On 22 March 2018, Dowsett J delivered judgment on penalties in ASIC v Cassimatis, the long running litigation related to the collapse of Storm Financial. His Honour made declarations and imposed pecuniary penalties, injunctions and disqualifications against Mr and Mrs Cassimatis, the founders, sole shareholders and executive directors of Storm. While not a competition law case, the judgment provides interesting insights as to the Court’s approach to civil penalties under the Corporations Act.
Background
Storm was a financial advisory company which advised the vast majority of its clients to adopt the ‘Storm model’. This involved mortgaging their family home and using the proceeds to invest in the stock market. This strategy resulted in significant losses during the Global Financial Crisis and Storm went into liquidation in early 2009. Some of Storm’s clients lost their homes or had to postpone their planned retirements for long periods of time.
Decision on liability
The decision on liability was delivered by Edelman J on 26 August 2016. His Honour found that Storm gave inappropriate financial advice to at least 11 of its clients by recommending that they adopt the Storm model. Each of these 11 clients was retired or close to retirement, had few assets other than the family home and had little income. Edelman J found that this was a risky strategy which was inappropriate for such people as they had little prospect of being able to recover from significant financial losses.
Edelman J found that Mr and Mrs Cassimatis breached their duty as directors to act with reasonable care and diligence under s 180 of the Corporations Act by permitting inappropriate advice to be given and thereby exposing Storm to the risk of regulatory action and losing its AFSL.
Importantly, Mr and Mrs Cassimatis were found to have exercised an “extraordinary degree of control” over Storm. This included making decisions without the executive committee, approving payments by the CFO, and controlling what advice was provided by Storm’s financial advisers.
Pecuniary penalties
Dowsett J commenced his consideration of pecuniary penalties by noting the maximum of $200,000 per contravention. His Honour then engaged in a comparative analysis of previous decisions where pecuniary penalties were ordered for breaches of s180. The decisions which Dowsett J found to offer the best guidance were:
- Shafron v ASIC, where $75,000 was imposed for three contraventions by failing to advise the Board of relevant matters in relation to James Hardie’s continuous disclosure obligations; and
- ASIC v Lindberg, where $100,000 was imposed for four contraventions by negligently failing to make proper enquiries and inform the Board of various matters in relation to the AWB oil-for-wheat scandal.
Dowsett J found that Mr and Mrs Cassimatis’s conduct was more serious than either Shafron or Lindberg and that, as a result, ASIC’s suggested figure of $70,000 was “on the low side”. However, in consideration of the small number of comparable cases, Dowsett J decided to adopt ASIC’s suggested figure. This decision illustrates the reluctance of judges to order penalties which are higher than those submitted by a regulator, even in circumstances where the judge is otherwise minded to do so.
Dowsett J’s approach differed from the ‘instinctive synthesis’ of the ‘French factors’ which is typically applied in competition law cases. While His Honour noted a range of relevant factors including deterrence, consistency, capacity to pay, hardship, harm caused, contrition and the seriousness of conduct, his determination of the final figure appeared to predominantly rely upon a comparison with the Shafron and Lindberg decisions and ASIC’s suggested figure.
Reaction and consequences
These penalties have been strongly criticised by some commentators for being too lenient given the nature of the conduct in question. There has also been criticism about the level of the maximum penalty.
Coincidentally, the decision was handed down immediately before the release of an OECD report finding that Australia’s competition law penalties were low by international standards (see our blog post here). The OECD report made a number of recommendations including that consistency with past penalties (also known as the parity principle) be given less weight relative to other factors such as deterrence, economic resources and capacity to pay.
Given the recommendation by the ASIC Enforcement Review to increase a number of maximum penalties as well as the Government’s stated intention to add competition issues to ASIC’s mandate, it will be interesting to see if ASIC takes note of the OECD report and adopts a more aggressive approach in future enforcement actions.
Image: courtesy Tobiasvde / Wikimedia (resized and greyscale).
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