ASIC Enforcement Wrap: September 2024 | Large penalties/fines imposed for greenwashing and market gatekeeping failures

Key September Takeaways:

• ASIC achieved its second success in two months in greenwashing civil penalty proceedings, with an aggregate penalty of $12.9 million being imposed on Vanguard related to failure to properly screen investments.
• The Market Disciplinary Tribunal imposed a record fine of $4.995 million on Macquarie Bank for failing to prevent suspicious orders placed on the electricity futures market, the penalty size aggravated by Macquarie’s failure to respond to ASIC’s concerns in a timely fashion.
• Two Australian credit licenses were cancelled, automatically triggered by payment of compensation by the Compensation Scheme of Last Resort upon the licensees’ failure to satisfy an AFCA determination. In one case the unpaid determination amounted to a mere $500.

Spotlight– Superannuation portability in focus in dismissed case against REST

On 18 September 2024, the Federal Court dismissed ASIC’s case against superannuation trustee, Retail Employees Superannuation Pty Ltd (REST) for allegedly making misleading representations about limitations on members’ rights to transfer superannuation funds out of REST.

ASIC alleged that REST represented to members who were considering transferring their superannuation to another fund that:

• if they remained with an employer who made contributions to REST (REST employer), they were required to keep a minimum balance of $5,000 in the fund;
• if the REST employer was willing to contribute to another fund, the member needed to obtain an employer declaration; and
• if the member was no longer employed by a REST employer, the member needed to obtain a separation certificate or confirmation of their termination date to transfer their full superannuation balance.

ASIC alleged that the representations were false, or misleading or deceptive, because REST was not permitted to impose these conditions. According to the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and the associated regulations, members of a superannuation fund had the option to transfer all or part of their superannuation balance to another fund subject to a few limited exceptions.

ASIC further alleged that REST gained substantial financial benefit from making these representations by retaining members in the trust.

The Court dismissed ASIC’s case for two reasons:

• The alleged representations were statements in respect of REST’s practice as a matter of fact; and
• Alternatively, if REST’s statements could be construed as relating to the legal requirements under the SIS Act, it was based on a reasonably held belief based on advice received for an extended period of time from law firms.

Although a setback for ASIC, the regulator may take solace in the fact that transfer of superannuation balances are now much easier than it was more than a decade ago before the government’s SuperStream reform. ASIC commenced these proceedings out of concern that members should have the right of superannuation portability and choice of superannuation fund.

September in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Proceedings Commenced

ASIC commenced two civil proceedings:

• ASIC commenced urgent proceedings against David McWilliams and several of his companies. ASIC is currently investigating Mr McWilliams in relation to the provision of financial services and use of investor funds following receipt of information about Mr McWilliams’ gambling activities. On 11 September, the Federal Court ordered the preservation of the assets of a number of companies, and restrained Mr McWilliams and his partner from leaving Australia. On 16 September, the Federal Court made orders extending the aforementioned orders.
• ASIC commenced proceedings against Diamond Wheels Pty Ltd (trading as Lansvale Motor Group), Keo Automotive Pty Ltd, and Ken Keomanivong (a former director of Diamond Wheels and current director of Keo Automotive). ASIC alleges that the two companies provided finance to consumers to purchase new and used vehicles without holding an Australian Credit Licence. ASIC also alleges that in the course of providing finance, Diamond Wheels and Keo Automotive charged consumers roughly double the amount of interest that could lawfully be charged.

Civil Penalties

The Federal Court ordered civil penalties of $12.9 million:

• The Federal Court ordered Vanguard Investments Australia to pay a $12.9 million penalty for making misleading statements about environment, social and governance exclusionary screens. Vanguard admitted it misled investors by failing to screen certain funds to exclude bond issuers with business activities in certain industries such as fossil fuels.

Civil Judgments

The following three judgments were delivered in ASIC civil proceedings:

• The Federal Court ruled that Rent4Keeps’ largest franchise Darranda Pty Ltd breached the Credit Act in selling everyday goods. Darranda entered into 516‘lease’ agreements with customers who typically paid more than four times the market price for everyday goods. Darranda described their lending arrangements as ‘leases’ for goods that customers were not entitled to keep, when in fact customers did keep the goods. The Court held that these ‘leases’ were in fact credit contracts, meaning that obligations under the Credit Act applied. Darranda breached the rate cap obligation and other requirements imposed by the Credit Act.
• The Federal Court dismissed civil penalty proceedings against Retail Employees Superannuation Pty Ltd (REST). ASIC alleged that REST made false or misleading representations about members’ rights to transfer superannuation funds out of the Retail Employees Superannuation Trust to another superannuation fund. ASIC alleged that REST denied members rights to superannuation portability and choice of superannuation fund which caused members financial loss. ASIC has 28 days to lodge an appeal against the decision.
• The Federal Court appointed Jason Tracy and Lucica Palaghia of Deloitte as receivers and managers, and subsequently administrators, of Keystone Asset Management Ltd. ASIC appointed Mr Tracy and Ms Palaghia because it was concerned about the management and operation of Shield Master Fund, of which Keystone Asset Management is the responsible entity.

