Gadens assists ASIC to secure findings of contravention in failed managed investment scheme

Introduction

In ASIC v Daly (Liability Hearing),[1] the fallout from the failure of Linchpin Capital Group Ltd (Linchpin) continued on 3 April 2023, when Justice Cheeseman in the Federal Court made findings of contravention of section 601FD of the Corporations Act 2001 (Cth) (the Act) sought by ASIC against four officers of Endeavour Securities (Australia) Ltd (Endeavour), which operated a registered managed investment scheme (the Registered Fund).

Background 

The respondents (save for one respondent) were directors of Endeavour. They were also directors of Linchpin.

Between 1 April 2015 and 7 August 2018 (the Relevant Period), the respondents obtained $16.5m from members of the Registered Fund, then transferred those funds to the Unregistered Fund. From there, the funds were lent, without adequate documentation or security, to various parties including Linchpin, other companies in the Linchpin Group, and two of the respondents, Peter Daly (Mr Daly) and Paul Raftery.

The Court referred to these transfers as “uncertain, uncommercial and improvident“.

Three of the Respondents did not oppose the relief sought by ASIC. However Mr Daly, the former CEO of the Linchpin Capital Group, did so.

Mr Daly argued that he was not an officer of Endeavour during the Relevant Period, such that section 601FD wasn’t triggered (he was not a director of Endeavour), and advanced technical arguments that because ASIC had not called a certain witness the evidence it did call should be discounted, and that ASIC’s pleading did not properly disclose the case he had to meet and was therefore unfair.

Judgment

The Court held that the transfer of the funds was approved by an Investment Committee that made decisions for both the Registered and Unregistered Funds. The Court found that all four respondents were members of the Investment Committee throughout the Relevant Period.

The Court held that Mr Daly was clearly a member of the Investment Committee throughout the period, and because of this (and other reasons such as being a director of Linchpin, the holding company of Endeavour) he was an officer of Endeavour on the basis that he participated in decisions that affected the whole or a substantial part of the business of Endeavour.

Mr Daly placed considerable weight on the fact that ASIC did not call Mr Blanchette, who had been a member of the Investment Committee, in regard to a crucial document, a circular issued by the Investment Committee. He argued that the Court should therefore discount the evidence ASIC had presented in regard to the circular and the Investment Committee’s activities. The Court rejected this argument, holding that in civil penalty proceedings “the duty that befalls ASIC is limited to one of fairness – that is, a duty to act fairly with respect to the conduct of the proceedings.” The Court further held that the circular was clear on its face, that there was no unfairness in how ASIC had conducted its case in regard to not calling Mr Blanchette, and in any event, Mr Daly could have given any relevant evidence about the circular but chose not to do so.

In closing submissions, Mr Daly similarly complained that ASIC’s pleadings did not disclose the case he had to meet, and that this resulted in unfairness towards him. The Court rejected this submission, first saying that Mr Daly should have dealt with any such issue long before trial by seeking particulars or clarification, rather than “to lie in wait and take a pleading point in closing submissions.” The Court held that ASIC’s case was presented in “a positive, and obvious“, way and there was no unfairness in its conduct of the proceeding.

The Court made the following findings of contravention against the respondents:

• 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);
• failing to take all steps to ensure that the responsible entity complied with the Act and the Registered Fund’s constitution and compliance plan: section 601FD(1)(f).

The matter proceeded to a penalty hearing against all respondents on 14 June 2023. Her Honour has reserved her judgment on penalty.

This case demonstrates that ASIC continues to hold to account directors and officers of a responsible entity of a managed investment scheme who fail to act in the best interests of members.

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Authored by:
Scott Couper, Partner
Craig Melrose, Senior Associate

[1] [2023] FCA 290