ASIC Enforcement Wrap: July 2024 | Enforcement of DDO obligations still making headway with success in two court cases

Key July Takeaways:

• Enforcement actions against market manipulation ramp up with civil penalty proceedings against COFCO for manipulating futures contracts, and criminal proceedings brought against four individuals for a pump and dump scheme.
• A busy month for ASIC in terms of administrative actions, with seven individuals banned from financial services or credit activities, and six companies and individuals having their AFS or Credit license cancelled or suspended.
• A term in PayPal Australia’s standard form contracts which require its clients to notify PayPal of erroneously charged fees within 60 days, was declared void as an unfair term.

Spotlight – Results in for first wave of DDO Civil Proceedings

ASIC has obtained two significant victories in civil penalty proceedings commenced for breaches of the design and distribution obligations (DDO), with a civil penalty of $8 million against American Express and judgment against Firstmac.

Both of these cases are amongst the first civil penalty cases commenced by ASIC for DDO breaches. The AMEX case is the first,  Firstmac being the first targeting a product distributor.

The DDO regime requires issuers and distributors of financial products to adopt a consumer-centric focus in designing, marketing and distributing financial products.

A central part of the DDO regime is a Target Market Determination (TMD) must be prepared for a number of categories of financial products. The TMD must, amongst other things, describe the target market, specify distribution conditions and specify circumstances which would suggest the TMD is no longer appropriate. Issuers and distributors must then take reasonable steps to distribute the financial product consistently with the TMD.

In the AMEX case, the Court found that AMEX breached the DDO obligations because it ought to have stopped issuing it’s David Jones co-branded credit cards when high cancellation rates suggests that the TMD for that product was no longer appropriate.

In Firstmac case, the Court found that Firstmac breached the DDO obligations by failing to take reasonable steps to distribute the High Livez product consistently with its TMD, when it cross sold High Livez to customers who held Firstmac term deposits.

ASIC’s success in these two cases provides important authority in this new area of financial services law, and lend support generally to ASIC’s interpretation of the DDO laws.

July in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Proceedings Commenced

ASIC commenced one civil penalty proceeding:

• ASIC has commenced civil penalty proceedings in the Federal Court against COFCO International Australia Pty Ltd and COFCO Resources SA alleging the companies manipulated certain futures contracts traded on the ASX. ASIC alleges that COFCO placed orders shortly before the close of the day session for the improper purpose of affecting the daily settlement price, in a practice known as ‘marking the close’. ASIC alleges these orders had the effect of causing the price of the contracts to not reflect the forces of genuine supply and demand in an open, informed and efficient market, and creating artificial prices for the contracts on the ASX.

Civil Penalties

The Federal Court ordered civil penalties totalling $8 million American Express Australia Limited (Amex):

• The Federal Court has ordered that Amex pay $8 million in penalties for breaching DDO obligations in relation to it’s co-branded credit cards distributed in David Jones stores. The Court found that Amex i) ought to have known high cancelled application rates suggested that the target market determinations (TMD) for the cards were no longer appropriate; and ii)failed to stop issuing the credit cards when it had not reviewed the TMDs. Amex admitted the contraventions and jointly submitted with ASIC on penalties.

Civil Judgments

An additional two judgments/decisions were delivered in ASIC civil proceedings:

• The Federal Court declared a term used between September 2021 and November 2023 by PayPal Australia in its standard form contracts with small businesses to be unfair. The term would have allowed PayPal to retain fees that it had erroneously charged if the client failed to notify PayPal of the error within 60 days of its account statement. The Court found that small businesses were not placed in a position to manage the risk of incorrect charging of fees. The Court also ordered PayPal to pay ASIC’s litigation costs. From November 2023, breaches of the prohibition on unfair contract terms will attract a civil penalty.
• The Federal Court has found that Firstmac Limited breached DDO obligations by failing to take reasonable steps that would have resulted in the distribution of one of its investment products being consistent with its target market determination (TMD) for that product. The Court found that Firstmac implemented a cross-selling strategy by marketing investments a High Livez investment product to 780 consumers who held existing term deposits with Firstmac. The TMD of the High Livez product specifically excluded clients who had a “Capital Guaranteed” objective. This is the first finding by a court of contravention of the DDO provisions by a distributor of a financial product.

Other Results

ASIC has obtained the following orders:

• ASIC has secured travel restraint orders in the Supreme Court of NSW against Barry David King, preventing him from leaving Australia until 1 April 2025. ASIC is currently investigating Mr King and companies and entities associated with him for alleged financial misconduct.

Criminal:

Sentencing – Two individual were sentenced:

• John Bigatton, the Australian promotor of BitConnect, was convicted and conditionally released on a recognisance to be of good behaviour for three years. This followed a guilty plea for the offence of providing financial product advice without a licence.
• Stephen Allen was sentenced to community correction orders and fined $20,000 for making false statements to induce others. ASIC investigation found that Mr Allen falsified the signatures of registered company auditors relating to audits of financial accounts of 12 separate clients.

