ASIC Enforcement Wrap: June 2024 | Freezes, cancellations and suspensions caps off financial year

Key June Takeaways:

• ASIC issued its first stop order under the new Crowd-Source Funding (CSF) regime against Hirehood Pty Ltd. ASIC took action because the shares offered by Hirehood would be held by an intermediary as bare trustee, instead of issued to CSF shareholders directly.
• Seven companies and individuals had their AFSL cancelled or suspended, including two companies XTrade.AU Pty Ltd and Guildfords Funds Management Pty Ltd where licenses were cancelled following investigations which raised concerns of significant breaches of AFS licensee obligations or financial services laws.
• Three companies and entities had their assets frozen – Shield Master Fund, United Global Capital Pty Ltd and Global Capital Property Fund Limited –  with ASIC taking court  injunctive action to protect investor fundswhile it investigates.
• Sustainable Finance continues to be an enforcement priority, with an infringement notice issued to ASX listed Fertoz Limited, based on concerns that Fertoz made false and misleading statements about its Reforestation Project in the Philippines.

Spotlight– Block Earner escapes civil penalty despite being found to be offering a crypto-related product without a license

The recent penalty decision regarding Block Earner highlights the importance of seeking legal advice and engaging with regulatory authorities when operating in an uncertain regulatory environment.

On 9 February 2024, Web3 Ventures Pty Ltd trading as Block Earner (Block Earner) was found to have contravened the Corporations Act 2001 (Cth) (Corporations Act) by offering its crypto-related Earner product without an AFSL.

On 4 June 2024, the Federal Court relieved Block Earner from liability to pay any pecuniary penalty for the contravention.

Block Earner relied on the oft-cited but rarely successfully prosecuted section 1317S(2) of the Corporations Act, which allows the Court to grant relief where:

• The person acted honestly; and\
• Having regard to all the circumstances of the case, the person ought fairly to be excused.

In support of applying section 1317S(2), Block Earner submitted, and the Court accepted, that:

• The contraventions arose in an uncertain regulatory environment;
• No loss or damage was suffered by investors by reason of the provision of the Earner product;
• Block Earner formed the view, after obtaining advice from a leading law firm, that there was no identified risk that the Earner product would breach any laws or regulations;
• Mr Karaboga, Chief Executive Officer and co-founder of Block Earner, had been actively involved in policy discussions with key industry participants and regulators concerning crypto-related products. This active participation supports a finding that Block Earner had sought to conduct its business in a lawful manner and had not consciously sought to contravene the Act.
• Block Earner received adverse media coverage as a result of ASIC’s unfair and misleading coverage of the earlier 9 February 2024 judgment, which potentially caused reputational damage.

The final point regarding adverse publicity is notable, as the judgment went as far as citing the headline and specific paragraphs of ASIC’s media release to give detailed reasoning as to why the said release was false, or at the very least had a “tendency to lead into error”.

In consideration of these reasons, the Court exercised its discretion to grant full relief to Block Earner from pecuniary penalties.

On 18 June 2024, ASIC appealed the Federal Court’s decision to relieve Block Earner from pecuniary penalty.

The full implications of this case will only be clear once ASIC’s appeal is determined and the sut settles.

Junein Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Penalties

The Federal Court ordered civil penalties of $16 million in one case:

• The Federal Court has ordered Ferratum Australia Pty Ltd to pay a total of $16 million in penalties for contraventions of the National Consumer Protection Act and the National Credit Code. The Court had earlier found that Ferratum imposed prohibited fees, incorrectly calculated payout amounts for its customers in two-thirds of the sample that ASIC reviewed, and failed to maintain the systems necessary to ensure it charged its customers properly for early payouts on small amount credit contracts. Ferratum defended the proceedings until its voluntary liquidation on 4 April 2023.

Civil Judgments

Five other judgments or decisions were delivered in ASIC civil proceedings:

• The Federal Court relieved Block Earner from liability to pay any civil penalty for contraventions related to unlicensed financial services when it offered its crypt-related Earner product. The reasons Justice Jackman exercised his discretion in this way included that Block Earner 1) considered it didn’t need an AFSL or to register an MIS following receiving legal advice from a leading law firm; 2) received adverse media coverage from ASIC’s media release which at a minimum ‘had a tendency to lead readers into error; and 3) actively engaged with industry bodies and regulatory bodies on cryptocurrency regulation, demonstrating Block Earner sought to conduct its business in a lawful manner. The decision has been appealed by ASIC.
• The Federal Court found that Active Super engaged in ‘greenwashing’ when it claimed in its marketing that it eliminated investments such as gambling, coal mining and oil tar sands. It was found that Active Super held direct and indirect investments in companies such as SkyCity Entertainment (gambling), Shell (oil tar sands), and Whitehaven Coal (coal mining). The Court rejected Active Super’s defence that consumers would draw a distinction between holding shares directly in a company, and indirect exposure through a pooled fund, when the claims used words such as “No Way”, “Not invest” or “eliminate”.  
• The Federal Court froze the assets of the Shield Master Fund and appointed an independent party to control Shield’s bank accounts on ASIC’s application. ASIC is investigating whether the product disclosure statements of the Shield Master Fund contained misleading statements. Mr Paul Chiodo, former director of the responsible entity of the fund, also provided an undertaking to the Court to give ASIC written notice 14 days prior to any international travel, and to take all reasonable steps to comply with any ASIC notices when travelling overseas.
• The Federal Court found that iSignthis, a former ASX listed company, breached disclosure laws. These included a finding that iSignthis failed to disclose from May 2020 that VISA had terminated its relationship with iSignthis, and the reasons for the termination. The Court also found that Mr Karantzis, former managing director and chief executive officer of iSignthis, failed to exercise his powers and discharge his duties with due care and diligence, and was involved in iSignthis’ failure to comply with disclosure obligations.
• The Federal Court froze the assets of AFS licensee United Global Capital Pty Ltd and related property investment company Global Capital Property Fund Limited, on ASIC’s application. ASIC sought the order to protect investor funds while its investigation continues.

