ASIC Enforcement Wrap: August 2024 | ASIC aims big by taking on ASX for alleged misleading statements

Key August Takeaways:

• ASIC flexes its muscle suing ASX Limited, Australia’s primary stock market operator, over alleged misleading public announcements in relation to its troubled project upgrading the CHESS system.
• Mercer ordered to pay $11.3 million in penalties concluding the first greenwashing case brought by ASIC in the Federal Court. Mercer represented that one of its investment options excluded carbon fuels, alcohol production and gambling companies, when it was found that it didn’t.
• ASIC cancelled the AFS license of Libertas Financial Planning Pty Ltd, the first instance where the cancellation was triggered by a payment of compensation by the Compensation Scheme of Last Resort.

Spotlight– Bit Trade highlights possible contradictions in the lack of cryptocurrency specific regulation

ASIC succeeded in a civil action against Bit Trade Pty Ltd (Bit Trade), operator of the Kraken cryptocurrency exchange in Australia, in respect of its failure to prepare a Target Market Determination (TMD) for a margin facility product it issued named “Margin Extension”.

Under the design and distribution obligations (DDO),a TMD must be prepared if certain categories of financial products, such as credit facilities, are issued.

In its judgment, the Court noted that the funds advanced by Bit Trade in relation to the Margin Extension product can be in either ‘Legal Tender’, such as US Dollars, or Digital Assets (i.e. cryptocurrencies), such as Bitcoin. Its customers are then obligated to return funds of the same type as was advanced to them (i.e. if borrowed in Bitcoin, the customer needs to be return Bitcoin). This distinction is important.

The definition of a credit facility under the Corporations Act 2001 (Cth) includes a contract, arrangement or understanding under which a person incurs a ‘deferred debt’ to another person. The Court found that a debt can only be an obligation to pay a sum of money, and not anything else.

The Court held that since the Margin Extension product can utilise national currencies (including foreign currency such as USD), that involves an obligation to pay money, and the Margin Extension product thus constituted a financial product, being a credit facility, and a TMD was required.

What about when the Margin Extension product does not involve fiat currency? That is, when the lending occurs in bitcoin or some other crypto?

Interestingly, the Court, considering the operation of the product and application of financial services laws, reasoned that cryptocurrency is not money, and thus an obligation to pay cryptocurrency cannot be a debt.

Ultimately in ASIC’s case, this distinction was not relevant.  It considered Margin Extension was a single product, and because it could involve fiat currency, Bit Trade was found to have contravened its DDO obligations by issuing the Margin Extension product in USD without issuing a TMD.

Bit Trade may, after considering these statements, amend the Margin Extension product to only provide and return funds in Digital Assets.  By doing so, Bit Trade may avoid the product being captured by certain laws and the need to prepare a TMD altogether.

Another alternative would be to split the product in two – one dealing in crypto, which does not require a TMD, and one dealing in national currency, requiring a TMD.

The decision highlights the difficulties posed by the lack of both judicial consideration and regulation of cryptocurrency.  Effectively, the same activity, on the one hand involving fiat currency is regulated, on the other hand involving crypto is not.

Rather than a one size fits all approach centred around the status of cryptocurrency under general law and certain statute, a better approach could be treating activities or behaviours as regulated based on the activity or behaviour, rather than whether or not crypto (which exhibits many of the same characteristics as ‘money’. Ultimately, the lack of regulation and the increasing maturity of cryptocurrency as an asset is starting to throw up practical issues for those holding, dealing in and operating markets in crypto.

August in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Proceedings Commenced

ASIC commenced one civil penalty proceeding:

ASIC commenced proceedings in the Federal Court against ASX Limited for alleged misleading statements related to its Clearing House Electronic Subregister System (CHESS) replacement project. ASX made an announcement on 10 February 2022 that the CHESS project remained “on-track forgo-live’ in April 2023. ASIC alleges that the announcement was misleading and deceptive, because, at the time of the announcement, the project was not tracking to plan, and ASX did not have any reasonable basis to imply the project was on track to meet future milestones.

Civil Penalties

The Federal Court ordered civil penalties totalling $16.3 million in two cases:

• The Federal Court ordered that Mercer Superannuation (Australia) Limited pay a penalty of $11.3 million, concluding the first greenwashing case brought by ASIC to the Federal Court. The Court found Mercer made misleading statements on its website about its Sustainable Plus investment option which was said to exclude investments in companies involved in carbon intensive fossil fuels, alcohol production and gambling. It turned out that members who took up the Sustainable Plus option invested in companies such as AGL Energy Ltd (fossil fuel), Carlsberg AS (alcohol) and Crown Resorts Limited (gambling).
• The Federal Court ordered that ASX-Listed Noumi Limited pay penalty of $5 million for breach of continuous disclosure obligations. The Court found that Noumi overstated its inventories in its financial reports for the full year ending 30 June 2019 and the half year ending 31 December 2019 (HY2020) by including unsaleable inventory. The Court also found that Noumi’s HY2020 revenue and profit was overstated by at least $9.8 million and $8.5 million respectively.

