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ASIC and Westpoint: The Mechanics of a Collapsing Mezzanine
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Gerard Magner, Partner and Melanie Younis, Lawyer |
The collapse of the Westpoint group and the loss of many millions of dollars of investors’ funds has been the subject of much publicity. ASIC has recently announced that it will commence legal action to recover damages on behalf of investors in respect of various Westpoint developments.
That proceeding is but the latest in a series of actions that ASIC has taken in the mop-up of the Westpoint debacle. ASIC has thus far commenced investigations into 13 licensees and 28 authorised representatives who advised on Westpoint products. As at 16 November 2007, ASIC’s website showed that there were 11 banning briefs currently under consideration. Orders have already been made banning 6 advisers from providing financial services to the public.
ASIC’s investigations in relation to Westpoint are obviously not over, and notices to produce documents and summonses to attend hearings are still being issued to any person that ASIC considers might have broken the law in advising on Westpoint products or may be able to shed light on the activities of financial planners who recommended Westpoint products or who have been involved in financial planning businesses that had recommended Westpoint products.
The question therefore arises - what can ASIC do to obtain information and what should you do if you receive such a request?
Notice to produce
Division 3 of Part 3 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) outlines the powers conferred on ASIC in relation to the collection of relevant documents. Those powers may be exercised for the purpose of performing functions and powers under the corporations legislation or for ensuring compliance with the corporations legislation. They may also be exercised in relation to an alleged or suspected contravention of the corporations legislation or in certain circumstances, a law of the Commonwealth, State or Territory.
ASIC’s powers to require the production of documents include:
requiring corporations or registered schemes to produce specified books relating to the affairs of the corporation or operation of the scheme;
requiring any person who in ASIC’s opinion has been a party to a dealing in financial products to produce documents relating to matters such as:
- the business or affairs of a financial market or clearing facility;
- a dealing in financial products; or
- advice given, or an analysis or report issued or published, about financial products; and
requiring a person who supplies, or has supplied a financial service, to produce specified books.
Section 33 of the ASIC Act also (more simply) provides that ASIC may give a person written notice requiring the production of specified books in their possession and which relate to the affairs of a body corporate or registered scheme.
The first step in an ASIC investigation will often be the service of a notice to produce documents. If you receive such a request, it is important to note that a failure to comply with such a notice is an offence under the ASIC Act. Further, where ASIC has reasonable grounds to suspect that documents will be at a premises within 3 days, and those documents have not been produced in compliance with a notice to produce, a Magistrates’ Court can grant ASIC a warrant. In certain circumstances, ASIC also has power to request the Australian Federal Police to apply for a warrant on its behalf.
You should also be aware that certain documents may be withheld from inspection by ASIC (although they must still be produced) on the basis of legal professional privilege. Determining whether a document is covered by legal professional privilege can be complicated and this in itself is a good reason to seek legal advice upon being served with a notice to produce.
Notice for examination
Where ASIC, on reasonable grounds, suspects or believes a person can give information relevant to a matter it is investigating, section 19 of the ASIC Act gives ASIC power to issue a notice requiring that person to attend for examination.
The person will be required to attend at (usually) an ASIC office to answer questions under oath or affirmation. ASIC has wide powers under the ASIC Act as to the questions it can ask and can essentially require the examinee to answer any question put to them if that question is relevant to the investigation.
If you are served with a notice under section 19, the ASIC Act provides that you are able to bring a legal representative to the examination. The rules of evidence do not apply when the investigator or ASIC appointed lawyer is questioning an examinee. For example, ASIC can require a person to speculate, give an opinion, and require a person to examine a document and answer questions about that document.
The role of the examinee’s lawyer is to assist in clarifying any questions put to the examinee which are unclear. Section 23 also provides that the examinee’s lawyer may, usually at the end of the examination, address the ASIC investigator or examine the examinee about matters which the investigator has raised during the questioning. This can assist the examinee to clarify any points made, or to raise new points which the examinee wishes the investigator to be aware of.
Section 68 of the ASIC Act provides that an examinee may claim privilege before giving an answer at the examination. The purpose of claiming privilege is to protect the examinee against self-incrimination. Once privilege is claimed, the answer given is not admissible in evidence in a criminal proceeding or a proceeding for the imposition of a penalty (except in relation to allegations of perjury). This is vitally important where it is possible that the examination is a prelude to a proceeding where, for example, a banning order might be a possibility.
The traps that exist in attending any examination at which your conduct may be an issue warrant early attention by experienced legal advisers. What may seem to be a request to spend a couple of hours (or more) answering a series of seemingly innocuous questions about matters occurring several years ago may turn into something far more serious.
Administrative hearing
In some circumstances, the information gathered pursuant to a notice to produce documents or at an examination can lead to an administrative hearing.
