B53/ %6 NOT FOR DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G.247 of 1985 GENERAL DIVISION BETWEEN: OLIVER ROLAND EDMUND COLMAN and SUSAN CLARE COLMAN Applicants ~ AND: LINCOLN HUNT AUSTRALIA PTY LIMITED First Respondent RICHARD HAWKE Second Respondent JACOB FEDOR DUBINSKI-HUNT Third Respondent CORAM: WILCOX J 3 PLACE: SYDNEY DATE: 11 AUGUST 1986 MINUTES OF ORDER ol eeciealiataaaenan ateeniaitcen iar i lea te omer re pe THE COURT ORDERS THAT: ~ Note: Judgment be entered against each of the first and third respondents in the sum of sixteen thousand dollars ($16,000.00) together with interest in the sum of two thousand eight hundred dollars ($2,800.00). The first and third respondents pay to the applicants their costs of these proceedings. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. Vuoaee my me, hae ata yo = wees ee mae ees NOT FOR DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G.247 of 1985 wwe we GENERAL DIVISION BETWEEN: OLIVER ROLAND EDMUND COLMAN and SUSAN CLARE COLMAN" Applicants AND: LINCOLN HUNT AUSTRALIA PTY LIMITED First Respondent RICHARD HAWKE Second Respondent JACOB FEDOR DUBINSKI~HUNT Third Respondent wdlideh tl u CORAM: _ WILCOX J PLACE: SYDNEY DATE: 11 AUGUST 1986 EXTEMPORE REASONS FOR JUDGMENT This is an application brought under s.52 of the- Trade Practices Act 1974. The applicants Oliver Roland Edmund Colman and Susan Clare Colman made two deposits with the first respondent, Lincoln Hunt Australia Pty Limited pursuant to certain statements made to them, both orally and in documentary form, regarding so-called investments. The first deposit was made on 8 May 1985 in the sum of $8,000. The second payment was made on 27 June 1985 in the same amount. The second respondent to the proceedings, Richard Hawke, was employed by the first respondent as Chief ° Executive, Financial Services Division. He played some part in the persuasion of Mr Colman, who made the relevant decisions on behalf of himself and his wife to invest money with the company. However, an agreement has been reached between the applicants and Mr Hawke where, by consent, the proceedings have been dismissed as against him. Consequently I am not further concerned with his involvement. hes The third respondent, Jacob Fedor Dubinsk1-Hunt, Swas at all Material times both a director and the principal o | wblid executive officer of the company. According to an answer to interrogatories sworn by him his functions, duties and responsibilities in relation to the first respondent were, in 1984, "to direct the activities of the first respondent, investigate market conditions and generally manage the offices of the first respondent". weer ee mr mr, --- aa we eer oe A Defence was entered to these proceedings on behalf of the first respondent, Lincoln Hunt, but that company failed to answer interrogatories and I was informed during the hearing of a Notice of Motion in respect of interrogatories that the company had gone into provisional liquidation. There was some question about whether the company would in fact defend the proceedings. Upon the application of the applicants on 20 June 1986, I ordered that the first respondent, within 14 days from that day, file and serve _ answers to interrogatories as set out in the applicants' : Notice to Answer Interrogatories, paras.18 to 40 and 45(c) and (d) respectively, and in default thereof and without the necessity for a further order the Defence of the first respondent be struck out. The answers to interrogatories referred to in that order were not in fact filed whereby, in consequence of the order, the Defence was struck out. At no subsequent time has there been any appearance on behalf of the first respondent. ub dete, So far as the third respondent, Mr Dubinski-Hunt?; is concerned a Defence was filed and Answers to Interrogatories were filed. He has been represented by counsel on a number of occasions. However, he has not been represented today and I note that no affidavits were filed by Mr Dubinski-Hunt, notwithstanding a direction that all affidavits upon which he _- = ate t wen re nie rn en rn et intended to rely were to be filed prior to the hearing. - Consequently the matter has proceeded as an undefended matter as against both the first and third respondents. The first applicant, Mr Colman, has sworn an affidavit setting out the way in which he became involved. It appears that he was first approached by a Mr Jason Ryder. According to the Answers to Interrogatories on behalf of the first respondent and third respondent. Mr Ryder was employed by Lincoln Hunt as a sales person. Mr Ryder contacted Mr Colman, who is a dentist by profession, on a number of . occasions and eventually persuaded him to attend a meeting held at the offices of Lincoln Hunt on 27 Pebruary 1985. There were a number of other people present on that occasion and they were each given documents which have been tendered in evidence as exhibits A and B. These documents are attractively presented and show photographs of various well known people but they appear to have very little, 1f anything, to do with the investment @hich Lincoln Hunt was offering to interested persons. Exhibit@A is t a prospectus for Property Trust of Australia Limited and, so far as the evidence indicates, this has nothing whatever to do with either Lincoln Hunt or the particular investment which was being offered. Exhibit B is a document dealing with Lincoln Hunt and its real estate investments. It has nothing ae ee ype ey sate oo oo eg ee wy evel to do with the particular investments which were being offered to Mr Colman and the others at the meeting. I suppose it can best be described as an attempt in image-building on behalf of Lincoln Hunt. On that occasion Mr Hawke addressed those present for some time and he handed to those present, including Mr Colman, various documents. These documents included