A couple of recent Federal Court cases have highlighted ASIC's enthusiasm for pursuing discrepancies in the financial services world, particularly when there are suggestions of misleading and deceptive conduct.
In the case of Australian Securities and Investments Commission v Camelot Derivatives Pty Limited (in Liq)  FCA 414 (Camelot Derivatives) the court came down heavily on an unsuccessful options trader that was using the iron condor trading strategy to clock-up transaction commissions.
In Australian Securities and Investments Commission v Stone Assets Management Pty Ltd  (Stone Assets Management) the court took a hard line against an online CFD trading company in breach for providing online trade analysis without an Australian financial services license (AFSL).
The case involved Camelot's option trading business that promoted a trading strategy called 'condor' or 'iron condor', on the basis that:
- Camelot's clients had generated significant returns by investing in an options trading market;
- Camelot's clients could generate, or have an expectation of generating, significant returns by investing in an options trading market;
- Camelot had experience in implementing a successful strategy, methodology, formula or concept to generate significant returns from investments in an options trading market; and
- Camelot was able to show potential clients how they could achieve significant returns by investing in an options trading market.
Many of Camelot's clients sustained heavy losses as a result of this trading strategy during the GFC.
ASIC claimed that Camelot's representations constituted misleading and deceptive conduct in breach of section 1014H of the Corporations Act 2001 (Cth) (Corporations Act) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (including because its managing director, Mr King, had no reasonable basis for them). It also alleged that Camelot induced clients to use the strategy so that it could charge excessive brokerage. On this basis ASIC also claimed that Camelot and Mr. King contravened section 912A(1)(a) of the Corporations Act by failing to do all things necessary to ensure that they provided the financial services efficiently, honestly and fairly.
The Court held that:
- Camelot had engaged in options trading when it knew, or ought reasonably to have known, that it was furthering its interests in earning commissions and not acting in the interests of its clients;
- Mr King had caused Camelot to make misleading or deceptive statements, including about profits earned by Camelot clients, in contravention of the Corporations Act and ASIC Act;
- Camelot had failed to do all things necessary to ensure the financial services it provided were provided efficiently, honestly and fairly in contravention of the Corporations Act; and
- Mr King had aided and abetted, and was knowingly concerned in, the contraventions by Camelot.
Mr King was restrained from providing any financial services for a period of six years.
Misleading and Deceptive Conduct
Camelot's inducements were misleading or deceptive or likely to mislead or deceive because they did not adequately explain the risks involved and did not make clear to prospective clients the potential for Camelot to make significant profits while its clients made significant losses.
Efficiently, honestly and fairly
The Court reviewed previous case law to the effect that:
- the requirement to act 'efficiently, honestly and
fairly' connotes a requirement of:
- competence in providing advice and in complying with relevant statutory obligations; and
- an element not just of even handedness in dealing with clients but also sound ethical values and judgment in matters relevant to a client's affairs;
- the word 'efficient' refers to a person who performs his duties efficiently, meaning the person is adequate in performance, produces the desired effect, is capable, competent and adequate and that inefficiency may be established by demonstrating that the performance of a licensee's functions falls short of the reasonable standard of performance that the public is entitled to expect; and
- it is not necessary to establish dishonesty in the criminal
sense. The word 'honestly':
- may comprehend conduct which is not criminal, but which is morally wrong in the commercial sense: and
- when used in conjunction with the word 'fairly' tends to give the flavour of behaviour that is not only honest, but also ethically sound.
The strategy adopted by Camelot and its managing director was not honest, in a commercial sense, and did not constitute the fair provision of financial services. Therefore Camelot had failed to do all things necessary to ensure that the financial services it provided were provided efficiently, honestly and fairly.
Stone Assets Management
In this case, ASIC successfully sought declarations that an online CFD trading company had contravened the Corporations Act by carrying on a financial services business without an AFSL and had engaged in misleading and deceptive conduct by representing that it held an AFSL.
The Federal Court explored the meanings of several key concepts of Chapter 7 of the Corporations Act, including what constitutes a financial product, providing financial product advice and dealing. The Court also considered the meaning of misleading and deceptive conduct and the application of enforcement mechanisms under the Act. The Court found that the company was carrying on a financial services business and had engaged in misleading and deceptive conduct. A number of permanent injunctions were granted. The court also ordered the company to be wound up on the 'just and equitable' ground in s461(1)(k) of the Act.
This case adds to the body of law about whether providing online trade analysis information can amount to financial product advice. This case is also a reminder that courts will not hesitate to use the full force of the Act's enforcement mechanisms on entities that deliberately mislead the public about whether they are licensed to provide financial services, including by winding up the entity.
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