ASIC Enforcement Wrap: August 2023 | Slew of new civil actions show ASIC not afraid to litigate despite setbacks

ASIC commenced civil actions this month, many reflecting ASIC’s key priorities such as design and distribution obligations, unconscionable lending behaviour and greenwashing. This is against a backdrop of setbacks experienced by ASIC in the Federal Court.

Key Takeaways:

• ‍ASIC weaponises DDO against eToro in its first civil penalty action for contravention of the Design and Distribution Obligations (DDO) regime against online CFD trader eToro. Read our article here.
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• ‍ASIC unsuccessful in an illegal phoenixing case against liquidator Mr Jason Bettles, despite substantial evidence and a judgment running to over 270 pages. This highlights the challenges that ASIC faces in proving allegations of this type. Read our article here.
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• ‍Full Federal Court Clarifies Conflicted Remuneration in an unsuccessful ASIC appeal. The Full Court wound back the reasoning of theTrial Judge, rejecting the limited scope to the conflicted remuneration provisions of the first instance judgment. Read our article here.

August in summary – enforcement actions and outcomes

Civil Action:

Civil Proceedings Commenced:

A total of six civil proceedings commenced, all civil penalty proceedings.

• ASIC commenced its first DDO civil penalty action in relation to a ‘Contract For Difference’ product. ASIC alleges eToro’s target market was too broad. Most clients lost money yet the relevant target market included investors with medium-risk tolerance who were inexperienced in trading CFDs. eToro’s screening test also allowed clients to amend their answers without limitation, and prompted clients from selecting answers which could result them failing.
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• ASIC commenced civil penalty proceedings against Paul Ryan, director of Dixon Advisory & Superannuation Services Pty Ltd (DASS), allegedly for failing to properly consider the interests of Dixon Advisory’s creditors. From 2020, DASS faced claims from clients for its advice to invest in certain fund products. DASS was subject to ASIC proceedings, which resulted in orders for DASS to pay a $7.2m penalty and $1m towards ASIC’s costs, and numerous complaints by clients were made to AFCA. In its action, ASIC alleges that Mr Ryan was involved in amending DASS’s constitution to authorise its directors to act in the interest in DASS’s holding company, E&P Operations, and executing a deed of acknowledgment of debt between DASS and E&P, to the advantage of E&P and the detriment of DASS.
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• ASIC commenced civil penalty proceedings against debt management firm Solve My Debt Now (SMDN) and its director. SMDN offered vulnerable customers a service whereby it managed their debt by collecting funds from them, on-paying their creditors, and negotiating with creditors to reduce debt. ASIC alleges that while SMDN collected $3.6 million from its customers, it only paid $1.1 million to creditors. ASIC further alleged that in many cases, the fees charged by SMDN exceeded the amount that the debts were reduced by, leaving clients worse off. On this basis, ASIC alleges that SMDN engaged in unconscionable conduct, made false and misleading representations regarding its services, and carried on a financial services business without the requisite licence.
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• ASIC commenced civil penalty proceedings against the trustee of Active Super for greenwashing. It alleges Active Super represented that it avoided investments that posed a great risk to the environment and the community, such as tobacco manufacturing, coal mining and gambling, but in fact, the investment was exposed to investments that it claims to restrict or eliminate (with investments in companies such as Pointsbet, Whitehaven Coal and Amcor PLC).
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• ASIC commenced civil penalty proceedings against two IAG subsidiaries for misleading customers about loyalty discounts on home insurance. ASIC alleges the insurance company made statements that its customers would receive loyalty discounts based on how many years of membership. But in fact, IAG’s pricing algorithm operated inconsistently with the discount promises, by allocating a bigger price increase to policies held by clients which they deem more likely to be renewed.
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• ASIC commenced civil penalty proceedings against five former directors and officers of the Youpla Group, which operated funds providing funeral insurance mostly marketed to indigenous Australians. It is alleged that the directors and officers did not act in the best interest of Youpla Group and its fund members, by maintaining insurance arrangements with a Vanuatu-based company which was beneficially owned and controlled by Ronald Joseph Pattenden and Jonathan Glen Law, two of Youpla’s directors.

Judgments:

• The Federal Court dismissed ASIC’s case against Mr Jason Bettles, a registered liquidator. ASIC commenced the case in 2019, where it requested the Federal Court to inquire into Mr Bettle’s appointment as a liquidator of the Members Alliance Group of companies. ASIC’s key allegations against Mr Bettles were that he failed to discharge his obligations as a liquidator, and failed to act independently and with a degree of care and diligence required of a liquidator, leading to the improper transfer of MA Group assets. Following an eight-day trial, the Federal Court found that ASIC did not establish these allegations against Mr Bettles.
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• The Federal Court has dismissed ASIC’s civil penalty case against Frank Wilson, former managing director of former ASX listed company Quintis Limited finding that Mr Wilson did not breach his duties as director of Quintis in relation to the handling of price sensitive information. On 10 May 2017, Quintis announced to the ASX the termination of key contracts. Quintis’s share price dropped precipitously on the next trading day, and was suspended from trading on 15 May 2017.

Appeals:

• The Full Federal Court clarified the scope of the conflicted remuneration provisions.  ASIC’s appeal was dismissed, but the Full Court, in reversing findings of the Trial Judge, held that a revenue sharing arrangement in the distribution of a financial product was a relevant ‘benefit’ within the meaning of the conflicted remuneration provisions; and, conflicted remuneration is not limited to payments between ‘arms-length’ entities, and may potentially apply to payments from one entity to another entity within a group of companies.

Interlocutory:

• ASIC obtained urgent freezing orders against the assets of Mr Valvo and Your Financial Freedom Pty Ltd, which also restrained Mr Valvo from leaving Australia. ASIC is currently investigating the financial services provided by Mr Valvo, regarding fees charged to client superannuation funds.

Criminal:

• Guilty Pleas/Convictions – Five defendants pleaded guilty or were convicted of various offences including attempting to obtain a financial advantage from a Commonwealth entity, failing to discharge duties as a director in the best interests of a company, fraudulent removal of company property, falsely claiming to an Australian credit license and making false or misleading statement to ASIC.
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• Charges Laid – One individual was charged with two counts of engaging in insider trading, and another with two counts of procuring another person to commit insider trading.

Administrative Action:

• Financial Services Bannings – Two individuals were banned from financial services based on concerns involving misappropriating investor funds, making false or misleading representations in relation to certain financial products and demonstrating a lack of diligence, professionalism and/or poor judgment. One of the banned individuals, Ms Maree Hawcroft, appealed the ban to the AAT, and the ban has been stayed pending the determination of the appeal.  One individual was banned from credit activities for making false disclosures to ASIC in annual compliance certificates.
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• License Cancellation/Suspension – Four companies had their AFS licence cancelled or suspended, for reasons including failure to maintain sufficient net assets, being placed into voluntary administration, ceasing to carry on a financial services business and failing to meet financial reporting obligations. One company’s AFS license cancellation is related to the banning of their director from financial services set out above. One further company had its credit licence cancelled in relation to the banning of its director from credit services.
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• Director Disqualification – Two individuals were disqualified from managing corporations, for their involvement in the failure of 9 companies, which owed unsecured creditors a total of over $16 million, almost $3 million of which was owed to the ATO.

Supervision:

• Financial Reporting Surveillance Program – Following an ASIC review of a selection of recent annual reports, two ASX listed companies have made additional disclosures on a diverse range of material business risks, including sustainability-related risks.

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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.

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.