this seminar a doctor from New Zealand
(Lewis Gray) also spoke. There was no introduction
by a Dr Gray on the DVD
footage at the start of the first day and it seems unlikely that he was there at
least at that stage since,
after Ms Wool introduced herself, Mr Hobbs referred
jovially to the fact that "there's two Kiwi's in the room", including himself
in
that reference. However, it is possible that Mr Gray was one of the two new
attendees referred to on the second day.
- A
number of topics were covered in Mr Hobbs' presentation (and in some instances
repeated more than once) over the course of those
two days, including: warnings
as to various investment scams and frauds; the role of FTC; the opportunities
for legal participation
in the offshore wholesale market; historic rates of
return (and the amount that introducers could make by way of commission); the
performance of particular funds (with emphasis on whether those were funds to
which there was access); and the due diligence carried
out on funds. Various
examples were given of arbitrage (whether in relation to a home mortgage or a
car club) and other types of
investment, with comment as to the suitability of
one or other type of investment. More than once, Mr Hobbs referred to the
performance
of particular funds (including one fund in which on-line access to
trading was said to be available; one in which a share of the
"pips" on all
trading was available; and one with a capital guarantee.).
- A
short video of FTC was shown, Mr Hobbs referring to the video as showing "just
our New Zealand offices" (in fact the video showing
both Mr and Mrs Dent's house
in Queensland and the office in Nelson), and describing his role in FTC as
"International Sales Manager".
Mr Hobbs said, by way of introduction to the
video:
As I said, it's [FTC] owned by OEM Limited. OEM is owned by attorneys,
accountants, and fund managers, in the US. (P 5 lines 35-36).
- Mr
Hobbs spoke about historic returns and some products coming with a capital
guarantee (some guarantees said to be triple A rated
and some issued by
Citibank, Bank of America, Jefferson Pilot, which Mr Hobbs described as
"extraordinary in some measures"), and
about the "styles" of returns (some
monthly, some quarterly, some annually).
- Mr
Hobbs, throughout the seminar, regularly uses the first person plural "we" or
"our" (as I have emphasised in the extracts set out
above). So, for example,
from P 6 line 13 where he says:
The top performing compounding fund for last year, and I wish to emphasise
very clearly this is not a fund that we have access to because we
cannot obtain audit[ed] set[s] of accounts for the fund, but the top
performing fund last year produced 2,028 per cent, I mean that's a significant
return. It's a highly leveraged futures trading style fund. Again, it's not a
fund that we have access to. [Well] Sorry, It's not a fund that we would
recommend on any form because we cannot do enough due diligence on it, ...
(my emphasis)
- It
might be thought that the penultimate sentence in the above extract is a
Freudian slip (namely that it was a fund to which whoever
was comprised by the
pronoun "we" did not have access) being quickly corrected to it not being a fund
"that we would recommend on
any form". The link between recommendation of a fund
and the carrying out of due diligence on it is also interesting, given that
most
(if not all) of the schemes the subject of these proceedings could not have been
the subject of any (or any prolonged) due diligence
by KLM or anyone, since they
seem to have been set up and to have started almost immediate operation (so, for
example, the Super
Save scheme and the various Li/Collard schemes). Nor is there
any evidence of the carrying out of, or product received from, the
due diligence
or extensive research generally said to be carried out (other than as can be
discerned from in the very general newsletters
and news flashes). (While it
might be possible that there was due diligence carried out on the US traders or
funds associated with
them, the DVD Seminar makes clear that the funds to which
Mr Hobbs was referring were funds such as Mr Diaz' Xpress
Fund.)
- Mr
Hobbs makes reference to various funds in the course of the seminar: for example
at P 7 line 1 to "a fund that is available, a
unit trust fund that's available
that's cleared through a major bank in the world". This example (repeated the
following day) is
said to be one that permits the client to watch the daily
trading online and where "the introducer earns a commission that one, is
under
contract from the bank, and two, it's just been incorporated they now share in
the bank's trading commission". He goes on to
say that "The fund managers we
have incorporated in one of the unit trusts in trade [in] foreign exchange
have now just developed a contract with the bank that the introducers not
only
receive commission, they also share in the pips that are paid as commission per
trade".
- Mr
Hobbs emphasised the difference between profit (a share in the profit of the
business, up or down) and "retail" (a set interest
rate) and supported that by
way of an example to when his wife (who he described as an accountant) was doing
her degree and to the
information "that was being fed back from a group of
accountants". (He also referred to himself having "honoured in financial
planning".)
- Relevantly,
Mr Hobbs contrasted Ponzi and prime bank investment scams on the one hand with
dealing with "Chase Manhattan or Citibank
or Merrill Lynch, or
Refco":
I mean it's highly reputable people, and the difference being you can come in
on the wholesale rate, and we'll talk about how KLM are able to negotiate the
same institutional rate of investment as the banks and insurance companies
(my emphasis) (P 9 lines 14-15)
- The
message clearly being conveyed at the DVD Seminar was that it was possible for
an investor to obtain "the wholesale rates, from
the same institutional levels".
Mr Hobbs emphasised the difference "between what is real out there in the world
and what is not"
and spoke time and again of high rates of returns, saying that
he had "resigned from an extremely well paid job in the insurance
industry to
travel the world to try [to] bring these same opportunities back to the average
person that you receive from the wholesale
return" - an excise that he said was
fraught with a lot of difficulty because "to participate in the wholesale arena
you had to have
hundreds of millions of dollars because you were dealing in the
same league as the major insurance companies and banks".
- Mr
Hobbs said that:
Over a period of time we were able to negotiate contracts with the
major banks and major security firms and so forth that allowed us, by way of
contract, to bring in
smaller parcels of money, you know, like in the one and
two million, so we were able to accumulate under contract smaller amounts
of money to piggy back if you like on the wholesale markets. (P10 lines 12-16).
(my emphasis)
- In
cross-examination Mr Hobbs sought to explain away the use of "we" and "our" as a
mere figure of speech. While I accept that use
of the first person plural is
likely to have been Mr Hobbs' way of associating himself with those involved in
the matters he was
talking about (as he says he used to speak of the team when
he was with Colonial Mutual), what emerges very clear is that Mr Hobbs
was
including himself in some fashion in a proprietorial way with the incorporation
of funds and the ability to access investments
through those
funds.
- October 2003
trip to Miami
- Mr
Diaz gives evidence that in October 2003, he, Mr Hobbs, Mr Cable, Mr Fitzgerald
and others attended a seminar in Miami, during
which trip they met with Mr
Parker. He says that Mr Parker handed out a paper setting out predicted returns
on the investment strategy
for Covered Strategies (but that Mr Hobbs had torn up
the papers) ([186]-[189]). Tellingly, however, from October 2003 (until about
November 2005) some of the funds invested in the Covered Strategies fund were
transferred to the Optionz NZ account controlled by
Mr Parker.
- First Secured
Bond Unit Trust
- The
First Secured Bond Unit Trust was set up around about November 2003; an NZ
dollar bank account having been opened in the name
of Secured Bond around
September 2003 and a US dollar account also in Nelson (both with Mr Collard's
son as the initial account signatory).
There is evidence of the promotion of the
fund at FTC seminars and meetings from around October 2003 by each of Ms Li, Mr
Collard
and Mr Hobbs (see Huang [86], [89], Zhang [107], [110], Jouravlev [22],
[92]).
- By
letter dated 18 December 2003 (part of Ex BB) a further complaint was raised by
ASIC with Mr Hobbs in relation to the activities
of FTC in Australia.
Significantly, the letter refers to previous correspondence in relation to FTC
and to "undertakings" that had
been given by Mr Hobbs that FTC "is not
conducting any business that would contravene the Corporations Act 2001".
The letter refers to information that a person in North Avalon (Mr Ian Evans)
had represented that he was an executive sub-area
manager of FTC and had offered
potential investors a 90% pa return for certain investments.
- In
this letter ASIC expressed concern, first, that "[a]s discussed previously, if
FTC is carrying on business in Australia it is required
to be registered or
recognised as a company within the jurisdiction" and, secondly, as to the
allegation that there had been a solicitation
of funds for investment and/or
deposit in offshore business operations without a licence under the Act. It is
noted that these were
serious issues.
- Mr
Hobbs did not have a clear recollection of the making of this query but it is
consistent with the accounts given by Mr Koutsoukos,
Mr Woods and Mr Truong that
Mr Hobbs had told them about this incident (and that he had told them not to
talk publicly about investments).
The recollection of Mr Koutsoukos was that
some time after December 2003 Mr Hobbs had told the J&B Financial officers
that: "Ian
Evans has got in some strife with ASIC because he was doing some
meetings at the Mosman town hall" and "He was on stage talking about
selling
investments" (and had said that Mr Evans had to go and front ASIC, but he got
off with a warning on this occasion). Mr Koutsoukos
said that Mr Hobbs had said:
"You can't talk publicly about the investments. You should do it oneonone
wherever practical."
- Mr
Hobbs' response when tested on this in cross-examination was:
Mr Halley, I don't recall that. And, with due respect to the three gentlemen
at J&B and the business they've conducted, and you
would've seen under
crossexamination, it's just dubious any evidence they would give.
(a comment that I treated as a submission). It is relevant to note that the
ASIC letter corroborates the evidence that there was an
issue as to Mr Evans
behaviour at around this time.
- In
any event, receipt of this letter must have put Mr Hobbs on notice as at
December 2003 (if he had not already appreciated it) that
there might be a
requirement to be licensed if the conduct in this jurisdiction amounted to a
solicitation of funds for offshore
investment or deposit. (It does not appear
that Mr Hobbs referred this issue to Mr Hartnell for advice.) In
cross-examination, however,
Mr Hobbs sought to dismiss the significance of the
concern that had been expressed by ASIC:
Well, yes, but that doesn't mean - that could be this gentleman's first
reaction, I don't know.
Events in 2004
- As
adverted to earlier, Mr Hobbs exhibited to his first affidavit copies of
documents recording the death of a Mr Howard (Kip) Becker
on 12 April 2004. It
does not seem to be disputed by ASIC that such a person existed nor that he died
on that date. However, ASIC
does dispute the role that Mr Hobbs suggests Mr
Becker played in relation to the schemes the subject of these
proceedings.
- Mr
Hobbs advised FTC executives of Mr Becker's death by email from nasl on 26 May
2004 stating that:
You may have heard the sad news of the passing of Mr Kip Becker, an
attorney involved with OEM Ltd and Future Trading Corporation Limited.
...
The position of Mr Becker's replacement will be announced shortly.
- Mr
Hobbs' evidence was that a replacement was not ever announced for Mr Becker and
that he had confirmed that after Mr Becker's death
there was no longer an
attorney appointed for the purposes of providing assistance for OEM and
FTC.
- Relevantly,
the email does not suggest that Mr Becker was an owner of the companies, simply
that he was an "attorney involved" with
them, and the email makes no reference
to KLM. Significantly, there is nothing to suggest that the operation of any of
the funds
(or of FTC/OEM/KLM for that matter) changed following the death of Mr
Becker. Further, even though I note that KLM was deregistered
in May 2004
(presumably, as with similar deregistrations, due to non payment of fees) Mrs
Watson's evidence was that the OEM/KLM
process finished (or "dried up") well
after 2004.
- Had
Mr Becker indeed held an interest in one or more of the companies (or in any
intellectual property represented by the development
of the investment products
made available through one or more of FTC/OEM/KLM) then one might have expected
the executor or administrator
of his estate to seek to realise value from those
assets for the benefit of the estate.
Global Forex Trading
- Mr
Diaz gives evidence that in about May 2004, he and Mr Hobbs commenced discussion
with Ms Reisinger and Mr Matthews in relation
to the opening of an account with
a US based foreign exchange dealer, Global Forex Trading ([25]), which proposal
included the purchase
of US Treasury strips with a proportion of investment
funds and leveraging the remaining portion of the funds for investment in
various
foreign exchange instruments. He refers to an email of 13 May 2004
setting out that proposal. (Between May and September that year,
some of the
funds that had been invested in the Elite Premier Option Two Unit Trust were
transferred to Global Forex Trading.)
- Advice from
Rout Milner Fitchett
- By
letter dated 6 May 2004 addressed to the directors, Global Futures & Forex
Ltd Qld, Rout Milner Fitchett of Vanuatu stated:
We have been consulted by Grant Clements of the above company (Preserved)
...
As requested by you, we advise (as solicitors to Preserved Investments and Mr
Clements)
Preserved Investments is acting as an entity pooling third parties' moneys
for investment purposes;
when operating in New Zealand, Preserved Investments operates under
anti-money laundering legislation similar to the USA Patriot Act
as described in
your letter of 21st April;
Ithe writer is not a solicitor or legal counsel admitted to practise in
Vanuatu.
- It
is not clear the purpose for which this letter was obtained.
- Queries by
potential investors
- At
least as at July 2004, Mr Diaz was still in the role of National Sales Manager
of FTC. In that role, he apparently liaised with
Mr Hobbs on at least one
occasion in relation to the proposed response to be given to enquiries from
potential investors. Relevantly,
Mr Hobbs seems to have directed Mr Diaz what to
say in response to a query relayed to Mr Hobbs by Mr Anthony Gahan (an FTC
executive).
- By
fax on FTC letterhead (showing a Queensland address for FTC), Mr Gahan had
forwarded to Mr Hobbs on 21 July 2004 a series of questions
put to him by a Mr
Morris Fink (in relation to potential investment in the Elite Premier Option Two
fund or other funds). Mr Gahan
described these as being "very typical questions
I am being asked" and suggested to Mr Hobbs that "If we can show people like
Morris
Fink that the mechanisms used provide complete security and
accountability of funds then many referrals will come". Mr Gahan's letter
had
indicated that he would telephone Mr Hobbs on a particular day "as David Collard
suggested". Whether he did or not is unclear
from the text of the
response.
- On
22 July 2004, under a fax coversheet on Tasman Business Consultants ("trading as
Business Consultants") letterhead, on which the
"nasl" email address and a post
office box address at Stoke, Nelson, appear, Mr Hobbs forwarded to Mr Diaz a
copy 'for his information'
of what seems to be a response to the questions that
had been conveyed to Mr Hobbs. The response, unsigned on the copy in evidence,
is on FZF Anguilla letterhead (showing the address of FZF Anguilla as c/- First
Anguilla Trust Co in Anguilla, British West Indies)
and bears a facsimile
transmission imprint from Tasman Business Consultants fax number. It provides to
Mr Anthony Gahan an answer
to the "quality questions" raised by Mr Fink.
- Relevantly,
the questions (and the answers given to them) included:
Q1.From what Robert [Diaz] has said to him the client receives 80% of the
profits and administration received the other 20%. Is this
correct?
A1.The administration company does retain 20% of the gross, which pays for
trustees, commissions and overheads.
Q2.For accountability reasons a quarterly statement from the Trust is given
to the Unit Holders in the Trust. Is this correct? Can
a sample copy be
provided?
A2.If the fund pays profit monthly, a monthly statement is produced and of
course if it is quarterly the same procedure takes place.
I will provide a
sample for you.
Q3.Is a statement or document of any form distributed from the trader stating
the percentage/amount earned for the period by the trust?
Or what document
proves the actual earn from the investment by the trust?
A3.The clearinghouse forwards daily an activity statement and monthly
account balance. [inconsistent with Mr Hobbs' assertion that he did not
receive Cadent daily statements] Some of the funds operate a different style.
We
can't distribute this to clients as we must protect the clearing house/traders
from a small investor attempting to circumvent
us an [sic] more importantly as
we invest at an institutional level the clearing house/security firm do not wish
to know about a
small investor as the unit trust is the client. [The truth of
this is illustrated by the concern by Cadent when it later received
a number of
small wire transfers from J&B Financial and when Mr Koutsoukos sent
correspondence suggesting the funds were not
from a single source.]
Q4.Who are the auditors for the trust?
A4.Different funds use different accountants, the majority of the funds use
[certain named firms] [I note that there is no evidence that any audit as
such was carried out in respect of the funds - simply a suggestion that
accounting
services of some kind may have been provided]
Q5.Procedure of paying client returns? Who is the administrator, is there an
outside administrator appointed for this task? If not
why not? By using an arms
length administrator this would demonstrate security and provide an inbuilt form
of accountability?
A5.Each fund has their own administrator who reports all transactions to
outside trustee (trustee being Trans Management Ltd.) [It seems that only one
or two scheme administrators ever reported to Trans Management and there is
nothing to suggest that it ever
performed an oversight role. Moreover, to the
extent that Trans Management was associated with the Hobbs office (and the
investment
funds were promoted through the Hobbs office - at the very least in
the sense that Mrs Watson and Mrs Burnard provided the investment
information
out of that office - then the description of an "outside" trustee seems
disingenuous]
Q6.If the administrator is not an outside administrator have you ever
considered co-administrator appointments?
A6.Each administrator is specific to each fund [It is difficult to know
what to make of this answer. If it suggests that the fund-specific
administrators were independent of the
"introducers" then, on the evidence
before me, nothing could be further from the truth]
...
Q8.If there is single administrator to the trust used for safe keeping of
investor funds, is that person the only signature to the
money? How can you show
investors their money is safe in this case? For a system/mechanism to be
accepted, the trusting of a party(s)
cannot be part of it. The system has to be
designed so that one person does not have to put his trust in another?.
A8.No the trustees have the ultimate control and the system double checks it
all the way. [There is no evidence of any "double-checking" or control by
Trans Management. For two funds there was a system later set up in which
Diligence Discovery purported to verify certain matters but the extent of any
audit control in the sense that this question seems
to test was extremely
limited]
Q9.Where are these trust(s) which are used to hold investor funds set up
(country)?
A9.In a British Colony country usually Anguilla
...
Q11.How long has Future Trading Corporation and associated companies been
operating?
A11.Future Trading Corporation Ltd has been operating for 8 (eight) years,
prior to this we [my emphasis] did not retail education material, so
investment funds have been operating approximately 12 years [There are a
number of points to note about this response, apart from the fact that the use
of the pronoun "we" suggests that the
writer is identifying himself at the very
least with FTC. The juxtaposition of the sale of educational material and the
earlier operation
of investment funds, through the use of the word "so",
suggests that there is some connection between the two - perhaps that time
gap
being the period that Mr Hobbs in his seminar to FTC and other executives in
about October 2003 suggested was the time that research
was taken before a fund
was recommended. Further, FTC was only incorporated in Vanuatu in 1999 -
therefore at the time of this response
had been in existence only 5 years, yet
the suggestion here seems to be that it had been operating for a longer period.
There is
no reference to any associated company.]
Q12What value of funds do you hold under management?
A12This is ifficult [sic] to answer as we [my emphasis] have one-off
clients with amounts of 100-300 million which is treated separately. [Mr
Hobbs was unable satisfactorily to explain how such an answer could be correct.
In any event, the suggestion that FTC, in some
capacity linked with FZF Anguilla
on whose letterhead the response was written, had clients with significant funds
"under management"
belies the role of FTC as solely an education
provider.]
Q13How many Australian investors do you act for? How many investors in total
do you act for?
A13The funds do not deal with Australian investors, they deal with
international corporations, some of which are owned by Australians.
I am unsure
of how many Australians would own international companies that utilize the
funds. [This is a somewhat surprising answer given the apparent requirement
that any Australians who wished to invest (other than through
self-managed
superannuation schemes when that system was later set up) were required to do so
through IBCs and since there were records
readily available from which Mr Hobbs
could have answered this question]
- This
exchange is significant in my view in that it shows the involvement of Mr Hobbs
in the overall process of the offer of investment
opportunities for FTC
subscribers - and the referral to Mr Hobbs of questions of this kind indicates
that FTC executives such as
Mr Gahan and Mr Collard looked to Mr Hobbs for
answers as to the mechanics of the investment process. It is also relevant to
note
that there is a reference to the clearing house activity at a time when the
first Cadent accounts opened directly by corporate or
scheme administrators had
not yet been opened. New World Holdings had only relatively recently been set up
as at September 2004 when
Ms Reisinger says she first met Ty Andros (from
TraderView/TraderVest). Therefore, the reference to clearing houses must be a
reference
to investment through brokers other than New World Holdings (and is
consistent with Ms Reisinger's understanding that Mr Hobbs had
already been
doing business (with Refco) before she met him).
- Cross-examined
as to what he understood to be the position of the outside trustee, there was
the following evidence by Mr Hobbs:
What did you understand an outside trustee was Mr Hobbs?
A. Well I believed it was Mr Becker, Chen and Parker and two or three others
that were-
...
My question was what you understand an outside trustee to be, not who was the
outside trustee?
A. I believe it would be somebody, a trustee, who could verify what the
information was.
Q. And the use of the adjective 'outside', did that mean anything to you as
at July 2004?
A. I am sorry I don't, it doesn't mean anything, I am sorry.
Q. Surely Mr Hobbs an outside trustee, as you understood it in July 2004, was
somebody independent of the fund managers or people
that were otherwise involved
in the investment of the clients' money?
A. Well people that controlled and owned those investments were the people
that owned the companies and the administrators.
Q. But you appreciated that an outside trustee would be somebody, as you
understood it, who would be at arm's length from the people
that controlled the
clients' funds and invested it on their behalf surely?
A. Well they would have been because they didn't own; the people that owned
the funds and controlled them were the people that owned
and controlled the
companies, which wasn't Becker, Chen and others.
Q. So do you say the people that owned and controlled the companies made all
the investment decisions with respect to their clients'
funds?
A. Yes, with Ms Reisinger.
- There
is simply no evidence that Mr Becker, Mr Chen or Mr Parker adopted any
monitoring role in relation to the investment schemes.
Mr Hobbs was, however,
quite sanguine as to this (even though he had been at pains to stress on the DVD
Seminar, and in his response
to Mr Gahan, the overly zealous nature of the
checking of transactions):
Do you suggest that an investor or potential investor asking you, were there
any checks and balances, would not be concerned to hear
that the outside trustee
was an IBC in Vanuatu where you didn't even know who the directors of it were?
A. It's as it was.
- Setting up of
J&B Financial
- Mr
Wood and Mr Truong gave evidence that in about June 2004 they told Mr Hobbs that
they were thinking of leaving Mr Diaz' office.
(At this time, each of Mr Wood
and Mr Truong was an FTC executive in his own right.) (It is not clear whether
by this stage the falling
out between Mr Hobbs, on the one hand and Mr Diaz on
the other, had occurred. In any event, it is interesting that Mr Wood and Mr
Truong sought Mr Hobbs' views, and perhaps his approval at least insofar as that
might affect their position as FTC executives, for
the move.)
- In
or about August 2004, Mr Koutsoukos was introduced to Mr Hobbs. (Ms Dabelic
seems also to have been involved in the Diaz business
at that
stage.)
- On
1 September 2004, J&B Financial was incorporated in NSW. Mr Wood was the
sole director. (Mr Wood says that he, Mr Truong and
Mr Koutsoukos were equal
partners in the J&B Financial business which operated from September 2004 to
December 2007.) J&B
Financial set up office in leased premises in Burwood.
It opened a bank account with NAB in Australia on 16 September 2004 and a
Technocash account on 24 September 2004.
- Each
of Mr Wood, Mr Truong and Mr Koutsoukos entered into FTC executive agreements
(in the case of Messrs Wood and Truong those being
new agreements) in the period
from around August to October 2004. So, for example, in September 2004, Mr
Koutsoukos signed an FTC
executive agreement and received a letter from Mr Hobbs
on FTC letterhead welcoming him as an FTC executive.
- Meanwhile,
in around August/September 2004, the Best Fund was set up following a meeting Mr
Zhang had with Ms Li.
- Opening of
Geneva Financial Cadent account
- The
first account opened with Cadent for any of the schemes involved in this case
was the account opened by Geneva Financial for the
Prestige scheme (administered
by Geneva Financial) as at 10 December 2004 (though I note that the copy of the
document in evidence
bears two date references in the fax header - 10 December
2004 and 3 February 2005).
- There
was in evidence an incomplete copy of an application form for the opening of the
Cadent account by Geneva Financial. Ms Reisinger's
evidence is that this was an
account that was opened originally by TraderView/TraderVest and that when she
was later provided with
the documentation she received only the incomplete copy.
(The opening of the account through someone other than Ms Reisinger is supported
by the fact that the New World Holdings' business records disclose a sharing of
commission between New World Holdings and Mr Andros
in relation to some of the
earlier Cadent accounts.)
- The
Geneva Financial application was signed on pp 12, 13 and 14. Page 20 of the
document contains a corporate resolution and indemnification statement which
states:
I, David John Hobbs, do hereby certify that I am the duly elected and acting
secretary of Geneva Financial Limited.
- Relevantly,
the section requiring details of the experience of the applicant are completed
to suggest that the applicant had 20 years
experience in each of the various
market areas (an answer that could only be truthful if the applicant were there
referring to Mr
Hobbs' expertise - as the J&B Financial officers said he had
told them to do in relation to their applications). Significantly,
also, in
light of Mr Hobbs' denial that he had previously done business with Refco, the
question as to firms with whom the applicant
had traded is answered Refco and
Merrill Lynch (a similar answer being given in the personal guarantee provided
to Cadent in the
body of the document). This belies Mr Hobbs' denials of
involvement in the Cadent account for Geneva Financial (or at least in its
opening) as does later correspondence with Ms Reisinger in relation to decisions
in respect of the account or querying commissions
in relation to the account.
- As
noted earlier, Ms Reisinger's evidence was that Trader View/Trader Vest was
associated with a Mr Ty Andros. It appears to have
been both an introducing
broker and a CTA (and hence was able to operate both as a broker and as a
trader). At p 165.20 of her SEC
examination, Ms Reisinger identified Mr Hobbs as
the foreign introducing broker for each of the Cadent accounts. (Mr Hobbs
challenges
this, among other things, on the basis that Ms Reisinger accepted
that this was a "made-up" title. I consider this assertion in due
course.
Suffice it to note that this submission is not based on a fair reading of Ms
Reisinger's examination in my view.)
- Financial
advice to Mrs Brock
- In
evidence was a copy of a letter dated 13 September 2004 from Mr Hobbs to Mrs
Brock sent by facsimile to a fax number in Australia
(to a city where Mr Hobbs
knew Mrs Brock lived), to which ASIC points as illustrating the giving by Mr
Hobbs of financial advice.
Mr Hobbs, remarkably, resisted the notion that the
letter contained investment advice:
You are giving her advice as to which is the investment product most commonly
used for arbitraging a mortgage, aren't you?
A. That's a pretty open statement.
Q. Well, that's a statement that you are making, isn't it, Mr Hobbs?
A. I do not believe that that is investment advice.
Q. And you're giving specific advice as to how such a fund might have its
capital protected, aren't you?
A. Yes; because we're talking about Treasury bills. (my emphasis)
Q. There are many funds out there that don't have their capital protected by
Treasury bills, aren't there?
A. Yes.
- Mr
Hobbs did not accept that use of the Treasury bill by way of capital protection
was something that he himself had developed in
consultation with others to
provide capital protection for investment funds. He also denied that part of the
process, or the explanation
provided to executives and potential subscribers in
Australia, was that the funds could be protected through the purchase of a
Treasury
bill (saying that "You are taking things totally out of context there,
I'm sorry"). The answer to the above, however, seems to indicate
that Mr Hobbs
equated the acquisition of Treasury bills as equivalent to capital protection,
no matter how they were used.
- Each
of Mr Koutsoukos (at [73]-[74]) and Mr Truong (at [120]) deposes that, in about
mid to late 2004, Mr Hobbs offered an investment
fund for them to operate (Mr
Koutsoukos' recollection is that he offered them more than one such fund). Mr
Truong recalls that Mr
Hobbs said that he would set the fund up for them. Mr
Wood recalls that in about September 2004, he, Mr Koutsoukos, Mr Truong, Ms
Dabelic and Mr Wood had a telephone conversation with Mr Hobbs during which Mr
Hobbs assured them that a fund was being set up for
them.
- Each
of Mr Truong and Mr Wood travelled (with Ms Dabelic) in about September 2004 to
meet with Mr Hobbs (and gave evidence as to what
Mr Hobbs had said to them in
relation to the fund that was being set up for them. (Mr Koutsoukos gave
evidence that he had to cancel
his trip at the last moment (but also as to what
was later conveyed to him in relation to the meeting).) (Mr Hobbs disputes the
account
of this meeting - and puts it later in about 2006, though by then Ms
Dabelic was no longer involved with J&B Financial or FTC
so a meeting
attended by her cannot have happened that late in the course of events.)
- Mr
Wood's evidence was that he understood that the fund would be protected by
Treasury STRIPS and the funds would initially be invested
through Mr Caffray,
who would be the conduit to the broker (Wood at [241]). Relevantly, the three
understood (they say from what
was conveyed to them by Mr Hobbs) that the fund
would be "their own" but that investors would need to join FTC and that the fund
would be offered by KLM and OEM operated through the OEM process. Mr Wood
deposed to Mr Hobbs having said that the fund would be
like "the other funds"
(at [241]). Mr Wood also deposed to being told by Mr Hobbs that he would design
the necessary memorandum and
would provide guidance as to the running of the
fund (and that it would cost around $1 million to set up the fund, which costs
Mr
Hobbs would bear, to be repaid from future commissions) (Wood at [241],
[243]).
- Mr
Wood says that Mr Hobbs spoke to them on that occasion about an investment fund
that would be a Merrill Lynch fund ([305]); Mr
Koutsoukos' recollection of the
discussion as it was later conveyed to him was that it was to be a fund
investing in wheat, soy and
bank commodities at the Chicago Board of Trade
([74]). The three say they began promoting the Integrity Plus fund to investors
from
mid to late 2004. (The reference to two funds may well include reference to
an Integrity Fund to invest through Global Forex, given
that an account with
that entity was set up on 16 November 2004 but funds were never invested in it.)
In any event following the
2004 meeting the three understood that there would be
an Integrity Plus Fund set up for them.
- A
payment of $150,000 was made to Magny-Cours in November 2004. Mr Koutsoukos'
evidence was that he understood this to be the amount
payable for the
acquisition of the Integrity and Integrity Plus funds ($200,000) less the sum of
$50,000 that Mr Hobbs allowed the
J&B Financial officers to retain to keep
the office going [315]-[320]). (Mr Koutsoukos deposed that he had paid $200,000
to J&B
Financial by way o his personal contribution to the purchase of the
funds.)
- Mr
Hobbs, after the conclusion of the hearing, forwarded to my chambers an email in
which he asserted that the moneys paid to Magny-Cours
out of the J&B
Technocash account (referred to in Mr Koutsoukos' affidavit at [315]-[320] and
[836]-[840], the latter being a
payment of $200,000 paid to Magny-Cours in
November 2006 in respect of an invoice by KLM for intellectual property in a
white label
fund, to which I refer in due course) were initially paid by Mr
Koutsoukos by a cheque from his own funds but not accepted by Magny-Cours
in
that form so that there was a transfer from the J&B Technocash account.
There is no evidence to support this assertion. In
any event, there seems to be
no dispute that a sum of $150,000 was paid to Magny-Cours in November 2004 from
J&B Financial's
account. The only explanation proffered for this is that
given by the J&B Financial officers that it was referable to the acquisition
of the initial fund they operated.
- The
evidence of Messrs Koutsoukos, Truong and Wood as to their roles within PJCB
(which they say were as assigned to them by Mr Hobbs)
was broadly that: Mr
Koutsoukos was the business development manager; Mr Wood was the director of
J&B Financial responsible for
overseeing finances, incorporating IBCs and
preparing letters to OEM/KLM; and Mr Truong was involved in the administration
of the
fund (in setting up bank accounts for the IBCs). Mr Truong and Ms Dabelic
also carried out some mortgage broking work for J&B
Financial clients.
- The
Integrity Plus Unit Trust fund was administered by PJCB (Integrity Plus Fund
Private Placement Memorandum Prospectus, EX P tab
41), PJCB having been
incorporated in Anguilla in 2004. Mr Wood's evidence is that Mr Hobbs directed
he, Mr Truong, Mr Koutsoukos
and Ms Dabelic to set up that company (naming the
four of them as beneficial owners) and suggested Anguilla as a good place to set
up IBCs as it had "very good privacy" (Wood at [251] -[256]).
- Mr
Wood gave evidence as to Mr Hobbs' involvement in the process of setting up the
IBC (including reference to the managing director
of First Anguilla Trust
Company, Mr John Dyrud, and assistance given in relation to the provision of
answers to questions as to the
details of the proposed IBC (Wood at [128],
[129], [131]-[135]). Mr Koutsoukos gave evidence that he and Mr Truong were also
involved
in the setting up of the company [218]-[219]).Both Mr Koutsoukos and Mr
Truong gave evidence as to how the name of the company was
chosen (Koutsoukos at
[223]; Truong at [135]). The company was set up on the basis that each of Mr
Koutsoukos, Mr Wood, Mr Truong
and Ms Dabelic beneficially owned 25% of the
company (Koutsoukos at [221]; Wood at [251]-[256]). (I note that in the private
placement
memorandum subsequently issued in relation to Integrity Plus, the
reader is directed that any enquiries about the investment are
to be made to
PJCB International Limited with a head office address nominated at a building in
Lugano, Switzerland. There is no evidence
to suggest any association by any of
the persons involved with PJCB (Mr Koutsoukos, Mr Truong, Mr Wood or Mr Hobbs)
with that address
in Switzerland, though it appears to be an address noted on
some of the Magny-Cours documentation.)
- Each
of Mr Koutsoukos, Mr Wood and Mr Truong gave evidence as to their management of
the day to day business of PJCB (Koutsoukos at
[222], [704]-[705]; Wood at
[217]-[222]; Truong at [155]). Each signed memoranda, agreements and other
documents on behalf of PJCB.
(By way of example of those matters, ASIC points to
the evidence of Mr Koutsoukos at [376]; Ex P tabs 50-59; Ex P tab 44,45; Ex AU
8569; and Ex AG tab 32; Ex P tabs 26, 62,18,182 and 258).
- In
October 2004, it is said that Mr Hobbs visited the J&B Financial Burwood
office and gave Messrs Koutsoukos, Truong and Wood
a memorandum in the name of
Integrity Plus to them to use for the purposes of the Integrity Plus fund. On 14
October 2004, PJCB opened
an account for Integrity Plus with Technocash. (On 16
November 2004, PJCB opened and began operating a derivatives trading account
with Global Forex.)
- Mr
Wood says that in November 2004 he gave to Mr Koutsoukos a cheque (made out to
Magny-Cours) for $150,000 to give to Mr Hobbs. This
payment was understood by Mr
Wood and Mr Koutsoukos to be the payment for the investment fund Mr Hobbs had
established for them (less
an amount of $50,000 that they explained to Mr Hobbs
was needed to cover rent).
- In
November 2004, Mr Truong was appointed by Mr Hobbs to the role of Sub-Area
Manager, FTC.
- In
around October 2004, arrangements for the establishment of the Master Fund took
place. (In late 2004, when Mr Zhang said he wished
to get his money back from
Elite Premier, he says that he was told by Ms Li that it would be better to
transfer the money to Master
Fund ([186]). There is evidence as to the promotion
of the Master Fund by Mr Collard and Ms Li (including Dong at [28], [69]-[70],
[80], [98], Bernard Moore at [39], Hogno [74], Huang [155], Xu [17],[20],[23],
[47],[78], Zhang [147], [186], [205], [223], [226].
Ms Dong gives evidence also
as to Mr Hobbs' awareness of the arrangements for the operation of the Master
Fund ([85]).
Events in 2005
- According
to Messrs Truong, Koutsoukos and Wood, in around January/February 2005 they
decided to dismiss Ms Dabelic. They say that
they spoke with Mr Hobbs about that
decision and that he told them to make a payment of $50,000 to Ms Dabelic (which
they did). ASIC
relies on this as showing the deferral by those three to Mr
Hobbs in the making of decisions in relation to the operations of PJCB.
(Mr
Hobbs does not accept this.) The timing of this event is, however, significant
in assessing the reliability of Mr Hobbs' recollection
of events - since in his
affidavit he suggests that a meeting took place with Ms Dabelic in
2006.
- Investment by
PJCB in Prestige
- Money
invested in the Integrity Plus fund was disbursed (by way of investment or
otherwise) in a variety of ways. However, for present
purposes I note that on 17
February 2005, Geneva Financial opened a USD account for its then new Prestige
Unit Trust with WestpacTrust
in New Zealand and on 23 February 2005, funds from
PJCB (representing, according to ASIC, Integrity Plus investment funds) were
transferred
to Geneva Financial for investment in the Prestige Unit Trust. Mr
Koutsoukos says that when he, Mr Truong and Mr Wood complained
to Mr Hobbs in
January 2005 that they were running short of funds [388] he encouraged them to
seek clients to invest in Prestige,
through Integrity Plus. (This is of
relevance, amongst other things, because Mr Hobbs has deposed that he did not
refer any FTC subscribers
or executives to Geneva Financial and that he never
marketed Geneva Financial to FTC subscribers or executives [17] a proposition
belied by Mr Hobbs signing as broker on at least two Smart Money contracts,
those of Conroy and Clifford, in 2003.)
- Mr
Hobbs deposes to an understanding that the investment made by PJCB in Geneva
Financial came from the sale of some property held
by Mr Koutsoukos ([56]) and
in submissions noted that the moneys came from a personal bank account of Mr
Wood. Insofar as he deposes
to the former, the conversation in which he says Mr
Koutsoukos referred to such moneys (and in which Mr Hobbs says he referred to
an
investment fund his wife was setting up) is placed by Mr Hobbs as occurring in
about July 2006 when Ms Dabelic, Mr Trong, Mr Koutsoukos
and Mr Wood visited him
in New Zealand "to discuss Future Trading's business". That cannot have been the
case as the investment in
question was in February 2005 (even apart from Ms
Dabelic's departure before 2006). (Mr Halley submits that this is no more than
an attempt to shift the jurisdictional location of the offer made in relation to
investment to New Zealand.) Whatever the source
of the funds, the documentation
clearly records the investment as one made by PJCB out of funds held for the
Integrity Plus scheme.
- NCCN LLC -
account with Cadent
- In
about May 2005, NCCN LLC opened an account with Cadent. Ms Reisinger, in her SEC
examination said that Mr Hobbs had introduced
the NCCN accounts through Mr Lynn
Caswell and that Mr Hobbs had introduced Mr Don Caffray. Ms Reisinger confirmed
that she (and Mr
Matthews) had signed the Cadent account application on behalf
of NCCN and that she was the operator of that account (along with Mr
Matthews).
(Ms Reisinger said that Mr Hobbs was the foreign introducing broker with respect
to the NCCN account.) (Mr Hobbs takes
issue with this evidence, as I discuss
when considering the weight to attach to Ms Reisinger's transcript
generally.)
- A
copy of a Cadent account application form for the NCCN account, signed by Ms
Reisinger (both as managing partner and elsewhere in
the document as secretary
of NCCN LLC) and by Mr Alan Matthews (as member) was in evidence. The document
was signed by Ms Reisinger
on 2 May 2005 and Mr Matthews on 30 April 2005. Ms
Reisinger signed the corporate resolution and indemnification portion of the
account
application as the duly elected of secretary NCCN LLC and was identified
in the document as a member of NCCN LLC. There was a guarantee
provided by Mr
Matthews.
- May 2005
Preserved Investments account
- In
about May 2005, Mr Clements opened the account with Cadent for Preserved
Investments. Ms Reisinger said that all the Cadent accounts
were opened as
proprietary accounts (Ex AO p183) except the Preserved Investments account,
which was opened as a pooled fund. (The
opening of the other Cadent accounts as
proprietary accounts seems to be the basis for the regulatory charges brought in
the United
States.)
- On
3 May 2005, Mr Paul Fry of Cadent sent an email to Mr Clements (copied to Ms
Reisinger's email address) attaching account documents
to open a non US
corporate account. On receipt of that email, Mr Clements forwarded it on to the
"nasl" email address for Mr Hobbs.
(Ex AU 3917), something unnecessary if Mr
Hobbs had not been involved in the decision to open the
account.
- In
relation to the opening of that account, a series of questions were raised by
Cadent's General Counsel (Ms Fitzpatrick) to Mr Fry.
It seems that Mr Fry
prepared some answers to the first two questions (noting that the customer would
sign CTA Advisory agreements
and a power of attorney for each trader). The
questions to be referred to Mr Clements related to the registration. Mr Fry then
forwarded
the email to Ms Reisinger for other answers to be provided by Mr
Clements (namely to provide the document which states that Grant
Clements is the
"director of Preserved Investments Group and authority to open" and (question 3)
that Mr Clements "In the CPO exemption
for foreign entities, namely that he had
stated no other Investors or Shareholders and funds not solicited for deposit
into this
account". Reference was made to a letter from Rout Milner Fitchett,
Barristers in which it stated that "Preserved Investments was
acting as an
entity pooling third parties' moneys for investment purposes".
- By
email from the nasl email address to Mr Fry at Cadent (copied to Ms Reisinger,
by Mr Clements), said:
I am faxing you the Exemption for foreign entities again and it does state
that there is a third party involved and we do pool funds
of other investors.
Preserved Investments Group is opening this account and Cadent will only know
Preserved Investment Group Ltd
as the only investor.
(hardly an answer likely to satisfy a query as to whether pooled funds were
being used - nevertheless the account was opened, albeit
as a pooled not
proprietary fund).
- Ms
Reisinger gives evidence (EX AO p192) that the Preserved Investments account
which was opened in about May 2005 was the first account
opened by Ms Reisinger
for Mr Hobbs with Cadent.
- Chicago
meeting July 2005
- In
Ms Reisinger's CFTC examination she gives evidence of a visit by Mr Hobbs to
Chicago in about July 2005 (Ex AO p179) and a meeting
with the Cadent, New World
and Trader View/Trader Vest executives, attended by Mr Hobbs at which there was
discussion about the opening
of accounts with Cadent and of FTC. Of the Geneva
Financial account, Ms Reisinger said:
It was opened in February of '05, I believe, and I was not made aware of it
until July of '05. I didn't even know it existed.
- Ms
Reisinger says that at that meeting Mr Hobbs explained FTC and how it worked. Ms
Reisinger's account of what was said (T 180ff)
is consistent with the
description Mr Hobbs gave at the DVD Seminar and with the accounts of the
OEM/KLM process by others (though
not by reference to the company names).
Relevantly, the understanding Ms Reisinger gained of the process was one that
limited the
sale of the financial education with the opportunity to purchase
units in an investment trust through an IBC.
- Establishment
of Good Value Fund
- The
establishment of the Good Value Fund occurred from around July 2005, following a
meeting at which Mr Hobbs made reference to a
new overseas investment
opportunity for which the vehicle was North Wave (B Moore at [52]-[53]. Mr Moore
says that he received the
documentation from Mr Collard. It was in the same form
in essence as for other schemes.
- Appointment
of Mr Koutsoukos as National Sales Manager FTC
- By
July 2005 it seems that there had been a falling out between Mr Hobbs and Mr
Diaz (Mr Hobbs in his submissions explains the reason
for this but there is no
evidence of the dispute between the two, nor any basis for concluding that it
reflected adversely on Mr
Diaz' credit in the witness box), though Mr Diaz was
still copied in on correspondence as at September 2005. In any event, Mr
Koutsoukos
was appointed the National Sales Manager of FTC at that time in place
of Mr Diaz and on 12 July 2005, he signed a document setting
out the Terms and
Conditions of his employment.
- Payment for
sale of white label funds
- Mr
Hobbs accepted in the witness box that he (and his brother) had treated the
Magny-Cours account as their personal account. Sovereign
Trust International,
however, appears to have been concerned to ensure that there was proper
authorisation for deposits into and
disbursements out of that account.
- By
email on 7 October 2005 (signed in the name of Mr Hobbs), referring to
correspondence from Ms Li, Mr Hobbs had stated that MagnyCours
did not conduct
any business. Ms Li responded as follows on 25 October 2005:
Dear David, further to your email below, our compliance officer is
questioning your comment with regards to the company not conducting
any
business. If this is the case, then please can you advise the source of funds
arriving in the account. Also I note Robert has
requested a payment to be made
for his boat canopy. In the absence of any formal agreement between the company
and Robert, there
is no commercial reason for the company to pay Robert's bills
or expenses. We suggest a consultancy agreement be put in place between
the
company and Robert. I look forward to hearing from you soon.
- Mr
Hobbs responded to that email on 26 October 2005, with regard to the payment for
the boat canopy, requesting that a consultancy
agreement be prepared between the
company and Robert. Not surprisingly perhaps, this caused some difficulty for Ms
Li, who wrote
on 1 November 2005:
In order for us to prepare such a consultancy agreement, we would need to
know what exactly is the business of the company and what
is Robert and your
role is in the company. Without a full description we are unable to prepare
same. You did mention that the company
was not doing any business but if this is
the case then where is all the money coming from?
- It
seems that it was this that led to the letter dated 3 November 2005 from or on
behalf of Mr Hobbs to Ms Penny Li (or Lee) of Sovereign
Trust International in
Hong Kong (Ex AU 5133), in which Mr Hobbs stated:
In relation to money received by Magny-Cours Ltd, it is from sale of
intellectual property personally. I am currently selling off my worldwide
contacts for the setting up of white-labelled funds, ie investment funds spread
over a blend
of registered traders and the opening of an account with a licenced
[sic] clearing house. Also this intellectual property comprises
of the clients
being able to obtain a new stripped US Treasury Bill to capital protect their
money. The client then has their own accounts with the traders clearing
house and treasury purchase of which is on-screen directly to the
clients [a
concept about which Mr Hobbs had spoken at the DVD Seminar]. While the sale is
not made in Magny-Cours Ltd name I have
had the payment transferred to
Magny-Cours Ltd account.
For the consultancy agreements for Robert and myself, together we operate
a financial education company, an international company conducting project
financing and institutional investment
for sophisticated clients. Again
there is no relationship between any of these companies and Magny-Cours Ltd.
For a consultancy agreement we would like to be able to have Magny-Cours Ltd
receive personal income and pay accounts etc .... (my
emphasis)
- Questioned
as to this in cross-examination, Mr Hobbs said that the moneys had been paid
into the Magny-Cours account at the request
of Mr Chen (and that he knew that
they had been disbursed for investment but was unable to recall anything about
the investment).
(Mr Halley points out that there was no suggestion in the
letter to Ms Li that the payment related to a sale by anyone other than
Mr Hobbs
of his intellectual property in relation to white-label funds.) The explanation
by Mr Hobbs is not consistent with the evidence
given by Mr Koutsoukos, Mr Woods
and Mr Truong regarding moneys that they understood were due by them for the
sale of funds.
- Furthermore,
the suggestion that it was Mr Chen, not Mr Hobbs, who was selling rights in
relation to a white label fund is inconsistent
with the fact that Mr Hobbs,
writing on FZF Anguilla letterhead, on 26 May 2005 had written to a Mr Raymond
Pakalns of Technocash
suggesting to him that he would be in a position to set up
a white label fund for him to "own and control". In the letter Mr Hobbs
said
that "this would enable you to develop your own funding pool using institutional
profits and offset existing interest components
as well". (In the witness box,
Mr Hobbs was unable to recall this but the letter bears his signature and a
Tasman Business Consultants
fax header imprint of that date.)
- Authorisations
re round turn commissions
- On
23 November 2005, Mr Clements sent an authorisation (Ex AU 5209) to Cadent
Financial, in his stated capacity as "Fund Administrator",
in the following
terms:
I (Preserved Investment Group) hereby authorise Cadent Financial to debit my
account one dollar per complete transaction as a transaction
fee to be paid to
David John Hobbs, as the introducer of my account (my emphasis).
The authorisation stated that it was to be effective 1 October 2005 "until
further notice". The fax header imprint is 23 December
2005 from "FTCL"
(therefore infer it was sent from Hobbs office). (Mr Clements notes this is
consistent with what Ms Reisinger said
as to round turn agreements.)
- At
around the same time pro forma typed letters were sent (with details of the
party signing the particular authorisation added in
handwriting) by Mr Guo Ping
Zhang on behalf of GP Global (dated 17 October 2005 and bearing a fax
transmission imprint of 23 November
2005 from FTCL) (Ex AU 5036) to which common
seal attached and by Mr Collard and Ms Li on behalf of Secured Bond (dated 21
November
2005 (Ex T 210) and bearing fax transmission imprints from an
Australian number and then a New Zealand number on 21 and 23 November
2005
respectively). (A similar authorisation was sent from Geneva Financial on 15
March 2006 though with different type face and
content, to which I refer in due
course Ex AU 5745.)
- Mr
Hobbs disputes the receipt of any "additional" round turn commissions (or any
round turn commissions at all).
- Mr Hobbs'
application as foreign broker to Cadent - Global Funerals
- On
29 November 2005, on the letterhead of Tasman Business Consultants "trading as
Business Solutions", a facsimile transmission was
sent to Cadent Financial in
which application was made by "David Hobbs Director" (those words inserted in Mr
Hobbs' handwriting),
whose principal occupation was said to be "Finance" (again
in Mr Hobbs' handwriting), to be paid compensation for the referral to
Cadent of
a non US person who wished to open a trading account. (Ex AU 5223). The covering
letter states "My principal business is
not the solicitation of customers or
clients for trading. However, I have referred to Cadent a non-US person who
would like to open
a trading account, and I would like to be compensated re such
referral." Attached to that letter was signed a Cadent Financial Services
LLC
Foreign Broker Execution Agreement signed by Mr Hobbs. (Ms Reisinger forwarded
this documentation by email dated 28 November
2005 to Mr Erdman of (New World
Holdings), Mr Hobbs (at nasl) and Mr Paul Fry (of Cadent) the previous day with
the comment "This
is David's FIB [which I infer to be foreign introducing
broker] paperwork".)
- The
attached 29 November 2005 Foreign Broker agreement, signed by Mr Hobbs, recited
that the foreign broker (FB) (defined in the preface
to the agreement as Mr
Hobbs, though he was defined in the agreement (Clause 1 set out the services to
be provided by Cadent with
respect to such accounts; Clause 2 the services not
provided) as the introducing broker) desires to introduce accounts (plural) "on
behalf of its customers" to Cadent "on a fully disclosed basis") and obtain
services relating to transactions in commodities, contracts
for the future
delivery of commodities, and options thereon". Clause 3 dealt with his
obligations as foreign broker.
- Clause
9 dealt with the compensation payable. During the term of the agreement, FB had
the sole right to establish commissions to
be paid to Customers (generally not
to exceed $99.00) all commissions established by the foreign broker and paid on
transactions
executed and cleared for Customers, Cadent (the futures commission
merchant) was to pay all commissions (less appropriate deductions)
"as mutually
agreed to" between Cadent and the foreign broker. Mr Hobbs provided an indemnity
in that document and signed a special
personal guarantee to Cadent.
- Mr
Hobbs places considerable weight on the opening and operation of the Global
Funerals account as providing the explanation for any
moneys received by him
from Cadent. As ASIC notes, however, this agreement was not in terms limited to
the introduction of Global
Funerals as a Cadent account, the compensation
provision referring to "funds". Furthermore, the evidence does not support any
conclusion
that trading commenced on the Global Funerals account until May
2006.
- Mr
Hobbs informed me that the account purpose was for hedging of the US dollar
against exchange movement on future sales of products
(it is not apparent that
there is any evidence of the stated purpose of these accounts). (Mr Hobbs in his
submissions gave me an
explanation for the setting up of the hedging arrangement
put in place for those companies - namely that the companies used their
own
funds that were leveraged to offset the risk of exchange movement of the sale of
products rather than purchasing expensive hedging
insurance - although again
that was a matter of assertion not evidence that was before
me.)
- By
email dated 2 December 2005 (Ex AU 300) from Mr Zhang to Mr Hobbs, Mr Zhang
forwarded a message from Ms Fitzpatrick referring to
receipt of faxes from
someone she assumed was "Lily's guy" but had not received Cadent account forms.
(I note that Mr Zhang saw fit
to send this communication also to Mr
Hobbs.)
- In
Mr Hobbs' supplementary 7 August 2012 affidavit (admitted subject to relevance)
(at [6]), Mr Hobbs deposes to discussions he says
took place in mid 2005 and
later in relation to a commercial bond raising to purchase life insurance
companies in mainland China.
Mr Hobbs deposes that he entered into agreements in
December 2005 providing for payment of fees but they were in Chinese (and he
does not have copies of them) (though they could be part of DJH10 because he
cannot read Chinese). The agreement document in Mr Chit's
affidavit is in
English.
- On
12 December 2005 a Cadent account application was signed in the name of Global
Funeral Services by Lin, Wan-Chu (President). The
copy in evidence bears a fax
transmission imprint of 28 December 2005. (Mr Hobbs seemed to rely on this date
as suggesting that Global
Funerals trading started in about late 2005 (perhaps
to explain receipt of commissions before September 2006). However, the
contemporaneous
evidence (in the form of emails from Cadent and New World
Holdings) suggests that trading only began in mid 2006 (to which I refer
shortly).
- The
evidence shows that a managed account authorisation document was signed for
Global Funerals with a particular trader (Diamond
Capital Management) on 12
December 2005. No further sub accounts were opened for Global Funerals until
June 2006.
- (As
to other Cadent account applications, I note that Mr Hobbs relies on the fact
that the opening of the Cadent account for Barclaywest
was signed by Ms Dong and
Ms Li as showing that Mr Collard had incorporated the company under the
instruction of Ms Li - a conclusion
that does not seem to me logically to follow
- and submits that he, Mr Hobbs, had no involvement in the opening of the Cadent
account
(referring to the affidavit of Ms Dong [147]-[151]). I consider this in
due course.)
Events in 2006
- Round Turn
Agreement re Geneva Financial
- On
15 March 2006 (as adverted to earlier), a similar round turn authorisation (to
those signed by Mr Clements, Mr Zhang, Mr Collard
and Ms Li) was signed on
Geneva Financial letterhead by each of Mrs Jacky Hobbs and Mrs Brenda Hobbs
(designating themselves as "Beneficial
Owner and Controller") for the payment of
a US$1.00 "round turn" (commission) "on our Geneva Financial account for
introducer David
Hobbs effective 1 January 2006 or prior").
- From
around April 2006, HelloPages Limited (a company run by Mr Parsons) commenced
work developing websites for a number of the schemes
including Integrity Plus,
Master Fund, Elite Premier Option Two Unit Trust and the Best Fund. Mr Parsons
says that he was engaged
to do so by Mr Hobbs following a meeting with Mr Hobbs
at the Nelson office in around April 2006. He described the process that he
had
followed in structuring the fund websites (after he had structured a Hobbs
website which Mr Hobbs reviewed). He deposed that
the company had always
invoiced FTC for the work in creating the fund web sites, on the instructions of
Mr Hobbs.
- Mr
Parsons exhibited to his affidavit a copy of an email of 27 June 2006 to Mr
Hobbs in which he had reported on his progress in creating
various of the
websites including the Elite Premier, Best Fund and Master Fund websites. Among
others, he developed a J&B Financial
website, on instructions from and with
information provided by Mr Hobbs, and a website for Integrity Plus.
- (Mr
Parsons explains that he subsequently signed separate web site hosting and
development agreements for each of the fund websites
with the administrators or
with Mr Hobbs - for example, at EX AD tab 26 there is a copy of a hosting
agreement for the development
of the Integrity Plus website that was signed by
Mr Wood on 9 February 2007 (it having been signed by Mr Parsons on behalf of
HelloPages
Limited on 1 November 2006).)
- I
refer later to the communications between Ms Reisinger and Mr Hobbs in relation
to the opening and operation of the various Cadent
accounts. In the context of
the present timeline, however, it is relevant to note that, as at 18 April 2006
(a time at which the
Global Funerals account had not commenced trading and seems
not yet to have been funded), Ms Reisinger had written to Mr Hobbs (via
email
addresses for both Mr and Mrs Hobbs) in relation to traders for Geneva
Financial:
David
Here are the traders you asked for for [sic] three and pick out which ones
you think are best. Keep in mind that there is no leverage
on the results so you
will need to times it by three to get results. (Ex AU 5831)
- The
suggestion that Mr Hobbs had no involvement in that process strains
credulity.
- On
28 June 2006 (Ex AU 6196), Ms Reisinger sent an email to her mother (Ms Dadey)
and Mr Hobbs in relation to "Pending Accounts",
the text of which message
read:
David - attached is a spreadsheet on the accounts and what is still remaining
to be done on them.
- The
spreadsheet showed First Secured Bond Ltd as a new account (querying whether
there was a "POA"), as well as International Management
Corporation (an IBC
established by Mr Hobbs). In relation to International Management Corporation,
Ms Reisinger advised that she
needed an official document or resolution stating
that Mr Hobbs could sign off on behalf of the corporation and she queried why Mr
Mitchell and Mr Hobbs were authorised to act with regard to the
account.
- (ASIC's
submission is that it can be inferred that the pending accounts were being
arranged directly by Mr Hobbs with Ms Reisinger.
It seems to me that such an
inference is open to be drawn. Certainly, if (as Mr Hobbs asserts) he had
nothing to do with the opening
of the Cadent accounts, this communication is
inexplicable.)
- Establishment
of 888 (Super Save) Fund
- Steps
in relation to this fund commenced in about April 2006 with the incorporation of
888 Vanuatu. The private placement memorandum
was provided by Mr Hobbs by email
sent from the "nasl" address on 2 May 2006. A revised memorandum was issued by
Mr Hobbs on 17 May
2006. (The fund was set up by November 2006 and promoted by
Mr Collard, Ms Li, Ms Wu and Mr Hobbs. (888 Vanuatu also administered
the
Pinnacle Fund that received investments from around 2007. Also in 2007, the
Enhanced Fund was set up - a Li/Collard scheme.)
- Global
Funerals account trading
- In
relation to Global Funerals Cadent account, by email of May 2006, (Ex AU 6019)
is Ms Reisinger confirmed to Mr Hobbs and Lili that
trading started "that day"
with Diamond (on the Global Funerals account). That trading account had been
opened in December 2005 (but
as at May 2006 there was no other such account).
Therefore a statement that trading had started in May 2006 makes it difficult to
accept the account had been funded at an earlier stage.
- By
email on 10 May 2006 (Ex AU 5927) Ms Reisinger had forwarded to Mr Hobbs a copy
of an email message she had sent to Mr Fry of Cadent
requesting that Mr Hobbs be
added to the list for distribution for the account statements. (Part of that
email chain was a message
from Ms Reisinger to Ms Li, referring to instructions
received from Mr Hobbs in relation to that account.)
- On
11 May 2006, Mr Fry emailed Ms Reisinger and Mr Hobbs at the "nasl" email
address saying "Congrats again on the account funding"
(Ex AU 5934). (From this
ASIC submits it should be inferred that the account had at that stage only
recently been funded. I agree.
That is consistent with the May 2006 Cadent
statements (showing a substantial amount in the Global Funerals cash account on
9 May
2006; albeit that the date on which it was deposited to the account is not
clear) and then that amount being split between two accounts
for trading in
accordance with Mr Hobbs' instructions.)
- Meeting in
New Zealand in mid 2006
- Each
of Mr Koutsoukos, Mr Truong and Mr Wood says that the three travelled to New
Zealand in around mid 2006 to meet Mr Hobbs and
that they there had a discussion
in relation to the establishment of a fund to receive investments from
superannuation funds. While
there is some inconsistency as to the timing of this
meeting, the accounts of the three are broadly consistent as to what was
discussed.
It was around that time (late July 2006) that Mr Hobbs is said to
have advised Mr Wood, Mr Koutsoukos and Mr Truong that it was necessary
to put
in place an audit entity (Diligence Discovery) for the purpose of monitoring and
reporting in relation to the superannuation
investments.
- In
cross-examination, it was put to Mr Hobbs that it was this meeting to which he
was referring when he deposed in [56] of his 3 August
2012 affidavit to a
meeting that occurred in New Zealand in about July 2006. Mr Hobbs' account of
the mid 2006 meeting is that Ms
Paulina Dabelic was present at that meeting and
that the visit was to discuss FTC's business, which he is adamant did not
include
investment of superannuation or any other funds. At the very least, Mr
Hobbs recollection that Ms Dabelic was present at the meeting
must be incorrect
if he is recalling a meeting in mid 2006, since Ms Dabelic had left J&B
Financial's offices by around February
2005. There is, therefore, a real
possibility that what Mr Hobbs recalled as a meeting to discuss FTC's business
was the meeting
in 2004 (not attended by Mr Koutsoukos) in which Mr Wood and Mr
Truong say that the Integrity Plus fund was discussed.
- Insofar
as Mr Hobbs has deposed that the four met with him in July 2006 "to discuss
Future Trading's business", he was unable to recall
precisely what had been
discussed (but thought it "would have been" production). From T 1206.50 there
was the following exchange:
Q. What future trading business do you recall that they were discussing with
you, Mr Hobbs?
A. It's 2006. I don't actually recall.
Q. Future Trading Corporation had been operating for some time with these
three gentlemen, prior to July 2006; hadn't it?
A. Yes.
Q. No reason those three go all the way to New Zealand to talk to you about
selling your financial brochures; would they?
A. Yes.
Q. Can you give any explanation for what they were doing, as you say, talking
in New Zealand to discuss future tradings business in
July 2006?
A. We'd probably been discussing what the production was.
Q. You see, you don't remember any discussion about future tradings business
with any of Mr Truong, Koutsoukos and Mr Wood in July
2006 at all; do you?
A. No. That's not entirely correct.
Q. What did you discuss with them about future trading in July 2006 in New
Zealand?
A. We [w]ould have discussed production.
- (Mr
Hobbs' use of the expression "would have" seemed to indicate that he did not
have a precise recollection of this, consistent with
his initial answer that he
did not "actually recall" what was discussed.) The cross-examination
continued:
Q. You said "we would have"; do you have any recollection of discussing it
with them?
A. We would have and I would have discussed production.
Q. You aren't able to say what you discussed because you don't remember
discussing it with them, do you, Mr Hobbs?
A. That's not true.
Q. You said a couple of minutes ago you don't recall any discussion about FTC
in July 2006 with the three of them, didn't you?
A. You drew my attention to the line, paragraph. And yes, that's what the
discussions would have been about.
Q. But you don't remember what it was; do you?
A. We would have discussed production.
Q. You're using the expression "would have", do you have any recollection of
discussing future trading business with the three of
them in July 2006?
A. It would have been about production.
- By
email on 17 May 2006 (EX AU 5956), (the metadata for which discloses that it was
sent by email from the "nasl" email address from
Mr Hobbs), a "Supersave revised
version doc" was attached and "blind copied" to each of Mr Truong, Mr Wood, Ms
Li and Mr Koutsoukos.
It seems reasonable to infer that this was a revised
version of an earlier Super Save private placement memorandum or investment
contract template (or perhaps both). That is consistent with Mr Koutsoukos'
evidence that in mid 2006 Mr Hobbs attended the offices
in Burwood and provided
amendments to a memorandum to be used for the Super Save fund.
- Given
that: a company (Diligence Discovery) was set up in New Zealand in late April
2006, which then was used to perform monitoring
services in connection with the
superannuation investment fund (Super Save) and another fund (888 (Super Save)
Fund); that the Super
Save fund (offering opportunity for investment of
superannuation funds) was set up at around that time; that Mr Hobbs'
recollection
of a meeting with Ms Dabelic would place the meeting to which he
was referring as sometime before February 2005; and that if, as
Mr Hobbs
suggests, the topic of discussion at the meeting was "production", that seems
more likely to have been dealt with at an
earlier stage in the business of FTC
rather than to have required a trip to New Zealand in mid 2006 (when the 3
persons involved
in J&B Financial had been FTC executives and the Integrity
Plus fund had already been up and running for some time), it seems
to me likely
that there was a meeting with Messrs Koutsoukos, Wood and Truong in mid 2006 in
which the proposal for a new superannuation
investment fund was discussed. In
other words, the account given by Messrs Koutsoukos, Wood and Truong of this
meeting fits more
readily with the chronology of events discernible from the
contemporaneous documents than does Mr Hobbs' account of the
meeting.
- Certainly,
from around August - November 2006, Diligence Discovery seems to have undertaken
responsibility for the provision of monitoring
and reporting services for the
benefit of Super Save investors (from 1 August 2006) and 888 (Super Save) Fund
investors (from November
2006). (In evidence was a copy of an agreement dated 1
August 2006 between Diligence Discovery and 888 Vanuatu in that regard Ex
AG tab
48.)
- The
role of corporate administrator for Super Save was one that passed through
various corporate hands. Initially, it seems that the
administrator was 888
Turks & Caicos (an entity which was incorporated as an IBC in the Turks and
Caicos Islands). (ASIC contends
that from July to November 2006, 888 Turks &
Caicos acted as Super Save trustee and 888 Management Australia acted as the
agent
of 888 Turks & Caicos. On 26 June 2006, 888 Management Australia was
incorporated in New South Wales.)
- Mr
Truong deposes (at [319]) that in August 2006, on a visit by Mr Hobbs to the
Burwood office, Mr Hobbs directed that the name 888
Turks & Caicos be
changed as it was too close to "a company I've already got". (While that is
consistent with the existence by
this time of other 888 Management Inc
companies, this might perhaps be thought not likely to have troubled Mr Hobbs,
since there
were other companies with the same or similar names by that time or
thereafter). In any event, I accept that Mr Truong understood
from Mr Hobbs that
there was a need to change the company name from 888 Turks & Caicos.
- ISPL
was incorporated in New South Wales on 28 September 2006 (with Mr Truong as the
sole director and shareholder). From October
to December 2006 ISPL seems to have
acted as the trustee or administrator of the Super Save Fund. So for example, on
3 October 2006,
a Cadent Agreement for ISPL was signed by the J&B Financial
officers and on 4 October 2006, ISPL opened two separate bank accounts
for Super
Save with ANZ in Australia.
- From
around mid 2006 the promotion of Super Save to investors commenced. Mr
Koutsoukos and Mr Wood both say that there was a training
seminar conducted by
Mr Hobbs in relation to Super Save with about 15 FTC executives.
- Update to Mr
Hobbs on NCCN account with Cadent
- By
email on 26 June 2006 (Ex AU 6177) Ms Reisinger wrote to Mrs Hobbs and Mr Hobbs,
stating "I wanted to update you as to progress
on several fronts". This event
referred to Lili's accounts (noting that "We were able to return profit to
Global Funeral Services
this month", the rest of the traders were on trading and
she had another trader she would like to put in the blend) and to Geneva
(saying
that she would start Diamond trading again and "I will check on your round turn
commissions for that account. Jacky informed
me that you had not got that on
this account") and NCCN LLC profit ("We did get buy/sell done and I have sent
profit to Don...").
- ASIC
contends that this constitutes a report to Mr Hobbs concerning the operation of
the NCCN account and confirming that a profit
that has been derived on that
account and sent back to Mr Caffray. (In passing I note that in her CFTC
examination Ms Reisinger referred
to a visit by Mr Hobbs to Chicago in 2006 in
which she says that Mr Hobbs met with officers of Cadent and talked about having
introduced
several accounts to Cadent and the possibility of other arrangements
with Cadent (Ex AO p16).)
- Mr
Hobbs tendered in evidence a copy of a document signed by him on 9 June 2006 for
First Zurich Financial Ltd (which I had assumed
must have been a reference to
FZF Anguilla, since FZF Vanuatu had not then been incorporated, although the
document does not make
that clear and I note that in Mr Hobbs' evidence in the s
10 examination in New Zealand, to which Mr Hobbs was taken in cross-examination,
he said that the Global Funerals transaction was through FZF Vanuatu).
- The
document relates to a proposed Commercial Bond transaction involving a Taiwanese
company (Global Funeral Services Co Ltd). Mr
Hobbs, in his defence, read an
affidavit sworn by a Mr Chau Chung Chit on 6 August 2012 in which Mr Chit, whose
occupation is not
identified, explained the steps taken to obtain a copy of what
he describes as "the original Contract and a copy of the original
Confidentiality and Non-Circumvention Agreement documents between Global Funeral
Services Co Ltd of Taiwan and First Zurich Financial
Ltd, David John Hobbs and
Tasman Business Consultants Ltd of New Zealand".
- The
annexed contract appears not dissimilar (in its layout or format) to some of the
investment contracts entered into between corporate
administrators and investors
in schemes the subject of the proceedings. It was signed for FZF on 9 June 2006.
The agreement on its
face relates to the facilitation of a commercial bond in
mainland China, the facilitator being defined (collectively) as First Zurich
Financial Ltd, David John Hobbs and Tasman Business Consultants Ltd and the
company "wishing to effect the listing of the Commercial
Bond being Global
Funeral Services Co Ltd".
- The
facilitator was to arrange the supply of US Treasury Notes as a backing to the
commercial bond offering. The funding purpose was
stated to be the acquisition
of a shareholding in a life insurance company in mainland
China.
- The
projected funding to be raised was US$150 million. Commission was to be 1.5% of
that amount (US$1.5m). The fee payer agreed to
invest $US 20m "minimum" in a
futures trading investment via Clearing House Cadent Financial Services LLC and
(despite the success
or otherwise of the listing of the commercial bond) that
amount was to be used "for the payment of fees". All profit generated from
the
invested amount was to be payable to the facilitator and not refundable.
Commission and fee payments were to be paid "to the
Secured Bond/Master Fund
account" for the facilitator and commission payments were to be "administered"
by Ms Li of Secured Bond.
- A
Confidentiality and Non-Circumvention Agreement was entered into by the same
parties (and, in the case of Global Funeral Services
Co "other associated
Companies"). This agreement refers throughout (in one might be forgiven for
thinking was unnecessary repetition)
to "highly sensitive" and confidential
information and "highly sensitive commercial business relationships" and a
"highly sensitive
commercial transaction".
- Insofar
as Mr Hobbs has placed emphasis on his involvement with Global Funerals, Mr
Halley made clear that ASIC does not suggest that
Global Funerals was illusory
or did not exist, nor that it did not have an account with Cadent, nor does it
suggest that every payment
made into the Business Solutions accounts from Cadent
or otherwise was from the schemes that are the subject of these proceedings.
However, it is submitted that to the extent that Mr Hobbs has maintained that he
at no time received any commission with respect
to any of the scheme
corporations (and that all the commission he received was from Global Funerals
with the exception of payment
of rent by Mr Clements), this is inconsistent with
the evidence (to which I was taken in some detail by Mr Clarke). I accept that
submission for the reasons set out later when dealing with the issue of
commission.
- By
email on 11 August 2006, addressed to "Lilli and David" (at various email
addresses, including for David Hobbs at nasl and Mrs
Hobbs), (the reference
being to "Global Funeral and Secured Bond"), Ms Reisinger referred to
discussions with Mr Hobbs not just in
relation to Global Funerals but also
Secured Bond (about which she referred to David being excited and asked him to
fill in all the
gaps for Lilli on the trader in question (Chuck
Reeder)).
- Renewal of
registration of OEM
- Prior
to August 2006, each of OEM and KLM had been struck off the register in Anguilla
for non-payment of registration fees. On 2
August 2006, following an email to Mr
Hobbs confirming the companies had been struck off, Mr Hobbs sent an email to Mr
Mervyn Esdaille
of First Anguilla Trust Company Limited, instructing Mr Esdaille
that OEM and KLM should be revived and that "Beneficial owner will
be Ms Li". Mr
Hobbs forwarded that email to Mr Wood (consistently with the evidence of Mr Wood
that he was responsible for dealing
with renewals of all IBCs incorporated in
Anguilla). (Ex F (tab 52) to Mr Diaz' affidavit is a list of the IBCs maintained
by Mr
Wood.)
- Mr
Hobbs maintained in his submissions that the reason for the revival of the
registration of OEM/KLM was that Ms Li had asked him
whether she could use those
companies. (Interestingly, given Mr Hobbs' denial of knowledge as to the OEM/KLM
process or the ownership
of OEM/KLM, if Mr Hobbs' account of the reason for the
revival of registration of those companies is correct then not only did Ms
Li
seem to have some basis for thinking that Mr Hobbs was the one who would be in a
position to revive the companies but also he
took it upon himself to do so.
Furthermore, there was no suggestion that this was something that required
approval from Mr Chen or
any other beneficial owner of the companies, and is
inconsistent with Mr Hobbs assertion at the DVD Seminar that Mr Parker was the
beneficial owner or a beneficial owner of KLM.) There is nothing other than Mr
Hobbs' assertion, other than whatever inference might
be drawn from the
nomination of Ms Li as beneficial owner, to suggest that the reason for revival
of the companies was something
that had nothing to do with Mr
Hobbs.
- Issues
concerning the operation of the Cadent accounts
- In
August 2006, an issue arose within Cadent as to a number of small transfers of
funds that had been made direct from 888 Turks &
Caicos (the 888 Management
Inc entity operated by the J&B Financial officers) to the Cadent account
(the concern apparently being
that this would trigger a review of its operations
or would breach anti-money laundering requirements in the US).
- The
General Counsel at Cadent (Ms Cheryl Fitzpatrick) sought information (as to what
accounts the 6 wires were from, the owners of
the accounts, whether commission
was paid on the accounts and other information that was sought by Cadent in
relation to due diligence
on those accounts) from Ms Reisinger who (tellingly)
then conveyed that query to Mr Hobbs.
- Responding
to that query, on 2 August 2006, there was an email from the Tasman Business
Consultants "nasl" email address to Mr Dennis
Reisinger (the husband of Ms
Reisinger) (Ex AU 6448). That email was copied to each of Mr Wood, Mr Truong and
Mr Koutsoukos. Mr Hobbs'
email of 2 August 2006 to Ms Reisinger (signed DJ Hobbs
ISF) referred to an email of the same date from 888 Turks & Caicos (in
which
to 888 Turks & Caicos sought to prove that the money came from its
Australian account and had stated that the wire transfers
were sent separately
"to allow for in-house accounting"). Similarly, there was a document from "DJ
Hobbs ISF Consultant" on FZF Anguilla
letterhead to Ms Cheryl Fitzpatrick-Smith
(there described as the General Counsel at Cadent so presumably the same person
as Ms Fitzpatrick)
in relation to 888 Turks & Caicos, stating that the
reason for the 6 wires was:
...under instructions from myself as to diligence company set up to
oversee all transactions should 888 Management Inc Australia draw money from one
account to their
wiring account it must be reported and wired separately with
the copies forwarded to the diligence company for auditing, while this
process
may seem overzealous it does give a very thorough check as to bank transfers and
purchase of treasury notes for each transfer.
(my emphasis)
[I also note the similarity with the language used by Mr Hobbs in the DVD
Seminar and the suggested response provided by Mr Hobbs
to the enquiries made
via Mr Gahan by Mr Morris Fink, in relation to the zealous nature of the
checking said to be carried out in
relation to the investments]
- On
11 August 2006 there was a letter (seemingly issued after Mr Hobbs had already
responded to Cadent in relation to the query) on
the letterhead of FZF Anguilla
(signed by Mr Hobbs as consultant) to J&B Financial, restating the request
for information as
to the accounts and ownership of the accounts (but not the
request as to the due diligence that had been carried out). (The use of
FZF
Anguilla letterhead is somewhat ironic since, from 21 July 2006 it seems that
this company had itself been struck off the relevant
company register.)
- Queries as to
Mr Hobbs' application for registration as a foreign broker with
Cadent
- I
have noted above that on 29 November 2005, Mr Hobbs had made an application for
compensation as a foreign introducing broker to
Cadent. (Although noted by Ms
Reisinger on New World Holdings' records that he was the foreign introducing
broker on all the scheme
accounts with Cadent, this was the first and only
occasion when Mr Hobbs formally applied for registration with Cadent as a
foreign
broker entitled to receive compensation for the introduction of a non US
person account.) It seems that subsequently there were queries
raised as to
aspects of that application or at least that further information was required
since on 23 August 2006, Ms Reisinger
sent an email to Mr Hobbs (and to Ms
Fitzpatrick, Ms Dadey and Mr Erdman) attaching a foreign broker checklist that
had been forwarded
to her by Ms Fitzpatrick at Cadent setting out "the
information we are looking for in a letter from legal counsel for the foreign
broker". Attached was the "IB profile that we require of all foreign brokers"
(Ex AU 6659, 6660, 6662).
- Promptly
in response to the queries that had been raised by Cadent, Mr Bellamy wrote on
the letterhead of Fletcher Vautier Moore to
Ms Fitzpatrick (on Mr Hobbs' behalf)
on 25 August 2006, setting out his opinion as to various matters related to the
foreign broker
application by Mr Hobbs.
- By
letter dated 1 September 2006, Ms Fitzpatrick responded to that letter (which
she described as addressing "registration issues
pertaining to Mr Hobbs")
(Exhibit AU 6739). This letter was forwarded by Ms Reisinger to Mr Hobbs at the
"nasl" email address on that date as being
the "letter I was talking about for your attorney to answer to Cheryl" (Ms
Reisinger thanking Mr Hobbs
for his "continued business and support", thus
indicating that Mr Hobbs had had some business with Ms Reisinger prior to the
issue
arising as to his registration as a foreign broker entitled to
compensation from Cadent - of relevance in light of Mr Hobbs' submission
that
his only business with Cadent was in relation to the Global Funerals account,
funding for which arrived in around May 2006,
and the two mainland China
accounts.)
- Ms
Fitzpatrick's letter opened with the statement that "we are looking forward to
establishing and further developing a relationship"
with Mr Hobbs. (At least by
the reference to "further developing" this suggests that there was an existing
relationship of some kind
with Mr Hobbs, though this seems inconsistent with the
reference to "establishing" a relationship). In that letter Ms Fitzpatrick
sought to ascertain "more about the regulations potentially applicable to David
John Hobbs in relation to commodity futures accounts
being introduced to Cadent
by Mr Hobbs".
- Ms
Fitzpatrick posed three "follow-up questions", stating her understanding
that:
1.We understand that Mr Hobbs develops educational material pertaining to
investing in scurities [sic] and futures, including a periodic
newsletter, and
that he distributes these to subscribers who pay for the materials. ...
2.We understand that Mr Hobbs assists persons in forming corporations or
other entities in various jurisdictions, and understand some
of the accounts
which he is introducing are formed by the aggregating of funds from multiple
investors (pooling) or by the purchase
of interests in unit trusts.
- As
to the first activity, Ms Fitzpatrick wished to know if it required registration
or licensing in New Zealand as a securities investment
adviser or commodity
trading adviser "or in any other capacity (like personal financial planner)"
and, if so, what registration or
licence was required (or, if not, what the
registration or licensing requirement was for investment or trading advisers in
New Zealand
and how Mr Hobbs' activities were excluded or exempted from the
requirement. Clarification was also sought as to whether Mr Hobbs
currently
received any direct or indirect compensation from this activity on a transaction
basis.
- As
to the second activity, Ms Fitzpatrick whished to know whether Mr Hobbs'
activities in assisting investors in forming entities
and possibly pooling money
and offering unit trust investments were subject to regulation in New Zealand
and if so what that regulation
was (and if not what it was about Mr Hobbs'
activities that prevented them from being subject to the regulation), Ms
Fitzpatrick
having noted that in the United States activity of the nature
described in 2 above could be construed as selling securities.
- As
to the 3rd question, Ms Fitzpatrick considered that the earlier response from Mr
Bellamy was confusing (in that it said there was
no registration required to
solicit and conduct futures business but also said that the law required
appropriate authorisation for
futures dealers). Ms Fitzpatrick
asked:
3....whether, if Mr Hobbs solicited or referred customers from New Zealand to
trade futures on US markets, and is paid for such solicitation
or referral (and
how such compensation is being paid), he is required to have any license,
registration or authorisation in New Zealand.
If so, please let us know what
that requirement is, and id not, please explain how Mr Hobbs is excluded or
exempted from whatever
requirement exists.
- By
letter dated 14 September 2006 (Ex AU 6810), Mr Bellamy responded to that
further query. In summary, as to the first question,
he stated (somewhat
surprisingly if this is meant to suggest that no qualifications whatsoever were
necessary for that role) that
in New Zealand "anyone can be an investment
adviser" (but went on to qualify the breadth of that statement by linking it to
the fact
that there was no need for any "special qualification" or for
investment advisers, other than share brokers, to be licensed). Mr
Bellamy noted
that all investment advisers were required to comply with specified disclosure
legislation. He went on to say in the
second paragraph of
[1.4]:
As I understand it the educational material produced by Mr Hobbs is generic
in nature without making specific recommendations in respect
of any particular
investment or organisation in which to invest. Similarly the newsletter does not
make specific recommendations,
but even if it did, the fact that this advice is
being passed on in writing does not require the investment adviser to be
licensed.
This does not change even should the subscribers to the educational
material and newsletter pay a subscription fee.
- As
to the second query in relation to the aggregation of funds, Mr Bellamy
said:
2.1 The basis process that has been discussed with me is that Mr Hobbs
has around Australia, the United States and England various investment
advisers. These advisers qualify investors and refer them to Fund Managers.
The investor enters into a contract with the fund and the fund
invests money in
the futures market through Cadent. (my emphasis)
(Pausing there, the people whose role it seems was to "qualify" investors and
refer them to fund managers were Mrs Watson and Mrs
Burnard, who would hardly be
aptly described as "investment advisors" around Australia, the United States and
England and who seem
to have disclaimed any such role in the witness box.)
- Mr
Bellamy's opinion was therefore based on what he was told in the discussions
referred to in the above paragraph. (Furthermore,
in the context of the Cadent
accounts, the letter proceeds on the basis that investment has already occurred,
not simply being a
prospective or potential activity.)
- Mr
Bellamy concluded [at 2.2] that:
Therefore Mr Hobbs and the people and corporations to which he is
affiliated would all be operating outside of New Zealand and no funds will be
solicited
within New Zealand. Assuming these circumstances to be true, I do
not think the laws of New Zealand would apply to Mr Hobbs in respect of these
matters,
as all the transactions occur outside the jurisdiction.
- Neither
of the assumptions on which Mr Bellamy's advice was predicated seems to be
sustainable on the facts of this case, insofar
as Mr Hobbs (and at least those
FTC executives based in New Zealand) acted in New Zealand as introducing brokers
for investment in
various of the investment schemes (whether that investment be
truly an investment by the offshore IBC or whether in truth it was
an investment
by the individual associated with the IBC) and accepted funds into accounts in
New Zealand for investment in various
of the investment
schemes.
- After
giving some advice as to the extreme width of the definition of "security" in
New Zealand, at [2.4] Mr Bellamy summarised his
opinion as being
that:
...Mr Hobbs' activities are not regulated in New Zealand because -
(a)the activities are taking place outside the jurisdiction; and
(b)while Mr Hobbs is associated with various entities and companies, his
involvement with the whole process is too far removed for
the regulatory duties
or requirements that attach to the investment activities to apply to him.
- At
section 3 of his advice, Mr Bellamy clarified the confusion that had arisen from
his earlier letter and expressed his understanding
that Mr Hobbs would only have
to be an authorised futures dealer if he were actively involved on behalf of the
investor in the conduct
of futures trading as set out in [3.2(a), (b) and (c)]
of his advice. He stated the opinion that:
3.6Given that Mr Hobbs only gives generic advice about the futures market,
does not qualify the investor as a sophisticated investor,
is not a Fund Manager
and may never meet or ever speak to the investor, it is my view that it cannot
be said that he deals in futures
and accordingly he does not need to be an
authorised dealer as defined by the Securities Markets Act 1988.
- Mr
Bellamy again stated his view that Mr Hobbs was not soliciting funds in New
Zealand in support for the conclusion that the Securities
Markets Act 1988 and
regulations relating to the solicitation of funds to be put on the futures
market did not apply. (Reliance is
placed by Mr Hobbs on this advice in the
context of Mr Hobbs' submission as to the reasonableness of his opinion in
relation to the
legality of what he was doing.)
- An
indication of the instructions on which Mr Bellamy's advice was given is
provided in Mr Hobbs' email to Ms Reisinger on 12 September
2006 (Ex AU 6800),
in which he said "These are the answers that I sent to the
lawyer":
Dear Phil
1.Financial Education, this education does not offer or sell investment nor
give financial advice. The material does not name any
institution or product.
Financial education that does not offer or sell investment nor give financial
advice does not require any
regulation. Mr Hobbs does receive remuneration from
the sale of subscriptions as the International Sales Manager.
2.Mr Hobbs does not assist in the forming of international companies. This
activity is conducted by an independent company that has
no relationship with Mr
Hobbs.
3.Mr Hobbs does not solicit or receive commission to trade futures
- Ms
Reisinger considered that response "perfect except for the 3rd answer" noting
that "I am sending you commissions off of [sic] futures
business which according
to our lawyer is legal for me to send to an offshore party. What they need to
know is how does NZ authority
view that". (Relevantly, in the context of Mr
Hobbs' submissions that the requirement for incorporation of IBCs was a
requirement
imposed by Ms Reisinger, this email does not suggest that the
investment through Cadent's accounts be in the name of an IBC nor even
that
commission could be paid only to an IBC; rather it focusses on whether the
recipient of the commission is offshore.)
- For
completeness, I note that after the conclusion of the hearing Mr Hobbs forwarded
material (by email on 13 September 2012) apparently
in support of some of the
oral closing submissions he had made as to the characterisation of some of the
payments shown to have been
made out of some of the investment schemes,
including material in relation to the a company by the name of Legend Services
Ltd. (ASIC
contends that this material is not in evidence and there is no
suggestion to the contrary by Mr Hobbs). As I understand it, Mr Hobbs
wishes to
rely on those documents to show that Legend Services Ltd (a company apparently
incorporated in New Zealand on 17 October
2006, the company secretary of which
was recorded as Mr Lewis Brock and Mr Hobbs) was a company in which J&B
Financial Group
was a shareholder. Included in the material was a shareholders'
consent form for Legend Services Ltd (apparently signed by Mr Wood
in the stated
capacity of director and member). Mr Hobbs submits that $20,000 was wired to
Fletcher Vautier Moore "for the shareholding
in this company".
- The
material forwarded by email after the close of the hearing is not in evidence.
To the extent that this represented some form of
informal (and unstated)
application to reopen the hearing to admit such evidence, I reject it. ASIC did
not have an opportunity to
test that evidence in any way and its relevance seems
to be limited to the characterisation of a payment of $20,000, which, in the
scheme of things, is not material to the determination of the issues in the
proceedings.
- KLM invoice
for acquisition of IP re clearing house account
- On
1 November 2006, Mr Koutsoukos and Mr Truong signed (for J&B Financial) a
Deed Poll (apparently by way of acceptance of the
invoice appearing on that
document) a document on KLM letterhead (that letterhead identifying KLM as an
entity in Nassau, the Bahamas
- the letterhead also stating the disclaimer that
KLM "is not an investment company" and "is an information company") in relation
to the payment of a sum of AU$200,000 said to be "Due for the facilitation and
the opening of a clearing house account using intellectual
property" and said to
be "payable immediately" (Ex AU 13514).
- Payment
for the above amount seems to have been effected by the transfer by PJCB on 6
November 2006, of US$200,000 to the J&B
Financial Technocash account and
then the transfer on 8 November 2006, from J&B Financial's Technocash
account of that amount
to Magny-Cours.
- On
10 November 2006, Mr Robert Hobbs wrote to Ms Penny Li at Sovereign Trust (Ex AU
7489), (the document bearing a fax transmission
imprint showing that it was
received from FTCL), advising that a deposit of $200,000 was being made to the
Magny-Cours bank account
and that:
This payment is made by J&B Financial Group Pty Ltd who have purchased
the intellectual property rights to open an institutional account with Cadent
Financial Services LLC, Chicago USA. (my emphasis)
- Further
Cadent account application
- On
7 November 2006, Mr Mitchell sent to Ms Reisinger an account application for
Cadent in the name of International Management Incorporation.
The application
was signed by Mr Hobbs as "beneficial owner of International Management
Incorporation". (Again, this is inconsistent
with Mr Hobbs' assertion that he
did not sign any Cadent account documents.) Mr Hobbs also gave a personal
guarantee in that document
in favour of Cadent and signed to the statement that
there had been a directors' resolution of the company authorising him to act
as
signatory to the Cadent account in all manners required.
- By
email dated 16 November 2006 (Ex AN) Mrs Burnard, on the letterhead of Diligence
Discovery, wrote to Mr Truong, Mr Wood, Mr Koutsoukos
(and Ms Trinh) attaching a
"T-bill Purchase Check doc". The letter relevantly, noted:
Have been talking to Suzanne this morning and she is going to run my
letter from the accountants past David as soon as she can.
Please find attached advise [sic] for clients. I would like to get this off
today if possible to keep them in the loop. [my emphasis]
- The
attached draft standard form letter referred to a T-bill purchase and
said:
The Clearing House statement has arrived showing receipt of your funds.
Diligence Discovery Ltd is aware you will require documentation and is
currently seeking advise [sic] on how to release this to you.
- Mrs
Burnard was unable to say in the witness box what a clearing house was and says
she did not know at the time (T 409).
- Amendment to
Super Save private placement memorandum
- In
late November 2006, correspondence was received from Cadent requiring the
removal of Cadent's name from the memorandum for the
Super Save fund (Mr
Koutsoukos [851]). By letter dated 21 November 2006, Ms Fitzpatrick, the General
Counsel of Cadent, wrote to
Mr Koutsoukos, Mr Truong and Mr Wood as to the use
of Cadent's name (Ex P 248/249; Ex A 52/53). Mr Hobbs also communicated in
relation
thereto. (This is an instance of Mr Hobbs' involvement in the ISPL
Cadent account, not explicable on Mr Hobbs' version of events.)
- Agreements
with New World Holdings
- By
agreement dated 21 December 2006 (Ex AU 8166), signed by Mr Hobbs, there was
recorded an agreement between Mr Hobbs "d/b/a Business
Solutions (a New Zealand
proprietorship)" and New World Holdings LLC. (It bears a fax headed imprint
Tasman Business Consultants
25 January 2007.) That agreement stated (in what
appear as paras [A] and [B] of the "Statement of Background") that Business
Solutions
wished to provide account introduction services to New World Holdings
and that the latter wished to compensate Business Solutions.
(Mr Hobbs points
out that the copy of the agreement in evidence was not signed by New World
Holdings. While that might well go to
its enforceability as between Mr Hobbs and
New World Holdings, for present purposes it is relevant to note that Mr Hobbs
admits he
signed a document to the effect there contained.)
- The
agreement provided:
1.Business Solutions Services
Services to be provided by Business Solutions under this Agreement shall
consist of (a) introducing potential brokerage accounts to
NWH and (b)
consultation in connection with the foregoing. [It went on to note that Business
Solutions may engage employees agents
independent contractors "including Jackie
Hobbs" to assist it in generating the introductions referred to in this
Agreement
2.Compensation
Compensation will be paid to Business Solutions only on accounts which NWH
acknowledges in writing as having been introduced by Business
Solutions prior to
generation of commissions. NWH shall pay Business Solutions one third of net
commissions that would be otherwise
paid to Lisa Reisinger on such accounts.
Commissions will be paid by 15th day of month following the month in which the
commissions
were generated.
- The
agreement contained (in 3(b)) a representation and warranty by Business
Solutions to NWH that Business Solutions would carry on
its business as an
independent contractor and not as an agent or employee of NWH. 5(d) provided
that neither the agreement nor the
provision of services thereunder was to be
construed as creating a joint venture or partnership between the
parties.
- An
agreement in what seems to have been almost identical form (though the copy in
evidence was incomplete and, relevantly, was missing
the page on which, on Mr
Hobbs' version of the document, the compensation clause had been) was signed by
Mrs Hobbs (again described
as "d/b/a Business Solutions"). That agreement
include provision for Mrs Hobbs to engage the services of independent
contractors
"including David Hobbs". The agreement was dated 3 September 2007
and signed by Mrs Hobbs (and by New World Holdings' President (Mr
Erdman) on 25
September 2007 (Ex AU 9997). An unsigned copy of Mr Hobbs' agreement is Ex AU
5518 (containing the missing second page).
- Ms
Reisinger's explanation for the two agreements was that they were not cumulative
but that the agreement with Mrs Hobbs was to enable
her to receive commission in
place of Mr Hobbs if anything happened to him.
Events in 2007
- Mr Hobbs'
February 2007 advice to FTC Executives
- By
letter dated 27 February 2007, signed by Mr Hobbs on FTC letterhead and
addressed "To Whom It May Concern", Mr Hobbs issued a notice
in its terms
directing that the message that FTC did not sell investments was to re
reinforced. Given that this letter was sent or
given to Ms Xu, who was not an
FTC executive (and could not read English anyway), I would infer that this was a
standard form letter
sent to FTC subscribers. It stated:
I have received two phone calls to the Nelson office recently. Stating that a
friend referred this person to myself, and the friend
had an investment, and
this person wished to make an investment.
To both calls I explained Future Trading Corporation Ltd does not sell
investments or have investments.
On both occasions the caller has asked for Future Trading Corporation Ltd
website, and would not provide any personal details, this
seems unusual. I
replied Future Trading Corporation Ltd does not sell or have investments.
Could we please reinforce to any person we speak to, Future Trading
Corporation Ltd does not sell investments or give any form of financial
advice.
OEM Ltd the company that owns Future Trading Corporation Ltd is concerned
that subscribers or potential subscribers may be misinformed
as to the
subscription of financial education Future Trading Corporation Ltd provides.
(emphasis in original)
- There
is nothing to suggest that anyone other than Mr Hobbs was responsible for this
missive. There is no communication to Mr Hobbs
or FTC, for example, from someone
at OEM expressing concern about the events mentioned (nor of Mr Hobbs informing
any of the people
he says were the overseas owners of OEM of the communication).
At the very least this suggests that Mr Hobbs saw himself as able
to speak for
OEM.
- On
22 March 2007, a company by the name of First Zurich Financial Ltd was
incorporated in Vanuatu by Ms Dong and Ms Li (see Ms Dong's
affidavit
[58]-[59]). Ms Dong says that this followed communications in 2006 between
herself, Ms Li and Mr Hobbs [53]-[56]. Ms Dong
says that she completed an
application form provided to her by Ms Li who said Mr Hobbs would open the bank
account. Ms Dong says
that she understood the forms were to be sent to Moores
Rowland in Vanuatu by Ms Li [59]. Ms Dong did not pay for incorporation of
company.
- Mr
Hobbs, in cross-examination, said he was the owner (or beneficial owner) of FZF
Vanuatu on the basis that it was incorporated for
him (T1385.12-14 ff
[34]-[37]). After Ms Dong ceased to be the administrator of that company, he
assumed the role (and issued a proxy
in August this year as "authorised officer"
of the company for the purposes of a liquidators' meeting (though in
cross-examination
he said that was a mistake and he had signed the proxy without
looking at it).
- Further
amendment to Super Save documents
- On
21 April 2007, an email was sent from Mr Hobbs' office to each of Mr Wood, Mr
Koutsoukos and Mr Truong attaching details in relation
to Super Save and on 17
May 2007 revised documents re Super Save were forwarded.
- Mr
Koutsoukos gives evidence as to the circumstances in which ISL was incorporated
(from [969]). Mr Koutsoukos deposes that in about
early to mid 2007 he had a
meeting with an accountant, Mr Papaioannou, in which the latter told him
(complete with expletives) that
as he had over 20 investors (presumably
referring to the J&B Financial funds) Mr Koutsoukos was breaking the law. Mr
Koutsoukos
said that he passed this on to Mr Hobbs and that, at a subsequent
meeting between Mr Hobbs, Mr Papaioannou and the J&B Financial
officers, Mr
Hobbs told them to close the bank account, set up an IBC, "get all the
memorandums off the clients and get them all
re-signed". This provides an
explanation for the establishment of ISL (and there is evidence from Mr
Koutsoukos and others, including
investors, as to the re-signing of contracts
that had been in the name of ISPL to corroborate Mr Koutsoukos' evidence in that
regard).
Mr Wood also gives evidence that the change of administrator/trustee of
the Super Save fund to ISL was because Mr Hobbs said that
the company had to be
incorporated offshore. (On 2 April 2007, ISL opened an account for Super Save
with Technocash.)
- 2007 meetings
in Miami/Chicago
- In
April 2007, Mr Koutsoukos, Mr Truong and Mr Wood travelled to Miami and Chicago.
Various others (including Mr Hobbs, Mr Collard,
Ms Li, Mr Stanton and Mr
Clements) were in attendance at one or more of the meetings on that trip.
Relevantly, there was what was
described as a due diligence seminar in Miami; a
visit to Cadent's office in Chicago; and a meeting with traders of Cadent. Much
weight is placed by Mr Hobbs on the inconsistent accounts of what, if anything,
was said by the traders as to their returns (when
making submissions as to the
credibility of the evidence given by Mr Koutsoukos in particular). I consider
these in due course. I
note, in passing, that neither Mrs Hobbs nor Mrs Brenda
Hobbs attended these meetings with traders.
- Research
reports agreement
- At
some time in mid to late 2007 an arrangement was put in place whereby payment of
a monthly US$600 fee was to be made to Mr Hobbs
(or to the joint account of Mr
and Mrs Hobbs) by New World Holdings as a fee said to be referable to the costs
of distribution of
"research reports" containing material prepared by the Cadent
traders to the corporate administrators. New World Holdings charged
the fee to
the corporate administrators and then was to pay that monthly amount to Mr
Hobbs. The first such payment was made in September
2007.
- Transfer of
shares in Barclaywest to International Management
Incorporation
- Notwithstanding
that on 4 May 2007 International Management Incorporation had been struck off
the register in Vanuatu, on 28 June
2007 Mr Hobbs transferred his 26 shares in
Barclaywest to International Management Incorporation.
- Later,
on 27 August 2007, Mr Hobbs signed a temporary contract for Pinnacle Fund
purportedly on behalf of International Management
Incorporation (Ex AU 9845),
the address of International Management Incorporation being noted as the same as
that for the registered
office of Tasman Business Consultants. (The 888 Vanuatu
business records - Ex AU 207 - show Mr Hobbs as the administrator of
International
Management Incorporation). (I note that Ms Wu referred in her
submissions to a "temporary" contract she witnessed for the Pinnacle
Fund.
Extraordinarily, that temporary contract states an agreement to invest in the
fund (A) and an agreement that "... the Pinnacle
Fund is controlled by 888
Management Inc and I/we agree to abide by the full contract to be supplied at a
future date" (B) - a remarkably
trusting proposition. The temporary contract
also agreed that "I/we were not solicited for this investment and I/we sought
the opportunity".
A "No Advice Acknowledgement" was also signed. Ms Wu signed
this document as broker.)
- The
explanation for events occurring in the name of or on behalf of the company
after it had been deregistered presumably lies in
the fact that deregistration
apparently occurs in the offshore jurisdictions in question where there is a
failure to pay annual registration
fees and it may be that, when Mr Hobbs took
steps relating to International Management Incorporation in May and August 2007
he was
not aware of the fact that it had been deregistered. (That may also be
the explanation for the verification by Mrs Hobbs of a defence
in the name of
Geneva Financial at a time when it had also been deregistered.)
- Issue re
payment of introducer fees from Cadent/New World
- On
7 May 2007, an issue apparently arose as to a suggestion that Mr Koutsoukos or
others might become entitled to introducer fees
from Cadent/New World. On that
date, an email was sent from the Tasman Business Consultants email address to Mr
Erdman and Ms Reisinger
(Ex AU 36), headed "Introducing Broker",
saying:
... I just spoke with Steve [Erdman] to get a heads up on Lili's fund before
I speak with her.
Also I just received a call from Con [Koutsoukos], whom [sic] discussed an
introducing broker for this phone call he had with Lisa,
no he is not or anyone
else to because an introducing broker as a tight control must be held on each
and everyone. We have set in place stringent rules for 2007 in making
everybody accountable for their own place, from brokers and extending to
traders. Con said Lisa would phone me to discuss it, any change to the
system that lead to money being pulled and taken elsewhere should a
broker or
administrator get their knickers in a knot over the smallest thing, which is
something we don't want to happen.
The Tongan reporting office will be running late next week, which I am
very excited about.
Again thank you for all you did to make the trip the success it was. (my
emphasis).
- The
response to this on 5 July 2007 from Ms Reisinger was:
Good afternoon David
...no side agreements for any type of compensation with Con or anyone else
pertaining to any accounts introduced or managed by Con,
Jimmy or Brian that
have been introduced to Steve or myself.
...
David Hobbs is the only foreign broker to receive such compensation.
- By
email on 7 May 2007 from the Tasman Business Consultants nasl email address, Mr
Hobbs wrote to Ms Reisinger, Mr Erdman and Messrs
Koutsoukos, Truong and Wood
(Ex AU 8993), "Re Commissions - Con, Brian and Jimmy", advising that to enable
commissions to be received
"I will open a bank account in Tonga in my name with
the signing rights for that account to be in the name of Con, Brian and Jimmy
or
which two of them, they choose" and that it "may be easier if my portion of
commission is forwarded to this account also" and
then for J&B Financial "to
split my commission and pay myself". (Given that the J&B Financial team had
no involvement in
the Global Funerals transaction, the inescapable conclusion
from this is that Mr Hobbs was anticipating an entitlement to commission
in
relation to some other fund in which those people were
involved.)
- On
8 May 2007 (Ex AU 38) Mr Hobbs emailed Ms Reisinger and Mr Erdman re Tonga "As
discussed and agreed in Chicago, the payment for
services for the Tongan office
is set at US$300.00 per week paid fortnightly. The question is how do you deduct
this from the funds and forward it through?" (my
emphasis)
- On
1 June 2007 references were provided to the Prime Minister of Tonga (by Mr
Thomas J Konopiots Chief Operating Officer of Cadent
and by Mr Steve Erdman the
President of New World Holdings) as to the respective relationship between
Cadent and New World Holdings
with Mr Hobbs (Mr Konopiots describing Mr Hobbs as
a direct customer of Cadent and someone who worked closely with New World
Holdings,
that entity being an introducing broker to the Cadent accounts; some
of which accounts being for over 2 years).)
- On
10 June 2007 (Ex AU 9179) Mr Hobbs emailed Ms Reisinger re "various matters",
including:
Good news last week the Tongan office received two reports from Colm Cronin
[C3 Trader]. Now when the balance of reports flow from
the other traders the
Tongan office will be able to forward them to the administrators
involved. (my emphasis)
Just a few other areas;
Nancy kindly emailed me to keep informed the contract for the transactions
had to be changed, could you also forward a copy of the
old one I signed along
with the new one.
...
The Tongan office is now due for its first monthly payment, details attached
.... Account name Swiss Financial Security Ltd.
[I note in relation to the timing of this email that the New World
Holdings statements show that in May 2007 there was a payment of
$840 in
commission]
Could you please give me a list of the funds and what trades are attached
to each. (my emphasis)
- On
1 June 2007, Mr Hobbs (in his name as "consultant") and MLN entered a Consulting
and Marketing Agreement with Mr Charles (Chuck)
Weed (the agreement being signed
by Mr Hobbs above his name but under the name "First Zurich Financial", even
though that entity
was not named as a party to the agreement) for the payment of
remuneration by Mr Weed to MLN and Hobbs for their "marketing and consulting
services" (Ex AU 9141).
- The
recital to the agreement provided that Weed agreed to accept and remunerate MLN
and Hobbs for the consulting and marketing services".
The term of the agreement
was stated to be one year (commencing 1 June 2007) unless extended or otherwise
terminated. Clause 3 set
out the "Consulting and Marketing Compensation", as
follows:
Weed hereby agrees to compensate MLN and Hobbs jointly for their marketing
and consulting services which directly produce new assets
under management for
Weed . The initial compensation will consist of $4.25 per $1,000 of face value
of a bond until the total value
of bonds purchased exceeds the value of
$134,000,000. Upon the attainment of bonds purchased exceeding $134,000,000,
Weed agrees
to increase the compensation to $4.50 per $1,000. ...
- The
copy of this agreement bears a fax header transmission imprint for Tasman
Business Consultants (25 September 2007). (ASIC points
to the Business Solutions
cheque account details that show receipt of fees from New World Holdings - Ex
10136, that includes amounts
received from ROF Consulting.)
- By
letter dated 17 October 2007 ("the Ponzi letter"), signed by Mr Koutsoukos on
J&B Financial letterhead (and with logos at the
bottom for FTC and denoting
that the company is a member of the ISF) to Mr Hobbs:
You have raised the question today whether any of our funds trade as ponzi.
We want to assure you none of our funds trade as a ponzi
and all returns come
from profits.
- This
is an extraordinary letter in that it is difficult to see what forensic purpose
it could have served. Either the Integrity Plus
and Super Save schemes were
operating as ponzi schemes or not; the assertion to the contrary goes nowhere
unless Mr Hobbs was seeking
to rely on it for the making of some decision - and
even then if he was on notice of facts that gave rise to a reasonable
apprehension
that the funds were trading as ponzi, it would be hard to see how
any reliance could be placed thereon.
- Mr
Koutsoukos says the letter was signed by him at a meeting with Mr Hobbs and Mr
Truong in the boardroom. He says Mr Hobbs dictated
the letter, Mr Truong typed
it and printed it. He said Mr Hobbs said:
I need a letter off you guys to protect my name. I need a letter from your
company to protect my name. My name needs to be clear,
it has to be protected,
because if my names gets muddied, none of us have a business.
- Mr
Koutsoukos says Mr Hobbs told them that to someone who did not know "our
business", it looks like a ponzi because the returns had
been consistently 4% a
month. Mr Koutsoukos says this occurred some time after his ASIC examination on
8 November 2007 and before
he found out about the proceedings on 5 December (ie
on his evidence the letter was backdated).
- Mr
Truong, instead, recalls that the document was provided in the boardroom on an
occasion when Mr Wood was also present. However,
he says that there were two
documents and that the second one was signed by Mr Wood as well. He does not
recall ever signing a document
with the wrong date on it.
- At
[432] Mr Truong deposes to the signing by each of he, Mr Wood and Mr Koutsoukos
of the Ponzi statement. He says it was around the
time he received notice of the
compulsory examinations to be conducted by ASIC. He says at [431] that he met
with Mr Hobbs at a hotel
in Sydney's CBD with Mr Wood and Mr Koutsoukos and that
Mr Hobbs said to him that he was "a bit worried about you going in there,
Jimmy".
- On
19 October 2007, PJCB transferred AU$1,000,000 of Integrity Plus investor funds
to Destiny. The evidence of Messrs Wood, Koutsoukos
and Truong is that Mr Hobbs
told them to transfer that amount of money to Upton Ltd to start a new fund to
replace money missing
from the Covered Strategies investments (or, as Mr
Koutsoukos contends Mr Stanton referred to it, as capital enhancement of the
fund).
(In December 2007 Mr Hobbs prepared statements to be signed by the
J&B Financial office and Mr Mitchell as to this transaction
to which I refer
later.)
- Legend
of Bathurst Ltd was incorporated in New Zealand in October 2007. A partner of
Fletcher Vautier Moore (Mr Nicholas Moore) was
its sole director and he and Mr
Bellamy were the sole shareholders (each as to 50%). Both Mr Nicholas Moore and
Mr Bellamy gave evidence
that they held their shares in the company on trust for
Mr Hobbs (N Moore at [21]; Bellamy at [27]). Mr Moore has deposed (and was
not
challenged in cross-examination on this) that the company was set up on
instructions from Mr Hobbs and that all relevant decisions
in relation to the
company were made by Mr Hobbs.
- In
November 2007, Legend of Bathurst, on instructions from Mr Hobbs to Fletcher
Vautier Moore, purchased the property at Echodale
Place (now Tasman Business
Consultants registered office) and a residential property that is now Mr and Mrs
Hobbs' home in Nelson.
The Agreement was dated 5 November 2007 (Ex Y, N. Moore,
tab 24).
- On
the date of its incorporation (29 October 2007) of Legend of Bathurst, Destiny
transferred NZ$443,990 to Fletcher Vautier Moore
on behalf of Legend of
Bathurst, this payment being recorded in the Echodale trust account ledger at
the firm as being "Technocash
Pty Ltd loan advance". (It is said by Mr Hobbs in
his submissions that this was a loan from Destiny to Legend of Bathurst.) Mr
Nicholas
Moore deposed that prior to this occasion he had not heard of
Technocash and he assumes that he provided the narration to his accounts
staff
in relation to the payment consistent with Mr Hobbs' earlier advice that there
would be a loan made for the purchase ([28]).
- On
1 November 2007, Secured Bond transferred NZ$655,342.45 (at least some of which
ASIC contends represented Master Fund investor
funds) to Fletcher Vautier Moore
for the benefit of Legend of Bathurst. This payment was also recorded in the
trust account ledger
as a loan advance.
- Mr
Nicholas Moore deposed (at [36]-[37]) to his concern at the time (understandable
in my view from the perspective of a partner of
a law firm with no personal
interest of his own in the purchase) to a concern as to the incurring of what
seemed to him to be a significant
debt liability by Legend of Bathurst. He
deposes to a conversation he had with Mr Hobbs in which he says Mr Hobbs
said:
I hold money in Australia which I have earned as commission from my business
activities in Australia. I want to lend that money to
Legend of Bathurst to fund
the purchase of the Echodale property.
- Mr
Moore says that he told Mr Hobbs that he was concerned as a director and
shareholder of the company about the loan arrangements
and did not want to be
held responsible for the repayment of a loan, to which he said that Mr Hobbs
said there were tax advantages
for the money to be treated as a loan and that he
would arrange for a loan agreement to be sent to Mr Moore. A loan agreement was
provided to Mr Moore on about 13 November 2007. He says that the lender was
named as Destiny and that prior to this he had not heard
of Destiny.
- The
draft loan agreement was between Destiny Holdings Limited and Legend of
Bathurst. The amount of the loan was expressed to be in
two tranches and the
stated purpose of the loan was to enable the borrower to acquire property. The
security for the loan was identified
to be in the form of US treasury bills. (Mr
Halley submits that the language in which this is expressed suggests that the
security
had been taken in advance of the loan insofar as it records that
security "is held by Destiny Holdings in the form of US treasury
bills purchased
by party B".) The stated term of the loan agreement is 10 years and the
governing law is said to be the British law
of the British Virgin Islands (with
a corresponding choice of jurisdiction clause).
- Mr
Moore said that he reviewed the draft but was not happy with its terms and was
not happy signing it and that Mr Hobbs said "Well,
I suppose it doesn't have to
be a loan. I can arrange for it to be my own funds".
- Mr
Moore also said that he had not issued any invoice from Legend of Bathurst to
Master Fund, Secured Bond Ltd (dated 29 October 2007)
and had not heard of those
before receiving a bundle of documents from Mr Hobbs around the time of the
above conversation. Nothing
further seems to have happened in relation to the
proposed loan. After the transaction there were excess funds of about $580,000
which Mr Hobbs directed be invested into the Capital Mortgage Income Trust
partly owned by Fletcher Vautier Moore. Various withdrawals
of those moneys were
made on Mr Hobbs instructions.
- This
was the subject of submissions made by Mr Hobbs in closing (in which he said
that some of that amount had been the subject of
a loan). Following the close of
the hearing, on 13 September 2012 Mr Hobbs forwarded certain documents in
support of that submission,
not all of which were in evidence (and some of
which, namely two documents entitled "Loan Agreement", ASIC communicated to my
staff
that it did not believe it had previously seen). (Mr Hobbs did not point
in his submissions to any evidence of that kind in relation
to the alleged
loan.)
- The
submission by Mr Hobbs that the funds were the subject of a loan has a number of
difficulties not the least of which is that the
documents entitled loan
agreements were not in evidence. First and foremost, the contemporaneous
evidence does not support the submission
that, in the hands of Legend of
Bathurst, the moneys were the subject of a loan (since Mr Nicholas Moore had
made clear his concern
as to the exposure for the firm if there were to be an
obligation to repay such moneys).
- There
are receipts showing the receipt by Destiny of moneys said by Mr Hobbs (as I
understand it) to be repayments of some or all
of the moneys provided for the
purchase of the properties (referred to in Mr N Moore's affidavit at [52]-[54]).
Mr Hobbs also refers
to the evidence in relation to the alleged repayment of the
loan from Destiny contained in an earlier affidavit of the liquidator,
Mr Taylor
at [2249]-[251].
- Even
assuming, in Mr Hobbs' favour, that the moneys provided for the Echodale
purchase by Legend of Bathurst were the subject of a
loan made to him or for his
benefit, (part or all of which was later unpaid) that does not alter the
position that the initial payment
of funds to Destiny does not seem consistent
with the investment objectives of the fund out of which the moneys originally
came.
(I refer in due course to the loan submissions.)
- Further legal
advice in relation to the FTC and other activities
- Paragraph
[79] of Mr Hobbs' 3 August 2012 affidavit deposes that a letter of advice that
Mr Hobbs in his supplementary affidavit sworn
7 August 2012 identified as the
relevant advice:
On 6 November 2007 I sought further advice in relation to FTC's business and
as to whether the funds being operated by Mr Koutsoukos
and others permitted an
Australian to invest in those products.
- The
actual letter of advice was not annexed but I later admitted (subject to weight
and over the objection of ASIC) (Pausing there,
I note that on 7 November 2007,
FTC was deregistered. Hence the need for advice on the part of FTC the day
before deregistration
might be thought to be moot. That said, it is not clear
that Mr Hobbs was aware at that time of the deregistration of the
company.)
- The
advice covered the same two topics as that of the earlier Hartnell advice,
though with a further query as to the operation of
"DIY Super Funds in relation
to the same". Ms Maroun had clearly been provided with a copy of the Hartnell
opinion. She reached the
same conclusions. There is, however, no evidence as to
what instructions or information she received other than as appears in the
advice. (Mr Hobbs gave evidence that Ms Maroun was an
investor.)
- As
to the need for incorporation in Australia "for the purposes of selling
subscriptions in Australia and paying commissions to retailers",
Ms Maroun noted
the provisions of s 601CD; stated that "with reference to the background
information provided by you, and the fact
that the Trading Corporation does not
offer or sell investments nor does it give financial advice, it is arguable that
"your company"
is not carrying on business".
- As
to "selling financial advice" Ms Maroun expressly reiterated the Hartnell advice
on the assumption that the sale of letters was
conducted through an independent
contractor. Ms Maroun referred to the "new" regulations in relation to financial
services referred
to in the Hartnell advice of some five years earlier;
concluded that a financial services licence was not required "to continue
[FTC's]
practice of educating people". The advice then turned to the question of
offshore investments.
- After
considering the definition of wholesale clients, Ms Maroun restated and agreed
with the earlier advice (without emphasising
the need for the investment process
to be totally offshore (unless to wholesale clients)). More attention was paid
to the superannuation
question, the author apparently seeking to provide "an
insight into the operation of DIY Super funds in Australia.
- On
13 November 2007 (Ex AU10598) Mr Charles Weed wrote to Ms Dadey revising the MLN
marketing agreement (this communication being
copied to Ms Reisinger, Mr Carper,
Mr Christopher Swiecicki and Mr Hobbs) terminating the 1 June 2007 MLN agreement
and offering
a new contract with "updated numbers" after November 2007. (Mr Weed
noted that the June agreement was countersigned in October and
delivered to him
in October 2007.)
- Loan
Agreements re Destiny Holdings
- After
the conclusion of the hearing, Mr Hobbs pointed to copies of two receipts (that
ASIC concedes are in evidence) apparently issued
by Destiny Holdings: the first,
dated 27 November 2007, is to "Legend of Bathurst Ltd" recording receipt by
electronic transfer of
the sum of AU$181,046.00 with the note "This payment was
paid to Destiny Holding Ltd for repayment to Destiny Holdings Ltd for Legend
of
Bathurst Ltd"; and, the second, dated 29 November 2007, records the receipt of
US$147,261.20, again with a note that "This payment
was paid to Destiny Holdings
Ltd for Legend of Bathurst Ltd". Mr Hobbs relies on these as evidencing the
repayment by Legend of Bathurst
to Destiny Holdings of the moneys that had been
paid in relation to the acquisition of the Echodale Place and other property in
2007
(and, seemingly, in support of his contention that the moneys provided for
the purchase of those properties were by way of loan,
although no loan agreement
was entered into by Legend of Bathurst at the time for the reasons explained by
Mr Nicholas Moore).
- While
ASIC concedes that these receipts are in evidence, what it maintain were not in
evidence (and which I understand ASIC contends
it has not previously seen) were
copies of documents that Mr Hobbs forwarded with those receipts - on their face
being loan agreements
between Mr Hobbs as borrower and each of Ms Sophie Li and
Ms Christine Li as lenders in respect of those amounts.
- The
first, is a copy of a loan agreement dated 26 November 2007 by which Ms Sophie
Li is recorded as agreeing to lend to Mr Hobbs
as borrower US$147,259.20,
providing for an agreed interest rate of 6.5% pa on 60 days' notice; the loan to
be for 10 years; payment
of interest to be made to a bank the details of which
were to be forwarded by Ms Li; the loan was to be confidential and the document
stated the understanding that the money was to be paid to Legend of Bathurst "a
New Zealand Company". The document provided that
it was agreed that Ms Li would
pay the amount directly to Destiny Holdings Ltd on behalf of Legend of Bathurst.
The document was
not signed by Mr Hobbs. It seems to be in the same or similar
format as the Global Funerals facilitation agreement, suggesting that
it may
have emanated from the same source.
- The
second is a similar document recording an agreement with Ms Christine Li of the
same address, for the sum of AU$181,046.00. This
document seems to have been
signed by Mr Collard on 26 November 2007.
- The
circumstances in which these loan agreements were purportedly entered into are
not explained. At first blush, it would seem that
Mr Hobbs was putting in place
an arrangement whereby he was in a position to put Legend of Bathurst in funds
to repay the amounts
it had received from Destiny Holdings in relation to the
purchase of the Nelson properties (perhaps because there was an issue around
this time as to the source of those funds in the hands of Legend of Bathurst).
In any event, the loan agreements are not in evidence;
the receipts are in
evidence. What I can draw from the above is that, whether as a loan or
otherwise, it appears that moneys paid
to Legend of Bathurst from Destiny
Holdings in relation to the property purchases appear to have been repaid
(though this does not
address the question as to the legitimacy of the payments
made to Legend of Bathurst in the first place of funds from Destiny Holdings
but
which emanated initially from investor funds in the schemes operated by the
J&B Financial officers).
- Letter to
Hobbs' legal representative
- Exhibited
to Mr Woods affidavit is a document he received (and that each of he and Messrs
Truong and Koutsoukos signed, complete with
typographical errors) addressed to
Mr Hobbs' legal representative. Like a number of documents apparently prepared
by or on Mr Hobbs'
behalf for the J&B Financial officers to sign, it seems
self serving in the extreme and consists of little more than bald assertions
and
denials:
The Legal Representative
Mr. David Hobbs
SOTKE NELSON [sic]
NEW ZEALAND
Dear Sir.
RE: CONDUCT OF INTEGRITY PLUS FUND
We, Con Koutsoukos, Jimmy Truong and Brian John Wood hereby acknowledge and
confirm (the following matters In relation to the management
and conduct of the
Integrity Plus Fund:-
1.At all times and under all circumstances the immediate and ultimate
decision as to the percentage, best effort average, profit to
be paid on each
month to the various investors connected with the Integrity Plus Fund has been
our decision entirely and exclusively.
2.At no time was the decision referred to above taken either before during or
after any consultation, advice, or input, (written or
verbal) of Mr. David
Hobbs.
3.At no time was the decision, referred to above made following any
direction, directive, suggestion or guidance counseling [sic]
or advice by David
Hobbs either as to the manner or as to the extent of the profit that should be
paid, best effort average.
4.At no time and under no circumstances was any person either in a legal,
financial, accounting or other capacity said to be connected
or associated with
David Hobbs consulted about or advice sought from prior to during or following
the making and implementation to
the decision referred to above.
At time [sic] was any person or company said to be associated with David
Hobbs a party or a person who proffered for reward or otherwise
advice guidance
or direction as to the manner in which the decision referred to above be taken
and implemented.
5.At no time during the conduct of the integrity Plus Fund were its books of
record, specifically which evidenced the payment of best
effort average profit
either sought by David Hobbs either directly or indirectly nor were the said
books of record made available
to him or any representative acting on his behalf
under any circumstances at all.
6.We the undersigned accept and take unto ourselves the full and complete
responsibility, liability and consequence for the fashion
in which the conduct
of the Integrity Plus Fund has been carried out by and during the period in
which it has operated and acknowledge
and state clearly that David Hobbs has
never played either an active or passive role in the conduct of that fund and
most specifically
has never directed, advised or counselled us in the fashion in
which the payment of best effort average profit should be made.
- On
5 December 2007, ASIC commenced s 1323 proceedings in relation to Super Save
(and on 14 December 2007 in relation to Integrity
Plus).
- On
12 December 2007, an email was sent from the "nasl" Tasman Business Consultants
email address to each of Mr Truong, Mr Wood and
an email address with the
initials "ftc" (which I infer would have been Mr Koutsoukos' address given the
description in the header
of the attachment), attaching a document described as
"Affidavit J&B.doc" as follows:
This affidavit refers to J& B Financial and individuals Con Koutsoukos,
Jimmy Truong, Brian Wood.
- Introduced 2003
to Lisa Reisinger.
- Introduced 2005
to Steve Erdman of New World Holdings.
- David Hobbs does
not have any part of any company, be it investment company or
otherwise.
- David Hobbs does
not have any part in procuring investment business or payments that be
investment or otherwise.
- My only
involvement is as the International Sales Manager for Future Corporation Limited
which retail financial education material [my
emphasis - a Freudian slip given
that it was Mr Hobbs who held that role at all relevant times, so the "my" must
refer to him, which
indicates that it was he who prepared or caused to be
prepared this document]
- David Hobbs is
not a director, shareholder, or owner of any companies that J&B Financial
have or may have had. Neither was David
Hobbs involved in the setting up of any
company involved with J&B Financial.
- This
curious document (EX AU 10894) appears to be an instruction as to what should be
put in an affidavit by the operators of J&B
Financial in the context of the
then ASIC enquiries. Messrs Truong, Koutsoukos and Wood say that they received
communications from
Mr Hobbs at that time in relation to the ASIC enquiry. (The
generality of the propositions stated in the draft bullet point affidavit
document is reminiscent both of the document signed by Mr Mitchell in December
2007 in relation to the Upton $1m payment and of the
"Ponzi letter", the subject
of evidence in reply by each of Mr Koutsoukos and Mr Truong, to which I refer
below.)
- Mr
Truong then swore an affidavit before a Justice of the Peace (with no formal
heading to indicate any proceedings in which it was
to be used) deposing to the
following:
1.I am a Finance Director of J&B Financial Pty Ltd ...
2.I know David John Hobbs by reason of connection with Future Trading
Corporation.
3.I have for five (5) years been an executive of Future Trading
Corporation.
4.In that capacity I have sold an education package concerning retail
financial education material.
5.I know that know David John Hobbs is the International Sales Manager of
Future Trading Corporation.
6.The Future Trading Corporation education package offers no financial or
investment advice nor does it offer any financial product
or investment for
sale.
7.I was introduced to Lisa Reisinger in 2003.
8.I was introduced to Steve Erdman of New World Holdings in 2005.
9.To the best of my knowledge and belief David Hobbs is not a director,
office bearer or shareholder of any company involved in finance,
trading or
investment.
10.To the best of my knowledge David Hobbs is not involved directly or
indirectly in the procuring offering or facilitating of investment
business or
payments representing investment or profits in any capacity.
11.David Hobbs is not a director, shareholder, or office bearer of J&B
Financial nor was he involved in any capacity or fashion
in the setting up of
that company.
- An
affidavit in similar terms was sworn by Mr Wood on the same day, Mr Wood
describing his occupation as mortgage broker and signing
as a director of
J&B Financial.
- On
20 December 2007, Mr Koutsoukos, Mr Wood and Mr Truong signed a joint statement
concerning the $1m that had been deposited by PJCB
into Destiny's Upton Ltd
account in October that year (the purpose of which, at the time, seems to have
been understood by the J&B
Financial officers to be to replace moneys
missing from Covered Strategies or to enhance that fund).
- As
to the signing of those statements, Mr Koutsoukos ([1201]) says that there was a
meeting in or about mid December 2007 with Mr
Hobbs and Mr Stanton at J&B
Financial's offices, in the course of which he says that Mr Hobbs said that he
was "...risking $50,000
a month income from all of the funds that I have
introduced to Cadent" and that they needed to sign something to "fix
everything".
He says that shortly thereafter (on 20 December 2007) they received
by email from Mr Hobbs a draft statement about the Upton payment.
(Pausing
there, by this stage the income that ASIC contends Mr Hobbs was receiving out of
the various commission agreements included
not simply a portion of the
introducers' commissions from introducers such as Mr Clements, but the New World
Holdings commissions,
the round turn commissions from Cadent, the additional $1
round turns authorised by some of the scheme administrators, the 'marketing'
fees in relation to the purchase of T-STRIPS through Mr Weed's company, and the
research report fees through New World Holdings.)
- The
attached statement (Ex 102/103; Ex P 317,318) was as follows:
Con Koutsoukos, Brian Wood, Jimmy Truong state the following matter, on the
19th October 2007 a sum of one million dollars (Australian
$1,000,000.00) was
deposited by P JCB International Ltd to a company Destiny Holdings Ltd.
On that same day 19th October 2007 a payment of $1,000,000.00 was made to
Upton Ltd in account number [...], that was described as
a business investment
and believed it to be a legitimate exercise of discretion as an investment
pursuant to the Private Placement
memorandum
The deposit into Upton's account was not made with the knowledge, consent or
approval of Upton Ltd.
We had become aware of the Upton Ltd through a discussion with Pierre
Mitchell.
The deposit into the Upton Account was at no time directed, suggested,
otherwise done with the knowledge or consent of David Hobbs.
As best as we are
aware David Hobbs has no direct association with Upton Ltd.
- The
statement refers to the money transmitted by PJCB to Destiny as a "business
investment". (The format and content of the document
is strikingly similar to
the bullet point draft affidavit prepared for the three J&B Financial
officers to sign at around the
same time, disclaiming any involvement by Mr
Hobbs in J&B Financial and any investment products offered by that company.)
- A
similar statement was signed by Mr Mitchell on 20 December 2007 (and relied upon
by Mr Hobbs in the course of his cross-examination
of Mr Mitchell). Again, it is
in similar format to a number of documents that were forwarded by or on behalf
of Mr Hobbs for others
to sign, expressly disclaiming any involvement by Mr
Hobbs in matters relating to one or more of the schemes.
- The
statement signed by Mr Mitchell related specifically to Upton Ltd's Technocash
account and was as follows:
1.In my capacity as the in-house account (Independent Contractor):
(a)The application to commence the abovementioned [Upton Technocash] account
was signed by me on 31 July 2007, the fees were paid
by an American Express card
number .... in the name of in David John Hobbs.
(b)That account was not opened by nor was it intended to be utilized by David
John Hobbs either personally or in a corporate capacity.
(c)I am authorized to use the American Express card (noted above) for various
sundry purposes.
(d)The opening of the Upton Ltd account was one such purpose.
(e)I am a signatory of the Upton account.
(f)To the best of my knowledge and belief neither the account nor has the
corporation Upton Ltd ever been used or associated with
David John Hobbs.
2.I have become aware of a transaction set out in an affidavit of Mark
Richard Howard dated 17 December 2007 that a deposit was made
to the Upton Ltd
account on the 19th October 2007 for Australian $1,000,000.00.
3.The Howard affidavit records that deposit as having been made from Destiny
Holdings Ltd, that is a company about which I have no
knowledge or
information.
4.Until today's date I have no knowledge that the Upton Ltd account was
utilized in this fashion or at all.
5.I can state categorically that since the date of the opening of the account
I have had no dealing in any fashion with the Upton
Ltd Technocash account.
6.No access has ever been gained to the Upton Ltd Account from these offices
from the computers or otherwise.
I do not have the password nor do I have any means by which it can be
accessed.
In the absence of the password I still cannot as at today's date ascertain
the account balance of that account to verify or challenge
the content of the
Howard affidavit.
- (Given
the last sentence, it is difficult to see how Mr Mitchell would have been in a
position to make the categorical assertion that
no access had ever been gained
to the account from "these offices" (presumably the Hobbs office). However,
broad conclusions based
on unstated facts seem to be a feature of the documents
prepared by or on behalf of Mr Hobbs for others to sign at around this time.)
- In
the witness box, Mr Mitchell denied knowledge of the purpose of the $1m payment
but gave evidence that he was aware of its receipt.
- Cancellation
of FTC executive agreements
- On
20 December 2007, Mr Hobbs sent a letter to Mr Koutsoukos advising that FTC had
made the decision to cancel all executive agreements
in Australia and instructed
him to remove all signs and information relating to FTC.
- Instructions
to destroy records
- Troubling
evidence was given both by Mr Truong and Mr Koutsoukos as to what occurred after
the ASIC notices were received in late
November 2007. At [434] Mr Truong says
that he, together with Mr Wood and Mr Koutsoukos, had a conversation with Mr
Hobbs in which
Mr Hobbs said words to the effect "Just get rid of the
information so ASIC can't find anything at all" and at [435] Mr Truong confirms
that he destroyed some of the documents that had been kept at the Burwood office
(such as memoranda, contracts and any paperwork
involving Mr Hobbs), and that he
saw Mr Wood and Mr Koutsoukos do the same. From [1177ff], Mr Koutsoukos deposes
that he, Mr Wood
and Mr Truong had a telephone conversation with Mr Hobbs to the
following effect:
In order for us to keep having a business, my name must be protected. Shred
anything with my name on it. I've got all the contacts.
Without my good name,
there's nothing. You've got to get all of that paperwork out of your office.
Whatever you've got in your office
relating to investment, get rid of it! Only
keep material that's got to do with the education.
and that when Mr Koutsoukos queried how they could shred people's signed
memoranda (that he said "We need [...] to run our business"),
he says that Mr
Hobbs said:
Shift them. What you need is to get another place. Use it for storage. None
of you three can rent this place. Get someone that you
know to rent it. Put that
stuff in there. Get rid of the rest. Especially anything relating to offering
someone investment. If you've
just got information about an investment, leave it
in there and say, "That it's all part of the education process. I am not
offering
an investment to someone." What's caused this problem is the
superannuation money.
- Mr
Koutsoukos deposes that arrangements were then made for Mr Truong's wife to rent
a room in an office building and that he (and
to his observation the others did
the same) went through all the documents in his office and shredded various
documents; left those
relating to FTC subscriptions; and moved others to the new
office. He said that the process took about two days to complete (which
presumably indicates the volume of material with which he was dealing). (Mr
Koutsoukos was not cross-examined on this evidence.)
Events in 2008
- Cadent/New
World meeting - January 2008
- On
28 January 2008, Mr Hobbs and Mr Collard met various representatives of New
World Holdings in a conference room at Cadent. Also
in attendance was a
barrister, Mr Stanton. Mr Konopiots of Cadent made a statement in 15 April 2008
in which he said that at that
meeting Mr Stanton said that he represented Idylic
in connection with ASIC proceedings and Mr Hobbs said that he had been misled
by
Mr Koutsoukos, Mr Truong and Mr Wood.
- Cadent due
diligence requirements
- It
appears that at some point in early 2008 Mr Hobbs sought advice from solicitors
in Vanuatu as to whether there was a requirement
for registration of the Vanuatu
incorporated IBCs (with a view to providing that advice to the scheme
administrators for provision
to Cadent). The advice, obtained from Geoffrey Gee
& Partners in Vanuatu, seems to have been a pro forma or generic advice (in
that it did not identify the particular company or companies in respect of which
the advice was being given and left a space for
the company name or names to be
inserted). There only appears to have been one letter issued (or else all the
letters were in identical
form). It seems that Mr Hobbs provided a copy of the
letter to the administrators of various of the funds for provision by them to
Cadent. (The funds in respect of which the same letter was used were First
Secured Bond Unit Trust, Master Fund, 888 (Super Save),
Good Value and Best Fund
(all being Li/Collard schemes).
- The
letter of advice was dated 1 April 2008 and was addressed to Mr Hobbs. It was
headed "Due Diligence Requirements". It referred
to "your letter" of 27 March
2008 and stated
I understand these [unidentified] Vanuatu Companies hold accounts with
brokers in the United States who then manage/invest those funds
through Futures
Trading etc
I believe these companies would be classified as International Companies
under the International Companies Act currently in force
in Vanuatu and are not
local companies.
Whilst there are general regulations covering the promotion of and dealing in
securities by companies to the public there is no bar
on International Companies
registered in Vanuatu holding accounts with licensed clearing houses then being
contracted to Futures
Traders overseas.
Accordingly such International Companies do not require registration within
the Vanuatu jurisdiction to invest in the United States.
- (The
issue of such a letter to Mr Hobbs, and its use in relation to funds other than
Global Funerals, is a significant indication
that Mr Hobbs was involved in the
operation of the schemes in question - since there is otherwise no explanation
for Mr Hobbs obtaining
such a letter for the purposes of those other
funds.)
- Threat to
withdraw Cadent funds
- On
7 May 2008, Mr Hobbs (by email from the "nasl" email address) sent an email to
Ms Reisinger (copying the email to Mr Erdman) headed
"Commission" and
stating:
I need to make some tough decisions as it is not possible to have money with
Cadent and no commission. To this end can you communicate
when the commission is
released.
What the plan is, should the commissions not be sorted out as soon as
possible the clients will give notice to the traders to trade
out and state a
period to do so. Is this the right way, eg, request what trades they have and
finish those contracts and not enter
any further for the account balances.
- Mr
Hobbs submits that in February 2008 payment commissions on those accounts
stopped "as Mr Erdman made a decision that stopped paying
commissions to fund
the legal expenses of New World Holdings and Lisa Reisinger in regard to the
cost associated with UniFund which
was caught up in the Integrity Plus and
J&B scheme".
