Hedge Cash and Carrie (HCC) was a partnership of financial planners and advisors who promoted their services as having provided “exclusive, specialized financial advice to high net wealth individuals, professionals and small business for fifty years. Principals with Principles, HCC today deserves its reputation as a market leader in financial advisory services, future-proofing your life-balance through exceptional service, exceptional people, integrity, professionalism and outstanding competence.” The firm’s letterhead showed that HCC was authorised to operate under PMTED Financial Pty Ltd’s Australian Financial Services Licence (No. 987654), issued by the Australian Securities and Investment Commission (ASIC) in 1998.
Bruce Magoo was a retired senior State government bureaucrat. Formerly Director-General of the State’s Treasury Department, Bruce was confident that he could run his own self-managed superannuation fund on behalf of his wife and himself, having completed a Master of Financial Planning degree online at the University of Dalby in Western Queensland. Although Bruce conceded that he was not an experienced businessperson, he believed that his degree had given him the necessary rigorous training, with relevant advice, to maximise his post-retirement returns.
Bruce saw a promotion by HCC in the investment magazine Shrewd Investor, inviting him to enquire about investing $2 million in syndicated mezzanine fixed rate, secured ‘at the money’ negative-equity instalment warrants to be issued by Beta Corporation Ltd (“Beta”), a public company listed on the Australian Securities Exchange (ASX), which was the parent company of the Beta Group of Companies (“Beta Group”). The warrant issue was solely underwritten and guaranteed by investment company Beta Investments Ltd (“Beta Investments”), another company in the Beta Group of Companies. The warrants were secured by a registered second mortgage over Beta’s fixed assets, as well as an unregistered equitable charge over the circulating assets of the Beta Trust, a unit trust within the Beta Group. The promotion listed the phone number of one Mary Hedge, a principal with HCC.
Bruce phoned Mary and enquired about the instalment warrants. He told Mary that he required a secure, short-term investment for his $2 million superannuation payout with a reasonable return, with a coverage of no more than 80% of debt to secured property. Bruce had always been a little vague about what this meant, but it was something he had learned in his Masters of Financial Planning at Dalby University, and he thought that mentioning it would be prudent.
Mary was very vivacious and engaging on the phone, assuring Bruce that the instalment warrants were secure, had a term of no more than six months (with a rollover if needed), had a debt coverage ratio of 80%, and were guaranteed a reasonable return. She added that, “This is an excellent opportunity to invest.” All of this sounded particularly attractive for Bruce who, even though he had no real understanding of the nature of an instalment warrant and assumed it was some sort of promissory note, pricked up his ears even more when Mary told him that there were no entry or exit fees on the product.
Following this telephone conversation Mary, on behalf of HCC, wrote to Bruce introducing the firm, and making it clear that HCC was capable of advising Bruce and doing research on his behalf. Mary even offered in the letter to provide Bruce with a financial plan to help secure his financial future.
In response to this letter, Bruce spoke with Mary via videolink on Zoom and assured her that he handled his own superannuation scheme and did not require a financial plan, but needed clarification on the nature of the promissory notes she was offering him. Mary was not specific on the nature of the securities (in truth, she had little real understanding of them herself), but again reassured Bruce that they were secure, had a term of no more than six months (with a rollover if needed), had a debt coverage ratio of 80%, and were guaranteed a reasonable return.
Bruce told Mary in this Zoom conversation that he had no real understanding of what a second mortgage or ‘unregistered equitable charge’ were, but took these terms to mean that the company guaranteed it would repay his money with interest. He said he assumed that ‘circulating assets’ meant that his securities would circulate through the financial system, helping to provide liquidity for the economy; and that a ‘warrant’ was either a promise to repay, or something akin to a warranty. He laughed, saying he had no idea what ‘mezzanine’ meant, except that a mezzanine floor in a building was higher than the first floor, and he assumed that this could only indicate be a good thing, indicating higher returns. Mary said nothing in response to any of this, merely nodding sagaciously on screen as Bruce engaged in what seemed to her to be friendly chitchat.
As a follow-up to this Zoom conversation, Bruce wrote the following diary note:
“Spoke to Mary and said not interested in any other investments she offered me – insufficient return and term too long. I said what I need is –
A short-term investment @ around 8%
Suitable for gearing as I will be using borrowed money
Regular income returns (monthly)
- Mary said that investment in these securities would be ideal for my purposes;
- I said that as long as she was satisfied that my investment would be secure, then pls send relevant Info Memo or PDS;
- She said she was satisfied that investment in these securities very secure.
Three days after writing this diary note, Bruce invested his $2 million superannuation payout in the syndicated mezzanine fixed rate, secured ‘at the money’ negative-equity underwritten and guaranteed instalment warrants.
Unbeknown to Bruce, the day after he had written his diary note, ASIC issued a media release, as well as notification to the ASX. Both documents stated that ASIC had issued a Regulatory Non-Compliance Notice to the solicitors of all companies in the Beta Group, demanding that each and every company in the Beta Group cease any and all activities directly or indirectly associated with public fundraising by security issue “immediately and forthwith on receipt of this Notice.”
HCC’s Research Department immediately notified all HCC partners by internal email on the same day as news of the ASIC action was made public on the ASX, but Mary had fallen into a habit of not reading her emails, preferring to “get the real work done of making money for the firm.” Nor did Mary make any enquiries about the nature of the instalment warrants she had recommended to Bruce.
Six months later, the entire Beta Group of Companies had gone into compulsory liquidation, and all instalment warrants were completely worthless.
Bruce is enraged, and now consults you to see whether he can sue HCC on two grounds:
(a)Breach of s. 12 DA of the ASIC Act, which is essentially the same as s. 18 of the Australian Consumer Law, and provides that “A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive”; and
Advise Bruce about whether Mary and/or HCC, in your opinion, contravened s.12 DA of the ASIC Act.
For the purposes of your advice, ignore all other provisions of the ASIC Act; do not discuss any other causes of action; and assume that the law you have learnt in relation to s. 18 of the Australian Consumer Law applies equally to s.12 DA of the ASIC Act.
You are required to write only the ‘Application of Law’ and ‘Conclusion’ for Question 1. Apply the law and identify the relevant sections of legislation and/or case law in your answer. DO NOT use the full ILAC method in Question 1.
Advise Bruce about his prospects of success if he sued HCC for negligent advice, including whether HCC has any defences in law.
Using the full ILAC method, explain your answer by making reference to relevant case law on negligent misstatement and relevant sections of the Civil Liability legislation (either the Queensland Civil Liability Act or the equivalent legislation) in your State or Territory. You have already been emailed a publication specifying the relevant law in your State or Territory. If you need further assistance finding the relevant law in your State or Territory, please do not hesitate to telephone me on Tel (0412) 742 827.
In your response to Question 2, remember to use the full ILAC method.