ASIC Enforcement Wrap: April 2024 | New Firsts for ASIC re breach of audit rotation and issue of final stop order under DDO Regime

Key April Takeaways:

• ASIC two significant Federal Court decisions, one regarding the Finder Earn crypto-asset product, and the other regarding alleged unfair contract terms made by Auto & General Insurance Company Limited.
• ASIC’s first enforcement action against an alleged breach of audit rotation was made against Nicholas Benbow of William Buck Audit (Vic) Pty Ltd. Three infringement notices were issued in connection to allegations that Mr Benbow acted as a lead auditor for more than the maximum limit of five successive years for three listed companies.
• ASIC made its first final stop order under the ‘design and distribution obligations’ regime against Coral Coast Distributors (Cairns) Pty Ltd, the operator of Urban Rampage stores. Previous stop orders issued under the DDO regime were all interim.
• The Federal Court has ordered ‘licensee for hire’ firm Lanterne Fund Service Pty Ltd pay a $1.25 million penalty for failing to meet the six of the 912A ‘general obligations’. Lanterne authorised (and by extension had to supervise and ensure compliance of) over 60 corporate authorised representatives but had only one full-time employee, its CEO and sole director, Peter Cozens.

Spotlight – first ever contested appeal of a liquidator disciplinary decision results in win for the liquidator

Cameron Duncan, successfully appealed the decision by the Liquidator Disciplinary Committee to cancel his registration as a liquidator, with the AAT overturning the LDC’s decision and reinstating his registration subject to conditions.

Mr Duncan has been registered as a liquidator in Australia since 2009. In 2010, Mr Duncan relocated with his family to Singapore to work as a partner in the Singapore office of Korda Mentha. He headed a team of insolvency practitioners serving clients in Singapore and Jakarta, and enjoyed a good reputation as a liquidator in Singapore.  

After relocating to Singapore, Mr Duncan retained and renewed his registration as a liquidator in Australia and continued to satisfy professional education requirements. However, Mr Duncan rarely serviced Australian clients.

On 29 June 2022, ASIC sent Mr Duncan a show cause letter. The matter then escalated to a three-person statutory committee (Liquidator Disciplinary Committee), which decided on 28 February 2023 to cancel Mr Duncan’s registration as a liquidator on the basis that he no longer had the prescribed qualifications, experience, knowledge and abilities. This followed a hearing.

Mr Duncan appealed the decision to the Administrative Appeals Tribunal (AAT).

There have been a total of 12 decisions by the Liquidator Disciplinary Committee since the new liquidator disciplinary regime was introduced in March 2017. Only two of those decisions have ever been appealed to the AAT, Mr Duncan’s and one other which was resolved by consent.

During the AAT hearing, Mr Duncan was cross-examined as to his knowledge of Australian insolvency law, and he satisfied the tribunal that he had the appropriate level of knowledge and expertise.

Regarding the AAT’s residual concerns about Mr Duncan’s residential status, the AAT was happy to adopt a set of conditions agreed between Mr Duncan and ASIC to address this issue, such as being required to return to Australia if ordered by a Court or ASIC, and maintaining an Australian telephone number at which he can be contacted.

April in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Proceedings Commenced

ASIC has commenced two civil proceedings, one a civil penalty proceeding:

• ASIC commenced civil proceedings in the Federal Court against blockchain mining companies NGS Cypto Pty Ltd, NGS Digital Pty Ltd and NGS Group Ltd and the sole directors of those respective companies. ASIC alleges that the NGS Companies provided financial services without an AFS license, and that they targeted Australian investors to transfer funds from their SMSF to be converted to crypto currency. The Federal Court has made interim orders that receivers be appointed to secure the digital assets of the NGS companies.
• ASIC commenced civil penalty proceedings in the Federal Court against Magnis, and its executive chairman Frank Poullas, for failing to disclose material information about its ‘flagship’ lithium-ion battery plant in Endicott, New York. Magnis previously claimed that its Endicott battery plant can produce cells at a rate of 1 gigawatt hour per year, but ASIC alleges that by January 2023, Magnis and Mr Poullas were aware that claim was inaccurate, and that the plant was struggling to produce a fraction of the claimed amount. ASIC further alleges that in failing to disclose information about the true situation of the battery plant, Magnis and Mr Poullas engaged in misleading or deceptive conduct.