- Pausing
there, there was no evidence in Mr Hobbs' affidavits as to this issue, nor any
other evidence to which I was taken to establish
either that there was a
cessation of payment of commission on these particular Cadent accounts or the
stated reason therefor. (There
was some reference in the evidence to UniFund -
in relation to the payment of expenses of Mr Stanton who it was said had
travelled
to Keele University UK to promote such a fund or to advise in relation
to a proposed investment through such a fund. Mr Hobbs, perhaps
tellingly,
described UniFund in his submissions as a "stand alone" fund - if this is
intended to be by contrast to the other funds
the subject of these proceedings
then it suggests he viewed the others as related or connected in some way.) (Mr
Hobbs also referred
to there being a reference to commissions on treasuries for
this fund in the transcript of Ms Reisinger (p 139.8-24), though again
it is not
clear to me what significance Mr Hobbs sought to draw from
this.)
- Insofar
as Mr Hobbs submits that this email related only to the withholding of
commissions from the Global Funerals or other Chinese
mainland accounts (and
that the funds had been withheld in order to fund legal costs in relation to
UniFund), there is no evidence
from which I can form a view as to the reason for
cessation of commissions, nor does it seem to me that it can be assumed that the
withheld commissions related solely to Global Funerals. (I note that the
commissions for that account seem to have ceased after December
2006 through at
least until mid July 2007, having regard to the Cadent and New World Holdings
records in evidence. If so, the lapse
of time through to a threatened withdrawal
in May 2008 seems surprising. In any event, as this is not the sole evidence to
support
the contention that Mr Hobbs was receiving commission from more than one
fund, nothing ultimately turns on this email.)
- Further
documents prepared by Mr Hobbs
- At
[442], Mr Truong gives evidence that in or about 2008, after the Burwood office
had closed, he received an email from Mr Hobbs
with an attachment relating to a
purported loan to Mr Hobbs. He says that at about that time he then had a
conversation with Mr Hobbs
in which Mr Hobbs said to him words to this effect,
"Tell ASIC that you lent me some money" and that he needed Mr Truong to do it
urgently. Mr Truong said that he did not sign that document because he then had
a discussion with Mr Stanton who told him not to
do so. (This is consistent with
the pattern of behaviour of Mr Hobbs from late 2007 drafting various documents
for others to sign
in which they were in effect being asked to absolve him from
responsibility for various matters.)
Credibility of Witnesses
- Before
turning to the issues for determination, I consider the submissions made as to
the credibility (or reliability of the evidence)
of various of the witnesses.
Mr Hobbs
- As
Mr Hobbs' conduct is central to many of the allegations on which ASIC's case
rests, I will address first the criticisms made of
Mr Hobbs' reliability or
credibility as a witness.
- Mr
Halley submitted that no reliance could be placed on any evidence of Mr Hobbs
concerning any disputed issues (except to the extent
that there might be an
admission against selfinterest made by him). Mr Halley quite squarely put to Mr
Hobbs on various occasions
throughout cross-examination that Mr Hobbs evidence
was dishonest and he submits that (although such a finding is not necessary for
ASIC's case) a finding of dishonesty could comfortably be made in relation to Mr
Hobbs' evidence in the proceedings in a number of
respects.
- Those
submissions are predicated on the inconsistencies between Mr Hobbs' version of
various events (whether given in his affidavit
or in his evidence in
cross-examination) and that which can be gleaned by reference to contemporaneous
documents and/or the evidence
given by other witnesses. Mr Halley submitted
that, when confronted in cross-examination with material that made his stated
position
untenable, Mr Hobbs tended to change his evidence or blame his medical
condition or profess an inability to recall events. I think
there is
considerable force to that submission. I also note that at various points, when
confronted with propositions that seemed
unarguable (such as the meaning that
would be conveyed by things that had been written or said by him), Mr Hobbs
seemed to seek to
shut down the questioning with statements such as "It is what
it is" or to justify his conclusions as to particular matters based
on his
asserted knowledge (of which there was no independent corroboration). As an
example of the former:
Q. So, how are we to determine, Mr Hobbs, when it's a case of instant
recollection and when it's a case of denial, Mr Hobbs?
A. It is what it is, whatever it is.
- As
to the suggestion that Mr Hobbs resorted to an inability to recall matters when
faced with evidence inconsistent to that he had
given elsewhere, somewhat
ironically Mr Hobbs himself has criticised the inability of another witness (Mr
Parsons) to recall events
and has treated that in submissions as being
synonymous with the unreliability of Mr Parsons as a witness.
- In
that regard, I am conscious of the fact that some of the events in issue in the
proceedings took place quite some time ago. It
is well recognised that the
memory of witnesses is likely to become more unreliable over time (hence the
presumptive prejudice recognised
as flowing from delay in the determination of
proceedings). In Brisbane South Regional Health Authority v Taylor,
McHugh J (at 552-553) considered the difficulty posed by the lapse of time
between relevant events and the ultimate hearing, saying
that:
.... Sometimes the deterioration in quality is palpable, as in the case where
a crucial witness is dead or an important document has
been destroyed. But
sometimes, perhaps more often than we realise, the deterioration in quality is
not recognisable even by the parties.
Prejudice may exist without the parties or
anybody else realising that it exists. As the United States Supreme Court
pointed out
in Barker v Wingo, "what has been forgotten can rarely be
shown". So, it must often happen that important, perhaps decisive, evidence has
disappeared
without anybody now "knowing" that it ever existed. Similarly, it
must often happen that time will diminish the significance of a
known fact or
circumstance because its relationship to the cause of action is no longer as
apparent as it was when the cause of action
arose.
- In
those circumstances, what is relevant is not so much whether Mr Hobbs does or
does not now recall particular details or events
(such as, for example, the name
of Mr Cowern, who was the subject of the ASIC enquiry in 2002) but to compare
the matters that Mr
Hobbs does profess to recall with confidence (such as a
telephone conversation with Mr Becker in 2003 in which he says the latter
instructed him as to the operation of the LEAPS strategy that he then conveyed
to Mr Fitzgerald) with those matters that Mr Hobbs
says he does not recall (such
as the ownership of OEM/KLM) particularly where the latter are matters about
which Mr Hobbs has previously
been far more expansive in the context of selling
his expertise (or the FTC product) and might be expected to be matters that Mr
Hobbs would be unlikely to forget.
- Mr
Halley characterised Mr Hobbs' evidence as falling into one of three categories:
evidence that was inconsistent with contemporaneous
documents; evidence that was
internally inconsistent; and evidence that Mr Halley submits was inconsistent
with evidence of other
witnesses (the veracity of whose evidence there was no
reason to doubt and/or who were persons who might be expected to be or were
transparently sympathetic to Mr Hobbs' position, such as the evidence of Mrs
Watson concerning the operation of the OEM and KLM "system").
- Mr
Halley pointed to a number of matters as demonstrating the unreliability of Mr
Hobbs' evidence: the inconsistency in his evidence
on various occasions as to
the authorship of Art of Arbitrage booklet that formed part of the FTC
educational materials; his refusal
to accept that he had told people that FTC
would give them access to the "real things" (and that, by that, he was referring
to the
opportunity to invest moneys in offshore investments for higher returns);
his refusal to accept that at one stage he considered Mr
Diaz to have had a
successful background in building a solid financial business in Sydney (though
this is how he had himself described
Mr Diaz when appointing him to the role of
National Sales Manager of FTC); his reluctance to accept that he had overstated
Mrs Hobbs'
qualifications to others; his insistence that instruction as to the
LEAPs strategy was provided by Mr Becker; his denial of knowledge
as to the
ongoing updating of manuals issued to KLM introducers; his denial of knowledge
in relation to OEM and the inconsistency
between his evidence as to the
formation of FTC and the ownership of OEM/KLM; his evidence as to the
investment by PJCB in Geneva Financial; and, significantly, the evidence given
by Mr Hobbs in relation to the
DVD Seminar and as to the returns that might be
achieved from investment in the offshore wholesale market.
- As
to the Art of Arbitrage evidence, Mr Hobbs (at [7] of his 3 August
affidavit) deposed to the provision to him of a number of booklets which he said
he believed
were prepared by either Mr Chen or Mr Becker and gave as an express
example the Art of Arbitrage "and the other booklets in these
proceedings". What
this clearly conveyed was that not only had that particular booklet been
prepared by Mr Chen or Mr Becker but
also that the other booklets in the
proceedings had been similarly prepared. There was certainly no suggestion in
that paragraph
of the affidavit that Mr Hobbs or his wife had prepared or
written any of the booklets.
- Mr
Halley characterises this as a deliberate attempt by Mr Hobbs to suggest that he
had nothing to do with the preparation of the
FTC booklets. Whether or not that
be the case (and I note that this may simply be an instance, common throughout
the evidence in
the proceedings, where Mr Hobbs seems to have been inaccurate or
infelicitous in his choice of language or use of grammar and may
not necessarily
have been an attempt by Mr Hobbs to convey a misleading impression in his
affidavit), the cross-examination on this
issue led to the quite implausible
evidence that there were two Art of Arbitrage books - one being the book that Mr
Hobbs said in
his s 10 examination in New Zealand that he had written and the
other being the book he said in his affidavit in these proceedings
had been
prepared by Mr Becker or Mr Chen.
- In
the s 10 examination, Mr Hobbs (having been asked what sort of educational
materials or financial materials he was preparing for
FTC and having said that
he wrote some aspects of the books) quite clearly said "I wrote the book on the
Art of Arbitrage". Taken
to this evidence in his cross-examination, Mr Hobbs
insisted that the booklet to which he had referred in the s 10 examination was
not the book that formed part of the FTC materials and that there was another
book on the "Art of Arbitrage" that he had written
for Mrs Andrews for sale by
NASL. (There is no evidence that NASL was in the business of selling financial
information). Again, whether
or not that be the case, the answer that Mr Hobbs
gave in the s 10 examination (in its context) clearly conveyed that the Art of
Arbitrage book written by Mr Hobbs was one of the books that was part of the FTC
series of 18 books and the explanation proffered
by Mr Hobbs for the
inconsistency between his affidavit and that evidence was unsupported by any
evidence.
- As
indicated earlier, Mr Halley submits that a Jones v Dunkel inference can
be drawn that, had Mrs Andrews given evidence, that evidence would not have
assisted Mr Hobbs on the particular issue
as to who wrote the book on the Art of
Arbitrage that formed part of the FTC materials. (Mrs Andrews availability to
give such evidence
being something I would infer from the plethora of
communications received from her before and during the hearing - communications
that Mr Hobbs suggests were not sent on his instructions or with his approval).
Ultimately, Mr Hobbs accepted that what he had written
in his affidavit (ie that
Mr Becker of Mr Chen had provided the books including the Art of Arbitrage was
incorrect insofar as it
suggested that he, Mr Hobbs, had not written any) but he
maintained that he had not written the FTC book of that name.
- It
seems to me that an inference is open (having regard to Mr Hobbs' FTC
appointment contract and, in particular, the obligation to
develop the
educational materials and the non-compete and confidentiality provisions
contained therein) that Mr Hobbs would not have
been likely to have been writing
a book for sale by NASL with the same title as that of a book in the FTC series.
(Mr Hobbs' response
to that suggestion in cross-examination was that Mr Becker
had approved this but there is no evidence of any such approval - nor
is there
any evidence of the provision of the FTC materials by Mr Becker to Mr Hobbs in
the first place). The fact that Mrs Andrews
was not called on to corroborate Mr
Hobbs' version of events would lead to an inference that she would not have
assisted his case
in that regard (and would mean that I could more comfortably
conclude that Mr Hobbs had written the Arbitrage book for FTC and not
NASL).
- Ultimately,
it is not necessary to draw any such inference because nothing turns in my view
on who in fact wrote the FTC Arbitrage
book. What is more significant is that
the inconsistency in the different versions of the evidence Mr Hobbs has given
points to the
caution I should exercise before accepting the version of events
set out in Mr Hobbs' recent affidavits (which, on either view of
the authorship
of the Arbitrage book, was unreliable).
- Moreover,
the transcript of the cross-examination on this issue is a good example both of
the incremental changes in Mr Hobbs' evidence
when faced with inconsistent
documentary or other evidence and of Mr Hobbs taking refuge in the pressure of
the s 10 examination
(T 1244.4):
Q. Having reread those lines, you represented, did you not to Miss Hayden,
that the FTC book on the Art of Arbitrage was written by
you?
A. If that was how it was presented it's incorrect and I think it's important
to note when you are under crossexamination by a number
of people you do make
mistakes.
- Mr
Halley submits, in effect, that if the pressure of such an examination was so
great as to cause Mr Hobbs to give mistaken answers,
then reliance cannot be
placed on his evidence in the present proceedings for similar reasons. (In that
regard, I accept that the
pressure on Mr Hobbs as a witness in court proceedings
of the present kind, particularly where he is self-represented, must be at
least
as great as that experienced in the s 10 examination in New Zealand where Mr
Hobbs did have legal assistance and where the
proceedings were not held with the
same formality as court proceedings.)
- ASIC's
main submission, arising out of this evidence was that Mr Hobbs was here seeking
to accommodate his evidence to fit the objective
facts put to him in light of
the discrepancy between [7] of his affidavit and the evidence given in his s 10
examination. I think
that submission has great force.
- FTC - access
to 'real things'
- The
second example to which Mr Halley pointed in support of his submission as to the
unreliability of Mr Hobbs' evidence in general
was the evidence given by Mr
Hobbs concerning the proposition that FTC would lead people to a position
where they could "access the real things". Surprisingly, Mr Hobbs resisted
at first the proposition that this was the purpose or aim of FTC, nor could he
recall having made
such statements to people (even though it was in effect a
statement that Mr Hobbs had deposed in his 3 August affidavit (at [32(j)])
that
he would make in the ordinary course of presenting a "Future Trading
Seminar").
- The
significance of this evidence is that ASIC's case is that FTC was an integral
part of the scheme, being the conduit by which investors
were led into the
scheme. (ASIC's contention is that the benefit obtained by subscription to FTC
was in substance not the booklets,
those being general in content and sent out
over a three year period, but the opportunity to have access (through a
collective or
pooled investment scheme), wholesale investments offshore with the
represented potential of significant returns of interest.)
- Mr
Hobbs deposed in his affidavit to having ordinarily made in the course of an FTC
seminar the statement that "Future Trading does
not offer investment, we do not
offer investment advice but will lead people to a position where they can access
the real things".
This is consistent with what Mr Hobbs is recorded as having
said in the DVD Seminar:
...So the opportunity from Future Trading's point of view: we do not offer
investment, we do not offer investment advice, but we will
lead people to a
position where they can access real things. And the investment products is not
owned by Future Trading, it's owned
by KLM Enterprises Limited.
So when somebody takes what we call an executive agreement with us with
Future Trading, that is to sell financial subscriptions, and
then they wish to
sell investments, that contract for investment sale is with [KLM]
Enterprises. Now, some of the investment opportunities with KLM Enterprises
are: you can have monthly income producing funds, quarterly income
producing
funds, annual income producing funds. Remember that 98 per cent of the funds are
profit based funds.
Here are some funds that are just new on the market. ...(my emphasis)
- Mr
Halley submits (and I agree) that, taken in context (ie, immediately followed by
the words "And the investment product is not owned
by Future Trading, it's owned
by KLM Enterprises Limited", the statement as to "access" to "real things" must
be seen as a reference
to the investment products "owned by KLM" (those being
products that Mr Hobbs himself said could be sold through a contract for
investment
sale with KLM by someone who takes an executive agreement "with us
[FTC]" (ie an FTC executive) and then wishes to sell investments).
- In
cross-examination (at T 1222.43), inconsistently with his own statements at the
DVD Seminar and inconsistently with the thrust
of his own affidavit evidence, Mr
Hobbs was not prepared to accept the proposition that FTC's aim was to lead
people to a position
where they could access "the real things". Tellingly, the
way in which Mr Hobbs sought to distance himself from that proposition
was to
emphasis that FTC was an education company and then to say:
Q. Mr Hobbs, the purpose of FTC, I suggest, was to lead people to a position
where they can access the real things, wasn't it?
A. I have heard that said, but FTC was an education company. (my
emphasis)
- As
I noted during the course of closing submissions, the answer " I have heard it
said..." conveyed to me at the time that Mr Hobbs
was suggesting that someone
other than he, himself, had said this (just as in other parts of his evidence he
had said that he had
read things in affidavits, suggesting that this was the
first time he had been aware of the particular matter). My impression of
Mr
Hobbs' evidence in this regard was that Mr Hobbs' overriding concern was to
emphasise that FTC was restricted to the sale of financial
education (and that
his unresponsive answer to the precise questions posed of him was due more to
his desire to communicate his own
version of events rather than to avoid
answering the question).
- Mr
Halley submits that the evidence that Mr Hobbs gave in the course of
crossexamination that he did not recall making statements
as to "access to real
things" is difficult to accept in light of the fact that he deposed to this as
recently as 3 August 2012. I
agree (subject to the question mark there as to Mr
Hobbs' short term memory, to which I will refer in due course).
- While
Mr Hobbs was not the only person involved in the drafting of his affidavit (and
other evidence, such as the review of the accounting
records, and some of his
submissions, such as to the alleged lack of Cadent source documents, seems to
have been based on what others
did or said, namely his wife and his secretary),
there is no reason to think that the statement at [32](j) was not one that Mr
Hobbs
had considered as at 3 August 2012 accurately represented his recollection
of events. It is, however, flatly contradicted by contemporaneous
evidence
(particularly the DVD Seminar).
- Again,
Mr Halley points to this as casting doubt on the accuracy of Mr Hobbs' affidavit
evidence. I agree.
- In
the witness box, Mr Hobbs pointed to the absence of specific reference in the
FTC educational material as to investment opportunities
(just as he had when
providing Mr Bellamy with the answers for the Cadent legal opinion) - there
being the following exchange at
T 1276:
Q. Do you deny the purpose of Future Trading was to lead people to a position
where they could access real things?
A. That's just not correct. Future Trading, there's nowhere in the Future
Trading information you will find anything like that.
without regard to what was said to people in seminars about FTC and what
opportunities (such as the potential for investment) could
follow therefrom. Mr
Hobbs sought to explain the reference in the DVD Seminar to access to "real
things" as meaning the provision
of such access "[b]y education":
Q. Now, what were the real things that you were referring to?
A. It's education. It's understanding what is right and wrong.
Q. So the real things that you were leading them to was education, is that
what you say?
A. Well, if you read the newsletters from Future Trading it would become
quite obvious.
- From
my review of the DVD Seminar footage, it seems to me inconceivable that someone
in attendance at that seminar would have understood
that the "real things" to
which it was being said that an FTC subscriber could have access were limited to
education (laudable as
the aim of educating people between what is right and
wrong may be). There was a clear link between the educational message and the
funds that Mr Hobbs consistently referred to as funds "we" have or to which "we"
did or did not have access. (In that regard, Mr
Hobbs' response in
cross-examination that he used the expression "we" when he was part of the
"team" at Colonial Mutual confirms
the impression I gained on viewing the DVD
Seminar footage, which was that Mr Hobbs was including himself as part of the
"we" at
the DVD Seminar - and, to the extent that there was a reference to "we"
have funds, that could only sensibly have conveyed the meaning
that he, as part
of FTC and/or KLM or whatever entity was part of that overall team had those
funds or access to those funds.)
- Mr Hobbs'
regard (or otherwise) for Mr Diaz
- As
to the evidence in relation to Mr Diaz' appointment in August 2003, Mr Halley
points to Mr Hobbs' adamant refusal to accept that
(at least as at August 2003)
he had significant respect for Mr Diaz' financial skills, notwithstanding that
the email by which Mr
Hobbs announced the appointment of Mr Diaz to the role of
National Sales Manager stated that:
Rob comes to the position with a very successful background in building a
solid financial business in Sydney. He enjoys undivided
loyalty from staff.
- (Mr
Halley contrasted this with the dismissive description by Mr Hobbs (in his
affidavit of 3 August 2012 at [27]) of Mr Diaz as an
"unsophisticated cleaner",
that being in the context of Mr Hobbs' evidence as to the trip Mr Diaz said he
had made to America to
meet Ms Reisinger for a proposed US$20million
transaction, and with the offence taken by Mr Hobbs during his cross-examination
to
the description by Mr Halley of Mrs Watson as a "hairdresser".)
- When
cross-examined, from T 1413, as to the view he had held at the relevant time of
Mr Diaz' skills, Mr Hobbs refused to accept that
at the relevant time he had had
significant respect for the financial skills of Mr Diaz; he said "I liked Mr
Diaz. He was learning.
He didn't have high skills, I'm sorry" and was prepared
to concede only that Mr Diaz "did very well in mortgages and mortgage
brokering".
- (Tellingly,
he described the appointment of Mr Diaz to the role of national sales manager of
FTC for Australia as giving Mr Diaz an
"opportunity", conveying to me that he
was doing him a favour - much as Mr Clements' evidence suggested that Mr Hobbs
had put him
into the role of administrator of the Elite Premier Funds as a means
of giving him an opportunity when he was unemployed.)
- Mr
Hobbs resisted answering the question whether he thought Mr Diaz appropriately
qualified for the role to which he had appointed
him ("He was learning").
Somewhat remarkably, given Mr Hobbs' role as International Sales Manager and the
fact that he seemed to
have had the responsibility for making or confirming
appointments to the position of FTC executives, when I sought to clarify whether
his answer to that question was a "yes" or a "no", Mr Hobbs responded that he
was "not sure what he had to be qualified for, ...
for that role".
- Mr
Hobbs accepted that the distinction he was drawing in this evidence was between
a solid financial business and a solid financial
mortgage brokering business,
though it is by no means clear what relevance Mr Hobbs thought lay in such a
distinction (whether generally
or when promoting Mr Diaz to FTC
executives).
- Mr
Halley submits that Mr Hobbs' denial of the proposition that at any time he had
thought that Mr Diaz had built a solid financial
business (as opposed to a solid
"mortgage brokering business") is significant because of the extent to which Mr
Hobbs sought to cavil
with a proposition that he had himself earlier espoused
(and as an example of his evidence changing incrementally during the course
of
crossexamination). (Here, and in other instances, Mr Halley's observation was
that the demeanour of Mr Hobbs was more co-operative
when answering questions
from the bench as opposed to answering questions in cross-examination. As to
that issue, while I accept
the force of Mr Halley's observation, I draw little
from this.)
- Other
than again highlighting a disparity between Mr Hobbs' present evidence and what
is contained in a contemporaneous document,
Mr Halley submits that Mr Hobbs'
dismissal of Mr Diaz as an "unsophisticated cleaner" is consistent with his
characterisation of
Mr Koutsoukos, Mr Wood and Mr Truong as "fraudsters". (In
relation to that last point, it seems to me that there is a distinction
between
Mr Hobbs seeking to downplay Mr Diaz' experience (in the context of submitting
that it is not likely that he would have asked
him to negotiate a multi-million
dollar proposal) and his submission that I should not accept the evidence of
persons against whom
criminal liability in relation to the schemes has been
alleged.)
- Mrs Hobbs'
book-keeping/accounting skills
- As
an example of what was submitted by Mr Halley to be Mr Hobbs' inability to make
an obvious concession was the evidence concerning
Mrs Hobbs and her bookkeeping
(or accounting) skills. At the outset, I note that Mr Halley made clear that
there was no criticism
of Mrs Hobbs in this regard. Rather, the issue was as to
whether (as the contemporaneous record confirmed, but as Mr Hobbs was reluctant
to concede) Mr Hobbs had represented to others that she was an accountant who
had undertaken some kind of degree course.
- At
the DVD Seminar, Mr Hobbs clearly referred to his wife as "an accountant" and
spoke of the time when she was "doing her degree".
In cross-examination, Mr
Hobbs confirmed that his wife was not a chartered accountant and did not have a
formal degree, but was vague
as to what her qualifications were and was not
prepared to concede that he had previously described her as an accountant or
that,
if he had done so, this would have been incorrect (T 1249ff).
- (In
passing, I note that Ms Reisinger's understanding as gleaned from her CTFC
examination transcript, consistent with what had been
conveyed at the DVD
Seminar, was that Mrs Hobbs was an accountant but I accept that that
understanding may not necessarily have derived
from anything Mr Hobbs, but may
have been an assumption based on what she regarded as Mrs Hobbs' ability to ask
pertinent questions
about the account statements.)
- Another
example of what I consider to be Mr Hobbs' tendency to gloss over the details,
or to be imprecise in his language, is that
when asked to describe the
difference between a chartered accountant and an accountant Mr Hobbs said:
A. A chartered accountant is qualified and belongs to the Society and
anybody can be an accountant who is good at bookkeeping. (my emphasis)
(a surprising statement for someone who said at the DVD Seminar he had
"honoured" in financial planning).
- I
see this evidence as indicating Mr Hobbs' tendency to put a gloss on statements
made by him in the context of what he describes
as selling his expertise (in the
FTC seminar context), a tendency that Mr Hobbs himself seemed to confirm in
closing submissions
when explaining the inconsistencies he concedes there were
in his account of how FTC was incorporated or formed as referable in part
to the
difference between selling one's expertise and giving evidence under oath.
- This
is but one of a number of statements in the DVD Seminar that seems to be a far
stretch from the truth (other examples being the
reference to FTC's offices on
the promotional video, when the only office of which there is any evidence is
the office in Nelson;
the reference to thousands of people researching and
carrying out due diligence on the funds, when there is no evidence of that kind;
the reference to doing 2-3 years diligence on a fund, when it seems that funds
such as the Super Save superannuation fund and the
later Li/Collard schemes were
set up and made available for investment almost immediately; the reference to
the people running funds
or otherwise connected with FTC in the Hobbs office at
the DVD Seminar (none of whom was referred to by anyone else as being there
and
whose connection with the running of "KLM" funds or funds in which investment
might be possible was by no means evident); the
statements as to the extent of
outside scrutiny and transparency of the investment and as to the accountability
of the investment
process - made at the DVD Seminar, recorded in the notes taken
by Mr Blow and in the response to the questions conveyed to Mr Gahan;
to name
but a few).
- Tellingly,
having regard to the value of the education being delivered through the FTC
educational process, Mr Hobbs expressed the
opinion that "I guess anybody could
research and write a book like this [namely the "Is Your Money Really in the
Bank?" (that Mrs
Hobbs' email to Mr Dent indicated she had written) Mrs Hobbs
there suggesting that "Dave should start paying me for writing
them"].
- The
fourth issue to which Mr Halley referred in this context was the evidence as to
the source of the information in relation to the
LEAPs Strategy that Mr Hobbs
provided to Mr Fitzgerald. (Significance is also placed on this communication,
whatever the source of
the information, as a contemporaneous record of a written
instruction that Mr Hobbs was providing to a scheme administrator (Mr
Fitzgerald)
as to how the investment scheme (Covered Strategies) was to be
conducted.)
- Mr
Hobbs seemed implicitly to accept that the letter of 4 August 2003 to Mr
Fitzgerald involved the giving of instructions as to how
to operate the fund,
though he sought to dismiss the significance of the letter as being merely "a
letter sent to Mr Fitzgerald on
his request after we had discussions one time"
and he insisted that this was simply following Mr Becker's instructions:
Q. So what you were doing in this letter was telling him how he should be
operating his fund, weren't you, Mr Hobbs?
A. Well, it's exactly what Mr Becker said, so I did exactly as he said.
- Having
given that explanation for the letter, it was then put to Mr Hobbs that the
contemporaneous documents suggested that the relevant
information had in fact
come from Mr Hank Parker. In that regard, Mr Hobbs accepted that it was possible
that he had received the
two documents sent from Mr Parker as to the LEAPs
strategy, the fax headers on which indicated that they had been forwarded to Mr
Diaz' office from the Hobbs office at a time when Mr Hobbs was working in the
Diaz office but Mr Hobbs maintained that the information
was provided to him in
a telephone conversation that he recalled having with Mr Becker. As to the
likelihood that it was Mr Becker,
a securities attorney, rather than Mr Parker,
a trader who had been running the Covered Calls fund at around that time who
gave that
information, while it seems more likely to have been the latter I
would not necessarily discount the possibility that it was the
former. However,
the timing of the Parker letters (and the obvious assumption on the part of Mr
Parker that Mr Hobbs would be communicating
this information to others, having
regard to the content of the letters) means that if Mr Hobbs' recollection is
correct it seems
an incredible coincidence that, just at the time Mr Parker was
suggesting the use of the LEAPS strategy (and instructing Mr Hobbs
as to how
that should operate), Mr Becker would also raise that means of investment. (Mr
Halley points out that this was attributed
by Mr Hobbs to a telephone
conversation of which Mr Hobbs had no record and could now give no account of
what had been said therein.)
- Mr
Halley relies on this as an illustration of the "mantra" he submits Mr Hobbs had
adopted throughout his evidence (namely that,
to the extent that Mr Hobbs was
provided with any information or instructions, it was Mr Becker (and after Mr
Becker died, Mr Chen)
who provided that information) notwithstanding that
contemporaneous documents suggested otherwise. In that regard, I consider that
there is some force in the observation that Mr Hobbs sought to attribute
responsibility for a variety of matters to persons such
as Mr Becker, Mr Chen
and Mr Parker (and often in an unspecific way - "Mr Becker and Co" without being
able to point to any contemporaneous
evidence of their involvement) and, on one
occasion, started to attribute conduct to Mr Becker at a date after Mr Becker's
death,
though immediately correcting that mistake.
- While
I accept that the information contained in the letter to Mr Fitzgerald could
have come from someone other than Mr Parker, it
seems to me significant that the
LEAPs instruction to Mr Fitzgerald was given only shortly after Mr Parker gave
advice as to how
to communicate that advice and in terms consistent with Mr
Parker's advice.
- In
any event, (wherever Mr Hobbs obtained the information about the LEAPs strategy)
it is significant that this was an instance in
which Mr Hobbs was clearly giving
instructions to a scheme administrator (Mr Fitzgerald) as to how the fund was to
operate (and whether
he did so on instruction from Mr Becker is irrelevant when
considering Mr Hobbs' role, vis a vis that of Mr Fitzgerald, in relation
to that
scheme). (Also relevant in that regard is the fact that Mr Fitzgerald clearly
saw himself as having only an administrative
role in relation to the fund and
that Mr Hobbs assumed responsibility for the fund when Mr Fitzgerald resigned as
"director" in early
2005.)
- As
to the next issue to which Mr Halley points in relation to the unreliability of
Mr Hobbs' evidence, this relates to Mr Hobbs' denial
that he was aware of KLM
introducers being issued with manuals that were updated annually (inconsistently
with what he was recorded
as saying on the video of the DVD Seminar). At the DVD
Seminar, in the context of a discussion as to particular funds, Mr Hobbs is
recorded as saying:
... Another type of fund that is - and again when somebody becomes an
introducer for KLM Enterprises, they get equipped with a manual that's updated
annually with all
the latest reports from the different fund managers, showing
the performance for that year and so forth. So they see all the inside
information. They see who the fund managers are, you know, you get all the
information required. (my emphasis)
- At
T 1278.33, Mr Hobbs first said that he was not sure but believed that KLM
"introducers" were provided with information of that
kind and then disclaimed
any such knowledge. When taken to what he had told the attendees at the DVD
Seminar, Mr Hobbs said "That's
completely what I understood" and seemed to draw
a distinction between a manual and any "ongoing introducer's manual". He said
that
it was his understanding that KLM introducers received a manual listing the
funds that were available but could not say that he had
ever seen that manual
updated on an annual basis. There was then the following exchange:
Q. Now, what I want to suggest to you, Mr Hobbs, is that you were well aware
of what material was provided to KLM introducers at the
time you were speaking
to these FTC executives and potential FTC executives in October 2003, that's the
case, isn't it?
A. I was aware of only what I knew. [An answer akin to "it is what it
is"]
...
A. Well, I was aware that they received a manual and I was told it was
updated.
...
Q. You were confident that you had sufficient knowledge to pass on to FTC
executives the fact that if they became KLM Enterprise introducers,
as you
understood it, they would get access to a manual that was updated annually with
information concerning funds made available
by KLM?
A. I was under the understanding, yes, with an introducer that that's what
they would receive.
Q. And that was all part of the system that you understood was to enable
retail investors in Australia to get access legally, as you
understood it, to
offshore funds?
A. Yes, but you can't draw FTC into that. [my emphasis - this
indicates the distinction that Mr Hobbs consistently sought to emphasise between
FTC and the investment process]
- Again,
this is an example of Mr Hobbs' recollection being far more vague in his
evidence than in the account that he gave of the process
at the DVD Seminar
(though I accept that the lapse of time may have dimmed his memory in that
regard). The suggestion that he did
no more than parrot information received
from Mr Becker or others to FTC executives or potential executives (and did not
have any
personal knowledge of what he was telling the attendees at the DVD
Seminar) is surprising and difficult to believe in the absence
of anything to
corroborate Mr Hobbs' account of his dealings with Mr Becker.
- OEM/KLM
process and formation of FTC
- While
some of the other examples to which Mr Halley pointed in the evidence might be
considered to be of less weight in the overall
scheme of things (such as who
wrote the FTC Art of Arbitrage booklet), the inconsistency in Mr Hobbs' evidence
as to the formation/incorporation
of OEM and KLM (and of FTC) is in my view
highly significant given the role of OEM/KLM in the investment process. (I
regard that
role as significant because if, as seems to me to be the case, there
was no relevant separation between OEM/KLM and Mr Hobbs/FTC,
then the reason for
the interposition of the OEM/KLM process can only have been an attempt to convey
the, on this hypothesis, false
impression of some international involvement in
the investment process and an attempt artificially to distance FTC and the
provision
of educational material from that process.)
- At
T 1280, Mr Hobbs denied any knowledge of the identity of the OEM directors,
where OEM was incorporated, where (or when) KLM was
incorporated and who its
directors were. (Disingenuously, having regard to his knowledge of the operation
of IBCs and his description
of them in the DVD Seminar, Mr Hobbs suggested, as
he did more than once to Mr Halley, that reference could be made to the company
register to see who the directors were or to confirm that he had no interest in
the company.)
- Mr
Hobbs' inability to recall any of this information is in marked contrast to the
information Mr Hobbs provided at the DVD Seminar
where, as set out earlier, he
gave an immediate response to the request by Ms Wool for information as to "a
clearer structure of
FTC and the relationship with OEM Limited and then KLM ...
who owns what and, you know, is it floated and - or where you can get
some
additional information".
- There
is no doubt that Mr Hobbs' evidence on the formation of FTC and on the ownership
of OEM and KLM has been inconsistent. In the
handwritten notes made by Mr Blow
of the meeting he attended on 15 February 2003 (at which he clearly identified
Mr Hobbs as present),
there is reference to FTC as an offshore company and to
the "intermediary KLM - Research education material". The notes later record
the
meeting being told that an entity (which must in the context refer to FTC as
this is noted on the following line with a series
of points: Vanuatu; sell
educational material (no prospectus)) was "formed by David Hobbs (still own a %
thru a trust)"; then with
the words "share the investment info" and an arrow to
"owned by OEM Ltd" and a further arrow to "Based n London". (Pausing there,
there is absolutely no evidence to suggest that either OEM or FTC was ever based
in London.)
- Also
in Mr Blow's notes there is a list headed Individuals and the following "Georgia
in US"; "Securities trader US New York"; "Fund
Mger US New York" and "ACCTT
[presumably accountant] Canadian Bahamas" bracketed by the words "Due
Diligence"; as well as the line
"Not using in this fund" and "Kentucky
University US".
- (There
is also reference in Mr Blow's notes to "Trustee company trans capital mgmt";
"All the investment funds have a different mgr
(80% of each fund); OEM owns 20%
of each fund"; "Trustees check each transaction (all over - Australia, NZ, US)";
"Audited accountants";
"Fund mgrs - Merrill Lynch Barclays Soc gen"; "Lots of
safeguards in place - 2-4 year process to research a fund; analysts on contract
from different major firms; a number of people" - all later repeated at the
presentation that Mr Hobbs is recorded on the DVD Seminar
as giving at the later
October 2003 conference.)
- Cross-examined
as to the reference to "forming" FTC, Mr Hobbs sought to draw a distinction
between formation and incorporation (though
interestingly, various of the
material relating to the US corporations also uses the word "formation" rather
than incorporation).
Cross-examined as to the ownership of FTC, there was the
following exchange:
Did you sell FTC to somebody else at some stage?
FTC was sold between Mr Cheng [Chen] and Becker. At one stage I was
supposed to have ownership of FTC, but that never happened. [cf his
statement at the DVD Seminar that he no longer owned the company]
So, what was the sale that you referred to [on the DVD], Mr Hobbs?
The sale was supposed to be the I was supposed to get paid for a portion of
FTC, which I never did.
So, it was the sale you selling FTC to Cheng [Chen] and Becker; is that what
you say?
No.
What was the sale then?
Cheng Mr Cheng and Mr Becker were selling part of FTC to another person.
And how was it proposed that you have anything to do with that sale, as you
understood it, Mr Hobbs?
Mr Cheng said I was going to get paid from it.
Why would you get paid for the sale of an interest in FTC unless you had an
interest in FTC, Mr Hobbs?
Well, you would be welcome to check the register of companies. I didn't
have any interest in it. (my emphasis)
...
[Having been taken to the DVD footage and asked if this had refreshed his
memory],
What were you to be paid, Mr Hobbs?
They said I was to be paid something from the company when they were selling
it.
And, as you understood it, did they sell it?
I don't know.
So, you were to be paid something if they sold the company, as you understood
it, but you don't know whether they ever sold the company;
is that your
evidence?
A. No, I don't, no.
- PJCB initial
investment in Geneva Financial
- A
further example to which Mr Halley pointed as demonstrating the unreliability of
Mr Hobbs' evidence was the statement made by Mr
Hobbs as to the initial
investment by PJCB into the fund administered by Geneva. At [17] of his first
affidavit Mr Hobbs had said,
in unconditional terms:
Although my wife and sister in law were involved in Geneva I did not refer
any Future Trading subscribers or executives to them. Neither
I nor to my
knowledge anyone else at Future trading ever marketed Geneva to subscribers or
executives in Future Trading.
- Later,
Mr Hobbs at [56] deposed to a meeting that he said occurred in about July 2006
in New Zealand with Ms Dabelic, Mr Truong, Mr
Koutsoukos and Mr Wood "to discuss
Future Trading's business" at which he says there was some discussion as to his
wife starting
an account with Cadent to trade futures and Mr Koutsoukos said
that he had sold some flats and wanted to invest the monies "in your
fund". (Mr
Hobbs deposed that his understanding was that this had in fact occurred and that
investments were made with Geneva Financial
but that this was the only
investment of this kind "although I believe they invested further funds after
the first instalment".)
- Mr
Hobbs emphasised in his written submissions this conversation and the belief of
he and his wife that the investment in Geneva Financial
was of personal funds of
Mr Koutsoukos. I have referred earlier to the difficulties with Mr Hobbs'
version of this meeting (in terms
both of the time at which it occurred and the
context of the discussions that there occurred). One of the stated attendees (Ms
Dabelic)
cannot have attended any such meeting in July 2006 as she by then no
longer had anything to do with the J&B Financial or FTC
business;
furthermore, the suggestion that in July 2006 Mrs Hobbs was starting an account
with Cadent is contrary to the evidence
that the Cadent application forms for
Geneva Financial were signed in December 2004 and that account was opened by
January/February
2005. In addition, the first PJCB private placement agreement
with Prestige was dated 21 February 2005. Therefore any discussion
of the kind
Mr Hobbs suggested must have taken placed some time before February
2005.
- As
to the content of any discussion occurring in mid 2006, it seems implausible
that the three J&B Financial officers would have
travelled all the way to
New Zealand just to discuss "production" when they were having regular telephone
calls with Mr Hobbs and
it might be thought to have been far easier and cheaper
to discuss production in one such call. ASIC's contention is that the mid
2006
meeting (that required a trip to New Zealand) was to discuss the establishment
of the Super Save superannuation fund and that
Mr Hobbs has confused the two
meetings (or deliberately reconstructed the latter in order to place any
discussion about investment
in the funds operated by Geneva Financial as
occurring outside of Australia). Mr Hobbs refused to accept that this was the
case.
- Relevantly,
in terms of the manner in which Mr Hobbs gave evidence, at T 1206.50, when Mr
Halley put to Mr Hobbs that at the meeting
in 2006 the discussion was not about
FTC business, Mr Hobbs first response was "It's 2006. I don't actually recall".
Pressed on this,
he said "We'd probably been discussing what the production was"
and this then became "We would have and I would have discussed production",
...
"It would have been about production".
- At
least in relation to the timing of the discussion about investment by PJCB in
the Prestige fund contract with PJCB (which self-evidently
must have occurred
prior to the entry into the agreement), Mr Hobbs ultimately conceded that
paragraph [56] of his affidavit might
be wrong to the extent that it suggested
that the introduction of Geneva Financial to Mr Truong, Mr Koutsoukos and Mr
Wood took place
in or about July 2006, but was quick to add "I'm not to say. I
didn't control Geneva".
- ASIC
cites this as an example of Mr Hobbs' refusal to make obvious concessions unless
or until driven to do so. I consider there is
force to that submission. I note
that, on this occasion, even after being taken to evidence that seems to me to
have been compelling
against Mr Hobbs' stated recollection of events, Mr Hobbs
still qualified his answer (just as he had qualified his concession as
to his
wife's accounting qualifications by saying that he would have to ask her first
before conceding that it was incorrect to refer
to her having done a
degree).
- I
have referred elsewhere in some detail to the DVD Seminar video. It provides one
of the most stark examples of the inconsistencies
between Mr Hobbs' affidavit
evidence and the contemporaneous record of what occurred. At [19] of Mr Hobbs'
first affidavit he deposes
(in unqualified terms) that he made a point of never
giving specific references to funds and further says that "While it is correct
that I mention funds could be capital guaranteed I made no such representation
about any specific fund".
- Cross-examined
as to this, Mr Hobbs (at T 1210) stood by that evidence but immediately
qualified this by saying that he could not
recall ever giving specific
references to funds. There was the following exchange:
Q. Mr Hobbs, you don't say in your affidavit "I can't recall"; do you?
A. No. Well, I don't recall it.
Q. Did you make a point of never giving specific references to funds when you
spoke at FTV seminars?
A. I was under strict instructions not to. [here, seemingly, invoking
Mr Becker or some absent controller of the process]
- Mr
Hobbs was taken to the DVD of the DVD Seminar, which he agreed he recalled was
taped at an FTC seminar in about October 2003. (Though
on its face this answer
appears inconsistent with his evidence that the seminar was taped without his
knowledge, it might conceivably
be that he was unaware of it at the time and
later found out it had been taped. Certainly at the hearing Mr Hobbs said that
he had
watched the DVD but then appeared to contradict this since he made
comments as to no attendees' faces appearing on the DVD and questioned
whether
Ms Li and Mr Truong were there, when those matters were evident on a complete
viewing of the DVD.)
- It
is apparent that Mr Hobbs made numerous references at the DVD Seminar to
particular funds, some at least of which by name: including
the Express fund
that he accepted was run by Mr Diaz and that he acknowledged he had been aware
of at least as at October 2003 (though
at first he had suggested in
cross-examination that he only recalled it by reading it in his affidavit) and
the Solid Gold product:
...So then we have a third foreign exchange product which is called
Solid Gold. It's a unit trust as well. It's run by accountants out of
Maroochydore.
And they use Refco, which is a clearing house, as well. But
that's on exchange spot transactions only. (my emphasis)
- Mr
Hobbs nevertheless refused in cross-examination to concede that he had made
specific references to individual funds in the course
of the FTC seminars,
dismissing the DVD Seminar by saying that "That wasn't a seminar as you are
providing in other evidence" and
describing it (both in cross-examination and in
submissions) as a "oneoff totally different operation".
- Mr
Hobbs also did not accept that in the course of the DVD Seminar he was providing
instructions to FTC executives as to how they
were to promote FTC and its
business (though that is what I would infer from the suggestion at the end of
the first day's taping
that they would discuss the "sales track" tomorrow) and
said that "This was a very unusual oneoff seminar that we discussed a number
of
topics". He was only prepared to concede that it was "possible" that some of the
people at the DVD Seminar were FTC executives,
even though it was apparent that
at least some of them were (such as Mr Diaz and Ms Li) and even then maintained
that this "Doesn't
mean it's an FTC seminar".
- Mr
Hobbs was adamant that the DVD needed to be seen in total context. Pressed on
this, he accepted that the context was that at that
seminar he was discussing
FTC and its operations with those present and that for the first half he was
doing so for the purpose of
telling those present about how FTC worked. He said
that in the second part of the seminar "we spoke about KLM". He denied that he
described how FTC gave access to offshore investment:
Q. And you also took it upon yourself to describe how Future Trading
Corporation gave investors, that is retail investors in Australia,
access to
wholesale funds offshore, didn't you?
A. That's not correct, because FTC didn't do that.
- There
is a clear inconsistency between what Mr Hobbs deposes was his practice of not
referring to specific funds and what he is recorded
at least at this one seminar
as doing. (Moreover, the fact that some of the funds are not named on the DVD
Seminar is not to the
point insofar as Mr Hobbs described in some detail the
operation of funds and the returns they made.)
- Mr
Blow's notes of the February 2003 meeting, for example, refer to comments on
funds where payments are made monthly and the types
of funds (arbitrage mutual
(an AA ratings fund), bond, currency (main ones) options, futures (not a lot)
with the comment against
options "insured against loss". Tellingly, much of the
content of the notes taken by Blow is consistent with the thrust of the examples
and comments noted in the DVD Seminar (which thus provides two contemporaneous
records inconsistent with the evidence given by Mr
Hobbs in this
hearing).
- In
addition to the above matters, I note that there are examples of communications
by Mr Hobbs that flatly contradict the insistence
by him that he did not give
investment advice. For example, the 13 September 2004 (Ex AU 2809) fax sent on
the FZF Anguilla letterhead
(signed by Mr Hobbs ISF as "consultant" and bearing
a fax transmission imprint from Tasman Business Consultants) to Mrs Brock, which
clearly involved the giving of at least general investment advice including the
relatively low exposure of a particular type of investment.
A further example is
the letter of 28 June 2005, (Ex AU 4239) on the letterhead of FZF Anguilla (with
the facsimile transmission
imprint from Tasman Business Consultants on 29 June
2005) in which Mr Hobbs (again described as a consultant) wrote to a Mr John
Simonetta (of Perfection Superannuation) attaching "the requested fund breakdown
for compliance" (which refers to all funds having
"an outside licensed monitor -
Trader View Ltd who manages all fund managers on your behalf ... a
very prudent style of investment" - my emphasis). (Insofar as this letter refers
to Trader View, it indicates an involvement with TraderView which is consistent
with Ms Reisinger's evidence in the CFTC examination.)
- As
to the submission that Mr Hobbs did not provide specific details of investments,
it must be noted that Mr Hobbs spent a not insubstantial
part of the DVD Seminar
describing funds or investment products (sometimes by name though more often by
reference to what the fund
offered or who was running it) and described them in
the context of indicating whether they were KLM funds or funds to which access
was available (using the possessive "we" or "our"). So, for example, after
having explained that FTC made available the financial
education and then
investors could enter into contracts with KLM for funds, Mr Hobbs went on to say
things such as:
... Here are some funds that are just new on the market. ... And when I say
new on the market, ... The whole investment arena worldwide
is changing and it's
going through a cycle again, a cycle that we see 15 years ago, and that is,
capital guarantees. Most top products
now are coming with a capital guarantee.
Most of the guarantees are issued in the form of either a AAA insurance product
or a AAA
rated instrument issued by Bank of America, Citibank. There's a AA,
A-rated product issued by SocGen Bank. But that's all the very
good hard-core
capital guarantees.
The other interesting point that's: out of everything bad comes something
good. And what you're seeing now in the world is you are
having investment
products that are absolutely performance focussed. They perform in bull and bear
markets. So they'll perform in
a market going up and down, with a capital
guarantee. Now, we do not have products like that here in Australia, and we may
not ever
see some of them because we don't have the financial horsepower or the
instruments available. (Pt 2 P 3 lines 6-35)
- Mr
Hobbs said that he had just written an article "to our subscribers on risk
return" (Pt 2 P3 line 44) and at Pt 2 P 4 line 30ff:
So incidentally, some of the products that you have there with capital
guarantee are: there's a foreign exchange trading product that's
just been
offered a capital guarantee on it. Now, that's the first time in history I've
ever seen a foreign exchange trading product
being offered with a capital
guarantee. It's pretty significant. They've also stated that that product can be
invested in Australian
dollars take away exchange rate fluctuations.
- In
light of the above (and the references to funds to which various of the
investors have referred in their evidence) the submission
by Mr Hobbs that there
was no reference to specific funds in the FTC material is disingenuous to say
the least.
- Attribution
of responsibility to others
- In
addition to the matters referred to above (to which Mr Halley pointed as
indicating the unreliability of Mr Hobbs' evidence, it
was submitted by Mr
Halley (again, not without substance in my view) that during cross-examination
Mr Hobbs sought, at every available
opportunity, to deny any knowledge or
involvement in the OEM and KLM activities and to attribute anything to do with
OEM or KLM (as
well as much of the matters relating to FTC) principally to Mr
Becker but also to Mr Chen (and similarly, to attribute responsibility
for the
development and operation of the financial product constituted by the schemes to
Ms Reisinger). Certainly, Mr Hobbs on numerous
occasions gave evidence to the
effect that he was simply following instructions given to him by Mr Becker or
doing what Mr Becker
wished him to do.
- So
for example, I note that in his answers in crossexamination in relation to the
statement on the DVD Seminar that he was building
up a team in Australia to
manage funds, Mr Hobbs was adamant that the instruction to do so had come from
Mr Becker but then gave
internally contradictory evidence as to whether that was
in fact what he was doing.
- In
the DVD seminar, Mr Hobbs is recorded as saying (from p17 line 45, tab 10):
In Australia here we want to build up a bigger team in Australia to
actually manage funds. Their job of course is total transparency. They
must do everything according to the book in informing the trustees of every
transaction. And it's all checked and monitored along
the way. (my
emphasis)
[The suggestion that the role of the scheme administrators was one of "total
transparency" and to inform the trustees of every transaction
is belied by
reference to what scheme administrators actually did - which was to solicit
funds. Again, the suggestion that administrators
informed trustees every step of
the way and that the investment was checked and monitored along the way is a
remarkable statement
when one takes into account that there seems to have been
no reporting by any of the Australian administrators to the "trustee" identified
in the scheme memoranda; there is no evidence of that trustee doing anything to
check or monitor the investments; and that trustee
was based in Mr Hobbs' office
and, I have concluded, beneficially owned or controlled by him]
- From
T 1317.20 there was the following exchange as to this issue:
Q. Now, turn to page 18 of the transcript, go to line 1. You will see you go
on to say: "In Australia here we want to build up a bigger
team in Australia to
actually manage funds"; do you see that?
A. Yes.
Q. Was that what you were seeking to do in October 2003?
A. That's what Kip Becker asked me to do. (my emphasis)
Q. Is that what you were seeking to do, Mr Hobbs?
A. No, not particularly. I was doing - that's exactly what Kip Becker
was
Q. You were doing what Kip Becker wished; is that your evidence?
A. Correct.
Q. Did Mr Becker, as you understand it, wish for you to build up a bigger
team in Australia to actually manage funds?
A. Yes. [Pausing here, to this point, my understanding of Mr Hobbs'
evidence at this point was that he was telling me that, when he said to
the FTC
seminar that "we want" to build up a bigger team to manage funds, he was
conveying what Mr Becker had asked him to do, not
what he personally wanted or
was seeking to do - but, that he was not suggesting that he was not in fact
complying with Mr Becker's
wishes in that regard - ie, that he was doing what Mr
Becker wanted him to do. As Mr Halley points out, that would be consistent
with
what was happening as at October 2003 with the establishment of further
investment schemes in Australia]
Q. So that is what you were seeking to do, was it, in October 2003?
A. No, it wasn't actually. [This answer might be consistent with the
previous ones if by this Mr Hobbs was suggesting that it was not his personal
objective but
that he was simply implementing Mr Becker's objective. However,
the next answer seemed to contradict such a reading of the evidence
to this
point]
Q. Were you seeking to do what you understood Mr Becker wanted you to do, as
at October 2003, with respect to the building up of a
bigger team in Australia
to actually manage funds?
A. That's what he wished and that's what he wanted; that's not exactly
what I was doing. (my emphasis)
Q. Well, if that wasn't what you were doing, Mr Hobbs, why were you telling
the people present at this October 2003 seminar, that;
"in Australia, here, we
want to build up a bigger team in Australia to actually manage funds"?
A. That's exactly as I was described, and I passed it straight on.
Q. Mr Hobbs, you didn't intend to build up a bigger team in Australia to
actually manage funds yourself, why would you have passed
on to this meeting
that that was what you wanted to do?
A. Well, I would have related exactly what I was told.
...
Q. So I can get this clear, Mr Hobbs: Did you, yourself, want to build up a
bigger team in Australia to actually manage funds as of
October 2003?
A. Personally, no.
Q. So you didn't want to; is that what you're saying?
A. I was doing exactly what I was asked.
Q. Mr Hobbs, is it your evidence that you did not want, in October 2003, to
build up a bigger team in Australia to actually manage
funds?
A. Personally, no.
Q. Why were you telling people that's what wanted to do?
A. Because that's exactly what I was asked to do.
Q. Do you say you do, at all times, exactly what Mr Becker asked you to do?
A. Yes, I do.
Q. Then Mr Becker wanted you to build up a bigger team in Australia to
actually manage funds; didn't he?
A. That's what he wanted.
Q. That's what you wanted to do then; wasn't it?
A. No, that's not true.
Q. So you ignored Mr Becker's instruction to you, to build up a bigger team
in Australia to actually manage funds; did you?
A. No, I repeated it exactly as it is in the transcript. (my
emphasis)
- Mr
Halley submits that the evidence otherwise establishes (and I agree) that,
whether or not this was at Mr Becker's instruction,
this is precisely what Mr
Hobbs was doing (namely, establishing an increasing number of funds with scheme
administrators in Australia
from October 2003 onwards) and submits that this
exchange in cross-examination was an example of Mr Hobbs cavilling with a
selfevident
proposition (namely, that he told the meeting that "we" were
proposing to do something) by taking refuge in the explanation that
he was only
relaying what Mr Becker had told him to relay (and answering that this was not
in fact what he was personally trying
to do).
- What
I understood Mr Hobbs to be trying to convey in this exchange was that it was
not his personal objective to build a bigger team in Australia to manage
funds; rather that it was Mr Becker's objective and that he was only doing
what
Mr Becker had told him to do. It seemed to me that Mr Hobbs had become confused
during the course of the questioning. However,
that does not explain the
inconsistency between Mr Hobbs' evidence that he did what Mr Becker had asked
(or told or wished) him to
do and his unwillingness to accept that, by so doing,
he was in fact taking steps to build up a bigger team in Australia to manage
funds (whether or not that was his own personal objective). I was left to
conclude that the reason the evidence had become confused
on this issue was
because Mr Hobbs was faced with the logical inconsistency between saying that he
was doing what he was instructed
to do (and what Mr Becker wanted him to do
though this was not his own personal objective), on the one hand, and being
anxious to
deny that this is in fact what he was doing (perhaps because he was
seeking to avoid an admission that he was establishing funds
in
Australia).
- Significantly,
in my view, insofar as it suggests what appears to have happened, was the answer
by Mr Hobbs to the following question:
Q. And that was how you were to implement, as you understood it, Mr Becker's
instruction to build up a bigger team in Australia to
actually manage funds;
wasn't it?
A. Well, it took a life of its own. (my emphasis)
- As
to Mr Becker, Mr Halley notes that the only contemporaneous evidence suggesting
any involvement by Mr Becker in the matters the
subject of the proceedings is
the email that Mr Hobbs sent to FTC executives advising of Mr Becker's death.
(Mr Halley contrasts
the description in that email of the activity in which Mr
Becker was involved (ie that he was an attorney associated with OEM) with
the
impression he says Mr Hobbs sought to convey of Mr Becker's involvement in the
course of his crossexamination.)
- In
relation to Mr Chen, about whom there is similarly no evidence of any
involvement in the contemporaneous records, it was submitted
by Mr Halley that
had Mr Chen had any relevant evidence to give it might be expected that Mr Hobbs
would have approached him well
before the conclusion of ASIC's evidence (which
is the time when Mr Hobbs has deposed in his affidavit that he had made
enquiries
of Mr Becker's office as to Mr Chen's whereabouts or availability to
give evidence). It is, I have to say, difficult to accept that
Mr Hobbs would
not have been in a position to make any enquiries as to Mr Chen's whereabouts
over the period since at least 2009
when Mr Hobbs was aware that the ASIC
investigation into these schemes included an enquiry into Mr Hobbs' own conduct,
if not from
late 2007 when Mr Hobbs was on notice of the enquiries being made of
others such as the J&B Financial officers (and was taking
steps to marshal
evidence in support of his position in the form of statements from the J&B
Financial officers and Mr Mitchell),
particularly as Mr Hobbs had legal
assistance through much if not all of that period (in the form of advice from Mr
Bellamy and,
for some time, representation by Mr Southwick of Counsel).
- The
lack of any apparent enquiry by anyone on behalf of Mr Becker's estate as to the
FTC or OEM/KLM entities or the investment schemes
after the death of Mr Becker,
and the lack of any apparent involvement by Mr Chen in the operation of those
entities or schemes at
any time, is inconsistent with the suggestion that either
Mr Becker or Mr Chen had any ownership or controlling interest in FTC or
OEM/KLM
or that Mr Chen had assumed any controlling role in relation to those companies
after Mr Becker's death. (I note that the
suggestion that Mr Parker had an
ownership interest in KLM is also inconsistent with the absence of any apparent
involvement by Mr
Parker in the schemes after the falling out with Mr Hobbs and
Mr Fitzgerald over the non-return of moneys the subject of the Covered
Strategies investment.) The fact that Mr Hobbs considered himself able to seek
the revival of registration of both OEM and KLM in
2006 (without any apparent
need for approval from Mr Chen or Mr Parker or anyone else), whether or not that
was at Ms Li's request
or for her benefit, strongly tells against anyone else
having had a controlling role in those companies or their operation at an
earlier stage.
- I
am left to conclude that Mr Becker and Mr Chen are convenient scapegoats on whom
Mr Hobbs has sought to place responsibility for
what occurred with the funds
from at least 2000/2001 onwards (Mr Becker because he is no longer alive to give
any conflicting version
of events; Mr Chen because he has not been called upon
by Mr Hobbs to do so and there being no evidence beyond assertions by Mr Hobbs
of any involvement by Mr Chen in the operation of the investment schemes). I
consider the position of Ms Reisinger later in these
reasons.
- Mr Hobbs'
explanation for the inconsistencies
- Mr
Hobbs frankly concedes that he has given conflicting accounts at different
stages of events. That, in itself might not be surprising,
given the lapse of
time since some of the events occurred, were it not for the fact that some of
the areas in which there was a difference
in accounts were fundamental issues
about which it is hard to see how there would be any room for confusion - such
as who had established
FTC or the OEM/KLM process or as to whether Mr Hobbs ever
had an ownership interest in any of those companies.
- What
is more troubling, however, is the manner in which Mr Hobbs has sought to
explain those differing accounts. In submissions Mr
Hobbs said:
But I ask your Honour to consider that when I was selling the Future Trading
Corporation product I was attempting to sell my expertise.
That is a very
different thing to giving evidence under oath. The evidence I gave during the
examination in New Zealand was given
whilst I had no understanding of the
importance of certain aspects of ASIC's claim. At that time I was the 16th
defendant in one
of the two proceedings involving these entities. I also was
having severe difficulties with my health and these compound the usual
problems
we all have with memories over events from 2005, prior to and after this.
- The
first part of this explanation suggests that Mr Hobbs was inclined to put a
favourable gloss or "spin" on facts to encourage the
purchase of whatever
product or expertise he was actually offering in the FTC seminars or meetings.
That is borne out by a number
of the statements Mr Hobbs made at the DVD Seminar
(which seem to be unsupported by the evidence of what in fact occurred or by any
evidence to suggest they were correct), such as the statements made as to the
zealous process of checking and double checking and
reporting to the trustee and
the assertion that there were thousands of people researching the operation of
funds around the world,
on whose research FTC was able to draw (again, not
supported by any evidence).
- I
accept that this might perhaps be able to be characterised as mere puffery or
exaggeration, but it does mean that caution is required
before accepting broad
assertions made by Mr Hobbs of the relevant course of events as having any
factual foundation (and illustrates
the difficulty of accepting as reasonable
his reliance on legal opinions provided on the basis of what, as far as the
evidence suggests,
were similarly broad and unsubstantiated assertions).
- The
second part of the explanation suggests that Mr Hobbs might have paid more
attention to the accuracy of some of the evidence given
by him in the past had
he been aware of the gravity of the allegations made against him or of the
perceived significance of the particular
issue or issues on which he was giving
evidence to the case brought by ASIC.
- As
to the former (lack of awareness as to the gravity of the allegations), it is
difficult to see how Mr Hobbs' legal advisers would
not have drawn to his
attention the gravity of the matters under investigation by ASIC in 2009 but,
even assuming that they did not,
what Mr Hobbs seems here to be suggesting is
that the evidence he gave in New Zealand (under oath) was not given with the
care and
regard to truth that one would expect of an examinee in those
circumstances. Mr Halley submits that it is inconceivable that Mr Hobbs
(and I
would interpose to add those who were advising him at the time) would not have
appreciated the serious nature of the enquiries
being made by ASIC (and its New
Zealand counterpart) at that time but that in any event whatever Mr Hobbs
understood as to the gravity
of the matters under investigation, he should have
appreciated the seriousness of giving evidence under oath. (I might add that
this
should even more so be the case because, in the context of his religious
faith Mr Hobbs made it clear when cross-examining Mr Koutsoukos
that he sees
dishonesty as an abomination in the eyes of God).
- As
to the latter (lack of awareness of the significance of particular issues), if,
by this, it is suggested (and I make no finding
that this is the case) that Mr
Hobbs might have given different evidence (or tailored his evidence to suit) had
he been aware of
the significance to the case that might be brought against him
or was there being investigated of particular issues, then that would
indeed
cast serious doubts on his credibility as a witness.
- The
other explanation that Mr Hobbs gives as to the inconsistency in his evidence or
as to his inability to recall matters in the
witness box is his medical
condition (coupled with the pressure of being examined). During the course of
his cross-examination, Mr
Hobbs adverted more than once to this
difficulty:
A. .... It's a little bit difficult for myself, with MS you lose your
shortterm memory. I tried to recall a discussion in 2006, exactly
what it was. I
just can't recall all the details at present.
- Mr
Hobbs included in his submissions material relating to multiple sclerosis and
explaining that short term memory loss may be associated
with that condition.
There was medical evidence before me (not in the hearing per se but in an
interlocutory application shortly before the commencement of the hearing) that
Mr Hobbs had been diagnosed for some time
as suffering from multiple sclerosis.
There was no expert evidence as to the impact of such an affliction on long-term
memory, nor
is there any basis by which I can assess when the onset of
difficulties with his short-term memory may have commenced.
- Mr
Halley does not dispute that judicial notice can be taken of the symptoms of
multiple sclerosis, including the fact that it is
a debilitating disease and
that it may from time to time lead to shortterm memory loss. However, he submits
that it is not open to
me, in the absence of any clinical assessment of the
impact that that disease might have on Mr Hobbs' longterm memory, to form any
conclusion as to the impact that the condition has had on Mr Hobbs at any
particular time.
- In
that regard, while the condition might explain shortterm memory loss of the kind
of which Mr Hobbs spoke (such as being able to
recall names from one day to the
next) (and might, to be charitable to Mr Hobbs, explain why he was unable only a
week after swearing
his first affidavit to recall what he had done in order to
satisfy himself that various of the assertions in it were correct), it
is by no
means clear that it would have affected Mr Hobbs' ability now to remember
matters from further in the past; nor is it clear
how it might have affected his
ability to remember things back in 2009 when he was being examined in New
Zealand or back in 2003
when he was speaking at the DVD
Seminar.
- Insofar
as Mr Hobbs' submission suggests that reliance cannot necessarily be placed on
his present memory (and as noted above it is
not clear at what stage his memory
began to be impacted by his condition), then it must follow that I should be
cautious about placing
reliance on his present stated recollection of events. In
any event, it means that significant weight should be placed on contemporaneous
material in testing the reliability of Mr Hobbs' evidence.
- In
this regard, Mr Halley places weight on the contrast between the precision of Mr
Hobbs' stated recollection of events that occurred
a long time ago and the lack
of corroboration of that evidence from contemporaneous documents or witnesses
(including witnesses who
might be expected to be sympathetic to him) rather than
an inability of Mr Hobbs to recall particular details.
- It
was certainly clear at some points in the hearing that Mr Hobbs was having
difficulty speaking (and on one occasion he informed
me that he was having
difficulty with his eyesight). At times he said he was "struggling". On the
occasions when Mr Hobbs appeared
to be (or indicated that he was), having
difficulty, steps were taken to accommodate this. I note that Mr Halley was
assiduous in
suggesting, and ASIC in consenting, to appropriate adjournments in
this regard. (On the occasion when ASIC did oppose a request for
adjournment
during the course of the hearing it was not unreasonably put on the basis that
there was insufficient evidence of Mr
Hobbs' medical condition before the Court
and, in any event, I granted the adjournment.)
- On
the whole, it seemed to me that Mr Hobbs was able to follow the conduct of the
hearing and the arguments that were being put forward
(indeed, he was quick to
point out perceived inaccuracies in the factual picture being put in the course
of opening and he was clearly
familiar with the concepts involved in the
investments into which the various schemes had entered). Mr Hobbs certainly did
not present
as an unsophisticated person unfamiliar with financial matters (in
contrast, for example, to a number of the witnesses, such as Mr
Clements, Mrs
Watson and Mrs Burnard).
- I
consider that it is fair to say that Mr Hobbs' medical condition did not appear
relevantly to affect his ability to present his
defence during the course of the
hearing (though I accept that as a lay person he was subject to the limitations
that any lay person
has in presenting his or her case in Court and I endeavoured
to ensure that he was at no procedural disadvantage in this regard).
- It
seems to me that the overwhelming number of inconsistencies in Mr Hobbs'
evidence (when compared, in particular, to contemporaneous
records, including
the DVD Seminar, the Blow notes and the Parsons diagram (to which I will refer
shortly), but also when compared
with the sheer number of witnesses, across a
range of issues, whose accounts of events differs from that of Mr Hobbs but is
consistent
with the evidence of others called by ASIC) compels the conclusion
that, at the very least, Mr Hobbs' recollection of events has
been
subconsciously recast to accord with his belief (stated by Mr Hobbs to all and
sundry as if that were determinative of the fact)
that the activities in which
he was engaged were lawful.
- The
fallibility of human memory was addressed in Watson v Foxman (in a case
involving allegations of misleading and deceptive conduct) by McLelland CJ in Eq
(as his Honour then was) (at 318) as
follows:
... human memory of what was said in a conversation is fallible for a variety
of reasons, and ordinarily the degree of fallibility
increases with the passage
of time, particularly where disputes or litigation intervene, and the processes
of memory are overlaid,
often subconsciously, by perceptions or self-interest as
well as conscious consideration of what should have been said or could have
been
said. All too often what is actually remembered is little more than an
impression from which plausible details are then, again
often subconsciously,
constructed. All this is a matter of ordinary human experience.
- His
Honour went on to say (at 318-319) that:
Each element of the cause of action must be proved to the reasonable
satisfaction of the court, which means that the court "must feel
an actual
persuasion of its occurrence or existence". Such satisfaction is "not ...
attained or established independently of the
nature and consequence of the fact
or facts to be proved" including the "seriousness of an allegation made, the
inherent unlikelihood
of an occurrence of a given description, or the gravity of
the consequences flowing from a particular finding": Helton v Allen [1940] HCA 20; (1940) 63
CLR 691 at 712.
Considerations of the above kinds can pose serious difficulties of proof for
a party relying upon spoken words as the foundation of
a cause of action ..., in
the absence of some reliable contemporaneous record or other satisfactory
corroboration.
- Those
comments seem apposite in the present case. It seems to me that (whether with
hindsight or because he has for some time been
blind to the reality of the
situation), Mr Hobbs has convinced himself that the position he has espoused is
the truth and that he
has consistently sought to put a favourable gloss on
events that is not supported by the contemporaneous evidence (and to place the
responsibility on others for events happening under his apparent control). Not
only is Mr Hobbs' account inconsistent with the evidence
before me but there is
an almost complete dearth of evidence to suggest that others (such as Mr Becker
and Mr Chen) were relevantly
involved in the way Mr Hobbs
suggests.
- In
circumstances where I cannot exclude the possibility that some of the evidence
given in the present proceedings was a product of
an unreliable memory (or a
tendency in Mr Hobbs' case to convince himself that the facts are as he would
like them to be), I am not
persuaded that Mr Hobbs has given dishonest evidence
in these proceedings (though that seems to me well within the realm of
possibilities).
- However,
what I have no doubt about is that Mr Hobbs' recollection of events is extremely
unreliable (and his constant references
to conversations with or directions from
persons not before the court self-serving). Wherever Mr Hobbs' evidence
conflicts with a
contemporaneous record or with credible evidence from another
witness, I find that other evidence by far the more likely to be the
truth and
wherever it is uncorroborated by credible evidence, I treat Mr Hobbs' evidence
with considerable scepticism.
- Taking
the whole of the evidence into account, the version of events put forward by Mr
Hobbs is one that I simply cannot accept as
a likely (or even a realistic)
possibility. Accepting that the evidence must be tested having regard, inter
alia, to the gravity
of the allegations that have been made against Mr Hobbs, I
am nevertheless firmly of the view that his overall account of events
is wholly
improbable and that the evidence establishes that it is far more probable that
Mr Hobbs' involvement, in the schemes the
subject of the proceedings, was in
fact as ASIC has alleged.
Witnesses called by ASIC
- The
witnesses who gave evidence in ASIC's case (some by affidavit, some who were
subpoenaed to do so and examined in chief by either
Mr Halley or Mr Clarke) can
broadly be grouped into a number of categories (though I note that there is a
degree of overlap between
the various categories):
(i)those who it is said acted as scheme administrators for the schemes the
subject of these proceedings (Mr Koutsoukos, Mr Truong,
Mr Wood, Ms Dong, Mr
Bernard Moore, Mr Zhang), though not all scheme administrators gave evidence
(for example, Mr Collard, Ms Li
and, for all relevant purposes Ms Wu, since her
very late affidavit was largely comprised of denials and assertions);
(ii)those who were at one time or another FTC executives (Ms Brenda Canham,
Mr Diaz, Mr Gahan, Mr Brian Hogno) (some of whom were
also investors; and Mr
Diaz at least having also at one stage administered an investment fund, though
not one the subject of the
proceedings);
(iii)those who invested (or, to put it more neutrally, chose to invest)
(through an IBC or a trustee of a self-managed superannuation
fund) in one or
more schemes but were not themselves scheme administrators or FTC executives (Mr
Richard Blow, Ms Raffaela Camilleri,
Mr Feng Gao, Ms Maria Gemmell, Mr Daryl
Handebo, Ms Lei Huang, Mr Dimitri Jouravlev, Mr Vernon Lewis, Mr Colin
MacDonald, Ms Natasha
Marciniak, Mr Eric Millington, Mr Kevin Moule, Mr Wayne
Moule, Ms Lara Mulligan, Mr Trent Ormond-Allen, Mr Gideon Russell, Mr Nicholas
Stavropolous, Ms Zhi Jun Xu);
(iv)friends or relatives of Mr Hobbs or others associated with the Nelson
office from which Mr Hobbs carried on business from time
to time (Mrs Burnard
(nee Watson), Mr Clements (who was also a scheme administrator), Mr Dent, Mr
Fitzgerald (also a scheme administrator),
Mrs Brenda Hobbs, Mr Mitchell, Mrs
Watson);
(v)those associated with the relevant events in one or other capacity (Mr
Parsons, Mr Bellamy, Mr Nicholas Moore, Mr Paul Monsted
(from Technocash));
and
(vi)Ms Reisinger (whose evidence was comprised of the transcript of her CFTC
examination and who was not available for cross-examination
by Mr Hobbs).
- Mr
Hobbs cross-examined a number, but by no means all, of those witnesses. He made
submissions as to the weight to be placed on the
evidence of various of the
witnesses (with particular emphasis on Ms Reisinger, the three J&B Financial
officers, Ms Dong and
Ms Huang).
(i)Scheme Administrators
- As
to the evidence of each of the J&B Financial officers, Mr Halley submits
that this should be seen in light of the relative
lack of financial
sophistication of each (and particularly Mr Truong) in respect of the provision
of financial services of the kind
involved in the investment schemes with which
they were associated.
- As
to the experience of each, prior to his involvement with J&B Financial and
PJCB, the evidence is that:
- Mr Koutsoukos
had previously operated various small businesses, including a newspaper shop and
a wholesale milk run; as at 2004 he
was running a gym in Bankstown; he had no
formal financial education or qualifications (but had attended a two-hour
seminar on option
trading about 16 years before (Koutsoukos at [3],[4]);
- Mr Wood had also
previously operated a number of small businesses and had been a sales consultant
for a roofing business; from about
2002, he had worked as a mortgage broker or
salesman for Mr Diaz; he had undertaken a short business training course in 1965
and
had completed a short mortgage broking course in 2002 but otherwise had no
formal financial qualifications (Wood at [3]-[6]); and
- Mr Truong had
worked in various jobs, including as a packer and storeman, a kitchen hand, a
house-keeper, and in furniture retail;
had begun working one day a week for Mr
Diaz in late 2002 and had then worked full-time for Mr Diaz during which period
he said he
learnt about mortgage and finance broking; and he had no financial
qualifications (Truong at [7]-[14]).
- In
response to the submission as to the lack of sophistication of these witnesses,
Mr Hobbs raises two matters.
- On
the one hand, Mr Hobbs points to evidence that he says refutes the suggestion
that Mr Koutsoukos (at least) did not have capacity
to be involved in financial
matters such as the running of the fund (in particular, Ms Reisinger's evidence
(at Ex AO p134.4-24,
p135.1-24, p136.1-18), where Ms Reisinger refers to
discussions in May 2007, after a meeting with the traders (in which she says
Mr
Hobbs was also involved - Ex AO p130), where she says Mr Koutsoukos "talked
about having balance in the portfolio".
- On
the other hand, Mr Hobbs asserts (and this is significant in my opinion) that a
level of financial sophistication on the part of
Mr Koutsoukos (and presumably
not for any other scheme administrator) was not required (since the day to day
trading was done by
"professionals", namely the traders (or CTAs) "under the
advice of Ms Reisinger"). Mr Hobbs submits that administration of the fund
(which he describes as management of an aspect of the "Reisinger product")
"simply required honesty, and good book keeping", no different
from the other
businesses that Mr Koutsoukos previously owned or ran.
- As
to the first (the submission that Mr Koutsoukos did have sufficient capacity to
be involved in financial matters involved in the
running of a fund), there seems
to me to be some ambiguity in the portion of Ms Reisinger's transcript on which
Mr Hobbs relies,
namely as to whether what Ms Reisinger was there saying was
that Mr Koutsoukos had been discussing the balance of the portfolio "between
ag-related commodities, metals and financial futures and S&P indexes" as Mr
Hobbs' submission suggests or whether she was simply
saying that she believed Mr
Koutsoukos understood that having a diverse and well-balanced portfolio was good
for his account (a proposition
that would not be surprising having regard to the
fact that this was a view that had been espoused by Mr Hobbs in the DVD
Seminar).
- I
accept that this is an issue on which Mr Hobbs might have sought to
cross-examine Ms Reisinger had she been available for cross-examination
(though
I note that Mr Hobbs did not indicate any particular areas that he would have
wished to explore in cross-examination of Ms
Reisinger). To that extent, I might
have been inclined to proceed on the assumption that any such ambiguity as to
the proper reading
of her evidence should be resolved in favour of the
construction for which Mr Hobbs contends. However, at Ex AO p 135.5ff, Ms
Reisinger
is recorded as saying (when asked what Mr Koutsoukos had said that led
to her opinion as to his sophistication):
He just made a general comment that the Idylic account had been very
profitable and, in his opinion it was due to the balance of the
portfolio
...
..his general opinions and questions and the questions that they would ask
the traders as far as their strategies and how long they
held a trade, whether
they were in and out on a daily basis or if they held the trade for a longer
period of time
...
He [Koutsoukos] did ask a trader if .. how long he held his positions and if
he was a short-term trader, a long-term trader or medium-term
- In
particular, Ms Reisinger said that there was nothing that Mr Koutsoukos did that
indicated that he understood the difference between
such trades other than the
asking of the question.
- Therefore,
to the extent that the basis for Ms Reisinger's understanding as to Mr
Koutsoukos' level of sophistication was tested in
her CFTC examination, the
matters to which she pointed for that conclusion were relatively flimsy. I have
difficulty in placing much
weight on Ms Reisinger's assessment of Mr Koutsoukos'
abilities in this regard and I note that Mr Hobbs did not cross-examine Mr
Koutsoukos on his understanding of matters of this kind (simply focussing on his
understanding of profit in a business context).
- As
to the second part of the submission (namely, that the role of the scheme
administrator was one that did not require a great degree
of sophistication),
this seems to me to underscore ASIC's case, which is that the corporate/scheme
administrators performed a largely
administrative role (and that Mr Hobbs was
the one at whose direction or instruction the funds ultimately operated).
- While
ASIC goes further to submit that it can be inferred that Mr Hobbs chose
relatively unsophisticated people to administer the
funds because they were
unlikely to question him, I do not accept that such an inference should
necessarily be drawn. I am inclined
to think that an equally available inference
is that Mr Hobbs' choice of persons to administer the funds, or for whom funds
would
be set up, reflects his view that the role was little more than an
administrative role and one that (as explained in the DVD Seminar)
followed on
from the role of an FTC executives as someone who then wished to "sell
investments" - which Mr Hobbs explained was possible
through investment contract
sales with KLM.
- At
least some of the scheme administrators seem to have taken on that role by
reason of their relationship or association with Mr
Hobbs (Mr Fitzgerald says he
did so at Mr Hobbs' request to help a friend; Mr Clements' evidence suggests
that Mr Hobbs saw this
as a way to give him an opportunity to make some money,
reminiscent perhaps of Mr Hobbs' explanation that he appointed Mr Diaz as
FTC
National Sales Manager in order to give him an opportunity (and not because he
had significant regard for Mr Diaz' solid financial
business at that
time).
- What
the administrative nature of the role (as Mr Hobbs saw it) throws sharply into
focus is the question of at whose direction or
instigation the funds were set up
and were to operate. I cannot accept the suggestion that no financial experience
was necessary
because the relevant decisions were all made by the traders. The
investment schemes were set up (and investment therein was sought
from potential
investors) before any trading decisions were made by the traders and the traders
themselves had no input as to what
each scheme would promote as fund
investments.
- It
is very obvious that persons such as Mr Clements had no idea about financial
products of the kind in which the scheme he operated
was to invest in
(notwithstanding that he agreed with Mr Hobbs that he had written an e-book on
investment - an answer in which I
could in any event place little weight if I
accepted Mr Hobbs' assertion that "anyone" could write a financial education
book of
the kind that FTC distributed to subscribers). Similarly, while Mr
Fitzgerald had some idea of the responsibilities involved in relation
to
ensuring the proper disbursement of investors' funds, he clearly was doing no
more than taking administrative steps in relation
to that fund (and for at least
six months it appears that no one was directing the operation of that funds).
- Mr
Hobbs says that it was Ms Reisinger who was giving the directions in relation to
the funds (and in support of this he refers to
the evidence of Mr Bernard Moore
(at [79] to [82]), as further evidence of Ms Reisinger being the person who gave
advice to fund
administrators). The evidence of involvement by Ms Reisinger in
the investment schemes related in general to the advice given by
her (consistent
with the advice that one would expect to be given by a broker or adviser to a
client) as to the appointment of, and
instructions given to, traders and advice
as to what profits from trading were available to be withdrawn and whether she
recommended
that the profits be taken out at particular times (apart from the
calculation and distribution of commissions or other payments to
Mr Hobbs or
those associated with the schemes).
- There
is no evidence to suggest that Ms Reisinger made the decision to establish new
investment schemes or made the decision as to
who should take on the role of
administrator of those schemes. (At most there is a suggestion that she came out
to Australia and
made a number of presentations to FTC executives or others
(which would equally be consistent with Mr Hobbs' characterisation of
Mr
Caswell's trip to Australia as being something of general interest to
people).)
- Insofar
as Mr Hobbs points to the evidence of Mr Bernard Moore (who was the appointed
"administrator" of North Wave Ltd which operated,
the Good Value Fund, the
appointed company secretary of North Wave being Mr Collard), this seems to me to
be another example (disingenuous
or otherwise) of Mr Hobbs focussing on one
aspect of evidence out of its overall context.
- In
the relevant paragraphs of his affidavit, Mr Moore gives evidence as to
communications with Ms Reisinger in relation to the opening
of the Cadent
account for that fund. Relevantly, however, the email chain of communications
commences with advice from Ms Reisinger
to Mr Moore on 7 November 2006 that his
account at Cadent had been improved and says "Please contact Lili or David
Hobbs for further instructions (my emphasis)" and that if he could not reach
them he could contact Ms Reisinger and she would "try to help
you". Mr Moore
responded that he had tried to contact Lili and David but had no response and Ms
Reisinger then (on 21 November 2006)
emailed to him that Lili was in China until
the end of January and Mr Hobbs was ill and sounded likely to be until after the
first
of the year; and said "I can help you get started if you would like for me
to. Let me know what I can do to help".
- A
fair reading of that exchange (and Mr Moore's evidence that he dealt with Ms
Reisinger as an intermediary between North Wave and
Cadent) is not that that Ms
Reisinger was giving directions in relation to the fund, but rather that Ms
Reisinger had referred Mr
Moore to Ms Li and Mr Hobbs for instructions and that
she was assisting him in the absence of him being able to contact Ms Li and
Mr
Hobbs. From that I would draw the opposite conclusion from that for which Mr
Hobbs contends, namely I would conclude that this
is evidence of Ms Reisinger's
understanding that the instructions in relation to the fund would come from Mr
Hobbs (and Ms Li) and
that Ms Reisinger was acting as an adviser only.
- Mr
Halley submits, and I accept, that having regard to the level of sophistication
of the three J&B Financial officers (and the
history of their business
activities prior to their involvement in the schemes the subject of these
proceedings) it is inconceivable
that they would themselves have conceived of
the idea of establishing the Super Save Superannuation fund (for example).
Similarly,
the suggestion that they had the relevant contacts with persons such
as Ms Reisinger to open and operate the Cadent accounts without
guidance or
assistance from Mr Hobbs seems to me to be far-fetched. Any such submission is
inconsistent with the willingness of the
J&B Financial officers to accept
and pay the invoiced amount for the "IP" associated with the fund that they
understood had been
set up for them by Mr Hobbs (and with the payment of that
amount into the Magny-Cours bank account that was controlled by Mr Hobbs).
- Turning
then to the submissions made as to the credibility of the particular scheme
administrators who were cross-examined in the
proceedings, I comment as
follows.
Mr Koutsoukos
- Mr
Hobbs submits that Mr Koutsoukos cannot be relied upon to give truthful
testimony; that his total stance has been to attempt to
shift blame for his
actions ("even to the point that he is attempting to distort the truth about
Geneva Financial" - a reference,
as I understand it, to the nature of his first
investment of funds through PJCB to Geneva Financial in 2005); and that he is
not
a reliable witness. Mr Hobbs points to the variations in the accounts given
by the three J&B Financial officers as "nothing more
than the perpetrated
lie given by all three" and made no secret of the fact that he believes Mr
Koutsoukos to have given false evidence.
- In
general, where there were inconsistencies between the evidence of the three
J&B Financial officers, Mr Halley submitted, and
I accept, that given the
frequency and the number of conversations, meetings and discussions it was not
surprising that there might
be differences between the three as to the time
things were said or done or as to precisely what was said. Mr Halley places
weight
on the striking similarity of the evidence that each gave as to
fundamental aspects of the relevant events. In particular, it is
submitted by Mr
Halley that there is a consistency between the three on their recollection as to
how they came to operate the Integrity
Plus and Super Save schemes; how they
came to make decisions as to where they were going to place the investors'
funds; the circumstances
in which they came to start to pay profits; and the
circumstances in which they had dealings with Cadent.
- Mr
Hobbs, however, points to the following instances where he contends that Mr
Koutsoukos' evidence was inconsistent with that of
others or should not be
believed.
- First,
Mr Hobbs refers to the inconsistency in the evidence given as to the religious
meetings in the J&B Financial offices to
which Mr Koutsoukos deposed at
[171] and which in cross-examination he maintained Mr Hobbs (and Ms Reisinger)
had either attended
or participated in via a telephone link (T 271.47-50, T
272.1-19/32-35). Mr Hobbs points to the evidence of Mr Truong in cross
examination
(T 367.32-50), which was that neither Ms Reisinger nor Mr Hobbs had
attended such meetings.
- In
that regard, I note that Mr Truong did confirm that there had been regular early
morning prayer meetings. It seems to me not implausible
that Mr Hobbs (who
invoked his faith on more than one occasion when the veracity of his evidence
was challenged in the witness box
and who stridently challenged Mr Koutsoukos in
cross-examination with the proposition, readily accepted by Mr Koutsoukos, that
telling
an untruth was an abomination in the eyes of God) would have
participated in prayer or religious discussion from time to time, particularly
if he were in contact with the J&B Financial officers at the time of such a
prayer meeting. Nothing seems to me to turn on whether
or not Mr Hobbs actually
did so. This issue seems to me to be peripheral to a determination of the
overall credibility of Mr Koutsoukos
as a witness (whose evidence was
corroborated by others on numerous matters and was consistent in broad terms
with the contemporaneous
documents). (Moreover, I note that Mr Koutsoukos, who
readily acknowledged the religious significance of speaking the truth, was
not
shaken in the evidence that he had given.)
- As
I understand it, Mr Hobbs suggests that Mr Koutsoukos has made reference to the
prayer meetings and has invoked his faith in order
to bolster his general
credibility. If that had been his intent then it would have served little
purpose. In any event, as I understand
the relevance ASIC places on the
references throughout the evidence to religious matters, it is that part of
ASIC's theory of what
had occurred was that Mr Hobbs had used religion as a
means of persuading others to accept his account of matters (and, in that
regard,
I note that Mr Hobbs himself emphasised his religious faith a number of
times when pressed on matters in cross-examination). In any
event, I am not
persuaded that anything turns on the inconsistency between the witnesses'
evidence in this regard.
- Second,
Mr Hobbs refers to the evidence given by Mr Koutsoukos as to the traders'
meetings in Chicago in 2007, namely his evidence
(at [96]) that that both Ms
Reisinger and Mr Hobbs told those attending that they could not talk to the
traders about their returns
(Mr Hobbs referring to his cross-examination of Mr
Koutsoukos at T 305.14-16/33-50; T 307.40-45; T 396.1-15; and T 324.1-13/24.32).
Mr Hobbs notes that Mr Koutsoukos conceded that the traders gave presentations
about their business and that their business was one
of trading in the
expectation of making profit (T 324.24-32), from which it seems Mr Hobbs invites
the conclusion, by way of a process
of deductive reasoning, that the traders
spoke about profit (a conclusion that in my view does not necessarily
follow).
- Mr
Hobbs notes that in cross-examination each of Mr Clements (T 774.50; T 775.1-9;
T 776.1-8) and Mr Woods (T1125.27-50; T 1126.1-25)
agreed that at the meetings
in Chicago the traders spoke about their strategies and returns or the lack of
returns. Though general
in content, I accept that this does suggest an
inconsistency in the recollection of the three in this regard.
- Mr
Hobbs argues that it would be incomprehensible for traders to give a talk about
trading strategy without speaking about the most
fundamental part of it, namely,
profit or loss. That may or may not be the case. It seems to me, for example, by
no means implausible
that the traders could have spoken only in general terms
about returns and that what Mr Koutsoukos understood he was precluded from
asking was as to the specifics. (As to what reason there might have been for the
giving of a direction not to talk about the specifics
of trading, I could only
speculate.) Again, this is a matter on which Mr Hobbs might perhaps have sought
to cross-examine Ms Reisinger
had she been available for
cross-examination.
- While
I accept that there is an inconsistency in the evidence on this point, it does
not seem to me to follow therefrom that (as Mr
Hobbs asserts) this is an
instance of Mr Koutsoukos blaming others for his conduct of what Mr Hobbs refers
to as the "J&B operation"
nor does it seem to me to cast doubt on the
credibility of Mr Koutsoukos' evidence on the whole.
- Third,
Mr Hobbs refers to Mr Koutsoukos' evidence in cross-examination that he could
not recall a company with a name similar to "TITL"
(T 270.30-46). Mr Hobbs
points to the statement by Ms Reisinger in her CFTC examination
that:
TITL was an account that was opened on Cadent's books [later she submits as
being in 2008] ... It's my understanding that that was
a second account. And in
review of the account opening documents that were submitted, there was a second
account for Jimmy Truong,
Brian Woods and Con ... Koutsoukos
- Ms
Reisinger said that she was not involved in the opening of that account and did
not receive the documents until well after the
account paperwork and
documentation was received by New World Holdings. Ms Reisinger recalled that she
had had a conversation with
Mr Erdman about the account but could not recall
what he had said; she also said that the account was never opened (as she
believed
that Cadent's background check had revealed what was by then the ASIC
investigation into the J&B Financial officers). (Ms Reisinger
went on to
state her understanding that this account was to be associated with a unit trust
(on the basis that it was her understanding
at the time that the companies
opening accounts with Cadent were the owners of unit trusts) and that Mr Hobbs
was the foreign introducing
broker for that account, matters to which, for
perhaps obvious reasons, Mr Hobbs does not point - Ex AO pp558.21-561.12).
- Mr
Hobbs relies on Mr Koutsoukos' stated inability to recall a company by the name
of TITL as "further evidence of Mr Koutsoukos misleading
the court". He bases
that submission on his assertion that "this was the company Mr Koutsoukos
referred to when I spoke to them on
17 October, 2007. At this discussion, Mr
Koutsoukos told me that this was the company, through which they were making the
most money".
The significance of the 17 October 2007 date is that this is the
date on which Mr Hobbs visited the J&B Financial office and
asked that the
J&B Financial officers sign a letter asserting that they were not operating
a Ponzi scheme out of the J&B
Financial office.
- There
is no evidence of the incorporation of any company by the name of TITL, nor is
there a copy of the Cadent paperwork to which
Ms Reisinger referred (though I
accept that Mr Hobbs may not necessarily have been in the position to obtain
access to the latter).
There was, however, in evidence a copy (Ex AU 45) of a
declaration made by the Chief Operating Officer of Cadent in April 2008, Mr
Thomas Konopiots, attesting to the fact that in mid December 2007 Cadent
received a request to open an account for a potential new
client (TITL
Management Ltd). He says that the information provided to Cadent by TITL
indicated that its owners were Mr Koutsoukos
Mr Wood and Mr Truong and that each
was employed by J&B Financial ([7]).
- (Mr
Konopiots in that declaration also attested to the opening of the ISPL Cadent
account in or around October 2006 and the opening
of 13 sub-accounts to that
account. He says that in the course of due diligence in relation to the opening
of the TITL account it
was discovered that ASIC had issued an advisory notice
mentioning J&B Financial. He also attests to the meeting in January 2008
at
which Mr Stanton, Mr Hobbs and Mr Collard conferred with members of New World
Holdings and Cadent; at which he says that Mr Stanton
said that he was
representing "Idylic" in connection with legal proceedings and that "Super Save
investors had been made whole" and
Mr Hobbs said that he had been misled by Mr
Koutsoukos, Mr Truong and Mr Wood. Mr Konopiots says that Mr Stanton and Mr Wood
said
that they did not know for certain to whom money in the ISPL account
belonged but it "might be" Messrs Koutsoukos, Wood and Truong
(see paras [8],
[14]-[17]).)
- There
was no evidence from Mr Hobbs as to any conversation on 17 October 2007 in the
terms stated in his submissions (and I note that
this conversation is placed as
occurring at around two months before an account application in the name of TITL
was apparently made
to Cadent, hence it is difficult to see how any commission
could yet have been earnt, or money coming in, from trading with Cadent
on
behalf of such a company at that stage). (The other point to note is that the
Konopiots' declaration corroborates Ms Reisinger's
evidence in the CFTC
examination of those matters.)
- What
was put to Mr Koutsoukos in cross-examination was whether he recalled a company
of that name. My observation of Mr Koutsoukos
in the witness box was that he
appeared genuinely to be perplexed by the reference by Mr Hobbs to TITL. That
may have been due to
any number of reasons - he may not have understood the
reference to the company name (it might for example have been miscommunicated
by
Mr Hobbs or misrecorded in the CTFC transcript; alternatively, Mr Koutsoukos may
not have anticipated questions as to that company
and, out of context, may not
have immediately recalled the name; or he may simply have forgotten about the
company). Certainly, any
suggestion that J&B Financial was making a lot of
money out of trading through Cadent by that company (if that is what the
reference
to this meant) would have been inconsistent with the evidence of Ms
Reisinger that no such account had been established at that
time.
- It
is impossible for me to conclude, on the evidence that was before me, that Mr
Koutsoukos' evidence that he did not recall a company
of that name was false or
a deliberate attempt to mislead (or "further mislead") the Court.
- Fourth,
Mr Hobbs points to the inconsistency between Mr Koutsoukos' evidence as to when
the "ponzi" letter dated 17 October 2007 was
signed (he placing this event at
some time after his ASIC examination on 8 November 2007 and before the s 1323
proceedings were commenced
on 5 December 2007) and the evidence of Mr Truong
(confirmed by Mr Truong in cross-examination - T 1475.15-20) that he signed the
letter on 17 October 2007 and that he had never signed documents that were
backdated (T 1476.4/20-26). (For linguistic edification,
I note that the word
"Ponzi" was used in a variety of ways in the course of the hearing: as an
adjective, noun and even a verb, although
according to the Macquarie
Dictionary it is a noun - defined as "a fraudulent investment scheme in
which initial investors are paid dividends using the income derived
from later
investors rather than real profits"; see also the Oxford English
Dictionary definition of the term, the etymological derivation of which is
the name of the notorious perpetrator of such a fraud.)
- I
accept that there is an inconsistency in the accounts given by Mr Koutsoukos and
Mr Truong in this regard (though I note that Mr
Truong's account of the meeting
in his affidavit is itself incorrect at least insofar as it places Mr Wood in
attendance at the meeting
- as Mr Truong accepted in cross-examination - and on
Mr Truong's account there were two letters signed, yet, as far as I know, only
one has surfaced in the proceedings).
- Mr
Halley submits that the differences in the recollections of Mr Koutsoukos and Mr
Truong as to how the December 2007 "ponzi" letter
was typed simply highlight the
extent to which each of those gave an independent recollection of his activities
with Mr Hobbs. Mr
Halley submits that what was consistent was that both said
that Mr Hobbs was present, both said that the wording came from Mr Hobbs
and
both of them said that it was in that context that they signed it and gave it to
Mr Hobbs (none of which was disclosed by Mr
Hobbs in his evidence and on which
points Mr Hobbs did not challenge them). I agree.
- The
inconsistency in relation to this issue could not, on any view, lead to the
conclusion for which Mr Hobbs contends (namely, that
"This is a deliberate
attempt by Mr Koutsoukos to suggest that I was somehow involved in his ponzi").
What Mr Koutsoukos' evidence
(as does Mr Truong's) goes to is that he signed the
letter at Mr Hobbs' request and did so without regard to the veracity of the
statements contained therein. However, accepting that Mr Koutsoukos (and Mr
Truong) had no belief in the truth of the statements
in that letter would not
itself not make true that which the letter denies (therefore it is difficult to
see how doubt cast as to
the evidence given by Mr Koutsoukos as to the
circumstances in which the letter was signed would lead to the conclusion that
this
was an attempt to implicate Mr Hobbs in any Ponzi scheme there being
operated).
- The
evidence of both Mr Koutsoukos and Mr Truong (coupled with Mr Hobbs'
acknowledgement in his submissions that he attended a meeting
at which the said
letter was provided to him) is telling in that it indicates that Mr Hobbs had
some concern that he might be said
to be involved in the operation of the funds
administered from the Burwood office and that those schemes might be said to
have operated
as ponzi schemes (since absent such a concern it is difficult to
see why the letter would have been requested in the first place).
This might, on
one view, indicate a level of knowledge by Mr Hobbs of the running of the
schemes that belies his assertion that he
had no knowledge of how the funds were
operating. Be that as it may, I do not consider that the inconsistency in the
evidence in
this regard casts doubt on the overall credibility of Mr
Koutsoukos.
- (To
the extent that Mr Hobbs' submissions in this regard go on to make assertions as
to what Mr Collard in his submissions would say
or as to what discussions he had
with Mr Collard at the time, this amounts to unsworn evidence after the close of
the evidence in
the hearing and I cannot properly, and do not, take those
assertions into account.)
- Pausing
there, I note that Mr Hobbs has emphasised the inconsistencies between the
witnesses' accounts on particular matters such
as this as indicative of the
unreliability of their evidence (and made a point of cross-examining witnesses
as to who had prepared
their affidavits). Mr Halley submits (and I accept) that
the differences in the respective accounts given by the J&B Financial
officers are at the margin and that it would be more suspicious if the accounts
of the witnesses were to be identical (as, I note,
were the affidavits prepared
by the J&B Financial officers on the basis of the draft affidavit prepared
by Mr Hobbs). In that
regard, I accept that there is a more readily available
inference of collusion between witnesses where affidavits can be seen to
have
been cut and pasted (and the affidavits prepared by Mr Hobbs would clearly
suffer from that problem). Therefore, the mere fact
that there are differences
in the accounts given by the various witnesses is not in itself a cause for
suspicion.
- Notwithstanding
that he submits Mr Koutsoukos is an unreliable witness, in some of his
submissions Mr Hobbs relies on Mr Koutsoukos'
evidence as supporting his version
of events.
- Mr
Hobbs points to Mr Koutsoukos' acceptance in cross examination of the
proposition that he had the direct control and running of
the two funds "of
J&B" (referring to T 315.27-49; T 316.1-49; T 317.1-33; [795]-[813] of Mr
Koutsoukos' affidavit) as being inconsistent
with the allegation that Mr Hobbs
was a director or de facto director for those funds. In effect, he relies on the
evidence of Mr
Koutsoukos as an admission that Mr Koutsoukos ran the funds. Mr
Hobbs refers to the evidence at T 279.46,T 298.35 and T 315/316 in
this
regard.
- Mr
Halley submits that those answers should be seen in the context of Mr Koutsoukos
having made decisions on a daily basis but not
as inconsistent with those
decisions having been made subject to the directions and instructions of Mr
Hobbs. I accept that there
is no inconsistency between the proposition that Mr
Koutsoukos made decisions in relation to the running of the funds and the case
mounted by ASIC which is that he did so at the direction or on the instruction
of Mr Hobbs (with which he was accustomed to act).
- I
therefore do not regard this evidence in isolation as damning of ASIC's case.
Rather, it must be seen in the context of the evidence
of Mr Koutsoukos and
others as to the involvement Mr Hobbs had in the making of those decisions (or
the approval of such decisions
when relayed to him). In that regard, the
evidence as to Mr Hobbs' reaction to the level of the profit distribution made
by the scheme
administrators to themselves (as to it being too low) and the
evidence as to Mr Hobbs directing that the percentage profit be varied
to avoid
the appearance of a Ponzi scheme, which I accept, is consistent only with Mr
Hobbs having a directing role in relation to
the funds administered by Mr
Koutsoukos and the other J&B Financial officers. (I note that Mr Koutsoukos'
evidence as to the
payment of returns was largely not challenged in
cross-examination.)
- Complaint as
to insufficient time spent by Mr Hobbs at the office
- Further,
Mr Hobbs points to Mr Koutsoukos' evidence that he complained (T 301.39-41) that
Mr Hobbs did not spend enough time at J&B's
office as indicating that he was
not giving instructions and was not a de facto director (on the basis that had
that been the case
Mr Hobbs would have spent a large amount of time at J&B).
That submission seems to be predicated on the assumption that physical
presence
is necessary for a finding that Mr Hobbs acted as a director. However, the
evidence that there were regular conference calls
in which the J&B Financial
officers reported on the running of the business conducted from that office and
sought instructions
from time to time would be sufficient without the need for
Mr Hobbs to have been physically in attendance at the office. (Moreover,
had the
J&B Financial officers not regarded Mr Hobbs as having a role in the conduct
of the business there would have been no
reason to make such a complaint.)
- Concession as
to deceptive conduct
- Mr
Hobbs places weight on the concession by Mr Koutsoukos that he had behaved
deceptively when leaving an open Bible on his desk during
client meetings (T
320.50 - T 321). Mr Hobbs referred to Mr Koutsoukos' evidence (at [173(d)]) that
he had used religion as part
of his sales routine and had accepted (T 321.40-46)
that this was a devious way to entice clients. (As noted earlier, Mr Hobbs
submits
that Mr Koutsoukos has attempted to use religion and the Bible "as a way
of attempting to put credibility into his affidavit". Ironically,
Mr Hobbs also
invoked his religious faith throughout cross-examination, perhaps also as a
means of putting credibility into his answers.)
- This
submission seems to go to Mr Koutsoukos' credit generally. Mr Halley submits
that this evidence simply demonstrates that Mr Koutsoukos
was prepared to
address and confront difficult questions and to do so directly (without excuse
or prevarication).
- Similarly,
in response to the submission by Mr Hobbs that the evidence of "fraudsters"
(namely Mr Koutsoukos, Mr Wood and Mr Truong)
was of dubious reliability, Mr
Halley points to the ready acceptance by Mr Koutsoukos of matters that would not
go to his credit
(namely his acceptance that the payments to himself and others
out of client funds amounted to stealing). Mr Hobbs had pointed to
the
transcript of Mr Koutsoukos' cross-examination at T 264.26 to T 267.39; in
particular to Mr Koutsoukos' agreement that the money
paid to each of himself
and Mr Wood came from investors' funds and his agreement that this was stealing
(T 320.50; T 321.1-6) and
to T 265.1-3; T 266.13-20; T 301.6-49 in this regard.)
Mr Hobbs also noted the concessions that Mr Koutsoukos made in the course
of
crossexamination at T 265.34 as to the drawing of salaries out of investor's
funds - T 266. Mr Halley points out that Mr Koutsoukos
made no attempt to cavil
with this. (The fact that Mr Koutsoukos has now been charged in criminal
proceedings yet did not resile
from the proposition that he had behaved wrongly
is relied upon by Mr Halley as showing that (unlike Mr Hobbs) Mr Koutsoukos has
been prepared squarely to face up to the consequences of his actions. Be that as
it may, I do not consider that the fact that Mr
Koutsoukos admits having behaved
deceptively means that I should not accept his evidence, particularly where that
evidence is consistent
with other witnesses and contemporaneous
records.)
- I
accept that to the extent that the evidence of Mr Koutsoukos is that he was
prepared to sign a statement (in terms of the 17 October
2007 letter), a false
affidavit (in terms of the 20 December 2007 document that was not on its face
for use in any particular proceedings)
and was prepared to give false evidence
in the s 19 examinations, this is cause for concern (though not a matter
advanced by Mr Hobbs
as a reason not to accept Mr Koutsoukos' evidence in the
present proceedings, perhaps understandably since the Mr Hobbs seems to
have
been involved in procuring some or all of that material). However, and
significantly in my view, the evidence given in the present
proceedings by Mr
Koutsoukos (unlike that of Mr Hobbs) is broadly consistent both with the
contemporaneous documents and with the
evidence of other witnesses.
- Briefly
as to the other matters to which Mr Hobbs has pointed in his submissions, I note
as follows.
- I
cannot place any weight on the answer by Mr Koutsoukos (when asked at T
268.20-32 whether Mr Hobbs would have been entitled to a
salary had he acted as
it was alleged he had in relation to the funds) that he did not know or that he
accepted that it was "Hardly
likely that somebody would conduct all that
business without wanting a salary to be paid". What Mr Koutsoukos did or did not
think
would be the expectation of someone performing that role is irrelevant to
the issue whether Mr Hobbs in fact perform that role. That
is an issue for the
Court. Moreover, this argument wholly fails to take into account the fact that a
person might have been prepared
to act in relation to a fund of this kind if
there were a financial benefit otherwise expected to be gained from that work.
Mr Hobbs'
submission that "I did not give any alleged advice. I did not do the
work so I had no reason or expectation to be paid" is no more
than an assertion
and I have treated it as such.
- Mr
Hobbs also referred to the transcript at T 275 where Mr Koutsoukos conceded the
unlikelihood of someone in the position of Mr Tomlinson
(said to have a
considerable amount invested in Cadent funds) seeking to borrow moneys. In that
regard, I note that Mr Koutsoukos'
answer ("you were my boss") sounded to me
quite unrehearsed and as reflecting Mr Koutsoukos' genuine understanding of the
relationship
between them.
- As
to the submission made by Mr Hobbs as to his recollection of Mr Koutsoukos and
Mr Wood having "one-on one" discussions at a due
diligence seminar in Miami with
Mr David Marchant (referring to Mr Koutsouskos' cross-examination at T 304.4-33)
about a business
matter in which Mr Hobbs says he did not have any participation
and Mr Hobbs' assertions as to what was understood by others, such
as his
brother, his wife and his sister-in-law in relation to investment by Mr
Koutsoukos and Mr Wood into the funds administered
by Geneva Financial, those
are matters of evidence not submission and, again, they are not matters that I
can properly take into
account.
- My
observation of Mr Koutsoukos in the witness box was that he gave his evidence in
a basic but matter of fact way. He readily conceded
aspects of his behaviour
that would be seen to be reprehensible (such as the deceptive nature of his use
of religion in dealing with
clients and that his conduct amounted to
"stealing"). The concern to which he deposed in his affidavit as to the position
in which
he had placed family and friends who had invested in these products had
the ring of truth to me; as did the concern to which he deposed
that he
expressed to Mr Hobbs at the time the ASIC investigation commenced, namely
whether they had been doing anything wrong.
- While
it was suggested by Mr Hobbs that Mr Koutsoukos (and others) were simply seeking
to put responsibility or the blame for the
loss of the investments onto others,
Mr Koutsoukos appeared in the witness box to accept his share of responsibility
for wrongdoing
with which he was involved (in the context where there are
criminal proceedings on foot).
- Mr
Koutsoukos gave his evidence in a straightforward and genuine manner. He seemed
to me someone who was impressionable in his dealings
with Mr Hobbs. I accept
that his recollection of events was not always consistent with others (such as
in relation to matters such
as the regularity of or participation in Bible
meetings or the signing of the "ponzi" letter). Nevertheless I accept his
evidence
in essence as truthful.
Mr Wood
- Mr
Hobbs makes similar submissions as to the evidence of Mr Wood. He commenced his
submissions in this regard by the assertion that
it became immediately apparent
to him that he "was not going to extract the truth from Mr Wood" when he
cross-examined Mr Wood about
the evidence given in his affidavit in relation to
a spark plug deal.
- Mr
Hobbs seemed to place great significance on the so-called spark plug deal (which
is not a matter the subject of any allegations
in the proceedings but was put
forward as explaining the willingness of persons such as Mr Wood to place faith
in what Mr Hobbs had
represented to them). In particular, Mr Hobbs takes issue
with the proposition that there was ever any money invested in the alleged
spark
plug deal (referring to T 1102.27-33; T 1104.1-9, 21-50; T 1105.1-35; T 1106.1-5
and referring to Mr Diaz' evidence in cross
examination to that effect - T
357.32-37). I read Mr Wood's evidence in this regard as no more than his account
of what he understood
had been promised or represented in this regard. The fact
that no money was ever invested in a deal of this kind seems to me to be
immaterial to Mr Wood's credibility as a witness overall.
- Mr
Hobbs points to what he sees as inconsistency between evidence from Mr Wood as
to whether a particular discussion occurred in a
telephone call or in a
conference room (contrasting T 1123.39-50; T 1124.15-35 with the reference in
his affidavit to a conversation
in the boardroom; and also referring to T
1128.19 to 50) as discrediting Mr Wood's evidence generally. Again, confusion or
inconsistency
on an aspect such as this does not seem to me to indicate that Mr
Wood is not overall a credible witness.
- Mr
Hobbs also submits that the evidence given by Mr Wood (referring to T 1127.1-50;
T 1128.1-3) that Mr Hobbs had typed changes into
a soft copy of the scheme
memorandum agreement and had then taken the disk out of Mr Wood's computer to Ms
Trinh's office could not
be true because:
as at this time I could not use a computer, let alone change text in a soft
copy, or put something onto a disk or even put a disk
in or out of a computer.
Still as of today I would have no idea how create a document or change text in a
document or to put something
onto a disk and I have only just learnt during this
hearing what a "soft copy" is. The only thing I use a computer for is for
limited
emailing and for searching the web.
- There
is no evidence other than Mr Hobbs' assertion to that effect (this being a
matter to which presumably Mrs Andrews, if not others,
in the Hobbs' office
could readily have attested). (Moreover, it is by no means apparent to me that a
person not otherwise literate
in computer skills could not have typed changes to
a document in a soft copy.) In any event, what I place weight on in relation to
the scheme memoranda is the striking similarity between the documents across
different schemes, which it seems to me is readily explicable
only by the
provision of those documents by Mr Hobbs or Mrs Watson on his behalf.
- Mr
Hobbs also placed emphasis on the evidence given by Mr Wood in which reference
was made to a "Stromberg carburettor" (referring
to T 1129.29-50; T 1130.5-25; T
1132.15-24). He submits that this conversation could not have occurred since
Stromberg carburettors
were phased out in the 1970's and fuel injection became
the product for manufacturers to use from the 1980's. He submits that by
the
year 2007 "no new vehicles produced would ever have reverted to carburetion over
the standard fuel injection system in use since
the 1980's". He considers it to
be a bizarre suggestion that investment in developing obsolete Stromberg
carburettors could have
been financially viable. Mr Hobbs might very well be
right but I cannot possibly draw any conclusion about what might or might not
have been understood at the time to have been financially viable in this regard
(particularly when there is no evidence of the matters
asserted by Mr Hobbs in
relation to Stromberg carburettors about which, as I made abundantly clear
during the hearing, I have no
knowledge whatsoever).
- Similarly,
Mr Hobbs points to Mr Wood's evidence in relation to Mr Starr and mag wheel
production (T 1132.30-40; T 1133.1-16, 35-40)]
as being inconsistent with the
evidence that Mr Starr's business with J&B Financial was the production of
inlet manifolds. Mr
Hobbs finds significance in the fact that Mr Wood at first
disagreed that he was confused about what Mr Starr said and then did agree
that
Mr Starr spoke about making inlet manifolds for motor vehicles. Again, it does
not seem to me that anything turns on any inconsistency
between the answers
given by Mr Wood on this issue to matters in dispute in the
proceedings.
- Mr
Hobbs notes the acceptance by Mr Wood that he had "paid a Ponzi" (T 1110.30-41;
T 1121.38-50; T 1122.1-40]) and Mr Wood's agreement
that: he understood that the
clients' money in the bank in mid 2005 was money for the purposes of investment
(referring to T 1121.
41- 51; T 1122.1-40]; that he was receiving money from
J&B Financial (T 1107.30-43); and that "possibly some of that money could
then be investors money" (T 1107.41-43). As with Mr Koutsoukos' evidence of
similar propositions, this reflects Mr Wood's acceptance
of responsibility for
wrongful conduct, a matter that is contrasted by Mr Halley with the attitude of
Mr Hobbs to the same conduct.
- Mr
Hobbs refers to Mr Wood's evidence at T 1102.9-12/14 in relation to earnings
from J& B Financial and how it made its money.
He also pointed out that
while (at T 1106.14-49; T 1107.1-45) Mr Wood did not accept he had received the
sum shown on the diagram
prepared by ASIC (of $842,000 approximately) "No,
because there was no relevant receipts shown, it was just an amount of money
that
was supposedly an outgoing amount that was put in the pie chart", Mr Wood
did accept that he had received money from J&B Financial.
As I understand
it, reliance was placed on this to show that Mr Wood had been complicit in
receiving investors' money and as going
to his discredit generally. However, the
acceptance of wrongful conduct by Mr Wood (or Mr Koutsoukos for that matter)
does not absolve
Mr Hobbs from responsibility for any involvement he had in the
schemes, nor does it suggest any reason for Mr Wood to give false
or unreliable
evidence as to Mr Hobbs' involvement.
- Tellingly,
at T 1102.20, when answering Mr Hobbs' questions on that aspect of the matter,
Mr Wood said that he did not recall "exactly
when we started selling the FTC
information for your group of companies [my emphasis] and started
receiving commission on that". The use of the possessive "your" did not seem to
me to
be forced and I understood it as indicating Mr Wood's genuine
understanding as to Mr Hobbs' association with FTC (and the other 'group'
of
companies, that seems likely to have encompassed OEM/KLM).
- In
summary, Mr Hobbs' submission was that there was no credibility in Mr Wood's
evidence, on the basis that Mr Wood was confused at
times during the
cross-examination; attempted to shift blame "for his actions in the funds
Integrity and Integrity Plus" (implicitly
there seeming to accept that there was
at one stage a second Integrity fund or a proposed second Integrity fund);
denied receiving
approximately $842,000 of investors' money; and gave given
conflicting evidence to Mr Koutsoukos in regard to what the traders in
Chicago
spoke about in relation to traders' returns (though in relation to this point,
as I understand it, Mr Hobbs would invite
me to prefer Mr Wood's recollection to
that of Mr Koutsoukos).
- As
to the submission by Mr Hobbs that Mr Wood's evidence was confused, in part I
suspect that may have been due to his obvious physical
frailty. (Mr Wood's
cross-examination had been deferred for a time due to a period of
hospitalisation.) Mr Wood gave his evidence
quietly. He had difficulty at times
in hearing questions I put to him, which was certainly no reflection on his
cooperation as a
witness (but, no doubt, a reflection on my audibility).
However, Mr Wood showed no sign of confusion when taken to the substantive
facts
in dispute. I have no reason to disbelieve his evidence and I consider it to be
consistent with the thrust of, and corroborated
by, the evidence from each of Mr
Koutsoukos and Mr Truong.
Mr Truong
- In
relation to Mr Truong, Mr Hobbs relies on a number of points in his
cross-examination where Mr Truong accepted propositions inconsistent
with the
evidence of Mr Wood or Mr Koutsoukos or accepted propositions consistent with
the version of events put forward by Mr Hobbs,
namely:
- T 364.42-46 T
365.16-21, 27-35; T 367.4-7 in relation to who came up with the name "Integrity
Plus" for the fund;
- T 367.32-50 as
to the religious meetings to which Mr Koutsoukos deposed;
- T 368.48-50 as
to the receipt of instructions from Ms Reisinger in June 2007 to increase
trading and the confirmation by Mr Truong
in that regard (an answer on which Mr
Hobbs relies for the submission that "at no time did I have any involvement in
the running
of Idyllic or Idyllic Plus [sic] all business was completed between
Lisa Reisinger and the fund managers");
- T 369.49-50, T
370.1-2, where Mr Truong accepted that he might be mistaken in deposing that Mr
Hobbs had referred to "my investments";
- T 371.46-50,
where Mr Truong accepted that it would be unlikely that Mrs Watson had used the
word Integrity Plus as stated at [76]
of Mr Truong's affidavit, accepting at T
373.11-14, in relation to [71] of the affidavit that while Mr Truong worked in
the Bankstown
office there was no Integrity Plus Fund;
- T 373.15-27
where Mr Truong indicated that best efforts meant one could make anywhere
between 0 and 4 per cent;
- T 374.27-29,
where Mr Truong answered no to a question whether he was aware if Mr Hobbs had
received a salary from J&B;
- T 377.5-19 where
Mr Truong (having not accepted the proposition that Mr Hobbs would never talk
about an investment or investment product
and having said "to my memory when you
were speaking about FTC you did mention to us some of the funds that you can
access through
offshore investments which is the I think U.S offshore magazines
some of the returns you can actually access") agreed that Mr Hobbs
would show
the magazine as an example).
- Reliance
is also placed on the evidence of Mr Truong at T 1475.17-19 that he did recall
signing the "Ponzi" letter on 17 October 2007,
which Mr Hobbs invites me to
accept as the truth and as indicating that "Mr Koutsoukos in his affidavit and
evidence in regard to
the letter of the 17th of October 2007 that he was
deliberately telling a lie in an attempt to involve [Mr Hobbs] in the Ponzi he
ran".
- Mr
Truong gave his evidence in a quiet manner and appeared to me to be deferential
to Mr Hobbs. My observation was that there appeared
to be more open exchanges of
looks between Mr (and Mrs Hobbs) at the bar table and Mr Truong in the witness
box, than between Mr
and Mrs Hobbs and the other J&B Financial witnesses and
I note that Mr Hobbs prefaced his cross-examination with a statement
of
sentiment (to which Mr Halley immediately objected), which suggested to me that
there was still a relationship of goodwill between
them and that there was
perhaps an expectation that Mr Truong would be slow to give evidence
unfavourable to them. The potential
significance of this is that my impression
was that Mr Truong was quick to accede to propositions put to him by Mr Hobbs in
cross-examination
even where those were inconsistent with the thrust of his
evidence in chief (but just as quickly retracted from some of those answers
in
re-examination).
- Relevantly,
insofar as Mr Truong did seem quick to adopt or agree with what Mr Hobbs put to
him on certain matters, this suggests
to me that greater weight can be placed on
the instances during the course of his examination where he did not do so (in
particular,
his firm recollection as to what had been said to him by Mr Hobbs as
to access to investments). Overall, I consider that Mr Truong's
affidavit
evidence was consistent with contemporaneous records and not significantly
challenged in cross-examination.
Ms Bi Hong Dong
- Ms
Dong was involved in the administration of the Enhanced Fund scheme and deposed
to her involvement with Mr Collard, Ms Li and Ms
Wu, as well as to her
recollection of various meetings at which Mr Hobbs spoke. Ms Dong was softly
spoken. She appeared to me to
give careful consideration to her answers in the
witness box and from time to time in cross-examination she corrected her
evidence
in response to questions put by Mr Hobbs or when her attention was
drawn to particular passages. This served to emphasise the firmness
with which
she confirmed other parts of her affidavit to be correct.
- As
to Ms Dong, Mr Hobbs refers to her affidavit [13], [18] and [19] as to the
property management company she ran with a Ms Ma (MLD
Developments), which Ms
Dong said was not profitable, and to the liquidation of that company while she
was in China. Mr Hobbs submits
that this is evidence of Ms Dong's "strategy"
that, whenever faced with a difficult situation, Ms Dong "either removes herself
from
the scene or quickly blames somebody else" (a submission that Mr Halley
argues is not simply unfair but would aptly describe Mr Hobbs'
own conduct
insofar as he has sought to blame Mr Becker/Mr Chen and Ms Reisinger for the
events that have unfolded). I cannot possibly
make any adverse finding as to Ms
Dong's credibility as a witness based on assertions by Mr Hobbs that she went to
China at some
point with the purpose of avoiding a difficult situation (whether
or not the company in which she was involved went into liquidation
while she was
there). (Mr Halley submits that the characterisation sought to be placed by Mr
Hobbs on this conduct as a "strategy"
of blaming others would be apposite to
refer to Mr Hobbs' own conduct.)
- Mr
Hobbs made reference to various aspects of Ms Dong's affidavit evidence and to
her evidence in cross-examination (as to her staying
with Ms Wu; setting up FZF;
and setting up and funding of the Cadent account). He submits that Ms Dong was
the administrator of FZF
(Vanuatu) and was "very familiar" with Master Fund. He
submits that she was the administrator for that company and signed all of
the
transactions in and out of Master Fund. (Pausing there, it is not disputed that
Ms Dong acted as a co-scheme administrator in
relation to the Enhanced Fund and
that she acted for a time with the title of 'administrator' of FZF Vanuatu. That
does not, however,
establish that Mr Hobbs had no involvement with the Enhanced
Fund. Nor does her alleged familiarity with the Master Fund point to
such a
conclusion.)
- Mr
Hobbs submits that the evidence shows that Ms Dong directly opened a Cadent
account and he asks, rhetorically, how could he be
the introducing broker "when
they are opening accounts directly and setting up trading accounts". (This, of
course, ignores the evidence
that Ms Dong did so under instructions from Ms Li
and ignores the fact that Ms Reisinger was keeping Mr Hobbs (and Ms Li) updated
as to the setting up of the various Cadent accounts and understood Mr Hobbs to
be the foreign introducing broker for this account;
it also ignores the evidence
of Mr Hobbs' entitlement to and receipt of commissions from Cadent funds other
than simply the Global
Funeral funds.)
- Mr
Hobbs' submission is that Ms Dong's affidavit leads to the conclusion that Ms
Dong was intimately involved with Ms Li "and all
of the different companies they
ran together". He submits that the two important points emerging from Ms Dong's
affidavits are those
as to the running of the company and the opening of Cadent
account ([147]-[151]) and that these demonstrate that Ms Li and Ms Dong
were
involved directly in the opening of companies and accounts. (He further submits
that Ms Wu's involvement was "following the
instructions of Ms Dong and Ms Min
Hua Li as they worked so closely together".)
- In
support of this submission Mr Hobbs refers to the following paragraphs in Ms
Dong's affidavit [37],[124];[126]-[127]; [133],[135];
[153]; [154]; [144]
(including the fact that Ms Dong deposes to Ms Li having given Ms Dong shares of
the companies for which Ms Dong
did not have to pay). In this regard, Mr Halley
made clear that ASIC accepts that Ms Dong worked with Ms Li on or with respect
to
a number of funds. The relevant question is as to the role that each of Mr
Hobbs, Mr Collard and Ms Wu played in relation to the
relevant fund or funds.
(Mr Halley submits that Ms Wu also worked very closely with Ms Li with respect
to those funds and that, over
time, what emerged was that Ms Wu came to have a
greater and more specific role in the operation of those funds. I consider this
submission in due course.)
- Mr
Hobbs further submits that Mr Collard's involvement in the companies (as deposed
to in paragraphs [123], [125], [139] and [143]
of Ms Dong's) affidavit "was in
fact at the request of Ms Ming Wa Li to do the administrative work or drive her
to meetings where
a lot of those meetings were conducted in Chinese". He says
(in what is clearly unsworn evidence that I cannot properly take into
account
when introduced only at the stage of submissions) "I can personally also speak
about many meetings I had in China with Ms
Li (Ming Wa Li) where I would sit for
1-2 hours and not understand a word that was spoken. When it was finally
translated to me at
the end, it might have been summed up to perhaps 5-10
minutes of conversation".
- Mr
Hobbs asserts that Ms Dong's evidence that she did not receive any money (other
than accommodation and a trip to China) is not
correct (and submits that this is
collaborated by Ms Wu and Mr Collard), though again there was no evidence (as
opposed to submission)
as to this issue.
- Mr
Halley submits that overall the evidence from Ms Dong should be accepted, noting
that she answered Mr Hobbs' questions directly
and that while there may be some
questions as to the accuracy of her recollection from time to time, on the whole
she was a witness
of credit on which significant weight can be placed. I agree.
It seemed to me that Ms Dong considered the questions put to her by
Mr Hobbs
carefully; made concessions and corrections to her evidence from time to time;
was a co-operative witness and did not seek
to overstate her evidence. I accept
her as a truthful witness.
(ii)FTC Executives - Mr Diaz
- ASIC
relies on Mr Diaz' evidence as to his conversations with Mr Hobbs as to the
establishment of the OEM/KLM system, the detail of
the FTC process, the role of
the introducer, and the commissions to be paid. ASIC submits that considerable
weight can be placed
on Mr Diaz' evidence, particularly the detail of the notes
that were provided by Mr Diaz, not least because Mr Diaz' evidence cannot
be
characterised as that of a 'fraudster' in the dismissive manner in which Mr
Hobbs sought to do with the J&B Financial witnesses.
- Mr
Halley notes that Mr Diaz had more financial acumen than the three J&B
Financial officers and submits that Mr Diaz, who engaged
in a number of
activities jointly with Mr Hobbs (particularly with respect to Mr Lynn Caswell),
is in a position reliably to give
evidence as to what had there occurred (and
that the fact that Mr Diaz and Mr Hobbs subsequently had a falling out does not
detract
from that evidence). On that point, it was not suggested to Mr Diaz in
cross-examination that his evidence was motivated by any ill-feeling
towards Mr
Hobbs, nor did it appear to me that it could be so characterised (particularly
in circumstances where it was consistent
with contemporaneous evidence such as
the DVD Seminar).
- Mr
Halley also submits that the fact that Mr Diaz was not involved in the
subsequent funds the subject of the ASIC proceedings means
that he can be
accepted as presenting a more objective account of what took place
(independently of concerns that wrongdoing on his
part may have had an impact on
the quality or character of his evidence).
- My
observation of Mr Diaz in the witness box was that he was forthright and
confident in manner. He spoke succinctly and answered
quickly and without
hesitation the questions put to him. He did not prevaricate nor did he not
engage in confrontation or argument
with Mr Hobbs in
cross-examination.
- Mr
Hobbs' focus in his submissions in relation to the evidence of Mr Diaz relates
to the supply of the DVD to ASIC. Mr Hobbs asserts
that the DVD Seminar "was a
one-off situation that was not aimed at any investor"; that "[t]his DVD was a
once only situation, and
was undertaken without my permission or consent, and
Mr Collard's submission will agree to this" and that "I have spent a
considerable amount of time with Mr Collard over the years and never has such a
seminar been repeated".
(The references to what Mr Collard might agree to in his
submissions or as to evidence Mr Collard might have given in relation to
the
repetition of such a seminar are references to matters not in evidence and
cannot properly be taken into account).
- As
to the assertion that the DVD was filmed without Mr Hobbs' permission or
consent: first that is irrelevant to the weight that is
to be placed on what Mr
Hobbs accepts is a recording of the presentation he gave at that seminar (and I
note that there was no suggestion
that the evidence was unlawfully obtained in
such a fashion as should lead to its inadmissibility) and, secondly, it is
difficult
to accept that Mr Hobbs did not at least have knowledge that the
seminar was being filmed at the time, having regard to the apparent
size of the
room and the audibility on the tape of discussions as to when the tape was to be
changed (and Mr Hobbs does not dispute
the evidence that the tape was provided
to him by Mr Diaz sometime after the seminar was conducted). Moreover, it is
difficult to
see how this has any bearing on Mr Diaz' credibility as a
witness.
- Mr
Hobbs asserts that the credit card business of Mr Diaz was the reason for his
termination as National Sales Manager of FTC and
went on to describe what he
says that business was. Apart from the fact that there was no evidence of this
in the proceedings, it
is not apparent what relevance it would have to Mr Diaz'
credit as a witness in respect of other matters related to FTC. If it is
sought
to be suggested that this presented some form of motivation for Mr Diaz to give
unfavourable evidence, that was not put to
him and there is nothing from which I
could draw the conclusion that that was the case.
- Mr
Hobbs places weight on the reference in Mr Diaz' affidavit to having put his
"own spin" on things he had heard Mr Hobbs say when
later conveying information
about the investments to investors. Mr Hobbs submits that this is what Mr Diaz
has done in his own affidavit.
There is no logical connection between the two
but in any event this comes very close to an acknowledgement by Mr Hobbs that he
was
putting a gloss on matters at FTC seminars (something in effect conceded
when Mr Hobbs explained in his closing submissions inconsistencies
by referring
to a difference between giving evidence in court and saying things in the course
of selling one's expertise).
- Submission as
to the "trend" of the ASIC affidavits
- Mr
Hobbs next submits that Mr Diaz' affidavit reflects "The trend of ASIC
affidavits to present David Hobbs as a de facto director
or alternative
promoting a 4% return".
- I
interpose here to note that a consistent theme by Mr Hobbs throughout his
cross-examination of witnesses was to enquire as to whether
they had prepared
their own affidavits and, for various of the witnesses who had not sworn
affidavits (but had been subpoenaed to
give evidence), to enquire as to the
reason that they had not sworn the affidavits prepared for them (occasionally
adducing evidence
that the witness had disagreed with the contents, but without
specifics of that disagreement, but also, in the case of Mrs Burnard,
eliciting
the answer that she had simply not bothered to read the draft affidavit sent to
her after she saw that it had incorrectly
specified her name).
- Insofar
as this was intended (as was the reference to a consistent "trend" in the
affidavits) to suggest that ASIC officers had prepared
the affidavits so as to
create an impression or convey a message in the affidavits that bolstered its
case and that did not reflect
the witness' own recollection of events, that
submission should be addressed, particularly having regard to the obligations of
ASIC
as a model litigant.
- The
fact that affidavits are commonly prepared by solicitors or barristers does not
of itself warrant any submission that the information
to which the witness has
deposed is not the witness' own truthful recollection of events. One would
expect preparation of affidavits
by officers of this Court (who owe professional
and ethical responsibilities to the Court) to follow the careful taking of
witness
statements/interviews with witnesses and to involve no more than a
process of putting into admissible form the particular witness'
recollection of
events insofar as those are or may be relevant to the issues in the case (ie,
not what the witness or the legal practitioners
might think would best suit
their client's case), testing in an appropriate fashion the witness'
recollection of events as against
contemporaneous material or having regard to
the inherent probability or otherwise of such an account. It may on occasion be
that
a legal practitioner will consider that material a witness wishes to
include in an affidavit is not admissible or irrelevant (and
I suspect it is not
uncommon that disagreements may arise where lay witnesses are of a different
view as to what is relevant to a
case).
- In
the case of various of the witnesses who refused or declined to sign affidavits,
the outlines of evidence served by ASIC followed
closely, as I understand it,
the evidence given by those affidavits in the s 10 examinations. If so, then the
fact that the witnesses
may not later have been prepared to sign affidavits
repeating such testimony is no indication of any impropriety on the part of the
draftsperson. Indeed in Mrs Watson's case, the evidence she gave in examination
in chief in the proceedings was at least in one respect
inconsistent with her
earlier evidence in the s 10 examinations (which she said was due to the
pressure that she was under during
the earlier examinations). If so, then that
might explain a disagreement on her part with material in an affidavit that
recorded
the thrust of her sworn answers from the earlier examinations. Whether
or not that is the explanation, or whether one or more of
the subpoenaed
witnesses simply chose for his or her own reasons not to cooperate in the
provision of affidavit evidence in these
proceedings, there is simply no
evidentiary basis for any submission that ASIC's officers behaved in any way
improperly in the preparation
of draft affidavits or outlines of evidence or
crafted them to reflect a particular "trend".
- Indeed
the approach taken by ASIC when one of the witnesses (Mrs Brenda Hobbs) at the
last moment had an apparent change of heart
and executed the draft affidavit
that had apparently been sent to her much earlier provides an indication of how
ASIC had approached
this task. In that instance I was informed that unless
ASIC's officers had an opportunity to confer with Mrs Brenda Hobbs and satisfy
themselves as to the basis on which the affidavit was now being sworn, ASIC was
not prepared to read the affidavit and would rely
on eliciting the evidence in
chief (which is what happened in due course, Mrs Brenda Hobbs appearing in Court
under compulsion of
subpoena for that purpose).
- The
very fact that some affidavits make clear that particular witnesses'
recollection of events has varied or where a particular witness
was able to
recall matters only in general terms (such as Ms Huang) whereas others are more
detailed in their recollection, is consistent
with a proper approach to the
preparation of affidavit evidence.
- What
would be more suspicious would be a cut and paste of identical testimony (as
appears in the December 2007 affidavits prepared
from the bullet points provided
by Mr Hobbs). In that regard I referred in the course of the hearing (when Mr
Hobbs had raised the
issue of inconsistencies in the J&B Financial officers'
affidavits) to the suspicion that can arise where there are affidavits
in
substantially identical terms. I had in mind the authorities that suggest that
this may give rise to an inference of collusion
between witnesses, which
inference in turn may diminish the weight or credit accorded to the evidence of
those witnesses, depending
on whether there is an acceptable explanation that
excludes the appearance of collusion.
- In
Macquarie Developments Pty Limited and Anor v Forrester and Anor [2005]
NSWSC 674 Palmer J considered the weight to be attributed to two affidavits
dealing with critical discussions in virtually identical terms,
in circumstances
where the evidence was that the solicitor who prepared the affidavits had
"copied and pasted" portions from each.
His Honour noted that:
[I]t is totally destructive of the utility of evidence by affidavit if a
solicitor or anyone else attempts to express a witness' evidence
in words that
are not truly and literally his or her own.
Save in the case of proving formal or non-contentious matters, affidavit
evidence of a witness which is in the same words as affidavit
evidence of
another witness is highly suggestive either of collusion between the witnesses
or that the person drafting the affidavit
has not used the actual words of one
or both of the deponents. Both possibilities seriously prejudice the value of
the evidence and
Counsel usually attacks the credit of such witnesses, with good
reason.
- So,
for example, in Seamez v McLaughlin [1999] NSWSC 9, Sperling J concluded
that where there was a high degree of similarity in content, detail, terminology
and sequence (particularly
in relation to conversations) between the affidavits
of three witnesses the affidavits could not have come into existence without
direct or indirect collaboration. His Honour noted that:
[a]cceptance of one of the three accounts of the events ... means not only
that the other two are not genuinely recollected, independent
accounts. It also
means that the authors of those other accounts have misstated the way in which
their respective accounts came into
existence, and seriously so. The credit of
the others would then be worthless.
- In
Dialog Pty Limited v Addease Pty Limited [2003] FCA 1359 Cooper J did not
accept as the witness' independent recollection evidence produced by way of a
"cut and paste" exercise.
