Australian Law of Investments - Report Example

Introduction The main issues for the Greens is the quality of advice rendered by Ubeaut and non-disclosure of a conflict of interest. The quality of the advice given is questionable since Ubeaut via its agent advised the Greens that investments in debenture stock was very secure during difficult economic times. The conflict of interest arises out of the fact that advisor from Ubeaut failed to disclose his office as director of the company from whom the debenture stocks were purchased. Discussion The advisor informed the Greens of the relative security of the debenture stocks and the documents finalizing the sale confirmed the advisor’s assessment of debenture. It was not until the description of the secure nature of the debentures appeared in the documents relative to the debenture that the Greens made the decision to make the investment. Section 12D of the Australian Securities and Investments Commission Act 2001 forbids persons in the financial services engaging in conduct that is “misleading or deceptive or likely to mislead or deceive.”1 Misleading or deception conduct is more particularly defined by Section 104 of Part 10.2, Division 2 of the Corporations Act 2001. Section 1041E and 1041F are particularly relevant to the facts of the Green’s case. By virtue of Section 1041E the conduct of the investment advisor at U-beat is entirely prohibited. Section 1041E provides for prohibitive conduct that can be attributed to the Green’s advisor. To start with a person is not permitted to make a statement containing information that is “false in a material particular or is materially misleading” and is “likely to induce” the recipient to either “apply for financial products” or “acquire financial products”.2 Moreover, the person providing the information or the statement has offended the prohibition if he or she either knows that statement of information is false or “ought reasonably to have known, that the statement or information is false” or only false “in a material particular or is materially misleading.”3 The information and statements made by U-Beaut’s advisor was obviously false. There was no ambiguity with respect to the advice that debenture stocks were secure investments. As an expert in the field, the advisor ought to have reasonably known, at the very least, that the information was false or at the very least materially misleading. Section 1041F similarly prohibits inducing another into dealing “in financial products” by virtue of statements, promises or forecasts “if the persons knows, or is reckless as to whether the statement is misleading, false, or deceptive.”4 Moreover, inducement in this regard is prohibited if the person making the inducement dishonestly conceals “material facts.”5 Here again, the information with respect to the security of the debenture represented a forecast that the advisor either knew was misleading, false or deceptive. At the very least, the advisor was reckless as to the veracity of his forecast or promise. Moreover, the statements made were calculated to induce the Greens to make the investment. The fact that the advisor failed to disclose the fact that the company issuing the debenture was experiencing financial difficulties has the potential to support a case against him in two material respects. First it confirms that contention that he was deliberately providing false information about the secure nature of the debenture stocks. He had to have known that investing in debenture from a company suffering financial difficulties was risky. The failure to disclose this information therefore amounts to a dishonestly concealing material facts. Secondly, the failure to disclose his connection to the company also amounts to dishonestly concealing material facts. The logical conclusion is that the U-Beaut advisor made these false and misleading representations for the express purpose of inducing the Greens into purchasing the debentures. It is clear from the facts of the case for discussion that the advisor was not merely stating an opinion, but offering a statement of fact. In the case of factual statements, a statement is misleading within the meaning of Section 1041, if it was subsequently demonstrated that the statement is inconsistent with the objective facts.6 Even if the advisor at U-Beaut was offering an opinion it would still be considered deceptive or misleading. According to the ruling in James v ANZ Banking Group Ltd. [1986] 64 ALR 347 an opinion: “...conveys the meaning that the maker of the statement had a particular state of mind when the statement was made and that there was a basis for that state of mind.”7 Obviously the advisor’s state of mind was one that reflected a desire to obtain a debenture investment in the failing company that he was connected to. His state of mind also reflected a desire to induce the Greens to make that investment by deliberately concealing material information and by overstating the security of the debenture investment. In any event under the Australian Securities and Investments Commission Act 2001the presumption is that an opinion rendered by an expert is deemed to have a reasonable basis so that the recipient is entitled to rely on that opinion. It is automatically assumed that the statement of opinion is based on the application of “due care and skill” and as such can be relied upon.8 As Lockhart explains, when an opinion is provided in circumstances where it is: “...the exercise of certain expertise...carries with it the implication that it is based on rational grounds and accordingly will breach the prohibition if it has no reasonable basis.”9 Section 12ED of the Australian Securities and Investments Commission Act 2001specifically provides for an implied warranty of fitness and due care and skill in instances where experts or professionals in a particular field offer an opinion.10 U-Beaut is a financial adviser company. The agent at U-Beaut is therefore assumed to be a financial adviser and therefore an expert in the field. Moreover, the document reflecting the deal for the Greens to purchase debentures was issued from U-Beaut. It is therefore only logical and consistent with the tenet that the Greens were entitled to act on the opinion or the statement of fact offered on behalf of U-Beaut. It can also be argued that separate and apart from the statutory duty to provide honest and reliable financial advice and information, U-Beaut and/or its agent had a fiduciary relationship with the Greens and as such had a residual duty to avoid a conflict of interests. Tuch explains that the breadth of Australian common law suggest that a fiduciary relationship is characterized by an undertaking by one person “to act in the interest of another,” or a relationship involving trust and confidence” , “vulnerability to another’s power or vulnerability necessitating reliance,” and: “a reasonable expectation that a person (the fiduciary) will act in the interests of another in and for the purposes of a relationship.”11 Based on these characteristics of fiduciary relationships it is fair to assume that U-Beaut has a fiduciary relationship with the Greens in that there was an “reasonable expectation” on the part of the Greens that U-Beaut would act in their interest and “for the purposes of” the relationship. By failing to disclose the fact that the active advisor was a director at the company from which the debentures were purchased and that the company had financial difficulties was in a position where its loyalties were divided, thereby creating a conflict of interest. Remedies for deceptive conduct under Section 12D of the Australian Securities and Investments Commission Act 2001are provide for in Section 12G of the Act.12 The remedies include both criminal and civil actions. The advisor and/or U-Beaut are jointly or severally liable and as such the Greens may wish to pursue an action in damages against both parties with a view to having the 200,000 dollar investment returned to them. Bibliography Australian Securities and Investments Commission Act 2001 Corporation Act 2001 Global Sportsman Pty Ltd v Mirror Newspaper Pty Ltd. [1982] 2 FCR 82 James v ANZ Banking Group Ltd. [1986] 64 ALR 347 Lockhart, C. The Law of Misleading or Deceptive Conduct. Sydney: Butterworths, 2003 MIGGIA (1992) Ltd. v Kenny and Good Ltd. [1996] 70 FCR 236 Tuch, Andrew. “Investment Banks as Fiduciaries: Implications for Conflicts of Interest.” Melbourne University Law Review Vol. 29(2), 2005, 478-517 Read More