News | Gadens client ASIC Secures Judgment in Linchpin Capital Group Managed Investment Scheme Case

The fallout from the failure of Linchpin Capital Group (Linchpin) continued on 3 April 2023, when Justice Cheeseman in the Federal Court made findings of contravention sought by the Australian Securities and Investments Commission (ASIC) against four officers of Endeavour Securities (Australia) Ltd (Endeavour), which operated a registered managed investment scheme (the Scheme).

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

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

The Court found that between 1 April 2015 and 7 August 2018 (the Relevant Period), the respondents obtained funds in an amount of $17 million from members of the Scheme, then transferred those funds to an unregistered managed investment scheme controlled by Linchpin. From the unregistered scheme the funds were lent, without adequate documentation or security, to various parties including Linchpin, other companies in the Linchpin Group, and to Mr Daly and one of the other respondents, Mr Raftery, personally.

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

The Court held that this flow of funds was approved by an Investment Committee that made decisions for both the Scheme and the unregistered managed investment scheme operated by Linchpin. The Court found that all four respondents were members of the Investment Committee throughout the Relevant Period.

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

Mr Daly placed considerable weight on the fact that ASIC did not call a Mr Blanchette, who had been a member of the Investment Committee, regarding a crucial resolution issued by the Investment Committee which set a strategy for the joint future operation of the two schemes. He argued that the Court should discount the evidence ASIC had presented about 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 held that the circular was clear on its face, that there was no unfairness in how ASIC had conducted the case, and in any event, Mr Daly could have given any relevant evidence about the circular but chose not to.

In closing submissions, Mr Daly 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, finding 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.

In conclusion, her Honour carefully analysed each of the allegations against each of the respondents during the relevant period. Her Honour was satisfied that ASIC had established, to the requisite standard, that each of the respondents had contravened sections 601AD(1)(b), (c), (e), (f) and 601FD(3) of the Act in the manner contended for by ASIC.

This case demonstrates that ASIC will hold to account directors who breach their duties as officers of a responsible entity of a registered managed investment scheme and who fail to act in the best interests of members.