- Hence,
in my view suspicion of collusion would have attached to the December 2007
affidavits, had they been relied upon by Mr Hobbs
in his defence, (a suspicion
that would have been justified having regard to the evidence as to how the
affidavits came to be prepared).
- However,
there is nothing to warrant a suggestion of collusion between the ASIC witnesses
nor of any impropriety in the preparation
of the evidence of those witnesses
(any more than it could be said that there was any impropriety in Counsel
settling the affidavits
sworn by Mr Hobbs, as I was told had been the case).
(Although the J&B Financial officers had received copies of the affidavits
sworn by each other, that was at a stage when they were defendants and entitled
to be served with such affidavits and there is no
suggestion that they saw or
commented on each other's affidavits in draft before they were executed.)
- Therefore
any "trend" in the affidavits in the sense of a common reference to a 4% return
strongly suggests not that there has been
an attempt to put that figure into the
mouths of the witnesses but, rather, that this is indeed what was said on a
number of occasions
(as corroborated by the references to returns generally in
the DVD Seminar and Mr Blow's notes of the February 2003 seminar or
meeting).
- Other
criticisms of Mr Diaz' evidence
- Returning
to the criticisms made of Mr Diaz' reliability as a witness, Mr Hobbs points to
the fact that Mr Diaz had incorrectly suggested
that it was Mrs Brenda Hobbs who
was featured in the DVD Seminar (when in fact it was Mrs Dent). Having seen Mrs
Brenda Hobbs in
the witness box and having viewed the DVD Seminar video, I
accept that Mr Diaz was incorrect in this regard. However, I do not accept
that
his inability to distinguish between the two women on the video reflects
adversely on his credibility as a witness overall.
- Mr
Hobbs referred to the cross-examination of Mr Diaz at T 357.4-23 in relation to
the meeting of Mr Diaz with Ms Reisinger and Mr
Diaz' evidence that she stated
that she was an introducing broker for Refco (and his meeting with Mr Erdman at
which they discussed
various investments). Mr Hobbs says that the significance
of this is that in Ms Reisinger's CFTC examination (Ex AO p19.1-5) Ms Reisinger
said that Mr Hobbs had had business with Refco (which Mr Hobbs asserts was
untrue). In this context Mr Hobbs submits that it is significance
that Ms
Reisinger was first introduced to him by Mr Diaz (referring to Ms Reisinger's
transcript p19.18-24; p20.1).
- It
is still not clear to me (though I attempted to ascertain this in the course of
submissions) how the timing of the introduction
of Mr Hobbs to Ms Reisinger (ie
the fact that Mr Diaz had met Ms Reisinger before Mr Hobbs had done) impacts
upon Mr Diaz' credibility
as a witness (particularly when it is to be noted that
this timing is consistent with Mr Diaz' evidence as to the trip he made to
the
United States in early 2002, a suggestion that Mr Hobbs dismisses as fanciful
because Mr Diaz was an "unsophisticated cleaner").
Insofar as Mr Hobbs disputes
that he had had business with Refco before he met Ms Reisinger, that seems to be
the thrust of the statements
made by Mr Hobbs himself on the DVD Seminar. In
relation to Mr Diaz' Express Fund, Mr Hobbs says that Mr Diaz arranged the
traders
for this account himself while he was in the USA and that the traders
contracted were evidenced by Ms Reisinger's transcript. Whether
or not that be
the case, it is clear from the documents in evidence that well after the
breakdown of the working relationship between
Mr Diaz and Mr Hobbs, the latter
was having communications with Ms Reisinger in relation to the setting up of
Cadent accounts for
funds with which there is no suggestion that Mr Diaz has had
any involvement whatsoever.
- Mr
Hobbs also seems to dismiss as implausible the evidence at T 359.43-48 in
relation to Mr Diaz having said that Mr Hobbs had told
him to sign off "as
Junior Manager of KLM". The point Mr Hobbs was there seeking to make (namely
that he has no idea what that term
would mean and therefore would not have said
it) goes no higher than assertion on Mr Hobbs' part.
(iii)Investors
- As
to the investor witnesses, Mr Halley submitted that those who were crossexamined
stood by the contents of their affidavits and
gave evidence in a frank and
considered manner and should be accepted (including, in particular, Mr Richard
Blow, Mr Nicholas Stavropoulos,
Mr Gideon Russell and Ms Lei Huang). Further, it
is submitted by Mr Halley that the strength of the investor affidavit evidence
that
was not tested by Mr Hobbs in cross-examination is the consistency
of corroboration that it provides in relation to the evidence of others.
- Mr
Hobbs' position in relation to the investor evidence in general was not that the
investors were lying; rather, Mr Hobbs said that
he accepted that they believed
what they said. However, I was invited to find that they were mistaken to the
extent that they say
that Mr Hobbs was involved because "since ASIC were
carrying out an investigation about Hobbs of course they would remember the
Hobbs
name".
- Mr
Hobbs' submission was that "when ASIC is saying they are investigating Mr Hobbs
and all the media attention is on myself, I believe
it is very easy for a
witness to not recall exactly who said what at different time several years ago.
Mostly, they could only remember
my name because that is what they heard over
and over again from ASIC".
- The
difficulty for Mr Hobbs in this submission (apart from the fact that there is no
evidence whatsoever as to what media attention
there might have been at the time
or whether any of these witnesses had seen any relevant media reports) is not
only that Mr Hobbs
is simply speculating on what the witnesses might have been
told in the course of investigation (and that this was not put to the
relevant
witnesses) but also, and more fundamentally, that at least some of the witnesses
have notes of the meetings at which they
have recorded Mr Hobbs being present
(and what was said) and Mr Hobbs himself has been recorded at the DVD Seminar of
saying things
that in his affidavit he deposes that he made a point of never
saying (a glaring inconsistency that causes me difficulty in placing
any weight
on Mr Hobbs' denials as to what he is alleged to have said to investors on the
same or similar topics).
- Turning
to those investors who were cross-examined, I note as follows:
Mr Richard Blow
- Mr
Blow was a subscriber to FTC (in October 2003) and an investor in June 2004 in
the Elite Premier scheme. He gave evidence as to
his attendance at various
seminars at which investments were discussed. He was straightforward in the
witness box and there was no
reason to doubt his evidence. Significantly, he had
taken contemporaneous notes of what was said in the seminars and, in particular,
I place great weight on the notes of the 15 February 2003 seminar to which I
have referred elsewhere.
- I
have no hesitation in accepting Mr Blow's evidence; nor did Mr Hobbs make any
criticism of his reliability as a witness other than
the general submission that
he might have been mistaken in attributing comments to Mr Hobbs. In that regard,
Mr Blow's contemporaneous
notes (and their consistency with statements made by
Mr Hobbs at the later 2003 DVD Seminar) makes Mr Hobbs' submission that Mr Blow
might have been mistaken untenable in my view.
Mr Nicholas Stavropoulos
- Mr
Stavropoulos is a company director who has operated a travel agency since 2002
(with a Mr George Papaioannou, who may or may not
be the same Mr Papaioannou of
Kemper & Co who raised with Mr Koutsoukos and Mr Hobbs in 2006 concerns as
to the legality of Super
Save). Mr Stavropoulos was an investor in the Prestige
Unit Trust and subsequently took steps to become an administrator for a fund
not
the subject of these proceedings (although his evidence is that that fund did
not ever trade). Mr Stavropoulos gave evidence
as to the circumstances in which
he came to make that investment (including a conversation with Mr Hobbs in
Nelson in which he said
that Mr Hobbs offered him the opportunity to invest some
money to recover losses that Mr Stavropoulos said he had incurred relating
to
cancelled credit card charges for travel bookings for Mr Hobbs. (Contemporaneous
emails relating to the credit card dispute were
exhibited to Mr Stavropoulos'
affidavit and corroborate his account of events in that
regard.)
- Mr
Stavropoulos deposed (at [29] of his affidavit) to a conversation around 31
October 2005 with Mr Hobbs in which he said Mr Hobbs
said, among other things,
that he had access to various investments and had an investment opportunity
"which would be great for you
to piggy back off", referring to the Prestige
investment fund, that he said was "an investment in a debenture trade" and into
which
he said that the Crown Prince of Tonga had put in a couple of million
dollars. Mr Stavropoulos said that Mr Hobbs told him he would
get returns 36
times his initial investment and every 10 days would get up to double returns.
Mr Stavropoulos deposed to having met
a number of people in Mr Hobbs' office
including Mrs Watson, Mrs Andrews, Mr Clements (who he said was introduced to
him by Mr Hobbs
as a person who ran a hedge fund) and Mr Robert Hobbs. He also
deposed to there being a discussion with Mr Hobbs as to the opening
of an IBC,
investment opportunities and financing.
- Exhibited
to his affidavit were emails following that meeting with Mrs Watson in relation
to the setting up of an IBC, which corroborates
the evidence that there was a
discussion in that regard at the October 2005 meeting. There were also emails
between Mr Stavropoulos
and Mr Koutsoukos consistent with Mr Stavropoulos'
evidence, in which Mr Koutsoukos refers to assistance "in your dealings with FTC
and David Hobbs" and says that he would send detailed analyses "of how the fund
that we administer works". (Mr Koutsoukos forwarded
details of the Integrity
Plus fund but ultimately Mr Stavropoulos invested in the Prestige Fund and there
was correspondence from
Mrs Brenda Hobbs "on behalf of Jacky" sending details as
to the completion of the Geneva Financial documents.)
- Mr
Stavropoulos also gave evidence as to steps that he and Mr Papaioannou had taken
to establish an investment fund (the Infinity
Fund) after a conversation with Mr
Hobbs in early 2007 in which Mr Hobbs said that he would set up a hedge fund for
him (at a cost
of $250,000) and said:
The other funds are screwing up so we'll switch the investors in those funds
to yours. The money will be deposited into an account
with Cadent and traded
through a special instrument. Treasury notes will be bought at wholesale rates
and guaranteed against the
principal invested.
- Mr
Stavropoulos gave evidence as to the signing of a fund contract for that
purpose, receipt of an email as to a website (following
Mr Hobbs stating that he
would pay the cost of setting one up for that fund), payment of $20,000 to
Magny-Cours as the initial payment
towards the cost of setting up the hedge
fund, the opening of Technocash account, receipt of an email from the nasl
address with
the private placement memorandum for the fund and private placement
agreement, and emails from the nasl address regarding trading
accounts with
Cadent.
- Relevantly,
Mr Stavropoulos deposes to conversations with Mr Hobbs in which he says Mr Hobbs
said he would handle particular issues
with Cadent and gave him instructions as
to what to say in his correspondence with Cadent. Exhibited to his affidavit are
copies
of email communications in relation to queries raised as to the
beneficial ownership of the IBC, which led to Ms Reisinger sending
the following
message to Mr Hobbs on 6 September 2007:
Hi David
Can you let the guys know that it is not a good idea to e-mail Cadent
directly instead it is best they send to me first so I can filter
what needs to
be filtered. ... I just want to be sure that they understand about the filter
process we set up so that Cadent does
not get something they are not suppose
[sic] to.
- Mr
Hobbs received this and forwarded it to Mr Stavropoulos that same day.
Relevantly, he did not respond to Ms Reisinger to say he
knew nothing about the
matter or to enquire as to why she would be sending this to him or what she was
talking about in relation
to the "filter" process.
- Mr
Hobbs cross-examined Mr Stavropoulos, relevantly, as to the conversations and
matters deposed to at [28]-[29], [43], [46], [61]
and [1119]-[120] of the
latter's affidavit. At T 527.17-19, Mr Hobbs put to Mr Stavropoulos that he had
discussed an account with
Cadent that Mr Stavropoulos was going to open "that
was predominantly for their wealthy business partner and themselves" and submits
that this was the "single cause for them to contact Ms Reisinger and open an
account". I accept that this Cadent account related
to a fund not the subject of
these proceedings. However, the significance of this exchange of communications
is the involvement of
Mr Hobbs in the setting up of the fund (including the
provision from his office of the template documents) and that Ms Reisinger
was
communicating with Mr Hobbs in relation to that fund (and pointing out very
clearly to Mr Hobbs the need for communication to
be filtered on the way to
Cadent), not whether the fund was one the subject of the proceedings.
- Mr
Hobbs also suggests that Mr Stavropoulos' business partner(s) should have been
part of these proceedings (though it is not apparent
to me why that should be
the case, particularly if, as Mr Stavropoulos deposes, the Infinity Fund never
traded and was never promoted
to investors). Mr Hobbs made a point of noting
that he could not cross examine Mr Stavropoulos partners to determine the reason
for
the account opening. The relevance of such evidence to the issues in dispute
in these proceedings is not apparent.
- In
that regard, I interpose to note that, although not put by Mr Hobbs as such, the
suggestion that he was deprived of an opportunity
to cross-examine Mr
Stavropoulos' partners seems to raise a question as to whether ASIC had an
obligation to call evidence from those
persons. If that is the nub of Mr Hobbs'
submission (properly understood), then it seems to me that it is without
substance.
- I
note that the High Court has recently considered the question whether ASIC had
an obligation to call evidence from certain witnesses
in civil penalty
proceedings in Australian Securities and Investments Commission v Hellicar
[2012] HCA 17. It rejected the proposition that the public interest could
only be served if the case advanced by ASIC represented what actually
occurred (and hence that witnesses central to the case were required to be
called) (at [146]). (Here, Mr Stavropoulos' business partner(s)
could hardly be
said to be central to the issues in the case.)
- The
judgment of the plurality in the High Court (French CJ, Gummow, Hayne, Crennan,
Kiefel and Bell JJ) did not decide the issue as
to whether an obligation of
fairness had existed, instead stating at [152] that:
...it is convenient to assume, without deciding, that ASIC is subject
to some form of duty, even if a duty of imperfect obligation, that be described
as a duty to conduct litigation
fairly. (my emphasis)
- Heydon
J, in a separate judgment, considered that any such duty of fairness as
expounded by the Court of Appeal was novel, put forward
as pointing to the lack
of authority, statutory provision or accepted principle justifying the exception
found by the Court of Appeal
to the proposition that a regulator was under no
duty to call every bystander or eyewitness who could give relevant evidence (at
[246]). His Honour concluded (at [245]) that the rules of evidence and procedure
in civil cases afforded the requisite safeguards
to securing a fair trial.
- The
plurality, having assumed for the purposes of the argument (without deciding)
that such a duty of fairness did exist, went on
to consider at [152]-[153] the
consequences of breach such a duty:
What consequences might be thought to follow if failure to call a witness
could, and in a particular case did, amount to a breach
of a duty of that kind
can then be elucidated by reference first to prosecutorial duties in criminal
proceedings.
What was held by this Court in Apostilides to be the duty of a Crown
prosecutor in relation to the calling of evidence must be understood in the
light of a number of relevant
considerations. First, it is to be remembered that
a criminal trial is an accusatorial process in which the prosecution bears the
burden of proving its case beyond reasonable doubt. The prosecutor's duty stems
from the very nature of the proceedings. Second,
as this Court pointed out in
Apostilides, the conclusion that a prosecutor has failed to call a
witness who should have been called does not, of itself, require the further
conclusion that the conviction recorded at that trial must be set aside. Rather,
in the words of the common form criminal appeal
statute, the question would be
whether, having regard to the conduct of the trial as a whole, there was "on any
other ground whatsoever
a miscarriage of justice". If a prosecutor's failure to
call a witness who should have been called occasioned a miscarriage of justice,
the conviction entered at trial would be set aside and a new trial would be
ordered. The failure to call the witness could not, and
would not, found any
reassessment of the evidence that was called at trial, let alone any suggestion
that the cogency of that evidence
should be discounted.
- (Their
Honours considered that an approach of discounting existing evidence if there
were to be a breach of any such duty of fairness
as might have existed would be
"necessarily indeterminate" so that there would be no certain content to any
principle that permitted
the cogency of such evidence to be discounted in the
event of a breach of such a duty (assuming one existed) (at
[155]).)
- Relevantly,
for present purposes, the High Court considered that there was in fact no actual
unfairness to the respondents occasioned
by the failure to call the witness in
question in that case. Their Honours reached that conclusion by considering what
evidence,
based on other evidence already before the Court, the witness was
likely or unlikely to have said had he been called and then considering
what
advantage had been denied to the respondents, or what disadvantage they had been
subjected to, as a result of that evidence
not having been given (and there not
having been an opportunity to cross-examine the witness).
- Here,
there is no suggestion that Mr Stavropoulos' business partner or partners had
participated in the relevant conversations with
Mr Hobbs or had been at the
October 2005 meeting. Mr Papaioannou's (or anyone else's) reasons for opening a
Cadent account seem to
me to be wholly irrelevant to the issues that must be
determined in the present proceedings. Even if there were a duty of fairness
of
the kind considered by the Court of Appeal to have arisen in Morley & Ors
v Australian Securities and Investments Commission [2010] NSWCA 331,
adopting an analysis of the kind the High Court considered in Hellicar to
be required would not have led me to conclude that there was any breach of that
duty or actual unfairness occasioned by reason
of the fact that Mr Stavropoulos'
business partner(s) had not been called as witnesses. There is simply nothing to
suggest that any
evidence that he (or they) would have been likely to have given
(in chief or in cross-examination) would have assisted Mr Hobbs'
defence.
- Returning
to Mr Hobbs' written submissions as to the evidence of Mr Stavropoulos, he notes
that (at [123]) Mr Stavropoulos deposes
to having arranged to meet with Mr
Erdman when he was in the United States of America; at [124] he refers to an
email he received
back from Mr Erdman (Tab 85) and to the evidence of Mr
Stavropoulos (at [125]) that he travelled to Chicago in or about late October
2007 and met with Mr Erdman and Mr Paul Fry at Cadent and (at [127]) that he
received a further email from Mr Erdman (Tab 86). It
is not clear what
submission Mr Hobbs seeks to make in relation thereto (other than as linked to
the submission that the opening
of this account was for a reason connected with
Mr Stavropoulos' business partner, that I have considered above).
- Mr
Hobbs also in his submissions draws attention to the conversation to which Mr
Stavropoulos deposed at [61] as occurring in early
2007 in which Mr Stavropoulos
said Mr Hobbs told him that Mr Stanton had a hedge fund. It is not clear what
point Mr Hobbs seeks
to make in this regard unless Mr Hobbs is suggesting that
ASIC should have joined Mr Stanton as a party to the proceedings (that
being a
submission made elsewhere by Mr Collard as to the IBC said to have been
administered by Mr Stanton).
- I
found that Mr Stavropoulos to be a quiet and matter of fact witness. His
evidence is consistent with the contemporaneous documents
and there is no reason
to disbelieve him.
Mr Gideon Russell
- Mr
Russell gave evidence via video link from Dubai, where he works as an aircraft
technician. He was an investor in the Covered Strategies
and Elite Premier funds
(and another fund the name of which he cannot remember) in August 2004 and gave
evidence of the circumstances
of those investments that supports the allegations
ASIC makes as to the process for such investments.) Again, his evidence was
straightforward
and matter of fact. Mr Hobbs made no specific criticisms of his
evidence and I have no reason to disbelieve his evidence.
Ms Lei Huang
- Ms
Huang had the assistance of an interpreter in the witness box but was able to
speak basic English and did not need to call upon
the interpreter's assistance
on many occasions. Ms Huang looked directly at Mr Hobbs when he was
cross-examining her and was quietly
confident in her answers in
cross-examination.
- As
to Ms Huang, Mr Hobbs places emphasis on the evidence given by Ms Huang as to
her close friendship with Ms Li ([8]) and suggests
that Ms Huang may have been
seeking to protect her friend by attributing responsibility to Mr Hobbs. This
was not put to Ms Huang
in cross-examination.
- Mr
Hobbs also refers to the occasions in her affidavit where Ms Huang says that
something was said by Mr Hobbs or by Ms Li (seemingly suggesting this
raises doubt as to the general reliability of her evidence). I accept that there
are a number
of occasions where Ms Huang has been unable to attribute a comment
to one in particular of the two but, as I understood her evidence
in that
regard, it was that something was said to her at a meeting when both were
present and she could not recall which of the two
had said it. If so, then a
statement by one, not corrected by the other, would be of relevance even though
she could not recall who
precisely had made the relevant comment. It seems to me
to speak to the honesty of the witness that, where she was not able recall
who
in particular made a comment or statement, she made that clear. The question
would be whether it casts doubt on her recollection
that such a statement was
made at all and as to whether there was doubt as to whether it was said in the
presence of both. I do not
think that it does.
- Mr
Hobbs submits that Ms Huang's affidavit "was a continuing trend of the ASIC
affidavits where she states I spoke about named funds".
I have commented earlier
as to the implied criticism of ASIC in the reference to a "continuing trend" of
the affidavits. The difficulty
I see for Mr Hobbs in this submission is that not
only is there an overwhelming quantity of evidence as to this (and as to the
related
"returns" representations) from a range of people - those associated in
the schemes (who Mr Hobbs suggests have an interest in blaming
responsibility
for any wrongdoing on himself), other FTC executives associated less closely
with Mr Hobbs, and those who invested
in the schemes (some of whom, at least,
are likely to have lost money in their investments and who may well wish to
blame those responsible
for encouraging them to invest in the schemes but would
not necessarily have any particular reason to put the blame on Mr Hobbs had
he
not been present at meetings and made statements to the effect asserted) - and
no reasonable basis to suggest collusion between
all of those witnesses; but
there is also irrefutable evidence of statements made by Mr Hobbs himself (on
the DVD Seminar) to that
effect (and, in the case of the "returns"
representations) statements contained in the scheme documents (the provision of
templates
for which were, I have found, provided by Mr Hobbs or on his behalf to
the scheme administrators).
- In
relation to Ms Huang's evidence, Mr Hobbs pointed in his submissions to certain
answers recorded in the transcript of her cross-examination
that he submitted
could not be accepted as they were on their face incredible. The difficulty with
those submissions is that during
the course of the hearing (and, indeed, at the
first available opportunity after the transcript was received), Mr Clarke had
drawn
attention to errors he perceived in the transcript in relation to that
evidence and (although I accept that Mr Hobbs at that stage
did not have a copy
of the transcript) there was a discussion as to what had been recorded; I
reviewed my notes of the particular
exchanges and indicated that I agreed with
the corrections; and Mr Hobbs did not (then or later) suggest that the
corrections were
not in order.
- The
portions of the transcript in question were, first, at T 1003.42-50; T 1004.1-6.
When initially produced, the transcript recorded
Ms Huang as saying, in answer
to a question put to her by Mr Hobbs:
yes that's one of them. You didn't mention other funds. I mean over several
seminars.
- The
following day Mr Clarke indicated that he considered this to be an error and
that Ms Huang had in fact said "You did mention other
funds". My recollection
was that that was correct and, on reviewing my notes, I confirmed that my notes
had recorded that the witness
had said "You did mention other funds" (though I
had noted a query to check this against the transcript and my recollection is
that
I did so because the witness, who was quietly spoken, had been difficult to
hear at that point).
- The
second such reference was to the answer given by Ms Huang to the proposition put
by him (at T 1014.1-4) that it was Ms Li who
could have spoken about Elite
Premier (not him). Before corrected, the transcript read:
from my memory, you didn't spoke and you introduced Mr Caswell
- Clearly,
that answer would have been internally inconsistent (and it was treated with
some derision in submissions by Mr Hobbs). However,
my recollection (confirmed
by my review of my notes) of what Ms Huang said was:
From my memory you spoke, few funds there and this is one of the funds and
you are not specifically spoke about Elite Premier but
you were introduced
different funds
- This
accords with what Mr Clarke informed me his note of the evidence had been.
Again, this was raised and discussed during the course
of the hearing and Mr
Hobbs did not demur from the correction of the transcript in this regard. I
interpose to note that, although
Mr Hobbs did not receive the transcript until
after the close of the evidence (and did so then on ASIC's intervention and
pursuant
to an order I made for its provision to Mr Hobbs), Mrs Hobbs had a
computer laptop at the bar table during the course of proceedings
and I had
observed her to be typing throughout the course of evidence in the proceedings
so I would infer that Mr Hobbs was in a
position to have reference to whatever
contemporaneous notes had been taken by Mrs Hobbs during the hearing.)
- Insofar
as Mr Hobbs notes that some of Ms Huang's evidence was general in its content
and that the witness conceded she did not recall
the name of the fund or had
only overhead a conversation briefly, there is again a question of the weight to
be attached to that
evidence. (So, for example where Ms Huang said "I do not
recall the name of the fund but I was 100% sure that that the conversation
occurred, because I was very impressed" and "I overheard so very briefly, but
that's what I heard", I accept that this must be assessed
having regard to the
level of vagueness with which the evidence is given - that said, one might well
expect that a witness would
not remember particular fund names after so many
years but would remember being impressed as to the very high levels of returns
about
which others were speaking).
- Mr
Hobbs submitted that Ms Huang was confused (as between an options trader and
someone trading futures and as to whether he was introduced
as a millionaire).
The thrust of her evidence does not, however, turn on whether she mistakenly
referred to an options trader or
a future trader (and she may very well not have
understood the difference between the two). Mr Hobbs also suggested that it
might
be that Ms Huang thought she might be protecting her friend Ms Li by
attempting to associate him with discussions she may have had
with Ms Li. That
is mere speculation on his part (and was not put to Ms Huang in
cross-examination).
- Mr
Hobbs submitted that he had not handed out documents of the kind Ms Huang said
she did. Again, this is simply Mr Hobbs asserting
a different version of events
to that of Ms Huang.
- Mr
Hobbs also submitted that Ms Huang's recollection that (in a seminar in or about
July or August 2003) he had said words to the
effect that "Covered strategies
last month returned 21%" was incorrect. Ms Huang had said that:
Ms Li was there, I remember 21% as another factor to invest
Mr Hobbs denies that he had discussed Covered Strategies or a return of 21%
and submits that "this appears suspiciously like network
marketing and Lili's
previous involvement in the Amway corporation where the first step to financial
independence is going 21% or
going direct. Lili signed up 168 persons in Amway
in her first week she claims". There is no evidence as to Ms Li's involvement in
Amway to support such a contention. It is simply speculation on Mr Hobbs'
part.
- Mr
Hobbs notes that in his cross-examination of Ms Huang at T 1009.6-47, she was
asked about some questions about Mr Caswell and a
First Secured Bond
Presentation. In his submissions, Mr Hobbs pointed out that Mr Collard had
reminded him that First Secured Bond
had not even been incorporated at the time
that Ms Huang said that Mr Caswell had discussed that fund. The transcript on
this issue
is instructive. Mr Hobbs took Ms Huang to what she had said in [88]
of her affidavit, namely that "In or around October or early
November 2003 [she]
attended a presentation with Mr Hobbs in a big meeting room at a hotel in
Sydney, the First Secured Bond presentation.
There was approximately 20 people
in the audience". Ms Huang could not remember what hotel it was. She then went
on at [89] to refer
to Mr Caswell and to Mr Hobbs referring to Mr Caswell
wanting to run a fund and letting "us put our money into his fund". Ms Huang's
evidence was that she had listened to Mr Caswell speak and
that:
A. I think what he discuss is it relate to First Secured Bond, as I
understood.
- Pressed
as to whether Mr Caswell had referred to First Secured Bond, Ms Huang said:
A. I cannot remember the name and I cannot remember what he say, because it's
about 10 years ago, but in my impression I am more impressed
with Lynn Caswell's
background.
Q. Yes?
A. And knowledge.
- Consistently
with her evidence in cross-examination, Ms Huang at [93] had said that she could
not remember in detail what Mr Caswell
said at that presentation.
- Mr
Hobbs put to Ms Huang that in this "alleged meeting" in October or early
November 2003 he did not say that Mr Caswell had a fund
or expected a 4 percent
per month return. Ms Huang's response was firm:
A. The impression I got was that all the funding you talk about being mainly
at 4 percent.
- Ms
Huang made it clear, to my mind, that she could not remember in detail what Mr
Caswell had said at that presentation but that from
her recollection the First
Secured Bond was "what we were talking about". When Mr Hobbs put to her that
there was no discussion on
First Secured Bond because it did not exist at the
time, Ms Huang considered that question carefully and responded with a
correction
to her affidavit to say:
A. The First Secured Bond. I was sure at that time they were talking about
fund, but I can't remember the name but may be they put
it as First Secured Bond
name after, but at that time they didn't [my notes say "did'] discuss a fund,
the same fund, but because
I couldn't remember the first name I referred to my
document, that that was the First Secured Bond fund, so that's why I put the
words here First Secured Bond [in [89] and [90]] ...
- Ms
Huang was adamant that there was discussion to the effect stated in relation to
a fund but could not remember the name of the fund
there discussed but said that
"I know this was later named as First Secured Bond" and that she understood that
to be the same fund
as had been discussed at the meeting.
- Mr
Halley pointed out during the course of cross-examination that on ASIC's case
the first investment in the First Secured Bond Unit
Trust was made on 10
December 2003, only about a month or a month and a half after this conversation,
and that the premise to Mr
Hobbs' question (that the First Secured Bond Unit
Trust did not exist at this time) was not established (in the sense that the
trust
or fund may have been set up or was about to be set up at the time of this
meeting).
- As
I understood her evidence, Ms Huang confirmed that she had no knowledge as to
when the First Secured Bond Unit Trust had come into
existence and that at the
time that the discussion that took place at the presentation to which she had
referred in [89]-[90] she
did not know the name of the fund but that she now
believes that it was a reference to the First Secured Bond Unit trust fund. I
accept that evidence.
- Mr
Hobbs submits that Ms Huang's testimony (through her affidavit and cross
examination) "is realistically based on the fact that
my name is the name that
has been used widely in association with this investigation and would be the
name that many people would
automatically associate to any of the matters in
relation to these proceedings". I do not accept that there is any foundation for
that submission. He also emphasises that ASIC prepared Ms Huang's affidavit (as
to which I have already indicated I do not draw any
adverse inference) and
submits that the evidence of Ms Huang was unreliable. I do not accept that to be
a fair characterisation of
her evidence.
- I
found Ms Huang to be a quiet witness. I found it not surprising that her
recollection might have been imprecise as to details of
the Caswell presentation
(not least because of the fact that English is not her first language). There is
no basis, however, for
the submission that she tailored her evidence to protect
Ms Li (who is not in any event exposed to the making of any orders in these
proceedings as they are stayed against her). I accept Ms Huang's evidence
(subject of course to exercising some caution where the
evidence is expressed in
very general or conclusory terms).
(iv)Friends/relatives/Hobbs office personnel
Mr Craig Dent
- Mr
Dent is married to Mrs Hobbs' sister (and hence is Mr Hobbs' brother-in-law). He
was at pains to confine the role he performed
with his wife as that of
publishers and printers (prefacing the answer to many of his questions with the
words "as publishers and
printers..."). He was also at pains to eschew any
employment role as such - describing his role as simply providing assistance to
his wife (a concern perhaps as to whether the performance of services on a
contractual basis would have been in breach of his employment
terms and
conditions as a police officer in Queensland). He took care to read the material
provided to him in the witness box and
spoke slowly in answer to questions. He
was not in my view uncooperative in giving his evidence in chief in the witness
box (having
been subpoenaed to do so by ASIC).
- Mr
Hobbs refers to the evidence given at T 663.17 to 25 where he asked Mr Dent if
there was a reason why he did not agree to sign
an affidavit and Mr Dent replied
"Yes there was. There was a number of reasons, and I had a disagreement with
ASIC". (For the reasons
adverted to earlier, I draw no adverse inference from
the fact that Mr Dent was not prepared to sign the draft affidavit that had
been
prepared. The disagreement might have related to anything and it certainly
cannot be inferred that Mr Dent's objection related
to any attempt by ASIC
improperly to obtain evidence.)
- ASIC
submits that Mr Dent's evidence cannot be accepted as reliable to the extent
that Mr Dent sought to contend that he was not himself
undertaking significant
work or that the work was being done by his wife. Mr Halley submits that the
objective evidence as to the
preparation of the reports and Mr Dent's response
to requests from FTC executives and Mrs Watson demonstrated that Mr Dent had a
central role in the activities carried out in Brisbane, in particular as to the
printing of the scheme material. I agree. (It was
suggested that the evidence
that Mr Dent's daughter had assisted in reading out names and numbers for the
preparation of reports
was not credible, given her young age at the time.)
- ASIC
suggested that Mr Dent's evidence on this issue may have been influenced by a
concern that, as a police officer, he might have
been expected to have disclosed
to his employer that he was undertaking this alternative employment (something
Mr Dent appeared at
least implicitly to concede) and that this was the reason
that the money was being paid into a credit union account in the name of
his
wife (something that Mr Dent did not concede). (That said, Mr Dent's explanation
as to why he was more involved in the computer
work than his wife, namely that
she was better at the laundry than he was, seemed to me to have the ring of
truth to it.)
- Apart
from the evidence on the above issue, Mr Halley urges me to accept the evidence
of Mr Dent as demonstrating that the scheme
memoranda and investor agreements
were being printed and distributed from Brisbane pursuant to instructions
received from Mrs Watson
(and in a context where Mr Dent had made it clear in
his evidence that he would only do so if he were satisfied that it accorded
with
Mr Hobbs' instructions and, was not prepared to undertake work that he thought
was being requested by people other than Mr Hobbs
or Mrs Watson on Mr Hobbs'
behalf). It is submitted that this evidence is highly relevant from someone who
showed a tendency to support,
rather than to give evidence inconsistent with,
whatever Mr Hobbs' interest might be perceived to be. I agree.
- Other
than the attempt by Mr Dent to minimise his role (and that of his wife) in the
operation of the OEM/KLM and investment process
generally (ie that they were no
more than publishers and printers, whereas the evidence suggests that there was
a greater processing
and reporting role undertaken by them), which is
inconsistent with the contemporaneous documents in evidence, I accept Mr Dent's
evidence as generally reliable.
Mrs Emma Burnard (nee Watson)
- As
to Mrs Burnard, ASIC submits that the evidence she gave was truthful and that
Mrs Burnard did do her best to recall what had taken
place. Mr Halley submits
that what emerged from Mrs Burnard's evidence was that she was simply
implementing a process that she had
been instructed to implement; that she was
someone with good attention to detail; and that she was the person who, on a day
to day
level, implemented the sequence of requests to OEM and the dispatch of
information to, and "qualification" of, investors and then
took on the role
attributed to Diligence Discovery Limited. Mrs Burnard had no financial
qualifications and worked from home (seemingly
as a basis of making some money
to supplement the family income rather than as a career as such). The
verification process performed
by Mrs Burnard for Diligence Discovery seems to
have been a perfunctory administrative role rather than any careful audit of the
funds that were being invested.
- Mrs
Burnard was another witness who was not prepared to sign an affidavit in advance
of the proceedings and who gave her evidence
in chief in the witness box, having
been the recipient of a subpoena compelling her attendance at the hearing.
- Mrs
Burnard was very nervous in the witness box and often did not seem able to
concentrate on following the questions put to her.
It seems to me fair to say
that she demonstrated no understanding or appreciation of the role she was
performing in relation to the
various investment funds.
- What
is said by Mr Halley to be striking from her evidence is Mrs Burnard's
explanation as to who it was from whom she obtained instructions
(namely, that
it was always her mother or Mr Hobbs). Mr Halley emphasises that there was no
suggestion that anyone had had ever told
her at any time that anyone else was
behind the OEM/KLM process. I accept that this is a significant fact from which
I can infer
that the only realistic possibility was that it was Mr Hobbs who
gave Mrs Burnard instructions in relation to the system (and I interpose
to note
that this is corroborated by the evidence of Mr Parsons).
- Mr
Halley submits that this was a bespoke system, developed for the purposes of
FTC, OEM and KLM largely with respect to Australian
and New Zealand investors.
That may or may not be the case. However, I do accept that there is no evidence
that the entities in the
present proceedings operated otherwise than through the
Hobbs' office in relation to investment schemes of the kind the subject of
the
present proceedings.
- Insofar
as it is submitted that the diversion of fax numbers to New Zealand indicates
the appearance of a system that was not applied
around the world (but rather was
specifically developed for Mrs Burnard and her mother to conduct from New
Zealand), I accept that
this aspect of the process was likely to have been put
in place only in relation to the investment schemes operated through the Hobbs
office system. Further than that seems to me to be speculation.
- What
I do not accept is that the use of the diversion system is likely to have been
purely as a matter of convenience in order to
enable Mrs Burnard to access
emails at her convenience (as Mrs Watson suggested). If that had been the
purpose it would have been
a simple matter for potential investors or FTC
subscribers to have been given Mrs Burnard's email address as the relevant point
of
contact. I consider that the only conclusion reasonably open on the evidence
is that the J2 diversion system was put in place in
order to convey to potential
investors that they were dealing with offshore entities not closely associated
(as I find they were)
with FTC and/or Mr Hobbs. The only purpose for so doing
seems to me to be one consistent with Mr Hobbs seeking to distance himself
from
the operation of the investment schemes that, in reality, he had established and
through which he had a financial interest.
Mrs Suzanne Watson
- Mrs
Watson was another witness who gave her evidence having been subpoenaed by ASIC.
She was not a particularly cooperative witness
in the witness box and seemed to
me to be overly defensive as to her position. (Indeed, her manner in the witness
box seems not unlike
the description given by Mr Parsons in his affidavit as to
her behaviour in the Nelson office.) I accept that she consistently displayed
partiality for Mr Hobbs' position and loyalty to him. (In connection with an
interlocutory application to set aside the subpoena
served on her to give
evidence, Mrs Watson expressed in very emotive terms her outrage at the
proceedings being brought against Mr
Hobbs.) Mrs Hobbs presented as somewhat
scatterbrained and with no idea as to the financial matters to which the
investment schemes
related. She was nervous and agitated in the witness box.
- I
consider that any suggestion that Mrs Watson had a decision-making role in the
setting up of the processes involving OEM/KLM (independent
of Mr Hobbs) (as
opposed to the making of decisions as to how to implement that process) is
fanciful. Mrs Watson had no financial
qualifications or experience, worked as a
hairdresser, carried out some part-time filing for Mr Hobbs and seemed to have
very little
apparent idea of what was involved in the process she was following
(hence her apparent recognition only for the first time in the
witness box of
the 'awkwardness' of a company with a UK prefix having an office address in the
Bahamas). Mrs Watson clearly saw the
process as an automatic (or 'seamless')
progression of events (such as Mr Hobbs seems to have sought in the first
instance to have
put in place via a computer program, as deposed to by Mr
Parsons).
- Mr
Halley submitted, and I accept, that the significance of Mrs Watson's evidence
is that it was not Mr Becker (or anyone other than
Mr Hobbs) who she said was
giving her instructions or directions or who had put in place or co-ordinated
the system - that evidence
being consistent with ASIC's case (and damning of the
version of events given by Mr Hobbs).
Mr Pierre Mitchell
- Mr
Mitchell was the accountant who worked for Mr Hobbs and the Hobbs companies in
the Nelson office. He also had a role in the administration
of at least one of
the schemes. He was gruff in his manner but not an uncooperative witness. He
swore an affidavit only shortly prior
to the hearing, though his outline of
evidence had been served on Mr Hobbs in advance.
- Mr
Halley submitted that Mr Mitchell's evidence, though somewhat vague, can be
relied upon for the concession as to the evidence concerning
the payment of the
million dollars to Upton Ltd (namely his knowledge as to the receipt of that
payment having come from Mr Hobbs
and the notification that the money was to
come in). (While it was suggested that the vagueness of his memory might have
been attributable
to him having a certain loyalty to Mr Hobbs, I did not discern
any overt partiality to Mr Hobbs.) Suffice it to say that I accept
Mr Mitchell's
evidence as to the Upton payment - and that it is inconsistent with the version
of the evidence that Mr Hobbs sought
to put forward in relation thereto.
Mrs Brenda Hobbs
- Mrs
Brenda Hobbs is married to Mr Hobbs' brother, Mr Robert Hobbs. Whether due to
nervousness or otherwise, Mrs Brenda Hobbs was truculent
confrontational from
the start of her evidence in chief and broke down in tears more than once during
her evidence. She clearly perceived
the questioning by Mr Halley (which I
considered to be quite unobjectionable) as intimidatory or accusatory (and
described it as
an attempt to 'wind [her] up'. Mrs Brenda Hobbs she spoke
quickly and in clipped tones, She was not a particularly co-operative witness
and regularly resorted to answers such as "no idea" or "whatever". Mr Halley
(with commendable understatement) observed in his closing
submissions that Mrs
Brenda Hobbs had clearly found the process of giving evidence challenging and
that she had made clear that she
did not consider that the process was fair. I
consider that to be an accurate assessment of the manner in which Mrs Brenda
Hobbs
presented as a witness.
- Mr
Halley submits that her evidence underlined two fundamental propositions of
ASIC's case: the first, being the identification and
use by Mr Hobbs of people
with very limited financial skills and background to undertake tasks what were
often no more than administrative
tasks; and the second, being that it was Mr
Hobbs who was the directing mind and guiding will of these operations.
- As
to the first, Mr Halley submits that Mrs Brenda Hobbs in the witness box
demonstrated, by the manner in which she gave her evidence
and her attitude to
the questions she was being asked, that she did what she was told (and that she
found it offensive for it to
be suggested that she was in any way was managing
or operating something). (Another possibility is that she was seeking to
distance
herself from any involvement that might implicate her in the
proceedings. However, as I understand it ASIC had made clear to Mrs
Brenda Hobbs
at least at the time her cooperation was sought for the filing of an affidavit,
that there was no intention to bring
any charges against her.) It is submitted
that Mrs Brenda Hobbs was in reality nothing more than a clerk in many ways
(though, as
Mr Halley notes, she was being held out to financial institutions in
the United States, to investors and to others as a scheme administrator).
- As
to the person from whom Mrs Brenda Hobbs looked for instructions and directions,
ASIC does not cavil at the suggestion that she
turned first to Mrs Hobbs for
those (indeed ASIC contends that Mrs Jacky Hobbs was relevantly a director and
officer of Geneva Financial).
However, ASIC submits that Mrs Jacky Hobbs was
also at all relevant times acting under the directions or instructions of Mr
Hobbs
(citing by way of example, the dealings with Cadent and Ms Reisinger,
which were referred by Ms Reisinger to Mr Hobbs, even if passed
on through his
wife, and the evidence as to the traders for Geneva Financial). I agree.
Mr Grant Clements
- Mr
Clements was another witness who gave evidence only having been served with a
subpoena to attend and to do so. He is a truck driver
in New Zealand and has no
financial qualifications. He became involved in the investment schemes following
a discussion with Mr Hobbs
as to what he was then doing. He saw Mr Hobbs as a
father figure (which ASIC submits this highlights the extent to which I should
infer that Mr Hobbs saw Mr Clements as someone who would do what he was told and
who could be expected not to ask any awkward questions).
- As
to the experience or sophistication of Mr Clements, Mr Hobbs points out that, at
T 773.29-34, Mr Clements agreed that he had researched
and written the eBook
referred to earlier. (This is, however, to be balanced against Mr Hobbs' own
evidence that "anyone" could write
financial education books - at least of the
kind distributed by FTC - and I would infer from the title of the e-Book that
this book
was of similar ilk). (Given Mr Clements' lack of understanding in the
witness box as to what, for example, was a debenture (T 704.2)
(though in the
private placement memorandum for Elite Premier it was emphasised that the fund
did not invest in bank debentures trading
programs) and that he operated two
funds that were set up as unit trusts but was unable to explain what a unit
trust was (T 684.20),
those might perhaps have usefully been some of the 40
questions.)
- Reference
is made by Mr Hobbs in this context to portions of the transcript of Ms
Reisinger (Ex AO p143.1-24, p144.1-24, p145.1-24,
p146.1-24, p147.1-24,
p148.1-24, p149.1-24, p150.1-24 and p151.1-15) in relation to the sophistication
of Mr Clements. For the reasons
given earlier in relation to Mr Koutsoukos, and
by reference to Mr Clements' own answers in the witness box, I am not persuaded
that
Ms Reisinger's opinion as to Mr Clements' sophistication was one that had
any real foundation (and again it seems to have been based
on broad based
statements that could have derived from dealings with Mr Hobbs himself).
- Mr
Clements himself saw his role as administrator of the fund to be "Just to
administrate [sic] contracts and people's investments"
(T 684.38). Mr Clements'
explanation of the steps he took to set up the fund was just as
basic:
There was a IBC was [Preserved] and set up. And then there was an account set
up for the fund, mainly for the investment money to
come into
...
and then it went out to wherever it was going to go
- Mr
Hobbs submits that Mr Clements' ability to run a business is "quite different to
how he answered questions under the pressure of
a cross examination in court". I
cannot possibly test that on the evidence before me. Suffice it to say that Mr
Clements gave no
indication in the witness box of any skills that would enable
him to give financial investment advice of the kind that might lead
to an
investor being able to make an informed investment decision ie as to whether to
invest in the funds Mr Clements administered
(nor was there any indication that
he would have had the qualifications or experience to have been granted an
Australian financial
services licence had he applied for one).
- Mr
Hobbs, in what I can only describe as an extraordinary submission, referred to
the evidence at T 7041-4 (where Mr Clements was
unable to describe what a bank
debenture was) and said:
I submit that most people attempting to bring investors into what I would
call fraudulent transactions of Bank Debentures don't understand
what [they're]
trying to promote as its supposedly a very secret market
- I
would assume that Mr Hobbs was not thereby accusing Mr Clements of fraud.
However, it does suggest that Mr Hobbs assumed that some
form of withholding of
relevant information from investors was to be expected.
- Mr
Hobbs, in his submissions, referred to particular passages of the
cross-examination of Mr Clements. In so doing, Mr Hobbs either
put forward an
alternative explanation for that evidence or suggested that Mr Clements was
confused (by reference to Mr Hobbs' own
asserted version of
events).
- So,
for example, Mr Hobbs submits that (although Mr Clements said in his examination
in chief (at T 681.5-8) that he would have asked
Mr Hobbs to send a fax to
Vanuatu to set the company up), in cross-examination Mr Clements accepted that
(T 777.17-24) it was common
for him ask the same question in regard to business
of Doreen Andrews, Robert Hobbs and Mr Hobbs. Mr Hobbs submits that "Mr Clements
was in the habit of asking peoples [sic] opinion even after he had completed
something and yet at other times he was quite secretive".
There is no evidence
of how this so-called secretive behaviour was displayed. (Nor, for that matter,
was there evidence as to the
similar assertion made as to Ms Li's so-called
secretive behaviour when opening Cadent accounts.)
- As
an example of the kind of question Mr Clements might ask of multiple people, Mr
Clements said in the witness box "I suppose I was
just reassuring myself just if
I would ask a question I would ask Dave and Tim Robert and Doreen yep". (That
evidence seems to me
to highlight the likelihood of Mr Clements relying on Mr
Hobbs for advice, not the contrary.)
- Mr
Hobbs also referred to Mr Clements' evidence at T 697.1-22 (where Mr Clements
gave evidence of travelling to America where he met
Ms Reisinger and Mr
Caswell), submitting that "this is the time Mr Clements started dealing with Ms
Reisinger for the Reisinger Product".
This seems to me no more than mere
speculation (and in any event it does not address the question as to at whose
instigation Mr Clements
had travelled to America, had met Ms Reisinger and had
started dealing with Ms Reisinger for the so-called "Reisinger Product", that
seeming to mirror the product described by Mr Hobbs in the DVD Seminar and
elsewhere).
- Similarly,
in relation to the evidence at T 706.24-50, (where Mr Clements accepted that it
was possible that Mr Hobbs suggested he
use the Bank of Nevis), Mr Hobbs denied
that he introduced the Bank of Nevis to Mr Clements and suggested that Mr
Clements "would
have received that" from Mr Ty Andros (of Trader/View) and/or Ms
Reisinger. Mr Hobbs notes that at T 789.50 - T 790.1-4 Mr Clements
answered that
he did not ask Mr Hobbs for advice or authority before he opened the bank
account at BNZ for Preserved Investments.
Again that seems to me to be
speculation by Mr Hobbs. Mr Clements himself considered it possible that the
suggestion had come from
Mr Hobbs and there seems no basis to suggest that Ms
Reisinger or Mr Andros had any connection with the Bank of Nevis so as to make
it likely that either of them had referred Mr Clements to that
bank.
- Mr
Hobbs reminds me (in his submissions) that at one point in cross-examination Mr
Clements sought from Mr Hobbs confirmation as to
the sending of money to
Magny-Cours. Mr Hobbs referred to the evidence (at T 776.42-46) that it was for
the Cash Builder trust and
to Mr Clements describing that as "a fund" and saying
"What do they trade in? I just called it Cash Builder which was ... Pierre
run"
at which point Mr Clements had asked Mr Hobbs "wasn't it?". That seems to me
consistent with Mr Clements relying on Mr Hobbs
for answers as to the scheme
arrangements and indicating an assumption on Mr Clements' part that Mr Hobbs
would know the answer.
Therefore it is difficult to see what benefit Mr Hobbs
seeks to draw from that. What I took from this was that Mr Clements relied
on Mr
Hobbs for instruction or guidance or information as to the funds that were
operated out of the Hobbs office (which is consistent
with ASIC's case as to the
involvement of Mr Hobbs and his use of unsophisticated
administrators).
- At
T 774.50, in cross-examination, Mr Clements said that he remembered meeting Ms
Reisinger in Chicago and the traders speaking about
their business and that they
discussed what their trading was, "how it was going" and "whether it was good or
bad". Mr Hobbs relied
on this as inconsistent with Mr Koutsoukos' evidence that
Ms Reisinger and Mr Hobbs had told them not to ask the traders about their
returns. (As noted earlier, the content of what others recall that the traders
said was rather general.)
- Mr
Hobbs notes that at T 711.44-46, it was put to Mr Clements that he would not
have authorised transfers to Magny-Cours or to Focus
Administration unless he
had the approval of Mr Hobbs or somebody working for him and Mr Clements had
agreed. Mr Hobbs submits that
Mr Clements was "somewhat confused because he
wouldn't have transferred to Magny-Cours without Mr Mitchell's approval and as
to Focus
administration I have no idea what it is nor would I be required to
give approval". Apart from the fact that this was not put to
Mr Clements, it
amounts to no more than an assertion by Mr Hobbs.
- Again,
as to the evidence at T 712.17-50, where Mr Clements agreed that he had received
a number of documents from Mr Hobbs, it is
submitted by Mr Hobbs that Mr
Clements was very confused at times while giving evidence. In support of this,
Mr Hobbs submits that
from T 780 Mr Clements "basically agreed in re-examination
with everything Mr Clarke said". My impression at the time was that this
was
because Mr Clements realised that he had given inconsistent evidence and that he
was accepting that there was no basis for the
matters he had agreed to in
cross-examination by Mr Hobbs. Certainly, Mr Clements did not cavil with what Mr
Clarke put to him in
re-examination. The highest I could put this evidence for
Mr Hobbs would be to assume that Mr Clements was susceptible to agreement
with
whatever proposition may have been put to him but if so that means I can place
no weight on the answers he gave to Mr Hobbs.
- Mr
Hobbs then submitted that a statement that Mr Clements had written after he
returned to New Zealand confirmed he was confused and
that he was not answering
correctly but that he had not included that statement as it is "probably
evidence". I cannot possibly draw
any conclusions from an unknown statement that
is not in evidence before me.
- As
to the evidence at T 718.1-10 (where Mr Clements gave evidence that Mr Hobbs had
approved the certificate for the Elite Premier
Option Two trust), Mr Hobbs
submits that had he seen the certificate it would not have been his approval
that was required rather
that "It would have simply been Mr Clements way of
asking everybody in the office not for approval in the sense of legality or
permission
but approval that the certificate looked good". Insofar as this seems
to be Mr Hobbs giving evidence in his submissions as to his
observation of Mr
Clements' practice, that is unsworn and untested evidence that I cannot properly
take into account.
- What
Mr Hobbs submits Mr Clements "very clearly and concisely confirmed" was the
following:
- at T 784.41-44,
that he would not ask Mr Hobbs' permission for him to control and run his
business;
- at T 786.6-16,
that Mr Hobbs did not ever request him to put on certain traders and did not
ever request him to pay profit when it
was due (noting that Mr Clements, in
response to the question "Did I ever request you to pay certain profits?" said
"only paid what
profit was made in the trade. You can't request that, you can
only - whatever was made");
- at T 787.21-24,
that Mr Hobbs did not ever give him instructions as to the way money in
Preserved Investments Unit Trusts investments
were to be made;
- at T 787.35-50
that Mr Hobbs did not ever suggest to him that he should look at Boston Trading
and that when he was dealing with Cadent
and the traders contracted to his funds
and he would deal with Ms Reisinger, that he did take the advice of Ms Reisinger
if she suggested
he should leverage or de-leverage or put on traders or such
like. (Mr Hobbs refers to the admission by Mr Clements that Paul Fry,
the Risk
manager, would be part of that as showing that Mr Clements took the advice of Ms
Reisinger and Mr Fry).
- Ironically,
given the suggestion by Mr Hobbs that I should disregard Mr Clements' evidence
in chief because he just accepted what
Mr Clarke put to him, the same comment
could be made as to the evidence to which Mr Hobbs refers above. In any event,
the answers
given by Mr Clements must be seen in the context of the unlikelihood
that he made any such decisions on his own and that the role
of Ms Reisinger and
Mr Fry can be ascertained from contemporary documents.
- As
to T 721.5-18 (where Mr Clements suggested that he must have obtained from Mr
Hobbs his understanding that he should send a fax
to Mr Dent to get a contract
memorandum and said he must have had a discussion with Mr Hobbs) the submission
made by Mr Hobbs is
that he "would have received" that fax number from Mrs
Watson. (This does not take the matter very far if, as I consider to be the
case, Mrs Watson was acting on Mr Hobbs' behalf in that
regard.)
- Mr
Hobbs also referred to the letter dated 6 May 2004 from Rout Milner Fitchett as
evidencing that Mr Clements obtained his own legal
advice as to his business and
fund. There was, however, no evidence form Mr Clements as to the circumstances
in which this advice
was obtained or as to the purpose for which the advice was
sought.
- Mr
Hobbs relies on Mr Clements' response (T 744.1-10) to a question about Preserved
Investments and its two funds (namely, that Mr
Hobbs did not personally instruct
or control him or what he did and that, in regard to the last traders he put on
(Boston Trading),
that he did the research, found these traders and put them on
himself). I have great difficulty accepting that Mr Clements was in
a position
independently of Mr Hobbs to form an assessment as to traders or the like
(unless he was relying on advice from Ms Reisinger
and even then I would
conclude that this was because Mr Clements understood that to be in accordance
with Mr Hobbs' general instructions
or practice). The fact is that Mr Clements
did not give the impression of understanding anything of any financial
complexity in relation
to the funds he administered.
- Mr
Hobbs also points to the evidence at T 774.15-21 in which Mr Clements accepted
that 20% of 20% of commission was actually paid
to Mr Hobbs for office rent. (I
accept that a rental arrangement of some informal kind may well have been in
existence. That, however,
simply points to Mr Hobbs having a financial interest
in the operation of Mr Clements' schemes in that regard.)
- Mr
Hobbs also relies on the fact that when he asked Mr Clements whether Mr Hobbs
himself had any control of ownership of his companies
Preserved Investments,
Elite Premier, Mr Clements answered that he did not. Again, I regard that
question and answer with considerable
scepticism. Apart from the fact that the
question was self-serving and no doubt intended to prompt the answer from a
witness partial
to Mr Hobbs' position, it is by no means clear what Mr Clements
understood by this answer.
- I
consider that Mr Clements evidence in general supports the contentions made by
ASIC, not Mr Hobbs, as to Mr Hobbs' role in relation
to the investment
schemes.
- Mr
Fitzgerald worked in Mr Hobbs' Nelson office for a period of time and acted as
the administrator for the Covered Strategies fund
for a short period of time. Mr
Fitzgerald, unlike many of the other scheme administrators, seems to have had an
understanding of
financial matters and quickly formed the view that there was a
problem with the manner in which the moneys invested by investors
were being
dealt with. He struck me as a straightforward and honest
witness.
- Mr
Halley submits that, while Mr Fitzgerald might be expected to have had a little
more business acumen than others involved as scheme
administrators, he
nevertheless did not appear to have any relevant financial services experience.
I accept that that seems to be
the case. Mr Fitzgerald conceded that he did not
have anything of substance to do with the named trustee (Trans Management
Corporation)
referred to in the Covered Strategies private placement memorandum;
was not able to identify anybody from the trustee to whom he
had ever spoken;
and appeared to be receiving instructions either from Mr Hobbs or from Mr Parker
from time to time.
- Mr
Halley also points to the fact that it was Mr Hobbs who "stepped in" when it
became apparent that Mr Fitzgerald was not taking
any action as administrator
and that he did so in a public way by notifying others as to the position. (In a
similar way emphasis
is placed on the evidence Mr Hobbs had also sought to
identify solutions when money was "lost", for example, the direction to move
money around within the schemes (the "cross pollination" aspect of that being
part of what ASIC relies upon for the contention that
in substance there was one
scheme in which money was moved around as appropriate to help administrators out
if investments did not
turn out as successfully as may have been hoped).
- I
consider that Mr Fitzgerald was a credible witness and I consider that his
evidence supports the characterisation put by ASIC on
his role.
(v)Mr Parsons
- ASIC
places weight on Mr Parsons' evidence because of the extent to which he was
involved in establishing fund websites at Mr Hobbs'
instructions. It is
submitted that if Mr Hobbs had nothing to do with any of these schemes it is
inconceivable that he would have
assisted in the design of websites for each of
the schemes as Mr Parsons said that he did. I agree. Furthermore, I place weight
on
the fact that (without input from Mr Hobbs as to the overall arrangements in
operation for the schemes) it would seem to have been
impossible for Mr Parsons
himself independently to have conceived of the various connections and links
between the entities (a number
being IBCs) so closely mirroring what the
contemporaneous documents suggest occurred.
- I
note that Mr Parsons was not a particularly co-operative witness in
cross-examination by Mr Hobbs (expressing a lack of knowledge
as to building a
website when, by later answers, it was apparent that he understood the thrust of
the questions). There was clearly
no love lost between Mr Parsons and Mr Hobbs
(the latter having accused Mr Parsons, among other things it would seem, of
wrongly
providing material to ASIC).
- Mr
Hobbs submits that Mr Parsons is not a reliable witness. He accepts that Mr
Parsons, through his company HelloPages, developed
corporate websites (referring
to T 485.46-47) but he submits that "His website development was going to be a
viable business and
we would sell websites off to any interested parties"
(my emphasis) and notes that none of the websites developed by Mr Parsons was
sold.
- There
was no evidence of any arrangement for the on-sale of websites after their
development by Mr Parsons' company (of any proposal
that this occur). Such a
proposal (that Mr Hobbs might have been seeking to have websites set up for
on-sale to the fund administrators)
would seem inconsistent with the signing of
the hosting agreements by the various fund administrators (and it difficult to
see how
the websites would be attractive for use by anyone other than the
respective fund administrators).
- Mr
Hobbs places weight on the evidence as to an altercation between Mr Jim Cable
"of our office" and Mr Parsons (T 512.11- 20). Mr
Hobbs submits that "it was
because of Mr Parsons' continual cause of conflict and problems within our
office that his services were
terminated". The reason for the termination of the
arrangements seems to me to be irrelevant other than if it is suggested that Mr
Parsons' evidence was somehow motivated by ill-feeling.
- In
that regard, while there was clearly ill-feeling between Mr Parsons and Mr
Hobbs, it does not seem to me that Mr Parsons' evidence
was inconsistent with
the contemporaneous documents. Mr Hobbs did not pursue the line of questioning
that seemed intended to raise
the disputes between them (following the
objections raised by Mr Halley to such a course in light of correspondence from
Mr Hobbs
in which Mr Hobbs had asserted that certain issues that he had
foreshadowed would be dealt with in cross-examination were irrelevant
to the
current proceedings and only relevant to other unrelated
proceedings.)
- Mr
Hobbs submits that certain of Mr Parsons' evidence (T 511.16-40) is "a complete
fabrication". In order to understand that submission
I set out that portion of
the cross-examination:
Q. Well, Mr Parsons, when we get further to your affidavit if we just quickly
go over to paragraph 58 you say:
"At some point during the building of the J&B website Mr Truong also sent
me information that he wanted to put on the J&B
website. The content
described the relationship Mr Hobbs had with Wood, Truong and Koutsoukos."
[I interpose to note that the statement at para [58] concluded with the
words "and it talked about how great Mr Hobbs was". Mr Parsons
exhibited to his
affidavit email documents that he said Mr Truong had sent to him on 7 August
2006 - one of which was a Welcome Future
Trading Corporation document that had a
section headed Key Players and referred to Mr Hobbs as the International Sale s
Manager of
FTC - the significance being the apparent link in the mind of Mr
Truong between the Integrity Plus Fund and the FTC subscription.
Mr Parsons
deposed that he had uploaded that information to the draft J& B website and
had shown it to Mr Hobbs in his office
"who always signed off on each web site
before it was finished"]
If we just go over to paragraph 61 you then allege in paragraph 61, if you
just go down to the bottom, you allege I said:
"Get this off. If they go down, they go down on their own and they won't drag
me with them."
Is that correct?
A. That's correct.
Q. So why would I give you content for the J&B website if here I'm
alleging to get it off the website?
A. Because the content that you gave me was different to the content that
they gave me. They are two separate pieces of content.
Q. I put to you, Mr Parsons, that's just not true at all, is it?
A. It is true.
- What
Mr Hobbs submits is incorrect in the above exchange is presumably the evidence
that he, Mr Hobbs, had instructed Mr Parsons to
remove information from the
website (although the penultimate question seems to be focussed on the
proposition that it made no sense
for Mr Hobbs to have given Mr Parsons content
for that website at all).
- Mr
Hobbs further submits that the evidence given by Mr Parsons from [99] of his
affidavit as to the flow chart diagramme that Mr Parsons
said he prepared in
about early 2007 of Mr Hobbs' business structure (and which Mr Parsons says Mr
Hobbs shredded) was not credible.
The cross-examination as to this was at T
517.21-50; T 518.1-17. After taking Mr Parsons to [99]-[100] of his affidavit,
there was
the following exchange:
Q....And then you say, "I said, "That's no good"". And we continue to
paragraph 100. And you say, "After Mr Hobbs said these words
he walked off and I
saw him shred the diagram". Mr Parsons, where do you allege you was it in my
office you allege you showed me
this diagram?
A. Half way in your office, half way out of your office.
Q. And I walked off which way, Mr Parsons?
A. Towards the kitchen area.
Q. And then you saw me shred the diagram?
A. Correct.
Q. Through a shredder, Mr Parsons, or not?
A. With your hands.
Q. So I'm walking on sticks but I'm ripping up a document with my hands?
A. You wasn't walking on sticks.
Q. Mr Parsons, I want walk on sticks?
A. You were standing still.
Q. But you say I walked off. Did I stop walking?
A. Correct.
Q. Or did I have sticks with me, or not?
A. You were standing there. Your sticks were just propped up. You weren't
using your sticks.
Q. So I shredded the diagram?
A. You shredded the diagram.
Q. I put it to you that's totally incorrect as well, isn't it? Sorry. It's
totally incorrect, isn't it?
A. It is correct.
- Mr
Hobbs maintains that it was farcical to suggest that he was ripping up a
document with his hands while walking on his crutches
(and submits that he has
walked with crutches for 13 years). Mr Hobbs submits that Mr Parsons evidence
"is simply not truthful, neither
is this alleged diagram he drew".
- As
to the former, on the DVD Seminar video I observed that there were occasions
when Mr Hobbs had his sticks propped up and he was
sitting on the desk but also
where he appeared to be standing and balancing on the sticks but gesturing with
his hands (which makes
ripping up a document not inconceivable while the sticks
were propped up - though I accept that this would seem to be more difficult
if
not indeed impossible if walking at the time and using the sticks for support).
However, Mr Parsons' evidence was clearly not
that Mr Hobbs had shredded the
document with his hands while walking. I am not satisfied that Mr Parsons'
evidence is therefore inconceivable.
- As
to Mr Parsons' diagram, relevantly it includes information that Mr Parsons would
have no reason to know but for information provided
to him by Mr Hobbs (or by
fund administrators at Mr Hobbs' request). Significantly, it is consistent with
other evidence. So, for
example, it has a circle top right in which the
following words appear:
USA
CADENT FINANCIAL
LISA REISINGER
with an arrow pointing to those and the words "David Hobbs Introducing
Broker".
- It
also includes reference to "DDL Christchurch" (under the words Emma Watson) with
arrows Susan Watson (presumably a reference to
Suzanne) and David Hobbs and
numerous other entities to which reference has been made in the proceedings
(including the Peter Brock
Foundation NZ, Elite Premier Option Two (Grant
Clements and the words "$50.00 in D Hobbs 4 P Mitchell"), Master Fund.com (Min
Li
David Collard); Dest Fund.Biz (Guo Ping Zhang) Integrity Plus.net (Truong,
Con Wood).
- In
the middle of the diagram linked by arrows to other circles, is a circle "David
Hobbs. Tasman Business Solutions". There are arrows
to it from the following
names: James Stirling Cable, Pierre Michelle, Robert Hobbs, Grant Clements,
Doreen Andrews as well as from
a circle "David Hobbs House" (with an arrow to it
from Jacky Hobbs) and linked to that circle "Robert Hobbs House" (with an arrow
to it from Brenda Hobbs). Against those circles in the word NODE. Two other
circles linked by arrows from the Tasman Business Solutions
circle are, first, a
"J& B Financial" circle (with the names J. Truong, Con Koscuss (obviously
misspelt) and B. Wood in the circle)
and other names pointing to it (including
Con, Stanton, Jennings, "Paulina Diabolica" (presumably a reference to Ms
Dabelic) and
"Lui Lawyer and wife") and an arrow from that circle to the
Integrity Fund circles, and a second circle "Chuck FTC Education Books"
with an
arrow to it for David Hobbs and Jacky Hobbs. Arrows link each of those circles
also to the respective Hobbs house circles
with notations "request" or
"referred" (which appear to reflect the FTC/OEM/KLM process of transmission of
requests, referral and
so on). Interestingly there is also a circle "Magniccue"
(possibly Magny-Cours) with the words "Offshore Account" and the words pointing
to it "D Hobbs Could be the dump/sink" and the word "SINK".
- Critically,
it is difficult to see how the information on this document could have been
gained otherwise than by information provided
to Mr Parsons in the course of the
exercise of building the websites. Had Mr Parsons set out to cause trouble for
Mr Hobbs without
first having been provided with that information it is
difficult to see how he could have accessed the information (particularly
as to
the offshore Magny-Cours account). To the extent that Mr Hobbs has raised issues
as to the production of electronic documents
to the Securities Commission of New
Zealand that were initially copied by Mr Parsons from the Hobbs office (referred
to as the Cable
CDs and back up files of "Doreen's machines") it is by no means
apparent that the information on the diagram could have been readily
gleaned
from that material (and if it had Magny-Cours would surely have been spelt
correctly). It seems to me very telling that the
links that Mr Hobbs was adamant
did not exist between FTC and the OEM/KLM process and the investment schemes are
clearly reflected
in this document.
- In
the context of the above, whether or not Mr Hobbs shredded the diagram while
standing or walking, does not detract from the overwhelming
likelihood that such
a document was prepared by Mr Parsons from information provided to him by Mr
Hobbs.
- As
to other matters, Mr Hobbs also takes issue with the statement by Mr Parsons at
[92] to the effect that Mr Hobbs introduced Ms
Li as "one of my administrators"
and as "a doctor, brain surgeon who is very famous in China" and says that this
is a complete fabrication.
Mr Parsons confirmed in cross-examination that this
was his recollection of what had been said (and there was nothing further
explored
in that regard). Suffice it note that a statement that Ms Li was a
doctor or brain surgeon in China is suspiciously close to the
statement that Mr
Hobbs is recorded as having made on the DVD Seminar video as to Ms Li and, in
circumstances where there is ample
evidence that Ms Li was a scheme
administrator and communicated closely with Mr Hobbs, including travelling with
him to China to
negotiate possible investments, it is by no means implausible
that Mr Hobbs did introduce Ms Li to Mr Parsons in such terms.
- Mr
Hobbs next takes issue with the evidence by Mr Parsons as to a conversation he
says took place with Mr Bellamy. Mr Hobbs submits
that this "simply did not
happen". The conversation in question is deposed to at ([69]ff of Mr Parsons'
affidavit). He puts it as
occurring in about September 2006 following concerns
that he said he had as to the legality of the fund websites. Mr Parsons exhibits
to his affidavit a copy of a letter of advice dated 1 September 2006 from Mr
Bellamy on the letterhead of Fletcher Vautier Moore.
This letter is addressed to
Mr Hobbs, Tasman Business Consultants and headed Private Placement. It
corroborates Mr Parsons' evidence
in that it states:
Your primary question to us was in relation to the web site. As I understand
matters you and John [Mr Parsons] are concerned about
whether or not the web
site complies with the requirements of an exempted transaction as defined in
Section 4(2) of the United States
Security Act 1933 and Regulation D
- Mr
Parsons' evidence is that he had created a mock fund web site for the purpose of
seeking the advice and had based it on the Eighth
Wonder Fund's web site that he
had earlier created. Mr Bellamy's advice was that the web site was worded in a
sufficiently neutral
way so as not to infringe the section. Mr Bellamy states
that:
The web site I saw does not solicit funds in any way shape or form either
from the public at large or from a sophisticated investor
and goes on to suggest that the limited liability status be displayed more
prominently. The letter also makes general and not "conclusive"
views as to the
concept of a sophisticated investor, in the course of which he considers that
the issue of an accountants certificate
would be likely to provide "absolute and
complete protection to the issuer" under Australian law but that it would be
wise "to check
with your various introducers whether the countries from which
they obtain their funding regulations similar to the Audit and Assurance
Alert
No 9 from Australia". Mr Bellamy gave advice as to how Mr Hobbs could be
satisfied in respect of documentation for qualifying
as a sophisticated
investor. This is only consistent with Mr Bellamy having an understanding that
the activities conducted or to
be conducted included such investment.
- The
only challenge that Mr Hobbs made to that evidence (at T 519.39-50) was as to
the statement Mr Parsons said he made at that meeting
in relation to the
suggestion by Mr Hobbs that he research the countries to find out if they had
such regulations (a request corroborated
by the note "JP to "research" against
item 10 of the advice). Mr Hobbs put to Mr Parsons that Mr Parsons had not said
the following:
I don't know what you get paid an hour, Philip, but I am not qualified to
research these things. You are the lawyer. You have these
investors, David. I
don't know.
- As
a seeming aside, Mr Hobbs submits that the style of Mr Parsons was always
argumentative "and that comes across in his fabrications
as well".
- The
difficulty for Mr Hobbs in this submission is that the copy advice (marked with
Mr Parsons' annotations) corroborates the rest
of Mr Parsons' evidence on that
issue and makes it not unlikely that a statement of that kind was made; Mr Hobbs
did not require
Mr Bellamy for cross-examination so did not take that
opportunity to challenge Mr Parsons' evidence by reference to the other
participant
to the conversation; and, in any event, it is not necessary to rely
on what Mr Parsons attributes to himself as saying in order to
come to the
conclusion that what Mr Bellamy understood he was giving advice on related to
investment in funds referable to websites
such as those created by Mr Parsons.
- Mr
Hobbs also takes issue with the evidence of Mr Parsons from [64] as to a
conversation at a meeting with Mr Hobbs, Mr Koutsoukos,
Mr Truong, Mr Jennings,
Mr Stanton, Mrs Watson and an Egyptian couple who he said told him they were
potential investors. Mr Hobbs
in his submissions identified this couple as two
lawyers from Sydney "one of whom wrote the legal opinion for me at the end of
2007
(Ms Louisa-Maria Maroun)". In Mr Parsons' affidavit he says that Mr Hobbs
said in that meeting "in a very excited manner":
There are changes to the Australian employees' superannuation laws. You've
got to get more motivated. You've got to get back to Australia
and push, push,
push the sale of FTC. This is what you've got to do. You really need to push the
FTC education to people in Australia
and drive this really hard. We could do
very well.
- Mr
Hobbs submits that the suggestion that he encouraged people to promote FTC is
again a complete fabrication. Mr Parsons, when challenged
on this (T 520.24-50;
T 521.1-5, 7-39) maintained that the conversation had occurred. (Such a
conversation is consistent with the
evidence of Mr Koutsoukos as to targets for
FTC subscription and with the evidence of the J&B Financial officers as to
the suggestion
in mid 2006 that Mr Hobbs would set up a superannuation fund for
them.)
- Mr
Hobbs then refers to portions of the transcript of Mr Parsons' cross-examination
(in which Mr Hobbs put to him a different version
of events to that to which Mr
Parsons had referred in his affidavit) but on each occasion Mr Parsons
maintained his version of events
and there was no evidence by Mr Hobbs to
suggest otherwise. (So, for example, the suggestion put to Mr Parsons at T
501.15-36 that
it was Mr Evans not Mr Hobbs who had given him the Spring
Investments memorandum, cf [12] of Mr Parsons' affidavit - a suggestion
that
indicates Mr Hobbs had some knowledge that Mr Evans was associated with that
fund; and the suggestion that it would have been
very rude for Mr Hobbs to have
abruptly walked out of the initial meeting - T 491.26, T 492.1-49, cf [8] of Mr
Parsons' affidavit
(which Mr Parsons said he did not think was rude and which Mr
Hobbs asserts is a complete fabrication.)
- Mr
Hobbs then refers to particular paragraphs of Mr Parsons' affidavit (which he
did not challenge in cross-examination) and suggests,
either that they are a
total fabrication ([41]-[46], in which Mr Parsons recounts a conversation with
Mr Robert Hobbs where he says
that Mrs Watson and her daughter had a system for
"qualifying" investors that was secret; Mrs Watson refused to comment on it and
Mr Hobbs later asked him to create a system that allowed people to put in their
details and for "OEM and KLM letters to get created
and sent to clients
automatically" (consistent with the notations on Mr Parsons' diagram) and that
he said there needed to be someone
to monitor the information received and reply
and that it could not be automatic); and [49]-[53], in which Mr Parsons
continues to
give evidence of that conversation with Mr Hobbs and Mrs Watson
(relating to a "prequalification" process involving OEM forms and
to the request
by Mr Hobbs that he copy all the hard drives and discs of Mr Cable's computer;
or on the other hand bizarre: namely
[52] where Mr Hobbs is said to have said
that:
...In this office, everybody is a company. Grant Clements is running his own
business. Jim Cable is running his own business. Doreen
Andrews is running
Tasman Business Consultants. They are all separate businesses.
(The statement that Mr Hobbs suggests was bizarre was the statement that Mrs
Andrews ran Tasman Business Consultants, even though
in other contexts he seems
to have suggested she had considerable autonomy to act without reference to
him.)
- Mr
Hobbs submits that Mr Parsons had no authority to copy or retain files or emails
from "our office" and that this "combined with
the interception of emails casts
a cloud over Mr Parsons' credibility". He refers to the discussion at T 514.5-26
in that regard.
The difficulty with this submission is that there is no evidence
to support the assertion that files were copied or retained without
authority.
Mr Parsons denied what Mr Hobbs put to him (which was that the conversation to
which Mr Parsons had deposed (at [108])
with Mr Robert Hobbs as to the copying
of the files had not occurred). Mr Robert Hobbs was not called to give evidence.
(When questioned,
Mr Parsons said that to his knowledge Mr Robert would have had
the authority to say that (although the basis for this conclusion
was not
tested). Mr Hobbs then put to Mr Parsons that he had "actually illegally [taken]
our files". That question I rejected.)
- Mr
Halley had objected to the making of allegations of illegality when the
relevance of the allegations to any issue in the proceeding
had not been
explained (and had previously been expressly disclaimed by Mr Hobbs) and
submitted that if Mr Hobbs sought to rely on
such an allegation for the purposes
of credit he should explain why that allegation could substantially bear on the
credibility of
the witness' evidence.
- I
am not in a position to make (nor would it be appropriate for me to make) any
finding that the material in question had been copied
without authority (let
alone that it had been downloaded illegally). Insofar as Mr Hobbs' submissions
sought to reintroduce that
topic (which he had not pursued in cross-examination)
I reject them.
- Finally,
Mr Hobbs submitted that "Mr Parsons' demeanour while in the witness box as he
said plainly he does not recall thereby avoiding
the answer". I have set out
earlier my observations of Mr Parsons' demeanour. I accept that Mr Parsons was
not a particularly co-operative
witness in cross-examination. I do not accept
that I can infer from this that had Mr Parsons been otherwise he would have
supported
Mr Hobbs' version of events.
- Mr
Halley accepts that there was a significant amount of tension that was apparent
between Mr Hobbs and Mr Parsons (referring to the
matters raised in
correspondence by Mr Hobbs prior to Mr Parsons giving evidence and the personal
challenges made in crossexamination).
It was clear that this was the case.
However, Mr Halley submits that this does not detract from Mr Parsons'
reliability as a witness.
I agree.
- It
is submitted by Mr Halley that there is no reason why Mr Parsons' evidence as to
the discussions that he had had with Mr Hobbs
should not be accepted and that to
the extent that the personal attack was made on Mr Parsons it should be
understood as only underlining
Mr Hobbs' recognition of the damaging nature of
Mr Parsons' evidence. In this regard, I consider that the most significant part
of
Mr Parsons' evidence goes to the preparation of the diagramme and the
discussions that he had with Mr Hobbs (and others in the Hobbs
office) as to the
overall scheme and the OEM/KLM process. I accept Mr Parsons' evidence as to how
that document came into being.
(vi)Ms Reisinger
- I
have indicated above the circumstances in which the transcript of Ms Reisinger's
examination, conducted under the auspices of the
Commodity Future Trading
Commission, was admitted into evidence notwithstanding that she was not made
available for cross-examination.
I granted ASIC's application for leave to
adduce that evidence over the objection raised on behalf of Mr Hobbs and his
wife (who
were represented by Counsel at that stage) and the objection of Mr
Collard (who was represented by Mr Hartnell on that occasion),
for the reasons
that I have already published.
- Mr
Hobbs continued during the course of the hearing to raise objections in relation
thereto and to assert that he had been prejudiced
by reference to his inability
to cross-examine Ms Reisinger (or to make inquiries in the United States about
matters relating to
her testimony). As to the latter, on the evidence before me
earlier in the year it seems unlikely that Mr Hobbs would have had the
funds to
pursue any such inquiries. Moreover, there was no evidence as to any particular
attempts or inquiries that Mr Hobbs had
made in that regard.
- I
have read the transcript (Ex AO) with caution precisely because of the fact that
her evidence was not tested in cross-examination
(though in substance I consider
that the aspects of Ms Reisinger's evidence on which ASIC places reliance are
corroborated by other
evidence).
- Mr
Hobbs did not indicate particular issues to which he would have taken Ms
Reisinger in cross-examination had the opportunity been
available. However, from
his submissions it might be inferred that he would have sought to test Ms
Reisinger as to one or more of:
the circumstances in which she came to be
introduced to Mr Hobbs; her belief that Mr Hobbs had previously conducted
business through,
or had had an involvement with, Refco; the circumstances in
which the first of the relevant Cadent funds was opened through
TraderView/TraderVest;
the commission arrangements vis a vis Mr Hobbs or others;
the traders' meeting in Chicago in 2007; her dealings with fund administrators;
and, perhaps most likely, the authenticity of the New World (and/or Cadent)
business records.
- Mr
Hobbs relies upon parts of Ms Reisinger's transcript in support of his
submissions but also argues that parts are inconsistent
with other evidence or
incorrect. In particular, he raises the following issues:
- Knowledge of
international clients for NCCN
- Mr
Hobbs refers to the evidence by Ms Reisinger that he describes as being to the
effect that she had no knowledge of any international
clients for NCCN before it
was brought to her attention (in mid 2005) and that Mr Donald Caffray was the
client. (Mr Hobbs adds that
this "also part of the legal proceedings against Ms
Reisinger" by which I can only assume he is suggesting that the issue as to Ms
Reisinger's knowledge of international clients through NCCN or Mr Caffray is an
issue in the proceedings commenced in Illinois to
which I will refer below.) He
gave no transcript reference for that submission.
- Mr
Hobbs then refers to an email from Ms Reisinger to Mr Matthews on 22 June 2006
in which she refers to Mr Caffray's international
clients and submits that it
was Ms Reisinger who arranged for the international clients "to come into the
NCCN Exempt Pool" (and
asserts that an Exempt pool is supposed to have United
States of America clients only).
- I
have assumed that Mr Hobbs is referring to the portion of the transcript at Ex
AO where Ms Reisinger said that she was not aware
until a meeting in July 2005
that there had been an earlier Cadent account opened through
TraderView/TraderVest for Geneva Financial
(p179ff)
- Instructions
to Cadent traders
- Mr
Hobbs refers to the evidence that Ms Reisinger gave instructions to traders for
two submissions, as I understand it.
- First,
he makes reference to the evidence at Ex AO p 528.4-24; p 529.1-24; p 530.1-24;
p 531.1-21, p 532.15-24 in relation to the
recommendation or instruction that Ms
Reisinger gave to Idylic Solutions (ISL) to buy into a drawdown in June 2007. Ms
Reisinger
had been taken to an email dated 21 June 2007 that she sent to Mrs
Hobbs in relation to the Geneva Financial account. That email
(to which I have
referred in part earlier) read:
Hi Jacky
I do not know how much David had time to go through with you but we have now
qualified for management and inventive fees paid from
the traders cut of fees
charged to the accounts.
The management fees are starting to get billed it normally takes about 3
weeks for the whole process but I wanted to give you heads
up.
Of course there is very little in incentive fees due to the draw down but
Idyllic Solutions bought the draw down when I told them
to so they may have a
few incentive fees. The majority of the fees will be management fees.
This is separate from commissions and is paid by the trader to us ie Steve
and then down to us.
You may have already received a contract for this from Steve separate from
the commission contract.
Anyway that will be coming and I will keep you informed as it gets
closer.
- This
was in response to a message from Mrs Hobbs to Ms Reisinger, copied to Mrs
Brenda Hobbs, raising "a couple of questions on our
account",
including:
..While our account is down a bit, does any profit that is made just go in to
fill the hole or is it possible to draw some of this
for a payment to the
clients. Also, can you look for an opportunity to trade our treasury notes to
make up some lost ground.
- Pausing
there, the last is an example of a situation where it might well be understood
that Mrs Hobbs was authorising Ms Reisinger
to make decisions in relation to
particular trading but it is clear that those decisions would be as Mrs Hobbs'
agent or broker not
by Ms Reisinger as a principal, an issue which is considered
further below, (and it is inconsistent with the suggestion that Ms Reisinger
was
giving directions to Mrs Hobbs as to what to do with the Geneva Financial
account). Also relevant to note is that Ms Reisinger
is clearly communicating
with Mrs Hobbs as to the position in relation to management and incentive fees
referable to other fund accounts
(supporting the conclusion that Mr Hobbs had,
through Mrs Hobbs or otherwise, an interest in those).
- I
accept that the email refers to Ms Reisinger telling "Idylic Solutions" to "buy
the draw down". This is what is explained in the
examination at the passages to
which Mr Hobbs has referred. Ms Reisinger there qualified that by saying that
"told" is a strong word,
"I recommended to Idylic Solutions and that was a
standard" [sic].
- Ms
Reisinger explained that the "we" have now qualified was a reference to Mr
Erdman and herself. She said that she referred in the
email to the possibility
that Mr Hobbs had discussed this with Mrs Hobbs because it was her understanding
that an additional Business
Solutions Foreign Introducing Broker agreement was
issued in the name of Mrs Hobbs "due to David Hobbs' health" as "We wanted her
to be able to continue to receive fees". Ms Reisinger said that her
understanding was that Mrs Hobbs was also an owner of Business
Solutions (in
fact Business Solutions seems to have been a trading name used sometimes for
Tasman Business Consultants and sometimes
for Mr and Mrs Hobbs individually or
together). Ms Reisinger said that, in effect, the two agreements related to the
same set of
fees (not an entitlement to two sets of fees) and it would just have
been a transfer of fees from Mr Hobbs to Mrs Hobbs. Ms Reisinger
confirmed that
the arrangement was that Mr Hobbs (or Mrs Hobbs in his place) was to receive
management and incentive fees "in addition
to the commissions". (see Ex AO
p526/527)
- What
Mr Hobbs points to is Ms Reisinger's evidence that:
I had recommended to Idylic Solutions to go ahead and initiate the trading
with that particular CTA buying into a drawdown, is what
we called it, was an
opportunity because based on their track records -- you know, there's no
guarantee; but most of the time after
the drawdown, they had a tendency to then
start to make money again.
- Ms
Reisinger described buying into a "drawdown" as subscribing or adding money to a
trader and said that the opportunity for the CTA
"to then become profitable
becomes greater after a drawdown" because the likelihood of that CTA making
profits is greater and once
they have made profits that was what the incentive
fees were paid from.
- Ms
Reisinger went on to explain that:
The probability of them [the client] realizing a profit, in my opinion would
be greater. I cannot tell you whether or not they did.
I believe on that
particular situation they might have, yes, therefore incentive fees from that
split would be incurred
- The
explanation given by Ms Reisinger (and added to by her legal representative) in
lay terms appeared to be that if one bought in
at the bottom of a "trend market"
then there would be an opportunity to make profits when the market turned
around. Ms Reisinger
said that those profits would not necessarily have been
drawn (or realised) for the client. She said that "since one of the ways
they
tracked CTAs was based upon their historical track records, where a CTA had
traded for a long period and where a trend market
the accounts have a tendency
to gain profits then the CTA will then pull back". She said that CTAs were
always very cautious of "open
trade equity realized gains on an open trading
market".
- Mr
Hobbs submits that there is no financial evidence or logical reason to buy into
a draw down (since, if a trader is in a 20% draw
down, one must gain that 20%
back before you make profit). Insofar as Ms Reisinger had recommended to clients
to buy into a draw
down (and was describing in the examination the making of
profits and payment of incentive fees from that profit), Mr Hobbs submits
that
this suggested that an incentive fee would be paid where profit was made on
individual trades while the trader was "in draw
down" (regardless of whether the
trades had reached the point of bringing the client's invested money back into
profit). I accept
that this is the effect of what Ms Reisinger was
describing.
- Mr
Hobbs then submits that Ms Reisinger would have had an incentive to encourage
her clients to buy into draw down (even though it
would not necessarily mean
profit for the client) because it would mean larger incentive fees for the
introducing broker. I accept
that there would be such an incentive (although Ms
Reisinger's explanation suggested that there would be a greater probability for
that client to make profit if it did so).
- Mr
Hobbs submits that this is not the practice of competent professional
introducing brokers and that this practice is deceptive and
deliberately
misleading. I cannot possibly comment on what would be the practice of
"competent professional introducing brokers"
simply on the basis of Mr Hobbs say
so. There is no evidence of the practice in this regard. The potential conflict
of interest in
the provision for round turn commissions was recognised at the
outset of the agreement to which I referred above. The potential for
a further
conflict of interest in relation to the basis on which incentive fees are earnt
might give rise to a basis for complaint
as between the client and the
introducing broker but is not something that renders Ms Reisinger's evidence
unreliable. Moreover,
it is impossible to find that this was a deceptive and
deliberately misleading practice without a far more detailed understanding
of
what the relevant clients were told. This is no more than assertion on Mr Hobbs'
part (and an interesting submission for him to
make as someone who appears to
have received commissions as a result of that very process).
- Mr
Hobbs then relies on that submission to assert that the allegations of
destroying business records and emails "stems because of
Ms Reisinger's evidence
of highly dubious advice and actions in relation to telling client's [sic] to
buy into draw downs as she
gave in evidence in her transcript". I consider below
the weight to be placed on the charges that have been laid against Ms Reisinger
in the United States. Suffice it to note that no finding has been made, as I
understand it, of any improper destruction of business
records or emails and for
me to speculate not only that this had occurred but that it was due to the
reason proffered by Mr Hobbs
would be unsustainable.
- Unrelated
to the above issue, Mr Hobbs then says that the evidence of Ms Reisinger (at Ex
AO p 344.2-15) that:
I never formed the opinion, though, that he gave them [the account holders]
instructions as to what to do, but I do - I did form the
opinion that he did
give them advice on different trading strategies and how to - how to -- ...
- Mr
Hobbs submits that he never gave instructions or advice. I treat that as a
denial. In that regard, I should note that the weight
I could place on Ms
Reisinger's opinion in that regard is limited in the sense that it is not clear
on what she based that opinion.
Ms Reisinger did say at p343 that she had formed
the opinion that the account holders did seek Mr Hobbs' assistance and advice,
based
on general conversations and that account holders told her that they did
value his opinion and did lean on him for advice. However,
that is expressed in
such general terms that I place no weight on this part of her evidence (relying
instead on the evidence of what
the various administrators say Mr Hobbs told
them in relation to them operation of the funds and the management of the Cadent
accounts).
(That said, without corroboration I consider Mr Hobbs' blatant denial
to be unreliable having regard to the general inconsistency
of his
evidence.)
- The
second aspect of the instructions given to traders on which Mr Hobbs relies is
the evidence that Ms Reisinger told ISL to "bump
up" Diamond and Rosetta (two of
the Cadent traders) from $3m to $7m and C3 (another Cadent trader) to trade as
to $3m, as well as
to the instructions given by Ms Reisinger as to the
termination of another Cadent trader (Tresner), as evidencing that she had a
decision-making role in relation to the traders.
- In
relation to the Tresner issue, there is an email sent on 24 July 2007 by Ms
Reisinger to the "Hobbs family" email address (which
seems to be an address used
by Mrs Brenda Hobbs) stating that after much thought she had suspended trading
with Tresner that day
and that she needed a letter "from one of you" to
authorise that (and to authorise the increase for the Diamond trading). While,
in its terms, this email communicates the making of a particular decision by Ms
Reisinger, there are two points to be made: first,
it is clear from the text of
the email that Ms Reisinger was seeking ratification of that decision (which
indicates that Ms Reisinger
did not understand herself to be in a position to
make such a decision without authorisation from the client) and, second, when
read
in the context of various of the emails around that time, it seems clear
that Mrs Hobbs had been querying the performance of traders
and seeking advice
from Ms Reisinger as to matters such as whether to terminate the
'non-performing' traders and trade only with
the Diamond Capital trader.
- Mr
Hobbs relies in support of his submissions on various statements made by Ms
Reisinger in the context of her CFTC examination (although
elsewhere in
submissions his contention is that reliance should not be placed on this due to
his inability to cross-examine Ms Reisinger).
- First,
he notes that Ms Reisinger said she was not aware of what moneys he would have
received (Ex AO p69.2-10 and p71.9-10); to her
helping work out the figures for
commissions for him (p71.1-8); and to her statement that she did not see the
statements that were
sent to him (p69.8-10). (Mr Hobbs asserts that the
statements were not in fact ever received by him, though I can place no reliance
on this assertion for the reasons already indicated and I note that Mrs Watson's
evidence suggests to the contrary.)
- Second,
he says that Ms Reisinger "added me as the Foreign Introducing Broker on all
funds, even when I only signed a Foreign introducing
Broker agreement mid 2006"
(though that agreement in its terms contemplates more than one fund will be
introduced). This submission
ignores the distinction between registration with
Cadent - which meant commission would be paid direct from Cadent - and the
arrangement
between he and New World Holdings in which he was entitled to a
share of the New World Holdings commission without the need for any
'registration' as a foreign broker as such. Further, the reliance by Mr Hobbs on
the fact that "when questioned by ASIC Ms Reisinger
admitted that a Foreign
Introducing Broker was just a made up title" (Ex AO p189.6-12) "and that I was
not registered" (p190.16-22)
is disingenuous (since it turns on a selective
reading of Ms Reisinger's evidence on this topic in context). This indicates
what
seems to me to be a tendency on Mr Hobbs' part to put a favourable gloss on
statements contained in the material (or perhaps simply
that he reads or hears
what he wants to see or hear) consistent with the manner in which he says he
understood Mr Hartnell's advice.
- Read
in the context of the communications between Ms Reisinger and each of Mrs Hobbs
and Mrs Brenda Hobbs, Ms Reisinger's responses
in relation to the traders are
those of an adviser, not those of a principal. It seems to me to be clear that
Ms Reisinger operated
on the basis that the ultimate decision as to traders was
one that was for the client, not her and not New World Holdings, to make
and,
relevantly, it seems likely that Ms Reisinger regarded herself as impliedly
authorised to make the decision on behalf of Geneva
Financial to suspend or
terminate trading of Tresner in light of the earlier
communications.
- Commission as
introducing broker
- Mr
Hobbs suggests that there is an inconsistency in the evidence given by Ms
Reisinger as to an email dated 10 May 2007 from her to
Ms Dadey and Mr Erdman
headed "Fw: pay out to David and Grant". The text of that email commences "Pay
out detail for David" and lists
account numbers against which it says Commission
Net to Lisa 30% to David 20%.
- There
follows a list of Cadent account numbers (through which I was taken on more than
one occasion) that match up to the account
numbers for the various accounts the
subject of the proceedings and at the bottom of which there is a total for
"David" that is calculated
out by reference to his commission on particular
accounts plus or minus other amounts (including float totals). The total shown
for
Mr Hobbs there is $5,004.36 less an amount referred to as "diamond override"
and an amount for legal fees, leaving the bottom line
total at $4,905.31.
Significantly, the bank account statements in evidence show the receipt into Mr
Hobbs bank account of that exact
amount as converted to New Zealand dollars
shortly after 10 May 2007. (ASIC relies on this as a significant document in
showing the
receipt by Mr Hobbs of commission referable to Cadent accounts for
funds the subject of the proceedings.)
- Mr
Hobbs submits that there is an inconsistency in Ms Reisinger saying (at EX AO at
12) that the accounts that were frozen at Cadent
were accounts that had been
introduced by Mr Hobbs through Mr Lynn Caswell and Ms Reisinger saying at Ex AO
p 555.20 that the list
of the account numbers on this document "would have been
account numbers that David Hobbs had - from account holders that David Hobbs
had
introduced to Cadent". (Ms Reisinger went on in the transcript to confirm that
the account numbers listed were the specific Cadent
account numbers (which can
be verified by reference to the account number details appended to the
respective account applications).)
- From
my reading of the transcript, the references to accounts being frozen at Cadent
(at Ex AO p12) were references to the Idylic
Solutions account and a Unifund
account (Ms Reisinger saying at line 15ff that she believed that they were the
only two accounts
that were frozen at that time - around May 2008). Ms
Reisinger's evidence was that Mr Hobbs had contacted her around May 2008 to
enquire as to the status of the commissions he was receiving from New World
Holdings and if that had changed (11.18).
- Ms
Reisinger said:
He apologized about the mess. He had mentioned the Donald Caffray account
with NCCN, that he didn't understand the confusion there.
- It
was in that context that Ms Reisinger said that Mr Hobbs had introduced "all of
those accounts to Cadent". Her explanation was
that Mr Hobbs had introduced
those accounts (ie the Idylic Solutions and Unifund accounts) through Mr Lynn
Caswell and that "[h]e
had introduced Don Caffray to the members of NCCN". She
said that it was her understanding that when the Idylic account was frozen,
Mr
Hobbs' commissions had stopped but saw this as an issue between Mr Hobbs and Mr
Erdman of New World Holdings.
- The
listed accounts to which Ms Reisinger was referring at p 555.20 went beyond the
accounts referred to at p12. Therefore, I do not
see the inconsistency to which
Mr Hobbs is seeking to point between those references.
- There
does not seem to me to be an inconsistency between Ms Reisinger saying (as I
understand her evidence to be) that, as between
Cadent and New World Holdings,
Ms Reisinger was the associated person or introducing broker and Ms Reisinger
saying that the accounts
in question were referred to her by Mr Hobbs (or by Mr
Hobbs through Mr Caswell). The round turn commission agreements make clear
that
the introduction of the particular accounts to Cadent is made through New World
Holdings (I accept that in relation to the earlier
accounts opened through
TraderView/TraderVest the introduction was not made through New World Holdings).
What Ms Reisinger in that
portion of her evidence seems to be doing is to elide
the middleman, so to speak, when she says that these were all accounts
introduced
by Mr Hobbs to Cadent. (The need for the interposition of New World
Holdings seems to arise from the fact that Cadent is dealing
with registered
brokers not unregistered individuals such as Mr Hobbs.)
- Mr
Hobbs notes that Ms Reisinger is shown on the commission statements as claiming
commission as the introducing broker and submits
that, on the one hand Ms
Reisinger is saying that the introductions came through Mr Caswell, then she
says the introductions were
made by Mr Hobbs and then she claims commission for
herself. (I have explained above how I read the evidence relating to the
introductions
by Mr Hobbs through Mr Caswell.) As to the submission by Mr Hobbs
that this demonstrates that reliance cannot be placed on the documents
admitted
as New World Holdings business records, I do not accept that this is the logical
conclusion to be drawn from Ms Reisinger's
evidence (not least, having regard to
the other documents on which ASIC relies for the allegation that commission was
paid to Mr
Hobbs).
- The
first part of this submission seems to raise the distinction between the role of
introducing broker as noted in the New World
Holdings' records and the status of
Mr Hobbs for the purposes of the arrangement between New World Holdings and Mr
Hobbs for him
to obtain a share of the New World Holdings' commission (as a
result of his introduction of the accounts to Cadent through New World
Holdings).
- Mr
Hobbs takes issues with the evidence that Ms Reisinger gave in relation to the
meaning of the term "Foreign Introducing Broker".
In his submissions he contends
that Ms Reisinger said that "there was no such thing as a Foreign introducing
Broker" (referring to
the Reisinger transcript p 189.6-24. As Mr Halley pointed
out in his cross-examination of Mr Hobbs (when he suggested that Mr Hobbs
must
have thought ASIC was dopey) (T 1433.34) this is a somewhat selective use of the
transcript. (In his affidavit, Mr Hobbs had
deposed that "when questioned by
ASIC Ms Reisinger admitted that a Foreign Introducing Broker was just a made up
title" (referring
to the Reisinger transcript at Ex AO p189.6-12) "and that I
was not registered" (at p190 lines 16-22).
- I
accept Mr Halley's submission that Mr Hobbs' reading of the transcript is not a
fair reading when one considers Ms Reisinger's evidence
on the topic of foreign
introducing brokers in context. Ms Reisinger explained, at Ex AO p13, that Mr
Hobbs "was not my [ie, her]
introducing broker". Mr Hobbs, in his affidavit,
referred to this as an acknowledgement by Ms Reisinger that he was not an
introducing
broker. However, what Ms Reisinger explained she had meant by that
was that the contract that Mr Hobbs had was not with her. Ms Reisinger's
evidence was that there were two separate contracts - one (on which she was
copied) between Mr Hobbs and Cadent (that she described
as "his introducing
broker contract that allowed him to receive commissions off of the accounts that
he introduced to Cadent"), which
presumably was the contract entered into in
November 2006 being the foreign broker registration documentation, and one
through New
World Holdings (of which she said that she had general knowledge and
referring to the one for Business Solutions).
- It
is clear, having regard to the documents in evidence, that Ms Reisinger must
have been there referring to the Cadent foreign broker
documentation (that Mr
Hobbs submits is restricted to the Global Funds account but is not in terms so
limited) and the Business Solutions
agreements (one each with Mr Hobbs and Mrs
Hobbs) in which there is agreement as to the payment of round turn commissions
(and reference
to the deduction of management and incentive fees).
- The
arrangements there provided for seem to me to encompass a position whereby there
was no doubling up of commissions (and hence
no inconsistency between
commissions referable to introductions by both Ms Reisinger and Mr Hobbs) but
rather a sharing of commissions
between Ms Reisinger or New World Holdings and
Mr Hobbs in relation to accounts introduced by Mr Hobbs to New World Holdings
and
thence to Cadent. (The position of Mr Caswell and any claim he might have
had to commission as to the initial NCCN accounts with
Cadent seems to me to be
irrelevant to the arrangements that seem subsequently to have been put in place
as between New World Holdings
and Mr Hobbs for the sharing of the Cadent
commissions.)
- Ms
Reisinger herself was asked in the CFTC examination how it was that both she and
Mr Hobbs were receiving round turn commissions
on the self same accounts and
said that this was because she had introduced Mr Hobbs to TraderView and Ty
Andros and that they were
creating portfolios for Mr Hobbs utilising the CTAs
and historical data from the CTAs, creating blends (Ex AO 40.6). Ms Reisinger
said that in turn Mr Andros had introduced Mr Hobbs to Cadent and that the
TraderView portfolios had then been phased out and Cadent
"wanting to save those
accounts that had been introduced by Mr Hobbs, stepped up and started
introducing us to CTA's ... and then
we paid them [the CTAs] the fees that
normally would have been paid to TraderView" and that because of that
involvement she or New
World Holdings were paid a referral or commission on
those accounts. (Ms Reisinger described her fees or commissions off the Cadent
accounts as "more of a referral based than an actual commission based fee" and
said Mr Hobbs' (round turn commission) fees (as the
foreign introducing broker)
were taken out before hers.)
- Disclosure of
fees to third parties
- Mr
Hobbs refers to the portions of Ms Reisinger's examination in which she was
questioned as to disclosure of fees (Ex AO p543.1-24,
p544.1-24, p545.1-16). Mr
Hobbs makes the point that Ms Reisinger accepted that New World Holdings had an
obligation to make a disclosure
that fees were being passed onto a third person
and said "It just didn't happen". (It is not clear what reliance places on the
"It
just didn't happen". If Mr Hobbs relies on this as supporting his assertion
that he did not receive commissions, such a reading would
not accord with the
transcript read in context.)
- The
relevant passages recorded on the transcript show that Ms Reisinger was asked
why New World Holdings was disclosing to the client
that a portion of the
commission (ie a portion of the round turn commissions charged to the client's
Cadent account) would be paid
to the trader to which she
responded:
A.Because all fees should be disclosed.
- Pausing
there, the letter itself gives a reason for such disclosure - namely the
conflict of interest that it was acknowledged the
trader had in making trades
that generated commission for itself. Relevantly, Ms Reisinger was then asked
why it was that it was
not disclosed that Mr Hobbs was to receive such
commissions and fees. Ms Reisinger's response (and it should be borne in mind
that,
at least with respect to the fees the subject of this arrangement, Mr
Hobbs' fees were deducted from New World Holdings' share of
the round turn
commissions and not an additional charge to the client's account)
was:
That is a very good point. I don't - I don't believe that the breakdown of
those fees were ever disclosed beyond New World Holdings.
I don't believe that
that again was normal course of business for New World Holdings to break down
those fees to that extent.
...No, I'm saying it wasn't normal course of business to disclose how the
fees that were paid to New World Holdings were broke down
and paid past New
World Holdings.
- Asked
whether there were other instances where New World Holdings was passing on
commissions or management fees or incentive fees
to a third party other than a
trader, Ms Reisinger said:
Yes, New World Holdings would pass those fees down to the AP, which would be
me, and Mr David Hobbs or Business Solutions.
- Mr
Hobbs then emphasises the following exchange from p 545.4:
Q. So you said before that it would be unusual for New World Holdings to make
a disclosure that such fees were being passed on to
a third person, there was in
fact, no other third person ever other than Mr Hobbs, is that correct?
A. That's my understanding.
Q. So it's not usual or unusual, it just didn't happen?
A. It just didn't happen.
- Accordingly,
the evidence (as it there stands) is that there was a disclosure of the fact
that a share of the round turn commissions
was paid to New World Holdings and to
the trader; Ms Reisinger accepted that the share paid to New World Holdings was
in effect her
share; out of Ms Reisinger's share or New World Holdings' share
there were fees paid to Mr Hobbs (but to no other third person);
and there was
no disclosure to the client as to how New World Holdings' share of the round
turn commissions was divided up (as between
Ms Reisinger and Mr
Hobbs).
- As
to whether the disclosure of fees was discussed with Mr Hobbs:
A. I believe David Hobbs was aware of the 2 and 20 management fee or any
other management fee or incentive fee that was charged by
a CTA. The reason I
believe that was the times that he would come into Chicago it was openly talked
about and he participated in
those fees.
Q. And did you ever have or were present when there was a discussion with Mr
Hobbs about whether his fees should be disclosed.
A. No I was never present or participated in a discussion or not his fees
should be disclosed.
- Mr
Hobbs submits that Ms Reisinger was present in any meeting in Chicago when he
was there and that these fees were never discussed.
Apart from the fact that
this is simply an assertion, the difference between the two versions is not
whether disclosure of fees was
discussed but whether fees were discussed at
all.
- Break-down of
the payment for Business Solutions
- Mr
Hobbs regards as a very important issue the evidence from Ms Reisinger from p
544 of Ex AO as to a document recording the break-down
of the payment for
Business Solutions in May 2007. (ASIC places weight on this document, together
with the bank statements recording
payment into the Hobbs' bank account of the
corresponding amount, as evidence that commissions were received by Mr Hobbs in
relation
to funds other than simply the Global Funerals fund.)
- Mr
Hobbs notes that Ms Reisinger gave evidence that she sent that document to Mr
Erdman and Ms Dadey and explained the document as
follows:
A. This is - I was helping Steve - one of the guys must have been out of the
office. From time to time I did do this. And this is
a break-down of the payment
for Business Solutions. These are the listed account numbers and the break down
for those amounts. And
then to the bottom there is a total on commissions to
David, Total float, grand total.
- From
this, Mr Hobbs submits, first, that "all the documents" (presumably meaning all
the New World Holdings documents that were admitted
in evidence as business
records) were produced by Ms Reisinger not by New World Holdings. Given that Ms
Reisinger was the branch
manager of New World Holdings, it is difficult to know
what to make of this submission (since documents created by her in that role
would still be New World Holdings' documents). Mr Hobbs submits that if the
documents were to come from an introducing brokerage
company the size of New
World Holdings, they would be on letterhead. However, that requires an
assumption to be made (that could
not be made on the evidence) as to what the
practice of New World Holdings was when keeping internal records of this kind
(and in
any event the document to which he is pointing is an email not an
accounting document as such).
- Second,
Mr Hobbs contends that that the 'breakdowns' that Ms Reisinger said would be
shown on documents of this kind are not recorded
on the New World Holdings
business records. Insofar as this is a complaint as to the lack of source
documents, I deal with that elsewhere.
Mr Clarke, in submissions both in opening
and reply, took me through the documents that confirm receipt of the amount
there recorded
as the "total" for Mr Hobbs and that indicated that the
commissions there recorded could not have been referable to the Global Funerals
account (which by May 2007 was not recorded as producing any trading
profits).
- As
to Ms Reisinger's evidence (from p 555.1-24, p 556.1- 24, p 557.1-24) that this
sort of document would have been sent to Mr Hobbs
every month, Mr Hobbs'
response is to assert that he had "never viewed such documents until ASIC
produced them" and had "never received
them from New World Holdings or Ms
Reisinger". Ms Reisinger's evidence was not definitive on this point ("I would
think it would
have been sent every month"). Whether or not Mr Hobbs received a
copy of an email communication of this kind (and on the face of
the document it
was not sent to him) is not to the point - the more relevant questions seem to
me to be whether he had an entitlement
to receive commissions of this kind and
whether the evidence establishes that he received such commissions (and I am
satisfied that
on both counts the answer is yes).
- In
any event, I do not consider that the matters to which Mr Hobbs has here pointed
undermine the credibility of Ms Reisinger's evidence
as a
whole.
- Evidence re
Global Funeral cheques
- Mr
Hobbs refers to Ms Reisinger's evidence (at T 517.14-24, T 518.1-15) in which
she was referred to an email sent by her on 23 August
2006 to Mr Hobbs (and
others) referring to "some housekeeping on your Foreign IB status" and monthly
cheques being sent from Global
Funeral Services. Ms Reisinger certainly accepted
that cheques were sent every month from Global Funeral Services to Mr Hobbs (and
the evidence at T 159.9-21)
- From
all of the above, Mr Hobbs submits that fees were "undisclosed"; that Ms
Reisinger was the author of the statements; that the
commission statements did
not include what Ms Reisinger alleges they should have done; and that the
evidence that deliberate encouragement
and advice was given by Ms Reisinger to
administrators of accounts she administered to invest into traders draw down
could only be
for the reason of higher incentive fees for Ms Reisinger. For the
reasons given above, I do not accept that such submissions are
consistent with
the evidence. Significantly, when considering the reliability of Ms Reisinger's
evidence (untested by Cross-examination
though it was), is the fact that it is
remarkably consistent with contemporaneous documents and the evidence of other
witnesses.
- Finally,
I note that Mr Hobbs has pointed to Ms Reisinger's evidence (at Ex AO p
600.14-19) in relation to a meeting in Chicago after
the ASIC investigations had
come to light (at which she says Mr Hobbs, Mr Collard and Mr Stanton attended).
Ms Reisinger says that
she felt that Mr Hobbs needed to answer questions as he
had introduced the Idylic account. Ms Reisinger said that Mr Hobbs and Mr
Stanton had explained what the ASIC enquiry was about and that Mr Hobbs had said
that:
The three individuals that were the managers of the Idylic Solutions account
did not follow the system and they had regulatory issues
He did not go into detail, but the executives from Cadent Financial, New
World Holdings and myself understood what that system was
and that was that
there was to be no solicitation in the country of Australia; that everything -
there was to be no direct solicitation.
Mr Hobbs said that they had violated
that system that he had spent hundreds of thousands of dollars to set up
- It
is not clear what Mr Hobbs sought to draw from this. I do not take into account
what Ms Reisinger says was the understanding of
Cadent or New World Holdings but
it is relevant to note that she records Mr Hobbs as referring to the "system" as
one that he had
set up and that the J&B Financial officers had not followed
(in terms that suggest he understood that they should have followed
his
system).
Authenticity of the New World Holdings documents
- Incomplete
documents (or documents not on letterhead)
- Various
New World Holdings documents were admitted in evidence as business records. Mr
Hobbs takes issue with the provenance or authenticity
of those documents. He
submits that a brokerage firm "the size of New World Holdings" would not submit
something as important as
a Commission Statement (referred to as the New World
Holdings business records) without that document being printed on the New World
Holdings letterhead. By way of explanation, the documents in question were
documents produced to the CFTC (and on which Ms Reisinger
was examined during
her CFTC examination).
- At
EX AO p539.17-24, p 540.1-12, Ms Reisinger was asked about a particular document
(at tab 48 of Ex AO vol 2), being a copy of a
document signed by Mr Collard for
888 Management Inc (that being, I assume, the 888 Vanuatu entity). On its face
it is a letter from
New World Holdings to the Client advising that the Client's
Cadent account will be introduced by New World Holdings to Cadent "and
advised
by New World and carried on Cadent's books", to be traded by a particular trader
(Del Rio). The letter goes on to state that
the account will be charged
commissions per round turn transaction "by Cadent, which will pay a share of the
commissions to each
of Del Rio and New World" (noting that by receiving
commissions based on trading conducted according to its discretion, Del Rio
would
have a conflict of interest and, in effect, seeking acknowledgement by the
client to waive that conflict). The amount of the round
turn commission was not
completed in the copy document.
- The
letter stated that the account would also be subject to payment of a monthly
management fee and quarterly incentive fee to New
World for its services. The
management fee was there stated to be 2% per annum based on the value of the
assets in the account at
the close of business each calendar month and the
incentive fee was stated to be 20% of New Net Trading Profits in the account (as
defined) at the end of each calendar quarter. The letter stated that New World
Holdings would invoice Cadent at the end of each month
or quarter as the case
may be and provided that the client authorised Cadent to pay such invoices from
the client's account without
any duty on the part of Cadent to calculate or
question the amounts so invoiced.
- Mr
Collard signed for 888 Vanuatu, signifying its acknowledgment of and agreement
with the contents of the letter. The letter was
not on letterhead (bearing the
header [New World Stationery]). It bore the handwritten annotation "Faxed to
Lisa 24-10-07 by DC".
- Taken
to this in her CFTC examination, Ms Reisinger identified the handwriting as that
of Mr Collard's on the second page of the document
and said that she believed a
more complete document would be on the file. She identified it as being "for the
Texas trader Del Rio
and the CTA fees that were being charged for the Del Rio
trading by New World Holdings". (Ms Reisinger said that she believed on
the
complete copy the round turn was filled in and that this was a $25 round turn -
$12.50 in and $12.50 out.) Asked about the more
complete document, Ms Reisinger
said that the only material difference would be the letterhead of New World
Holdings.
- At
p542.7, Ms Reisinger explained that the reason there was no reference to Mr
Hobbs receiving any commissions, fees or charges on
this document was "because
Mr Hobbs' fees and commissions and charges were paid to New World Holdings and
then New World Holdings
paid Mr Hobbs".
- As
to the submission by Mr Hobbs that Ms Reisinger says she never saw these figures
in the New World Holdings statements (Reisinger
transcript p 69.8-10), Mr Clarke
points out that the figures in question were figures relating to payments
directly from Cadent and
it is not surprising that Ms Reisinger would not have
direct knowledge thereof.
- The
provenance of the documents that were admitted as business records was
established in the affidavit of Ms Padgett. That affidavit
authenticates
documents such as the above as documents that were produced to the CFTC under
compulsion by New World Holdings. Given
that the document was produced in that
form, I can only assume that (whatever other documents there might have been)
this was a document
that had been signed by Mr Collard and sent to New World
Holdings where it was retained on its files in that form and hence produced
in
that form when New World Holdings was ordered to do so.
- There
is no dispute, as I understand it, that "Del Rio" was not appointed as a trader
for the 888 Vanuatu Cadent account and the other
business records from Cadent
disclose that there were fees and commissions charged in relation
thereto.
- As
for the suggestion that the document would have been expected to be produced on
letterhead, the manner in which many of the documents
in this case were signed,
witnessed or prepared, leaves much to be desired from the point of view of a
professional organisation.
The fact that Mr Collard was prepared to sign a
document not on letterhead may say as much for Mr Collard's business practices
as
it does for New World Holdings.
- I
cannot conclude (simply by reference to the fact that the above document was not
on letterhead) that this indicates an issue about
the authenticity of the
documents in general. Mr Hobbs nevertheless relied on the above to support the
evidence of a US Commodity
Futures Trading Commission Press Release of 27 July
2010 (referring to charges having been laid against Ms Reisinger, Mr Erdman and
New World Holdings) being admitted into evidence.
- US charges
against New World Holdings/Ms Reisinger; Cadent
- Significant
weight is attached by Mr Hobbs to the fact that in about July 2010 charges were
brought by the Commodities Futures Trading
Commission against New World
Holdings, Mr Erdman and Ms Reisinger alleging various offences. This is relied
upon as reinforcing the
Hobbs' submissions as to the unreliability of the New
World Holdings documents (namely that they cannot be relied upon as being
authenticated
business records of New World Holdings and may have been
falsified, or in Mrs Hobbs' words "reverse engineered").
- Mr
Hobbs made more than one attempt to adduce the press release and charge into
evidence. In the end I admitted as Ex 5, subject to
weight and relevance, the
actual complaint document in which the charges were made and the answer filed
thereto, not the press release.
I did so over the objection of
ASIC.
- The
complaint appears on its face to relate to allegations that Ms Reisinger aided
and abetted New World Holdings' failure to keep
proper business records; the
complaint alleging that, at least from 10 March 2006 to 1 April 2009, New World
Holdings failed to maintain
books and records as required by the Commodity
Exchange Act and CFTC regulations. The complaint also charges Ms Reisinger (and
Mr Erdman) with aiding and abetting New World Holding's violations
by knowingly
falsifying and destroying records.
- Mr
Hobbs relies on the making of these charges for the submission that the New
World Holdings business records "as alleged by the
Trading Commission in the
USA, documents have been falsified". Pausing there, the complaint as laid does
not indicate that records
of the kind produced in these proceedings were
falsified - rather it appears to relate to the destruction of or failure to keep
emails
alleged to have been business records of the company.
- As
I foreshadowed at the time, I cannot place any weight on the fact that such
charges have been laid. They amount to no more than
allegations that are not
proven at this stage (and have been denied by Ms Reisinger). The complaint
relates (on its face) to conduct
in respect of opening as "proprietary accounts"
accounts that were in fact pooled accounts. That does not support a conclusion
that,
if that conduct were proved, it would mean that the records for those
accounts (trades and commissions) were also falsified.
- In
her evidence at the CFTC examination, Ms Reisinger explained that the only
account opened as a pooled account was the Preserved
Investments Cadent account
and said that this was because he had sent through to Cadent the offering
memorandum. Certainly, the evidence
suggests that Cadent was on notice, at least
in relation to the ISPL Cadent account, that the funds were pooled funds -
having regard
to Mr Koutsoukos' correspondence with Cadent when the first
'profit' distributions were made for the Integrity Fund (and Ms Fitzpatrick's
immediate response was to request no direct communications with Cadent from the
administrators of that fund). To the extent that
this was the basis of the
Cadent concern, it was a matter of which Mr Hobbs was apprised at the time.
- The
thrust of Mr Hobbs' submission seems to be that because Ms Reisinger has been
charged with an offence relating to the falsification
of records I should assume
that the business records in evidence in these proceedings as produced by New
World have been falsified
or at least that there is a possibility that they have
been falsified. I do not accept that such a conclusion can be properly drawn.
- As
noted, Mr Hobbs denies that he received any document in regard to commissions.
He submits that the allegations against Ms Reisinger
and Mr Erdman and the
alleged acceptance by Ms Reisinger that there was no disclosure sent to any
other third parties (that, as I
understand it, he contends supports his
submission that there was never any disclosure sent to him) provide support for
his contention
that even if New World Holdings was paying him in relation to
funds the subject of these proceedings he had no knowledge of that.
He submits
that the commissions that it is alleged he received were commissions of New
World Holdings and that these commissions
were not additional commissions
charged to any account. Mr Hobbs further asks rhetorically how, if Ms Reisinger
cannot explain payments,
could statements that she helped to prepare be
credible. (In that regard, at least some of the payments that Ms Reisinger was
asked
to explain appear to be payments from Cadent, not New World - hence it is
by no means clear that an adverse inference can be drawn
as to her reliability
as a witness simply by reason of a lack of direct knowledge of Cadent
payments.)
- To
the extent that the documents that Mrs Hobbs contended might have been "reverse
engineered" were Cadent documents (in particular
the Cadent statements) it is
illogical to suggest that Ms Reisinger or Mr Erdman "reverse engineered" them,
since they were employed
by New World Holdings, not Cadent. Moreover (as pointed
out in reply submissions by Mr Halley) any suggestion that the documents
were
"reverse engineered" would be extraordinary having regard to the fact that the
amounts shown in the documents match exactly
in many instances with amounts
received in the New Zealand bank accounts by Mr and Mrs Hobbs at the time (after
conversion to NZ
dollars at the then applicable rates).
- Mr
Hobbs also made submissions as to a document that he accepts is not in evidence
before me, that he says records a settlement between
Cadent and the authorities.
He maintains that "This document came about because of an employee of Cadent,
for a period of time, was
taking good profitable trades to their own account and
putting less profitable trades into client's accounts" and submits that the
incentive for an introducing broker to accept "these trades" from a member of a
clearing house is because of the increased incentive
fees to the broker. I
cannot possibly take into account matters relating to Cadent that are not in
evidence and that appear to be
evidence of no more than the making of
allegations (and on settlement of some sort that would not necessarily involve
any admission
of wrongdoing).
Financial/accounting submissions by Mr and Mr Hobbs
- Mr
and Mrs Hobbs both made submissions as to the accounting or financial material
in evidence in the proceedings. Mrs Hobbs spoke
to those matters on behalf of
herself and her husband.
- As
to the particular criticisms made of the figures in the documents that were
adduced in evidence as supporting the allegations in
relation to the payment of
commission, Mr Hobbs submitted (and Mrs Hobbs took me through various of the
documents in some detail
to support the submission) that there was no
consistency across the figures shown in the New World Holdings records as to the
amounts
being paid (it ranging from an 80-20 split to a 70-30 percent split
between himself) yet the Reisinger transcript records at p 42.12-18
that "It was
my general understanding that Mr Hobbs was receiving 33 and a half percent off
of all the management fees, incentive
fees and round turn commissions and
interest float, what we called float in the industry, off of these accounts".
- Mr
Hobbs submitted that Ms Reisinger's statements did not in any way correlate to
any figures in the documents relied upon by ASIC.
Mr and Mrs Hobbs each
submitted that there were no source documents (from Cadent or New World Holdings
or the traders) from which
the figures in the documents could be
reconciled.
- Mr
and Mrs Hobbs each made clear their suspicion that the documents were a
reconstruction by Ms Reisinger for the SEC (or perhaps
the CFTC). (Mr Hobbs
again complains that he had no way of testing that proposition or asking Ms
Reisinger to explain.) As to the
allegation that the New World Holdings business
records had been or might have been falsified or reverse engineered (to which I
have
referred above) Mr Halley submits, and I accept, that there is no factual
foundation in evidence that would support such a finding.
- I
accept at the outset that Mrs Hobbs had obviously taken some time to consider
the evidence put forward by ASIC in relation to the
transactions recorded in
Schedule B to the Third Amended Statement of Claim and had sought to reconcile
the accounting material for
the purpose of demonstrating the alleged
unreliability of the records on which ASIC relies. Further, Mr Halley confirmed
that in
relation to certain of the entries (rows 356, 384, 405, 445 and 492) in
Schedule B, ASIC accepted that these were not amounts in
the case that ASIC
seeks to make (relating to the amount that was split 5 ways in relation to
Global Funerals - to which Mr Hobbs
referred specifically in his submissions).
That said, it was submitted that much of the submissions made by Mr Hobbs in
relation
to the flow of money was assertion not based on any
evidence.
- As
to the itemisation of transactions in Schedule B to the Third Further Amended
Statement of Claim, Mr and Mrs Hobbs submitted that
it was inadequate and
difficult to follow; that it was an incomplete record of all the financial
transactions for each fund; that
it did not record returns generated for most of
the funds (so that it was not possible to evaluate accurately the profitability
of
each fund); that it did not disclose returns disbursed to all clients for
each fund (such that it was difficult to assess whether
payments out were made
from profit or capital); that without a record of returns paid to every client
it was difficult to trace the
flow of money. On that basis it was submitted that
it could not be assumed from the worksheets derived from Schedule B that all
payments
out from each fund came from capital. (I should add that I do not
understand ASIC to suggest that to be the case. ASIC does not contend
that
payments were made out of capital for each of the funds; only out of the
Integrity Plus, Super Save, Master Fund and Enhanced
Funds.)
- Incomplete
nature of the business records
- Mr
Hobbs noted that no documents purporting to be business records have been
supplied by New World Holdings for the month of August
2006 or for the period
July 2007 to January 2008 and that payments were made from New World Holdings to
Business Solutions ASB Bank
account during the period September 2006 to February
2008. It is submitted that reliance cannot be placed on the so-called New World
Holdings business records because the spreadsheets are in various forms and in
various states of completion; the spreadsheets are
only for a portion of the
period during which money was paid from New World Holdings to Business Solutions
ASB Bank account; there
are no source documents for the 10 months of business
records supplied to verify the veracity and accuracy of the New World Holdings
documents; and a number of significant details cannot be verified to source
documents.
- ASIC
does not contend that these records are more than records for the particular
months in question. However, what it seeks to establish
by these records is not
the total amount of commission received by Mr Hobbs over the relevant period but
simply the fact that commission
was received by him. Therefore, the fact that
the business records cover only some 10 months does not assist Mr Hobbs. There
is nothing
to suggest that anything in the accounts outside that period would
have affected the accuracy of the months for which there were
records.
- Mr
Hobbs submits that not all of the account numbers listed in the records can be
matched to Cadent Account opening documents; that
the net commission amount per
account number described as "Net Commission" cannot be verified (noting that the
'Net Commission' figure
is obviously the product of column 4 'Total RT's'
multiplied by a number and that the number used to multiply the 'Total RT's' by
varies from row to row on the spreadsheet).
- Examples
were given for errors or inconsistencies identified in those documents and Mrs
Hobbs took me through some of those in her
oral submissions: namely where there
was the same trader but different multiplying factors (Mrs Hobbs submitting that
the source
documents would reveal whether or not the multiplying factor should
be different for the relevant account numbers or whether the
multiplying factor
should be the same and there was an inputting error on the New World Holdings
document); where there were different
traders and different multiplying factors;
where there were different sales codes, same trader and different multiplying
factors
(Mrs Hobbs again noting that the source documents would reveal the
significance of two different sales codes for the one trader and
also reveal
whether or not the multiplying factor should be different for these two account
numbers or whether the multiplying factor
should be the same and there was an
inputting error on the New World Holdings document). Mrs Hobbs identified other
perceived errors
or inconsistencies in the compilation of the documents, such as
where there was a different sales code, different trader, and different
percentage to Cadent.
- It
was noted that the percentage split between amounts shown as due to Ms Reisinger
and to "D Hobbs/Business Solutions" differed on
every occasion (as to which Mr
Clarke submits there is a logical reason, namely the differences in commissions
between brokers and
the difference in the sharing of expenses between
them.)
- As
to the submissions made by Mr Hobbs relating to the fact that for the
commissions paid by New World Holdings, the actual proportion
of fees to Mr
Hobbs was not always the onethird as the New World Holdings agreement specified
and as referred to be Ms Reisinger,
Mr Clarke accepts that there is a difference
between reference in the New World Holdings agreement to onethird of net
admissions
and the reference in Ms Reisinger's evidence to onethird of total
gross commissions but submits that otherwise the account given
by Ms Reisinger
is consistent with the contract.
- ASIC
accepts that what happened in practice seems to have varied. It is noted that
before working out the final pay out, various amounts
are added or subtracted
(and there may well have been a different allocation as between Ms Reisinger and
Mr Hobbs of those amounts).
Further it is noted by reference to the 10 May 2007
email (containing Ms Reisinger's calculation of the final amount of commission
for that month of $4,905.31 for Mr Hobbs, that the percentage commission for the
particular sub-accounts varied on occasion between
those accounts (from a 30%
figure to Mr Hobbs to, on occasion, that 30% plus an additional 20% and in one
instance the figure is
shown as 100% (for account 38353, which is referable to
Secured Bond). There is also a Geneva Financial sub-account (35202) on which
Mr
Hobbs is recorded as receiving 100% per cent of the net commission. ASIC does
not have an explanation as to why there was a difference
in those sub-accounts
for that period or at all.
- What
seems to be clear from the material in evidence is that Mr Hobbs eventually
received (in the Business Solutions account in different
months) amounts
referable to different subaccounts in respect of funds the subject of the
proceedings for which a varying percentage
split applied as between Mr Hobbs (or
Business Solutions) and Ms Reisinger.
- ASIC
submits that no significance can be placed upon the different multiplying
factors or different rates of commissions that were
identified in the New World
Holdings' statements, referring in this regard to Ms Reisinger's evidence at Ex
AO p 36.21 that, in effect,
there is no industry standard for determining the
compensation that a futures commission merchant pays an introducing broker -
rather
it is based on volume and an agreement between the futures commission
merchant and the introducing broker, such that normally the
more one introduces
the split becomes higher and the percentage of profitability becomes
higher.
- Ms
Reisinger's evidence at p39 was that the range of round turn commissions she had
seen was from as little as 50c a round turn to
as high as $40. Her evidence was
that the round turn commissions that Mr Hobbs earned on his accounts with Cadent
were between 50
cents and $15. Thus it is submitted by Mr Clarke that the
possibility of a range of different commission rates across different traders
means that the fact that there may be a different commission rate as between
traders is not an indicator of incorrect calculations.
- It
is submitted that this is demonstrated by the fact that the Cadent daily
statements referable to the ISPL account (Ex P tabs 239-242)
indicate different
commission rates even with the same trader for the same account. The different
trader authorisations also show
a variety of rates specified to round turn
commissions, management fees and incentive fees (and differences in rates
charged by the
same trader) as well as instances where the commission charge or
incentive or management fee was expressed as a maximum.
- Hence
it is submitted by Mr Clarke that not only could the round turn commission rate
vary (including for the same trader across different
accounts), so also could
there be a variation in the management and incentive fees, and therefore it is
not surprising that there
would be differences in the make-up of the total
commission, and different multiplying factors, depending on the precise
arrangements
in place with respect to each account.
- I
was taken by way of example to the Cadent daily statement (Ex P tab 241),
referable to the ISPL sub-account traded by Reynoso S&P
(that being an
account dated 11 May 2007) which identifies the trades made on that day and
notes the commission referable thereto
(in amounts of $12.20, $36.60 and $36.60
respectively). Figures marked with an asterisk (consistently with the Cadent
guide to its
statements attached to Mr Hobbs' submissions) indicates the total
number of trades referable to that particular trade (hence the
total commission
shown on the statement in some cases represents more than one trade). (Mr Clarke
accepts that on the face of the
Cadent statements it would not be possible to
tell whether the commissions on that account included the additional $1 return
per
trade.)
- I
was taken to the New World Holdings monthly statements from 3 September 2006,
which record the total net commission inclusive of the Cadent charge
(which is separately identified from the total net commission). The net
commission is then shown in the New World
Holdings document as split between New
World and Cadent and a ratio of 70/30 applies to the difference between the net
commission
and the Cadent charge (70% to Ms Reisinger/30% to New World
Holdings). (Mr Clarke notes that to this point the documents are consistent
with
Ms Reisinger's explanation as to the 70/30 split between her and New World
Holdings.) It is noted by Mr Clarke that there is
an exact match (on 5 of the 9
Cadent statements referable to the September 2006 account numbers) between the
number of round turns,
though it is noted that the multiplying factor for the
round turns may vary between traders.
- (Mr
Clarke points out therefore that whatever the charges that have been laid
against persons associated with New World Holdings,
there is a consistency
between the New World Holdings statements and the Cadent statements insofar as
they show round turns commissions.)
- Mr
Hobbs submitted that the particular document to which I was taken (insofar as it
contains an average and the contract opening amount
and the settlement amount
that seems to relate to futures positions and open positions) did not refer to
round turns but applies
to trades opened and trades closed (not round turns on
those trades). Nevertheless, for the documents that correspond exactly in
terms
of round turns, the submissions made by Mr Clarke seem to me to be
correct.
- Insofar
as the monthly statements that do not correspond exactly, there are some that
make reference to options showing strike prices,
expiry dates and referring to
premium collected or premium paid. (It is suggested that the explanation for the
difference in the
round turn trade figures on those documents may be due to the
possibility that not all of the option trades are considered in the
calculation
of complete rounds.)
- Accordingly,
on the example to which I was taken, to the extent that there is an exact match
between the information recorded on five
of the nine New World Holdings account
statements and the Cadent round turn numbers, it is submitted that for there to
have been
a reconstruction or reverse engineering of this document falsely to
suggest that Mr Hobbs had received an amount of commission which
he had not, it
would have been necessary for that person to have access to Mr Hobbs' Business
Solutions account so as to make an
exact calculation (and to do so having regard
to the actual amount of New Zealand dollars on the relevant exchange rate for
that
day). Mr Clarke submits (and I agree) that this would be an extraordinary
process. I accept that the likelihood of a reverse engineering
of these numbers
is fanciful.
- Leaving
aside the mathematical accuracy of whether the right multiplying factor was used
or not, ASIC's case is that commissions were
received by Mr Hobbs referable to
the accounts which are the subject of these proceedings. Mr Clarke notes that
the no commissions
were shown on the Cadent statements as referable to Global
Funerals prior to June 2006 and none were shown after December 2006 yet
the
account details for Mr and Mrs Hobbs bank accounts show the receipt of payments
directly from Cadent outside that period (and
in particular the receipt of
payments directly from Cadent from January 2006) and Mr Hobbs has not explained
the receipt of funds
from Cadent outside the period in which Global Funerals
account was trading through Cadent.
- (Mr
Clarke also points to the receipt of commissions through New World Holdings into
Mr Hobbs' accounts in respect of funds the subject
of the proceedings for
periods both before during and after Global Funerals.)
- I
accept that there may well be errors or inaccuracies in the calculation of the
precise amounts. However, what can clearly be gleaned
by reference to the Cadent
daily statements, New World Holdings statements and the Hobbs bank account
records is that commission
was received into the Hobbs accounts both from Cadent
and New World and that at least part of those amounts must have been referable
to Cadent accounts other than the Global Funerals account.
- Insofar
as Mrs Hobbs put forward explanations for some of the payments out of the Geneva
Financial accounts (such as the payment of
renewal/registration fees for its IBC
deregistration and repayment of amounts allegedly funded by Mr Hobbs at the time
the company
was set up). I accept that Mrs Hobbs had genuinely sought to
identify particular payments and the timing and amounts of the payments
would be
consistent with renewal or setup fees being paid. However, the exercise carried
out by her was one of speculation (as evident
from her difficulty in identifying
various payments).
- I
have already noted that Mr Hobbs raised issues as to the provenance of the New
World Holdings' business records. In his written
submissions pointed out that
there were no figures from Ms Reisinger or New World other than the documents
produced by ASIC "allegedly
from New World Holdings". Mr Hobbs maintained that
he had not seen those documents prior to the court case.
- It
was further submitted in Mr Hobbs' closing submissions that not only were the
documents unreliable but that "the first time we
have ever viewed them or even
understood that such records even existed was when they were presented to us by
ASIC during some stage
of the hearing", complaining that it was a complete
surprise when they were handed up by ASIC, as "it felt like an ambush". In any
event, Mr and Mrs Hobbs submit that "since analysing these documents in detail",
they are irrelevant and they ask me so to find.
- In
that regard, ASIC served on Mr and Mrs Hobbs around October or November last
year the affidavit of Ms Padgett deposing to the provenance
of the documents
obtained in the CFTC examination proceedings but did not provide copies of the
documents so produced. Mr Halley
contends that it was open to Mr Hobbs to seek
provision of the documents. (Indeed, given that Mr Hobbs did not seek to open
the disc
served with Ms Padgett's affidavit before the close of the evidence in
the hearing - nor perhaps even then - it is a moot point whether
it would have
made any difference had the underlying source documents been physically served
on Mr Hobbs at that time.)