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Civil Penalties

The Federal Court ordered civil penalties in three proceedings totalling $12.1 million:

• The Federal Court ordered ‘licensee for hire’ firm Lanterne Fund Service Pty Ltd pay a $1.25 million penalty. The Court found that Lanterne breached a number of AFS license obligations, including failure to have adequate risk management systems, and failure to take reasonable steps to ensure that its representatives complied with Australian financial services laws. It was found that Lanterne authorised over 60 corporate authorised representatives and under them, a further 205 authorised representatives (individuals). Lanterne had only one full-time employee, its CEO and sole director, Peter Cozens.
• The Federal Court ordered Adam Blumenthal to pay a $850,000 penalty and be disqualified from managing corporations for five years. The Court found that Mr Blumenthal, inter alia, engaged in market rigging when placing orders to purchase shares in ASX-listed Creso, and breached his duties as a director Creso by paying Tyson Scholz more than $2 million to provide marketing and promotional services in the absence of sufficient due diligence.
• The Federal Court has ordered Macquarie Bank to pay a $10,000,000 penalty for failing to have effective controls to prevent and detect unauthorised fee transactions conducted by third parties, such as financial advisers, on their client’s bank accounts. Macquarie allowed third parties to use a bulk transacting tool to make multiple withdrawals from a number of customer accounts simultaneously. This failure enabled financial adviser Ross Hopkins to fraudulently withdraw around $2.9 million from his customers’ accounts without being detected by Macquarie.

Civil Judgments

An additional three Judgments or decisions were delivered in ASIC civil proceedings:

• The Federal Court dismissed an application by Provide Capital to prevent further investigation of it by ASIC. Provide Capital alleged that ASIC did not have the requisite state of mind required to conduct an investigation, namely that ASIC had reason to suspect that a contravention of Corporations Legislation had been committed. Provide Capital relied on the fact that ASIC did not prepare an interim report, which it is required to prepare if ASIC ‘forms the opinion that a serious contravention of a law…has been committed’. Rofe J did not agree with Provide Capital’s reasoning, noting there being significant differences between suspicion and forming an opinion.
• The Federal Court ordered that Prospero Markets Pty Ltd, a retail OTC derivative issuer, be wound up on just and equitable grounds, and that liquidators be appointed. ASIC had a broad range of concerns regarding the management of Prospero’s business, including compliance with its AFS license conditions. There were enquiries from Prospero’s clients concerned about return of their funds, and ASIC considered appointment of liquidators the best way to return client funds.
• The Federal Court found that Sunshine Loans entered into over 670,000 credit contracts which included an amendment or rescheduling fee that is not permitted by the National Credit Code. Sunshine Loans received nearly $300,000 from over 8,000 occasions of payments. The matter is being listed for determination of relief.

Appeals

ASIC has appealed two Federal Court decisions:

• ASIC has appealed the Federal Court’s decision to dismiss ASIC’s proceedings against Finder Wallet for, inter alia, allegedly providing unlicensed financial services in relation to its crypto-asset related product named ‘Finder Earn’. While ASIC alleges that Finder Earn was a debenture, the Federal Court disagreed and dismissed ASIC’s proceedings on 14 March 2024.
• ASIC has appealed the Federal Court’s decision to dismiss ASIC’s proceedings against Auto & General Insurance Company Limited regarding an alleged unfair contract term. ASIC alleged, and remained concerned, that a term requiring policy holders to notify Auto & General if ‘anything’ changes about their home and contents imposes an unclear obligation, and that the term suggests an unduly broad right to refuse claims which is not permitted under the Insurance Contracts Act.

Criminal:

Sentencing – One individual was sentenced:

• Henry Eng Chye Heng was sentenced to 18 months’ imprisonment for market manipulation and creating a false or misleading appearance of active trading in the shares of Eneco Refresh. Mr Heng was released forthwith on recognisance upon the condition that he be of good behaviour for a period of 12 months. Mr Heng was the managing director and executive chairman of Eneco and used share trading accounts held in the names of his family to manipulate the share price of Eneco.