Charges – Five Defendants were charged:

• Syed Yusuf, Larissa Quinlan, Emma Summer, and Kurt Stuart were charged with conspiracy to commit market rigging and false trading, in particular to artificially increase the price of Australian shares before dumping them. ASIC alleges the defendants formed a private group on the Telegram app where they discussed and selected penny stocks to announce to the public Telegram group named the ‘ASX Pump and Dump Group’ as part of the ‘pumping’ operation. The Defendants have also been charged with dealing with the proceeds of crime in relation to the money they allegedly obtained from the ‘pump and dump’ activity.
• Mark Stevens was charged for dishonestly causing a financial disadvantage to a company by deception, where it was alleged he dishonestly caused $110,000 payable to his company in liquidation to be directed to Australasian Justice Services Pty Ltd (In Liquidation).

Appeals

• The Queensland Court of Appeal has dismissed an appeal by Dr Roger Munro against his conviction on three counts of fraud. The Court of Appeal found no substantial miscarriage of justice occurred when the primary judge refused to allow Dr Munro to withdraw his guilty pleas in April 2022. Dr Munro received $299,600 from three investors, but rather than investing the money, he applied the funds to paying personal expenses.

Administrative action:

Financial Services Bannings

ASIC banned seven individuals from financial services or credit activities:

• ASIC permanently banned Dashiel Benjo Vee from financial services for dishonest conduct. ASIC observed that Mr Vee provided his employer with a falsified financial adviser exam certificate, and misled his clients that he met the prescribed education and training standards.
• ASIC permanently banned Anass Abdalla from financial services for lacking fitness and propriety to provide financial services. ASIC found that Mr Abdalla, as the general manager of a financial services licensee, asked an authorised representative to sign documents to mislead clients into thinking personal advice had been provided by the said authorised representative.
• ASIC permanently banned Aleksandra Frizzell from credit activities following convictions of fraud, including 17 counts of dishonestly obtaining a financial advantage by deception.
• ASIC banned Shay Zakhaim and Anthony Anderson, the former directors and responsible managers of XTrade.AU Pty Ltd from carrying on of a financial services business for three and five years respectively. ASIC has reason to believe that Mr Zakhaim and Mr Anderson are not fit and proper, nor adequately trained or are not competent to provide financial services, due to their involvement in XTrade’s failure to comply with financial services laws.
• ASIC banned Pedro Eduardo Sasso, the director of Maxi EFX Global AUPty Ltd (EuropeFX), from being a director of or controlling an entity that carries on a financial services business for 5 years. ASIC believe Mr Sasso is not competent to act as an officer of a financial services business, nor a fit and proper person. ASIC found that Mr Sasso exercised very little oversight of EuropeFX’s position and did not take steps to mitigate or address any problems.
• ASIC banned Christopher Edward Luff from providing financial services for 5 years. ASIC’s review of a sample of Mr Luff’s advice identified that Mr Luff did not act in the best interests of the client. ASIC also established that there was a conflict of interest between Mr Luff and those of his clients due to relationships with his associated entities.
• ASIC banned Joel James Hewish from financial services for 10 years, having found, amongst other things, that he demonstrated a fundamental lack of competence and created a culture of non-compliance at United Global Capital Pty Ltd.

Licence Cancellation/Suspension

Six companies/individuals had their AFS or Credit license cancelled or suspended:

• ASIC suspended the AFS license of HLK Group Pty Ltd because it ceased carrying on a financial services business.
• ASIC cancelled the AFS license of Accumulus Capital Pty Ltd for failure to pay ASIC Industry Funding Levies and for not engaging in credit activities since license was granted.
• ASIC suspended the credit license of John Adicho due to non-payment of fees, failure to lodge annual compliance certificates and failure to pay industry funding levies owed to ASIC.
• ASIC cancelled the AFS license of Build Your Wealth Pty Ltd for failing to ensure that the financial services it provided were done efficiently, honestly and fairly, and that it failed to take reasonable steps to ensure its representatives complied with financial services laws.
• ASIC cancelled the AFS license of United Global Capital Pty Ltd, having found that it lured clients into investing their retirement savings in speculative investments, attempted to contract out of its personal advice obligations when its representatives did give personal advice to clients, and contravened a number of its general obligations as an AFS licensee.
• ASIC suspended the AFS license of Id Funds Management Limited for failure to meet its statutory audit and financial reporting lodgment obligations.

Director Disqualifications

ASIC disqualified two individuals from managing corporations:

• ASIC disqualified Christian Oey from managing corporations due to his involvement in the failure of three companies which owed the combined amount of $5,850,309 to creditors, including $482,289 to the ATO and over $500,000 to small business creditors.
• ASIC disqualified Dominique Grubisa from managing corporations for 18 months due to her involvement in the failure of two companies, which owed a combined total of $305,623 with the main creditor being the ATO.

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.