ASIC has the power to hold an administrative hearing in relation to any alleged breaches of the Corporations Act 2001 (Cth) (“Corporations Act”). For example, ASIC may allege that a financial adviser has made misleading statements to investors about financial products or made recommendations to clients without having a reasonable basis for that advice.
The hearing itself is conducted in what may seem to be a non-threatening environment - usually in a meeting room at an ASIC office - but there should be no misapprehension as to what is really occurring. The hearing is essentially a trial from which serious consequences can flow and, as such, should be properly prepared for as if going to a tribunal or court The hearing will be presided over by a Delegate of ASIC, who has been given the power to hear and determine the matter. The Delegate can require a person to attend as a witness and take evidence from that person on oath or affirmation.
At the hearing, the Delegate is, once again, not bound by the rules of evidence. The Delegate has the power to rely on hearsay evidence, and can question a witness or the person whose conduct is being investigated about what they thought or matters of speculation.
A person the subject of an administrative hearing has a right to be legally represented. The role of the legal representative is to prepare the matter for hearing. This will include gathering relevant supporting documentation, such as witness statements in support of the person’s case, identifying documents that support the person’s case and which ought be specifically brought to the Delegate’s attention and preparing written and oral submissions to be put before the Delegate at the hearing. The ASIC Act provides that any evidence or submissions presented at the hearing must be taken into account by ASIC in the determination of the matter. Again, the serious consequences that may flow from an adverse finding by a Delegate warrant the involvement of experienced legal representatives at an early stage if a notice of an administrative hearing is received.
Banning orders
After the hearing has been held, ASIC has power under the Corporations Act to ban a person from providing financial services. For example, this can occur if the Delegate finds that the person has not complied with a financial services law, or the general obligations of a financial services licensee under the Corporations Act.
As at 6 November 2007, ASIC had imposed banning orders on 6 financial advisers in relation to Westpoint investments. The banning order may prohibit a person from providing financial services permanently, or for a specified period.
Insofar as Westpoint is concerned, banning orders have been made in respect of advisors who ASIC has found:
failed to provide appropriate advice as to Westpoint products;
engaged in misleading and deceptive conduct, or conduct likely to mislead and deceive, with respect to Westpoint products;
provided inappropriate advice to clients about investing in Westpoint products in breach of the obligation to have a reasonable basis for the advice given and to act in the best interests of the clients;
advised a client to invest in a Westpoint product which was not on the Approved Product List of the relevant Licensee; and
failed to accurately disclose to clients commissions and payments received.
A person banned from providing financial services has a right to appeal the decision to the Administrative Appeals Tribunal or the Federal Court.
Enforceable undertaking
Section 93AA of the ASIC Act provides that ASIC may accept a written undertaking given by a person in connection with a matter in relation to which ASIC has a function or power under this Act.
This is obviously a very general power, which is clarified further by ASIC’s regulatory guides in relation to enforceable undertakings and hearings.
For example, ASIC’s guide to enforceable undertakings provides that an enforceable undertaking may be accepted instead of:
seeking a civil order from a Court;
taking administrative action; or
referring a matter to another administrative body.
By way of example, a person may offer ASIC an enforceable undertaking to submit to an ASIC approved financial services expert to review client files and conduct file audits or to undertake to attend specified training courses so as to educate the person about the obligations of a financial advisor under the Corporations Act.
ASIC has outlined several factors it will take into account when considering whether to accept an enforceable undertaking, such as:
whether the person is prepared to publicly acknowledge ASIC’s concerns about the conduct and the necessity for protective or corrective action;
whether the misconduct that ASIC considers to be a breach was inadvertent; and
whether the person has co-operated with ASIC, including providing complete information about the underlying breaches and remedial
efforts.
Despite the fact that ASIC’s hearings practice manual makes direct reference to giving enforceable undertakings, the ASIC enforceable undertaking guide provides that generally ASIC will not consider an enforceable undertaking once a matter has been referred to an ASIC delegate for possible disqualification or suspension.
The impractical outcome of this approach is that a person is required to offer an undertaking and therefore effectively admit some misconduct on their behalf, in circumstances where a formal hearing has not been conducted, or in fact, may never be conducted.
Conclusion
The pressure from investors and government and some criticism of ASIC’s position in relation to the Westpoint collapse may have contributed to ASIC’s heavy crackdown on financial advisers and their role in relation to Westpoint.
Financial advisers served with notices to produce and summonses to attend examinations and hearings should carefully consider their rights and obligations under the ASIC Act and the Corporations Act. The involvement of experienced legal representatives at an early stage is well advised, even if you think the target of the investigation may be somebody else.
If you would like to discuss any issues raised in this article, Hall & Wilcox has a team of experienced lawyers who are able to assist.
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