Update | Gadens client ASIC secures penalties and disqualification orders against directors of Linchpin Capital Group

By way of update to our article in April 2023 concerning the liability judgment in the Linchpin Capital Group (Linchpin) matter, judgment was handed down yesterday in the Federal Court by her Honour Justice Cheeseman following the penalty hearing in June 2023. Gadens assisted the Australian Securities and Investments Commission (ASIC) to obtain significant financial penalty orders and disqualification orders following findings of serious breaches of duty by the directors.

Background

Gadens partner, Scott Couper acted for ASIC, supported by Tegan Harris (Director) and Craig Melrose (Senior Associate).

In ASIC v Daly [2023] FCA 290, ASIC obtained judgment against four officers of the responsible entity of the Scheme for the following breaches of the Corporations Act 2001 (Cth) (the Act):

• failing to exercise care and diligence: section 601FD(1)(b);
• failing to act in the best interests of the members of the Scheme: section 601FD(1)(c);
• making improper use of the respondents’ position as an officer: section 601FD(1)(e); and
• failing to take all steps to ensure that the responsible entity complied with the Act and the Scheme’s constitution and compliance plan: section 601FD(1)(f).

At the commencement of the trial three of the four respondents confirmed that they did not contest the relief sought by ASIC. The other respondent, Mr Daly, the former CEO of the Linchpin Capital Group, contested the relief sought by ASIC, was legally represented, and took an active part in the proceedings.

Mr Daly denied he was an officer of Endeavour during the Relevant Period, and contended ASIC’s claim against him was inadequately pleaded and that ASIC had not established a causative link between his conduct and contraventions of the Act. Mr Daly elected to exercise his privilege against exposure to a penalty and did not go into evidence. In short, he was unsuccessful on each of the defences raised.

Judgment – penalty

Judgment was handed down yesterday in the Federal Court by her Honour Justice Cheeseman following the penalty hearing in June 2023. Mr Nielson, Mr Williams and Mr Raftery did not contest ASIC’s case at trial and agreed to ASIC’s penalty submissions, including the pecuniary penalties sought and the periods of disqualification sought.

Mr Nielson and Mr Williams were each ordered to pay a $100,000 penalty and were banned from managing corporations for four years.

Mr Raftery was ordered to pay a $40,000 penalty and was banned from managing a corporation for three years.

Mr Daly, who contested ASIC’s case, was ordered to pay a $150,000 penalty and was banned from managing corporations for five years.

In considering the position of Mr Nielson, Mr Williams and Mr Raftery (the Submitting Respondents), her Honour considered a number of matters, including the following:

• The penalties imposed must reflect the need for general and specific deterrence.
• In considering that the agreed relief as between ASIC and the Submitting Respondents was an appropriate remedy, her Honour took into account that ASIC supported the agreed outcomes for each of the Submitting Respondents.
• Although each of the Submitting Respondents showed some contrition by not contesting liability, they did not do so until shortly before the final hearing of the proceeding.
• The Submitting Respondents’ belated agreement not to contest liability saved public resources in that ASIC was saved some expenses of proceeding against them.
• The agreement reached between ASIC and each of the Submitting Respondents in relation to relief also saved public resources and also reduced the level of specific deterrence required.
• Whereas here, there is agreement between the parties as to the relief, provided the Court is satisfied that the relief is an appropriate remedy, the Court will be slow to refuse to give effect to the terms of a settlement reached by consent.
• The investors in the Registered Scheme have suffered significant harm.

In relation to the position of Mr Daly, her Honour took into account a number of matters, including the following:

• Mr Daly evinced a propensity to blame others and not accept responsibility for his own actions.
• While he expressed remorse that investors had lost money, he did not express contrition for his part in that outcome.
• Notability missing from his affidavit evidence was an acknowledgement or acceptance that it was Mr Daly’s own conduct which contributed to the investors losing money. His regret is limited to the outcome of his conduct, and did not extend to an express acceptance that it was his conduct which led to that outcome. The conduct engaged in by Mr Daly was serious.
• Mr Daly did not repay the loans improperly made to him until February 2023, by which time the liquidators of Linchpin had obtained default judgment against him and served a bankruptcy notice on him.
• There is a risk that through his lack of insight and his lack of acceptance of responsibility for his actions that Mr Daly may engage in further contraventions in the future. The relief imposed must protect the community from such conduct.
• The starting point for the Submitting Respondents was that for the reasons given, her Honour was satisfied that the relief agreed between ASIC and the Submitting Respondents was an appropriate remedy, in all the circumstances pertaining to each of the Submitting Respondents.
• The starting point for Mr Daly was that he did not settle with ASIC. In his case, her Honour must come to a decision applying the established principles in relation to civil penalties based on instinctive synthesis to arrive at the appropriate penalty, accepting that there may be a range within which the appropriate penalty falls.
• Mr Daly contested liability. While he is not to be punished for that, he is not entitled to receive the benefit that the Submitting Respondents received attendant on their having reached agreement with ASIC.
• That Mr Daly did not accept his culpability by agreeing before the liability hearing that he was liable for the contraventions alleged against him reflects another factor in considering what is the appropriate penalty in his case.
• The lack of remorse or contrition demonstrated by Mr Daly, assessed in light of his conduct as a whole, is relevant in that it suggests a higher penalty is warranted for the penalty to achieve the objective of specific deterrence.
• Taking all of these matters into account, the critical factor is that there must not be unjustifiable disparity between the remedies agreed by the Submitting Respondents, and accepted as an appropriate outcome by the Court, and the relief granted against Mr Daly.
• Taking into account all of these matters, as well as Mr Daly’s difficult personal circumstances and his financial position, it was appropriate to order that Mr Daly be disqualified from managing corporations for a period of five years and that he pay to the Commonwealth a pecuniary penalty in the sum of $150,000.

As discussed in our April 2023 article, this judgment demonstrates ASIC will hold to account directors who breach their duties. Further, the Courts will order appropriate and significant financial penalties and disqualify directors from managing corporations for significant periods of time. The case further demonstrates that ASIC will take action to protect investors in managed investment schemes.