- A
DVD of underlying documents for the entries in the spreadsheets admitted as s 50
summaries was served with Mr Connor's affidavit sworn 30 March 2012 in March or
April this year. Ex A comprises those parts of exhibit
to Mr Connor's affidavit
PJC 1 as were accepted as summaries for the purposes of the hearing in
accordance with my reasons on that
application handed down on 25 May 2012.
Provenance of the business records is dealt with in Ms Elizabeth Chu Padgett's
affidavit
of 17 October 2011. Mr Hobbs' then legal representatives clearly had
access to those documents insofar as submissions were made in
relation to
certain of the entries in the s 50 summaries by reference to documents in the
course of the s 50 application. In light of the above, the submissions as to an
ambush are not sustainable.
- Global
Funerals commissions
- It
is submitted by Mr Hobbs that it is not possible accurately to apportion the
amount of any commission allegedly referable to the
funds the subject of these
proceedings and the amount referable to Global Funeral Services because the
veracity of the business records
cannot be confirmed and because of the errors
and inconsistencies identified. It is submitted that commission payable via any
of
the parties (New World Holdings, Cadent, ROF, Dennis Reisinger and MLN),
profit paid to Secured Bond as an investment into Master
Fund for the client
FZF, withdrawals from FZF's investment account in Master Fund, and profit and
commission payable in regard to
Global Funeral Services cannot be included in
any consideration of the information presented against Mr and Mrs
Hobbs.
- In
particular, Mr Hobbs noted that the Global Funeral Services Cadent Account
Opening documents refer to a letter re Diamond Capital
Management LLC showing
that a sum of $7,000,000.00 was to be traded from December 2005. He notes that
the sum of $29,960,393.20 shown
on Cadent's Global Funeral Services Cash Account
37375 daily statement for 9 May 2006 is simply the opening balance for that day
(and would therefore would have been the closing balance for the day before, 8
May 2006) and hence submits that it cannot be said
that this was an amount
deposited by Global Funeral Services on 9 May 2006. Mr Hobbs submits (and, as I
understand it, Mr Clarke
accepts) that it cannot be concluded, simply by looking
at the 9 May daily statement for Global Funeral Services Cash Account 37375,
that this is when an amount of $29,960,393.20 was deposited.
- Mr
Hobbs further submits that all investments into Cadent Financial Services were
done by "wire transfer", not by deposit; that the
daily statement for 9 May 2006
shows a "reverse wire transfer from 8 May 2006" debiting the Cash Account 37375
with $10,000,711.10
on 9 May 2006, leaving a closing balance on 9 May 2006 of
$19,959,682.10; and that the next daily statement for Cadent's Global Funeral
Services Cash Account 37376 for 9 May 2006 shows an opening account balance of
nought and a "wire transfer received 8 May 2006" crediting
the Cash Account
37376 with $10,000,711.10 on 9 May 2006.
- Accordingly,
Mr Hobbs submits that ASIC's reliance on these cash account statements is
dismissed as "simply a random selection of
daily statements that happen to show
a wire transfer transaction on 9 May 2006 between 2 Global Funeral Services Cash
Accounts".
(Mr Hobbs further submits that the Technocash accounts for Global
Funeral Services and Secured Bond clearly show the flow of funds
from Global
Services Cadent account to Secured Bond Technocash.)
- As
to the submissions made in relation to the documents for the Global Funeral
Services Cadent account, Mr Clarke in reply took me
through the material in
relation to the Cadent account applications for Global Funerals from which it is
apparent that the main Global
Funerals Cadent account (the opening application
for which bears a fax header of December 2005) was account number 37375.
- Separate
sub-accounts for the cash account for Global Funeral Services were opened each
time an authorisation document appointing
a trader to the account was signed.
Diamond Capital Management was the first trader with respect to Global Funeral
Services (that
account being 37377). The relevant authorisation document was
dated 12 December 2005 and faxed with the date header of 21 December
2005. (All
of the other trader authorisations for the Global Funeral services account were
dated variously between June 2006 and
September 2006.) It is submitted by Mr
Clarke, and I accept, that the evidence reveals that as at the end of May 2006
the only trader
that had been authorised on that account was Diamond
Capital.
- As
to the submission by Mr Hobbs that there was an amount available from December
2005 that was available to be traded on that account,
and his submissions in
relation to the May 2006 Cadent daily statements for Global Funeral Services (on
which ASIC relies for the
proposition that the Global Funerals account was not
traded until around May 2006), Mr Clarke noted that the daily Cadent account
statements for 9 May 2006 (forwarded by email from Ms Reisinger to Mr Hobbs on
10 May 2006) make it clear that for account 37375
and 37376 there were two cash
accounts. (In evidence there were copies of bank statements of Business
Solutions and J & D Hobbs
for the relevant months.)
- Mr
Clarke notes that the daily statement in respect of 37376 shows a wire transfer
as at 9 May 2006 in the sum of approximately US$10
million and that the effect
of the transfer of US$10 million to the 37376 account was to split the funds
that were in the Global
Funeral's main cash account 37375, into two amounts of
around US$20 million and US$10 million. He notes that this is consistent with
the instructions confirmed by Mr Hobbs on 11 May 2006. In that 11 May email,
authorising the purchase of the treasury notes, Mr Hobbs
stated "and just to
remind you we split the account...we will use the same trader" (the only trader
at that time being Diamond).
(By letter dated 10 May 2006 sent by email there is
authorisation from Global Funeral Services for the purchase of treasury notes
and treasury bills through Mr Chuck Weed.)
- Although
Mr Clarke accepts that the first daily statement referable to 37375 does not
prove that the $30 million arrived into that
account on 9 May 2006, he notes the
reference in Ex AU 5927/5934 (an email chain between Mr Fry and Ms Reisinger)
confirming that
Mr Hobbs had been added to the list of recipients of the daily
account statements on this account and the statement "Congrats again
on the
account funding", which Mr Clarke submits indicates that the account has only
recently been funded. It is certainly consistent
with a recent funding of the
account (and more likely than if the funding had been in the account for 6
months by then).
- Mr
Clarke next points to Ex AU 6019 (a chain of emails going back to 29 May 2006)
including an email from Ms Reisinger to Mr Hobbs
and Ms Li of 30 May 2006 in
which Ms Reisinger noted that "Lily, trading started today with Diamond. The
rest should be starting
here shortly. I will answer your questions on a separate
email". It is submitted by Mr Clarke that it is clear from this that the
trading
with Diamond had not commenced until that date notwithstanding that the Diamond
account appears to have been set up some
months prior to that. I consider that
to be the most likely inference from this communication.
- As
the Diamond account at that time was the only trading account that had been set
up for the Global Funerals Cadent account, Mr Clarke
submits, and I accept, that
no round turn commissions could have been earned in respect of Global Funerals
until at least June 2006
(those commissions only being earned on completed
transactions not cash account balances).
- Hence,
it is submitted (and I accept) that the US$30 million is likely to have been
received in or about early May 2006. (Reliance
is placed on the New World
Holdings statements for the months after November 2006 as demonstrating that no
commissions in respect
of those Global Funeral Services subaccounts were
received past December 2006.)
- I
accept that the most likely inference from the above is that the earning of
round turn commissions on the Global Funeral Services
account did not commence
until trading commenced by Diamond in May 2006. Therefore the submission by Mr
Hobbs that all commissions
were referable to the Global Funerals fund cannot be
sustained.
- Status of
agreements in question
- Mr
and Mrs Hobbs submit that they did not have copies of the completed agreements
with New World Holdings in our business records
(though they recall signing
them). They submit they did not receive a completed copy back from New World
Holdings at any point following
their completion by New World Holdings. The
incomplete nature of the agreement signed by Mrs Hobbs is noted (it does not
contain
any reference to any compensation). It is further noted that the copy of
the agreement between Mr Hobbs t/as as Business Solutions
has not been signed by
New World Holdings.
- This
submission seemed to be a submission to the effect that the Business Solutions
agreements were incomplete or not enforceable.
Whatever the position as between
New World Holdings and Mr or Mrs Hobbs in this regard, the fact is that each of
Mr and Mrs Hobbs
signed an agreement of this kind (and in Mrs Hobbs' case,
though it is incomplete I would infer that it was in the same terms as
that
signed by Mr Hobbs, particularly given the evidence of Ms Reisinger as to the
reason a second agreement was signed). Furthermore,
to the extent that there is
evidence of commissions having been paid by New World Holdings, then it can be
inferred that it considered
there was an arrangement pursuant to which it had
agreed to do so (whether legally binding or not).
- Authorisation
of additional round turns
- As
to the agreements pursuant to which ASIC contends that round turn commission
payments were made to Mr Hobbs, he submits that: first,
Cadent did not have any
way of deducting any fee for such transactions or round turns from any Cadent
account; second, there are
no deductions for any transaction fees or round turns
evident on any of Cadent account daily or monthly statement; and third, while
he
accepts that such fees can be calculated from the New World Holding documents,
that they do not represent any relationship to
the alleged authorised additional
round turn amounts. In that regard, it is submitted that it cannot be shown that
Cadent Financial
Services did in fact take action on the alleged instructions
from the Fund Administrators because there are no source documents from
Cadent
Financial Services to verify any such allegation.
- It
is submitted that "Round turn" fees have no connection to funds held in Cadent
Cash or trading accounts; that there are no connections
between Cadent accounts
and the amount attributed to New World Holdings to disburse; that the amounts on
the New World Holdings'
documents do not appear anywhere on any Cadent account
as a deduction, fee or commission; and that no Cadent Financial Services account
holder bears the cost of such a fee payment (reference being made to the
document providing instructions on how to read a Cadent
Daily statement), which
did not make reference to any deductions from Cadent accounts for round turns.
- As
to the additional $1 round turn commissions, Mr Clarke referred to Ms
Reisinger's evidence at Ex AO p 37, in which she referred
to the different types
of commission paid to an introducing broker (round turn commissions, float (a
percentage of the interest that
the FCM makes on the dollars in the account)
profitability, management fees and incentive fees commission) and added that on
Mr Hobbs'
accounts there was also an additional $1 round turn commission paid to
him as a referral; and said "Cadent paid him an additional
dollar round turn for
every trade that was placed, to cover his costs".
- Ms
Reisinger confirmed at Ex AO p 64.14 that the additional dollar round turn
commission was "a fee added on top of the normal round
turn commissions that
were charged on the account. It was an additional fee that was charged to the
account above and beyond the
round turn commission". Ms Reisinger made it clear
that this was on top of the (usual) round turn commission and normal clearing
fees, it was "an additional $1 round turn that was on every trade that was
placed that was paid by Cadent to David Hobbs, it was
deducted right from the
account".
- Ms
Reisinger's explanation is consistent with the terms of the authorisations that
were signed. Mr Clarke notes that those authorisations
for the $1 round turn
commission make clear that Cadent was to make the payment and that it was to be
paid to Mr Hobbs as the "introducer
of my account" and notes that each
authorisation (except for the Geneva Financial authorisation) has an FTCL fax
header imprint indicating
that it was sent from Mr Hobbs' office.
- While
Mr Clarke accepts that there is not a direct reference on the Cadent daily or
monthly statements in evidence in these proceedings
to an additional $1 round
turn commission, it is submitted that it should be inferred that such amounts
were paid. This submission
is on the basis that the New World Holdings monthly
statements show the amount of net commission that includes the amount that goes
to Cadent (without apportioning commission or fees to Cadent in that amount) and
thus it should be inferred that the amount recorded
as going to Cadent in this
New World Holdings statement includes all amounts that are to be received by or
distributed by Cadent
(including the $1 round turns). In other words none of the
separate items of commission or management fees or incentive fees appear
on the
Cadent statements (so that it is not surprising that there is not a reference to
an additional $1 round turn).
- Further,
it is noted that the authorisations for the additional round turns predate the
times when the Global Funerals Cadent account
was operative.
- Mr
Clarke refers to the summary table prepared of the commissions received from
Cadent into Mr and Mrs Hobbs' Business Solutions account
that shows the receipt
of funds directly from Cadent on dates including 24 January 2006, 13 February
2006 and 13 March 2006, all
before trading commenced by Diamond on the Global
Funerals' account.
Legal principles
- Relevant
to the issues for determination are the following legal principles.
De facto/shadow directors
- Paragraph
[421] of the Third Further Amended Statement of Claim pleads that, by reason of
the matters alleged in paragraphs [37] to
[276], Mr Hobbs was at all material
times a director or an officer of each of the corporate administrators (defined
in the pleading
as the "Scheme Corporations") for the purposes of the
Corporations Act. It is clear from the particulars to this paragraph of
the pleading (and it was made clear in Mr Halley's comprehensive opening
submissions)
that ASIC contends that Mr Hobbs was a de facto or a shadow
director or officer of those companies (and of FTC).
- ASIC
contends that either the individual scheme administrators (such as Mr
Koutsoukos, Mr Wood, Ms Li and Mr Collard) were themselves the de facto
directors
of the IBCs that operated each of the individual schemes and acted at
all times in accordance with directions or instructions from
Mr Hobbs, thus
making Mr Hobbs the shadow director of those companies, or, if the
individual scheme administrators did not rise to the position of a de facto
director (but rather were either officers or
agents or employees of the IBCs),
then Mr Hobbs himself was the de facto director of each of those IBCs (since if
the scheme administrators
with respect to a particular scheme were not in the
position of de facto directors of the corporate administrator, then the only
other person who could fit that category would be Mr Hobbs, as a de facto
director). (Mr Halley postulated as a further alternative
that both Mr Hobbs and
the relevant scheme administrators were de facto directors.)
- The
term "director", as defined in s 9 of the Corporations Act, includes a
person who, though not validly appointed as a director, acts in the position of
a director (a de facto director) or whose
instructions or wishes are ones in
accordance with which the directors of the company or body are accustomed to act
(a shadow director).
The term "officer" is defined in s 9 of the Corporations
Act as including a person who is a director (which, by reference to the
earlier definition of director, includes a de facto or shadow
director); who
makes or participates in making decisions that affect the whole or a substantial
part of the corporation's business;
who has the capacity significantly to affect
the corporation's financial standing; or in accordance with whose instructions
or wishes
the directors of the corporation are accustomed to act. There is room
for overlap between persons occupying a de facto role (as director
and officer)
and those occupying a shadow role of that kind.
- Paragraph
(a) of the particulars to [421] states that Mr Hobbs acted in the position of a
director of each of the Scheme Corporations
(which, if established, would be
constitute Mr Hobbs both a de facto director and an officer for the purposes of
the Corporations Act) or was someone in accordance with whose wishes the
directors of each of the Scheme Corporations was accustomed to act (which, if
established, would be sufficient to constitute Mr Hobbs both a shadow director
and officer for the purposes of the Corporations Act).
- Paragraph
(b) of the particulars states that Mr Hobbs made, or participated in making,
decisions that affected the whole or a substantial
part, of the business of each
of the Scheme Corporations. Paragraph (c) of the particulars contains the
statement that Mr Hobbs had
the capacity significantly to affect the financial
standing of each of the Scheme Corporations. If either is established, this
would
be sufficient to constitute Mr Hobbs at the least an officer for the
purposes of the Corporations Act but in the circumstances such a role
might have the consequence that the definition of a shadow director was also
satisfied (since
in those circumstances his wishes might be ones in accordance
with which the directors were accustomed to act).
- Therefore,
while Mr Hobbs (in his and his wife's joint written submissions) contends that
there is no allegation in the pleading that
he was a shadow director of any of
the companies, it is apparent (and would, no doubt, have been apparent to the
lawyers advising
Mr Hobbs at the time he pleaded his defence to the claim) from
the particulars to [421] that ASIC was relying, for the contention
that Mr Hobbs
was a director of the respective companies, on facts that would constitute him a
de facto or alternatively a shadow
director or officer for the purposes of the
Corporations Act. (Hence, the assertion made in Mr Hobbs' submissions
that there is no allegation that he was a shadow director or officer of the
companies cannot fairly be made. Mr Hobbs has at all times been on notice of the
factual contentions on the basis of which ASIC now
seeks a finding that that he
was a director or officer of the companies.)
- As
to the matters to be taken into account when considering whether someone is a de
facto or shadow director, in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012)
200 FCR 296; (2012) 287 ALR 22 Finn, Stone and Perram JJ considered what was
meant by the definition contained in s 9(b)(i) of someone acting "in the
position of a director" and said (from [64]-[69]):
(i)A person may be a director even without any purported appointment of that
person to that position at any time....
(ii)The formula, "acts in the position of a director", which mirrors the
language of Mason J in Drysdale at 242 contemplates that in some degree
at least the person concerned, though not appointed a director, has been "doing
the work
of a director" in that company: cf Re Western Counties Steam
Bakeries and Milling Company at 630. Or to put the matter more fully, the
person concerned, though not a director de jure, has been acting in a role
(or roles) within the company and performing functions one would reasonably
expect to have been performed
by a director of that company given its
circumstances.
(iii)The roles and functions so performed will vary with the commercial
context, operations and governance structure (to the extent it is operative:
see Mistmorn Pty Ltd (in liq) v Yasseen (1996) 33 ATR 332[PDF] at
336-337) of the company: Austin at 489-490. Their performance by that
person may well be at variance with what is permitted by the Corporations Act or
by the company's constitution. Nonetheless, whether they suffice in the
circumstances to constitute the person a director for the Corporations
Act's purposes will often be a question of degree having regard to "the
nature of the functions or powers which are exercised and the
extent of their
exercise": Austin at 490; Natcomp Technology Australia Pty Ltd v
Graiche [2000] NSWCA 374; (2001) 19 ACLC 1,117 esp at [14]-[15]; Re Valleys Rugby League
Football Club Ltd at 656.
(iv)There is no reason why the relationship of a person with a company may
not evolve over time into that of de facto director. It
also may be the case
that the person only performs the role and functions that constitute him or her
a director for a limited period
of time: see Austin.
(v)Whether a person has acted in the position of a director is a question of
substance and not simply of how that person has been
denominated in, or by, the
company: see s 9 "director" (a). The fact that a person has been designated a
"consultant" for the performance of functions for a company will not as of
course mean
that person cannot be found to be a director. Whether or not he
or she will be a director will turn on the nature and extent of the functions to
be performed (both in and beyond
the consultancy) and on the constraints imposed
thereon. A limited and specific consultancy is unlikely on its own to be
caught by the s 9 definition. Not so, a general and unconstrained one which
permitted taking an active part in directing the affairs of the company
even if
not necessarily on a full-time basis: cf Mistmorn at 342 (the
references there to Australian Securities Commission v AS Nominees Ltd
[1995] FCA 1663; (1995) 133 ALR 1 (AS Nominees) and to Antico seem mistaken). ...
[in the present case, though Mr Hobbs has frequently styled himself as a
"consultant" (for example for FZF Anguilla
in particular) that does not mean he
will not have fallen within the statutory definition of director, particularly
if the consultancy
seems, as it does, to have been general and unconstrained and
Mr Hobbs was performing functions, such as the entry into contracts,
of a kind
that would be expected to be performed by a director of that comapny]
(vi)...with the extension of the de facto director concept to persons who
have never purportedly been appointed director, a rigid distinction
between a de
facto and a shadow director cannot be maintained. A person's power or
influence over the directors of a company may provide the capacity to secure as
of course compliance with his
or her wishes or instructions for "shadow
director" purposes: see AS Nominees at 52-53. But the possession and
exercise of such power or influence by a person alleged to be a de facto
director may throw direct
light on the evaluation of that person's true position
and influence in the affairs of the company. We also consider that like a
shadow director whose wishes or instructions need not relate to all facets of
the management of the company's
business: see AS Nominees at 52; the functions
assumed by a de facto director likewise may be limited in their scope: see
Austin. Nonetheless, as Williams J observed (at 656) in Re Valleys
Rugby League Football Club Ltd there will commonly be the need to determine
"how much a person must do before it can be held that such person is occupying
or acting
in the position of a director".
(vii)... put shortly, was the work done, work for a director of that company?
In a given company, this may involve an alleged director
in the day-to-day
management and business affairs of that company and may require his or her doing
many things for reasons of need,
expediency or whatever, but which hardly could
be said to be things that only a de jure director can properly do: see eg
Mistmorn
at 342. In another corporate setting, the work done may be simply
selective and strategic action. In the end what is being asked for is the
making of a value judgment about the proper characterisation of what in its
context the
person in question had been doing. (my emphasis)
- In
Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565, Madgwick J
referred to the character of the decisions made by the person in question, in
particular as to whether the person was
performing "top-level management
functions" (a term adopted by ASIC in its submissions), as distinct from
functions of an administrative
or company-secretary type role.
- It
is noted that questions as to a person's participation in management functions
and capacity to affect the financial standing of
the company are questions of
fact (Morley v ASIC (2010); 81 ACSR 284 at [893]).
Agency
- It
is alleged that FTC was the agent (or alter ego) of Mr Hobbs and that each of
the FTC executives, corporate and scheme administrators,
as well as New World
Holdings and Ms Reisinger, acted as agents of Mr Hobbs when engaging in
different categories. There are obvious
differences in the position of the FTC
executives/corporate and scheme administrators, on the one hand, and New World
Holdings/Ms
Reisinger on the other hand.
- At
the heart of the legal definition of an 'agent' is a person who acts on behalf
on another person and who acts with the authority
of that person to affect or
create legal relations with third parties (International Harvester Co of
Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co [1958] HCA 16; (1958) 100 CLR 644;
Petersen v Moloney [1951] HCA 57; (1951) 84 CLR 91). 'Control' by the principal over the
agent is a common element in an agency relationship and a corollary of the
authority conferred
by the principal upon the agent, reflecting the
representative nature of the agency relationship. Dal Pont in Law of Agency
(2nd ed, 2008) notes at [1.4]:
Put another way, if the right by virtue of which the alleged agent acts is an
independent right he or she already possessed, then
he or she is not an agent;
if it is, conversely, by virtue of some authority from another, then he or she
is an agent. Thus, even
though the words or phrases 'for', 'on behalf of', 'for
the benefit of' or even 'authorise' may be used in relation to services done
to
advantage the person who requests them, lacking a representation of that person
to third parties, there is no agency.
- In
Premier Building and Consulting Pty Ltd (recs apptd) v Spotless Group Ltd
[2007] VSC 377; (2007) 64 ACSR 114), when considering whether there was an
agency relationship between a holding company and its subsidiary, Byrne J (at
[341] and [342])
considered it necessary to establish the extent of the power of
the holding company to exercise control and its exercise of such
control, "and
any further indication that the subsidiary has so abandoned its independent
commercial existence" that he might conclude
that it had no independent
commercial existence and was but the tool of the parent and labouring for the
benefit only of the parent.
His Honour concluded there that there was nothing to
show a relationship beyond that of a parent and subsidiary within a corporate
group.
- The
fact that the alleged agent has an independent commercial existence (of
particular relevance when considering the position of
New World Holdings, which
clearly had its own separate commercial operation) is not necessarily
inconsistent with a principal and
agent relationship existing in relation to
some activities carried out by the putative agent on behalf of the putative
principal.
- In
Tonto Home Loans Australia Pty Ltd v Tavares; Firstmac Ltd v Di Benedetto;
Firstmac Ltd v O'Donnell [2011] NSWCA 389), Allsop P In Tonto Allsop
P considered the principles of agency in the context of the use by a lender of
"mortgage originators", where those mortgage
originators in turn used
"sub-introducers" to identify potential borrowers and one of those
sub-introducers had engaged in dishonest
conduct. His Honour referred to
judicial and academic discussion of the concept and central elements of agency
(namely the discussion
by Finn J in South Sydney District Rugby League
Football Club Ltd v News Ltd [2000] FCA 1541; 177 ALR 611 at 645-647
[131]- [137], in P Watts and F M B Reynolds, Bowstead and Reynolds on
Agency (19th edn, Sweet & Maxwell, 2010) at 1-10, in G E Dal Pont Law
of Agency (2nd edn, LexisNexis, 2008) at 4-8 and 26-28)) and referred also
to W A Seavey "The Rationale of Agency" (1919-1920) 29 Yale Law Journal
859).
- His
Honour emphasised that the concept of agency is not merely functional but is a
consensual arrangement or relationship, whereby
the agent is to be taken as, or
as representing, the principal ([175]), noting the definition set out in Article
1 of Bowstead and Reynolds that "Agency is the fiduciary relationship
which exists between two persons, one of whom expressly or impliedly manifests
assent
that the other should act on his behalf so as to affect his relations
with third parties, and the other of whom similarly manifests
assent so to act
or so acts pursuant to the manifestation".
- His
Honour considered it uncontroversial that the concept of agency might properly
extend to canvassers and those seeking to bring
business (and noted the
reference in 9-10 [1-019] of Bowstead and Reynolds on Agency (19th edn)
to Art 1(4) as "incomplete agency" directed in particular to the "canvassing" or
"introducing agent").
- It
is clear from the analysis in Tonto that the relationship must be
considered and characterised in its commercial context. There, Allsop P
considered that an Introduction
Deed (and other agreed arrangements) taken as a
whole "did not provide for an arrangement under which [the alleged agent] would
act
on behalf, and in the interests, of [the alleged principal]" ([192]). Placed
in its commercial context, his Honour considered that
the arrangement was one
"between two entities each of which had its own business. One was to endeavour
to introduce business from
its own customer base for the mutual commercial
advantage of both". No agency relationship was found to have existed.
- Whether
or not a person is named as an agent in the course of business is not
determinative of the issue. It is recognised that the
legal concept of an agent
may be different from that understood by the common usage of the word in a
business context. In International Harvester, the High Court noted (at
652) that:
Agency is a word used in the law to connote an authority or capacity in one
person to create legal relations between a person occupying
the position of
principal and third parties. But in the business world its significance is by no
means thus restricted.
- Where
there is found to be an agency relationship, issues may then arise as to the
scope of the agent's authority and the acts or
omissions for which the principal
will be liable. Relevantly, given some of the submissions made by Mr Hobbs in
the present case,
I note that in Colonial Mutual Life Assurance Society Ltd v
Producers and Citizens Co-operative Assurance Co of Australia Ltd [1931] HCA 53; (1931) 46
CLR 41 Gavan Duffy CJ and Starke J observed that the liability of the
principal is not confined to that which has been specifically authorised
(nor
does it exclude that which has been specifically prohibited) but may also extend
to conduct which the principal has put the
agent in a position to do. (Thus the
fact that FTC executives were precluded, by the terms and conditions of their
appointment, from
soliciting for investment - a point emphasised more than once
in submissions by Mr Hobbs - is by no means fatal to ASIC's case that
the FTC
executives were FTC's and/or Mr Hobbs' agents even if acting in breach of their
contractual obligations.)
- The
scope of an agent's actual authority is to be ascertained by applying "ordinary
principles of construction of contacts, including
any proper implications from
the express words used, the usages of the trade, or the course of business
between the parties" (Freeman v Lockyer v Buckhurst Park Properties (Mangal)
Ltd [1964] 2 QB 480 per Diplock LJ at 502). An agent will also have implied
authority to do that which is incidental to the activity expressly authorised,
that which a person in the agent's position would usually have the authority to
do, and that which is in accordance with such applicable
business customs as are
reasonable (Freeman v Lockyer). Implied authority may also arise due to a
course of dealing between the principal and the agent. In Powercor Australia
Ltd v Pacific Power [1999] VSC 110, Gillard J explains at
[1274]:
[I]f an employee performs a task on behalf of his employer who acquiesces in
what he does, endorses it and gives effect to what he
did, the employer is
thereby authorising him to carry out that task. If this is permitted over a
period of time then the clear inference
is that he has that power within his
employment to carry out that task. Indeed, the employee may have been
expressly forbidden at some point to perform the task in question but if
thereafter the employer
with knowledge adopts the transaction and gives effect
to it then in the absence of any contrary evidence one would be confident
in
drawing the inference that the employee's contract of employment has been varied
authorising him to perform similar type tasks. (my emphasis)
- Therefore,
if (as ultimately I have found to be the case) there was an agency relationship
between the FTC executives and FTC/Mr Hobbs,
then in ascertaining what fell
within the scope of the FTC executives' actual or implied authority one would
need to consider the
ordinary meaning of the terms of the executive's contract
(objectively construed in their context, taking into account the object
of the
authority conferred as explained in Pacific Carriers Ltd v BNP Paribas
[2004] HCA 35; (2004) 218 CLR 451; Toll (FGCT) Pty Ltd v Alphapharm Pty
Ltd [2004] HCA 52; (2004) 219 CLR 165), as well as the acts that would be
incidental to that authority and (of relevance in the case of the
representations
made by FTC executives to potential investors in meetings at
which Mr Hobbs was present) statements or acts to which the principal
did not
demur or in which the principal had acquiesced.
- Whether
a particular act falls within the scope of the agent's authority thus requires
consideration of all the circumstances in which
the authority was conferred, the
purpose for which it was conferred, and the circumstances in which the authority
was exercised.
In Kirkpatrick v Kotis [2004] NSWSC 1265 by Campbell J (as
his Honour was then) said (at [85]):
Even if P has given a general power of attorney to A, A is treated as acting
on behalf of P only when, from the circumstances, one
can tell that A is
intending to act on P's behalf rather than on his own behalf, or where other
circumstances, beyond the existence
of the power of attorney, provide a
justification for attributing A's action to P. Outside the context of P having
given A a general
power of attorney, one needs to look at circumstances such as
whether there is a contract which entitles or obliges A to act on behalf
of P,
whether there is any request by P and A that should act on his behalf, whether
there is any permissions by P for A to act on
his behalf, or whether there are
other circumstances on the basis of which the court will treat a relationship of
agency as existing,
before one decides whether A is at some particular time
acting as the agent of P.
- In
Lysaught Bros & Co Ltd v Falk (1905) 2 CLR 421, Griffith CJ remarked
that "an agent who is not acting for his principal but for his own benefit is
acting beyond the scope of his
authority" (at 429-430). However, Dal Pont argues
at [7.31] that this is misleading in its connotation that an act performed by an
agent within his or her actual authority may lose its status if motivated by the
agent's own interests, and says at [7.32]-[7.34]:
What can be said is that an agent's authority cannot extend to acts that are
advantageous solely to the agent, as this is inconsistent
with the agent's duty
to act in the principal's best interests. ... The aforesaid applies subject to
any express provision in the
authority to the contrary. If the principal
expressly authorises an agent to commit an act that is not in the principal's
interests
or that is solely in the agent's own interests, the principal is bound
by the consequences of his or her own act.
- As
to the implied authority that an FTC executive performing his or her role would
have, the question is what would be the ordinary
or necessary acts incidental to
those acts expressly authorised, or the custom, or the usual authority exercised
by a person in that
role and any other evidence regarding a course of dealing.
- Relevantly,
where there is express authority to negotiate on behalf of the principal, then
there is likely to be implied authority
to make certain representations on
behalf of the principal (see Mullens v Miller (1882) 22 Ch D 194, where
Bacon VC observed that where an agent was authorised to lease a property, there
would be implied authority to describe the
property to prospective lessees; as
opposed to Fairmede Pty Ltd v Von Pein [2004] QSC 220, where Mullins J
held that an agent authorised to sell property lacked the implied authority to
make representations as to how the
vendors would respond to requests for
extensions of time under the contract).
- In
Australian Brokerage Ltd v Australian and New Zealand Banking Corp Ltd
[1934] HCA 34; (1934) 52 CLR 430, the making of misrepresentations by a director selling shares
of the company was considered to be something capable of falling within
the
scope of the director's implied authority to act on behalf of the company.
Dixon, Evatt and McTiernan JJ were of the view that
the inquiry as to authority
was to be directed not at whether the company had authorised the making of false
representations, but
whether or not the company had authorised the director to
make representations on behalf of it and left it open as to the manner
and
content of the representations. At 45-46, their Honours referred to the
following dicta:
"A person who puts another in his place to a do a class of acts in his
absence, necessarily leaves him to determine, according to
the circumstances
that arise, when an act of that class is to be done, and trusts him for the
manner in which it is done; and consequently
he is held answerable for the wrong
of the person so intrusted either in the manner of doing such an act, or in
doing such an act
under circumstances in which it ought not to have been done;
provided that what was done was done, not from any caprice of the servant,
but
in the course of the employment," per Willes J, Bayley v Manchester,
Sheffield and Lincolnshire Railway Co. "It is seldom possible to prove that
the fraudulent act complained of was committed by the express authority of the
principal, or
that he gave his agent general authority to commit wrongs or
frauds. Indeed it may be generally assumed that, in mercantile transactions,
principals do not authorize their agents to act wrongfully, and consequently
that frauds are beyond 'the scope of the agent's authority'
in the narrowest
sense of which the expression admits. But so narrow a sense would have the
effect of enabling principals largely
to avail themselves of the frauds of their
agents, without suffering losses or incurring liabilities on account of them,
and would
be opposed as much to justice as to authority. A wider construction
has been put upon the words. Principals have been held liable for frauds when
it has not been proved that they authorised the particular fraud complained of
or
gave a general authority to commit frauds," per Sir Montague E Smith,
speaking for the Privy Council in Mackay v Commercial Bank of New
Brunswick. (my emphasis)
- This
approach is consistent with the approach taken in Colonial Mutual Life
Assurance where Gavan Duffy CJ and Starke J said (at
46-47):
It is not necessary that the particular act should have been authorised: it
is enough that the agent should have been put in a position
to do the class of
acts complained of (Barwick v English Joint Stock Bank (1867) LR 2 Ex
259; Lloyd v Grace Smith & Co (1912) AC, at 733). And if an
unlawful act done by an agent be within the scope of his authority, it is
immaterial that the principal directed the agent
not to do it. (Cf Limpus
v London General Omnibus Co [1862] EngR 839; (1862) 1 H & C 526; 158 ER 993.) (my
emphasis)
- Whether,
as Dal Pont argues in Law of Agency (2nd, 2008) at [8.6], an agent,
authorised to make representations should be considered to be exercising
ostensible, rather than actual authority, when making misrepresentations
(due to the perceived incongruity in concluding that the principal actually
authorised
the misrepresentations), there is no doubt that the making of a
misrepresentation that is not expressly authorised can nevertheless
fall within
the scope of the agent's authority.
- (In
saying this, I note that ASIC would contend that various of the
misrepresentations allegedly made in this case were in fact authorised
in the
sense that FTC executives and scheme administrators were repeating what Mr Hobbs
had trained, or shown, them to say to potential
investors in the schemes or
potential subscribers for the FTC education package - as evidenced by his
presentation at the DVD Seminar;
and in many cases FTC executives made the
representations in Mr Hobbs' presence without any apparent demur by him as to
the accuracy
of the representations.)
- A
principal may be found to have expressly or impliedly adopted acts of an agent
or may be found to have ratified an agent's act by
acquiescence (such as where
the circumstances are such that the principal is required to take positive steps
to repudiate or deny
the act of the putative agent and fails to do so). In
City Bank of Sydney v McLaughlin [1909] HCA 78; (1909) 9 CLR 615 Griffith CJ and Barton
J referred to circumstances where "a man is bound by all rules of honesty not to
be quiescent, but actively
to dissent, when he knows that others have for his
benefit put themselves in a position of disadvantage, from which if he speaks
or
acts at once, they can no longer escape".
- On
the issue of illegal acts committed within authority, the authors of Bowstead
& Reynolds on Agency (19th ed, 2010) comment at [2-026]
that:
An issue that has not received much attention is whether a principal can
expressly authorise an agent to act illegally. In principal,
there is no reason
why such authority cannot be given as a matter of law, and in practice it must
be a common occurrence. ... Where
it is a question whether a principal is liable
to criminal or civil penalty for illegal conduct committed by an agent, the
liability
of the principal will usually turn on the construction of the relevant
statute.
- The
learned authors then go on to comment that "at least under companies statues
which confer unlimited capacity on companies, it
would be intra vires the
board of directors to commit the company to illegal action: see Morgan v
Babcock & Wilcox Ltd [1929] HCA 25; (1929) 43 CLR 163 at 173-4; Australian
Agricultural Co v Oatmont Pty Ltd (1992) 8 ACSR 255 at 265."
- In
Tonto, consideration was also given to the circumstances in which
knowledge of an agent is to be imputed to a principal (though the conclusion
that there was no agency relationship strictly made it unnecessary to consider
whether, on the assumption that there were an agency
relationship, the so-called
fraud exception would prevent the imputation of knowledge held by employees of
the sub-introducers through
to the lenders). Allsop P referred at ([207]) to the
statement of principle in Bowstead and Reynolds on Agency (19th edn) in
Art 95 at 514 [8-207], including as to the imputation to a principal of
knowledge relating to the subject-matter of
the agency which the agent acquires
both while acting within the scope of the agent's authority and in circumstances
where the knowledge
is acquired outside the scope of that authority.
- Insofar
as Mr Hobbs' maintains that the contract between FTC and the FTC executives
makes clear that the latter are not employees,
that distinction does not assist
Mr Hobbs in denying that the FTC executives were agents of FTC and/or of
himself.
- Generally
speaking the distinction between employee/independent contractor may be relevant
when considering the nature of any liability
of the party employing or retaining
the employee or independent contractor for the wrongful acts or omissions of the
latter. The
distinction there drawn is between the concept of vicarious
liability in tort for the wrongful acts or omissions of the employee
and the
concept of joint and several liability of a principal for the tortious act of an
agent within the scope of that agent's authority
(as in Brooke v Bool
[1928] 2 KB 578; Ex parte Colonial Petroleum Oil Pty Ltd [1944] NSWStRp 16; (1944) 44 SR
(NSW) 306; Schultz v Corwill Properties Pty Ltd [1969] 2 NSWR 576; J F
& B E Palmer Pty Ltd v Blowers and Lowe Pty Ltd (1987) 75 ALR 509).
- While,
as a general principle, it is generally the case that one is not vicariously
liable for the torts of an independent contractor
(H C Buckman and Son Pty
Ltd v Flanagan (1974) 133 CLR 244; Stoneman v Lyons [1975] HCA 59; (1975) 133 CLR
550; Scott v Davis (2000) 204 CLR 333; and Hollis v Vabu Pty Ltd
[2001] HCA 44; (2001) 207 CLR 21), liability may arise for the acts of an independent
contractor if an agency relationship can be established - see, in particular,
the approach taken by McHugh J (in a separate judgment to the majority) in
Hollis v Vabu, at [99] (though criticised by Dal Pont in Law of
Agency (2nd ed, 2008) at [22.6]):
...a principal is liable for the wrongful act of an agent causing damage to a
third party when that act occurred while the agent was
carrying out some
activity as the principal's authorised representative in a dealing with a third
party... Further, CML (Colonial Mutual Life) clearly demonstrates
that it is not necessary for the principal "specifically" to "instigate,
authorise or ratify" the agent's wrongful
act. In fact, the principal will be
liable even when there is an express prohibition against the tortious conduct
involved.
- As
to the distinction between an employee and independent contractor, this is a
matter of substance not form. In Hollis v Vabu the High Court noted at
[36] that:
Terms such as "employee" and "independent contractor", and the dichotomy
which is seen as existing between them, do not necessarily
display their legal
content purely by virtue of their semantic meaning.
- In
Colonial Mutual Life Dixon J (with whom Rich J agreed) said (at 48-49):
The independent contractor carries out his work, not as a representative but
as a principal. But a difficulty arises when the function
entrusted is that of
representing the person who requests its performance in a transaction with
others, so that the very service
to be performed consists in standing in his
place and assuming to act in his right and not in an independent capacity.
- In
Hollis, their Honours went on at [40] to say that:
Thus, by itself, the circumstance that the business enterprise of a party
said to be an employer is benefited by the activities of
the person in question
cannot be a sufficient indication that this person is an employee. However,
Dixon J fixed upon the absence
of representation and of identification with the
alleged employer as indicative of a relationship of principal and independent
contractor.
These notions later were expressed positively be Windeyer J in
Marshall v Whittaker's Building Supply Co. His Honour said that the
distinction between an employee and an independent contractor is "rooted
fundamentally in the difference
between a person services his employer in his,
the employer's business, and a person who carries on a trade or business of his
own".
- It
is not necessary for the purposes of deciding the issue of agency in the present
case to determine whether the FTC executives were
employees or independent
contractors.
Financial services contraventions
- The
two kinds of financial services contraventions alleged in the present case are
breaches of s 911A of the Corporations Act (by the carrying on of a
financial services business in the jurisdiction without an Australian financial
services licence covering
the provision of the financial services), alleged
against Mr Hobbs, FTC and each of the corporate and scheme administrators) and
breaches of s 601ED(5) of the Corporations Act (by the operation of a
managed investment scheme that was not registered), alleged against Mr Hobbs and
each of the scheme and corporate
administrators in respect of the overall Hobbs
scheme (if that be found to be a single collective scheme) or Mr Hobbs and the
scheme
and corporate administrators of the Integrity Plus and Super Save schemes
only (if there be not found to be a singly collective scheme).
Section 911A contraventions
- Section
911A(1) of the Corporations Act provides that:
Subject to this section, a person who carries on a financial services
business in this jurisdiction must hold an Australian financial
services licence
covering the provision of the financial services.
- Austin
and Black note ([7.911A] that "The licensing regime secures adequacy of
capitalisation of providers of financial services, excludes unqualified
and
untrained persons from the industry and enforces compliance with ethical
standards: Cairnsmore Holdings Pty Ltd v Barsden Holdings Pty Ltd [2007]
FCA 1822 at [32]" and that the licensing requirement extends to product issuers
who sell products directly to clients or engage representatives to
do so.
(Failure to comply with s 911A(1) is an offence: s 1311(1). Under item 262C of
Schedule 3, for a contravention of s 911A there is a maximum penalty of 200
penalty units or imprisonment for 2 years, or both.)
- Pursuant
to s 911D(1), although without limiting s 911D(2), a financial services business
is taken to be carried on in this jurisdiction by a person if, in the course of
the person carrying
on the business, the person engages in conduct that is
intended to induce people in this jurisdiction to use the financial services
the
person provides or is likely to have that effect (whether or not the conduct is
intended, or likely, to have that effect in other
places as well). Austin and
Black note that the section is capable of applying even if an overseas
financial services provider "does not target sales in Australia,
if it provides
information as to its services at the client's request or provides client
support or market information to the client,
which may constitute conduct
'intended to induce the use of the service' within the scope of the section"
([7.911D]).
- The
term "financial services business" is defined in s 761A of the Act as meaning "a
business of providing financial services". "Financial
service" is in turn
defined in s 766A of the Act as including conduct of the following kind:
providing "financial product advice"
(defined in s 766B) and dealing in a
"financial product" (defined in s 766C). ASIC relies on conduct falling within
ss 766B and 766C
for the contention that Mr Hobbs, FTC, and each of the
corporate and scheme administrators were carrying on or providing a financial
service. (In Australian Securities and Investments Commission v Matthews
(1999) 17 ACLC 528 at 530, the concept of carrying on a financial services
business was held to include a the conduct of a website providing information
about financial products.)
- The
term "financial product" is defined generally in ss 763A-E (subject to certain
specific inclusions under s 764A and certain specific
exclusions under s 765A)
as including a facility through which, or through the acquisition of which,
amongst other things, a person
makes a financial investment. A person makes a
financial investment if he or she (the investor) gives money to another person
and
the other person uses it to generate (or the investor intends that it will
be used to generate) a financial return for the investor
(s 763B). A "facility"
(as defined in s 762C) broadly includes intangible property or an arrangement or
term of an arrangement, or
a combination thereof. Pursuant to s 763A(2), a
"financial investment facility" includes a facility of a kind through which
people
commonly make financial investments, manage financial risk or make
non-cash payments.
- "Financial
product advice" is defined in s 766B as meaning 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 a particular financial
product or class of financial products; or could reasonably be regarded
as being
intended to have such an influence. The question whether an opinion or
recommendation falls within that definition is a
question of fact (Australian
Securities and Investments Commission v Online Investors Advantage Inc
(2005) 194 FLR 449; 23 ACLC 1929; [2005] QSC 324).
- The
definition of "dealing in a financial product" in s 766C includes applying for
or acquiring a financial product and issuing a
financial product and extends to
the conduct of an agent acting on behalf of a person dealing in a financial
product (s 766C(3A).
(It does not include a person dealing in a product on his
or her own behalf unless that person is an issuer of financial products
and the
dealing is in relation to one or more of those products, s 766C(3).)
- In
determining whether particular conduct has been "in relation to" a financial
service, those words are recognised as being of wide
import. In Australian
Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211, Jacobson
and Gordon JJ, while accepting that the words "in relation to a financial
product" qualified the conduct proscribed by
s 1041H, by narrowing or qualifying
the breadth of the proscribed conduct and directing attention to the
characteristics of the conduct
itself, not its consequences, referred (at [68])
to the wealth of authority for the proposition that the expression "in relation
to" is extremely wide and that its meaning will be determined by the context
(citing Joye v Beach Petroleum NL [1996] FCA 1552; (1996) 67 FCR 275 at 285 and
Australian Competition and Consumer Commission v Maritime Union of
Australia [2001] FCA 1549; (2001) 114 FCR 472 at [68] per Hill J).
- In
the present case, ASIC contends that, both by reason of the provision of
financial product advice and by reason of the issuing
of a financial product,
there was a requirement on the part of the administrators of the investment
schemes (and of Mr Hobbs and
FTC) to register or to obtain an Australian
financial services licence as they were carrying on a financial service business
in Australia.
- The
exceptions to the prohibition in s 911A include the provision of a service
covered by an exemption prescribed in regulations made
for the purposes of the
paragraph (s 911A(l)(k)). Regulation 7.6.01(1) specifies which service
provisions are covered by an exemption
from the requirement to hold a financial
services licence. None of those exemptions is here applicable.
Section 601ED(5) contraventions
- Section
601ED sets out the circumstances in which a managed investment scheme (as
defined in s 9) must be registered under s 601EB.
It provides, relevantly:
601EDWhen a managed investment scheme must be registered
(1)Subject to subsection (2), a managed investment scheme must be registered
under section 601EB if:
(a)it has more than 20 members; or
(b)it was promoted by a person, or an associate of a person, who was, when
the scheme was promoted, in the business of promoting managed
investment
schemes; or
(c)a determination under subsection (3) is in force in relation to the scheme
and the total number of members of all of the schemes
to which the determination
relates exceeds 20.
(2)A managed investment scheme does not have to be registered if all the
issues of interests in the scheme that have been made would
not have required
the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the
scheme had been registered when
the issues were made.
- Pursuant
to s 601ED(5), a person must not operate in this jurisdiction a managed
investment scheme required to be registered under
s 601EB unless the scheme is
so registered. Subsection 601ED(6) provides, relevantly, that for the purpose of
subsection (5), a person
is not operating a scheme merely because that
person is acting as an agent or employee of another person.
- Section
1311(1) has the effect that a person who does something forbidden by a provision
of the Corporations Act, or fails to do something required by a
provision, or otherwise contravenes a provision, is guilty of an offence, unless
exempted
under s 1311(1)(a). Section 1311(1)(a) does not apply to s 601ED (as
Part 5C.1 is not specified in s 1311(1)(a)).
- Therefore,
pursuant to the general provision in s 1311(1), failure to comply with the
prohibition in s 601ED(5) against operating an unregistered managed investment
scheme required to be registered under s 601ED is an offence. (Item 163 of
Schedule 3 provides that the maximum penalty for a contravention of s 601ED(5)
is 200 penalty units or 5 years imprisonment, or both.)
- The
term "managed investment scheme" is defined, relevantly, in s 9 of the
Corporations Act to mean:
(a)a scheme [not excluded by subparas (e)-(h)] that has the following
features:
(i)people contribute money or money's worth as consideration to acquire
rights (interests) to benefits produced by the scheme (whether the rights
are actual, prospective or contingent and whether they are enforceable or
not);
(ii)any of the contributions are to be pooled, or used in a common enterprise
to produce financial benefits, or benefits consisting
of rights or interests in
property, for the people (the members) who hold interests in the scheme (whether
as contributors to the
scheme or as peoples who have acquired interests from
holders);
(iii)the members do not have day to day control over the operation of the
scheme (whether or not they have the right to be consulted
or to give
directions);
- The
term "scheme" is not defined in the Act (not was it defined in the predecessor
legislation). In Australian Softwood Forests Pty Ltd v A-G (NSW) [1981] HCA 49; (1981)
148 CLR 121 at 129, it was said to be a term of very wide import (a view adopted
in Chase Capital at [57] by Owen J and in Australian Securities and
Investment Commission v Takaran (2002) 170 FLR 388; [2002] NSWSC 834 by
Barrett J as his Honour then was.)
- In
Brookfield Multiplex Ltd v International Litigation Funding Partners Pte
Ltd (2009) 180 FCR 11; [2009] FCAFC 147 at [31] Sundberg and Dowsett JJ
noted that s 9 and Chapter 5C of the Corporations Act generally form part
of a regulatory system which guards against investment or market risk (the risk
that an investment will decline
in value), institution risk (the risk that an
institution operating the scheme might collapse) and compliance risk (the risk
that
the operator of a scheme might not follow the rules of the scheme's
constitution or laws governing the scheme, or would act fraudulently
or
dishonestly) and said at [33] that consistent with that object and purpose, the
definition of "managed investment scheme" is to
be construed broadly (noting the
observations of Mason J in Australian Softwood Forests).
- There
are a number of limbs to the definition of "managed investment scheme": first,
the contribution of money or money's worth to
benefits produced by the scheme by
several persons; second, that the contributions are to be pooled or used in a
common enterprise
to produce benefits for the members who hold interests in the
scheme; and, third, that the day to day control of the operation of
the scheme
be outside the hands of the scheme members.
- In
Takaran at [15]-[16] and [49], Barrett J referred to the collation of
judicial observations as to the meaning of "managed investment scheme"
in
Australian Securities and Investments Commission v Knightsbridge Managed
Funds Ltd [2001] WASC 339 and to the reliance by Owen J in Chase Capital
at 789 [57] and Douglas J in Australian Securities and Investments
Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403 on what
had been said in Australian Softwood Forests as to the meaning of the
word "scheme" in earlier legislation.
- In
Takaran, Barrett J noted that:
The word "pooled" and the expression "to be pooled", as they appear in the
present definition of "managed investment scheme", have
been considered in
Australian Securities and Investments Commission v Enterprise Solutions 2000
Pty Ltd and on appeal in Australian Securities and Investments Commission
v Enterprise Solutions 2000 Pty Ltd (2000) 158 FLR 221. From those cases, it
appears that the word has its ordinary meaning. In particular, it will apply
to describe arrangements where there is "common fund into or from which all
gains and losses of the contributors
are paid" or "a fund made up of numerous
payments from participants and used for a purpose they contemplate". The
phrase "to be pooled to produce" implies that the intention must be to pool the
contributions and, by use of the pool, produce
benefits. Pooling will occur
where moneys are paid into or collected in an account: see Australian
Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd
(at 222 [8], 223 [9] and 224 [13]).
The expression "common enterprise" was discussed in the Australian
Softwood Forests case (at 133), where Mason J said:
The argument is that in order to constitute a "common enterprise" there must
be a joint participation in all the elements and activities
that constitute the
enterprise. I do not agree. An enterprise may be described as common if it
consists of two or more closely connected operations on the footing that one
part is
to be carried out by A and the other by B, each deriving a separate
profit from what he does, even though there is no pooling or
sharing of receipts
of profit. It will be enough that the two operations constituting the enterprise
contribute to the overall purpose
that unites them. There is then an enterprise
common to both participants and, accordingly, a common enterprise. (my
emphasis)
- His
Honour went on to say at [15]:
The essence of a "scheme" is a coherent and defined purpose, in the form of a
"programme" or "plan of action", coupled with a series
of steps or course of
conduct to effectuate the purpose and pursue the programme or plan. In some
cases, the scope of the scheme
will readily be gathered from some constitutive
document in the nature of a blueprint setting out all relevant matters. In
others,
there may be no writing or such as there is may tell only part of the
story, leaving the remainder to be supplied by necessary implication
from all
the circumstances. Profit-making will almost invariably be a feature or
objective of the kind of scheme with which the s 9 definition of "managed
investment scheme" is concerned, given the definition's references in several
places to "benefits". Whatever is incidental and necessary to the pursuit of
the profit (or "benefits") will therefore be comprehended by the scheme,
including, it seems to me, steps sensible to counter risk of loss (or
detriment). Every cogent plan caters for - or, at least, recognises
and takes
into account - contingencies of an adverse kind. (my emphasis)
It must also be emphasised that a scheme having the characteristics bringing
it within the s 9 definition of "managed investment scheme" will not necessarily
possess those characteristics alone. In Royal Bank of Canada v Inland Revenue
Commissioners [1972] Ch 665, Megarry J observed, in relation to the concept
of "ordinary banking business", that "a statement of the essentials of a
business
does not seem to me, without more, to be exhaustive of all that is
ordinary in that business". A managed investment scheme, like
a banking
business, may involve elements beyond the core attributes that give it its
essential character. Elements which lie beyond
those attributes but contribute
to the coherence and completeness which make a "programme" or "plan of action"
must form part of
that "scheme". Every programme or plan of action must be taken
to include the logical incidents of and consequences of and sequels
to its
acknowledged components.
- Takaran
was cited with approval of the Full Federal Court in National Australia Bank
v Norman [2009] FCAFC 152; (2009) 180 FCR 243 at [127]). (ASIC also refers to the
observations of Finkelstein J in Australian Securities and Investments
Commission v GDK Financial Solutions Pty Ltd [2006] FCA 1415 at [2]
in this regard.)
- There
are two components to the requirement that there be contribution by several
persons of money, or money's worth, to benefits
produced by the scheme: first,
that the identified programme or plan of action or scheme was articulated before
the contributions
were made (National Australia Bank v Norman (at [139]
per Gilmour J) and, second, that people have made the contribution of money or
money's worth in consideration for the acquisition
of rights to benefits to be
produced by the scheme (Brookfield Multiplex at [50]).
- Mr
Halley notes that what must have been articulated before the contributions are
made are the means by which benefits are to be produced;
the benefits; and the
consideration to be paid to obtain interests in those benefits. (In National
Australia Bank v Norman at [139] it was said that the making of
contributions may be steps, or a course of conduct, taken to effectuate the
purpose and pursue
the programme or plan articulated at previous meetings with
potential investors).
- As
to what is meant by contribution, it is noted that it looks to purpose not form
and that it means more than making available for
payment or supply; rather it
foreshadows the requirement for pooling or use in a common enterprise to produce
financial benefits
identified in the second limb of the definition and means to
"supply or pay along with others to a common fund or stock", whether
that supply
be direct or indirect. In Brookfield Multiplex it was said to be
sufficient that the intention is that the contributions be for the purposes of
the scheme, regardless of the identity
of the person to whom they are to be
paid, given or supplied. (Although an identifiable entity for the purposes of
Chapter 5C of
the Act, a scheme is not itself a legal person - Brookfield
Multiplex at [59]).
- The
term "interest" in a managed investment scheme is defined in s 9 to mean a right
to benefits produced by the scheme (whether the
right is actual, prospective or
contingent and whether it is enforceable or not) and that "benefit" is further
defined in s 9, meaning
"any benefit, whether by way of payment of cash or
otherwise".
- In
Australian Softwood Forests, Mason J, when considering the definition of
"Interest" in the predecessor legislation said:
In attempting to apply the statutory definition of "interest" to the
transactions already outlined, we must ask ourselves, first,
whether there is a
"financial or business undertaking or scheme" and, secondly, what are its
elements. We begin with the circumstance
that the words in question are of very
wide import. For example, all that the word "scheme" requires is that there
should be "some
programme, or plan of action" (Clowes v. Federal Commissioner of
Taxation (17). ...
- His
Honour noted that:
... It is not an objection to an enterprise qualifying as an undertaking or
scheme that it consists of a number of parts or elements,
the participation of
individual parties being limited to one of these parts or elements, their profit
or remuneration being derived
from the particular activities in which they
engage. There is nothing in the notion of an undertaking or scheme that requires
or
implies that there is joint participation in everything comprised in the plan
or that there must be a share or pooling of profits
or receipts.
Apart from any considerations which may be derived from the general context
in which the statutory definition appears, there is no
very good reason for
reading the words down. The context is that of prohibitions against issuing or
offering to the public for subscription
or purchase or inviting the public to
subscribe for or purchase "interests" unless there is in force in relation to
them an approved
deed and unless there is provided information similar to that
which is prescribed in connexion with an offer to the public of shares.
...
- Reference
was made by Mr Halley to what was said in ASIC v Great Northern Developments
Pty Ltd [2010] NSWSC 1087 at [76] by White J as to the relevant question
being what was the consideration for the contribution of money or money's worth
and the requirement
that such consideration be the right (even if unenforceable)
to acquire benefits produced by the scheme.
- In
Australian Securities Investment Commission v Emu Brewery Mezzanine Ltd
[2004] WASC 241; (2004) 52 ACSR 168 at [92], Simmonds J noted that it was important to
consider what it is that those responsible for the relevant scheme are offering
for acquisition
by reference to the context in which the scheme is marketed and
that, if the marketing context for the scheme shows that what is
being offered
goes beyond the legal rights the scheme otherwise gives rise to, then the
"right" for the purposes of the first limb
of the definition of managed
investment scheme need not be in the form of the benefit of a contractual
promise or promises in relation
to the scheme operation. Mr Halley notes that
where a characteristic of a scheme is an intermediate vehicle by and through
which
the investors are asked to contribute money (so as to enable them to gain
the sorts of benefits the vehicle's participation in the
scheme would make
possible for investors), then there is a sufficient link between a contributor
and a scheme to satisfy the first
limb of the definition.
- The
requirement that the contributions be pooled or used in a common enterprise to
produce benefits for the members who hold interests
in the scheme means pooling
for a common purpose (rather than a physical pooling of contributions). The
definition will be satisfied
if the moneys are available (and known to be
available) for a relevant purpose regardless of physical location and
irrespective of
whether investors have a proprietary interest in the fund
(Australian Securities and Investments Commission v Enterprise Solutions 2000
Pty Ltd [2000] 1 Qd R 135; [2000] QCA 452 at [10].) An aggregation is
necessary (as opposed, say, to a series of bilateral arrangements) (Burton v
Arcus (2006) WAR 366; [2006] WASCA 71 at [4] per McLure JA and [73]-[83] per
Buss JA).
- Mr
Halley notes that, while the investor's knowledge is relevant (in that any
pooling must occur with the express or implied approval
or knowledge of the
contributors), such knowledge may be discerned objectively and variously from
documents, discussions or conduct
(National Australia Bank v Norman at
[81]-[84]).
- As
to the requirement that there be a common enterprise, Austin and Black
note that this is similar to the concept of common enterprise formerly used in
the definition of "participation interest" ([5C.601EAA].
It is sufficient if
there are two or more closely connected operations if the two operations
constituting the enterprise contribute
to the overall purpose that united them
(Australian Softwood Forests at 133; H P Mercantile Pty Ltd v Tumut
River Orchard Management Limited (In Liq) [2011] FCA 200 at
[55]).
- As
to the meaning of "operate" in this context, Mr Halley notes that it refers to
the acts which constitute the management of, or
carrying out of, the activities
which constitute the managed investment scheme (rather than being a reference to
ownership or proprietorship.
- In
Australian Securities and Investments Commission v Pegasus Leveraged Options
at [55], where the question was whether the sole director of the company
that promoted and operated a managed investment scheme should
be considered to
be a person operating the scheme, Davies AJ said:
The word "operate" is an ordinary word of the English language and, in the
context, should be given its meaning in ordinary parlance.
The term is not used
to refer to ownership or proprietorship but rather to the acts which constitute
the management of or the carrying
out of the activities which constitute the
managed investment scheme. The Oxford English Dictionary gives these relevant
meanings:
"5. To effect or produce by action or the exertion of force or influence; to
bring about, accomplish, work.
6. To cause or actuate the working of; to work (a machine, etc). Chiefly
US.
7. To direct the working of; to manage, conduct, work (a railway, business,
etc); to carry out or through, direct to an end (a principle,
an undertaking,
etc) orig. US."
and found that as the "living person who formulated and directed the scheme
in question (and who was actively involved in the day
to day operation of the
scheme and supervised others in their performance), the director in question did
not "merely" act as an agent
or employee of the company but was the directing
mind and will of the company "and the scheme". (See also Takaran at [49];
and Australian Securities and Investments Commission v McNamara (2002) 42
ACSR 488; [2002] FCA 1005.)
- More
than one legal entity person may therefore operate the same scheme. In
Australian Securities and Investments Commission v McDougall [2006] FCA 427; (2006) 229
ALR 158 at [36]; [55], Young J (as his Honour then was) after referring to both
Pegasus and McNamara, concluded that both the person who
formulated and directed the scheme (and was the directing mind and will of the
company in its
day to day operations in relation to the scheme) and the company
operated the scheme in question.
- In
Australian Securities and Investments Commission v Edwards [2004] QSC 344; (2004) 22 ACLC
1469 at [34] McMurdo J, considering the question as to whether the carrying out
of some but not all of the activities of the scheme in the jurisdiction
amounted
to an operation of the scheme within the jurisdiction, said:
The concept of the operation of a managed investment scheme does not
require the identification of but one place, as that place where
the scheme is
operated. Nor does it require the identification of but one operator: see eg
ASIC v Pegasus Leveraged Operations Group Pty Ltd. The question then is
not whether this jurisdiction is the place where the scheme was operated but
whether it was a such place. That involves a question of degree, and a
consideration of the nature and extent of the activities carried on within the
jurisdiction
in the context of the scheme as a whole.
- In
that case, there was found to be a system within the jurisdiction for the
payment through the alleged operator's business of investors
and "a system in
the jurisdiction for the provision of documents to potential investors and for
their admission to the scheme". It
was concluded that the alleged operator's
involvement was probably more extensive than simply conducting pre-contractual
dealings
and disbursing funds to investors through a local bank account (noting
that the correspondence included emails written by the alleged
operator
himself). It was concluded from this that the activities were such as to amount
to an operation of the scheme and that:
.... As much if not all of his activity occurred within Australia,
including the canvassing of potential investors and the processing of
payments to them, I conclude that this scheme was operated within the
jurisdiction. (my emphasis)
- In
Pegasus, the person found to have operated a managed investment scheme
was the person who had formulated and directed the scheme, was actively
involved
in the scheme's day to day operations, and supervised others in their
performance. It is noted that others who have been
found to have operated such a
scheme include the "directing mind and will" of the scheme administrator or
manager in its day to day
operations in relation to the scheme (ASIC v
McDougall (at 167; at [36]; ASIC v McNamara at
[32]).
- The
requirement that the day to day control of the operation of the scheme be
outside the hands of the scheme members relates to control
as a factual matter
not the legal right to control (Burton); namely the authority to decide
matters directly and not merely to participate in decision making. Mr Halley
submits that day-to-day
control, in the context of s 9(a)(iii) of the definition
of managed investment scheme, means the making of routine, ordinary, everyday
management or operational decisions and does not refer to ownership or
proprietorship. (Hence, the fact that decisions such as where
investments are to
be placed (or, as in the present case, into which "KLM" listed fund an investor
wished to invest) are made by
the individual investor does not mean that the
investor has day-to-day control (Burton v Arcus at [9] per McLure JA),
nor does the existence of a right in a member to be consulted or give directions
as to the operation of the
scheme.)
- As
to what is meant by "promoter" in the context of s 601ED(1), it is noted that in
Australian Securities and Investments Commission v Young (2003) 173 FLR
441 at [53] Muir J said that it "plainly extends to activities in which a person
formulates a scheme... advertises it, solicits others
to participate in it and
embarks upon its implementation" (and see Australian Securities and
Investments Commission v Primelife Corporation Ltd [2005] FCA 1229; (2005) 54 ACSR 536 at
542; [2005] FCA 1229 at [22]). It has also been held to mean a person "who sets
up the joint venture and markets it to the investors" (Australian Securities
and Investments Commission v Infomercial Management Group Pty Ltd [2002] VSC
262 at [35]) and persons who "engage in exertion for the purpose of getting up
and starting a company (or a scheme), and those who assist them"
(Ibrahim v
Pham [2005] NSWSC 246 at [316], Australian Securities and Investments
Commission v Woods and Johnson Developments Pty Ltd (1991) 6 ACSR 191 at
194).
- ASIC
contends that even if the individual schemes are found not to constitute a
conglomerated scheme, s 601ED(1)(b) is satisfied if
the promoter of each scheme
is the same or, if different, is an associate of the promoter of the other(s)
and the ordinary business
of all includes the promotion of similar schemes
(citing Australian Securities and Investments Commission v Infomercial
Management Group Pty Ltd [2002] VSC 262 at [37]; Australian Securities
and Investments Commission v IP Product Management Group Pty Ltd
[2002] VSC 255; (2002) 42 ACSR 343 at 349; [2002] VSC 255 at [28] and noting that
"associate" is defined widely under the Corporations Act to include (s
15) a reference to a person in concert with whom a primary person is acting or
proposes to act where the material particulars of that
matter are known to the
associate).
- If
s 601ED(1) is satisfied, then the only exception to the requirement for
registration is provided by s 601ED(2) which applies where all the issues of
interests in the scheme that have been made would not have required the giving
of a product
disclosure statement if the scheme had been registered when the
issues were made.
- Sections
1012A and 1012B of the Corporations Act provide for the circumstances in
which there is an obligation to give a product disclosure statement for a
product. In summary, s 1012A requires a product disclosure statement when a
regulated person (as defined) provides personal advice to a retail client
recommending
that the client acquire a particular financial product (referred to
as a recommendation situation); s 1012B requires a product disclosure statement
where a person offers to sell, or sells, a financial product to a retail client
(referred
to as a sale situation). The relevant financial product may include a
managed investment.
- There
is an exception to s 1012B applies under s 1012E for small scale "personal
offers" of managed investments and other prescribed products. A product
disclosure statement is not required
for such offers if all of the products are
issued by the same person and none of the offers results in a breach, within any
12 month
period, of either the "20 purchasers ceiling" or the "$2 million
ceiling". (It is noted that "person" includes juristic persons such
as the
trustee of a self-managed superannuation fund and that s 761FA provides that
where a trust has two or more trustees, Chapter 7 applies to the trust as if the
trustees constituted a single legal
entity).
- Section
761G(1) provides a definition of "retail client" and operates with the effect
that a financial product is presumed to be provided to a person
as a retail
client unless one of subsections (5), (6) or (7) apply. Those exceptions do not
apply in the present case (this not being
the provision of an insurance product
for the purposes of s 761G(5) or a superannuation product for the purpose of s
761G(6), nor is it a case where the price for the provision of the financial
product exceeds $500,000 (s 761G(7), Reg 7.1.18) or the person is a professional
investor (as defined by s 9 of the Corporations Act) (in that regard Mr
Halley notes that SMSFs are not bodies regulated by APRA nor within the meaning
of the Superannuation Industry (Supervision) Act 1993.)
- Mr
Halley notes that since 28 June 2007 there has been an exception for
"sophisticated investors" under s 761GA (as amended from 6
May 2010) but that
this would not have been applicable on the facts of this case in any event as it
requires the person providing
the financial product to be a financial services
licensee (s 761GA(a)).
Misrepresentation contraventions
- A
number of contraventions predicated on the making of misleading or deceptive
statements are alleged, largely turning on the same
conduct (see
Wingecarribee Shire Council v Lehman Bros Australia Ltd (in liq) [2012]
FCA 1028 by Rares J as to the legislative framework (variously described by his
Honour as a legislative "morass" or "porridge") within which
representations in
relation to financial products or services are regulated, at
[947]-[948].)
- In
the present case, contraventions are alleged to have been committed of each of
the following provisions: ss 1041E, 1041G and 1041H of the Corporations
Act and ss 12DA, 12DB and 12DF of the ASIC Act.
- Section
1041E of the Corporations Act provides that a person must not
(whether in this jurisdiction or elsewhere) make a statement, or disseminate
information, if:
(a)the statement or information is false in a material particular or is
materially misleading; and
(b)the statement or information is likely:
(i)to induce persons in this jurisdiction to apply for financial products;
or
(ii)to induce persons in this jurisdiction to dispose of or acquire financial
products; and
(c)when the person makes the statement, or disseminates the information:
(i)the person does not care whether the statement or information is true or
false; or
(ii)the person knows, or ought reasonably to have known, that the statement
or information is false in a material particular or is
materially
misleading.
- For
the purposes of s 1041E(b), "likely" is to be understood in the sense of a "real
and not remote chance" not in the sense of "more than likely not" James
Hardie Industries NV v Australian Securities and Investments Commission
[2010] NSWCA 332; (2010) 274 ALR 85 at [184]- [185]).
- Section
1041G of the Corporations Act provides that a person must not, in the
course of carrying on a financial services business in this jurisdiction, engage
in dishonest
conduct in relation to a financial product or financial service.
Dishonest in this context means dishonest according to the standards
of ordinary
people and known by the person to be dishonest according to the standards of
ordinary people (s 1041G(2)).
- Section
1041H of the Corporations Act prohibits misleading or deceptive
conduct within Australia in relation to a financial product or a financial
service. It is in substantially
similar terms to s 52 of the former Trade
Practices Act 1974). Hence the relevance of the case law in relation to that
provision, as also applied to s 995 of the Corporations Act, to the
allegations made for breach of s 1041H (reference being made by Mr Halley
in this regard to Fame Decorator Agencies Pty Ltd v Jeffries [1998] NSWSC 157; (1998) 28
ACSR 58 at 63; Fraser v NRMA Holdings (1995) 55 FCR 452 at 464 and
National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369 at
[18]).
- Section
12DA is in similar terms to s 1041H and prohibits a person, in trade or
commerce, from engaging in conduct in relation to financial services
that is misleading or deceptive
or is likely to mislead or deceive. Certain
conduct is exempted by s 12DA(1A), but that is not relevant for present
purposes.
- "Financial
services" are defined by s 12BAB of the ASIC Act and, similarly to the
definition in the Corporations Act, include arranging for a person to
apply for or acquire a 'financial product' (that being 'dealing in a financial
product' and therefore
the provision of a 'financial service' for the purposes
of s 12DA(1)).
- Section
12DB of the ASIC Act prohibits a person, in connection with the
supply or possible supply of financial services, or in connection with the
promotion by
any means of the supply or use of financial services, from making a
false or misleading representation that services are of a particular
standard,
quality, value or grade.
- The
construction to be afforded to this provision can be discerned by analogy by
reference to the cases that have considered the prohibition
on the making of a
'false' statement in order contexts, such as the corresponding provision under
the Trade Practices Act 1974 (Cth).
- In
Darwin Bakery v Sully [1981] FCA 115; (1981) 36 ALR 371, Keely, Toohey and Fisher JJ
considered whether s 53(e) of the Trade Practices Act, prohibiting the
making of false and misleading statements, required there to be a mental
element, such a dishonesty or awareness
of the false nature of the statement.
Their Honours held that the correct construction was that s 53 imposed strict
liability and that (at 376) "it is unnecessary to established knowledge of the
falsity of the statement or reckless
indifference as to its truth or falsehood".
This was consistent with the earlier case of Riley McKay Pty Ltd v Bannerman
(1977) 15 ALR 561, where Bowen CJ observed in obiter that "these
provisions [ss 52, 53(a) and 53(c) Trade Practices Act] prescribe
absolute breaches...If a corporation does make such a representation there is a
breach of s 53(a) and it is irrelevant whether there was a guilty mind or not."
The reasoning in both these cases took into account the defences under
s 85 of
the Trade Practices Act that included reasonable mistake or reasonable
reliance on information supplied by another person or certain matters.
- In
Darwin, their Honours said at 376 that:
But we are of the opinion that the existence of s 85 in regard to
contraventions of Pt V of the Act points to a policy on the part of the
legislature that in the absence of one of the defences there mentioned the
liability
imposed by s 53 is strict.
[...]
The breadth of these defences hardly accords with a situation in which
liability depends in any event upon establishing mens rea.
Rather it assumes a
liability arising from conduct objectively measured, but which may be avoided by
the proof of matters peculiarly
within the knowledge of the defendant.
- Similar
defences are contained in s 12GI of the ASIC Act, such as those of
reasonable mistake (s 12GI(1)(a)), reasonable reliance (s 12GI(1)(b)) and that
the contravention was an act or
default of another person, outside the
defendant's control, and with respect to which the defendant took reasonable
precautions and
exercised due diligence (s 12GI (1)(c)). Therefore, applying the
reasoning in Darwin Bakery, a guilty mind is not required to establish a
contravention under s 12DB.
- Section
12DF of the ASIC Act provides that a person must not, in trade or
commerce, engage in conduct that is liable to mislead the public as to the
nature, the
characteristics, the suitability for their purpose or the quantity
of any financial services.
- (Section
12GB provides that a person who contravenes s 12DB or s 12DF; or who aids,
abets, counsels or procures another to contravene;
or induces, or attempts to
induce, a person (whether by threats or promises or otherwise) to contravene; or
is in any way, directly
or knowingly concerned in, or party to, the
contravention by a person of; or conspires with others to contravene, either
section
is guilty of an offence punishable by a fine not exceeding 10,000
penalty units. An offence under s 12GB for contravention of s 12DB
or s 12DF is
an offence of strict liability (s 12DB(3) and s 12DF(2)
respectively).
- Conduct
is defined in the ASIC Act (s 12BA(2)(d)) as including doing or refusing
to do any act such as making or arriving at a contract, arrangement or
understanding,
and giving effect to the provisions of such a contract,
arrangement or understanding. Offering to do an act includes a reference
to the
person making known that the person will accept applications, offers or
proposals for the person to do that act or to do that
act on that condition, as
the case may be (s 12BA(2)(d)).
- Insofar
as the conduct relied upon for the contraventions involved the sale of financial
education material (and the provision of
reports, lectures and books was held
not to be conduct in trade or commerce in Chapman v Luminis Pty Ltd (No
5) [2002] ATPR Digest 46-214; [2001] FCA 1106 at [13]) Mr Halley notes that
promotional activity usually falls within the ambit of the phrase (Gianni
Versace SpA v Monte (2002) 119 FCR 349; [2002] FCA 190 at [105]- [106]) and
that statements made by a person not himself or herself engaged in trade or
commerce may nevertheless fall within the statutory
prohibition if designed to
encourage others to invest, or to continue investments, in a particular trading
entity (Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59 at
[34]).
- The
principles applicable in considering whether conduct is misleading or deceptive
or is likely to mislead or deceive have been considered
by numerous cases in
relation to the former Trade Practices Act provisions. They were conveniently
summarised as follows.
- Whether
conduct is misleading or deceptive (or likely to mislead or deceive) is a
question of fact (Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42
ALR 177 at 202-203) to be determined objectively having regard to all the
circumstances of the case (Butcher v Lachlan Elder Realty Pty Limited
[2004] HCA 60; (2004) 218 CLR 592 at 109 per McHugh J).
- Conduct
is misleading and deceptive if it leads a person into error (Parkdale Custom
Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 198; Butcher
v Lachlan Elder Realty at [111]); namely if it induces or is capable of
inducing error (Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2000] FCA 1572; (2000) 104
FCR 564 at 589) or leads to an erroneous assumption (Taco Bell [1982] FCA 136; (1982) 42
ALR 177 at 200) or misconception (Hornsby Building Information Centre Pty Ltd
v Sydney Building Information Centre Ltd [1978] HCA 11; (1978) 140 CLR 216 at 228); or
does, or is likely to, cause a person to misinterpret, or be deluded as to, the
facts (Weitmann v Katies (1977) 29 FLR 336 at 342).
- Conduct
is likely to mislead or deceive if there is a real or not remote possibility of
it so doing (Global Sportsman v Mirror Newspapers (1984) 2FCR 82 at
87).
- It
is not necessary to prove that the conduct in question actually deceived or
misled anyone (Parkdale Custom Built Furniture at 198; Taco Bell
at 189). Further, it is unnecessary to show on the balance of probabilities
whether the impugned conduct was in fact misleading or
deceptive (provided that
it is established on the balance of probabilities that it was likely to be so)
(Butcher v Lachlan Elder Realty at [112]). Evidence of persons actually
misled is relevant but not determinative (Global Sportsman at
87).
- Whether
or not the conduct has led to, or is capable of leading to, error or
misconception depends upon the presence of a sufficient
nexus between the
conduct (which may include refraining from doing an act) and the error or
misconception (Campomar Sociedad Limitada v Nike International Ltd [2000] HCA 12; (2000)
202 CLR 45 at [98]).
- The
former s 52 of the Trade Practices Act (as is the case with its
counterparts in later legislation) is contravened even if the maker of the
representation acted honestly
and reasonably and without intent to mislead or
deceive and without negligence (Parkdale Custom Built Furniture at 197).
(The position is obviously different in contraventions where dishonesty is
required to be proved - such as s 1041G of the Corporations Act - or
where knowledge of the falsity or misleading nature of the conduct is required -
such as s 12GB of the ASIC Act.)
- As
adverted to above, the conduct is to be considered in the light of the
surrounding facts and circumstances and looking at the relevant
course of
conduct as a whole (Butcher v Lachlan Elder Realty at [39], [40],
[109]), including the whole of the content of relevant documents and any other
statements made that might impact on
the relevant representations or conduct
(Tobacco Institute of Australia Limited v Australian Federation of Consumer
Organisations Inc [1992] FCA 630; (1992) 38 FCR 1 at 4).
- Of
relevance to the consideration of some of the alleged misleading and deceptive
conduct in the present case is the effect of disclaimers
or qualifications on
the representations in question.
- The
effect of a disclaimer to a claim of misleading and deceptive conduct was
considered in Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661. There, Mason A-CJ,
Wilson, Deane and Dawson JJ said at 666:
That does not, however, mean that a corporation which purports to do no more
than pass on information supplied by another must nevertheless
be engaging in
misleading or deceptive conduct if the information turns out ot be false. If the
circumstances are such as to make
it apparent that the corporation is not the
source of the information and that it expressly or impliedly disclaims any
belief in
its truth or falsity, merely passing it on for what it is worth, we
very much doubt that the corporation can properly be said to
be itself engaging
in conduct which is misleading or deceptive.
- In
The Australian Consumer Law (S G Coroneo, 2011), the author comments on
the so-called "conduit defence" at [4.40] that it:
... arises in the context of principal-agency relationships, where the agent
relays information imparted by the principal and seeks
to immunise himself or
herself by means of a contemporaneous disclaimer. It also arises in situations
where an information provider,
such as a newspaper or magazine publishes an
advertisement on behalf of a supplier of goods or services that may contain
misleading
representations, and that the newspaper does not express its own
views as to the truth or falsity of those representations.
- Insofar
as the disclaimer is contained in an exclusion clause (which would be relevant
to statements contained in the scheme agreements),
there is authority that it
cannot break the nexus between pre-contractual misleading conduct and the
contract induced by that conduct
(Henjo Investments Pty Ltd v Collins
Marrickville Pty Ltd [1988] FCA 40; (1988) 39 FCR 546; Benlist Pty Ltd v Olivetti
Australia Pty Ltd (1990) ATPR 41-043; CH Real Estate Pty Ltd v
Jainran Pty Ltd [2010] NSWCA 37).
- Insofar
as the disclaimer is made contemporaneously (ie during pre-contractual
negotiations), then whether it precludes liability
arising for misleading or
deceptive conduct otherwise in the course of those negotiations will depend on
whether the effect of the
disclaimer erased whatever was otherwise misleading
(Butcher v Lachlan Elder Realty).
- In
Butcher v Lachlan Elder Realty, there was found to be no misleading and
deceptive conduct in relation to information contained in a survey diagram
contained in
an auction brochure, in circumstances where the brochure contained
the following statement:
All information contained herein is gathered from sources we believe to be
reliable. However, we cannot guarantee its accuracy and
interested persons
should rely on their inquiries.
- That
disclaimer clause had the effect of erasing what would otherwise have been
misleading not by any independent force of its own
but by modifying the conduct
( Butcher v Lachlan Elder Realty at [152]). McHugh J said, from
[151]:
As I have indicated, the intent of the corporation is not relevant for the
purposes of s 52. As a result, a disclaimer as to the truth
or otherwise of a
representation does not, of itself, absolve the corporation from liability.
This is not to say that a disclaimer should be ignored for the purposes of
assessing whether a contravention of s 52 has occurred.
As Miller notes in
Miller's Annotated Trade Practices Act (150), the conduct must be
considered as a whole. This requires consideration of whether the conduct in
question, including any representations
and the disclaimer, is misleading or
deceptive or is likely to mislead or deceive. If a disclaimer clause has the
effect of erasing
whatever is misleading in the conduct, the clause will be
effective, not by any independent force of its own, but by actually modifying
the conduct. However, a formal disclaimer would have this effect only in rare
cases. Thus, in Benlist Pty Ltd v Olivetti Australia Pty Ltd (151),
Burchett J said:
"It has been held on many occasions that the perpetrator of misleading
conduct cannot, by resorting to [a disclaimer] clause, evade
the operation of
the [Act]. Of course, if the clause actually has the effect [of] erasing
whatever is misleading in the conduct, the clause will be effective,
not by any
independent force of its own, but by actually modifying the conduct.
However, I should think it would only be in rare cases that a formal disclaimer
would have that effect. (Emphasis added.)"
The case law suggests that disclaimers that appear in small print at the foot
of marketing brochures are rarely effective to prevent
conduct from being found
to be misleading or deceptive or likely to mislead or deceive. If misleading
conduct has induced a contract,
that fact cannot be negated by the mere
circumstance that there is a statement to the contrary.
...the agent did not engage in conduct towards the purchasers which was
misleading. Whatever representation the vendor made to the
purchases by
authorising the agent to issue the brochure, it was not made by the agent to the
purchasers. The agents did no more
than communicating what the vendor was
representing, without adopting it or endorsing it. That conclusion flows from
the nature of
the parties, the character of the transaction contemplated, and
the contents of the brochure itself.
- The
relevant factors that the High Court took into account in reaching the
conclusion in Butcher v Lachlan Realty included that: suburban real
estate agents do not hold themselves out as possessing research skills or means
of independently verifying
title details; suburban real estate agents do not
commonly or habitually act as agents in the sense of creating legal
relationships
on behalf of the vendor; matters of title to land can be complex
and outside the realm of skills a suburban real estate agent holds
out as
possessing; the size of the transaction; that the purchasers had engaged
appropriate professional advisers to assist in relation
to the transaction and
their plans to renovate the property; that the diagram was recognisable as a
survey document; and that the
circumstances negated any suggestion that the
agent had adopted the surveyor's diagram as its own, or that it had verified its
accuracy
- thus indicating the overall context in which the misleading or other
nature of a communication must be assessed.
- In
Butcher v Lachlan Elder Realty, their Honours noted that although the
disclaimers in that case were in small print, only persons of "very poor
eyesight would find
them illegible" (at [49]) and went on to say, as to the
import of the disclaimers (at [50]):
If the "conduct" of the agent is what a reasonable person in the position of
the purchasers, taking into account what they knew, would
make of the agent's
behaviour, reasonable purchasers would have read the whole document, given its
importance, its brevity, and their
use of it as the source of instructions to
professional advisers. There are circumstances in which the "conduct" of the
agent would depend on different tests. For example, those tests might
turn on what purchasers actually made of the agent's behaviour, whether they
were acting reasonably
or not, and they might also call for consideration of how
the agent perceived the purchasers. Tests of that latter kind might be
appropriate for plaintiff of limited experience acting without professional
advice in rushed circumstances. (my emphasis)
- The
application of that approach in other contexts can be seen in Downey &
Anor v Carlson Hotels Asia Pacific P/L [2005] QCA 199; Dalton v Lawson
Hills Estate Pty Ltd [2005] FCAFC 169; and Orix Australia Corporations
Limited v Moody Kiddell & Partners Pty Limited [2006] NSWCA 257.
- In
Downey, Keane JA (with whom Williams JA and Atkinson J agreed)
acknowledged at [83] that "disclaimers can be effective ...if the effect
of the
disclaimer is make clear something that, if allowed to remain vague or
ambiguous, could have led a person into error" and
said:
It is apparent that if a disclaimer is to function in this way it must be
worded unambiguously, feature prominently and it must be
communicated to the
reader that the disclaimer is relevant to the information it is seeking to
qualify.
- There,
his Honour rejected the submissions that the disclaimers operated to 'erase' the
misleading effect of the representations made
concerning the appellant's views
as to the project's success on the basis that, considering all of the marketing
material as a whole
(and taking into account the effect of each disclaimer
vis-à-vis each representation), the disclaimers in question did not
specifically disclaim the relevant representations and that disclaimers which
were contained in separate brochures (although sometimes
provided together in
the same marketing package) did not suffice to 'erase' the effect of the
misleading representations contained
in another brochure.
- The
Full Federal Court considered the effect of a contemporaneous disclaimer in
Dalton v Lawson Hill Estate noting that the representation in that case
was as to something that was readily ascertainable to the purchaser. (Their
Honours took
into account that the agent did not have expertise regarding the
information in question and that the purchaser was in the same position
as the
agent to determine the actual acreage.)
- In
Orix, Ipp JA (with whom Spigelman CJ and Basten JA agreed) emphasised at
[70] that:
The majority in Butcher make it clear that, while the existence of a
disclaimer is relevant to the 'conduct', it is not essential to a finding that
an agent
did no more than communicate what others were representing. The
characterisation of the agent's conduct depends on a consideration
of all the
relevant circumstances and the existence or otherwise of a disclaimer is not
necessarily determinative.
- Where
the persons to whom the representation is directed in a general sense are
members of a class, it may be necessary to isolate
by some criterion a
representative member of that class (see Campomar Sociedad Limitada at
[103]). Although the test is objective, the attributes of the target audience
are relevant. Once the relevant section (or sections)
of the public (by
reference to whom the question of whether conduct is or is likely to be
misleading or deceptive falls to be tested)
is identified, then it has been
noted that the matter is to be considered by reference to all who come within
it, including the astute
and the gullible, the intelligent and the not so
intelligent, the well educated as well as the poorly educated and men and women
of various ages pursuing a variety of vocations (Taco Bell; National
Exchange Pty Ltd v ASIC (2004) 49 ACSR 369; [2004] FCA 427 at
[18]).
- The
High Court has recently considered the operation of s 1041H of the
Corporations Act in Forrest v Australian Securities and Investments
Commission [2012] HCA 39. Relevantly, for present purposes, their Honours
emphasised the need to identify the intended audience for the impugned
statements
and the message or messages conveyed to that audience. The plurality
said at [36]:
...The intended audience can be sufficiently identified as investors (both
present and possible future investors) and, perhaps, as
some wider section of
the commercial or business community
and considered it not necessary to identify the audience more precisely.
Later, at [48] their Honours emphasised the need to bear
firmly in mind that the
impugned statements were made to the business and commercial community.
- Heydon
J, in a separate judgment, also noted that what the statement in question should
be taken to have said depended on what the
audience must have understood it to
have said. His Honour noted that:
Fortescue's remarks were not directed to the public as a whole. They were
directed to a section of the public. It comprised superannuation
funds, other
large institutions, other wealthy investors, stock brokers and other financial
advisers, specialised financial journalists,
as well as smaller investors
reliant on advice. This was not a naïve audience. It was not an
audience in whom the adjectives "Western Australian", "mining" and "Chinese"
would excite a sudden certainty about
the imminent creation of wealth beyond the
dreams of avarice. ... The audience was sufficiently tough, shrewd and
sceptical to know something of the difficulties of "forcing" a builder to
build and finance anything... (my emphasis)
- The
emphasis on what the audience should be taken to have understood by impugned
statements or what message should be taken to have
been conveyed to a particular
audience thereby is of particular significance when considering the
representations in the present
case.
- The
audience for the statements in the present case (a number of whom gave evidence
and were not challenged on that evidence) was
comprised of people who heard by
word of mouth about the FTC financial subscriptions (often because they were
friends or relatives
of the FTC executives themselves). They cannot on any
stretch of the imagination be described as sceptical or they surely would not
have accepted at face value a number of the extraordinary statements being made
to them (as to the banks or the government wanting
to deprive them of
opportunities to make a greater return on their investments, or as to the
amazing rates of return said to have
been achieved by various funds); they
surely would have been alerted to the unsophisticated nature of the operation by
reason of
the typographical errors in the documents provided to them or the
inconsistent way in which the documents were completed.
- Some
mortgaged their homes to invest in the products; some used their inheritances.
Those who gave evidence were (and I say this with
no criticism to them) not
specialised financial advisers or journalists nor were they wealthy investors.
They were, I would surmise,
the very people in whom representations as to rates
of return of the kind Mr Hobbs mentioned would excite sudden certainty as to
the
imminent creation of wealth beyond the "dreams of avarice".
- And,
tellingly, that is how Mr Hobbs understood his audience to be. At the DVD
seminar, he made it clear that he understood that fear
and greed were motivating
factors for the investors to whom FTC executives would be
speaking:
Now, it's important though that the problem that you have there is - and take
any one of that style of wholesale fund, people will
usually want - all they
see is the return, you know. They say "8 per cent a month or something,
that's me," you know. Try to get them to spread their money around and not put
it all
in one basket, because the two things that drive investment is fear and
greed. That's the two things that drive investment - fear
and greed.
- I
accept that Mr Hobbs was there exhorting the attendees to encourage people to
spread their portfolios, but what he clearly recognised
was that once rates of
return of the ilk he was suggesting were raised, then it was highly likely that
this would be what motivated
investors and little or nothing
else.
- Mr
Hobbs knew not only that the investors were not sophisticated investors (since
he made much of the fact that he was making available
investments for them that
otherwise they would not be able to access) but also (and this is relevant when
considering what Mr Hobbs
must have expected or understood they would pass on to
potential investors) that the relevant scheme administrators were not
sophisticated
financial advisers. Mr Hobbs seems to have regarded FTC executives
as no more than salespersons (indeed, he appointed Mr Koutsoukos
on the basis of
his salesmanship) who needed to be honest and good at book-keeping. I would
infer from the following statement that
he made at the DVD Seminar that he also
considered them likely to be similarly motivated by greed:
I can tell you commission-wise for introducers to that the most I've ever
paid an introducer, which is paid directly from the company by the way, was
228,000 for a days work. I went and sat down with the accountants for this
introducer and came out at the end of the time and handed him the forms and he
just
earned 228,000, which is not a bad days work. (my emphasis).
thus making it plausible that Mr Hobbs made extravagant promises to them of
investment in their funds or, in Mr Halley's words, dangled
the carrot of
significant investments (in the commercial bond transaction instance and
elsewhere) in order to maintain their loyalty
to him.
- The
statements made by Mr Hobbs and FTC executives and introducers to potential
investors and scheme members must be seen therefore
in the context of an
unsophisticated and relatively naïve audience (an audience likely to be
gullible and likely to be swayed
by promises of access to high rates of return
not otherwise available), such that any disclaimer or qualification (to be
effective)
would surely need to have been at least as prominent as that
suggested in Thornton v Shoe Lane Parking (1970) EWCA Civ 2; [1971] All ER 686 by Lord
Denning MR (namely, "printed in red ink with a red hand pointing to it"; in the
modern context perhaps complete with the
literary equivalent of flashing
lights).
- This
is precisely the kind of investment that one would think would not prudently
have been entered into without investors obtaining
independent financial advice:
it was solicited in a manner kept secret from regulatory overview and the
promised returns were wildly
in excess of rates of return for conventional
investments of the kind to which the investors would have been accustomed. The
provision
and signing of documents in some cases on the spot (and in some cases
only after the payment of funds - where a temporary contract
was first entered)
cannot possibly have permitted any real opportunity for independent financial or
other advice to be obtained.
This difficulty would seem to me to have been
particularly acute for a number of the investors in the Li/Collard schemes (such
as
Ms Xu), namely those who were unable to read much or any English and who
appear to have signed documents with no formal translation
whatsoever, and
reliant on whatever Ms Li and/or Ms Wu (each of whom had a clear conflict of
interest in relation to the investments)
said as to the operation of the scheme
and the effect of the documents that were being signed.
- I
note that ASIC has invoked both s 769C of the Corporations Act and s
12BB(2) of the ASIC Act in relation to any representations made as to
future matters (which would include representations at least as to the rates of
return
and the representations as to the $200million commercial bond and
Barclaywest transactions but, on one view, would also extend to
the
representations as to the type of investment in which the funds would be
placed).
- Section
12BB(2) (which applies only to the maker of the statement and not to someone
responsible as principal for another's statement or knowingly
involved in a
contravention of the relevant section) provides that a representation is deemed
to be misleading if made with respect
to any future matter and the person did
not have reasonable grounds for making it at the time (in the same fashion in
which the former
s 51A of the Trade Practices Act operated), namely that
the section reverses the evidentiary but not the legal (or persuasive onus)
(McGrath v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2; (2008) 165 FCR 230, at
[191]-[192]) and see Forrest per Heydon J [104] fn 46). Thus, if evidence
is adduced by the representor that tends to establish (or permits the inference)
that
there were reasonable grounds for making the representation, the deeming
provision will cease to operate.
- By
contrast, s 769C of the Corporations Act, which provides that a
representation as to any future matter is to be taken to be misleading unless a
representor had reasonable
grounds for making the representation, does not
contain any such deeming provision (ASIC v Cyclone Magnetic Engines Inc
[2009] QSC 58; (2009) 71 ACSR 1 at [78]).
Directors' duties
- Contraventions
of ss 180, 181 and 182 of the Corporations Act are alleged against Mr Hobbs and
various of the scheme administrators who it is alleged were de facto directors
or officers of the
respective corporate administrators of the schemes in
question. The breaches of ss 180 and 181 are predicated, in essence, on the
financial services contraventions by the companies in question.
- In
Diakyne Pty Ltd v Ralph [2009] FCA 721; (2009) 72 ACSR 450 at [84]; [124]-[127], Jagot J
outlined the principles applicable to the statutory provisions alleged to have
been breached in this case in
relation to directors' and officers' duties,
having regard to the observations in Re HIH Insurance Ltd (in prov liq) and
HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and
Investments
Commission v Adler (2002) 41 ACSR 72 ; [2002] NSWSC 171 at
[372], [458] and [735] (Adler); Australian Securities and Investments
Commission v Macdonald (No 11) (2009) 256 ALR 199 ; 71 ACSR 368 ; [2009]
NSWSC 287 at [236]- [257] and Vrisakis v Australian Securities Commission
(1993) 9 WAR 395 ; 11 ACSR 162. Her Honour observed from those decisions
that:
(1)Sections 180, 181 and 182 involve duties owed to the corporation.
(2)The requirement of reasonable care and diligence is objective in the sense
that it involves asking what an ordinary person of ordinary
prudence, with the
knowledge and experience of the director, might be expected to have done in all
of the circumstances at the relevant
time of the conduct if he or she were
acting on his or her own behalf.
(3)Putting the test another way, was the director cognisant of circumstances
of "such a character, so plain, so manifest, and so simple
of appreciation, that
no men with any ordinary degree of prudence, acting on their own behalf, would
have entered into such a transaction
as they entered into": Vrisakis at
WAR 450; ACSR 212 citing Overend & Gurney Co v Gibb & Darby
(1872) LR5HL 480 at 486-7 (Overend).
(4)The circumstances of the corporation at the time are thus elevant to the
content of the duty to act with reasonable care and diligence.
(5)Directors are not required to exhibit a greater degree of skill than may
reasonably be expected from persons of commensurate knowledge
and experience in
the circumstances and are entitled to rely on others except where an exercise of
ordinary care would deny reliance.
(6)There can be no failure to exercise reasonable care and diligence unless
at the relevant time harm to the interests of the corporation
is reasonably
foreseeable by reason of the conduct and, to determine breach, the foreseeable
risk of harm must be balanced against
the potential benefits which might be
expected to accrue to the corporation.
(7)Where the matter involves a potential conflict between the director's
duties to the corporation and a personal interest, "the duty
of care and
diligence falls to be exercised in a context requiring special vigilance":
Adler at [372].
- ASIC
notes that the duties owed by directors to companies include a duty not to
authorise or permit a company to commit contraventions
under the Corporations
Act and points out that a company's interests may be put at risk by actual
or potential exposure of the company to civil penalties or
other liability under
the Corporations Act. It is submitted that it is a breach of a relevant
duty for a director to embark on or authorise a course of conduct which
attracted
the risk of such exposure, at least to the extent that the risk was
clear and any countervailing benefits insignificant.
- Reliance
is placed in this regard on Australian Securities and Investments Commission
v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373 at [104] per Brereton J; ASIC v Elm
Financial Services Pty Ltd [2005] NSWSC 1020; (2005) 55 ACSR 411 at [5]- [7] (per Barrett J as
his Honour then was); and ASIC v Elm Financial Services Pty Ltd [2005] NSWSC 1065; (2005) 55
ACSR 544 at [3]- [4].
- In
Maxwell, Brereton J said (from [102]), when considering the allegation of
breach of directors duties in ss 180(1), 181(1) and 182(2) of the
Corporations Act by reference to the director's conduct in permitting,
allowing and participating in the various contraventions committed by those
companies (including contraventions of s 911A and 12DA, as well as
contraventions of other sections relating to the publication of misleading
information:
The constitution of the corporation, and concomitantly the identity of those
to whom the duty is owed, is of importance because the
duties referred to in ss
180, 181 and 182 are not duties owed in the abstract, but duties owed to the
corporation. As Clarke and Sheller JJA observed in Daniels v Anderson at
NSWLR 504; FLR 309; ACSR 665, the duties imposed by former s 232 (the
predecessor of s 180) reflected the concept of negligence at general law, in
that a director owes to the company a duty to take reasonable care in the
performance of the office. ...
One consequence of this, of present significance, is that where there is an
identity of interest between the directors and the shareholders,
so that in
effect the directors are the shareholders, the requirement to prevent
self-interested dealing, constrain management and
strengthen shareholder control
- which is fundamental purpose and rationale of these duties - is much less
acute. That is a circumstance
which can impact considerably on the content of
the duties. The significance of a correspondence between the identity of the
directors
and the shareholders is illustrated by the circumstance that, at
general law, a fully informed general meeting can prospectively
or
retrospectively ratify the actions of directors of the company, though they
involve negligence, breach of fiduciary duty or the
exercise of the directors'
powers for an improper purpose: North-West Transportation Co Ltd v Beatty
(1887) 12 App Cas 589; Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583 ; 9 ALJ 419;
Hogg v Cramphorn [1967] Ch 254 at 265-6 ; [1966] 3 All ER 420 at 426
(Buckley LJ); Regal (Hastings) Ltd v Gulliver [1942] UKHL 1; [1967] 2 AC 134; [1942] 1
All ER 378; Winthrop Investments Ltd v Winns Ltd [1975] ...
- At
[104], his Honour recognised that:
There are cases in which it will be a contravention of their duties, owed
to the company, for directors to authorise or permit the
company to commit
contraventions of provisions of the Corporations Act. Relevant jeopardy to the
interests of the company may be found in the actual or potential exposure of the
company to civil penalties
or other liability under the Act, and it may no doubt
be a breach of a relevant duty for a director to embark on or authorise a course
which attracts the risk of that exposure, at least if the risk is clear and the
countervailing potential benefits insignificant. But it is a mistake to
think that ss 180, 181 and 182 are concerned with any general obligation owed by
directors at large to conduct
the affairs of the company in accordance with law
generally or the Corporations Act in particular; they are not. They are
concerned with duties owed to the company.
... [In my opinion, if a contravention of s 180(1) is to be established, it
must be founded on jeopardy to the interests of the corporation, and not to
protection of the interests
of potential investors (though the interests of
investors may be relevant to the interests of the corporation, as potential
creditors).
- Section
180 provides:
180Care and diligence - civil obligation only
Care and diligence - directors and other officers
(1)A director or other officer of a corporation must exercise their powers
and discharge their duties with the degree of care and
diligence that a
reasonable person would exercise if they:
(a)were a director or officer of a corporation in the corporation's
circumstances; and
(b)occupied the office held by, and had the same responsibilities within the
corporation as, the director or officer.
Business judgment rule
(2)A director or other officer of a corporation who makes a business judgment
is taken to meet the requirements of subsection (1),
and their equivalent duties
at common law and in equity, in respect of the judgment if they:
(a)make the judgment in good faith for a proper purpose; and
(b)do not have a material personal interest in the subject matter of the
judgment; and
(c)inform themselves about the subject matter of the judgment to the extent
they reasonably believe to be appropriate; and
(d)rationally believe that the judgment is in the best interests of the
corporation.
The director's or officer's belief that the judgment is in the best interests
of the corporation is a rational one unless the belief
is one that no reasonable
person in their position would hold.
Note: This subsection only operates in relation to duties under this section
and their equivalent duties at common law or in equity
(including the duty of
care that arises under the common law principles governing liability for
negligence)--it does not operate
in relation to duties under any other provision
of this Act or under any other laws.
(3)In this section:
"business judgment" means any decision to take or not take
action in respect of a matter relevant to the business operations of the
corporation.
- Mr
Halley notes that the degree of negligence necessary to constitute a breach of s
180 is no higher than that which would support
a claim of professional
negligence on the part of the company director or officer at common law
(referring to Vines v ASIC [2007] NSWCA 75; (2007) 73 NSWLR 451; [NSWCA] 75 at [63],
[142]-[152], [587], [779] and [875]; and ASIC v Vines [2005] NSWSC 738; (2005) 55
ACSR 617; [NSWSC] 738 at [1070]ff per Austin J).
- It
is noted that an act or omission is capable of constituting failure to exercise
care and diligence under the section, if, at the
relevant time, it was
reasonably foreseeable that the act or omission might cause harm to the
interests of the company and that the
relevant question is what an ordinary
person, with the knowledge and experience of the defendant, might be expected to
have done
in the circumstances if he or she was acting on their own behalf
(ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 at [372] per Santow J (as
his Honour then was), taking into account the purpose of the officer's actions.
It is submitted that the requirements
of the duty are particularly high in
circumstances of known reliance and vulnerability of others (referring to
ASIC v Vines [2005] NSWSC 738; (2005) 55 ACSR 617; [NSWSC] 738 at [1085].
- ASIC
notes, in particular, that breaches of s 180 have been found where a director
has failed to ensure that a company was properly
licensed to carry on a
financial services business and that all its staff were adequately qualified to
provide financial advice (ASIC v PFS Business Development Group Pty Ltd
(2006) 57 ACSR 553; [2006] VSC 192, where his Honour considered the
management of the group to be a "complete shambles" and that unsuitable and
unqualified persons
had been employed to act as "introducers" to potential
clients); has allowed a company to enter into transactions that produce no
benefit to the company (ASIC v Adler); and has procured payments by a
company to a related entity of the director of an amount that the director
should have appreciated
was a debatable liability of the company (Diakyne Pty
Ltd v Ralph).
- Section
181 of the Corporations Act provides that:
181Good faith--civil obligations
Good faith - directors and other officers
(1)A director or other officer of a corporation must exercise their powers
and discharge their duties:
(a)in good faith in the best interests of the corporation; and
(b)for a proper purpose.
(2)A person who is involved in a contravention of subsection (1) contravenes
this subsection.
- It
is noted that the test as to whether a director or officer has contravened
s181(1) is an objective test, having regard to what a comparable person, having
the same knowledge and skills as the relevant director or
officer, would
reasonably have done in the circumstances (Bell Group chapter 20 per Owen
J) and that the duty to exercise powers for a proper purpose and the obligation
to act in good faith are separate
duties (Bell Group at
[4456]).
- It
is well recognised that the best interests of the corporation refer to the best
interests of its corporators as a general body
(Greenhalgh v Arderne Cinemas
Ltd [1951] Ch 286 at 291 per Evershed MR); that when considering whether a
power has been exercised by a director for a proper purpose, it is necessary
to
consider the nature of the power being exercised and the substantial purpose for
which the power was exercised (Howard Smith Ltd v Ampol Petroleum Ltd
[1974] UKPC 3; [1974] AC 821); and that directors must use their powers for their intended
purpose and not for a collateral purpose (Whitehouse v Carlton Hotel Pty Ltd
[1987] HCA 11; (1987) 162 CLR 285).
- It
is noted that where the director's conduct is attributable to a range of
different purposes, the "but for" test is ordinarily used
to determine what the
relevant purpose was (Mills v Mills [1938] HCA 4; (1938) 60 CLR 150 at 186 (Dixon J);
Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 at 294 (Mason,
Deane and Dawson JJ), consideration being given to whether the director would
still have acted in the same manner
had the collateral purpose not
existed.
- Section
182 of the Corporations Act provides:
182 Use of position--civil obligations
Use of position--directors, other officers and employees
(1)A director, secretary, other officer or employee of a corporation must not
improperly use their position to:
(a)gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.
(2)A person who is involved in a contravention of subsection (1) contravenes
this subsection.
- It
is noted that the requirement of acting "improperly" does not necessarily equate
to dishonest conduct (Kwok v The Queen [2007] NSWCCA 281; (2007) 64 ACSR 307 at [80] (per
Santow JA) and that a director of a company may act improperly with no intention
of acting dishonestly or otherwise than in
the best interests of the company as
a whole (Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 at 640).
- It
is further noted that the improper conduct may consist in an abuse of the power
or authority which the position of director confers
and that where there is such
an abuse for the purpose of gaining an advantage for himself or another person
or causing detriment
to the corporation, both elements of s 182 are established
(R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 at 512 per Brennan, Deane, Toohey and
Gaudron JJ).
- The
test of impropriety is objective and depends not on the consciousness of
impropriety but breach of the standard of conduct expected
of a person in the
position of the alleged offender by reasonable persons with knowledge of the
duties, powers and authority of the
position and the circumstances of the case
(Byrnes at 517). In Byrnes, a fiduciary who exercised an authority
or power for the personal benefit or gain of the fiduciary (or a third party)
without the
beneficiary's consent was said to act improperly.
- It
is said that impropriety would consist in a breach of the standards of conduct
that would be expected of a person in the director's
position by reasonable
persons with knowledge of the duties, powers and authority of the position as
direction and the circumstances
of the case, including the commercial context,
such standards being expressed according to objective criteria (Doyle v ASIC
[2005] HCA 78; (2005) 227 CLR 18 at [35]; see also Forkserve Pty Ltd v Jack (2000)
19 ACLR 299 at [120] (Santow J as his Honour then was), referring to Residues
Treatment & Trading Co Ltd v Southern Resources Ltd [1989] SASC 1397; (1989) 15 ACLR 416,
Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 3
ACSR 207).
- In
Doyle v Australian Securities and Investments Commission [2005] HCA 78; (2005) 227 CLR
18 at [35], Gleeson CJ, Gummow, Kirby, Hayne and Callinan JJ said
:
... Impropriety on the part of Mr Doyle would consist in a breach of the
standards of conduct that would be expected of a person in
his position by
reasonable persons with knowledge of the duties, powers and authority of his
position as director, and the circumstances
of the case, including the
commercial context. Such standards, expressed according to objective criteria,
are ultimately stated,
as necessary, by the courts.
- Particular
reference is made by ASIC to Grove v Flavel (1986) 43 SASR 410 where the
Court held (at 662) that "improper" is not a term of art but is to be understood
in its commercial context to refer to
conduct which is inconsistent with the
proper discharge of the duties, obligations and responsibilities of the officer
concerned.
It is further noted that a director may breach the section even if
the purpose of gaining an advantage by the director is not achieved
(Forkserve Pty Ltd v Jack (2000) 19 ACLR 299 at [119] (Santow J),
referring to Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 [120].
Breach of fiduciary duties
- Mason,
Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd
[1985] HCA 49; (1985) 157 CLR 1 (at 11-12) noted that:
A fiduciary relationship can arise and fiduciary duties can exist between
parties who have not reached, and who may never reach, agreement
upon the
consensual terms which are to govern the arrangement between them... Indeed, in
such circumstances, the mutual confidence
and trust which underlie most
consensual fiduciary relationships are likely to be more readily apparent than
in the case where mutual
rights and obligations have been expressly defined in
some formal agreement. Likewise, the relationship between prospective partners
or participants in a proposed partnership to carry out a single joint
undertaking or endeavour will ordinarily be fiduciary if the
prospective
partners have reached an informal arrangement to assume such a relationship and
have proceeded to take steps involved
in its establishment or
implementation.
- Once
a fiduciary relationship exists, the duties owed by the fiduciary are
proscriptive in nature (Breen v Williams per Gaudron and McHugh JJ at
113; approved in Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001)
207 CLR 165 at [74]; and see the plurality judgment in Youyang v Minter
Ellison at [41]): namely, not to put himself or herself in a position of
conflict between duty and interest (Birtchnell v Equity Trustees, Executors
and Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 per Dixon J at 408) and not to withhold
any opportunity of advantage or use for his or her own exclusive benefit,
information, knowledge
or resources (Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178
at 199 per Deane J). In Chan, Deane J said:
[A] person who is under a fiduciary obligation must account to the person to
whom the obligation is owed for any benefit or gain (i)
which has been obtained
or received in circumstances where a conflict or significant possibility of
conflict existed between his
fiduciary duty and his personal interest... or (ii)
which was obtained or received by use or by reason of his fiduciary position
or
of opportunity or knowledge resulting from it. Any such benefit or gain is held
by the fiduciary as constructive trustee.
- The
distinguishing characteristic of a fiduciary relationship is that its essence,
or purpose, is to serve exclusively the interests
of a person or group of
persons; it being a relationship in which the parties are not each free to
pursue their own separate interests
(Meagher, Gummow & Lehane's Equity
Doctrines & Remedies, 4th ed (2002), Meagher, Heydon & Leeming, at
[5-005]). However, the relationship may be one in which a fiduciary obligation
is
not owed as to all of the tasks or areas of activity undertaken in the course
of the relationship (New Zealand Netherlands Society "Oranje" Incv Kuys
[1973] 2 All ER 1222 at 1225-1226; Blythe v Northwood [2005] NSWCA
221 at [211]; Meagher, Gummow & Lehane, 4th ed, at
[5-010]).
- In
"The Fiduciary Principle" (Equity Fiduciaries and Trusts, TG Youdan (ed,
LawBook Co (1989) at pp46-47), Professor Finn, as his Honour then was, said that
what must be shown:
... is that the actual circumstances of a relationship are such that one
party is entitled to expect that the other will act in his
interests in and for
the purposes of the relationship. Ascendancy, influence, vulnerability, trust,
confidence or dependence doubtless
will be of importance in making this out, but
they will be important only to the extent that they evidence a relationship
suggesting
that entitlement. The critical matter in the end is the role that the
alleged fiduciary has, or should be taken to have in the relationship.
It must
so implicate that party in the other's affairs or so align him with the
protection or advancement of that other's interest
that foundation exists for
the 'fiduciary expectation'.
- While
a relationship of trust and confidence in the putative fiduciary may be
indicative of a fiduciary relationship (Breen v Williams (1996) 186 CLR
71 at 82), the actual reposing of trust and confidence is not a necessary
feature of all fiduciary relationships (see
Dawson and Toohey JJ in Breen v
Williams at 92-93). Similarly, the fact that a person is able to exercise a
power or discretion, to which another person is vulnerable and
whose interests
may be affected, will not necessarily indicate the existence of a fiduciary
relationship (Meagher, Gummow & Lehane, 4th ed, at [5-005]). It is
submitted by Mr Halley that what is relevant is the ability (or otherwise) of
the person holding the power
or discretion to exercise it against the interests
of the other.
- Mr
Halley notes that, pursuant to s 601FC(2) of the Corporations Act, where
a scheme is registered the responsible entity holds scheme property on trust for
scheme members and the responsible entity
owes fiduciary duties under the
general law as well as specific statutory duties (s 601FC). Reference is made to
the cases that have recognised that the responsible entity of a scheme owes
fiduciary duties to the members
(Brisconnections Management Co Ltd v
Australian Style Investments Pty Ltd (2009) 23 VR 253; [2009] VSC 128 at
[67]; Stacks Managed Investments Ltd (2005) 219 ALR 532; [2005] NSWSC 753
at [56]).
- It
is also noted that fiduciary duties can attach to those that operate a scheme
which ought to have been, but was not, registered
(ASIC v ABC Fund Managers
Ltd (No 2) (2001) 39 ACSR 443; [2001] VSC 383 at [124] per Warren J as her
Honour then was).
- In
Tonto, Allsop P considered at [177] the circumstances in which an agent
may or may not owe fiduciary duties:
... the word "agent" has a potentially wide and varying meaning in life and
business and that, on some occasions, the business description
will be given to
someone who is not a fiduciary. See also Hospital Products Ltd v United
States Surgical Corporation [1984] HCA 64 ; 156 CLR 41 at 71-72 (per Gibbs
CJ), cf at 96-97 (per Mason J), Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46 at 127,
F E Dowrick "The Relationship of Principal and Agent" (1954) 17 Modern
Law Review 24 and R P Meagher, J D Heydon and M J Leeming (eds) Meagher,
Gummow and Lehane's Equity: Doctrines and Remedies (4th Ed, LexisNexis,
2002) at 191-192 [5-195]. It is sufficient to recognise that the essential
characteristic is that one party
(A) acts on the other's (P's) behalf, and that
this will generally be in circumstances of a requirement or duty not to act
otherwise
than in the interests of P in the performance of the consensual
arrangement. Bowstead and Reynolds on Agency , the Restatement and
Seavey op cit at 863 include in the conception of agency the
characteristic of fiduciary duty. The duty will, of course, conform with the
extent and scope of the agency and thus be of potentially varied content,
recognising that context (in particular, perhaps, a market
or commercial
context) may attenuate the rigour or content of the fiduciary duty:
Birtchnell v The Equity Trustees, Executors and Agency Co Ltd
[1929] HCA 24 ; 42 CLR 384 at 408; In re Goldcorp Exchange Ltd [1995] 1
AC 74 at 98; Meagher, Gummow and Lehane (4th Ed) at 161-162 [5-010]);
Finn J in South Sydney v News at [136], and in his text Fiduciary
Obligations (LawBook Co, 1977) at 201. The necessary good faith implicit in
a fiduciary character in the relationship reflects the character
of identity or
representation that the relationship essentially carries.
- In
Australian Securities and Investments Commission v AS Nominees Ltd [1995] FCA 1663; (1995)
62 FCR 504, Finn J approached the question as to whether there was a fiduciary
relationship by reference to what the putative fiduciary had
in fact done and
held that there was a fiduciary relationship with the investor-beneficiaries
noting that:
Even if it is the case that Securities can properly be said as a matter of
legal form to be the manager for, or the agent of, the
trustees (ie ASN and
Ample) in performing services for the trusts, this by no means precludes a
finding that it is, as well, in a
direct fiduciary relationship with the
beneficiaries of the trusts when providing those services: cf Powell &
Thomas v Evan Jones & Co [1905] 1 KB 11; Blair v Martin [1929]
NZLR 225.
- As
to the position of those offering financial or investment advice, in Daly v
The Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371, a broker giving advice
about investment was held to have owed a fiduciary duty to disclose information
that would have revealed
the disadvantageous nature of the investment, that duty
arising, according to Gibbs CJ, in circumstances where the broker's firm
had
held itself out as an adviser of matters of investment "when, and because, a
relationship of confidence exists between the parties".
Brennan J said at
385:
The duty of an investment adviser who is approached by a client for advice
and undertakes to give it, and who proposes to offer the
client an investment in
which the adviser has a financial interest is a heavy one.
- Here,
although Mr Hobbs disavows the giving of any investment advice, the operation of
the schemes was such as to inform potential
investors of the ability to give
them access to investment schemes that would yield a high rate of return. In
those circumstances
a duty of the kind found to have arisen in Daly (ie
not to put oneself in a position of potential conflict) is by no means
unlikely.
- ASIC
submits that the relationship of an operator of a scheme to scheme investors is
one that bears the hallmarks of a fiduciary relationship
since it gives the
scheme operator a special opportunity to exercise power or discretion to the
detriment of investors who are accordingly
vulnerable to abuse by the fiduciary
of his or her position (adopting the language used in Hospital Products Ltd v
United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [96]- [97] per Mason
J (as his Honour then was) cited with approval in Breen v Williams (1996)
186 CLR 71 at [20]) and it is one in which the scheme operator undertakes or
agrees to act for or on behalf of or in the interests
of investors in the
exercise of a power or discretion which affects the interests of investors in a
legal or practical sense. It
is submitted that a scheme operator acts in a
'representative' character in the exercise of his or her responsibility (again
adopting
the language in Hospital Products Ltd v United States Surgical
Corporation at [68] per Mason J).
Aiding and abetting
- Section
s 79 of the Corporations Act provides that a person is "involved" in a
contravention if, and only if, the person:
(a)has aided, abetted, counselled or procured the contravention; or
(b)has induced, whether by threats or promises or otherwise, the
contravention; or
(c)has been in any way, by act or omission, directly or indirectly, knowingly
concerned in, or party to, the contravention; or
(d)has conspired with others to effect the contravention.
- Mr
Halley notes that the words "aid, abet, counsel or procure" encompass is the
concept that the accessory is in some way linked in
purpose with the person
actually contravening the relevant provision, and is by his or her words or
conduct doing something to bring
about, or rendering more likely, such
contravention (referring in this regard to Giorgianni v R [1985] HCA 29; (1985)
156 CLR 473 at 492). There must be demonstrated actual involvement by the person
in the specific conduct the subject of the contravention, in
the sense of that
person being an "intentional participant" (Yorke v Lucas at
670).
- For
a person to be "knowingly concerned in" a contravention, he or she must have
"knowledge of the essential facts constituting the
contravention", though it
need not be proved that the person knew that the matters in question constituted
a contravention (Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 670; Smithers v
Beveridge (1994) 14 ACSR 197 at 201). Knowledge for this purpose means
actual and not constructive knowledge (Compaq Computer Australia Ltd v
Merry [1998] FCA 968; (1998) 157 ALR 1 at 4-5).
- With
respect to representations as to future matters, a "person involved" must have
known of the representations and been involved
in the making of them, and
have known there were no reasonable grounds for the making of those
representations (Yorke v Lucas at 670).
- Mr
Halley accepts that an individual defending an accessorial claim is not subject
to the evidentiary presumption as to the existence
of reasonable grounds created
by s 12BB of the ASIC Act (cf Quinlivan v ACCC [2004] FCAFC 175;
[2004] ATPR 42-010; ACCC v Universal Sports Challenge Pty Ltd [2002] FCA
1276; ACCC v Michigan Group Pty Ltd [2002] FCA 1439 at [341]) and
therefore that it must be demonstrated that such a person knew that the
representation was made and either knew that it was
misleading or knew that the
corporation had no reasonable grounds for making it (ACCC v Michigan Group
Pty Ltd [2002] FCA 1439 at [303]).
Matters raised by Mr Hobbs - relief from liability
- Section
1317S permits the Court to grant an applicant relief from liability for a
contravention of a civil penalty provision. It is
in similar terms to s 1318,
which empowers a Court to relieve a party in civil proceedings for negligence,
default, breach of trust
or breach of duty.
- The
two requirements that must be fulfilled are contained in s 1317S(2)(b): first,
that the person has acted honestly and, second,
that having regard to all the
circumstances of the case, the person ought fairly to be excused.
- The
words "proceedings for contravention of a civil penalty provision" are not
otherwise defined in Pt 9.4B of the Corporations Act. Ford's
Principles of Corporations Law notes at [3.410] that s 1317S is presumably
available in proceedings for a declaration of contravention, or a pecuniary
penalty order, or a disqualification order
under s 206, as well as a
compensation order under s 1317H, and any other proceedings which seek relief
for contravention of a civil penalty provision, such as proceedings under s 1324
which complain of contravention of a civil penalty provision (see also the
discussion in Australian Securities and Investments Commission v Healey (No
2) [2011] FCA 1003; (2011) 284 ALR 734, referring to Australian
Securities and Investments Commission v Plymin (No 2) [2003] VSC
230.
- The
requirement of honesty is used in a narrow sense, namely, whether or not the
person's actions were without an element of moral
turpitude. In Australian
Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714,
Gzell J stated the test for honesty (for the purposes of ss 1318 and 1317S) at
[22] as being:
...if that person's conduct is without moral turpitude in the sense that it
is without deceit or conscious impropriety, without intent
to gain improper
benefit or advantage and without carelessness or imprudence at a level that
negates the performance of the duty
in question. That conclusion may be drawn
from evidence of the person's subjective intent. But a lack of such
subjective intent will not lead the court to conclude that a person has acted
honestly if a reasonable person in
that position would regard the conduct as
exhibiting moral turpitude. (my emphasis)
- This
test was also applied in Healey (No 2) and is consistent with the narrow
interpretation of honesty given in Hall v Poolman [2007] NSWSC 1330;
ASIC v Vines; and ASIC v Edwards (No 3) [2006] NSWSC 376; (2006)
57 ACSR 209.
- Although
reasonableness is no longer an express statutory requirement to be excused from
liability, there have been decisions where
the question whether or not the
person acted reasonably was a relevant consideration when looking at "all the
circumstances of the
case" (Circle Petroleum (Qld) Pty Ltd v Greensdale
(1998) 16 ACLC 1577; Kenna & Brown Pty Ltd (in liq) v Kenna
[1999] NSWSC 533; (1999) 32 ACSR 430). Where the liability sought to be excused from is where
there has been a breach of the statutory duty of care and diligence, that
finding may affect whether or not the defendant's conduct could be said to be
reasonable, but it does not determine the question.
(In Vines, it was
said at [38]-[39] that it was relevant to the Court's discretion under s 1318 to
consider the degree to which the defendant's conduct had fallen short of
the statutory standard.)
- In
Vines, the Court of Appeal noted the following as relevant to be taken
into account when considering all the circumstances of the
case:
the presence or absence of contrition by the defendant after the event, even
though thus may also be relevant to the question of penalties
if relief is not
granted (at [51]);
the seriousness of the contravention(s), taking into account three elements:
the importance of the provision contravened in terms
of public policy; the
degree of flagrancy of the contravention; and the consequences of the
contravention in terms of harm to others
(at [52]);
whether the defendant obtained and followed competent advice before
committing the contravening act (at [57]);
Whether the conduct was in accordance with some established practice (at
[57]); and
whether the defendant was paid for undertaking the contravening conduct (at
[57]).
- With
respect to contrition as a relevant factor, in Macdonald (No 12), Gzell J
at [96]-[97] indicated that little weight was placed on the lack of contrition
(and seeking to maintain their innocence
in the fact of overwhelming evidence)
by some of the defendants seeking exoneration as it was not a case where the
defendants were
guilty of "obvious and palpable wrongdoing". (This point was not
the subject of appeal in either the subsequent Court of Appeal proceedings
(Morley v Australian Securities and Investments Commission (No 2) [2011]
NSWCA 110; (2011) 83 ACSR 620) or the High Court proceedings (Australian
Securities and Investments Commission v Hellicar [2012] HCA 17).
- Mr
Hobbs also invokes s 189 of the Corporations Act, which provides
that:
If:
(a)a director relies on information, professional or expert advice, given or
prepared by:
(i)an employee of the corporation whom the director believes on reasonable
grounds to be reliable and competent in relation to the
matters concerned;
or
(ii)a professional adviser or expert in relation to matters that the director
believes on reasonable grounds to be within the person's
professional or expert
competence; or
(iii)another director or officer in relation to matters within the director's
or officer's authority; or
(iv)a committee of directors on which the director did not serve in relation
to matters within the committee's authority; and
(b)the reliance was made:
(i)in good faith; and
(ii)after making an independent assessment of the information or advice,
having regard to the director's knowledge of the corporation
and the complexity
of the structure and operations of the corporation; and
(c)the reasonableness of the director's reliance on the information or advice
arises in proceedings brought to determine whether a
director has performed a
duty under this part [Part 2D.1 of the Corporations Act (which deals with
the duties and powers of officers)] or an equivalent general law duty;
the director's reliance on the information or advice is taken to be
reasonable unless the contrary is proved.
- In
effect, s 189 requires that, where the director relies on information,
professional or expert advice, he or she must do so in good faith and only
after
having made an independent assessment of the information or advice. The
requirement for an independent assessment imposes an
obligation upon the
director and replaces the words "proper inquiry" which were present in the
previous version of this legislative
provision.
- There
has been little judicial discussion as to the operation of s 189. In
Australian Securities and Investments Commission v Macdonald (No 11)
[2009] NSWSC 287 dismissed a defendant's invocation of s 189 on the basis that
there was no evidence that the defendant in fact relied on the
information provided by the other defendants. On appeal, in Macdonald v
Australian Securities and Investments Commission [2007] NSWCA 304),
Spigelman CJ noted that reliance as proved pursuant to s 189 might be relevant
to breaches alleged under s 180 and 181 Corporations Act.
- With
respect to the requirement for independent assessment, Ford's Principles of
Corporations Law suggests at [7.264] that:
...what the section contemplates is an analysis of the information or advice
in a way that is unbiased. The words "having regard to
the director's knowledge
of the corporations and the complexity of the structure and operations of the
corporation" would seem to
contemplate that the type of assessment may vary
according to these factors. Inevitably, some information or advice will be given
greater scrutiny by a director than other information or advice. Some knowledge
that the director possesses might require the director
to scrutinise the
information or advice more carefully than other otherwise be required...
Support for this interpretation is obtained from the judgment of the Full
Court of the Supreme Court of South Australia in Southern Resources Ltd v
Residues Treatment & Trading Co Ltd (1990) 56 SASR 455; 3 ACSR 207 at
255; 8 ACLC 1151 where the court said that when directors are required to
exercise independent judgment, this means "no money than that they, having
listened to and assessed what their colleagues have to say, must bring their own
mind to bear on the issue using such skill and judgment
as they may
possess".
Evidentiary Principles
Onus
- As
noted by Mr Halley, ASIC must prove its case on the balance of probabilities
(that being the applicable standard under s 140 of the Evidence Act for
civil matters including civil penalty proceedings in New South Wales) and, in
determining whether that onus has been discharged,
the Court must take into
account the nature of the cause of action or defence; the nature of the subject
matter of the proceedings;
and the gravity of the matters alleged (s 140(2)).
- In
that regard, it is accepted that serious allegations are made in the present
case: financial services contraventions and breaches
of civil penalty provisions
(for which serious penalties may be imposed); as well as allegations of knowing
conduct of a misleading
and deceptive nature and dishonesty (which amount to
allegations of fraud).
- Dixon
J in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 361-362
said:
Except upon criminal issues to be proved by the Prosecution it is enough that
the affirmative of an allegation is made out to the
reasonable satisfaction of
the Tribunal. But reasonable satisfaction is not a state of mind that is
obtained or established independently
of the nature or consequence of the fact
or facts to be proved. The seriousness of an allegation made, the inherent
unlikelihood
of an occurrence of a given description, or the gravity of the
consequences flowing from a particular coding are considerations which
must
affect the answer to the question, whether the issue has been proved to the
reasonable satisfaction of the tribunal. In such
matters "reasonable
satisfaction" should not be proved by inexact proofs, indefinite testimony, or
indirect inferences.
- (An
interesting commentary on the test in Briginshaw from a neurobiological
perspective can be found in "The civil standard of proof and the "test" in
Briginshaw: Is there a neurological
basis to being "comfortably satisfied"
(2012) 86 ALJR 258, H Bennett and G A Broe.)
- As
to the approach to be adopted in considering circumstantial evidence in civil
cases, in Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 at 5 the High Court
said:
Of course as far as logical consistency goes many hypotheses may be put which
the evidence does not exclude positively. But this is
a civil and not a criminal
case. We are concerned with probabilities, not with possibilities. The
difference between the criminal
standard of proof in its application to
circumstantial evidence and the civil is that in the former the facts must be
such as to
exclude reasonable hypotheses consistent with innocence, while the
latter you need only circumstances raising a more probable inference
in favour
of what is alleged. ... if circumstances are proved in which it is reasonable to
find a balance of probabilities in favour
of the conclusion sought then, though
the conclusion may fall short of certainty, it is not to be regarded as mere
conjecture or
surmise ...
- Where,
as is the case here, a lesser standard of proof than that beyond reasonable
doubt applies, the existence of other reasonable
hypotheses is a matter to be
taken into account in determining whether the fact in issue should be inferred
from the facts proved
(Doney v R [1990] HCA 51; (1990) 171 CLR 207 at 211) but in
general it is not necessary that all reasonable hypotheses consistent with the
non-existence of a fact, or inconsistent
with its existence, be excluded before
the fact can be found (Nguyen v Cosmopolitan Homes [2008] NSWCA 246 per
McDougall J at [55] with whom McColl and Bell JJA agreed).
- Mr
Halley notes that in Vines at [811], Ipp JA noted that nothing in
Briginshaw (or s 140) detracts from the proposition that a serious
allegation may be proved by circumstantial evidentiary facts, inference and
circumstance.
- Reference
was also made to Palmer v Dolman [2005] NSWCA 361 at [47] where it was
said that there are no hard and fast rules by which serious allegations might be
proved from circumstantial evidence
and at [41] where it was said (there in a
case of fraud) that the Court must consider the weight to be given to the united
force
of all the circumstances put together (citing Lord Cairns in Belhaven
& Stanton Peerage (1875) 1 App Cas 278 at 279, quoted by Gibbs CJ and
Mason J in Chamberlain v R (No 2) [1984] HCA 7; (1984) 153 CLR 521 at 535) and that the
onus of proof is to be applied only at the final stage of the reasoning process.
In Palmer, the Court cited Winneke P in Transport Industries Insurance
Co Ltd v Longmuir [1997] 1 VR 124 at 129:
...It is erroneous to divide the process into stages and, at each stage,
apply some particular standard of proof. To do so destroys
the integrity of [a]
circumstantial case.
and, as to the authoritative weight attaching to the observation that, where
a serious allegation is made, "reasonable satisfaction"
should not be produced
by "inexact proofs, indefinite testimony, or indirect inferences" referred at
[46] to the following from Neat Holdings Pty Ltd v Karajan Holdings Pty
Ltd [1992] HCA 66; (1992) 67 ALJR 170 per Mason CJ, Brennan, Deane and Gaudron JJ at
171:
[T]he strength of the evidence necessary to establish a fact or facts on the
balance of probabilities may vary according to the nature
of what it is sought
to prove. Thus, authoritative statements have often been made to the effect that
clear or cogent or strict proof
is necessary 'where so serious a matter as fraud
is to be found'. Statements to that effect should not, however, be understood as
directed to the standard of proof. Rather, they should be understood as merely
reflecting a conventional perception that members
of our society do not
ordinarily engage in fraudulent or criminal conduct and a judicial approach that
a Court should not lightly
make a finding that, on the balance of probabilities,
a party to civil litigation has been guilty of such conduct.
- In
Palmer, Ipp JA (with whom Tobias and Basten JJA agreed) concluded at [47]
that:
The more recent authorities to which I have referred, and s 140 of the
Evidence Act (1995) (NSW) make it plain that there are no hard and fast rules by
which serious allegations might be proved from circumstantial
evidence. The
inquiry is simply, taking due account of what was said in Neat Holdings Pty
Ltd v Karajan Holdings Pty Ltd, has the allegation been proved on a balance
of probabilities.
Jones v Dunkel inferences
- As
to the Jones v Dunkel inferences that I have been invited to draw, I note
that such inferences may be drawn in civil penalty proceedings (where pecuniary
penalties, disqualification and compensation orders are sought pursuant to the
Corporations Act 2001 (Cth)) against a defendant who does not call a
particular witness as would be available in ordinary civil proceedings.
- This
issue was considered in Adler v Australian Securities & Investments
Commission; Williams v Australian Securities & Investments Commission
[2003] NSWCA 131. Giles JA, with whom Mason P and Beazley JA agreed, considered
the question whether inferences could be drawn against defendants who
had chosen
not to give evidence in the proceedings. At first instance, reference had been
made to the statement of Street J (as his
Honour then was) in Dilose v Latec
Finance Pty Ltd (1966) 84 WN (Pt1)(NSW) 557 at 582 that:
The inference which a Court can properly draw in the absence of a witness,
where such absence is not satisfactorily accounted for,
is that nothing this
witness could say would assist the case of the party who would normally have
been expected to have called that
witness. The significance of this inference
differs according to the closeness of the relationship of the absent witness
with the
party against whom the inference is sought to be propounded. Where the
absent witness is party himself then considerable importance
may well attach to
the inference. Similarly, the inference is significant if the absent witness is,
as in the present case, a person
who is a senior executive of a corporate party
who was personally engaged in the transactions in question and who was in fact
present
at Court during part of the hearing...
- The
defendants appealed on the basis that a Jones v Dunkel inference was not
available in civil penalty proceedings, by analogy with the reasoning of the
High Court in RPS v The Queen [2000] HCA 3; (2000) 199 CLR 620. Giles JA
rejected this analogy, distinguishing RPS v The Queen at
[656]:
However, the reasoning in RPS v The Queen began with what were described as
the fundamental features of a criminal trial, that it
is "an accusatorial
process in which the prosecution bears the onus of proving the guilt of the
accused beyond reasonable doubt"
(at [22]). The nature of a criminal trial was
contrasted with that a civil trial, and the reasoning included that because of
the
prosecution's burden of proof beyond reasonable doubt "it will seldom, if
ever, be reasonable to conclude that an accused in a criminal
trial would be
expected to give evidence".
- His
Honour also discussed Azzopardi v The Queen (2001) 205 CLR 50, which
again emphasised the particular features of a criminal trial which was that it
was an "accusatorial process,
in which the prosecution bears the onus of proving
the guilt of the accused beyond reasonable doubt" and where it was said at [34]
that:
Further, because the process is accusatorial and it is the prosecution that
always bears the burden of proving the accusation made,
as a general an accused
cannot be expected to give evidence at trial. In this respect, a criminal trial
differs radically from a
civil proceeding.
- Giles
JA in Adler concluded (at [658]-[661]) that:
Proceedings for civil penalties do not share the same fundamental features of
a criminal trial. Civil penalties can be fairly regarded
as punitive, with a
resemblance to fines imposed on criminal offenders, but the resemblance is not
identity.
