ASIC Enforcement Wrap: May 2024 | Financial reporting in the spotlight with actions targeting auditor independence and compliance with accounting standards

KeyMay Takeaways:

• Four listed companies were restricted from conducting fundraising through reduced content prospectuses for 12 months because of failures to lodge financial reports on time and for failing to comply with accounting standards.
• Robert Johnson, a registered company auditor, entered into a court enforceable undertaking with ASIC due to concerns about his independence. Mr Johnson was the auditor for Consolidated Builders Ltd for 32years.  Under the EU Mr Johnson will not re-apply as a company auditor.
• The Cigno saga reaches a new phase, with ASIC obtaining civil judgment against the corporate entities Cigno Australia Pty Ltd and BSF Solutions Pty Ltd for engaging in credit activity without a license, and the directors, Mark Swanepoel and Brenton Harrison, personally, for their involvement in the breaches.
• ASIC obtained its first court outcome against a non-cash payment facility involving crypto, with the Federal Court finding BPS Financial Pty Ltd engaged in misleading and deceptive conduct when offering the Qoin Wallet.

May in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Judgments

Two judgments were delivered in ASIC civil proceedings:

• The Federal Court has found that BPS Financial Pty Ltd engaged in unlicensed conduct when offering the “Qoin Wallet”, which was a non-cash payment facility using a crypto asset called “Qoin”. The Court also found that BPS engaged in misleading or deceptive conduct when it made representations that the Qoin Wallet could be used to purchase goods and services from an increasing number of merchants, and that Qoin tokens can be exchanged for currency or other crypto-assets, when these representations were false. This is ASIC’s first outcome against a non-cash payment facility involving crypto assets. The question of penalties will be determined on a date to be fixed.
• The Federal Court has found that Cigno Australia Pty Ltd and BSF Solutions Pty Ltd engaged in credit activity without an Australian Credit license and charged consumers prohibited fees. The Federal Court has also found that Cigno director Mark Swanepoel and BSF director Brenton Harrison were involved in the breaches. Orders were made that restrained Cigno and BSF from recovering any further fees, charges or other amounts.

Other Results

• The Federal Court granted freezing orders against Sunny Mahendra Prakash and his related companies, Principal Financial Services Pty Ltd, Self-Managed Super Pty Ltd, Provest Enterprises Pty Ltd and Super Funds Australia Pty Ltd. ASIC is currently investigating Mr Prakash and his related entities regarding financial advice and activities on client trading accounts.

Criminal:

Sentencing – Five individuals and entities were sentenced:

• Odyssey Equity Finance Pty Ltd, an AFS Licensee, pleaded guilty to three counts of failing to lodge a profit and loss statement and balance sheet, and three counts of failing to lodge an auditor’s report. Upon sentencing, Odyssey was discharged without conviction upon giving security by entering into a recognizance in the sum of $2,500 to be of good behaviour for a period of 12 months. A special condition is for Odyssey to comply with outstanding reporting obligations within the period of the bond.
• Henry Heng was sentenced to a recognisance release order upon providing security of $10,000 to be of good behaviour for 12 months, after pleading guilty to nine counts of failing as a director to notify the market operator of a change in his relevant interests in a listed corporation.
• Alexander Henry and Luke David Mason were convicted and each fined $5,000 plus costs for failure to have a director ID. Both directors were convicted ex-parte.
• Daniel Farook Ali, former director of DanFX Trade Pty Ltd, pleaded guilty to five counts of fraud totalling $447,313 relating to misappropriation of funds invested for trading and investment purposes. Mr Ali was sentenced to seven years and three months imprisonment. Mr Ali has been in custody since November 2021, having initially been arrested in Poland, and was extradited to Australia in August 2022 to face his charges.

Guilty Plea - Four individuals pleaded guilty:

• Henry Heng (above)
• Brett Paul Trevillian pleaded guilty to two charges of making a false document with the intention to obtain a financial advantage. Mr Trevillian forged portfolio performance verification reports as investment manager of AlphaThorn Pty Ltd, where such reports were intended to be provided to potential investors, and falsely verified or claimed a history of investment returns by AlphaThorn.
• John Louis Anthony Bigatton pleaded guilty to one criminal charge of providing unlicensed financial services on behalf of another person, in relation to his role as a national promoter of BitConnect.
• Daniel Farook Ali (above)

Administrative action:

Financial Services Bannings

ASIC banned four individuals from financial services:

• Kudzanai Philip Dzawo was permanently banned from financial services after ASIC found that he was not a fit and proper person to provide financial services. ASIC also found that Mr Dzawo dishonestly attempted to induce clients to transfer their superannuation into a bank account he controlled by making false and misleading statements to the clients. Mr Dzawo has applied to the AAT for a review of this decision.
• Gawad Nabi was banned for three years from financial services. An ASIC review of advice provided by Mr Nabi found that he breached various financial services laws by i) failing to act in the best interests of clients, ii) failing to provide advice appropriate to his clients; and iii) not prioritising the interests of his clients above his own.
• Brett Andrew Gordon was permanently banned from financial services following his conviction for fraud offences.
• Christopher David Nairn was permanently banned from financial services, as ASIC found Mr Nairn lacked the honesty, integrity, professionalism and trustworthiness to participate in the financial services and credit industries. It was found that Mr Nairn falsified numerous documents by forging his clients’ signatures, enabling him to misappropriate more than $650,000 in client funds.