Appeals

ASIC appealed one Federal Court decision:

• ASIC appealed the Federal Court decision relieving Block Earner from liability to pay a penalty in relation to the Earner Product.

Administrative action:

Financial Services Bannings

ASIC banned one individual from financial services:

• ASIC banned Dr Robert Payne from financial services for four years, finding that he lacked the competence and diligence required of a Responsible Manager, and was involved in Guildfords Funds Management Pty Ltd’s contravention of financial services laws. Guildfords’ AFSL was also cancelled by ASIC.

Licence Cancellation/Suspension

Seven companies or individuals had their AFSL cancelled or suspended:

• ASIC cancelled the AFSL of XTrade.AU Pty Ltd, a retail OTC derivatives issuer, after ASIC’s investigation found that several vulnerable clients were encouraged to trade in CFDs when they could not afford to do so, or had limited trading experience. ASIC also found XTrade failed to comply with its general obligations as an AFS licensee, and that it put its own interests above those of its clients. XTrade unsuccessfully appealed ASIC’s decision in the Administrative Appeals Tribunal.
• ASIC cancelled the AFSL of Aussie Wealth Super Pty Ltd because it was being wound up.
• ASIC suspended the AFSL of Responsible Entity Services Limited until 11 June 2025 because it is under external administration.
• ASIC cancelled the AFSL of Haywards Audit Pty Ltd because it no longer carried on a financial services business.
• ASIC cancelled the AFSL of Sug Ou Jeung on the basis they had not provided financial services under the license within six months of the license being granted.
• ASIC cancelled the AFSL of Guildfords Funds Management Pty Ltd, after ASIC found significant and systemic failures of oversight and compliance in Guildford’s provision of financial services. ASIC found that Guildfords failed to meet numerous obligations of the Corporations Act, arising predominantly from its failure to adequately supervise Mr Mitchell Atkins, a former authorised representative, which enabled unauthorised high-risk trading of derivative products, resulting in investor losses.
• ASIC suspended the AFSL of Airrails Pty Ltd for 3 months because it failed to lodge its annual financial statement, auditor’s report and audit opinion for the financial year ending 30 June 2023 within the prescribed timeframe.

Infringement Notices

• The Market Disciplinary Panel (MDP) issued an infringement notice to Ascot Securities Pty Ltd (Ascot) for alleged serious failures, allegedly contravening market integrity rules on numerous occasions, including by entering a client’s orders onto the ASX where it should have suspected the orders were manipulative, and failing to report to ASIC. The MDP also found alleged deficiencies in Ascot’s policies and procedures, and that Ascot allegedly failed to review them despite a senior compliance staff considering them deficient. Ascot elected not to comply with the infringement notice, which required it to pay a penalty of $3.1 million, and enter into an enforcement undertaking. Ascot’s AFSL was cancelled, and it has informed ASIC that it will be wound up.
• ASIC issued two infringement notices to Fertoz Limited, an ASX listed company, for alleged false or misleading statements regarding its Reforestation Project in the Philippines. In November 2023, Fertoz published a statement on the ASX that the Philippines Reforestation Project would obtain an offtake partner or receive funding for the project by the end of 2023, and begin planting in quarter 4 of 2023. ASIC alleges these statements were false or misleading, because Fertoz had ended discussions with two prospective offtake partners in April and August 2023, and had not signed any letters of intents, non-disclosure agreements or engaged in advanced discussions with new offtake partners which would reach completion by end of 2023.  Fertoz complied with the infringement notices and paid $37,560 (this does not constitute an admission of wrongdoing).

Stop Orders

ASIC issued one stop order:

• ASIC issued an interim stop order preventing Hirehood Pty Ltd from offering securities under a crowd-sourced funding (CSF) offer document published on VentureCrowd. ASIC took action because Hirehood used a nominee arrangement, where shares would be held by an intermediary on bare trust for the shareholders, which meant that shareholders will only hold an equitable interest in Hirehood shares, instead of full legal and equitable ownership rights. A valid offer under the current CSF regime requires the offer of fully paid ordinary shares. This is the first stop order issued by ASIC under the CSF regime.

Court Enforceable Undertaking

ASIC accepted one Court Enforceable Undertaking:

• ASIC accepted a court enforceable undertaking from PKF Melbourne Corporate Pty Ltd in relation to concerns about independent expert report (IER) engagements. PKF admitted to having, amongst other things, failed to have 1) internal policies on valuation methodology selection and application; 2) robust processes and procedures for managing conflicts of interest for IER engagements; and 3) documented its assessment of the competence of technical specialists. Under the CEU, PKJ will cease providing IERs until an independent expert completes a review of PKF’s policies for IER engagements, and PKF implements all recommendations.

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.