It is necessary to focus on these proceedings brought under the Act, rather
than some general class of civil penalty proceedings,
since the statutory
foundation for and incidents of the proceedings may affect the view taken. As
used in the Act the civil penalty
provisions do not necessarily lead to
imposition of pecuniary penalties, and may lead to a compensation order with the
same effect
as if the company had brought civil proceedings for breach of the
directors' duties or to a disqualification order made not punitively
but
protectively. They are not be equated with provision for criminal offences. More
important, the civil penalty proceedings are
expressly to be maintained by civil
law processes, not by a criminal trial with its fundamental features.
When civil procedures have been adapted in civil penalty cases, it has not
been because of equation with a criminal trial. It has
been because of the
privilege against exposure to penalties.
...To say that a person can not be forced to evidence against himself, by
providing discovery or answering interrogatories or, in
a criminal context,
making a statement to the police, says little when it come to the giving of
evidence in the person's own case.
In ordinary civil proceedings the defendant
can not be forced to give evidence in his own case. Civil penalty proceedings
are no
different in that respect.
- The
procedural incidents of the privilege against penalties in civil penalty
proceedings were considered subsequently by the High
Court in Rich v
Australian Securities and Investments Commission [2004] HCA 42, in
relation to a dispute as to whether the appellants were required to give
discovery in such proceedings (the High Court holding
that the privilege against
penalties did apply in civil penalty proceedings and, in doing so, emphasising
that focus must be placed
on the orders that are sought).
- In
light of the emphasis placed by the High Court on the punitive character of
orders sought in civil penalty proceedings in Rich v ASIC, in Morley
& Ors v Australian Securities and Investments Commission [2010] NSWCA
331 a question arose for consideration as to whether the position with respect
to Jones v Dunkel inferences in Adler v ASIC had been implicitly
overruled in Rich v ASIC.
- In
Morley, Spigelman CJ, Giles and Beazley JJA declined to depart from
Adler v ASIC, stating (at [689]) that:
In our opinion, nothing in the High Court's reasoning in Rich v Australian
Securities and Investments Commission suggests that it is appropriate to
reason by analogy from criminal procedure to civil penalty proceedings. Indeed,
in our opinion,
the analysis contained in the High Court's judgment is contrary
to any such proposition.
- Their
Honours had earlier observed (at [684]) that the Corporations Act 2001
(Cth) maintained the distinction between criminal proceedings and civil
penalty proceedings:
A distinction between civil penalty proceedings and criminal proceedings is
found in ss 1317N, 1317P and 1317Q. They provide for staying proceedings for a
declaration of contravention or a pecuniary penalty order if criminal
proceedings are
started or have already been started against the person for
substantially the same conduct (s 1317N); for starting criminal proceedings for
conduct substantially the same as conduct constituting a contravention of a
civil penalty
provision (s 1317P); and for general inadmissibility in criminal
proceedings against a person of evidence of information given or production of
documents
by the person in proceedings for contravention of a civil penalty
provision for substantially the same conduct (s 1317Q).
- The
position of the Court of Appeal on that issue was affirmed on appeal to the High
Court in Hellicar [2012] HCA 17 (at [154]) (although Morley v ASIC
was overturned on other grounds).
- As
to the nature of the inference that may properly be drawn if the principles of
Jones v Dunkel are enlivened, the Court of Appeal in Morley v ASIC
stated (at [634]) that:
The first matter was the familiar, although other misunderstood, Jones v
Dunkel reasoning from a party's unexplained failure to call a witness the
party would be expected to call. The fact-finding tribunal may
infer that the
evidence of the absent witness would not assist the case of that party, or it
may draw with greater confidence an
inference unfavourable to that party. There
is no compulsion to reason in either way. The reasoning cannot make up for
absence of
proof: before there can be greater confidence in an inference
unfavourable to a party, the inference must already be available on
the
evidence. Conversely, if the party's case is otherwise proved, the inference
that the absent witness would not assist the party's
case does not detract from
the proof.
- The
plurality judgment in ASIC v Hellicar stressed that an inference which
may be drawn from the failure to call a particular witness to give evidence was
that the witness's
evidence would not have assisted that party's case,
not an adverse inference against that party, saying at
[166]-[168]:
Lord Mansfield's dictum in Blatch v Archer that "[i]t is certainly a
maxim that all evidence is to be weighed according to the proof which it was in
the power of one side to
have produced, and in the power of the other to have
contradicted" is not to be understood as countenancing any departure from any
of
these rules. Indeed, in Blatch v Archer itself, Lord Mansfield concluded
that the maxim was not engaged for "it would have been very improper to have
called" the person
whose account of events was not available to the court.
noting that in Jones v Dunkel itself, the Court had held "that any
inference favourable to the plaintiff for which there was ground in the evidence
might be more
confidently drawn when a person presumably able to put the true
complexion on the facts relied on as the ground for the inference
has not been
called as a witness by the defendant and the evidence provides no sufficient
explanation of his absence".
- Heydon
J, in a separate judgment, noted that two consequences can flow from the
unexplained failure of a party to call a witness whom
that party would be
expected to call (at [232]):
One is that the trier of fact may infer that the evidence of the absent
witness would not assist the case of that party. The other
is that the trier of
fact may draw an inference unfavourable to that party with greater confidence.
But Jones v Dunkel does not enable the trier of fact to infer that the
evidence of the absent witness would have been positively adverse to that
party.
- In
the present case, the only inferences of this kind that ASIC seeks to be drawn
arise out of the failure of Mr Hobbs (who did choose
to go into evidence) to
call his secretary (Mrs Andrews) in relation to two issues (the authorship of a
second Art of Arbitrage book
and her practice in relation to the dissemination
of emails received on the "nasl" email address to Mr Hobbs) and to call his
brother
(Mr Robert Hobbs) in relation to the issue as to the disbursement out of
the Magny-Cours account of the funds received from J&B
Financial in payment
of the KLM invoice for intellectual property in the sale of a white label fund.
- While
I accept that such inferences are open to be drawn, ultimately I would have
reached the same conclusions without the benefit
of such inferences. As to the
Art of Arbitrage booklet, nothing in my view turns on who was in fact its
author, the only relevance
being what should be drawn (from the inconsistency in
Mr Hobbs' testimony on this issue) as to the reliability of his evidence. Given
that this is by no means the only example of inconsistency, the Art of Arbitrage
authorship evidence does no more than reinforce
my view as to the caution to be
exercised in accepting Mr Hobbs' blanket assertions at face value. As to the
issue in relation to
the email communications, the content of those
communications makes clear that the understanding of the senders and recipients
was
that emails addressed to the nasl address would in the ordinary course be
relayed to Mr Hobbs. Nevertheless, the failure of Mr Hobbs
to call evidence from
Mrs Andrews as to her practice in relation to the "nasl" emails does give me
more comfort in concluding that
in the ordinary course documents sent to Mr
Hobbs at that email address would have come to his attention.
- In
relation to the Magny-Cours account, the fact that Mr Hobbs did not call his
brother to explain what happened to the KLM IP invoice
amount after it reached
the Hong Kong account again gave me more comfort in concluding (as I would have
done in any event from the
documents in evidence) that Mr Hobbs was the relevant
decision maker in relation to withdrawals from that account (and had treated
the
moneys in that account as moneys he was free to disburse) though there is other
evidence to support that conclusion. Moreover
the evidence of Mr Hobbs'
financial interest in the schemes is not restricted to this
payment.
Authentication of business records
- Business
records may be admitted as an exception to the hearsay rule pursuant to s 69.
Note 1 to the section states that ss 48, 49, 50, 146, 147 and 150(1) are
relevant to the mode of proof and authentication, of business records. In
particular, The New Law of Evidence (2nd ed, 2009) notes that the
contents of the document may be proved by any of the means specified in s 48(1).
- In
Uniform Evidence Law (10th ed, 2012, S Odgers), the author notes (as to
the issue of authentication of business records under s 48(1)(e)) at [1.2.4960]
pp 186-187 that:
On the other hand, it must be established that the tendered document "forms
part of the records of or kept by a business". In accordance
with s 142(1) the
court must be satisfied that this "has been proved on the balance of
probabilities". However, reasonable inferences may be drawn
from the document
itself under s 183.
...
Whatever the proper approach in that content, this hearsay exception requires
that it must be established on the balance of probabilities
that the tendered
document "forms part of the records of or kept by a business".
- The
question of authentication was discussed in Aqua-Marine Marketing Pty Ltd v
Pacific Reef Fisheries (Australia) Pty Ltd (No 4) [2011] FCA 578 by Collier
J. His Honour referred to Australian Securities and Investment Commission v
Rich [2005] NSWSC 417 and distilled the following principles at
[14]:
It is important not to set the bar too high for the authentication of
documents, because if too much is demanded, the authentication
requirement will
fight against the policy underlying the business records provisions. That policy
recognises that any significant
organisation depends for its efficiency upon the
keeping of proper records, to be used and relied upon in the everyday carrying
on
of the activities of the business and therefore likely to be accurate, and
likely to be a far more reliable source of truth than
memory (Rich at
[116]).
The party tendering the document must establish authenticity, which cannot be
achieved solely by drawing inferences from the face
of the document where there
is no other evidence to indicate provenance (Rich at [117]).
Authentication is about showing that the document is what it is claimed to
be, not about assessing, at that point of the adducing
of the evidence, whether
the document proves what the tendering party claims it proves (Rich at
[118]).
There is a distinction between matter of authenticity going to the adducing
of evidence and matters going to the credibility and weight
of documentary
evidence once it has been authenticated and judged admissible (Rich at
[118]).
- In
Aqua-Marine Marketing, the document concerned was an email between an
employee of the defendant and a third party. The document was produced by the
third
party in response to a subpoena and evidence was given by a witness called
by the respondent during cross-examination that there
was communication between
the employees of the respondent and the third party. Collier J was satisfied on
the basis of that evidence
that the document was what it purposed to be (an
email which was a business record of the third party) and accordingly
admissible.
- There
is some disagreement as to the principle above, deriving from Rich, that
authenticity cannot be achieved solely by drawing inferences from the face of
the document. Odgers notes (at p 187), s 183 of the Evidence Act
expressly permits a court to "draw any reasonable inferences from" the document
and argues that "[g]iven that, it is not apparent
why authenticity (in this
context, establishing that the document is a business record) "cannot be
achieved solely by drawing inferences
from the face of the document."
Nevertheless, Rich (and Collier J's endorsement of Rich in
Aqua-Marine Marketing) stand for the proposition that inferences
drawn from the face of the document are not enough, absent other evidence, to
establish
authenticity.
Issues for Determination
- Having
regard to the matters set out above, I turn to the principal issues for
determination. For convenience, I have annexed the
ASIC's list of principal
issues. There is substantial overlap across some of the issues and I do not deal
with each of them separately,
but I have approached the issues in roughly the
same order.
- At
the outset, I address the position of Mr Hobbs in relation to the companies
referred to by ASIC as the Hobbs companies (Tasman
Business Consultants,
Magny-Cours, Trans Management Corporation, FZF Anguilla, International
Management Corporation and FZF Vanuatu);
his role in FTC and the other entities
(OEM, KLM) through which (or in whose name) the investment process for most
investors in the
relevant schemes occurred), his role in Diligence Discovery;
the involvement he had in the respective individual investment schemes;
and the
relationship between Mr Hobbs and the respective scheme administrators and FTC
executives in relation to the process that
led to investment of funds in the
schemes the subject of these proceedings (since these matters are fundamental to
the case ASIC
makes against Mr Hobbs).
- I
interpose to note that Mr Hobbs' understanding, as professed in the witness box,
was that there was a difference in the concept
of beneficial ownership of
limited companies in Australia and that of beneficial ownership or control of an
IBC (though he was not
able meaningfully to articulate what that difference
was). In the context of questions as to the beneficial ownership of Geneva
Financial
(an IBC controlled by Mrs Hobbs and her sister-in-law, Mrs Brenda
Hobbs), Mr Hobbs said the following:
Q. What do you see is the difference between a shareholder and a beneficial
owner, Mr Hobbs?
A. With an IBC they have a beneficial owner of the company, quite separate.
Q. Do you understand the difference between holding shares on trust for
somebody else and holding shares solely for your own purposes?
A. Yes, but an IBC is different to a limited company here in Australia.
Q. What I want to suggest to you Mr Hobbs is that the concept of beneficial
ownership is the same here as it is anywhere else, isn't
it, Mr Hobbs?
A. I don't agree with you.
- That
evidence is perhaps all the more remarkable in circumstances where Mrs Hobbs and
Mrs Brenda Hobbs signed documents for Geneva
Financial variously as beneficial
owner and controller, as principal (and in one instance at least as director of
the company) and
there was at least one Geneva document to which Mr Hobbs was a
signatory (signing the Cadent account opening documents as the duly
acting
secretary of the company).
- The
above is indicative of the way in which Mr Hobbs appears to have considered that
the individual on whose application or behalf
an IBC was established was the
person who was the "owner" of the IBC (that being the basis on which he said he
was the owner and
able to assume the position as administrator of FZF Vanuatu)
and able to control its activities. It also highlights the disingenuous
nature
of some of his responses in cross-examination (when suggesting that Mr Halley
could check the registers of certain offshore
IBCs if he wanted to check that Mr
Hobbs had no interest therein). Tellingly, Mr Hobbs said that:
Q. Now the funds that you spoke about from time to time to FTC executives and
others in Australia were funds that were the funds of
KLM, weren't they?
A. They were owned; no, they were in the KLM list. They were owned by the
people who owned the companies and controlled by them.
Q. You were about to say they were owned by KLM, weren't you, Mr Hobbs?
A. No.
Q. When you use the term 'owned' what do you mean to convey by that Mr Hobbs?
A. Well they physically owned the companies and they owned their own
fund. (my emphasis)
Q. So who owned Geneva Financial Limited Mr Hobbs?
A. Jacky and Brenda.
Q. Why do you say that?
A. Well they owned the company, they ran the company.
Q. Well did they own the company or did they run the company?
A. Both.
- In
fact, as adverted to earlier, there was evidence to suggest that Tasman Business
Consultants was at least from 2002 the beneficial
owner of Geneva Financial (in
the form of a Nominee Declaration dated 20 August 2002 by an entity named Newman
Enterprises Limited
in Anguilla, that entity being recorded on the register of
shareholders of Geneva Financial in Anguilla as the shareholder of Geneva
Financial is recorded as Newman Enterprises Limited, and being defined in the
Nominee Declaration form as the trustee). The Nominee
Declaration referred to
Tasman Business Consultants Limited as the beneficiary.
- Mr
Hobbs accepted that (on the register), Newman Enterprises was disclosed as the
shareholder of Geneva Financial and that it appeared
that it had made a
declaration that that share was held on trust for Tasman Business Consultants
Limited. The declaration stated
that it was executed under the common seal of
Newman Enterprises Limited (and it was signed by a Ms Atrene Pemberton), though
Mr
Hobbs pointed out that he did not see the seal on the copy of the declaration
(and there was no discernible imprint of a company
seal on the copy in
evidence).
- Mr
Hobbs maintains that he first became aware that Tasman Business Consultants was
the beneficial owner of Geneva Financial when it
was put to him in his s 10
interview in Wellington (in 2009). Mr Hobbs was, however, taken to a document
apparently signed by Mrs Hobbs and by Mrs Brenda Hobbs,
to which the common seal
of Geneva Financial had been attached, and bearing a fax transmission imprint
from FTC, that stated:
To whom it may concern. The titles of Jacqueline Hobbs and Brenda Hobbs are
both "beneficial owner and controller". Both Jacqueline
Hobbs and Brenda Hobbs
are authorised to act on behalf of Geneva Financial Limited.
- It
was put to Mr Hobbs that, as a matter of common sense, if it had not been
appreciated that Tasman Business Consultants was the
beneficial owner of Geneva
Financial (as seems to be the effect of the execution by the shareholder
recorded on the register having
executed a declaration of trust in favour of
Tasman Business Consultants) it would not have been thought necessary to make
any form
of declaration that Tasman Business Consultants held that beneficial
ownership on behalf of anyone else (or, I might add, for there
to be any form of
authorisation by it as to the persons entitled to act on behalf of Geneva
Financial). There was evident confusion
by Mr Hobbs as to that question but
ultimately it seemed to me that Mr Hobbs did accept the proposition that if he
did not appreciate
or understand that Tasman Business Consultants was the
beneficial owner of the share in Geneva Financial then it would not have
occurred
to him to make a declaration of trust on behalf of Tasman Business
Consultants of that beneficial share, ownership in the share.
- (Mr
Hobbs did not recall any discussion at any time with either Mrs Hobbs or Mrs
Brenda Hobbs about who might be the beneficial owner
of Geneva Financial
Limited. He said that he "just always assumed that".)
- Confusingly,
Mr Hobbs' response when cross-examined on the issue of beneficial ownership of
Geneva Financial said:
Q. When did you first become aware that Tasman Business Consultants was the
beneficial owner of Geneva Financial Limited?
A. Well I didn't realise it was the beneficial owner. I thought it was a
shareholder.
...
Q. Wouldn't you have expected to have been told that your company was the
shareholder of Geneva Financial Limited, a company that
was offering investment
funds to investors in Australia?
A. Look I may have been told before that. I just; simply I did not recall it.
- In
light of the above evidence, it is hard to accept that Mr Hobbs saw any real
distinction between an IBC and the individual that
was nominated or acted as the
"administrator" of the IBC.
Findings - Hobbs companies
- Tasman
Business Consultants
- Mr
Hobbs admits the allegation (at [2] of the Third Further Amended Statement of
Claim) that he is the sole director and shareholder
of Tasman Business
Consultants and that Mrs Hobbs is a shareholder of that company. In that regard,
I am satisfied that Mr Hobbs
was responsible for, and controlled the business
operations of, the company.
- The
persons who were employed by (or whose wages or expenses were paid by) Tasman
Business Consultants and who worked in the Hobbs'
office over the relevant
period (Mr Mitchell, Mrs Andrews, Mr Robert Hobbs, Mrs Watson and Mr Cable)
reported to Mr Hobbs and largely,
if not wholly performed administrative tasks
(accounting/banking services; secretarial services; running errands and
maintaining
records of FTC subscriptions; "ad hoc" filing and tasks related to
the 'automatic' issue of correspondence on OEM or KLM letterhead
as well as
liaison with FTC executives and introducers; and maintaining records and
renewals for IBCs linked with the Hobbs office
or the investment schemes in
general, respectively). I would conclude that at all material times those
persons acted in accordance
with Mr Hobbs' directions and instructions, and with
his (if not express, then certainly implicit) authority or approval.
- The
suggestion (implicit in the evidence of Mr Hobbs that he did not see various
documents that had been received at the nasl email
address and that Mrs Andrews
may not have conveyed such information to him) that Mrs Andrews occupied a
sufficient degree of autonomy,
in her role as secretary or personal assistant,
to make her own decisions as to what was or was not to be done in relation to
Tasman
Business Consultants or the business carried on from the Hobbs office
seems to me to be implausible (and it is not supported by any
evidence from Mrs
Andrews herself).
- (Similarly,
the suggestion that Mrs Watson was performing tasks related to the investment
schemes otherwise than with the implicit,
if not express, approval of Mr Hobbs
is implausible and inconsistent with her apparent lack of understanding of
matters integral
to the OEM/KLM operations or of the nature of the investment
schemes in particular.)
- I
find that Mr Hobbs controlled the business operations of Tasman Business
Consultants at all material times.
- I
further find that Mr Hobbs dealt with the funds of Tasman Business Consultants
as his own.
- As
noted earlier, Mr Hobbs has deposed that the income received into the ANZ trust
account of Tasman Business Consultants from the
business operations of FTC was
his sole source of income at the time (at [11] of his 3 August 2012 affidavit;
his written submissions
also referring to this as his principal source of
income) and Mr Mitchell has deposed that (with one exception) income received by
Tasman Business Consultants was deposited into the company's ANZ trust account
to which Mr Hobbs was the only signatory (Mitchell
[29]-[30]). Business expenses
paid by Tasman Business Consultants were paid from the company's BNZ bank
account (including the wages
of Mr Robert Hobbs, Mr Mitchell and Mrs Andrews
(Mitchell at [25], [38]) as were business expenses of Mr Hobbs (Mitchell at
[33],
[36])) with funds which had been transferred by Mr Hobbs by cheque from
the company's ANZ trust account (Mitchell at [29], [30)].
- The
expenses paid by Tasman Business Consultants included payments referable to work
performed for entities other than the company
(namely, for the work performed by
Mrs Burnard (and expenses incurred by Mrs Watson) on behalf (or in the name) of
OEM and KLM (Watson
at T 465.3 - T 466.6) as well as Mr Hobbs' personal expenses
(Mitchell at [33]-[36]) (including credit card charges incurred by Mr
and Mrs
Hobbs) (Mitchell at [26] which Mr Mitchell says were treated in the company's
books as drawings by Mr Hobbs (Mitchell at
[24], [33]-[36])).
- Mr
Mitchell, who was a signatory to the BNZ account, deposed that he never made any
transaction on that account without the authorisation
of Mr Hobbs (Mitchell at
[27]). Mr Halley points out that there is no evidence of any system in place for
anyone else (such as the
only other shareholder, Mrs Hobbs) to approve
expenditure by Tasman Business Consultants or expenses not directly related to
the
company.
- Mr
Hobbs, tellingly, seems to have considered himself at liberty to disburse for
his personal purposes moneys retained in the Tasman
Business Consultants'
account even though he acknowledged that it had been set up as a trust account.
(Mr Halley submits that this
is relevant to the extent that there might
otherwise have been any suggestion that a third party controlled FTC by reason
of the
fact that the moneys in the account comprised the FTC subscription
payments.)
- In
cross-examination, Mr Hobbs, having confirmed that the Tasman Business
Consultants account was the only account into which FTC
subscription money was
deposited and having acknowledged that this was a trust account for FTC ("Yes, I
know it was; we formed it
as a trust account"), explained his belief as to his
personal entitlement to the moneys held in that account as follows:
Q. If it was a trust account, how could it be your personal money?
A. It's income that is earned into that account.
...
Q. Who was the beneficiary of the trust account?
A. It was whoever we drew the cheque for.
...
Q. So you established a trust account for FTC and you thought the beneficiary
of that trust account was for whoever you drew a cheque
for?
A. Yes, it was a trust account in name; yes.
Q. Do you mean by that, in name only?
A. I don't recall having any other material, any other accounting books for
it.
Q. So you regarded yourself at all times as able to [disburse] money from the
ANZ account, maintained by Tasman Business Consultants,
as you saw fit?
A. Correct.
- Mr
Halley relies on this evidence as highlighting the artificiality of any alleged
distinction between Mr Hobbs and FTC; and I accept
that it does so.
- In
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [128],
the High Court said that a company is the alter ego of an individual where his
or her mind is the company's mind. In Ascot Investments Pty Ltd v Harper
[1981] HCA 1; (1981) 148 CLR 337 at 343 such a conclusion was said to follow where an
individual was able to treat the company as his or her own.
- Having
regard to the above, and to Mr Hobbs' own reference to Tasman Business
Consultants as his "personal consulting business" (in
his letter dated 22
November 1999 to Sovereign Trust International explaining the receipt and/or
disbursement of moneys in and from
the Magny-Cours Hong Kong bank account), I
find that Tasman Business Consultants was the alter ego of Mr
Hobbs.
- I
find that Tasman Business Consultants was beneficially owned and controlled at
all material times by Mr Hobbs and that Tasman Business
Consultants was his
alter ego.
- Magny-Cours
Limited (as with all the relevant Hobbs companies other than Tasman Business
Consultants and Legend of Bathurst) was incorporated
as an offshore IBC.
- The
evidence establishes that, following Mr Hobbs' application to Sovereign Trust
International in 1999 for an offshore IBC to be
incorporated, the beneficial
interest in the company was held for Mr Hobbs. (In this regard, the manner in
which the IBC was set
up, as I would infer was the case for all of the offshore
IBCs incorporated in what Mr Hobbs regarded as "privacy havens" was that
whoever
was noted on the register as the shareholder or director of the IBC held such
shareholding or such office in a nominee capacity
only. In some instances there
was evidence of a nominee declaration that made it clear where the beneficial
ownership lay; in others
(as with some of the investor IBCs) it appears that
there was a power of attorney granted in favour of the individual on whose
application
the IBC had been established, so as to permit the making of all
relevant business decisions by that individual.)
- At
least up to the nomination by Mr Hobbs of his brother, Mr Robert Hobbs, as a
co-beneficial owner in 2000, the evidence establishes
that Mr Hobbs was the sole
beneficial owner and controller of the company. Thereafter, at least up until
the communication by Mr
Hobbs of authority for the withdrawal of his beneficial
interest in the company (which I assume was intended as some form of
renunciation
or disclaimer of that interest in the company that would, if
effective, have had the effect of leaving Mr Robert Hobbs as the sole
beneficial
owner or controller of the company), Mr Hobbs was a co-beneficial owner and
controller (with his brother) of the company
and gave instructions in relation
to the disbursement of moneys from that account. In that role, I find that he
was a de facto director
of the company.
- After
Mr Hobbs authorised Mr Robert Hobbs to become the sole beneficial owner of the
issued share in the company, Mr Hobbs continued
to issue instructions for moneys
to be transferred out of the Magny-Cours Hong Kong bank account from time to
time (and as at late
2005 Mr Robert Hobbs had referred at least some enquiries
as to the operation of the company to him, indicating that Mr Robert Hobbs
understood his brother to continue to have a role in the decision-making of the
company or allowed him so to act). Therefore, I find
that Mr Hobbs continued
after that date at least as a shadow director (if not also a de facto director).
- It
is submitted by ASIC that Mr Hobbs exercised all relevant top-level management
functions and acted as if he were (and assumed the
responsibility of the role
of) the most senior executive director of the company and therefore was at all
material times a de facto
director of the company. I accept that such an
inference should be drawn at least up until 2004 (and I note that had that not
been
the case it would have been open to Mr Hobbs to call his brother to give
evidence to dispel any such inference, though ASIC did not
ask me to draw any
Jones v Dunkel inference on this issue).
- I
further accept that the evidence establishes that the only persons who took any
steps on behalf of Magny-Cours other than Mr Hobbs
(namely, Mr Robert Hobbs and
Mr Mitchell) were persons who were authorised (or permitted) to do so by Mr
Hobbs. Within the Hobbs
office I accept that they generally acted (and I would
infer were accustomed to act) on the instructions of Mr Hobbs. (In this regard,
the evidence is that Mr Robert Hobbs was engaged by Mr Hobbs in full-time
employment and paid by Tasman Business Consultants on Mr
Hobbs' instructions,
running errands for Mr Hobbs, processing FTC subscription details, and reporting
directly to Mr Hobbs. Mr Mitchell's
own evidence supports the conclusion that
the work he did for the company was at the direction or on the instructions of
Mr Hobbs.)
- Having
regard to the above, and the apparent treatment by Mr Hobbs (at least since
2004) of the Magny-Cours HSBC bank account as his
own personal bank account
(from which, as he accepted in cross-examination, he authorised payment for
various personal expenses),
I find that Mr Hobbs was from the time of its
incorporation up to 2000 a de facto director of, and from at least 2004 a shadow
director
of, Magny-Cours.
- Trans
Management Corporation
- Trans
Management Corporation was again incorporated as an offshore IBC.
- The
provision of registered agency/registered office services for Trans Management
Corporation was, as Mr Hobbs acknowledged, paid
for by himself (as were the fees
for its incorporation), though Mr Hobbs maintains that this was at the request
of Mr Becker (and
simply continued after Mr Becker's death). The renewal fees
were arranged for some time by Mr Jim Cable, who worked for Mr Hobbs
out of the
Hobbs office in arranging and maintaining the registration of various offshore
IBCs (and who also operated an investment
fund that was administered by an IBC
set up on his behalf). Those fees were paid for out of the Tasman Business
Consultant account
on the instructions of Mr Hobbs. The business address of
Trans Management Corporation was that of Tasman Business Consultants (which,
as
I have found above, was a company controlled by Mr Hobbs).
- Mr
Hobbs said that he did not have anything to do with Trans Management Limited;
did not know who its directors were; believed that
it was incorporated in
Vanuatu; and that it was an IBC. Mr Hobbs' account is that he just paid the
incorporation for it at the request
of Mr Becker and that he continued to do
that after Mr Becker died. Pausing there, Mr Hobbs does not seem to have had any
concern
as to whether it was in the best interests of Tasman Business
Consultants as a company to pay the fees for an unrelated company about
which Mr
Hobbs claims to have known very little - though it may be explained if the fees
were accounted for as personal drawings
of Mr Hobbs; since it would then be a
matter for him whether he chose to continue to pay moneys for a company about
which he purported
to have such little knowledge.
- In
cross-examination, Mr Hobbs maintained that he did not have any understanding as
to who the beneficial owners of Trans Management
were and did not to his
knowledge ever see any document which might record who had some responsibility
for the activities of that
company. When asked:
Q. Did you ever speak to anybody who you understood to be an officer of Trans
Management Limited? [this must be a reference to Trans Management Corporation
as this was the company identified in Mr Hobbs' response to queries raised
by a
prospective adviser as the outside trustee for the funds]
A. Look I thought it was all controlled by Mr Becker and co. [I interpose
to note that the somewhat throwaway description "and co" is consistent with a
lack of precision on Mr Hobbs' part (and
reinforces the impression that Mr Hobbs
was just looking to place responsibility on others without having any firm
recollection of
who in fact was involved.]
- There
was evidence by Mr Diaz that Mr Hobbs had told him Trans Management Corporation
(the entity nominated in the respective scheme
memoranda as the trustee
responsible for oversight of the schemes the subject of the proceedings) was
owned by Mr Hank Parker (a
suggestion that, according to Mr Diaz, was disavowed
by Mr Parker himself). The only evidence of any association between Mr Parker
and Trans Management Corporation was Mr Fitzgerald's recollection that he had
sent reports of some kind in relation to the Covered
Strategies scheme to Mr
Parker for Trans Management Corporation. However, since the address for Trans
Management Corporation was
that of Tasman Business Consultants (and the reports
do not seem to have been the subject of any action or response by Mr Parker),
this does not suggest that Mr Parker had any controlling role in relation to the
entity. (By far the majority of the scheme administrators
did not perform even
the perfunctory role of sending reports to the so-called outside
trustee.)
- Given
that the business address of the company was that of Tasman Business
Consultants, that payment of registered agency fees for
the company was through
the Tasman Business Consultants' account, and that there is no evidence showing
any involvement by Mr Parker
(or anyone else) in the operation of that company,
I conclude that this was a company that was incorporated by, and operated on,
the instructions of Mr Hobbs and that Mr Hobbs was the beneficial owner and
controller of the company.
- Again,
this company was incorporated as an offshore IBC. First Trust Anguilla provided
registered office/agency services for the company
(on instructions from Mr
Hobbs). The initial incorporation expenses were shared equally between Mr Hobbs
and Mr Diaz (whose evidence
was that the two had agreed to set up the company to
avoid confusion in dealings with clients). I would infer that the person or
entity registered as the shareholder and director of FZF Anguilla held such
shareholding and such office only in a nominee capacity
and, by reference to the
circumstances of its incorporation (including the payment of the incorporation
fees from Tasman Business
Consultants' account) that from the time of its
incorporation Mr Hobbs was at least a 50% beneficial owner and controller of the
company.
- There
is no evidence of Mr Diaz having any involvement with FZF Anguilla after its
incorporation (and certainly not after the breakdown
of his working relationship
with Mr Hobbs in about 2004) and no evidence of Mr Diaz obtaining any financial
benefit from that company.
- Mr
Hobbs signed agreements on behalf of a FZF Anguilla (such as the agreement dated
6 September 2006 between that company and Chen
Zhi Hua and the agreement dated
10 February 2005 between that company and Tan Yue Investments Co Ltd); signed
correspondence (providing
what on its face appears to be broad financial advice)
on the letterhead of FZF Anguilla (fax dated 3 September 2004 from Mr Hobbs
to
"Anita" - Ex AU 369); and sent correspondence as "consultant" on the letterhead
of FZF Anguilla (Ex AU 369) (including correspondence
to Mr Gahan - Ex H tabs
5,7,10,11,12 - in 2004-2005).
- There
was in evidence a copy of a "First Zurich Financial Limited" business card in
the name of Mr Hobbs, with his stated address
being the business address of
Tasman Business Consultants "care of the registered company address in Anguilla"
(a card which Ms Dong
says Mr Hobbs gave to her when Ms Li introduced him to her
in 2006). The evidence of Ms Dong (at [52]-[53]) is that Ms Li described
"First
Zurich Financial" as a large bank used by Mr Hobbs for project funding and (at
[55]) that Mr Hobbs told her that First Zurich
Financial did mergers and project
funding. This is consistent with the entry by Mr Hobbs on behalf of FZF Anguilla
of the two agreements
referred to above and (assuming that the FZF entity that
entered into the Global Funerals facilitation agreement, on which Mr Hobbs
places much reliance, was FZF Anguilla and not FZF Vanuatu) the commercial bond
facilitation agreement with Global Funerals.
- As
to the particular FZF entity with whom the Global Funerals facilitation
agreement was entered, there is some doubt (ie whether
it was FZF Anguilla or
FZF Vanuatu). In cross-examination, Mr Hobbs was taken to a portion of the
transcript of his s 10 examination in New Zealand (p73.26) where he was asked
whether he had been involved in incorporating any companies in Anguilla. He
answered no and denied that he had given instructions for the incorporation of
any companies in Anguilla. Asked whether he had given
anyone on his own behalf
or on behalf of somebody else to incorporate any company in Anguilla, Mr Hobbs
then answered that First
Zurich Financial was incorporated in Anguilla and that
this would have been on his instructions.
- Mr
Halley notes that the s 10 transcript then continued (at p74.6), as
follows:
Q. Are you a director of First Zurich?
A. No, no, First Zurich was then taken over. I didn't continue with First
Zurich and the name was picked up by Bi Hong Dong who incorporated
it.
- Asked
whether that was correct, Mr Hobbs had said "Well, the name was taken over, and
it was incorporated in Vanuatu". (Again this
reflects a very casual approach to
the use of corporate vehicles.) Mr Hobbs confirmed that he had incorporated a
company called First
Zurich Financial in Anguilla and that Ms Dong had
incorporated a company called First Zurich Financial in Vanuatu and that they
were
different companies.
- In
his evidence in the s 10 examination, when asked whether the company he had
incorporated in Anguilla was still listed and if not when it was deregistered,
Mr Hobbs said "Probably 2006, 7, something, I assume. I don't really know".
- In
response to a question as to whether his answer at the s 10 examination that he
had never used the First Zurich Anguillian company was correct, Mr Hobbs said
"Yes, but I never had a bank account"
(seemingly suggesting that the existence
of a bank account equated to the use of the corporate entity). Taken to his
evidence in
his s 10 examination to the effect that FZF Anguilla had not engaged
in any activities and asked in the witness box before me if that was
a correct
answer, Mr Hobbs said:
A. Well it didn't have any bank accounts, so it didn't engage any financial
activities such as that. [Pausing there, the suggestion
that a company engaged
in no activities because it had no bank account is surprising, particularly
given that FTC which clearly did
engage in the activity of selling subscriptions
also had no bank.]
...
Q. You understood, I suggest, when you answered no, Mr Hobbs, to the
question, "so it engaged in no activities?" that First Zurich
Limited, to the
best of your knowledge, had never engaged in any activities?
A. Mr Halley, very soon after this interview I was sectioned to the hospital.
I cannot say, I cannot even recall these questions here.
- Pressed
on this answer at the s 10 examination, Mr Hobbs is recorded as saying the "We
never completed any transactions, no" and that he had started to do project
financing
facilitation work with it but that had not continued and that "No, we
didn't receive any payments" (but adding that the FZF Vanuatu
company of Ms Dong
had received payments).
- Mr
Hobbs was unable in the witness box before me to recall whether FZF Anguilla had
ever had an entitlement to receive any payments
or to identify any payment as
one to which he considered FZF Anguilla was at any time entitled. Mr Hobbs
accepted that FZF had been
deregistered and he was unable to recall whether FZF
Anguilla was re-registered at any time after its deregistration in or about
2006
or 2007. Mr Hobbs was also unable to recall the last time he had had anything to
do with FZF Anguilla.
- For
present purposes, I note that Mr Hobbs' recollection in the witness box before
me was that he did recall having an involvement
in the activities of FZF
Vanuatu, the nature of that involvement being "working for Global Funerals
Limited". Hence, there is some
doubt as to whether the FZF company named in the
Global Funerals facilitation agreement is the entity that was incorporated in
Anguilla
or the entity of the same name in Vanuatu. Nothing presently turns on
this except that it illustrates the potential for confusion
where more than one
entity was incorporated with the same name (and provides an explanation for the
apparently conflicting evidence
as to the place of incorporation of OEM and
KLM).
- I
accept that there is no evidence of any person other than Mr Hobbs making a
decision for or on behalf of FZF Anguilla with the possible
exception of Mr
Diaz. However, whatever involvement Mr Diaz may have had with that company it
had ceased by the time of the breakdown
in the working relationship between he
and Mr Hobbs. ASIC submits that the fact that Mr Diaz was accustomed as an FTC
executive to
act at the direction of and on the instructions of Mr Hobbs, means
that it can be inferred that he did so in relation to FZF Anguilla.
More
relevant, in my view, is the fact that the evidence does not disclose him
performing any role at all for that company before
or after
2004.)
- Having
regard to the above, I find that at the relevant times Mr Hobbs acted as the de
facto director of FZF Anguilla.
- FZF
Vanuatu (to which I have referred above) was another offshore incorporated IBC,
separate from FZF Anguilla (though Mr Hobbs described
it as having been "taken
over" from that entity in some fashion). Ms Dong's evidence is that she and Ms
Li incorporated FZF Vanuatu
as an offshore IBC following conversations with Mr
Hobbs in about 2006. There is no evidence that registered office services were
invoiced to Mr Hobbs or paid by Tasman Business Consultants. However, Mr Hobbs
himself concedes that the company was set up at his
request and on his behalf
and (at T 1385.12-14; T 1388.34-37) Mr Hobbs admitted that he was the owner of
the company. (He described
Ms Dong as the "administrator" of the company. Mr
Collard seems to have seen some significance in the asserted fact that Ms Dong
had resigned as the administrator of Secured Bond at the request of Chinese
investors but there is no evidence of this.)
- At
T 1385-35-36 Mr Hobbs confirmed that he was the beneficial owner of FZF
Vanuatu.) Mr Hobbs explained his understanding was that
this was because the
company was incorporated for him (T 1388.49; T 1389.10-12) by Ms Dong (T
1381.10-19) or by Ms Dong and Ms Li
(T 1389.49-50).
- Insofar
as Ms Dong signed documents on behalf of FZF Vanuatu such as the FZF Vanuatu
Master Fund agreement ([281]-[283]) and documents
as "administrator" of FZF
Vanuatu (Ex G tab 42; [274]), she says (and I accept) that this was at the
request or direction, or on
the instruction, of Ms Li ([253], [256], [257]-[276]
or at the direction of Mr Hobbs ([284]). (Ms Dong says that she also on one
occasion signed an FZF Vanuatu document on the instruction of Mr Zhang.)
- Ms
Dong's evidence, which I accept, was that she was accustomed to signing
documents placed before her by Mr Hobbs ([159]-[160], [165]-[169])
or Ms Li
([257]-[276], [285]-[286]); that on some occasions those documents were
backdated ([252], [256]); and that she did not (or
did not always) know the
nature of the transactions in respect of which she was signing documents on
behalf of FZF Vanuatu ([257],
[276]).
- Documents
signed by Ms Dong on behalf of FZF Vanuatu included directions as to investments
and withdrawal of investments of funds
in various of the schemes the subject of
these proceedings (including Master Fund, Elite Premier Option Two Unit Trust
and Best Fund)
as well as directions to pay commissions to companies controlled
by Mr Hobbs (including Magny-Cours and Tasman Business Consultants),
to the
solicitors who acted for Mr Hobbs (Fletcher Vautier Moore) and to Shunfu
Corporation (an IBC controlled by Ms Li).
- Mr
Hobbs could not recall whether he had seen any document recording any ownership
by him in FZF Vanuatu but said "Look, I may have".
He did not believe that Ms
Dong is still the administrator of FZF Vanuatu but could not say when she
stopped being the administrator
for that company. Asked whether the company has
an administrator today, Mr Hobbs said "I would be the administrator of it" but
was
not able to point to any means by which he was so appointed, seemingly
having just assumed that role. He accepted that he had assumed
the role of
administrator independently of any corporate resolution of the shareholders or
directors.
- Mr
Hobbs denied that, as far as he was concerned, he and FZF Vanuatu were for all
practical purposes the same entity, though he maintained
he was the "owner" and
administrator of the company. Surprisingly, in light of that evidence, he
maintained that he did not know
who were the directors or shareholders of the
company. It is impossible having regard to this evidence to accept that Mr Hobbs
did
not regard an IBC as anything other than an extension of the owner of it or
person for whom it was incorporated. Any such suggestion
becomes even more
difficult to accept in circumstances where, during the course of the hearing,
evidence was given that Mr Hobbs
had signed an authority appointing two people
(whose names he had difficulty recalling when put to him in the witness box) as
his
proxy for FZF Vanuatu for a meeting convened by the liquidator of the Master
Fund. That proxy form (Ex BD) was signed by Mr Hobbs
above the typed words
"Signature Authorised Officer" maintained in the witness box that he understood
that he had authority to sign
as the "owner" of the company but when pressed on
this said "Well, depends what an officer is. I mean, I'm not a director or a
shareholder."
- Mr
Hobbs then seemingly sought to dismiss the significance of this by saying: "This
document was filled out, was handed to me across
the table very quickly, and I
just signed it. I didn't even read it". He accepted that he does not now know
whether he was an authorised
officer of FZF Vanuatu for the purposes of filling
out a proxy.
- Significantly,
on at least one occasion Mr Hobbs has signed an agreement nominating his
companies as including FZF Vanuatu (the agreement
dated 1 June 2007 with MLN -
see listing of FZF Vanuatu in the Confidentiality and Non-Circumvention
agreement; he had a business
card in his name on FZF Vanuatu letterhead; and he
received invoices addressed to FZF Vanuatu marked to his attention (such as the
invoice dated 29 April 2008 from Fletcher Vautier Moore re "loan
contracts").
- ASIC
submits, with the exception of Ms Li (and I would interpose to add Ms Dong),
there is no evidence of any person making a decision
for or on behalf of FZF
Vanuatu other than Mr Hobbs. In relation to Ms Dong, Mr Halley points out that
the evidence is that she signed
documents without the exercise of any
independent mind - a submission that I accept.
- Relevantly,
on the evidence before me I would conclude that (both as an FTC executive and in
her position as an "introducer" or in
promotion of the investment schemes for
the funds of which she was a co-administrator, Ms Li was accustomed to act at
the direction,
and on the instructions, of Mr Hobbs. I place weight in this
regard on the communications from Ms Reisinger to Mr Hobbs in which
she updated
him as to the progress of "Lili's" funds and informed him as to matters in
relation to those funds.
- In
that regard, Mr Hobbs referred to a particular email communication (on which
there was no recorded email address) that was sent
from Ms Reisinger in
September 2007 and headed "Lilli and David" (relating to the information
required in relation to Mr Zhang's
passport details for the opening of a Cadent
account, to which Ms Li responded that Equity Holdings (the nominee director)
was still
the director and Mr Zhang was the administrator of the company). Mr
Hobbs submits that the reference to "David" in that communication
was to Mr
Collard. Mr Halley noted that there was not an address on the face of the
document from which it could be determined precisely
to whom it was sent but
submitted that it could be inferred from the fact that Ms Reisinger wrote to
"Lilli and David" that either
Ms Reisinger knew that providing it to Ms Li meant
that it would be sent to Mr Hobbs or that the actual email from Ms Reisinger
went
to Ms Li and to Mr Hobbs.
- Mr
Hobbs, during the course of Mr Halley's opening submissions referred to this
email and said:
At the end of Friday, there was a lot of discussion about an email to Lilli
[and] David. It did not have my email address on it. It
was actually an email to
Lilli [and] David Collard. Lily, when she was opening accounts with Cadent, was
quite secretive and got
David to do the mundane chores.
- There
is no evidence from which I could conclude that the David to which reference is
here made is Mr Collard (although I accept that
this is possible). There is
however a fair amount of other communications to David and Ms Li that must be
referable to Mr Hobbs.
- Nor
is there evidence from which I could conclude that Ms Li was "quite secretive"
when opening Cadent accounts (though it is of interest
that someone who asserts
no interest in the accounts might have expected any information from Ms Li in
relation thereto and hence
might have formed the view that she was quite
secretive). Similarly, there is no evidence from which I could conclude that Mr
Collard's
role was a mundane one.
- In
relation to FZF Vanuatu, it is of significance that Mr Hobbs assumed the role of
administrator of FZF Vanuatu after Ms Dong ceased
in that role (T 1389.28-31)
and (as he concedes) did so without any company resolution to that effect (T
1390.28-31) and it should
be noted that he did so in circumstances where his
evidence is that he did not know who were the directors or shareholders of the
company (saying at T 1390.21-26):
Q. But how did you become the administrator, Mr Hobbs?
A. When Bi Hong Dong stepped away.
- (I
interpose to note that significance is placed by Mr Halley on the evidence
relating to Mr Hobbs' assumption of the role of administrator
FZF Vanuatu as
again indicating Mr Hobbs' understanding of the operation of offshore IBCs (as
entities controlled by a beneficial
or undisclosed owner) and who it is that in
effect controls them. Tellingly, Mrs Hobbs also seems to have understood an IBC
to be
an emanation of the person for whom it was established or who was in a
position to direct its activities, insofar as she referred
in closing
submissions to Wyndom Enterprises as "my IBC" (and I would infer that it is
likely that Mrs Hobbs obtained her understanding
of IBCs through Mr Hobbs, who
of the two had the more financial experience). Though Mrs Hobbs suggested later
that there were others
who shared a controlling interest in that IBC, the
relevance I see in this is simply the assumption, that Mr Hobbs seemed to share,
that an IBC incorporated on the application of a person in an offshore
jurisdiction was that person's IBC (from which one would infer
that person
controlled the operation thereof). This is consistent with the explanation that
Mr Hobbs gave at the DVD Seminar to the
incorporation of IBCs for the purposes
of investment in funds of the kind to which he there referred.)
- I
find that Mr Hobbs was the ultimate beneficial owner and controller of FZF
Vanuatu and the de facto director of that company (and
that he was, in any
event, a shadow director thereof).
- International
Management Incorporation
- International
Management Incorporation is yet another offshore incorporated IBC. I find that
it was incorporated at or on Mr Hobbs'
instructions, having regard to the fact
that the Certificate of Incorporation for the company contained a handwritten
notation marked
to the attention of Mr David Hobbs, that indicates it was
forwarded by the relevant incorporator to Mr Hobbs, and having regard to
the
contents of communications sent to Ms Reisinger when a Cadent account was opened
for it in mid 2006.
- On
22 May 2006, Mr Mitchell sent a fax to Ms Reisinger (stated to be on the
instructions of "David"), attaching a Cadent Account Application
and Agreement
for Corporations in the name of International Management Incorporation and
noting the persons authorised to act with
regard to the account as being Mr
Mitchell and Mr Hobbs. That application was signed by Mr Hobbs as "beneficial
owner" of International
Management Incorporation.
- On
7 November 2006, Mr Mitchell sent a further fax to Ms Reisinger in relation to
the International Management Incorporation Cadent
account application, attaching
various documents including a form entitled Exemption for Foreign Entities which
was signed by Mr
Hobbs, a personal guarantee given by Mr Hobbs to Cadent for the
International Management Incorporation Cadent account, and a director's
resolution of International Management Incorporation authorising Mr Hobbs to act
as signatory to the Cadent account "in all manners
required" and authorising Mr
Mitchell and Mr Hobbs to act with regard to the Cadent account in any way to
manage the account efficiently.
- There
is no evidence that Mr Mitchell exercised any independent management role in
respect of this company.
- On
28 June 2007 (shortly after International Management Incorporation had been
deregistered, that occurring on 4 May 2007), Mr Hobbs
transferred his 26 shares
in Barclaywest to International Management Incorporation. (In the absence of
anything to suggest that this
transfer was for consideration, I accept that it
should be inferred that Mr Hobbs was effecting the transfer of his shares in the
company to an entity controlled by him.)
- On
27 August 2007 (again, notwithstanding that it had by then been deregistered),
Mr Hobbs signed a temporary contract for Pinnacle
Fund on behalf of
International Management Incorporation (Ex AU 9845), in which the address of
International Management Incorporation
was stated to be the same as the
registered address of Tasman Business Consultants (and the contact details
included the Hobbs' "nasl"
email address).
- Mr
Halley also points to the fact that the business records of 888 Vanuatu identify
Mr Hobbs as the administrator of International
Management Incorporation (Ex AU
207; Ex AU 206) and that on 21 April 2008, 888 Vanuatu transferred $47,008.08
from the 888 Vanuatu
Sovereign Bank account to Tasman Business Consultants, from
funds invested in Pinnacle Fund (Ex AU 11509) purportedly representing
shareholder profit payable to International Management Incorporation (Ex AU
11483; 11488).
- On
the basis of the above, I find that Mr Hobbs beneficially owned and controlled
International Management Incorporation and was the
de facto director
thereof.
- Diligence
Discovery was incorporated in New Zealand on 27 April 2006 (and deregistered on
31 March 2009). Mrs Burnard was recorded
as its sole director and shareholder.
The sole business of the company (and, it would seem from Mrs Watson's evidence,
the sole reason
for its incorporation) was to provide a corporate vehicle to
monitor the receipt and payment out of superannuation money to Cadent
and to
account for any flow of funds from Cadent (T 401.13-18; T 404.20-25; T
406.45-48).
- It
was apparent from Mrs Burnard's examination in chief that she regarded her task
in the Diligence Discovery oversight process as
administrative and that she was
not responsible for determining what process the company should carry out as
part of an oversight
process of this kind (nor why such a process was necessary.
The evidence establishes that Mrs Burnard undertook this role according
to
directions provided by others (by Mr Hobbs, either directly or through her
mother, and by Mrs Watson herself (T 466.11-48; T 468.39-45;
T 402.37-42),
though she also had some communication with Mr Koutsoukos.
- It
seems fair to say that neither Mrs Watson nor Mrs Burnard displayed any real
understanding of why a process of this kind (or for
that matter the OEM/KLM
process) would be necessary or of what was comprised by some of the steps that
were put in place.
- Mrs
Burnard, for example, had no idea what a clearing house was, or what was the
purpose of including a disclaimer for legal professional
privilege on her
standard form correspondence (or indeed what type of communications might
attract such privilege). She accepted
that the language of the letter in that
regard would have been provided by others. Ms Burnard understood the Diligence
Discovery
process to be a process whereby Mr Hobbs was able to confirm and
verify that Mr Koutsoukos, Mr Wood and Mr Truong were subject to
proper
compliance and oversight (T 469.33-50; T 470.1-30; T 471.6-40).
- Mrs
Watson said that she had had some involvement in the setting up of Diligence
Discovery but when asked what she had done her involvement
seemed to be confined
to grammatical input into the preparation of the agreement between Diligence
Discovery and 888 Vanuatu (for
the provision of oversight services to the latter
in relation to the 888 (Super Save Fund) and ensuring it was readily
comprehensible
("Just made sure that it was clear to understand and that it was
set out clearly, grammatical, that the steps were easy to follow,
I hope"). As
to the content of the document, she said (T 466.20-28) that:
A. Well I think there was an input from both Con Koutsoukos and from David
Hobbs and Emma and I tidied it up with what we understood
to be what needed to
happen.
Q. And what was the input that you recall from Mr Hobbs?
A. Well it was a rough draft, it certainly wasn't as much as this has ended
up to be. I've, I can't tell you exactly how much input.
I am sure if we are
talking about percentages it was at least 50 percent.
Q. And do you recall whose idea it was to incorporate a company for Emma?
A. Well when Emma was approached to do this job I was concerned that she
would be safe and have no liability back on her own home
or anything like that
and so that was discussed with David, to make sure that Emma was protected.
Q. And when you say David that's Mr Hobbs?
A. Yes.
Q. And do you recall what Mr Hobbs said when you raised the concern about
protecting Emma?
A. I don't know the exact words but that's why Diligence Discovery Limited
was set up, to handle that aspect.
- As
to the scope of what work that it was envisaged Diligence Discovery would do,
Mrs Watson said that she had learnt of that through
separate discussions (in
which Ms Burnard was involved) with Mr Koutsoukos and with Mr Hobbs.
- Mrs
Watson seems to have understood the Diligence Discovery process to have involved
a more comprehensive exercise than on its face
it appeared to be, in that, when
asked if the fee payable to Diligence Discovery had subsequently changed, she
said:
A. Yes, it did because when I say Con Koutsoukos it also means Jimmy Truong
and Brian Wood. We were to supply the documentation to
show the trail and when
they became slow or negligent in providing that documentation all of a sudden
things changed and you know
so Emma was having to monitor it because she had an
obligation back to the investors and their accountants and if she couldn't
fulfil
that obligation well, then, she had a problem. So every time she had to
follow up it meant she had to check everything and it became
time consuming. All
of a sudden it wasn't just a paper trail, it was a nightmare. (my emphasis)
- Mrs
Watson confirmed that she had raised this issue with Mr Hobbs, though she was
unable to recall what she had said to him. She said
that she had raised that
with Mr Hobbs because:
A. Well what was supposed to have been a simple job was now becoming very
awkward and I don't know if I; yes, I would have raised
the question of the
money and the time but I also was raising it with Con Koutsoukos to comply and
in the end I think Emma put a
48 hour notice on them otherwise she was going to
have to notify the clients that she couldn't complete the money trail.
- Taken
to a letter signed by Mrs Burnard on letterhead of Diligence Discovery Limited
to Mr Collard (stating that "Your requirement
is to supply by fax and/or email
original receipts as listed below" and the list of matters there specified) Mrs
Watson indicated
that she had had no involvement in the specification of the
requirements and said that by that stage she thought "Emma had a pretty
fair
grip on the whole thing and she was driving it". Mrs Watson's evidence (as I
understand it) was that, apart from the original
establishment of the system, Ms
Burnard was in control of it and Mrs Watson had no daytoday involvement "other
than if Emma was creating
a new letter or whatever she would run it by me to see
if I understood what it meant which therefore would mean that whoever it was
going to would understand it too".
- Relevantly,
neither Mrs Burnard nor Mrs Watson had obtained any instruction as to the tasks
they were carrying out from anyone other
than Mr Hobbs (and certainly not by Mr
Becker, he being one of those persons who Mr Hobbs has broadly identified as
owning or controlling
OEM or KLM). Neither had spoken with Mr Becker. Mrs
Burnard recalled that she had communicated by email with Ms Reisinger but could
not recall having met her.
- Insofar
as Mrs Burnard gave evidence that she had spoken to Mr Koutsoukos, Mr Wood and
Mr Truong as to the nature of the work (T 406.13-27;
T 414.41-50; T 415.1-16; T
426.42-47), Mr Halley characterises the information they gave her (and I accept
that this is a fair characterisation)
as relating to the companies with which
they were involved in for the purposes of that process (888 Management
Australia, 888 Vanuatu,
ISPL and ISL) (T 415.29-45) rather than as matters going
to the rationale or need for the oversight process itself. (Indeed the evidence
of at least Mr Koutsoukos (who queried the cost of such services and thought
they could more economically be carried out from the
J&B Financial offices)
suggests that he and/or the other J&B Financial officers had no real
understanding as to why Diligence
Discovery was required to be involved in the
investment process for the funds operated out of that office but accepted the
necessity
for this process because Mr Hobbs had mandated it.)
- Mr
Halley notes that other than some assistance provided by Mrs Watson (T
453.21-26; T 440.45-49; T 441.1-13; T 446.8-9), Mrs Burnard
was the only person
who performed the services provided by Diligence Discovery and the company did
not engage any employees (T 400.29-32;
T 401.3-5; T 402.34-35). As I understand
the evidence, the Diligence Discovery work was largely, if not wholly, carried
out from
Mrs Burnard's home.
- When
queried as to who it was to whom she would speak if instructions were required
as to difficult issues in relation to the operation
of the process, Mrs
Burnard's evidence was that either she or her mother would speak to Mr Hobbs (T
468.39-45; T 467.26-50; T 468.1-16;
T 417.35-50; T 418.1-17; T 419.22-43). While
Mrs Burnard and her mother gave evidence that they prepared a number of standard
form
letters to use as part of the OEM/KLM process (T 468.39-49), their input
seems to have been more from a cosmetic point of view (or
as a courtesy as it
was described in relation to one such letter) than as to the substance of the
communication. Tellingly, where
a draft letter was required for submission to an
accountant, it seems that they considered Mr Hobbs' input would be necessary.
- Mrs
Burnard invoiced 888 Turks & Caicos, ISPL and ISL for the Diligence
Discovery work and was paid for her services by Mr Koutsoukos,
Mr Wood and Mr
Truong (T 406.13-16; T 414.22-30; T 415.21-45) and from late 2006, Mrs Burnard
also did work for 888 Vanuatu (the
corporate administrator of the 888 (Super
Save) Fund and/or for Mr Collard, Ms Li and Ms Wu) and was paid for those
services by them
(T 416.13-34; T 417.18-33; T 420.3-49).
- ASIC
contends that Mr Hobbs was a shadow (not de facto) director of Diligence
Discovery on the basis that, at all material times,
Mrs Burnard (the person who
undertook the major work performed by the company) reported directly to Mr Hobbs
and was accustomed to
act on his instructions and at his direction.
- I
accept that it was Mr Hobbs who directed that the monitoring or oversight
services provided by Mrs Burnard's company should be put
in place and used by
the J&B Financial officers (and that it is likely that he similarly directed
the use of those services by
888 Vanuatu or 888 Management Australia on its
behalf, given the unlikelihood of those companies independently deciding that
there
was a need for the services and the coincidence of them then using Mrs
Burnard's company in a different jurisdiction for that
purpose).
- I
am further satisfied that although Mrs Burnard (the sole director of the
company), had some independence in the way in which she
phrased the
communications issued by the company and sent update letters, she was accustomed
to act in accordance with the directions
of Mr Hobbs (from himself or through
her mother) and she did not make the substantive decisions for the company
without reference
to Mr Hobbs (again, either directly or through her mother).
- Without
any criticism of Mrs Burnard, who became involved in the process apparently
because of her recognised organisational and administrative
skills, Mrs
Burnard's ignorance of the meaning of various of the terms used in her own
correspondence, her lack of knowledge as to
why a disclaimer for legal
professional privilege would appear on the letter and her lack of any
understanding as to the purpose
of the tasks being carried out by the company in
the context of the investment schemes, makes it inconceivable that it was she
who
made the important business decisions of the company. That person can only
realistically have been Mr Hobbs, having regard to the
fact that Mrs Watson also
exhibited no understanding of what was involved in relation to the schemes. I am
therefore satisfied that
in substance Mr Hobbs directed the kind of services to
be provided (and that he was the person to whom Mrs Burnard and Mrs Watson
ordinarily have turned for guidance or instruction in relation to those tasks).
- (I
accept that there is evidence that Mrs Burnard spoke to Mr Koutsoukos in
relation to the tasks performed by Diligence Discovery.
However, it is clear
from his evidence that he had no understanding as to why this process would be
necessary for Super Save, as
opposed to the lack of such a process for Integrity
Plus, and his involvement was at an administrative level in that regard.
Moreover,
Mr Koutsoukos' involvement could not explain the fact that similar
arrangements were set up for the 888 (Super Save) Fund, which
was administered
by Mr Collard and Ms Li.)
- While,
taken in isolation, specifying the particular checks or tasks to be carried out
might be consistent with a client directing
an independent contractor as to its
particular accounting requirements, the role of Mr Hobbs seems to have gone much
further than
that (in drafting the terms or at least 50% of the contractual
terms between Diligence Discovery and scheme administrators, for example).
- I
am satisfied that in matters of significance in relation to the Diligence
Discovery process, Mrs Burnard (and Mrs Watson to the
extent that she remained
involved therein) were accustomed or likely to act in accordance with the
instructions of Mr Hobbs. Accordingly,
while I would have had considerable
hesitation if asked to find that he were a de facto director of the company, I
am satisfied on
the evidence that Mr Hobbs was a shadow director of the
company.
- Legend
of Bathurst was not an IBC. It was incorporated in New Zealand. I find that at
all material times Mr Hobbs beneficially owned
and controlled Legend of
Bathurst; that he controlled the practical direction of the company; exercised
all relevant top-level management
functions; and acted in the position of
controlling the sole director of the company (Mr Nicholas
Moore).
- Each
of Mr Nicholas Moore and Mr Bellamy (lawyers then working with Fletcher Vautier
Moore) has deposed that he holds the shares in
his name in the company on trust
for Mr Hobbs (N Moore [21]; Bellamy [27]). They have deposed to the
circumstances in which the company
was set up by them on instructions from Mr
Hobbs. Neither Mr Bellamy nor Mr Moore (the sole director of the company) made
any decisions
in respect of the management of the company, each deposing that
all relevant decisions of the company were made by Mr Hobbs (N Moore
at [21],
Bellamy at [28]). This is consistent with the evidence as to the instructions
given in relation to the purchase by Legend
of Bathurst of the Echodale and
Covent Street properties (Bellamy [35]) both as to the nomination of the
purchaser and as to the
source (and characterisation) of the funds used to
complete the purchase (as is, significantly in my view, the concern that was
expressed
by Mr Moore as to the exposure of his firm as to the then proposed
loan arrangement in relation to the purchase).
- It
is noted by Mr Halley that there is no evidence of any tenancy agreement between
Legend of Bathurst and Mr and Mrs Hobbs in relation
to the residential property
occupied by the latter nor of any rent paid by them to the company (N Moore at
[118], Bellamy at [24]-[25])
and that Council rates invoiced to Legend of
Bathurst in respect of the property at Covent Drive (and sometimes in respect of
the
property at Echodale Place) were paid (on the instructions of Mr Hobbs given
to Mr Mitchell) by Tasman Business Consultants (Mitchell
at
[26]).
- (I
have referred earlier to the assertion made by Mr Bellamy in correspondence
after the event as to the existence of a loan arrangement
in respect of the
funds the Legend of Bathurst used for purchase of the Nelson properties). This
is, however, inconsistent with the
correspondence at the time of the purchase
and, in any event, it does not detract from the conclusion (inescapable on the
evidence
of Mr Moore and Mr Bellamy, neither of whom was required for
examination by Mr Hobbs and whose evidence on this issue was therefore
not the
subject of any challenge) that they held their shares in the company on trust
for Mr Hobbs and that they acted at all times
in accordance with his
instructions in relation to the company. I find that Mr Hobbs was the shadow
director of this company.
Findings - FTC/OEM/KLM
- Turning
to the entities more central to the operation of the investment process, I make
the following findings.
- FTC
was incorporated as an IBC in Vanuatu. The provision of registered agency
services with respect to FTC's registered office, nominee
shareholder and
nominee director was arranged by Mr Cable (who worked for Mr Hobbs out of the
Hobbs office, as well as running an
investment fund not the subject of these
proceedings). Fees for those services were paid out of the Tasman Business
Consultants BNZ
bank account, on the instructions of Mr Hobbs (Mitchell evidence
referred to above). The business address of FTC was the registered
office of
Tasman Business Consultants (a company controlled by Mr Hobbs).
- As
an IBC registered in Vanuatu, I accept that it can be inferred from the evidence
of the manner in which such IBCs were incorporated
that the person or entities
registered as the shareholder and director of FTC held such shareholding and
office in a nominee capacity
for the benefit of the client for whom those
services were provided. I am satisfied that the evidence establishes that that
client
was Mr Hobbs.
- I
have noted earlier the inconsistent submissions from Mr Hobbs as to the
incorporation or formation of FTC: namely, whether he formed
the company; formed
the products brought into the company; sold the company; sold the company but
retained a beneficial interest
in the company; had an expectation of receipt of
a benefit from the sale by others of the company and the like. What can be
confidently
said is that Mr Hobbs represented to others that he had an interest
at some stage in the company and that Mr Hobbs acted at all times
from 2004
(and, in my view, did so before) as if he were the person in the position to
control the company (without the need for
reference to any person overseas such
as Mr Chen or Mr Parker).
- I
find that FTC was a company that was incorporated by (and/or continued to
operate at the relevant times on) the instructions of
Mr Hobbs and that he was
at all material times the beneficial owner and controller of FTC. There is no
evidence (other than Mr Hobbs'
assertions) that FTC (or, perhaps more precisely,
the entity known as FTC that was incorporated in Vanuatu in 1999, since I would
by no means exclude the possibility that there had been others incorporated by
Mr Becker or Mr Chen if, indeed, they were seeking
to build up an FTC 'empire'
of sorts across the United States and China as Mr Hobbs suggests) was a company
beneficially owned or
controlled by other persons such as Mr Becker or Mr Chen.
- Certainly,
after April 2004, Mr Becker could have had no involvement in FTC, he no longer
being alive. However, there is no evidence
of any involvement by Mr Becker in
the operation of FTC before that time. The suggestion by Mrs Watson in the
witness box that Mr
Becker was an owner of FTC seemed very much to be an
afterthought (she having already answered a number of questions without
mentioning
any such involvement). In any event, as emerged when she was
cross-examined on this issue, her belief as to the ownership of the
company by
Mr Becker and/or someone in China was clearly based on no more than what Mr
Hobbs had told her. As to Mr Chen, there is
simply no evidence that Mr Chen ever
exercised any control or took any step in respect of the company. Mr Hobbs'
reference to a visit
from Mr Chen at the time the KLM IP invoice was presented
to the J&B Financial officers (emerging for the first time in his
cross-examination)
was not supported by reference to any such meeting by anyone
else (and was not put to the J&B Financial officers in cross-examination.
I
accept that Mr Hobbs' stated recollection of a conversation with Mr Chen at that
time was implausible (and had the air of an incremental
change in his evidence
of the kind to which Mr Halley referred as characterising Mr Hobbs' evidence as
a whole).
- I
am satisfied that at all material times Mr Hobbs controlled the business and
operations of FTC (in Australia and New Zealand) the
subject of and relevant to
these proceedings (namely in relation to the sale of financial education
material, recruitment of FTC
executives, and conduct of FTC seminars or other
meetings (at which investment opportunities through access to the wholesale
market
offshore were discussed). I include in this finding, Mr Hobbs' control of
FTC's business activities in relation to the marketing
of opportunities for
offshore investment in investment schemes of the kind the subject of these
proceedings.
- Mr
Hobbs controlled the practical direction of FTC, exercised top-level management
functions for the company, and acted in the position
of the most senior
executive director (at least in Australia and New Zealand) of the company. I
find that Mr Hobbs was a de facto
director of FTC.
- Given
that all of the persons who undertook the principal work performed by the
company (including not only the FTC executives who
gave evidence in these
proceedings, but also Mr Robert Hobbs, Mrs Watson and Mr and Mrs Dent) reported
directly to Mr Hobbs and were
accustomed to act on his instructions and at his
direction, Mr Hobbs would also satisfy the test of being a shadow director of
FTC
(though such a finding is unnecessary in light of the fact that he was
clearly in my view a de facto director of the company).
- I
have referred earlier to the confusion as to where and when the relevant
OEM and KLM companies (ie those involved in the investment process) were
incorporated and to the seeming likelihood that there were at least two
companies registered in those names during part or all of
the relevant period.
- Relevantly,
the non-admissions made by Mr Hobbs in his pleaded defence as to the various
corporate entities include non-admissions
as to the alleged place (and date) of
incorporation of each of OEM and KLM. In its then form, the pleading to which Mr
Hobbs responded
in this regard ([26] and [27]) was that OEM was a company
incorporated in the British Virgin Islands on 12 December 2003 up to the
date of
its deregistration on 1 May 2007 and that KLM Enterprises was a company there
incorporated on 11 February 2002 up to the
date of its
deregistration.
- As
amended the pleading now goes on to allege further or in the alternative that
OEM was a company incorporated in Anguilla or the
Federation of Saint Kitts and
Nevis or the Bahamas or was an entity known as O.E.M. Ltd or OEM Ltd and (again
further or in the alternative
to the allegation in relation to KLM), that K.L.M.
Ltd or K.L.M. Enterprises Ltd was a company incorporated in Anguilla or the
Bahamas
or was an entity known as K.L.M. Ltd or KLM Ltd or K.L.M. Enterprises
Ltd.
- Ultimately,
nothing turns on the particular offshore jurisdiction in which OEM and KLM were
incorporated. However, it is relevant
in my view, when assessing the reliability
of Mr Hobbs' recollection, that entities about which he was so confidently able
to speak
when questioned as to their corporate structure in the context where he
was selling his financial expertise or product (such as the
DVD Seminar) are now
seemingly beyond his recall.
- There
is certainly primary evidence, in the form of business records, that companies
of those names were incorporated (and later deregistered)
in the British Virgin
Islands. However, there are references to OEM and KLM in correspondence at dates
earlier than the date of incorporation
of the companies in the British Virgin
Islands (which suggests that either the OEM/KLM entities there mentioned were
different entities
to BVI entities or that the letterhead/logo was a sham).
- There
is also evidence that indicates that companies of those names were at one stage
incorporated in Anguilla (namely, evidence that
registered agency services in
respect of companies named OEM and KLM were being provided by First Anguilla
Trust Co Ltd in Anguilla
in 2005, including the provision of nominee shareholder
and director and registered office address - Ex AH tab 10). Furthermore,
in
2006, Mr Hobbs communicated with First Anguilla Trust Co for OEM and KLM to be
"revived" (they having been struck off from the
company register in Anguilla
after non-payment of annual renewal fees). Mr Hobbs nominated the beneficial
owner of the companies
for the purposes of their revival as being Ms Li. (In his
submissions, Mr Hobbs says that this was at Ms Li's request. However, there
is
no evidence of this.) Mr Hobbs forwarded a copy of the above communication to Mr
Wood (Wood at [164], [302], [477]-[478]), who
Mr Diaz identified as having been
responsible for dealing with renewals of all IBCs incorporated in Anguilla,
including those for
Mr Hobbs (Diaz at [154]-[159]; Ex F tab 52), from which I
would infer that Mr Hobbs regarded those companies as being within the
IBCs
maintained for his behalf. (On the list of IBCs maintained by Mr Wood, OEM and
KLM are recorded as being "nz" companies, rather
than and "au" companies,
suggesting a closer link to Mr Hobbs.)
- There
are also various assertions in evidence in these proceedings that each of OEM
Ltd and KLM Ltd (or KLM Enterprises Ltd) was a
company incorporated in Nevis
(DVD Seminar, Ex R) or based in Nevis (email dated 12 July 2001 from Mr Cable in
relation to services
for IBCs; Ex AT, tab 70).
- Letters
were written on different versions of OEM Ltd letterhead (one, with a header
stating that the company had an office address
in Nevis (though with a fax
number in England) (Ex AM 8) another, also on letterhead with a header showing
an office address in the
Bahamas (but with the same fax number in England) (Ex
AM 9). Mr Halley notes that each of the versions of OEM Ltd documents with
either an office address in Nevis or an office address in Bahamas was a document
that Mrs Watson or Mrs Burnard arranged to be sent
to addresses in
Australia.
- Mr
Hobbs' attempt to distance himself from the operation of the OEM/KLM part of the
investment process was inconsistent with the contemporaneous
records (in
particular, his comments on the DVD Seminar) and the evidence of those to whom
he explained the process at the time (including
Mr Blow and Mr Parsons). It is
also inconsistent with the emphatic evidence by Mrs Watson as to how the system
should have worked
(since that understanding can only have come from Mr Hobbs)
and as to the total lack of awareness by Mrs Watson and Mrs Burnard as
to where
OEM/KLM were based and the purpose of the process.
- When
asked in cross-examination how Mr Hobbs understood the system should have
worked, Mr Hobbs was emphatic that "FTC executives
should have nothing to do
with selling investment". (If that was indeed a requirement of the process, then
it is somewhat unfortunate
that attendees at the DVD Seminar might not
unreasonably have formed the view from what Mr Hobbs himself said that the sale
of investments
was a natural consequence of the sale of financial education
material by FTC and that there could be a seamless move from provision
of the
financial education to sale of investments under a KLM contract by the same
peoples, though acting as introducers not FTC
executives.) (It is reminiscent of
Mrs Watson's adamant evidence in the witness box that Mr Jouravlev's response to
the questions
posed as part of the OEM qualification process were incorrect and
that Mr Jouravlev should not have 'qualified' for the next step
in the process,
whereas in fact the evidence shows that the process continued on
regardless.)
- Significantly,
what the evidence of Mr Parsons shows is that Mr Hobbs had not only been
instrumental in the setting up of the "OEM/KLM"
process but that he had
envisaged this as an 'automatic' process (and had hoped that it could be
implemented electronically without
the need for human intervention). That, to my
mind, clearly demonstrates the artificiality of the process, as does the
seemingly
unnecessary interposition of a UK fax number on the OEM/KLM
letterhead.
- (Reference
is made by Mr Halley to the evidence of Mr Diaz (at [182]) that (when Mr Hobbs
stated to Mr Diaz that Mr Parker was one
of the owners of OEM), Mr Parker
disavowed any such proposition and told Mr Diaz that Mr Hobbs was "the only one
that owns OEM, KLM
and FTC". To the extent that there is a suggestion that Mr
Hobbs was present when Mr Parker said this, and did not challenge this,
it would
be of some significance but I am by no means confident that this was what should
be drawn from Mr Diaz' affidavit and I
place no weight on
this.)
- Mrs
Watson's evidence made clear, in my opinion, the mechanical ("seamless") nature
of the OEM/KLM process or at least her involvement
in it. She confirmed that the
process was that once an IBC had been "qualified", through the OEM process, and
had received a list
of funds "through KLM", then the next step was that:
A. They could either choose to get a memorandum on that on whatever fund
interested them or not. If they chose to get a memorandum,
I would advise Craig
Dent and he would forward that memorandum on to that person, and that might be
one or several, whatever the
case may be.
Q. Then, would Mr Dent then confirm to you that he had provided that
memorandum to the potential investor?
A. Yes. There was no need for him to do that. Our interest in that process
was finished at that point.
Q. You say that, once he sent the memorandum to the IBC
A. Once the request was made for information on a particular fund, I would
notify him of that and the address and the IBC that it
was to be sent to, and
that was the finish of KLM involvement in the process.
- Mrs
Watson confirmed that Mr Dent had provided her (not very often) with a document
confirming the dispatch of scheme memoranda to
investors (in the form of the
documents headed "KLM dispatch between 1 October 2005 and 31 October 2005" and
"KLM events between
1 October 2005 and 31 October 2005" (that document
identifying in some cases that Mrs Watson had requested the dispatch of the
document).
Mrs Watson was also taken to a letter on the letterhead of KLM
Enterprises Limited to which her name had been added and confirmed
that she had
sent such documents to FTC executives (confirming the dispatch of the scheme
memoranda) but she denied that this was
the next step in the process, saying
that:
A. No. When Emma had let me know that the KLM fund further information on a
particular fund had been requested, I notified Craig Dent
and I also sent this
note to whoever might be attached to that person just to let them know that
whoever it was had received the
information. It was not something that was
required, but because people made incorrect requests from OEM and confusion
could set
off, especially amongst the Chinese et cetera, it was just a courtesy
thing really to tell them that memorandums had been sent out.
Q. Now, was the courtesy extended to the FTC executive who had initially sold
the FTC education package or was it to the fund manager,
in respect of which the
memorandum had been sought?
A. No, it was sent to the FTC executive who had introduced the person to
FTC. (my emphasis)
Q. And why did you do that?
A. Oh, just because sometimes people got tangled up in their original
approach to OEM and the other thing that was awkward was that
only one page at a
time could be sent to OEM and sometimes people repeatedly tried to send two and,
of course, if they were sending
their IBC certificate, it wouldn't come through.
So, at that point it created frustration and so I developed this practice of
letting
them know that, you know, if they'd gone through to the end where they'd
approach KLM for a memorandum, then it had actually been
dispatched or was about
to be dispatched.
- (Mrs
Watson said that she did not recall discussing with Mr Hobbs the sending of
these types of letters to FTC executives.)
- The
assertion made by Mr Hobbs in cross-examination (in stark contrast to what he
said at the DVD Seminar and, as I read Mr Blow's
notes, at the February 2003
meeting attended by Mr Blow) that he did not understand how the OEM/KLM process
worked is frankly unbelievable:
Q. Because on any view, Mr Hobbs, you were the person who was operating the
OEM, KLM process after April 2004, if not before; that
is the case, isn't it?
A. Not correct. I couldn't even tell you how it exactly worked. (my
emphasis)
- When
tested on what the knowledge given to investors comprised, Mr Hobbs denied that
it was the receipt of the fax number for OEM
and suggested that people could
"obviously pick up any magazine, like I used to show, and find investments
internationally" (even
though at the DVD Seminar Mr Hobbs was quite clear that
what would happen was that an investor would be provided with a fax number
to
contact OEM). Mr Hobbs' denial that the person from whom potential investors
obtained the fax number to contact OEM was an FTC
executive is implausible in
circumstances where he was otherwise unable to suggest how the number would be
found (and it was not
in any of the FTC booklets as far as I could see). Mr
Hobbs, in the witness box, sought refuge in a dismissive "They would be given
it
by somebody" and then "You would have to ask them. I wouldn't know". (The
difficulty for Mr Hobbs is that the evidence of those
he suggested Mr Halley
should ask was that the fax number was given to them by the FTC executive who
sold them the information packages
in the first place - or who occasionally sent
the fax request for them.)
- As
to FTC and the OEM/KLM process, ASIC contends that although FTC conducted
business in Australia by soliciting for sale and supplying
financial education
materials to subscribers of FTC in Australia, its business was not limited
thereto and that it included the solicitation
of potential investors to invest
in one or more of the individual schemes the subject of these proceedings. I
accept that the evidence
overwhelmingly establishes this.
- ASIC
contends that there was no distinction between the business of FTC and the FTC
executives in supplying financial education, on
the one hand, and the business
of KLM and the KLM introducers (or brokers) in introducing potential investors
to specific funds,
on the other. Rather, it contends that the sale of the
education and the communications on the letterhead of OEM/KLM process were
all
part of the one process by which investors were led to invest in one or more of
the individual schemes the subject of these proceedings.
I
agree.
- ASIC
submits that in all of the circumstances it can be inferred, and I so find, that
in respect of the matters the subject of this
proceeding the business and
operations of OEM and KLM (or KLM Enterprises) in Australia and New Zealand were
controlled and run by
Mr Hobbs.
Findings - allegations as to the roles of the particular individual
defendants
- I
next turn to consider the allegations made by ASIC as to the particular roles
occupied by the individual defendants in the respective
companies.
- In
summary, I note that paragraphs [1] to [36] of the Third Further Amended
Statement of Claim plead to the parties and the companies
of which ASIC alleges
the individual defendants were directors or officers.
- Other
than Mr Truong (who was formally appointed as a director of ISPL), Mr Hobbs (as
a director of Tasman Business Consultants) and
Mr Collard and Ms Li (who in
November 2006 were the subject of resolutions by the nominee director of Secured
Bond purporting to
appoint them as directors, apparently in the context of the
Cadent account applications at that time), it is not suggested that any
of the
individual defendants (ie Mr Hobbs, Ms Li, Mr Collard, Ms Wu, the J&B
Financial officers or Mrs Hobbs) was formally appointed
as a director or officer
of any of the relevant companies of which ASIC contends he or she was a director
and/or officer. (Rather,
ASIC contends that they were de facto, or alternatively
shadow, directors and/or officers of the relevant companies.)
- As
to Mr Hobbs, I have made findings above as to his role with each of FTC, Tasman
Business Consultants, Diligence Discovery, FZF
Anguilla and FZF Vanuatu. It is
also alleged (at [2]) that Mr Hobbs was a director (or alternatively an officer)
of each of the corporate
administrators (Secured Bond, PJCB, ISPL, ISL, 888
Vanuatu, 888 Turks & Caicos, Geneva Financial, Barclaywest, Preserved
Investments,
North Wave, GP Global, Destiny and Ultimate Investments). Mr Hobbs
denies that he is or was a director or officer of any of the companies
in
question other than Tasman Business Consultants. (He does not plead to the
allegations as to the position of other defendants
(in [3]-[9]) other,
relevantly, than that he admits that his wife is a shareholder of Tasman
Business Consultants and save that he
asserts that Ms Li and Messrs Collard,
Koutsoukos, Wood and Truong were "contractors" to FTC.)
- As
to Ms Li, it is alleged (at [3]) that at all material times she was a director
or alternatively an officer of Secured Bond, 888
Vanuatu, Barclaywest and GP
Global; an officer of FTC; a shareholder of Secured Bond, 888 Vanuatu,
Barclaywest, North Wave and GP
Global.
- As
to Mr Collard, it is alleged (at [4]) that at all material times he was a
director or alternatively an officer of Secured Bond,
888 Vanuatu, Barclaywest
and North Wave; an officer of FTC; a shareholder of Secured Bond, 888 Vanuatu,
Barclaywest, North Wave and
GP Global. (Mr Collard, as I understand it, wishes
to maintain that he performed no more than an administrative role for those
companies
and acted at all times on the instructions or direction of Ms Li.
There is no evidence from which I could draw that conclusion.)
- As
to Ms Wu, it is alleged (at [5]) that at all material times she was an officer
of 888 Vanuatu and Barclaywest. Ms Wu denies that
she was an officer of the said
companies. (The difficulty for Ms Wu is that there is copious material from
which it is apparent that
Ms Wu signed documents and gave instructions on behalf
of those companies - including emails advising as to whether particular
transfers
were subject to the Diligence Discovery process. Ms Wu may well have
acted in this regard solely on the instruction or at the direction
of Ms Li, or
she may have acted on the direction or instruction of Mr Collard or even, as Mr
Hobbs asserts, Ms Dong. However, the
evidence clearly supports the conclusion
that the role she performed was as an officer of the companies and I so
find.)
- As
to each of Mr Koutsoukos, Mr Wood and Mr Truong, it is alleged (at [6], [7] and
[8] respectively) that at all material times he
was a director or alternatively
an officer of PJCB, ISL, ISPL, 888 Turks & Caicos; J&B Financial;
Destiny; 888 Management
Australia (now known as Serenity Management Pty Ltd); an
officer of FTC; a shareholder of 888 Management Australia (and that in the
case
of Messrs Wood and Truong that they were also shareholders of J&B
Financial).
- As
to Mrs Hobbs, it is alleged (at [9]) that at all material times she was a
director or alternatively an officer of Geneva Financial
and a shareholder of
Tasman Business Consultants. Mrs Hobbs admits that she was an "administrator" of
Geneva Financial and a shareholder
of Tasman Business Consultants but otherwise
denies the said allegations.
- I
interpose to note (as adverted to earlier) that it is by no means clear what Mrs
Hobbs and others, including Mr Hobbs, understood
the role of "administrator" of
a company (as opposed to a scheme) to be, if not (at the very least) an officer
of the company, in
circumstances where the administrator seems to have been the
one responsible for the day to day operational decisions of the company.
I have
already pointed to the confusion as to corporate nomenclature and roles evident
on the part of many of those involved in the
schemes the subject of the
proceedings.
- Mr
Hobbs' position varied, as between companies, as to whether he accepted that the
person who was administrator was also the owner
of the company. While he saw
himself as owner of FZF Vanuatu (and Ms Dong only as administrator of that
company), he said that the
owners of Geneva Financial were his wife and
sister-in-law (seemingly on the basis that they were the administrators of that
company).
The only apparent difference in those two scenarios seems to be that
he considers that his wife and sister-in-law had incorporated
Geneva Financial
for their own purposes but that Ms Dong had incorporated FZF Vanuatu at his
request and on his behalf. In cross-examination,
he appeared to accept that the
owner of an IBC was its beneficial owner, but said that his understanding was
that being an administrator
of an IBC did not mean that he or she was the owner
of the IBC.
- Mr
Hobbs was insistent that a beneficial owner of an IBC was not the same as
someone who was a beneficial shareholder (though he did
not make clear the
difference he perceived between the two), maintaining that the position with
offshore IBCs was different to that
which applied in relation to companies
incorporated in the jurisdiction (and insisting that one or more of the IBCs
should have been
"hybrids" - by which he seemed to mean they should have been
incorporated as companies limited by shares and guarantee).) In any
event, what
the persons involved in the schemes called themselves is not the relevant test.
The question is what role they performed.
- As
to the particular scheme administrators, it is alleged that at all material
times Mr Clements was a director or officer of Preserved
Investments and Mr
Robert Fitzgerald was a director or officer of Ultimate Investments ([33]); that
Mr Bernard Moore was a director
or officer of North Wave ([34]); that Mr Guo
Ping Zhang was a director or officer of GP Global ([35]); and that Mrs Brenda
Hobbs
was a director or officer of Geneva Financial ([36]). (Mr Hobbs' defence
contains a non-admission in relation to the matters alleged
in each of these
paragraphs. Mrs Hobbs admits that Mrs Brenda Hobbs was an "administrator" of
Geneva Financial but otherwise denies
the allegation made as to her
sister-in-law's position in [36].)
- For
the reasons that I set out in relation to the findings in respect of the
individual schemes, I find that each of the scheme administrators
was a de facto
administrator of the relevant corporate administrator and that Mr Hobbs was a
shadow director of each of the said
corporate administrators.
- For
completeness, I note that, as to the allegations in respect of the place and
date of incorporation (and deregistration, as the
case may be) of the various
corporate entities contained in [10]-[32], Mr Hobbs admits the paragraphs in
which allegations are made
as to Geneva Financial, FTC and Tasman Business
Consultants ([13], [18] and [29] but otherwise pleads that he does not know and
cannot
admit the allegations made. (I note that, perhaps somewhat surprisingly,
this includes the allegation in [28] as to Magny-Cours,
a company that Mr Hobbs
himself made application to acquire and the disbursement of funds from which he
ultimately accepted he was
(jointly or otherwise) in a position to control, as
well as the allegations in [30] and [31] respectively - the former relating to
FZF Anguilla, on which letterhead Mr Hobbs wrote quite a quantity of
correspondence as "Consultant" and, on at least one occasion,
as "director"; the
latter relating to FZF Vanuatu, a company that in, the witness box, he said was
"his" because it had been set
up for him.)
- Mrs
Hobbs admits the allegations as to the incorporation of Geneva Financial ([13])
and Tasman Business Consultants ([29]) but otherwise
pleads that she has no
knowledge and therefore cannot admit the balance of those
paragraphs.
Findings - individual schemes
- In
relation to Mr Hobbs' role in individual schemes, and before turning to the
respective schemes, I note that Mr Hobbs denies that
he was "the principal on
all the funds".
- Mr
Hobbs makes a number of submissions as to why it is that I should not conclude
that he had a controlling or guiding role in relation
to the various investment
schemes (or as to why I should not find that he was the person on whose
direction or instructions the so-called
Hobbs scheme operated). In so doing, he
has no difficulty, it seems, in accepting that there was a financial product
that was being
offered for investment through the particular schemes, but he
characterises this (as does Mr Collard) as the "Reisinger Product",
she being
the individual who he contends was responsible for the relevant operation of the
individual schemes (at least in relation
to the investment, by those which did
so invest, through Cadent).
- Mr
Hobbs submits, first, that it must be the case that any investment (presumably
any investment through Cadent) had to meet Ms Reisinger's
and New World
Holding's requirements. Mr Hobbs submits that, no matter what Mr Hobbs did,
without Ms Reisinger/New World Holdings
as the intermediary to the Cadent
investments, nothing would have happened. (Linked to that is the submission that
it was Ms Reisinger/New
World Holdings that required the use of IBCs, and that
this was in order to meet the US Securities Exchange Commission requirements.
There is no evidence to support that assertion. It is also inconsistent with
other assertions by Mr Hobbs that it was Mr Becker who
advised that the use of
an IBC was necessary.)
- While
there is no evidence as to the particular requirements of New World Holdings (or
Ms Reisinger, assuming they were different
from those of New World Holdings)
other than that which can be gleaned from the correspondence over the period
(so, for example,
the complaint made by Ms Reisinger in 2003 suggests that there
were licensing requirements that she was obliged to meet in relation
to
investments), I would be prepared to accept that someone seeking to place funds
through an entity such as New World Holdings would
be required to meet whatever
internal requirements New World Holdings might have imposed (and whatever
regulatory requirements were
there applicable). I would also be prepared to
accept that, had Ms Reisinger or New World Holdings not accepted the moneys for
placement
with Cadent, then the investment schemes would not have been able to
place funds with Cadent (at least without coming to some form
of arrangement
with another broker in the United States). That, however, does not mean that
"nothing would have happened". There
are a range of possibilities as to what
might then have happened in relation to investment of the funds (particularly
bearing in
mind that not all schemes invested through Cadent). In any event, it
is not clear to me how that addresses the question as to who
it was, as at the
Australian/New Zealand end of the investment transaction, that was controlling
the operation of the investment
schemes.
- At
most, it might suggest that (if the interposition of an offshore IBC had in fact
been a regulatory requirement for investment in
the relevant US market, or of
New World Holdings), the inclusion of the IBC requirement as a step in the
FTC/OEM/KLM process was
something that may have been suggested or initiated by
Ms Reisinger (not that the process itself was something developed and operated
by Ms Reisinger). However, given that the evidence establishes that there was at
least one scheme that had invested through Cadent
(through Mr Caffray's NCCN
account) before Ms Reisinger's involvement, it is difficult to place
responsibility for the development
of this part of the process on Ms Reisinger
or New World Holdings. (The first Elite Premier scheme (about which Mr Hobbs
spoke at
the DVD Seminar and for which his FTC executives were informed
contracts were available as at 2002) was in operation prior to the
first
involvement by any of the funds with Cadent through New World Holdings or Ms
Reisinger.)
- Mr
Hobbs contends that it was "Ms Reisinger/Mr Kip Becker that established the
OEM/KLM arrangements" and that it was Mr Becker that
arranged for FTC to be set
up. In support of those contentions, Mr Hobbs asserts that all the documentation
with New World Holdings
and Cadent was handled through Ms Reisinger; that none
of the documentation was signed by him; and that Cadent and New World Holding
accounted to the fund administrators and not to him. (The significance of the
manner in which the Cadent accounts were opened or
operated is something that
cannot be related to Mr Becker's involvement vis a vis that of Mr Hobbs, since
Mr Becker was unfortunately
deceased by the time that the investment schemes
opened accounts with Cadent.)
- As
to those matters, I have considered elsewhere the inconsistency in the accounts
Mr Hobbs has given as to the establishment and
ownership of FTC. As to the
OEM/KLM arrangements, there is simply no evidence that anyone else was involved
in the overall implementation
and control of that process apart from Mr Hobbs.
- At
least some of the Cadent documentation was handled otherwise than through New
World Holdings (and, according to Ms Reisinger, on
one early occasion without
her knowledge or input). Further, it is incorrect for Mr Hobbs to assert that
none of the New World/Cadent
documentation was signed by him (leaving aside the
Global Funerals Cadent documentation that he accepts he signed), since he signed
as company secretary for Geneva Financial on its application.
- Relevantly,
I accept the evidence of various of the scheme administrators (and others, in
particular Mr Stavropoulos) who have deposed
to Mr Hobbs giving them
instructions and/or assistance as to the opening of the accounts (including
filling out of the Cadent forms
in which Mr Hobbs told at least the J&B
Financial officers to fill in the forms by reference to Mr Hobbs' years of
experience
in the various markets and the (asserted) value of the intellectual
property in the funds). The general uniformity of the responses
set out in the
completed Cadent applications is consistent with the evidence given by those
scheme administrators as to Mr Hobbs'
involvement in the process. In the case of
Mr Stavropoulos (who did utilise the assistance of Ms Reisinger in relation to
the completion
of the account opening, it was clear from Ms Reisinger's
correspondence that she was doing so to assist Mr Hobbs who was ill at the
time,
she having first referred Mr Stavropoulos to Mr Hobbs if he needed
instructions).
- Furthermore,
when issues arose as to the information necessary for Mr Hobbs' foreign broker
registration, Ms Reisinger deferred to
Mr Hobbs for the relevant answers and it
was to Mr Hobbs that Ms Reisinger turned when instructions were to be given to
scheme administrators
not to communicate with Cadent directly (or to explain
matters such as the 6 wire transfers from J&B Financial). None of that
is
consistent with Mr Hobbs' disavowal of involvement in relation to the Cadent
accounts; nor is it consistent with Ms Reisinger
being the controlling person in
relation to the investment schemes.
- As
to the submission that the accounting by New World and Cadent was to fund
administrators and not to Mr Hobbs, the evidence establishes
that there was a
regular flow of communications between Ms Reisinger and Mr Hobbs or copied to Mr
Hobbs and many instances where
his input seems to have been sought in relation
to particular matters. Mr Hobbs' denial that the Cadent daily statements were
sent
to him is unreliable given that he also suggests that he did not look at
(or was not always shown) documents that came to the Nelson
office email
address. The business records of both Cadent and New World Holdings clearly show
the payment of commissions to Mr Hobbs
or into his account and there are
communications between Mrs Hobbs and New World Holdings from time to time
enquiring as to her husband's
commission payments in terms that make it highly
unlikely that this was not information relating to him. There is certainly not
the
separation between Mr Hobbs and New World/Cadent that one would expect if he
had no involvement whatsoever in the dealings between
the various scheme
administrators with Cadent or New World Holdings.
- Mr
Hobbs refers to the evidence of Ms Dong (at [121],[147] - [149], [151] (as to
the incorporation by Ms Li of companies and as to
the opening by Ms Li of
accounts at Cadent) as being evidence that matters of that kind were done
independently of any input from
himself. He notes that each of Ms Dong, Mr
Koutsoukos and Mr Truong in their affidavits has spoken of material sent by Ms
Reisinger
for the opening of accounts, change of traders, allocation of leverage
and the amounts to be traded.
- Mr
Hobbs also refers to passages in Ms Reisinger's examination transcript as
supporting the submission that she dealt directly with
various of the scheme
administrators in respect of their Cadent accounts and that he (Mr Hobbs) was
not a principal in respect of
those accounts. In particular, he refers to Ex AO
p329.11 - p333.24 (where Ms Reisinger refers to a discussion with Mr Koutsoukos,
Mr Truong and Mr Wood as to her "strong opinion about Chuck Reeder of CBOR that
was coming into the portfolio"). Ms Reisinger (in
that portion of the
transcript) says she emphasised Mr Reeder's background and his trading style; as
well as his extensive track
record, and that his trading style was "short-term";
she refers to advice given to them as to the adding of balance to their
portfolio
by the addition of precious metals exposure and as to have a
well-balanced diversified exposure to the markets from short-term, medium
term
to long-term. Ms Reisinger confirmed that she had recommended Mr Reeder for
their portfolio. Mr Hobbs also refers to the transcript
at p389.1 - p393.6
(relating to the number of accounts that were opened with Cadent and identifying
who had sent the account opening
documents).
- Mr
Hobbs submits that there is no evidence that he provided "any such documentation
and arrangements (or advice)" regarding the individual
fund management for
traders or leverage in relation to any of the accounts (making specific
reference to the Geneva Financial Cadent
in respect of which he asserts that his
wife and Mrs Brenda Hobbs authorised all allocation of capital to traders and
leveraging
arrangements.). Recognising, no doubt, the difficulty that some of
the communication from Ms Reisinger to Mrs Hobbs referred to Mr
Hobbs in terms
that suggested he would have some input or would provide advice or instructions,
and referring in particular to the
email in which she suggests that Mrs Hobbs
"wait for David to come home", Mr Hobbs asserts that Mrs Brenda Hobbs and his
wife did
not seek advice from him on the operation of "their" Geneva Financial
account. (That is a matter on which no evidence was adduced
by Mr Hobbs. I treat
it as assertion and, having regard to the unreliability of other blanket denials
by Mr Hobbs, I place no weight
on this assertion.)
- I
have referred earlier to various of the communications with Ms Reisinger
relating to the funds. I do not accept that the giving
of instructions from time
to time by scheme administrators to Ms Reisinger demonstrates that Mr Hobbs was
not ultimately the controlling
operator of the schemes. I consider that the
evidence amply demonstrates the referral of matters relating to the funds (and
their
investment with Cadent) by scheme administrators (and Ms Reisinger) to Mr
Hobbs, which is consistent only with him having an overall
oversight
role.
- Turning
first to the Integrity Plus fund, I accept that the evidence establishes that as
at the time the Integrity Plus fund was established
each of Mr Wood, Mr Truong
and Mr Koutsoukos had no experience managing (and very limited financial or
business expertise to manage)
an investment fund such as Integrity Plus.
- In
that regard, if the role of administration of a pooled management investment
fund of this kind was no more than an administrative
role requiring good
book-keeping skills and honesty, as Mr Hobbs submits, then one wonders why there
would be a need for the imposition
of regulatory standards and requirement for
financial services licences for those in this area. It is difficult to accept
that investors
would have understood (or thought it acceptable) that they were
investing considerable amounts of money, the making of relevant investment
decisions as to which would be in the hands of no more than honest book-keepers.
Moreover it is inconsistent with the emphasis placed
by Mr Hobbs on his own
financial experience when addressing those in attendance at the DVD Seminar (or
as recounted by those attending
other seminars at which he spoke).
- The
logical conclusion from an acceptance (though Mr Hobbs did not accept this) that
these (or other) scheme administrators had little
or no expertise in dealing
with sophisticated financial investments is that not only is it not credible to
suggest that they could
have set up their own investment funds, assessed
investment products and put in place arrangements by which offshore trading
using
invested funds could take place (something Mr Hobbs was at pains to tell
others how much effort and money that had taken him to put
in place) but also
that they must have had direction from someone who did have that level of
sophistication. I accept that the only
credible and likely candidate for that
role, on the facts of this case, is Mr Hobbs.
- I
accept the evidence of the three J&B Financial officers that Mr Hobbs
offered Mr Wood, Mr Truong and Mr Koutsoukos the opportunity
for them to operate
the Integrity Plus fund and that he arranged for them to be the administrators
of Integrity Plus. There is no
other plausible explanation for how these three
(with no experience in the management of such funds) became involved in the
administration
of Integrity Plus (and, relevantly, how Mr Koutsoukos became
involved with each of Mr Wood and Mr Truong, they not having had a previous
association with him before the J&B Financial office was established).
- Nor
is there any plausible explanation for why they would otherwise have paid the
sum of $150,000, as they did, to Magny-Cours in
2004; there being no investment
agreement in evidence to provide an alternative explanation for that payment. As
noted, the direction
or oversight of Mr Hobbs is consistent with the fact that
Mr Koutsoukos' involvement or association with Mr Truong and Mr Wood seems
to
have been only shortly before the three, together with Ms Dabelic, commenced
working together and with the role Mr Hobbs played
when Ms Dabelic left the
J&B Financial offices - by insisting that she be paid an amount of $50,000.
(In passing I note that
there is some evidence to suggest that Ms Dabelic had
operated another investment fund - the Eighth Wonder fund - to which reference
is made on the Parsons' diagram and for which a website was created by Mr
Parsons on Mr Hobbs' instructions.)
- I
further accept the evidence of the three J&B Financial officers that Mr
Hobbs explained to them how to set up and operate the
Integrity Plus fund and
directed the steps to be taken in setting it up (including the opening of the
Technocash account.). I also
accept that Mr Hobbs provided them with the
original scheme documents for Integrity Plus and told them how these documents
were to
be used. (Given the remarkable similarity between the Integrity Plus
scheme documents and those for other schemes in which the three
were held
involved, and their inexperience in the management of investment funds, no other
explanation is plausible. In particular,
the suggestion that Mrs Watson simply
provided documents received from Mr Becker is not supported by Mrs Watson's own
evidence, nor
any contemporaneous record.)
- I
accept that Mr Hobbs gave the three J&B Financial officers directions and
instructions as to how to operate Integrity Plus,
not simply as to
administrative matters such as the designation of the roles that each would play
in the operation of Integrity Plus
but also as to the more fundamental matters
such as the opening in due course of the Cadent account and advice as to the
payment
of returns and the like. In particular, I accept that at all material
times, Mr Wood, Mr Truong and Mr Koutsoukos were guided by
Mr Hobbs in the
operation of Integrity Plus, consulted with Mr Hobbs in relation to major
decisions and generally accepted Mr Hobbs'
instructions and recommendations
regarding Integrity Plus, directing any queries they had regarding Integrity
Plus principally to
Mr Hobbs. (It is submitted that they generally accepted
those recommendations without querying anyone else. While I accept that as
a
general submission there is evidence that towards the latter stages of the
working relationship, at least, they did query Mr Hobbs'
decisions and a
suggestion that at one stage Mr Hobbs considered that Mr Koutsoukos may have
been attempting to by-pass him in dealings
with New World Holdings which
apparently arose from Mr Koutsoukos directly liaising with Ms Reisinger or New
World in relation to
the Cadent accounts.)
- I
find that Mr Wood, Mr Truong and Mr Koutsoukos followed Mr Hobbs' instructions
in relation to payments of profit, commissions, investments
and loans paid from
the PJCB Technocash account. (Though I accept that they made decisions in
relation to the Cadent account trading
from time to time on recommendations from
Ms Reisinger it seems to me that this was in accordance with Mr Hobbs'
instructions, in
effect, that they rely on her advice and with his implicit
authority.)
- I
accept their evidence that investments, loans and other payments made from the
PJCB Technocash account were generally made at the
direction of Mr Hobbs. To the
extent that these were made to associates of Mr Hobbs or to companies related to
Mr Hobbs and for his
ultimate benefit, the fact that copies of agreements were
sent to Mr Hobbs for his approval and that on a number of occasions he
provided
the drafts or templates of these agreements to Mr Wood, Mr Truong and Mr
Koutsoukos, demonstrates Mr Hobbs' involvement
in the scheme (and his disregard
for the particular investments into which scheme funds might properly be
channelled).
- ASIC
submits that Mr Wood, Mr Truong and Mr Koutsoukos did not make any substantive
operational decisions in relation to Integrity
Plus without the approval of Mr
Hobbs and that their involvement in the setting up and operation of Integrity
Plus was only in an
administrative (or company secretary-type) role. ASIC
further submits that the three did not perform any top-level management
functions
or make decisions regarding the business or operation of Integrity
Plus other than at the ultimate direction of Mr Hobbs. I consider
that the
evidence makes good each of those submissions.
- ASIC
submits (and I accept) that each of Mr Wood, Mr Truong and Mr Koutsoukos was
accustomed to act (together or individually) at
the direction and on the
instructions of Mr Hobbs in relation to the operation of Integrity Plus and
PJCB. ASIC further submits (and
I accept) that (at the direction and with the
advice, assistance or instructions of Mr Hobbs) Mr Wood, Mr Koutsoukos and Mr
Truong,
on behalf of PJCB: opened and operated the Technocash account for
Integrity Plus; paid returns to investors and commissions to FTC
executives from
principal amounts contributed to Integrity Plus by the investors not from
profits (and, as I find in due course,
that Mr Hobbs knew or ought to have known
that this was happening); and transferred funds received from investors in
Integrity Plus
(purportedly by way of investment or otherwise).
- I
find that each of the J&B Financial officers was a de facto director and
officer of PJCB and that Mr Hobbs was a shadow director
of
PJCB.
- Super Save
and its corporate administrators
- I
accept the evidence of Messrs Wood, Truong and Koutsoukos that, in mid 2006 at a
meeting in New Zealand, Mr Hobbs told them that
he would be establishing a
superannuation fund (Super Save) for them to operate and that he arranged for Mr
Wood, Mr Truong and Mr
Koutsoukos to be the administrators of Super Save. The
evidence of Mr Hobbs as to the meeting in mid 2006 (namely that it took place
between the four J&B Financial officers, including Ms Dabelic, and that it
"would have" been to discuss "production" as part
of FTC business) is
inconsistent with the time at which Ms Dabelic left J&B Financial and
implausible having regard to the length
of time the three had by then been FTC
executives and the fact that steps to set up Super Save commenced very shortly
thereafter.
- I
accept that Mr Hobbs explained to Mr Wood, Mr Truong and Mr Koutsoukos how to
set up and operate Super Save; directed each step
in setting it up, including
the opening of bank accounts; provided them with the original scheme documents
for Super Save and told
them how these documents were to be used (the question
as to whether Mr Hobbs himself typed amendments to the template documents
as
suggested by Mr Wood is one that seems to me to be immaterial having regard to
the clear evidence in the form of the email communications
which establish that
revised drafts of the Super Save scheme memoranda came from Mr Hobbs' office -
and the later evidence as to
the changes to the memoranda to remove Cadent's
name therefrom). I also accept that Mr Hobbs directed Mr Wood, Mr Truong and Mr
Koutsoukos
to change the corporate entity nominated as the administrator of
Super Save on two occasions.
- I
find that Mr Hobbs directed Mr Wood, Mr Truong and Mr Koutsoukos to open a
trading account for Super Save with Cadent (Mr Halley
noting that when this was
closed due to issues as to the manner in which the moneys had been transferred
to Cadent, Mr Hobbs then
directed them to open another).
- It
seems to me clear that the principal relationship with Cadent/New World in the
case of Super Save and all the other schemes was
through Mr Hobbs. I also accept
that Mr Hobbs either monitored the Cadent accounts of Super Save or was informed
by Ms Reisinger
from time to time as to when returns were being
paid.
- I
find that, at all material times, each of Mr Wood, Mr Truong and Mr Koutsoukos
was guided by Mr Hobbs in the operation of Super
Save; that they consulted with
Mr Hobbs in relation to major decisions as to the operation of Super Save; and
that they were accustomed
to act upon and follow Mr Hobbs' instructions and
recommendations regarding Super Save, including his instructions in relation to
payments of profit and commissions from Super Save.
- ASIC
submits (and I accept) that Mr Wood, Mr Truong and Mr Koutsoukos did not make
operational decisions in relation to Super Save
without the approval of Mr Hobbs
and that their involvement in the setting up and operation of Super Save was in
an administrative
role. I accept that they did not perform top-level management
functions or make decisions regarding the business or operation of
Super Save
other than at the ultimate direction or approval of Mr Hobbs (or, following
referral by him and hence his implicit approval,
of Ms Reisinger). (Whether Ms
Reisinger was Mr Hobbs' agent in providing recommendations as to traders and the
like is, in my view,
a different issue and one that I address in due
course.)
- I
accept that there is a striking similarity between the manner in which the
setting up of this fund (and the relevant fund documentation
for Super Save) and
that in relation to 888 Vanuatu (with which Messrs Wood, Truong and Koutsoukos
were not involved). I consider
that this leads to the inescapable inference that
both were done at the instruction and direction of Mr Hobbs.
- I
do not accept that the evidence establishes that there is any real possibility,
or reasonable alternative hypothesis, to the effect
that the various investment
funds were set up on the instructions or direction of Ms Reisinger or that they
amounted to a separate
"Reisinger product" developed or controlled by Ms
Reisinger (although I consider it likely that it was Ms Reisinger (whether alone
or with other investment advisers) was involved in developing or facilitating
the procedures by which pooled or "blended" investment
funds were able to be
traded through Cadent in accounts that were set up (other than in the case of
the Preserved Investments account)
as proprietary (not pooled)
accounts.
- In
the circumstances, ASIC submits (and I agree) that each of Mr Wood, Mr Truong
and Mr Koutsoukos was accustomed to act (both together
and individually) at the
direction of Mr Hobbs in relation to the operation of Super Save and each of 888
Turks & Caicos, 888
Management Australia, ISPL and ISL (those being the
successive corporate administrators of, or in the case of 888 Management
Australia,
the entity acting as agent of the corporate administrators of, the
Super Save fund and that (at the direction and with the advice,
assistance or
instructions of Mr Hobbs), they opened and operated bank accounts for Super Save
on behalf of the said companies. Further,
I find that, to Mr Hobbs' knowledge,
each of the said companies paid returns to investors and commissions to FTC
executives from
principal amounts contributed to Super Save by the
investors.
- I
find that each of the J&B Financial officers was a de facto director and
officer of each of the corporate administrators of
Super Save and that Mr Hobbs
was a shadow director of each of those companies.
- First Secured
Bond Unit Trust and Master Fund (administered by Secured
Bond)
- In
relation to Mr Hobbs' involvement with the First Secured Bond Unit Trust, ASIC
relies principally on the evidence of Mr Hogno,
Ms Huang, Mr Jouravlev, Mr
Bernard Moore and Mr Zhang; in relation to the Master Fund on the evidence of Ms
Dong, Mr Hogno, Ms Xu
and Mr Zhang.
- Secured
Bond was the corporate administrator of each of the First Secured Bond Unit
Trust and the Master Fund. At the time of its
incorporation each of Mr Collard
and Ms Li was a 25% shareholder of Secured Bond. (From September 2004, their
respective holdings
in the company increased to 50%.)
- Over
the period from its incorporation to 9 December 2006, each of Mr Collard and Ms
Li acted as an "administrator" of Secured Bond
(a non-technical term that seems
to have been adopted by a number of those associated with the schemes, perhaps
assuming it to have
the same content as administrator of the scheme or in an
attempt to distance themselves from the role of director).
- From
25 May 2008, Mr Collard was formally appointed as the "sole administrator" of
Secured Bond. It is submitted (and I accept) that
it can be inferred that before
this time (ie, from 12 April 2007 to 25 May 2008) Mr Collard was or regarded
himself as the "joint
administrator" of Secured Bond with Ms Li, with whom he
shared administration responsibilities. It is noted that Mr Collard was named
as
administrator of Master Fund on PowerPoint presentations given to investors. Ms
Li seems to have maintained the records of Master
Fund.
- From
9 November 2006 to 12 April 2007, each of Mr Collard and Ms Li was formally
appointed a director of Secured Bond (those appointments
apparently being made
at or about the time of the opening of the Cadent account for Secured Bond when
Cadent seems to have sought
proof as to the authorisation of persons to bind the
companies opening those accounts - as for example occurred when Mr Stavropoulos
took steps in relation to the opening of an account for the fund he was then
setting up or when Ms Li communicated with Ms Reisinger
as to the directorship
of the entity of which Mr Zhang was described as the
administrator).
- From
July 2004, each of Mr Collard and Ms Li was a signatory to and operated the
Secured Bond bank accounts with BNZ. They together
opened and operated the
Secured Bond Technocash account, to which Mr Collard was a
signatory.
- I
accept that each of Mr Collard and Ms Li promoted both the First Secured Bond
Unit Trust and Master Fund to potential investors
(and I accept Ms Dong's
evidence that Ms Li also instructed Ms Dong to promote Master Fund and
instructed her as to the investment
process for the fund).
- Ms
Li signed various private placement agreements for both First Secured Bond Unit
Trust and Master Fund on behalf of Secured Bond;
Mr Collard signed Master Fund
agreements on behalf of Secured Bond. In some instances each signed Master Fund
"temporary" contracts
on behalf of Secured Bond). Both sent correspondence to
investors in the respective funds (Mr Collard signing as "administrator"
of
Secured Bond, Ms Li variously as administrator of First Secured Bond Unit Trust,
Master Fund and Secured Bond). Mr Halley submits,
and I accept, that when Mr
Collard and Ms Li signed documents as administrator, each did so in the capacity
of the "controller" of
Secured Bond. It is also noted that there is evidence
that Ms Li stated on various occasions that she was the administrator of Master
Fund and controlled Master Fund.
- There
is evidence that Mr Collard made arrangements for some of the investments in
First Secured Bond Unit Trust to be transferred
to Elite Premier Option Two Unit
Trust (one of the funds administered by Mr Clements and Preserved
Investments).
- I
note that Ms Li and Mr Collard both signed the Cadent Account Application and
Agreement for Corporations document and did so on
behalf, and as administrator,
of Secured Bond (Ms Li signing as secretary for the company; Mr Collard
providing a personal guarantee
to Cadent in connection with the Secured Bond
Cadent account) and that each of Mr Collard and Ms Li corresponded with Ms
Reisinger
in relation to the operation of the Secured Bond Cadent account.
- A
number of the features of this fund were common to those of other funds. Mr
Collard authorised the deduction of additional due diligence
fees by New World
Holdings from the Secured Bond Cadent account as administrator of Secured Bond
(and each of Mr Collard and Ms Li
signed the authorisation for Cadent to deduct
the additional US$1 round turn fee from the Secured Bond Cadent account to be
paid
to Mr Hobbs); and Mr Collard entered into a hosting agreement on behalf of
Master Fund with HelloPages Limited for the creation of
a Master Fund website
and subsequently, each of Mr Collard and Ms Li signed a hosting cancellation
notification on behalf of Master
Fund and Secured Bond (after the breakdown of
the relationship between Mr Parsons and Mr Hobbs). (In passing, I note that the
fact
that all of the corporate administrators for whom websites were created
cancelled the hosting agreements at around the same time
as the falling out
between Mr Parsons and Mr Hobbs is a telling indication of the influence Mr
Hobbs exercised in respect of the
individual schemes.)
- The
evidence discloses that both Ms Li and Mr Collard received payments from Secured
Bond out of the amounts invested in Master Fund
(Mr Halley noting that they
received half the profits from Master Fund). There is also evidence that Mr
Collard received the benefit
of a payment by Secured Bond from amounts invested
in Master Fund to Excite Holidays for travel by, among others, himself.
- Mr
Collard also signed a loan agreement between Secured Bond and the R & B
Hobbs Family Trust on behalf of Mr Emori Toloi (the
person who ultimately became
administrator of the funds administered by Mr Collard), an investment that I
accept could on no view
be said to fall within the nature of the investments
into which the funds administered by Secured Bond were to be
invested.
- ASIC
submits (and I so find), by reference to the above, that at all material times
each of Ms Li and Mr Collard acted as an officer
or de facto director or officer
of Secured Bond. (I note that in the period from 9 December 2006 to 12 April
2007 each was also apparently
recorded as a director of Secured Bond.)
- As
to Mr Hobbs' involvement with Secured Bond and the two funds it administered,
ASIC relies on the fact that Mr Hobbs received invoices
sent to Tasman Business
Consultants Ltd from First Anguilla Trust Company for services related to
Secured Bond (including for transfer
of shares, annual registration fees, and
annual registered office/agent, corporate director and nominee shareholder fees)
from which
it submits, and I accept, it should be inferred that Mr Hobbs was
involved in the incorporation of Secured Bond. There is also evidence
that Mr
Hobbs promoted First Secured Bond Unit Trust to investors.
- ASIC
submits (and I accept that this is the case not simply for this but for the
other investment schemes) that there were striking
similarities between the way
in which these funds operated and the way other funds the subject of these
proceedings operated insofar
as: investors in both First Secured Bond Unit Trust
and Master Fund were required to subscribe to FTC before investing in either
fund and were required to follow the OEM/KLM process in order to obtain scheme
memoranda and agreements; scheme memoranda and private
placement agreements were
in substantially the same form as other scheme agreements drafted or provided by
Mr Hobbs (or used by other
schemes with which Mr Hobbs had an association) and
printed and distributed in the same way as others; and the trustee company
identified
in the scheme memoranda for each of First Secured Bond Unit Trust and
Master Fund was Trans Management Corporation (which, as I have
found above, was
controlled by Mr Hobbs).
- ASIC
contends, and I accept, that it can be inferred from the fact that Secured Bond
opened and operated an account with Technocash
at the time when the majority of
the schemes operated Technocash accounts that Mr Collard was referred to
Technocash by Mr Hobbs
and that Mr Collard was directed by Mr Hobbs to open the
Technocash account. Secured Bond also opened and operated an account with
Cadent, consistently with the other schemes the subject of these
proceedings.
- I
infer from the similarity of the documentation in relation to the First Secured
Bond Unit Trust and Master Fund (and the absence
of any evidence that it was
prepared by Ms Li or Mr Collard or was provided to them by anyone other than
someone out of the Hobbs'
office) that the documentation was provided to them by
Mr Hobbs or on his behalf.
- ASIC
places weight on the fact that the First Secured Bond Unit Trust invested in the
Elite Premier Option Two Unit Trust (and that
investments in First Secured Bond
Unit Trust were transferred to that scheme) as indicating the relationship
between the respective
schemes and Mr Hobbs. He notes that First Secured Bond
Unit Trust also invested in KJB Trust Foundation (a company controlled by
or
associated with Mr Lynn Caswell, with whom Mr Hobbs had dealings at or about the
time of the investment).
- ASIC
also places weight in this regard on the evidence that supports the conclusion
that Mr Hobbs organised the loan from Secured
Bond to the R & B Hobbs Family
Trust after a request from Mr Robert and Mrs Brenda Hobbs. ASIC notes that
Secured Bond made a
payment to Magny-Cours (which, as I have found, was a
company controlled by Mr Hobbs and in which his brother also had an interest)
from accounts into which amounts invested in First Secured Bond Unit Trust had
been deposited. It is further noted that Secured Bond
made payments from
accounts in to which amounts invested in Master Fund had been deposited to each
of Tasman Business Consultants,
Fletcher Vautier Moore (for the benefit of
Tasman Business Consultants and Legend of Bathurst respectively) and Excite
Holidays,
for travel by persons including Mr Hobbs. (In this regard, ASIC does
not dispute that there were funds in the Secured Bond account
other than funds
invested in the schemes; the submission simply being that the funds in that
account were mixed and that payments
were made out of that account to the above
entities.)
- There
is evidence that concerns in relation to the Secured Bond Cadent account were
directed by Ms Li to Mr Hobbs, who passed them
on to Ms Reisinger. Ms Reisinger
copied Mr Hobbs in on correspondence in relation to the Secured Bond Cadent
account and from time
to time she corresponded with Mr Hobbs directly in
relation to the Secured Bond Cadent account. Ms Li sought advice from Mr Hobbs
in relation to profits in the Secured Bond Cadent account. (There is also
evidence, but on which I do not rely for the purposes of
reaching the
conclusions I have reached, due to the second hand nature of this evidence -
although I admitted it on the basis that
Ms Li was asserted to be an agent of Mr
Hobbs - that Ms Li told others that Mr Hobbs had found a trader for Master Fund,
that she
had learnt from Mr Hobbs, that she followed Mr Hobbs' instructions and
that Mr Hobbs was the "whole designer" of Master Fund.)
- As
noted earlier, Mr Hobbs was authorised by Secured Bond to receive an additional
US$1 fee per complete (round turn) transaction
on the Secured Bond Cadent
account (in addition to other commissions paid to him in relation to the
account). The fax authorising
this was sent from Mr Collard to Mr Hobbs' office
and then from Mr Hobbs' office to Cadent (and bears a fax transmission imprint
or header "FTCL"). (I do not accept Mr Hobbs' denial that he in fact received
the additional round turn commission so authorised
but in any event it is
relevant to note that such an authorisation was granted.)
- I
accept that Mr Hobbs took various steps relating to the operation of the funds
in general (that being inconsistent with the suggestion
that he had no overall
involvement with them). In relation to Master Fund (as with various others), he
arranged for a website to
be set up by Mr Parsons for Master Fund (and when Mr
Hobbs' business dealings with Mr Parsons ended, Mr Hobbs organised for a hosting
cancellation notice to be signed by Mr Collard and Ms Li). Mr Hobbs also
provided to Mr Collard a copy of the pro forma Geoffrey
Gee advice as to the
lack of any requirement to register the Vanuatu based IBCs in that jurisdiction.
- Mr
Halley also points to the fact that Secured Bond opened accounts with the Nelson
branch of BNZ, even though neither Ms Li nor Mr
Collard was a resident in that
place and there would seem no logical reason to have done so other than through
association with Mr
Hobbs.
- Mr
Halley notes that Master Fund invested with Mr Caffray, who deposited money into
the NCCN Cadent account and that, on occasion,
Mr Hobbs received copies of the
'daily' Cadent reports for the NCCN Cadent account from Ms Reisinger. There is
also evidence that
Mr Hobbs also directed Messrs Koutsoukos, Wood and Truong to
invest money from Integrity Plus with Mr Caffray. Mr Halley notes that
Mr Hobbs
was also copied into correspondence between Mr Collard, Ms Li and Mr Caffray.
From this it is submitted (and I accept) that
it can be inferred that Mr Hobbs
directed Master Fund to invest funds with Mr Caffray.
- Having
regard to the above, ASIC submits (and I accept) that Ms Li and Mr Collard (as
de facto directors or officers, or for some
time as directors, of Secured Bond)
acted on the instructions and directions of Mr Hobbs, and were accustomed to act
at the direction
of Mr Hobbs, in relation to the operation of both First Secured
Bond Unit Trust and Master Fund.
- In
relation to Master Fund, ASIC further submits (and I accept that the evidence
establishes) that at the direction and with the advice,
assistance or
instructions of Mr Hobbs and on behalf of Secured Bond in each case: Ms Li, Mr
Collard (and Mr Collard's son, Matthew),
opened and operated the Secured Bond
bank accounts for the operations of Master Fund; and that Ms Li and Mr Collard
transferred funds
received from investors in Master Fund to Mr Caffray and then
to Cadent by way of investment; transferred funds received from investors
in
Master Fund to Cadent by way of investment; and made payments from the said
Master Fund accounts to various persons, by way of
commission and otherwise, as
set out in the Master Fund Spreadsheets and summarised in the Master Fund
summaries.
- ASIC
contends that each of Mr Hobbs and Secured Bond knew, or ought reasonably to
have known, that Master Fund had not generated sufficient
profits to pay returns
paid from Master Fund. I accept that this the case for the reasons set out in
due course when addressing the
issue as to payment of returns otherwise than out
of profits.
- Similarly,
in relation to the First Secured Bond Unit Trust, ASIC submits (and I accept
that the evidence establishes) that, at the
direction and with the advice,
assistance or instructions of Mr Hobbs, and on behalf of Secured Bond: Ms Li, Mr
Collard (and Mr Matthew
Collard) opened and operated the Secured Bond bank
accounts for the operations of First Secured Bond Unit Trust; and that Ms Li and
Mr Collard transferred funds received from investors in First Secured Bond Unit
Trust to KJB Trust Foundation and to Preserved Investments,
purportedly by way
of investment and made payments from the said bank accounts to various persons,
by way of commission and otherwise,
as set out in the First Secured Bond Unit
Trust Spreadsheets and summarised in the First Secured Bond Unit Trust
summaries.
- From
the above, ASIC submits (and I find) that Ms Li and Mr Collard were directors
and officers of Secured Bond (at least being de
facto directors and for some
time being recorded in corporate resolutions as having been appointed as
directors) and that Mr Hobbs
was a shadow director of Secured
Bond.
- 888 (Super
Save) Fund and Pinnacle Fund (funds being administered by 888
Vanuatu)
- I
find that Mr Collard was primarily responsible for incorporating 888 Vanuatu. At
the time of its incorporation, Mr Collard was a
29% shareholder of 888 Vanuatu,
Ms Li was a 29% shareholder of 888 Vanuatu and Ms Wu was a 2% shareholder of the
company. (From 3
July 2008 Mr Collard was a 39% shareholder of 888 Vanuatu.) (Ms
Li instructed 888 Vanuatu shareholders to sign forms agreeing to
strike off 888
Vanuatu).
- From
the date of incorporation to 1 July 2006, Mr Collard acted as "administrator" of
888 Vanuatu. On 1 July 2006, Mr Collard was
formally appointed "administrator"
of 888 Vanuatu, and continued to act as administrator of the company, including
signing documents
and materials identifying himself as administrator. I accept
that when Mr Collard signed documents as administrator, he signed as
the
controller of 888 Vanuatu.
- Ms
Wu maintained the records of 888 Vanuatu. (She seems to accept that she
performed a bookkeeping role in that regard, though she
says that this was
unpaid and at the request of others.) I accept that Ms Li directed Ms Wu in
relation to maintaining the records
of 888 Vanuatu, coordinating 888 (Super
Save) Fund payments into the 888 Vanuatu Super Save Technocash account,
transferring investor
funds to Cadent and writing letters to Diligence
Discovery.
- Mr
Hobbs provided the 888 Fund Memorandum and Agreement to Ms Li for use by Ms Li
in respect of the 888 (Super Save) Fund and that
each of Ms Li and Ms Wu then
provided the 888 (Super Save) Fund memorandum to investors. (I also note that on
at least one occasion
Ms Wu assisted an investor to establish an SMSF and that
on another occasion Ms Li instructed Ms Dong and Ms Ou to assist an investor
to
complete paperwork for an investment in Pinnacle Fund.)
- From
at least 23 September 2006, Mr Collard was authorised as the signatory to the
888 Vanuatu company accounts. He opened and operated
the 888 Vanuatu Technocash
account in the name of 888 Management Inc Super Save and he opened and operated
the 888 Vanuatu Technocash
account in the name of 888 Management Inc Pinnacle
Fund. Mr Collard opened and operated the 888 Vanuatu Sovereign Bank account. Ms
Wu operated the 888 Vanuatu Technocash accounts, by coordinating Super Save
investor payments into the 888 Management Inc Super Save
Technocash account and
transferring investor funds to the 888 Vanuatu Cadent account.
- I
find that each of Mr Collard, Ms Li and Ms Wu promoted the 888 (Super Save) Fund
to investors (and that each of Ms Li and Ms Wu
promoted the Pinnacle Fund to
investors) and that Ms Li instructed Ms Dong on the promotion of the 888 (Super
Save) Fund.
- I
note that Mr Collard was named as administrator of the 888 (Super Save) Fund on
PowerPoint presentations shown to investors; he
signed at least one Pinnacle
Fund temporary contract on behalf of 888 Vanuatu; he sent correspondence to
investors in 888 (Super
Save) Fund and Pinnacle Fund as "administrator" of 888
Vanuatu; he opened and operated the 888 Vanuatu Cadent account, signing the
Cadent Application and Agreement for Corporations on behalf of 888 Vanuatu and
as administrator of 888 Vanuatu; and he provided a
personal guarantee to Cadent
for the 888 Vanuatu Cadent account. (The Cadent account application was faxed to
Ms Reisinger by Ms
Li.)
- The
Cadent Application and Agreement for Corporations lists Mr Collard as the sole
person authorised to act with regard to the 888
Vanuatu Cadent account.
- Both
Mr Collard and Ms Wu corresponded with Ms Reisinger in relation to the operation
of the 888 Vanuatu Cadent Account. Ms Wu corresponded
with Diligence Discovery
on behalf of 888 (Super Save) Fund and 888 Vanuatu.
- Ms
Wu signed Pinnacle Fund agreements and temporary contracts on behalf of 888
Vanuatu and sent correspondence to investors in 888
(Super Save) Fund and
Pinnacle Fund (on one occasion signing as administrator of 888 Vanuatu, and on
other occasions "per administrator"
of 888 Vanuatu). Ms Wu assisted investors to
withdraw funds from the 888 (Super Save) Fund and the Pinnacle Fund. There is
also evidence
that Ms Wu on occasion stated that she was the manager of 888
(Super Save) Fund.
- I
accept that each of Mr Collard and Ms Li received payments from 888 Vanuatu,
being amounts invested in the Pinnacle Fund.
- ASIC
submits, and I so find, that both Mr Collard and Ms Li were officers or de facto
directors of 888 Vanuatu and that Ms Wu was
an officer of 888
Vanuatu.
- As
to the position of Mr Hobbs, at the time of incorporation of 888 Vanuatu, either
Mr Hobbs or International Management Incorporation
(which I have found was
controlled by Mr Hobbs) was a 29% shareholder of 888 Vanuatu. (At some later
time, that shareholding in 888
Vanuatu was reduced to 26%.)
- ASIC
submits (and I accept) that Mr Hobbs provided the 888 (Super Save) Fund
Memorandum and Agreement to Ms Li; promoted 888 (Super
Save) Fund and Pinnacle
Fund to investors; stated that he designed 888 (Super Save) Fund for 888
Vanuatu; and established or otherwise
directed the creation of 888 (Super Save)
Fund for 888 Vanuatu.
- In
that regard, I note that the same investment process applied to Pinnacle Fund as
to other funds associated with Mr Hobbs, in that
investors were required to
subscribe to FTC and the trustee company for Pinnacle Fund was noted in the
scheme memorandum as Trans
Management Corporation. (There is no evidence of any
communications between the administrators of the 888 (Super Save) fund, the
Pinnacle fund or 888 Vanuatu, on the one hand and Trans Management Corporation
on the other hand - whether in its role as trustee
or
otherwise.)
- Ms
Li provided updates of the opening of the 888 Vanuatu Cadent account to Mr
Hobbs, and sent him the account opening documentation.
Mr Alan Matthews (of New
World Holdings) also sent emails in relation to the 888 Vanuatu Cadent account
to Mr Hobbs.
- ASIC
notes that 888 Vanuatu made a payment to Tasman Business Consultants, a company
controlled by Mr Hobbs, from amounts invested
in Pinnacle Fund.
- It
is submitted (and I accept) that it should be inferred that, in all material
respects, Ms Li and Mr Collard acted on the instructions
or directions of Mr
Hobbs in relation to the 888 (Super Save) Fund and Pinnacle Fund. In that
regard, I base that conclusion on the
following matters to which ASIC has
referred. Ms Li and Mr Collard were present when Mr Hobbs promoted the
investment opportunity
in 888 Vanuatu to potential shareholders. Each of Ms Li
and Mr Collard became shareholders in 888 Vanuatu and promoted or supported
the
investment opportunity. The setting up of 888 Vanuatu involved the payment by
shareholders of a sum of money (in effect to Mr
Hobbs, Mr Collard and Ms Li), as
they acquired interests in shares in 888 Vanuatu that were paid for by the other
shareholders. 888
Vanuatu opened and operated an account with Technocash, and Mr
Collard was referred to Technocash by Mr Hobbs. At the time 888 Vanuatu
opened
the Technocash account, the majority of the schemes operated Technocash
accounts; and Mr Collard opened an account with Sovereign
Bank in the name of
888 Vanuatu (at least part of the account opening form for which was sent by fax
to Sovereign Bank from Mr Hobbs'
office, with a fax header "FTCL" from which I
would infer that Mr Hobbs was involved in the opening of the 888 Vanuatu
Sovereign
bank account).
- Significantly,
the Pinnacle Fund Scheme Memoranda and private placement agreements are in
substantially the same form as other scheme
agreements drafted or provided by Mr
Hobbs (from which I infer that the relevant documentation for Pinnacle Fund was
not prepared
by Ms Li, Mr Collard or Ms Wu but was provided to them by Mr
Hobbs).
- I
accept the evidence that Mr Hobbs provided updates from time to time as to the
status of the investment opportunity in 888 Vanuatu
(usually in the presence of
Ms Li and Mr Collard). 888 (Super Save) Fund and Pinnacle Fund, through 888
Vanuatu, each invested with
Cadent, with whom Mr Hobbs had dealings at or about
the time of the investment. Further, Ms Li provided an update to Mr Hobbs on
the
progress of multiple accounts being opened with Cadent, including 888 Vanuatu,
and with respect to other company administrators
of schemes the subject of these
proceedings.
- Diligence
Discovery provided monitoring and reporting services to 888 (Super Save) Fund
(from which I infer that Mr Hobbs directed
Ms Li and Mr Collard to use the
services of that entity, for the reasons earlier outlined).
- A
copy of the Gee advice (provided by Mr Hobbs to Mr Collard) was provided to
Cadent on behalf of 888 Vanuatu.
- I
accept that the evidence establishes that it was the general practice of Ms Li
and Mr Collard to follow directions and instructions
of Mr Hobbs in respect of
Ms Li's and Mr Collard's activities both with respect to the schemes the subject
of these proceedings and
in their capacity as FTC executives.
- It
is submitted by ASIC (and I accept, for the reasons outlined in the discussion
of the agency allegations) that at all material
times each of Ms Li, Mr Collard
and Ms Wu acted as an agent of Mr Hobbs in promoting and operating unregistered
managed investment
schemes (whether independently or as part of an overall
single scheme) to solicit subscriptions to FTC and investments from retail
investors, including retail investors in Australia, in the name of an IBC, in
the funds the subject of these proceedings (including
those operated by 888
Vanuatu).
- It
is highly significant in my view that the setting up of the respective funds and
the operation of (and relevant documentation for)
the 888 (Super Save) Fund and
the Pinnacle Fund bear a remarkable similarity to that of the other schemes the
subject of these proceedings
(with which there would be no reason for an
association otherwise than through Mr Hobbs). I consider that the inescapable
inference
from the above is that the establishment and operation of these two
funds was at the instruction and direction of Mr Hobbs.
- Mrs
Watson confirmed that she had had some involvement in the setting up of the 888
Vanuatu account with Cadent. Tellingly, she said
that this came about in the
following circumstances:
A. David was leaving to go away. As he went out the door he just said "please
work with Jimmy Truong, Brian Wood and Con Koutsoukos"
to set up this situation
which would oversight the paper trail of money sent from clients, their
accountants, through the J&B
boys and up to Cadent and profits paid back, so
we needed Lisa Reisinger to complete that process.
- Mrs
Watson's evidence was that she thought she was doing that work as work "between
DDL and Con Koutsoukos et cetera" and that she
was "just to be someone else that
could make contact with or maintain contact with Lisa Reisinger and someone that
Con Koutsoukos
and Jimmy and Brian could discuss in a loop with Emma to make it
all happen" (though that does not explain why Mr Hobbs would have
needed to
become involved if, as he submits, he had nothing to do with the opening of the
Cadent accounts).
Q. And again you did this, I take it, on whose instructions? Who was asking
you to do this?