Licence Cancellation/Suspension

Three companies had their AFSL cancelled or suspended:

• The AFSL of Octillion Partners Pty Ltd was cancelled after ASIC determined, interalia, that Octillion did not comply with financial services laws, and did not take reasonable steps to ensure that its representatives complied with financial services laws. ASIC’s concerns arose out of Octillion’s supervision of Shane Allan Rose, who was found to have used client invested funds for other purposes and was likewise banned permanently from financials service in March2024.
• The AFSL of Everest Asset Management was cancelled because Everest failed to prepare and lodge the required financial statements and auditor opinions with ASIC.
• The AFSL of Aurora Funds Management Limited was suspended until 20 September 2024 because Aurora failed to meet its audit and financial reporting lodgement obligations for itself and six registered managed investment schemes of which it was responsible entity.

Infringement Notices

The market disciplinary panel has issued one infringement notice:

• J.P. Morgan Securities has paid $775,000 to comply with an infringement notice issued by the market disciplinary panel in relation to the failure to identify that their client placed suspicious orders for Eastern Australia Wheat futures contracts. The MDP was of the view that the suspected orders were placed towards the end of a trading session to influence the daily settlement price of the derivative contract.

Director Disqualifications

ASIC disqualified two individuals from managing corporations:

• Laurence Christopher Pereira was disqualified for five years due to his involvement in the failure of four companies which owed the combined amount of $4,006,382 to unsecured creditors, including $1,031,357 for unpaid wages, superannuation, and employee entitlements.
• Andrew Liam Parry was disqualified for five years due to his involvement in the failure of four companies which owed a combined amount of $11,085,390, of which $6,169,090 was owed to 42 unsecured creditors.

Stop Orders

ASIC issued two stop orders, including:

• Two interim stop orders were made against Trademax Australia preventing it from opening trading accounts or dealing in contracts for difference or margin foreign exchange contracts to retail investors. ASIC was concerned that Trademax failed to take reasonable steps and that would result in retail product distribution inconsistent with target market determinations. The concerns revolve around a poorly designed and inadequate questionnaire, which, for instance, did not adequately enquire into prospective clients’ financial situation, and permitted retail investors two attempts to pass the questionnaire every 24 hours for an indefinite period.

Court Enforceable Undertakings

ASIC has accepted one Court Enforceable Undertaking from:

• Robert Johnson and audit firm Hardwickes, following an ASIC investigation where Mr Johnson admitted he failed to ensure the audit of property development company, Consolidated Builders Limited, was conducted in accordance with ethical requirements outlined in APES 110. Mr Johnson audited Consolidated Builders for 32 years, and Hardwickes also provided various non-auditing services to Consolidated Builders. Mr Johnson has undertaken not to re-apply his registration as a company auditor, and Hardwickes has undertaken to engage an independent third-party expert to review the firm’s audit practices.

Determinations

ASIC has restricted four listed companies from issuing a reduced content prospectus for 12 months, because:

• XTC Lithium Limited (XTC) failed to lodge its financial report for the half-year to 31 December 2023 within 75 days.
• My Rewards International Limited (MRI) failed to lodge its financial report for the half-year to 31 December 2023 within 75 days and, failed to have its annual report for the year ended 30 June 2023 audited as required.
• Range International Limited (RAN) failed to have its lodged financial reports audited as required for the financial years ended 31 December 2022 and 31 December 2023 and, its half year financial report for the half-year to 30 June 2023.
• Energy World Corporation Limited failed to comply with certain accounting standards with regards to impairment of assets in its FY2023 and HY2024 financial reports. EWC’s auditors had qualified their audit reports in respect of USD$921 million of assets as they were unable to obtain sufficient audit evidence to support the assumptions used by EWC in its impairment models.

Appeals

• The AAT upheld ASIC’s decision to permanently ban Sean John Sweeney, a former insurance broker, from financial services. ASIC’s original decision was made after Mr Sweeney was convicted of fraud offences where it was found that he diverted funds intended to be paid for his client’s insurance premiums under a “premium funding” arrangement, into his own accounts.

Surveillance:

Financial reporting and audit surveillance program

• LPI (Australia) Holdings Pty Limited (LPI Australia) lodged its financial report for FY2023 with restated FY2022 comparative figures following concerns raised by ASIC. ASIC was concerned that when LPI Australia lodged its FY2022 figures, it failed to consolidate a Taiwanese entity in which LPI Australia has a 100% holding, which meant users of the report did not have all relevant information about the entity’s true financial position. That entity had assets of $57 million, liabilities of $25 million, revenue of $100 million and expenses of $96 million.

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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.