Civil Judgments

An additional judgment was delivered in ASIC civil proceedings:

• The Federal Court ruled that Bit Trade Pty Ltd, the operator of the Kraken crypto exchange in Australia, failed to comply with design and distribution obligations when offering a margin trading product to Australian customers. As discussed in the ‘Spotlight’ above, the product provided for Margin Extensions to be made and repaid in either digital assets or national currencies. The Court found that the obligation to repay a national currency was a deferred debt, and thus such margin extensions a credit facility (a financial product), and Bit Trade is thus required by law to prepare a target market determination. Of note was the Court’s commentary that an obligation to repay cryptocurrency did not create a deferred debt, because cryptocurrency is not considered money.

Criminal:

Sentencing – two individuals were sentenced:

• Yat Nam (April) Yuen was sentenced to 2 years and 6 months imprisonment, to be served by way of an intensive correction order, for aiding and abetting BBY Limited to engage in dishonest conduct. Ms Yuen has been found to have caused the transfer of money out of BBY’s client money accounts to repay BBY’s corporate debts, in breach of BBY’s obligation to hold client money on trust.
• Ben Jayaweera was found guilty of 28 counts of fraud following a three-week retrial, and was sentenced to 12 years’ imprisonment. Mr Jayaweera induced his clients to invest approximately $5.9 million in an unregistered managed investment scheme, which he claimed to be a diversified fund investing in cash, property, shares, aquaculture and agriculture. In fact, the fund’s only investment was a single abalone farm in South Australia operated by entities under his control.

Administrative action:

Licence Cancellation/Suspension

One company had its AFS license cancelled:

• Libertas Financial Planning Pty Ltd had its AFS licence cancelled following its failure to comply with an AFCA determination, which was then met from the Compensation Scheme of Last Resort (CSLR). This is the first time that ASIC has cancelled an AFS license following a CSLR payment. Cancellation under this reason is not subject to ASIC’s discretion or a merits review, if the CSLR is triggered ASIC must cancel the firm’s licence.

Director Disqualifications

ASIC disqualified two individuals from managing corporations:

• Richard Andrew Sparreboom was banned from managing corporations for five years, due to his involvement in three failed companies, which owed a total of $9,809,880 to unsecured creditors, and $1,201,740 to former employees for unpaid wages, super and leave entitlements.
• Gregory Romano Lavopa was banned from managing corporations for five years, due to his involvement in three failed companies, which owed a total of $4.1 million to unsecured creditors, of which $100,000 was owed to small business operators, and $3.2 million was owed to statutory agencies such as the ATO.

Stop Orders

ASIC placed one stop orders:

• ASIC placed an interim stop order on an entitlement offer made under a prospectus lodged by Rhinomed Limited, due to concerns that the prospectus did not disclose all the required information such as historical financial information. ASIC subsequently revoked the interim stop order following lodgement of a replacement prospectus which addressed its concerns.

Infringement Notices

The Market Disciplinary Tribunal (MDP) issued one infringement notice:

• CLSA Australia Pty Ltd (CLSA) paid a penalty of $144,300 to comply with an infringement notice given by the Market Disciplinary Panel. The MDP alleged that CLSA failed to provide correct regulatory data to the market operator, when it incorrectly tagged orders as ‘agency’ instead of ‘principal’ on 9,243 occasions. The MDP also alleged that CLSA failed to give post trade confirmations to its clients on 27 occasions. The MDP further alleged that CLSA failed to immediately report a special crossing trade which involved two BlockTrades of the listed security VAP:ASX.

Other actions:

• ASIC announced that, since July 2023 when it acquired capability to takedown websites in combatting scams, it has taken down more than 7,300 phishing and investment scam websites. Of these websites, there were 5,530 fake investment platform scams, 1,065 phishing scam hyperlinks, and 615 cryptocurrency investment scams.
• ASIC accepted a voluntary variation of the AFS license of AP Lloyds Pty Ltd, which would exclude the firm from providing financial product advice as an independent expert. This variation means that AP Lloyds and Advisory Partner Connect Pty Ltd, its corporate authorised representative, cannot prepare or provide independent expert reports, opinion or valuations in connection with corporate transactions such as takeover bids, schemes of arrangement and corporate restructures. This variation follows ASIC’s concerns that expert reports prepared by Advisory Partner Connect did not comply with ASIC’s policy guidance in RG111 Content of expert reports and RG112 Independent of Experts. There was no admission of contravention of the law.
• ASIC prosecuted 78 individuals for failing to assist a registered liquidator, during a six month period between 1 January and 30 June2024. It was found that a number of company officers and other individuals failed to provide registered liquidators with access to company books and submit a report on company activities and property (i.e. ROCAP). The individuals involved were prosecuted summarily, and fines of more than $430,000 were imposed.

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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.