A. Well the original request was just one as David left the office to help
the guys get going, stay focused on what had to be done
and making sure that,
not necessarily in this order, but that Emma was part of it as well. Who drove
what I really don't know because
they were often in contact directly together,
either Emma with Lisa Reisinger or Emma with Koutsoukos and co. As they gained
knowledge
they outstripped me and there was no need for me to be involved at
all.
- (Mrs
Watson also seems to have communicated with Mr Hobbs as to a draft letter
prepared by Ms Burnard from Diligence Discovery to
accountants for the J&B
Financial matters "have been talking to Susanne this morning and she is going to
run my letter for the
accountants past David as soon as she can". Mrs Watson
confirmed that she understood this reference to be to Mr Hobbs.)
- I
find that Mr Hobbs acted as an officer or de facto director of 888 Vanuatu and
that each of Ms Li and Mr Collard (as officers or
de facto directors of 888
Vanuatu) and Ms Wu (as officer of 888 Vanuatu) at all relevant times acted on
the instructions and directions
of Mr Hobbs, and that each was accustomed to act
at the direction of Mr Hobbs in relation to the operation of 888 (Super Save)
Fund
and Pinnacle Fund.
- ASIC
further submits (and I accept) that in respect of the 888 (Super Save) Fund
that, each of Mr Collard and Ms Wu, on behalf of
888 Vanuatu, at the direction
and with the advice, assistance or instructions of Mr Hobbs: opened and operated
the 888 Vanuatu Super
Save Technocash account for the operations of fund;
transferred funds received from investors in 888 Fund to Cadent by way of
investment;
and made payments from the said 888 Vanuatu Super Save Technocash
Account to various persons, by way of commission and otherwise
as set out in the
Pinnacle Fund and 888 Fund Scheme Spreadsheets (Ex A tab 48, Pinnacle Fund and
888 Fund Scheme Spreadsheet) and
summarised in the 888 Fund summaries (Ex A, 888
Fund summaries).
- In
respect of the Pinnacle Fund it is submitted (and I accept) that each of Mr
Collard and Ms Wu, on behalf of 888 Vanuatu, at the
direction and with the
advice, assistance or instructions of Mr Hobbs: opened and operated the 888
Vanuatu Pinnacle Fund Technocash
account and the 888 Vanuatu Sovereign Bank
account for the operations of Pinnacle Fund; transferred funds received from
investors
in Pinnacle Fund to Cadent by way of investment; and made payments
from the said Pinnacle Fund Accounts to various persons, by way
of commission
and otherwise as set out in the Pinnacle Fund and 888 Fund Scheme Spreadsheets
and summarised in the Pinnacle Fund
summaries.
- ASIC
submits, and I so conclude, that by reason of all the above Mr Hobbs was a
shadow director of 888 Vanuatu.
- Good Value
Fund (administered by North Wave)
- The
principal evidence relied on by ASIC in relation to the Good Value Fund is that
of Mr Bernard Moore, whose evidence is that he
was formally appointed as the
"administrator" of North Wave Limited by resolution of the board of directors on
1 July 2006 (under
which Mr Collard was appointed company secretary (B. Moore at
[63]). Moores Rowland in Vanuatu appear to have acted on the incorporation
of
the company.
- The
sole director of North Wave, on its incorporation, was a company incorporated in
Vanuatu (Equity Holdings Limited), that seemingly
also being the nominee
director of GP Global the corporate administrator of the Best Fund which was
administered by Mr Zhang. Equity
Holdings seems to have remained the "sole
director" until 12 May 2008 when there was a company resolution in relation to
that position
(Ex X tab 28).
- The
shareholding of North Wave at the time of its incorporation was divided
essentially into three equal holdings (of three shares
each by Mr Hobbs, Mr
Collard and Ms Li with BOS Custodial Services Limited holding the one remaining
share) (Ex X tab 23).
- ASIC
contends, and I accept Mr Moore's evidence, that the investment opportunity for
which the Good Value Fund was created was promoted
by Mr Hobbs (in the presence
of Mr Collard) to Mr Moore and that Mr Collard arranged for Mr Moore to be the
administrator of the
Good Value Fund.
- On
18 May 2006, there was a director's resolution for the further allotment of
shares such that a further 23 shares were issued to
each of Mr Hobbs, Mr Collard
and Ms Li (bringing each of their shareholdings to 26 shares in total) and a
further 11 shares to BOS
(12), with 5 shares to Ms Jin Jin Xu and 5 shares to Mr
Yibo Qiu and Ms Jue Wang jointly. Mr Collard and Ms Li together held 52%
of the
shares in North Wave.
- I
accept that the relevant documentation for the Good Value Fund was not prepared
by Mr Moore but was provided to him by Mr Collard
and that Mr Collard assisted
Mr Moore to open, set up and operate the North Wave Technocash account. Mr
Collard, with Mr Moore, signed
and opened the Cadent Application and Agreement
for Corporations on behalf of North Wave as company secretary of North Wave.
- Mr
Moore's evidence is that Mr Collard and Ms Li each separately suggested to him
that he do the administration for North Wave and
that "it's just looking after
it as you do as a company secretary".
- I
accept Mr Moore's evidence that the way in which funds deposited into the Good
Value Fund were invested with Cadent was not determined
by Mr Moore, but by Mr
Hobbs or Mr Collard. The evidence also discloses that Mr Collard received
payments from North Wave, being
payments made from amounts invested in Good
Value Fund.
- I
find that, although Mr Moore was appointed as the "administrator" of North Wave,
at all material times, Mr Moore acted as administrator
of North Wave on the
instructions, directions or advice of Mr Collard. (ASIC submits, and I accept,
that Mr Moore was never a de
facto director of the company because he did not
make any operational decision in relation to the Good Value Fund other than as
instructed
or directed by Mr Hobbs or Mr Collard.)
- ASIC
further contends that the involvement of Mr Moore in the setting up and
operation of the Good Value Fund was only in an administrative
(or company
secretary-type) role and that Mr Moore did not perform any top-level management
functions or make any decisions regarding
the business or operations of the
company other than at the direction or on the instructions of Mr Hobbs or Mr
Collard, or on occasions
Ms Li. I consider that the evidence makes good that
contention.
- I
accept that Mr Moore was accustomed to act at the direction of Mr Collard in
relation to the operation of the Good Value Fund and
that, at the direction and
with the advice, assistance or instructions of Mr Collard, on behalf of and in
the name of North Wave
Mr Moore opened and operated the Technocash account for
the Good Value Fund. On that basis, I conclude that at all material times
Mr
Collard acted as an officer or de facto director or officer of North
Wave.
- As
to Mr Hobbs, ASIC submits that it should be inferred that, in all material
respects, Mr Collard was acting on the instructions
or directions of Mr Hobbs in
relation to the Good Value Fund. It relies on the following matters for that
contention. Mr Collard
was present when Mr Hobbs promoted the investment
opportunity to Mr Moore, and Mr Collard indicated his agreement with Mr Hobbs as
to the opportunity and that Mr Collard also intended to invest (the investment
opportunity for which the Good Value Fund was created
was thus promoted by Mr
Hobbs, in the presence of Mr Collard, to Mr Moore).
- The
setting up of North Wave involved the payment by Mr Moore of a sum in effect to
Mr Hobbs, Mr Collard and Ms Li, as they acquired
interests in shares in North
Wave that were paid for by Mr Moore. The assistance of Mr Collard in setting up
the Good Value Fund
account with Technocash involved the provision of a business
address being the post office address of Tasman Business Consultants.
Following
the setting up of the Good Value Fund, fund documentation was sent to Mr Moore
(and it is submitted that it can be inferred
that this was by Mr Dent, who
reported to Mr Hobbs or Mrs Watson on behalf of Mr Hobbs).
- Mr
Moore's evidence was that Mr Hobbs (as well as Mr Collard and Ms Li) told him
that they wanted to have North Wave set up on a similar
basis as Secured Bond
and they wanted to set up an account with Cadent to invest ([68]). Mr Moore said
that he would look after the
Cadent account but that he did not want outside
people investing in the fund.
- ASIC
further relies on the evidence that Mr Hobbs provided from time to time updates
as to the status of the investment in the Good
Value Fund, sometimes in the
presence of Mr Collard and that Mr Hobbs was kept apprised of important matters
relating to the setting
up and operations of the Good Value Fund. It is noted
that the trustee company for Good Value Fund was Trans Management Corporation
(though there is no evidence that Mr Moore or North Wave ever communicated with
Trans Management Corporation in its stated role as
trustee or otherwise).
- As
to the investment by the Good Value Fund with Cadent, at or around he same time
as some of the other investment schemes the subject
of the proceedings, ASIC
notes that at one stage Ms Li provided an update to Mr Hobbs on the progress of
multiple accounts being
opened with Cadent, including with respect to North
Wave.
- This
is another fund in respect of which the Gee advice provided to Mr Collard was
subsequently provided to Cadent on behalf of North
Wave.
- I
accept that it was the practice of Mr Collard to follow directions and
instructions of Mr Hobbs both in respect of Mr Collard's
activities with respect
to the schemes the subject of these proceedings and as an FTC
executive.
- Again,
I place weight on the fact that the setting up of the fund, operation of and
relevant documentation for the Good Value Fund
was strikingly similar to that of
the other schemes the subject of these proceedings. I infer from this that it
was done at the instruction
and direction of Mr Hobbs.
- ASIC
submits (and I accept) that Mr Moore was accustomed to act at the direction of
Mr Hobbs and Mr Collard in relation to the operation
of the Good Value Fund; and
that Mr Collard, when giving directions, advice, assistance or instructions to
Mr Moore in opening and
operating the North Wave Technocash account for the Good
Value Fund, on behalf of North Wave, was also acting on the directions,
advice,
assistance and instructions of Mr Hobbs.
- Accordingly,
I find that Mr Hobbs was a shadow director of North Wave.
- Enhanced Fund
(administered by Barclaywest Ltd)
- In
relation to the Enhanced Fund, the principal affidavits relied upon by ASIC are
the affidavits of Ms Bi Hong Dong and Ms Zhi Jun
Xu.
- Enhanced
Fund was administered by Barclaywest Ltd, an IBC incorporated in Vanuatu. At the
time of incorporation, the shareholding
of Barclaywest was held equally as
between Mr Collard, Ms Li and Mr Hobbs and the director of Barclaywest was a
nominee company (Equity
Holdings Limited), which was also the director of other
IBCs who had roles as corporate administrators for funds the subject of these
proceedings. From 15 March 2007, the shareholding had changed such that each of
Mr Collard and Ms Li was approximately a 10% shareholder,
and Ms Wu was a 10%
shareholder. (Mr Hobbs' shareholding was transferred to International Management
Incorporation in June 2007.)
From 5 May 2008 each of Mr Collard, Ms Li and Ms Wu
was a 10% shareholder of the company.
- Equity
Holdings was replaced as director by Mr Emori Toloi on 23 February 2006 (as
evidenced by the material accompanying Ex AU 8791
that being the Cadent account
application for Barclaywest enclosing Register of Directors of Barclaywest). The
registered office
of Barclaywest was Moores Rowland in Vanuatu (as noted on the
Cadent account application for Barclaywest Ex AU 8791 enclosing the
Constitution
of Barclaywest).
- After
its incorporation, Mr Collard purported to change Barclaywest's name to
"Barclaywest Ltd" and a new Certificate of Incorporation
was issued (Ex AU 5695,
Certificate of Incorporation of Barclaywest Ltd, dated 22 February 2006).
- On
18 May 2006, by facsimile to Moores Rowland in Vanuatu, Mr Collard requested
that Ms Li's shareholding be transferred to Shunfu
Corporation (an IBC
controlled by Ms Li) and that Mr Collard's shareholding be transferred to Mr Mac
Incorporated (an IBC controlled
by Mr Collard).
- ASIC
contends from the above that (and I accept) that Mr Collard was primarily
responsible for the incorporation of Barclaywest. At
some point after the time
of incorporation but prior to 13 February 2007, Mr Collard was formally
appointed "administrator" of Barclaywest,
but at all times Mr Collard acted as
an "administrator" of Barclaywest by signing documents and executing agreements
as administrator
of the company.
- On
14 November 2007, Mr Collard was given a power of attorney by the person
registered as director of Barclaywest (Mr Emori Toloi)
to sign Barclaywest
company documents and to exercise full authority on Mr Toloi's behalf on all
matters pertaining to Barclaywest.
- Mr
Collard opened and operated the Barclaywest Sovereign Bank accounts. Each of Mr
Collard and Ms Li was provided the Barclaywest
bank account details and PIN
numbers (from which it can be inferred that they operated or were authorised to
operate that account).
- Ms
Dong gave evidence that Ms Li asked Ms Dong to be "administrator" of
Barclaywest, and explained how to operate Barclaywest and
that Ms Dong relied on
Ms Li for instructions to complete documentation and to send facsimiles as
"administrator" of Barclaywest.
- Ms
Dong gives evidence (and I accept) that Ms Li provided documentation to Ms Dong
to be completed and signed on behalf of Barclaywest
and Enhanced Fund, including
forms to open a Technocash account, a Cadent account application, and documents
appointing traders to
the Barclaywest Cadent account and that Mr Collard
instructed Ms Dong as to the operation of Barclaywest and Enhanced Fund,
including
how to complete the Cadent account application for
Barclaywest.
- The
evidence discloses that Ms Wu was appointed as "book keeper" for Barclaywest and
maintained the company records for Barclaywest.
Ms Wu was provided with the
password to the Barclaywest email address (from which it can be inferred that Ms
Wu operated or was authorised
to operate the Barclaywest email address on behalf
of the company). Ms Wu signed the Barclaywest Cadent account application as
"secretary"
of Barclaywest. Ms Wu operated the Barclaywest Cadent account, and
sent Enhanced Fund investors' funds to Cadent; Ms Wu organised
the withdrawal of
investments in Enhanced Fund.
- Meetings
of Barclaywest shareholders were held variously at Mr Collard's house, Ms Li's
house and Ms Wu's house. Ms Wu took minutes
of meetings of Barclaywest
shareholders and sent correspondence to investors in Enhanced Fund on behalf of
Barclaywest and signed
"per administrator" of Barclaywest. Ms Wu also gave
documents to shareholders of Barclaywest to sign.
- I
accept that Ms Li directed Ms Wu and Mr Zhang Bing to prepare the Enhanced Fund
Scheme Memorandum and private placement agreement
and Ms Li provided documents
and instructions to Ms Dong and other Barclaywest shareholders for the promotion
of Enhanced Fund to
investors; that Ms Li, with Ms Wu, provided such documents
to investors in the Enhanced Fund; and that each of Ms Li and Mr Collard
promoted Enhanced Fund to investors.
- On
at least one occasion, Mr Collard sent correspondence to Ms Reisinger on behalf
of Barclaywest and signed as administrator of Barclaywest.
Ms Reisinger sent
correspondence to Mr Collard and Ms Li in relation to the operation of the
Barclaywest Cadent account.
- Mr
Collard received payments from Barclaywest, being payments made from Enhanced
Fund investor funds; and Mr Collard obtained the
benefit of payments to the
Secured Bond Master Fund Technocash account for the purchase of shares in
Barclaywest. Ms Li received
payments from Barclaywest to Secured Bond for the
benefit of Shunfu Corporation, being payments made from amounts Enhanced Fund
investor
funds, and Ms Li obtained the benefit of payments to the Secured Bond
Master Fund Technocash account for the purchase of shares in
Barclaywest.
Barclaywest made payments to Ms Wu's sister, Ms Hui Qing Wu, being payments made
from Enhanced Fund investor funds.
- As
to Ms Wu, the affidavit sworn by Ms Wu on 20 August 2012 (and read on her then
application for leave to file a defence in the proceedings)
deposes to similar
matters as contained in the submissions to which I have referred earlier and
contains the assertion (that I read
only as such) that she was not an officer or
employee of any company in these proceedings. She deposes that she subscribed to
FTC
and received financial education manuals and newsletters.
- Ms
Wu deposes to the receipt of certain payments to her or her company (Hao Tai
Corporation), at least one of which payments she says
that she received in
accordance with the commission structure set out in the Pinnacle Fund contract
and private placement memorandum
(her stated understanding being that she
received this for "introducing others when they received a profit from their
investment"
[12]). She also deposes to receipt of moneys that she understood
were a return on her investment.
- Ms
Wu asserts that she made no decisions and that any documents she signed or tasks
she undertook were at the direction of either
Ms Dong or Ms Li. She concedes
that she did tell her friends about the investments she made because she thought
at the time it was
a good idea [24]. She asserts that she invested in Master
Fund and in Barclaywest; she also asserts that she invested money invested
"in
888" (presumably 888 (Super Save).
- Ms
Wu deposes that she did not fully understand everything that has been going on
in this matter (something that, with respect, seemed
evident when she finally
sought to take some active role in the proceedings).
- ASIC
submits (and I accept), on the basis of the matters adverted to above, that at
all material times each of Ms Li and Mr Collard
was an officer or de facto
director of Barclaywest. I also have concluded that at all material times Ms Wu
was an officer of Barclaywest.
The fact that she performed the tasks that she
did voluntarily or at Ms Li's or even Ms Dong's request is not to the point. The
role
that the contemporaneous records indicate that Ms Wu performed was as an
officer (not director) of the company.
- I
therefore find that at all material times each of Ms Li and Mr Collard was an
officer or de facto director of Barclaywest and that
at all material times Ms Wu
was an officer of Barclaywest.
- As
to Mr Hobbs, it is submitted (and I accept) that: Ms Li discussed an investment
opportunity, with investors who became the shareholders
in Barclaywest, that the
company could set up a fund that would be like Master Fund and the 888 Vanuatu
funds (888 (Super Save) Fund
and Pinnacle Fund) each of which was a scheme
controlled by Mr Hobbs; Mr Hobbs told the shareholders in Barclaywest that he
was selling
his rights to intellectual property to a financial institution for
$200 million, and would give the profit to Barclaywest; and that
Ms Li told the
shareholders in Barclaywest, after Mr Hobbs had also spoken, that Mr Hobbs had
an investment opportunity involving
the sale of intellectual property rights
owned by Mr Hobbs, the funds from which would be shared with the shareholders of
Barclaywest
because the investment opportunity/sale of intellectual property
rights would be conducted through Barclaywest.
- I
place significance on the fact that, again, investors in Enhanced Fund were
required to subscribe to FTC before investing in Enhanced
Fund and were required
to follow the OEM/KLM process to obtain scheme memoranda and private placement
agreements.
- ASIC
submits (and I accept) that Mr Hobbs instructed Ms Dong to sign documents as
administrator of Barclaywest; Mr Hobbs promoted
the returns of Enhanced Fund to
investors; and that Mr Hobbs (and Ms Li on his behalf) stated that Enhanced Fund
was a "white label
fund", being a generic fund (which in all the circumstances I
would infer was a reference to a fund set up and arranged by Mr
Hobbs).
- ASIC
notes that Barclaywest made payments from accounts (into which amounts invested
in Enhanced Fund had been deposited) to Tasman
Business
Consultants.
- ASIC
submits (and I accept) that it should be inferred that, in all material
respects, Ms Li and Mr Collard were acting on the instructions
or directions of
Mr Hobbs in relation to the Enhanced Fund on the basis that: Ms Li and Mr
Collard were present when Mr Hobbs promoted
the investment opportunity in
Barclaywest to potential shareholders, and each of Ms Li and Mr Collard became
shareholders in Barclaywest
and promoted or supported the investment
opportunity; the setting up of Barclaywest involved the payment by shareholders
of a sum
of money, in effect to Mr Hobbs, Mr Collard and Ms Li, as they acquired
interests in shares in Barclaywest that were paid for by
the other shareholders;
Barclaywest opened and operated an account with Technocash, and Mr Collard was
referred to Technocash by
Mr Hobbs (at the time Barclaywest opened the
Technocash account, the majority of the schemes operated Technocash accounts);
following
the setting up of the Enhanced Fund, fund documentation was prepared
by Ms Wu and Mr Zhang Bing at Ms Li's direction, who reported
to Mr Hobbs, and
the fund documentation was in the same form as that used in other schemes; when
an update as to the status of the
investment opportunity in Barclaywest was
required, Mr Hobbs provided such update, usually in the presence of Ms Li and Mr
Collard;
the trustee company for Enhanced Fund was Trans Management Corporation;
Enhanced Fund, through Barclaywest, invested with Cadent,
with whom Mr Hobbs had
dealings at or about the time of the investment, using a trader made available
to and used by other schemes;
Ms Li provided an update to Mr Hobbs on the
progress of multiple accounts being opened with Cadent, including with respect
to other
company administrators of schemes the subject of these proceedings,
also contended to be controlled by Mr Hobbs; it was the practice
of Ms Li and Mr
Collard to follow directions and instructions of Mr Hobbs in respect of Ms Li's
and Mr Collard's activities with
respect to Schemes the subject of these
proceedings, and as an FTC Executive responsible to Mr Hobbs.
- ASIC
further submits (and I accept) that at all material times each of Ms Li, Mr
Collard and Ms Wu acted as an agent of Mr Hobbs in
promoting and operating
unregistered managed investment schemes (whether independently or as part of an
overall single scheme) to
solicit subscriptions to FTC and investments from
retail investors, including retail investors in Australia, in the name of an
IBC,
in funds the subject of these proceedings including Barclaywest. It is
noted that at the same time as Ms Dong was acting as "administrator"
of
Barclaywest, pursuant to the instructions and directions of Ms Li and Mr
Collard, she was also taking direct instructions and
directions from Mr Hobbs in
relation to FZF Vanuatu (including incorporating FZF Vanuatu for the benefit of
Mr Hobbs (T 1381.5-19;
T 1388.39-43)).
- Again,
the striking similarity in the setting up of the fund, operation of and relevant
documentation for the Enhanced Fund (and the
investment opportunities offered to
potential investors) to that of the other schemes the subject of these
proceedings is such that
I infer that the setting up and operation of the
Enhanced Fund was done at the instruction and direction of Mr
Hobbs.
- I
find that Ms Li, Mr Collard and Ms Wu (as officers or de facto directors of
Barclaywest) at all times acted on the instructions
and directions of Mr Hobbs,
and were accustomed to act at the direction of Mr Hobbs in relation to the
operation of the Enhanced
Fund.
- I
further find, in respect of the Enhanced Fund, that each of Ms Li, Mr Collard
and Ms Wu (at the direction and with the advice, assistance
or instructions of
Mr Hobbs, on behalf of Barclaywest, opened and operated the Barclaywest bank
accounts for the operations of the
Enhanced Fund; transferred funds received
from investors in the Enhanced Fund to Cadent by way of investment; and made
payments from
the Enhanced Fund Accounts to various persons, by way of
commission and otherwise, as set out in the Enhanced Fund Spreadsheets (Ex
A tab
80, Enhanced Fund Spreadsheets) and summarised in the Enhanced Fund summaries
(Ex A, Enhanced Fund summaries).
- Accordingly,
I find that Mr Hobbs was a shadow director of Barclaywest.
- Best Fund
(administered by GP Global)
- The
principal affidavits read by ASIC in relation to Best Fund are those of Mr Guo
Ping Zhang and Mr Bernard Moore.
- GP
Global was incorporated by Mr Zhang, with the assistance of Mr Collard. Mr Zhang
completed the forms and the incorporation was
arranged through Moores Rowland
lawyers (Zhang at [21]-[25]).
- At
the time of incorporation, Equity Holdings Limited, was nominated as the
director of GP Global (GP Global register of directors;
Zhang at [27],
presumably the same entity as has been referred to in relation to other funds as
noted earlier). On the following
day, 9 January 2003, Mr Zhang is recorded as
being appointed as the sole director of GP Global (Zhang at [27]). (ASIC submits
that
although Mr Zhang was purportedly appointed as the sole director of GP
Global, it is not clear that such appointment was ever validly
made.)
- At
all material times, Mr Zhang was the sole registered shareholder in GP Global.
In September 2004 he entered into an arrangement
with Ms Li and Mr Collard to
transfer 15% of his shareholding to each of Ms Li and Mr Collard (Zhang at [27],
[150]-[158]).
- ASIC
submits (and I accept) that: the investment opportunity for which Best Fund was
created was promoted by Ms Li to Mr Zhang (Ms
Li told Mr Zhang that she was able
to arrange investors who would want to invest in the fund and arrange traders
with whom the funds
deposited could be invested); at Ms Li's direction, Mr Zhang
prepared minutes of meetings related to the operation of the Best Fund;
the
relevant documentation for Best Fund was not prepared by Mr Zhang but was
provided to him by KLM Enterprises Ltd and explained
to Mr Zhang by Ms Li; Ms Li
(and Mr Collard) assisted Mr Zhang to open, set up and operate the GP Global
Technocash account and the
GP Global Cadent account; Ms Li showed Mr Zhang how
to create and send correspondence to investors in relation to Best Fund and how
to speak to potential investors in relation to Best Fund; the way in which funds
deposited into Best Fund were invested, first in
Master Fund and then with
Cadent, was determined by Ms Li; Ms Li introduced Mr Zhang to Ms Reisinger; Ms
Li was involved in communications
with Ms Reisinger as to the setting up of the
account with Cadent; at all material times, Mr Zhang, as administrator of GP
Global,
acted on the instructions, directions or advice of Ms Li; Mr Zhang
signed important documents and agreements at the direction and
instruction, and
with the assistance, of Ms Li, or on occasions Mr Collard, who at all times
worked with Ms Li; Mr Zhang followed
Ms Li's instructions in relation to
payments of profit, commissions or other payments from the GP Global Technocash
account; and
Ms Li received payments from GP Global, being payments made from
amounts invested in Best Fund.
- I
accept that there is no evidence that Mr Zhang made any substantive operational
decision in relation to Best Fund other than as
instructed or directed by Ms Li.
It is submitted (and I so find) that the involvement of Mr Zhang in the setting
up and operation
of Best Fund was only in an administrative (or company
secretary-type) role and that Mr Zhang did not perform any top-level management
functions or make any decisions regarding the business or operations of the
company other than at the direction or on the instructions
of Ms
Li.
- ASIC
submits (and I accept) that: Mr Zhang was accustomed to act at the direction and
on the instructions of Ms Li in relation to
the operation of the Best Fund; and
that, at the direction and advice, assistance or instructions of Ms Li, on
behalf of GP Global
Mr Zhang opened and operated the Technocash account for Best
Fund in the name of GP Global; transferred funds received from investors
in the
Best Fund to Master Fund, and subsequently withdrew all or part of those funds
from Master Fund and invested them, together
with other funds received from
investors in Best Fund, with Cadent; and made payments from the Best Fund
Account to various persons,
by way of commission and otherwise as set out in the
Best Fund Spreadsheet (Ex A tab 148, Best Fund Spreadsheet) and summarised in
the Best Fund summaries (Ex A tabs 149-161, Best Fund
summaries).
- As
to Mr Hobbs, ASIC further submits (and I accept) that it should be inferred
that, in all material respects, Ms Li was acting on
the instructions or
directions of Mr Hobbs in relation to the Best Fund on the basis that: Ms Li
stated that Mr Hobbs controlled
all of the funds and the traders and implied
that Mr Hobbs could make the appropriate arrangements to set up Best Fund for Mr
Zhang;
the setting up of Best Fund involved the procurement by Ms Li of a
payment from Mr Zhang to her, which in fact was a payment to be
sent to (and it
can be inferred procured on behalf of) Magny-Cours, a company controlled by Mr
Hobbs; the setting up of the Best
Fund Account involved the provision of a
business address which was the address of Mr Hobbs' office and the registered
office of
Tasman Business Consultants; following the setting up of Best Fund,
the Best Fund documentation was sent to Mr Zhang (it can be inferred
by Mr Dent,
who reported to Mr Hobbs, or to Mrs Watson who in turn reported to Mr Hobbs); Mr
Hobbs was kept apprised of important
matters relating to the setting up and
operations of Best Fund; the trustee company for Best Fund was Trans Management
Corporation
(though I note there is no evidence of any communication with that
company in its role as trustee); Best Fund invested with Cadent,
with whom Mr
Hobbs had dealings at or about the time of the investment; Ms Li provided an
update to Mr Hobbs on the progress of multiple
accounts being opened with
Cadent, including with respect to GP Global and other company administrators of
schemes the subject of
these proceedings, also contended to be controlled by Mr
Hobbs; the Gee advice was provided to Cadent on behalf of GP Global; it
was the
practice of Ms Li to follow directions and instructions of Mr Hobbs in respect
of Ms Li's activities with respect to schemes
the subject of these proceedings,
and as an FTC Executive responsible to Mr Hobbs; Mr Hobbs arranged the setting
up of websites for
various funds including Best Fund, and Ms Li assisted in
arranging that with Mr Zhang in relation to Best Fund, which it can be inferred
was on behalf of and at the instruction of Mr Hobbs, including as to obtaining
the signature of Mr Zhang for the relevant agreements;
specific instructions
from Mr Hobbs to Ms Li with respect to directions for payments were acted upon
by Ms Li by way of payments
authorised to be made from the Best Fund Account by
Mr Zhang, at the direction of Ms Li, on behalf of and, in certain specific
respects,
for the benefit of, Mr Hobbs.
- Again,
the making available through the fund of the offshore investment opportunity,
the setting up of the fund, the relevant documentation
bears striking similarity
to that of the other schemes the subject of these proceedings. The investment
opportunities undertaken
by the fund, both in respect of the investment in
(Master Fund) and thereafter the investment of funds with Cadent (consistently
with all other funds at the time), each of which can in my view be inferred to
have been done at the instruction and direction of
Mr Hobbs. I find that Ms Li
was at all times acting on behalf of Mr Hobbs with respect to the
schemes.
- I
find that Mr Hobbs was a shadow director of GP Global.
- Prestige and
Smart Money (administered by Geneva Financial)
- Mrs
Hobbs admits that the Prestige and Smart Money funds were administered by Geneva
Financial ([13]); (Mr Hobbs in his defence says
that he understood that Geneva
was the administrator of Smart Money [21]).
- The
principal affidavits relied on by ASIC in relation to Prestige are the
affidavits of Mr Gahan, Mr Stavropoulos, Mr Koutsoukos,
Mr Wood and Mr Truong,
as well as the evidence given in the witness box by Mrs Brenda Hobbs. The
principal affidavits relied on by
ASIC in relation to Smart Money are the
affidavits of Mr Hogno and Mr Zhang, together again with the evidence given by
Mrs Brenda
Hobbs.
- Mrs
Hobbs spoke to the submissions in relation to Geneva Financial and emphasised
that it was not "a family empire with various family
members receiving
unjustified payments". She submits (and ASIC accepts) that no payments
purportedly of profits from the Geneva Financial
funds (Smart Money and
Prestige) were made from investors' capital. It is submitted that Geneva
Financial did not ever pay clients
a fixed percentage return; nor did it pay a
return to clients on a regular monthly or any other basis.
- Mrs
Hobbs submits that Mrs Brenda Hobbs had an equal responsibility and involvement
in the company (being a 50% owner of the company)
and was remunerated
accordingly by a 50% share of fees. It is submitted that if either of the two
was more responsible or had higher
authority or did more of the work then one
would have expected that party would have been remunerated accordingly by
receiving a
higher percentage. (That expectation may or may not be justified but
in any event it does not seem to me that it affects the conclusion
that Mrs
Hobbs was a de facto director of the company nor does the fact, if it be the
case (and there is no or little evidence as
to this) that each of the two had
her separate agreed responsibilities and that neither would carry out the agreed
responsibilities
of the other.
- Mrs
Hobbs points to the evidence of Mrs Brenda Hobbs to the effect that one of her
agreed responsibilities was to send advice to Bizcards
with respect to Smart
Money when she had transferred money to Bizcards (T 804.21-23; Tab 3 Mrs B Hobbs
exhibits); to issue Client
ID numbers and contract numbers (T 806.3-30) (that it
is said she then advised to Mrs Hobbs to maintain on two separate registers
in
the form of spreadsheets -tab 14 Mrs Brenda Hobbs exhibits); to request transfer
of profit from Bizcards to Geneva Financial (Tab
4 B Hobbs exhibits); to
communicate with Bizcards (Tab 12 Ms B Hobbs exhibits; T 818.29-45); to issue
letters "as required for her
portion of the overall responsibilities" (T 808.13
to 15); to complete the agreement and private placement documents once filled
in
by a client (T 817.13-21); to receive and send all faxes in relation to Geneva
Financial (reference being made to the documents
at Tab 10, Tab 11 and tab 18 of
Mrs Brenda Hobbs exhibits and to T 811.34-50 and T 818.1-19; and T 824.11-36)
(it is said that Mrs
Hobbs' agreed responsibilities did not include sending
faxes and that she did not have a fax machine - referring to T 825.15-21);
to
receive all bank statements and communication from Westpac in Stoke, Nelson in
relation to Geneva Financial (Tab 10).
- Reference
is also made to the evidence given by Mrs Brenda Hobbs at T 811.5-51, T 812.18 A
to the document at Tab 7 Mrs B Hobbs exhibits
(Spreadsheet "Smart Money Final
Result"), that Mrs Brenda Hobbs said was prepared by Mrs Hobbs (T 811.9-13;
45-50; T 812.1-18). Mr
Hobbs submits that the statements that Mrs Brenda Hobbs
described as receiving from Mr Malcolm Carr were those at Tab 7 and Tab 17
and
that Mrs Brenda Hobbs was mistaken in identifying these as spreadsheets produced
by Mrs Hobbs. (That was not put to Mrs Brenda
Hobbs in cross-examination.)
- It
is submitted that where there was reference at T 813.37 to contracts of
administration of private placement being properly filled
out by a borrower,
there "are no such parties involved in any of Geneva Financial's private
placement memoranda or agreements" (reference
being made to tab 8 of Mrs Brenda
Hobbs exhibits).
- It
is submitted that one of the agreed responsibilities of Mrs Hobbs was to prepare
various spreadsheets (T 805.36 - T 806.1; Tab
23 Mrs Brenda Hobbs exhibits) and
to make online payments of profit to clients in NZD from the Geneva Financial
NZD bank account
to clients who wished to receive their profit in NZD (Tab 16
Mrs Brenda Hobbs exhibits).
- Mr
and Mrs Hobbs assert that (and I accept it may well be the case) that without
both parties completing their respective responsibilities
the administration of
the business would not have succeeded; that each party was equally important to
the company; and that no significant
decisions were made without consultation or
discussion with the other party (T 799.36-37 regarding opening of the bank
accounts).
- It
is submitted that the "money trail" proves the equality of both Mrs Brenda Hobbs
and Mrs Hobbs within Geneva Financial (reliance
being placed on entries in
Schedule B in that regard).
- The
difficulty I have with the above submissions is that an equality of
responsibility between Mrs Hobbs and her sister-in-law would
not preclude a
finding that Mrs Hobbs was a de facto director and officer of Geneva Financial
and a beneficial owner or controller
of the company or the funds administered by
it.
- ASIC
submits (and I accept) that:Mrs Hobbs personally arranged for Mrs Brenda Hobbs
to assist in the administration of the Smart Money
and Prestige funds; Mrs
Brenda Hobbs had no relevant experience or expertise to run such investment
funds; Mrs Hobbs explained to
Mrs Brenda Hobbs how to operate the funds; the
relevant documentation for Smart Money and Prestige was provided through Mrs
Hobbs;
Mrs Brenda Hobbs was not responsible for the soliciting of investors to
invest in the fund, or the decision as to how to invest funds
deposited by
investors; the way in which funds deposited into Smart Money and Prestige were
to be invested, as between Mrs Hobbs
and Mrs Brenda Hobbs, was determined by Mrs
Hobbs; Mrs Brenda Hobbs followed Mrs Hobbs' instructions in relation to payments
of profit,
commissions or other payments from the accounts held by Geneva
Financial; although Mrs Hobbs and Mrs Brenda Hobbs purported to share
the
ownership of Geneva Financial and to share the work performed for Geneva
Financial, at all relevant times Mrs Brenda Hobbs deferred
to Mrs
Hobbs.
- ASIC
submits that although Mrs Brenda Hobbs signed documents on behalf of Geneva
Financial, Mrs Brenda Hobbs did not make any operational
decision in relation to
Smart Money or Prestige other than as instructed or directed by Mrs Hobbs; the
involvement of Mrs Brenda
Hobbs in the setting up and operation of the funds was
only in an administrative (or company secretary-type) role; Mrs Brenda Hobbs
did
not perform any management functions or make any decisions regarding the
business or operations of the company other than at
the direction or on the
instructions of Mrs Hobbs. I consider that the evidence makes good those
submissions (particularly having
regard to Mrs Brenda Hobbs' lack of
understanding in the witness box of matters relevant to the
fund).
- As
to Mrs Hobbs, ASIC submits (and I accept the evidence establishes) that at all
material times (as between Mr and Mrs Hobbs), it
was Mr Hobbs who had the
financial experience and contacts in order to be able to set up and operate an
investment fund using pooled
moneys from investors to invest in foreign exchange
or derivatives trading (rather than Mrs Hobbs, who was a book-keeper and without
tertiary qualifications). Mr Halley notes (and I accept the evidence
establishes) that Mr Hobbs promoted both Prestige and Smart
Money and procured
investors for those funds (in the case of Prestige, the investment by PJCB is
one instance; in the case of Smart
Money, the investments by Mr Conroy and Mr
Clifford are such instances).
- In
relation to Smart Money, funds deposited with Geneva Financial were invested
with Mr Malcolm Carr, who Mr Halley notes worked for
and with Mr Hobbs at the
time, and who was involved with investigations into potential financial
investment opportunities at the
time with Mr Diaz, on behalf of Mr Hobbs,
including with Ms Reisinger and Mr Caswell. There is also evidence that Mr Hobbs
made direct
requests of Mr Koutsoukos and others to encourage investors to
deposit funds into Prestige. It is noted that other FTC executives,
working for
and reporting to Mr Hobbs (such as Mr Robert Hobbs and Mrs Watson) also promoted
the funds run by Geneva Financial.
- Mr
Halley further points out that at the time that Prestige was involved in opening
an account with Cadent, and investing funds with
Cadent, Mr Hobbs was involved
in negotiations with Cadent and introducing brokers in dealings with Cadent, and
it was Mr Hobbs, not
Mrs Hobbs, made direct representations to Cadent and New
World, at meetings in Chicago, as to investment accounts he was able to
introduce to Cadent. ASIC points to the fact that Mr Hobbs made further visits
to Chicago and met with Cadent and New World without
Mrs Hobbs and that Mr Hobbs
was involved in the application to open the Cadent account, and signed as Geneva
Financial's (company)
secretary.
- I
accept that there is evidence that Mr Hobbs dealt directly with Ms Reisinger in
relation to the trading of various accounts with
Cadent. I also think it fair to
characterise the communications between Mrs Hobbs and Ms Reisinger as often
proceeding on the basis
that Mrs Hobbs was pursuing questions or topics raised
by Mr Hobbs or following up matters she did not understand, though not all
communications can be so characterised.
- I
accept that the evidence establishes that (though denied by him) Mr Hobbs
received round turn commissions from the trading in the
Geneva Cadent account.
- I
also accept the evidence that Mr Hobbs solicited investors in the funds
administered by Geneva Financial, both directly (in the
case of Mr Stavropoulos)
and indirectly (through Mr Wood, Mr Truong and Mr Koutsoukos). ASIC submits (and
I accept) that it should
be inferred that Mr Hobbs directly and indirectly
sourced and procured investors in Smart Money and/or Prestige.
- ASIC
notes that the evidence records payments made from the Smart Money accounts,
including payments made to Mr Hobbs, Mrs Hobbs,
Mr Robert Hobbs, Mrs Brenda
Hobbs, Mr and Mrs Hobbs' daughter, and Tasman Business Consultants. (Mrs Hobbs
contends, and took me
to through the Schedule B reconstruction to explain, that
payments made to those in her family were in respect of funds invested
by them
and I accept that Mrs Hobbs was sincere in her submissions in that
regard.)
- Significantly,
however, the setting up of the respective funds, including the relevant fund
documentation for Smart Money and Prestige,
and its operation was strikingly
similar to that of the other schemes the subject of these proceedings, such that
I would infer this
was done at the instruction and direction of Mr Hobbs. That
conclusion is reinforced by the communications from Ms Reisinger that
point to
Mr Hobbs' involvement in aspects of the decision making for the Geneva Financial
Cadent accounts. I simply cannot accept
the suggestion in Mr Hobbs' evidence
that he simply ignored requests made by Ms Reisinger for him to discuss or
explain matters (and
if Mr Hobbs had done nothing then one would expect to see
chase up correspondence between Mrs Hobbs and Ms Reisinger).
- ASIC
submits (and I so find) that it can be inferred that Mrs Hobbs was acting with,
or on behalf of, Mr Hobbs, in relation to the
business of Geneva Financial and
the setting up and operation of Smart Money and Prestige.
- In
the circumstances, ASIC submits (and I accept) that: Mrs Brenda Hobbs was
accustomed to act at the direction of Mrs Hobbs, for
and on behalf of Mr Hobbs
(or Mr and Mrs Hobbs jointly), in relation to the operation of the Smart Money
and Prestige funds; and
that, at the direction and with the advice, assistance
or instructions of Mrs Hobbs, for and on behalf of Mr Hobbs (or Mr and Mrs
Hobbs
jointly), Mrs Brenda Hobbs and Mrs Hobbs, on behalf of Geneva Financial, opened
and operated the bank accounts for Smart Money
and Prestige in the name of
Geneva Financial; transferred funds received from investors in Smart Money and
Prestige to other accounts
purportedly by way of investment; and made payments
from the Smart Money and Prestige accounts to various persons, by way of
commission
and otherwise.
- I
find that Mrs Hobbs was a de facto director and officer of Geneva Financial and
that Mr Hobbs was a shadow director and officer
of that
company.
- Elite Premier
and Elite Premier Option Two Unit Trust (Preserved Investment
Group)
- ASIC
submits that: Mr Hobbs personally arranged Mr Clements to be the administrator
of the Elite Premier and Elite Premier Option
Two funds; Mr Clements had no
relevant experience or expertise to run such investment funds; Mr Hobbs
explained to Mr Clements how
to set up and operate the Elite Premier and Elite
Premier Option Two Unit Trust funds; the relevant documentation for Elite
Premier
and Elite Premier Option Two Unit Trust was provided to Mr Clements by
Mr Hobbs; at all material times, Mr Clements did not take
any active step in
relation to either Elite Premier or Elite Premier Option Two Unit Trust without
it first being approved by either
Mr Hobbs or Ms Reisinger (T780.43-45), in
circumstances where Mr Clements understood that Ms Reisinger's instructions had
been approved
by Mr Hobbs (T80.47-781.1); Mr Clements followed what Mr Hobbs
told him to do and would have done so even if it had been inconsistent
with what
Ms Reisinger told him to do (T782.3-10); at all stages Mr Clements looked to Mr
Hobbs to give him directions or instructions
about what to do in relation to
Elite Premier and Elite Premier Option Two Unit Trust (T783.3-10); Mr Clements
was not responsible
for the soliciting of investors to invest in the fund, or
the decision as to how to invest funds deposited by investors; the way
in which
funds deposited into the Elite Premier and Elite Premier Option Two Unit Trust
funds were to be invested was determined
by Mr Hobbs; Mr Clements followed Mr
Hobbs' instructions in relation to payments of profit, commissions or other
payments from the
accounts held by Preserved Investment Group. I consider that
the evidence makes good this submission.
- ASIC
contends, and I accept, that Mr Clements, in his evidence, demonstrated that he
had a very limited and basic comprehension of
pertinent matters to these
schemes, including the steps involved in setting up an investment fund (see T
684.40-48), the distinction
between a company and a trust (T 689.1-12), the role
of a trustee company (T 688.30-36), whether Trans Management Corp was in fact
an
IBC (T 690.21-23), whether the Trans Management Corp Trust was ever set up (T
688.38-42), how the Trans Management Corp fitted
in with the Elite Premier Unit
Trust Fund (T 688.44-46), what the investments offered by Elite Premier were as
described in the scheme
memorandum (T 702.41-703.27), who the fund manager was
as referred to in the scheme agreement for Elite Premier (T 698.3-5), what
the
role of the fund manager was (T 696.22-25), the purported "principles" of
private placement (T 698.18-28), how to understand
the different balances set
out in the Cadent account statements (T 749.44-745.2), the difference between a
Treasury note and a Treasury
STRIP (T 751.28-35), what a claim of "privilege"
was as made on documents he signed (T 754.14-28), or what a round turn
commission
was or why Mr Hobbs was entitled to be paid one, despite having
purportedly authorised such commission to be paid to Mr Hobbs ( T
761.6-37; T
764.34-37).
- ASIC
submits (and I accept) that, although Mr Clements signed documents on behalf of
Preserved Investment, Mr Clements did not make
any operational decision in
relation to Elite Premier or Elite Premier Option Two other than as instructed
or directed by Mr Hobbs.
I find that the involvement of Mr Clements in the
setting up and operation of the funds was only in an administrative (or company
secretary-type) role and that Mr Clements did not perform any top-level
management functions or make any decisions regarding the
business or operations
of the company other than at the direction or on the instructions of Mr
Hobbs.
- Payments
made from the Preserved Investments' accounts included payments made to Mr
Hobbs, Mrs Hobbs, Mr Robert Hobbs, various FTC
Executives (who reported to Mr
Hobbs and worked for FTC, a company controlled by Mr Hobbs) and Tasman Business
Consultants (which
was owned and controlled by Mr Hobbs). Mr Hobbs arranged the
setting up of websites for various funds including for Elite Premier
Option Two
Unit Trust (and I would infer that Mr Hobbs arranged for Mr Clements to sign the
relevant agreements).
- The
setting up of the fund, operation of and relevant fund documentation for Elite
Premier and Elite Premier Option Two was again
strikingly similar to that of the
other schemes the subject of these proceedings (such that, again, I infer that
each was established
and operated at the instruction and direction of Mr
Hobbs).
- ASIC
submits (and I so find) that Mr Clements was accustomed to act at the direction
of Mr Hobbs in relation to the operation of the
Elite Premier and Elite Premier
Option Two Unit Trust schemes; at the direction and advice, assistance or
instructions of Mr Hobbs,
on behalf of Preserved Investment Mr Clements opened
and operated the bank accounts for Elite Premier and Elite Premier Option Two
Unit Trust in the name of Preserved Investments; transferred funds received from
investors in Elite Premier and Elite Premier Option
Two Unit Trust to Cadent and
other accounts purportedly by way of investment; and made payments from the
Elite Premier Accounts to
various persons, by way of commission and otherwise as
set out in the Elite Premier Spreadsheet (Ex A tab 89, Elite Premier
Spreadsheet)
and Elite Premier Option Two Spreadsheet (Ex A tab 93, Elite
Premier Option Two Spreadsheet) and summarised in the Elite Premier
summaries
(Ex A tabs 90-92, Elite Premier summaries) and Elite Premier Option Two
summaries (Ex A tabs 94-114, Elite Premier Option
Two
summaries).
- I
therefore find that Mr Clements was a de facto director and officer of Preserved
Investment and that Mr Hobbs was a shadow director
of Preserved
Investments.
- Covered
Strategies (Ultimate Investments)
- ASIC
contends (and I so find) that Mr Hobbs personally arranged for Mr Fitzgerald to
be the administrator of the Covered Strategies
fund; Mr Fitzgerald had no
relevant experience or expertise to run such an investment fund; Mr Hobbs
explained to Mr Fitzgerald how
to set up and operate the Covered Strategies
fund; the relevant documentation for Covered Strategies was not prepared by Mr
Fitzgerald,
but was provided to Mr Fitzgerald through Mr Hobbs' office, save for
the certificate of units which was approved by Mr Hobbs; at
all material times,
Mr Fitzgerald considered himself to be subject to the directions and
instructions of Mr Hobbs while he was the
administrator of Covered Strategies;
Mr Fitzgerald was not responsible for the soliciting of investors to invest in
the fund, dealing
with brokers, or dealing with Mrs Watson in respect of KLM or
otherwise; Mr Fitzgerald was not involved in the decision as to how
to invest
funds deposited by investors. The way in which funds deposited into the Covered
Strategies fund were invested was determined
by Mr Hobbs, and Mr Hobbs made
arrangements with Mr Parker prior to any involvement by Mr Fitzgerald. Mr Hobbs
set up the original
contract with Mr Parker as trader; Mr Fitzgerald followed Mr
Hobbs' instructions in relation to the calculation and quantum of profit,
commissions and other amounts paid from the accounts held by Ultimate
Investments.
- ASIC
notes that when Mr Fitzgerald had problems with the fund, he left it to Mr Hobbs
to deal directly with Mr Parker to resolve the
issues that had arisen, and when
Mr Fitzgerald decided to cease in his role as administrator of the fund, he left
it to Mr Hobbs
to find an alternative person to be the administrator of the
fund, and assumed that that would be arranged by Mr Hobbs.
- ASIC
submits that, although Mr Fitzgerald signed documents on behalf of Ultimate
Investments, Mr Fitzgerald did not make any operational
decision in relation to
Covered Strategies other than as instructed or directed by Mr Hobbs; the
involvement of Mr Fitzgerald in
the setting up and operation of Covered
Strategies was only in an administrative or company secretary-type role; and Mr
Fitzgerald
did not perform any top-level management functions or make any
decisions regarding the business or operations of the company other
than at the
direction or on the instructions of Mr Hobbs, or on occasions Mr
Parker.
- Mr
Hobbs accepted that Mr Parker was (at least at one time) a friend of his. ASIC
contends, and I accept that the evidence establishes,
that each of Mr Diaz and
Mr Fitzgerald understood that issues with the Covered Strategies fund could be
addressed to Mr Hobbs, and
would be dealt with by Mr Hobbs speaking with Mr
Parker.
- As
earlier noted, Mr Diaz' evidence was that when Mr Hobbs stated to him that Mr
Parker was one of the owners of OEM, Mr Parker told
Mr Diaz that that was not
correct and that Mr Hobbs was "the only one that owns OEM, KLM and FTC" (Diaz at
[182]). While Mr Clements
appears to have been of the understanding that Mr
Parker had a role with Trans Management Corp (having sent faxes to him, such as
that at Ex AQ tab 52, for Trans Management Corp), that entity was controlled by
Mr Hobbs.
- It
is submitted that in all of the circumstances it can be inferred that Mr Parker
reported to and acted on the instructions of Mr
Hobbs. In that regard, I am not
satisfied that there is evidence of Mr Parker reporting to Mr Hobbs as such.
However, I am satisfied
that the schemes that invested with or through Mr Parker
(Covered Calls, insofar as this was administered by Mr Cable's IBC, and
Covered
Strategies, administered by Mr Fitzgerald) were schemes operated on Mr Hobbs'
instructions.
- ASIC
submits that in relation to Mr Hobbs: Covered Strategies was promoted by Mr
Hobbs and other FTC executives, who worked for Mr
Hobbs; Covered Strategies was
one of the funds listed on documents sent to investors by KLM Enterprises;
Covered Strategies was one
of the funds that was set up within a designated
"system", involving a "circle" of companies, FTC, OEM and KLM, which were part
of
a network or associated together, each of which were controlled by Mr Hobbs,
and Mr Hobbs controlled each and all parts of that system;
payments made from
the Covered Strategies accounts included payments made to Mr Hobbs, various FTC
Executives (who reported to Mr
Hobbs and worked for FTC, a company controlled by
Mr Hobbs) and Tasman Business Consultants and Magny-Cours (each of which were
owned
and controlled by Mr Hobbs). Again, the purported investment opportunity,
the setting up of the fund, operation of and relevant fund
documentation for
Covered Strategies was strikingly similar to that of the other schemes the
subject of these proceedings, such that
I infer it was done at the instruction
and direction of Mr Hobbs.
- ASIC
submits (and I accept) that: Mr Fitzgerald was accustomed to act at the
direction of Mr Hobbs in relation to the operation of
the Covered Strategies
fund; at the direction and advice, assistance or instructions of Mr Hobbs, on
behalf of Ultimate Investments
Mr Fitzgerald opened and operated the bank
accounts for Covered Strategies in the name of Ultimate Investments; transferred
funds
received from investors in Covered Strategies to other accounts
purportedly by way of investment; and made payments from the Covered
Strategies
Accounts to various persons, by way of commission and otherwise as set out in
the Covered Strategies Spreadsheet (Ex A
tab 115, Covered Strategies
Spreadsheet) and summarised in the Covered Strategies summaries (Ex A tabs
116-143, Covered Strategies
summaries).
- I
find that Mr Hobbs acted as a de facto director or officer of Ultimate
Investments from at least the time of Mr Fitzgerald's resignation
as a
'director' in 2005 and that in the period in which Mr Fitzgerald was the scheme
administrator of the Covered Strategies fund
Mr Hobbs was a shadow director of
Ultimate Investments.
Principal Issues for Determination
- In
the light of the above findings, I turn then to the principal issues for
determination and answer the questions therein posed as
follows.
"Hobbs scheme" issues
- Paragraphs
[37] - [46] of the Third Further Amended Statement of Claim plead matters
relating to the alleged development by Mr Hobbs
of the so-called Hobbs scheme,
raising a number of issues as to the role of Mr Hobbs (some of which have
already been addressed in
the factual findings above).
Whether in or prior to 2002, Mr Hobbs created or otherwise developed a
financial product, which he promoted and offered (or alternatively
which he was
engaged in the business of promoting and offering) to retail investors in
Australia (Hobbs financial product) [37].
- Paragraphs
[37] to [39] plead what is alleged to be the development by Mr Hobbs in or prior
to 2002 of a financial product within
the meaning of Division 3 of Part 7.1 of
the Corporations Act, which it is alleged in [40] that he promoted and
offered or was in the business of promoting and offering to retail investors in
Australia.
- The
financial product to which ASIC pleads in paragraphs [38]-[39] is the white
label or generic managed investment scheme outlined
in the introduction to these
reasons, it being alleged that investors contributed money to acquire rights to
benefits produced by
the financial product; that their contributions were
pooled; and that investors did not have day to day control over the operations
of the Hobbs financial product because they transferred funds to accounts with
financial institutions that they were not authorised
to operate, those funds
were transferred to other accounts for investment and they were not involved in
the day to day running of
the schemes.
- Mr
Halley submits, and I accept, that a scheme such as that outlined above
satisfies the definition of a financial product in s 763A of the Corporations
Act.
- Mr
Hobbs denies that there was any "Hobbs financial product" and denies the
allegations contained in the paragraphs referred to above.
In essence, however,
as I understand his case, Mr Hobbs is not denying that the facility that was
offered or made available to investors
through the schemes the subject of these
proceedings was a financial product, as such. Mr Hobbs' contention appears to
be, rather,
that it was not one made available to retail investors in Australia
(as opposed to one that was made to offshore IBCs) and, in any
event, that it
was not one developed or promoted by him.
- Hence,
in relation to the allegation in [37], in his Defence Mr Hobbs further says that
(a)FTC was a company established by Kip Becker and [Mr Hobbs] believed that
at all material times it was a wholly owned subsidiary
of OEM, a company owned
and controlled by Kip Becker, a United States attorney; John Chan, a Chinese
attorney; and others.
(b)FTC was a company engaged in the provision of educational materials and
did not promote any financial products.
(c)[Mr Hobbs] believes that Mr Becker, Mr Schillengier [sic] and Ms Reisinger
developed a financial product the provision of which
appears to be the subject
of these proceedings "the Reisinger Product".
(d)[Mr Hobbs] was instructed by Mr Becker to obtain a legal opinion as to the
legality of the Reisinger Product.
(e)[Mr Hobbs] believes Mr Becker, Mr Shillengier [sic] and Ms Reisinger
advised the Corporate Administrators with regard to the Reisinger
Product.
(f)Neither [Mr Hobbs] nor FTC received any commission or other payment with
regard to the Reisinger Product.
- (Pausing
there, to the extent that Mr Hobbs is there asserting that FTC was a company at
all material times owned and controlled by
others, it is difficult to see how
such a dogmatic statement could be made as is contained in (f) by Mr Hobbs as to
the non-receipt
of any commission or other payment by FTC with regard to
the "Reisinger Product". This simply highlights the inconsistency between the
case Mr Hobbs wants to put as to his
limited role in FTC and the knowledge and
familiarity displayed by him at the DVD Seminar and elsewhere of its
operations.)
- (Mrs
Hobbs pleads that she has no knowledge and cannot admit [37]-[40] inclusive. Ms
Wu's defence is also a non-admission of those
paragraphs insofar as they involve
her.)
- I
have no doubt (and I so find) that the financial product made available for
investment by investors in connection with the individual
investment schemes the
subject of these proceedings is one falling within the requisite definition in
the Act. Was it created or
otherwise developed by Mr Hobbs?
- I
accept that Mr Hobbs may well have obtained advice from securities attorneys or
advisers in the United States as to the financial
product that might be able to
be offered (that being a "pooled" investment product) and as to how that might
lawfully be done in
the United States. However, to the extent that he put such a
scheme into operation in Australia and New Zealand (and directed others
such as
Mrs Watson as to what steps were to be taken in the process) then Mr Hobbs was
clearly involved in the development of the
process. In contrast, I do not accept
that the evidence establishes that Ms Reisinger had been involved in the initial
development
of the so-called blended product (since Mr Hobbs was involved in the
establishment and operation of schemes before her introduction
to him in 2002).
Nor do I accept that the evidence establishes that the FTC entity involved in
the present case was one in the establishment
or operation of which Mr Hobbs had
no involvement.
- The
manner in which Mr Hobbs promoted FTC (both in the DVD Seminar and at meetings
with potential investors such as Mr Blow) was to
convey the impression that Mr
Hobbs was personally involved in the creation of the investment opportunities
there being presented
(or had been responsible for enabling access thereto).
- The
constant use of "we" and "our" in describing the funds and promoting the
investment opportunities (which I find was done in the
context of the sale of
the financial education packages) cannot in my view be dismissed as simply as
being a "figure of speech",
particularly given the explanation by Mr Hobbs at T
1270.27 that "When I worked in the insurance industry, I always used the word
"we" because it just incorporated the whole team". That, in my opinion, is a
very telling response because it confirms the impression
I had when observing Mr
Hobbs on the DVD Seminar, namely that Mr Hobbs was including himself as part of
the organisation or entity
that had access to the funds in question or that was
offering the investment opportunities in question. I find it inconceivable that
anyone listening to the DVD Seminar would not have understood Mr Hobbs to be
involved in the process by which access to investments
could be made available
to those who first had purchased the FTC educational package.
- That
Mr Hobbs was engaged in the business of promoting and offering to potential
(retail) investors in Australia a product (namely
a fund into which
contributions would be pooled for investment in offshore markets) that he had
developed (alone or in conjunction
with others) is the only conclusion
consistent with Mr Hobbs' references to the time and money spent in researching
those investment
opportunities and the assertion made by him as to the existence
of intellectual property in the funds (made not simply to persons
such as the
J&B Financial officers, inter alia when advising them how to complete the
Cadent application forms by reference to
his own experience and the value of the
intellectual property in the funds, but also in his own correspondence to
Sovereign Trust
in relation to Magny-Cours and, according to Ms Reisinger, in
his discussions with those at New World Holdings and Cadent when explaining
the
activities in which he was involved) and consistent with the constant references
in the DVD Seminar and, as deposed to by those
who did invest in the funds, at
other FTC seminars and meetings, to the opportunity to access "the real
things".
- Whether
Mr Hobbs solely created or developed the said financial product, he held himself
out as having been part of the creation of
that product (and he represented that
he had intellectual property in it and obtained a significant financial benefit
from it via
the $200,000 payment to Magny-Cours), I have no doubt that Mr Hobbs
promoted that product in the various seminars and meetings (including
the DVD
Seminar) in Australia and I so find.
- As
to the particular assertions contained in Mr Hobbs' defence, I do not accept
that the evidence supports them. I have dealt with
(a) to (c) already. In
relation to (c) and (f) there is at best a fleeting reference to Mr Schillengier
in the evidence and I was
taken to nothing in the evidence to support the
assertion that he was either involved or developed the financial product or that
he advised corporate administrators in relation thereto. As to (d), Mr Hobbs'
evidence was inconsistent as to this. The inference
I would draw from the timing
of the request for advice from Mr Hartnell (and the correspondence with ASIC
selectively quoting from
that advice) is that Mr Hobbs made the enquiry of his
own volition. That contention is reinforced by the use Mr Hobbs made of the
advice afterwards.
Whether in the period between at least 2002 and 2008, Mr Hobbs invited
or otherwise procured people in Australia and New Zealand to
establish managed
investment schemes using the Hobbs financial product and directed or otherwise
procured those people to establish
corporations for the purpose of acting as a
corporate administrator of those schemes [40].
- The
allegation in [40] is followed by the allegation in [41] that Mr Hobbs procured
the establishment in the period between 2002 and
2008 of the individual managed
investment schemes the subject of these proceedings (each of which is alleged to
have utilised or
been derived from the Hobbs financial product and to have
itself been a financial product within the definition in the Act) and the
respective corporate administrators who it is alleged administered the
Schemes.
- Mr
Hobbs expressly denies that there was any "scheme" as defined in [41] of the
pleading and denies each of [41]-[43], except to the
extent that he admits that
Geneva Financial administered what he understood to be the Reisinger Products
known as Prestige and Smart
Money. Mrs Hobbs admits to being introduced to Ms
Reisinger by Mr Hobbs and admits that Geneva Financial "subsequently invested in
the Reisinger Product and managed Prestige and Smart Money" but otherwise denies
that Geneva Financial was a scheme as defined in
[41].
- Having
regard to the findings above in relation to the respective schemes, I answer
this question in the affirmative.
Whether in the period between at least 2002 to 2008 Mr Hobbs and/or FTC
marketed and sold financial educational material to persons
within Australia and
marketed opportunities to persons within Australia to invest in offshore
wholesale investment markets through
the Schemes [44].
- Paragraphs
[44] - [46] relate broadly to the activities of FTC. At [44], it is alleged that
in the period between at least 2002 and
2008, Mr Hobbs and, further or in the
alternative, FTC, both marketed and sold financial educational to persons in
Australia and
marketed opportunities to persons in Australia to invest in
offshore wholesale investment markets through the Schemes.
- Mr
Hobbs admits [44(a)] (namely that he and, further or in the alternative, FTC
marketed and sold financial educational materials
to persons within Australia
over the relevant period) and (though not strictly required to plead to
particulars) he admits that the
financial educational materials consisted of the
approximately 18 booklets published and distributed "to potential investors" by
FTC over a 3 year period on various topics relating to investments. There is
therefore no dispute as to the first part of the allegation.
- What
Mr Hobbs denies is that he and/or FTC marketed the investment opportunities
referred to in (b) of this paragraph. In his defence,
Mr Hobbs further says that
he was the International Sales Manager of FTC and says that the educational
material "contained no mention
of the financial products which are the subject
of these proceedings".
- I
find that the promotion and sale by FTC of the education packages and the
process by which potential investors received information
from FTC and then were
referred to OEM and KLM were controlled by Mr Hobbs.
- Having
regard to the evidence of the various FTC executives who were called to give
evidence in these proceedings, the statements
made to FTC executives or
potential executives (and, potentially, those who might have chosen personally
to invest in the funds following
that seminar) at the DVD Seminar, and the
evidence of the investors, there is no doubt that Mr Hobbs did promote and
market the opportunity
for investment in the overseas wholesale market through
funds such as those the subject of the present proceedings. I find that he
did
so not only in his stated capacity as International Sales Manager of FTC but
also as a de facto director and officer of FTC.
- The
fact that there is no mention in the FTC booklets of the specific funds or
financial products is beside the point. There were
numerous references in the
DVD Seminar to identifiable funds, such as the Elite fund and the fund the run
by Mr Diaz (the Express
Fund), as well as references to various types of funds
or the investments in which those funds placed moneys. There were also numerous
references to funds in the meetings with investors - to such a degree that in
one instance a potential investor asked to invest in
a fund not listed on the
KLM list provided to her but instead to invest in a fund to which reference had
been made at the seminar.
- At
one point on the DVD Seminar, Mr Hobbs talked about actual returns of traders
who were licensed (stating that the best annual return
was 118% trading in
foreign exchange) and giving as an example "one of our traders at the
moment", which he said was run by solicitors from Brisbane had over the years
had some significant returns (making around
20% per month). I have earlier
extracted some parts of what Mr Hobbs was recorded as saying at the DVD seminar
as to the fact that
"we've had some significant returns over the years. I
mean, some months they've been 20-odd per cent per month", notwithstanding the
"extremely cautious" nature of the operators of
the fund in
question.
- Pressed
by one of the attendees (Ms Wool) on the question as to whether there was only
one bank that was also providing a share return,
Mr Hobbs said that was the case
but went on to explain:
We have three different foreign exchange trading investments. Only one
of them you can share the profit in with the bank. Another one out over here
carries a capital guarantee on the money. So,
I mean, again, horses for courses.
It's what people like. And each have a slightly different strategy in how they
trade. (my emphasis)
(Pt 2 P 6.16)
and went on to say:
We have another options trading program that has a prospectus, but the
prospectus is not registered here in Australia, and that trades on the FTSE
market in London. Now,
its worse year in 15 years was 1987. Most people in the
room that remember 1987, October '87, it wasn't a particularly good month.
But
they still did 30.3 per cent or something for '87.
Again theirs is a computer based system, has absolutely no emotion, it trades
based on knowing factors. Another type of fund that
is -. and again when
somebody becomes an introducer for KLM Enterprises, they get equipped with a
manual that's updated annually
with all the latest reports from the different
fund managers, showing the performance for that year and so forth. So they see
all
the inside information. They see who the fund managers are, you know, you
get all the information required
You will see one of the funds is an arbitraged mutual funds. Now, arbitraged
mutual funds is quite an interesting fund. ....
Now, that particular fund - there's an independent accountant's report on
that fund that produced over 100 per cent gross per annum
for the last three
years, and that profit is paid out quarterly. [Mr Hobbs said that the Securities
Exchange Commission in the US
had just introduced legislation stopping arbitrage
mutual funds because it was causing a false inflation of the markets for the
fund
managers and the average person was starting to do it from their home
computer in America]
So now arbitrage mutual funds are actually done from Europe and traded on the
London exchange from other parts of the Europe. It's
just the way it is. We
don't have a fund any more in the arbitrage mutual fund area because since that
legislation has come in, our fund managers, which
was Merrill Lynch securities
firm, just won't trade.
[There is] funds in wheat contracts - trading contacts of wheat - again
it's capital guaranteed and it's cleared through Refco, which
is again the
largest clearing house in the world. And that has been a very, very good
performer for the last 20 years. It performs anywhere from sort of 2 to 6 per
cent a month. And
that's paid out quarterly. Not a bad little performer at all
on a capital guaranteed product. Now of course all the funds we're talking
about here we cannot offer to an Australian resident, because the prospectuses
are not registered
here. So they've got to understand how they can legally
participate. And the only way we can do that is back to the education again.
I thought I had a funds list. We have 20 funds in total. I just don't
recall it off the top of my head. Yes, Elite Premier is another fund that trades
in commodities
and futures, and that's a leveraged fund. That is, half of the
money is held in cash at any one time. So basically there's a 50 per
cent risk
on the client's capital. And that has returned some significant returns in past
years. ...
I think the Elite Premier has been quoted at - where are we - about 8 per
cent. Last year it did 240 per cent. Now, I wouldn't say
it will do that again
this year. And past results - there's absolutely no guarantee of future
earnings. But it has been - it has
been a very successful fund. It is leveraged,
so it means that every dollar that you put in, they leverage that five times.
But the
fund manager also covers that leverage by cash. .... With the Premier
Elite you are not required by leverage to be responsible for any loss. (my
emphasis)
- At
Pt 2 P 9 from line 4, Mr Hobbs explained the process of
investment:
Each investment has its own contract, each investment has its full
disclosure agreement, and each investment has its own private placement
memorandum that outlines complaints procedure, where the investment is, you
know, whats the average return, and you can also get
historical
performance on every fund. Risk is always over-emphasised. And
that's pretty important. That's something that I hold close to my heart. I think
it's far better
to overemphasise risk and under-emphasise return than the other
way around. (my emphasis)
- Mr
Hobbs went through some of the foreign exchange products; explained that "We
also have products from Switzerland, and some of these
are IPOs"; said that
"Hedge funds is an area where we're steering clear of"; referred to scalping
trades and spot trades, spoke about
the rule of thumb in currency trading being
that there is usually a loss 3 times out of 10; and emphasised the arrangement
in the
fund in Brisbane:
Also in this particular fund the solicitors in Brisbane have negotiated a
very, very interesting arrangement that is: apart from commission
that is paid
to introducers, which works out roughly pro rata about 2 per cent a month. So if
you had $ 1 million of clients' money
under management, that's about twenty
grand a month income just on commission. It works out about 3 per cent best
efforts per month
for the client is the profit roughly, you know. And that
varies of course, because you cannot give a set figure because you're working
on
profit.
But the other position that they have negotiated for us is: we are now
allowed to share in what's called the pips. When you have a transaction done
and the bank or the clearing house, whoever is clearing that transaction, there
is a charge each
time a trade is made. And rest assured, banks never
lose. So whether that trader makes a profit or a loss, that bank receives a
commission. And the solicitors in Brisbane have been able to negotiate for
our introducers to receive part of that pip as commission per transaction.
So
not only are they getting commission out here from the profit, they also receive
commission per transaction. And you get a statement at the end of
every month from the bank showing you what your commission was on the sharing of
the pips and
of course you just match that up with the commission you receive to
your bank account. (my emphasis)
So that's one particular foreign exchange. We've been with that fund for
maybe four years. It's been running for about eight or 10
here in Australia.
These particular solicitors use 10 traders around the world between Europe and
the US. They also are in the very
privileged position of having on board what's
known as a gentleman who is renowned as the top trader in the world. And he only
works
usually about three months a year. And he's one of their 10 traders. But
he does 12 trades for 12 profitable returns. Unheard of,
just absolutely unheard
of. (my emphasis)
- Having
referred to the Express Fund run by Mr Diaz, Mr Hobbs also referred to a third
foreign exchange product called Solid Gold ("It's
a unit trust as well. It's run
by accountants out of Maroochydore. And they use Refco, which is a clearing
house, as well. But that's
on exchange spot transactions only"); spoke about
"we've actually withdrawing that [the arbitrage mutual fund] from the market"
and
that "right at the moment we do not have an arbitrage mutual fund for
offer"; and another fund with a registered prospectus out of
the UK (on the FTSE
100); and an "options fund that is a pooled investment that trades in the
Australian market about of which he
said:
cleared through a major brokerage in Melbourne - a great little performer.
The down side to this fund, and I need to be very clear
about that, the down
side to this fund, while the money is held and cleared by a major brokerage in
Melbourne, the decisions are
made by a sole individual. Now, you'll probably
say, "Well, that's not so bad." When we look at a fund, we look at - you
research a fund for two or three years, you look at the investment team. Is
there any prima donnas in there that make the decision, or is it a team effort?
In this case here it is an individual. And if
anything happened to that
individual, we would just have our funds returned and the fund would stop. So, I
mean, that's - people
have got to be aware of that. (my emphasis)
Then there is funds in the protected market, such as commodity trading. We
touched on that yesterday. There's funds that are available
trading in wheat and
gain commodities, have 100 per cent capital guaranteed, and other funds cleared
through Refco via SocGen Bank,
which -who runs these funds, also with 100 per
cent capital guarantee, that perform in bull and bear markets. So they'll
perform
whether a market is on the way up or down.
- It
cannot be suggested that Mr Hobbs did not make numerous representations at the
DVD Seminar as to the existence of funds to which
investors might have access
(and identified some of those funds by name or by reference to those running
them or by reference to
the nature of the particular investments in which fund
moneys were invested). I accept the evidence of the numerous witnesses called
by
ASIC who say that similar statements were made in other seminars or meetings by
Mr Hobbs or by FTC executives in his presence.
- I
was left with the firm impression that Mr Hobbs has simply convinced himself
(and no doubt this conviction has increased through
the constant repetition
thereof) that there was a sufficient divide between the sale of financial
education and the structure by
which offshore IBCs were able to invest in the
various investment schemes so as to removed the schemes from the scrutiny of
regulators
in Australia (or elsewhere). However, not only do I consider that his
attempt to distance himself from anything beyond the sale of
financial education
was artificial and contrived; the reality (as evidenced by the evidence from
numerous investors in the schemes
and the scheme administrators themselves) is
that the sale of educational material was treated as part of the overall process
of
investment in the schemes (and, as made clear in the authorities, the
structure adopted of an educational club does not preclude
a finding that there
was a managed investment scheme for the purposes of the legislation if it was
used as the conduit for investment
in such a scheme).
- I
find that Mr Hobbs also (albeit informally) marketed investment opportunities in
the sense that he suggested to Mr Koutsoukos the
possibility of investment in
the funds managed by Geneva Financial (and that whether or not this conversation
took place in Australia,
the offer of the investment was conveyed to the J&B
Financial officers in Australia) and that Mr Hobbs also directed scheme
administrators,
such as Mr Koutsoukos and Mr Collard/Ms Li, from time to time to
transfer investments between funds or place investor funds in other
funds.
Whether at all material times each of the persons identified in
paragraph [46] was an agent of Mr Hobbs
- At
[45] it is alleged that Mr Hobbs, on his own behalf and or on behalf of FTC
engaged people (the FTC executives) to carry on his
and FTC's business in
Australia (there particularising the persons said to have been so
engaged).
- Mr
Hobbs admits that FTC "engaged independent contractors to carry on the business
of FTC in Australia and elsewhere" and that certain
of the persons listed in
[45] signed FTC Executive Agreements but otherwise denies [45]. As I understand
it, there is no real dispute
that FTC did engage people to carry on the FTC
business of promoting sale of FTC subscriptions in Australia (and Mr Hobbs'
submissions
acknowledge that he was involved in the recruitment of such
persons).
- As
to the suggestion that the executives were independent contractors, Mr Hobbs
seems to rely on this as evidence that they were not
agents (a conclusion that
does not necessarily follow having regard to the authorities referred to earlier
in relation to agency).
For present purposes, nothing turns on whether the
executives were independent contractors or employees. I accept that the terms
of
the apparently standard form agency agreement are consistent with the executives
being appointed as independent contractors.
- At
[46], ASIC alleges that each of the FTC executives together with other specified
individuals in that paragraph was, to the extent
alleged in the pleading, acting
as the agent of Mr Hobbs and/or the agent of FTC. The specifically named
individuals include the
individual defendants (other than Mr Hobbs himself) to
these proceedings as well as (among others) Mrs Brenda Hobbs, Mr Zhang, Mr
Bernard Moore, Mr Fitzgerald, Mr Clements, Mr and Mrs Dent, Ms Dong, Mrs Watson,
Mrs Burnard, Mr Cable, Mrs Andrews, Mr Diaz, Mr
Robert Hobbs, Ms Reisinger and
Mr Parker (as well as Optionz NZ, the company with which Mr Parker seems to have
been associated).
- ASIC
relies, for the allegation of agency, upon affidavit evidence as to the giving
of directions and instructions by or on behalf
of Mr Hobbs to each of those
individuals and the compliance by those individuals with those instructions as
indicating that each
was accustomed to act in accordance with his direction or
the direction of persons appointed by Mr Hobbs to roles within FTC.
- Mr
Hobbs denies [46] and says:
...the named persons were agents of FTC for the sale of FTC educational
material only. The named persons had no authority from [Mr Hobbs] or FTC (to
[Mr Hobbs'] knowledge) to provide financial information nor to sell
any
financial product at all. (my emphasis)
- Mrs
Hobbs pleads that she has no knowledge and cannot admit paragraphs [44]-[46];
she further denies that she acted as Mr Hobbs' agent
or as an agent for FTC; and
says that: she has never received any money from FTC, has not acted for FTC and
that there is no contract
between her and FTC to do so. Ms Wu denies/does not
admit the allegation of agency made against her.
- Mr
Hobbs maintains that the definition of agency in International Harvester
at 652 (to which I have referred above) cannot be met in the present case
because (on ASIC's case) if it is said that each of Ms Reisinger/New
World, the
scheme administrators, directors/officers of FTC and the FTC executives are all
alleged to be agents for Mr Hobbs, then
there is relevantly "no third party for
all of the alleged agents to be negotiating with". In relation to that
submission, this ignores
the fact that the persons with whom FTC executives or
scheme administrators were dealing (as Mr Hobbs' alleged agents) were the
investors
in the schemes. These are the persons with whom, in the first place,
the alleged agents are said to be acting on Mr Hobbs' behalf.
- As
to New World Holdings/Ms Reisinger, the difficulty with Mr Hobbs' submission is
that they were dealing with Cadent (a relevant
third party) in relation to the
opening and operation of the Cadent accounts for the scheme
administrators.
- Moreover,
the concept of an agent in one capacity for Mr Hobbs dealing with another agent
in a different capacity for Mr Hobbs is
not something that points against them
both being agents.
- Mr
Hobbs submits that the only proper approach is to look at the particular
transaction/act alleged, the particular persons or entities
involved and to
determine whether that act is an act of that person or an act as agent for a
particular principle (citing Butcher v Lachlan Elder at [41]). That is,
in substance, the exercise that has been carried out by ASIC adducing copious
evidence as the role of the FTC executives,
their appointment, the evidence of
what they did and said to particular investors, and the dealings between the
scheme administrators
and Mr Hobbs on the one hand and Ms Reisinger on the
other.
- In
essence, as I understand Mr Hobbs' submissions, he contends that the FTC
executives were not his agents (and were at most the agents
of FTC only for the
purpose of sale of educational material) on the basis that:
(i)the FTC executive agreements make quite clear that there was no form of
relationship as an employee or agent, rather that they
were "executives"; (In
this regard it is clear that nomenclature is not determinative.)
(ii)the FTC executive agreements preclude FTC executives from selling
investments (Mr Hobbs submits that "just because someone does
something or has a
scheme does not mean they are acting as his agent") (reference being made to
clause 1) and therefore that any
act in breach of that provision was
unauthorised (ie, outside the scope of the agency as defined by the contract);
(the authorities
make clear that this is not the test);
(iii)if what the FTC executives were doing was unlawful then Mr Hobbs submits
that it was not an act that could bind the principal
(whoever that principal
might be); (this is how I read the submission made by Mr Hobbs that Mr
Koutsoukos "was acting on his own
behalf, or on behalf of J&B, or on behalf
of Ms Reisinger when he stole over $700,000 ($900,000?) [sic]) from investment
funds".)
(Again, the illegality of an agent's act does not preclude
responsibility on the part of the principal therefor. It is a question
as to
whether the act was within the scope of the agent's authority and construction
of the relevant statutes. Here, the disingenuous
nature of that submission lies
in the fact that Mr Koutsoukos (and the other J&B Financial officers) give
evidence that they
distributed moneys to themselves on Mr Hobbs' instructions or
with his approval.)
(iv)if FTC were his agents, then Mr Hobbs would be directing them (somewhat
of a non-sequitur when ASIC's case is that he did so)
and that he would be
getting paid directly in relation to them (in support of this proposition Mr
Hobbs refers to submissions from
Ms Wu and Mr Collard to the effect that Ms Dong
was paid $1000 per week by Mr Collard and Ms Li - as I understand it, by way of
contrast
to the fact that he did not receive such a payment). Mr Hobbs says
that:
Ms Wu will say in her submissions that she sold approximately 10
subscriptions to FTC. The commissions for these subscriptions were
all to be
paid to Bi Hong Dong. This was arranged by Ms Li & Ms Dong. Further, Mr
Collard has informed me that the commission
on these subscriptions was used
towards the figure of $1000 per week.
(The statements attributed to Ms Wu and Mr Collard are not supported by any
evidence in the proceedings and cannot properly be taken
into account.) I
consider this submission below.
- The
fourth proposition above is part of a succession of propositions that focus on
the money trail in relation to commissions. It
is submitted by Mr Hobbs that
insofar as an FTC executive is also a director/officer of a scheme administrator
(and was responsible
for taking investments) it is likely that he was acting in
his capacity as director/officer of the scheme (not FTC) and that any
doubts
about this can be resolved by reference to the source of the commission received
in relation to the investments (as opposed
to the FTC subscriptions). Mr Hobbs
submits that as the "director/officers" were paid by the scheme administrators
(and insofar as
Mr Hobbs is drawing a distinction here I assume he is
distinguishing between the individual scheme administrators, who are alleged
to
be directors or officers of the entities which were the corporate
administrators, and the corporate administrators themselves),
the scheme
administrators were the principals and the directors/officers were the agents of
the scheme administrators.
- In
support of this proposition, Mr Hobbs asserts that if they were acting as agents
for himself or FTC, then the payment would have
been from himself or FTC. He
contends that a very important element in determining with whom any agency
relationship arose is whether,
and by whom, the person was paid for the relevant
act. By way of example, Mr Hobbs points to the receipt by him of commission with
respect to Global Funeral Services (which he says is what would be the
commercial expectation as "I obtained the client"). Mr Hobbs
also asserts that
"the timing of the payments precisely fits with my explanation of events".
- One
difficulty with this submission is that it does not take into account the
possibility that an agent may perform services for the
principal without
monetary payment (but, say, from an expectation of a monetary benefit to be
derived elsewhere). (It is also not
inconceivable that an agent may perform
services for the principal on the basis that the agent will derive a
non-monetary benefit
or benefit from a third party in relation thereto).
- The
simple fact that commission for investments in the funds the subject of the
schemes was paid out of the profits generated by the
schemes does not mean that
there was an agency relationship between the corporate/scheme administrators and
the overseas fund managers.
In fact, the corporate administrators were by and
large controlled by, or alter egos of, the scheme administrators (on ASIC's
case,
ultimately by Mr Hobbs). Thus the fact that profits were paid out of the
schemes to the introducers does not preclude an agency arrangement
having been
in place in relation to the schemes as a whole as between Mr Hobbs/FTC and the
persons performing the roles, first, of
FTC executives in the sale of the
investment packages and then (with a different title) signing up investors for
the investment schemes
in question (some of which were administered by the same
people that were the sales persons for the FTC subscriptions in the first
place).
- Mr
Hobbs argues that if he had procured the opening of the Cadent accounts as
alleged then it would be expected that, from the opening
of each of those
accounts (or some other date as determined by a contract), he would be entitled
to receive some payment for the
opening of that account but that there is no
evidence of such an agreement nor are there any payments supporting such
agreements
save with respect to Global Funeral Services. He points to the
summary of money flows in support of the submission that had he been
the
principal it would be expected that he would receive a substantial proportion
(or at least some) of the commission or other payments
(and his agents a lesser
amount) and submits that there is no evidence of substantial payments to him (as
opposed to the substantial
payments that ASIC contends were made to Ms Li, Mr
Koutsoukos, Mr Wood, Mr Truong and others). ASIC, however, points to the
substantial
benefits that it contends Mr Hobbs received indirectly from the
schemes (including the $200,000 paid to the Magny-Cours account for
the "IP"
sale and the acquisition of properties in New Zealand through Legend of
Bathurst, at least one of which was funded through
investors'
moneys).
- The
difficulty with this submission is, first, that the Cadent account agreement in
November 2005 is in its terms not restricted to
the Global Funds, and, second,
that there is evidence that Mr Hobbs did in fact receive commission payments in
relation to the other
Cadent accounts.
- Mr
Hobbs submits that if he had arranged for agents to cause the Cadent accounts to
open then it would be expected that he would have
an agreement with those agents
and that he would have to pay those agents (submitting that there is no evidence
of any such agreements
or payments from him to such agents). However, the lack
of an agency agreement is not conclusive (particularly in circumstances where
it
does not seem that the contract documentation was particularly sophisticated in
relation to other aspects of the overall scheme)
and it ignores the fact that
the persons said to be opening accounts with Cadent on Mr Hobbs' behalf stood to
obtain a profit by
way of commission from the funds if the Cadent investments
were profitable - hence there was a commercial incentive for them to follow
Mr
Hobbs' directions in this regard.
- Mr
Hobbs also points to the evidence of the Cadent Account Applications and
Agreement for Corporations forms signed by the parties
to those agreements, and
notes that they were signed by the corporate administrators, not by himself.
Relevantly, however, various
witnesses give evidence as to the instructions and
assistance given by Mr Hobbs in relation to the paperwork for those accounts and
in that regard it is significant that some of the questions on the application
form cannot possibly have been truthfully answered
by reference to the
applicant's own experience. I accept that those answers were put forward by Mr
Hobbs as correct on the basis
that they would be operating, in effect, under his
experience.
- Mr
Hobbs submits that the concept of agency does not enable ASIC to sheet
responsibility home to him "for all of the activities of
all the persons
involved in the events the subject of these proceedings". I understand this to
be a submission that certain of the
activities of the persons fell outside the
scope of the agency. (Similar to the submission that illegal or unlawful
activities would
fall outside the scope of any agency, which raises a separate
issue.)
- It
is clear, in my view, that the FTC executives were acting on behalf of FTC when
selling educational materials or subscription packages.
In so doing, I find that
they were acting not simply as the agent of FTC but as Mr Hobbs' agent (since I
find that Mr Hobbs was the
alter ego of FTC).
- As
to what activities fell within the scope of that agency, the most useful
indication is by reference to the DVD Seminar, since I
consider that the
presentation made by Mr Hobbs on that occasion was at the very least a
recruitment and/or training session for
existing or potential FTC executives
(hence the business-like tone of the opening by Mr Hobbs, by reference to the
companies "we"
will be discussing over the following days and his reference to
the "sales track" as well as the way in which answers to potential
investors'
questions were dealt with). (I also note that this is consistent with the
emphasis placed by Mr Hobbs during this seminar
on the considerable amount of
money he had paid an introducer in one day, which cannot have been a reference
to FTC subscription
commissions.)
- In
relation to the DVD Seminar, Mr Hobbs asserts that there were no potential
investors in the room and there were no parties being
sought from this meeting
as introducers. As to the former, as a salesman one might think all parties in
the room were potential investors.
Certainly there was discussion of funds
available and returns that might be expected (that might be expected not to be
inconsistent
with the presence of potential investors). As to the latter, the
thrust of the DVD Seminar seems to have been to tell the attendees
of
opportunities to be made as FTC or KLM "introducers" by reference to the example
that one had been paid an extraordinary amount
for one day's
work.
- It
cannot in my view credibly be suggested that discussion as to the potential
investment opportunities or the returns to be made
in different types of
investment was something that fell outside the role of what an FTC executive was
to perform in selling the
FTC subscription packages. I think there is
considerable force in the submission that the FTC subscription package was the
price
that investors understood they had to pay in order to obtain access to the
investment opportunities of which the FTC executives were
speaking (and that the
FTC executives understood that the potential for high investment returns was the
"carrot" to induce people
to subscribe to the investment
packages).
- Therefore,
to the extent that Mr Hobbs submits that any discussion by FTC executives (once
appointed) as to investment opportunities
or returns or the particular
investment funds was outside the scope of their admitted agency, I do not accept
that submission. It
seems to me to be clear that the overall sales approach was
to encourage investors to purchase subscriptions on the basis that this
was the
way they could access the opportunities available for offshore investment (that
otherwise it was said were available only
to banks or sophisticated investors)
and that the FTC executive in question would be able to assist the investor in
making that investment
(hence soliciting investment contrary to the terms of the
FTC executive agreement but consistent with the training that Mr Hobbs
gave to
the FTC executives).
- Even
if the FTC executives were strictly in breach of their contractual obligations
to FTC when so soliciting for investment in the
offshore funds, I find that this
was authorised or otherwise acquiesced in by Mr Hobbs (who was present at
various of the seminars
in question) and that, in any event, it would be conduct
for which the principal (FTC and through FTC, Mr Hobbs) would be
liable.
- As
to whether Mr Hobbs could be liable for illegal activity by the agents of FTC
(or of himself), the authorities make it clear that
this liability can arise for
illegal acts of agents. In the present case, Mr Halley submits, in effect, that
this must be the case
when Mr Hobbs had himself authorised that
conduct.
- I
answer this question in the affirmative.
Whether each of Mr Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong,
Mr Koutsoukos, PJCB, Secured Bond, ISL, ISPL, 888 Turks &
Caicos and FTC
made each of the Investor Representations alleged in subparagraphs [48(a)] to
[48(o)]
- Paragraphs
[47] - [48] plead to the conduct by Mr Hobbs (by himself and his agents) of, and
attendance at, seminars and meetings over
the period between 2002 and 2008 that
were attended by potential investors in the Schemes (defined respectively as the
FTC Seminars
and the Investor Meetings) at which it is said that various oral
representations were made by each of Mr Hobbs, Ms Li, Mr Collard,
Ms Wu, Mr
Wood, Mr Truong and Mr Koutsoukos, PJCB, Secured Bond, ISL, ISPL, 888 Turks
& Caicos and FTC to potential investors.
- The
alleged Investor Representations (set out at [48(a)-(o)]) included
representations which may broadly be summarised as representative
of the ability
of Mr Hobbs or persons or entities associated with him to provide the potential
investor with access to offshore investment
opportunities and to wholesale
financial markets and opportunities otherwise available only to institutions
and/or sophisticated
investors; as to the process which a potential investor
must undertake to obtain access to those opportunities (including where the
potential investor wished to invest superannuation funds); as to the rate or
return their investment would generate; as to what part
or all of their money
would be used to buy (in the case of First Secured Bond Unit Trust, bonds or to
underwrite bonds; in the case
of Prestige Unit Trust, debentures; and in the
case of Integrity Plus, Super Save, Master Fund, Smart Money, the two Elite
Premier
funds and Best Funds, US Treasury securities or STRIPS) and that the
principal amount invested by the potential investor would be
guaranteed; that
the money invested would be pooled; and as to the process of making such an
investment.
- Mr
Hobbs denies [47]-[48]. (Mrs Hobbs pleads that she has no knowledge and cannot
admit those paragraphs, though stating that the
Smart Money memorandum indicated
that: return on investment would be 3% "best endeavours"; that subscribers to
Prestige were told
in the memorandum that Prestige would purchase Treasury notes
not debentures; that the Smart Money memorandum "specifically states
no
guarantee" and that both the Smart Money and Prestige memoranda say that
participation is only for those who can bear material
risk and a loss of their
entire investment and that the investment was high risk.)
- Mr
Hobbs, in further answer to [47], says that: in the period 2002-2008, with the
assistance of the FTC Executives, he conducted financial
educational seminars in
Australia "with the intent of selling financial information packages", at which
seminars he advised "invited
attendees" verbally and in writing that FTC
provided financial education only and gave no financial advice nor was it
affiliated
with any fund, fund manager or financial service; and that Ms
Reisinger and Mr Caswell "attended many of FTC's earlier seminars"
and
subsequently Mr Hobbs believes they "entered into arrangements with people who
became administrators of the Reisinger Product".
(This statement of belief is
disingenuous to say the least, having regard to the knowledge that Mr Hobbs had
as to the setting up
of the Cadent accounts by corporate administrators of
various of the schemes.)
- As
to [48], Mr Hobbs says that he did not make the oral representations set out in
(a)-(o) and that he did not represent that FTC
was other than a provider of
financial education material and that all potential subscribers were told that
FTC did not provide financial
advice.
- Turning
to the respective representations:
- Access to
offshore investments
- The
first class of the alleged Investor Representations is that Mr Hobbs, or persons
or entities associated with him, could provide
potential investors with access
to offshore investment opportunities ([48](a)), and/or access to wholesale
financial markets and
investment opportunities only available to institutions
and sophisticated investors ([48](b)). ASIC relies on evidence given by various
investors and FTC executives as to:
- the making of
the representation as to the provision of access to offshore investment
opportunities: by each of Mr Hobbs (Blow at [10], [14]; Marciniak at
[30]; Gahan at [12]; Stavropoulos at [43]; Huang at [20]; Koutsoukos at [207];
Wood at [19], [21];
Truong at [37]; Dong at [8]); Ms Li (Huang at [9],
[48]; Zhang at [10]; Gao at [10]; Xu at [83]); Mr Collard (Hogno at [17];
B. Moore at [6]); Ms Wu (Gao at [9], [37]); Mr Koutsoukos (Canham
at [7]; Koutsoukos at [170]); Mr Wood (Wood at [53]); Mr Truong
(Truong at [62], [182], [298]); Mr Jennings (Handebo at [5]; Gemmell
at [4]; Millington at [6]); W. Moule at [7]); and Mr Stavropoulos
(Mulligan at [8]); and
- the making of
the representation as to access to wholesale financial markets and investment
opportunities being only available to
institutions and sophisticated investors:
by each of Mr Hobbs (Blow at [10], [14]; Huang at [16], [20], [21](a),
[89]; Koutsoukos at [67], [108], [110], [207], [332], [393]; Wood at
[19], [21]; Truong at [37]; Dong at [8]); Ms Li (Zhang at [10], [90],
[150]; Gao at [10]; Xu at [47], [78], [135]; Dong at [7], [30], [68], [70],
[111]); Mr Collard (Jouravlev at [10]; Hogno at [9], [17]); Ms Wu
(Gao at [9]); Mr Koutsoukos (Canham at [7]); Mr Wood (Camilleri at
[22]; Wood at [53]) (Ms Dong (Dong at [31] 0, [83]; Mr Piggott (Marciniak
at [9]); Ms Dabelic (Stavropoulos at [5]).
- I
note that space does not permit the evidence as to the making of the respective
representations (here or in relation to other alleged
representations) to be set
out in any detail. I note, however, that I am satisfied that the material on
which ASIC relies, here and
elsewhere, as to the making of the representations
supports its contentions.
- Subscription
to FTC/establishment of IBC or SMSF
- The
second class of the alleged Investor Representation was that in order to obtain
access to these investment opportunities, a potential
investor must first
subscribe to FTC (for a fee) and either set up an IBC in an offshore
jurisdiction ([48](c), (e)) or, in the case
of investment in superannuation
funds, establish an SMSF ([48](e)). ASIC relies on the evidence of statements to
the following effect:
- as to the
representation relating to FTC subscription, by each of Mr Hobbs (Diaz at
[13], [71]; Koutsoukos at [99]; Truong at [37]; Wood at [19], [21], [32], [81]);
Ms Li (Huang at [9], [35], [39]; Xu at [17], [23], [24], [47], [78],
[135]; Zhang at [10], [11], [90], [150], [192]; Gao at [10]; Dong
at [7], [70],
[205]; MacDonald at [12]); Mr Collard (Jouravlev at [10], [13], [33];
Hogno at [9]; MacDonald at [12]); Ms Wu (Gao at [9]); Mr Koutsoukos
(Koutsoukos at [170], [677]; Canham at [7]); Mr Wood (Wood at [53],
[55]; Camilleri at [20]); Mr Truong (Truong at [62], [112], [302]); Mr
Diaz (Diaz at [30]); Ms Dabelic (Stavropoulos at [5]); Mr
Jennings (Handebo at [5]; Gemmell at [7]; Millington at [6]; W. Moule at
[7], [10]; K. Moule at [8], [11]); Mr Evans (Blow at [33], [35]); Mr
Piggott (Marciniak at [9], [12]-[15]); Lewis at [5], [8]); Mr
Stavropoulos (Mulligan at [8]) and Mr Denton (Russell at
[6]);
- as to the
representation that (other than in the case of superannuation funds) a person
must set up an IBC in order to invest, by
each of Mr Hobbs (Diaz at [11],
[13]; Huang at [10], [16]; Blow at [10], [14]; Gahan at [12]; Marciniak at [30],
[33]; Koutsoukos at [111], [137],
[332]; Truong at [37], [160]; Wood at [21];
Dong at [8]); Ms Li (Huang at [48]; Gao at [17]; Xu at [23], [24], [78],
[135]; Zhang at [10], [19], [90], [150], [192], [360]; Dong at [7], [68], [205];
MacDonald at [12]); Mr Collard (Jouravlev at [10], [13], [33]; Hogno at [17]; B.
Moore at [8]; MacDonald at [12]); Ms Wu (Gao at
[9]); Mr Koutsoukos
(Koutsoukos at [185]; Canham at [7]; Mulligan at [24]); Mr Wood (Wood at
[55]; Camilleri at [20]); Mr Truong (Truong at [62]); Mr Diaz
(Diaz at [31]); Mr Jennings (Millington at [6], [12]; W. Moule at
[7]); Mr Evans (Blow at [64]); Mr Piggott (Marciniak at [9];
Ormand-Allen at [4]; Lewis at [5], [8]); Mr Stavropoulos (Mulligan at
[15]) and Mr Denton (Russell at [6]); and
- as to the
setting up of an SMSF in order to invest superannuation funds (relevant to
investment in Super Save or the 888 (Super Save)
Fund), by each of Mr
Hobbs (Koutsoukos at [656]-[665]; Truong at [272]); Ms Li (Xu at
[88]; Zhang at [360]; Dong at [115]); Ms Wu (Gao at [37](b); Xu at [90]);
Mr Koutsoukos (Canham at [14]); Mr Wood (Camilleri at [90]; Wood
at [523]); Mr Truong (Truong at [298], [302]); Mr Jennings
(Handebo at [5]; Gemmell at [7], [10]; Millington at [37]; K. Moule at [11]);
and Mr Stavropoulos (Mulligan at [6]).
- Assistance by
FTC executive to establish IBC or SMS
- The
third alleged Investor Representation was that an FTC executive could assist the
potential investor to establish an IBC (as the
case may be) ([48](f)). ASIC
relies on evidence of the making of such statements by each of Ms Li
(Huang at [24], [48]-[53]; Xu at [25], [28]; Zhang at [19]; Dong at [10]);
Mr Collard (Jouravlev at [41]; Zhang at [21]-[22]); Ms Wu (Gao at
[19]); Mr Koutsoukos (Koutsoukos at [185]); Mr Wood (Camilleri at [22];
Wood at [55]); and other FTC executives (Marciniak at [33], [56]; Ormand-Allen
at [22]; K. Moule at [14]).
- Subscription
to FTC/establishment of IBC or SMSF
- The
fourth class of alleged Investor Representation is that, after satisfying the
FTC membership requirement and the IBC (or SMSF)
requirement, potential
investors needed to correspond by fax with OEM and KLM in order to obtain
information about opportunities
for investment ([48](k)), though, in the case of
some investors in Master Fund, this process could be completed after they made
the
investment ([48](1)). (The representation alleged in (k) is principally
directed at representatives to the extent by Mr Hobbs, Ms
Li, Mr Collard,
Secured Bond and FTC.)
- ASIC
relies on evidence of statements to that effect by each of Mr Hobbs
(Truong at [41], [73]; Wood at [21], [78], [81]); Ms Li (Xu at [60];
Huang at [58], [65], [96], [157]; Zhang at [28], [31], [42]; Dong at [29]; and,
as to the particular representation
to investors of Master Fund, that the
process could be completed after the investor had made their investment, Huang
at [157]); Mr Collard (Jouravlev at [53]-[56]; Hogno at [21], [61]; Huang
at [96]); Mr Wood (Wood at [57], [289]); Mr Truong (Truong at
[62], [67]); Mr Evans ( Blow at [64]); Mr Piggott (Marciniak at [9],
[11], [12]) and Mr Denton (Russell at [21]).
- Pooling of
funds for investment in wholesale market
- Fifth,
ASIC contends that it was represented that, if the potential investor chose one
of the investments being offered by Mr Hobbs,
or persons or entities associated
with him, the funds invested would be pooled with funds invested by other
investors ([48](m)) and
(at least in the case of Mr Hobbs, Ms Li, Mr Collard, Ms
Wu, Secured Bond and FTC) invested in the wholesale market ([48](g)) or
invested
so as to give the investor access to wholesale returns ([48](h)). ASIC relies on
evidence of statements to the relevant
effect:
- as to the
representation that the funds invested would be pooled with funds invested by
other investors, by each of Mr Hobbs (Blow at [31]; Ormand-Allen at [18];
Huang at [16], [20]; Dong at [8]); Ms Li (Xu at [60], [67], [78], [83],
[101]; Dong at [98]); Mr Collard (Hogno at [74](a)); Ms Wu (Gao at [9]);
Mr Wood (Camilleri at [22], [72]); and Mr Jennings (K. Moule at
[11]);
- as to the
representation that the funds invested would be invested in the wholesale
market, by each of Mr Hobbs (Blow at [10]; Huang at [89]; Dong at [8];
Koutsoukos at [108]); Ms Li (Zhang at [112]; Dong at [68], [70], [209];
Xu at [115]); Mr Collard (Hogno at [17], [74](b)); Ms Wu (Gao at
[9]); Mr Wood (Wood at [53]) and Ms Dong (Dong at [31], [83], [209]);
and
- as to the
representation that the funds invested would give the investor access to
wholesale returns, by each of Mr Hobbs (Blow at [10], [14]; Huang at
[89]; Dong at [8], [99]; Koutsoukos at [106]; Truong at [37]); Ms Li as
to Master Fund, Xu at [17], [83]; Huang at [155](a); Dong at [14], [30], [68],
[70], [111]; as to Enhanced Fund, Xu at [115];
Dong at [209]); Mr Collard
(Dong at [68], [110]); Ms Wu (Gao at [9]); Mr Wood (Wood at [53]);
Mr Truong (Truong at [182]) and Ms Dong (Dong at [83],
[209]).
- Sixth,
ASIC contends that it was represented that if the potential investor chose one
of the investments being offered by Mr Hobbs
or persons or entities associated
with him in relation to Integrity Plus, Super Save, Master Fund, First Secured
Bond Unit Trust,
Covered Strategies, Best Fund, Smart Money, Elite Premier,
Elite Premier Option Two Unit Trust and 888 (Super Save) Fund, the investment
would generate a monthly return of in the order of at least 3% to 4% per month
on funds invested and in relation to the Pinnacle
Fund that the investment would
generate at least 30% per annum on funds invested ([48](i)). ASIC relies on the
making of statements
to the effect of the monthly returns
representations:
- in relation to
Integrity Plus, by each of Mr Hobbs (Koutsoukos at [74], [120], [207],
[332]); Mr Koutsoukos (Canham at [7]; Mulligan at [24]); Mr Wood
(Camilleri at [72]; Wood at [288](b)); Mr Truong (Truong at [182]); Mr
Stavropoulos (Mulligan at [4]) and Mr Jennings (W. Moule at
[7]);
- in relation to
Super Save, by each of Mr Koutsoukos (Canham at [14]); Mr Wood
(Camilleri at [90]; Mulligan at [40]; Wood at [523]); Mr Truong (Truong
at [298]) and Mr Jennings (Handebo at [5]; Gemmell at [4]; K. Moule at
[11]);
- in relation to
Master Fund, by each of Mr Hobbs (Dong at [99]); Ms Li (Re Master
Fund: Xu at [17], [23], [60], [78], [88]; Zhang at [147], [223]; Huang at [155];
Dong at [70]); and Mr Collard (Hogno at [74](e));
- in relation to
First Secured Bond Unit Trust, by each of Mr Hobbs (Huang at [89]; Dong
at [229]); Ms Li (in relation to First Secured Bond Unit Trust: Zhang at
[107]; Huang at [86]); and Mr Collard (Jouravlev at [22]-[23]);
- in relation to
Covered Strategies, by each of Mr Hobbs (Huang at [16], [20], [29], [38],
[103]; Jouravlev at [71]; Wood at [145]-[146]); Ms Li (Zhang at [68],
[69], [105]; Huang at [103]); Mr Wood (Camilleri at [5], [24]); Mr
Truong (Koutsoukos at [13]); Mr Piggott (Ormand-Allen at [11](e);
Marciniak at [16]);
- in relation to
Best Fund, by Ms Li (Zhang at [150]);
- in relation to
Smart Money, by Ms Li (Zhang at [38]);
- in relation to
Elite Premier and Elite Premier Option Two Unit Trust, by each of Mr
Hobbs (Huang at [132]); Mr Collard (Jouravlev at [96]-[98]); and
Mr Piggott (Marciniak at [25]);
- in relation to
888 (Super Save) Fund, by each of Mr Hobbs (Dong at [99]); Ms Li
(Zhang at [361]; Xu at [78], [88]); and Ms Wu (Gao at [37]);
and
- in relation to
Pinnacle Fund, by Ms Li (Gao at [10]); and Ms Wu (Gao at
[9]).
- ASIC
also contends that a monthly return representation to this effect was also made
in relation to investment in unnamed and relies
in that regard on evidence of
statements to that effect by each of Mr Hobbs (Huang at [16]-[20], [23];
Marciniak at [33]; Ormand-Allen at [18]; Blow at [14], [31]; Gahan at [24];
Jouravlev at [71]; Koutsoukos
at [52], [106], [207], [210], [332], [388], [393],
[1030]; Truong at [37], [88], [217]; Wood at [19], [82], [393]); Ms Li
(Zhang at [10], [90], [150]; Huang at [9]; Dong at [68]; Xu at [115]; Macdonald
at [11]); Mr Collard (Jouravlev at [10], [12]-[13]; MacDonald at [11];
Dong at [68]); Mr Wood (Wood at [53]); Mr Truong (Truong at [62],
[119); Mr Piggott (Ormand-Allen at [4], [l11](e)); and Mr Jennings
(Millington at [6]).
- Particular
investments that would be made
- Seventh,
ASIC contends that it was represented that if the potential investor chose one
of the investments being offered by Mr Hobbs
or persons or entities associated
with him in particular funds, then ([48](g)(i)) the funds invested would be used
to buy particular
financial instruments (in the case of First Secured Bond Unit
Trust, bonds (or used for the purpose of underwriting bonds); in the
case of
Prestige, debentures; and in the case of Integrity Plus, Super Save, Master
Fund, Smart Money, Elite Premier, Elite Premier
Option Two and Best Fund,
Treasury securities or STRIPS, which would guarantee that the principal amount
invested by the investor
would be repaid unless the US Government defaulted) and
further ([48](g)(ii)) that the principal amount invested by the potential
investor would be guaranteed.
- In
relation to the relevant representation made in the case of First Secured Bond
Unit Trust (that funds invested would be used to
purchase bonds or used for the
purpose of underwriting bonds), ASIC relies on evidence of statements to that
effect by each of Mr Hobbs (Jouravlev at [67]-[71]; Huang at [89]-[90]);
and Mr Collard (Jouravlev at [22]).
- In
relation to the representation made in the case of Prestige (that funds invested
would be used to purchase debentures) ASIC relies
on evidence that such a
representation was made by Mr Hobbs (Gahan at [24]; Stavropoulos at [29],
[46]).
- In
relation to the representation made with respect to the purchase of Treasury
securities/ STRIPS, ASIC relies on evidence of statements
to that effect by each
of:
- Mr Hobbs
(with respect to Integrity Plus: Koutsoukos at [230]; with respect to Elite
Premier: Huang at [132]; and with respect to unnamed
funds: Koutsoukos at [42],
[91], [118], [332]; Truong at [232]; Dong at [85]);
- (with respect to
Integrity Plus, Elite Premier and unnamed funds), Ms Li (Xu at [17],
[23], [47], [60], [78], [88], [137]; Zhang at [90], [147], [181], [223]; Dong at
[70], [76], [98], [108], [209], [233]);
and Mr Collard (Hogno at [74](c);
Dong at [68], [98]);
- (with respect to
Master Fund and Best Fund), Ms Wu (Gao at [9], [37](a));
- (with respect to
888 (Super Save) Fund), Mr Koutsoukos (Canham at [7], [14]; Mulligan at
[24]);
- (with respect to
Integrity Plus and Super Save) Mr Wood (Handebo at [48]; Camilleri at
[36], [72], [90]; Wood at [53], [288](b), [297], [523], [531]) and Mr
Truong (Truong at [182], [298]);
- (with respect to
Master Fund) Ms Dong (Dong at [77]);
- and Mr
Jennings (Handebo at [5]; Gemmell at [4], [7]).
- In
relation to the representation that the principal amount invested by the
potential investor would be guaranteed, ASIC relies on
evidence of statements to
that effect by each of Mr Hobbs (Blow at [10]; Jouravlev at [71], [89];
Koutsoukos at [42]; Wood at [33]; Huang at [132]); Ms Li (Xu at [17],
[23], [24], [47]; Zhang at [90], [147], [181], [185], [223]; Dong at [70], [98],
[108]); Mr Collard (Hogno at [74](c); Dong at [98]); Ms Wu (Gao at
[9], [37](a)) Mr Koutsoukos (Canham at [7], [14]); Mr Truong (Truong at
[298]); Mr Jennings (Millington at [6], [25]; K. Moule at [11], [61]);
and Mr Piggott (Marciniak at [11]; Ormand-Allen at [11](e),
[12]).
- Scheme
agreement/deposit of funds
- Finally,
ASIC contends that it was represented that potential investors wishing to invest
had to sign a scheme agreement (save that
in some instances in the Master Fund
and Pinnacle Fund potential investors were told they could sign a temporary
contract and the
scheme agreement later) and deposit funds into a bank account
nominated by an FTC executive or the account identified in the scheme
agreement
([48](n)-(o)).
- In
relation to the representation that potential investors needed to sign a scheme
agreement to invest funds, ASIC relies on evidence
of statements to that effect
by each of Mr Hobbs (Koutsoukos at [140]); Ms Li (Xu at [127];
Huang at [78], [96], [104](a); Zhang at [71], [95]; Dong at [86]); Mr Collard
(Huang at [96]; Hogno at [26]); Ms Wu (Gao at [22], [26]-[29]); Mr
Koutsoukos (Mulligan at [25]); Mr Wood (Wood at [531]); and Mr
Truong (Truong at [302]).
- In
relation to the representation that potential investors needed to deposit their
funds into a bank account nominated by an FTC executive,
ASIC relies on evidence
of statements to that effect by each of Ms Li (Xu at [32]; Huang at [72];
Zhang at [73], [367]); Mr Collard (Jouravlev at [66]; Hogno at [26];
Zhang at [83]); and Ms Wu (Gao at [23]).
Conclusion
- There
is overwhelming evidence as to the making of the Investor Representations by
those identified in each case as having made those
representations. I find that
this allegation is established and that the denials by Mr Hobbs and Ms Wu in
this regard (and the submissions
of Mr Collard to the extent that he denies the
making of any such representations) not credible.
Whether at all relevant times each of KLM and OEM was the alter ego of
Mr Hobbs [62]
- Context in
which the alter ego allegation is made
- The
allegation that each of KLM and OEM was the alter ego of Mr Hobbs falls within
those paragraphs of the pleading ([49] - [67])
in which ASIC makes allegations
as to the process by which potential investors subscribed to FTC and invested in
the various schemes.
Paragraphs [68] to [70] then plead that the terms and
conditions of each Scheme were set out in the Scheme Memorandum for that scheme
(as particularised); that at or around the time of making an investment a
prospective investor was required to enter into a Scheme
Agreement with the
corporate administrator who administered the relevant scheme; and that the
material terms of each Scheme Memorandum
and Scheme Agreement were drafted by Mr
Hobbs or otherwise supplied by him to the corporate administrators for each
scheme. The particulars
to [70] state that Mr Hobbs or his agents (Mr Cable, Mrs
Andrews, Mr Dent and Mrs Watson) provided templates or standard form version
of
the Scheme Memoranda and Scheme Agreements electronically or otherwise to each
of the corporate administrators.
- Mrs
Hobbs pleads that she has no knowledge and cannot admit the allegations in
[49]-[65] and [67] in relation to the alleged investment
process.
- Mr
Hobbs admits in broad terms various of the components that formed part of what
ASIC alleges was the "process for investing" (such
as the completion of an FTC
application form, payment of $4,000 into the Tasman Business Consultants account
"on trust for FTC";
that FTC executives were independent contractors of FTC who
introduced subscribers and were paid a commission from the moneys held
in trust
for FTC; that subscribers received booklets as alleged) but denies most of the
allegations as to what occurred after the
FTC subscription.
- As
to [53] (which alleges that Mr Hobbs arranged, by himself or through his agents,
for the production of the FTC booklets and their
despatch to potential
investors) this is denied insofar as the activities are alleged to have been
carried out by agents for him
and insofar as the subscribers of FTC are
described as "potential investors" (Mr Hobbs saying that any activities carried
out by
himself or others "were as employees of, or contractors to,
FTC").
- As
to the allegation in [54] that Mr Hobbs (by himself or his agents) or
alternatively FTC or alternatively each of Ms Li, Mr Collard,
Ms Wu, Mr Wood, Mr
Truong and Mr Koutsoukos, assisted potential investors to establish IBCs, Mr
Hobbs "denies that he, or FTC or
(to his knowledge) any agent on their behalf"
established any IBC on behalf of any person described as a "potential investor"
but
otherwise does not admit the paragraph. (I note that this part of the
defence again appears to treat Mr Hobbs as being in a position
to speak on
behalf of FTC since the words in parentheses expressly qualify only the
reference to the acts of any agent on behalf
of Mr Hobbs or
FTC.)
- Mr
Hobbs pleads that he does not know and cannot admit the allegation that each of
Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong and
Mr Koutsoukos procured
documents to be sent to potential investors relating to the establishment of
their IBC or the granting to
them of a power of attorney over their IBC. (This
seems a rather disingenuous plea when one takes into account what Mr Hobbs
himself
told at least Ms Li, Mr Collard, Mr Truong and Mr Wood at the DVD
Seminar as to the process for incorporation of IBCs.)
- Mr
Hobbs denies that he, or FTC or (to his knowledge) any agent on their behalf
established any self managed superannuation fund on
behalf of any person
described as "potential investors" and denies that he, or FTC or (to his
knowledge) any agent on their behalf
procured the sending of a facsimile to OEM,
but otherwise does not admit the allegations in [56] and [57] in relation to
those matters.
- In
paragraph [36] of his defence, Mr Hobbs again states his belief that OEM was a
company owned and controlled by Mr Becker, Mr Chan
[sic] and others. He denies
the allegation in [58] (that he, by himself or his agents Mrs Watson and Ms
Burnard, directed or otherwise
procured OEM to request information from
potential investors about themselves and their IBCs) insofar as it is made
against him but
otherwise does not admit the paragraph.
- In
paragraph [37] of his defence, Mr Hobbs states his belief that KLM was a company
owned and controlled by Mr Becker, Mr Chan [sic]
and others. He denies the
allegation in [59] (that he, by himself or his agents Mrs Watson and Ms Burnard
directed or otherwise procured
KLM to provide documentary material to potential
investors who had provided information as requested to OEM about their IBCs)
insofar
as it is made against him but otherwise does not admit the
paragraph.
- Similarly,
Mr Hobbs denies the allegations in [60] and [61] (that relate to the provision
in the KLM documentary material of information
to potential investors as to the
Schemes in which they could invest or that potential investors were informed
that they could seek
further information as to the schemes in the KLM material
from KLM and/or OEM) insofar as the allegations are alleged against him
but
otherwise does not admit those paragraphs (by which it appears that Mr Hobbs is
denying that this occurred to his knowledge or
at his request or on his behalf
but not denying that it may have occurred).
- As
to [63], Mr Hobbs denies that he or (to his knowledge) his agents caused
information to be sent to potential investors as alleged
(ie documents setting
out the terms and conditions of the schemes) and says that to the extent that
Mrs Watson or Mr Dent may have
sent such material he did not authorise it (no
reference is specifically made to Mrs Dent in this context, though she is
alleged
to have been one of his agents who caused such documents to be
sent).
- As
to the allegation in [64] (as to the provision of Scheme memoranda and Scheme
Agreements or temporary contracts to potential investors),
Mr Hobbs denies the
allegation so far as it is made against him, otherwise does not admit the
paragraph and says further that he
did not authorise any FTC Executives "to
provide memoranda for the Reisinger Product or agreements for the Reisinger
Product" and
to the best of his knowledge no FTC executive was authorised by
anybody to do the same.
- Mr
Hobbs denies the allegation in [65] that potential investors, acting in reliance
on the Investor Representations, took the steps
therein set out (and repeats his
denial of [48] and the matters averred in relation to that
paragraph).
- As
to [66] (which alleges that Mr Hobbs by himself or the persons or entities named
therein as his agents caused investors to be sent
a certificate or letter
confirming their investment), Mr Hobbs denies that any of the named persons or
entities was his agent and
otherwise does not admit the paragraph. Similarly, in
relation to [67] (which relates to the procuring of some investors to sign
a
scheme agreement in respect of the Pinnacle and Master Funds after the deposit
of their money and to back-date the agreement, Mr
Hobbs denies the allegation
insofar as it is made against him, denies that Mr Li, Mr Collard or Ms Wu were
his agents and otherwise
does not admit the paragraph.
- As
to [68]-[70], Mr Hobbs denies the allegations insofar as the word Scheme refers
to the definition of Scheme in [41] but otherwise
pleads that he does not know
and cannot admit the allegations. He says that insofar as investors in the
"Reisinger Product" used
standard form documents he believes that they were
originally drafted by Mr Becker.
- Included
in this part of the pleading is the allegation (at [62]) (the relevant issue at
this point for determination) that at all
material times each of KLM and OEM was
the alter ego of Mr Hobbs (particularised on the basis that each of OEM and KLM
was established
on Mr Hobbs' instructions; each was accustomed at all times to
act in accordance with Mr Hobbs' instructions; that Mr Hobbs prepared
or gave
directions for the preparation of the substantive parts of all letters or other
documents sent by OEM or KLM to investors
or potential investors; that he
instructed his agents, Mrs Watson and Mrs Burnard to send correspondence in the
name of OEM and KLM
to potential investors and that faxes sent to the (UK) fax
number to which investors were directed were received by Mr Hobbs or
alternatively
his agents Mrs Watson and Mrs Burnard).
- Mr
Hobbs denies that allegation but pleads as follows to the particulars provided
of the alter ego allegation (at [39]) as follows:
(a)OEM and KLM were companies owned and controlled by Kip Becker, John Chan
[sic] and others and any assistance given to those companies
by [Mr Hobbs] was
on the instructions of Mr Becker and later John Chan. [which I take to be a
reference to the John Chen referred to in the affidavit evidence]
(b)That insofar as he gave instructions to Emma Watson, Suzanne Watson and Mr
Dent it was on behalf of Kip Becker and John Chan. [arguably implicitly
acknowledging the possibility that he did give instructions to those
individuals]
(c)[Mr Hobbs] denies that Suzanne Watson or Mr and Mrs Dent were his agents.
[A denial that in my view is extraordinary and cannot
possibly be accepted on
the evidence.]
(d)[Mr Hobbs] says that he believes the documentation referred to in
paragraph 62 was sent out as part of the above named persons'
duties to OEM/KLM.
[Again, this submission is extraordinary not only in light of the conspicuous
lack of any evidence of interaction
between those involved in the OEM/KLM
process and the persons Mr Hobbs says owned and controlled those entities, but
also because
on Mr Hobb's own evidence, he did not know what was involved in the
process - so it is difficult to see how he could have formed
the stated
belief.]
- I
have no doubt that Mr Hobbs controlled and ran the OEM/KLM operations in
Australia and New Zealand and, insofar as OEM/KLM were
legal entities through
which the OEM/KLM process operated, he controlled those entities. That, in
essence, disposes of this issue.
However, for completeness, I note as
follows.
- In
relation to the two Anguillian IBCs in respect of which registered agency
services were provided (and paid for by Mr Hobbs or by
Tasman Business
Consultants at his direction or on his instructions), I infer that whoever was
registered as the shareholder/director
of the IBCs held such office only in a
nominal capacity. Where there is no evidence that Mr Hobbs maintained those
companies on behalf
of anyone else and where Mr Hobbs seems in 2006 to have
assumed that he had the authority (and that First Anguilla Trust would accept
his authority) to nominate whoever he designated as the new "beneficial owner"
of the company on his application for its revival,
I conclude that at all
material times OEM Ltd (Anguilla) and KLM Enterprises Ltd (Anguilla) were
companies owned and controlled by
Mr Hobbs.
- As
to any other OEM/KLM entities that may have been involved in the process (as
opposed to the Anguillian registered entities) ASIC
submits, and I accept, that
the evidence demonstrates that at all material times Mr Hobbs controlled the
OEM/KLM process and accordingly
I would infer that he also controlled those
other entities.
- Mr
Halley submits, and I agree, that whether or not there was (at some earlier time
than the time the Anguillian companies were incorporated)
a company called OEM
Ltd or KLM Ltd that was separately incorporated in Nevis (or whether or not Mr
Hobbs or some other person controlled
any such a company) is an issue that does
not need to be decided in the present proceedings. (I note in passing that the
Macquarie Dictionary observes that Anguilla is one of the Leeward Islands
in the West Indies and a British dependency and one of two islands that formerly
formed the British colony of St Christopher and Nevis-Anguilla, now federal
parliamentary state of St Christopher and Nevis. Therefore,
it is possible that
the references to Nevis and Anguilla were intended loosely to refer to the same
location.)
- In
the case of KLM, Mr Halley points to the following additional matters as
evidencing Mr Hobbs' control of the relevant operations
of KLM:
(i)at the DVD Seminar, Mr Hobbs purported to speak on behalf of KLM in
respect of its business and operations, its processes, its
funds and its
traders; and accepted in cross-examination that he understood that Mr Becker
wanted him to build up a bigger team in
Australia actually to manage funds (T
1317.29 - T 1317.36), (which Mr Halley notes was, on Mr Hobbs' case, KLM
business rather than
FTC business); in that regard, I have already indicated
that the frequent use of "we" or "our" seems to me to be consistent only
with Mr
Hobbs' speaking as part of or on behalf of the entity in question;
(ii)Mr Hobbs and FTC executives who reported to Mr Hobbs (variously, Ms Li,
Mr Collard and Mr Wood) undertook steps which were purportedly
part of KLM's
business when assisting potential investors to establish an IBC (or an SMSF),
usually in the jurisdiction of Vanuatu
using Moores Rowland in Vanuatu (Dong at
[32], [38] (in respect of Ms Li and Mr Collard); Zhang at [19]-[22] (in respect
of Ms Li
and Mr Collard); Huang at [48]-[57] (Li); Xu at [24]-[30], [35]-[38]
(in respect of Ms Li); Gao at [30] (in respect of Ms Li); Gahan
at [13] and
Jouravlev at [34]-[40] (in respect of Mr Collard); Hogno at [17]-[19] (in
respect of Mr Collard); B. Moore at [8]-[9]
(in respect of Mr Collard); and
MacDonald at [393]) or Anguilla (using First Anguilla Trust Co (Koutsoukos at
[185]-[188], [195],
[373]; Wood at [55], [128]-[138], [213](h); Truong at
[134](c); Camilleri at [22]);
(iii)there is evidence that Mr Hobbs (and FTC executives) promoted specific
schemes at, or immediately after, FTC seminars or meetings,
and provided
information to persons attending the FTC seminars and meetings that, after
satisfying the FTC membership requirement
and the IBC (or SMSF) requirement,
they could correspond by fax with OEM and KLM in order to obtain specific fund
information, all
of which was (purportedly) the business of KLM. (In this
regard, Mr Halley notes that Mr Hobbs conceded that providing advice about
funds
directly to retail investors would not be consistent with his case as to the
purported distinction between FTC and KLM - T
1323.30 - T 1323);
(iv)the FTC executives who made representations to potential investors as to
potential investments (and on ASIC's case encouraged
the potential investors to
pursue the particular investment opportunities) then became KLM introducers in
respect of the introduction
of such investment (which it is submitted
demonstrates that in truth the FTC executives, each of whom reported to Mr
Hobbs, were
conducting business on behalf of KLM). (In this regard, emphasis is
placed on the fact that FTC executives were able to earn substantial
(undisclosed) commissions on returns on investors' investments in any of the
schemes - at a rate of 12% on returns, which Mr Halley
notes was emphasised in
the training of FTC executives (Koutsoukos at [549]-[554]; Canham at [27]; Diaz
at [42]), including by Mr
Hobbs (Truong at [41]). Thus it is said, and I think
it likely, that in practice it was inevitable that FTC executives also acted
as
introducers or brokers soliciting investment (Dong at [29]) and that their role
was to direct investors as to how to invest (reference
being made in this regard
to the role Ms Li (at Dong [26]-[27]), Mr Koutsoukos (at [829]) and Mr Diaz
(Diaz at [42]-[43]).);
(v)the printing and distribution of KLM funds memoranda and agreements was
conducted by Mr and Mrs Dent (it being said that this can
be inferred to be for
and on behalf of Mr Hobbs); in that regard Mr Hobbs' denial of knowledge of the
Dents' activity is implausible
and inconsistent with the later direction for
printing to take place offshore; and
(vi)when Mr Hobbs sought the advice of Mr Hartnell on behalf of FTC, on the
letterhead of FTC, the advice sought was not only in relation
to steps in the
FTC process but also (as Mr Hobbs agreed at T 1305.42-44, though Mr Halley
observes that Mr Halley suggested that
this was not material insofar as he also
said that he "could have used a different letterhead" at :T 1306.4-5) related to
the KLM
business and process. (Mr Halley submits that the evidence by Mr Hobbs
at T 1306.18-23 that he was not in any way acting on behalf
of KLM in this
regard cannot be accepted unless, in truth, the KLM process was simply a part of
the one FTC process).
- I
find that Mr Hobbs controlled all of the business and operations of OEM and KLM
(to the extent those companies were involved in
conduct in Australia and New
Zealand that is the subject of and relevant to these proceedings), namely the
conduct of the OEM/KLM
process.
- I
am satisfied that Mr Hobbs controlled the practical direction and exercised all
relevant top-level management functions in respect
of the operations of OEM and
KLM, to the extent they were part of the OEM/KLM process the subject of these
proceedings, and acted
in the position of the most senior executive director of
those entities. Accordingly, I find that Mr Hobbs was a de facto director
of OEM
and KLM.
- Further,
since each of the persons who undertook the relevant parts of the OEM/KLM
process (Mrs Watson and Mrs Burnard (and for some
time, the J&B Financial
officers)) took instructions from Mr Hobbs and (in the case of Mrs Watson) was
accustomed to act on Mr
Hobbs' instructions and at his direction or (in the case
of Mrs Burnard) was accustomed to act on the instructions of either Mr Hobbs
or
Mrs Watson, I find that Mr Hobbs was a shadow director of OEM and
KLM.
- I
find that OEM and KLM (namely, the entities under whose name the OEM/KLM process
was conducted, if they actually existed at all)
were the alter ego of Mr
Hobbs.
What was the true nature of the transaction entered into pursuant to
the Scheme Agreements [72]
- This
issue raises the allegation of sham as contained in [71] and [72] of ASIC's
pleading.
- What
is alleged is that, insofar as each Scheme Agreement purported to record an
agreement between an IBC and the corporate administrator
(rather than an
agreement between the person(s) who purported to sign the scheme agreement on
behalf of the IBC and the corporate
administrator), the Scheme Agreement was a
sham and, further or in the alternative, did not reflect the true nature of the
transaction.
- ASIC
contends that the true nature of the transaction was an agreement between the
scheme member and the corporate administrator (or
alternatively between the IBC
as the agent for the scheme member and the corporate administrator) recording
the terms and conditions
on which the scheme member agreed to contribute funds
to the relevant scheme and the corporate administrator agreed to deal with
those
funds.
- By
way of particulars to the sham allegation, ASIC relies on the following
matters:
(i)that the purported constitution of an agreement between an IBC and the
corporate administrator was to avoid the need for the corporate
administrator
and the other defendants to hold Australian financial services licences and for
the Schemes otherwise to be registered
as a managed investment scheme pursuant
to s 601 ED(1) of the Corporations Act;
(ii)principal amounts contributed by scheme members to the Schemes were not
paid from an account in the name of the IBC;
(iii)in a number of instances the scheme member executed the agreement by
signing his or her own name in the place for the investor/client's
signature in
the agreement and in the appendices
(iv)the scheme member was identified as the client for the purposes of the
source of funds declaration;
(v)the address of some of the IBCs recorded on the scheme agreement was the
scheme member's address in Australia;
(vi)in some instances the scheme member wrote his or her name next to the
words "Name of Client" in Appendix 1;
(vii)some scheme members nominated in Appendix 1 an account in their own name
in Australia or an account in Australia in a company
name but not that of their
IBC or an overseas account in the name of a natural person;
(viii)the contact details for some of the IBCs recorded in the agreement were
the scheme member's fax number email address and postal
address in Australia;
and
(ix)to the extent that the scheme agreement provided that the IBC was the
investor or the client, ASIC contends it was "a spurious
imitation, a
counterfeit, a disguise and/or a false front" [which appears to be an
assertion of ASIC's contention or conclusion from the above particulars,
adopting the description of a sham
found in Sharrment Pty Ltd v Official Trustee
in Bankruptcy [1988] FCA 179; (1988) 18 FCR 449 at 453.]
- ASIC
contends that the interposition of an IBC (in the place of the individual
investor) was a sham to give the appearance that the
relevant investor was not
an unsophisticated retail investor (but a discrete international business
corporation) and that the relevant
solicitation and issue in respect of the
investment took place offshore. (Pausing there, it is difficult to resist the
conclusion
that the interposition of an offshore incorporated IBC was designed
in order to give the investment an offshore character - that
was something made
abundantly clear by Mr Hobbs in his DVD Seminar.)
- I
note that Mr Halley submits that, even if I do not accept that the interposition
of the IBC was a sham, nevertheless the IBC only
ever acted as the agent of the
principal who was onshore and the investment funds were provided in the main by
the respective principals
onshore - hence the jurisdictional requirement is
satisfied in any event.
- Mr
Hobbs denies [71]-[72] insofar as the word "Scheme" is based on the definition
in [41] and insofar as any matters are alleged against
him and otherwise does
not admit these paragraphs.
- The
origin of the word 'sham' was discussed by Lockhart J in Sharrment Pty Ltd v
Official Trustee in Bankruptcy [1988] FCA 179; (1988) 18 FCR 449 at 453, where his
Honour noted that the word first appeared as slang in the seventeenth century
and that the dictionaries describe
it as of obscure origin. Kirby J in
Raftland Pty Ltd v Commissioner of Taxation of the Commonwealth of
Australia [2008] HCA 21; [2008] 238 CLR 516 at [135] explained that the word 'sham' derives
from Old English word 'shame', "with which its core notions of duplicity and
deceit are connected
and that the primary meaning assigned to the word sham by
current legal doctrine in Australia is that of one of its dictionary meanings,
namely "something that is not what it purports to be".
- In
Scott v Commissioner of Taxation (Cth) (No 2) (1966) 40 ALJR 265,
Windeyer J gave the following description of a 'sham' transaction at
279:
On the other hand, if the scheme, including the deed, was intended to be a
mere façade behind which activities might be carried
on which were not to
be really directed to the stated purposes but to other ends, the words of the
deed should be disregarded...
A disguise as a real thing: it may be elaborate
and carefully prepared thing; but it is nevertheless a disguise. The
difficult and debatable philosophic questions of the meaning and relationship of
reality, substance and form are for the purposes
of our law generally resolved
by asking did the parties who entered into the ostensible transaction mean it to
be and in fact use
it as, merely a disguise, a façade, a sham, a false
front - all these words have been metaphorically used - concealing their
real
transaction... (my emphasis)
- In
Bridge v Campbell Discount Co Ltd [1962] AC 600, where the House of Lords
considered whether or not a clause in a hire purchase contract amounted to a
penalty, only Lord Devlin
considered the question as to whether there was a
'sham' arrangement. (His Lordship did so in the course of pointing out that,
while
the other Lords did not expressly make any findings as to whether there
was a 'sham', their reasoning involved not taking the words of the clause
at their face value.) Lord Devlin said at 634:
It is well settled that when a court of law finds that the words which the
parties have used in a written agreement are not genuine,
and are not designed
to express the real nature of the transaction but for some ulterior purpose to
disguise it, the court will go
behind the sham front and get at the reality.
That, indeed, is what the court is doing when it declares that what is expressed
as
an agreement about liquidated damages is not a genuine agreement but cloaks
the imposition of a penalty.
- In
Snook v London & West Riding Investments Ltd [1967] 2 QB 786, Diplock
LJ said at 802:
...it is, I think, necessary to consider what, if any, legal concept is
involved in the use of this popular and pejorative word. If
it has any meaning
in law, ['sham'] means acts done or documents executed by the parties to the
'sham' which are intended by them
to give to third parties or to the court the
appearance of creating between the parties legal rights and obligations
different from
the actual legal rights and obligations (if any) which the
parties intend to create... [F]or acts or documents to be a 'sham', with
whatever legal consequences follow from this, all the parties thereto must have
a common
intention that the acts or documents are not to create the legal rights
and obligations which they give the appearance of creating. No unexpressed
intentions of a 'shammer' affect the rights of a party who he deceived. (my
emphasis)
- Regarding
the doctrine of 'sham' as stated in Snook by Diplock LJ, Kirby J in
Raftland commented at [120] that:
...the basic doctrine as explained in Snook continues to govern the
law's response in the United Kingdom when a transaction is alleged to be sham.
The parties must have intended to create rights and obligations different
from appearing in the documents. They must have intended to give a false
impression of those rights and obligations to third parties. Only then will the
label of sham be applied, with the
legal consequences that it attracts.
- Lockhart
J in Sharrment cited the above passage by Diplock LJ in Snook and
then proceeded to describe a 'sham transaction', for the purposes of Australian
law, at 454:
A 'sham' is... something that is intended to be mistaken for something else
or that is not really what it purports to be. It is a
spurious imitation, a
counterfeit, a disguise or a false front. It is not genuine or true, but
something made in imitation of something
else or made to appear to be something
which it is not. It is something which is false or deceptive.
- Sharrment
was concerned with whether an elaborate series of transactions that
purported to create an indebtedness were in fact a 'sham'. His
Honour noted that
the question was one of fact; a matter of characterising whether the
transactions were in fact what they purported
to be legally. Lockhart J observed
(at 454-455):
First, the fact that the transaction involved a round robin of cheques does
not necessarily establish that the transaction is a sham,
even when no party has
funds to meet the cheques: Re Barnett; Perpetual Trustee Co Ltd v Barnett
[1969] 2 NSWR 721.