Appeals

• The Full Federal Court dismissed an appeal from Peter Daly, a former director of Linchpin Capital Group Ltd (in liquidation), to set aside the disqualification orders and pecuniary penalty imposed by the Federal Court primary judge. Justice Jackman said that the $150,000 penalty and period of disqualification of 5 years from managing a corporation were well within the range of reasonableness.

Criminal Action:

Guilty Plea – two individuals pleaded guilty:

• Mark McCabe pleaded guilty to three offences of dishonestly obtaining a financial advantage by deception. Mr McCabe, as the sole director of two deregistered companies (Guevara Capital Access and Online Trading Capital), made deceptive representations to investors that he would provide them with access to foreign exchange trading accounts. Mr McCabe misappropriated investor funds by using the funds for business and personal expenses. He obtained $940,350 from eight victims, seven of whom were clients of the two deregistered companies.
• Daniel Kirby, the former director of Berndale Capital Securities Pty Ltd, pleaded guilty to one count of dishonest conduct in relation to a financial service, one count of dishonest use of his position as a director, and one count of providing false or misleading information to an auditor. Prior to and immediately following the cancellation of Berndale’s AFS licence, Mr Kirby transferred Berndale’s funds to himself. Mr Kirby also submitted false or misleading documents to Berndale’s auditor.

Sentencing– three individuals were sentenced:

• Tony Iervasi was sentenced to 11 years imprisonment with a non-parole period of seven years for engaging in dishonest conduct and carrying on an unlicensed financial services business by operating a ponzi scheme. The Courtenay House Companies, of which Mr Iervasi was a director, made representations to investors that funds would be traded in for ex and futures markets when only three percent of the monies deposited were in fact traded. There was a total net loss of $54 million to the victims.
• Bradley Grimm was sentenced to 18 months’ imprisonment, and to be of good behaviour bond for a period of 18 months upon release. Mr Grimm was convicted of three counts of engaging in dishonest conduct. Mr Grimm transferred funds from two clients’ SMSFs to three companies of which he was director and transferred his clients’ SMSF shares and convertible notes to another of which he was a sole director. He also failed to advise a client that ASIC had sought the winding up of entities relating to him and that he was banned from providing financial services.
• Russell Sandiford, former director of Reiwa-Capital, was sentenced to two years and eight months’ imprisonment to be served as an Intensive Correction Order. Mr Sandiford pleaded guilty to two counts of dishonest conduct relating to a financial product contrary to s1041G of the Corporations Act. 74 clients paid $440,909 to Mr Sandiford for investing or trading in one of two funds. Mr Sandiford instead used the funds for personal expenses. Only $6,316 of the funds were paid back to investors.

Administrative Action:

Licence Suspension/Cancellation

Four companies had its AFS or Credit licence cancelled or suspended:

• Olritz Financial Group Pty Ltd had its AFS licence suspended until 5 March 2025 because Olritz has not carried on a financial services business since May 2023.
• FXOpen AU Pty Ltd had its AFS licence cancelled following an investigation, which identified serious concerns of its inadequacy of human resources and various failures of its AFS licensee obligations. ASIC has found that failure to comply with core AFS licensee obligations warrants a cancellation of its AFS licence to protect existing and future clients of FXOpen AU.
• Ultimate Credit Management Pty Ltd and Worry Free Finance Pty Ltd had its Australian credit licences cancelled following payments of compensation by the Compensation Scheme of Last Resort (CSLR). Ultimate Credit and Worry Free failed to pay sums of $500and $22,001 to respective claimant pursuant to AFCA determinations, which led to the cancellations.

Director Disqualifications

ASIC disqualified one individual from managing corporations:

• Graeme Doble was disqualified by ASIC from managing corporations for a maximum of five years, in connection with his management of six failed companies. The six companies owed a total of $15,170,970 to unsecured creditors, including $8,041,582.90 to the ATO, $580,936.25 to Revenue NSW and $773,567.14 in unpaid workers compensation premiums.

Stop Orders

ASIC placed two stop orders:

• ASIC issued two interim stop orders to Candy Club Holdings Limited, one in relation to an offer made under a prospectus and another in relation to a target market determination prepared in connection with the offer. ASIC was concerned that the prospectus did not adequately disclose all required information, such as capital needed to fund expansion into the United States, and that the distribution conditions in the TMD would not result in the product being distributed to the company’s target market.

Infringement Notices

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

• The MDP imposed its highest ever penalty by fining Macquarie Bank Limited $4.995 million for allegedly breaching market integrity rules on 50 occasions by allowing three clients to place suspicious orders on the electricity futures market. It was alleged that Macquarie should have suspected each submitted order intended to create a false or misleading appearance in the market. Macquarie Bank’s failure to take timely action in response to ASIC’s alerts as to volatility of the energy markets or suspicious trading of its clients was an aggravating factor regarding the size of the penalty imposed.

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.