annexure A to Mr Colman's affidavit, which is a document headed: "How is My Money Invested?" Mr Dubinski-Hunt has acknowledged in his Answers to Interrogatories that he was one of the authors of this document. The document sets out a number of statements which I am satisfied were misleading or deceptive. At the commencement of the document and in response to the heading: "How 1s My Money Invested?", the statement 1s made: "30% of your money is invested in Australian trading bank accepted bills of exchange". The evidence indicates that no part of Mr Colman's money was ever invested in Australian trading bank accepted bills of exchange, and 1t appears to me unlikely £fhat there was ever any intention of so investing the funds. say this betause of the fact that, in the case of each of his- Ayn hi investments, the whole of the investment was immediately used for the purchase of futures in United States Treasury Bonds. The second statement which was made in the document was as follows: ae qmerss nce > a qos oe . . nw ena were "The balance of 70% is invested in the United States on the basis of the U.S. financial instruments contracts - Treasury Bills, Treasury Bonds, Government and National Mortgage Association securities (GNMA's) These are bought and sold as spreads. This is a very attractive way of investing because of the combination of security with an exceptional return." I think that, as pointed out in an affidavit by Mr E S Spooner, who is an experienced futures broker, the references to "financial instruments contracts" and in particular to "Treasury Bills" and "Treasury Bonds" would be likely to convey to the non-expert that the subject matter of the purchase was in fact instruments issued by the United States government, such as Treasury bills or Treasury bonds. In fact the money which was subscribed by Mr Colman was used not to purchase Treasury bills or Treasury bonds but rather futures contracts in Treasury bonds. Once again, I am satisfied that there was never any intention of doing otherwise, because the purpose of the transaction was to obtain the benefit of a spread and -~ with the benefit of information from Mr Spooner -- 1t appears that this could only be done by dealings in futures contracts. »abdiab dle . w On the second page of this document, under the heading "How Can The Return Be So High" the following appears: "You state that profits of 50% - 100% per annum may be made. How can the profit be so high? Because only a low deposit (or margin) is paid when investing in the U.S. T-Bonds and other financial instruments spreads." ot eo eee The explanation continued by reference to the multiplier ~ effect of purchasing with a substantial unpaid balance. It appears from the Answers to Interrogatories and the documents discovered that Lincoln Hunt had no record at all of profits of 50% to 100% per annum. Whereas the document handed to Mr Colman suggested considerable experience, it appears that the company had been purchasing futures in T~Bonds for only a number of months and that, although there had been some minor profits, these had been swallowed up by brokerage charges. Consequently the suggestion of profits of 50% to 100% per- annum was grossly misleading. Under the heading: "What Is My Security", the answer is returned: "Excellent. Your investment is not affected by falling prices, even of Treasury Bonds (which does happen from time to time). This 1s of course because your investment 1s designed to profit regardless of whether prices rise or fall." Again, the reference to "Treasury Bonds" would suggest to an incautious reader that he 1s actually buying Treasury bonds ; but, moxe relevant for present purposes, he is told in terms that the security is excellent. , As Mr Spooner makes clear in his affidavit, this is a gross deception. There is a chance of a spectacular profit, if one invests in futures contracts simultaneously to buy and sell government securities. There seems to be an equal chance of a spectacular loss, if incautious transactions are entered a te as Tt a a i Sa ie trcere Seren wore en ep TT oot meee oe ere ~ os (aes oro ore cor et aww aot -7 at Serpe CIN arcer: into, as the subsequent history of Mr Colman's investment. shows. The proposed investment could only be described as highly speculative, with a substantial chance of being lost in whole or in part. I think that I need not set out all of the matters contained in the document. Mr Colman has sworn that the matters set out in that document influenced his decision to enter into the investments. There is no reason to doubt this statement and there is no question in my mind that the document was grossly misleading in material respects. Mr Colman did not immediately enter into any investment. He was subsequently contacted by telephone by Mr Ryder on several occasions. On 7 May 1985, Mr Ryder spoke to him whilst he was at work and had a conversation during which he told him that if he had invested $8,000 in the previous November his units would now be worth $12,000. This statement no doubt assumed that the investment on the previous November had still been retained, an assumption which seems to be inconsistent with what subsequently happened when Mr coiman did invest. Mr Colman was sufficiently influenced by this statement to agree to receive a copy of the client agreement form. When 1t was received he telephoned Mr Ryder in relation to para.16 of the agreement and asked why there was a need for a paragraph covering the possibility of loss of an investment that is said to be so secure. Mr Ryder replied: "It is for L \ i Ly t re t I ce ase 4: Py v Fimehade Renae PaReenine senna nena EAS aT ys Lf TT ane re -t- the most unlikely situation where interest rates are not moving at all during the period of contract". Mr Colman remembered that he had been told by Mr Hawke that the only circumstances in