Secondly, the artificiality of the transaction does not give rise to its
characterisation as a sham or to the characterisation of
the constituent
documents as a sham so long as each document "had the effect that it purported
to have", and so long as none of the
documents purported "to do something
different from what the parties had agreed to do": Inland Revenue
Commissioners v Littlewoods Mail Order Stores Ltd [1962] 2 All ER 279 per
Lord Reid at 285. (my emphasis)
Thirdly, the complexity of the transaction does not in itself establish its
character as a sham. In Coppleson's case, supra, Hunt J of the Supreme
Court of New South Wales considered a gift to a hospital of redeemable
preference shares instead of
cash. His Honour observed (at 383) that the fact
that "the transaction became complex and elaborate rather than simple and
straightforward
does not seem to me to affect its true nature if in legal form
it is a gift and if the parties thereto intended it to be operative
according to
its tenor".
Fourthly, a purported disposal of property, and by analogy a purported
creation of a debt, may be a sham where donor and donee (or
lender and debtor)
do not intend to give effect to the transaction, it being agreed between them
that there will be no change in
the legal and beneficial ownership of the
property. ...
Fifthly, the fact that the transactions of 1979 may have been intended by Mr
Wynyard to present a shield against creditors does not,
absent the transactions
being set aside under the relevant provisions of the Bankruptcy Act,
characterise them as a sham. The transactions
may in themselves be legally
effective although intended to achieve an unacceptable purpose. In Miles v
Bull, supra, Megarry J said at 264: "A transaction is no sham merely because
it is carried out with a particular purpose or object. If
what is done is
genuinely done, it does not remain undone merely because there was an ulterior
purpose in doing it." Megarry J went
on to observe that in the context of
determining whether a sale of property was a sham so as to allow a defence to an
action for
possession that: "mere circumstances of suspicion do not by
themselves establish a transaction as a sham; it must be shown that the
outward
and visible form does not coincide with the inward and substantial truth" (at
264).
- Lockhart
J concluded that there was no evidence upon which to draw the inference that the
creation of the debt as a result of the
relevant transactions was a mere fiction
or sham. His Honour went on to raise a note of caution in relation to 'sham
transactions',
saying that:
The difficulty I feel about the matter is that to draw the inference of sham
for which the Official Trustee contends is to reach a
strong finding, and one
which cannot be made if another inference is at least equally open. As I have
indicated I think that another
inference is open, namely, that what was done was
to in fact create a debt in pursuance of Mr Wynyard's desire to benefit his
family
through his family trusts. [though noting that there was "an unpleasant
aura pervading the facts of the case"].
- The
concept of a 'sham' transaction was more recently considered in Equuscrop
Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471, where the
High Court considered a complex investment arrangement that was alleged to have
been a sham geared toward sustaining a
partnership loss so as to enable a tax
deduction to be obtained by subscribers to an investment scheme. It was alleged
that the scheme
recorded only "paper" debts and credits (with no "real" money in
fact ever being transferred). The respondents were each investors
in the scheme
who had been sued by Rural Finance (and Equuscorp as its assignee) on the
initial loans.
- Gleeson
CJ, McHugh, Kirby, Hayne and Callinan JJ, the High Court rejected the
characterisation of the transactions as 'shams' and
said at [46]:
Each of these transactions was legally effective. None of the transactions
that took place on 30 June 1989 could be said to be sham.
... "Sham" is an
expression which has a well-understood legal meaning. It refers to steps
which take the form of a legally effective transaction but which the parties
intend should have been apparent,
or any, legal consequences. In this case,
debts were created and satisfied at all points in the chain until, at its end,
Rural Finance owed JFM and FJA certain
sums, and the respondents owed Rural
Finance certain sums. And of most particular relevance to the present
matters, in accordance with its obligations under the written loan agreements,
Rural
Finance had applied the money it lent in payment of the application moneys
due from the respondents for the units being bought. (my emphasis)
- I
note that in the present case certificates or letters confirming the acquisition
of units in the schemes were issued in the relevant
IBC's name and that moneys
were paid for the incorporation of the IBC. Therefore, there is no doubt that
there was an IBC legally
in existence and that it was legally entitled to the
units issued by the corporate administrators on receipt of funds relating to
the
investment.)
- In
Equuscorp, their Honours rejected the view expressed in Australian
Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd (unreported, Court of
Appeal of Queensland, 9 December 1997) that a loan was not effective unless
'real' money was lent, emphasising
instead that the loans were legally
effective, observing at [48] that:
As the expression "real money" might suggest, the point which the respondents
sought to make in these matters appeared to one about
the economic rather than
the legal effect of the transactions in question.
- In
Raftland , by contrast, a finding of sham was upheld, though there was a
suggestion that the word was there being used in a less pejorative
sense than
"fraud" insofar as Gleeson CJ, Gummow and Crennan JJ said (at [35]-[36]):
The term 'sham' may be employed here, but as Lockhart J emphasised in
Sharrment Pty Ltd v Official Trustee in Bankruptcy, the term is ambiguous
and uncertainty surrounds its meaning and application. With reference to remarks
of Diplock LJ in Snook v London and West Riding Investments Ltd, Mustill
LJ later identified as one of several situations where an agreement may be taken
otherwise than at its face value, that
where was a 'sham'; the term, where
'[c]orrectly employed', denotes an objective of deliberate deception of third
parties.
The presence of an objective of deliberate deception indicates fraud. This
suggests the need for caution in adoption of the description.
However, in the
present litigation it may be used in a sense which is less pejorative but still
apt to deny the critical step in
the appellant's case.
- The
High Court found that there was never any intention by the trustee to pay a
particular sum to the discretionary beneficiary (though
that had been recorded
in a resolution by the directors of the trustee) and that the resolution, as
well as the appointment of the
beneficiary of the trust, was an attempt to
shelter income from taxation obligations. Their Honours found that there was an
intention
common to all parties to the transaction that the resolution in
question would not have substantive effect.
- Kirby
J, in a separate judgment, considered the import of Equuscorp on the
analysis of 'sham' at [135]-[136]:
Equuscorp thus stands for the proposition that where parties express
their rights and obligations in what appear to be binding legal instruments,
courts will accord such instruments their purported legal effect, according to
their tenor, even if the transactions described do
not appear to "have been
commercially sensible" (that is, entered into within an economic motive in mind
other than tax avoidance).
However, Equuscorp does not deny the existence of sham as a legal
category. On the contrary, this Court expressly accepted that sham has a
well-understood
legal meaning, and that whether a sham is established or not
depends on whether the parties intend their respective rights and obligations to
derive from
what appears to be a legal instrument. (my emphasis)
- His
Honour emphasised that when considering the invocation of the concept of sham in
legal analysis, what must be kept in mind was
the need for intentional
deception:
... And because what is intended in the context of a sham, may itself be
disguised, the objective facts are by no means irrelevant.
They may assist to
prove the relevant intention of the participants where (as will usually be the
case) a forthright admission by
those who have resorted to the sham is lacking.
- Again,
Kirby J at [112] emphasised in Raftland:
Important to this description is the idea that the parties do not intend to
give effect to the legal arrangement set out in their
apparent agreement,
understood only according to its terms. In Australia, this has become essential
to the notion of sham, which
contemplates a disparity between the ostensible and
the real intentions of the parties. The courts must therefore test the
intentions of parties, as expressed in documentation, against their own
testimony
on the subject (if any) and the available objective evidence tending
to show what that intention really was.
- ASIC
accepts that the investment itself was not a sham (moneys being transferred to
the relevant bank accounts for the purposes of
being pooled with other
investors' money for offshore investment); it is only the identity of the
investor that it contends was a
sham.
- I
have concluded that the relevant scheme agreements by which IBCs entered into
agreements for the investment of moneys in a pooled
managed investment scheme
were not sham transactions.
- The
evidence establishes that potential (individual) investors were told (and it was
part of the very process that ASIC contends took
place) that investment was only
possible (and could only lawfully be done) through an offshore IBC (except in
the case of the superannuation
funds, where investment was through a trustee of
the fund).
- Whether
or not this was an attempt to avoid the operation of laws in this jurisdiction
that would prohibit the offer of such investment
onshore (and it seems to me
difficult to escape the conclusion that this was at least part of the reason for
the IBC process, having
regard to what was said by Mr Hobbs at the DVD Seminar
and the reliance placed by Mr Hobbs on the second aspect of the Hartnell advice)
or was in order to comply with investment requirements in the United States (as
Mr Hobbs submits - though these seem to have related
to the investment process
through Cadent, which does not seem to have commenced at the time that the
requirements for investment
were explained at the DVD Seminar), it follows that
a potential investor must have intended the investment to occur in fact through
an IBC (since the investor was being told that otherwise he or she could not
access the investment opportunities there being offered).
- It
is relevant to note that the investors in question paid money for the
incorporation of an IBC and that one was in fact established.
Whether or not
there was in fact any legal requirement for investment to be through an IBC, and
formulaic as the OEM/KLM process
of "qualifying" an investor was, it seems to me
that the common intention of the parties to the scheme agreements entered into
by
IBCs was that the investment be an investment of the IBC in whose name the
agreements were signed.
- The
fact that the agreements were inconsistently or haphazardly completed (with
individuals signing in places in the agreements as
clients) seems to me to be
consistent with a lack of attention by the people investing in the funds and by
the introducers (all of
whom seem (on the whole) to have been unsophisticated
investors). (Similarly, the fact that signatures were witnessed in some
instances
where the witness had not seen the signatory execute the document; or
in some cases a witness had signed but there was no signature
on that page of
the document to be witnessed, illustrates the unprofessional and unsophisticated
manner in which the documents were
completed.)
- The
fact that in many instances local addresses or bank accounts were given for the
purposes of correspondence or payments of returns
seems to me to demonstrate the
alternative proposition for which ASIC contends, namely that the investment by
the IBC was on behalf
of the investor (or, in other words, that the investor was
making the investment through the IBC controlled by it).
- It
follows from my conclusion as to the investments being made by an investor
through an IBC (because the investors were advised was
necessary for the
investment to occur) and from the manner in which returns were made and
correspondence issued to the controllers
of the IBC (not the IBC itself), that
where investments were made in the name of the IBC they were on behalf of and
for the ultimate
benefit of the investor. I find that in making the relevant
investments the IBC was acting as the agent of the individual(s) on whose
behalf
or at whose instigation the IBC was incorporated and that the IBC was the alter
ego of the relevant individual(s) for that
purpose.
- For
completeness, I note that even if the investments were made by the named IBC as
principal (and not as agent for or as the alter
ego of the relevant individual)
the conclusion I would have reached as to the making of an offer, and issue of
the relevant interest,
in the jurisdiction would have been the same.
- The
private placement memoranda and scheme agreements were issued (for most of the
relevant period) by persons in Australia (Mr and
Mrs Dent and in some instances
by FTC executives in this jurisdiction) to addresses (mostly) nominated for the
IBCs in the jurisdiction
(the addresses of the "administrators" of the IBCs),
the certificates were issued to IBCs at addresses in the jurisdiction and
payments
were (again, mostly) made to bank accounts in the jurisdiction.
- There
is more than sufficient activity within the jurisdiction to bring the matter
within the jurisdictional reach of the Corporations Act and ASIC
Act.
Whether at all material times, to the extent alleged in the Third
Further Amended Statement of Claim, each of New World and Ms Reisinger
acted as
the agent of Mr Hobbs [86]
- The
allegation that New World and Ms Reisinger were acting as the agents of Mr Hobbs
is particularised (in [86]) as follows:
(i)Mr Hobbs provided or procured the information in relation to the operation
of the schemes to each of New World and Ms Reisinger;
(ii)each of New World and Ms Reisinger was accustomed to consult with Mr
Hobbs and act in accordance with his directions or instructions
in relation to
the operation and performance of the Cadent Accounts; and
(iii)Mr Hobbs profited from the conduct of New World and Ms Reisinger in
relation to the Cadent Accounts outlined in [87] and [119]-[121].
- Paragraph
[87] pleads to the opening of the various Cadent accounts; paragraphs
[119]-[121] to the various commission agreements and
payments thereunder. (I
consider the dispute as to payment of commission in due
course.)
- I
have already set out above the principles by which the existence of an agency
relationship is to be determined.
- I
am satisfied that the matters set out in (i), (ii) and (iii) above have been
established. As to (ii), I accept that Ms Reisinger
from time to time gave
recommendations or advice to one or more of the scheme administrators as to
traders or leveraging (and on
occasion that advice was couched as a direction),
and that Ms Reisinger acted on instructions or directions from scheme
administrators
(though I consider that she did so on the basis of an implicit
authorisation by Mr Hobbs). Nevertheless, there were communications
passing
between Ms Reisinger and Mr Hobbs office that indicate sufficiently that Ms
Reisinger looked to Mr Hobbs as the person with
the ability to make the ultimate
decisions in relation to the Cadent accounts.
- Insofar
as Mr Hobbs' submissions appear to suggest that Ms Reisinger and New World
cannot have been Mr Hobbs' agent (because they
were acting in their own
commercial interests in relation to the incurring of benefits from the trades
they initiated with Cadent),
it seems to me that this is a situation where the
existence of a commercial interest of their own does not preclude a finding that
in facilitating the opening and placement of accounts with Cadent (at the very
least) they were acting as the agent of the account
applicants (and ultimately
of Mr Hobbs on whose direction or instruction those applicants made the relevant
applications), just as
a mortgage originator acting on the initiation of
mortgages on behalf of a lender has a commercial interest in the commission it
may obtain from such a process.
- Mr
Hobbs has asserted no knowledge of the scheme administrators' dealings in
relation to Cadent (and that it was Ms Reisinger who
was responsible for dealing
with the individual scheme administrators). Mr Halley points to evidence,
including in relation to Geneva
Financial, which he submits (and I accept) shows
that Mr Hobbs had involvement in the Cadent accounts other than simply the
account
for Global Funerals account. Furthermore, the communications between
scheme administrators and Ms Reisinger or New World Holdings
were often copied
or referred to Mr Hobbs and are generally in terms that are consistent with Ms
Reisinger acting in an advisory
role (and not making the investment decisions
herself unless asked by scheme administrators to do so).
- There
is affidavit evidence by scheme administrators such as the J&B Financial
officers as to the instructions given by Mr Hobbs
for the opening and operation
of the Cadent accounts (including the instructions or advice given as to the
role Ms Reisinger was
to play in relation to the accounts) and as to his
knowledge and approval from time to time of payments out of those accounts.
There
is also ample evidence in the form of contemporaneous emails to
demonstrate Mr Hobbs' overall involvement in the opening and operation
of Cadent
accounts (that would be inexplicable unless he maintained oversight or control
in relation to the operation of the schemes
in this regard). So, for example,
without being exhaustive, I refer to the following:
- an email (also
of interest as showing Ms Reisinger's understanding of Mr Hobbs' earlier
business with Refco, notwithstanding Mr Hobbs'
position that he had not
previously carried on business with Refco) sent on 18 October 2005 by Ms
Reisinger to Mr Matthews, Mr Erdman,
Mr Fry and Ms Dadey, stating that
"David has a number of accounts that have pulled from Refco offshore and
they need a home" and that "The Hobbs Accounts are ready to start
opening up at
Cadent. David would like a conference call ... to talk with Cheryl" (Ex
AU 5049);
- an email on 31
January 2006 from Mr Matthews to Mr Hobbs at the "nasl" address referring to
"Status of accounts for Cadent" (Ex AU
5620) including Global Vision ("not open
awaiting some documents"); Global Funeral Services ("Account open awaiting
funding"); 888
account ("open awaiting funding"); Ultimate Investments ("open
awaiting funding"); Brian Wood Account ("NCCN awaiting funding");
GP Global
("from GFT awaiting authorisation forms"); Jade Enterprises Group (an entity
apparently associated with Ms Dabelic) (documents
"sent to David's office");
there is simply no explanation for such an email unless Mr Hobbs was involved in
the opening of the various
accounts;
- an email on 29
June 2006 from Ms Reisinger to Mr Hobbs with instructions for logging on to the
account (and her email around that
time sending him copies of "Cadent
financials") (though I accept this may have been related solely to Global
Funerals);
- an email from Ms
Reisinger on 8 August 2006 to Mr Hobbs and Ms Li (Ex AU 6490) thanking them
"again for all the business and the trust that you have placed with us.
Bring your clients to us..." and attaching a guide to Cadent statements (my
emphasis,
noting that at this stage the Global Funerals account had not yet been
funded, so the reference to "all the business" can surely
only be understood as
encompassing more than this account);
- an email on 12
August 2006 from Ms Reisinger to Mrs Hobbs, Mr Hobbs and Ms Li as to the setting
up not only of the Global Funerals
account but also as to matters relating to
the Secured Bond accounts (for which there would be no reason, at least in
relation to
the latter, if Mr Hobbs had had no involvement or oversight in
relation thereto);
- an email on 25
September 2006 from Ms Li to Mr Hobbs (Ex AU 6890) advising in relation to GP
Global and 888 (presumably 888 Vanuatu)
that she had faxed to Ms Reisinger
Cadent account opening documents would send him copies of the whole documents
for North Wave and
questioning whether she "should ... ask Burny" (presumably
Bernard Moore) to do the same;
- (significantly,
in my view) an email on 30 September 2006 from Ms Reisinger emailing Mrs Watson
with information as to the requirements
of foreign corporations when opening
accounts with Cadent (Ex AU 6935), which Mrs Watson then forwarded to the
J&B Financial
officers; Mrs Watson, in her examination in chief, gave
evidence that she had done so at Mr Hobbs' request and, unlike communications
in
relation to Secured Bond (some of which may have related to the Global Funerals
account), the J&B Financial officers had nothing
to do with the Global
Funerals account so this is clear evidence of Mr Hobbs' involvement with the
opening of other Cadent accounts);
- an email on 14
October 2006 from Ms Reisinger to Mrs Hobbs as to profit noting that "Things are
going very well. Lilli has now submitted
5 more accounts. I will keep you and
David informed of progress (Ex AU 7167) (my emphasis);
- an email on 18
January 2008 from Ms Reisinger to Mrs Hobbs and Mrs Brenda Hobbs (Ex AU 11095)
referring to a huge month profit and
saying "I have contacted David and he
returned a phone message to me and he agrees that we must have a plan to
draw down the profit so we do not shoot ourselves in the foot" and asking that
they "keep this profit
to yourselves until David, Steve and I speak" (my
emphasis); and
- an email on 13
August 2008 from Ms Reisinger chasing account information in relation to "888
Management", which was copied to Mr Hobbs.
- There
are certainly documents (of the kind to which Mr Hobbs points) that show
instructions being given by scheme administrators in
relation to trading amounts
and the like (such as the email of 21 October 2006 from the J&B Financial
offers directing Cadent
to open an additional account and allocate $1m for
trading - Ex AU 7214) without apparent reference to Mr Hobbs (as well as emails
that suggest that Ms Reisinger was directing things to be done in relation to
the accounts or had made decisions without reference
to the scheme
administrators or Mr Hobbs).
- However,
there are also numerous instances where enquiries are made, purportedly on
behalf of Mr Hobbs or in his name, as to Cadent
accounts and regular updates
from Ms Reisinger to Mr Hobbs, referrals of queries to him or copying of
correspondence to him, which
are inconsistent with the assertion that he had no
involvement (at least at the level of overall oversight) in relation to the
various
Cadent funds.
- Moreover,
at least in relation to the Cadent accounts operated by the J&B Financial
officers, the impression gleaned from the
correspondence is that they had, in
effect, delegated the decision-making on certain aspects of the Cadent trading
to Ms Reisinger.
Ultimately, however, Ms Reisinger's correspondence made clear
that the operational decisions in relation to the Cadent accounts were
to be
made by the relevant account holders. (The setting up of the ISPL Cadent account
was, I find, at the instigation of Mr Hobbs.)
- I
refer, again without intending to be exhaustive, in this regard to the
following:
- an email on 18
April 2006 from Ms Reisinger to the email address for Mr and Mrs Hobbs a message
that read "David ... here are the traders you asked for ..." (my
emphasis) and attaching trader details.
(Pausing here, I note that Mr Hobbs maintained in cross-examination that he
had had no involvement in the choosing of traders and
that, at most, he may have
passed on a message to his wife. There was the following exchange in
cross-examination in relation to
the request that had been made to him by Ms
Reisinger to pick out traders from the list she had sent in relation to the
Geneva account:
Q. Do you now concede Mr Hobbs that you did have some knowledge of what was
going on with respect to Geneva Financial Limited and
Cadent?
A. Look I didn't become involved in choosing the traders. I wouldn't have
been able to tell you at any one time who they had. (my emphasis)
Q. Don't you accept Mr Hobbs that this email on its face demonstrates that Ms
Reisinger had sent you a list of traders and asked you
to go through them and
pick out the ones which you thought were best?
A. On its face the reality is that I didn't do that.
Q. So you ignored the request, did you?
A. Yes, I would have left it to Brenda and Jacky.
Mr Hobbs accepted that from time to time he might have been told by Ms
Reisinger when traders might have been suspended on Geneva's
accounts (and was
shown an email from Ms Reisinger to Mrs Brenda Hobbs and to his wife that, on
its face, was copied to him concerning
the suspension of trading with a trader
named Tresner but he said that this "doesn't mean to say I got involved with
[the traders
operating the Cadent accounts]"). This evidence is clearly
inconsistent with Ms Reisinger's apparent understanding as to Mr Hobbs'
involvement (as can be seen from the email communications) and inconsistent with
the lack of any response from Mrs Hobbs or her sister-in-law
to Ms Reisinger to
the effect that Mr Hobbs had not given any assistance in that regard or that Ms
Reisinger should not assume he
would be doing so.)
- an email from
Mrs Hobbs to Mr Matthews on 27 June 2006 in which she notes that "Dave has just
asked me to confirm the amount we have
in Geneva's account" (referring to net
liquidity of a "fairly large negative amount of around $62k") (Ex AU 6174),
copied to Ms Reisinger
with the message that Mrs Hobbs had sent this to Mr
Matthews "after he has talked to Dave"; (Ms Reisinger's response made it clear
that it was up to Geneva Financial to authorise Cadent if it wished to remove
the negative balance on the account "carried over from
the trader you had under
Jim Green in Chicago"). (In cross-examination, Mr Hobbs did not recall, but
accepted that it was possible,
that he had asked his wife from time to time to
confirm with Ms Reisinger the amount that Geneva had in its account with Cadent,
though he said he could not see why he would ask that question and then that "It
might have been on a very very rare occasion". He
said that "I didn't take that
great deal of interest over the period of the time, sorry" and that "I
deliberately kept away from
it as much as possible" (an interesting comment
since there would seem no obvious reason for Mr Hobbs deliberately to distance
himself
from business in which his wife was involved, and particularly business
that had the potential to provide commissions or other payments
to him, other
than if he had a concern that there was some question as to the to lawfulness of
that business - although I make no
finding as to this). At most, Mr Hobbs was
prepared to concede that "I may have asked on one occasion; what I'd asked for
I'm not
sure".);
- an email also on
27 June 2006 from Mrs Hobbs to Ms Reisinger referring to the message to Mr
Matthews as to her understanding of Cadent
statements;
- an email from Ms
Reisinger in response on 27 June 2006 (sent to the email addresses of both Mrs
Hobbs and Mr Hobbs but addressing
the text of her message to "David") referred
to an update on the progress on "several fronts", providing details as to
"Lili's accounts"
(namely that there was a profit for the Global Funerals
account that month); as to Geneva (that she would start the Diamond trading
again and would check "on your round turn commissions for that account");
as to "NCCN LLC profit" ("sent to Don"); and referring to a buy out between
State Management
and Secured Bond. It is difficult to accept that Mr Hobbs had
no interest or involvement in the matters to which reference was there
made;
- an email on 22
August 2006 from Ms Li to Mr Hobbs reminding him of a number of things to do
including "Master Fund any profit payment"
(Ex AU 6658);
- an email on 22
August 2006 (Ex U 12617) from Ms Reisinger to Mr Hobbs and Ms Li advising as to
additional traders for Secured Bond
(addressed in the text to Lili but clearly
copied to Mr Hobbs), requesting certain documentation to be resent in order to
satisfy
the compliance requirements;
- an email from Ms
Reisinger to Ms Li, again copied to Mr Hobbs, on 13 February 2007 in relation to
Secured Bond (Ex AU 8440), saying
"Lilli I just spoke to David and he said that
you were concerned about your Secured Bond account and that you were in the
negative",
suggesting that they go through and "see what you need to do to make
it more effective for you" and that "If we need to make changes
to the trade
allocation we will" (consistent with Ms Reisinger having an advisory role,
rather than directing the scheme administrators;
and with Mr Hobbs having an
oversight role in relation to the accounts);
- an email on 21
February 2007 (Ex AU 8528) from Mr Koutsoukos to Ms Reisinger "re Idylic",
stating that:
David has asked me to request from you an investment strategy direct from
the traders.
We require the information as part of an audit process with the Australian
Tax Office.
... I thought I could write something up myself but David has told me that
the investment strategy has to come direct from the traders. (my
emphasis)
- communications
between 24/26 March 2007 between Ms Reisinger and each of Mrs Hobbs and Mrs
Brenda Hobbs copied to Mr Hobbs at the
"nasl" address (Ex AU 8822), in which Mrs
Brenda Hobbs had suggested that their account was alarming and asking Ms
Reisinger if she
thought they should be getting rid of one of the non-performing
traders and Ms Reisinger noted that she was "copying David in on
this" and that
"he can sit down and explain it to you"; and that "I am sure David can explain
in much more detail than I can [the
impact of the crash in Asia on the world
markets]" (in this regard, the relevance I draw from the communication is not
whether Mr
Hobbs in fact explained the matters that Ms Reisinger had indicated
he would, but that there was an assumption that he would do so
and would be in a
position to do so; and I note that there was no response from Mrs Hobbs or her
sister-in-law to Ms Reisinger pressing
her for an explanation on the basis that
Mr Hobbs had nothing to do with the fund and was not able to, or would not,
assist in that
regard);
- an email on 3
April 2007 from Ms Reisinger to the Hobbs family and Mrs Hobbs email addresses,
copied to Mr Hobbs, asking that "David call me tonight to discuss the
Geneva account and the draw down that the traders are in right now" (Ex AU 8869)
(which directly flies
in the face of the suggestion that Mr Hobbs did not have
any involvement in the Geneva account, whether or not he in fact returned
that
call); that email again contained advice from Ms Reisinger but made it clear
that she was leaving the decision to Geneva Financial
to make); (I also note Ms
Reisinger's explanation in that communication as to the putting of money in
during a draw down situation
is consistent with her evidence at the CFTC
examination (she describing it there as like buying into a stock market when it
is low)
points up the disingenuous nature of Mr Hobbs' submission in closing
that this gave rise to a conflict of interest for Ms Reisinger
and amounted to
unprofessional conduct on her part - since it would seem he was aware of the
logic behind buying into a draw down,
whether or not he agreed with it, back in
2007 but no issue was taken with Ms Reisinger as to this at that
time);
- an email on 10
May 2007 from Ms Reisinger to Mrs Hobbs and Mrs Brenda Hobbs, again copied to Mr
Hobbs (Ex AU 8925) re Geneva noting
that "One thing David and I did talk
about is addition of new traders into Geneva to help diversify your
portfolio. I think David and Robert can help explain what the traders
said better face to face than me in an email";
- an email on 20
June 2007 from Ms Reisinger to Mrs Hobbs (Ex AU 9214) saying "I do not know how
much David had time to go through with you but we have now qualified for
management and incentive fees paid for the traders cut of fees charged
to the
accounts" (my emphasis) and stating that there was little in incentive fees due
to the draw down (though Idylic may have a
few incentive fees) and that the
majority of fees will be management fees - separate from the commissions - and
paid by the traders
to Mr Erdman and "then down to us"; and
- an email on 6
July 2007 (Ex AU 9313) from Ms Reisinger to Mr Hobbs (and to Mr Erdman and Ms
Dadey) in relation to the Geneva account,
commencing "Good afternoon
David, In regards to the Geneva account no treasuries have been traded"
(again, my emphasis)and referring to the daily statements and month
end
statements that Mrs Hobbs received; in that email an assurance was given to Mr
Hobbs "that no such transaction has ever taken
place in the Geneva account or I
would know about it as I am the US broker for the account and it would be
transparent in the daily
statements for both Jacky and myself".
- Mr
Hobbs points to emails such as one on 15 March 2006 from Ms Reisinger to Mr
Matthews and Mr Fry advising as to the amount she would
"need to wire out of
NCCN LLC" and in relation to "Don Caffray's clients" in which there are
references to an error in relation to
PJCB's account and to the amount for
"Secured Bond, PJCB and the Tonga Church" as suggesting Ms Reisinger's control
of the process.
He also points to an email from Ms Reisinger to Mr Matthews on
10 December 2006 advising as to Secured Bond's part in this fund "from
my
conversation with Lilli tonight. Please adjust slightly and that should do it"
as showing Ms Li's involvement; an email on 6 January
2007 from Ms Reisinger to
Mr Wood in relation to the Integrity Fund, querying whether the a particular
amount included "the Tonga
Church money"; and an email on 7 December 2007 from
Ms Reisinger, emailed Mr Matthews, referring to a wire to NCCN and noting advice
received from Mr Collard as to the total amount "left there for them" (either
Secured Bond or the Tonga Church) of the total fund,
presumably as showing the
involvement of Mr Wood and Mr Collard respectively.
- However,
those do not explain communications of the kind I have referred to above, which
evidence Mr Hobbs' continued oversight of
the various Cadent accounts (and these
submissions seem to me to illustrate Mr Hobbs' tendency to take selected pieces
of information
out of the overall context in which they
appear).
- ASIC
also refers to the email in early 2007 from Ms Reisinger to Mr Green, Mr
Matthews and Ms Dadey, referring to the Caffray accounts
as indicating Ms
Reisinger's understanding that the NCCN account was to be shut down as a
separate account and that it had operated
in respect of funds coming from Mr
Caffray on behalf of Mr Hobbs (consistent with her evidence in the CTFC
examination). Emphasis
is placed on the use of the possessive in the reference
in that email to "most of the managers of David's".
- The
conclusion I draw from evidence of the above kind is that Mr Hobbs was well and
truly involved in the opening and operation of
the various Cadent accounts
(which is logical in circumstances where the relevant scheme administrators
appear to have had no prior
contact or involvement in trading Cadent accounts
and were introduced to Ms Reisinger and Cadent through Mr Hobbs).
- I
accept the submission of Mr Halley that it is inconceivable that persons such as
Mr Clements or the J&B Financial officers would
have had the contacts or
wherewithal to set up Cadent trading accounts on their own initiative (and there
is certainly nothing to
suggest that Ms Li or Mr Collard had any contact with Ms
Reisinger or Cadent until introduced thereto by Mr Hobbs; indeed, the evidence
that Ms Li at one stage suggested that she might be able to by-pass Mr Hobbs and
set up her own arrangements for investment funds
indicates that she had not
previously had any such involvement). As to Geneva Financial, it is telling that
neither Mrs Hobbs nor
Mrs Brenda Hobbs was included in the overseas meetings
with Cadent or the Cadent traders and that their role in the fund (and
particularly
the role of Mrs Brenda Hobbs) was of an administrative kind.
- It
is evident from the dealings between Mr Hobbs and Ms Reisinger/New World
Holdings and from the communications between the latter
and Mr Hobbs in relation
to Cadent accounts opened in the name of the various scheme administrators, that
Ms Reisinger and New World
Holdings were acting as Mr Hobbs' agent in placing
business with Cadent and in facilitating the operation of the Cadent accounts.
While I accept that in their role as brokers, the provision of advice to scheme
administrators (or to Mr Hobbs) as to investment
or trading decisions (such as
whether to buy into a draw down or whether to suspend traders from time to time
based on their performance)
would be consistent with the provision of investment
advice from a broker retained to provide such advice (and not with that advice
being provided as Mr Hobbs' agent), the opening and operation of the Cadent
accounts in general seems to me clearly to have been
effected by Ms
Reisinger/New World Holdings as Mr Hobbs' agent.
- Therefore,
in relation to the opening and facilitation of operation of the Cadent accounts,
I find that New World Holdings and Ms
Reisinger acted as Mr Hobbs' agent. As to
the provision of trading or investment advice from Ms Reisinger to the scheme
administrators,
I am not persuaded that this was done as Mr Hobbs' agent.
Rather, it seems to me that Ms Reisinger was there acting as a professional
adviser for the benefit of a client, and not as agent of Mr Hobbs (albeit that I
accept that the scheme administrators sought such
advice on the directions or
instruction of Mr Hobbs or with his express or implicit approval). (The receipt
of advice by the scheme
administrators from Ms Reisinger would, consistently
with my earlier finding, be receipt by them on behalf or as agent of Mr Hobbs.)
Whether the investors' funds in the Cadent accounts (whether held in
cash or in US Treasuries) were fully protected or secured
[113]-[114]
- ASIC
maintains (and the Principal Protected Representation is said to be false for
this reason) that there was a risk of investors
losing the principal sum
invested in each of the schemes because of the risks associated with the type of
investments made using
the funds invested in each of the schemes (including the
type of derivatives trading carried out in the Cadent Accounts); the extent
to
which that trading was leveraged to permit further speculative trading; the
possibility of large losses resulting from the trading;
the fact that the cash
and US Treasuries credited to the Cadent Accounts were a margin or deposit for
the derivatives trading and
were therefore at risk at all material times
(referring there to the Cadent Account Application and Agreement for
Corporations, clauses
8, 9, 15 and 31); and that none of the investments was
secured. (In relation to Integrity Plus, it is alleged that the risk of loss
of
the principal sum was also due to the fact that some of the funds were disbursed
in purported but not real investments, but that
is not relevant to the present
issue under consideration.)
- It
is submitted by Mr Clarke that all of the funds invested in each of the Cadent
Accounts were at risk and that, because of the leveraging
of those investments,
it was possible to lose more than 100% of the funds invested in any of the
Cadent Accounts. By way of explanation,
Ms Reisinger in her CFTC examination
said that the ISPL account was "at risk and then some", by which she meant
that:
...any commodity account [which is what the ISPL account was] is at 100
percent risk and you could lose all or more of your money,
so you could be
subject to a margin call and add more money to your account to hold your
positions (EX AO, Reisinger transcript pp736-737).
- Ms
Reisinger confirmed that this was also the case for all of the Cadent accounts
referred to in the examination as the Hobbs Cadent
accounts (including Secured
Bond and 888 Vanuatu). Mr Hobbs did not point to anything that suggested
otherwise.
- I
accept that the effect of the leveraging of the accounts, coupled with the fact
that margin calls could be made on the accounts
and that there was no evidence
of any security for the principal contributed to the Cadent accounts, meant that
it could not be said
that the funds invested in the Cadent accounts were fully
secured, whether or not those funds or part of them were used to purchase
US
Treasury bonds.
- It
seems that Mr Hobbs' position was that the mere fact that a US Treasury
instrument was being acquired meant that the principal
was protected - even
though not all of the capital invested in the funds was used for the acquisition
of such instruments - and without
consideration as to the exposure of the
invested funds to risks associated with leveraging and with the prospect of
margin calls
to secure trading in other instruments. I say this because there
are various examples of Mr Hobbs saying words to the effect:
We use treasuries as security. They are government backed. The security of a
treasury is safer than the security of the Commonwealth
Bank because a bank can
collapse. But it is very hard for a government to collapse. [Koutsoukos at
[118]].
- I
find as a matter of fact that the sums invested in the Cadent accounts were not
fully protected or secured.
Whether Mr Hobbs received commissions, fees or other amounts of money
in connection with funds invested by the Scheme Administrators
with Cadent
[119]-[121]
- Paragraphs
[119][122] plead the payment of commission payments to Mr Hobbs (and Mrs Hobbs)
from the transactions in the United States.
Mr Hobbs denies that he received any
commissions other than for the Global Funerals account (and says that, if he
had, then he was
unaware of that having been the case).
- Mr
Hobbs submits that the one transaction where he would have expected substantial
commission was with respect to Global Funeral Services;
that he was entitled to
US$1.5million and commissions from Cadent; that the $US1.5m is payable through
Secured Bond and the Cadent
commissions were payable to Business Solutions; he
accepts that he received US$970,435.75 from the Global Funeral Services Cadent
Account from profit generated on Global Funeral Services Trading accounts (those
being transactions about which he contends that
"ASIC throughout these
proceedings attempted to keep information" from the Court - a submission to
which I have already referred).
Mr Hobbs points to the statement by Ms Reisinger
(Ex AO p260.21-23) said that there was approximately $50 million under
management,
including $30 million from Global Funerals, and points out that even
on ASIC's case he "never received anything like" the commission
he should have
received as set out in the agreements between Global Funeral Services and FZF.
However, the business records reveal
that Mr Hobbs did receive commissions
otherwise than simply in relation to the Global Funerals account and the
suggestion that this
was without his knowledge is extremely difficult to accept
(having regard to the email communications to which I have earlier referred
passing between Mr Hobbs or others in the Hobbs office and Ms Reisinger and the
evidence from Mrs Watson as to the receipt of Cadent
statements in the Hobbs
office).
- I
have already given examples of the correspondence to and from Mr Hobbs (via the
nasl email address), or others seemingly writing
on his behalf, in relation to
the operation of the Cadent accounts. There are also examples of such
communications in which reference
is made to payments of commission or other
fees to Mr Hobbs, on accounts that cannot have been limited to the only account
from which
Mr Hobbs concedes that he obtained commissions (that being the Global
Funerals account). For example:
- an email on 25
October 2005 from Mrs Hobbs sent an email to Ms Reisinger, stating that "we
haven't received official confirmation"
of the purchase of US Treasury strip for
Geneva as advised on 2 August 2005 (Ms Reisinger's response confirmed that a sum
of $5,000
had been forwarded and referred to the same concession of $2,500 to
Jacky and $2,500 to David);
- an email on 19
December 2005 from the "djhobbs"email address to Ms Reisinger raising further
questions as to the round turn commissions,
including "Grant has informed me
that commission from these round turns is coming to my account. Does this amount
cover all funds? If so, what percentage portion is Grant's?", on which
ASIC places weight as an acknowledgement that the round turn commissions covered
all Cadent accounts.
- There
is also evidence of payment of commission or fees paid by NCCN to Mr and Mrs
Hobbs (either to their joint account or the Business
Solutions account)
presumably relating to scheme investments with NCCN (through Mr Caffray). (So,
for example, on 8 March 2006, NCCN
paid NZ$6,814.43 to the J&D Hobbs
Account; and on 8 August 2006, there is a wire transfer request in relation to
commission/fees
payable from NCCN to Business Solutions - J Hobbs account (Ex AU
6478.))
- Mr
Hobbs (at [7] of his 7 August 2012 affidavit) seems to accept there was an
agreement in relation to commission payable in respect
of US Treasury bills
purchased by Mr Chuck Weed of Cutter & Co for Global Funerals but says that
Ms Reisinger told him they would
be paid by ROF as the introducing broker. The
agreements with Mr Weed and MLN are referred to earlier.
- On
10 May 2007, Ms Reisinger emailed her mother (Ms Dadey) and Mr Erdman details in
relation to the payment to "David and Grant" in
relation to a particular
numbered account (being the Integrity Plus Cadent account 35201). Some
clarification was then sought by
Mrs Hobbs on 31 May 2007 as to the round turn
commissions and Mr Erdman on 8 June 2007 confirmed that, of the payment of
$4,905.31,
the sum of $706.23 represented Mr Clements' 20% net commission but
that Lisa had confirmed that "you can deduct whatever you want
for Grant". He
also pointed out that the sum wired did not include incentive and management
fees (and that Grant was not entitled
to those).
- Similarly,
the denial by Mr Hobbs of receipt of Cadent statements is contradicted by the
evidence of Mrs Watson who confirmed that
she had seen statements from Cadent in
Mr Hobbs' office (although I accept that this does not establish that Mr Hobbs
had in fact
looked at them):
Q. And did you do anything with those documents when you saw them in Mr
Hobbs' office?
A. Well I presume that it would be filed. I don't think these were anything
that were on a regular basis so far as I know.
...
A. No I think these were just ad hoc. I don't think there were very many of
them and they would be just filed.
- I
find that the evidence establishes that Mr Hobbs did receive commissions, fees
or other amounts of money in connection with funds
invested by the scheme
administrators with Cadent (otherwise than simply by reference to the Global
Funerals account). (I consider
it to be almost inconceivable that Mr Hobbs was
not aware that this was the case, particularly in light of the queries made to
Ms
Reisinger reportedly on his behalf as to commissions at least in relation to
the Geneva Financial Cadent accounts.)
Whether the respective Return Payments for the Integrity Plus, Super
Save and Master Fund schemes were paid from principal amounts
contributed to
those schemes by scheme members and not from profit [150], [173],
[186]
- The
schemes for which ASIC contends returns were paid out of capital were Integrity
Plus (Ex A - Table 165); Super Save (Ex A - Table
163); Master Fund (Ex A -
Table 162) and Enhanced Fund (Ex A - Table 164). (For the Enhanced Fund, ASIC
accepts that the first of
the payments out was partly paid out of profits; for
the other three schemes it is contended that the returns that were paid were
wholly paid out of capital rather than profits (irrespective of how one
calculates, on the three possible bases that such a calculation
might be carried
out, the status of the account).
- ASIC
relies on the respective Return Payments Spreadsheets (admitted as s 50
summaries) to establish that the returns defined as Integrity
Plus Return
Payments, Super Save Return Payments and Master Fund Return Payments were paid
from invested capital and not from profit.
(In relation to the Enhanced Fund,
the relevant Spreadsheet shows that other than the first return payment, returns
from that fund
were also paid from invested capital and not from profit.) In
those spreadsheets, the amounts invested with Cadent out of the respective
scheme accounts are identified, as well as the wire transfers out of the Cadent
accounts for payment of commissions and other payments.
The spreadsheets include
entries for payments into Cadent followed by the investment (for those accounts
where US Treasuries were
acquired) of funds in the acquisition of US treasury
notes or STRIPS (see T 223ff for examples of particular entries in the
spreadsheets).
- By
way of example, Mr Clarke explained the entries on the spreadsheet at tab 81 of
the Exhibit A summaries which disclosed four transfers
to Cadent from
Barclaywest (on 31 August, 11 September, 27 September and 27 September 2007
respectively). An aide-memoire (at tab
176) summarises the amounts transferred
into the Barclaywest Ltd Cadent Cash Account No 30200) (less an international
wire transfer
fee in each case).
- Within
roughly two weeks of the second of those wire transfers, two US treasury strips
were purchased: the first, for US$30,590.84
(the par value of which being
recorded at US$44,000) and the second for US$19,485.08 (the par value of which
being recorded as US$28,000).
(Accordingly, US treasury strips using
approximately 25% of the invested funds had been acquired.) Some two weeks after
the 27 September
payments (by which time the aggregated of the amounts
transferred to Cadent was approximately $415,000), a further US$200,000 "PRIN"
strip was purchased (on 16 October 2007) for $139,130. Mr Clarke notes that this
was the value of approximately 33% of the new funds
that had come into the
account. The instructions to purchase those treasury strips came from Ms Wu to
Ms Reisinger.
- By
May 2008 (after some payments to Barclaywest on 3 December 2007 of $11,400 and
on 1 May 2008 of $160,000, recorded in the document
at tab 80), the cash balance
in the account was in the negative by some $89,000 (although there was equity in
the account by reference
to the US treasury strips that had been
acquired).
- On
28 August 2008, there was a sale of the $200,000 PRIN strip, for US$154,000 (at
a profit of about US$15,000), at which point the
cash balance was positive;
followed by further sales of the other treasury strips on that date (one at a
profit of about $3,000,
the other of about $2,000).
- Relevantly,
on 1 December 2008 (at the time that there was a transfer of funds into the
Court and transfers between the three Barclaywest
subaccounts), only two of the
three Barclaywest sub-accounts showed a positive cash balance at that time.
- The
main scheme spreadsheet records payments made to investors and others on 10 and
11 December 2007.
- What
Mr Clarke notes that Table 164 demonstrates is the state of the Cadent
Barclaywest accounts on the date on which those payments
were made to investors
and the status of the three trading accounts on the previous business day
(calculated on three bases: closing
account balance, total equity and total
liquidity).
- In
her CFTC examination, Ms Reisinger explained (Ex AO pp 422- 428) that the
closing account balance is the realised profit (ie, the
cash in realised
profits); the total equity includes not only the realised profits but the value
of open option positions; and that
the total liquidity includes the value of
open futures positions (ie the difference between total liquidity and closing
account balance).
- Mr
Clarke submits, and I accept, that the result of that exercise is to show that,
whichever way one calculates the account balance,
the total amount of funds that
were being held in the Barclaywest/Cadent account as at the relevant dates (once
the returns to date
and the sums that were being traded on behalf of the traders
as of those dates were taken into account) as at the time the payment
on 1 May
2008 (of $160,000) was made was such that the payment was made in part out of
capital and not out of profits.
- A
similar exercise was carried out in relation to the balance of the payments from
this account and as to each of the payments of
returns in relation to the
Integrity Plus, Super Save and Master Fund schemes. I accept that for those
accounts (and the balance
of the payments in the Barclaywest Cadent Cash
account) all payments were made out of capital.
- Accordingly,
on the basis of the evidence summarised in the respective Return Payments
Spreadsheets, I find that the Integrity Plus,
Super Save and Master Fund Return
Payments were paid from invested capital not from profit.
Whether the Schemes collectively comprised a single managed investment
scheme [276]
- The
features of the alleged Hobbs scheme are pleaded at [37]-[49]. At [276], ASIC
alleges that the individual management schemes the
subject of the proceedings
collectively comprised a single managed investment scheme under the
Corporations Act (one that ASIC alleges in [277] required the giving of a
Product Disclosure Statement). The allegation in [276] is predicated on
the
matters alleged in paragraphs [37] to [275] of the pleading.
- ASIC's
principal allegation as to the existence of a collective scheme is based on the
similarity and interrelationship between the
individual schemes and the integral
role that it is said Mr Hobbs played in the promotion and establishment of each
of the 14 individual
schemes.
- The
single scheme allegation is particularised as follows:
(i)Scheme members of each of the Schemes contributed money from bank accounts
located within the jurisdiction as consideration to
acquire units that conferred
rights to benefits produced by the Schemes.
(ii)The money contributed by the scheme members to each of the Schemes was to
be pooled with other contributions, or used in a common
enterprise, to produce
financial benefits for the scheme members.
(iii)Scheme members did not have day to day control over the operation of the
Schemes.
(iv)Each of the Schemes was operated in the same, or in a substantially
similar, manner in that:
(1)each of the Schemes used documents in substantially the same form, being a
Scheme Memorandum, a Scheme Agreement and its components
including the
non-solicitation statement, the confidentiality agreement, the no advice
acknowledgment, a Scheme bank account details
form, the TT instructions, the
release and the source of funds declaration, and the certificate of units;
(2)each of the Schemes received funds from potential Investors who had been
given access to the schemes through FTC Seminars, Investor
Meetings and/or KLM
and/or OEM;
(3)each of the Schemes other than Super Save and the 888 Fund purported to
receive funds from potential investors through an IBC;
(4)the Corporate Administrator of most of the Schemes opened the Technocash
Accounts;
(5)most of the Schemes invested funds in derivatives trading accounts with
Cadent;
(6)a number of the Schemes (Integrity Plus, Master Fund, Elite Premier Option
2 and Best Fund) had websites designed by John Parsons
on Mr Hobbs'
instructions;
(7)the Schemes made investments in accordance with the advice or
recommendations of Mr Hobbs and/or Ms Reisinger; and
(8)the Schemes paid a commission to the FTC Executive who introduced the
relevant scheme member to the Scheme.
(v) Each of the Schemes was controlled by Mr Hobbs and further or in the
alternative FTC.
(vi)The Corporate Administrator of each of the Schemes was
accustomed to act in accordance with Mr Hobbs' instructions.
(vii)Each of the Schemes was only made available to potential retail
investors who subscribed to FTC.
(viii)Mr Hobbs, by himself and his agents each of Ms Li, Mr Collard, Ms Wu,
Mr Wood, Mr Truong, Mr Koutsoukos and the FTC Executives,
and the KLM Material,
solicited investors and promoted each of the Schemes in the same, or in a
substantially similar, manner.
- It
is submitted by ASIC that there was only one overall or collective scheme (of
which Mr Hobbs was the designer) and that the FTC
process and the OEM/KLM
process were simply a part of the one overall process (controlled by Mr Hobbs)
by which investors were approached
and solicited to invest in any of the Schemes
designed and overseen by Mr Hobbs.
- Mr
Halley emphasises that the process was applied in some instances even after the
investment had already been made (Huang at [157])
and notes the evidence of
witnesses who have deposed to FTC, OEM and KLM making up the "whole program"
(Dong at [29]) or being a
"circle" (Fitzgerald T 992.30; 993.46); or to the
examples of it operating as a single process (Canham [8]; Handebo [5]-[6]). (In
this regard, the evidence of Mr Parsons is compelling also.)
- Mr
Halley submits that each scheme was merely a version of a "white label" or
generic fund that enabled the scheme to be administered
by the appointed
administrator acting in an administrative (or secretarial) role. Significantly,
Mr Hobbs himself, in closing submissions,
seemed to assert that the role of
administrator required no specialist financial expertise - supporting the
characterisation by Mr
Halley of the administrator's role being in effect a
clerical one. It seems to me that this is consistent with the evidence given
by
the respective scheme administrators - some of whom, (such as Mrs Brenda Hobbs),
had no apparent idea of the investments in which
investors' funds were placed
and treated the role as administrative only. (Mr Fitzgerald, for example,
clearly saw his role as no
more than administrative.)
- Mr
Hobbs denies the existence of the alleged Hobbs Scheme (as does Mrs Hobbs) and
denies paragraph [276], repeating his defence to
the earlier paragraphs of the
pleading on which it is predicated. In his defence he states that he believes
that "any similarities
arising between the funds relates [sic] to them all being
investments in the Reisinger Product".
- In
his written submissions, Mr Hobbs has pointed to various ways in which he said
the funds operated differently. In particular, Mr
Hobbs notes that:
- not all funds
paid administration fees to administrators (he identifies the funds which did
not pay administration fees to administrators
as North Wave, Barclaywest (by
which I understand him to be referring to the Enhanced Fund), Pinnacle Fund and
888 (Super Save) Fund);
- some funds
"appear to have paid" a fixed percentage (4%) per month whereas some paid no
return and others paid variable percentages
in returns (according to Mr Hobbs
this being "seemingly determined by what percentage return was produced by the
fund");
- some funds
"seemed to pay" on a regular monthly basis, others on a quarterly basis and
others at irregular periods (again, Mr Hobbs
suggests that this was determined
by whether or not the fund produced a profit) and others did not pay at all;
- some funds had
shareholders and others did not; and that for one of the funds (I understand
this to be a reference to the Good Value
Fund) that had shareholders, the
shareholders were the only investors in the fund; and
- every fund had a
different composition of traders with different proportions of the total funds
invested allocated to the different
traders; each fund had traders with varying
amounts of leverage assigned to the traders (referring to the advice from Ms
Reisinger
at Exhibit AU 11838 and 11836 and the authorisation of each individual
administrator).
- As
to the submissions based on differences in payment of dividends and profit and
payments to administrators, Mr Hobbs relies on the
following:
- in respect of
Barclaywest that on one occasion a dividend of 10% was paid to the shareholders
and 11.2% was paid to the investors
(giving the investor/shareholders a 21.2%
return) (Exhibit AU 11537);
- in respect of
the Pinnacle Fund, that on one occasion the investors received a 15% profit
return and the shareholders received an
18.07% dividend (giving
investor/shareholders a 33% return) (Exhibit AU 11488);
- that the Good
Value Fund had generated a profit which was retained in the Cadent account and
not paid out to the investors who were
also the shareholders of the company (it
being said that the "capital plus 28%" is presently held in the Court); and
- in the case of
Mr Collard, pointing out that he was the administrator of Pinnacle, 888 (Super
Save) and the Enhanced Fund (in relation
to the latter there being 17
shareholders, some of whom became investors, and that all investors were
shareholders) and that, as
secretary to North Wave, Mr Collard did not receive
any fees/commissions.
- Whether
the individual schemes constituted a single collective (or conglomerate) scheme,
is to be determined by whether or not there
is a degree of interdependence that
binds them into a single scheme (ASIC v IP Product Management Group at
[22] and [28]).
- In
Chase Capital at [59], Owen J noted that the application was brought
forward on the basis that there were two managed investment schemes each being
the combination of the investments promoted through the respective Turks and
Caicos Islands incorporated entity and the holder of
its issued shares. His
Honour concluded that:
... It seems to me that each investment is itself a separate part of the
scheme but, nonetheless, it is a part of the overall scheme. I acknowledge
that each is comprised of different participants or groups of participants.
The method of organisation, while substantially similar, had subtle
differences. The "manager" was different in the sense that on some occasions
the application form mentioned that CCML would be the manager while,
on others,
it would act through an agent. The target or object of the various
investments were different. For example, in some of them the money was put in by
way of subscription
for shares or units in unit trusts. On another there was
a purchase of a piece of machinery and the lease of the equipment to the target.
Other investments, such as
BBF, TCF and TIF were quite different again. But
many, if not most, investment schemes will have a spread of investments.
In the end, though, what ties the various investments together is the
concept of "the club". It is the same overall structure, using
the same method
of operation and designed towards the same end. (my emphasis).
- In
the present case it is submitted by Mr Halley that where the explanations
provided to investors (as to how their contributions
would be used) have varied
(and in many cases have borne no correlation with how the moneys were actually
used by the scheme managers
or operators), the question is as to the substance
of how the scheme operated in reality (citing Pegasus Leveraged Options Group
at [36]-[37], where the intent of numerous separate arrangements with
investors was for investors to pay money into accounts which
a scheme operator
held at the National Australia Bank and all monies invested through those
accounts were thereafter used indiscriminately
by the operators without regard
to the investors' intentions or understanding, and Davies AJ held there was only
one scheme not several).
- ASIC
relies on the following as warranting a finding that there was a single
scheme:
(i)the common structure of each of the schemes (bearing the indicia of a
managed investment scheme, namely: scheme members contributing
money as
consideration to acquire units that conferred rights to benefits produced by the
scheme; those contributions being pooled
with other contributions in respect of
that scheme, and used in a common enterprise, to produce financial benefits for
the scheme
members; and the scheme members not having day to day control over
the operation of the schemes);
(ii)the substantial similarity in the operation of each of the schemes;
(iii)the control by Mr Hobbs (and/or FTC) of each of the schemes and the fact
that each of the corporate administrators was accustomed
to act in accordance
with Mr Hobbs' instructions or directions; and
(iv)that each of the schemes was only made available to potential retail
investors who subscribed to FTC; that the potential investors
in each of the
schemes were identified and solicited through a common process involving FTC;
and that potential investors in many
of the schemes were required to participate
in a common process (the OEM/KLM process as described earlier) in order to be
provided
with information in respect of the available schemes.
- As
to (ii) above, Mr Halley points to the following matters:
- the use of
documents in substantially the same form; the use of a common arrangement and
process for the printing and dispatch of
the relevant scheme documents; the
receipt of funds from potential investors who had been given access to the
schemes through FTC
and/or OEM and KLM; the receipt of funds from (or
purportedly from) potential investors through an IBC or (in the case of Super
Save
and the 888 (Super Save) Fund) an SMSF; for most of the schemes the opening
of a Technocash account by the corporate administrator;
investment by most of
the schemes of funds in a similar manner, particularly (from around 2005) in
derivatives trading accounts with
Cadent, with the same introducing broker and
foreign introducing broker and on the advice or recommendations of Ms Reisinger
or Mr
Hobbs; for a number of the schemes, the design of websites at around the
same time by the same person, at the direction of Mr Hobbs
(and which Mr Parsons
deposes Mr Hobbs referred to as "his" websites [45]); and the similar commission
structure for the "introducer"
(usually 12%), the introducer usually being the
FTC executive who introduced the relevant scheme member to the scheme.
- As
to (iii), Mr Halley relies upon evidence that Mr Hobbs:
- determined the
person(s) who would be the administrator of each of the schemes: having either
personally chosen the person(s) who
would be the scheme administrators (as it is
said was the case with Integrity Plus and Super Save; Prestige and Smart Money;
Elite
Premier and Elite Premier Option Two Unit Trust; Covered Strategies; First
Secured Bond Unit Trust, Master Fund, Pinnacle Fund and
888 (Super Save) Fund)
or having approved the involvement of others to act as co-administrators (with
Ms Li and/or Mr Collard in
relation to Good Value Fund, Enhanced Fund, and Best
Fund);
(Mr Halley notes, and I accept, that the administrators so chosen had no
prior experience in the operation of investment funds or
the investment in
financial products of the kind in which the funds invested, such as derivatives;
did not have the financial education,
business background or experience to
operate such a scheme; and did not hold an Australian financial services
licence);
- made
arrangements or assisted in the arrangements for the setting up of an IBC for or
on behalf of the scheme administrator(s) of
each of the schemes, to operate as
the corporate administrator of each of the schemes, or provided an IBC to the
scheme administrator(s)
to operate as the corporate administrator of each of the
schemes; Insofar as Mr Hobbs advised FTC executives of the requirements
for IBCs
and provided details of the firms and entities through whom IBCs could be
established - including reference to Sovereign
Trust at the DVD Seminar and, I
would infer, referrals to Moore Rowlands in Vanuatu and the First Anguilla Trust
Company in Anguilla,
with whom those working in the Hobbs office and Mr Wood
communicated for renewal of registrations in the respective jurisdictions
and of
whom there is no suggestion they had any knowledge prior to working with Mr
Hobbs;
- provided the
scheme administrators of each of the schemes, or made arrangements for them to
be provided, with the relevant documents
for the operation of the schemes, and
made arrangements for the relevant scheme documents to be printed and
dispatched;
- assisted in or
provided instructions as to the setting up of a dedicated bank account, in the
name of the corporate administrator,
for the receipt of funds to be invested in
each of the schemes;
- assisted in or
provided instructions as to the investment of funds received by the corporate
administrator of each of the schemes
(including for a number of funds the
setting up of an account with Cadent for investment in derivatives trading
through Cadent, on
the advice or recommendations of Ms Reisinger or Mr Hobbs);
- directed to whom
payments were to be made from funds invested in the schemes, including payments
by way of returns or purported returns
to investors, payments of commission to
the scheme administrator(s), relevant FTC executives acting as brokers, and also
to Mr Hobbs;
and
- directed that
investor funds be transferred between different schemes and that investor funds
be transferred to other entities and
individuals who were not
investors.
- As
to those matters, I am satisfied that Mr Hobbs personally chose those who were
to be the administrators of the various schemes
or, in some of the Li/Collard
schemes, implicitly approved the involvement of co-administrators, in the sense
that he did not demur
from persons such as Ms Wu and Ms Dong being held out as
scheme administrators. I am satisfied that the evidence establishes that
Mr
Hobbs either gave the directions or assistance referred to above or put in place
the means by which the scheme administrators
would receive and act upon advice
from others.
- I
do not accept as plausible Mr Hobbs' denial that he was unaware that Mr and Mrs
Dent were printing and distributing private placement
memoranda and scheme
agreements, having regard to the emphasis Mr Dent placed on having dealings in
relation to the printing directly
with Mr Hobbs and not the scheme
administrators.
- As
to (iv), it is noted that FTC executives invited potential investors to FTC
seminars or investor meetings in Australia; FTC executives
made representations
orally to potential investors at the FTC seminars and meetings as to the
potential access to offshore investment
opportunities, providing monthly returns
in the order of at least 3-4% per month on funds invested (save for Pinnacle
Fund which
was represented to offer at least 30% per annum) or otherwise
providing access to wholesale returns, not otherwise available to retail
investors, provided they subscribed to FTC and set up an IBC; the dispatch to
potential investors who subscribed to FTC of the FTC
financial education
booklets; and (with the exception of the schemes that were limited to specific
investors who were invited to
be shareholders of the corporate administrator of
the relevant scheme - such as the Good Value Fund), the provision of assistance
by FTC executives (or other persons assisting the FTC executives) to set up and
establish IBCs, or self managed superannuation funds,
as the case may
be.
- Insofar
as the process by which Mrs Watson and/or Mrs Burnard (or scheme administrators)
sought to solicit and 'qualify' potential
investors as eligible to invest in the
schemes was said to be based on (or justified by) the June 2002 advice received
from Mr Hartnell,
Mr Halley submits that this is also indicative of there being,
in substance, only one scheme.
- Mr
Halley submits, and I accept, that the above matters (which I consider to be
broadly established by the evidence) warrant the conclusion
that the FTC process
and the OEM/KLM process were part of a single process by which investors were
approached and solicited to invest
in any of the schemes the subject of these
proceedings (being schemes over which Mr Hobbs had effective control).
- In
addition, Mr Halley submits that Mr Hobbs himself regarded the individual
schemes as, in effect, one scheme, and engaged in conduct
consistent with there
being only one scheme. Reference in this regard is made to:
- the evidence by
various of the witnesses to Mr Hobbs: having referred to the various schemes or
funds as 'his' funds (Diaz at [11],
[13], [68], [126]; Parsons at [11];
Stavropoulos at [29], [61]; Blow at [31]; Camilleri at [66]; Gahan at [24];
Jouravlev at [71],
[89]; Huang at [16], [20], [38]; Koutsoukos at [119], [207];
Dong at [85]); having referred to the investors in the various schemes
as his
("our") investors (Parsons at [39]), having referred to the scheme
administrators as "his" people (Parsons at [11]); and having
referred to profits
being made by the schemes as profits being made by him, or by him and others
(Diaz at [68]; Jouravlev at [89]);
- the evidence
that Mr Hobbs referred to the schemes as "white label funds" (Koutsoukos at
[74]; Dong at [143]; Wood at [467]-[468])
and referred, in his letter to
Sovereign Trust International in November 2009, to the payment of $200,000 to
Magny-Cours as involving
the "setting up of white-labelled funds, ie investment
funds spread over a blend of registered traders and the opening of an account
with a licensed clearing house";
- the statements
made by Mr Hobbs' then legal representative, Mr Bellamy, writing on behalf of Mr
Hobbs to Cadent, and with Mr Hobbs'
knowledge, as to the operation of the funds
(Ex B tab 4);
- the fact that Mr
Hobbs arranged for visits by various of the scheme administrators as a group to
Cadent's offices in Chicago in about
April 2007 (Koutsoukos at [99]-[1011], T
141); and
- the evidence by
Mr Parsons as to Mr Hobbs' stated understanding of the whole operation (set out
in the diagram drawn by Mr Parsons
after having received instructions from Mr
Hobbs as to the scheme(s) (Parsons at [99], Tab 3) (evidence which I regard as
very significant
not least because of Mr Hobbs' reaction in the witness box to
the documentation of the arrangements, which I find were in fact in
place as
represented on that diagram).
- Reference
is also made to what Mr Halley refers to as the "cross-pollination" by or at the
direction of Mr Hobbs between schemes,
in that: on some occasions, funds
invested in one particular fund were in turn invested on the instructions or
advice of Mr Hobbs
in another fund (Jouravlev at [98]); the evidence of Mr
Koutsoukos that Mr Hobbs directed or encouraged the administrators of one
scheme
to invest in or assist in soliciting investment of funds in another fund (such
as when Geneva Financial needed propping up
at [288]) and at [388]-[397] that Mr
Hobbs encouraged people to invest Geneva in 2005;and at [961]-[966] when Elite
Premier Option
Two Unit Trust needed to be "built up".
- I
consider that the lack of financial sophistication/expertise on the part of most
of the scheme administrators and the persons involved
in the OEM/KLM process is
significant insofar as it makes it inconceivable that each would separately (or
in groups of one or two)
have themselves formulated the process that was put in
place or had the contacts to enable that to be done. The evidence overwhelmingly
leads to the conclusion that it was Mr Hobbs who provided the common link
between the schemes.
- That
is consistent with Mr Hobbs' belief that there was valuable intellectual
property that reposed in the investment process or the
setting up of the "white
label" fund (for which he would be justified in charging a substantial premium).
Had he formulated the scheme,
made the introductions and had no further
involvement therein, that might have been one thing. However, having regard to
his continued
involvement in the process (evidenced by communications both with
scheme administrators and with Ms Reisinger) and his continued
presentations at
FTC seminars to potential investors, and having to the fundamental aspects that
the schemes had in common (particularly
the striking similarity in the scheme
documentation and the process involved), I consider that the four schemes taken
together were
part of one collective scheme (involving both FTC and the OEM/KLM
process), even though some funds once set up operated in a slightly
different
way in relation to solicitation of investments).
- I
place weight on Mr Hobbs' own presentation of the process at the DVD seminar
that clearly links the sale of the financial packages
with the provision of
access to offshore investments and his presentation on other occasions as
recorded in contemporaneous documents
such as Mr Blow's notes of the seminar he
attended.
- I
find that the fourteen individual managed investment schemes collectively
comprised a single scheme (of which the steps involving
FTC on the one hand and
OEM/KLM on the other hand were part).
Whether the issue of interests in the "Hobbs Scheme", or alternatively
each of the Super Save and Integrity Plus Schemes, required
the giving of a
product disclosure statement under Division 2 of Part 7.9 of the Corporations
Act [277]-[278]
- Paragraph
[277] alleges that the issue of interests in the Hobbs Scheme (as defined in the
Third Further Amended Statement of Claim)
required the giving of a Product
Disclosure Statement under Division 2 of Part 7.9 of the Corporations
Act. The basis on which this allegation is made is that, at least from 1
July 2004, the Hobbs Scheme had in excess of 20 members and
the amount invested
in the Hobbs Scheme exceeded AU$2,000,000 within any twelve month
period.
- Paragraph
[278] pleads, further or in the alternative, that the issue of interests in each
of the Super Save and Integrity Plus schemes
required the giving of a Product
Disclosure Statement under the said statutory provisions. This is particularised
by reference to
the facts that in the twelve month period between 1 January 2006
and 31 December 2006 Integrity Plus had more than 20 members and
the amount
invested in the Scheme during that period exceeded AU$2,000,000; and that in the
twelve month period between 7 December
2006 and 6 December 2007 Super Save had
more than 20 members and the amount invested in the Scheme during that period
exceeded AU$2,000,000.
(Pausing there, ASIC does not assert that the other
individual schemes taken in isolation required the giving of a product
disclosure
statement, so the submission of Mrs Hobbs in relation to Geneva
Financial is not disputed per se; rather what is said is that it
was part of the
overall scheme and that overall scheme was required to be
registered.)
- Mr
Hobbs, in his defence, denies the existence of the alleged Hobbs Scheme and says
"accordingly" the obligation alleged in paragraph
277 of the Further Amended
Statement of Claim is denied. (On a pedantic reading of the pleading, one might
think that issue was there
being taken simply with the allegation that there was
an overall or collective scheme as alleged, not as to whether, if there was
a
single scheme, it required the issue of a product disclosure statement.
Nevertheless, I have treated this as a denial of the substantive
allegation.)
- As
to [278], Mr Hobbs pleads that he does not know and cannot admit the allegation
(consistent with his denial of knowledge or involvement
in the respective
individual schemes). (Ms Wu does not admit the allegations in
[277]-[278].)
- In
light of the finding as to the existence of an overall collective scheme, it
follows from the level of investment therein over
the relevant periods that the
Hobbs scheme required the issue of a product disclosure
statement.
Misrepresentations
- The
second broad group of issues relates to the alleged misrepresentations by Mr
Hobbs or others allegedly acting as his agent or
on his behalf.
- There
are three scheme representations alleged at [279] to have been made in the
period from at least 2004 to 2008 in respect of each
of the schemes, by each of
Mr Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Koutsoukos, Mr Wood, Mr Truong and FTC,
namely:
(i)the Lawful Investment Representation (namely that, by investing in
the Hobbs scheme (and further or alternatively each of the schemes), Mr Hobbs or
persons or entities
associated with Mr Hobbs could lawfully provide investors
with access to offshore investment products and opportunities);
(ii)the Principal Protected Representation (namely that there was no
risk of investors losing the principal sum invested in the Hobbs scheme, and
further or alternatively each
of the schemes); and
(iii)the Investment Returns Representation (namely that each investor
could generally expect to receive returns in the order of at least 3 to 4% per
month on funds invested
in the Hobbs Scheme, and further or alternatively each
of the schemes - although the Pinnacle Fund the representation was of a 30%
annual rate of return (that may be equated to approximately 2.5% per month).
- Particulars
of the Scheme Representations are contained in the pleading. Each is said to
have been partly express and partly implied.
- The
Lawful Investment Representation, to the extent that it was express, is said to
have been oral; the others to the extent that
they were express are said to be
partly in writing (deriving from statements in the respective Private Placement
Memoranda for the
funds and (in the case of the Investment Returns
Representation) from some PowerPoint presentations).
- To
the extent that the Scheme Representations are said to be
implied:
(i)in the case of the Lawful Investment Representation it is said to be
implied from the making of the Investor Representations without
any
qualification or reservation that the Hobbs Scheme, and further or alternatively
the Schemes, were not or may not have been operating
lawfully in Australia in
soliciting investments from potential investors, purportedly through
international business corporations
or by reason of some alleged qualification
as a sophisticated investor by purchasing educational materials from FTC and
then pooling
those funds that were invested and placing those pooled funds in
either proprietary accounts with Cadent, without disclosing the
beneficial
interests of the investors in the funds placed with Cadent, or in other alleged
investment opportunities;
(ii)in the case of the Principal Protected Representation, to the extent that
it is said to be implied, ASIC contends that it is to
be implied from statements
made by each of Mr Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong and Mr
Koutsoukos, to investors
at FTC Seminars and Investor Meetings concerning the
types of investments made by the Hobbs Scheme, and further or alternatively
the
Schemes, including the purchase of US Treasuries to protect their principal;
and
(iii)in the case of the Investment Returns Representation, to the extent that
it is implied, it is said to be implied from the circumstances
in which the
Investor Representations were made, including statements and representations
made by Mr Hobbs and each of his agents
Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr
Truong and Mr Koutsoukos in the course of FTC Seminars and Investor Meetings in
the period
from at least 2004 to 2008 as to rates of return achieved and
achievable in the offshore wholesale investment market generally and
by
investment in the Hobbs Scheme, and further or alternatively each of the Schemes
(and in the case of Master Fund the representation
is to be implied from the
Master Fund Presentation).
- Each
of the Scheme Representations is alleged at [280] to have been a continuing
representation on the basis that each was made to
potential investors to
encourage them to make and retain investments in each of the Schemes. Hence it
is said that the representation
continued unless and until the investment had
been redeemed in full, or the representation was withdrawn.
- Further,
it is alleged in [281] that each of the Scheme Representations was false in a
material particular, materially misleading,
misleading or deceptive, or likely
to mislead or deceive.
- It
is submitted that in the circumstances in which each of the scheme
Representations was made to potential investors to encourage
them subsequently
to make and retain investments in each of the schemes, it can readily be
concluded that such representations were
likely to induce persons in Australia
to make and retain investments in, or apply for or acquire interests in, the
schemes. I agree.
- As
to the Scheme Representations, in general, Mr Hobbs accepts that he made the
statements recorded at the DVD Seminar (on that occasion
- though, as I have
noted, he dismisses that seminar as being a "one-off" occasion). However, he
does not accept the characterisation
of those statements put against him by
ASIC.
- I
turn then to the particular issues so arising in relation to the
misrepresentation issues:
Whether each of Mr Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong,
Mr Koutsoukos and FTC made the Lawful Investment Representation
[279](a) (namely
that by investing in the Hobbs Scheme, and further or alternatively each of the
Schemes, Mr Hobbs or persons or
entities associated with Mr Hobbs could lawfully
provide investors with access to offshore investment products and
opportunities)
- ASIC
relies for the allegation that the Lawful Investment Representation was made by
each of the above on the following evidence of
the making of oral statements to
this effect:
(i)by Mr Hobbs (Blow at [10], [12] (including Mr Blow's handwritten
notes of the first FTC meeting he attended), [14]; Marciniak at [30], [33];
Koutsoukos
at [67], [68] (when the Hartnell opinion was produced and Mr
Koutsoukos says Mr Hobbs said that if anyone questioned the legality
of the
investment reliance should be placed on this), [110], [112]-[113], [189]; Dong
at [8], [109], [230] (again referring to the
Hartnell advice); Wood at [21],
[32]; Truong at [37]; Huang at [16]);
(ii)by Ms Li (Huang at [9], [48]; Gao at [10], [17], Xu
[60]-[61],[88]; Dong at [230] (referring to the Hartnell advice));
(iii)by Mr Collard (Hogno at [17], [21]; Gao at [45]; Jouravlev at
[10]; Ms Dong at [230] (referring to the Hartnell advice));
(iv)by Ms Wu (Gao at [9]);
(v)by Mr Wood (Wood (as to his practice of what to say at client
meetings between about mid-2002 and about December 2007) at [55] (including
reference
to the Hartnell advice); at [523] talking about his usual practice
when speaking to clients about Super Save to say);
(vi)by Mr Truong (Truong at [62] and [67] (as to his usual practice
from about 2002 and continuing in the period from about 2004 to about 2007),
[298]
as to his practice when promoting Super Save; Mr Koutsoukos at [16]);
(vii)by Mr Koutsoukos (Canham at [7]);
(viii)by other FTC executives (Mr Evans (Blow at [33], [35], [64]);
Mr Jennings (Handebo at [5], [16]; Gemmell at [4]; W. Moule at [7]);
Mr Piggott (Ormond-Allen at [4]).
- Mr
Hobbs' submission is that he had "good reasons not to do any more than talk
about products and specifically not to give financial
advice" (there referring
to the advice provided to him by each of Mr Miles, Mr Hartnell and Ms Maroun)
and he denies having done
so. (This submission seems to be a tacit
acknowledgment of awareness at the time that to do so would have risked a
contravention
of the legislation in this jurisdiction.)
- As
to the Lawful Investment Representation, in particular, Mr Hobbs submits that
this "is not consistent with a representation by
me that my own acts were
legal"; rather that, at its highest, what was said at the seminars was to the
effect that investors could,
under certain circumstances, legally invest
overseas. Mr Hobbs says that no specific details of any kind were
provided.
- Mr
Hobbs relies on the fact that he was "in possession of the Hartnell advice which
did provide that in certain circumstances investors
could invest overseas" and
submits that there is nothing in ASIC's case to suggest that, by so investing,
investors were acting illegally.
- It
is worth noting precisely what Mr Hobbs said at the DVD
Seminar:
So, if we come to talk about what is real opportunities in the world, and we
know that a lot of the major fund [managers] do not operate down in our
part of the world, how do you legally participate? Well, the first point
being we can pull out a number of prospectuses here now and discuss a number of
prospectuses from around the
world but if we made an investment offer or gave
advice, we are breaking securities law here in Australia.
So, how does a person legally participate in that market? Most
sophisticated individuals, or people that understand how to participate
in the
international arena know that they must form a company internationally, and
that's usually a company that's formed in one
of the tax havens of the world,
and that company seeks an offer from the fund managers. For example, there
is - and you can go on the web and have a look - there is a very good options
trading program that has been on
the [FTSE] market for about 15 or 16
years now, it's worst year in the last fifteen years including '87, it produced
30.3 per cent for the year,
and that was '87. It's a registered prospectus, but
you apply for that prospectus as an Australian resident and they will not send
it to you, because you're breaking - they would be breaking the law.
But they will send it to a company that's registered or incorporated, I
should say, in a jurisdiction that allows them to transfer
that information. So,
if a client has a company, and please, we'll review this in more detail over the
next [two] days but I'm just
speeding through a process here, I guess. If a
client has a company in a jurisdiction that allows them to receive investment,
you
still cannot offer that company here in Australia, that investment. That
particular company must seek an investment offer from offshore.
So, you cannot
give financial advice, you cannot make an investment offer, which of course, if
you did make an investment offer,
if you did give financial advice, you would be
under all the jurisdiction that is here, requires public indemnity insurance,
requires
registration, requires the products to be registered, to have a
prospectus and so forth. (P 5 lines 3-31) (my emphasis in italics;
my correction
of the transcript based on what I heard said on the video is in italics]
- As
can be seen, Mr Hobbs (both at the DVD Seminar and in his submissions) is there
conflating two issues - whether an Australian resident
can lawfully invest (in
the market to which he was referring at the DVD Seminar) and whether investment
offers could lawfully be
made in the jurisdiction.
- The
Lawful Investment Representation goes only as to the latter. What ASIC contends
is that there was a representation made to potential
investors that "by
investing in the [Scheme or Schemes] ...Mr Hobbs or persons or entities
associated with Mr Hobbs could lawfully provide investors with access to
offshore investment products and opportunities" (my emphasis). At the
introduction of the DVD Seminar, Mr Hobbs stressed this very
point:
By law in Australia we can [share] financial [education]
information by education, but the moment you make an investment offer, in
Australia, you must have either the twelve twenty rule
or have a registered
prospectus. ... (P 3 line 38-39) (my correction of the transcript based on what
I heard said on the video is
in italics)
- And
again later:
[But] Enjoying the results of wholesale funds is substantially
different to being restricted to a retail level only. The difficulty is,
we['ll]
come back to it again, if it does not have a prospectus registered here in
Australia you cannot offer that investment, you
can only discuss it by way of
education, and by way of education you can show people how they can legally
participate, but after
that the client must make the effort to obtain that
information. [Yes] We can give them the fax number offshore they can
fax to requesting it, but there is procedure that that client must do,
you cannot offer the investment here in Australia, and again we can go
through that in a little bit more detail. (P 10 lines 37-45) (my emphasis in
italics; my correction of the transcript
based on what I heard said on the video
is in italics)
- Whether
or not (consistently with the Hartnell advice or otherwise) investors could
lawfully invest in the offshore market through
an offshore IBC (if an investment
offer were to be made to them and the investment offer and issue took place
totally offshore) or
even if they could lawfully do so despite a breach by the
offeror of statutory prohibitions in this jurisdiction is not the issue.
The
case against Mr Hobbs, in this regard, is that potential investors were told
that the offeror could lawfully provide them with
the investment opportunities
in question.
- The
above extracted portion of the transcript of the DVD seminar makes it unarguable
that a statement of that kind was made by Mr
Hobbs on at least that occasion.
The evidence of persons who attended other seminars or who were appointed as
scheme administrators
makes it clear that Mr Hobbs said this on many other
occasions. (Elsewhere on the DVD Seminar, Mr Hobbs describes FTC subscription
as
"Subscription is a legal means to an end" - that end can only, in the context of
the seminar, have meant investment in offshore
markets).
- Again,
on the second day of the seminar, Mr Hobbs is recorded as
saying:
But you can only share that information by educational purposes. You cannot
make an investment offer. Because you're operating on
an educational basis,
you're not required to have PI insurance, you're not giving financial advice,
you're selling an educational
program. In that educational program it shows
clients how they can legally participate in an investment that has a prospectus
registered
in the US or UK or Europe and - and physically obtain the memorandum
or the prospectus as a contract, because as we touched on yesterday,
if you
have a fund manager in the US and you're a resident of Australia and you apply
for that prospectus, you will not receive it,
because they are breaking security
laws here. Their product is not registered here. (my emphasis)
- Mr
Hobbs again went into some detail in relation to the investment products (in
similar terms to the day before) and said:
The procedure for clients. The procedure for clients is: they can only - we
can only share this information with them by education.
And let's be very
clear about that, because if we try and make an investment offer to a client
here if the product is not registered
here in Australia, we're breaking the
law. And that's absolutely somewhere we don't want to go to. So we can only
do it by education. The client learns to participate in international
finance or
international investments. They form a company, which can be formed for them by
different solicitors and attorneys from
around the world, in a jurisdiction that
allows them to receive a contract memorandum and the product. Now, usually
that's close
to Australia. Of course that can be Vanuatu, but not the most
significant area, but the Isle of Man, Anguilla, The Bahamas. (my emphasis)
- Again,
Mr Hobbs is there addressing two issues - whether a person can lawfully invest
in such products and whether it would be a breach
of the law to offer such
investment.
- As
to the manner in which the Hartnell advice was deployed, on the first day at the
DVD Seminar, Mr Hobbs said:
The advice that we took on this matter was from different solicitors. We
actually had a recent opinion from Tony Hartnell, a solicitor
here in Sydney who
was involved in the forming of the New South Wales financial services industry,
or ASIC.
...
And he said - he was very clear in his opinion: providing the client has an
offshore company, that offshore company approaches offshore
for an investment
offer, it does not constitute an offer here in Australia, providing you have
not made any form of offer here or financial advice. (my emphasis)
- He
repeated this on the second day:
Now, we have an opinion here, as we mentioned yesterday. The opinion is via
the solicitor here in Sydney, Mr Tony Hartnell. Mr Hartnell
was involved in
writing the ASIC legislation, and was very plain - he states very plainly -
should a person operate in that procedure
from an IBC and request the
information from offshore in the IBC's name, it does not fall under any of the
securities commission's
- a conflict here in Australia because the offer has not
been made on Australian soil to Australian resident, it's been made to an
offshore company from another offshore identity.
- Those
cannot, in my view, fairly be said to be statements limited as to the lawfulness
of investment by the investor - what they appear
to address (particularly the
first of the extracts) includes or at least relates to the lawfulness of
providing the investment offer
or opportunity.
- As
to the evidence from the various witnesses in respect of what was said by Mr
Hobbs at particular meetings, I consider that statements
to the effect that "We
are limited to what we can [invest in] in Australia" (as Mr Blow records Mr
Hobbs as having said, juxtaposing
the requirement for prospectuses in Australia
and "a lot of organisations around the world [that] don't have the requirement
for
prospectuses" with the statement that there are a number of ways that those
in Australia can invest offshore, are statements that
convey the message that
the investment process there being spoken about is lawful for the investor, but
statements to the effect
that there are no requirements for prospectuses also
conveys the message, in my view, that a company offering the investment through
the IBC process can do so lawfully in a way that permits investors in Australia
to invest in the funds without a prospectus.
- Similarly,
the statement identified by Ms Marciniak that it was necessary to establish a
"legal business" offshore in order to "explain
the overseas flow of money" and
that:
There are offshore funds available to invest in, but these are only open to
offshore companies.
- In
saying this, I am conscious of the need (emphasised in Forrest) to focus
on what the particular audience would understand the statements to have meant.
In the present instance, it seems to me
that an unsophisticated listener to such
statements would not have sought to parse the meaning thereof but would have
understood
them to mean that the investment process there put forward was legal
from whatever perspective (ie that of the offeror and that of
the offeree) - in
other words that there was no risk attached that the investor would be involved
in something that was not legal
in the jurisdiction.
- More
specifically, Mr Koutsoukos deposes (and I accept his evidence) that during an
initial conversation with Mr Hobbs (relevantly,
after Mr Hobbs had said "Show
them this [an Investment Magazine] and tell them about the education that leads
onto investment", when
Mr Koutsoukos queried whether this was all legal, he says
Mr Hobbs handed him a copy of the Hartnell advice and said words to the
following effect:
This is an opinion by a lawyer from Atanaskovic Hartnell. This guy wrote the
ASIC Act. He's top notch. What we're doing is all legal.
If anybody questions
whether what we do is legal, give them a copy of this.
- Similarly,
Mr Koutsoukos says that at the first seminar he attended at which Mr Hobbs
spoke, Mr Hobbs said words to the following
effect:
Look, how can we make this possible and accessible to the mums and dads
without breaking any of the ASIC laws? They become sophisticated. An
investor can become sophisticated in one of two ways: if you have large sums of
money, or if you have
knowledge. Very few people have got a half a million
dollars in cash to put into any investment but any one can be knowledgeable.
We
have legal opinions here and if you buy the education it's all legal. (my
emphasis)
- He
says that at that Mr Hobbs held up the Hartnell advice and said:
This is an opinion by a lawyer from Atanaskovic Hartnell. This guy wrote the
ASIC Act.
Once you buy the education and read it, then you become knowledge. Then if
you set up an international business company, or "IBC",
it is your IBC, not you,
talking to another IBC. The IBC requests a memorandum and the IBC makes the
investment, not the Australian
resident. That way the average mum and dad won't
have to pay our exorbitant tax rates here in Australia.
Once you buy the education, it will all be revealed to you.
- Significantly,
Mr Koutsoukos deposes, and I accept, that when dealing with clients he also
presented and discussed the Hartnell advice
"as a way to assure clients as to
the legality of investing in the Integrity Plus fund" and he gave copies of the
advice to a number
of clients. Insofar as Mr Hobbs relies on the Hartnell advice
as assuring him that what FTC (or KLM) was doing was legal, he can
hardly
suggest that the provision of that advice to potential investors was not
intended to convey that same message.
- Similarly,
Ms Dong deposes that each of Mr Collard, Ms Li and Mr Hobbs on separate
occasions in meetings with investors said words
to the effect:
Tony Hartnell used to write ASIC laws. He looked at this. He tell us its
legal. He look at all the documents. It's very legal.
All this FTC stuff, or Master Fund, everything is already given to Tony to
look at.
As long as you tell people you have to have FTC and an IBC to invest
- Mr
Hogno deposes to a discussion with Mr Collard in late 2002, in which he
says Mr Collard said that before he could invest in private placement he would
have to set up and get an offshore business
company "because Australian citizens
cannot partake in wholesale investments" and that in early 2003, after setting
up his IBC, he
spoke with Mr Collard who said that:
I cannot give you any information myself. All IBC's have to go through KLM to
get their information. Just use your IBC name and write
them a short letter
requestion further information. Use the fax number that I gave you
conveying in my view the message that while Mr Collard could not do so, KLM
(lawfully) could.
- Other
witnesses depose to the making of similar statements (as particularised by
ASIC), such as Ms Gao and Mr Jouravlev. Mr Wood and
Mr Truong depose to what it
was their practice to say in this regard, Mr Wood referring specifically to the
Hartnell advice and Mr
Truong emphasising that he said to clients words to the
effect "We are complying with the law if we do it this way".
- I
am satisfied that the evidence establishes the making of statements to the
effect, or conveying the message, of the Lawful Investment
Representation by Mr
Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong, Mr Koutsoukos, Mr Evans and
Mr Jennings. In particular,
the provision of the Hartnell advice goes squarely
to the issue whether the activity comprised in offering investment on an
offshore
basis was lawful.
- Mr
Hobbs submits that, insofar as ASIC relies on the making of the Lawful
Investment Representation by "each of Ms Li, Mr Collard
and all the FTC
executives both on their own behalf and on behalf of [Mr Hobbs] and FTC" (as
stated in (iii) of the particulars to
[279](a) of the pleading, the pleading
(and also the evidence in the case) fails properly to examine "of whom and in
what capacity
any such representation was made". There can be no criticism
fairly made of a failure to identify by whom the alleged representations
were
said to be made. ASIC has clearly identified those persons by reference to the
evidence in the proceedings. However, what I
understand to be the nub of Mr
Hobbs' complaint in this regard is as to whether it can be said that, where such
representations were
made by others, they were representations made on his
behalf.
- Mr
Hobbs submits, for example, that if Ms Li is said to have been making the
representation as agent for Mr Hobbs, then the evidence
"should identify the
authority on which she was making such a statement". That seems to raise again
the submission as to whether
such conduct fell within the scope of her authority
as an agent (and, on that issue, I find that it did - by analogy with the
position
of a director authorised to sell shares being implicitly authorised to
make representations in relation thereto). However, insofar
as Mr Hobbs goes on
to submit that it is far more likely any statement Ms Li made (apart from one
made with respect to the financial
education package) was made on behalf of the
fund in which the investor ultimately invested, Mr Hobbs' submission seems to be
that
responsibility for representations of this kind lies only with the "fund"
(or more precisely, the corporate administrator, since
the "fund" or investment
scheme itself does not have a separate legal existence).
- The
difficulty I have with this submission is that it ignores the evidence that it
was Mr Hobbs who set up the investment schemes
and that they operated as part of
an overall scheme (under which Mr Hobbs stood to gain considerable financial
benefits, albeit not
directly from the investments made in the scheme by way of
a broker's or introducer's commission (other than on limited occasions)).
Logically, therefore, representations on behalf of corporate administrators can
(and I find that they were) made on behalf of or
as agent of Mr Hobbs.
- Mr
Hobbs argues that one indication as to the capacity and authority of Ms Li to
make such a representation "would be the flow of
money with respect to the
representation". He submits that "generally" the party benefiting from the
investments would be the person
making the alleged representation (in this case
Ms Li as director/officer of her fund) and not Mr Hobbs or FTC). (That is a
generalisation
not supported by any evidence.) It raises again the submissions
made by Mr Hobbs as to the need to follow the "money trail". Ironically,
the
evidence adduced by ASIC points to a money trail that often ends in Mr Hobbs'
bank account or in the hands of persons or entities
associated with
him.
- Mr
Hobbs also raises an issue as to whether Ms Li was "merely passing on Mr
Hartnell's advice". If that is intended as a "conduit
defence", the passing on
of the advice would at the least need to be accompanied by a suitable
disclaimer. As it is, the advice was
provided to investors or referred to by Ms
Li and others (including Mr Hobbs) in the context of statements to investors
that conveyed
the message that the investments were being lawfully offered (or
that the investment process was such as to permit a benefit to be
obtained that
could not otherwise lawfully be passed on to persons in their position). Hence
the evidence goes further than the mere
provision (as a conduit) of legal advice
for the investor to consider. Moreover, any suggestion that the investor could
obtain independent
investment advice cannot seriously be maintained having
regard to the manner in which solicitation for investment took place (agreements
in some instances at least being signed at the same time as the provision of the
private placement memoranda or, in the case of the
Pinnacle Fund, before the
provision of such information by way of a temporary contract committing the
investor to unspecified contract
terms).
- Relevantly,
from the evidence of what was said to FTC executives (both at the DVD Seminar
and as deposed to by the various executives)
as to the investment process (and
the training or demonstration as to how to present the investments to clients)
(and I note that
at least Ms Li, Mr Wood and Mr Truong were present at the DVD
Seminar), it is readily able to be concluded that any representations
they
thereafter made to investors were as shown by or as instructed by Mr Hobbs'. Mr
Hobbs consistently emphasised the lawfulness
of what FTC/KLM was doing (via the
offer of investment through offshore entities) to potential investors and FTC
executives (and
did not apparently demur when statements of that kind were made
by others). The representation is one that I would conclude Mr Hobbs
was
encouraging the FTC executives to make. In those circumstances I cannot accept
the proposition that Ms Li was simply "passing
on" Mr Hartnell's advice or that
the FTC executives when making statements to the effect alleged were not doing
so as agents of Mr
Hobbs and FTC or on their behalf.
- I
find that the relevant representations were made by each of the alleged
representors.
Whether the Lawful Investment Representation was false in a material
particular, materially misleading, misleading or deceptive and
likely to mislead
or deceive [281(a)]
- By
way of particulars of this allegation, ASIC relies on the following for the
allegation that the Lawful Investment Representation
was false. It says that Mr
Hobbs or persons or entities associated with Mr Hobbs could not, in the
circumstances in which they purported
to do so, lawfully provide investors with
access to offshore investment products and opportunities since: the real
investor in each
of the Schemes was not the IBC set up on behalf of each
relevant potential investor, but was the individual person themselves, or
alternatively (as I have found) the IBC was merely an agent for the individual
investor; the investment in the schemes occurred in
Australia; FTC carried on a
financial services business in Australia without an Australian financial
services licence; FTC made recommendations
or statements of opinion that were
intended to influence a person in making a decision in relation to investing in
the Hobbs Scheme
or the schemes without an Australian financial services
licence; at no time did FTC give a Product Disclosure Statement with respect
to
the issue of units in the Hobbs Scheme or any of the individual schemes; Mr
Hobbs and FTC operated a managed investment scheme
(the collective Hobbs
scheme), which was not registered with ASIC in contravention of s 601ED(5); Mr
Hobbs carried on a financial
services business in Australia without an
Australian financial services licence; each of Mr Wood, Mr Truong, Mr
Koutsoukos, Ms Li,
Mr Collard, Ms Wu, Mrs Hobbs, Mrs Brenda Hobbs, Mr Clements,
Mr Fitzgerald, Mr Moore, Mr Zhang, FTC, PJCB, Secured Bond, 888 Vanuatu,
Geneva
Financial, Preserved Investments, Ultimate Investments, North Wave, Barclaywest
and GP Global carried on a financial services
business in Australia without an
Australian financial services licence; and that none of the schemes was
registered with ASIC. I
consider each of those matters to have been established
(other than the sham allegation though in that regard I accept that the IBCs
were the agent or alter ego of the individual in question).
- It
is not disputed that neither FTC nor Mr Hobbs (nor any of the scheme or
corporate administrators) held an Australian financial
services licence. Nor is
it disputed that none of the schemes was registered with ASIC. I find that the
Lawful Investment Representation
was false. (Moreover, it seems to me that the
Hartnell advice could not reasonably have been relied upon by Mr Hobbs as
correct,
given that the advice he had obtained was predicated on an incorrect or
incomplete version of the activities in which FTC and Mr
Hobbs, including the
activities of KLM, were in fact engaged.)
Whether each of Mr Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong,
Mr Koutsoukos and FTC made the Principal Protected Representation
[279(b)]
(namely that there was no risk of investors losing the principal sum invested in
the Hobbs Scheme, and further or alternatively
each of the Schemes)
- ASIC
relies for the allegation that the Principal Protected Representation was made
by each of the above on the following evidence
of the making of oral statements
to that effect:
(i)by Mr Hobbs (Blow at [10], [31]; Jouravlev at [71], [89]; Huang at
[132]; Koutsoukos at [42], [118], [332], Truong at [232]);
(ii)by Ms Li (Xu at [17], [23], [24], [47], [60], [88]; Zhang at [90],
[147], [181], [185], [223], Dong at [70], [98], [108], [209], [233]);
(iii)by Mr Collard (Hogno at [74](a), (c); Dong at [68], [98]);
(iv)by Ms Wu (Gao at [9], [37](a));
(v)by Mr Wood (Handebo at [48]; Camilleri at [36], [72]; Wood at [53]
as to his practice of what he said at client meetings, [288](b) as to his
usual
practice when promoting Integrity Plus; [297]/[531] as to numerous conversations
with clients in relation to Integrity Plus/Super
Save in which he responded to
client queries as to whether the investment was safe by saying "Yes, we believe
it's safe. It's protected
by the Treasury STRIPS", [523] as to his usual
practice when speaking to clients about Super Save);
(vi)by Mr Truong ( Truong at [182] as to his usual practice when
promoting Integrity Plus; [298] as to his practice when promoting Super Save);
(vii)by Mr Koutsoukos (Canham at [7]; [14]; Mulligan at [24]);
(viii)by agents of Mr Hobbs/FTC: Mr Clements (Blow at [88]); Mr
Jennings (Handebo at [5]); Gemmell at [4]; K Moule at [11]); Mr
Fitzgerald (Huang at [27]).
- ASIC
also points to the following written statements to the effect of the alleged
representation:
- pages 10, 12 and
14 of the Integrity Plus scheme Memorandum and the evidence of various witnesses
in relation thereto (Mr Millington
at [22], [23], [45], [47], [62], [63]; Ms
Camilleri at [84], [108]; Ms Mulligan at [25], [26]; Mr W Moule at [30];
- pages 9, 12, 14
and 16 of the Super Save scheme Memorandum and the evidence of witnesses in
relation thereto (Ms Canham at [35]; Ms
Mulligan at [42]; Mr K Moule at [41]);
- page 14 of the
Prestige scheme Memorandum;
- pages 6, 10 and
14 of the Best Fund scheme Memorandum (and evidence of Mr Hogno at [26] (a) and
(b); Mr B Moore at [42]),
- page 5 of the
888 Fund Memorandum;
- p 3 of the
Master Fund power point presentation ("Master Fund Important Notice" and
evidence Ms Dong at [80] as to the provision of
copies of this presentation to
potential investors from about 2006 to 2007 in presentations conducted by Ms Li
and Mr Collard;
- p 3 of the
Barclaywest power point presentation ("Barclaywest fund Important Notice") and
evidence of Ms Dong at [162], [164] in relation
thereto;
- p 8 of a power
point presentation ("Super Save Returns of the Fund") given to potential
investors in the Pinnacle Fund - Ms Dong at
[116].
- As
to statements from which the Principal Protected Representation is said to be
implied (concerning types of investments made by
the Hobbs Scheme or schemes,
including the purchase of US Treasuries to protect their principal), ASIC relies
on the evidence in
relation to the allegation at [48](j) as to oral
representations to the effect that investor's money would be used to buy
bond/debentures/US
Treasuries and the principal amount invested would be
guaranteed; and the evidence relied upon in support of the allegations in
[282(a)]
(as to the Trading Representation), [282](b) and [285](d) and [288](b)
( as to the Capital Protected Representations to potential
investors in
Integrity Plus, Super Save and Master Fund); [285](a) and [288](a) (as to the
Investment Representations to potential
investors in Integrity Plus and Master
Fund); [289](a) as to the A+ Representation to potential investors in First
Secured Bond Unit
Trust.
- ASIC
points to evidence of Mr Hobbs making two types of oral representations as to
the principal (or capital) invested in the funds
being protected.
- First,
the making of general statements as to the security of the investment. For
example, [10] of Mr Blow's affidavit gives evidence
that Mr Hobbs said words to
the effect "I know of a capital guaranteed fund that guarantees a certain
percent return each year."
- Second,
statements which refer to the capital being protected by US Treasury Notes (Mr
Jouravlev at [71] and [89]; Ms Huang at [132];
Mr Koutsoukos at [118]; and Mr
Truong at [232]). An example of the latter representation is at [118] of Mr
Koutsoukos' affidavit,
to which I have earlier referred.
- There
is certainly evidence of Mr Hobbs making statements to potential investors in
which he gives as an example funds that he said
are capital guaranteed. Although
those might be said to be general references that are not necessarily misleading
of themselves,
it is instructive to see how Mr Hobbs explains the meaning of a
capital guaranteed fund. Mr Jouravlev, for example, refers to his
notes taken at
the third "Hobbs seminar" he attended and gives evidence that Mr Hobbs said
words to the following effect:
In the first quarter of 2004 we are launching a new kind product with a
capital guarantee. It makes money in AAA insurance underwriting.
It is backed by
US Treasury bills, and doubles every 5.7 years. The capital guarantee is backed
by Chase Manhattan Bank. After a
period of time your capital is guaranteed to be
worth 100% of what you originally put in.
- The
message that an unsophisticated investor would take from the above must be that
the amount invested in such a fund (ie, the capital)
would be guaranteed; that
it would be backed by US Treasury bills; and that the named financial
institution (if one invested in that
fund) was guaranteeing that capital (so
that all that was at risk would be the return from that invested capital). The
manner in
which the US Treasury bonds were purchased and used as support for
leveraged accounts in which the losses could exceed the amount
of the bonds
themselves makes such a representation demonstrably false.
- Mr
Jouravlev says that at the next seminar, Mr Hobbs further explained this as
being:
We have a new capital guaranteed fund that pays profit. It pays 4 to 5% per
month. The capital guarantee is provided by a US Treasury
bill. From each $100
invested, $60 is put into the US bond, which will mature in 5 years to be worth
$100. The remaining $40 is leveraged
and traded. This is where we make our
money.
- True
it is that Mr Hobbs suggested to some investors (as indicated in the above) that
only part of the money would be invested in
US Treasuries, but he nevertheless
suggested that the investors' capital would be protected at least to the extent
of the amount
represented by the Treasuries.
- Similar
statements were made to others (Ms Huang, Mr Koutsoukos and Mr Truong). Mr
Truong gives evidence of a statement that:
When we purchase the Treasury note, it protects the capital. Every dollar,
they pay, they secure 80%. They leverage the 20% 3 times
and that's how they
trade. When it comes to mature to 5 years, you get your capital back. It has a
AAA rating. It's a lot better
than the US government. Only certain people can
have access to buy treasury notes, not everyone can go and purchase it.
- At
[118], Mr Koutsoukos deposes to Mr Hobbs having said the
following:
Hands up who has invested in blue chip companies? Recently we have seen even
large companies that have gone bad, like Enron and they
were considered blue
chip. A company can go broke. A government will never go broke. Our investment
vehicles are backed by US government
treasuries.
We use treasuries as security. They are government backed. The security of a
treasury is safer than the security of the Commonwealth
Bank because a bank can
collapse. But it is very hard for a government to collapse.
- A
very similar statement can be heard on the DVD Seminar. Again, while Mr Hobbs
seems to accept that there is evidence on the DVD
Seminar of the statements he
made on one occasion from which this allegation can be tested at least in part,
he submits that, at
its highest, what he there said was that there were funds
(not available in Australia) that provided for principal protection. He
maintains that there was no specific representation that any particular fund was
so protected. The context in which those statements
were made (and followed by
the provision of private placement memoranda in which there are clear statements
to the effect that principal
is protected) makes it clear that what Mr Hobbs was
representing was that there were funds available to which FTC subscribers could
have access where their funds would be capital guaranteed or principal
protected. That was simply not the case for the funds in question
in these
proceedings.
- As
to Ms Li, there is evidence from a number of investors as to the representations
made by her that the money invested in the funds
she was promoting was protected
by T-bills or Treasury notes or US bonds. These representations were frequently
made in the context
of assuring a potential investor that their capital would be
safely guaranteed, such as stating:
I promise that you won't lose your capital with this investment. If we take
$1 of an investment, then 40c is used to invest in the
stock market and thus
will grow three times in $1.20 or more. The 60c is used to buy American bonds.
The American bonds are like
insurance, so you can always have your capital back.
The US government have given us a guarantee. Your principal is always
guaranteed.
As long as you give 1 month's notice, you can get your capital back.
This investment is so secure. (Xu at [23])
- Ms
Xu quotes Ms Li as also saying on other occasions (and has a note of the second,
albeit that I could not read as it is in Chinese
characters):
If you invest $1 in Master Fund, your investment is sent to a clearing house
in the US. They will put 60c of that dollar to buy US
bonds. The rest is put
into some other investment scheme. This investment in US bonds is a very
safe, very conservative project because the money that it put into US bonds
means that it is
guaranteed that years later you will always get your money
back. The rest of your money is packaged for investment purposes.
...
The Master Fund is protected by the US Treasury. If you take 1 dollar
of an investment, 60 cents is invested with the US Treasury. Back in 1999 when
the financial world had a lot
of trouble and people lost money, the Master Fund
achieved 20%-40% return. It is very secure and very good. It is protected by
the US government. (my emphasis)
- Mr
Zhang gives similar evidence of representations by Ms Li. Significantly they
were made in the presence of Mr Hobbs. Ms Dong gives
evidence that at a meeting
in which Mr Collard was present, Ms Li made similar statements:
There is no risk because this fund will buy 80 per cent or 90 per cent of
money in the fund will buy an American treasury bond. We
can't talk guarantees,
nothing's guaranteed in this world but is more secure.
Your personal guarantee is nothing because you are the bankrupt and then a
company guarantee maybe little bit better and the bank
guarantee maybe even
better than a company but the government give you guarantee. The treasury bond
is like a safety net. You will only lose your money if America is
bankrupt.
The other money will go to the trading, the trade for profit. (my
emphasis)
- As
to Mr Collard, Mr Hogno and Ms Dong give evidence that Mr Collard made
statements to the effect that the "investment would be capital
guaranteed by US
Treasury Notes" (Hogno at [74]) or "protected by a T-Bill" (Dong at [68] and
[98]). In the case of Ms Wu, Ms Gao
gives evidence of a conversation with Ms Wu
in June 2007 where Ms Gao asked, in relation to investment opportunities
available through
FTC, whether investment capital was secure and where Ms Wu
responded that it was (at [9]). Ms Gao also gives evidence of a later
conversation in 2007 where Ms Wu reassures her that her "capital is not lost. It
is guaranteed".
- ASIC
points to the evidence of Mr Handebo and Ms Camilleri to the effect that Mr Wood
made representations that their money was "absolutely
guaranteed" and "capital
guaranteed by the purchase of US bank bills" (Handebo at [48]; and Camilleri at
[36] and [72]). Mr Wood
also gives evidence of his own practice in promoting
Integrity Plus and Super Save to make representations that the investment in
those funds was protected by the purchase of Treasury STRIPS (at [53]; [288];
[297]; [531] and [523]). An example of such a representation
(which he says was
indicative of his usual practice) is given at [523]:
Your investment in Super Save will be protected by treasury STRIPS. A portion
of the investment is bought by Treasury STRIPS and they
are held until they
reach maturity, which is 8 years hence. When they reach maturity they will
replenish the money to the full extent
to which the money is invested. The most
you'd have to wait is 8 years to get your money back.
- As
to Mr Truong, he also gives evidence that, in the course of promoting Integrity
Plus and Super Save, it was his practice to make
representations that the
investment was protected by a T-bill. For example, he attests at [182] that he
would say that the "[c]apital
was protected by the T-bill" and at [298] that the
"fund is covered by the Treasury notes...the Treasury Note matures in 5 years,
then you get your capital back".
- Ms
Canham and Ms Mulligan give evidence that Mr Koutsoukos, in course of promoting
Integrity Plus and Super Save, would make representation
regarding the fund
being "secured by US Treasury STRIPS" (Ms Canham at [7] and [14]; Ms Mulligan at
[24]). Ms Canham's evidence at
[7] goes on to note that Mr Koutsoukos said that
upon maturation of the Treasury STRIPS (in that case, after 12 months), she
would
be able to request her capital back with 60 days notice.
- Mr
Blow gives evidence at [88] that when he queried Mr Clements as to the statement
in the fax he had received to the effect that
for the Elite Premier fund the
investment was "capital guaranteed", Mr Clements responded that the "overall
capital amount is insured"
as the "insurance company that insures the capital
takes out a treasury note to the value of the invested capital":
The investors' funds are pooled. The overall capital amount is insured. The
fund trader trades daily and only trades with a small
amount of capital at a
time. And only one trade is open at any one time and each trade is closed before
the next one is opened. This
means that only a very small percentage of the
capital is at risk at any one time.
The insurance company that insures the capital takes out a treasury note to
the value of the invested capital.
- Mr
Jennings made similar statements according to Mr Handebo at
[5]:
Your money is absolutely guaranteed by the American government and you will
be given Treasury STRIPS showing where your money is and
showing the guarantee.
The only way you will lose your initial investment is if the American government
collapses.
- This
is consistent with the evidence of Mr K Moule that Mr Jennings said that the
money was "all capital guaranteed by the United
States Treasury" (at [11]) and
the general evidence of Ms Gemmell that Mr Jennings represented that the money
invested with Super
Save would be "very safe" as the scheme was "foolproof" (at
[4]). Ms Huang gives evidence at [27] of Mr Fitzgerald stating that the
"money
is safe" when invested with Covered Strategies and that there was a risk
management strategy in place.
- ASIC
points to a number of written statements to the effect of the Principal
Protected Representation, for example, statements in
the Integrity Plus
Memorandum contains statements to the effect that the fund trades in "AA+ rated
financial instruments" and that
the fund is protected "by virtue of being a non
depletion account". No risk to capital is discussed in the memorandum (the
section
headed 'Risk' dealing only with the risk due to difficulties in
conducting due diligence). These statements are not unique to the
Integrity Plus
Memorandum. They are repeated, for example, in the Master Fund Memorandum.
- A
frequent statement in the scheme memoranda was to the effect that the principal
would be protected or the fund secured with a Treasury
note or bill. The Super
Save memorandum refers to the purchase of a Treasury note with 60% of the
invested fund and then represents
that the fund is protected by these Treasury
notes, which "on maturity yield 100% of the investing capital". This
representation
is then repeated under the section titled 'Risk' in the
memorandum. Similarly, the Best Fund Memorandum, under the heading 'Investment
Objectives and Fees', notes that "capital protection on the fund is by way of US
T/notes which have a maturity date of 5-8 years".
Similarly worded
representations as to capital protection by a Treasury note are also featured at
page 3 of the Master Fund PowerPoint
and page 3 of the Barclaywest Important
Notice.
- In
general, in response to the alleged Scheme Representations relating to the
funds, Mr Hobbs submits that, on ASIC's own case, potential
investors were told
to seek further information from KLM or OEM (at [60] of the pleading) and says
that until they had receipt of
that information investors did not know what
funds were available for investment. He notes that the same material that
provided investors
with information as to specific funds also provided investors
with an assessment of the risk of the investment. Mr Hobbs directs
attention to
the documentation in question (the KLM material containing a précis of
the funds, the provenance of which, or
Mr Hobbs' involvement in the provision of
which, is a matter in dispute) as to the level of detail provided of the risks
of investment
in the respective funds.
- It
is submitted that insofar as a particular fund elected to be capital guaranteed
or not that was a matter for the fund administrators
"possibly on the advice of
Ms Reisinger" and was entirely outside Mr Hobbs' control. Similarly, it is
submitted that insofar as there
were terms and conditions as set by traders,
those were matters for the fund administrators either to accept or choose
another fund
manager and entirely outside Mr Hobbs' control. Mr Hobbs submits
that "At most I could give non-specific and general educational
information".
- Mr
Hobbs submits that insofar as the fund administrators caused scheme
documentation to be prepared it was based on material prepared
by Mr Becker and
the scheme administrators would make such amendments as were appropriate. He
further submits that "regardless of
any comments I might have made at the
seminars" in choosing a fund in which to invest investors must have had regard
to the information they received from the fund
administrators.
- Mr
Hobbs argues that it is difficult to see how there can be reliance on a general
statement "when there has been a choice of a specific
product". I am not certain
precisely what Mr Hobbs is putting forward by this submission. If he is here
submitting that it is not
likely that a general statement of this kind would
mislead or deceive investors who have (subsequently to the making of the general
statement) received information as to a specific product, then would be likely
to turn on whether the specific product advice corrected
the representation. If
it is suggested that the ability to choose between products necessarily removes
any misleading quality from
a general statement of that kind, I do not agree. (I
note that for the purpose of determining whether damages had been suffered in
reliance on a misleading statement requires proof of reliance, but proof of
actual reliance is not necessary where the allegation
is that a statement is
likely to mislead or deceive).
- As
to the information provided to potential investors about the funds, Mr Hobbs
asserts that it could not have emanated from him because
it was the fund that
chose the particular investment products and decided upon the terms under which
the traders operated (or agreed
to accept those offered by traders). (He points
out that the agreements with the Cadent traders were signed by the
directors/officers
of the fund and not by him.)
- In
that regard, there is evidence (for example from the J&B Financial officers,
when they depose to the statement by Mr Hobbs
that he would set up a fund for
them that would trade in commodities) that Mr Hobbs did direct the nature of at
least some of the
products in which particular funds were to invest
(significantly, in relation to the Covered Strategies Fund, he did so in writing
when giving instructions to Mr Fitzgerald as to the LEAPS strategy).
Furthermore, to the extent that the private placement memoranda
followed a
standard template provided by or on behalf of Mr Hobbs, it might reasonably be
concluded that general statements as to
the investments of the particular funds
derived from Mr Hobbs.
- In
circumstances where the scheme administrators by and large had little financial
experience it is not credible to suggest that they
prepared the précis
information (or the risk assessments of the funds) themselves (and there is no
evidence that this was
prepared for them by Ms Reisinger or others at New World
Holdings (other than that there was some discussion at the 2007 traders'
meetings in Chicago as to the trading strategies and perhaps as to the traders'
returns).
- I
note that the question of the source of the précis information was the
subject of inconsistent evidence from Mrs Watson.
In chief, when
asked:
Q. And was sometimes that information provided to you from the fund managers
by Mr Hobbs?
A. No, I don't think so. There was no need. He had no information in his
office on these funds. Those fund managers managed their
own funds.
- That
answer was inconsistent with the evidence Mrs Watson had given on that topic
when she was examined in her s 10 examination in
New Zealand in May 2009. Mr
Halley therefore sought and I gave leave for him to cross-examine on the answer
extracted above.
- In
that cross-examination, Mrs Watson maintained at first her denial that sometimes
the information with respect to each of the individual
funds was provided to her
by Mr Hobbs and denied that Mr Hobbs would give to her a document containing a
description of the funds'
investment activities and ask her to include it in the
KLM Enterprises document (that was forwarded to investors as part of the OEM/KLM
process). Faced with the inconsistent evidence she had given in 2009, Mrs Watson
then conceded that it was possible that Mr Hobbs
did have the information from
the fund managers and that it was possible that he had passed on to her the
information from them but
said "Well, it's not how I recall it now" (and gave an
explanation as to the stress she was under at the time of the s 10 examination
and suggested that "sometimes we were talking at crosspurposes").
- There
was the following exchange:
My recollection is that my recollection is that certainly most of this
information was given me by the fund managers. If David had passed on some of
their
information from them, so be it, but that's how my recall is now.
Q. It's possible that Mr Hobbs may have passed on information that he said
he'd received from fund managers to you, isn't it?
A. That's just what I said. That's possible, but most of this I recall that
it was sent to me by the fund managers. If David passed
that on from one of the
fund managers, well, I don't know. He didn't David didn't run these funds. (my
emphasis)
- The
assertion by Mrs Watson that Mr Hobbs did not run the funds (volunteered as
seeming explanation for her recollection that most
of this information was sent
to her by the fund managers) does not appear to have been based on any knowledge
by Mrs Watson of what
was involved in the running of a fund and nor (as she
accepted) did she have any involvement in the operation of any of the funds
included in the KLM letters (other than sending the précis on the funds).
Therefore, the conclusion expressed by Mrs Watson
is one the foundation for
which cannot be tested. (Mrs Watson denied that her knowledge was based almost
exclusively on what Mr Hobbs
told her as to his involvement in the running of
the funds, but there was no basis put forward as to how she had formed her
conclusion
in that regard.) I am unable to place any weight on the view there
expressed by Mrs Watson.
- Mr
Hobbs submits that, to the extent that ASIC has particularised the Principal
Protected Representation by reference to statements
contained in the fund
documents (paragraph (iv) of the particulars to [279](b)), Mr Hobbs submits that
this confirms that the representations
were made by the "fund" and its
directors/officer, not by him. Such an argument does not take into account the
oral representations
made by him of which there is evidence, nor the evidence
that fund documents were provided by him. (Nor does it address the contention
that representations made by fund administrators were made on his behalf or as
his agent, though I accept that this is firmly denied
by Mr
Hobbs.)
- In
the interests of space, I have not set out the entirety of the material which
supports this or the other allegations as to the
representations. Suffice it to
say that there is abundant evidence of the making of statements of the kind
alleged and that I consider
that to an unsophisticated investor of the kind to
which these statements were made they would convey the meaning for which ASIC
contends.
- I
find this allegation to be established.
Whether the Principal Protected Representation was false in a material
particular, materially misleading, misleading or deceptive
and likely to mislead
or deceive [281(b)]
- The
Principal Protected Representation is said to be false in that there was a risk
of investors losing the principal sum invested
in each of the Schemes because of
the risks associated with the type of investments made using the funds invested
in each of the
Schemes, including the type of derivatives trading carried out in
the Cadent Accounts, the extent to which that trading was leveraged
to permit
further speculative trading, the possibility of large losses resulting from the
trading and the fact that the cash and
US Treasuries credited to the Cadent
Accounts were a margin or deposit for the derivatives trading and were therefore
at risk at
all material times, and that none of the investments was secured. (In
relation to Integrity Plus, it is alleged the risk of loss
of the principal sum
was also due to the fact that some of the funds were disbursed in purported but
not real investments, such as
the payments to the late Mr Brock and to the
entity associated with Mr Graham (Tractor) Tomlinson, for which there was not
even lip
service paid to the documentation of a loan arrangement in relation to
moneys paid out of the pooled funds in the scheme account.)
- I
accept that the evidence establishes that all of the funds that invested in each
of the Cadent Accounts were at risk and that, because
of the leveraging of those
investments, it was possible (as Ms Reisinger explained) to lose more than 100%
of the funds invested
in any of the Cadent Accounts (EX AO
pp736-737).
Whether each of Mr Hobbs, Ms Li, Mr Collard, Ms Wu, Mr Wood, Mr Truong,
Mr Koutsoukos and FTC made the Investment Returns Representation
[279(c)]
(namely that each investor could generally expect to receive returns in the
order of at least 3 to 4% per month on funds
invested in the Hobbs Scheme, and
further or alternatively each of the Schemes - although the Pinnacle Fund the
representation was
of an annual rate of return that equated to about 2.5% per
month).
- ASIC
relies for the allegation that the Investment Returns Representation was made by
each of the above on the following evidence
of the making of oral statements to
this effect:
(i)by Mr Hobbs (Blow at [10], [14], [31]; Ormond-Allen at [18];
Marciniak at [33]; Gahan (at [24], who says that Mr Hobbs said in about 2005 "I
am running several funds. One of them is called Prestige. Investment funds in
Prestige go to the large trading houses in the US.
The return on investments in
Prestige is 3% per month. Investments in Prestige are secured by US treasury
notes that will mature
in the future"), Jouravlev at [71] (whose recollection of
what was said by Mr Hobbs at the seminars he attended is remarkably similar
to
that on the DVD Seminar); Koutsoukos at [74], [120], [207], [332]; Dong at [99];
Huang at [16] -[19] (and the documents she says
were handed out at seminars),
[20], [23], [29], [38], [103], [132]; Wood at [145], [146]);
(ii)by Ms Li (in relation to Master Fund (Xu at [17], [23], [60] ,
[78] , [88]; Zhang at [147], [223], Huang at [155], Dong at [70]); in relation
to First Secured Bond Unit Trust (Huang at [86], Zhang at [107]); in relation to
Best Fund (Zhang at [150]); in relation to Super
Save (Zhang at [361], Xu at
[78], [88]); in relation to Pinnacle Fund (Gao at [10]); in relation to Smart
Money (Zhang at [38]);
in relation to Covered Strategies (Zhang at [68], [69],
[105]; Huang at [103]) in relation to Solid Gold (Zhang at [38]); in relation
to
other funds (Huang at [9], in relation to a car club investment, in early 2003 -
reminiscent of what Mr Hobbs had said more than
once by way of explanation as to
arbitrage in the DVD Seminar, Zhang at [10], [90], [150]; Dong at [68]; Xu at
[115]; MacDonald at
[11].
(iii)by Mr Collard (Hogno at [74](e); Jouravlev [10], [13], [22], [98]
(the last in relation to a representation on telephone call, not at meeting]);
MacDonald at [11]; Dong at [68]);
(iv)by Ms Wu (Gao at [9], [37], a minimum 30% return in relation to
Super Save);
(v)by Mr Wood (Wood at [53] as to his practice to say at client
meetings "They're at a far greater rate than bank interest. For instance, if you
took them at 4% per month you'd get 48% per year which is much greater than the
current interest rate with the banks", [288](b) as
to his usual practice when
promoting Integrity Plus - "Integrity Plus is paying returns of 4% per month
best efforts. Best efforts
means that it's the best it would do. But on this
fund we've said that 4% will be the result all the time. So it will pay each
month.
After one month, your money will start working for you and after 2
months, you'll get the first return. After that, it will be monthly.
You'll get
4% per month ad infinitum", at [523] as to his usual practice when speaking to
clients about Super Save - "Super Save
is a new fund. It's starting off. So it's
probably not going to be generating as much of a return as the other fund. In
fact in the
memorandum it says it's returning about 3.5% but we anticipate it
will grow"; Camilleri at [5], [24], [72], [90]; Mulligan at [40]);
(vi)by Mr Truong (Truong at [182] as to his usual practice when
promoting Integrity Plus to say "Best efforts means that it could make 4% per
month,
or it could make less. It's not an indication that it will make 4% all
the time. The average person cannot access the wholesale market.
The average
person like me can only access the retail market, which is paying 6 or 8%. You
can make anything like 3-4% per month
best efforts in the wholesale market",
[62] ,[67], [119], [298] as to his practice when promoting Super Save;
Koutsoukos at [13]);
(vii)by Mr Koutsoukos (Canham at [7],[14]; Mulligan at 24]).
- ASIC
also points to statements contained:
- on pages 6 and
10 of the Integrity Plus Memorandum (Millington at [22], [23], [45], [47], [62],
[63]; Canham at [53]; Camilleri at
[84], [108]; Mulligan at [25], [26]; W Moule
at [30]);
- on pages 7 and
12 of the Super Save Memorandum (Mulligan at [42]; K Moule at
[41]);
- pages 6 and 10
of the Master Fund Memorandum (B Moore at [42]);
- on pages 6, 10
and 14 of the First Secured Bond Unit Trust Memorandum (Hogno at [26] (a) and
(b); Zhang at [114]; Jouravlev at [62],
[63]);
- on pages 6 and
10 or 13 of the Smart Money Memorandum (Zhang at [43], [45]; Lewis at [17],
[18]);
- on pages 6 and
10 of the Elite Premier Memorandum (Zhang at [48], [76]; Russell at [30],
[33]);
- on pages 6 and
10 of the Elite Premier Option Two Memorandum (Jouravlev at [102], [103]; Lewis
at [17], [18]);
- on pages 6, 10
and 14 of the Covered Strategies Memorandum (Hogno at [26] (a) and (b); Natasha
Marciniak at [38]; Ormond-Allen at
[33]; Zhang at [98], [101]; Russell at [29],
[33]; Jouravlev at [62], [63]);
- on pages 6 and
10 of the Best Fund Memorandum (Hogno at [26] (a) and (b); Zhang at [178],
[181].
- ASIC
also relies on what was contained in the KLM faxes (including the history of the
funds, type of investment, the performance of
the fund, the risk rating of the
funds, contract period and the expected returns on a best efforts basis) (Hogno
at [22]-[23]; Marciniak
at [36], Huang at [64], Blow at [30], [32], Zhang at
[34], [35], [76], [285], Russell at [23], Jouravlev at [58]-[59]; Lewis at [14],
Truong at [204].
- As
to statements from which ASIC contends the representation concerning the rates
of return achieved and achievable in the offshore
wholesale investment market
generally and by investment in the Hobbs Scheme, and further or alternatively
each of the Schemes, can
be implied, reliance is placed on the evidence in
support of the alleged Investor Representation as to wholesale returns ([48](h))
and for returns of 3%-4% per month ([48](i)).
- ASIC
relies, for the contention that the said representation can be implied from the
Master Fund Presentation on the contents of the
Master Fund Presentation and the
evidence of Ms Dong at [80] that, in the period from about 2006 to 2007, copies
of PowerPoint slides
on the Master Fund PowerPoint were provided in
presentations to potential investors conducted by Ms Li and Mr Collard at which
she
was present.
- In
relation to the alleged Investment Returns Representation, Mr Hobbs submits that
there is no evidence that he made any representation
as to the return on any
particular fund. He asserts that his comments were entirely "non-specific" and
he repeats the submissions
made in relation to the Principal Protected
Representation.
- I
accept that the evidence establishes that Mr Hobbs made frequent references to
the rate of investment returns of various funds,
including Prestige (Gahan at
[24]), Covered Call (Wood at [145]-[146]) or Covered Strategies (Jouravlev at
[71]; Huang at [16]-[19];
[29]; [38] and [103]), Integrity Plus (Koutsoukos at
[207]), Solid Gold (Jouravlev at [71]) and Elite Premier (Huang at [132]).
- These
representations were either representations regarding past performance of the
fund (for example, Ms Huang gives evidence at
[29] that Mr Hobbs represented
that Covered Strategies "did 21% last month") or representations as to the
projected future performance
of a fund (for example, in relation to Elite
Premier, Mr Wood at [146] gives evidence that Mr Hobbs said the fund did 25% per
month
and "could go higher"; and Ms Huang gives evidence at [103] that Mr
Hobbs made statements such as "Covered Strategies will return 4% every
month").
- A
number of witnesses also give evidence that, in addition to making specific
representations regarding the performance of a particular
fund, Mr Hobbs also
would refer to the performance of anonymous funds that he was not allowed to
name. For example, Mr Blow gives
evidence (at [31]) of Mr Hobbs referring to
funds which made 2-3% per month and then speaking of one that made 300% over the
past
few weeks, while prefacing that information with the comment that "I can't
mention the funds by name". Another example is given in
the evidence of Mr
Koutsoukos where at [74] he describes Mr Hobbs stating to him that "[a]n exact
fund like the one you're getting
made 4000% last year." Although these
representations did not directly relate to a particular named fund, the
anonymous way in which
Mr Hobbs discussed these purported funds would have
facilitated the extravagant nature of the claims he made.
- The
evidence of statements as to rates of return linked to particular types of fund
(and some named funds, including Mr Diaz' Express
Fund) is consistent with the
statements that can be heard on the DVD Seminar.
- As
to Ms Li, ASIC points evidence that Ms Li made representations as to the rate of
investment returns in relation to funds including
the Master Fund (Xu at [17],
[23], [69], [78] and [88]; Zhang at [147] and [223]; Huang at [155]; and Dong at
[70]); the First Secured
Bond Unit Trust ( Huang at [86]; and Zhang at [107]);
the Best Fund (Zhang at [150]); 888 (Super Save) (Xu at [78] and [88]; and
Zhang
at [361]); Pinnacle Fund (Gao at [10]); Smart Money (Zhang at [38]); Covered
Strategies (Zhang at [68], [69] and [105]); and
Solid Gold ( Zhang at [38]).
- Although
the rates of return cited varied according to the specific fund referred to, the
representations were similar in the sense
that they were made in an unqualified
manner and expressed with certainty. For example, in relation to the Master
Fund, evidence
is given that Ms Li said:
Back in 1999 when the financial world had a lot of trouble and people lost
money, the Master Fund achieved 20%-40% return. It is very
secure and very good.
It is protected by the US government.
The return you will receive each month from your investment in Master [sic]
will be different, but your goal is to have at least 4%
per month, so you'll
make at least 40% per year.
- Ms
Li also made more general statements regarding funds accessible should potential
clients join FTC without specific reference to
a particular fund. For example,
at [90] of Mr Zhang's affidavit, he gives evidence of Ms Li saying, in an early
2004 meeting, that
"[t]he funds David Hobbs runs [sic] make between 2 and 5% per
month".
- As
to Ms Wu, ASIC points to the evidence of Ms Gao at [9], where she gives evidence
of Ms Wu representing that an investment in the
'888' fund had at least 30%
returns per year. Although in that same conversation Ms Wu says that "there is
no guarantee", this is
qualified in the context where Ms Wu also says that "it
gives higher returns than normal" and that "there is no risk involved".
- In
addition to the evidence of investors in the schemes with which he was related,
Mr Wood gives evidence of his own practice, noting
at [53] and [288] that he
made representations in relation to Integrity Plus that it would return 4% per
month and at [523] that
Super Save would return 3.5% per month but that this
rate was anticipated to grow.
- Mr
Truong similarly gives evidence that it was his usual practice when promoting
Integrity Plus to say (at [182]):
Best efforts means that it could make 4% per month, or it could make less.
It's not an indication that it will make 4% all the time...
You can make
anything like 3-4% per month best efforts in the wholesale market.
- His
evidence is also that he made similar representations about investment returns
when promoting the Super Save fund (at [298]).
Mr Koutsoukos also gives evidence
as to representations of returns made by Mr Truong (at [13]).
- Again,
there is abundant evidence for the making of investment return representations
by the various FTC executives and scheme administrators
and it seems to me to be
an inescapable conclusion that this was what Mr Hobbs encouraged FTC executives
and introducers to do (particularly
by reference to what was said at the DVD
Seminar).
- As
to written statements regarding investment returns, there are numerous examples
contained in the various scheme memoranda (such
as for Integrity Plus, Super
Save, Master Fund, First Secured Bond Unit Trust, Smart Money, Elite Premier,
Elite Premier Option Two
Unit Trust, Best Fund and Covered Strategies), and in
KLM correspondence with various potential scheme investors.
- In
the scheme memoranda, the representations are generally in similar form (such as
that in the Covered Strategies Private Placement
Memorandum, under the heading
'What returns will I get', where it is said "Best efforts basis. Approximately
5% per month paid quarterly
in arrears".) Where there was variation was as to
the rate of return that was specified. However, in general (there being a
difference
with the Pinnacle Fund) the statement was in similar form and
commonly there was a nominated rate (on a monthly basis) and the words
"best
efforts".
- As
to the statements in the KLM correspondence, an example can be found in the
correspondence that was sent to Mr Jouravlev. After
the list of funds, with the
risk scale identifying the degree of risk associated with each fund, there are
short descriptions of
each of the funds on the list. In each case there is a
statement as to returns. So, for example, the projected returns for the Covered
Strategies fund are stated to be "5% per month. Best effort" and it is said "to
date three to four month's results have been in the
10% to 20% range per month."
Other funds the subject of these proceedings described in this document include
Elite Premier, Elite
Premier Option Two Unit Trust, Express Fund, Smart Money
and Solid Gold. (Some of the fund descriptions include a note that past
performance is not indicative of future returns, such as for Solid Gold,
although this is not a common feature of all the descriptions
for the various
funds.)
- The
question is not whether statements as to returns were made (as they clearly
were) but what would have been understood by the audience
to whom those
representations were made, bearing in mind the context in which it was made
(including, that in the private scheme
memoranda there was usually the "best
efforts" qualification and statements as to there being "no guarantee" or as to
the nature
of the risk and that investors should only invest "discretionary"
capital or money that they could afford to lose. I consider this
below when
addressing the question whether the statements were misleading or deceptive.
- For
present purposes, I simply note that there were numerous representations made to
investors that they could expect to receive a
rate of return on their
investments (on a "best efforts" basis) of a specified amount (usually around 4%
monthly) and that in each
case the rate of return was much higher than the
retail rate of return on onshore investments. (Mr Hobbs himself was at pains to
distinguish between retail/wholesale returns at the DVD Seminar and in the
February 2003 seminar attended by Mr Blow.)
Whether the Investment Returns Representation was false in a material
particular, materially misleading, misleading or deceptive and
likely to mislead
or deceive [281](c)
- The
Investment Returns Representation is said to be false in that the funds were not
invested in investments that could regularly
produce returns in the order of at
least 3% to 4% per month for investors since: administrators did not invest 100%
of the funds
deposited by investors (reference being made to Ex A and Ex BG and
the Scheme Spreadsheets); some of the funds were invested in the
Cadent accounts
in commodity futures contracts, commodity option contracts, cash commodities and
related transactions, for which
there was no basis to make the representation
made as to returns; and, in the case of the Integrity Plus, Super Save and
Master Fund,
the funds invested did not in fact produce returns in the order of
at least 3% to 4% per month (Ex A table 162 Master Fund return
payment
spreadsheet, table 163 Super Save return payment spreadsheet and table 165
Integrity Plus return payment spreadsheet).
- I
find that the representation was false and that it was materially misleading and
deceptive or likely to mislead or deceive. As noted
earlier, the misleading or
other quality of the impugned statement must be assessed by reference to the
audience to which it was
made.
- Here,
the audience was one comprising friends or relatives of those promoting the
investments or those to whom by word of mouth the
investments had become known.
There was no evidence of any public advertisement of the schemes (and the
material handed out to prospective
investors makes it unlikely that there was
any such public advertising - given the emphasis on confidentiality in relation
to the
investment). It is significant, as I noted earlier, that Mr Hobbs
understood the audience for his FTC education packages (and the
audience to whom
he was so altruistically making available the opportunities for high returns
that he said the government and banks
were trying to keep from them) to be the
"mums and dads" - not the sophisticated investors.
- The
combination of statements made in FTC seminars and meetings as to historically
high levels of returns and the "best efforts" statements
in the written material
issued in respect of the particular fund in which an investor was proposing to
invest (coupled with the emphasis
on risk in the context of a difficulty to
carry out due diligence on an offshore company - which difficulty was presumably
being
suggested to be alleviated by the thousands of people researching matters
worldwide for FTC and/or KLM and the educational material
distributed by FTC)
makes it likely in my view that an unsophisticated investor would be expected to
focus on the upside of the investment
and to discount the stated risk. That is,
of course, exactly what Mr Hobbs seems to have expected (having regard to the
comments
made by him at the DVD Seminar).
- The
presence of a seemingly scientific "risk scale" and the references to
investments being "capital protected" or fully secured would
in my view also
lessen the impact of the disclaimers made as to past performance not being a
guarantee of future performance and
cautions against investing more than one
could afford to lose. (It is a moot point as to what would be understood by an
unsophisticated
investor as to the meaning of "discretionary capital" for
example.)
- As
to the "best efforts" qualification itself, Mr Halley submits that, to the
extent that it has any effect, it qualifies that the
precise return of 3-4% may
not be achieved every month (but that in context it represents that such a
return is not only possible
but in the order of magnitude of what is likely to
be achieved and hence the representation is false).
- I
do not consider that the effect of the qualifications as to best efforts, or to
there being no guarantee, are sufficient to remove
or counteract the misleading
effect of what was said. I think it is fair to say that the likely impression
conveyed to an unsophisticated
investor would be that it was likely that the
investment would achieve a return of around 4% per month, not that the
investment might
make no return at all for any number of
months.
- The
reaction of investors to this kind of representation is evidenced by the
affidavits relied upon by ASIC in the proceedings. Ms
Xu, for example, was told
by Ms Li, in effect, not to worry about the disclaimer (because that was just
something that the administrators
had to say) and that the investment would be
perfectly safe.
- Therefore,
I do not accept that the statements as to risk or the "best efforts"
qualification contained in the written material (or
made orally) had the effect
of erasing the misleading nature of the Investment Returns
Representations.
