ARTICLE
11 September 2009

Fund Manager Insulated From Fraudulent Conversion Of Cheques

In Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84, the New South Wales Court of Appeal examined whether an investor who was the victim of fraud could recover lost funds from the manager of a common fund.
Australia Litigation, Mediation & Arbitration
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In Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84, the New South Wales Court of Appeal examined whether an investor who was the victim of fraud could recover lost funds from the manager of a common fund.

The fraud was perpetrated by the investor's mortgage broker who fraudulently utilised cheques given to him to invest in the fund. Rather than using those cheques to establish a type of mortgage off-set account, the fraudster used them for other purposes.

His fraud involved:

  • using an account with the fund which he had fraudulently set up in his ex-wife's name
  • delivering the cheques to the fund manager for conversion into units in the fund
  • arranging for those units in the fund to be allocated to the account in his ex-wife's name, and
  • cashing in those units and dispersing the funds obtained.

Eventually the fraud was uncovered but the victim of the fraud could only recover approximately $1,000,000 from the now-bankrupt fraudster out of approximately $4,000,000 invested in the illusory mortgage off-set account.

In an attempt to recover approximately $2,700,000 of the outstanding funds, the victim claimed that the fund manager had unlawfully converted six cheques.

At trial, the victim was successful. The trial judge held that the victim was entitled to recover against the fund manager because it had unlawfully converted the cheques. According to the trial judge, there was unlawful conversion by the fund manager because the mortgage broker had acted outside the scope of his authority.

Unsurprisingly, the fund manager appealed. The Court of Appeal overturned the trial judge's decision.

The following factors were material in the Court of Appeal's decision:

  • the fund manager was unaware of the fraud
  • the fund manager did not receive a direct benefit from the fraud
  • the cheques were clearly drawn and the fund manager was the intended payee
  • the fund manager dealt with the cheques properly as title to the cheques had passed to the fund manager in accordance with the Cheques Act 1986 (Cth), and
  • although the mortgage broker was not authorised to commit the fraud, he was authorised to deliver the cheques to the fund manager.

Undoubtedly this result was disappointing for the defrauded investor. On balance, though, it seems to be a good result because the fund manager was unknowingly involved in the fraud.

Although unsuccessful against the fund manager, the defrauded investor might be able to recover some of the misused funds from the ex-wife of the fraudster. The Court of Appeal is yet to determine finally whether any of the misappropriated funds innocently received by the fraudster's ex-wife can be recovered by the investor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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