which a profit would not be made would be if interest rates did not move at all; that it did not matter whether interest rates went up or down, providing there was movement in the market. Mr Colman accepted this explanation, signed the agreement and subscribed $8,000. On 25 June, Mr Ryder telephoned again and told Mr Colman that his spread had picked up a number of ticks, that is to say, percentage points of a dollar and that his money was doing very well. He was told that he had made about $2,000. There was discussion about what would happen if he withdrew this amount but in the end Mr Colman agreed to subscribe a further $8,000. This money was then paid over. Mr Colman received from Lincoln Hunt receipts for each of the $8,000 subscriptions. In each case these were signed by Mr Dubinski-Hunt. In due course, Mr Colman received settlement statements. These showed that his money had been = expended in purchasing contracts both to buy and sell * sddide "Treasury Bonds", there being a three month difference between the date of maturity of each of the contracts. The theory was that money would be made if the price spread immediately before maturity. — —= pe eee more' 10. Consistently with what had been told to him, Mr _, Colman's best interests would have been served by retaining the contracts and selling at an advantageous time shortly prior to maturity. In relation to the first investment the bought contract was to expire in June 1986 and the sell contract in September 1986. In relation to the second investment, the relevant dates were December 1986 and March 1987. Notwithstanding this, it appears that Lincoln Hunt decided to close the contracts which had been entered into. There are a number of settlement statements and I will not set out all the details. Some of them show a profit in US doflar terms on the transaction and this, of course, meant a profit at a different rate in Australian dollars. The remarkable feature of the settlement statements zs that however profitable the transaction itself, after brokerage 1s allowed for, there was a debit against Mr Colman's account. For example, the $2,000 which Mr Ryder told him about on 25 June, seems to have been more than offset by brokerage charged of $2,750 on that transaction; which M dd Ryder omitted to tell him about. The result of all this Bs that the first investment of $8,000 which was made on 8 May 1985 diminished to be worth $3,312.90 by 31 July 1985, a loss of well over half the capital invested in less than three months. The investment made on 27 June 1985 disappeared in an even more spectacular fashion: $8,000 was deposited on that day but by 31 July 1985 there was a debit balance in the ll. account of $503.23. The main reason for these results was that Lincoln Hunt was charging a brokerage fee of $A275 on each unit. It appears from evidence in this case that the rate charged to Lincoln Hunt by the United States brokers in respect of that same transaction was $US25 per unit. I think that there is no question that misleading statements were made to Mr Colman, both orally and in writing, and that these caused him to deposit the total sum of $16,000 with the first respondent. I am also satisfied that Mr - Dubinski-Hunt was knowingly concerned in the conduct = complained of. Not only was he a director and the principal executive officer of the company, he had been involved throughout 1984 in 1ts general management. He was the author of the document "How Is My Money Invested" which I have already found was grossly misleading, he personally signed the receipts, the client agreements and the certificates of investment so that he was clearly aware of Mr Colman's investments. It also appears from one of his Answers to Interrogatories that he was personally involved in the "alded delhew instructions to the United States brokers as to the investment, inter alia, of Mr Colman's money. The relevant transaction sheets are in his own handwriting. The applicants seek interest on their deposit as from the dates when each were made. There has been some discussion as to how this ought to be calculated. There are no rules to arcs wae coer we eee ce te ete wh STITT, Janette een CNS a SE NT 12. . provide for the computation of pre-judgment interest; one has to have regard to the circumstances, the nature of the investment, and so on. Counsel has drawn my attention to the rules made in the Supreme Court of New South Wales for calculation of pre-judgment interest. It appears that the relevant rate during 1985 was 14.5%. During this year, to date, 1t has been 18.25%. I find this a little surprising as my impression is that interest rates have been somewhat lower this year than in 1985. I find this reference provides some general guidance but it should not be applied directly. I think 1t is reasonable under the circumstances to allow an interest rate of 15%. I round this out to take completed months so that there would be a total of $2,800 earned by way of interest on this basis. The orders that I make are as follows: that judgment be entered against each of the first and third respondents in the sum of $16,000 together with interest 1n the sum of $2,800 and that the first and third respondents pay to the applicants their costs of these proceedings. "= I certify this and the eleven (11) preceding pages to be a true copy of the Reasons for Judgment of his Honour Mr Justice Wilcox. Associate: YurAAe. "* Hetfow Date: 20 August 1986 fore pee Cr eae a val oanenin Counsel for the Applicant: Solicitors for the Applicant: Appearance for the Second Respondent: Solicitors for the Second Respondent: Date(s) of hearing: 13. Mr M Walton Messrs Walter Dickson & Co Mr P MacMahon, ~ Solicitor Messrs MacMahon & Drake 11 August 1986 wo sdihibgh diets, rT aperse eo ee oer _ i tl Saletan aieentemartd eee ere apr sera mI ay TOES -7 ~ te qT anreeger ee 7. 3 fs 5 or a