- Particular
Scheme Representations
(i)Integrity Plus Representations
- At
[282] it is alleged that, in the period 2004 to 2007, each of Mr Hobbs, Mr Wood,
Mr Truong, Mr Koutsoukos and PJCB made the following
representations
(collectively referred to as the Integrity Plus Representations) in Australia to
potential investors in Integrity
Plus:
(a)that the investor's funds would be traded in AA+ rated financial
instruments (the Trading Representation);
(b)that the capital of funds invested would be protected by US Treasuries
(the Capital Protected Representation);
(c)that once funds had been invested for at least 12 months, each investor
would be able to redeem or withdraw the invested capital
upon giving 60 days'
notice (the Redemption Representation); and
(d)that each investor would receive returns of approximately 4% per month on
funds invested on a best efforts basis (the Returns Representation)
- It
is alleged that those representations were continuing ([283]) and that each was
false in a material particular, or materially misleading
or deceptive or likely
to mislead or deceive.
- By
way of particulars, each representation is said to have been express and either
in writing or partly in writing. The Trading Representation
is the only one said
only to have been in writing (contained on pages 6, 10 and 14 of the Integrity
Plus Memorandum).
- To
the extent that the remaining Integrity Plus Representations are said to have
been writing, the Capital Protected Representation
is identified as contained on
pages 10, 12 and 14 of the Integrity Plus Memorandum; the Redemption
Representation on pages 7, 9 and
13 of the Integrity Plus Memorandum; and the
Returns Representation on pages 6 and 10 of the Integrity Plus
Memorandum.
- In
that regard, the documents clearly contain such
representations.
- To
the extent that each of the representations was oral, the representation is said
to have been made by each of Mr Wood, Mr Truong
and Mr Koutsoukos on his own
behalf and on behalf of Mr Hobbs and PJCB to potential investors in the period
2004 to 2007 at FTC Seminars
and Investor Meetings.
- The
evidence on which ASIC relies for the contention that the respective Integrity
Plus Representations were orally made is as follows:
Capital Protected Representation (the capital of funds invested would be
protected by US Treasuries)
- This
is said to have been made orally by Mr Hobbs specifically in relation to
Integrity Plus (Koutsoukos at [230]) and in relation to unspecified funds
(Koutsoukos at [42], [91],
[118], [332], Truong at [232]); to have been made
orally by Mr Wood (Camilleri at [36], [72], [90]; Wood at [53], [297]);
to have been made orally by Mr Truong (Truong at [182]) and orally by
Mr Koutsoukos (Canham at [7]; Mulligan at [24]).
- ASIC
contends that when made by each of Mr Wood, Mr Truong and Mr Koutsoukos, the
representation was also made on behalf of Mr Hobbs
(on the basis that they were
his agents) and was also made on behalf of PJCB (on the basis that each was a
director or officer of
PJCB).
- I
accept that the evidence establishes that such representations were
made.
Redemption Representation (once funds had been invested for at least 12
months, each investor would be able to redeem or withdraw
the invested capital
upon giving 60 days' notice)
- ASIC
relies on the following evidence for the allegation that this was made orally by
Mr Hobbs (Wood at [33]); by Mr Wood (Wood at [288](b)]); by Mr
Koutsoukos (Canham at [7]).
- Again,
it is alleged that when made by each of Mr Wood, Mr Truong and Mr Koutsoukos,
the representation was also made on behalf of
Mr Hobbs (on the basis that they
were his agents) and on behalf of PJCB (on the basis that each was a director or
officer of PJCB).
- Again,
I accept that such representations were made (and they were in any event clearly
stated in the investment agreements). I find
that the representations were
false. There was no evidence of any mechanism available by which funds that had
been pooled for investment
purposes could be redeemed on 60 days' notice after
12 months. Rather, the agreement seemed to contemplate that if no redemption
notice was given then the investment would continue. That begs the question as
to what would happen if some of the investors wished
to withdraw funds and
others did not (particularly if those funds were being traded by Cadent traders
at the relevant time). Indeed
the complaint made in the submissions by Mr
Collard as to the losses occasioned when trading positions had to be closed in
order
to comply with orders for the transfer of the funds to Court, suggests
that even a 60 day withdrawal notice may not have been feasible.
In any event,
whether or not false as a matter of what was logistically possible, the
representations were clearly misleading or
deceptive and likely to mislead or
deceive, having regard to the fact that funds were being disbursed out of at
least some of the
accounts for unsecured investments (such as the moneys paid
out of the Secured Bond accounts for the Master Fund).
Returns Representation (each investor would receive returns of
approximately 4% per month on funds invested on a best efforts basis)
- ASIC
relies on the following evidence for the allegation that this was made orally by
Mr Hobbs (Koutsoukos at [74], [120], [207], [332]); by Mr Wood
(Wood at [288](b)], Camilleri at [72]); by Mr Truong (Truong at [182]);
and by Mr Koutsoukos (Canham at [7], Mulligan at [24]).
- Again,
it is alleged that when made by each of Mr Wood, Mr Truong and Mr Koutsoukos,
the representation was also made on behalf of
Mr Hobbs (on the basis that they
were his agents) and on behalf of PJCB (on the basis that each was a director or
officer of PJCB).
- I
have considered above the making of such representations as part of the
consideration of the scheme representations. I find that
such representations
were made. For the reasons set out above, I find that they were false,
misleading or deceptive in a material
particular, or likely to mislead or
deceive the audience of unsophisticated investors to which they were
made.
(ii)Super Save Representations
- At
[285] of the pleading it is alleged that in the period 2006 to 2007, each of Mr
Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL
made the following
representations (referred to collectively as the Super Save Representations) in
Australia to potential investors
in Super Save:
(a)that the investor's funds would be invested in AA+ rated financial
instruments which were presold (the Investment Representation);
(b)that the investor's funds would be invested in equities, currencies,
options, factoring, the secondary life insurance market, futures
and registered
derivatives;
(c)that the investor's funds would be invested with various fund managers
such as Bond's Viatical Markets, Registered Derivatives,
Factoring Funds and
Company Debentures, Shares/Options, Initial Public Offerings, Unit Trusts and
Currency Trading;
(d)the Capital Protected Representation (as earlier defined); and
(e)the Redemption Representation (as earlier defined);
(f)each investor would receive returns of approximately 3.5% per month on
funds invested on a best efforts basis (the Super Save Returns
Representation)
- It
is alleged that those representations were continuing ([286]) and that each was
false in a material particular, or materially misleading
or deceptive or likely
to mislead or deceive ([287]).
- By
way of particulars, each representation is said to have been express and either
in writing or partly in writing. Other than the
Capital Protected
Representation, the Redemption Representation and the Super Save Representation,
the said representations are only
said to have been in writing (contained on
pages 16 (for the Investment Representation), 7 and 16 for the representation in
(b) above
and 11 for the representation in (c) above, respectively of the Super
Save Memorandum.
- To
the extent that the remaining Super Save Representations are said to have been
writing, the Capital Protected Representation is
identified as contained on
pages 9, 12, 14 and 16 of the Super Save Memorandum; the Redemption
Representation on pages 8, 11 and
15 of the Super Save Memorandum; and the Super
Save Returns Representation on pages 7 and 12 of the Super Save
Memorandum.
- I
am satisfied that the representations alleged to have been made in writing were
made (and that read in context and by reference
to the audience to which they
were made, they were misleading and deceptive or likely to mislead or
deceive).
- To
the extent that each of those representations was said to have been partly oral,
the representation is said to have been made by
each of Mr Wood, Mr Truong and
Mr Koutsoukos on his own behalf and on behalf of Mr Hobbs and ISL to potential
investors in the period
2004 to 2007 at FTC Seminars and Investor
Meetings.
- The
evidence on which ASIC relies for the contention that the respective Super Save
Representations were made orally is as follows:
Capital Protected Representation (the capital of funds invested would be
protected by US Treasuries)
- This
is said to have been made orally by Mr Wood (Handebo at [48], Camilleri
at [36]; Wood at [53], [523], [531]); to have been made orally by Mr
Truong (Truong at [298]) and orally by Mr Koutsoukos (Canham at
[14]).
- ASIC
contends that when made by each of Mr Wood, Mr Truong and Mr Koutsoukos, the
representation was also made on behalf of Mr Hobbs
(on the basis that they were
his agents) and was also made on behalf of ISL (on the basis that each was a
director or officer of
ISL).
Redemption Representation (once funds had been invested for at least 12
months, each investor would be able to redeem or withdraw
the invested capital
upon giving 60 days' notice)
- ASIC
relies on the following evidence for the allegation that this was made orally by
Mr Truong (Truong at [298]); by Mr Koutsoukos (Canham at [7]).
- It
is contended that when made by each of Mr Truong and Mr Koutsoukos, the
representation was also made on behalf of Mr Hobbs (on
the basis that they were
his agents) and on behalf of ISL (on the basis that each was a director or
officer of ISL).
Super Save Returns Representation (each investor would receive returns of
approximately 3-4% per month on funds invested on a best
efforts basis)
- ASIC
relies on the following evidence for the allegation that this was made orally by
Mr Wood (Mr Wood at [523], Camilleri at [90], Mulligan at [40]); by Mr
Truong (Truong at [298]); and by Mr Koutsoukos (Canham at [14]).
- Again,
it is alleged that when made by each of Mr Wood, Mr Truong and Mr Koutsoukos,
the representation was also made on behalf of
Mr Hobbs (on the basis that they
were his agents) and on behalf of ISL (on the basis that each was a director or
officer of ISL).
- I
am satisfied that the evidence establishes the making of those oral
representations.
(iii)Master Fund Representations
- At
[288] of the pleading, it is alleged that in the period 2003 to 2008, each of Mr
Hobbs, Ms Li and Mr Collard and Secured Bond made
the following representations
(together, Master Fund Representations) in Australia to potential investors in
Master Fund:
(a)the Investment Representation;
(b)the Capital Protected Representation; and
(c)the Returns Representation (each as earlier defined).
- At
[290], each is said to be a continuing representation and at [291] each is said
to have been false in a material particular, or
materially misleading or
deceptive or likely to mislead or deceive.
- By
way of particulars, each representation is said to have been express and each
(other than the Investment Representation which was
only in writing) to be
partly in writing and partly oral. The Investment Representation is said to be
contained on pages 6 and 10
of the Master Fund Memorandum. To the extent that
they were in writing, the Capital Protected Representation is identified as
contained
on page 3 of the Master Fund power point presentation and the Returns
Representation at pages 6 and 10 of the Master Fund Memorandum.
- Again,
the making of the written representations is established by the material to
which I was taken.
- To
the extent that the Capital Protected Representation and Returns Representation
were said to have been partly oral, the representations
are said to have been
made by each of Ms Li and Mr Collard on her or his own behalf and on behalf of
Mr Hobbs and Secured Bond to
potential investors in the period 2004 to 2007 at
FTC Seminars and Investor Meetings.
- The
evidence on which ASIC relies for the contention that the respective Master Fund
Representations were made orally is as follows:
Capital Protected Representation (the capital of funds invested would be
protected by US Treasuries)
- This
is said to have been made orally by Mr Hobbs (Dong at [85]); by Ms
Li (Zhang at [147], [223]; Xu at [17], [23], [47], [60], [78], [88]; Dong at
[70], [76], [98], [108]); by Mr Collard (Hogno [74](c), Dong at [68],
[98]).
- ASIC
contends that when made by each of Ms Li and Mr Collard, the representation was
also made on behalf of Mr Hobbs (on the basis
that they were his agents) and
when made by Mr Hobbs, Ms Li and Mr Collard, the representation was as also made
on behalf of Secured
Bond (on the basis that each was a director or officer of
Secured Bond).
Returns Representation (each investor would receive returns of
approximately 4% per month on funds invested on a best efforts basis)
- ASIC
relies on the following evidence for the allegation that this was made orally by
Mr Hobbs (Dong at [99]); by Ms Li (Xu at [17], [23], [60], [78],
[88], Zhang at [14], [223], Huang at [155], Dong at [70]); and by Mr
Collard (Hogno at [74](e)).
- Again,
it is alleged that when made by each of Ms Li and Mr Collard, the representation
was also made on behalf of Mr Hobbs (on the
basis that they were his agents) and
when made by Mr Hobbs, Ms Li and Mr Collard on behalf of Secured Bond (on the
basis that each
was a director or officer of Secured Bond).
- I
accept that the evidence relied upon by ASIC establishes the making of the
respective representations.
(iv)First Secured Bond Unit Trust Representations
- At
[289] similar allegations are made in relation to the specific First Secured
Bond Unit Trust Representations, namely that in the
period 2003 to 2004, each of
Mr Hobbs, Ms Li, Mr Collard and Secured Bond represented in Australia (the First
Secured Bond Unit Trust
Representations), to potential investors in First
Secured Bond Unit Trust that:
(a)that the investor's funds would be invested in A+ registered securities or
the underwriting of those securities (the A+ Representation); and
(b)the Returns Representation (as earlier defined).
- At
[290], each is said to be a continuing representation and at [291] each is said
to have been false in a material particular, or
materially misleading or
deceptive or likely to mislead or deceive.
- By
way of particulars, each representation is said to have been express. The A+
Representation is particularised as only in writing
(contained on pages 6, 8, 9,
10 and 14 of the First Secured Bond Unit Trust Memorandum) (though ASIC notes
that there is evidence
in Ms Huang's affidavit at [89] that "In or around
October or early November 2003 Mr Hobbs said "JP Morgan Bank is involved in
First
Secured Bond. JP Morgan had an AAA rating, which is one of the highest you
can get. This means that your investment in First Secured
Bond will be very
reliable and very low risk"). To the extent that the Returns Representation is
identified as contained in writing
it is on pages 6,10 and 14 of the First
Secured Bond Unit Trust Memorandum. I accept that the written material contains
those representations.
- To
the extent that the Returns Representation were said to have been partly oral,
the representations are said to have been made by
each of Ms Li and Mr Collard,
on her and his own behalf and on behalf of Mr Hobbs and Secured Bond to
potential investors in the
period 2004 to 2007 at FTC Seminars and Investor
Meetings. Again, I accept the evidence of the witnesses who have deposed to the
making of those representations.
Returns Representation (each investor would receive returns of
approximately 4% per month on funds invested on a best efforts basis)
- ASIC
relies on the following evidence for the allegation that this representation was
made orally by Mr Hobbs (Huang at [89], Dong (at [229])); by Ms Li
(Huang at [86], Zhang at [107]); by Mr Collard (Jouravlev at [22]).
- Again,
it is alleged that when made by each of Ms Li and Mr Collard, the representation
was also made on behalf of Mr Hobbs (on the
basis that they were his agents) and
when made by Mr Hobbs, Ms Li and Mr Collard on behalf of Secured Bond (on the
basis that each
was a director or officer of Secured Bond). Again, I am
satisfied that the evidence establishes the making of those
representations.
(i)Profits Representations
- At
[292], it is alleged that in the period from 4 April 2005 to 14 December 2007
each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos
and PJCB represented, in
Australia, to investors in Integrity Plus that Integrity Plus was generating
profits or sufficient profits
to enable the returns each investor received by
way of purported profit to be paid to them (Integrity Plus Profits
Representation).
- At
[293] it is alleged that on or about each of 12 February 2007, 21 to 25 May
2007, 4 June 2007, 20, 22 and 29 August 2007, 20 September
2007 and 22 November
2007, each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL represented,
in Australia, to investors in
Super Save that Super Save was generating profits
or sufficient profits to enable the returns each investor received by way of
purported
profit to be paid to them (Super Save Profits
Representation).
- At
[294] a similar allegation is made in relation to the Master Fund, namely that
on particular dates on or about each of 31 May 2005,
28 June 2005, 29 September
2005, 22 December 2005, 4 July 2006, 3 October 2006, 31 October 2006, 27 July
2007 and 27 August 2007,
each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond
represented, in Australia, to investors in Master Fund that Master Fund was
generating profits or sufficient profits to enable the returns each investor
received by way of purported profit to be paid to them
(Master Funds Profits
Representation).
- Each
of the said Profits Representations is said to be a continuing representation
([295]) and to be false in a material particular,
or materially misleading or
deceptive or likely to mislead or deceive ([296]).
- By
way of particulars, each representation is said to have been partly express and
partly implied. To the extent that it was express,
it is said to be in writing,
contained in that the statements or profit statements issued (in the case of
Integrity Plus on a monthly
and quarterly basis, and in the case of Super Save
on a quarterly basis) to investors in the respective funds.
- To
the extent that the Profit Representations are said to have been implied, it is
contended that they are to be implied from the
payment to investors of what was
described in the statements as "profit".
- The
evidence on which ASIC relies for these allegations is comprised of the various
profit statements in question. I accept that the
issuing of statements in which
payment is described as profit amounts to a representation that would be likely
to have been understood
by an unsophisticated investor as meaning that the
moneys being paid were being paid out of profits. In the case of the four funds
identified (Integrity Plus, Super Save, Master Fund and, other than in one
instance, the Enhanced Fund) the evidence establishes
that this was not the case
and the payments were being made out of capital not profits.
(ii)Barclaywest Shareholder Representation
- At
[297], the allegation is made as to the making in 2007 and 2008 by each of Mr
Hobbs, Ms Li and Mr Collard of representations (together,
the Barclaywest
Shareholder Representations) in Australia to potential and existing shareholders
of Barclaywest that:
(a)Barclaywest's involvement in projects, including a project in China, would
generate profits for shareholders (this being said to
be an express
representation made orally at Mr Collard's house in 2007 by Ms Li on her own
behalf and on behalf of Mr Hobbs and Mr
Collard to potential and existing
shareholders of Barclaywest - Dong at [123]).
(b)Barclaywest would do a commercial bond to fund a project (again this being
particularised as an express allegation made orally
at Mr Collard's house in
2007 by Ms Li on her own behalf and on behalf of Mr Hobbs and Mr Collard to
potential and existing shareholders
of Barclaywest - Dong at [123]); and
(c)Mr Hobbs would give $200 million, being proceeds from a sale of rights, to
Barclaywest (again an express allegation particularised
as being made by Ms Li
on her own behalf and on behalf of Mr Hobbs and Mr Collard, and by Mr Hobbs on
his own behalf to potential
shareholders of Barclaywest in 2007 at Mr Collard's
house - Xu at [113], Dong at [156]).
- ASIC
contends that the representations were made to Ms Dong, Ms Wu, Ms Zhi Jun Xu, Mr
Jim Ping Qin, Mr Zhang Xian, Ms Wang Ying and
Ms Yu Qiong Li (Dong at [123]) who
were potential and existing shareholders of Barclaywest at that time (Dong at
[112]).
- It
is contended that the representations by Ms Li were on behalf of Mr Hobbs (as a
director and/or officer of Barclaywest at the relevant
time) and that Mr Hobbs
knew, or ought reasonably to have known, that Ms Li made the representation.
- (Ms
Dong deposes to a statement by Mr Hobbs at such a meeting in early 2007 ([143])
in which Mr Hobbs said words in English to the
effect "Barclaywest is a white
label fund" and at [156] to his statement that "I am selling my rights to a
financial institution.
The buyer will buy the rights for 200 million. This is
exciting news. There is a big deal coming over. You will get this money. I
will
give the profit to Barclaywest" at a meeting she attended. I would conclude that
Mr Hobbs, having attended various of the FTC
seminars and meetings, had a
reasonable expectation that statements he made would be repeated, accurately or
otherwise, by the FTC
executives or introducers).
- It
is further said that the representations made by Ms Li were on behalf of Mr
Collard and were made in his presence (Mr Collard being
a director and/or
officer of Barclaywest at the relevant time).
- I
accept Ms Dong's evidence. (Although I do not rely on this to reach that
conclusion, I note that a feature of the evidence of a
large number of the
witnesses was the extravagant statements by Mr Hobbs about profits or
investments in general, which would counter
the scepticism by which I might
otherwise have been inclined to treat such statements.) Moreover the reference
to a commercial bond
transaction was being made at a time when Mr Hobbs was
involved with Ms Li in the commercial bond facilitation (in respect of a
considerable
sum of money to be invested in Cadent).
- I
am satisfied as to the making of these representations. (As representations
going to future matters, the lack of any evidence to
suggest that there were
reasonable grounds for the making of this representation will assist ASIC in
establishing the ASIC Act contraventions
against the makers of the statement -
Mr Collard and Ms Li.)
(iii)888 Shareholder Representations
- At
[298] it is alleged that in April 2006, each of Mr Hobbs, Ms Li and Mr Collard
represented to a potential shareholder of 888 Vanuatu,
that an amount in the
order of $207 million would be invested and would generate returns in the order
of 100% every 10 days, 50%
of which would be paid to 888 Vanuatu (888
Shareholder Representation). The 888 Shareholder Representation is
particularised as being
express and made orally by Mr Collard on his own behalf
and on behalf of Mr Hobbs and Ms Li, to a potential shareholder of 888 Vanuatu
in April 2006 at the offices of Advest Consulting Group Pty Ltd. The evidence on
which ASIC relies for this is that of MacDonald
at [18], [19]. (Mr MacDonald was
not cross-examined on his affidavit.)
- ASIC
contends that Mr Collard made the representation on behalf of Mr Hobbs since Mr
Hobbs was a director and/or officer of Barclaywest
at the relevant time and
contends that it can be inferred that Mr Hobbs knew, or ought reasonably to have
known, that Mr Collard
made the representation by reason of statements made by
Mr Collard as to Mr Hobbs' involvement and from subsequent representations
by Mr
Hobbs as to his involvement in the scheme (MacDonald at [30], [32])
- It
is contended that Mr Collard made the representation on behalf of Ms Li as Ms Li
was a director and/or officer of Barclaywest at
the relevant time and that it
can be inferred that Ms Li knew, or ought reasonably to have known, that Mr
Collard made the representation
on the basis of statements as to Ms Li's
involvement and her subsequent involvement (MacDonald [22], [29], [32], [44]).
- There
is no basis not to accept Mr MacDonald's evidence (and it seems consistent with
the general manner in which promises were made
to potential investors, including
the Barclaywest Representations referred to above. I find this allegation also
to be established.
I find that there was no reasonable basis for this
representation. (As a representation of a future matter, the evidentiary onus
assists ASIC in establishing the contraventions of the ASIC Act by the
makers of this representation - Mr Collard and Ms Li.)
- Findings
on the representation issues
- I
have made findings on the representation issues in the course of answering the
issues above, but so that there is no doubt I confirm
that I make the following
findings:
(i)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and PJCB made the
Trading Representation (as alleged in [282(a)] and that
it was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged
in [284](a));
(ii)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and PJCB made
the Capital Protected Representation (as alleged in [282](b))
and that it was
false in a material particular, materially misleading, misleading or deceptive
or likely to mislead or deceive (as
alleged in [284](b));
(iii)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and PJCB made
the Redemption Representation (as alleged in [282](c))
and that it was false in
a material particular, materially misleading, misleading or deceptive or likely
to mislead or deceive [284(c)]);.
(iv)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and PJCB made
the Returns Representation (as alleged in [282](d)) and
that it was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged
in [284](d));
(v)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made the
Investment Representation ((as alleged in [285](a)) and
that it was
false in a material particular, materially misleading, misleading or
deceptive or likely to mislead or deceive ([287](a));
(vi)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made the
Specific Instruments Representation (as alleged in ([285](b))
and that it was
false in a material particular, materially misleading, misleading or deceptive
or likely to mislead or deceive (as
alleged in [287](b));
(vii)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made
the Fund Managers Representation (as alleged in [285](c))
and that it was false
in a material particular, materially misleading, misleading or deceptive or
likely to mislead or deceive (as
alleged in [287](c));
(viii)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made
the Capital Protected Representation (as alleged in [285](d))
and that it was
false in a material particular, materially misleading, misleading or deceptive
or likely to mislead or deceive (as
alleged in [287](d));
(ix)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made the
Redemption Representation (as alleged in [285](e)) and
that it was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged
in [287](e));
(x)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made the
Super Save Returns Representation (as alleged in [285](f)
and that it was false
in a material particular, materially misleading, misleading or deceptive or
likely to mislead or deceive (as
alleged in [287](f));
(xi)that each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond made the
Investment Representation (as alleged in [288](a)) and that
it was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged
in [291](a));
(xii)that each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond made the
Capital Protected Representation (as alleged in [288](b))
and that it was false
in a material particular, materially misleading, misleading or deceptive or
likely to mislead or deceive (as
alleged in [291](b));
(xiii) that each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond made the
Returns Representation (as alleged in [288](c)) and that
it was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged
in [291](c));
(xiv)that each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond made the A+
Representation (as alleged in [289](a)) and that it was
false in a material
particular, materially misleading, misleading or deceptive or likely to mislead
or deceive (as alleged in [291](d));
(xv)that each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond made the
Returns Representation (as alleged in [289](b)) and that it
was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged in
[291](e));
(xvi)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and PJCB made
the Integrity Plus Profits Representation (as alleged
in [292]) and that it was
false in a material particular, materially misleading, misleading or deceptive
or likely to mislead or
deceive (as alleged in [296](a));
(xvii)that each of Mr Hobbs, Mr Wood, Mr Truong, Mr Koutsoukos and ISL made
the Super Save Profits Representation (as alleged in [293])
and that it was
false in a material particular, materially misleading, misleading or deceptive
or likely to mislead or deceive (as
alleged in [296](b));
(xviii)that each of Mr Hobbs, Ms Li, Mr Collard and Secured Bond made the
Master Fund Profits Representation (as alleged in [294])
and that it was false
in a material particular, materially misleading, misleading or deceptive or
likely to mislead or deceive (as
alleged in [296](c));
(xix)that each of Mr Hobbs, Ms Li and Mr Collard made the Barclaywest Profits
Representation (as alleged in [297](a)) and that it
was false in a material
particular, materially misleading, misleading or deceptive or likely to mislead
or deceive (as alleged in
[300](a) and [300](b)(i));
(xx)that each of Mr Hobbs, Ms Li and Mr Collard made the Commercial Bond
Representation (as alleged in [297](b)) and that it was false
in a material
particular, materially misleading, misleading or deceptive or likely to mislead
or deceive (as alleged in [300](b)(ii));
(xxi)that each of Mr Hobbs, Ms Li and Mr Collard made the Barclaywest $200
million Representation (as alleged in [297](c)) and that
it was false in a
material particular, materially misleading, misleading or deceptive or likely to
mislead or deceive (as alleged
in [300](b)(iii)); and
(xxii)that each of Mr Hobbs, Ms Li and Mr Collard made the 888 Shareholder
Representation (as alleged in [298]) and that it was false
in a material
particular, materially misleading, misleading or deceptive or likely to mislead
or deceive (as alleged in [300](b)(iv)).
Direct contraventions
Section 601ED(5) of the Corporations Act contraventions - operation of
an unregistered managed investment scheme in Australia - Mr Hobbs - [408]); Mr
Collard - [383A]; FTC
- [305]-[306]; PJCB - [315]-[316]; ISL -
[325]-[326]
- There
is no doubt that, if viewed (as I so find them to be) as a collective scheme,
the individual schemes together constituted a
managed investment scheme that was
required to be registered. There were more than 20 members of the schemes as a
whole and the exception
in sub-section 601ED(2) does not apply (on the basis
that there was an obligation to provide a product disclosure statement in
respect
of the issue of units in either the Hobbs financial product
or the overall Hobbs scheme).
- In
Chase Capital at 789, Owen J considered whether a series of syndicated
investments (utilising moneys that had been obtained from various investors
and
pooled together) constituted a "managed investments scheme" under the
Corporations Law. Two of the relevant respondents were companies
registered or incorporated in the Turks and Caicos Islands (neither being
registered
as a foreign company in Australia). Other respondents were the
controller and/or directors of one or more of the entities involved
in the
alleged scheme.
- The
facts of that case have obvious parallels to the present. As described by his
Honour at [4]-[5]:
A business name "The Manhattan Club" was registered on 11 January 1999.
The nature of its business is described as "investment information
service". Various persons or entities have, from time to time, carried on
business under that name. ...
...[as to the evidence of the background to the investment activities, his
Honour noted that] It seems that out of the activities
of the Manhattan Club
there emerged another group called the Chase Investment Club. It is not easy to
ascertain from the materials
the exact relationship between the Manhattan Club
and the Chase Investment Club. I will refer to the groups globally as "the
Club".
The idea for the Club came about after discussions following addresses
Hicks made to groups of people on subjects relating to tax
minimisation and
wealth creation. This led to a group comprised of members who paid
subscriptions in return for educational videos, compact discs, books and
presentations
from individuals in the finance industry. In an advertising
brochure for the Manhattan Club it is said that the Club "educates and
assists
its subscribers in financial literacy". It held fortnightly seminars and
distributed a monthly newsletter. ... (my emphasis)
- Owen
J said from [63]:
Counsel for the respondents submitted that here the money was paid by
investors to the various corporate entities as managers "as
a conduit" to the
ultimate investments. Chase and Leadenhall were never in a position "to give
consideration" for anything. Rather,
they were trustees or agents to invest the
money as requested by the investors. I do not accept this submission. It
seems to me that relevant part of the definition focuses on the acquisition of
benefits from the "scheme", not from the manager.
The "scheme" is the entire
operation. It starts with "the club". It then involves the generation of ideas
or proposals for individual
investments that are communicated to members of the
club either orally at meetings, or by newsletters or the posting of invitations
to participate. It then involves the investors, the manager, the ultimate
recipient of the investment funds and the flow of moneys
to, from and between
those various persons or entities. Take AET as an example. AET is referred
to in the newsletter "Millionaires' Corner" for December 1999, January 2000 and
February
2000. The application form indicates that moneys are to be paid "for a
syndicated investment security [to] be held by [CCML] on behalf
of the
investor". CCML is to manage the investment. It envisages that profits will be
earned and that, subject to CCML deducting
an administration fee, those profits
will be distributed back to the investor.
This, it seems to me, constitutes the acquisition by the investor of
rights, namely a sharing of profits, from the scheme. The fact
that the money is
paid by the investor to a trustee or agent to be passed through to the entity
that is (hopefully) to generate the
profit is not to the point. It is a payment
as part of the overall scheme and it is consideration for the acquisition of
rights or
benefits in the scheme. I was referred to the judgment of the
court in Australian Securities and Investments Commission v Enterprise
Solutions 2000 Pty Ltd [2000] QCA 452; (2000) 35 ACSR 620. At [6] of that judgment I find
support for the proposition that the generation and earning of profits from the
investment and the distribution
of those profits to the investor is a relevant
benefit produced by the scheme, which benefit has been acquired by the investor.
(my
emphasis)
- (Pausing
there, Mr Halley submits, with considerable force, that it is inconceivable that
had Mr Hartnell been apprised of the full
circumstances of the manner in which
investment in the offshore schemes was occurring or was to occur he would have
given the advice
he did in relation to the second part of the advice in 2002,
having regard to what had been said in Chase Capital. At the very least,
assuming (as I would expect of a senior practitioner experienced in this area
such as Mr Hartnell) that the legal
adviser was aware of the above decision, one
would have expected that any advice as to the legality of the sale of financial
subscriptions
(in circumstances where it was contemplated that subscribers would
then have the opportunity to gain access to offshore investment
opportunities)
would have been suitably qualified to take into account the possibility that the
financial education seminars were
part of an overall scheme for such investment
(as I find was the case here).)
- I
find that each of Mr Hobbs, Mr Collard, FTC, PJCB and ISL was directly involved
in the operation of the Hobbs scheme within the
jurisdiction and thereby
breached s 601ED(5) of the Corporations Act by operating an unregistered
managed investment scheme (the Hobbs Scheme) within the jurisdiction. The fact
that investment was in
the name of an offshore incorporated IBC does not assist
in bringing the scheme outside the reach of s 601ED. The provision of
information about the individual funds in which investors could invest occurred
within this jurisdiction; the making
of the offer (in the sense of the provision
of an indication that an application for investment would be accepted) was made
in this
jurisdiction (and offers were solicited in seminars and meetings within
this jurisdiction, particularly in relation to the Li/Collard
schemes); and unit
certificates and confirmatory letters were issued and payment of returns made in
this jurisdiction. The offshore
component of the scheme (though not a sham in my
view) was a deliberate (but unsuccessful) attempt to remove the investments from
regulatory overview or supervision.
- Had
I not found that there was a collective scheme, then the obligation to register
the individual managed investment schemes would
apply only to Integrity Plus and
Super Save because of the application of the exemption to the requirement for
the giving of a product
disclosure statement under s 1012E for those smaller
schemes. (ASIC concedes that if the smaller schemes are found to be individual
schemes then, by reason of s 1012E, there would not be a requirement to give a
product disclosure statement).
Section 911A Corporations Act contraventions - carrying on an
unlicensed financial services business in Australia - Mr Hobbs - [409]-[412]; Mr
Collard - [380]-[383];
Ms Wu [380]-[383]; FTC - [301]-[304]; PJCB - [309]-[314];
ISL - [319]-[324]; ISPL - [329]-[334]; Secured Bond - [372]-[377]; Barclaywest
-
[435]-[436]; 888 Vanuatu - [452]-[453] Geneva Financial - [443]-[444]; Preserved
Investments - [441]-[442]; GP Global [439]-[440];
North Wave
[437]-[438];
- In
accordance with the findings I have made above as to the promotion of the
financial product referred to as the Hobbs financial
product and the operation
of the Hobbs scheme, I find that each of Mr Hobbs, Mr Collard, Ms Wu, FTC, PJCB,
ISL, ISPL, Secured Bond,
Barclaywest, 888 Vanuatu, Geneva Financial, Preserved
Investments, GP Global and North Wave contravened s 911A of the Corporations
Act by reason of the provision of financial services within this
jurisdiction without a financial services licence.
Section 1041E Corporations Act contraventions - making statements or
disseminating information that was false or misleading - Mr Hobbs - [413](a],
[414](a]; Mr
Collard - [384](a); FTC - [307](a), [308](a); PJCB - [317](a);
[318](a)); ISL - [327](a); [328](a); Secured Bond - [378](a);
[379](a)
- Having
regard to the findings made above as to the making of the respective
representations identified above (and the false or misleading
and deceptive
nature of each of those representations, ie that they were false and that there
was a real and not remote chance that
they would mislead the particular audience
to which they were directed) I find that each of Mr Hobbs, Mr Collard, FTC,
PJCB, ISL
and Secured Bond, contravened s 1041E of the Corporations Act
by making statements that were, or disseminating information that was, false or
misleading.
Section 1041G Corporations Act contraventions - engaging in dishonest
conduct in relation to a financial product or service - Mr Hobbs - [413](b],
[414](a); Mr
Collard - [384](c); [386](a); FTC - [307](b), [308](a); PJCB -
[317](b); [318](a); ISL - [327](b); [328](a); Secured Bond - [378](b);
[379](a)
- The
substance of the conduct relied upon for this category of contravention is the
same as considered above. There is no doubt that
the respective representations
were made in relation to a financial product or service. As to the question
whether the conduct was
dishonest on the part of each of the representors, I
note that dishonesty is to be tested by the conduct expected according to the
standards of honesty of ordinary people.
- In
relation to the Lawful Investment Representation, it is submitted that it can be
inferred that Mr Hobbs either did not care whether
the Lawful Investment
Representation was true or false, or knew or ought reasonably to have known that
it was false in a material
particular or was materially misleading in
circumstances where: as a matter of fact, the representation was false; Mr
Hobbs, in his
role at FTC (having responsibility for matters concerning the
regulatory requirements of FTC in respect of its business and operations
to the
extent such occurred within Australia) knew that the Hartnell advice was based
on assumptions inconsistent with the way that
FTC and investment in the schemes
occurred in practice and knew that neither FTC nor any of the schemes was
appropriately registered
where FTC was carrying on business in Australia and the
schemes were operating in Australia, and given his role as a (shadow) director
of the corporate administrators of each of the schemes.
- As
to Mr Collard, it is submitted that, given his role as a (de facto) director or
officer of the relevant corporate administrators,
he ought to have known whether
the Lawful Investment Representation was true when it was made by him and others
including Mr Hobbs,
and therefore it can be inferred that Mr Collard either did
not care whether the Lawful Investment Representation was true or false,
or that
he knew or ought reasonably to have known that it was false in a material
particular or was materially misleading.
- Mr
Halley submits that to embark on a scheme which ultimately led to very
significant sums of money being invested in reliance on
a legal advice that
proceeded on a false premise is entirely unreasonable (and that reliance on that
advice in the context of representations
to potential investors as to the
lawfulness of the investments was consistent only with an absence of good faith
and with Mr Hobbs
acting dishonestly for the purposes of s 1041G of the
Corporations Act). In this regard, Mr Halley points to the fact that the
representations made to investors as to the lawfulness of the investments
were
made in the context that investors became aware of these investment
opportunities through word of mouth, not through recognised
financial
institutions, and might be expected to ask questions as to the legality of such
an investment. (Hence ASIC contends that
the Lawful Investment Representation
issue is at the heart of what is alleged to have been the misleading and
deceptive conduct,
the making of false statements and the dishonesty by Mr
Hobbs.)
- In
relation to the Principal Protected Representation, it is submitted that it can
be inferred that Mr Hobbs either did not care whether
the Principal Protected
Representation was true or false, or he knew or ought reasonably to have known
that it was false in a material
particular or was materially misleading in
circumstances where: as a matter of fact, the representation was false; Mr Hobbs
knew
the type of investments made using the funds invested in each of the
Schemes, including the type of derivatives trading carried out
in the Cadent
Accounts, the extent to which that trading was leveraged to permit further
speculative trading, the possibility of
large losses resulting from the trading
and the fact that the cash and US Treasuries credited to the Cadent Accounts
were a margin
or deposit for the derivatives trading and were therefore at risk
at all material times, and knew none of the investments were secured;
and given
his role as a (shadow) director of the corporate administrators of each of the
schemes.
- As
to Mr Collard, again it is submitted that, given his role as a (de facto)
director or officer of the relevant corporate administrators,
he ought to have
known whether the Principal Protected Representation was true when it was made
by him and others, including Mr Hobbs,
and so it can be inferred that Mr Collard
either did not care whether the Principal Protected Representation was true or
false, or
that he knew or ought reasonably to have known that it was false in a
material particular or was materially misleading.
- In
relation to the Investment Returns Representation, it is submitted that it can
be inferred that Mr Hobbs either did not care whether
the Investment Returns
Representation was true or false, or he knew or ought reasonably to have known
that it was false in a material
particular or was materially misleading in
circumstances where: as a matter of fact, the representation was false, and Mr
Hobbs knew
that returns of 3-4% per month, every month, were not realistic,
whether on a best efforts basis or otherwise, and understood that
the "best
efforts" qualification meant "whatever" (namely, that the returns could
realistically be anything from positive to negative
in reality), and given his
role as a (shadow) director of the corporate administrators of each of the
Schemes.
- Again,
as to Mr Collard, it is submitted that given his role as a (de facto) director
or officer of the relevant corporate administrators,
he ought to have known
whether the Investment Returns Representation was true when it was made by him
and others including Mr Hobbs,
and so it can be inferred that Mr Collard either
did not care whether the Investment Returns Representation was true or false, or
that he knew or ought reasonably to have known that it was false in a material
particular or was materially misleading.
- As
to the representation in relation to returns, it is noted that Mr Hobbs in
cross-examination admitted that it was not possible
to provide returns to
investors consistently of 3-4% per month (T1252.49-1253.13) and that the
qualification in the Private Placement
Memoranda by reference to "best efforts"
or "best endeavours" is meaningless (particularly having regard to Mr Hobbs'
opinion that
"best efforts" means "whatever" (T1253.36-44) such that a best
efforts representation would mean that the return could be anywhere
from
positive to negative. At least some of the scheme administrators gave evidence
that they were told to pay no more than the 3
or 4% monthly figure.
- The
evidence of Mr Hobbs from T 1252 line 49 makes it clear that he knew not only
that any representation as to a fixed return would
be false (as does his
explanation on the DVD Seminar of the difference between retail and wholesale
returns) but also that there
would be no reasonable expectation as to whether
from time to time a monthly return of the kind indicated in the scheme memoranda
would be likely:
Q. Would you agree, Mr Hobbs, that it was not possible to obtain a return of
4% per month in the futures market on any regular basis?
A. It wouldn't be possible to do it month after month after month, no.
Q. I want to be quite clear what I'm putting to you: Would you agree it was
not possible to obtain a return of 4% or more per month
in the futures market on
any regular basis?
A. No. I said I don't believe that to be.
Q. So it is not the case it is 4% exactly. It is the case that the figure of
4% per month, in terms of return, you regard as excessive
if one was to
represent that that was to be obtained on the investment in the futures market?
A. It's not just percentage. I don't know a trader in the world who would
make a profit every 30 days. You couldn't do it. They would
have losses at
different times.
Q. I'll put it slightly differently, Mr Hobbs. Would you agree it was not
possible to obtain a return of 48% or more per annum in
the futures market from
year to year?
A. Well, that, I don't particularly agree with because in the years that the
markets were very buoyant, you could make very good returns
regularly. But in
the years of 2002, three, onwards, I don't believe that would be possible.
Q. So what do you consider to be a reasonable estimate of what one could
expect to earn by way of return on an investment in the futures
market in the
period 2002 onwards?
A. I'd have to look at the traders' returns, but I couldn't tell you.
Q. But you didn't have any hesitation in passing on to people estimates,
knowledge of returns that had been made, investing in funds
in 2003, 2003; did
you?
A. I don't agree with what I have heard and read in affidavits.
Q. By that you mean to suggest that when people have in an affidavit
represented the figures that you were suggesting, you don't accept
that those
figures were figures that you mentioned in discussions with them; is that your
evidence?
A. Correct. I mean, you could talk about best efforts but best efforts
means whatever.
Q. Sorry, what does it mean; "whatever"?
A. You could go anywhere from negative to a positive.
Q. So if one was to say best efforts, 4%, that could mean whatever; is that
what you're saying?
A. Well, it would be unlikely to be anything past that. (my
emphasis)
- It
was suggested by Mr Halley to Mr Hobbs (and I consider this to be self-evident,
though Mr Hobbs did not accept the premise on which
it was based) that the
monthly return would be particularly unlikely to be anything past 4% if the
relevant FTC executive or introducers
had been told that they were entitled to
keep anything above 4% (and I note the evidence in that regard from the J&B
Financial
officers as to the percentage that they could keep out of the profits
or so-called profits of the fund).
- As
to the submission that Mr Hobbs knew or ought to have reasonably known that
profits were being paid out of capital not returns,
reliance is placed on the
evidence of each of Mr Wood, Mr Truong and Mr Koutsoukos of various
conversations with Mr Hobbs (starting
from about June 2005 when Mr Koutsoukos
says he told them to start paying returns even though no funds had been
transferred from
Mr Caffray's account to the PJCB Technocash account ([473]),
following which they queried Mr Hobbs as to whether there were sufficient
returns to pay investors and/or raised concerns as to a "hole" in the fund; and
conversations towards the end of 2005 as to them
running out of money because
they were paying money for returns out of the fund where it is said that Mr
Hobbs told them to keep
paying out and either that he would fix it up or that
the returns were there (Koutsoukos [473], [479], [482]. [486], [488] (on which
he was not challenged in cross-examination), Wood [428], [435] on which he was
challenged in cross-examination and [457], Truong
[246] on which he was not
challenged); and to their practice of querying Mr Hobbs regularly in relation to
the returns (Wood [376],
[378], [428]).
- Mr
Koutsoukos deposes to a conversation in late 2005 (on which Mr Clarke notes he
was not challenged in cross-examination) when he
asked Mr Hobbs if they were
running a "pyramid scheme" and he says that Mr Hobbs said that once they had
issued a certificate of
units to the investor they could do what they wanted
with the invested money as long as they had enough assets to pay them back
(Koutsoukos
[605]).
- Significantly,
in evidence that was not challenged in cross-examination, Mr Koutsoukos deposes
that some time between June and October
2007 Mr Hobbs directed the three of them
to vary the 4% rate of return because the consistent payment of 4% would look to
ASIC to
be a Ponzi scheme ([1163]) and that thereafter they varied the
percentage paid out to investors.
- Reliance
is also placed on the evidence of Mr Koutsoukos that in about mid-October 2007
Mr Hobbs told them that they had to get money
into Integrity Plus quickly
because there had been a "draw down" in the Integrity Plus account (Koutsoukos
[1124]) (also not challenged
in cross-examination) and directed them to transfer
$1 million into Upton Ltd. Further, Mr Koutsoukos deposes to a conversation with
Mr Hobbs on about 13 December 2007 (after ASIC had served freezing orders in
respect of the Integrity Plus account) in which Mr Koutsoukos
says he suggested
that they return the money to the Australian investors and re-build the business
in Europe, to which he says Mr
Hobbs responded that it was not that simple to
get the money and that it was "all over the place" (Koutsoukos [1197], again not
challenged
in cross-examination).
- In
relation to Mr Hobbs and FTC (which is the alter ego of Mr Hobbs), I consider
that their conduct in making each of the representations
was dishonest.
(Ironically, Mr Hobbs himself suggested that the conduct of the schemes run by
the J&B Financial officers was
dishonest when accusing those officers of
fraud in relation to the Ponzi aspect of the schemes - the irony being that (as
I have
found) they were following his instructions in relation to the payment
out of returns in respect of the schemes they administered.)
- In
relation to the corporate administrators (Secured Bond on the one hand and
PJCB/ISL on the other hand), the basis on which their
honesty is to be tested
can only be by reference to the conduct of the officers or agents carried out on
their behalf. I consider
that having regard what Mr Collard must have known as
to the operation of the investment schemes his conduct at the relevant time
was
dishonest (as was the conduct of the J&B Financial officers). True it is
that they may have relied on information from Mr
Hobbs as to matters such as the
lawfulness of the investment process, but they were clearly on notice of the
disbursement of investor
funds otherwise than in accordance with the private
placement memoranda and they made or participated in the making of
representations
as to the nature of the fund investments, the protection of
capital invested in the schemes and the expected rates of return, at
times when
there can have been no reasonable basis for them to consider that these were
correct.
- I
find that each of Mr Hobbs, FTC, Mr Collard, Secured Bond, PJCB and ISL
contravened s 1041G of the Corporations Act by engaging in dishonest
conduct in relation to a financial product or service.
Section 1041H Corporations Act contraventions - misleading or deceptive
conduct in relation to a financial product or a financial service -Mr Hobbs -
[413](c);
[414](a); Mr Collard - [385](d); [386](a); Ms Wu - [385](a); [386](a);
FTC - Act [307](c), [308](a); PJCB - [317](c); [318](a); ISL
- [327](c);
[328](a); Secured Bond - [378](c); [379](a)
- On
the basis of the findings made earlier, I find that each of Mr Hobbs, Mr
Collard, Ms Wu, FTC, PJCB, ISL and Secured Bond breached
s 1041H
of the Corporations Act by engaging in misleading or deceptive conduct in
relation to a financial product or a financial service.
Section 12DA ASIC Act contraventions - engaging in misleading or
deceptive conduct in relation to financial services - Mr Hobbs -
[413](d);
[414](b); Mr Collard - [385](e); [386](b); Ms Wu - [385](b); [386](b); FTC -
[307](d); [308](b); PJCB - [317](d); [318](b);
[327](d); [328](b); Secured Bond
- [378](d); [379](b)
- Again
on the basis of the earlier findings, I find that each of Mr Hobbs, Mr Collard,
Ms Wu, FTC, PJCB, ISL and Secured Bond contravened
s12DA of the ASIC
Act by engaging in misleading or deceptive conduct in relation to
financial services.
Section 12DB ASIC Act contraventions - falsely representing that
financial services were of a particular standard - Mr Hobbs- [413](e);
[414](b);
Mr Collard - [384](f); [386](b); FTC - [307](e); [308](b); PJCB - [317](e);
[318](b); [327](e); [328](b); Secured Bond
- [378](e); [379](b)
- I
find that each of Mr Hobbs, Mr Collard, FTC, PJCB, ISL, and Secured Bond
contravened s 12DB ASIC Act by falsely representing that
financial services were of a particular standard. The representations made to
investors were that the
investments would be in particular types of investment
and would have a particular rating and/or would be capital or principal
protected.
Those representations were false.
Section 12DF ASIC Act contraventions - misleading the public as to the
characteristics or suitability for purpose of financial services
- Mr Hobbs -
[413](f); [414](b); Mr Collard - [384](g); [386](b); FTC - [307](f); [308](b);
PJCB -[317](f); [318](b); [327](f); [328](b);
Secured Bond - Act [378](f);
[379](b)
- I
find that each of Mr Hobbs, Mr Collard, FTC, PJCB, ISL, Secured Bond
contravened s 12DF ASIC Act by misleading the public as to the
characteristics or suitability for purpose of financial services. Again,
representations were
made as to the characteristics and suitability of the
investment funds. The effect of those was not erased by general statements
as to
the "discretionary" nature of capital to be invested therein or generalised
warnings as to the lack of a guarantee of performance
or that investors should
only invest if they could afford to lose their funds.
Breach of directors' or other duties
- A
series of contraventions is alleged against the individual defendants of
breaches of directors' and or officers' duties owed to
the various corporations,
some of those depending on a finding of contraventions by the companies of which
they were directors or
officers (the s 180 and s 181 contraventions) and others
not so dependent (the s 182 contraventions). The s 180 and s 181 contraventions
(like the s 911A contravention) are contraventions of civil penalty
provisions.
- As
to the s 180 and s 181 contraventions, I have referred (much earlier) in these
reasons to the authorities in which it has been
said that a director may breach
his or her duties to the corporation by placing it in a position (or permitting
it to act) where
it is in contravention of statutory provisions.
- In
the present case, it seems to me that a fundamental requirement for a company
carrying on the operation of an investment scheme
such as those the subject of
the present proceedings would be to ensure that the company and any relevant
officers held the appropriate
licences and took the appropriate steps to ensure
that the company was lawfully conducting business in the jurisdiction
(particularly
where that was the sole business of the company and the reason for
its incorporation). In those circumstances, it seems to me that
there is a clear
breach of directors' duties in taking steps that put the company in jeopardy of
prosecution for breach of ss 911A
and s 601ED of the Corporations Act.
- As
to the remaining statutory breaches (by reference to the misrepresentation
contraventions), the question whether or not a director
had breached the duty of
good faith contained in s 181(1) of the Corporations Act by causing or
permitting the company to make misleading and deceptive statements in
contravention of the Corporations Act and the ASIC Act has been
considered in ASIC v PFS Business Development Group Pty Ltd [2006] VSC
192; ASIC v Maxwell [2006] NSWSC 1052; ASIC v Sydney Investment House
Equities Pty Ltd [2008] NSWSC 1224 (to which I have made reference
earlier).
- In
ASIC v Maxwell, Brereton J found that there was not a breach of s 181 by
the director of a company that had made misleading and deceptive statements.
There, unlike the present case, the director was not found to have made, caused
to be made or been involved (within the meaning of
s 79 of the Corporations
Act) in the making of the alleged misleading and deceptive statements.
- In
both PFS and Sydney Investment House Equities, misleading and
deceptive conduct did amount to a breach by the relevant director of s 181(1).
So, for example, in Sydney Investment House Equities, Hamilton J found
certain representations contained in memoranda and prospectuses provided by the
company were misleading and deceptive
within the meaning of s 1041H of the
Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act and
that the conduct of the director "in causing or permitting" the company to issue
to misrepresentations therefore exposing the
company to potential civil remedies
and criminal sanction under the respective Acts had breached ss 180 and
181 in relation to each misrepresentation. His Honour's reasoning seemed to be
on basis that these were "indirect
breaches" of the director's duties (his
Honour citing Brereton J in ASIC v Maxwell). His Honour said (at [49])
that "causing a company to engage in a course of conduct that breaches the law
may involve on the part
of the director a failure to exercise reasonable care
and skill and a failure to act in the best interests of the company within
the
meaning of s 181".
- In
PFS, however, a distinction was drawn between actual dishonesty and
negligent conduct. Hargrave J found that, with respect to misleading
and
deceptive conduct, one of the directors had acted with actual dishonesty,
thereby contravening ss 12DA and 12DB of the ASIC Act and s 1041H of the
Corporations Act (see [365]), as a consequence of which that director had
acted in bad faith and in contravention of s 181(1) (at [383]). In
contrast to the position of that director, Hargrave J held that another director
who had made misrepresentations in
contravention of the relevant provisions
nevertheless did not contravene s 181 (at [385]) as his conduct "should be
viewed as gross negligence, rather than as a lack of good faith on his part".
Hargrave J inferred
that the director in question "was simply complying with
directions from [the dishonest director] in circumstances where, as I have
said,
he had no real appreciation of his duties as a director".
- In
the present case, the s 181(1) good faith contraventions are pressed against
each of Mr Hobbs, Mr Collard and Ms Li, and the J&B Financial officers. In
each
case the individuals were directly involved in the making of the relevant
misrepresentations and, in the case of those other than
Mr Hobbs, although I
consider that they were following the general instructions (and example) of Mr
Hobbs in what they said to investors,
I am not persuaded that this is a case
where they could be said to have simply acted as a conduit or following
directions without
being in a position where one would expect them to have
understood that the making of misrepresentations of the kind alleged in relation
to the investment products could well expose the companies in whose name the
schemes were operated to exposure.
- Therefore,
in considering the liability of the said individuals for contraventions of their
duties of good faith by reference to the
s 1041E, s 1041H and s 1041G
Corporations Act contraventions and the s 12DA, s 12DB and s 12DF ASIC
Act contraventions, I consider that this case is more analogous to the
scenario considered with the dishonest director in PFS and the director
held to have contravened s 181(1) in Sydney Investment House Equities
than with the position in Maxwell.
- Here,
the persons who is it is said breached obligations of good faith in exposing the
companies to liability (or permitting or causing
the relevant misrepresentation
contraventions) were the very individuals who promoted the investment schemes by
the making of statements
as to matters that, from their involvement in the
operation of the schemes, they must have been aware were inconsistent with the
way in which the schemes were in fact operating. Mr Collard, in particular, was
privy to various arrangements such as the authorisation
of the additional round
turn commissions and directions for payment of moneys out of Secured Bond to
entities associated with or
on the direction of Mr Hobbs that should have caused
a reasonable person to question the basis on which those steps were taking place
and as to whether it was in the best interests of Secured Bond for those steps
to be taken.
- As
to the s 182 contraventions, before addressing the particular breaches alleged,
I note that Mr and Mrs Hobbs had prepared a summary
document, relied upon as an
aide-memoire, from which payments recorded in Schedule B to the pleadings had
been extracted and by reference
to which it was submitted that Mr Hobbs had
received nothing (or very little) out of the respective funds.
- In
reply submissions, in relation to the document headed "Summary Money Flow"
listing payments referable to the Integrity Plus and
Super Save, Mr Halley noted
that the payments extracted in the Hobbs' reconstruction (relating to parties
other than Mr Hobbs) were
payments that ASIC itself contends were made. However,
it was submitted that overall the summary presented a misleading picture.
Mr
Halley noted that the Money Flow document did not record the transmission of
funds from Integrity Plus to Destiny Holdings and
ultimately to Fletcher Vautier
Moore (which were used for the purchase of Echodale Place) in the aggregate sum
of around NZ$444,000
on 25 October 2007 and did not record the $200,000 payment
from J&B Financial to Magny-Cours for the sale of the white label
fund. (The
status of those payments is a matter in dispute.)
- As
to the first of the amounts that Mr Halley submits have been omitted from the
schedule, emphasis was placed on the fact that Mr
Nicholas Moore (the partner at
Fletcher Vautier Moore who acted in relation to the purchase) was not
cross-examined and had given
evidence as to the receipt of those moneys. (In
this regard, as I have earlier noted, there is some inconsistency between the
evidence
of Mr Moore as to what occurred at the time of the transaction -
particularly, in relation to the draft loan agreement that had been
submitted to
him - and Mr Bellamy, his employed solicitor, when subsequently writing on Mr
Hobbs' behalf to the liquidator in relation
to that payment.) As to the second
of the payments said to have been omitted from the reconstruction, Mr Hobbs
maintained in cross-examination
that this was a payment made to KLM but directed
to be paid to Magny-Cours account by Mr Chen.
- Whatever
the status of the alleged loan in respect of the purchase of the Echodale Place
property, I cannot accept that the payment
into Magny-Cours' account was other
than a payment for Mr Hobbs' own benefit. Mr Halley contends (and I accept) that
the submission
that Mr Hobbs received nothing from Integrity Plus and Super Save
is demonstrated to be incorrect by reference to that payment (and
makes a
similar submission in relation to the Echodale Place payment).
- As
to the payments out of the Master Fund scheme, ASIC prepared a further summary
for use as an aide-memoire of the payments (and
handed up copies of the
supporting documents noting that each was already in evidence) in order to
address the submission made by
Mr Hobbs that the payments made through Master
Fund were linked solely to moneys from Global Funerals. The schedule recorded
both
the investment of capital into the Master Fund scheme as well as the
outgoing payments around that time and the deposits received
from Global Funeral
Services.
- ASIC
accepts that certain of the amounts received in relation to Global Funerals did
not represent an investment in Master Fund and
have nothing to do with the
operation of the investment schemes the subject of these proceedings. (So, for
example, where reference
was made in Mr Hobbs' summary to the sum of $249,278.79
on 7 July 2006 as an investment of capital, ASIC accepts that there is a
bank
record that evidences the deposit from Global Funeral Services of that amount
(recorded as having been received from Global
Funeral Services; the payer being
Bi Hong Dong and the relevant IBC as First Zurich Financial Ltd) and ASIC
accepts that this relates
to introducing fees of Mr Hobbs (which in aggregate
amounted to $253,675.55) (not being moneys included in the case that ASIC seeks
to make.)
- However,
what ASIC does argue is that the records demonstrate that the $249,278.79
deposit was pooled with other funds and that pooled
amount was then transferred
by the administrators of Master Fund to Cadent on 11 July 2006. Accordingly, it
is submitted that when
those funds were transferred they were no longer the
individual funds of the investor but were scheme funds (unless and until there
was a redemption of units in the scheme). The Master Fund scheme spreadsheet
records a wire transfer to Cadent of $266,722.50 on
11 July
2006.
- Significantly,
there is in evidence a copy of a Master Fund agreement between First Zurich
Financial Ltd (presumably the FZF Vanuatu
company is unclear) and Secured Bond
Limited dated 15 July 2006, recording the amount of the investment by FZF as
$249,227 (almost
exactly the amount of the deposit of $249,278.79). Ms Dong
signed that document for FZF and Mr Collard signed for Secured Bond by
Mr
Collard (his signature being witnessed by Ms Li).
- (Ms
Dong's evidence (at [280] of her affidavit) was that she had not prepared (and
had not in the relevant period seen) the spreadsheet
at tab 45 of the exhibits
to her affidavit that purported to record a series of deposits and withdrawals
(and she was not aware of
the transactions or the source of any of these funds).
- Mr
Halley notes that the contemporaneous scheme and bank records therefore show the
sum received from or referable to the Global Funerals
account being treated as a
deposit by First Zurich Financial Ltd for the purposes of a pooled investment of
that amount with other
contributions to the Master Fund scheme. Accordingly,
while it is accepted by ASIC that the source of the funds may well have been
Global Funerals, it is noted that the sum was treated at the time as an
investment by First Zurich Financial Ltd (by Ms Dong) and
that this amount was
then, together with other money, transferred to Cadent for investment. Mr Halley
notes that this is the basis
on which ASIC had treated each of the deposits so
recorded in the contemporaneous records as an investment by First Zurich
Financial
Ltd in Master Fund.
- Mr
Halley notes that of the investments recorded in this fashion, sometimes the
amounts paid to Cadent following the investment were
for amounts less than that
deposited and sometimes they were considerably more. (So, for example, at row
401 on the spreadsheet to
which I was taken there was a credit of $293,281
followed three days later by a transfer of $273,257 to Cadent; but on row 443
after
a sum of $71,981.96 was deposited on 16 October 2006, an amount of
$323,000 was invested the following day by Master Fund with Cadent.)
Mr Halley
submits that this reflects the fact that the scheme funds were pooled funds and,
once funds were invested in the scheme,
the operators of Master Fund were able
to transmit in aggregate funds from different investors for investment with
Cadent.
- As
to the list of payments out of the fund (extracted in Mr Hobbs' spreadsheet),
they included payments to MagnyCours, Tasman Business,
Fletcher Vautier Moore,
Nelsons Bay Holden and R&B Hobbs Family Trust. Mr Hobbs submits that these
payments related to funds
received in respect of the Global Funeral Services
investment. Mr Halley submits that this cannot be the case. In particular, in
relation to the payment to Nelsons Bay Holden, for example, of $15,440.40 on 19
May 2006, it is submitted that this could not be
directly referable to Global
Funerals because it was paid almost two months before there was any deposit from
Global Funerals.
- For
others, such as the R&B Hobbs Family Trust payment on 7 August 2006, it is
submitted that the timing of the relevant payments
in and out permits an
inference that there was a causal connection as contended for by ASIC. There,
row 375, a deposit was recorded
as an investment of capital in the scheme
records by First Zurich Financial of around $120,493 on 7 August 2006; there was
a wire
transfer to the Hobbs Family Trust on the same day for roughly
threequarters of that amount. In any event, ASIC relies on the fact
that the
payment out is from Secured Bond. being the administrator of the Master Fund
(without any apparent redemption of funds in
the interim).
- Mr
Halley notes that in relation to some of the payments Ms Dong signed a direction
to Secured Bond to make a payment to a third party.
However, it is submitted
that simply because FZF made an investment of funds into the Secured Bond
account does not mean that capital
could be withdrawn pursuant to a simple
direction to withdraw capital in that fashion. I agree.
- So,
for example, there was a payment to D and G Wells of $6,214.28 on 21 March 2007
(row 757) following a direction by Ms Dong to
Secured Bond Limited to transfer a
US dollar amount from First Zurich Financial Ltd to that account. Mr Halley
notes that this entry
is referable to moneys from Global Funerals. Other
directions were issued for the withdrawal "from our account" of moneys to other
accounts (including one for the transfer of US$79,762 to Tasman Business
Consultants). ASIC treats those not as a formal redemption
of capital but as a
direction to the administrators (such as the direction for the item at row 857
on 14 August 2007 "Pay direct
to foreign bank, description reference Tasman
Business").
- The
last of those directions relates to a payment of around NZ $99,999 (recorded in
the Technocash statement for Secured Bond). Mr
Halley notes that Mr Mitchell
treated this as a loan referable to provisional tax in his schedule of 15 August
2009.
- Whether
there was a link between FZF Vanuatu and this payment because of the direction
from Ms Dong, Mr Halley relies on this evidence
as demonstrating in part the
extent to which the account of Master Fund held by Secured Bond as the corporate
administrator was used
as a device or a mechanism by which payments that Mr
Hobbs wished to make were channelled through scheme funds.
- Therefore,
ASIC's response to the submission sought to be made good by the money flow
summary prepared by Mr and Mrs Hobbs in relation
to the Master Fund payments
was, ultimately, that whatever may have been the original source of these funds,
they were recorded at
the time as investments by First Zurich Financial Ltd in
Master Fund in a pooled investment and then disbursed (pursuant in some
cases to
directions signed from time to time by Ms Dong, who did not have any idea of the
reason for the direction) from the Secured
Bond account without any redemption
of that investment. Further, it is submitted that given the extent to which
funds were pooled,
and that the account operated as a running account (with no
separation in the account for moneys from different investments), it
is probable
that these funds would have consisted or comprised funds contributed by others.
Hence ASIC submits that (particularly
in the absence of any evidence to the
contrary), the payments can be characterised as payments out of the Secured Bond
Master Fund
account of moneys that included investors' funds.
- Mrs
Hobbs sought me to address me on this issue. Her understanding seems to have
been that the money from Global Funerals was "still
First Zurich's capital" when
it was paid into the Secured Bond account (even though in at least some
instances it was paid into that
account pursuant to an investment contract. She
submitted that this may have been in accordance with the facilitation agreement
between
Global Funerals and Mr Hobbs (and First Zurich) in which Ms Li was to
administer the commission statements (and suggested that Ms
Li had produced the
spreadsheet of payments that Ms Dong gave evidence that she had not seen).
- However,
even assuming that Ms Li was "administering" the commission payments in some
fashion by placing them in an investment with
Secured Bond, the fact is that the
funds were placed in a pooled investment fund (in at least one case pursuant to
a signed agreement
for investment therein) and thereafter were not simply
amenable to a direction for the withdrawal of the funds and payment out to
third
parties (not least because of the difficulty of establishing whose funds were
comprised by the moneys so paid out). This gave
rise to the question to which I
referred earlier as to how funds pooled in the account of the corporate
administrator of a fund could
properly be dealt with by way of a direction of
the kind that seems to have been given to Secured Bond on a number of occasions.
To the extent that Mr Hobbs (and various of the scheme administrators) seems to
have considered that the Secured Bond account could
be treated as a personal
bank account into which moneys would be deposited and withdrawn at will, this is
inconsistent with the duties
of Secured Bond to the persons who invested funds
in the investment schemes it was administering. (Mr Zhang's reaction to such
conduct
is illuminating in that he queried why it was that Mr Hobbs caused
moneys to be invested in the investment scheme only to withdraw
them the
following day. No satisfactory explanation of this was given.)
- As
to the receipt of moneys by Geneva Financial out of the PJCB account, it was Mr
Hobbs' submission that there was no reason for
he or his wife to doubt the
statement that he says was made by Mr Koutsoukos to the effect that the funds
(subsequently invested
in Smart Money) were from the sale of property owned by
Mr Koutsoukos. Mr Hobbs submitted that "To this day I can think of no reason
why
Mr Koutsoukos, Mr Wood and Mr Truong would take funds out of PJCB for which they
were taking commission which were invested in
a similar fund and on which they
would pay no further commission" (which I read by way of a comment only - since
whether or not Mr
Hobbs is able to postulate a reason for such an investment is
not relevant to the issue). (Similarly, Mr Hobbs' submission, noting
that the
first transfer was from Mr Wood's personal account, that the only sensible
reason for this investment was that the J&B
Financial officers were trying
not to mix personal funds with investors' funds is no more than speculation or
commentary on what
Mr Hobbs perceives may have been the explanation for this.)
- Mr
Hobbs submits that neither he nor his wife had any reason to look beyond that
explanation for the funds being invested in Smart
Money (which rather suggests
that Mr Hobbs was accepting he had an involvement in the fund) and that the
request for the profit to
be paid to J&B Financial is only consistent with
it being an investment by the J&B Financial officers. (As to the first
point,
on Mr Hobbs' case he had no involvement with Smart Money in any event, so
it is not clear why he would be involving himself in any
explanation as to the
source of funds received by Geneva Financial for that fund. As to the last
point, it rather conflicts with
the argument that investment contracts were with
the named offshore IBCs, since in many cases the returns were paid to bank
accounts
of the individuals in question.)
- Finally,
Mr Hobbs submits that: Mrs Hobbs did not speak to Mr Koutsoukos after the first
discussion about investment to which Mr Hobbs
deposes in his affidavit (a matter
of which there is no evidence); that Mrs Brenda Hobbs was the person responsible
for correspondence
for Geneva Financial and ensuring agreements were completed
correctly (accepted to an extent by Mrs Brenda Hobbs in the witness box
but not
to the point in establishing the source of the funds); that "Both Jacky and
Brenda are clearly of the understanding that
the money coming from PJCB was Mr
Koutsoukos' and Wood's money" (about which there was no evidence - at least in
the case of what
Mrs Hobbs understood and the understanding of Mrs Brenda Hobbs
not being put to her in cross-examination); that the first transfer
to Geneva
Financial was from Mr Wood's personal bank account; and that the profit from
Geneva Financial was paid to J&B Financial's
bank account "as instructed by
them in their agreements with Geneva" (matters to which I have referred briefly
above).
- As
to the submission that Geneva Financial understood that there was a progressive
sale of flats and funds were available when the
flats had sold and that "If
Geneva Financial Limited understood the money was to be from third party's [sic]
the investment would
not have been accepted", if Mr Hobbs is here suggesting
that he is in a position to speak to the understanding of Geneva Financial
at
that time, then it would be an implicit acknowledgement that he was in a
position of control in respect of that entity. However,
I will give him the
benefit of the doubt and assume that he is making this submission on behalf of
Mrs Hobbs. In any event, there
is no evidence as to what would have been the
case had the controlling mind(s) of Geneva Financial understood this money to
have
been from third party investors - even assuming that Mr Hobbs' account of
the conversation were to be accepted.
- With
those general remarks, I make findings in relation to the particular breaches as
set out below.
Breaches of s 180(1) of the Corporations Act - duties of care and
diligence
- Breaches
of directors' and officers' duties of care and diligence (or in the case of Ms
Wu of officers' duties of care and diligence)
are alleged as
follows:
(i)by reference to the respective contraventions of s 911A of the
Corporations Act by:
- Mr Hobbs in
relation to FTC [416]-[419]; PJCB and ISL [421]-[423];
- Mr Collard in
relation to FTC [395]-[396]; Secured Bond [388], [390], Barclaywest [455]-[456]
and 888 Vanuatu [460]-[461]; and
- Ms Wu in
relation to Barclaywest [455]-[456] and 888 Vanuatu
[460]-[461].
(ii)by reference to the respective contraventions of s 601ED of the
Corporations Act by Mr Hobbs in relation to FTC [416]-[419], PJCB and ISL
[426];
(iii)by reference to the respective corporate misrepresentation
contraventions, by:
- Mr Hobbs in
relation to FTC [418]-[419], PJCB and ISL [424] [425]; Secured Bond [434],
[426];
- Mr Collard in
relation to FTC [395]-[396]; Secured Bond [388], [390]; and
- Ms Li in
relation to FTC [395]-[396].
Breaches of s 181(1) of the Corporations Act - duties of good
faith
- Breaches
of directors' and officers' duties of good faith are alleged as
follows:
(i)by reference to the respective contraventions of s 911A of the
Corporations Act by:
- Mr Hobbs in
relation to FTC [416]-[418], [420], PJCB and ISL [424][426];
- Mr Collard in
relation to FTC [397]; Barclaywest [457]; 888 Vanuatu [459]-[460],
[462];
- Ms Li in
relation to FTC [397]; Barclaywest [457], 888 Vanuatu [459]-[460],
[462];
- Messrs
Koutsoukos, Wood and Truong in relation to PJCB and ISL [350]-[352],
[354];
(ii)by reference to the respective contraventions of s 601ED of the
Corporations Act by:
- Mr Hobbs in
relation to FTC [417]-[420]; PJCB and ISL [422], [426] and
- Messrs
Koutsoukos, Wood and Truong in relation to PJCB and ISL [350]-[352],
[354];
(iii)by reference to the respective misrepresentation contraventions by:
- Mr Hobbs in
relation to FTC [418]-[419]; PJCB, ISL, Secured Bond [426];
- Mr Collard in
relation to FTC [397]; Secured Bond [391]; and
- Ms Li in
relation to FTC [397]; Secured Bond [391]; and
- Messrs
Koutsoukos, Wood and Truong in relation to PJCB [350]-[352],
[354];
- I
have found above that Mr Hobbs was at all material times a director or
alternatively an officer of FTC. FTC was his alter ego. I
have no doubt that Mr
Hobbs breached his duties as a director and officers of FTC (both of care and
diligence under s 180(1) of the Corporations Act and of good faith under
s 181 of the Corporations Act), in carrying on through FTC a financial
services business without the appropriate licence and permitting it to
participate in the
operation of an unregistered managed investment scheme, thus
exposing it to penalties. I also find that Mr Hobbs breached those duties
by
exposing FTC to liability for the misrepresentation
contraventions.
- In
relation to the contraventions of s 911A of the Corporations Act, I find that
the allegations against the directors and officers of the relevant companies for
breach of director's or officers' duties
in relation to the financial services
contraventions to be established. (In relation to Ms Wu, although I think it
likely that she
acted at the direction of others in relation to the companies
for which she acted as administrator and not of her own initiative,
she was
fulfilling a corporate role as administrator of those companies and the test as
to whether she is liable for breach of duties
of care and diligence must be
tested by what one would reasonably expect of an officer in her position.)
- As
to the alleged breaches of directors' and officers' duties predicated on the
misrepresentation contraventions by the respective
companies, I consider that
the relevant directors were so closely involved in the making of the misleading
and false statements that
the contraventions of s 180 and/or 181 in the case of
the respective directors has been established.
- I
find that Mr Collard breached the officer's duties of care and diligence owed to
FTC (having regard to the s 911A, s 1041E, s 1041G, s 1041H Corporations
Act and s 12DA, s 12DB, s 12DF ASIC Act contraventions by FTC)
pursuant to s 180(1) Corporations Act on the basis that Mr Collard played
a prominent role (with Ms Li and Mr Hobbs) in the promotion and marketing of the
Li/Collard schemes.
- I
find that each of Ms Li and Mr Collard breached officer's duties of good faith
owed to FTC (having regard to the s 911 A, s 1041E, s 1041G, s 1041H
Corporations Act and s 12DA, s 12DB, s 12DF ASIC Act contraventions by
FTC) pursuant to s 181 Corporations Act; (I note that the contravention
by Ms Li is relevant only to the aiding and abetting claims against Mr
Hobbs.)
- I
find that Mr Hobbs breached directors' and officers' duties of care and
diligence he owed to each of PJCB, ISL and Secured Bond
pursuant to s 180(1) of
the Corporations Act (having regard to the s 911A and s 601ED(5)
contraventions by PJCB and ISL and the s 911A contravention by Secured Bond). I
further find that Mr Hobbs breached the said duties having regard to the s
1041E, s 1041G, s 1041H Corporations Act and s 12DA, s 12DB, s 12DF
ASIC Act contraventions of each of those companies (in circumstances
where Mr Hobbs was not only personally responsible for the misrepresentation
contraventions but was responsible for contraventions of the same ilk by the
J&B Financial officers, having given them instructions
and directions as to
what to say to investors in relation to the investment scheme, and acquiesced in
the contraventions by the J&B
Financial officers and Ms Li and Mr Collard
when present at seminars and meetings at which they made similar
representations). For
the same reasons, I find that Mr Hobbs breached directors'
or officers' duties of good faith he owed to each of those companies (having
regard to the s 1041E, s 1041G, s 1041H Corporations Act and s 12DA, s
12DB, s 12DF ASIC Act contraventions by PJCB and ISL) pursuant to s 181
Corporations Act.
- I
find that each of Mr Wood, Mr Truong and Mr Koutsoukos breached directors' or
officers' duties of good faith owed to PJCB and ISL
pursuant to s 181 of the
Corporations Act (having regard to the s 601ED(5) and s 911A
contraventions by PJCB; as well as the s 1041E, s 1041H Corporations Act
and s 12DA, s 12DB, s 12DF ASIC Act contraventions by those companies. (I
note that this finding is relevant only to the aiding and abetting claim against
Mr Hobbs.)
- I
find that Mr Collard breached directors' or officers' duties of care and
diligence owed to Secured Bond (having regard to the s
911A, s 1041E, s 1041H
Corporations Act and s 12DA, s 12DB, s 12DF ASIC Act pursuant to s 181
Corporations Act contraventions by Secured Bond).
- I
find that each of Mr Collard and Ms Li breached directors' or officers' duties
of good faith he or she owed to Secured Bond (having
regard to the s 1041E, s
1041G, s 1041H Corporations Act and s 12DA, s 12DB, s 12DF ASIC
Act contraventions by Secured Bond) pursuant to s 181 Corporations
Act. (I note that the finding against Ms Li is relevant only to aiding and
abetting claim against Mr Hobbs.)
- I
find that Mr Collard breached directors' and officers' duties of care and
diligence he owed to Barclaywest (having regard to the
s 911A contravention of
Barclaywest) pursuant to s 180(1) Corporations Act.
- I
find that Mr Collard and Ms Li breached directors' or officers' duties of good
faith he or she owed to Barclaywest (having regard
to the s 911A contravention
by Barclaywest) pursuant to s 181 Corporations Act. (The finding against
Ms Li is relevant only to the aiding and abetting claim against Mr
Hobbs.)
- I
find that Ms Wu breached officers' duties of care and diligence she owed to
Barclaywest and 888 Vanuatu (having regard to the s 911A Corporations Act
contravention by those companies).
Breaches of s 182 of the Corporations Act - obtaining a benefit or
advantage for oneself or others to the detriment of the corporation
- Breaches
of s 182 of the Corporations Act are alleged against:
- Mr Hobbs in
relation to PJCB [427]; ISL [427]; ISPL [427]; Secured Bond [427]; Barclaywest
[427]; 888 Vanuatu [427]; Geneva Financial
[427]; Preserved Investments [427];
Ultimate Investments [427]; GP Global [427];
- Messrs
Koutsoukos, Wood and Truong in relation to PJCB [355]; ISL
[362];
- Mr Collard in
relation to Secured Bond [392]; Barclaywest [458]; 888 Vanuatu
[463];
- Ms Li in
relation to Secured Bond [392]; Barclaywest [458]; 888 Vanuatu
[463];
- Ms Wu in
relation to Barclaywest [458] and 888 Vanuatu [463]; and
- Mrs Hobbs in
relation to Geneva Financial [449].
- There
is ample evidence of the payment of benefits (out of accounts in which
investors' pooled funds were held by the corporate administrators)
to those
associated with one or more of the schemes (otherwise than, on the face of the
payment, for commission due in accordance
with the scheme memoranda) or for the
apparent benefit of the above defendants or others associated with them or made
at the express
or implicit direction or request of one or more of the
defendants.
- So,
for example, the payment of invoices rendered for private expenses of Mr Hobbs
or his brother, or payments made at the request
of Mr Hobbs for family members
(such as the payments to his cousins, Ms Hall and Mr Johns) or by way of
purported loans to friends
or associates (such as payments to Mr Brock or to Mr
"Tractor" Tomlinson). (Similarly, there is evidence of a payment treated by
Mr
Mitchell as referable to provisional tax payable by or on behalf of Mr Hobbs.)
Even if, as is contended by Mr and Mrs Hobbs, certain
of the payments are
explicable as proper disbursements out of the funds held by corporate
administrators (such as the payments to
Mr Hobbs out of Geneva Financial that
Mrs Hobbs explains as a repayment of the company's renewal registration fees in
Anguilla met
by Mr Hobbs) or as a return on investments (as Ms Wu characterised
the moneys received by entities associated with her and as Mrs
Hobbs
characterised the moneys received out of Geneva Financial by family members) or
as legitimate administration fees (as Mrs Hobbs
characterised the amounts paid
to her and her sister-in-law) that leaves a considerable number of payments (out
of what must have
included investor funds), the receipt of which (or the
direction for the payment of which) amounts to a breach of s 182 by the director
or officer of the corporate administrator receiving or making that
payment).
- Similarly,
payments of moneys between funds in order to enhance the position of other funds
or payment of moneys out of pooled funds
in order to meet expenses of or related
to Mr Hobbs would seem to me to be payments giving rise to clear breaches of s
182. Even if, as Mr Hobbs contends, there were moneys in Secured Bond's bank
account which represented commission due to him from Global
Funerals, those
moneys (once pooled with other investors' funds), could not properly be treated
as belonging to him personally (without
a proper redemption of the investment
into which they had been placed), having regard to the interests of other
investors in the
pooled investment scheme.
- I
do not set out in detail all of the payments in question. Broadly, I note that
ASIC has referred to payments of the following kind:
sums of $50,000 each paid
by the Super Save administrators to Mr Koutsoukos, Mr Wood and Mr Truong and a
payment to J&B Financial
in circumstances where there was no profits which
would have permitted the payment of returns; the disbursement out of Best Fund
contributions into Secured Bond's account of money to Ms Li, ShunFu Corporation
(an IBC of Ms Li), to Mr Collard; the significant
number of payments out of the
Master Fund account to entities such as MagnyCours, Tasman Business, Fletcher
Vautier Moore (from whence
funds were used for the benefit of or transferred to
Legend of Bathurst, the R&B Hobbs Family Trust (that being the family trust
of Mr Robert and Mrs Brenda Hobbs), Tricksmart Holidays and to Nelson Bays
Holden); payments out of that fund to J&B Financial,
Guo Ping Zhang, the
Wells, Preserved Investments and ED Weaver as well as to Ms Li and ShunFu
Corporation ($130,000 to Ms Li and
ShunFu and $130,000 to Mr Collard and Mr
Mack); payment out of the First Secured Bond Unit Trust funds of some $39,000 to
MagnyCours
(without any apparent record of investment) and $86,000 to Preserved
Investments; disbursement out of the Pinnacle Fund accounts
to Mr Collard and Ms
Li of amounts of approximately $50,000 as well as payments to a company
associated with Ms Li (HLD Corporation),
and to a Susan Fi Ou and a payment of
some US$47,000 to Tasman Business (I note that the only payment that ASIC
contends went to
the Hobbs' interests directly from the Pinnacle fund was the
payment to Tasman Business); payment out of the 888 Vanuatu fund (from
which no
returns were paid) of $1,000 was paid to ShunFu Corporation and the IBC of Ms
Li; payments out of the Enhanced Fund to ShunFu
(Ms Li's company), Amazing Glory
and Mr Mac Incorporated (Mr Collard's company); payments out of the Best Fund to
Ms Li, ShunFu Corporation
and various entities such as Watercraft World,
Lambretta South, DC Fiver Limited trading as Philco Farm as well as to Mr
Collard,
to Ms Huang and New Century 2001 (ASIC submits that the Watercraft
World, Lambretta South and DC Fiver payments were made at the
direction of Mr
Hobbs); payments out of Elite Premier of some $50,000 to MagnyCours, and $54,000
to Focus Administration Services;
and payments out of Elite Premier Option Two
Unit Trust to Austin Trading, Mr Caffray, Keystone International Limited. There
were
also payments out of Elite Premier Option Two Unit Trust to Tasman Business
(of some $55,000) as well as to Ms Li (of US$29,000)
and to Mr Collard (of
US$5,000) (neither Ms Li nor Mr Collard being a scheme administrator of that
fund, though ASIC concedes that
they were FTC executives and hence these
payments could have been by way of commission); in relation to Covered
Strategies, payments
were made to Mr Truong, Ms Li and Mr Wood (none of whom was
a scheme administrator of that fund) and to Bamford Law (which ASIC says
was at
the direction of Hobbs) as well as additional payments (some $93,000 to Tasman
Business and $60,000 to MagnyCours), as well
as some payments to persons or
entities the identity of whom ASIC has not been able to
confirm.
- I
note that there were also payments out of Geneva Financial to Mr Hobbs, Mr
Robert Hobbs and Mr & Mrs Hobbs' daughter (though
these are said by Mrs
Hobbs to be referable to investments and for present purposes it is not
necessary to come to a concluded view
on those payments).
- I
am satisfied that ASIC has established the breach by Mr Hobbs of directors' or
officers' duties owed to the respective corporate
administrators by reason of
the fact that he gained an advantage for himself and others and caused a
detriment to those companies
having regard to the payments and benefits
identified by ASIC that he received or directed to be disbursed to others out of
investors'
funds during the period the respective companies acted as corporate
administrator of schemes within the Hobbs scheme.
- I
find that each of Mr Wood, Mr Truong and Mr Koutsoukos breached directors' or
officers' duties owed to PJCB and ISL by gaining an
advantage for himself or
someone else or causing a detriment to those companies in breach of s 182 of the
Corporations Act. (Again, I note that this finding is relevant only to
the aiding and abetting claims against Mr Hobbs and Mrs Hobbs.)
- I
find that each of Ms Li and Mr Collard breached directors' or officers' duties
owed to each of Secured Bond; Barclaywest and 888
Vanuatu by gaining an
advantage for herself/himself or someone else or causing a detriment to those
companies pursuant to s 182 Corporations Act. (Again, I note that this
finding is relevant only to the aiding and abetting claims against Mr
Hobbs.)
- I
find that Ms Wu breached officers' duties owed to Barclaywest and 888 Vanuatu by
gaining an advantage for herself or someone else
or causing a detriment to those
companies pursuant to s 182 Corporations Act. (Even though Ms Wu says
that she was no more than an investor in the companies, she signed, as
administrator, directions for moneys
to be paid out of the Secured Bond accounts
to the advantage of others and the detriment of the companies in question.)
- I
find that Mrs Hobbs breached directors' or officers' duties she owed to Geneva
Financial by gaining an advantage for herself or
someone else or causing a
detriment to Geneva Financial pursuant to s 182 Corporations Act as
alleged. I note that the arrangements by which Mrs Hobbs authorised Mr Hobbs to
obtain the round turn commissions in relation
to the Geneva Cadent accounts and
the MLN arrangements clearly benefited Mr Hobbs (and in relation to MLN,
herself) at the expense
of investors and to the detriment of the corporate
administrator insofar as it was exposed to claims in relation thereto.
Aiding and Abetting Breaches of Directors' Duties
- There
are various allegations made as to the aiding and abetting of particular
contraventions of ss 181 and 182 (those aiding and abetting allegations being
made variously against Mr Hobbs, Mrs Hobbs and Geneva Financial). As noted
earlier,
these are only pressed as an alternative claim (in the event that the
relevant individual scheme administrators, such as Mr Koutsoukos,
Mr Wood and Mr
Truong were not acting as Mr Hobbs' agents, but rather as principals, in the
conduct that contravened the respective
statutory provisions). ASIC's primary
claim is that the relevant contraventions by the scheme administrators were as
Mr Hobbs' agent.
Having found that the scheme administrators were acting as Mr
Hobbs' agents, the alternative aiding and abetting claims do not strictly
arise.
I consider below what findings I would have made had the issues been necessary
to decide.
Did Geneva Financial aid and abet, counsel or procure and/or was it
directly or indirectly knowingly concerned in contraventions by
Wood, Truong and
Koutsoukos of s 182 of the Corporations Act and contraventions by Mr Hobbs of ss
181 and 182 of the Corporations Act [445]-[447]
- Not
only does this issue not arise for determination on the basis of the principal
findings I have made, but it would go nowhere as
Geneva Financial is
deregistered. In the event that this issue had fallen for determination I would
have found that the contravention
was established on the basis that the
knowledge of Mr Hobbs would be imputed to the company of which he was the de
facto or shadow
director (and for this purpose is likely to have been the
guiding mind of Geneva Financial).
Did Mr Hobbs aid and abet, counsel or procure and/or was he directly or
indirectly knowingly concerned in contraventions by Messrs
Wood, Truong and
Koutsoukos of ss 181 and 182 of the Corporations Act ([429](a)); by Ms Li and Mr
Collard of those statutory provisions ([429](b)); and by Ms Wu of s 182 of the
Corporations Act [429(b)]
- I
accept the evidence of the J&B Financial officers as to the directions,
instructions or advice given by Mr Hobbs as to the implementation
and operation
of the individual investment schemes operated by them and as to the payment of
moneys out of the fund otherwise than
in accordance with the investments in
which the fund memoranda specified. Mr Hobbs was aware of the representations
being made through
the scheme documents and at meetings at which he was present
as to the financial product to which investors were being offered access
(indeed, he provided the role model for the J&B Financial officers to
follow). He provided (and I find he did so directly) the
templates for the
scheme documents and directed the process through which investment was to occur.
- Mr
Hobbs was in my view clearly involved in the various contraventions by the
J&B Financial officers and knew of the essential
facts that constituted
those contraventions. He was on notice from as early as the ASIC enquiry in 2002
of the risk that the activities
in which he and (later, by extension) the
J&B Financial officers were engaged. His attention was again drawn to it in
mid 2007
by Mr Koutsoukos (following the concerns expressed by Mr Papaioannou).
It seems to me not unduly melodramatic to describe him (as
ASIC has) as the
mastermind behind the operation of the Burwood schemes.
- In
light of the findings made in relation to the issues for determination in these
proceedings, it seems to me clear (and certainly
it has been established to my
satisfaction on the balance, and having had regard to the gravity of the
allegations) that Mr Hobbs
aided and abetted the contraventions by Mr
Koutsoukos, Mr Wood and Mr Truong of ss 181 and 182 of the Corporations
Act.
- As
to the position with Ms Li, Mr Collard and Ms Wu, there is no evidence directly
from those defendants (other than Ms Wu's affidavit
sworn in support as to the
application for leave to file the defence) as to the circumstances in which each
of them became involved
in the investment schemes in which they were involved
(in differing capacities, since Ms Wu was only an officer of two of the
corporate
administrators). Nevertheless, there is ample documentary evidence of
Mr Hobbs' involvement in the contraventions by those defendants
as well as
evidence from various of the witnesses as to the role Mr Hobbs played in the
operation of the schemes.
- It
is inconceivable that the operation of these schemes so closely mirrored the
operation of the Burwood schemes for there not to
have been an involvement by Mr
Hobbs in relation to the Li/Collard schemes. Moreover, he communications between
Ms Reisinger and
Mr Hobbs make it clear that he was frequently updated on the
status of the Cadent accounts with which Ms Li was involved. Furthermore,
the
payment out of moneys from Secured Bond (not all of which could possibly be
attributable to the distribution of commissions received
via Global Funerals) to
persons and entities associated with Mr Hobbs (on receipt of directions signed
by Ms Dong without her having
any knowledge of the reason she was asked to sign
the directions) points again to Mr Hobbs' knowing involvement in the
contraventions.
(The evidence of Mr Zhang in this regard is instructive - he
expressed bewilderment at the receipt into his investment fund (Best
Fund) of
moneys from Mr Hobbs only for those moneys to be directed to be paid out almost
immediately. It seems to me clear that Mr
Hobbs was directing the payment out of
funds and treating the Secured Bond account as, in effect, a personal bank
account.)
Did Mrs Hobbs aid and abet, counsel or procure and/or was she directly
or indirectly knowingly concerned in contraventions: by each
of Messrs Wood,
Truong and Koutsoukos of s 182 of the Corporations Act ([450]-[451]) and/or by
Mr Hobbs of those statutory provisions [450]-[451]
- As
to the aiding and abetting allegations against his wife, Mr Hobbs submits that
"in virtually every case" the actions alleged against
him were alleged to have
been carried out by other people as his agents (such as Ms Reisinger and the
fund administrators) and that
in circumstances where those people were acting
outside of their authority as FTC "consultants" and in circumstances where they
may
have been acting illegally, Mrs Hobbs cannot be responsible for their
actions. For the reasons given above, when considering the
question of agency,
even if it were to be the case that acts were conducted in breach of the FTC
executives' authority, or illegally,
that does not preclude a finding that those
individuals committed contraventions and that Mrs Hobbs was knowingly involved
in or
assisted those contraventions.
- That
said, I have some difficulty in relation to the allegation that Mrs Hobbs, in
her capacity as a scheme administrator of the Prestige
Unit Trust, assisted
knowingly in the contravention by the J&B Financial officers of their
statutory obligations as de facto
directors or officers of PJCB (in relation to
the acceptance of investment funds from those officers that were dealt with
otherwise
than in accordance with the scheme memoranda).
- There
is no evidence that she was in attendance at the various FTC seminars or
meetings at which representations were made to potential
investors, nor is it
clear to me that she directed any payments to be made out of the Burwood scheme
funds for her benefit or the
benefit of others. Had it been necessary to
determine this issue, I would not have found that Mrs Hobbs had aided and
abetted the
contraventions of the J&B Financial officers.
- The
position in relation to the contraventions of Mr Hobbs is very different. Mrs
Hobbs appears to have taken a direct role in relation
to the communications with
Ms Reisinger as to commissions (and was clearly involved in seeking to reconcile
the statements received
in relation to commissions for more than the Geneva
Financial funds). She seems to have done so on Mr Hobbs' directions or at his
request (having regard to the way in which various of the emails are worded). I
consider that it has been established that Mrs Hobbs
was involved in at least
some of the contraventions by Mr Hobbs of ss 181 and 182 of the Corporations
Act. (As the claim in this regard is an alternative to the claim made for the
direct contraventions of the respective statutory provisions,
I do not set out
in detail the particular contraventions of Mr Hobbs in which I consider Mrs
Hobbs aided and abetted or was knowingly
involved.)
Breach of Fiduciary Duties
Did each of Mr Hobbs ([433]-[432]; [434]), Mr Collard ([398]-[400];
[407]) and Ms Wu ([398]-[400]; [407]) breach fiduciary duties
owed to investors
either by placing himself or herself in a position where there was a real and
substantial risk that his or her
interest would conflict with those of investors
or by using his or her position to gain an advantage for himself or herself and
others
- Again,
this set of issues does not arise in the sense that ASIC puts these claims
forward as an alternative or "stopgap", in the event
that there were not
findings of breaches of the Corporations Act by reason of the conduct of
the individuals or corporations. In those circumstances it is contended that Mr
Hobbs, Mr Collard and
Ms Wu (by reason of the position that each was in) owed
fiduciary duties to the investors and those duties were breached.
- Having
found that each of Mr Hobbs, Mr Collard and Ms Wu was in breach of the relevant
statutory duties owed by them as directors
and/or officers of the relevant
companies in relation to the operation of the respective scheme or schemes, no
finding is necessary
on the fiduciary duty claims. However, again, I consider
below what would have been my findings had I not found that one or more
of them
was acting in a corporate capacity in relation to the scheme or schemes.
- The
allegation that each of Mr Collard and Ms Wu (as well as Ms Li) owed a fiduciary
duty to investors (in the case of Mr Collard
and Ms Wu in relation to investors
in the 888(Super Save) Fund, the Pinnacle Fund and the Enhanced Fund; and in the
case of Mr Collard
also in relation to the Master Fund and First Secured Bond
Unit Trust) is contained in [398]-[399] of the pleading. The allegation
that
fiduciary obligations were owed to the respective investors is based on the
following: that each of Mr Collard and Ms Wu (and
Ms Li) provided or was
otherwise involved in the provision of financial services to potential investors
in the said funds; each operated
or was otherwise involved in the promotion and
operation of the said funds; investors in the said funds were dependent or
otherwise
relied on each of Mr Collard and Ms Wu (and Ms Li) for information and
advice on whether and how to invest in the funds; investors
had no control over
their investment once it was placed with the said funds and were dependent on
each of Mr Collard and Ms Wu (and
Ms Li) to invest their capital in profitable
and secure income producing investments, distribute profits to them and redeem
the investments
to them on the termination of the investment; that as investors
did not have any control over the investment of their funds each
was placed in a
position of vulnerability as against each of Mr Collard and Ms Wu (and Ms Li);
that, by reason thereof, investors
placed trust and confidence in, and were
dependent upon, each of them to provide impartial advice and to act in the
investors' best
interests; and therefore investors were entitled to expect that
each of Mr Collard and Ms Wu (and Ms Li) would act in their interest
or the
interests of the investors in the particular funds.
- I
consider that in their capacity as operators of the relevant managed investment
schemes, each of Mr Collard and Ms Wu (and, for
that matter, Ms Li) owed
fiduciary obligations to the members of the scheme. (I accept that the existence
or content of any such
fiduciary obligation might be qualified or informed by
reference to the terms of the contract by which the investors became scheme
members. However, even apart from the fact that the contractual relationship was
between the member and the corporate administrator,
there is nothing in the
private placement agreement that in my view is inconsistent with the existence
of fiduciary duty obligations
on the part of the scheme administrators.
Particularly in circumstances where the scheme administrator was often also an
introducer
in respect of the investment (and promoted and provided advice, at
the very least in the form of the provision of the private placement
memoranda,
and assistance to the investor in relation to the investment), I consider that
the fiduciary relationship has been established.
- In
that regard, I consider that each of Mr Collard and Ms Wu was n a position where
he or she owed fiduciary obligations to investors
not to put himself or herself
in a position of potential or actual conflict of interest and not to obtain an
advantage for himself,
herself or others by use of his or her position as a
fiduciary. Insofar as the receipt of commissions as scheme administrator, these
were disclosed in the private placement memoranda. Other benefits or potential
benefits were not. (I note that Mr Collard and Ms
Wu were not parties to
arrangements of the kind to which Mr Hobbs was party (for the payment of round
turn or other commissions from
Cadent or through New World Holdings. However,
they were in a position where they procured or directed the making of payments
out
of the pooled funds otherwise than in accordance with the scheme memoranda
and in circumstances where those payments benefited themselves
or others with
whom they were associated).
- As
to Mr Hobbs, the basis on which ASIC contends that there was a fiduciary
relationship between he and the investors in the Hobbs
scheme, as pleaded in
[430]-[431] is that: Mr Hobbs provided or was otherwise involved in the
provision of the Hobbs financial services
to potential investors in the Hobbs
scheme; he operated or was otherwise involved in the promotion and operation of
the Hobbs scheme;
investors in the Hobbs scheme were dependent or otherwise
relied on Mr Hobbs for information and advice on whether and how to invest
in
the Hobbs scheme; investors had no control over their investment once it was
placed with the Hobbs scheme and were dependent on
Mr Hobbs to invest their
principal in profitable and secure income producing investments, distribute
profits to them and redeem the
investments to them on the termination of the
investment; as investors did not have any control over the investment of their
funds
each was placed in a position of vulnerability as against Mr Hobbs; by
reason of those matters investors placed trust and confidence
in Mr Hobbs and
were dependent upon him to provide them with impartial advice and to act in
their best interests; and investors were
entitled to expect that Mr Hobbs would
act in their interest or the interests of the investors in the Hobbs scheme as a
whole to
the exclusion of his own interests.
- The
alleged breaches of fiduciary duties (and unconscionable conduct) by Mr Hobbs
are that he directed or otherwise procured the making
of the various scheme
returns and scheme payments: first, from money provided to the corporate
administrators by investors for the
purpose of investing in the schemes rather
than out of profits and thereby placed himself in a position where there was a
real and
substantial risk that his interests would conflict with those of
investors ([432]) and, second, that were not authorised by or otherwise
disclosed in the Scheme Memoranda or otherwise by the investor and thereby he
improperly used his position within the corporate administrator
to gain an
advantage for himself, Mr Wood, Mr Truong, Mr Koutsoukos, Ms Li, Mr Collard, Mrs
Hobbs and related parties ([433]).
- As
can be seen from [430], the allegation that a fiduciary relationship was in
existence is predicated not simply on the provision
by Mr Hobbs of financial
services (in the form of advice as to the accessibility or availability of the
relevant offshore investments)
and reliance by investors thereon, but on the
dependence by investors on Mr Hobbs' advice and conduct in relation to the
investment
of their moneys as someone operating or involved in the operation in
the overall Hobbs scheme.
- I
have little doubt that as an operator of the overall Hobbs scheme, Mr Hobbs was
in a position where he owed fiduciary obligations
to those who had invested in
the scheme. However, as I understand the submissions made by Mr Halley, although
pleaded as a claim
further or in the alternative to the foregoing claims, the
breach of fiduciaries claim is pressed (as a stopgap) in the event that
Mr Hobbs
is found not to have been acting as a de facto or shadow director of the
corporate administrators in relation to the scheme.
If that had been my finding
(and it is not), then logically his involvement in the operation of the scheme
would have been found
to have been much more remote and there would be a
question in my mind as to whether his anterior involvement in the events leading
up to investment in the schemes would have been sufficient to give rise to a
fiduciary relationship.
- In
other words, if Mr Hobbs' involvement had been limited to setting up (and, say,
selling to administrators the rights to use or
operate) the investment funds,
then I would have had difficulty finding that he owed any fiduciary obligations
to ultimate investors
in those funds (and, to be fair, I do not think ASIC
contends otherwise). Similarly, if all Mr Hobbs had done had been to disseminate
financial education and train others to sell the FTC educational packages, but
thereafter he had not been involved in the provision
of information in relation
to the available investment funds or in the operation of those funds, then there
might be some difficulty
in finding sufficient dependence by ultimate investors
on Mr Hobbs as to give rise to such obligations.
- While
there might be some analogy drawn with the position of the broker in
Daly, in that I consider that Mr Hobbs was holding himself out as able to
advise in relation to investment in the offshore wholesale market
and did
provide both generic advice and more specific advice in some instances as to the
funds in which persons could invest (and
I accept that at that stage there was
at least a sufficient degree of trust and confidence reposed in Mr Hobbs for
potential investors
to seek the information he said would be made available in
relation to the funds), I am not satisfied that there was a sufficient
relationship to give rise to fiduciary obligations at that point.
- However,
in the present case, Mr Hobbs' involvement in the operation of the funds went
far beyond the initial introduction to funds
through which offshore investment
was made possible for scheme members (hence his liability for the contraventions
as found above).
To the extent that it was Mr Hobbs' operation of the scheme as
a de facto or shadow director of FTC and the corporate administrators
that would
lead to the conclusion that there was a fiduciary relationship, then a finding
that he had not been involved in such a
capacity would have caused me some
hesitation (since his role would on that hypothesis have been largely removed
from the decision
making role in relation to the schemes). There might of course
have been a sufficient relationship of dependence and confidence as
to lead to
the conclusion that the relationship was one in which Mr Hobbs was not free to
pursue his own separate interests in advising
as to investment in the funds, but
it would have been less clear.
- As
it is, Mr Hobbs' role in relation to the operation of the Hobbs scheme
(consistent with the finding of his involvement as a de
facto or shadow director
of the corporate administrators) is such that I find that Mr Hobbs was in a
fiduciary position and owed
fiduciary duties to scheme investors above and
beyond the directors' and officers' duties owed to the respective corporations.
I
also find that he was in breach of both of the proscriptive duties owed by him
as a fiduciary. However, as I understand it, such
a claim is not pressed by ASIC
in light of the findings I have made above in respect of Mr Hobbs' breach of the
civil penalty provisions.
- For
completeness, I note that the procuring and receipt of the respective payments
and returns each of Mr Hobbs, Mr Collard and Ms
Wu have been established and I
find that the allegations as to the making of payments not authorised by, and
not disclosed to, scheme
members have also been established. (The broad
reference in the scheme memoranda to the making of other investments did not
authorise
the investment of funds in, for example, unsecured loans or payments
to friends or associates of Mr Hobbs; nor am I satisfied that
it was open to
treat moneys the subject of investment with Secured Bond as moneys open to a
mere direction for payment out of pooled
moneys, without any consideration give
to or application of the redemption process provided for under the scheme
documents.)
Defences/matters pleaded in answer to the claim
Limitations defence
- In
further answer to the whole of the Further Amended Statement of Claim, Mr Hobbs
makes a number of assertions. The first of those,
at [287], appears to raise a
limitations defence (although this was not the subject of any submissions during
the hearing) namely
that, to the extent that the (then) Further Amended
Statement of Claim relies on events six years prior to 31 March 2010 (the date
of filing of the first Statement of Claim), the claim is statute barred. (Mrs
Hobbs similarly relies on such a defence in a broad
sense in answer to the
claims made against her to the extent that reliance is placed on events that
occurred more than six years
from the date of the first pleaded Statement of
Claim.)
- The
first two sets of proceedings, as noted earlier, were instituted in late 2007
and were commenced by summons. The third set of
proceedings was similarly
commenced by summons in 2008. Mrs Hobbs was a party to the third set of
proceedings from the outset. Mr
Hobbs was joined as the seventeenth defendant to
the third set of proceedings on 11 July 2008 by order of Austin J. He was also
joined
as a party (the twelfth defendant) to the first set of proceedings by
orders on that date. The respective proceedings were consolidated
by orders made
on 27 August 2010.
- Section
1317K Corporations Act provides that proceedings for a declaration of
contravention, a pecuniary penalty order or a compensation order may be
commenced
no later than six years after the contravention. Ford's
Principles of Corporations Law notes at [3.410] that:
The lapse of substantial time from the contravention to the proceedings will
probably have the effect of dissuading the court from
exercising its discretion
to make a pecuniary penalty order or a disqualification order, even if the
contravention is established
and the declaration of contravention is made. The
lapse of time is likely to be less significant in proceedings for a compensation
order, unless the plaintiff is guilty of delay or the defence of laches is
established.
- This
can be compared to the five-year limitation period (unless the Minister's
consent is obtained) for proceedings for an offence against the
Corporations Act provided for under s 1316 Corporations Act.
- The
limitation period ceases to run when proceedings are commenced. Proceedings are
commenced when the originating process is issued
(although a defendant is not
drawn into proceedings until served). In P Handford, Limitations of Actions:
The Laws of Australia (2nd ed, 2007) at [5.10.460], it notes that it is not
necessary for service of the originating process to take place within the
limitation period, as long as it is sealed in the court registry within the
relevant
limitation period. Handford then goes on to say:
The commencement of proceedings stops time running only in respect of the
cause of action sought to be enforced in those proceedings.
Time continues to
run in respect of other causes of action, although the running of time may be
deemed to be stayed where other causes
of action are added by a later amendment.
- T
Prime and G Scanlan (The Law of Limitation, 2nd ed, 2001) comment that
existing proceedings may be amended, provided that the substance of the
allegations remains constant.
Further, they note that the cessation of time
running for one cause of action does not stop time running in respect of another
cause
of action (see, for example, Leferve v White [1990] 1 Lloyd's Rep
569).
- With
respect to parties joined after the commencement of proceedings in New South
Wales (such as Mr Hobbs), r 6.28 of the Uniform Civil Procedure Rules 2005
(NSW) provides that where a party is joined, the date of commencement of
proceedings as against that party is the date on which order for joinder is
made (or on such later date as the Court may specify in the order).
- Accordingly,
time would not cease to run, for limitations purposes, on a cause of action in
the proceedings against Mr Hobbs at least
until he was joined in 2008. Mr Hobbs,
however, points to the March 2010 date when the first Statement of Claim was
pleaded (a draft
as at 20 November 2009 having apparently earlier been served in
the proceedings). As at the time Mr Hobbs was joined to the respective
proceedings in 2008, the Further Amended Originating Process already alleged
contraventions of s 911A and s 601ED in relation to
the relevant scheme (in the
6201/07 proceedings that being the Integrity Plus scheme, in the 5864/07
proceedings that being the Super
Save scheme) as well as seeking declaratory
relief in relation to alleged contraventions of s 180(1) and s 1041H of the
Corporations Act. Thus in respect of those causes of action, arguably
time ceased to run once Mr Hobbs was joined (and not at the later date when
the
claims were pleaded more completely in the Statement of Claim).
- It
is not necessary to consider whether the allegations in the pleaded claim (once
the three actions were consolidated and the matter
proceeded with a consolidated
pleading) introduced new causes of action that were not encompassed in the
respective originating processes
at the time of Mr Hobbs' joinder as a party to
the proceedings in July 2008 (such as some of the misrepresentation claims not
the
subject of the claim for declaratory relief as contained in the originating
process as at that date) because even on the later date
the causes of action
would not have been statute barred.
- The
contraventions of ss 601ED(5) and s 911A of the Corporations Act relate
to the Hobbs scheme that was still in operation as late as May 2008 (that being
when the last investment into the Master Fund
occurred). Even if there were no
collective "Hobbs scheme", each of the individual managed investment schemes was
still in operation
within 6 years of the filing of the first Statement of Claim
(the earliest of those schemes to have ceased taking investments being
the Elite
Premier Unit Trust, the last investment in which was on 20 August
2004).
- For
the same reason, the contraventions by reference to the making of
representations to investors and the breaches of directors'
and officers'
duties, insofar as they relate to conduct over the period from at least the
relevant date in 2004, would be within
time even if the date on which time
stopped running, for the purposes of a limitations defence, in respect of claims
against Mr Hobbs
was not until the first Statement of Claim was filed in March
2010.
Invocation of s 1317S and s 189 Corporations Act
- At
[288], Mr Hobbs asserts that, to the extent that the Corporations Act
applies and is liable for a civil penalty (which is denied), then reliance is
placed on s 1317S of the Corporations Act. Mr Hobbs says that he acted
honestly throughout and ought to be fully excused.
- By
way of particularisation of that pleading, Mr Hobbs points to the advice
obtained in 2002 "on behalf of Kip Becker" from Atanaskovic
Hartnell "which said
that the Reisinger Product would not contravene the relevant provisions of the
Corporations Act; that Mr Hobbs did not raise funds from investors in
Australia for the purposes of investment in the Reisinger Product; that "insofar
as he was aware that IBCs were investing in the Reisinger Product", Mr Hobbs
reasonably believed that they could do as set out in
the Hartnell advice; that
this belief was confirmed by the investment in the Reisinger Product "by
Australian lawyers including a
barrister Greg Stanton, who eventually
administered one of the Reisinger Products" (of which there was no evidence in
the hearing
before me); that opinion was confirmed by subsequent legal opinion
in 2007 (unidentified but apparently this is a reference to the
advice from Ms
Maroun); that he himself invested in the Reisinger Product; that he believed
that Geneva Financial "being a fund operated
in New Zealand by New Zealanders,
had no requirement to comply with Australian Law (but would for reasons in the
Hartnell advice
be legal there in any event)"; and that Mr Hobbs believed that
Global Funeral Services Limited, being a Taiwanese company, had no
requirement
to comply with Australian Law, and any services provided by Mr Hobbs in Taiwan
or elsewhere outside Australia were not
within the jurisdiction of this
Court.
- As
noted earlier, in order for s 1317S to apply, it must be found that the person
has acted honestly and that, having regard to all the circumstances of the case,
that
person ought fairly to be excused in relation to the relevant breach of the
civil penalty provision in question.
- I
am unable to conclude that Mr Hobbs acted honestly in relation to the schemes,
adopting the test of honesty as being without moral
turpitude (ie, "without
deceit or conscious impropriety, without intent to gain improper benefit or
advantage and without carelessness
or imprudence at a level that negates the
performance of the duty in question"). I consider that a reasonable person in Mr
Hobbs'
position would have regarded the conduct involved in relation to the
schemes as exhibiting moral turpitude.
- Moreover,
I cannot be satisfied that Mr Hobbs' actions ought fairly to be excused when he
was squarely on notice (from as early as
2002) that there were requirements for
the operation of schemes such as these, which he knew were not being met. Mr
Hobbs, on his
own admission having regard to the matters of which he spoke in
the DVD Seminar) believed that if he (or entities operating through
him or on
his behalf) solicited investment by retail customers in Australia of funds in a
pooled investment scheme such as the ones
he had established then it would be
necessary at least for there to be a product disclosure statement or prospectus
issued for those
schemes and for regulatory requirements in this jurisdiction to
be met. He made a point of emphasising the regulators and that the
investment
could not lawfully be made within the jurisdiction (or that if offers were made
in the jurisdiction, there would be a
breach of the law).
- Mr
Hobbs seems to have considered that the feature that removed these schemes from
regulatory overview and prevented the operation
of the schemes from being
unlawful in this jurisdiction was the incorporation of an offshore IBC in whose
name the interest in the
scheme was to be acquired. In so doing he seems to have
ignored (wilfully or otherwise) the many connecting points in this jurisdiction
(not least being the printing of scheme memoranda and the issue of the scheme
memoranda in this jurisdiction to addresses within
this jurisdiction). Accepting
that he is not a lawyer, I nevertheless consider that a reasonable lay person in
receipt of Mr Hartnell's
advice would have understood it to say no more than
that solicitation of investment that occurred wholly offshore would not be
regulated
in this jurisdiction. That was not the case with the Hobbs scheme or
the underlying investment schemes that comprised it.
- It
should be noted that Mr Hobbs has expressed no contrition (and indeed he accuses
others involved in the scheme as being fraudsters);
and that the contraventions
were serious (having regard to the public policy underlying the relevant
provisions, the flagrancy of
the contraventions and the harm to unsophisticated
investors in the schemes). The advice obtained by Mr Hobbs was based on what
seems
to have been an incomplete account of what was occurring or what was to
occur in relation to the schemes (and obtained, at least
in relation to the
Maroun advice, well after the event) and Mr Hobbs had a significant financial
interest in the conduct of the schemes.
- I
am firmly of the view that relief under s 1317S is neither applicable nor
warranted in relation to the contraventions by Mr Hobbs of the civil penalty
provisions.
- At
[289], Mr Hobbs states that, to the extent that it is found that the
Corporations Act applies (which is denied), and he is found to be a
director of FTC or any company associated with the "Reisinger Product" (which
is
denied), he relies on the defence provided by s 189 of the Corporations
Act. By way of particulars, reliance is again placed on the 2002 Atanaskovic
Hartnell advice said to have been obtained "On behalf of
Kip Becker". It is
stated that the opinion provided that:
i)the sale of financial information by FTC "'through magazines, newsletters,
etc. to Australian retailers was not a sale of a financial
product and did not
constitute the carrying on of a financial services business as defined and thus
FTC did not need an Australian
financial services license under the Act.
Reisinger Product would not contravene the relevant provisions of the
Corporations Act.
ii)Australians who seek investment through foreign unregistered prospectus or
memorandums may legally do so if they own an IBC and
the offer and acceptance
are both offshore. The First Defendant, having made enquiry of a legal
professional who has significant
expertise as a former head of ASIC, was
entitled to rely in good faith on the information and advice provided in the
legal opinion
and he is entitled to rely on that advice.
- Reliance
is also placed on the confirmation of the Hartnell opinion by a subsequent legal
opinion in 2007 (the opinion provided by
Ms Maroun). Mr Hobbs pleads that "the
opinion" (the Hartnell opinion) was relied on by him when he provided
educational material
through FTC and in discussions with FTC executives and that
his reliance on the opinion provided by Atanaskovic Hartnell ("legal
professionals with acknowledged expertise in Corporations Law and ASIC
compliance") was reasonable and made in good faith.
- Although
at [18] of Mr Hobbs' affidavit, he deposes to his understanding of the
lawfulness of the activity on the basis of the advice
not only from Mr Hartnell
but also from Mr Miles and Mr Becker, the primary reliance in that regard seems
to have been on the advice
from Mr Hartnell. (Reliance on Ms Maroun's advice
would not assist in relation to the contraventions before the time at which it
was provided.)
- As
Mr Halley points out, no particular advice from Mr Becker was identified. I have
assumed that to the extent that Mr Hobbs' evidence
is that Mr Becker told him
that investment needed to be through IBCs for the purposes of investment
requirements in the United States
then that might be relevant advice (and
perhaps any advice comprised by the provision of templates for the investment
documents,
assuming for present purposes that I could accept Mr Hobbs' evidence
that the initial template for those documents was prepared or
provided by Mr
Becker, also included some advice). There is certainly no written advice from Mr
Becker in evidence and even if there
had been oral advice in relation to the
above matters, it does not extend to (nor could it reasonably have been
understood to extend
to) the lawfulness in Australia of the activities that were
undertaken in relation to the schemes.
- As
to the advice from Mr Miles referred to in paragraph [9] of Mr Hobbs' affidavit,
this was oral advice the content of which is elucidated
no further than the
statement that "as far as I am aware this is perfectly legal" and the advice
that FTC should appoint executives
rather than brokers or consultants.
- It
is impossible to make any assessment as to the reasonableness of reliance on
advice the content of which is not clear and (more
importantly perhaps) the
instructions or assumptions on which it is based are not identified. That
becomes even more apparent when
the advice of Mr Hartnell is considered. I have
set out earlier the relevant parts of Mr Hartnell's June 2002 advice.
- Mr
Hobbs has deposed, at [18]:
I always understood based on that advice there was nothing contravening any
New Zealand, Australian or American law in an Australian
making investments of
this kind as long as it was done in accordance with the advice from Mr
Hartnell." (my emphasis)
- Mr
Halley points out that Mr Hobbs goes on to say:
I was aware that people were establishing these schemes but did not give them
much consideration as I had no financial interest.
- (The
financial interest Mr Hobbs had in the scheme has been identified earlier.
Moreover, the proposition that he did not give much
consideration to the
establishment of the schemes seems perilously close to suggesting that there was
no real reliance on the advice
itself (if, as Mr Hobbs suggests, he did not
think it relevant to his own personal situation).
- As
to the Hartnell advice, as already noted the request for advice raised two
questions: the first, concerning FTC (the activities
of which are described as
being limited to the sale of financial information worldwide); the second, as to
the legality of offshore
investments.
- As
to the assumptions on which the advice was based, Mr Halley notes that there was
no suggestion in the letter that Mr Hobbs or FTC
was conducting seminars or
meetings in Australia (at which statements were made as to how access could be
gained to wholesale funds
offshore or as to the performance of various funds,
the returns that had been received in the past by particular funds and what
returns
might be received in the future). Nor was there any reference to the
dispatch of lists of funds in which investment could be made
(in response to
faxes sent to offshore companies).
- As
to the conclusion that that "financial information of the kind provided by you
is not a financial product in itself", that must
be understood in the context
that the financial information to which Mr Hartnell's advice referred (insofar
as it was based on what
was said in the letter requesting the advice) was
information contained in a series of booklets as to generic topics such as
budgeting,
succession planning, debt restructuring, mortgages, an ABC of IBCs
and introduction to financial statements (and newsletters warning
of investment
scams or the like). Mr Halley notes that there was no reference to explanations
given to potential investors of opportunities
available for investment overseas,
the types of funds that might be accessible and the types of returns that might
be expected to
be achieved.
- Mr
Hartnell's advice in this regard can only be read as limited to the proposition
that the sale and distribution of magazines and
newsletters on generic topics of
kind referred to above (without more) would not amount to the provision of a
financial product or
financial service requiring the provider to be licensed.
- As
to the second part of the advice, Mr Halley notes that even if it is accepted
that (and ASIC does not accept this) the true nature
of the investment was that
it was by the IBC and that the IBC had a relevant discrete existence to the
investor, nevertheless the
request for information was made on-shore to an
offshore number and the offer (and issue of the product) was made by the sending
of material to the potential investors on-shore. The private placement memoranda
and the agreements were sent or provided to persons
or addresses in Australia
(or New Zealand as the case may be). The unit certificates were issued in the
name of IBCs and, in most
cases, sent to addresses in Australia or New Zealand.
The money was generally paid into Technocash accounts (whether by the IBC or
by
the administrator of the IBC) in Australia and returns (whether of capital or
profit - though ASIC has shown that there were only
little returns made out of
profits) were generally paid into bank accounts in Australia.
- Mr
Halley submits that the obvious inference is that Mr Hartnell was not asked to
consider the relevant facts as to the actual operation
of the investment process
(since it is submitted that had the relevant facts been drawn to Mr Hartnell's
attention is it inconceivable
that Mr Hartnell would have given the advice he
did, having regard not only to the provisions of the Corporations Act but
to the authorities that had considered very similar factual circumstances to
those that apply in the present case). Having regard
to the Chase Capital
case, I consider this submission to be irresistible. The suggestion that someone
of Mr Hartnell's experience (to which Mr Hobbs himself
points as warranting a
finding that reliance on the Hartnell advice was reasonable) would not have, at
the very least, have qualified
his advice by reference to the then recent
authorities on this area would be extraordinary.
- Mr
Halley submits, and I accept, that the letter makes it clear to Mr Hobbs that
there is an express prohibition on operating a managed
investment scheme in
Australia if the scheme is required to be registered but is not in fact
registered. He submits that the reference
in [3.5] to the fact that the
exemption from the prohibition on operating an unregistered foreign scheme in
Australia applies even
if the foreign schemes make offers and issues to
investors in Australia provided that all such Australian investors are
wholesale client, should have made it clear that where investment offers were
being made in
Australia in relation to foreign schemes the relevant exemption
was for wholesale clients (not an exemption for investments through
an IBC). (Mr
Hartnell's letter makes clear what the qualification for a wholesale client was
under the legislation.)
- Mr
Halley submits further that the statement in the letter that "separate to the
question of registration of a foreign fund the product
disclosure regime
contained in the Corporations Act provides there is no requirement to give the
investor a disclosure statement where no offers or issues of foreign products
are made
or received in Australia" emphasises the significance of the making or
the receipt of the offers in Australia.
- Mr
Hobbs, in his affidavit and cross-examination, explained what he understood by
the advice and emphasised that he was not a lawyer.
Nevertheless, Mr Halley
submits that reliance on this advice as an imprimatur for the activities being
conducted was not reasonable
particularly given the use by Mr Hobbs of this
advice in emphasising the lawfulness of what was being done. (Indeed, the
statements
made at the DVD seminar seem to me to make it clear that Mr Hobbs
well understood that it was not lawful to offer investments of
this kind to
persons in Australia without compliance with the requirements under the relevant
legislation - hence the emphasis on
the requirement for incorporation of an
offshore IBC. The difficulty for Mr Hobbs is that, being as charitable as one
can be in this
regard, at best he seems to have assumed that once there was an
investment in the name of an offshore IBC, it did not matter what
else was done
in relation to the investment within the jurisdiction - as indicated by his
answers in cross-examination at T 1300
- and any such assumption was
fundamentally misconceived.)
- At
T 1290.13ff, Mr Hobbs accepted that he had not asked Mr Hartnell whether it was
legal to conduct seminars in Australia to potential
subscribers and that his
question to Mr Hartnell was limited to the sale of manuals and distribution of
newsletters. At T 1292.35,
he was asked:
Q. And you would agree that Mr Hartnell's advice concerning registration as a
foreign company therefore proceeded on the assumption
that the only link to
Australia was a newsletter sold to Australian subscribers?
A. I probably didn't read it as that at the time.
- Not
surprisingly, he was then asked at T 1293.20:
Q. When do you say you first appreciated that Mr Hartnell's advice concerning
whether FTC had to register as a foreign company in
Australia proceeded on the
assumption that the only link that FTC had with Australia was the sale of a
newsletter to Australian subscribers
through retailers or possibly directly?
A. I mean just as you are explaining it now. I didn't read into that anything
else.
- The
suggestion by Mr Hobbs that he did not understand that Mr Hartnell's advice was
based on the activities Mr Hartnell had been told
were engaged in by FTC is
frankly difficult to accept. The value of any legal advice (and the reliance
that a client could place
upon it) must be heavily influenced by the content
(and accuracy) of the instructions on which it is based. At T 1293.44, Mr Hobbs
suggests that as he was not a lawyer, he simply took the advice on its face
value. Mr Halley submits that the only meaning that could
be attributed to the
first part of the advice (by a lay person or otherwise) on its face value would
be that it related to what Mr
Hobbs had indicated, namely the sale through other
people of financial booklets of a very general nature and some newsletters. I
agree.
- As
to the second part of the advice, at T 1300, Mr Hobbs agreed that when he had
received and read this advice he understood that
what Mr Hartnell was saying was
that provided everything was offshore, it was outside the reach of the
Corporations Act. (He deposes to this same understanding in his affidavit
at [18]). At T 1300.28 there was the following exchange:
Q. So what I want to suggest to you Mr Hobbs is that when you read this
advice you must have appreciated that what Mr Hartnell was
saying would not
constitute a contravention, was an investment where everything with respect to
that investment, the application,
the request, the offer, was all done offshore,
that's how you understood it at the time you read it, wasn't it?
A. I believe so.
Q. And that advice would not cover a situation where somebody in Australia
made a request for information concerning an offshore investment,
would it?
A. I am sorry, I don't know.
Q. And it would not cover a situation where an offshore entity sent private
placement memorandums and investor agreements to investors
in Australia, would
it?
A. I am sorry I don't, I don't know. If it was an offshore company I don't
see any reason why not. (my emphasis)
...
Q. I am talking Mr Hobbs, so we are not as crosspurposes, about the dispatch
of a private placement memorandum and an investor agreement
from offshore to an
investor in Australia, you understood that Mr Hartnell's advice didn't cover
that situation, did it?
A. No, I am not sure about that. I believe that if it was sent to an IBC
in the name of an IBC it didn't constitute anything. (again my emphasis)
- Mr
Halley submits that Mr Hobbs was either recklessly indifferent to the content of
Mr Hartnell's advice or chose deliberately to
ignore that it proceeded on a
fundamentally false premise as to the scope of the activities that FTC conducted
in Australia and the
OEM/KLM investment process, namely the premise that the
investment process was wholly offshore to offshore with no relevant connection
to Australia.
- I
am not satisfied that s 189 is applicable. In particular, I am not satisfied
that Mr Hobbs paid more than lip service to the advices obtained in relation to
the scheme. Certainly, I consider that any reliance he did place on the Hartnell
advice was not reasonable, there being no suggestion
that Mr Hobbs made any
independent assessment as to whether the actual operation of the scheme fell
within the parameters of what
Mr Hartnell had advised would be lawful (or that
he fully briefed Mr Hartnell at the time that advice was received). In this
regard,
Mr Hobbs' conduct when the lawfulness of the scheme was queried by Mr
Papaioannou in mid 2007 is instructive. There is no suggestion
that Mr Hobbs
went back to Mr Hartnell and enquired as to whether the initial advice had been
correct or whether there was now some
other requirement to be satisfied. Mr
Hobbs seems to have done no more than to move some aspects of the operation
offshore (the printing
of the memoranda) and to have continued on regardless. He
did seek further advice in relation to the lawfulness of the scheme (and
the
superannuation components of the Super Save scheme) but, for whatever reason,
this time he chose not to go to the expert in the
field but to a relatively
junior solicitor (to whom he provided the Hartnell advice and who seems largely
to have regurgitated that
advice, though adding further detail and responding to
the superannuation components).
- I
am not satisfied that Mr Hobbs gave any independent thought to the applicability
of the advices he received so as to satisfy the
requirement of s 189. (Moreover,
the incomplete information apparently provided in order to procure the advice
suggests strongly to me that it was not
sought in good faith - in the sense that
there is a reasonable inference that Mr Hobbs' instructions were couched in
order to bring
the fact situation presented to the advisers within one that
would enable the provision of the advice he wanted, without any apparent
concern
as to the completeness or correctness of that information.)
- Even
if Mr Hobbs could establish that he had relied on the Hartnell advice for the
purposes of s 189, I consider that ASIC has proved that such reliance was not
reasonable in all the circumstances. Therefore, I do not consider that
s 189
affords Mr Hobbs a defence to the contraventions of the civil penalty
provisions.
Conclusion
- I
am satisfied that the white label or generic investment funds promoted for
investment through Mr Hobbs, FTC and the FTC executives
constituted a financial
product for which an Australian financial services licence was required. No such
licence was obtained by
anyone involved in the promotion of those funds in this
jurisdiction. Therefore, there was a breach of s 911A of the Corporations
Act by Mr Hobbs, FTC and each of the corporate and scheme administrators by
reason of the provision of financial services without an
Australian financial
services licence in relation to the marketing of the investment funds (through a
combination of the sale of
FTC subscriptions and what has been termed the
OEM/KLM process, leading to the making of offers and issue of unit certificates
or
confirmation of investments in this jurisdiction).
- I
further find that there was a breach of s 601ED(5) of the Act by reason of the
operation of a unregistered managed investment scheme
within this jurisdiction
(that being the overall scheme that I have found was comprised by the individual
management schemes and
the process in which FTC and OEM/KLM were
engaged).
- I
summarise the findings as against each of the defendants,
below.
- I
find the following contraventions against Mr Hobbs have been proven:
- personal
contraventions of s 911A and s 601ED(5) (in respect of the collective Hobbs
scheme) on the basis that he was involved in
the operation of managed investment
schemes which were unregistered in this jurisdiction and carried on a financial
services business
(through the provision of financial services advice and the
promotion of a financial product) in this jurisdiction without an Australian
financial services licence;
- contraventions
of ss 180 and 181 as a de facto director of FTC and a shadow director or officer
of each of the corporate administrators
(by reference to the respective breaches
by the corporate administrators of the Corporations Act), as well as
contraventions of s 182 of the Act in relation to the benefits gained by himself
or others and to the detriment of the
following corporations.
- The
aiding and abetting allegations in respect of the contraventions of Mr
Koutsoukos, Mr Wood, Mr Truong, Ms Li and Mr Collard and
the breach of fiduciary
duties owed to investors by Mr Hobbs do not arise for determination in light of
the above. I have made varying
findings in relation to those.
- I
am not satisfied that Mr Hobbs has established what is necessary for relief to
be granted under s 1317S or s 189 of the Corporations Act. In particular,
I am not satisfied that reliance on the Hartnell advice was reasonable on the
basis that it was predicated on a factual
scenario that was known not to be the
case (ie that all the steps leading up to the investments occurred offshore).
- As
against Ms Li, the findings are only relevant for the purposes of the
liability of others in respect of those contraventions as the proceedings
are
stayed against Ms Li. I find that contraventions by Ms Li of (ss 911A and
601ED(5) of the Corporations Act, ss 1041E, 1041G and 1041H of the
Corporations Act and ss 12DA, 12DB and 12DF of the ASIC Act have
been established.
- As
against Mr Collard, I find that he contravened ss 911 and 601ED(5) of the
Corporations Act, ss 1041E, 1041G and 1041H of the Corporations
Act and ss 12DA, 12DB and 12DF of the ASIC Act. I find that (to the
extent that Secured Bond contravened the Corporations Act), Mr Collard,
as a de facto director and officer of Secured Bond, breached his duties under ss
180-181 of that Act. I also find that Mr Collard breached s 182 of that Act by
obtaining a benefit by reference to the receipt of funds for
his benefit or the
transfer of funds for the benefit of others at his direction out of the funds
deposited by investors to the funds
administered by Secured Bond.
- As
against Ms Wu, I find that, as an officer of Barclaywest and 888 Vanuatu
she contravened s 911 of the Corporations Act and ss 1041E, 1041G and
1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the ASIC
Act.
- As
against each of Messrs Wood, Truong and Koutsoukos I find
the contraventions of the Corporations Act and ASIC Act alleged
against him (of ss 911 and 601ED(5) of the Corporations Act, ss 1041E,
1041G and 1041H of the Corporations Act and ss 12DA, 12DB and 12DF of the
ASIC Act) to have been proven. Those findings are relevant only for the
purposes of the liability of other defendants in respect of that conduct
as the
proceedings have been discontinued against these three defendants.
- As
against Mrs Hobbs, I find that the contravention of s 182 of the
Corporations Act has been established. (Had the question arisen, I would
have found that she had aided and abetted the contraventions of Mr Hobbs
but not
of Messrs Koutsoukos, Wood and Truong as alleged.)
- As
against each of ISPL, 888 Vanuatu, Geneva Financial, Preserved Investments,
North Wave GP Global, I find the contraventions of s 911A of the
Corporations Act proven. (I note that only ISPL and North Wave remain
currently registered.)
- I
have considered above the fiduciary duty claims but no findings need be made in
that regard, in light of the principal findings.
Declarations and Orders sought by ASIC
- By
way of relief, ASIC has sought: declarations that Mr Hobbs and each of the
defendants, other than the second defendant against
whom proceedings are stayed
and the fifth to seventh defendants against whom the proceedings have been
discontinued (to which I would
presume should be added the corporate defendants
that have been deregistered) ("the remaining defendants"),has contravened the
relevant
sections of the Corporations Act and ASIC Act (including
declarations of contraventions of civil penalty provisions pursuant to s 1317E
of the Corporations Act); disqualification orders pursuant to s 206C or
alternatively s 206E of the Corporations Act against each of Mr Hobbs, Mr
Collard and Mrs Hobbs; and pecuniary penalty orders pursuant to s 1317G of the
Corporations Act in an amount to be determined by the Court against each
of Mr Hobbs, Mr Collard and Mrs Hobbs.
- ASIC
also seeks the following orders pursuant to ss 1101B and 1324(1) of the
Corporations Act:
(i)orders that each of the remaining defendants be permanently restrained
from operating or promoting the individual schemes, carrying
on any business
related to, concerning or directed to be part of those individual schemes and
being in any way involved in the promotion
or establishment of or the carrying
on of the individual schemes;
(ii)orders that for a period of years to be determined by the Court each of
the remaining defendants be restrained from carrying on
any business related to,
concerning or directed to be a registered managed investment scheme within the
meaning of the Corporations Act and being in any way involved in the
promotion, establishment or the carrying of the business of a registered managed
investment
scheme within the meaning of the Corporations Act;
(iii)orders that each of the remaining defendants be permanently restrained
from carrying on any business in relation to financial
products or financial
services in contravention of s 911A of the Corporations Act;
(iv)orders that each of the remaining defendants be permanently restrained,
alternatively be restrained for a period of years to be
determined by the Court,
from carrying on any business in relation to the financial products or financial
services or being involved
in the carrying on by another person of financial
services business.
(v)ASIC seeks orders for the winding up and appointment of a liquidator to
each of the Pinnacle Fund, Smart Money, Prestige, Enhanced
Fund, Elite Premier
Option Two Unit Trust, Good Value Fund and the Best Fund. (Mr Collard supports
such an application and, towards
the close of the hearing, handed up Consents to
Act by a proposed liquidator for that purpose; as did ASIC at the conclusion of
the
hearing - ASIC's proposal being for the appointment of Mr Taylor, the
liquidator who was appointed to each of the Integrity Plus,
Super Save and
Master Fund schemes.)
(vi)ASIC also seeks an order pursuant to ss 1323(1)(h) and 1101B of the
Corporations Act that a receiver be appointed to Mr Collard and a
receiver be appointed over the assets located in each jurisdiction of each of
Geneva
Financial, Mr Hobbs and Mrs Hobbs.
- I
note that the Court is required to make a declaration of contravention under s
1317E if satisfied that a person has contravened one of the specified sections;
such a declaration must specify the civil penalty provision
that was
contravened, the person who contravened the provision, the conduct which
constituted the contravention and the corporation
to which the conduct related
(s 1317E(2)). Austin and Black note at [9.1317E] that if multiple
contraventions are found it may be appropriate for a separate declaration to be
made in respect
of each contravention but that the Court must not take account
of conduct declared to constitute a contravention more that once since
this
could penalise the defendant more than once for that conduct (citing Adler v
ASIC (2003) 179 FLR 1; 46 ACSR 504; [2003] NSWCA 131; Vines v ASIC
(2007) 63 ACSR 505; 25 ACLC 867; [2007] NSWCA 126.)
- I
also note that, if satisfied that a civil penalty should be imposed, then there
should be a separate hearing in relation to penalty
in order to allow
submissions to be made as to the circumstances of the defendant and the
appropriate penalty (ASIC v Adler (2002) 42 ACSR 74; [2002] NSWSC 510). I
consider that ASIC has clearly established a basis for civil penalties to be
imposed in light of the contraventions that have been
found against the various
defendants against whom such penalties might be imposed.
- In
those circumstances, I consider that the appropriate course is to hear
submissions on the appropriate declarations of contravention
to be made in light
of the above findings and for submissions as to penalty. I will list the matter
for directions at a convenient
time for such a hearing.
**********
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