Charges – Three Defendants charged:

• David Valvo was charged with 12 counts of dishonest conduct in the course of carrying on a financial services business. ASIC alleges that Mr Valvo completed and submitted adviser fee withdrawal forms, which were not genuine, for his clients’ superannuation accounts for amounts totalling approximately $110,000.
• James Mawhinney was charged with 4 counts of dishonest conduct in the course of carrying on a financial services business. ASIC alleges that Mr Mawhinney dishonestly represented to the trustee of the IPO Wealth Fund, that the IPO Wealth Group owned two Italian companies, Poveglia S.R.L. and Retta S.R.L, when it did not.
• Benjamin Thomas Molloy was charged with one count of breaching his duties as a director and five counts of making false statements to ASIC. It was alleged that he caused the sale proceeds of a motor vehicle asset to be redirected to another company he was a director of.

Administrative action:

Financial Services Bannings

ASIC banned one individual from financial services:

• Adele Baaini was permanently banned from financial services for engaging in dishonest conduct and failing to act with integrity and sound judgment in relation to financial services. ASIC found that Ms Baaini provided her AFS licensee a falsified Financial Adviser Exam certificate and continued to provide personal financial advice to 121 clients even though she did not meet the prescribed education and training standard.

Licence Cancellation/Suspension

Two companies had their AFSL cancelled:

• The AFSL of Menon & Associates Pty Ltd was cancelled because it is no longer carrying on a financial services business.
• The AFSL of JB Markets Pty Ltd was cancelled for failing to comply with its financial requirements of its AFS license, and failing to have adequate resources to provide the financial services.

Infringement Notices

ASIC issued one infringement notice:

• Nicholas Benbow of William Buck Audit (Vic) Pty Ltd has paid $20,625 to comply with three infringement notices in relation to alleged breaches of audit rotation issues. ASIC alleges that Mr Benbow played a significant role as lead auditor for 3 listed companies in 2023, when he already performed the role as lead auditor for those listed companies for five successive years. This is the first time ASIC has issued an infringement notice for an alleged breach of audit rotation.

Director Disqualifications

ASIC disqualified one individual from managing corporations:

• Miroslav Jack Samardzija was disqualified for five years due to his involvement in the failure of three companies which owed the combined amount of $2,344,867.80 to unsecured creditors, including approximately $1,031,522 to the Australian Taxation Office.

Stop Orders

ASIC issued one final stop order:

• Coral Coast Distributors (Cairns) Pty Ltd can no longer sign-up customers into Centrepay credit arrangements in its Urban Rampage stores. This is ASIC’s first final stop order under the design and distribution obligations regime. ASIC made the initial interim stop order against Coral Coast on 22 February 2024. ASIC alleges that Coral Coast’s Centrepay product places First Nations consumers at risk of financial harm.

Appeals

• The Administrative Appeals Tribunal has decided that Cameron Lindsay Duncan’s registration as a liquidator should be reinstated, subject to conditions when he remains non-resident of Australia. Mr Duncan is a partner at Korda Mentha’s Singapore office. Previously, a committee convened to consider Mr Duncan’s matter cancelled his registration as a liquidator on the basis that he lacked the requisite experience and knowledge. After a hearing in the AAT where Mr Duncan was cross-examined in his knowledge of Australian insolvency law, AAT was satisfied that he had the requisite experience and knowledge. However, Mr Duncan’s registration is subject to a number of conditions, such as being required to return to Australia within Australia if ordered by a Court or ASIC, and only accepting Australian appointments on a joint and several basis with an Australian registered liquidator.

Surveillance:

Financial reporting and audit surveillance program

• Southern Steel Group Pty Ltd re-lodged its financial report for the year 30 June 2023 with comparatives for the 30 June 2022 financial year, after ASIC’s enquiries. Southern Steel initially lodged its 30 June 2023 financial report without comparatives, but ASIC raised concerns that this failed to comply with the requirements of accounting standards.

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If any of the above is relevant to you or you want to know more, please feel free to get in touch.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.